### UNITED STATES**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

FORM 10-Q

[X]        QUARTERLY REPORTPURSUANT TO SECTION 13 or 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2002

or

[  ]        TRANSITIONREPORT PURSUANT TO SECTION 13 or 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________. 

Commission File Number:   001-11629

**FARMLAND INDUSTRIES, INC.**Debtor-in-Possession as of May 31, 2002(Exact name of registrant as specified in its charter)

| Kansas
44-0209330
(State of incorporation)
(I.R.S. Employer Identification No.)
12200 North Ambassador Drive
Kansas City, Missouri
64163-1244
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: 816-713-7000

Indicate by check mark whether the registrant (1) has filed all reports required to befiled by Section 13or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for the past90 days.  Yes [X]  No [  ]

 

 **-   **PART I - FINANCIAL INFORMATION**  **(Debtor-in-Possession)**     **Item 1.     FINANCIAL STATEMENTS**        **FARMLAND INDUSTRIES, INC.     (Debtor-in-Possession)**  **CONDENSEDCONSOLIDATED BALANCE SHEETS****(UNAUDITED)**  ASSETS     
August 31
May 31
2001
2002
(Amounts in Thousands)Accounts receivable - trade$
352,956$
315,065Inventories (Note 3)
539,275
343,250Other current assets
153,530
126,398Current assets from discontinued operations (Note 10)
307,083
144,832    Total Current Assets$
1,352,844$
929,545Investments and Long-Term Receivables (Note 4)$
371,358$
334,961Property, Plant and Equipment:  Property, plant and equipment, at cost$
1,679,313$
1,831,468      Less accumulated        depreciation and      amortization
947,693
890,297  Net Property, Plant and Equipment$
731,620$
941,171Other Assets$
238,994$
219,376Long-term assets from discontinued operations          (Note 10)
        32,728
        17,261Total Assets$
2,727,544$
2,442,314
        

See accompanying Notes to Condensed Consolidated Financial Statements

**FARMLAND INDUSTRIES, INC.     (Debtor-in-Possession)**

**CONDENSEDCONSOLIDATED BALANCE SHEETS    (UNAUDITED)**

LIABILITIES AND EQUITIES

 

August 31
May 31
2001
2002
(Amounts in Thousands)Current Liabilities:     Short-term notes payable (Note        13)
$
253,524 
$
-0-     Current maturities of long-term        debt (Note 13)
48,054 
13,668      Accounts payable - trade
264,809 
37,856      Other current liabilities
268,835 
98,856      Current liabilities from        discontinued operations (Note 10)
279,903 
135,614           Total        Current Liabilities$
1,115,125 $
285,994 Liabilities Subject to Compromise (Note 2)$
-0-$
943,841 Long-Term Liabilities:     Long-term borrowings (excluding        current maturities)                (Note 13)        $
        700,996         $
        549,360      Other long-term liabilities
38,702 
2,751      Long-term liabilities from        discontinued operations (Note 10)
9,980 
290           Total        Long-Term Liabilities
$
749,678 $
552,401 Deferred Income Taxes
$
70,906 
$
74,361 Minority Owners' Equity in Subsidiaries
$
29,311 
$
36,649 Net (loss)(Note 1)
$
-0- 
$
(236,013)Capital Shares and Equities:     Preferred shares, authorized        8,000,000 shares, 8% Series A                  cumulative redeemable        preferred shares, stated           at        redemption value, $50 per share
$
100,000 
$
100,000      Common shares, authorized          50,000,000        shares, $25 par value
527,563 
527,419      Accumulated other comprehensive        income (loss)           (net        of deferred tax benefit (expense) of $3,806 at 
          August        31, 2001 and $(746) at May 31, 2002)                  (Notes 5 and 6)
        (21,342)
        4,307      Earned surplus and other        equities
156,303 
153,355           Total        Capital Shares and Equities
$
762,524 
$
785,081 Contingent Liabilities and Commitments (Note 7)Total Liabilities and Equities
$
2,727,544 
$
2,442,314 
         

See accompanying Notes to Condensed Consolidated Financial Statements

**FARMLAND INDUSTRIES, INC.     (Debtor-in-Possession)**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS    (UNAUDITED)**

 

Nine Months Ended
May 31
May 31
2001
2002
(Amounts in Thousands)Sales
$
7,305,887 
$
4,998,021 Cost of sales
6,967,706 
4,850,565 Gross income
$
338,181 
$
147,456 Selling, general and administrative expenses
278,084 
247,511 Restructuring and other charges (Note 8)
79,788 
49,237 Other income (expense):     Interest expense
(92,810)
(68,214)     Interest income
10,773 
1,515      Other, net (Notes 6 and 9)
22,219 
(1,312)Total other income (expense)
$
(59,818)
$
(68,011)Loss before equity in net income of investees, minority        owners' interest      in net (income) of subsidiaries,        reorganization expenses, income tax      benefit, discontinued        operations and cumulative effect of changes in              accounting principles
        $
        (79,509)
        $
        (217,303)Equity in net income of investees (Note 4) 
22,265 
22,572 Minority owners' interest in net (income)      of subsidiaries
(15,807)
(11,870)Loss before reorganization expenses, income tax benefit,             discontinued operations and cumulative effect of changes in             accounting principles
        $
        (73,051)
        $
        (206,601)Reorganization expenses (Note 2)
-0-
54,719 Income tax benefit
17,243 
60,590 Loss from continuing operations before discontinued        operations and      cumulative effect of changes in accounting        principles
        $
        (55,808)
        $
        (200,730)Discontinued operations (Note 10):             Loss from operations of discontinued international grain        division      (net of applicable income tax benefit (expense) of        $1,712 at             May 2001 and of $(4,779) at May 2002)
        (1,031)
        (35,283)Loss before cumulative effect of changes in accounting        principles
$
(56,839)
$
(236,013)Cumulative effect of changes in accounting for              derivative financial instruments and planned major             maintenance costs, net of $3,333 income tax              expense (Notes 6 and 12)
        19,776 
        -0-Net loss
$
(37,063)
$
(236,013)
         

See accompanying Notes to Condensed Consolidated Financial Statements

****

**FARMLAND INDUSTRIES, INC.     (Debtor-in-Possession)**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS    (UNAUDITED)**

 

Three Months Ended
May 31
May 31
2001
2002
(Amounts in Thousands)Sales
$
2,569,507 
$
1,592,706 Cost of sales
2,432,595 
1,581,127 Gross income
$
136,912 
$
11,579 Selling, general and administrative expenses
98,558 
93,408 Restructuring and other charges (Note 8)
79,788 
55,577 Other income (expense):     Interest expense
(28,853)
(23,730)     Interest income
5,985 
456      Other, net (Notes 6 and 9)
(1,821)
(20,704)Total other income (expense)
$
(24,689)
$
(43,978)Loss before equity in net income of investees, minority        owners' interest              in net (income) of subsidiaries, reorganization expenses,        income tax              benefit and discontinued operations 
        $
        (66,123)
        $
        (181,384)Equity in net income of investees (Note 4) 
21,121 
21,253 Minority owners' interest in net (income)      of subsidiaries
(6,717)
(2,282)Loss before reorganization expenses, income tax benefit and              discontinued operations
        $
        (51,719)
        $
        (162,413)Reorganization expenses (Note 2)
-0-
54,719 Income tax benefit
16,170 
48,734 Loss from continuing operations before discontinued        operations
$
(35,549)
$
(168,398)Discontinued operations (Note 10):             Loss from operations of discontinued international grain             division (net of applicable income tax benefit (expense) of        $722 at      May 2001 and $(3,918) at May 2002)
        (6,883)
        (21,119)Net loss
$
(42,432)
$
(189,517)
         

See accompanying Notes to Condensed Consolidated Financial Statements

****

**FARMLAND INDUSTRIES, INC.     (Debtor-in-Possession)**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS    (UNAUDITED)**

 

 

