UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 2-60372Farmland Industries, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Kansas 44-0209330
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
12200 N. Ambassador Dr., Kansas City, Missouri 64163-1244
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 816-713-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Farmland Industries, Inc. is a cooperative. Its voting stock can only be held by its members. No public market for voting stock of
Farmland Industries, Inc. is established and it is unlikely, in the foreseeable future, that a public market for such voting stock
will develop.
Documents incorporated by reference: None
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIESTHE COMPANY
Farmland Industries, Inc., founded in 1929 and formally incorporated in Kansas in 1931, is a farm supply and a processing and marketing cooperative. Its principal executive offices are at 12200 N. Ambassador Dr., Kansas City, Missouri 64163 (telephone 816-713-7000). Unless the context requires otherwise, (i) “Farmland”, “we”, “us”, or “our” refers to Farmland Industries, Inc. and its consolidated subsidiaries, (ii) all references to “year” or “years” are to fiscal years ended August 31, and (iii) the term “member” means (a) any voting member, (b) any associate member, or (c) any other person with which Farmland is a party to a currently effective patronage refund agreement (a “patron”). See “Business and Properties - Business - Patronage Refunds and Distribution of Annual Earnings.”
Recent DevelopmentsDuring November 2001, we sold our interest in our petroleum products marketing venture, Country Energy, to Cenex Harvest States Cooperatives. Cash received from this transaction will be used primarily for reduction of notes payable balances on our credit facility and to prepay rent on our leased nitrogen facility at Coffeyville. As a part of this transaction, for an initial period of two years, we will sell all refined products produced at our Coffeyville, Kansas refinery to Cenex Harvest States (approximately $750 million in 2001), thereby making Cenex Harvest States a material customer of Farmland. This agreement to sell all refined product to Cenex Harvest States terminates if we sell the refinery.
During October 2001, we received and executed a commitment letter from three financial institutions to underwrite a new credit facility. To accommodate the due diligence necessary by the members of this new facility, our existing Credit Facility which had previously been extended through November 9, 2001, was extended to February 8, 2002. The commitment letter contains certain conditions to closing that include, among other things, certain material adverse change clauses. Although management cannot predict with certainty the outcome of future events, we anticipate the conditions to closing will be met and the financing will be accomplished prior to February 8, 2002. We anticipate that the new credit facility will be in an amount adequate to repay our existing Credit Facility as well as to refinance the Coffeyville, Kansas nitrogen plant which is currently operated by Farmland under a synthetic lease agreement.
MembershipFarmland operates on a cooperative basis and is primarily owned by its members. Requirements for membership in the cooperative are established by the Articles of Incorporation of Farmland and by the Board of Directors.
As of August 31, 2001, Farmland’s membership, associate membership and holders of capital credits consisted of approximately 2,400 cooperative associations of farmers and ranchers and 8,800 pork or beef producers or associations of such producers. See “Business and Properties - Business - Patronage Refunds and Distribution of Annual Earnings.”
BUSINESS
GeneralIn terms of revenue, Farmland is one of the largest cooperatives in the United States. In 2001, we had sales of $11.8 billion including export sales of approximately $1.7 billion to customers worldwide. Substantially all of our international sales are invoiced and collected in U.S. Dollars.
We conduct business primarily in two operating areas. First, on the input side of the agricultural industry, we operate as a farm supply cooperative. Second, on the output side of the agricultural industry, we operate as a processing and marketing cooperative.
Our farm supply operations consist of three principal product divisions: crop production, petroleum, and feed. Principal products of the crop production division are nitrogen and phosphate-based fertilizers (“plant foods”) and a complete line of insecticides, herbicides and mixed chemicals. Principal products of the petroleum division are refined fuels, propane 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. Effective October 1, 2000, substantially all of our feed operations are conducted through our equity participation in Land O’Lakes Farmland Feed LLC. We manufactured approximately 54% of the dollar value of our sales of farm supply products in 2001. Approximately 57% of the farm supply products we sold in 2001 were at wholesale to farm cooperative associations which are members of Farmland, and who, in turn, distribute these products primarily to farmers and ranchers.
The output side of our business consists of the processing and marketing of meat and the storage and marketing of grain. In 2001, approximately 79% of the hogs processed, 32% of the cattle processed and 59% of the domestic grain marketed by us were supplied to us by our members. Substantially all the pork and beef products we sold in 2001 was processed in plants we own. Grain operations are conducted through our wholly-owned subsidiary, Tradigrain, and through our grain marketing relationship with ADM/Farmland, Inc. ADM/Farmland, which leases and operates Farmland’s grain elevators throughout the United States, is a wholly-owned subsidiary of the Archer Daniels Midland Company (ADM).
Our crop nutrient manufacturing facilities sell all of their output to our 25%-owned crop protection and crop nutrient marketing venture, Agriliance. Agriliance, in turn, sells product to numerous local cooperatives and other crop protection and crop nutrient retailers. Effective December 2001, our petroleum refinery will sell all of its output to Country Energy, a wholly-owned subsidiary of Cenex Harvest States. Except as discussed above, no material part of the business of any segment of Farmland is dependent on a single customer or a few customers. Financial information about our industry segments is presented in Note 15 of the Notes to Consolidated Financial Statements.
The principal businesses of Farmland have been highly seasonal. Historically, the majority of sales of crop production products occur in the spring. Demand for refined petroleum fuels historically have been concentrated in the summer, and summer is the period of lowest demand for the feed business.
Farmland competes for market share with numerous participants of various sizes and with various levels of vertical integration, product and geographical diversification. Competitors in the crop production industry include global producers of nitrogen- and phosphate-based fertilizers, major chemical companies, and product importers and brokers. In the petroleum industry, competitors include major oil companies, independent refiners, and product brokers. The feed, grain, and meats industries are comprised of a large variety of competitive participants.
Business Risk FactorsEnvironmental Matters
Farmland is subject to various stringent federal, state and local environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous materials, which may impose liability for cleanup of environmental contamination. Farmland uses hazardous materials and generates hazardous wastes in the ordinary course of our manufacturing processes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources – Matters Involving the Environment.”
External Risk Factors That May Affect FarmlandFarmland’s revenues, margins, net income and cash flow may be volatile due to factors beyond our control. External factors that affect agricultural conditions and Farmland’s results of operations include:
1. Regulatory: Farmland's ability to grow through acquisitions and investments in ventures can be adversely affected by regulatory
delays or other unforeseen factors beyond our control. Various federal and state regulations can affect the amount of crop
nutrient and crop protection products used.
2. Competition: Competitors may have better access to equity capital markets and may offer more varied products or possess greater
resources than Farmland.
3. Imports and Exports: Factors which affect the level of agricultural products imported or exported including foreign trade and
monetary policies, laws and regulations, political and governmental changes, inflation and exchange rates, taxes, operating
conditions and world demand. Fluctuations in the level of agricultural product imports and exports will likely impact our
operations.
4. Weather: Weather conditions, both domestic and global, affect Farmland's operations. Weather conditions may either increase or
decrease demand. Changes in demand affect selling prices and income of all our business segments. Weather conditions also may
increase or decrease the supply of products. These changes in supply may affect costs related to Farmland's meat processing and
marketing, livestock production, feed and grain storage and marketing businesses.
5. Raw Materials Cost: Historically, changes in the costs of raw materials have not necessarily resulted in corresponding changes in
the prices at which finished products have been sold by Farmland.
6. Other Factors: Domestic variables, such as crop failures, federal agricultural programs and production efficiencies, and global
variables, such as general economic conditions, conditions in financial markets, embargoes, political instabilities, terrorist
activities, local conflicts and other incidents affect, among other things, the supply, demand and price of crude oil, refined
fuels, natural gas and other commodities and may unfavorably impact Farmland's operations.
Management cannot determine the extent to which these factors may impact our future operations. Farmland's revenues, margins,
net income and cash flow are likely to be volatile as conditions affecting agriculture and markets for our products change. See
"Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations for Years Ended
August 31, 1999, 2000 and 2001."
Limited Access to Equity Capital MarketsAs a cooperative, Farmland cannot sell its voting common equity to traditional public or private markets. Instead, equity is raised largely from payment of the noncash portion of patronage refunds with common stock, associate member common stock and capital credits, from offerings of preferred stocks and from net income on transactions with nonmembers. See “Business and Properties Business - Patronage Refunds and Distribution of Annual Earnings” and ” - Equity Redemption Plans.”
Crop ProductionMarketing
Effective January 1, 2000, Farmland and Cenex Harvest States formed UCB LLC, a holding company. UCB and Land O’Lakes formed Agriliance LLC, an agronomy venture that distributes and markets crop nutrients, crop protection products, and seed. Farmland has a 50% ownership interest in UCB, and UCB has a 50% ownership interest in Agriliance. Farmland contributed to UCB, and UCB contributed to Agriliance, among other assets, our 50% ownership in the WILFARM and Omnium ventures, which included manufacturing of crop protection products and the distribution of a complete line of crop protection products such as insecticides, herbicides and mixed chemicals. Our crop nutrients business includes nitrogen and phosphate-based plant foods, which we sell to Agriliance at a discount to the retail market price. Sales of the crop production business segment as a percent of consolidated sales for 1999, 2000 and 2001 were 9%, 8%, and 6%, respectively.
Competition in the crop production industry is dominated by price considerations. However, during the spring and fall application seasons, farming activities intensify and delivery service capacity is a significant competitive factor. We maintain a capital investment in distribution assets and a seasonal investment in inventory to enhance our manufacturing and distribution operations. We also contributed to UCB, and UCB contributed to Agriliance, certain warehouse and distribution facilities to further enhance distribution operations. Both Farmland and Agriliance own or lease custom dry blending, liquid mixing, storage and distribution facilities at a large number of locations throughout our trade territory to conform delivery capacity more closely to customer demands for delivery services.
Domestic competition, mainly from other regional cooperatives and integrated multinational plant foods companies, is intense due to customers’ sophisticated buying tendencies and production strategies that focus on costs and service. Also, foreign competition exists from producers of plant foods products manufactured in countries with lower cost natural gas supplies (the principal raw material in nitrogen-based plant foods). In certain cases, foreign producers of plant foods for export to the United States may be subsidized by their respective governments.
ProductionWe manufacture nitrogen-based plant food products. Natural gas is the major raw material used in production of nitrogen-based plant foods, including synthetic anhydrous ammonia, urea, UAN (urea-ammonium nitrate) and other forms of nitrogen-based plant foods.
We operate eight anhydrous ammonia production plants (four of which are leased) at seven locations in Kansas, Iowa, Nebraska, Oklahoma and Louisiana. In addition, Farmland is a 50% owner of a joint venture, Farmland MissChem, Limited, which owns an anhydrous ammonia production facility located in The Republic of Trinidad and Tobago. Under the venture agreement, 50% of the output from this facility is sold to and distributed by Farmland. The lease at our Pollock, Louisiana facility expires in March 2002. Management is currently evaluating our options related to this facility. Farmland’s options include negotiating to purchase the facility, negotiating a new lease agreement or terminating our operations at the site. The Pollock facility produced approximately 5% of our total anhydrous ammonia production during 2001.
Due to unfavorable market conditions during 2001, we temporarily curtailed production of nitrogen-based plant foods at various production plants. As a result, our production plants operated at approximate two-thirds of their capacity during the year. Annual anhydrous ammonia production of nitrogen-based plant foods for fiscal years 1999, 2000 and 2001, including Farmland’s 50% share of the output of Farmland MissChem Limited, totaled approximately 3.1 million tons, 2.9 million tons and 2.4 million tons, respectively.
Six of our synthetic anhydrous ammonia plants have capacity to further process anhydrous ammonia into urea, UAN solutions and other forms of nitrogen plant nutrients. In 1999, 2000 and 2001, production of these upgraded products approximated 2.1 million tons, 1.8 million tons and 1.8 million tons, respectively.
We own a phosphate chemical plant located in Joplin, Missouri, that produces feed grade phosphate (dicalcium phosphate) and ammonium phosphate, which is combined in varying ratios with muriate of potash to produce different plant foods products. Production of feed grade phosphate approximated 168,000 tons, 168,000 tons and 149,000 tons in 1999, 2000 and 2001, respectively, and production of ammonium phosphate approximated 29,000 tons, 30,000 tons and 24,000 tons in 1999, 2000 and 2001, respectively.
Farmland and Norsk Hydro a.s. are each 50% owners of Farmland Hydro, L.P. (“Hydro”), a joint venture which owns a phosphate manufacturing plant at Bartow, Florida. Hydro’s plant produces products such as super phosphoric acid, diammonium phosphate and monoammonium phosphate. Annual production of such products for 1999, 2000 and 2001 was 1,457,000 tons, 1,472,000 tons and 1,432,000 tons, respectively. We provide management and administrative services and Norsk Hydro a.s. provides marketing services to Hydro. Substantially all of Hydro’s super phosphoric acid production is purchased by Farmland and sold to the domestic market. Substantially all of the diammonium and monoammonium production is sold by Hydro to the international markets.
Farmland is a 50% owner of SF Phosphates Limited Liability Company (“SF Phosphates”), a venture which operates a phosphate mine located in Vernal, Utah, a phosphate manufacturing plant located in Rock Springs, Wyoming and a 96-mile pipeline connecting the mine to the plant. The plant produces monoammonium phosphate and super phosphoric acid with annual production for 1999, 2000 and 2001, of 522,000 tons, 539,000 tons, and 548,000 tons, respectively. Under the venture agreement, each owner purchases 50% of the venture’s production.
Raw MaterialsNatural gas, the largest single component of nitrogen-based plant foods production, is purchased directly from natural gas producers. However, only a small percentage of natural gas production is used to produce nitrogen-based fertilizers. As a result, the market place factors that determine the price of natural gas differ from those market place factors which determine the price of nitrogen-based fertilizers. Therefore, changes in the price of natural gas may not correlate with changes in the price of nitrogen-based fertilizers, exposing Farmland to changes in the price of natural gas. We use futures contracts and options to mitigate this exposure. Futures contracts are contracts purchased on a national exchange, such as the New York Mercantile Exchange, and do not have a risk of counterparty default. Option contracts are generally made with counterparties, and we have a risk of counterparty default. To mitigate this risk, we evaluate the credit rating of each counterparty and enter into transactions only with counterparties which we believe to have a minimal risk of default. Our utilization of futures and options contracts will vary based on our view of near-term and long-term market conditions. Certain futures and options are designated as accounting hedges, and the related gain and loss is included as a component of accumulated other comprehensive income until the period in which the hedged forecasted transaction affects earnings, at which time the gain or loss is reclassified to earnings as a component of cost of sales. To further mitigate our exposure to natural gas market price volatility, our Coffeyville, Kansas facility uses petroleum coke by-products as the primary feedstock to produce anhydrous ammonia and UAN solutions. We also have entered into a letter of intent to use nitrogen and hydrogen from a proposed coal gasification plant, rather than natural gas, as the primary feedstock for our Enid, Oklahoma production plants. Syn Fuel Technologies will construct and operate the coal gasification plant, which has a planned completion date of June 2004. See ” Business and Properties - Business - Business Risk Factors - External Factors That May Affect the Company.”
Natural gas is delivered to Farmland’s facilities under pipeline transportation service agreements which have been negotiated with each plant’s delivering pipeline. Natural gas delivery to the plants could be curtailed under regulations of the Federal Energy Regulatory Commission if a delivering pipeline’s capacity was required to serve priority users such as residences, hospitals and schools. In such cases, production could be curtailed. No significant production has been lost because of curtailments in pipeline transportation and no such curtailment is anticipated.
Currently, all phosphate rock required to operate the Hydro phosphate plant is acquired from a third party under a long-term purchase contract. This purchase contract expires during the fourth quarter of 2005.
Hydro owns phosphate rock reserves located in Hardee County, Florida which contain an estimated 80 million tons of phosphate rock. In 1998, Hydro began obtaining various permits and licenses necessary for mining this property. Farmland Hydro has submitted an official application for mine permitting and we anticipate the state of Florida will grant the necessary permits early in 2002. It will take Hydro approximately three years to acquire the equipment and to construct the facilities necessary to begin mining. If permitting is not granted or if equipment and facilities necessary to mine are not completed prior to the expiration of our purchase contract, we believe Hydro can obtain, at reasonable prices, adequate quantities of phosphate rock from other sources.
Based on current recovery methods and the levels of the SF Phosphate plant production in recent years, we estimate that the phosphate rock reserves owned by SF Phosphates are adequate to provide the phosphate rock requirements of the plant in excess of 80 years.
PetroleumMarketing
The principal products of this business segment are refined fuels, propane and by-products of the petroleum refinery. Sales of petroleum products as a percent of consolidated sales for 1999, 2000 and 2001 were 9%, 12%, and 15%, respectively.
Farmland participates in the industry as a mid-continent refiner and as a wholesale distributor of petroleum products. Since September 1, 1998, Country Energy LLC, a joint venture with Cenex Harvest States has provided, on an agency basis, refined fuel, propane and lubricants marketing and distribution services for its owners. Subsequent to year-end, we sold our ownership interest in Country Energy to Cenex Harvest States. As part of the agreement, for an initial period of two years Country Energy will continue to market and distribute the full production from our Coffeyville, Kansas refinery. If we sell the refinery, this off-take agreement will terminate.
Competitive methods in the petroleum industry include service, product quality and price. However, in refined fuel markets, price competition is dominant. Many participants in the industry engage in more than one of the industry’s processes (oil production, transportation, refining, wholesale distribution and retailing).
RefiningEffective September 1, 1999, we formed an alliance, Cooperative Refining, LLC, with the owners of National Cooperative Refinery Association (“NCRA”) to jointly operate NCRA’s refinery at McPherson, Kansas and Farmland’s refinery at Coffeyville, Kansas. This venture, which was 42% owned by Farmland, was subsequently dissolved effective December 31, 2000. Farmland now manages and operates the facility at Coffeyville, Kansas, with approximately 95,000 barrel per day capacity. Our refinery converts crude oil into refined products such as gasoline, diesel fuel, and distillates. The difference between crude oil prices and the selling prices of finished product is known in the industry as the crack spread The crack spread largely determines Farmland’s gross margin from our petroleum operations. We generally do not hedge the crack spread. Therefore, volatility in the crack spread results in income volatility for our petroleum business.
Raw MaterialsIn 2001, Farmland’s pipeline/trucking gathering system collected approximately 15% of its crude oil supplies under agreements with producers near its refinery. Additional supplies are acquired from diversified sources, including crude oil from foreign sources.
Crude oil is purchased approximately 35 to 50 days in advance of the time the related refined products are to be marketed. We manage our exposure to certain of these advance crude oil purchase transactions, through the use of petroleum futures contracts. Futures contracts are contracts purchased on a national exchange, such as the New York Mercantile Exchange, and do not have a risk of counterparty default. Our utilization of futures contracts will vary based on our view of near-term and long-term market conditions. Although these contracts are intended to serve as an economic hedge, we do not designate the contracts as an accounting hedge. As a result, each period’s gains and losses related to these future contracts are recorded as a component of other income (expense). We also have short-term refined fuels sales which have been designated as normal course of business sales. Therefore, these contracts are not marked to market and, to the extent the contract is advantageous or disadvantageous compared to current market prices, any gain or loss is recognized as a component of cost of sales when the finished product is sold. See “Business and Properties – Business – Business Risk Factors – External Factors That May Affect the Company”.
During periods of volatile crude oil price changes, or in extremely short crude oil supply conditions, our petroleum operations could be affected to a greater extent than petroleum operations of more vertically integrated competitors with crude oil supplies available from owned producing reserves. In past periods of relatively severe crude oil shortages, various governmental regulations such as price controls and mandatory crude oil allocating programs have been implemented. There can be no assurance as to what, if any, government action would be taken if a crude oil shortage were to develop.
FeedIn order to enhance the size, scale and market position of our feed operations, effective October 1, 2000, Farmland and Land O’Lakes each contributed substantially all of their feed business assets to a newly formed venture, Land O’Lakes Farmland Feed (LOLFF). Feed products of LOLFF include swine, beef, poultry, dairy, pet, mineral and specialty feeds, feed ingredients and supplements, animal health products and farm and ranch supplies. LOLFF operates approximately 54 feed mills with sales in 31 states, primarily in the midwestern, southern and western regions of the United States. As of August 31, 2001 we owned approximately 26.3% of LOLFF.
During October 2001, LOLFF acquired an independent feed company, Purina Mills. Although our ownership percentage was reduced to 8%, we will still have significant influence over this joint venture as the result of the number of board seats we retain. Accordingly, we will continue to record earnings using the equity method of accounting, and we believe that this acquisition will not have a significant impact on our total earnings from the LOLFF venture.
