| Three months ended | | | | | | | | | | |
| November 30, 2002 (Page 2 of 3) | | | | | | | | | | |
| (Amounts in Thousands) | | | | | | | | | | |
| INPUT AND OTHER SEGMENTS | |
| | | Crop Production | | | Petroleum | | | Feed | | | Other Operating Units | | | Total Input and Other Segments |
| Sales & transfers | $ | 147,746 | | $ | 256,839 | | $ | -0- | | $ | 5,617 | | $ | 410,202 |
| Transfers between segments | | (1,583) | | | (1,231) | | | -0- | | | -0- | | | (2,814) |
| Net sales | $ | 146,163 | | $ | 255,608 | | $ | -0- | | $ | 5,617 | | $ | 407,388 | |
| | | | | | | | | | | | | | | | |
| Income (loss) from
continuing operations before reorganization
expense |
$
|
(10,657) | |
$ |
(1,219) | |
$ |
8,082 | |
$ |
(1,063) | |
$ |
(4,857)
| |
| | | | | | | | | | | | | | | | |
| Reorganization (expense) | | (275,679) | | | (147,754) | | | -0- | | | 297 | | | (423,136) | |
| | | | | | | | | | | | | | | | |
| Income (loss) from
continuing operations |
$
|
(286,336) | |
$ |
(148,973) | |
$ |
8,082 | |
$ |
(766) | |
$ |
(427,993)
| |
| | | | | | | | | | | | | | | | |
| Income from discontinued
operations, net of
income tax benefit | |
-0- | | |
-0- | | |
-0- | | |
-0- | | |
-0-
| |
| | | | | | | | | | | | | | | | |
| Net income (loss) | $ | (286,336) | | $ | (148,973) | | $ | 8,082 | | $ | (766) | | $ | (427,993) |
| | | | | | | | | | | | | | | |
| Goodwill | $ | -0- | | $ | -0- | | $ | -0- | | $ | -0- | | $ | -0- |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total assets | $ | 455,348 | | $ | 119,145 | | $ | 59,489 | | $ | 14,580 | | $ | 648,562 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| Three months ended | | | | | | | | | | |
November 30, 2001 (Page 3 of 3)
(Amounts in Thousands) | | | | | | | | | | |
| OUTPUT SEGMENTS |
| | | | | | | | | | Total |
| Pork | | Beef | | World | | Output |
| Marketing | | Marketing | | Grain | | Segments |
| Sales and transfers | $ | 690,843 | | $ | 830,407 | | $ | 2,585 | | $ | 1,523,835 |
| Transfers between segments | | (235,713) | | | (15,541) | | | -0- | | | (251,254) |
| Net sales | $ | 455,130 | | $ | 814,866 | | $ | 2,585 | | $ | 1,272,581 |
| | | | | | | | | | | |
Income (loss) from continuing
operations |
$ |
10,073
| |
$ |
11,387
| |
$ |
(1,468)
| |
$ |
19,992
|
| | | | | | | | | | | |
Loss from discontinued
operations, net of income tax
benefit | |
-0-
| | |
-0-
| | |
(2,861)
| | |
(2,861)
|
| | | | | | | | | | | |
| Net income (loss) | $ | 10,073 | | $ | 11,387 | | $ | (4,329) | | $ | 17,131 |
| | | | | | | | | | | |
| Goodwill | $ | 2,859 | | $ | 16,638 | | $ | 11,263 | | $ | 30,760 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total assets | $ | 434,912 | | $ | 388,371 | | $ | 331,003 | | $ | 1,154,286 |
| | | | | | | | | | | | | |
| | | | | | | | | | |
| Three months ended | | | | | | | | | | |
November 30, 2002 (Page 3 of 3)
(Amounts in Thousands) | | | | | | | | | | |
| OUTPUT SEGMENTS |
| | | | | | | | | | Total |
| Pork | | Beef | | World | | Output |
| Marketing | | Marketing | | Grain | | Segments |
| Sales and transfers | $ | 606,139 | | $ | 867,698 | | $ | -0- | | $ | 1,473,837 |
| Transfers between segments | | (207,620) | | | (18,850) | | | -0- | | | (226,470) |
| Net sales | $ | 398,519 | | $ | 848,848 | | $ | -0- | | $ | 1,247,367 |
| | | | | | | | | | | |
Income (loss) from continuing
operations before
reorganization expense |
$ |
11,252
| |
$ |
11,943
| |
$ |
(527)
| |
$ |
22,668
|
| | | | | | | | | | | |
| Reorganization (expense) | | 279 | | | -0- | | | 12 | | | 291 |
| | | | | | | | | | | |
Income (loss) from continuing
operations |
$ |
11,531
| |
$ |
11,943
| |
$ |
(515)
| |
$ |
22,959
|
| | | | | | | | | | | |
Income from discontinued
operations, net of income tax
benefit | |
-0-
| | |
-0-
| | |
294
| | |
294
|
| | | | | | | | | | | |
| Net income (loss) | $ | 11,531 | | $ | 11,943 | | $ | (221) | | $ | 23,253 |
| | | | | | | | | | | |
| Goodwill | $ | 2,767 | | $ | 15,889 | | $ | 10,084 | | $ | 28,740 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total assets | $ | 387,609 | | $ | 416,345 | | $ | 93,231 | | $ | 897,185 |
| | | | | | | | | | | | |
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this discussion and in the unaudited Condensed Consolidated Financial Statements and Accompanying Notes presented in this Form 10-Q should be read in conjunction with information set forth in Part II, Items 7 and 8, in Farmland's Annual Report on Form 10-K for the year ended August 31, 2002.
Recent Developments
Bankruptcy Proceedings
On May 31, 2002 (the "Petition Date"), Farmland Industries, Inc. and four of its subsidiaries, Farmland Foods, Inc., Farmland Pipe Line Company, Farmland Transportation, Inc., and SFA, Inc., (collectively, the "Debtors") filed voluntary petitions for protection under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court, Western District of Missouri (the "Court") (Joint Case Number 02-50557-JWV). The filings were made in order to facilitate the restructuring of the Debtors' trade liabilities, debt, and other obligations. We continue to manage the business, as debtors-in-possession, but may not engage in transactions outside the ordinary course of business without the approval of the Court.
On June 4, 2002, the Court appointed a committee to represent the interests of unsecured creditors (the "Creditors' Committee") and a committee to represent the interests of unsecured bondholders (the "Bondholders' Committee"). The Creditors' Committee and the Bondholders' Committee are comprised of representatives of the Debtors' unsecured creditors and unsecured bondholders, respectively. Both committees review and gather information about the Debtors' financial condition and restructuring activities. We are required to reimburse certain fees and expenses of each committee, including fees for attorneys and other professionals, to the extent allowed by the Court.