Nine Months Ended
May 31        2001
May 31        2002
(Amounts in Thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss$
(37,063)$
(236,013)Reorganization expenses
54,719 Adjustments to reconcile (loss) to net cash provided by             (used in) operating activities:          Depreciation        and amortization
82,266 
88,047           Equity        in net (income) of investees
(22,265)
(22,572)          Asset        impairment
67,567 
61,211           Deferred        tax benefit
(3,275)
(52,430)          (Gain)        loss on sale of investments and fixed assets
3,291 
(20,419)          Other
21,255 
9,405          Changes        in assets and liabilities:               Accounts        receivable
17,482 
139,049                Inventories
195,581 
230,864                Other        assets
(5,373)
(6,480)               Accounts        payable
(6,357)
(27,705)               Other        liabilities
(27,021)
7,905 Net cash provided by operating activities before             reorganization items        $
        286,088        $
        225,581 Reorganization items:     Reorganization expenses$
-0-$
(54,719)     Asset impairments
-0-
52,996 Net cash used by reorganization items$
-0-$
(1,723)Net cash provided by operating activities$
286,088 $
223,858 CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures$
(79,667)$
(256,782)Distributions from joint ventures
21,429 
16,223 Additions to investments and notes receivable
(14,242)
(3,380)Acquisition of other long-term assets
(12,782)
(2,194)Proceeds from disposal of investments and              collection of notes receivable
        24,099 
        43,435 Proceeds from sale of fixed assets
7,977 
25,291 Net cash (used in) investing activities$
(53,186)$
(177,407)CASH FLOWS FROM FINANCING ACTIVITIES:Payments of dividends$
(6,000)$
(4,000)Proceeds from bank loans and notes payable
2,805,623 
1,681,346 Payments on bank loans and notes payable
(2,982,175)
(1,599,944)Proceeds from issuance of subordinated debt certificates
15,328 
-0-Payments for redemption of subordinated debt certificates
(37,962)
(59,358)Debt issuance cost
(7,361)
(15,960)Net decrease in checks and drafts outstanding
(5,672)
(43,139)Net decrease in demand loan certificates
(7,382)
(5,661)Other increase (decrease)
(7,301)
265 Net cash (used in) financing activities$
(232,902)$
(46,451)Net decrease in cash and cash equivalents$
-0-$
-0-Cash and cash equivalents at beginning of period
-0-
-0-Cash and cash equivalents at end of period$
-0-$
-0-
 

 

**Non-cash transactions:**

On October 1, 2000, we contributed property, plant and equipment and investments with a    carrying value of approximately $43.8 million in return for an equity interest in Land    O'Lakes Farmland Feed, LLC.

On December 31, 2000, Cooperative Refining, LLC was dissolved.  We received    inventory with a value of $54.4 million in exchange for our equity interest in Cooperative    Refining.

During February 2002, approximately $55.0 million of lease payments, which were prepaid    during fiscal year 2001, were applied as a portion of the total $261 million consideration    to purchase the Coffeyville, Kansas nitrogen facility.

               

See accompanying Notes to Condensed Consolidated Financial Statements

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS    (UNAUDITED)**

 

**(1)     Interim Financial Statements**

**(A)                   The Company and Basis of Presentation**

Unless the context requires otherwise, (i) "Farmland", "we",    "us" and "our" refer to Farmland Industries, Inc. and its consolidated    subsidiaries, (ii) all references to "year" or "years" are to fiscal    years ended August 31, and (iii) the term "member" means (a) any voting member,    (b) any associate member, or (c) any other person with which Farmland is a party to a    currently effective patronage refund agreement (a "patron").  Patronage    refund is the term we use to refer to the distribution of income from transactions done on    a cooperative basis with or for our patrons.

In view of the seasonality of Farmland's businesses, it must be emphasized that the    results of operations for the periods presented are not necessarily indicative of the    results for a full fiscal year.

The accompanying unaudited Condensed Consolidated Financial Statements have been    prepared in accordance with generally accepted accounting principles ("GAAP")    for interim financial information; therefore, they do not include all of the information    and footnotes required by GAAP for complete financial statements.  In the opinion of    management, all adjustments considered necessary for a fair presentation have been    included.  For further information, refer to the Consolidated Financial Statements    and Notes to Consolidated Financial Statements thereto included in Farmland's Annual    Report on Form 10-K for the year ended August 31, 2001.

Certain amounts pertaining to the three month and nine month periods ended May 31, 2001    have been reclassified to conform with the current year presentation.

The unaudited Condensed Consolidated Balance Sheets and Statements of Operations have    been restated to present our international grain trading subsidiaries (collectively    referred to as "Tradigrain") as a discontinued operation.  The    international grain sales and related cost of sales and operating expenses have been    reclassified as discontinued operations for all periods presented.

Our sales, gross margins and net income or loss depend, to a large extent, on    conditions in agriculture and may be volatile due to factors beyond our control, such as    weather, crop failures, federal agricultural programs, production efficiencies, currency    fluctuations, tariffs and other factors affecting United States imports and exports.     In addition, various federal and state regulations intended to protect the environment    encourage farmers to reduce the use of fertilizers and other chemicals.  Global    variables which affect supply, demand and price of crude oil, refined fuels, natural gas,    livestock, grain and other commodities may impact our operations.  Historically,    changes in the costs of raw materials used in the manufacturing of Farmland's finished    products have not necessarily resulted in corresponding changes in the prices at which    such products have been sold.  For example, at times during the last few years, the    results of our crop production business have been adversely affected by a combination of    high natural gas prices and competition from imports.  In addition, earlier this    year, use of nitrogen-based crop nutrients for wheat application was reduced as a result    of drought conditions experienced in Oklahoma and Texas, and use of nitrogen-based crop    nutrients for corn application was reduced as a result of excessively wet weather in    Illinois and Indiana.  Also, changes in the prices of crude oil and refined fuels    have caused, and will continue to cause, significant variations in the results of our    petroleum business.  Management cannot determine the extent to which the factors    mentioned above may impact our future operations.  

In accordance with the bylaws of Farmland, we determine annually the members' portion    of income or loss before income taxes.  From this amount, patronage refunds, if any,    are distributed or losses are allocated to our members.

During 1997 and 1998, Farmland issued approximately $111 million of nonqualified    patronage refunds in the form of common shares, associate member common shares, or capital    credits. Farmland is not allowed an income tax deduction in the year a nonqualified    patronage refund is issued.  However, the nonqualified patronage refund is deductible    in the year when it is redeemed.  As a result of our policy and historical practice    of subsequently redeeming patronage refunds and our intention to continue such    redemptions, we previously recorded a deferred tax asset in an amount of approximately $42    million related to such nonqualified equities issued and outstanding.  The    recoverability of this deferred tax asset depends on a number of factors, including    actions to be taken by our Board, our plan of reorganization and related decisions by the    Court  in  our bankruptcy filing, and the results of our future    operations.  We will continue to evaluate the recoverability of this deferred tax    asset in light of the aforementioned factors.  We have not provided a valuation    allowance for this deferred tax asset as of May 31, 2002.

Farmland does not provide for patronage refunds in our interim financial statements as:    

·         we determine the amount of members'    income and the amount of members' loss only after the end of the fiscal                year; 

·         after consideration of members'    losses (if any), the Board of Directors, in its sole discretion, then determines the               amount of patronage refund to    be paid in cash and the portion to be paid in Farmland equity (common shares,               associate member common    shares and capital credits); and

·         the amount of income appropriated to    earned surplus is dependent on the amount of patronage refunds and the                handling of members'    losses (if any).

Therefore, the amount of net loss for the interim period presented is reflected as a    separate item in the accompanying unaudited Condensed Consolidated Balance Sheet as of May    31, 2002.     

Effective March 1, 2002, Farmland adopted SFAS No. 145 "Rescission of FASB    Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical    Corrections".  The Statement updates, clarifies and simplifies existing    accounting pronouncements.  The Statement rescinds SFAS No. 4, which required all    gains and losses from extinguishment of debt to be aggregated and, if material, classified    as an extraordinary item, net of related income tax effect.  As a result, the    criteria in APB Opinion No. 30 will now be used to classify those gains and losses.     SFAS No. 64 amended SFAS No. 4, and is no longer necessary because SFAS No. 4 has been    rescinded.  Adoption of this statement had no effect on Farmland's previously    reported financial position or our results of operations.

 

**(B)                   Bankruptcy Proceedings**

On May 31, 2002 (the "Petition Date"), Farmland Industries, Inc. and four of    its subsidiaries, Farmland Foods, Inc., Farmland Pipe Line Company, Farmland    Transportation Inc., and SFA, Inc. (collectively, the "Debtors"), filed    voluntary petitions to reorganize under Chapter 11 of the United States Bankruptcy Code    (the "Bankruptcy Code") in the United States Bankruptcy Court, Western District    of Missouri (the "Court") (Joint Case Number 02-50557-JWV).  The filings    were made in order to facilitate the restructuring of the Debtors' trade liabilities, debt    and other obligations.  The Debtors are currently operating their business as    debtors-in-possession.  As debtors-in-possession, the Debtors are authorized to    operate their business but may not engage in transactions outside the ordinary course of    business without the approval of the Court.  Subsequent to May 31, 2002, the Court    approved the Debtors' request to enter into a new credit facility with a syndicate of    banks to provide up to $306.0 million of debtors-in-possession financing (see Note 13).

 

The Debtors sought relief under Chapter 11 of the Bankruptcy Code because of a lack of    sufficient liquidity.  Operating losses in our crop production and petroleum    businesses, coupled with planned maintenance on our Coffeyville, Kansas refinery,    significantly hampered our cash flow during the spring of 2002.  As a result, in our    Form 10-Q for the quarter ended February 28, 2002, filed with the Securities and Exchange    Commission, we stated that we might be forced to seek protection from creditors if    conditions did not improve.  Concerns regarding our financial condition led to    increased cash demands and more restrictive payment terms from our trade creditors, as    well as increased demands for early redemptions of subordinated debt, which adversely    affected our liquidity and our ability to fund our ongoing operations and service our    debt.