Refrigerated FoodsRaw Materials and Processing
Farmland’s meat processing and marketing are primarily conducted through Farmland National Beef Packing Company, L.P. (“National Beef”), Farmland Foods, Inc. (“Foods”), and Southern Farm Fish Processors (“SFFP”). As of August 31, 2001, National Beef, Foods, and SFFP were 71%-owned, 99%-owned, and 100%-owned, respectively, by Farmland. During 1999, 2000 and 2001, we slaughtered approximately 2.6 million, 2.7 million and 2.8 million cattle, respectively, and approximately 8.1 million, 7.4 million, and 6.4 million hogs, respectively. During 1999, 2000, and 2001, we processed approximately 34.9 million, 32.9 million, and 30.3 million pounds, respectively, of catfish.
The refrigerated foods abattoirs are located in Liberal, Kansas, Dodge City, Kansas, Denison, Iowa, Monmouth, Illinois and Crete, Nebraska. Facilities to further process primal beef and pork cuts are located in Springfield, Massachusetts, New Riegel, Ohio, Wichita, Kansas and Topeka, Kansas. The abattoirs also have additional capabilities for further processing meat. Refrigerated foods also operates case ready facilities in Salt Lake City, Utah, Omaha, Nebraska and Madison, Wisconsin. In response to changing customer needs, during 2001 we have opened two additional case ready facilities in Hummels Wharf, Pennsylvania and Moultrie, Georgia. The catfish processing facility is located in Eudora, Arkansas and processes catfish into fillets, nuggets, whole and value-added catfish products.
The profitability of our refrigerated foods business is affected by changes in the prices we pay for our raw materials and the prices we are able to charge for our finished product. We manage our exposure to the changing prices to acquire raw materials, primarily live hogs and cattle, through the use of futures and options contracts and through long-term purchase contracts. Futures contracts are contracts purchased on a national exchange, such as the Chicago Mercantile Exchange, and do not have a risk of counterparty default. Our utilization of futures contracts will vary based on our view of near-term and long-term market conditions. Although these contracts are intended to serve as an economic hedge, we do not designate the contracts as an accounting hedge. As a result, each period’s gains and losses related to these future contracts are recorded as a component of other income (expense). Our long-term purchase contracts are purchases made in the normal course of business. Therefore, these contracts are not marked to market and, to the extent the contract is advantageous or disadvantageous compared to current market prices, any gain or loss is recognized as a component of cost of sales when the finished product is sold.
Farmland also manages a part of our price risk related to procurement of raw materials by producing market hogs for processing. We currently have approximately 300 contracts with producers in eight states to finish hogs from our own production or from the production of Alliance Farms, an affiliate. The risks associated with the managing of hogs include disease and genetic changes, as well as the general market price risk for hogs. In 2001, our integrated hog production operations provided approximately 12% of our total hog processing requirements.
During August 2001, Farmland National Beef and DMV USA entered into aLF Ventures, LLC. aLF Ventures is developing activated lactoferrin for commercialization. Lactoferrin is a naturally occurring protein found in milk. Activated lactoferrin, when applied to meat, inhibits the growth of pathogenic bacteria, including E. coli O157:H7, Salmonella and Campylobacter, and prevents these pathogenic bacteria from attaching to meat surfaces. Activated lactoferrin has been designated as Generally Recognized as Safe (GRAS) by the U.S. Food and Drug Administration, but is still being reviewed by the U.S. Department of Agriculture and has not been approved for commercial use.
MarketingRefrigerated Foods’ products include fresh and frozen beef, boxed beef, case ready beef and pork, fresh pork, fabricated pork, smoked meats, ham, bacon, fresh sausage, dry sausage, hot dogs, packing house by-products, and fresh and frozen catfish products. These products are marketed under a variety of brand names including: Farmland, Black Angus Beef, Farmstead, OhSe, Maple River, Carando, Roegelein, Regal and Springwater Farms. Product distribution is through national and regional retail and food service chains, distributors and in international markets.
Beef, pork, and fish marketing are highly competitive industries with many suppliers of fresh and processed products. Other meat products also compete directly with beef, pork, and fish products. Competitive methods in this industry include price, product quality, brand and product differentiation and customer service.
World GrainMarketing
Effective May 4, 2001, we formed a grain marketing relationship with ADM. ADM/Farmland, Inc., a wholly-owned subsidiary of ADM, purchased substantially all of our United States grain inventories. ADM/Farmland leases and operates our grain elevators throughout the United States, and we are entitled to receive a 50% share of the earnings or losses of ADM/Farmland.
Through our wholly-owned subsidiary, Tradigrain, we provide international grain marketing and brokerage services to our customers. Tradigrain markets wheat, feed grains, soybeans, barley and sugar. We purchase grain throughout the world, and we assume all risks related to selling such grain.
Tradigrain is exposed to price risk as a result of holding grain inventory and because, in the ordinary course of business, Tradigrain is a party to numerous fixed price sales and fixed price purchase contracts. To reduce the price change risk associated with holding positions in grain, Tradigrain may take opposite and offsetting positions by entering into grain commodity futures contracts. Generally, such contracts have terms of up to one year. Our strategy is to maintain economically hedged positions unless we perceive market opportunity, at which time we may decide to take a long or short position. Taking a long or short position increases both our risk of loss and our gain potential from changes in the market price of grain. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources - Results of Operations for Years Ended August 31, 1999, 2000 and 2001 - World Grain”.
Sales are affected by the level of grain production worldwide. Furthermore, sales may be affected by international political events and changes in countries’ trade policies that are not within the control of Tradigrain.
PropertyFarmland owns or leases 27 inland elevators and one export elevator in the United States with a total capacity of approximately 178.8 million bushels of grain. These elevators are leased or subleased to ADM/Farmland. The leases between Farmland and ADM/Farmland are structured to cover the depreciation, amortization and taxes related to the elevators. Farmland also owns an export elevator in Arroyo Seco, Argentina with a total capacity of approximately 3.7 million bushels of grain.
ResearchFarmland conducts research at our pork processing facilities directed toward product development and process improvement. Expenditures related to all product research and process improvements sponsored by Farmland amounted to $2.4 million, $1.9 million and $0.8 million for 1999, 2000, and 2001 respectively.
Capital Expenditures and Investments in VenturesIn 2001, Farmland made capital expenditures totaling $107.4 million and cash investments in ventures totaling $12.8 million. Farmland is committed to expenditures of $3.4 million as of August 31, 2001. We are currently negotiating a new credit facility. If this credit facility is established, we intend to use approximately $200 million of our capacity under the facility to refinance the nitrogen plant at Coffeyville, Kansas that we currently operate under a synthetic lease.
The Environmental Protection Agency has issued new rules limiting sulfur in gasoline to 30 parts per million and has published a proposed rule limiting sulfur in diesel fuel to 15 parts per million. The rules affecting gasoline were effective December 1, 1999 with a January 1, 2004 compliance date. The proposed rules for diesel fuel have a June 1, 2006 compliance date. Based on information currently available, we anticipate that material expenditures, possibly in excess of $100 million, will be required to achieve compliance with these new and pending rules. Farmland has applied for, but has not received, regulatory extension of the deadlines until 2008. Furthermore, Congress is considering legislation which may result in classification of Farmland as a small refiner. Classification as a small refiner may provide Farmland with greater flexibility in meeting the low sulfur requirements
We intend to fund our capital program with cash from operations, through borrowings or through other capital market transactions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources."
Government RegulationFarmland’s business is conducted within a legal environment created by numerous federal, state and local laws which have been enacted to protect the public’s interest by promoting environmental protection, fair trade practices, safety, health and welfare. Farmland believes that its operating procedures conform to the intent of these laws and that we currently are in compliance with all such laws, the violation of which could have a material adverse effect on us.
Certain policies may be implemented from time to time by the United States Department of Agriculture, the Environmental Protection Agency, the Department of Energy or other governmental agencies which may impact agricultural producers’ demands and consumers’ needs for Farmland’s products or which may impact the methods by which certain of our operations are conducted. Such policies may impact our farm supply, food processing and marketing and grain storage and marketing operations.
The Federal Agriculture Improvement and Reform Act (“FAIR”) represents the most significant change in government farm programs in more than 60 years. Under FAIR, the former system of variable price-linked deficiency payments to farmers has been replaced by a program of fixed payments which decline over a seven-year period. In addition, FAIR eliminates federal planting restrictions and acreage controls. Whether demand for our products is favorably impacted depends in a large part on whether United States agriculture becomes more competitive in world markets as this industry moves toward a greater market orientation, the extent which governmental actions expand international trade agreements and whether market access opportunities for United States agriculture are increased.
As the 107th Congress begins deliberation of the new farm bill, many issues will be reviewed, including expansion of markets, food safety, biosecurity, competition, farm payments and environmental stewardship. All these issues impact our business activities.
The United States Congress has in the past considered and may consider trade measures which, if passed, could enhance agricultural export potential. In 2000 Congress passed permanent normal trade relations with China and removed trade sanctions on five key countries. In November 2001, the World Trade Organization admitted China into its organization. This enables the United States/China agricultural agreement to go into effect, meaning greater export opportunities with China. Farmland believes trade promotion authority, previously known as “fast-track” (legislation which would authorize the President to submit a trade agreement to Congress with the assurance that it will be voted on within 90 days and not be subject to amendments), removal of trade sanctions on additional countries, and language to prohibit embargoes could benefit United States agricultural interests by opening markets, increasing exports and expanding trade opportunities with countries which import agricultural products. Absent such legislation, our access to international markets may be adversely impacted.
We are not aware of any newly implemented or pending policies, other than as discussed above, which may have a significant impact on our operations.
Employee RelationsAt August 31, 2001, Farmland had approximately 14,500 employees. Approximately 50% of our employees were represented by unions having national affiliations. Farmland considers its relationship with employees to be generally satisfactory. No labor strikes or work stoppages within the last three fiscal years have had a materially adverse effect on our operating results. Current labor contracts expire on various dates through March 2004.
Patronage Refunds and Distribution of Annual EarningsFarmland operates on a cooperative basis. In accordance with its bylaws, Farmland determines its annual net earnings from transactions with members (“member-sourced earnings”). For this purpose, annual net earnings means income before income tax determined in accordance with accounting principles generally accepted in the United States of America. The bylaws of Farmland provide that the Board of Directors has complete discretion with respect to the handling and ultimate disposition of any member-sourced losses. The member-sourced earnings (after handling of member-sourced losses) may be returned to members as patronage refunds in the form of qualified and/or nonqualified written notices of patronage refund allocation. Each member’s portion of the annual patronage refund is determined by the earnings of Farmland attributed to the quantity or value of business transacted by the member with Farmland during the year for which the patronage is paid.
A qualified patronage refund must be paid at least 20% in cash. The portion of the qualified patronage refund not paid in cash (the allocated equity portion) is currently paid by Farmland to our members in the form of common shares, associate member common shares or capital credits (depending on the membership status of the recipient). The Board of Directors may determine to pay the allocated equity portion in any other form or forms of nonpreferred equities, all of which are non-interest bearing. The allocated equity portion of the qualified patronage refund is determined annually by the Board of Directors. Farmland is allowed an income tax deduction for the total amount (the cash portion and the allocated equity portion) of its qualified patronage refunds.
Nonqualified patronage refunds may be paid entirely in allocated equity; there are no minimum cash requirements. Nonqualified patronage refunds have been paid by Farmland in the form of common shares, associate member common shares or capital credits (depending on the membership status of the recipient). The Board of Directors may determine to pay the nonqualified patronage refund in any other form or forms of nonpreferred equities, all of which are non-interest bearing. Farmland is not allowed an income tax deduction for a nonqualified patronage refund in the year paid. The nonqualified patronage refund is deductible by us for federal income tax purposes only when such nonqualified written notices of allocation are redeemed for cash or tangible property.
For the years ended 1999, 2000 and 2001, patronage refunds authorized by the Board of Directors were:
Equivalent Portion of Non-Cash Portion of Total Patronage
Patronage Refunds Patronage Refunds Refunds
------------------------ ----------------------- ---------------------
(Amounts in Thousands)
1999............... $ 6,054 $ 24,215 $ 30,269
2000............... $ -0- $ 8,002 $ 8,002
2001............... $ -0- $ -0- $ -0-Nonmember-sourced income (earnings attributed to transactions with persons not eligible to receive patronage refunds, i.e. nonmembers) and nonpatronage income or loss (income or loss from activities not directly related to the cooperative activities of Farmland) is subject to income taxes computed on the same basis as such taxes are computed on the income or loss of other corporations.
Equity Redemption PlansThe equity redemption plans described below, namely the base capital plan, the estate settlement plan, and the special equity redemption plans (collectively, the “Plans”) may be changed at any time or from time to time at the sole and absolute discretion of the Board of Directors. The Plans are not binding upon the Board of Directors or Farmland, and the Board of Directors reserves the right to redeem, or not redeem, any of Farmland’s equities without regard to whether such action or inaction is in accordance with the Plans. Factors which the Board of Directors may consider in determining when and under what circumstances Farmland may redeem equities include, but are not limited to, the terms of our base capital plan and other equity redemption plans, results of operations, financial position, cash flow, capital requirements, long-term financial planning needs, income and other tax considerations and other relevant considerations. By retaining discretion to determine the amount, timing and ordering of any equity redemptions, the Board of Directors believes that it can continue to assure that the best interests of Farmland and our owners will be protected. Under our current credit facility, we are not allowed to make any payments under these Plans.
Base Capital PlanFor the purposes of acquiring and maintaining adequate capital to finance Farmland’s business, the Board of Directors has established a base capital plan.
The base capital plan provides a mechanism for determining Farmland’s total capital requirements and each voting member’s and associate member’s share of such requirements (referred to as the “Base Capital Requirement”). As part of the base capital plan, the Board of Directors may, in its discretion, provide for redemption of Farmland common shares or associate member common shares held by voting members or associate members whose holdings of common shares or associate member shares exceed the voting members’ or associate members’ Base Capital Requirement. The base capital plan provides a mechanism under which the cash portion of the patronage refund payable to voting members or associate members will depend upon the degree to which such voting members or associate members meet their Base Capital Requirements.
Estate Settlement PlanThe estate settlement plan generally provides that equity holdings of deceased natural persons be redeemed at par value.
Special Equity Redemption PlansFrom time to time, Farmland has redeemed portions of its outstanding equity under various special equity redemption plans. The special equity redemption plans have been and may be changed at any time or from time to time at the sole and absolute discretion of the Board of Directors. The special equity redemption plans are not binding upon the Board of Directors or Farmland, and the Board of Directors reserves the right to redeem, or not redeem, any equities without regard to whether such action or inaction is in accordance with the special equity redemption plans.
The special equity redemption plans are designed to return cash to members or former members of Farmland or Farmland Foods by providing a method for redemption of outstanding equity which may not be subject to redemption through other Plans, such as the base capital plan or the estate settlement plan. The order in which each type of equity is redeemed is determined by the Board of Directors.
Presented below are the amounts of equity approved for redemption by the Board of Directors of Farmland and Farmland Foods under our equity redemption plans for each of the years in the three-year period ended 2001.
Base Capital Special Equity
Plan and other Total Plan
Redemptions Redemptions(a) Redemptions
------------------ ------------------- ----------------
(Amounts in Thousands)
1999........ $ -0- $ 377 $ 377
2000........ $ -0- $ 262 $ 262
2001........ $ -0- $ 34 $ 34(a) Includes redemptions of preferred stock.ITEM 3. LEGAL PROCEEDINGS
Management believes there is no litigation existing or pending against Farmland or any of its subsidiaries that, based on the amounts involved or the defenses available, would have a material adverse effect on our financial statements.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF EQUITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of equity holders.PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public market for the voting common stock, associate member common stock or capital credits of Farmland. We believe that it is highly unlikely that a public market for any of these equities will develop in the foreseeable future for the following reasons:
1. The common stock, associate member common stock and capital credits are nondividend and noninterest bearing;
2. The common stock, associate member common stock and capital credits are not transferable without consent of the Farmland Board of
Directors.
3. The amount of patronage refunds a holder, who is eligible to receive patronage refunds, may receive is dependent on the earnings
of Farmland attributable to the quantity or value of business such holder transacts with Farmland and not on the amount of
equity held. See "Business and Properties - Business - Patronage Refunds and Distribution of Annual Earnings"; and
4. Farmland may redeem its equities from time to time at the sole and absolute discretion of the Board of Directors. See "Business
and Properties - Business - Equity Redemption Plans".At August 31, 2001, based on holders of record, there are approximately 3,400 holders of common shares, 400 holders of associate member shares and 7,400 holders of capital credits.ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of the end of and for each of the years in the five-year period ended August 31, 2001 are derived from the Consolidated Financial Statements of Farmland, which have been audited by KPMG LLP, independent certified public accountants. The information set forth below should be read in conjunction with the Consolidated Financial Statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes.
Year Ended August 31
-----------------------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------------ ---------------- ---------------- ---------------- -----------------
Summary of Operations
Net Sales..................... $9,255,507 $8,903,017 $ 10,850,907 $ 12,388,723 $ 11,763,442
Operating Income of Industry
Segments(1)................ 265,961 150,966 140,622 120,476 59,854
Interest Expense.............. 62,335 73,645 90,773 114,239 136,288
Net Income (Loss)............. 135,423 58,770 13,865 (29,250) (89,986)
Distribution of Net Income:
Patronage Refunds:
Allocated Equity........... $ 68,079 $ 35,528 $ 24,215 $ 8,002 $ -0-
Cash....................... 40,228 23,593 6,054 -0- -0-
Earned Surplus and Other
Equities................... 27,116 (351) (16,404) (37,252) (89,986)
$ 135,423 $ 58,770 $ 13,865 $ (29,250) $ (89,986)
Balance Sheets:
Working Capital............... $ 242,211 $ 435,482 $ 450,439 $ 214,902 $ 237,719
Property, Plant and
Equipment, net............. 783,108 827,149 833,203 826,962 755,629
Total Assets.................. 2,669,502 2,889,602 3,275,771 3,282,187 2,737,199
Long-Term Borrowings
(excluding
current maturities)........ 580,665 728,103 808,413 646,160 710,976
Capital Shares and
Equities................... 821,993 912,696 917,327 881,231 762,524
1. Includes segment gross income, segment selling, general, and administrative expenses, segment other income (loss), segment
minority interest, and the segment's equity in income (loss) of investees.
As described in Note 10 to the Consolidated Financial Statements, Farmland changed its method of accounting for derivative instruments and hedging activities in 2001. The cumulative effect of this change at September 1, 2000 was to decrease our net loss by $13.5 million.As described in Note 13 to the Consolidated Financial Statements, Farmland changed its method of accounting for planned major maintenance costs from the accrue-in-advance method to the direct expense method in 2001. The cumulative effect of this change at September 1, 2000 was to decrease net loss by $6.3 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition, Liquidity and Capital ResourcesFarmland has historically maintained two primary sources for debt capital: a substantially continuous public offering of its subordinated debt and demand loan securities (the “continuous debt program”) and bank lines of credit.
Farmland’s debt securities issued under the continuous debt program generally are offered on a best-efforts basis through our wholly owned broker-dealer subsidiary, Farmland Securities Company and also may be offered by selected unaffiliated broker-dealers. The types of debt securities offered in the continuous debt program include certificates payable on demand and subordinated debenture bonds. The total amount of debt securities outstanding and the flow of funds to or from Farmland as a result of the continuous debt program are influenced by the rate of interest which we establish for each type or series of debt security offered, by options of Farmland to call for redemption certain of its outstanding debt securities, and by the option of holders, under certain circumstances, to request the early redemption of outstanding debt securities. On October 31, 2000, we suspended sales under our debt program. To sell debt under our program, we will need to register additional securities with the Securities and Exchange Commission. This report on Form 10-K does not constitute an offer of securities; such an offering will only be made through a prospectus. During the year ended August 31, 2001, the outstanding balance of demand certificates decreased by $8.0 million and the outstanding balance of subordinated debenture bonds decreased by $33.6 million.
In May 2000, Farmland established a 364 day, $750 million, revolving credit facility (the “Credit Facility”) with a syndicate of banks. During April 2001, Farmland and a syndicate of banks reached an agreement to amend our Credit Facility and extend the term to November 9, 2001, in an amount of $500 million. During November 2001, Farmland and the syndicate of banks reached an agreement to extend the Credit Facility through February 8, 2002, in an amount of $418 million. Also during October 2001, Farmland received a commitment from another syndicate of banks to establish a new five year revolving credit of $350 million and a two year credit of $150 million that will replace the present Credit Facility. The commitment letter contains certain conditions to closing that include, among other things, certain material adverse change clauses. Although management cannot predict with certainty the outcome of future events, we anticipate the conditions to closing will be met and the financing will be accomplished prior to February 8, 2002. Concurrent with establishing the new bank facility, we intend to refinance, for approximately $200 million, the nitrogen facility at Coffeyville, Kansas that we currently operate under a synthetic lease. The new credit facility will be collateralized by substantially all of Farmland’s assets. The new credit facility will contain various financial covenants, including covenants regarding working capital, the ratio of certain debt to average cash flow and the ratio of equity to total capitalization.