Subsequent to the Petition Date, the Court approved the Debtors' request to enter into a new credit facility with a syndicate of banks to provide up to $306.0 million of debtors-in-possession financing ("the DIP Credit Facility"). The DIP Credit Facility partially replaced a five-year $500 million credit facility entered into with a syndicate of banks on February 7, 2002 (the "Pre-petition Credit Facility").
As debtors-in-possession, the Debtors, subject to any required Court approval, may elect to assume or reject real estate leases, employment contracts, personal property leases, service contracts, and other unexpired executory pre-petition contracts prior to the confirmation of a plan of reorganization. Damages related to rejected contracts are a pre-petition claim. We have estimated and accrued our liability resulting from contracts rejected through November 30, 2002 and this estimated liability, in the amount of $14.2 million, is included in our unaudited Condensed Consolidated Balance Sheets as Liabilities Subject to Compromise.
As a result of the Chapter 11 proceedings, virtually all liabilities, litigation and other claims against the Debtors that were in existence as of the Petition Date are stayed unless the stay is modified or lifted or payment is authorized by the Court. As part of the reorganization process, the Debtors have attempted to notify all known or potential creditors of the Chapter 11 filings for the purpose of identifying all pre-petition claims against the Debtors. The Court set January 10, 2003 (the "Bar Date"), as the date by which creditors were required to file proof of claims against the Debtors. At this time, the ultimate amount of claims that will be allowed by the Court is not determinable.
Pursuant to the provisions of the Bankruptcy Code, on November 27, 2002, the Debtors filed with the Court a plan of reorganization under which the Debtors' liabilities and equity interests would be restructured. This plan of reorganization identifies various classes of creditors and equity interests. Classes that will be paid in full or whose rights are not altered are considered unimpaired and do not have a right to vote on the plan of reorganization. Classes that will not be paid in full are considered impaired. Impaired classes include holders of unsecured demand loan certificates and holders of unsecured subordinated debenture bonds, as well as general unsecured creditors of the Debtors. The equity interests in Farmland, including its preferred stock interests, are also impaired. As a general matter, each impaired class is entitled to vote as a class to accept or reject the plan of reorganization. Although management filed a plan of reorganization, there can be no assurance at this time whether it will be contested by any impaired class or whether it will be approved or confirmed by the Court.
As a part of the bankruptcy process, we are required to file a disclosure statement with the Court. The disclosure statement will provide all creditor classes with information regarding our proposed reorganization, including identification of assets we intend to sell and estimated cash proceeds from those sales. Currently, the Court is considering our motion to postpone the date by which we must file our disclosure statement from January 15, 2003 to March 31, 2003. Once the disclosure statement is deemed adequate by the Court, the disclosure statement will be submitted to the various impaired classes, and the plan of reorganization will be voted on by those classes.
The plan of reorganization, as filed, in effect contemplates either that the Debtors will reorganize around our pork and beef marketing businesses, with other assets being sold, or that the Debtors will sell all or substantially all of their assets. The plan of reorganization also provides for the payment of obligations under the DIP Credit Facility and certain pre-petition liabilities under a prior bank credit agreement in full in cash on the effective date of the plan of reorganization. As to various impaired classes, including the classes pertaining to the holders of our demand loan certificates and our subordinated debenture bonds, as well as our general unsecured creditors, the plan provides that these classes will receive cash and/or securities of the reorganized entity. The amounts to be received by any particular class are subject to further negotiation and will depend, in part, on the amounts we realize from potential sales of assets. As a result, we will need to amend the plan of reorganization before it is confirmed. The plan of reorganization, if accepted and confirmed, will substantially change the amounts and characterization of liabilities currently disclosed in the accompanying unaudited Condensed Consolidated Financial Statements.
As provided in the DIP Credit Facility, under certain circumstances it is an event of default if the Debtors fail to file a plan of reorganization approved by all lenders under the DIP Credit Facility (the "DIP Lenders") (such approval not to be unreasonably withheld) by November 27, 2002. Farmland believes, based on consultation with counsel, that the plan of reorganization, as filed on November 27, 2002, satisfies the requirements of the DIP Credit Facility. Subsequent to November 30, 2002, the DIP Lenders asserted that the plan of reorganization, as filed, did not satisfy the requirements of the DIP Credit Facility. Concurrent with this assertion, the DIP Lenders notified Farmland that the DIP Lenders were terminating the $25.0 million Tranche A loan commitment under the DIP Credit Facility and were increasing, by 200 basis points, the interest rate charged to Farmland on borrowings outstanding under the DIP Credit Facility. As a result of the assertion by the DIP Lenders that an event of default exists as described in the preceding paragraph, Farmland entered into an amendment to the DIP Credit Facility on January 8, 2003 (the "DIP Amendment") in order to resolve issues surrounding the alleged event of default by the DIP Lenders and modify certain other terms of the agreement. The effectiveness of the amendment requires approval of the Court, which Farmland is in the process of seeking. See "Financial Condition, Liquidity and Capital Resources" for additional discussion regarding the DIP Amendment.
In the event that the Court does not approve the DIP Amendment, Farmland continues to believe that the plan of reorganization satisfies the requirements of the DIP Credit Facility as the plan of reorganization, among other things, provides that the DIP Lenders will be paid in full in cash on or before the effective date of the plan of reorganization, which will be prior to the termination date of the DIP Credit Facility. Since, as described in the plan of reorganization, the DIP Lenders are unimpaired, the DIP Lenders will not be offered the opportunity to vote on the plan of reorganization. Based on consultation with counsel, Farmland believes that, absent Court approval of the DIP Amendment, if the DIP Lenders were to attempt to declare all unpaid loans and accrued interest under the DIP Credit Facility to be due and payable, or if the DIP Lenders were to seek to terminate their obligation to make future loans under Tranche B of the DIP Credit Facility, the Court, if presented with the issue, should not permit the DIP Lenders, in the present circumstances, to do so.
The ability of Farmland to continue as a going concern is dependent upon, but not limited to, the confirmation of the plan of reorganization, continued access to adequate sources of capital, the continued compliance with all covenants under the DIP Credit Facility, as proposed to be amended, the ability to secure new financing adequate to support our remaining businesses if and when we emerge from our Chapter 11 proceedings, retention of key suppliers, customers and employees, and the ability to sustain positive cash flows sufficient to fund operations and repay debt. No assurance can be given that the Debtors will be successful in reorganizing their affairs within the Chapter 11 proceedings. Because of the ongoing nature of the reorganization process, the outcome of which is not determinable until a plan of reorganization is confirmed and consummated, the accompanying unaudited Condensed Consolidated Financial Statements are subject to material uncertainties, and we cannot assure you that Farmland will successfully emerge from bankruptcy proceedings.