 

As a result of the filing on May 31, 2002 of petitions under Chapter 11 of the    Bankruptcy Code by the Debtors, Farmland's unaudited Condensed Consolidated Financial    Statements have been prepared in accordance with AICPA Statement of Position    ("SOP") 90-7, "Financial Reporting by Entities in Reorganization under the    Bankruptcy Code" and generally accepted accounting principles applicable to a going    concern which, unless otherwise noted, assumes the realization of assets and the payment    of liabilities in the ordinary course of business.

 

SOP 90-7 requires (a) that pre-petition liabilities that are subject to compromise be    segregated in Farmland's unaudited Condensed Consolidated Balance Sheet as Liabilities    Subject to Compromise and (b) that revenues, expenses, realized gains and losses, and    provisions for losses resulting from the reorganization and restructuring of the Debtors    be reported separately as Reorganization expenses in the unaudited Condensed Consolidated    Statements of Operations.  As a result of the reorganization proceedings under    Chapter 11, the Debtors may be required to take actions that may cause assets to be    realized, or liabilities to be liquidated, for amounts other than those reflected in the    unaudited Condensed Consolidated Financial Statements.

 

As debtors-in-possession, the Debtors, subject to any required Court approval, may    elect to assume or reject real estate leases, employment contracts, personal property    leases, service contracts, and other unexpired executory pre-petition contracts.  We    cannot presently determine with certainty the ultimate aggregate liability that will    result from the filing and settlement of claims related to any rejected contracts, and, as    a result, no allowance has been recorded for these items.

 

Pursuant to the provisions of the Bankruptcy Code, the Debtors are currently developing    a plan of reorganization.  The principal objective of the plan of reorganization will    be to restructure the Debtors' obligations to creditors in a manner which permits Farmland    to continue as a viable business organization.  The Bankruptcy Code allows the    Debtors the exclusive right to file a plan of reorganization during the first 120 days of    the Chapter 11 cases, or such longer or shorter time as the Court orders.  Although    management expects to file a plan of reorganization, there can be no assurance at this    time as to whether or when a plan of reorganization will be proposed by the Debtors, how    liabilities and equity interests will be treated in the plan, that the plan will be    approved by the various classes of creditors and equity holders, or that it will be    approved or confirmed by the Court.  If the exclusivity period were to expire or be    terminated, other interested parties, such as creditors, would have the right to propose    alternative plans of reorganization.  The Debtors' plan of reorganization could    substantially change the amounts and characterization of liabilities currently disclosed    in the accompanying unaudited Condensed Consolidated Financial Statements.

 

The ability of Farmland to continue as a going concern is dependent upon, but not    limited to, the development and confirmation of a plan of reorganization, continued access    to adequate sources of capital, the continued compliance with all debt covenants under the    debtor-in-possession credit facility, retention of key suppliers, customers and employees,    and the ability to sustain positive cash flows sufficient to fund operations and repay    debt.  No assurance can be given that the Debtors will be successful in reorganizing    their affairs within the Chapter 11 bankruptcy proceedings.  Because of the ongoing    nature of the reorganization process, the outcome of which is not determinable until a    plan of reorganization is confirmed and consummated, the accompanying unaudited Condensed    Consolidated Financial Statements are subject to material uncertainties.

 

**(2)                    Liabilities Subject to Compromise**

 

As a result of the Chapter 11 filings, substantially all pre-petition indebtedness of    the Debtors is subject to compromise or other treatment under the plan of    reorganization.  Generally, actions to enforce or otherwise effect payment of    pre-Chapter 11 liabilities are stayed.  These claims are reflected in the    May 31, 2002 unaudited Condensed Consolidated Balance Sheet as Liabilities Subject to    Compromise.  Pre-petition claims secured by the Debtors' assets are also stayed,    although the holders of such claims have the right to move the Court for relief from the    stay.  Pre-petition secured claims (primarily representing amounts borrowed under the    Debtors' pre-petition credit facility) are secured by a substantial portion of our    accounts receivable, inventories, property, plant and equipment and intangible    assets.  These secured claims have not been reflected as Liabilities Subject to    Compromise.  Although pre-petition claims are generally stayed, as part of the first    day orders and subsequent motions granted by the Court, the Court approved Debtors'    motions to pay certain pre-petition obligations essential for the ongoing operation of the    Debtors' business.  Employee wages, benefits and reimbursements, all of which were    approved for payment as a part of first day orders, have not been reflected as Liabilities    Subject to Compromise.  The Debtors have been and intend to continue to pay    undisputed post-petition claims of all vendors and suppliers in the ordinary course of    business.

 

As of May 31, 2002, the Debtors have Liabilities Subject to Compromise of approximately    $943.8 million which include the following:

 

Liabilities Subject to        Compromise
May 31, 2002
(Amounts in Thousands)Accounts payable -- trade$
230,234 Other current liabilities
162,040 Subordinated debt and demand loan certificates
487,842 Other borrowings
25,600 Other long-term liabilities
43,657 Less liabilities due to subsidiaries not in reorganization
(5,532)Liabilities Subject to Compromise$
943,841 
 

Under SOP 90-7 any revenue, expenses, interest income or realized gains    and losses resulting from the reorganization are classified as "Reorganization    expenses" on the statement of operations.  During the three and nine months    periods ended May 31, 2002 we recorded $54.7 million in Reorganization expenses.     Reorganization expenses include $53.0 million for the recognition of asset impairments,    primarily related to goodwill and other assets associated with businesses that will be    closed or discontinued, the remaining balances of deferred debt issuance costs and    security commissions, and $1.7 million in professional fees.  For segment reporting,    Reorganization expenses have been included as a component of unallocated corporate    expenses.  The following tables summarize unaudited financial information for    Farmland's non-bankruptcy and bankruptcy filing operations.

 

**Condensed Consolidated Balance Sheet     As of May 31, 2002**

 

Farmland and Subsidiaries        in        Reorganization
        Subsidiaries        not in        Reorganization
        Eliminations
        Consolidated
(Amounts in Thousands)Current assets$
586,857$
380,283 $
(37,595)$
929,545Property, plant and equipment, net
775,883
165,288 
-0-
941,171Other long-term assets
648,645
35,945 
(112,992)
571,598     Total assets$
2,011,385$
581,516 $
(150,587)$
2,442,314Current liabilities$
44,965$
273,761 $
(32,732)$
285,994Liabilities subject to compromise
949,373
-0-
(5,532)
943,841Long-term liabilities
385,794
167,297 
(690)
552,401Deferred income taxes
74,364
(3)
(5,532)
74,361Minority owners' equity in subsidiaries
36,415
234 
-0-
36,649Capital shares and equities
520,474
140,227 
(111,633)
549,068     Total liabilities and equity$
2,011,385$
581,516 $
(150,587)$
2,442,314
 

 

**Condensed Consolidated Statement of Operations****For the Nine Months Ended May 31, 2002**

 

Farmland and Subsidiaries        in        Reorganization
        Subsidiaries        not in        Reorganization
        Eliminations
        Consolidated
(Amounts in Thousands)Total sales$
3,700,803 $
2,508,507 $
(1,211,289)$
4,998,021 Total cost of sales
3,630,148 
2,431,706 
(1,211,289)
4,850,565      Gross income$
70,655 $
76,801 $
-0-$
147,456 Restructuring expenses$
55,431 $
(6,194)$
-0-$
49,237 Reorganization expenses
54,719 
-0-
-0-
54,719 Other operating, non-operating and tax              expenses
        236,544 
        7,685 
        -0-
        244,230 Income (loss) from continuing operations$
(276,039)$
75,309 $
-0-$
(200,730)Loss from discontinued operations
-0-
(35,283)
-0-
(35,283)Net income (loss)$
(276,039)$
40,026 $
-0-$
(236,013)
 

 

**Condensed Consolidated Statement of Operations****For the Three Months Ended May 31, 2002**

 

Farmland and Subsidiaries        in        Reorganization
        Subsidiaries        not in        Reorganization
        Eliminations
        Consolidated
(Amounts in Thousands)Total sales$
985,840 $
854,855 $
(247,989)$
1,592,706 Total cost of sales
995,486 
833,630 
(247,989)
1,581,127      Gross income$
(9,646)$
21,225 $
-0-$
11,579 Restructuring expenses$
55,577 $
-0-$
-0-$
55,577  Reorganization expenses
54,719 
-0-
-0-
54,719 Other operating, non-operating and tax              expenses
        89,379 
        (19,698)
        -0-
        69,681 Income (loss) from continuing operations$
(209,321)$
40,923$$
(168,398)Loss from discontinued operations
-0-
(21,119)
-0-
(21,119)Net income (loss)$
(209,321)$
19,804$
-0-$
(189,517)
 