At August 31, 2001, Farmland had $238.1 million of short-term borrowings under the current Credit Facility. Additionally, $47.8 million of the Credit Facility was utilized to support letters of credit. Farmland pays commitment fees under the Credit Facility based on the unused portion of the credit line. Borrowings under the Credit Facility are secured by a substantial portion of our accounts receivable, inventories, fixed assets, and certain investments. 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 London Interbank Offering Rate). 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 related 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 calculated at August 31, 2001, availability under the Credit Facility was approximately $121.5 million.
Farmland National Beef Packing Company, L.P. (“FNBPC”), a consolidated subsidiary, has established a five year, $225 million credit facility with a syndicate of banks. This facility provides for a line of credit for up to $100 million, and a term loan of $125 million, both of which are nonrecourse to Farmland. Borrowings under the credit facility are collateralized by substantially all the assets of FNBPC and are subject to certain financial covenants and restrictions. At year end, FNBPC had borrowings of $138.9 million, and $16.9 million of the facility was being utilized to support letters of credit.
At August 31, 2001, Tradigrain had $439.4 million in credit facilities with various international banks. Tradigrain primarily uses these facilities to provide financing and letters of credit to support international grain trading transactions. Obligations of Tradigrain under these facilities are nonrecourse to Farmland and Farmland’s other affiliates. At August 31, 2001 Tradigrain had borrowings under the credit facilities of $97.9 million, and $7.1 million of the facilities were being utilized to support letters of credit. Additionally, $106.4 million of checks and drafts outstanding at August 31, 2001 were committed against the credit facilities.
Other subsidiaries and affiliates maintain other borrowing arrangements with banks and financial institutions. At August 31, 2001, $5.4 million was borrowed under such agreements, which are nonrecourse to Farmland.
Leveraged leasing has been utilized to finance railcars, a significant portion of our crop production equipment, and certain crop production manufacturing facilities.Farmland has issued and outstanding 2 million shares of 8% Series A Cumulative Redeemable Preferred Shares (the “Preferred Shares”) with an aggregate liquidation preference of $100 million ($50 liquidation preference per share). The Preferred Shares are not redeemable prior to December 15, 2022. On and after December 15, 2022, the Preferred Shares may be redeemed for cash at our option, in whole or in part, at specified redemption prices declining to $50 per share on and after December 15, 2027, plus accumulated and unpaid dividends. The Preferred Shares do not have any stated maturity, are not subject to any sinking fund or mandatory redemption provisions and are not convertible into any other security.
As discussed above, we have a commitment letter to establish a new, long-term credit facility. Management believes that a new facility will be established prior to the existing facility becoming due and payable, and that this new facility will provide debt capital adequate for our operating and capital plans. However, no assurance of completion can be given
Farmland operates on a cooperative basis. In accordance with its bylaws, Farmland determines its annual earnings before income tax in accordance with accounting principles generally accepted in the United States of America. Such earnings are then identified to the various patronage refund allocation units (groups of similar products or services) which have been established by the Board of Directors The earnings of each patronage refund allocation unit are then divided into 1) a member-sourced portion determined on the basis of the quantity or value of business done by such allocation unit with or for its members who are eligible to receive patronage refunds and 2) a non-member sourced portion for which amounts are determined on the basis of the quantity or value of business done by such allocation unit with or for persons who are not eligible to receive patronage refunds, plus such net amount of earnings, expense or loss in an allocation unit which is unrelated to the cooperative operations carried on by Farmland for its members. The member-sourced portion of each patronage refund allocation unit is allocated among the members transacting business with such allocation unit in the ratio that the quantity or value of the business done with or for each such member bears to the quantity or value of the business done with or for all of such members. The Board of Directors reasonably and equitably determines whether allocations within any allocation unit will be on the basis of the quantity or value. The non-member sourced portion of annual earnings and earnings unrelated to the cooperative operations carried on by Farmland for its members are transferred to earned surplus after appropriate reduction for income tax.
Under Farmland’s bylaws, patronage refunds may be distributed to members from the member-sourced earnings as determined above, unless the earned surplus account after such distribution is lower than 30% of the sum of the prior year-end balance of outstanding common shares, associate member shares, capital credits and patronage refunds for reinvestment. In such cases, the patronage refund is reduced by the lesser of 15% or an amount required to increase the earned surplus account to the required 30%. The amount by which the member sourced income is so reduced is treated as nonmember-sourced income. The member sourced income remaining may be distributed to members as patronage refunds. For the years 1999 and 2000, the earned surplus account exceeded the required amount by $57.3 million and $13.6 million, respectively. For 2001, the earned surplus account was deficient of the required amount by $95.5 million.
The patronage refunds may be paid in the form of qualified or nonqualified written notices of allocation or cash. The nonqualified patronage refund and the allocated equity portion of the qualified patronage refund are sources of funds from operations which are retained for use in the business and which increase our equity base. Common shares and associate member common shares may be redeemed by cash payments from Farmland to holders of these equities who participate in Farmland’s base capital plan. Common stock, associate member common stock, capital credits and other equities of Farmland and Farmland Foods may also be redeemed under other equity redemption plans. The base capital plan and other equity redemption plans are described under “Business and Properties Business - Equity Redemption Plans”.
The Board of Directors of this Association has complete discretion to determine the handling and ultimate disposition of the Association’s patronage-sourced net losses (including allocation unit losses) and the form, priority and manner in which such losses or portions thereof are taken into account, retained, and ultimately disposed of or recovered. The Board may, as it did for fiscal year 2001, retain such losses of the Association and subsequently (i) dispose of them by offset against the net earnings of the Association of subsequent years, (ii) apply such losses to prior years’ patronage allocation at any time in order to dispose of them by means of offset and cancellation against members’ and patrons’ equity account balances, or (iii) select and use any other method of disposition of such losses as the Board of Directors, in its sole discretion, from time to time determines.
Net cash of $426.8 million was provided by operating activities during 2001 compared with net cash of $23.9 million provided by operating activities during 2000, reflecting a decrease in account receivables and inventories, partially offset by a decrease in accounts payable, other liabilities and net income. The decrease in working capital (accounts receivables, inventories and accounts payable) is primarily the result of restructuring our feed and domestic grain businesses as ventures. As a result, the working capital of these businesses is now held by Land O’Lakes Farmland Feed and ADM/Farmland. A significant portion of the cash generated was used to reduce bank loans, notes payable and subordinated debt by $263.8 million. Other major uses of cash for 2001 include: $107.4 million for capital expenditures, $24.2 million for acquisition of other long-term assets and $28.1 million for acquisition of investments and notes receivable.
In addition to the $426.8 million of cash from operations, other major sources of cash include: $32.0 million from sale of investments and collection of notes receivable and $28.8 million of distributions from joint ventures.
Results of Operations for Years Ended August 31, 1999, 2000 and 2001Farmland’s sales, gross margins and net income depend, to a large extent, on conditions in agriculture and may be volatile due to factors beyond our control, such as weather, crop failures, federal agricultural programs, production efficiencies, currency fluctuations, tariffs and other factors affecting United States imports and exports. In addition, various federal and state regulations to protect the environment encourage farmers to reduce the use of fertilizers and other chemicals. Global variables which affect supply, demand and price of crude oil, refined fuels, natural gas and other commodities may impact our operations. Historically, changes in the costs of raw materials used in the manufacture of Farmland’s finished products have not necessarily resulted in corresponding changes in the prices at which such products have been sold. Management cannot determine the extent to which these factors may impact our future operations. Farmland’s cash flow and net income or loss may be volatile as conditions affecting agriculture and markets for our products change.
The level of operating income in the crop production, petroleum, and refrigerated foods businesses is, to a significant degree, attributable to the spread between selling prices and raw material costs (natural gas in the case of nitrogen-based crop nutrients, crude oil in the case of petroleum products, and live hogs, cattle and catfish in the case of refrigerated foods). We cannot determine the direction or magnitude to which these factors will affect our cash flow and net income or loss.
Change in Net Sales
1999 2000 Compared 2001
Compared with 1999 Compared
with 1998 with 2000
--------------- -------------- -----------------
(Amount in Millions)
Increase (Decrease) of Business Segment Sales:
Crop Production..................................................... $ (155) $ (23) $ (236)
Petroleum........................................................... (183) 465 292
Feed................................................................ 26 37 (567)
Refrigerated Foods................................................. 143 605 215
World Grain........................................................ 2,029 362 (286)
Other Operating Units............................................... 88 92 (43)
-------------- -------------- ----------------
Total Increase (Decrease) in Business Segment Sales................... $ 1,948 $ 1,538 $ (625)
============== ============== ================
Change in Business Segment Income
1999 2000 2001
Compared Compared Compared with
with 1998 with 1999 2000
-------------- -------------- ---------------
(Amount in Millions)
Increase (Decrease) of Business Segment Income:
Crop Production..................................................... $ (59) $ (24) $ (49)
Petroleum........................................................... 11 8 49
Feed................................................................ 2 1 (11)
Refrigerated Foods................................................. 21 16 (28)
World Grain........................................................ 1 (49) (12)
Other Operating Units............................................... 6 (3) (29)
--------------- -------------- --------------
Total Increase (Decrease) in Business Segment Income.................. $ (18) $ (51) $ (80)
General and administrative expenses (increase) decrease............ $ (15) $ (6) $ 29
Restructuring and other charges (increase)............................ -0- -0- (26)
Interest expense (increase) decrease.................................. (9) 11 -0-
Interest income increase.............................................. 2 2 1
Other, net increase (decrease)........................................ (9) (7) 7
Equity in net income of investees..................................... -0- (5) 1
Minority owners interest in net income of subsidiaries................ -0- -0- -0-
Cumulative effect of changes in accounting principles................. -0- -0- 1
Income tax benefit increase........................................... 4 13 6
-------------- -------------- -------------
Total (Increase) Decrease in Unallocated Expenses..................... $ (27) $ 8 $ 19
Total (Decrease) in Net Income........................................ $ (45) $ (43) $ (61)
============== ============== =============
In computing the change of business segment income or loss, income and expenses not identified to an industry segment and income taxes have been excluded. See Note 15 of the Consolidated Financial Statements.
Following is management's discussion of business segment sales, segment income or loss and other factors affecting Farmland's net income during 1999, 2000 and 2001.Crop Production
SalesOn January 1, 2000, Farmland, Land O’Lakes, and Cenex Harvest States combined their crop production and crop protection marketing functions into a new venture, Agriliance, LLC. Farmland now sells 100% of our manufactured product to Agriliance. Sales of the crop production segment decreased $235.7 million, or 24%, in 2001 as compared to 2000. The decline is primarily due to an approximate 35% decrease in unit sales of plant foods offset by a 13% increase in the average unit selling prices for nitrogen-based plant foods and phosphate-based plant foods. The decrease in unit sales is primarily a result of lower demand as reflected by an industry-wide decrease in nitrogen and phosphate sales for the year ended August 31, 2001 compared with the prior year. As a result, Farmland reduced production output, which decreased our sales to Agriliance. The increase in average unit selling prices was the result of a combination of factors. The significant increase in natural gas prices caused nitrogen-based crop nutrient prices to increase. However, the increase in average unit selling prices was significantly less than the increase in natural gas prices as the relatively higher price within the United States for nitrogen-based crop nutrients made the United States market more attractive to foreign producers, resulting in increased imports of nitrogen-based crop nutrients to the United States. The average price of natural gas was $4.69 per mmbtu in 2001 as compared to $2.74 per mmbtu in 2000, which translates to an increased cost of producing anhydrous ammonia of approximately $66 per ton. To better manage our inventory costs, during the year we temporarily curtailed production of nitrogen-based plant foods at various production plants.
Sales of the crop production segment decreased $23 million, or 2%, in 2000 as compared to 1999. The decline was primarily due to an approximate 4% decrease in unit sales of plant foods combined with a 12% decrease in the average unit selling prices for phosphate-based plant foods, partially offset by a 15% increase in the average unit selling prices of nitrogen-based plant foods. The decline in the average unit selling price of phosphate-based plant foods was due primarily to decreased demand by China and India. In 2000, nitrogen-based plant foods unit selling prices have rebounded from 1999 unit selling prices primarily because supply has tightened due to industry-wide plant closings. During 1999, plant closings were in response to an imbalance in the supply and demand for nitrogen-based plant foods.
Crop production unit sales in 1999 were comparable to unit sales in 1998; however, the average unit selling price for nitrogen-based plant foods decreased 16%. As a result, sales decreased $155 million, or 13%, in 1999 as compared to 1998. The nitrogen plant foods industry experienced market price declines due to increased worldwide supplies of nitrogen and decreased demand for plant foods in response to decreased unit prices that producers realize for their grain. These adverse conditions were exacerbated by heavy spring rains throughout Farmland’s market area, which restricted the use of fertilizer products. As a result of the above market conditions, Farmland temporarily ceased production of urea ammonia nitrate at our Enid, Oklahoma and Lawrence, Kansas facilities during the fourth quarter of 1999.
IncomeIncome of the crop production segment decreased $48.5 million in 2001 as compared to 2000. Income before interest expense decreased $40.7 million in 2001 as compared to 2000 (see “Other Income (Deductions) – Interest Expense” for discussion regarding interest expense). Gains related to management of natural gas positions of $38.9 million in the current year including the increase in income of $12.3 million for the change in accounting methods for derivative instruments, are offset by a decrease in other income of $49.6 million due to the fiscal year 2000 pretax gain on the sale of a portion of our direct equity investment in the Agriliance venture. Other contributing factors include a reduction in gross margins of $30.9 million as a result of higher per unit cost of production caused by the increase in the cost of natural gas, $19.2 million increase in unrecovered fixed costs due to temporary shutdowns of three of our facilities during 2001, and an $18.9 million decrease in equity income from investees, primarily due to lower earnings from Agriliance. These factors were offset in part by a $29.8 million decrease in start-up costs related to the gasification plant located in Coffeyville, Kansas, a $6.6 million reduction in selling, general and administrative expenses and a change in our accounting method for planned major maintenance expenses, which resulted in a $6.3 million increase in income.
Income of the crop production segment decreased from a gain of $11.7 million in 1999 to a loss of $12.3 million in 2000. This decrease is primarily due to approximately $35.3 million of start-up costs related to the gasification plant located in Coffeyville, Kansas, lower phosphate-based plant foods margins due to lower demand by China and India, reducing our share of venture income by $16.6 million, a $22.1 million increase in interest expense, a $5.9 million increase in unrecovered fixed costs due to temporary shutdowns of two of our facilities during 2000, and $2.6 million in costs related to a write-off of certain natural gas inventory. These factors were offset in part by a $49.6 million pre-tax gain on the sale of a portion of our investment in the Agriliance venture to Land O’Lakes, and $8.9 million gain on futures positions closed as a result of anticipated natural gas purchases for our Pollock facility which did not occur. With the formation of the Agriliance venture, a portion of our nitrogen-based plant food income was recognized as equity in income of investees, rather than as gross income. Also, certain of crop production’s selling, general and administrative expenses were transferred to Agriliance.
Income of the crop production segment decreased from $70.5 million in 1998 to $11.7 million in 1999. This decrease was primarily attributable to lower unit margins on nitrogen-based plant food products. Unit margins declined as additional global plant foods production capacity combined with reduced domestic demand continued to decrease selling prices of nitrogen products in 1999. Partially offsetting the decline in gross margin, crop production and protection realized a $7.7 million gain on the sale of phosphate rock reserves, a $4.1 million gain on futures positions closed as a result of anticipated natural gas purchases which will not occur and a $4.3 million gain from settlement of litigation related to the acquisition of raw materials.
Petroleum
SalesSales of the petroleum business increased $292 million, or 21%, in 2001 as compared to 2000. The increase is primarily due to an approximate 6% increase in unit sales of refined fuels along with a 13% increase in the average unit selling price. Propane unit sales increased 45% and propane average unit selling prices increased 47%. The refined fuels and propane unit price increases resulted from a colder than normal winter throughout much of the United States combined with low inventory levels of refined fuels, especially gasoline, and unplanned refinery shutdowns in the Midwest region of the country.
Sales of the petroleum business increased $465 million, or 49%, in 2000 compared to 1999. This increase was primarily a result of a 64% increase in product selling prices due to a decrease in worldwide inventories of crude oil.
Sales of the petroleum business decreased $183 million, or 16%, in 1999 compared to 1998. This decrease resulted in a 12% decrease in unit sales for refined fuels (gasoline, distillates and diesel) and a decrease in the average unit price for refined fuels and propane of 16% and 12%, respectively. The price decline was primarily due to a temporary excess of product supplies in the market relative to demand.
IncomeIncome of the petroleum segment increased $49.0 million in 2001 as compared to 2000 primarily as a result of unusually large spreads between crude oil cost and refined fuel selling prices. The spread was caused by lower than normal inventory levels throughout the country and unplanned refinery shutdowns. The increase in gross margins of $70.6 million was partly a result of the dissolution of Cooperative Refining, LLC, which was 42% owned by Farmland, effective December 31, 2000. As a result, income previously recognized as equity in income of investees is now recognized as a part of gross margins. The increase in gross margins was offset by $3.6 million increase in selling, general and administrative expenses, and a decrease in equity in income from investees of $14.7 million, primarily as a result of the dissolution of Cooperative Refining, LLC.
The petroleum business segment had income of $10.2 million in 2000 compared with $2.3 million in 1999. This increase resulted primarily when, during the last half of our fiscal year, refined fuel product prices increased more than crude oil prices increased. With the formation of Cooperative Refining, a significant portion of our petroleum income was recognized as equity in income of investees, rather than gross income. Also, certain of petroleum’s selling, general and administrative expenses were transferred to our ventures.
The income of the petroleum business segment increased $11.3 million in 1999 as compared to 1998. The increase in income was primarily a result of volatile market prices for energy products. In 1998, market prices fell sharply, and we reduced our income and the carrying value of inventories by approximately $27.6 million to reflect this market value decline. During 1999, we recovered the market value of these inventories, and accordingly, we increased the carrying value of these petroleum inventories by $27.6 million and recognized income in the same amount to reflect this increase. In addition, we placed the operations of the Coffeyville refining in a venture which commenced operations on September 1, 1999. In anticipation of the venture’s operations, we were able to liquidate certain LIFO inventories and realize a $14.5 million gain. These increases in income were partially offset by strong industry-wide production of refined fuels combined with lower demand for these products, which reduced the spread between crude oil costs and refined product selling prices.
Feed
SalesIn order to enhance the size, scale and market position of our feed operations, effective October 1, 2000, Farmland and Land O’Lakes combined feed businesses to form a new venture, Land O’Lakes Farmland Feed (LOLFF). Starting October 1, 2000, we no longer record our feed business sales, SG&A expenses and other income in our Consolidated Financial Statements. Instead, we record only our share of net income (loss) of the venture as equity in net income of investees in our Consolidated Financial Statements. As a result of forming the venture, the sales of the feed segment as recorded in Farmland’s financial statements decreased $567 million, or approximately 93%, in 2001 compared with 2000.
Sales of the feed business increased $37 million, or 6% in 2000 compared with 1999. The increase resulted primarily from a 4% increase in feed tons sold combined with higher unit prices for feed ingredients.
Sales of the feed business increased $26 million in 1999 compared with 1998. This increase resulted primarily from higher unit sales due to geographic expansion partially offset by lower per ton selling prices for livestock feed and feed ingredients.
IncomeIncome for the feed segment decreased $10.8 million in 2001 compared with the same period last year primarily due to our share of non-recurring cost associated with LOLFF’s restructuring of its manufacturing facilities combined with reduced margins from the poultry formula feed, Farm and Ranch, and Animal Protein lines of business. Manufacturing expenses also increased in part due to increased natural gas costs.
Income of the feed business increased $0.8 million in 2000 compared to 1999. The increase was primarily due to higher unit margins in formula feed, feed ingredients, and basic products. Income of the feed business increased $1.8 million in 1999 compared to 1998. The increase was primarily due to higher unit margins on pet, specialty, and equine feeds.During June 2001, LOLFF announced the acquisition by LOLFF of an independent feed company, Purina Mills. We believe that this acquisition will not have a significant impact on our earnings from the LOLFF venture.
Refrigerated Foods
SalesSales in the refrigerated foods segment increased $215 million, or approximately 5%, in 2001 compared with 2000. This increase was primarily due to an 8% increase in unit selling price partially offset by a 3% reduction in unit sales volume. The reduction in unit sales volume was primarily due to decreased slaughter levels resulting from the sale of an inefficient plant located in Dubuque, Iowa during June 2000 and the closure of our Carroll, Iowa plant during June 2001. The increase in unit selling price is in part, the result of our continued emphasis on providing value added products, such as Farmland Family Entrees™, Farmland Ground and Browned™ fully cooked and seasoned ground beef, and case ready meats.