Disposition of Assets
In conjunction with our reorganization proceedings, we are evaluating the potential sale or repositioning of a number of assets. Any sale of significant assets outside the normal course of business must be reviewed by our creditor committees and approved by the Court. If the Board approves the acceptance of a bid, then we would present the bid to the creditor committees for review, with a view, ultimately, to presenting the bid to the Court for approval.
Crop Production Nitrogen Assets
Subsequent to August 31, 2002, the Board authorized management to initiate a bid process for our crop production nitrogen assets, but did not commit to a plan to sell the assets. During mid-November 2002, we received various bids to purchase our crop production nitrogen assets. Management is currently evaluating the bids and, following negotiations regarding terms and conditions, will determine which, if any, bid or bids to recommend to the Board. The Board will determine whether to:
direct management to work with one or more bidders to restructure the bid or bids;
reject the bid or bids;
pursue another alternative; or
approve the acceptance of a bid or bids and commit to a plan to gain Court approval to sell our crop production assets.
In our plan of reorganization, filed November 27, 2002, we stated our intent to dispose of our crop production assets. Despite this stated intent, these assets are not classified as held for sale as, ultimately, any disposition must be approved by the Court and, to date, the Court has not approved such disposition. As a result, as of November 30, 2002, our crop production assets were classified as held for operations. Since during the first quarter we determined that it was more likely than not that our crop production assets would be disposed of, those assets were tested for impairment at November 30, 2002 pursuant to SFAS No. 144 using projected undiscounted cash flows based on management's best assumptions regarding the use and eventual disposition of these assets. Based on these tests and our assumptions and determinations as of November 30, 2002, these assets were impaired at November 30, 2002. Using management's best estimate as of November 30, 2002, it appears that the estimated fair value we will receive on disposition of these assets exceeds the carrying value of these assets by approximately $275.9 million. Since the ultimate proceeds from disposition of these assets will result from a bidding and auction process conducted in our bankruptcy proceedings, the ultimate loss may differ from the amount recognized at November 30, 2002. This estimated loss is included in reorganization expense in the accompanying unaudited Condensed Consolidated Statements of Operations.
Petroleum Assets
Subsequent to August 31, 2002, the Board authorized management to initiate a bid process for our petroleum assets, but did not commit to a plan to sell the assets. Subsequent to August 31, 2002, we received letters of interest to purchase our petroleum assets. Management is currently evaluating the bids and, following negotiations regarding terms and conditions, will determine which, if any, bid or bids to recommend to the Board. The Board will determine whether to:
direct management to work with one or more bidders to restructure the bid or bids;
reject the bid or bids;
pursue another alternative; or
approve the acceptance of a bid or bids and commit to a plan to gain Court approval to sell our petroleum assets.
In our plan of reorganization, filed November 27, 2002, we stated our intent to dispose of our petroleum assets. Despite this stated intent, these assets are not classified as held for sale as, ultimately, any disposition must be approved by the Court and, to date, the Court has not approved such disposition. As a result, as of November 30, 2002, our petroleum assets were classified as held for operations. Since during the first quarter we determined that it was more likely than not that our petroleum assets would disposed of, those assets were tested for impairment at November 30, 2002 pursuant to SFAS No. 144 using projected undisscounted cash flows based on management's best assumptions regarding the use and eventual disposition of these assets. Based on these tests and our assumptions and determinations as of November 30, 2002, these assets were impaired at November 30, 2002. Using management's best estimate as of November 30, 2002, it appears that the estimated fair value we will receive on disposition of these assets exceeds the carrying value of these assets by approximately $147.7 million. Since the ultimate proceeds from disposition of these assets will result from a bidding and auction process conducted in our bankruptcy proceedings, the ultimate loss may differ from the amount recognized at November 30, 2002. This estimated loss is included in reorganization expense in the accompanying unaudited Condensed Consolidated Statements of Operations.
North America Grain Assets
Our Board of Directors has authorized management to negotiate the possible sale of substantially all of our North America Grain assets. These assets are currently leased to ADM/Farmland, a subsidiary of the Archer Daniels Midland Company ("ADM"). Farmland receives 50% of the earnings or losses of the ADM/Farmland unit as a component of the lease
As of November 30, 2002, our grain assets were classified as held for operations. Consistent with this classification, the assets were tested for impairment at August 31, 2002 using projected undiscounted cash flows. Based on this test, the grain assets were not impaired at August 31, 2002.
Protein Assets
As part of the reorganization process, Farmland has a responsibility to consider whether it would be in the best interest of the unsecured creditors, unsecured bondholders, and other stakeholders to retain or to sell part or all of our protein assets, including Farmland Foods, Inc., Livestock Production and our investment in Farmland National Beef Packing Company. To help us determine the course of action that will provide the most benefit to our unsecured creditors, unsecured bondholders, and other stakeholders, Farmland requested, and has received, Court approval to enter into a contract with Trinity Capital to provide strategic and financial advisory and consulting services in connection with our evaluation of our Farmland Foods and Livestock Production assets. We anticipate amending our plan of reorganization to reflect that, in connection with our DIP Amendment, we have established a process for selling our beef marketing business, and this process includes certain milestone dates. See "Financial Condition, Liquidity and Capital Resources" for additional information regarding the proposed DIP Amendment. If we are able to pay, in full, our DIP Lenders prior to the date we would otherwise be required to sell our beef marketing business, we will not have any obligation to sell a part or all of our beef marketing business.
Critical Accounting Policies
The unaudited Condensed Consolidated Financial Statements of Farmland are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. These critical accounting policies are identified and described more fully in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" included in our Annual Report on Form 10-K for the year ended August 31, 2002.
One of the identified critical accounting policies disclosed our method for valuing long-lived and intangible assets, including goodwill. This policy has been modified as a result of the adoption of SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", on September 1, 2002. Application of SFAS No. 144 requires management to make various estimates, including estimates as to the fair value of long-lived assets. While all such estimates by management have been in good faith, actual results will differ from management's estimates. See "Recent Developments - Disposition of Assets" for further information regarding application of SFAS No. 144.
