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.
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.
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.
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition, Liquidity and Capital Resources
Farmland has historically maintained two primary sources for debt capital: a substantially continuous public offering of its subordinated debt and demand loan securities (the “continuous debt program”) and bank lines of credit.
Farmland’s debt securities issued under the continuous debt program generally are offered on a best-efforts basis through our wholly owned broker-dealer subsidiary, Farmland Securities Company and also may be offered by selected unaffiliated broker-dealers. The types of debt securities offered in the continuous debt program include certificates payable on demand and subordinated debenture bonds. The total amount of debt securities outstanding and the flow of funds to or from Farmland as a result of the continuous debt program are influenced by the rate of interest which we establish for each type or series of debt security offered, 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 2001
Farmland’s sales, gross margins and net income depend, to a large extent, on conditions in agriculture and may be volatile due to factors beyond our control, such as weather, crop failures, federal agricultural programs, production efficiencies, 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.
The table below shows the increase (decrease) in sales and income by business segment in each of the years in the three-year period ended 2001, compared with the respective prior year.
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
Sales
On 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.
Income
Income 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
Sales
Sales 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.
Income
Income 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
Sales
In 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.
Income
Income 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
Sales
Sales 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.
Income
Income 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
Sales
Sales 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.
Income
During 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 Expense
Interest 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, Net
Other, 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 1995
Farmland is including the following cautionary statement in this Form to make applicable and take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, Farmland. The factors identified in this cautionary statement are important factors (but 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.
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 ---------------------------------------------------------------------- (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.
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 LLP
Kansas City, Missouri November 19, 2001
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
August 31 ------------------------------------ 2000 2001 ------------------- ---------------- (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 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
(1) Summary of Significant Accounting Policies
Farmland Industries, Inc., a Kansas corporation, is organized and operated as a cooperative and its mission is to be a global, consumer-driven, 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) Inventories
Major 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 Receivables
Investments 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.
At August 31, 2001, our share of the undistributed earnings of all ventures accounted for by the equity method totaled $57.7 million.
(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 Payable
Bank 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 ============= =============
Subordinated debt certificates have been issued under several indentures. Certain subordinated capital investment certificates may be redeemed prior to maturity at the option of the owner in accordance terms of the securities. Subject to limitations under the terms of the securities, Farmland has options to redeem certain subordinated capital investment certificates in advance of scheduled maturities. Additionally, subject to limitations in the applicable indenture, upon written request we will redeem subordinated capital investment certificates and subordinated monthly income certificates in the case of death of an owner.
Outstanding subordinated debt certificates are subordinated to senior indebtedness of $325.6 million at August 31, 2001, and to certain additional financings (principally long-term operating leases). See Note 11.
In August 2001, Farmland National Beef Packing Company, L.P. ("FNBPC"), a consolidated subsidiary, 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, which are all 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 under the credit facility of $138.9 million, and $16.9 million of the facility was being utilized to support letters of credit.
Farmland maintains other borrowing arrangements with banks and financial institutions. At August 31, 2001, $17.6 million was borrowed under these agreements, including $12.2 million borrowed by Tradigrain, a consolidated subsidiary.
At August 31, 2001, under industrial revenue bonds and other agreements, assets with a carrying value of $12.4 million have been pledged.
Bank loans, subordinated debt certificates and notes payable mature during future fiscal years ending August 31 in the following amounts:
(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) ============= =============== ==============
Income tax expense (benefit) is comprised of the following:
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 Equities
At 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 Income
Changes 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 Instruments Effective 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 Commitments
Farmland 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 Charges
During 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 Costs
Effective 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 Plans
The Farmland Industries, Inc. Employee Retirement Plan (the “Plan”) is a defined benefit plan in which substantially all employees may participate. Participation in the Plan is optional prior to age 34, but mandatory thereafter. Benefits payable under the Plan are based on years of service and the employee’s average compensation during the highest four of the employee’s last ten years of employment.
The assets of the Plan are maintained in a trust fund. The majority of the Plan’s assets are invested in common stocks, corporate bonds, United States Government bonds, short-term investment funds, private REITS, 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 Information
Farmland adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” for the year ended August 31, 1999. This statement requires companies to report certain information about operating segments in their financial statements and establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. Comparative information for prior years presented has been restated to conform to our current organizational structure.
Farmland conducts business primarily in two operating areas: agricultural inputs and outputs. On the input side of the agricultural industry, we operate as a farm supply cooperative. On the output side of the agricultural industry, we operate as a processing and marketing cooperative.