Sales in the refrigerated foods segment increased $606 million, or 15%, in 2000 compared with 1999. This increase was attributable to a 6% increase in volume of meat sold combined with a 10% increase in unit selling prices of meat products.
The refrigerated foods segment sales increased $143 million, or 4% in 1999 compared with 1998. The increase was attributable to higher unit sales of both beef and pork, partly offset by a decrease in unit sales price of pork.
IncomeIncome in the refrigerated foods segment decreased $28.1 million in 2001 compared with 2000. This decrease was primarily the result of a management decision, based on a review of our refrigerated foods business, to close unprofitable meat facilities. As a result of these closings, we recorded a $17 million charge during our third quarter, reflecting the reduction of the net book value of fixed assets to their net realizable value, accrued severance costs, and the elimination of associated goodwill. Other components of the decrease are increased promotional costs and continued advertising costs to enhance our brand recognition and start up costs related to our case ready program. Case ready refers to meat products which are prepared to the specifications of retailers and which do not require additional preparation work prior to sale by the retailer. Also, additional cleanup costs were incurred as a result of a fire at our Albert Lea, Minnesota plant in July. Although the fire destroyed our Albert Lea facility, our ability to supply product to our customers has not been significantly affected as we moved some production to our other owned facilities and entered into co-packing arrangements to supply additional product.
Income of the refrigerated foods segment increased $15.7 million in 2000 compared with 1999. This increase was attributable to increased unit sales combined with increased margins per pound of beef. This increase was partially offset by higher pork selling and marketing expenses and an $11.5 million loss recognized on the sale of our Dubuque, Iowa meat processing plant.
Income of the refrigerated foods segment increased $21.5 million in 1999 compared with 1998. This increase was primarily due to increased gross margins as a result of a decline in live hog prices and an increase in unit selling prices of beef. This increase was partially offset by an increase in promotional, advertising and storage expenses.
World Grain
SalesSales of the world grain segment decreased $286 million, or 6%, in 2001 as compared to 2000. The decline was primarily a result of the formation of a grain marketing relationship between Farmland and ADM, effective May 4, 2001. ADM/Farmland, a wholly-owned subsidiary of ADM, purchased our United States grain inventories and now leases and operates Farmland’s grain elevators throughout the United States. The leases are structured to cover the depreciation, amortization and taxes related to the elevators, and we are entitled to receive a 50% share of the earnings or losses of ADM/Farmland. With this agreement substantially all domestic grain sales are now recognized by the new entity and are no longer included in Farmland’s consolidated sales.
Sales of the world grain segment increased $362 million, or 9%, in 2000 compared to 1999. This increase was primarily due to unit sale increases in grain, oilseeds and sugar, partially offset by lower grain unit prices.
World grain sales increased 95%, or $2.0 billion, in 1999 compared to 1998. The primary cause of this increase in sales was the change in our international grain marketing business from grain brokerage operations to buy/sell operations. Due to this change, it was appropriate to record the full value of the grain sold as revenue ($2.0 billion in 1999) and related costs of grain acquisition as cost of goods sold ($1.9 billion in 1999), rather than recognizing as revenue only the net margins on grain transactions.
IncomeDuring May 2001, Farmland entered into a grain marketing relationship with ADM and sold our grain commission company, Farmland Atwood, to ADM. These transactions resulted in a charge of $12.2 million during the year, consisting primarily of elimination of associated goodwill and accrued severance for the affected employees. This was the primary reason income of the world grain segment decreased $12.5 million, or 43%, in 2001 as compared to 2000. Also affecting world grain’s income were higher interest costs associated with carrying grain inventories, partly offset by a reduction of selling, general and administrative (SG&A) expenses.
World grain income decreased $48.9 million in 2000 compared to 1999. This decrease is primarily the result of Farmland terminating grain contracts after we determined the risk associated with these contracts could no longer be evaluated. Lower per unit margins from wheat marketing was also a contributing factor. This decrease was partly offset by the capturing of deferred shipment values, commonly referred to as “carry,” which is revenue in excess of the cost of holding grain for deferred execution.
In 1999, world grain income increased 7%, or $1.3 million. This increase resulted primarily from higher storage revenues offset by increased interest expense.Other Operating Units
Segment income for other operating units decreased $28.6 million for the twelve months ended August 31, 2001 compared with the prior year. This decrease was primarily attributable to Heartland Wheat Growers, our subsidiary which produced wheat gluten at a facility in Russell, Kansas. In response to government subsidies of European wheat gluten production, the United States government had in place a trade protection order which limited the volume of European wheat gluten which could be imported into the United States. This trade order expired June 1, 2001 and was not renewed. Primarily as a result of the anticipated increase in wheat gluten availability, wheat gluten prices declined significantly during the third quarter. Since we believe wheat gluten prices will remain depressed for an extended time, we closed our wheat gluten facility during May 2001. As a result, we have recorded a $20 million charge related to this closing, primarily to reduce the net book values of certain fixed assets to their net realizable values.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses decreased $82.4 million in 2001 compared with 2000. SG&A expenses directly associated with business segments decreased $55.3 million, primarily related to formation of our Land O’Lakes Farmland Feed, ADM/Farmland, and Agriliance joint ventures and the sale of our Dubuque, Iowa meat processing plant. We successfully reduced SG&A expenses not identified to business segments by $29.1 million (part of a $39 million overall decrease in net unallocated expense before taxes and restructuring charges), primarily as a result of reduced information technology and personnel costs.
Selling, general and administrative expenses decreased $4.0 million in 2000 compared with 1999. SG&A expenses directly associated with business segments decreased $10.4 million, primarily related to formation of the Agriliance and Cooperative Refining joint ventures and lower agency fees paid to Country Energy. SG&A expenses not identified to business segments increased by $6.4 million primarily as a result of higher employee related costs.
Selling, general and administrative expenses increased $48.8 million, or 11%, in 1999 compared with 1998. SG&A and expenses directly associated with business segments increased $33.3 million (primarily related to the pork business and acquisition of SF Services, Inc.) and has been included in the determination of the operating income of business segments. General corporate expenses not identified to business segments increased $15.5 million primarily as a result of the increased cost of management information systems and increased expenses related to geographic expansion.
Restructuring and Other Charges
During 2001, we recorded $80.3 million of restructuring and other charges. In addition to the significant charges included in the above segment discussion, we recorded a $26 million charge to write off a portion of our enterprise-wide integrated software system associated with businesses which have been sold or are being operated through joint ventures.
Other Income (Deductions)
Interest ExpenseInterest expense increased $22.0 million in 2001 compared with 2000 primarily due to increased financing to support grain inventories and receivables, an increase in our average borrowing rate, and the amortization of costs related to establishing our new senior secured credit facility.
Interest expense increased $23.4 million in 2000 compared with 1999 primarily due to an increase in the average interest rate and the amortization of cost related to establishing our new senior secured credit facility. Interest expense directly charged to the segments increased by $34.2 million.
Interest expense increased $17.1 million in 1999 compared with 1998 primarily reflecting higher average borrowings. Interest expense directly charged to the segments increased by $8.3 million.
Other, NetOther, net decreased $4.0 million in 2001 compared to 2000. Other, net directly connected to segments decreased $11.2 million and those results have been included in the results of segments previously discussed. Other, net not directly connected to the segments increased $7.2 million, primarily due to the gain on the sale of our 50% ownership in One System Group, a provider of information services.
Other, net decreased $20.6 million in 2000 compared with 1999. Other, net directly connected to segments decreased $13.2 million. Other, net not identified to segments decreased $7.4 million in 2000 compared with 1999, primarily as a result of a $6.9 million loss from our 24.5% ownership in VantagePoint Network LLC, a joint venture providing information services to production agriculture.
Other, net increased $13.0 million in 1999 compared with 1998. Other, net directly connected to segments increased $22.0 million. Other, net not identified to segments decreased $9.0 million. The decrease in 1999 compared to 1998 is primarily due to non-recurring income recognized in 1998, including the $2.2 million gain on the sale of Cooperative Service Company and the $7.2 million gain on the sale of a 3.8% interest in National Beef Packing Co. L.P.
Capital Expenditures
See "Business and Properties - Business - Capital Expenditures and Investments in Ventures."Matters Involving the Environment
Farmland is subject to various stringent federal, state and local environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous materials, as we use hazardous substances and generate hazardous wastes in the ordinary course of our manufacturing processes. Liabilities related to remediation of contaminated properties are recognized when the related costs are probable and can be reasonably estimated. Estimates of these costs are based upon currently available facts, existing technology, undiscounted site specific costs and currently enacted laws and regulations. In reporting environmental liabilities, no offset is made for potential recoveries. Such liabilities include estimates of Farmland’s share of costs attributable to potentially responsible parties which are insolvent or otherwise unable to pay. All liabilities are monitored and adjusted regularly as new facts or changes in law or technology occur.
Farmland wholly or jointly owns or operates grain elevators and manufacturing properties and has potential responsibility for environmental conditions at a number of former manufacturing facilities and at waste disposal facilities operated by third parties. Farmland also has been identified by the Environmental Protection Agency (EPA), as a potentially responsible party (“PRP”) under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”) at various National Priority List sites and has unresolved liability with respect to the past disposal of hazardous substances at four such sites. CERCLA may impose joint and several liability on certain statutory classes of persons for the costs of investigation and remediation of contaminated properties, regardless of fault or the legality of the original disposal. These persons include the present and former owners or operators of a contaminated property and companies that generated, disposed of, or arranged for the disposal of hazardous substances found at the property. We are investigating or remediating contamination at 51 properties under various state and federal hazardous waste management laws. During 1999, 2000 and 2001, we paid approximately $7.2 million, $2.3 million and $1.2 million, respectively, for environmental investigation and remediation.
Farmland currently is aware of probable obligations for environmental matters at a number of properties. As of August 31, 2001, we had an environmental accrual in our Consolidated Balance Sheet for probable and reasonably estimated cost for remediation of contaminated property of $17.2 million. We periodically review and, as appropriate, revise our environmental accruals. Based on current information and regulatory requirements, we believe that the accruals established for environmental expenditures are adequate. Farmland has also recorded, as a receivable, approximately $0.3 million of estimated, probable insurance proceeds related to an environmental issue which has been remediated.
Some environmental matters are in preliminary stages and the timing, extent and costs of actions which governmental authorities may require are currently unknown. As a result, certain costs of addressing environmental matters are either not probable or not reasonably estimable and, therefore, have not been accrued. In management’s opinion, it is reasonably possible that Farmland may incur $14.7 million of costs in addition to the $17.2 million which has been accrued.
Under the Resource Conservation Recovery Act of 1976 (‘‘RCRA”), Farmland has three closure and four post-closure plans in place for five locations. Closure and post-closure plans also are in place for three landfills and two injection wells as required by state regulations. Such closure and post-closure costs are estimated to be $5.1 million at August 31, 2001 (and are in addition to the $14.7 million discussed in the prior paragraph). These liabilities are accrued when plans for termination of plant operations have been made. Operations are being conducted at these locations and we do not plan to terminate such operations in the foreseeable future. Therefore, these environmental exit costs have not been accrued.
In November 1998, there was a release of petroleum into the Verdigris River near Coffeyville, Kansas, from a break in a section of Farmland’s pipeline facilities. Farmland committed extensive resources to address the release and we believe there has been no lasting impact on the environment. However, in April 2001, Farmland received an EPA demand for civil penalty associated with the release. Although the final penalty amount to be assessed still has not been decided, Farmland believes the matter ultimately will be resolved for an immaterial which has been accrued as of August 31, 2001.
Protection of the environment requires us to incur expenditures for equipment or processes. These expenditures may impact our future net income. The EPA has issued new rules limiting sulfur in gasoline to 30 parts per million and has published a proposed rule limiting sulfur in diesel fuel to 15 parts per million. The rules affecting gasoline were effective December 1, 1999 with a January 1, 2004 compliance date. The proposed rules for diesel fuel have a June 1, 2006 compliance date. Based on information currently available, we anticipate that material expenditures, possibly in excess of $100 million, will be required to achieve compliance with these new and pending rules. Farmland has applied for, but has not received, regulatory extension of the deadlines until 2008. Furthermore, Congress is considering legislation which may result in classification of Farmland as a small refiner. Classification as a small refiner may provide Farmland with greater flexibility in meeting the low sulfur requirements.
Environmental expenditures are capitalized when such expenditures provide future economic benefits. In 1999, 2000 and 2001, Farmland had capital expenditures of approximately $6.5 million, $6.8 million and $0.7 million, respectively, to improve our environmental compliance and the efficiency of our operations.
Management believes we currently are in substantial compliance with existing environmental rules and regulations. There can be no assurance that the environmental matters described above or environmental matters which may develop in the future will not have a material adverse effect on our business, financial condition or results of operations.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities” was issued by the Financial Accounting Standards Board (FASB) and is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000 (our fiscal year 2001). Adoption of SFAS No. 140 did not have a material effect on Farmland’s financial position or our results of operations.
SFAS No. 141 “Business Combinations” effective for business combinations with non-cooperative enterprises initiated after June 30, 2001. A business combination occurs when an enterprise acquires net assets that constitute a business or equity interests of one or more other enterprises and obtains control over that enterprise or enterprises. For purposes of the final Statement, the formation of a joint venture is not a business combination. Business combinations involving a non-cooperative enterprise which are initiated after June 30, 2001 must use the purchase method of accounting, and the pooling of interest method of accounting is prohibited. Business combination involving cooperative enterprises are excluded from the scope of SFAS No. 141 pending issuance of interpretative guidance from the FASB. We do not anticipate that adoption of this statement will have a material effect on Farmland’s financial position or our results of operations.
SFAS No. 142 “Goodwill and Other Intangible Assets” was issued during June 2001 by the FASB. On adoption of this standard, goodwill and other intangible assets with an indefinite life will no longer be amortized; however, both goodwill and other intangible assets will need to be tested annually for impairment. For goodwill and intangible assets arising out of business combinations with non-cooperative enterprises, SFAS No. 142, will be effective for fiscal years beginning after December 15, 2001 (our fiscal year 2003). For goodwill and other intangible assets arising out of business combination with cooperatives, implementation of SFAS No. 142 is delayed pending additional interpretive guidance from the FASB. Management is currently reviewing the impact that the provisions of this statement will have on our financial statements and results of operations.
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" was issued in December 1999 by the staff of the SEC and is effective no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999 (our fiscal year 2001). Adoption of Staff Accounting Bulletin No. 101 did not have a material effect on Farmland's financial position or our results of operations.
SFAS No. 143 “Accounting for Asset Retirement Obligations” was issued during June 2001, by the FASB. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, Farmland will recognize a gain or loss on settlement.
Farmland is required and plans to adopt the provisions of Statement No. 143 for the quarter ending November 30, 2002 (our fiscal year 2003). To accomplish this, Farmland must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require Farmland to gather market information and develop cash flow models. Additionally, Farmland will be required to develop processes to track and monitor these obligations. Because of the effort necessary to comply with the adoption of Statement No. 143, it is not practicable for management to estimate the impact of adopting this Statement at the date of this report.
SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” was issued during October 2001, by the FASB. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While this statement supersedes SFAS No. 121, “Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of” it retains many of the fundamental provisions of that statement.
This statement also supersedes the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occuring Events and Transactions”, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale.
This statement is effective for fiscal years beginning after December 15, 2001 (our fiscal year 2003), management is currently reviewing the impact that the provisions of this statement will have on our financial statements and results of operations.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995Farmland is including the following cautionary statement in this Form to make applicable and take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, Farmland. The factors identified in this cautionary statement are important factors (but are not necessarily all of the potentially important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Farmland. Where any such forward-looking statement includes a statement of the assumptions or basis underlying such forward-looking statement, Farmland cautions that, while it believes such assumptions or basis to be reasonable and makes them in good faith, assumed facts or basis almost always vary from actual results and the differences between the assumed facts or basis and actual results can be material, depending upon the circumstances. Where, in any forward-looking statement, Farmland, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. Such forward looking statements include, without limitation, statements regarding the seasonal effects upon the business, the effects of actual, pending and possible legislation and regulation (including, but not limited to, the effects of FAIR, “trade promotion authority” and certain environmental laws), the anticipated expenditures for environmental remediation, the potential capital expenditures required to comply with recently enacted and proposed regulations related to low sulfur gasoline and diesel fuel, our ability to qualify for a delay in implementation of enacted and proposed low sulfur rules, our ability to obtain a new, long-term credit facility, the redemption of our various equities, the anticipated refinancing of certain leased facilities, and the adequacy of certain raw material reserves and supplies. Discussion containing such forward-looking statements is found in the material set forth under “Business and Properties” (including, without limitation, “Business Risk Factors”), “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements”, as well as within this Form 10-K generally.
Taking into account the foregoing, the following are identified as important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Farmland:
1. Weather patterns (flood, drought, frost, etc.) or crop failure.
2. Federal or state regulations regarding agricultural programs and production efficiencies.
3. Federal or state regulations regarding the amounts of fertilizer and other chemical applications used by farmers.
4. Factors affecting the export of United States agricultural produce (including foreign trade and monetary policies, laws and
regulations, political and governmental changes, inflation and exchange rates, taxes, operating conditions and world demand).
5. Factors affecting supply, demand and price of crude oil, refined fuels, natural gas and other commodities.
6. Regulatory delays and other unforeseeable obstacles beyond our control that may affect growth strategies through unification,
acquisitions and investments in ventures.
7. Competitors in various segments which may be larger than Farmland, offer more varied products or possess greater resources.
8. Technological changes that are more difficult or expensive to implement than anticipated.
9. Unusual or unexpected events such as, among other things, litigation settlements, adverse rulings or judgments and environmental
remediation costs in excess of amounts accrued.
10. Material adverse changes in financial, banking or capital markets.
11. Federal or state regulations regarding environmental matters.
12. Terrorist attacks which have disrupted the financial and credit markets and have negatively impacted the United States economy
and other economies.
13. The factors identified in "Business and Properties - Business - Business Risk Factors".
ITEM 7A. Quantitative and qualitative disclosures about Market Risk
Sensitivity Analysis
Farmland is exposed to various market risks, including commodity price risk, foreign currency risk and interest rate risk. To manage the volatility related to these risks, we enter into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices. Within limits approved by the Board of Directors, we may take net long or short grain and sugar positions. Otherwise, all derivative instruments held by Farmland are intended to serve as economic hedges, although they may not be designated as accounting hedges. Commodities to which we have risk exposure include: feedgrains, wheat, oilseeds, soybean meal, sugar, cattle, hogs, natural gas, crude oil and refined fuels. Farmland also has risk exposure to changes in interest rates and changes in the exchange rate for certain foreign currencies, primarily the Euro. Farmland maintains risk management control systems to monitor its commodity risks and the offsetting hedge positions.
The following table presents one measure of market risk exposure using sensitivity analysis. Market risk exposure is defined as the change in the fair value of the derivative commodity instruments assuming a hypothetical change of 10% in market prices. Actual changes in commodity market prices may differ from hypothetical changes. Fair value was determined for derivative commodity contracts using the average quoted market prices for the three near-term contract periods combined with Farmland’s net position by commodity at year-end. The market risk exposure excludes the underlying positions that are being economically hedged. The underlying commodities hedged have a high inverse correlation to price changes of the derivative commodity instruments.
Effect of 10% Change in Fair Value
As of August 31
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(Amounts in Millions)
Derivative Commodity Contracts:
2000 2001
Grains:
Trading................................. $ 10.2 $ 15.8
Other than trading...................... $ 20.7 $ -0-
Energy:
Trading................................. $ -0- $ 1.0
Other than trading...................... $ 14.5 $ 1.2
Meats:
Trading................................. $ 0.7 $ 2.1
Farmland uses interest rate swaps to hedge a portion of its variable interest rate exposure and uses foreign currency forward contracts to hedge its exposure related to certain foreign currency denominated transactions. Farmland also has fair value exposure to interest rate risk as a result of our fixed rate debt. Assuming an adverse interest rate movement of 100 basis points, the impact on fair value of interest positions held at August 31, 2000 and 2001 would be $32.7 million and $33.8 million, respectively. Assuming an adverse movement in the foreign currency spot price of 10%, the impact on fair value of currency positions held at August 31, 2000 and 2001 would be $1.2 million and $2.1 million, respectively. Market risk on other than trading transactions is not material to our results of operations or financial position, as we have offsetting physical positions. The market risk of trading positions is unlikely to have a material impact on our financial position, but could have a material impact on our results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FARMLAND CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report..........................................................35
Consolidated Balance Sheets, August 31, 2000 and 2001.................................36
Consolidated Statements of Operations for each of the years in the three-year
period ended August 31, 2001..........................................................38
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended August 31, 2001...........................................39
Consolidated Statements of Capital Shares and Equities for each of the years in
the three-year period ended August 31, 2001...........................................41
Notes to Consolidated Financial Statements............................................42
INDEPENDENT AUDITORS' REPORT
The Board of Directors Farmland Industries, Inc.:We have audited the accompanying consolidated balance sheets of Farmland Industries, Inc. and subsidiaries as of August 31, 2000 and 2001, 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, 2001. 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, 2000 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 10 to the consolidated financial statements, Farmland changed its method of accounting for derivative instruments and hedging activities in 2001. As discussed in Note 13 to the consolidated financial statements, Farmland changed its method of accounting for planned major maintenance costs from the accrue-in-advance method to the direct expense method in 2001.