Contractual Obligations
Farmland's contractual obligations, including commitments for future payments under non-cancelable lease arrangements and short and long-term debt arrangements, are summarized below.
| Payments due by period | |
|
Total
| | Less than 1 year | | 1-3
years | | 4-5
years | | After 5 years | |
| (Amounts in millions) | |
| | | | | | | | | | | | | | |
Long-term debt including capital
leases |
$
|
471.3
| |
$
|
322.1
| |
$
|
46.3
| |
$
|
71.2
| |
$
|
31.7
|
Liabilities subject to compromise(1) | | 885.6 | | | N/A | | | N/A | | | N/A | | | N/A |
Operating leases(2) | | 126.2 | | | 24.2 | | | 40.6 | | | 22.9 | | | 38.5 |
Take or pay contracts | | 154.8 | | | 33.0 | | | 59.4 | | | 44.5 | | | 17.9 |
Forward purchase obligation (3) | | 1,671.1 | | | 404.5 | | | 619.8 | | | 476.7 | | | 170.1 |
Purchase option for Enid,
Oklahoma nitrogen facilities | |
25.5
| | |
25.5
| | |
-0-
| | |
-0-
| | |
-0-
|
Total contractual obligations | $ | 3,334.5 | | $ | 809.3 | | $ | 766.1 | | $ | 615.3 | | $ | 258.2 |
| | | | | | | | | | | | | | | | | | | | | | | |
(1) As a result of the Chapter 11 filings, substantially all pre-petition indebtedness of the Debtors is subject to compromise or other treatment under the plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-Chapter 11 liabilities are stayed pending Court approval or the confirmation of a plan of reorganization.
(2) Future minimum lease payments may be reduced as we complete our review of all executory contracts, including operating leases, and determine which we will assume and which we will reject. Once we reject an operating lease, we no longer owe the future minimum lease payments, but we may owe damages to the other party.
(3) The forward purchase contracts are for a commodity and have variable pricing. The contractual obligation was calculated using a five year historical average price. We also have contracts to take, at variable formula prices, the output of our SF Phosphates and Farmland MissChem joint ventures. As the output is not controlled by Farmland, we have not included future purchases from these ventures in this table. During the year ended August 31, 2002, we purchased 423,000 tons at a cost of $80.5 million from these ventures.
Farmland also has contingent liabilities and commitments that are not reflected in our unaudited Condensed Consolidated Balance Sheets. These contingent liabilities and commitments primarily include the following:
letters of credit of $48.4 million (including $22.5 million which is nonrecourse to Farmland and Farmland's other affiliates) outstanding as of November 30, 2002;
Tradigrain has guarantees with banks of $2.2 million as of November 30, 2002, which are nonrecourse to Farmland and Farmland's other affiliates;
certain environmental matters that are in preliminary stages and the timing and extent of actions which governmental authorities may ultimately require are unknown, but it is reasonably possible that such liabilities could exceed the liability accrued at November 30, 2002 by approximately $8.5 million;
an estimated $3.8 million of unaccrued costs relating to closure and post-closure plans in place for five locations; and
- the total damages related to rejected operating leases will ultimately depend on the number of operating leases rejected, the total value of future payments related to those rejected leases, the contract language of each lease and the ability of the lessor to mitigate damages.
Financial Condition, Liquidity and Capital Resources
Farmland's liquidity depends primarily on cash flow from operations and our access to debt capital. On May 31, 2002, due to significantly limited liquidity, the Debtors filed voluntary petitions for protection under Chapter 11 of the Bankruptcy Code. The filings were made in order to facilitate the restructuring of the Debtors' trade liabilities, debt, and other obligations. The Debtors are currently operating as debtors-in-possession under the supervision of the Court.
Farmland has historically maintained two primary sources for debt capital: (1) bank lines of credit and (2) a historically substantially continuous but now suspended public offering of its subordinated debt and demand loan securities.
On February 7, 2002, Farmland and a syndicate of banks, including Deutsche Bank Trust Company Americas, Rabobank, and CoBank, entered into the Pre-petition Credit Facility. The Chapter 11 petition filings constituted an event of default under the terms of our Pre-petition Credit Facility. As of the Petition Date, the Debtors were indebted under the Pre-petition Credit Facility in the amount of $399.7 million (consisting of $233.0 million in revolving loans, $31.7 million of letters of credit obligations and a $135.0 million term loan) plus additional fees, interest and expenses. The Pre-petition Credit Facility was collateralized by a substantial portion of our accounts receivable, inventories, property, plant and equipment and intangible assets.
Subsequent to the Petition Date, the Debtors and a syndicate of banks, including Deutsche Bank Trust Company Americas, entered into the DIP Credit Facility, which was subsequently revised and approved by the Court, to provide up to $306.0 million in post-petition financing. The DIP Credit Facility expires on the occurrence of an event that constitutes a commitment termination date as defined in the agreement or, if no such event has occurred, on November 30, 2003. All outstanding borrowings under the DIP Credit Facility are due and payable on the commitment termination date.
The DIP Credit Facility is collateralized by a first priority priming lien on all assets of the Debtors, including all real, personal and mixed property, both tangible and intangible, but excluding rights in respect to avoidance actions approved by the Court under the Bankruptcy Code. The DIP Credit Facility also allows for super priority administrative expense claim status in the Chapter 11 cases with priority over certain other administrative expenses of the kind specified or ordered pursuant to provisions of the Bankruptcy Code. The DIP Credit Facility also includes various restrictive covenants prohibiting the Debtors from, among other things, incurring additional indebtedness, permitting any liens or encumbrances to be placed on property or assets, making investments, or becoming liable for any contingent obligations, all as defined in the agreement.
As of November 30, 2002, the $306.0 million DIP Credit Facility was comprised of two separate commitments: a $25.0 million Tranche A commitment and a $281.0 million Tranche B commitment. The Tranche A commitment was intended to be a "backstop" to be used only if we needed to issue new letters of credit or we had exhausted our borrowing capacity under Tranche B as determined periodically, as described below, by a borrowing base calculation based on collateral values. Since inception of the DIP Credit Facility, Farmland has not had to utilize Tranche A for any borrowings under the DIP Credit Facility. Our ability to borrow under Tranche B of the DIP Credit Facility is limited by several factors, including:
the amount available under Tranche B is determined periodically through the use of a borrowing base formula based on the amount and nature of our inventory, receivables and required reserves;
we are subject to three budget covenants contained in the DIP Credit Facility: (1) a maximum amount of the DIP Credit Facility that can be utilized, (2) a minimum amount of excess availability determined by a borrowing base formula, and (3) a minimum level of operating revenues, all as described in the agreement; and
we are required to comply with all of the other terms and conditions of the DIP Credit Facility.