Our farm supply operations consist of three segments: crop production, petroleum, and feed. Principal products of the crop production segment are nitrogen-based and phosphate-based plant foods and a complete line of insecticides, herbicides and mixed chemicals. Principal products of the petroleum division are refined fuels, propane, jet fuels and by-products of petroleum refining. Principal products of the feed division include swine, dairy, pet, beef, poultry, mineral and specialty feeds; feed ingredients and supplements, animal health products and livestock services.
On the output side, Farmland’s operations consist of two segments: the processing and marketing of meat products (“refrigerated foods”) and the origination, storage and marketing of grain (“world grain”).
Other operations primarily include 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 ================== ================ =================
1999 (Page 2 of 3) (Amounts in Thousands)
INPUT AND OTHER SEGMENTS --------------------------------------------------------------------------------- Other Total Input Crop Operating and Other Production Petroleum Feed Units Segments ------------------- -------------- ------------ ------------ -------------
Sales & transfers $ 1,009,266 $ 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 =================== ============== ============ ============ =============
1999 (Page 3 of 3) (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 ================ =============== ==============
2000 (Page 1 of 3) (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 ================= ================ =================
2000 (Page 2 of 3) (Amounts in Thousands)
INPUT AND OTHER SEGMENTS ---------------------------------------------------------------------------------- Other Total Input Crop Operating and Other Production Petroleum Feed Units Segments -------------- --------------- ------------- --------------- --------------
Sales & transfers $ 984,782 $1,440,406 $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 ============== =============== ============= =============== ==============
2000 (Page 3 of 3) (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 ================ =============== ==============
2001 (page 1 of 3) (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 =================== ================== ==================
2001 (page 2 of 3) (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 =============== =============== ================
Substantially all of Farmland's long-lived assets are located in the United States. Sales by country, determined by customer location, were as follows:
Year Ended August 31 ------------------------------------------------------- 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 Risk
Farmland extends credit to its customers on terms generally no more favorable than standard terms of sale for the industries it serves. A substantial portion of our receivables are concentrated in the agricultural 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 Instruments
Estimates of fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could affect the estimates.
Investments in the equities of other cooperatives which have been purchased are carried at cost and equities received as patronage refunds are carried at par value, less provisions for other-than-temporary impairment. Management believes it is not practicable to estimate the fair value of these equities because there is no established market for these equities and estimated future cash flows, which are largely dependent on the future equity redemption policy of each cooperative, are not determinable. At August 31, 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 Transactions
Farmland has a 50% interest in three manufacturers of crop nutrient products, Farmland Hydro, L.P., SF Phosphates Limited Company and Farmland MissChem Limited. Beginning January 1, 2000, we acquired an approximate 50% equity interest in UCB LLC, which in turn holds a 50% equity interest in Agriliance LLC, an agronomy distribution and marketing venture. During the year ended August 31, 2000, we acquired an approximate 42% equity interest in Cooperative Refining, LLC, which 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 Income
During 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 Events
During 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.
.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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.
The executive officers of Farmland are as follows:
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.
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 Participation
The following persons, none of whom, except as indicated below, is either currently or formerly an officer or employee of Farmland or any of its subsidiaries, served as members of the compensation committee during 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 Directors
Directors’ compensation consists of payment of three hundred dollars ($300.00) per day of Farmland business (including, for example, board and committee meetings and other similar activities), plus reimbursement of necessary expenses incurred in connection with their official duties. In addition, we pay annual retainers of $30,000 to the Chairman; $25,000 to each member of the Executive Committee, other than the Chairman and President; and $20,000 to all other directors.
Farmland provides each director a $100,000 life insurance benefit. Farmland also has established a $100,000 supplemental life insurance benefit for directors. A director is eligible for this supplemental life insurance benefit on commencement of a second elected term of office.
ITEM 12.
ITEM 12. EQUITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Farmland's equity consists of preferred shares, common shares, associate member common shares and capital credits. Only the common shares have voting rights.
At August 31, 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.
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.
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-K
No reports on Form 8-K have been filed during the last quarter of the period covered by the report.
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act
As of the filing of this Form 10-K, no annual report covering the Registrant’s last fiscal year and no proxy statement, form of proxy or other proxy soliciting material, has been sent to holders of the Registrant’s securities. At such time as any such annual report or proxy soliciting material is sent to holders of the Registrant’s securities subsequent to the filing of this Form 10-K, four copies of the same will be furnished to the Commission as and to the extent required by the Instructions to Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, Farmland Industries, Inc. has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Kansas City, State of Missouri on November 19, 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-Fact
INDEPENDENT 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