KPMG LLPKansas City, Missouri
November 19, 2001
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
August 31
------------------------------------
2000 2001
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(Amounts in Thousands)
Current Assets:
Accounts receivable - trade......................................... $ 740,026 $ 550,291
Inventories (Note 2)................................................ 832,687 588,807
Deferred income taxes (Note 6)...................................... 45,589 63,160
Other current assets................................................ 207,127 150,586
---------------- ----------------
Total Current Assets.......................................... $ 1,825,429 $ 1,352,844
---------------- ----------------
Investments and Long-Term Receivables (Note 3) $ 399,889 $ 373,119
---------------- ----------------
Property, Plant and Equipment (Notes 4 and 5):
Property, plant and equipment, at cost.............................. $ 1,787,614 $ 1,708,382
Less accumulated depreciation and amortization...................... 960,652 952,753
---------------- ----------------
Net Property, Plant and Equipment................................... $ 826,962 $ 755,629
---------------- ----------------
Other Assets $ 229,907 $ 245,952
---------------- ----------------
Total Assets $ 3,282,187 $ 2,727,544
================ ================
See accompanying Notes to Consolidated Financial Statements.FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITIES
------------------------------------
2000 2001
------------------- ----------------
(Amounts in Thousands)
Current Liabilities:
Checks and drafts outstanding.......................................... $ 135,799 $ 116,640
Short-term notes payable (Note 5)...................................... 689,477 341,559
Current maturities of long-term debt (Note 5).......................... 32,222 48,054
Accounts payable - trade............................................... 345,286 342,312
Customer advances on product purchases................................. 120,731 10,747
Accumulated interest on subordinated securities........................ 53,069 67,795
Other current liabilities.............................................. 233,943 188,018
-------------- --------------
Total Current Liabilities........................................ $ 1,610,527 $ 1,115,125
-------------- --------------
Long-term Liabilities:
Long-term borrowings (excluding current maturities) (Note 5)........... $ 646,160 $ 710,976
Other long-term liabilities............................................ 40,134 38,702
-------------- --------------
Total Long-Term Liabilities...................................... $ 686,294 $ 749,678
-------------- --------------
Deferred Income Taxes (Note 6)........................................... $ 54,676 $ 70,906
-------------- --------------
Minority Owners' Equity in Subsidiaries (Note 7)......................... $ 49,459 $ 29,311
-------------- --------------
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
Common shares, $25 par value -- Authorized 50,000,000 shares,
21,102,505 shares issued and outstanding
(20,915,040 shares in 2000)........................................ 522,876 527,563
Associate member common shares (nonvoting),
$25 par value -- Authorized 2,000,000 shares, 1,119,627
shares issued and outstanding (1,212,840 shares in 2000)............ 30,321 27,991
Accumulated other comprehensive income (net of deferred tax benefit
of $3,806 in 2001) (Notes 9 and 10)................................. 111 (21,342)
Earned surplus and other equities...................................... 227,923 128,312
-------------- --------------
Total Capital Shares and Equities................................ $ 881,231 $ 762,524
-------------- --------------
Contingent Liabilities and Commitments (Notes 5 and 11)
Total Liabilities and Equities........................................... $ 3,282,187 $ 2,727,544
============== ==============
See accompanying Notes to Consolidated Financial Statements.FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended August 31
--------------------------------------------------------
1999 2000 2001
----------------- ---------------- -----------------
(Amounts in Thousands)
Sales........................................................ $ 10,850,907 $ 12,388,723 $ 11,763,442
Cost of sales................................................ 10,372,915 11,917,242 11,331,217
----------------- ---------------- -----------------
Gross income................................................. $ 477,992 $ 471,481 $ 432,225
Selling, general and administrative expenses................. 480,839 476,808 394,398
Restructuring and other charges (Note 12).................... -0- -0- 80,325
Other income (expense):
Interest expense......................................... (90,773) (114,239) (136,288)
Interest income.......................................... 8,337 14,248 18,257
Other, net (Note 19)..................................... 43,322 22,691 18,696
Total other income (expense)................................. $ (39,114) $ (77,300) $ (99,335)
----------------- ---------------- -----------------
Loss before equity in net income of investees, minority
owners' interest in net (income) of subsidiaries, income
tax benefit, and cumulative effect of changes
in accounting principles, net of income tax expense...... $ (41,961) $ (82,627) $ (141,833)
Equity in net income of investees (Note 3)................... 65,510 56,891 27,457
Minority owners' interest in net income
of subsidiaries.......................................... (17,727) (24,996) (23,164)
----------------- ---------------- -----------------
Income (loss) before income tax benefit and
cumulative effect of changes in accounting
principles $ 5,822 $ (50,732) $ (137,540)
Income tax benefit (Note 6).................................. 8,043 21,482 27,778
----------------- ---------------- -----------------
Income (loss) before cumulative effect of changes in
accounting principles..................................... $ 13,865 $ (29,250) $ (109,762)
Cumulative effect of changes in accounting for
derivative financial instruments and planned major
maintenance costs, net of $3,333 income
tax expense (Notes 10 and 13)............................. -0- -0- 19,776
----------------- ---------------- -----------------
Net income (loss)............................................. $ 13,865 $ (29,250) $ (89,986)
=============== ================= ================
Pro forma net income (loss) assuming use of the direct
expense method of accounting for planned major
maintenance costs (Note 13)............................... $ 15,398 $ (29,615) $ (96,256)
=============== ================= ================
See accompanying Notes to Consolidated Financial Statements.FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31
---------------------------------------------------
1999 2000 2001
--------------- --------------- ----------------
(Amounts in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $ 13,865 $ (29,250) $ (89,986)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................ 109,184 108,126 113,631
Asset impairment charges..................................... -0- 66,954
-0-
Equity in net income of investees............................ (65,510) (56,891) (27,457)
Minority owners' equity in net
income of subsidiaries..................................... 17,727 24,996 23,164
(Gain) loss on disposition of investments.................... 189 (50,234) 4,032
Patronage refunds received in equities....................... (2,143) (1,284) (1,348)
Proceeds from redemption of patronage equities............... 4,598 3,123 -0-
Deferred income taxes........................................ 10,230 (4,476) 2,465
Adjustment of LIFO inventories............................... (27,593) -0- -0-
Other increase (decrease).................................... 7,929 (5,450) 11,788
Changes in assets and liabilities (exclusive
of assets and liabilities of businesses acquired):
Accounts receivable........................................ (181,454) 54,211 186,953
Inventories................................................ (76,190) (45,737) 288,778
Other assets............................................... (30,592) (11,214) (362)
Accounts payable........................................... 105,028 (118,010) (2,974)
Other liabilities.......................................... (35,791) 155,960 (148,827)
--------------- --------------- ----------------
Net cash provided by (used in) operating activities............ $ (150,523) $ 23,870 $ 426,811
--------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................... $ (121,184) $ (100,865) $ (107,414)
Distributions from joint ventures.............................. 54,121 58,962 28,774
Acquisition of investments and notes receivable................ (69,811) (36,568) (28,087)
Acquisition of other long-term assets.......................... (38,240) (35,081) (24,194)
Proceeds from sale of investments
and collection of notes receivable........................... 61,993 93,530 32,046
Proceeds from sale of fixed assets............................. 22,023 16,825 14,445
Acquisition of businesses, net of cash acquired................ (5,829) -0- -0-
Other (decrease)............................................... (233) -0- -0-
--------------- --------------- ----------------
Net cash used in investing activities.......................... $ (97,160) $ (3,197) $ (84,430)
--------------- --------------- ----------------
See accompanying Notes to Consolidated Financial Statements.FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended August 31
------------------------------------------------------
1999 2000 2001
--------------- --------------- -----------------
(Amounts in Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of patronage refunds................................$. (23,593) $ (6,054) $ -0-
Payments for redemption of equities............................ (9,050) (480) -0-
Payments of dividends on preferred shares...................... (8,004) (8,000) (8,000)
Proceeds from bank loans and notes payable..................... 2,739,865 3,335,921 5,280,228
Payments of bank loans and notes payable....................... (2,624,938) (3,447,962) (5,510,711)
Proceeds from issuance of subordinated debt
certificates............................................... 121,630 101,786 15,328
Payments for redemption of subordinated
debt certificates.......................................... (20,376) (40,538) (48,641)
Net increase (decrease) in checks
and drafts outstanding..................................... 76,128 59,671 (19,159)
Partner distributions.......................................... (11,957) (16,204) (43,446)
Other increase (decrease)...................................... 644 1,187 (7,980)
--------------- --------------- -----------------
Net cash provided by (used in) financing activities..........$. 240,349 $ (20,673) $ (342,381)
--------------- --------------- -----------------
Net decrease in cash and cash equivalents....................$. (7,334) $ -0- $ -0-
Cash and cash equivalents at beginning of year................. 7,334 -0- -0-
--------------- --------------- -----------------
Cash and cash equivalents at end of year.....................$. -0- $ -0- $ -0-
=============== ================ =================
SUPPLEMENTAL SCHEDULE OF CASH PAID FOR INTEREST AND INCOME
TAXES:
Interest.....................................................$. 77,143 $ 107,991 $ 123,039
Income taxes paid (refunded), net............................$. (4,045) $ (17,622) $ 3,409
=============== ================ =================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Transfer of assets in exchange for investment in
joint ventures (petroleum and crop production in
2000, feed in 2001)....................................$. 300 $ 69,150 $ 45,774
=============== ================ =================
Receipt of assets as return of equity in petroleum
venture..................................................$. -0- $ -0- $ 54,399
=============== ================ =================
Appropriation of current year's net income as
patronage refunds........................................$. 30,269 $ 8,002 $ -0-
=============== ================ =================
Acquisition of businesses:
Fair value of assets acquired............................$. 32,883 $ -0- $ -0-
Goodwill................................................... 14,574 -0- -0-
Equity issuable............................................ -0- -0- -0-
Cash paid or payable....................................... (7,750) -0- -0-
--------------- --------------- -----------------
Liabilities assumed...........................................$ 39,707 $ -0- $ -0-
=============== ================ =================
See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL SHARES AND EQUITIES
Years Ended August 31, 1999, 2000 and 2001
--------------------------------------------------------------------------------
Associate Accumulated Earned Total
Member Other Surplus and Capital
Preferred Common Common Comprehensive Other Shares and
Shares Shares Shares Income Equities Equities
------------ ------------ ----------- ---------------------------- ------------
(Amounts in Thousands)
Balance at August 31, 1998..................$100,071 $451,804 $28,508 $ 65 $ 332,248 $912,696
Comprehensive income:
Appropriation of current year's net income... -0- -0- -0- -0- 13,865 13,865
Currency translation adjustments...............-0- -0- -0- 31 -0- 31
------------
Total comprehensive income........................ 13,896
Patronage refund payable in cash transferred
to current liabilities................ -0- -0- -0- -0- (6,054) (6,054)
Prior year patronage refund allocation..... -0- 32,481 3,046 -0- (35,527) -0-
Dividends on preferred stock............... -0- -0- -0- -0- (8,004) (8,004)
Exchange of common stock, associate member
common stock and other equities....... -0- (1,821) (1,393) -0- 3,214 -0-
Issue, redemption and cancellation of equities.. (2) 25,565 (3,272) -0- (17,498) 4,793
------------ ------------ ----------- ------------ ------------ -----------
Balance at August 31, 1999..................$100,069 $508,029 $26,889 $ 96 $ 282,244 $917,327
Comprehensive income:
Appropriation of current year's net loss.. -0- -0- -0- -0- (29,250) (29,250)
Currency translation adjustments.......... -0- -0- -0- 15 -0- 15
------------
Total comprehensive income (loss)............ (29,235)
Prior year patronage refund allocation....... -0- 18,241 3,757 -0- (21,998) -0-
Dividends on preferred stock................. -0- -0- -0- -0- (8,000) (8,000)
Exchange of common stock, associate member
common stock and other equities....... -0- (2,209) (345) -0- 2,554 -0-
Issue, redemption and cancellation of equities. (69) (1,185) 20 -0- 2,373 1,139
------------ ------------ ----------- --------------- ------------ -----------
Balance at August 31, 2000..................$100,000 $522,876 $30,321 $ 111 $ 227,923 $881,231
Comprehensive income:
Appropriation of current year's net loss.. -0- -0- -0- -0- (89,986) (89,986)
Currency translation adjustments.......... -0- -0- -0- (17) -0- (17)
Transition adjustment, net of tax......... -0- -0- -0- 25,653 -0- 25,653
Net gain on cash flow hedges, net of tax.. -0- -0- -0- 9,519 -0- 9,519
Less reclassification adjustments, net of tax. -0- -0- -0- (56,608) -0- (56,608)
------------ ------------ ----------- ------------ ------------ ------------
Total comprehensive income (loss)................. (111,439)
Prior year patronage refund allocation............-0- 5,268 2,865 -0- (8,133) -0-
Dividends on preferred stock......................-0- -0- -0- -0- (8,000) (8,000)
Exchange of common stock, associate member
common stock and other equities....... -0- (207) (4,952) -0- 5,159 -0-
Issue, redemption and cancellation of equities.. -0- (374) (243) -0- 1,349 732
------------ ------------ ----------- -------------- ------------ ------------
Balance at August 31, 2001.................$.100,000 $ 527,563 $ 27,991 $ (21,342) $ 128,312 $ 762,524
============ ============ =========== ============================ ============
See accompanying Notes to Consolidated Financial Statements.FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Farmland Industries, Inc., a Kansas corporation, is organized and operated as a cooperative and its mission is to be a global, consumer-driven, financially successful, 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 receivable.
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.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of – Farmland accounts for long-lived assets in accordance with the provisions of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
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 primarily over a period of 15 to 25 years. Farmland assesses the recoverability of goodwill and other intangible assets 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 $23.1 million and $21.9 million, respectively, at August 31, 2000 and 2001. Other intangible assets, primarily software, are amortized over three to ten years.
Sales – Products sales are recognized when the product is shipped and all significant obligations of Farmland have been satisfied. In accordance with a consensus reached by the Emerging Issues Task Force on Issue No. 00-10, beginning in the fourth quarter of 2001, Farmland’s refrigerated foods segment reclassified all costs incurred for shipping and handling from a reduction of revenue to cost of sales. The presentation of prior period information has been reclassified to conform with the current year presentation. Shipping and handling costs reclassified totaled $141.8 and $149.8 million for the years ending August 31, 1999 and 2000, respectively.
Derivative Commodity Instruments -- Farmland uses derivative commodity instruments, including forward contracts, futures and options contracts, primarily to reduce our exposure to 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.
Crop production uses futures contracts and forward contracts to help manage risk associated with the price volatility of natural gas, which is the major raw material for the production of nitrogen-based crop nutrients. Gains and losses related to derivative instruments which qualify for and have been designated as cash flow hedges of forecasted transactions are recorded as a component of other comprehensive income and are reclassified into earnings as a component of cost of sales when the underlying hedged transaction affects earnings. When a qualifying cash flow hedge is terminated or ceases to meet the specified criteria for use of hedge accounting, any gains or losses included as a component of other comprehensive income through that date continue to be deferred until the period in which the underlying transaction affects earnings, at which time the gain or loss is reclassified into earnings as a component of cost of sales. Changes in the fair value of the derivative instrument subsequent to the termination of the hedge are recorded into earnings as a component of other income. 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. When a cash flow hedge is discontinued because it is probable the forecasted transaction will not occur, the net gain or loss in accumulated other comprehensive income is immediately reclassified into earnings as a component of other income.
Our refrigerated foods, petroleum and crop production businesses use futures contracts, options, and forward contracts to provide economic hedges of inventory positions and forecasted transactions. These derivative instruments have not been designated as hedges for accounting purposes. Accordingly, changes in the fair value of these derivative instruments are recorded into earnings as a component of other income. Our world grain business may use derivative commodity instruments to establish positions for trading purposes and these instruments are neither accounting nor economic hedges. These instruments are recorded in our balance sheet at fair value and each period’s gain or loss is recorded as a component of other income.
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. These financial instruments are recorded in our balance sheet at fair value and each period’s gain or loss is recorded as a component of other income.
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.
Use of Estimates – The preparation of 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 amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Reclassifications -- Certain prior year amounts have been reclassified to conform with the current year presentation.
(2) InventoriesMajor components of inventories are as follows:
August 31
------------------------------------
2000 2001
---------------- -----------------
(Amounts in Thousands)
Finished and in-process products..... $ 750,057 $ 431,739
Materials............................ 16,939 98,167
Supplies............................. 65,691 58,901
---------------- -----------------
$ 832,687 $ 588,807
================ =================
On December 31, 2000, Cooperative Refining, LLC was dissolved and our equity investment of $54.4 million was returned to us in the form of crude oil and in-process inventories. On May 4, 2001 Farmland formed a grain marketing relationship with Archer Daniels Midland Company (ADM). ADM/Farmland Inc. a wholly-owned subsidiary of ADM, purchased substantially all of Farmland’s United States grain inventories.
The carrying values of crude oil and refined petroleum inventories stated under the lower of LIFO cost or market at August 31, 2000 and 2001, were $39.1 million and $148.1 million, respectively. Replacement cost is higher than the carrying values of petroleum inventories at August 31, 2000 and 2001, by $24.7 million and $61.6 million, respectively.
During 2000 and 2001, LIFO inventory quantities were reduced, resulting in a liquidation of LIFO inventory layers. The effect of these layer liquidations was to decrease cost of goods sold and increase income before income taxes by approximately $3.2 million and $2.3 million, respectively.
(3) Investments and Long-Term ReceivablesInvestments and long-term receivables are as follows:
August 31
-------------------------------------
2000 2001
----------------- ------------------
(Amounts in Thousands)
Investments accounted for by the equity method................. $ 277,633 $ 256,652
Investments in and advances to other cooperatives.............. 39,540 39,304
National Bank for Cooperatives................................. 20,201 18,226
Other investments and long-term receivables.................... 62,515 58,937
----------------- ------------------
$ 399,889 $ 373,119
================= ==================
National Bank for Cooperatives (“CoBank”) requires its borrowers to maintain an investment in the 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, 2000 and 2001, 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:
-------------------------------------
2000 2001
----------------- -----------------
(Amounts in Thousands)
Current Assets................................................. $ 2,615,992 $ 1,450,291
Long-Term Assets............................................... 920,548 999,287
----------------- -----------------
Total Assets............................................... $ 3,536,540 $ 2,449,578
----------------- -----------------
Current Liabilities............................................ $ 2,279,139 $ 1,218,090
Long-Term Liabilities.......................................... 643,942 506,649
----------------- -----------------
Total Liabilities.......................................... $ 2,923,081 $ 1,724,739
----------------- -----------------
Net Assets..................................................... $ 613,459 $ 724,839
================= ==================
Year Ended August 31
--------------------------------------------------------
1999 2000 2001
----------------- ----------------- -----------------
(Amounts in Thousands)
Net sales................................... $ 2,618,163 $ 6,770,839 $ 7,216,098
================ ================= ==================
Net income.................................. $ 125,826 $ 173,081 $ 82,153
================ ================= ==================
Farmland's equity in net income............. $ 65,510 $ 56,891 $ 27,457
================ ================= ==================
Our investments accounted for by the equity method consist principally of : 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;
- from September 1, 1999 through December 31, 2000, an equity interest in Cooperative Refining, LLC, which operated two refineries; and
- beginning October 1, 2000, an equity interest in Land O'Lakes Farmland Feed, LLC, a manufacturer and marketer of feed products.