 

**Condensed Consolidated Statement of Cash Flows    For the Nine Months Ended May 31, 2002**

 

Farmland and Subsidiaries        in        Reorganization
        Subsidiaries        not in        Reorganization
        Consolidated
(Amounts in Thousands)Cash flows from operating activities:Net income (loss)$
(276,039)$
40,026 $
(236,013)Adjustments to reconcile net income (loss)     to net cash        provided by operating activities:     Non-cash items, net
110,675 
5,563 
116,238      Changes in other        assets and liabilities
293,260 
50,373 
343,633 Net cash provided by operating activities$
127,896 $
95,962 $
223,858 Net cash (used in) investing activities$
(158,979)$
(18,428)$
(177,407)Net cash provided by (used in) financing        activities$
62,074 $
(108,525)$
(46,451)
 

**(3)     Inventories**

Major components of inventories are as follows:

 

 
        August 31
        May 31
2001
2002
(Amounts in Thousands)Finished and in-process products$
382,207$
245,292Materials
98,167
58,176Supplies
58,901
39,782$
539,275$
343,250
 

At May 31, 2002, the carrying value of crude oil and refined petroleum    inventories, stated at LIFO costs, was $60.5 million, which is approximately $5.8 million    lower than the market value of such inventories.

 

During December 2001, we liquidated our purchased gasoline and purchased    distillate LIFO pools.   The effect of this layer liquidation was to increase    cost of goods sold and decrease income before income taxes during the nine months ended    May 31, 2002 by approximately $8.7 million.

 

**(4)     Summarized Financial Information of    Investees Accounted for by the Equity Method**

 

Summarized financial information of investees accounted for by the equity    method is as follows:

 

Nine Months Ended
Three Months Ended
May 31        2001
May 31        2002
May 31        2001
May 31        2002
(Amounts in Thousands)Net sales
$
5,582,556
$
6,375,340$
2,415,646$
2,608,590Net income 
$
44,805
$
104,752$
74,993$
113,523Farmland's equity in net income 
$
22,265
$
22,572$
21,121$
21,253
 

    Our investments accounted for by the equity method consist principally of :

·         50% equity interests in    three manufacturers of crop nutrient products, Farmland Hydro, L.P., SF Phosphates                Limited Company and    Farmland MissChem Limited;

·         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;

·         beginning May 4, 2001,    a 50% contractual share of the earnings or losses of ADM/Farmland, a grain storage                and marketing company;

·         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 May 31, 2002, our share of the undistributed earnings of all ventures    accounted for by the equity method totaled $63.2 million.

In May 2002, we signed a non-binding letter of intent to sell our 50%    ownership interest in Farmland Hydro, L.P.  Based on our intent to sell our    investment in this venture, we have recorded a $22.0 million impairment to reduce the    carrying value of our investment and other long-term assets to their net realizable value,    which is included in restructuring and other charges in the accompanying unaudited    Condensed Consolidated Statements of Operations for the three month and nine month periods    ended May 31, 2002.

 

**(5)     Comprehensive Income**

 

Changes in accumulated other comprehensive income (AOCI) during the nine    months ended May 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-
(18)
(18)Transition adjustment, net of tax
25,653 
-0-
25,653 Net gain on cash flow hedges, net of tax
17,138 
-0-
17,138 Reclassification adjustments, net of tax
(58,248)
-0-
(58,248)Balance at May 31, 2001$
(15,457)$
93 $
(15,364)
 

Changes in accumulated other comprehensive income (AOCI) during the nine    months ended May 31, 2002 were as follows:

 

Cash Flow
Foreign Currency
Total
Hedges
Translation
AOCI
(Amounts in Thousands)Balance at August 31, 2001$
(21,436)
$
94 $
(21,342)Foreign currency translation adjustment
-0-
13 
13 Net gain on cash flow hedges, net of tax
2,357 
-0-
2,357 Reclassification adjustments, net of tax
23,279 
-0-
23,279 Balance at May 31, 2002$
4,200 
$
107 $
4,307 
 

Comprehensive loss for the nine months ended May 31, 2001 and 2002 is as    follows: 

 

Nine Months Ended
May 31, 2001
May 31, 2002
(Amounts in Thousands)Net loss
$
(37,063)$
(236,013)Net gains (losses) arising during the period     Cash flow hedges:          Net        derivative transition gain
$
30,208 $
-0-          Net        derivative gains during period
20,181 
2,775           Reclassification        adjustment
(68,591)
27,413      Foreign currency translation        adjustment
(18)
13 Other comprehensive income (loss) before tax
$
(18,220)$
30,201 Income tax benefit (expense) related to items of     other comprehensive income
$
2,745 $
(4,552)Other comprehensive income (loss)
$
(15,475)$
25,649 Comprehensive loss
$
(52,538)$
(210,364)
 

 

Comprehensive loss for the three months ended May 31, 2001 and 2002 is as    follows:

 

 

Three Months Ended
May 31, 2001
May 31, 2002
(Amounts in Thousands)Net loss
$
(42,432)$
(189,517)Net gains (losses) arising during the period     Cash flow hedges:          Net        derivative gains (losses) during period
$
(21,319)$
3,833           Reclassification        adjustment
(33,031)
11,124      Foreign currency translation        adjustment
2 
3 Other comprehensive income (loss) before tax
$
(54,348)$
14,960 Income tax benefit (expense) related to items of     other comprehensive income
8,195 
(2,255)Other comprehensive income (loss)
$
(46,153)$
12,705 Comprehensive loss
$
(88,585)$
(176,812)
 

**(6)     Derivative Financial Instruments**

 

Farmland is exposed to market risk, such as changes in commodity prices,    currency exchange rates and interest rates.  In Farmland's various production    processes, we are subject to raw material price fluctuations caused by supply conditions,    weather, economic conditions and other factors.  To manage volatility associated with    these exposures, Farmland may enter into various derivative transactions pursuant to our    established policies.  Generally, Farmland hedges a portion of its anticipated    consumption of commodity inputs for periods up to twelve months.  We may enter into    longer term contracts if deemed appropriate.

 

Effective September 1, 2000, we adopted Statement of Financial Accounting    Standard ("SFAS") 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, certain natural gas contracts 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 the change in fair    value of these derivative instruments are recognized as a component of other income during    that period.  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).  All derivative instruments are recorded in our balance sheet at fair    value.  At May 31, 2002, we recorded receivables of $9.0 million and $7.3 million in    other current assets and other long-term assets, respectively, related to unrealized gains    on derivative instruments, and we recorded payables of $13.0 million in other current    liabilities related to unrealized losses on derivative instruments.  

 

Farmland also uses derivative commodity 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.  These instruments have been designated as cash flow hedges for    accounting purposes with gains and losses deferred in accumulated other comprehensive    income (AOCI), to the extent the hedge is effective.  These amounts are recognized    within cost of goods sold in the period during which the hedged transaction affects    earnings.  Any hedge gain or loss resulting from ineffectiveness are immediately    recognized to earnings as a component of other income.

 

In this hedging activity, our objective is to use derivative commodity    instruments 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.  The instruments we use 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 three and nine    months ended May 31, 2001 and May 31, 2002.

 

As of May 31, 2002, 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 six months.  Gains and losses recorded in    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 an    approximate gain of $2.1 million deferred in AOCI as of May 31, 2002 will be reclassified    into earnings (loss) within the next twelve months.  Gains and losses in AOCI may    fluctuate until the related contract is closed.  During the nine month period ended    May 31, 2001, approximately $18.7 million was reclassified into earnings as other income    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.

 

In order to reduce exposures related to changes in interest rates,    Farmland may use derivative instruments, including interest rate swaps.  As of May    31, 2002, Farmland had an interest rate swap agreement outstanding with a notional amount    of $25.0 million expiring on September 14, 2003, effectively converting a portion of the    Farmland's variable rate debt to a fixed rate debt.  The interest rate swap is    accounted for at fair value with gains or losses recorded as a component of interest    expense.  As a result of our filing petitions for protection under Chapter 11 of the    United States Bankruptcy Code, the financial institution that we entered into the interest    rate swap with cancelled the swap agreement in June 2002.

 

**(7)     Contingencies**

 

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.

 

SFAS 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, a gain or loss would be recognized on settlement.

 

Farmland is required and plans to adopt the provisions of SFAS 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 SFAS No. 143, it is not practicable for    management to estimate the impact of adopting this Statement at the date of this report.

 

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    $22.1 million and $17.2 million at May 31, 2002 and August 31, 2001,    respectively.  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.  

 

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 which can be reasonably estimated at May 31,    2002.  In the opinion of management, it is reasonably possible for such additional    costs to approximate an additional $8.5 million.