As provided in the DIP Credit Facility under certain circumstances it is an event of default if the Debtors fail to file a plan of reorganization approved by all DIP Lenders (such approval not to be unreasonably withheld) by November 27, 2002. Farmland believes, based on consultation with counsel, that the plan of reorganization, as filed on November 27, 2002, satisfies the requirements of the DIP Credit Facility. Subsequent to November 30, 2002, the DIP Lenders asserted that the plan of reorganization, as filed, did not satisfy the requirements of the DIP Credit Facility. Concurrent with this assertion, the DIP Lenders notified Farmland that the DIP Lenders were terminating the $25.0 million Tranche A loan commitment under the DIP Credit Facility and were increasing by 200 basis points, the interest rate charged on borrowings outstanding under the DIP Credit Facility. The right of the DIP Credit Facility to charge this higher rate is unresolved and may be contested by Farmland. Farmland entered into an amendment to the DIP Credit Facility on January 8, 2003 (the "DIP Amendment") in order to resolve issues surrounding the alleged event of default by the DIP Lenders and to modify certain other terms of the agreement. The effectiveness of the amendment requires approval of the Court, which Farmland is in the process of seeking.
The DIP Amendment, if approved by the Court, requires Farmland to, among other things:
eliminate the Tranche A commitment as of December 9, 2002;
reduce the Tranche B commitment by $20 million to $256.5 million upon the effectiveness of the DIP Amendment;
require prepayment of at least $40 million by February 28, 2003 and an additional $10 million by March 31, 2003 of loans under the DIP Credit Facility or the Pre-petition Credit Facility;
establish milestones relating to the progress of the sales of our crop production and beef marketing businesses;
permit us to issue new letters of credit under the Tranche B commitment;
waive the alleged event of default relating to our plan of reorganization; and
limit the default interest charge based on the alleged event of default to the period from December 9, 2002 until the effectiveness of the DIP Amendment.
The DIP Amendment, if approved by the Court, eliminates the requirement by Farmland to file a plan of reorganization approved by all DIP Lenders and eliminates the requirement that the auditors' report covering Farmland's Consolidated Financial Statements express no doubts about the ability of Farmland and its subsidiaries to continue as a going concern.
If the Court does not approve the DIP Amendment, Farmland continues to believe that the plan of reorganization satisfies the requirements of the DIP Credit Facility as the plan of reorganization, among other things, provides that the DIP Lenders will be paid in full in cash on or before the effective date of the plan of reorganization, which will be prior to the termination date of the DIP Credit Facility. Since, as described in the plan of reorganization, the DIP Lenders are unimpaired, the DIP Lenders will not be offered the opportunity to vote on the plan of reorganization. Based on consultation with counsel, Farmland believes that, absent Court approval of the DIP Amendment, if the DIP Lenders were to attempt to declare all unpaid loans and accrued interest under the DIP Credit Facility to be due and payable, or if the DIP Lenders were to seek to terminate their obligation to make future loans under Tranche B of the DIP Credit Facility, the Court, if presented with the issue, should not permit the DIP Lenders, in the present circumstances, to do so.
As discussed above, at November 30, 2002, we believe we were in compliance with all financial covenants, terms, and conditions of the DIP Credit Facility; although the DIP Lenders have asserted that the plan of reorganization, as filed, did not satisfy the requirements of the DIP Credit Facility.
Interest on the DIP Credit Facility is variable and, through November 30, 2002, was based on a 2.50% spread over the higher of (1) the Prime Rate or (2) the rate which is 50 basis points in excess of the Federal Funds Effective Rate, as such terms are defined in the DIP Credit Facility. As of November 30, 2002, the higher rate, as so determined, was 6.75%. Through November 30, 2002, commitment fees of up to 100 basis points per annum were paid periodically on the unused portion of Tranche A of the DIP Credit Facility.
As of November 30, 2002, Farmland had borrowings under the DIP Credit Facility of $175.0 million, and $25.9 million of the facility was being utilized to support letters of credits. As calculated at November 30, 2002 and January 5, 2003, additional availability under the DIP Credit Facility was approximately $25.9 million and $20.9 million, respectively. Management believes that our borrowing capacity under the DIP Credit Facility, as proposed to be modified by the DIP Amendment, is adequate to enable us to continue operations under the supervision of the Court.
As of November 30, 2002, $130.7 million of the pre-petition term loan remains outstanding and accrues interest at a rate of 4% over the base rate (8.25% at November 30, 2002). Farmland does not pay any commitment fees related to the pre-petition term loan. All other obligations under the Pre-petition Credit Facility were paid from the proceeds of the DIP Credit Facility or have otherwise been satisfied.
In August 2001, Farmland National Beef Packing Company, L.P. ("FNBPC") 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. FNBPC was in compliance with all covenants at November 30, 2002. At November 30, 2002 FNBPC had borrowings of $120.5 million, and $20.0 million of the facility was being utilized to support letters of credit. At November 30, 2002, availability under the line of credit was approximately $68.9 million. FNBPC is not a Debtor entity and has continued normal operations.
During February 2002, a decision was made to dispose of our international grain trading subsidiaries (collectively referred to as Tradigrain), through an orderly liquidation of assets and settlement of liabilities. The disposal plan consists primarily of the termination of normal activity, the sale of existing inventories, the collection of receivables, and the settlement of trade and financing liabilities. Our Switzerland subsidiary, which held the primary credit facility to fund the operations of all Tradigrain subsidiaries, filed for creditor protection at that time and all unused lines of credit were rescinded. Continuing financing is negotiated with the banks on an as needed basis. As of November 30, 2002, Tradigrain had short-term borrowings of $2.2 million and additionally had $8.7 million of outstanding checks and drafts which will be funded by the banks. All obligations of Tradigrain are nonrecourse to Farmland and Farmland's other affiliates.
Farmland maintains other borrowing arrangements with banks and financial institutions. Under such arrangements, at November 30, 2002, $3.5 million was borrowed and an additional $2.6 million were being utilized to support letters of credit, which are nonrecourse to Farmland.
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. Subsequent to the Petition Date, our Board of Directors has not authorized any payments of dividends on the Preferred Shares. The status of the Preferred Shares, including accumulated but unpaid dividends, will be subject to the final terms established in the Debtors' plan of reorganization as confirmed by the Court.
For the three months ended November 30, 2002, Farmland primary sources of cash were:
. cash generated from operations, before reorganization expenses and changes in assets and liabilities, of $43.6 million; and
Cash generated was primarily used to:
support a $31.4 million increase in receivables, primarily related to our beef marketing business;
pay reorganization costs, primarily professional fees, of $9.8 million; and
fund $16.1 million in capital expenditures, primarily related to our beef marketing business.