(4) Property, Plant and Equipment
A summary of cost for property, plant and equipment is as follows:
-----------------------------------------
2000 2001
----------------- ------------------
(Amounts in Thousands)
Land and improvements...................... $ 70,085 $ 64,673
Buildings.................................. 304,855 272,149
Machinery and equipment.................... 1,103,155 1,085,078
Automotive equipment....................... 75,417 67,015
Furniture and fixtures..................... 57,446 61,501
Capital leases............................. 50,351 49,266
Leasehold improvements..................... 40,793 43,000
Other...................................... 5,217 4,726
Construction in progress................... 80,295 60,974
--------------- ---------------
$ 1,787,614 $ 1,708,382
=============== ===============
(5) Bank Loans, Subordinated Debt Certificates and Notes PayableBank loans, subordinated debt certificates and notes payable are as follows:
--------------------------------
2000 2001
--------------- --------------
(Amounts in Thousands)
Subordinated capital investment certificates
--6.5% to 10.00%, maturing 2002 through 2014..................... $ 446,968 $ 422,675
Subordinated monthly income certificates
--6.5% to 10.00%, maturing 2002 through 2010..................... 121,947 112,661
Farmland National Beef credit facility
--4.12% to 6.5%, maturing 2002-2006.............................. 14,000 138,917
Other bank notes
--5.38% to 8.78%, maturing 2002-2004............................. 17,153 17,613
Industrial revenue bonds--2.4% to 6.75%,
maturing 2002 through 2021...................................... 38,423 38,350
Promissory notes--7% to 9.5%,
maturing 2002................................................... 8,224 2,689
Other--1.64% to 12.77%............................................. 31,667 26,125
------------- -------------
$ 678,382 $ 759,030
Less current maturities............................................ 32,222 48,054
------------- -------------
$ 646,160 $ 710,976
============= =============
(Amounts in Thousands)
----------------------
2002........................... $ 48,054
2003........................... 76,723
2004........................... 84,766
2005........................... 68,602
2006........................... 85,259
2007 and after................. 395,626
----------------------
$ 759,030
======================At August 31, 2000 and 2001, we had demand loan certificates and short-term bank debt outstanding of $689.5 million (weighted average interest rate of 8.55%) and $341.6 million (weighted average interest rate of 7.10%), respectively. At August 31, 2001, Farmland had a $500 million revolving credit facility, expiring November 9, 2001 (subsequently extended, in an amount of $418 million, to February 8, 2002), with a group of domestic and international banks ("the Credit Facility"). At year end, Farmland had outstanding $238.1 million of short-term borrowings under the Credit Facility; additionally $47.8 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 75 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 London Interbank Offered Rate). 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, 2001, we were in compliance with all covenants under the Credit Facility. At August 31, 2001, Tradigrain had $439.4 million in credit facilities, principally non-committed, with various international banks. Tradigrain primarily uses these facilities to provide financing and letters of credit to support international grain trading transactions. Obligations of Tradigrain under these facilities are nonrecourse to Farmland and Farmland's other affiliates. At August 31, 2001, Tradigrain had short-term borrowings under the credit facilities of $85.7 million, and $7.1 million of the facilities were being utilized to support letters of credit. Additionally, $106.4 million of checks and drafts outstanding at August 31, 2001 were committed against the credit facilities. Borrowings from CoBank, under both the Syndicated Credit Facility and short-term notes payable, totaling $54.7 million at August 31, 2001, are partially secured by liens on the equity investment held by Farmland in CoBank. See Note 3. During 1999, 2000 and 2001, Farmland capitalized interest of $0.3 million, $1.7 million and $1.0 million, respectively.(6) Income Taxes
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, 1990 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 Internal Revenue Service has commenced an examination of the income tax returns of Farmland and its subsidiaries for the years ended August 31,1999 and 2000. No reports have been issued, and adjustments, if any, which may be proposed as a result of the examination are not presently determinable. Income (loss) before income taxes include the following components:
Year Ended August 31
-----------------------------------------------------
1999 2000 2001
------------- --------------- --------------
Foreign................................... $ 27,381 $ (12,873) $ (860)
Domestic.................................. (21,559) (37,859) (113,571)
------------- --------------- --------------
Total..................................... $ 5,822 $ (50,732) $ (114,431)
============= =============== ==============
Year Ended August 31
--------------------------------------------------------
1999 2000 2001
----------------- ----------------- -----------------
(Amounts in Thousands)
Federal:
Current................................... $ (23,440) $ (14,147) $ (23,689)
Deferred.................................. 12,119 (5,286) 936
----------------- ----------------- -----------------
$ (11,321) $ (19,433) $ (22,753)
----------------- ----------------- -----------------
State:
Current.................................. $ (4,135) $ (2,497) $ (4,181)
Deferred................................. 2,138 (932) 602
----------------- ----------------- -----------------
$ (1,997) $ (3,429) $ (3,579)
----------------- ----------------- -----------------
Foreign:
Current.................................. $ 1,362 $ 1,140 $ 960
Deferred................................. 3,913 240 927
----------------- ----------------- -----------------
$ 5,275 $ 1,380 $ 1,887
----------------- ----------------- -----------------
Total income tax (benefit).................. $ (8,043) $ (21,482) $ (24,445)
================= ================= =================
Income tax expense (benefit) differs from the “expected” income tax expense (benefit) using a statutory rate of 35% as follows:
Year Ended August 31
--------------------------------------------------------
1999 2000 2001
----------------- ----------------- -----------------
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....................... (181.7) (5.5) -0-
Patronage-sourced items for which no
benefit is available................. -0- 8.9 18.4
State income tax expense (benefit),
net of federal income tax effect..... 2.4 (3.6) (3.2)
Other, net.............................. 6.2 (7.1) (1.6)
----------------- ----------------- -----------------
Income tax (benefit)........................ (138.1)% (42.3)% (21.4)%
================= ================= =================
The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at August 31, 2000 and 2001 are as follows:
August 31
------------------------------------
2000 2001
---------------- -----------------
(Amounts in Thousands)
Deferred tax liabilities:
Property, plant and equipment,
principally due to differences
in depreciation.......................... $ 94,945 $ 94,859
Prepaid pension cost....................... 13,237 15,671
Income from foreign subsidiaries........... 12,141 12,536
Basis differences in pass-through
ventures................................. 6,461 7,844
Other...................................... 10,883 2,344
---------------- -----------------
Total deferred tax liabilities........... $ 137,667 $ 133,254
---------------- -----------------
Deferred tax assets:
Safe harbor leases......................... $ 3,034 $ 2,583
Accrued expenses........................... 58,111 50,546
Benefit of nonqualified
written notices.......................... 42,317 42,316
Alternative minimum tax credit............. 17,689 17,689
Accounts receivable, principally due to
allowance for doubtful accounts.......... 4,496 5,635
Derivative financial instruments........... -0- 3,806
Other...................................... 2,933 2,933
---------------- -----------------
Total deferred tax assets................ $ 128,580 $ 125,508
---------------- -----------------
Net deferred tax liability.................. $ (9,087) $ (7,746)
================ =================
At August 31, 2001, Farmland has nonmember-sourced loss carryforwards, expiring from 2019 to 2021, amounting to $147.2 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, 2001, Farmland has member-sourced loss carryforwards, expiring from 2010 through 2021, amounting to $90.7 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:
August 31
-----------------------------------
2000 2001
----------------- ----------------
(Amounts in Thousands)
Farmland National Beef Packing Company, L.P................ $ 45,737 $ 25,478
Farmland Foods, Inc........................................ 3,341 3,337
Other subsidiaries......................................... 381 496
$ 49,459 $ 29,311
================= ================
(8) Preferred Stock, Earned Surplus and Other EquitiesAt both August 31, 2000 and 2001, we had 8,000,000 shares of Series A preferred shares authorized, with 2,000,000 such shares issued and outstanding. These shares are stated at their redemption value of $100 million. 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. The preferred shares are not entitled to vote.
A summary of earned surplus and other equities is as follows:
---------------------------------
2000 2001
---------------- ----------------
(Amounts in Thousands)
Earned surplus............................................ $ 180,508 $ 81,521
Patronage refund payable in equities...................... 8,002 -0-
Capital credits........................................... 32,167 37,091
Additional paid-in surplus................................ 7,246 9,700
---------------- ----------------
$ 227,923 $ 128,312
================ ================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, 2001, $1.2 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.
At the conclusion of our fiscal year, our Board of Directors authorizes the distribution of our net income (loss) to our patrons. Distributions of net income (loss) for the years ended August 31, 1999, 2000 and 2001 were as follows:
Year Eneded August 31
----------------------------------------------------
1999 2000 2001
------------ -------------- ----------------
(Amounts in Thousands)
Patronage refunds:
Farm supply patrons................ $ 20,320 $ -0- $ -0-
Pork marketing patrons.............. 4,050 -0- -0-
Beef marketing patrons.............. 5,420 8,002 -0-
Grain marketing patrons............. 479 -0- -0-
------------ -------------- ----------------
$ 30,269 $ 8,002 $ -0-
Earned surplus and other equities....... (16,404) (37,252) (89,986)
------------ -------------- ----------------
$ 13,865 $ (29,250) $ (89,986)
============ ============== ================
(9) Comprehensive IncomeChanges in accumulated other comprehensive income (AOCI) for the year ended August 31, 2001 were as follows:
Cash Flow Foreign Currency Total
Hedges Translation AOCI
-------------- --------------------- -----------------
(Amounts in Thousands)
Balance at August 31, 2000.......................... $ -0- $ 111 $ 111
Foreign currency translation adjustment............. -0- (17) (17)
Transition adjustment, net of tax................... 25,653 -0- 25,653
Net gain on cash flow hedges, net of tax............ 9,519 -0- 9,519
Less reclassification adjustments, net of tax....... (56,608) -0- (56,608)
-------------- --------------------- -----------------
Balance at August 31, 2001.......................... $ (21,436) $ 94 $ (21,342)
============== ===================== =================
Comprehensive income is as follows:
Year Ended August 31
---------------------------------------------------------
1999 2000 2001
---------------------------------------------------------
(Amounts in Thousands)
Net income (loss)............................................. $ 13,865 $ (29,250) $ (89,986)
Net gains (losses) arising during the period
Cash flow hedges:
Net derivative transition gain....................... $ -0- $ -0- $ 30,208
Net derivative gains (losses) during period.......... -0- -0- 11,210
Reclassification adjustment.......................... -0- -0- (66,660)
Foreign currency translation adjustment................... 31 15 (17)
------------- ----------------- -----------------
Other comprehensive income (loss) before tax.................. $ 31 $ 15 $ (25,259)
Income tax benefit related to items of
other comprehensive income................................ $ -0- $ -0- $ 3,806
------------- ----------------- -----------------
Other comprehensive income (loss)............................. $ 31 $ 15 $ (21,453)
------------- ----------------- -----------------
Comprehensive income (loss)................................... $ 13,896 $ (29,235) $ (111,439)
============= ================= =================
(10) Derivative Financial InstrumentsEffective September 1, 2000, we adopted Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. This standard imposes extensive recordkeeping requirements in order to designate a derivative financial instrument as a hedge. As a result, certain of our segments hold derivative instruments, such as exchange traded grain, crude oil and live hog futures, and foreign currency forward positions that we believe provide an economic hedge of future transactions, but have not been designated as a hedge. Gains or losses related to these derivative instruments are classified as a component of other income. All derivative instruments are recorded in our balance sheet at fair value. The cumulative effect of this change in accounting principle at September 1, 2000 was to increase income by $13.5 million (net of income tax expense of $2.2 million).
Farmland also uses derivative financial instruments to manage our commodity price risk in the procurement of natural gas, the primary input necessary for the production of the various nitrogen-based crop production products we manufacture. Our objective is to fix the price of a portion of our forecasted purchases of natural gas used to manufacture crop production products. To meet this objective, we enter into various types of derivative instruments to manage fluctuations in cash flows resulting from commodity price risk. These instruments may include exchange traded futures contracts, over the counter (OTC) swap contracts and OTC option or exchange traded option contracts. The changes in the market value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item. The amount of hedge ineffectiveness, which is recognized as a component of other income, was immaterial for the year ended August 31, 2001.
As of August 31, 2001, the maximum length of time over which we are hedging our exposure to the variability in future cash flows associated with natural gas forecasted transactions is approximately one year. Gains and losses recorded in accumulated other comprehensive income (“AOCI”) are reclassified, on a first-in, first-out basis, as a component of cost of sales when the related crop production product is sold. As a result, we anticipate that substantially all gains and losses in AOCI as of August 31, 2001 will be reclassified into earnings within the next twelve months. Gains and losses in AOCI may fluctuate until the related contract is closed. During the year ended August 31, 2001, after tax net gains of approximately $70.0 million related to derivative instruments included in AOCI as a result of the September 1, 2000 transition adjustment were reclassified into net income. During the year ended August 31, 2001, approximately $18.8 million was reclassified into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted purchases of natural gas would not occur.
(11) Contingent Liabilities and CommitmentsFarmland leases various equipment and real properties under long-term operating leases. For 1999, 2000 and 2001, rental expense totaled $66.3 million, $71.1 million, and $90.9 million, respectively. Rental expense is reduced for sublease income, primarily rental income received on leased railroad cars and ammonia trailers ($1.0 million in 1999, $1.1 million in 2000, and $0.9 million in 2001).
The lease agreements have various remaining terms ranging from one to fifteen 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:
2002.......................................... $ 74,459
2003.......................................... 55,573
2004.......................................... 45,417
2005.......................................... 194,017
2006.......................................... 17,415
2007 and after................................ 47,429
----------
$ 434,310
==========
Commitments for capital expenditures and investments in joint ventures aggregated $3.4 million at August 31, 2001.
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 $12.9 million and $17.2 million at August 31, 2000 and 2001, 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, 2001. In the opinion of management, it is reasonably possible for such costs to approximate an additional $14.7 million.
In the ordinary course of conducting grain trading activities, as of August 31, 2001, we were contingently liable in the amount of $92.6 million for performance bonds, and guarantees.
The Environmental Protection Agency has issued new rules limiting sulfur in gasoline to 30 parts per million and has published a proposed rule limiting sulfur in diesel fuel to 15 parts per million. The rules affecting gasoline were effective December 1, 1999 with a January 1, 2004 compliance date. The proposed rules for diesel fuel have a June 1, 2006 compliance date. Based on information currently available, we anticipate that material expenditures, possibly in excess of $100 million, will be required to achieve compliance with these new and pending rules. Farmland has applied for, but has not received, regulatory extension of the deadlines until 2008.
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.
(12) Restructuring and Other ChargesDuring the year ended August 31, 2001, the Board of Directors approved a plan to close certain facilities and exit nonstrategic businesses. Accordingly, we recorded charges to operations of approximately $80 million. Our wheat gluten plant located in Russell, Kansas was closed during May 2001 due to low market prices. To improve our refrigerated foods cost structure, we are closing unprofitable meat facilities. During May, we also sold our wholly-owned subsidiary, Farmland-Atwood, to ADM and sold substantially all of our United States grain inventories to ADM/Farmland, which is a wholly-owned subsidiary of ADM. ADM/Farmland leases and operates Farmland’s grain elevators throughout the United States, and Farmland is entitled to receive a 50% share of the earnings or losses of ADM/Farmland. As a part of our transactions with ADM, we leased or sold assets which had generated sales of $1.9 billion during the year ended August 31, 2000 and $1.7 billion during the year ended August 31, 2001. During August 2001, Farmland closed its office in Mexico City due to a reduced need for their services as a result of changes in Farmland’s feed and grain businesses.
As a result of the facility closings discussed above, we recognized approximately $28 million of impairment charges on the related long-lived assets. Assets which can be readily sold were revalued at their used market value. Assets which cannot be used or sold were valued at their salvage value, if any. Carrying value of these assets, after recognition of impairment charges, was reduced to approximately $5 million. Goodwill associated with facilities closed or businesses sold was written-off from our balance sheet, resulting in an approximate $13 million charge to expense. Over the past few years, we implemented enterprise-wide software for operational and financial reporting. The software was configured to support nearly all of our domestic operations. In accordance with accounting principles, generally accepted in the United States of America, certain software development and implementation costs were capitalized. During the third quarter of 2001, we charged to expense approximately $26 million of capitalized software costs related to operations which have been closed, sold or contributed to ventures.
Included in the restructuring and other charges is an approximate $5 million accrual of termination benefits associated with the separation of approximately 480 employees. The charge includes approximately $3 million for administrative employees and approximately $2 million for production employees. Through August 2001, approximately 290 of the planned employee separations were completed, and employees received cash severance payments totaling approximately $3.2 million. Through August 2001, $1.2 million of expenses were incurred due to the closing of the wheat gluten plant at Russell, Kansas, and $1.0 million of expenses were incurred due to the closing of the meat processing plant at Carroll, Iowa. These cash outlays were funded through cash from operations. Also included in the restructuring and other charges is $8 million of other costs, including the costs to terminate certain long term contracts, to recognize certain environmental expenses, and to reduce supply inventories to net realizable value. As of August 31, 2001, included in other current liabilities were approximately $8 million of accruals related to these restructuring and other charges.
The following table displays the activity and balances of the restructuring reserve account from August 31, 2000 to August 31, 2001.
August 31, 2000 Aug 31, 2001
Type of Cost Balance Additions Adjustments Deductions Balance
- --------------------------- ------------------- ------------ -------------- -------------- ---------------
(Amounts in Thousands)
Employee separations $ -0- $ 4,860 $ (16) $ (3,242) $ 1,602
Facility closings -0- 6,056 (28) (2,198) 3,830
Other -0- 2,700 (200) -0- 2,500
- --------------------------- ------------------- ------------ -------------- -------------- ---------------
Total $ -0- $ 13,616 $ (244) $ (5,440) $ 7,932
=========================== =================== ============ ============== ============== ===============
(13) Planned Major Maintenance CostsEffective September 1, 2000, based on a proposed Statement of Position issued by the Accounting Standards Executive Committee of the AICPA during September 2000, Farmland changed its method of accounting for certain costs expected to be incurred in the next planned major maintenance of its manufacturing and processing facilities from the accrue-in-advance method to the direct expense method. Under the new accounting method, maintenance costs are recognized as expense as maintenance services are performed. We believe the new method is preferable in the circumstances because, prior to the performance of the maintenance services, we do not have a present unavoidable duty or responsibility to perform such services. The effect of this change at September 1, 2000 was a $6.3 million benefit (net of income taxes of $1.1 million) and has been presented as a cumulative effect of an accounting change in the accompanying Consolidated Statements of Operations for the year ended August 31, 2001. Had this new accounting method been applied in the year ended August 31, 2000, the effect would have been to increase our net loss by $0.4 million (net of an income tax benefit of $0.1 million). Had this new accounting method been applied in the year ended August 31, 1999, the effect would have been to increase our net income by $1.5 million (net of an income tax expense of $0.3 million).
(14) Employee Benefit PlansThe 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, real estate separate accounts, and venture capital funds.
The funding policy for the Plan is at the sole discretion of the Farmland Employee Retirement Plan Committee. Farmland charges pension costs as accrued based on the actuarial valuation of the plan.
Components of Farmland's pension cost are as follows:
Year Ended August 31
---------------------------------------------
1999 2000 2001
---------------------------------------------
(Amounts in Thousands)
Service cost....................................................... $ 15,126 $ 16,175 $ 13,124
Interest cost...................................................... 23,405 25,168 27,630
Expected return on Plan assets (34,621) (35,207) (38,454)
Amortization of unrecognized net loss (gain)....................... 207 207 (378)
------------ ------------- -------------
Net periodic pension cost.......................................... 4,117 6,343 1,922
Curtailment gain recognized........................................ -0- -0- (11,675)
Special termination benefit cost................................... -0- -0 1,263
------------ ------------- -------------
Total pension cost (income)........................................ $ 4,117 $ 6,343 $ (8,490)
============ ============= =============
For the year ending August 31, 2001, Farmland realized an $11.7 million curtailment gain as a result of termination of participants from the Plan primarily as a result of the sale of the Dubuque, Iowa meat processing plant and the formation of the Country Energy, Agriliance and Land O’Lakes Farmland Feed joint ventures. The curtailment gain is the difference between the accrued benefit based on actuarial assumptions and the actual benefit at time of termination. Farmland also realized a $1.3 million expense for special termination benefits, which was the cost to provide immediate vesting to specific participants terminated under enhanced severance agreements.
The following table sets forth the Plan’s funded status and amounts recognized as assets in our Consolidated Balance Sheets at August 31, 2000 and 2001. Such prepaid pension cost is based on the Plan’s funded status as of May 31, 2000 and 2001.