 

Under the Resource Conservation Recovery Act of 1976 (''RCRA''), Farmland    has four closure and four post-closure plans in place for five locations. Closure and    post-closure plans also are in place for four landfills and two injection wells as    required by state regulations. Such closure and post-closure costs are estimated to be    $10.0 million at May 31, 2002, of which $4.9 million has been accrued (and are in addition    to the $22.1 million accrual and the $8.5 million discussed in the prior    paragraphs).  These liabilities are accrued when plans for termination of plant    operations are made.  Recognition of a liability under generally accepted accounting    principles may not be determinative regarding the status of such claim under the    bankruptcy laws.  During the three months ended May 31, 2002, a determination was    made to close our fertilizer plant at Pollock, Louisiana and to maintain our Lawrence,    Kansas plant for limited use as a terminal for the foreseeable future.  As a result,    we accrued $4.6 million as an estimate for closure costs related to these plants.     These closure costs are included in other net expense in our accompanying unaudited    Condensed Consolidated Statements of Operations for the three month and nine month periods    ended May 31, 2002.  Environmental exit costs have not been accrued for locations at    which operations are being conducted and for which we do not plan to terminate operations    in the foreseeable future. 

 

The Environmental Protection Agency has issued new rules limiting sulfur    in gasoline to 30 parts per million and in diesel fuel to 15 parts per million.  The    rules affecting gasoline have a January 1, 2004 compliance date.  The EPA has issued    Farmland a regulatory extension of the gasoline deadline until January 1, 2008.  The    rules affecting diesel fuel have a June 1, 2006 compliance date.  Based on    information currently available, we anticipate that expenditures of approximately $90.0    million will be required to achieve compliance with these rules.  Our ability to make    these expenditures is contingent on our ability to successfully implement a plan of    reorganization.

 

As more fully described in Note 2 to these unaudited Condensed    Consolidated Financial Statements, on the Petition Date, the Debtors filed voluntary    petitions for protection under Chapter 11 of the Bankruptcy Code in the United States    Bankruptcy Court.

 

The Debtors are currently operating as debtors-in-possession under the    supervision of the Court.  As debtors-in-possession, the Debtors, subject to any    required court approval, may elect to assume or reject real estate leases, employment    contracts, personal property leases, service contracts, and other unexpired executory    pre-petition contracts.  We cannot presently determine with certainty the ultimate    aggregate liability that will result from the filing and settlement of claims relating to    any rejected contracts and as a result, no allowance for these items has been made.

 

Under the Bankruptcy Code, the rights and treatment of pre-petition    creditors and equity holders will be substantially altered.  As a result of the    Chapter 11 proceedings, virtually all liabilities, litigation and other claims against the    Debtors that were in existence as of the Petition Date are stayed unless the stay is    modified or lifted or payment is authorized by the Court.  The ultimate amount of the    allowed claims against the Debtors and the manner in which those claims might be resolved    in a plan of reorganization are not presently determinable.

 

Although management expects to file a plan of reorganization, there can be    no assurance at this time as to whether or when a plan of reorganization will be proposed    by the Debtors, how liabilities and equity interests will be treated in the plan, that the    plan will be approved by the various classes of creditors and equity holders or that it    will be approved or confirmed by the Court.  The plan of reorganization could    substantially change the amounts and characterization of liabilities currently presented    in our unaudited Condensed Consolidated Financial Statements.

 

Because of the ongoing nature of the Debtors' Chapter 11 cases, the    outcome of which is not determinable until a plan of reorganization is confirmed and    consummated, our unaudited Condensed Consolidated Financial Statements are subject to    material uncertainties.

 

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 unaudited Condensed    Consolidated Financial Statements.

 

**(8)     Restructuring and Other Charges**

 

In the third quarter of fiscal year 2001, Farmland recognized a reserve as    a result of restructuring activities.  As of August 31, 2001, the balance in the    restructuring reserve was $7.9 million.  During the three months ended May 31, 2002,    we added $0.8 million to the restructuring reserve related to closing our Pollock,    Louisiana fertilizer plant.  During the nine months ended May 31, 2002, adjustments    to the reserve reduced the balance by $2.8 million.  These adjustments were recorded    as a reduction to restructuring and other charges in our accompanying unaudited Condensed    Consolidated Statements of Operations for the nine month period ended May 31, 2002.     The major component of this adjustment resulted from the sale, during October 2001, of the    assets of Heartland Wheat Growers, our wheat gluten plant located in Russell, Kansas at a    price in excess of its previously estimated net realizable value.  This sale released    us from future plant maintenance, property taxes, and all other obligations associated    with maintaining the idle plant and property.  Deductions to the reserve, in the    amounts of $0.5 million for the three months ended May 31, 2002 and $1.8 million for the    nine months ended May 31, 2002, represent severance payments and ongoing maintenance costs    associated with closed facilities.  As of May 31, 2002, the balance in the    restructuring reserve was $4.1 million.

 

During the three months ended May 31, 2002, we reduced the carrying    amounts of fixed assets at two of our fertilizer plants to their net realizable values in    accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and    for Long-Lived Assets to Be Disposed Of."  The affected plants were our plants    in Lawrence, Kansas, and Pollock, Louisiana, which have recently been operated only during    periods when we anticipated high near-term demand.  During the three months ended May    31, 2002, management decided to close the Pollock plant and to maintain the Lawrence plant    for limited use as a terminal due to a combination of factors, including weak product    demand, inefficient plant operations, and logistical problems.  Fixed assets were    reduced by $21.1 million and the carrying amounts of inventories, primarily for supplies    and catalyst at these facilities which did not have alternative uses, were reduced by    $10.0 million.  In addition, as noted above, we accrued $0.8 million of estimated    cost to closing our Pollock, Louisiana fertilizer facility.  These adjustments were    recorded in restructuring and other charges in our accompanying unaudited Condensed    Consolidated Statements of Operations for the three month and nine month periods ended May    31, 2002.

 

During the three months ended May 31, 2002, a determination was made to    sell our long-term investments in Farmland Hydro, L.P. and Rocky Mountain Milling.     In accordance with Accounting Principles Board ("APB") No. 18, "The Equity    Method of Accounting for Investments in Common Stock", the carrying values of these    investments and other long-term assets were reduced by $22.4 million to their estimated    fair value, which is the estimated net sales proceeds.  Other impairment charges    totaling $1.3 million were recorded to reduce the carrying value of certain investments    for which the investment carrying value exceeded expected future cash flows.  

 

During the three months ended May 31, 2001 the Board of Directors approved    a plan to close certain facilities and exit nonstrategic businesses.  Accordingly, we    recorded a charge to operations of approximately $79.8 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 closed unprofitable    meat facilities.  We also sold our wholly-owned grain marketing subsidiary,    Farmland-Atwood, to Archer Daniels Midland Co.  As a result of these facility    closings, we recognized approximately $28.0 million of impairment charges on the related    long-lived assets.  Assets which could be readily sold, were revalued at their used    market value and assets which could not be used or sold were valued at their salvage    value, if any.  Goodwill associated with facilities closed or businesses sold was    written-off from our balance sheet, resulting in a $12.6 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 GAAP, certain software development and    implementation costs were capitalized.  During this period, we charged to expense    approximately $26.3 million of capitalized software costs related to operations which have    been closed, sold or contributed to ventures.  We also accrued $12.9 million in other    expenses related to restructuring activities, including plant closure costs and employee    severance costs.

 

The following is the effect of our restructuring charges (income) on    segment income:

 

Nine Months Ended
Three Months Ended
May 31
May 31
May 31
May 31
2001
2002
2001
2002
(Amounts in Millions)Crop Production$
-0-$
55.2 $
-0-$
55.2Petroleum
2.7
-0- 
2.7
-0-Feed
-0-
-0- 
-0-
-0-Refrigerated Foods
17.2
-0- 
17.2
-0-World Grain
12.0
-0- 
12.0
-0-Other
47.9
(6.0)
47.9
0.4Restructuring and other charges$
79.8$
49.2 $
79.8$
55.6
 

As part of the restructuring costs incurred in fiscal year 2001, we    recorded an asset impairment related to the closure of our wheat gluten plant to its    estimated net realizable value.  During October 2001, as noted above,  the    assets of the plant were sold and a gain on the sale of assets was recorded in the amount    of $3.5 million, representing the excess of the net proceeds over the plant's estimated    net realizable value.