Results of Operations
General
In view of the seasonality of Farmland's businesses, it must be emphasized that the results of operations for the periods presented are not necessarily indicative of the results for a full fiscal year.
Farmland's sales, gross margins and net income or loss 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, currency fluctuations, tariffs, concerns over food safety, and other factors affecting United States imports and exports. In addition, various federal and state regulations intended to protect the environment encourage farmers to reduce the use of fertilizers and other chemicals. Global variables, such as general economic conditions, conditions in financial markers, 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. Historically, charges 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. For example, at times during the last few years, the results of our crop production business have been adversely affected by a combination of high natural gas prices and competition from imports. Also, for example changes in the prices of crude oil and refined fuels have caused, and will continue to cause, significant variations in the results of our petroleum business. Management cannot determine the extent to which these factors may impact our future operations.
The level of operating income in the crop production, petroleum, pork and beef 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, live hogs in the case of pork products, and live cattle in the case beef products). We cannot determine the direction or magnitude to which these factors will affect our cash flow and net income or loss.
Results of Operations for Three Months Ended November 30, 2002 Compared to Three Months Ended November 30, 2001.
Sales for the three months ended November 30, 2002 decreased approximately $193.4 million, or 10%, compared with the same period last year. This decrease is primarily due to a decrease in sales recorded by our petroleum segment as we no longer market product to retailers.
For the three months ended November 30, 2002, we had a net loss of $417.1 million compared with a net income of $3.2 million for the same period last year. The decrease is primarily related to reorganization expense of $433.9 million incurred in the three months ended November 30, 2002, primarily resulting from the impairment of our crop production and petroleum assets, and a decline in our petroleum segment results before reorganization expense. This decrease is partially offset by an improvement in the crop production segments operating results before the reorganization charge, a partial settlement of vitamin supplement litigation included in the feed segment results and a decrease in interest expense primarily as a result of discontinuing interest accruals on certain unsecured debt.
Pork Marketing
Sales of the pork marketing segment decreased $56.6 million, or 12%, during the three months ended November 30, 2002 compared with the same period last year. The decrease was primarily due to an approximate 14% decrease in unit selling price partially offset by an approximate 2% increase in unit sales volume. Unit selling prices declined primarily as a result of competing proteins on the domestic market due to the Russian import ban on poultry products.
Income in the pork marketing segment increased by $1.5 million, or approximately 14% during the three months ended November 30, 2002 to an income of $11.5 million compared to an income of $10.0 million in the same period last year. Significant factors which caused the income of the pork marketing segment to increase for the three months ended November 30, 2002 compared with the prior year included:
. margins increased $0.5 million primarily as a result of an increase in slaughter levels and a decrease in hogs costs, partly offset by a decrease in per unit selling price;
. Selling, general, and administrative ("SG&A") expenses decreased $0.8 million primarily due to the reduction in work force in fiscal 2002; and
. interest expense decreased $3.1 million primarily due to discontinuing interest on certain pre-petition debt and lower inventory levels.
These factors were partially offset by:
. during the three months ended November 30, 2002, we realized a loss of $0.4 million on the sale of cull sows in the livestock production area because the market was lower in 2002 compared to 2001; and
. during the three months ended November 30, 2002, we incurred losses from derivative commodity instruments of $1.2 million compared with a gain of $0.9 million during the same period last year.
Beef Marketing
Sales of the beef marketing segment increased $34.0 million, or 4%, during the three months ended November 30, 2002 compared with the same period last year. The increase was primarily due to an approximate 7% increase in unit sales volume partially offset by an approximate 3% decrease in unit selling price. The increase in unit sales volume was primarily due to an increase in the number of cattle slaughtered and fabricated as a result of improved operational efficiencies. Unit selling prices declined primarily as a result of abundant supplies of competing proteins.
Income in the beef marketing segment increased by $0.6 million, or approximately 5% during the three months ended November 30, 2002 to an income of $11.9 million compared to an income of $11.3 million in the same period last year. Both sales dollars per head and variable costs per head during the three months ended November 30, 2002 were comparable to the revenues and costs during the three months ended November 30, 2001, resulting in a consistent gross margin.
World Grain
Our world grain segment incurred a loss of $0.2 million for the three months ended November 30, 2002 compared with a loss of $4.3 million in the same period last year. This change is primarily attributable to our discontinued international grain operations which during the three months ended November 30, 2001, incurred a loss primarily due to low gross margins on barley, sugar and freight combined with an increase in bad debt expense.
Crop Production
Sales of the crop production segment decreased $20.6 million, or 12%, during the three months ended November 30, 2002 compared with the same period last year. The decrease was primarily due to a 9% decrease in unit sales volume combined with a 4% decrease in average unit selling price. The decrease in unit sales volume is primarily due to a 38% decrease in phosphate-based plant food sales resulting from the sale of our Joplin, Missouri phosphate plant during February 2002 and the sale by Farmland Hydro of substantially all the assets of Farmland Hydro to Cargill Fertilizer, Inc. during November 2002.
The crop production segment incurred a loss of $286.3 million for the three months ended November 30, 2002 compared with a loss of $42.1 million for the same period last year. This $244.2 million decrease is primarily attributable to:
. during the three months ended November 30, 2002, we incurred reorganization expense of $275.7 million primarily as a result of the impairment charge recorded against certain long-lived assets;
. during the three months ended November 30, 2001, we were working off relatively high cost inventories at the same time as average unit selling prices were declining; as a result, margins increased $17.4 million in the current period compared with the same period last year;
. interest expense decreased $6.4 million primarily due to discontinuing interest on certain pre-petition debt and lower inventory levels; and
. other income increased $4.7 million primarily as a result of a refund of improperly assessed ad valorem tax related to natural gas purchases made in prior years; and
. during the three months ended November 30, 2002 we recognized a gain of $1.7 million in restructuring and other credits from the recovery of precious metals contained in our catalyst following the closure of our Lawrence, Kansas plant.