August 31
----------------------------------------------
2000 2001
--------------------- -------------------
(Amounts in Thousands)
Change in Projected Benefit Obligation:
Projected Benefit Obligation, beginning of year $ 344,987 $ 333,942
Service Cost 16,175 13,124
Expected Employee Contributions 6,800 6,300
Interest Cost 25,168 27,630
Actuarial (Gain) Loss (46,092) 41,443
Curtailment (Gain) Loss -0- (11,675)
Special Termination Benefit Cost -0- 1,263
Benefits Paid (13,096) (18,607)
--------------------- -------------------
Projected Benefit Obligation, end of year $ 333,942 $ 393,420
===================== ===================
Change in Fair Value of Plan Assets:
Plan Assets at fair value, beginning of year $ 392,792 $ 430,114
Return on Plan Assets 44,298 23,545
Company Contributions -0- -0-
Actual Employee Contributions 6,120 5,190
Benefits Paid (13,096) (18,607)
--------------------- -------------------
Plan Assets at fair value, end of year 430,114 440,242
===================== ===================
Funded Status and Prepaid Pension Cost:
Funded Status of the Plan, end of year $ 96,172 $ 46,822
Unrecognized Net (Gain) Loss (57,840) -0-
--------------------- -------------------
Prepaid Pension Cost, end of year $ 38,332 $ 46,822
===================== ===================
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
-------------------------------------------------------------
1999 2000 2001
-------------------------------------------------------------
Discount rate.......................... 7.5% 8.25% 7.75%
Rate of increase in future compensation
levels................................ 4.9% 4.92% 5.09%
Expected long-term rate of return on
plan assets........................... 9.0% 9.0% 9.0%
(15) Industry Segment InformationFarmland 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 retail petroleum and farm supply stores, grain processing, 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 certain interest, legal, human resources, and finance expenses.
Beginning September 1, 2000, Farmland began allocating certain interest expense based on net assets employed by each segment and allocating certain corporate service expenses based on estimated use of the service by each segment. Segment results for the years ended August 31, 1999 and 2000 were restated to conform to our current operational structure and our current method of allocation. Following is a summary of industry segment information as of and for the years ended August 31, 1999, 2000 and 2001.
As a result of restructuring and other charges recognized for the year ended August 31, 2001, world grain’s income decreased approximately $12 million, refrigerated foods’ income decreased approximately $17 million, petroleum’s income decreased approximately $3 million, other operating units’ income decreased approximately $22 million, and unallocated corporate expenses increased approximately $26 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1999 (Page 1 of 3)
(Amounts in Thousands) CONSOLIDATED SEGMENTS -------------------------------------------------------------- Combined Segments Unallocated Consolidated ------------------ ---------------- ----------------- Sales & transfers $ 11,893,743 $ -0- $ 11,893,743 Transfers between segments (1,042,836) -0- (1,042,836) ------------------ ---------------- ----------------- Net sales $ 10,850,907 $ -0- $ 10,850,907 Cost of sales 10,372,915 -0- 10,372,915 ------------------ ---------------- ----------------- Gross income $ 477,992 $ -0- $ 477,992 Selling, general and administrative expenses 410,565 70,274 480,839 Other income (expense): Interest expense (71,756) (19,017) (90,773) Interest income 4,419 3,918 8,337 Other, net 28,650 14,672 43,322 ------------------ ---------------- ----------------- Total other income (expense) $ (38,687) $ (427) $ (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) -0- (17,727) Income tax benefit -0- 8,043 8,043 ------------------ ---------------- ----------------- Net income (loss) $ 73,285 $ (59,420) $ 13,865 ================== ================ ================= Investment in and advances to investees $ 198,824 $ 6,223 $ 205,047 ================ ================= ================== Total assets $ 2,932,583 $ 343,188 $ 3,275,771 ================== ================ ================= Depreciation and amortization expense $ 94,219 $ 14,965 $ 109,184 ================== ================ ================= Capital expenditures $ 114,999 $ 6,185 $ 121,184 ================== ================ =================
(Amounts in Thousands)
INPUT AND OTHER SEGMENTS
---------------------------------------------------------------------------------
Other Total Input
Crop Operating and Other
Production Petroleum Feed Units Segments
------------------- -------------- ------------ ------------ -------------
Sales & transfers $ 1,009,266 $ 974,108 $ 599,208 $ 249,455 $ 2,832,037
Transfers between
segments (6,735) (19,936) (23,661) (30,837) (81,169)
------------------- -------------- ------------ ------------ -------------
Net sales $ 1,002,531 $ 954,172 $ 575,547 $ 218,618 $ 2,750,868
Cost of sales 1,004,441 918,186 530,246 183,852 2,636,725
------------------- -------------- ------------ ------------ -------------
Gross income $ (1,910) $ 35,986 $ 45,301 $ 34,766 $ 114,143
Selling, general and
administrative expenses 52,940 22,456 34,245 37,908 147,549
Other income (expense):
Interest expense (5,974) (16,634) (4,213) (3,476) (30,297)
Interest income (103) 337 126 838 1,198
Other, net 18,408 2,726 371 5,785 27,290
------------------- -------------- ------------ ------------ -------------
Total other income (expense) $ 12,331 $ (13,571) $ (3,716) $ 3,147 $ (1,809)
Equity in net income/(loss)
of investees 54,056 2,366 906 229 57,557
Minority owners' interest
in net (income)/loss 167 -0- (504) 781 444
Income tax benefit -0- -0- -0- -0- -0-
------------------- -------------- ------------ ------------ -------------
Net income (loss) $ 11,704 $ 2,325 $ 7,742 $ 1,015 $ 22,786
=================== ============== ============ ============ =============
Investment in and
advances to investees $ 162,811 $ 4,383 $ 7,771 $ 6,658 $ 181,623
=================== ============== ============ ============ =============
Total assets $ 678,109 $ 491,137 $124,701 $ 100,535 $ 1,394,482
=================== ============== ============ ============ =============
Depreciation and
amortization expense $ 23,498 $ 16,039 $ 4,844 $ 10,233 $ 54,614
=================== ============== ============ ============ =============
Capital expenditures $ 6,689 $ 26,841 $ 5,097 $ 11,280 $ 49,907
=================== ============== ============ ============ =============(Amounts in Thousands)
OUTPUT SEGMENTS
---------------------------------------------------
Total
Refrigerated World Output
Foods Grain Segments
---------------- --------------- --------------
Sales & transfers $4,663,990 $4,397,716 $9,061,706
Transfers between
segments (731,139) (230,528) (961,667)
---------------- --------------- --------------
Net sales $3,932,851 $ 4,167,188 $ 8,100,039
Cost of sales 3,662,382 4,073,808 7,736,190
---------------- --------------- --------------
Gross income $ 270,469 $ 93,380 $ 363,849
Selling, general and
administrative expenses 198,664 64,352 263,016
Other income (expense):
Interest expense (26,592) (14,867) (41,459)
Interest income 354 2,867 3,221
Other, net 2,157 (797) 1,360
---------------- --------------- --------------
Total other income (expense) $ (24,081) $ (12,797) $ (36,878)
Equity in net income/(loss)
of investees 870 3,845 4,715
Minority owners' interest
in net (income)/loss
of subsidiaries (18,171) -0- (18,171)
Income tax benefit -0- -0- -0-
---------------- --------------- --------------
Net income (loss) $ 30,423 $ 20,076 $ 50,499
================ =============== ==============
Investment in and
advances to investees $ 11,837 $ 5,364 $ 17,201
================ ================ ==============
Total assets $ 691,139 $ 846,962 $ 1,538,101
================ =============== ==============
Depreciation and
amortization expense $ 34,266 $ 5,339 $ 39,605
================ =============== ==============
Capital expenditures $ 44,489 $ 20,603 $ 65,092
================ =============== ==============
(Amounts in Thousands)
CONSOLIDATED SEGMENTS
-------------------------------------------------------------
Combined
Segments Unallocated Consolidated
----------------- ---------------- -----------------
Sales & transfers $ 15,546,930 $ -0- $ 15,546,930
Transfers between
segments (3,158,207) -0- (3,158,207)
----------------- ---------------- -----------------
Net sales $ 12,388,723 $ -0- $ 12,388,723
Cost of sales 11,917,242 -0- 11,917,242
----------------- ---------------- -----------------
Gross income (loss) $ 471,481 $ -0- $ 471,481
Selling, general and
administrative expenses 400,156 76,652 476,808
Other income (expense):
Interest expense (105,971) (8,268) (114,239)
Interest income 7.650 6,598 14,248
Other, net 15,447 7,244 22,691
----------------- ---------------- -----------------
Total other income (expense) $ (82,874) $ 5,574 $ (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) -0- (24,996)
Income tax benefit -0- 21,482 21,482
----------------- ---------------- -----------------
Net income (loss) $ 22,155 $ (51,405) $ (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
================= ================ =================
(Amounts in Thousands)
INPUT AND OTHER SEGMENTS
----------------------------------------------------------------------------------
Other Total Input
Crop Operating and Other
Production Petroleum Feed Units Segments
-------------- --------------- ------------- --------------- --------------
Sales & transfers $ 984,782 $1,440,406 $672,697 $ 2,120,300 $ 5,218,185
Transfers between
segments (5,601) (20,983) (60,125) (1,811,129) (1,897,838)
-------------- --------------- ------------- --------------- --------------
Net sales $ 979,181 $ 1,419,423 $ 612,572 $ 309,171 $ 3,320,347
Cost of sales 983,056 1,395,507 565,075 271,558 3,215,196
-------------- --------------- ------------- --------------- --------------
Gross income (loss) $ (3,875) $ 23,916 $ 47,497 $ 37,613 $ 105,151
Selling, general and
administrative expenses 36,525 15,557 34,162 39,749 125,993
Other income (expense):
Interest expense (28,193) (18,791) (6,014) (3,363) (56,361)
Interest income 52 455 (136) 939 1,310
Other, net 18,777 (142) 511 5,148 24,294
-------------- --------------- ------------- --------------- --------------
Total other income (expense) $ (9,364) $ (18,478) $ (5,639) $ 2,724 $ (30,757)
Equity in net income/(loss)
of investees 37,445 20,299 293 (2,094) 55,943
Minority owners' interest
in net (income)/loss
-0- -0- 504 6 510
Income tax benefit -0- -0- -0- -0- -0-
-------------- --------------- ------------- --------------- --------------
Net income (loss) $ (12,319) $ 10,180 $ 8,493 $ (1,500) $ 4,854
============== =============== ============= =============== ==============
Investment in and
advances to investees $ 182,296 $ 62,107 $ 7,126 $ 5,584 $ 257,113
============== =============== ============= =============== ==============
Total assets $ 596,354 $ 411,860 $124,999 $ 116,165 $ 1,249,378
============== =============== ============= =============== ==============
Depreciation and
amortization expense $ 23,968 $ 15,966 $ 5,774 $ 13,351 $ 59,059
============== =============== ============= =============== ==============
Capital expenditures $ 6,563 $ 6,986 $ 5,390 $ 3,938 $ 22,877
============== =============== ============= =============== ==============
(Amounts in Thousands)
OUTPUT SEGMENTS
---------------------------------------------------
Total
Refrigerated World Output
Foods Grain Segments
---------------- --------------- --------------
Sales & transfers $ 5,463,889 $ 4,864,856 $ 10,328,745
Transfers between
segments (924,629) (335,740) (1,260,369)
---------------- --------------- --------------
Net sales $ 4,539,260 $ 4,529,116 $ 9,068,376
Cost of sales 4,239,584 4,462,462 8,702,046
---------------- --------------- --------------
Gross income (loss) $ 299,676 $ 66,654 $ 366,330
Selling, general and
administrative expenses 206,011 68,152 274,163
Other income (expense):
Interest expense (18,524) (31,086) (49,610)
Interest income 658 5,682 6,340
Other, net (6,575) (2,272) (8,847)
---------------- --------------- --------------
Total other income (expense) $ (24,441) $ (27,676) $ (52,117)
Equity in net income/(loss)
of investees 2,397 360 2,757
Minority owners' interest
in net (income)/loss
of subsidiaries (25,506) -0- (25,506)
Income tax benefit -0- -0- -0-
---------------- --------------- --------------
Net income (loss) $ 46,115 $ (28,814) $ 17,301
================ =============== ==============
Investment in and
advances to investees $ 14,452 $ 7,765 $ 22,217
================ =============== =============
Total assets $ 722,212 $ 994,456 $ 1,716,668
================ =============== ==============
Depreciation and
amortization expense $ 34,324 $ 2,124 $ 36,448
================ =============== ==============
Capital expenditures $ 55,825 $ 17,325 $ 73,150
================ =============== ==============
(Amounts in Thousands)
Combined
Segments Unallocated Consolidated
------------------- ------------------ ------------------
Sales & transfers $ 14,933,199 $ -0- $ 14,933,199
Transfers between segments (3,169,757) -0- (3,169,757)
------------------- ------------------ ------------------
Net sales $ 11,763,442 $ -0- $ 11,763,442
Cost of sales 11,331,217 -0- 11,331,217
------------------- ------------------ ------------------
Gross income $ 432,225 $ -0- $ 432,225
Selling, general and administrative expense 346,817 47,581 394,398
Restructuring and other charges 54,016 26,309 80,325
Other income(expense):
Interest expense (128,078) (8,210) (136,288)
Interest income 10,733 7,524 18,257
Other, net (expense) 4,258 14,438 18,696
------------------- ------------------ ------------------
Total other inc.(expense) $ (113,087) $ 13,752 $ (99,335)
Equity in net income/(loss) of investees 28,377 (920) 27,457
Minority owners interest in
net (income)/loss of subsidiaries (23,164) -0- (23,164)
Income tax benefit -0- 27,778 27,778
------------------- ------------------ ------------------
Income (loss) before cumulative
effect of accounting changes
net of income tax expense $ (76,482) $ (33,280) $ (109,762)
Cumulative effect of
accounting changes,
net of income tax benefit 18,991 785 19,776
------------------- ------------------ ------------------
Net income (loss) $ (57,491) $ (32,495) $ (89,986)
=================== ================== ==================
Investment in and
advances to investees $ 255,720 $ 932 $ 256,652
=================== ================== ==================
Total assets $ 2,561,367 $ 166,177 $ 2,727,544
=================== ================== ==================
Depreciation and
amortization expense $ 102,242 $ 11,389 $ 113,631
=================== ================== ==================
Capital expenditures $ 104,181 $ 3,233 $ 107,414
=================== ================== ==================
(Amounts in Thousands)
Crop Operating and Other
Production Petroleum Feed Units Segments
---------------- ---------------- -------------- -------------- ---------------
Sales & transfers $ 744,898 $ 1,731,370 $ 50,262 $ 2,278,510 $ 4,805,040
Transfers between segments (1,393) (19,903) (5,191) (2,012,378) (2,038,865)
---------------- ---------------- -------------- -------------- ---------------
Net sales $ 743,505 $ 1,711,467 $ 45,071 $ 266,132 $ 2,766,175
Cost of sales 778,251 1,616,920 41,101 237,539 2,673,811
---------------- ---------------- -------------- -------------- ---------------
Gross income $ (34,746) $ 94,547 $ 3,970 $ 28,593 $ 92,364
Selling, general and
administrative expense 29,893 19,118 4,579 41,341 94,931
Restructuring and other charges -0- 2,500 -0- 21,884 24,384
Other income(expense):
Interest expense (36,121) (20,038) (5,295) (4,124) (65,578)
Interest income 159 443 -0- 1,952 2,554
Other, net 2,562 (1,693) 103 6,363 7,335
---------------- ---------------- -------------- -------------- ---------------
Total other Inc.(expense.) $ (33,400) $ (21,288) $ (5,192) $ 4,191 $ (55,689)
Equity in net income/(loss)
of investees 18,537 5,585 3,492 318 27,932
Minority owners interest in net
(income)/loss of subsidiaries (39) -0- -0- (2) (41)
Income tax benefit -0- -0- -0- -0- -0-
---------------- ---------------- -------------- -------------- ---------------
Income (loss) before cumulative
effect of accounting changes
net of income tax expense $ (79,541) $ 57,226 $ (2,309) $ (30,125) $ (54,749)
Cumulative effect of
accounting changes,
net of income tax benefit 18,647 1,965 (12) -0- 20,600
---------------- ---------------- -------------- -------------- ---------------
Net income (loss) $ (60,894) $ 59,191 $ (2,321) $ (30,125) $ (34,149)
================ ================ ============== ============== ===============
Investment in and
advances to Investees $ 178,583 $ 2,486 $ 46,700 $ 5,571 $ 233,340
================ ================ ============== ============== ===============
Total assets $ 647,091 $ 444,605 $ 55,306 $ 83,602 $ 1,230,604
================ ================ ============== ============== ===============
Depreciation and
amortization expense $ 28,991 $ 19,002 $ 82 $ 8,323 $ 56,398
================ ================ ============== ============== ===============
Capital expenditures $ 11,161 $ 7,397 $ 10 $ 1,727 $ 20,295
================ ================ ============== ============== ===============
2001 (page 3 of 3)
(Amounts in thousands) Total Refrigerated World Output Foods Grain Segments --------------- --------------- ---------------- Sales & transfers $ 5,652,602 $ 4,475,557 $ 10,128,159 Transfers between segments (898,830) (232,062) (1,130,892) --------------- --------------- ---------------- Net sales $ 4,753,772 $ 4,243,495 $ 8,997,267 Cost of sales 4,477,417 4,179,989 8,657,406 --------------- --------------- ---------------- Gross income $ 276,355 $ 63,506 $ 339,861 Selling, general and administrative expense 192,277 59,609 251,886 Restructuring and other charges 17,396 12,236 29,632 Other income(expense): Interest expense (20,735) (41,765) (62,500) Interest income 601 7,578 8,179 Other, net (5,333) 2,256 (3,077) --------------- --------------- ---------------- Total other inc.(expense.) $ (25,467) $ (31,931) $ (57,398) Equity in net income/(loss) of investees 1,484 (1,039) 445 Minority owners interest in net (income)/loss of subsidiaries (23,123) -0- (23,123) Income tax benefit -0- -0- -0- --------------- --------------- ---------------- Income (loss) before cumulative effect of accounting changes, net of income tax expense $ 19,576 $ (41,309) $ (21,733) Cumulative effect of accounting changes, net of income tax benefit (1,609) -0- (1,609) --------------- --------------- ---------------- Net income (loss) $ 17,967 $ (41,309) $ (23,342) =============== =============== ================ Investment in and advances to investees $ 16,163 $ 6,217 $ 22,380 =============== =============== ================ Total assets $ 911,109 $ 419,654 $ 1,330,763 =============== =============== ================ Depreciation and amortization expense $ 38,097 $ 7,747 $ 45,844 =============== =============== ================ Capital expenditures $ 79,064 $ 4,822 $ 83,886 =============== =============== ================
Year Ended August 31
-------------------------------------------------------
1999 2000 2001
---------------- ----------------- -----------------
(Amounts in Thousands)
United States......................... $ 7,662,399 $ 8,855,971 $ 8,294,811
Mexico................................ 570,959 533,524 499,142
Egypt................................. 133,012 303,884 192,675
Japan................................. 220,763 283,833 284,223
Other................................. 2,263,774 2,411,511 2,492,591
------------- ------------- -------------
Total................................. $ 10,850,907 $ 12,388,723 $ 11,763,442
============= ============= =============
(16) Significant Group Concentration of Credit RiskFarmland 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 and food retail and service 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. Repayment is dependent upon the financial stability of those countries’ national economies, and current global economic problems combined with turmoil in various parts of the world could create additional credit risk related to customers located in foreign countries. 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. 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.
(17) Disclosures About Fair Value of Financial InstrumentsEstimates 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, 2000 and 2001, the carrying value of our investments in other cooperatives’ equities totaled $50.8 million and $49.9 million, respectively.
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, 2001 is $535 million and $503 million, respectively. The estimated fair value of our remaining variable rate financial instruments approximates the carrying value.
(18) Related Party TransactionsFarmland 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 operated two refineries until its liquidation in December 2000
During 1999, 2000 and 2001, Farmland purchased $224.1 million, $1,082.4 million and $450.2 million, respectively, of products and services from ventures and had sales to a venture of $0, $55.4 and $743.5 million, respectively. Farmland had accounts payable of $27.9 million and $6.3 million due to ventures at August 31, 2000 and 2001, respectively, and a note payable due to a venture of $12.5 million and $0 million at August 31, 2000 and 2001, respectively. Accounts receivable owed to us at August 31, 2000 and 2001 totaled $36.0 million and $34.5 million, respectively. Notes receivable due from ventures totaled $20.3 million and $17.4 million at August 31, 2000 and 2001, respectively.
(19) Other IncomeDuring 2001, we recorded net gains of $15.6 million related to derivative instruments held by certain of our segments that we believe provide an economic hedge of future transactions, but that have not been designated as a hedge under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” Additionally, we realized a $4.4 million gain on the sale of our 50% ownership interest in One System Group.
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 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 did not occur.
(20) Subsequent EventsDuring November 2001, we sold our interest in our petroleum products marketing venture, Country Energy, to Cenex Harvest States Cooperatives. Cash received from this transaction will be used primarily for reduction of notes payable balances on our credit facility and to prepay rent on our leased nitrogen facility at Coffeyville. As a part of this transaction, for an initial period of two years, we will sell all refined products produced at our Coffeyville, Kansas refinery to Cenex Harvest States (approximately $750 million in 2001), thereby making Cenex Harvest States a material customer of Farmland. This agreement to sell all refined product to Cenex Harvest States terminates if we sell the refinery.