 

The following table displays the activity and balances of the    restructuring reserve account from August 31, 2001 to May 31, 2002:

 

 

        Type of Cost
        Aug. 31, 2001        Balance
        Additions
        Adjustments
        Deductions
        May 31, 2002        Balance
(Amounts in Thousands)Employee separations$
1,602
$
16 $
(228)$
(1,362)$
28Facility closings
3,830
800 
(2,598)
(459)
1,573Other
2,500
-0-
-0-
-0-
2,500Total$
7,932$
816 $
(2,826)$
(1,821)$
4,101
 

 

The following table displays the activity and balances of the    restructuring reserve account from February 28, 2002 to May 31, 2002:

 

        Type of Cost
Feb. 28, 2002 Balance
        Additions
        Adjustments
        Deductions
May 31, 2002        Balance
(Amounts in Thousands)Employee separations$
333
$
-0-$
-0-$
(305)$
28Facility closings
946
800 
-0-
(176)
1,573Other
2,500
-0-
-0-
-0-
2,500Total$
3,779$
800 $
-0-$
(481)$
4,101
 

**(9)     Other Income**

 

Other income for the nine months ended May 31, 2002 included $34.0 million    in shutdown costs associated with fertilizer plants we temporarily idled, partially offset    by a gain of $18.0 million recognized on the sale of our equity interest in Country Energy    to Cenex Harvest States and $4.0 million in rental income.  Other income for the nine    months ended May 31, 2001 included net gains of $12.6 million related to derivative    financial instruments held by certain of our segments that we believe provide an economic    hedge of future transactions, but were not designated as a hedge under SFAS 133    "Accounting for Derivative Instruments and Hedging Activities".  During the    nine months ended May 31, 2001, we recognized a $4.4 million gain on the sale of our 50%    ownership interest in One System Group, LLC, a provider of information services.

 

Other income for the three months ended May 31, 2002 included $16.2    million in shutdown costs associated with fertilizer plants we temporarily idled compared    with a cost of $7.4 million for the same period last year.  During the three months    ended May 31, 2002 we also accrued $6.6 million in additional environmental remediation    expenses in our crop production segment ($4.6 million associated with plant closures costs    at Lawrence, Kansas and Pollock, Louisiana, and $2.0 million for revised remediation    estimates at our facility in Bartow, Florida).

 

**(10)     Discontinued Operations**

 

During February 2002, a decision was made to liquidate our international    grain trading subsidiaries, Tradigrain.  Tradigrain was acquired in 1993 and provides    international grain marketing and brokerage services to our customers.  The formation    of ADM/Farmland, our domestic grain joint venture, the changing environment which limited    the availability of bank credit for trading businesses, and our continuing focus on core    businesses were the primary reasons for exiting this business.

 

The disposal plan consists primarily of the termination of normal    activity, the sale of existing inventories, the collection of receivables, and the    settlement of trade and financing liabilities.  The disposal of Tradigrain operations    represents the disposal of a business segment under APB Opinion No. 30.  Accordingly,    the accompanying unaudited Condensed Consolidated Statements of Operations have been    restated to reflect Tradigrain as discontinued operations for all periods presented.     For business segment reporting purposes, Tradigrain business results are reported as    discontinued operations within the "World Grain" segment.  Proceeds from    the liquidation of Tradigrain are being used to pay Tradigrain's operating expenses and to    repay Tradigrain's debt obligations.  

 

Under current applicable generally accepted accounting principles, we are    required to estimate and accrue estimated operating losses during the liquidation period    as well as any estimated loss we will incur on final liquidation of assets and settlement    of liabilities.  As of May 31, 2002, we did not accrue either a loss for future    operations or liquidation loss, as management estimates that the liquidation will not    result in a loss in a future period.  However, Tradigrain's remaining assets    primarily consist of trade and insurance receivables.  Such receivables may be    difficult to fully collect during the windup of operations.  As a part of our    accounting process we have established reserves to reduce these receivables to our best    estimate of net proceeds.  Furthermore, the length of time required to liquidate our    operations could vary from our estimate, which would affect total general and    administrative expenses incurred during the liquidation.  If actual events differ    from our estimates, there could be a material impact on our results of operations and    financial position.

 

The following tables summarize unaudited financial information as of and    for the three and nine month periods ended May 31, 2002 for Farmland's discontinued    operations.

 

Balance sheet of discontinued operations:

 

August 31        2001
May 31        2002
(Amounts in Thousands)AssetsAccounts receivable - trade$
197,335$
93,468 Inventories
49,532
4,492 Other current assets
60,216
46,872      Total current assets$
307,083$
144,832 Property, plant and equipment, net$
24,009$
2,247 Other long-term assets
8,719
15,014      Total long-term assets$
32,728$
17,261 Total assets$
339,811$
162,093 LiabilitiesShort-term notes payable$
88,035$
22,916 Accounts payable - trade
77,503
46,517 Other current liabilities
114,365
66,181      Total current liabilities$
279,903$
135,614 Long-term borrowings$
9,980$
290 Intercompany liabilities due to Farmland
190 
11,287 Total liabilities$
290,073$
147,191 Net assets of discontinued operations$
49,738$
14,902
 

 

Net sales and income from discontinued operations:

Nine Months Ended
Three Months Ended
May 31        2001
May 31         2002
May 31 2001
May 31 2002
(Amounts in Thousands)Net sales
$   1,991,279 
$      965,158 
$    691,816 
$    197,440 Pretax loss from             discontinued operations
        $         (2,743)
        $      (30,504)
        $       (7,605)
        $     (17,201)Income tax benefit (expense)
1,712 
(4,779)
722 
(3,918)Net loss from discontinued             operations
$         (1,031)
$      (35,283)
        $       (6,883)
        $     (21,119)
 

 

Cash flows related to discontinued operations:

Nine Months Ended
May 31, 2001
May 31, 2002
(Amounts in Thousands)Net cash provided by          operating activities
$       74,715 
$      124,898 Net cash provided by (used in)          investing activities
(2,899)
4,984 Net cash used in financing           activities
(50,272)
(125,006)Net increase in cash and cash            equivalents
$       21,544 
$          4,876 Cash and cash equivalents at           beginning of period
17,352 
8,708 Cash and cash equivalents at           end of period
$       38,896 
$        13,584 
 

**(11)     Industry Segment Information**

 

Effective September 1, 2001, Truck Operations and Transportation and    Warehousing Services are presented in the operating results of the segment they primarily    serve rather than as a component of Other Operating Units and Unallocated Corporate    Expenses.  Segment results for the three months and nine months ended May 31, 2001    were reclassified to conform to our current operational structure.

 

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.

 
**Nine months ended****May 31, 2001 (Page 1 of 3)**(Amounts in Thousands)
**CONSOLIDATED SEGMENTS**
        Combined         Segments
Unallocated        Corporate Expenses        ConsolidatedSales & transfers
$
9,691,987 
$
-0-
$
9,691,987 Transfers between segments
(2,386,100)
-0-
(2,386,100)Net sales
$
7,305,887 
$
-0-
$
7,305,887 Income (loss) from continuing operations
$
2,086 
$
(38,118)
$
(36,032)Loss from discontinued operations
(1,031)
-0-
(1,031)Net income (loss)
$
1,055 
$
(38,118)
$
(37,063)Total assets
$
2,701,964 
$
275,330 
$
2,977,294 
 

 
**Nine months ended****May 31, 2002 (Page 1 of 3)**(Amounts in Thousands)
**CONSOLIDATED SEGMENTS**
        Combined         Segments
Unallocated        Corporate Expenses        ConsolidatedSales & transfers
$
6,923,041 
$
-0-
$
6,923,041 Transfers between segments
(1,925,020)
-0-
(1,925,020)Net sales
$
4,998,021 
$
-0-
$
4,998,021 Income (loss) from continuing operations
$
(166,623)
$
(34,107)
$
(200,730)Loss from discontinued operations
(35,283)
-0-
(35,283)Net income (loss)
$
(201,906)
$
(34,107)
$
(236,013)Total assets
$
2,124,545 
$
317,769 
$
2,442,314 
 

 

 

 
**Nine months ended****May 31, 2001 (Page 2 of 3)**(Amounts in Thousands)
**INPUT AND OTHER SEGMENTS**
        Crop Production
        Petroleum
        Feed
Other Operating Units
Total Input and Other SegmentsSales & transfers$
652,465 $
1,313,635 $
50,262 $
1,584,220 $
3,600,582 Transfers between segments
(16,516)
(15,366)
(5,191)
(1,489,269)
(1,526,342)Net sales
$
635,949 $
1,298,269$
45,071 $
94,951 $
2,074,240 Income (loss) from             continuing operations        $
        (5,956)        $
        54,708         $
        (1,836)        $
        (26,413)        $
        20,503 Loss from discontinued             operations
        -0-
        -0-
        -0-
        -0-
        -0-Net income (loss)$
(5,956)$
54,708 $
(1,836)$
(26,413)$
20,503 Total assets$
769,799 $
442,387 $
55,191 $
56,807 $
1,324,184 
 