Petroleum
Sales of the petroleum segment decreased $126.7 million, or approximately 33%, for the three months ended November 30, 2002 compared with the same period last year. The decrease was primarily the result of a 26% decrease in refined fuels units sold; offset by slightly higher unit selling prices for gasoline, distillates and diesel fuels; and a 92% decrease in units sold for propane. The increase in unit prices for refined fuels was a result of a stronger demand for gasoline and distillates compared to the previous year. The lower demand last year was primarily a result of the September 11th terrorist attacks. The decrease in unit sales is primarily a result of the sale of our equity interest in Country Energy and the impact it had on our sales mix. During the three months ended November 30, 2001, our sales included 41% of all product sold through our agent, Country Energy. These sales arranged by Country Energy were derived from Cenex Harvest States' portion of the output of the NCRA refinery at McPherson, Kansas, the output of Cenex Harvest States' refinery at Laurel, Montana, the output of Farmland's refinery at Coffeyville, Kansas, sales of gasoline and distillates purchased from third parties for resale, and sales of wholesale propane, lubricants and petroleum equipment. During the three months ended November 30, 2002, our petroleum sales consisted of 100% of the output of our Coffeyville, Kansas refinery, and we no longer participated in sales related to the refineries at McPherson, Kansas or Laurel, Montana; in the resale of petroleum products to third parties; or in the selling of wholesale propane, lubricants and petroleum equipment.
The petroleum segment incurred a loss of $149.0 million during the three months ended November 30, 2002, compared with income of $35.2 million for the same period last year. This $184.2 million decrease is primarily attributable to:
. during the three months ended November 30, 2002, we incurred reorganization expense of $147.8 million primarily as a result of the impairment charge recorded against certain long-lived assets;
. during the three months ended November 30, 2002 as compared to the same period last year margins decreased by $24.5 million primarily due to the narrowing of the spread between crude oil costs and refined fuel selling prices; crack spreads for the prior year were very high in the month of September 2001 due to low inventories; and
. the results for the three months ended November 30, 2001 include an $18.0 million gain on the sale of our interest in Country Energy.
These factors were partly offset by:
. during the three months ended November 30, 2002 as compared to the same period last year SG&A expenses decreased $4.8 million primarily as a result of exiting the petroleum marketing business.
Feed
Income for the feed segment increased from $0.6 million during the three months ended November 30, 2001 to $8.1 million during the three months ended November 30, 2002. The increase primarily resulted from $7.4 million in proceeds received during the three months ended November 30, 2002 from a settlement related to vitamin supplements.
Other Operating Units
The other operating units segment incurred a loss of $0.8 million during the three months ended November 30, 2002, an $8.1 million decrease as compared to income of $7.3 million in the same period last year. The decrease in income was primarily the result of a $6.2 million gain realized on the sale of our wheat gluten production facility last year.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expense decreased $20.1 million for the three months ended November 30, 2002 compared with the same period last year. SG&A expense directly associated with business segments decreased $11.8 million, primarily as a result of completing the transition of our grain operations to ADM/Farmland, the sale of Country Energy, and the closing of certain businesses included in our other operating units segment. SG&A expense not directly associated with business segments decreased $8.3 million for the three months ended November 30, 2002 compared with the same period last year. This decrease is primarily related to a reduction in employee related costs, information services costs and financial advisory fees subsequent to our bankruptcy filing.
Restructuring and Other Charges
During the three months ended November 30, 2002, we recorded no adjustments to the reserve created in previous years for restructuring activities. Deductions to the reserve in the amount of $0.4 million relate to a reduction in the accrual for catalyst maintenance at our fertilizer plant in Pollock, Louisiana. During the three months ended November 30, 2001, we recorded adjustments in the amount of $2.8 million to the reserve created during the prior year for restructuring activities. The major component of this adjustment resulted from the sale, during October 2001, of the assets of Heartland Wheat Growers, our wheat gluten plant in Russell, Kansas. This sale released us from future plant maintenance, property taxes, and all other obligations associated with maintaining idle plant and property. During the three months ended November 30, 2002, restructuring income of $1.7 million was recorded as a result of the recovery of precious metals contained in our catalyst when equipment was dismantled at our Lawrence, Kansas plant. As a part of the restructuring costs incurred in fiscal year 2001, we recorded an asset impairment related to the closure of our wheat gluten plant to its estimated net realizable value. During October 2001, the assets of the plant were sold and a gain in the amount of $3.5 million was recorded representing the excess of the net proceeds over the plant's estimated net realizable value. See Note 9 "Restructuring and Other Charges" in the accompanying Notes to unaudited Condensed Consolidated Financial Statements.
Interest Expense
Interest expense from continuing operations decreased $16.0 million during the three months ended November 30, 2002 compared with the same period last year. Interest expense directly charged to the business segments decreased $12.9 million. The decrease in interest expense is primarily a result of the following:
. due to our bankruptcy, we discontinued accruing interest on certain unsecured debt, primarily subordinated debt securities, resulting in $13.1 million decrease in interest expense; and
. interest expense from other borrowings decreased $2.9 million as a result of a decrease in both average borrowings and our average borrowing rate.
Other Income
Other income decreased $10.3 million for the three months ended November 30, 2002 compared with the same period last year. Other income directly associated with business segments decreased $9.5 million primarily as the result of an $18.0 million gain on the sale of Country Energy during the three months ended November 30, 2001, partly offset by a $7.4 million gain related to a feed vitamin supplement partial settlement recognized during the three months ended November 30, 2002. Other income not directly associated with business segments decreased $0.8 million for the three months ended November 30, 2002 compared with the same period last year.
Reorganization Expense
Reorganization expense of $433.9 million during the three months ended November 30, 2002 consisted of costs associated with the Chapter 11 proceedings that are not directly attributable to the on-going operations of Farmland. Such costs include $424.5 million from the impairment of certain long-lived assets, $8.8 million for professional fees, $0.9 million for employee severance and retention, and a $0.4 million loss on the sale of investments. These costs are partially offset by a $0.3 million gain on settlement with vendors and a $0.5 million gain on the disposal of property, plant and equipment. See Note 11 "Reorganization expense" in the accompanying Notes to unaudited Condensed Consolidated Financial Statements.
Income Tax Expense
During the year ended August 31, 2002, management concluded that it was more likely than not that we would be unable to utilize a substantial portion of our net operating loss carryforward. Accordingly, we established a valuation allowance to reduce the income tax asset related to the future benefit to be provided by our net loss operating carryforward to an amount equal to our future liability related to our net income tax timing differences Management estimates that our effective tax rate for the year ending August 31, 2003 will be 0% as:
. if we have net income for the year ending August 31, 2003, any related tax expense will be offset by a reduction in our valuation allowance; and
. if we have a net loss for the year ending August 31, 2003, any related tax benefit will be offset by an increase in our valuation allowance.