During October 2001, we received and executed a commitment letter from three financial institutions to underwrite a new credit facility. To accommodate the due diligence necessary by the members of this new facility, our existing Credit Facility which had previously been extended through November 9, 2001, was extended to February 8, 2002. The commitment letter contains certain conditions to closing that include, among other things, certain material adverse change clauses. Although management cannot predict with certainty the outcome of future events, we anticipate the conditions to closing will be met and the financing will be accomplished prior to February 8, 2002. We anticipate that the new credit facility will be in an amount adequate to repay our existing Credit Facility as well as to refinance the Coffeyville, Kansas nitrogen plant which is currently operated by Farmland under a synthetic lease agreement.
.FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of Farmland are as follows:
Total
Expiration Years of
Age as of Positions of Present Service
August 31, Held With Term as as Board
Name 2001 Farmland Director Member Business Experience During Last Five Years
-------- ---------- --------- ---------- --------- -------------------------------------------
Albert J. Shivley 58 2001 17 General Manager--American Pride Co-op
Chairman of Association, Brighton, Colorado, a local
the Board cooperative association of farmers and
ranchers.
Jody Bezner 60 Vice Chairman 2003 10 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. 50 2001 9 General Manager--Cooperative Grain and
Supply, Hillsboro, Kansas, a local
cooperative association of farmers and
ranchers.
Ronald J. Amundson 57 2003 13 General Manager--Central Iowa Cooperative,
Jewell, Iowa, a local cooperative
association of farmers and ranchers.
Baxter Ankerstjerne 65 2002 11 Producer--Peterson, Iowa.
From 1988 to 1997, Mr. Ankerstjerne served
as Chairman of the Board of Directors of
Farmers Cooperative Association, Marathon,
Iowa.
Donald Anthony 51 2003 1 Producer--Lexington, Nebraska. Mr. Anthony
is past President and Vice President of
All Points Cooperative, Lexington,
Nebraska, a local cooperative association
of farmers and ranchers.
Larry Dahlsten 58 2003 1 Producer--Lindsborg, Kansas. Mr. Dahlsten
is Vice-Chairman of Mid-Kansas Cooperative
Association, Moundridge, Kansas, a local
cooperative association of farmers and
ranchers.
Steven Erdman 51 2001 9 Producer--Bayard, Nebraska.
Mr. Erdman serves as President of the
Board of Directors of Panhandle Co-op
Scottsbluff, Nebraska, a local cooperative
association of farmers and ranchers.
Harry Fehrenbacher 53 2002 5 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.
Donald Gales 39 2002 2 General Manager--South Dakota Wheat
Growers, Aberdeen, South Dakota, a local
cooperative association of farmers and
ranchers.
Warren Gerdes 53 2001 7 General Manager--Farmers Cooperative
Elevator Company, Buffalo Lake, Minnesota,
a local cooperative association of farmers
and ranchers.
Thomas H. Gist 66 2002 3 Producer--Marianna, Arkansas. Mr. Gist
serves as Secretary of the Board of
Directors of Tri-County Farmers
Association of Brinkley, Arkansas. A local
cooperative association of farmers and
ranchers.
Ben Griffith 52 2001 12 General Manager--Central Cooperatives,
Inc., Pleasant Hill, Missouri, a local
cooperative association of farmers and
ranchers.
Barry Jensen 56 2002 11 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 63 2001 6 General Manager--Agri Co-op in Holdrege,
Nebraska, a local cooperative association
of farmers and ranchers.
William F. Kuhlman 52 2002 5 Producer--Oakley, Kansas. Mr. Kuhlman is a
member and former President and CEO of
Cooperative Agricultural Services, Inc.,
Oakley, Kansas, a local cooperative
association of farmers and ranchers.
Greg Pfenning 52 2003 9 Producer--Hobart, Oklahoma. Past Director
and President of The Farmers Cooperative
Association, Hobart, Oklahoma, a local
cooperative association of farmers and
ranchers.
Monte Romohr 48 2002 11 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 49 2002 8 General Manager--Dacoma Farmers
Cooperative, Inc., Dacoma, Oklahoma, a
local cooperative association of farmers
and ranchers.
E. Kent Stamper 55 2002 5 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.
Eli F. Vaughn 52 2003 4 General Manager--Farmers Cooperative
Company, Afton, Iowa, a local cooperative
association of farmers and ranchers.
Frank Wilson 53 2001 6 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 2001 Principal Occupation and Other Positions
------ ----------- ----------------------------------------
Robert Honse 58 President and Chief Executive Officer - Mr. Honse has been with Farmland
since 1973. He was appointed to his present position September 1, 2000.
Prior to September 2000 Mr. Honse served as Executive Vice President and
Chief Operating Officer for Farmland. 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 58 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.
Stan Riemann 50 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.
Bob Terry 45 Executive Vice President, General Counsel and Corporate Secretary - Mr. Terry
was appointed to his present position in September 2000, and became
Corporate Secretary effective March 1, 2001. Mr. Terry joined Farmland
in 1989. From 1993 through August 2000, Mr. Terry served as Vice
President and General Counsel.
William Fielding 54 Executive Vice President and President, Refrigerated Foods - Mr. Fielding
joined Farmland in January 2000. Prior to joining Farmland, 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 48 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.
Mike Sweat 56 Vice President, Strategic Sourcing - Mr. Sweat joined Farmland in 1968. He
was appointed to his present position, Vice President, Strategic
Sourcing, in March 2000. Prior to his current position, Mr. Sweat served
as President of Feed and Grain Processing.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 1999, 2000 and 2001.
Annual Compensation Long-Term
Compensation
---------------------------------------------------------- -------------------
Employee
Year Variable
Ending Compensation LTIP
Name and Principal Position August 31 Salary Bonus Plan Payouts
- ------------------------------------- ------------ ------------ ----------- ---------------- -------------------
Robert Honse, 1999 $ 426,224 $ -0- $ -0- $ -0-
President and 2000 $ 552,057 $ -0- $ -0- $ -0-
Chief Executive Officer 2001 $ 615,612 $ -0- $ 235,143 $ -0-
John Berardi, 1999 $ 340,680 $ -0- $ -0- $ -0-
Executive Vice President and 2000 $ 361,110 $ -0- $ -0- $ -0-
Chief Financial Officer 2001 $ 404,720 $ -0- $ 138,302 $ -0-
Stan Riemann, 1999 $ 261,314 $ -0- $ -0- $ -0-
Executive Vice President and 2000 $ 292,197 $ -0- $ 137,912(2) $ -0-
President, Crop Production 2001 $ 298,782(1) $ -0- $ -0- $ -0-
William Fielding, 1999 $ -0- $ -0- $ -0- $ -0-
Executive Vice President and 2000 $ 204,167 $ 375,000 $ -0- $ -0-
President, Refrigerated Foods 2001 $ 350,000 $ -0- $ -0- $ -0-
Robert Terry, 1999 $ 165,048 $ -0- $ -0- $ -0-
Executive Vice President, 2000 $ 177,426 $ 25,000 $ -0- $ -0-
General Counsel and 2001 $ 228,766 $ -0- $ 56,925 $ -0-
Corporate Secretary
- --------------------------
(1) Mr. Riemann was employed with Agriliance from January 1, 2001 to August 3, 2001 and earned a salary of $175,866. This salary is
included as a part of Mr. Riemann's total salary.
(2) Mr. Riemann earned compensation under the Agriliance variable compensation program of $137,912. This variable compensation is
included as a part of Mr. Riemann's total variable compensation.
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 depends on 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 periods 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.
Under the Management Long-Term Incentive Plan, selected management employees, including Messrs. Honse, Berardi, Terry, and Riemann, are paid cash incentive amounts determined by a formula which takes into account the position held and Farmland’s aggregate income over periods specified in the Plan. The Plan’s currently existing performance and reward cycles are fiscal years 2001 through 2002, fiscal years 2001 through 2003, and fiscal years 2002 through 2004. The Plan’s subsequent performance and reward cycles will begin in 2003 and each subsequent year thereafter for a three-year time span until such time as the Board deems it is no longer in the best interest of Farmland and the membership. For each plan, if the aggregate income is less than the threshold or if the indebtedness ratio (funded indebtedness as a percent of capitalization) is above the level established by bank covenants at the end of the cycle, no payment will occur with respect to such Plan.
If aggregate income equals or exceeds the threshold and the indebtedness ratio below the level established by the bank covenants, then .83% of aggregate income of the Plan periods is made available to pay incentive awards. In general, a participant must be an active employee of Farmland at the end of a Plan in order to receive payment of the reward. Absent a significant change in their status, in which event such percentages may be adjusted, of the amount made available to pay incentives, Messrs. Honse, Berardi, Terry, and Riemann will receive at least 11.2%, 8.0%, 4.0% and 2.2%, respectively, for the 2001-2002 plan, 11.2%, 8.0%, 4.0% and 2.8%, respectively, for the 2001-2003 plan, and 11.2%, 9.0%, 5.0%, and 4.0%, respectively, for the 2002-2004 plan.
The Board of Directors may, in its sole discretion, amend, discontinue, adjust or cancel any award otherwise payable under the Management Long-Term Incentive Plan, should Farmland incur a loss in the final year of any plan. In addition, the Board of Directors may impact the payout amount of a plan by approving for inclusion or exclusion in the calculation of performance the effects of extraordinary events occurring during a plan period.
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 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.
Under the 2001-2002 Plan, the 2001-2003 Plan, and the 2002-2004 Plan, certain management employees, including those executives set forth below, may be eligible for future awards, contingent on satisfying the terms and conditions of the plan cycle, as set forth in the following table. The table also provides information as to possible incentive payments to Mr. Fielding under his employment contract.
Estimated Future Payouts Under Non-Stock
(A) (B) (C) 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
- --------------- ------------------ ------------------- --------------------- ------------------ ------------------
Robert Honse 2001-2002 $ 72,695 Note 2 Note 2
2001-2003 $ 180,528 Note 2 Note 2
2002-2004 $ 314,112 Note 2 Note 2
John Berardi 2001-2002 $ 51,925 Note 2 Note 2
2001-2003 $ 128,949 Note 2 Note 2
2002-2004 $ 252,411 Note 2 Note 2
Robert Terry 2001-2002 $ 25,962 Note 2 Note 2
2001-2003 $ 64,474 Note 2 Note 2
2002-2004 $ 140,229 Note 2 Note 2
Stan Riemann 2001-2002 $ 14,063 Note 2 Note 2
2001-2003 $ 44,774 Note 2 Note 2
2002-2004 $ 112,183 Note 2 Note 2
William Fielding 2001-2004 Note 3 Note 3 Note 3
(1) Rights in the incentive pool are expressed as a minimum percentage of the total pool.
(2) The Plan does not specify a target or maximum payment. Payouts are only made when income over the plan
periods reaches the threshold amount, and then the amount available for payment is a fixed percentage of
total income.
(3) 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. Under this plan payments of deferred amounts will 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 is paid, at the employee’s election, in a lump sum or in ten annual installments. Amounts deferred pursuant to the plan for the accounts of the named individuals during the years 1999, 2000, and 2001 are included in the cash compensation table above.
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 5,500 active and 11,000 inactive employees were participants in the Retirement Plan on August 31, 2001. 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 made no contributions to the Retirement Plan for the years ended August 31, 1999, 2000, and 2001.
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 $140,000 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 the federal compensation limits, 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 the federal compensation limits, the combined estimated annual benefits payable under the Retirement Plan and SERP assuming: (1) retirement occurs on or after age 62 in calendar year 2001; (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 80% of the total benefit lost; (3) benefits have been computed using an IRC 401(a)(17) Final Average Wage of $162,500, 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.
Final Average Years of Service
-----------------------------------------------------------------------------------------
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 50,531 67,375 84,219 101,063 117,906
250,000 61,031 81,375 101,719 122,063 142,406
300,000 71,531 95,375 119,219 143,063 166,906
350,000 82,031 109,375 136,719 164,063 191,406
400,000 92,531 123,375 154,219 185,063 215,906
450,000 103,031 137,375 171,719 206,063 240,406
500,000 113,531 151,375 189,219 227,063 264,906
600,000 134,531 179,375 224,219 269,063 313,906
700,000 155,531 207,375 259,219 311,063 362,906
800,000 176,531 235,375 294,219 353,063 411,906
900,000 197,531 263,375 329,219 395,063 460,906
1,000,000 218,531 291,375 364,219 437,063 509,906
The following table sets forth the credited years of service for certain of Farmland’s executive officers at August 31, 2001.
Name Years of Creditable Service
---- ---------------------------
Robert Honse 27
John Berardi 9
Robert Terry 12
Stan Riemann 25
William Fielding 1
Compensation Committee Interlocks and Insider ParticipationThe 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 2001: Messrs. Jody Bezner, Ron Amundson, Steve Erdman, Bill Kuhlman and Eli Vaughn. 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 DirectorsDirectors’ 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 supplemental life insurance benefit on commencement of a second elected term of office. ITEM12. 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, 2001, no person was known by Farmland to be the beneficial owner of more than five percent of Farmland’s common shares.
At August 31, 2001, 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) Listing of Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements
Consolidated Balance Sheets, August 31, 2000 and 2001
Consolidated Statements of Operations for each of the years in the three-year period ended August
31, 2001
Consolidated Statements of Cash Flows for each of the years in the three-year period ended August
31, 2001
Consolidated Statements of Capital Shares and Equities for each of the years in the three-year
period ended August 31, 2001
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules Farmland Industries, Inc. and Subsidiaries for each of the years in the three-year period ended August 31, 2001: IX - Valuation and qualifying accounts(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 andFive-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)
4.(ii)B Second Amendment to Syndicated Credit Agreement Facility between Farmland Industries, Inc. and various banks, dated
April 12, 2001 (Incorporated by Reference - Form 10-Q filed April 16, 2001)
* 4.(ii)C Third Amendment to Syndicated Credit Agreement Facility between Farmland Industries, Inc. and various banks, dated
November 9, 2001
Material Contracts:
Management Remunerative Plans:
* 10.(iii)A Employee Variable Compensation Plan (September 1, 2001 - August 31, 2002)
10.(iii)B Board of Directors Insurance (Incorporated by Reference – Form 10-K filed
November 22, 2000).
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. Robert W. Honse, dated August 1,
2000 (Incorporated by Reference – Form 10-Q filed November 22, 2000).
10.(iii)F Employment agreement between Farmland and Mr. William Fielding, dated January
31, 2000 (Incorporated by Reference – Form 10-Q filed April 14, 2000).
10.(iii)G Summary of severance and retention bonus plan for certain management employees
of Farmland, dated June 7, 1999 (Incorporated by Reference – Form 10-Q
filed July 14, 1999).
10.(iii)H Employment agreement between Farmland and Mr. Robert Terry, dated December 1,
2000 (Incorporated by Reference – Form 10-Q, filed April 16, 2001).
10.(iii)I Employment agreement between Farmland and Mr. John Berardi, dated April 6, 2001
(Incorporated by Reference – Form 10-Q, filed April 16, 2001).
10.(iii)J Long Term Incentive Plan dated February 22, 2001 (Incorporated by Reference
– Form 10-Q, filed April 16, 2001).
18 Letter regarding change in accounting principle (Incorporated by Reference
– Form 10Q, filed January 12, 2001).
* 21 Subsidiaries of the Registrant
* 24 Power of Attorney
* Filed with this registration
** 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-KNo reports on Form 8-K have been filed during the last quarter of the period covered by the report.
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the ActAs 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.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, Farmland Industries, Inc. has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Kansas City, State of Missouri on November 19, 2001.
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, Corporate Secretary 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 24, 2001.
Signature Title Date
* Chairman of the Board November 19, 2001
--------------------------------------------------
Albert J. Shivley and Director
* Vice Chairman of Board, November 19, 2001
--------------------------------------------------
Jody Benzer Vice President and Director
* Director November 19, 2001
--------------------------------------------------
Lyman L. Adams, Jr.
* Director November 19, 2001
--------------------------------------------------
Ronald J. Amundson
* Director November 19, 2001
--------------------------------------------------
Baxter Ankerstjerne
* Director November 19, 2001
--------------------------------------------------
--------------------------------------------------
Donald Anthony
* Director November 19, 2001
--------------------------------------------------
--------------------------------------------------
Larry Dahlsten
* Director November 19, 2001
--------------------------------------------------
Steven Erdman
* Director November 19, 2001
--------------------------------------------------
Harry Fehrenbacher
* Director November 19, 2001
--------------------------------------------------
Martie Floyd
* Director November 19, 2001
--------------------------------------------------
Warren Gerdes
* Director November 19, 2001
--------------------------------------------------
Thomas H. Gist
* Director November 19, 2001
--------------------------------------------------
Ben Griffith
Director November 19, 2001
--------------------------------------------------
Barry Jensen
* Director November 19, 2001
--------------------------------------------------
Ron Jurgens
* Director November 19, 2001
--------------------------------------------------
William F. Kuhlman
* Director November 19, 2001
--------------------------------------------------
Greg Pfenning
* Director November 19, 2001
--------------------------------------------------
Monte Romohr
* Director November 19, 2001
--------------------------------------------------
Joe Royster
* Director November 19, 2001
--------------------------------------------------
E. Kent Stamper
* Director November 19, 2001
--------------------------------------------------
Eli F. Vaughn
* Director November 19, 2001
--------------------------------------------------
Frank Wilson
/s/ ROBERT W. HONSE President and November 19, 2001
--------------------------------------------------
Robert W. Honse Chief Executive Officer
/s/ JOHN F. BERARDI Executive Vice President November 19, 2001
--------------------------------------------------
John F. Berardi and Chief Financial Officer
(Principal Financial Officer)
/s/ STEVEN R. RHODES Vice President and November 19, 2001
--------------------------------------------------
Steven R. Rhodes Controller
(Principal Accounting Officer)
*BY /s/ JOHN F. BERARDI
------------------------
John F. Berardi
Attorney-In-FactINDEPENDENT AUDITORS' REPORT
The Board of Directors Farmland Industries, Inc. Under date of November 19, 2001, we reported on the consolidated balance sheets of Farmland Industries, Inc. and subsidiaries as of August 31, 2000 and 2001, 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, 2001, which are included in the Annual Report filed on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule in the Annual Report filed on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.KPMG LLP
Kansas City, Missouri
November 19, 2001
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE IX
VALUATION AND QUALIFYING ACCOUNTS
Additions
----------------------------------
------------------ ---------------
Balance at Charged to Costs Charged to Deductions Balance
Beginning of and Expenses Other Accounts from Reserves at end
Description Year of Year
(Amounts in Thousands)
Allowance for doubtful
receivables
For the Fiscal Year
Ended August 31, 2001 9,401 12,640 (129) (5,589) 16,323
For the Fiscal Year
Ended August 31, 2000 5,263 7,030 (53) (2,839) 9,401
For the Fiscal Year
Ended August 31, 1999 4,095 1,687 282 (801) 5,263
EXHIBIT INDEX
Exhibit No. Description of 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)
4.(ii)B Second Amendment to Syndicated Credit Agreement Facility between Farmland Industries, Inc. and various banks, dated
April 12, 2001 (Incorporated by Reference - Form 10-Q filed April 16, 2001)
* 4.(ii)C Third Amendment to Syndicated Credit Agreement Facility between Farmland Industries, Inc. and various banks, dated
November 9, 2001
Material Contracts:
Management Remunerative Plans:
* 10.(iii)A Employee Variable Compensation Plan (September 1, 2001 - August 31, 2002)
10.(iii)B Board of Directors Insurance (Incorporated by Reference - Form 10-K filed
November 22, 2000).
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. Robert W. Honse, dated August 1, 2000 (Incorporated by Reference - Form
10-Q filed November 22, 2000).
10.(iii)F Employment agreement between Farmland and Mr. William Fielding, dated January 31, 2000 (Incorporated by Reference -
Form 10-Q filed April 14, 2000).
10.(iii)G Summary of severance and retention bonus plan for certain management employees of Farmland, dated June 7, 1999
(Incorporated by Reference - Form 10-Q filed July 14, 1999).
10.(iii)H Employment agreement between Farmland and Mr. Robert Terry, dated December 1, 2000 (Incorporated by Reference - Form
10-Q, filed April 16, 2001).
10.(iii)I Employment agreement between Farmland and Mr. John Berardi, dated April 6, 2001 (Incorporated by Reference - Form 10-Q,
filed April 16, 2001).
10.(iii)J Long Term Incentive Plan dated February 22, 2001 (Incorporated by Reference - Form 10-Q, filed April 16, 2001).
18 Letter regarding change in accounting principle (Incorporated by Reference - Form 10Q, filed January 12, 2001).
* 21 Subsidiaries of the Registrant
* 24 Power of Attorney
* Filed with this registration