 
**Nine months ended****May 31, 2002 (Page 2 of 3)**(Amounts in Thousands)
**INPUT AND OTHER SEGMENTS**
        Crop Production
        Petroleum
        Feed
Other Operating Units
Total Input and Other SegmentsSales & transfers$
476,087 $
742,048 $
-0-$
1,278,726 $
2,496,861 Transfers between segments
(6,651)
(7,495)
-0-
(1,226,793)
(1,240,939)Net sales
$
469,436 $
734,553 $
-0-$
51,933 $
1,255,922 Income (loss) from           continuing operations        $
        (164,719)        $
        (36,425)        $
        3,257         $
        4,510         $
        (193,377)Loss from discontinued             operations
        -0-
        -0-
        -0-
        -0-
        -0-Net income (loss)$
(164,719)$
(36,425)$
3,257 $
4,510 $
(193,377)Total assets$
766,092 $
272,774 $
59,168 $
24,302 $
1,122,336 
 

 

 
**Nine months ended****May 31, 2001 (Page 3 of 3)**(Amounts in Thousands)
**OUTPUT SEGMENTS**
Total
Refrigerated
World 
Output
Foods
Grain
SegmentsSales & transfers$
4,306,971 
$
1,784,434 
$
6,091,405 Transfers between segments
(687,597)
(172,161)
(859,758)Net sales$
3,619,374 
$
1,612,273 
$
5,231,647 Income (loss) from continuing             operations        $
        5,468 
        $
        (23,885)
        $
        (18,417)Loss from              discontinued operations
        -0- 
        (1,031)
        (1,031)Net income (loss)$
5,468 
$
(24,916)
$
(19,448)Total assets$
796,753 
$
581,027 
$
1,377,780 
 

 
**Nine months ended****May 31, 2002 (Page 3 of 3)**(Amounts in Thousands)
**OUTPUT SEGMENTS**
Total
Refrigerated
World 
Output
Foods
Grain
SegmentsSales & transfers$
4,423,847 
$
2,333 
$
4,426,180 Transfers between segments(684,081)
-0-
(684,081)Net sales$3,739,766 
$2,333 
$
3,742,099 Income (loss) from        continuing  operations        $        29,648 
        $        (2,894)
        $
        26,754 Loss from              discontinued operations        -0-        (35,283)
        (35,283)Net income (loss)$29,648 
$(38,177)
$
(8,529)Total assets$790,766 
$211,443 
$
1,002,209 
 

 

 
**Three months ended****May 31, 2001 (Page 1 of 3)**(Amounts in Thousands)
**CONSOLIDATED SEGMENTS**
Unallocated
Combined Segments
Corporate Expenses
        ConsolidatedSales & transfers
$
3,255,217 
$
-0-
$
3,255,217 Transfers between segments
(685,710)
-0-
(685,710)Net sales
$
2,569,507 
$
-0-
$
2,569,507 Income (loss) from continuing             operations
 

$
        (17,621)
 

$
        (17,928)
 

$
        (35,549)Loss from              discontinued operations
        (6,883)
        -0-
        (6,883)Net income (loss)$   
(24,504)
$
(17,928)
$
(42,432)Total assets
$
2,701,964 
$
275,330 
$
2,977,294 
 

 
**Three months ended****May 31, 2002 (Page 1 of 3)**(Amounts in Thousands)
**CONSOLIDATED SEGMENTS**
Unallocated
Combined Segments
Corporate Expenses
        ConsolidatedSales & transfers
$
2,055,761 
$
-0-
$
2,055,761 Transfers between segments
(463,055)
-0-
(463,055)Net sales
$
1,592,706 
$
-0-
$
1,592,706 Income (loss) from continuing             operations
 

$
        (149,920)
 

$
        (18,478)
 

$
        (168,398)Loss from              discontinued operations
        (21,119)
        -0-
        (21,119)Net income (loss)
$
(171,039)
$
(18,478)
$
(189,517)Total assets
$
2,124,545 
$
317,769 
$
2,442,314 
 

 
**Three months ended****May 31, 2001 (Page 2 of 3)**(Amounts in Thousands)
**INPUT AND OTHER SEGMENTS**
        Crop Production
 

Petroleum
 

Feed
Other Operating Units
Total Input and Other SegmentsSales & transfers$
299,783 $
449,889 $
-0-$
517,251 $
1,266,923 Transfers between segments
(3,122)
(4,908)
-0-
(478,398)
(486,428)Net sales
$
296,661 $
444,981 $
-0-$
38,853 $
780,495 Income (loss) from continuing              operations        $
        (3,891)        $
        39,575         $
        570         $
        (22,580)        $
        13,674 Loss from             discontinued operations
        -0-
        -0-
        -0-
        -0-
        -0-Net income (loss)$
(3,891)$
39,575 $
570 $
(22,580)$
13,674 Total assets$
769,799 $
442,387 $
55,191 $
56,807 $
1,324,184 
 

 
**Three months ended****May 31, 2002 (Page 2 of 3)**(Amounts in Thousands)
**INPUT AND OTHER SEGMENTS**
Crop Production
        Petroleum
        Feed
Other Operating Units
Total Input and Other SegmentsSales & transfers$
183,216 $
153,251 $
-0-$
272,569 $
609,036 Transfers between segments
(1,561)
(1,135)
-0-
(252,533)
(255,229)Net sales
$
181,655 $
152,116 $
-0-$
20,036 $
353,807 Income (loss) from continuing             operations        $
        (86,717)        $
        (55,131)        $
        596         $
        (2,358)        $
        (143,610)Loss from             discontinued operations
        -0-
        -0-
        -0-
        -0-
        -0-Net income (loss)$
(86,717)$
(55,131)$
596 $
(2,358)$
(143,610)Total assets$
766,092 $
272,774 $
59,168 $
24,302 $
1,122,336 
 

 

 
**Three months ended****May 31, 2001 (Page 3 of 3)**(Amounts in Thousands)
**OUTPUT SEGMENTS**
Total
Refrigerated
World 
Output
Foods
Grain
SegmentsSales & transfers$
1,478,518 
$
509,776 
$
1,988,294 Transfers between segments
(245,405)
46,123 
(199,282)Net sales$
1,233,113 
$
555,899 
$
1,789,012 Income (loss) from continuing             operations        $
        (9,001)
        $
        (22,294)
        $
        (31,295)Loss from              discontinued operations
        -0-
        (6,883)
        (6,883)Net income (loss)$
(9,001)
$
(29,177)
$
(38,178)Total assets$
796,753 
$
581,027 
$
1,377,780 
 

 
**Three months ended****May 31, 2002 (Page 3 of 3)**(Amounts in Thousands)
**OUTPUT SEGMENTS**
Total
Refrigerated
World 
Output
Foods
Grain
SegmentsSales & transfers$
1,446,725 
$
-0-
$
1,446,725 Transfers between segments
(207,826)
-0-
(207,826)Net sales$
1,238,899 
$
-0-
$
1,238,899 Income (loss) from continuing             operations        $
        (3,934)
        $
        (2,376)
        $
        (6,310)Loss from              discontinued operations
        -0-
        (21,119)
        (21,119)Net income (loss)$
(3,934)
$
(23,495)
$
(27,429)Total assets$
790,766 
$
211,443 
$
1,002,209 
 

**(12)     Planned Major Maintenance Costs**

 

Effective September 1, 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 unaudited Condensed Consolidated Statements of Operations for the nine months    ended May 31, 2001.  

 

**(13)     Credit Facility**

 

**(A)                   Pre-petition Credit Facility**

 

On February 7, 2002, Farmland and a syndicate of banks, including Deutsche    Bank Trust Company Americas, Rabobank, and CoBank, entered into a five-year $500 million    credit facility (the "Pre-petition Credit Facility").  The Chapter 11    petition filings constituted an event of default under the terms of our Pre-petition    Credit Facility.  As of the Petition Date, the Debtors were indebted under the    Pre-petition Credit Facility in the amount of $399.7 million (consisting of $233.0 million    in revolving loans, $31.7 million of letters of credit obligations and a $135.0 million    term loan) plus additional fees and expenses.  The Pre-petition Credit Facility was    collateralized by a substantial portion of our accounts receivable, inventories, property,    plant and equipment and intangible assets.  

 

Subsequent to the Petition Date, the Debtors requested and received    approval from the Court to use cash proceeds received from collections of pre-petition    accounts receivable for working capital needs on an interim basis, up to a maximum amount    of $3.0 million, until such time as debtor-in-possession financing could be    arranged.  

 

**(B)                   Debtor-In-Possession Credit Facility**

 

Subsequent to May 31, 2002, the Debtors and a syndicate of banks including    Deutsche Bank Trust Company Americas entered into a debtor-in-possession credit facility,    which was subsequently revised and approved by the Court (the" DIP Credit    Facility"), to provide up to $306.0 million in post-petition financing.  The DIP    Credit Facility expires on the occurrence of an event that constitutes commitment    termination date as defined in the agreement or, if no such event has occurred, on    November 30, 2003.  All outstanding borrowings under the DIP Credit Facility are due    and payable on the commitment termination date.  