Recent Accounting Pronouncements
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 are tested annually for impairment. For goodwill and intangible assets arising out of business combinations with non-cooperative enterprises, SFAS No. 142 was effective for fiscal years beginning after December 15, 2001 (our fiscal year 2003). As of September 1, 2002 (the beginning of our fiscal year 2003), Farmland adopted this statement for goodwill resulting from business combinations with non-cooperatives. In accordance with SFAS 142, we have tested our goodwill arising from business combinations with non-cooperatives and determined that no impairments exist. 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. At November 30, 2002 the carrying value of goodwill in our Consolidated Balance Sheets was $28.7 million. For the three months ended November 30, 2002, Farmland recognized goodwill amortization of $0.2 million from business combinations with cooperatives.
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" was issued during June 2002 by the FASB. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullified Emerging Issues Task Force (EITF) Issue No. 94-3. Under Issue 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. However, SFAS No. 146 concludes that a commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. Therefore, SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. Previously issued financial statements may not be restated. We do not anticipate that adoption of this statement will have a material impact on our financial position and results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Farmland's market exposure to derivative transactions, entered into for the purpose of managing commodity price risk, foreign currency risk and interest rate risk, has not materially changed since August 31, 2002. Quantitative and qualitative disclosures about market risk are contained in Item 7A of our Annual Report on Form 10-K for the year ended August 31, 2002.
Item 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures are defined by the Securities and Exchange Commission as those controls and other procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures within 90 days prior to the filing of this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective.
Subsequent to our evaluation, there were no significant changes in internal controls or other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
Farmland is including the following cautionary statement in this Form 10-Q to make applicable and take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, Farmland. The factors identified in this cautionary statement 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, the assumed facts or basis will 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 anticipated expenditures for environmental remediation, the potential capital expenditures required to comply with recently enacted regulations related to low sulfur gasoline and diesel fuel, the level of capital expenditures and monetary sanctions which will be required as a result of EPA proceedings, Court approval of a plan of reorganization, our ability to successfully implement any Court approved plan of reorganization, the adequacy of the DIP Credit Facility to satisfy our liquidity requirements, our ability to comply with the covenants contained in the DIP Credit Facility, our ability to sell our crop production and petroleum assets at their estimated fair value, our ability to realize our deferred tax assets, and our ability to liquidate our Tradigrain operation without incurring future losses. Discussion containing such forward-looking statements is found in the material set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Condensed Consolidated Financial Statements".
Taking into account the foregoing, the following are identified as important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Farmland:
1. Weather patterns (flood, drought, frost, etc.) or crop failure.
2. Federal or state regulations regarding agricultural programs.
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, live hogs and cattle 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. The continuing effects of terrorist attacks which disrupted the financial and credit markets and negatively impacted the United States economy and other economies.
13. Public perception of the safety of meat products and the level of government regulations of meat safety.
14. The factors identified in "Business and Properties - Business - Business Risk Factors" included in our Annual Report on Form 10-K for the year ended August 31, 2002.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In November 1999, Farmland commissioned a voluntary audit at its Coffeyville, Kansas petroleum refinery to verify compliance with the construction permitting requirements of the state and federal Clean Air Acts. We submitted a report detailing the audit findings to Region VII of the United States Environmental Protection Agency ("EPA") on September 19, 2000. In order to satisfy procedural prerequisites to resolve the findings, on January 17, 2002, EPA issued us a notice of violation. The notice of violation seeks both injunctive relief in the form of installation of additional pollution control equipment and monetary sanctions. At this point, it is not possible to determine the cost of the control device installations necessary to satisfy the EPA; however, we believe it is reasonably possible that the costs may eventually exceed $15 million. Also, at this stage of these proceedings it is not possible to predict the final amount of monetary sanctions that will be necessary to resolve this matter. Although Farmland believes this matter will ultimately be resolved for an immaterial amount, it is reasonably possible that the associated monetary sanctions may exceed $100,000. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Environmental Matters" in our Annual Report on Form 10-K, filed November 27, 2002.
On May 31, 2002, Farmland and certain of our subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the Bankruptcy Code. This action is described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments - Bankruptcy Proceedings."
On July 30, 2002, J.R. Simplot ("Simplot") filed a complaint for declaratory judgment against Farmland in the United States Bankruptcy Court, Western District of Missouri, Adversary Proceeding No. 02-4147. In this proceeding, Simplot asserts that, by operation of Utah Revised Limited Liability Company Act (the "Act"), Farmland's commencement of the Chapter 11 proceeding caused Farmland to forfeit governance rights in our SF Phosphates venture. Farmland believes that this Utah state law is preempted by Federal Bankruptcy Code and, therefore, we maintain our governance rights in relation to SF Phosphates. See "Business and Properties - Crop Production - Production" in our Annual Report on Form 10-K, filed November 27, 2002.
During April 2001, we initiated a suit in the English High Court of Justice, Queen's Bench Division, Commercial Court, Royal Court of Justice against Ace Insurance SA NV , SIACI & Partners SA, and SIACI SA to recover from our insurers the value of misappropriated soybeans.
On June 27, 2002, we filed a complaint against Agriliance LLC in the United States Bankruptcy Court, Western District of Missouri, Adversary Proceeding No. 02-4113. In this proceeding, we assert that Agriliance improperly setoff certain receivables and other items owed by Agriliance to Farmland against certain payables and other claims that Agriliance asserted were due to Agriliance from Farmland. We are requesting that the Court disallow the setoff and require Agriliance to return to Farmland the amount improperly setoff. Also see Note 8 to the unaudited Condensed Consolidated Financial Statements.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibit listed below is filed as part of Form 10-Q for quarter ended November 30, 2002.
Exhibit No | | Description of Exhibit |
99.1 | | The proposed Debtors' Joint Plan of Reorganization, filed in the United States Bankruptcy Court, Western District of Missouri on November 27, 2002. |
| | |
99.2 | | Certification by President and Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
99.3 | | Certification by Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended November 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FARMLAND INDUSTRIES, INC. |
(Registrant) |
By: | /s/ Steven R. Rhodes | |
| Steven R. Rhodes | |
| Executive Vice President | |
| and Chief Financial Officer | |
Date: January 14, 2003 | | |
I, Robert B. Terry, President and Chief Executive Officer of Farmland Industries, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Farmland Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or person performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003
/s/ ROBERT B. TERRY
Robert B. Terry
President and
Chief Executive Officer
I, Steven R. Rhodes, Executive Vice President and Chief Financial Officer of Farmland Industries, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Farmland Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or person performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003
/s/ STEVEN R. RHODES
Steven R. Rhodes
Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit No | | Description of Exhibit |
99.1 | | The proposed Debtors' Joint Plan of Reorganization, filed in the United States Bankruptcy Court, Western District of Missouri on November 27, 2002. |
| | |
99.2 | | Certification by President and Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
99.3 | | Certification by Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