 

The DIP Credit Facility is collateralized by a first priority priming lien    in all assets of the Debtors, both tangible and intangible, but excluding rights in    respect to avoidance actions approved by the Court under the Bankruptcy Code.  The    DIP Credit Facility also allows for super priority administrative expense claim status in    the Chapter 11 cases with priority over certain other administrative expenses of the kind    specified or ordered pursuant to any provision of the Bankruptcy Code.  By terms of    the DIP Credit Facility, Farmland must file a plan of reorganization no later than    November 27, 2002.  The DIP Credit Facility includes various restrictive covenants    prohibiting the Debtors from, among other things, incurring additional indebtedness,    permitting any liens or encumbrances to be placed on property or assets, making    investments, or becoming liable for any contingent obligations, all as defined in the    agreement.

 

The $306.0 million DIP Credit Facility is comprised of two components: a    $25.0 million Tranche A component and a $281.0 million Tranche B component.  Our    ability to borrow under the DIP Credit Facility is limited by several factors, including:

 

·         the maximum aggregate    amount of each of Tranche A and Tranche B of the DIP Credit Facility  is limited to    $306.0 million;

·         the amount available    under Tranche B is determined periodically through the use of a borrowing base formula    based on the amount and nature of our inventory, receivables and required reserves; 

·         we are subject to two    budget covenants contained in the DIP Credit Facility, one that specifies the maximum    amount of the DIP Credit Facility that can be utilized and the second that requires a    minimum amount of excess availability under the borrowing base, all as described in the    agreement; and

·         we are required to    comply with all of the other terms and conditions of the DIP Credit Facility. 

 

Interest on the DIP Credit Facility is variable and is based on a 2.50%    spread over the higher of (1) the Prime Rate or (2) the rate which is 50 basis points in    excess of the Federal Funds Effective Rate.  Commitment fees of up to 100 basis    points are allowed on the unused portion of the DIP Credit Facility.

 

Subsequent to execution of the DIP Credit Facility, cash received by the    Debtors from their operations is generally applied to pay the Pre-petition Credit Facility    and may then be advanced under the DIP Credit Facility as liquidity needs dictate.  

 

 

**Item 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF    FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

 

The information contained in this discussion and in the unaudited    Condensed Consolidated Financial Statements and Accompanying Notes presented in this Form    10-Q should be read in conjunction with information set forth in Part II, Items 7 and 8,    in Farmland's Annual Report on Form 10-K for the year ended August 31, 2001.

 

**Petition for Relief Under Chapter 11 of the United States Bankruptcy    Code**

 

On May 31, 2002 (the "Petition Date"), Farmland Industries, Inc.    and four of its subsidiaries, Farmland Foods, Inc., Farmland Pipe Line Company, Farmland    Transportation, Inc., and SFA, Inc., (collectively, the "Debtors") filed    voluntary petitions for protection under Chapter 11 of the United States Bankruptcy Code    (the "Bankruptcy Code") in the United States Bankruptcy Court, Western District    of Missouri (the "Court") (Joint Case Number 02-50557-JWV).  The filings    were made in order to facilitate the restructuring of the Debtors' trade liabilities,    debt, and other obligations.  As a part of this process, the Debtors arranged    debtor-in-possession financing which management believes is adequate to enable them to    maintain their properties and assets and continue to manage the operations of their    businesses as debtors-in-possession under the supervision of the Court.  As    debtors-in-possession, the Debtors are authorized to operate their business     but  may not engage in transactions outside the ordinary course of business without    the approval of the Court.

 

The Debtors sought relief under Chapter 11 of the Bankruptcy Code because    of a lack of sufficient liquidity.  Operating losses in our crop production and    petroleum businesses, coupled with planned maintenance on our Coffeyville, Kansas    refinery, significantly hampered our cash flow during the spring of 2002.  In our    Form 10-Q for the quarter ended February 28, 2002, filed with the Securities and Exchange    Commission, we stated that we might be forced to seek protection from creditors if    conditions did not improve.  Concerns regarding our financial condition led to    increased cash demands and more restrictive payment terms from our trade creditors, as    well as increased demands for early redemptions of subordinated debt, which adversely    affected our liquidity and our ability to fund our ongoing operations and service our    debt.

 

As debtors-in-possession, the Debtors, subject to any required Court    approval, may elect to assume or reject real estate leases, employment contracts, personal    property leases, service contracts, and other unexpired executory pre-petition    contracts.  We cannot presently determine with certainty the ultimate aggregate    liability that will result from the filing and settlement of claims related to any    rejected contracts and, as a result, no allowance has been recorded for these items.

 

Under the Bankruptcy Code, the rights and treatment of pre-petition    creditors and equity holders will be substantially altered.  As a result of the    Chapter 11 proceedings, virtually all liabilities, litigation and other claims against the    Debtors that were in existence as of the Petition Date are stayed unless the stay is    modified or lifted or payment is authorized by the Court.  As part of the    reorganization process, the Debtors have attempted to notify all known or potential    creditors of the Chapter 11 filings for the purpose of identifying all pre-petition claims    against the Debtors.  Subsequent to the Petition Date, the Court approved payment by    the Debtors of certain pre-petition claims, including employee wages and benefits.     Subsequent to the Petition Date, the Court approved the Debtors entering into a new credit    facility with a syndicate of banks to provide up to $306.0 million of debtor-in-possession    financing (see Financial Condition, Liquidity and Capital Resources included in this    Management's Discussion and Analysis of Financial Condition and Results of Operations).

 

Pursuant to the provisions of the Bankruptcy Code, the Debtors are    currently developing a plan of reorganization.  The principal objective of the plan    of reorganization will be to restructure the Debtors' obligations to creditors in a manner    which permits Farmland to continue as a viable business.  The Bankruptcy Code allows    the Debtors the exclusive right to file a plan of reorganization during the first 120 days    of the Chapter 11 cases, or such longer or shorter time as the Court orders.     Although management expects to file a plan of reorganization, there can be no assurance at    this time whether or when a plan of reorganization will be proposed by the Debtors, how    liabilities and equity interests will be treated in the plan, that it will be approved by    the various classes of creditors and equity holders, or that it will be approved or    confirmed by the Court.  If the exclusivity period were to expire or be terminated,    other interested parties, such as creditors, would have the right to propose alternative    plans of reorganization.  The plan of reorganization could substantially change the    amounts and characterization of liabilities currently disclosed in the accompanying    unaudited Condensed Consolidated Financial Statements.

 

The ability of Farmland to continue as a going concern is dependent upon,    but not limited to, the development and confirmation of the plan of reorganization,    continued access to adequate sources of capital, the continued compliance with all debt    covenants under the debtor-in-possession credit facility, retention of key suppliers,    customers and employees, and the ability to sustain positive cash flows sufficient to fund    operations and repay debt.  No assurance can be given that the Debtors will be    successful in reorganizing their affairs within the Chapter 11 proceedings.  Because    of the ongoing nature of the reorganization process, the outcome of which is not    determinable until a plan of reorganization is confirmed and consummated, the accompanying    unaudited Condensed Consolidated Financial Statements are subject to material    uncertainties.

 

 

Critical Accounting Policies

 

The unaudited Condensed Consolidated Financial Statements of Farmland are    prepared in conformity with accounting principles generally accepted in the United States    for interim reporting purposes.  The preparation of these financial statements    requires the use of estimates, judgments, and assumptions that affect the reported amounts    of assets and liabilities at the date of the financial statements and the reported amounts    of revenues and expenses during the periods presented.  Farmland believes that of its    significant accounting policies the following may involve a higher degree of judgments,    estimates, and complexity:

 

·            going    concern;

·               estimating the allowance for doubtful accounts;

·               estimating an accrued environmental liability;

·               accounting for bankruptcy proceedings;

·               accounting for income taxes;

·               valuation of long-lived and intangible assets, including goodwill;

·               valuation of derivative financial and commodity instruments;

·               accounting for discontinued operations;

·               inventory valuation; and

·               pension cost and prepaid pension cost.

 

*Going Concern. *Continuation of an entity, commonly referred    to as a "going concern", is assumed in financial reporting.  The going    concern assumption is fundamental when assessing whether assets are valued at an amount    which will be realized through normal operations and whether liabilities will be paid in    the ordinary course of business.  If this assumption were to change, the impact on    our results of operations and financial position could be material.

 

*Allowance for doubtful accounts.*  Our management must make    estimates of the uncollectability of our accounts receivables.  Management    specifically analyzes accounts receivable and analyzes historical bad debt experience,    customer concentrations, customer credit-worthiness, current economic trends, including    conditions in the industries in which our customers operate, and changes in our customer    payment terms when evaluating the adequacy of the allowance for doubtful accounts.     Our accounts receivable balance from continuing operations was $315.1 million, net of    allowance for doubtful accounts of $15.5 million, as of May 31, 2002.

 

*Accrued environmental liability*.  We accrue a liability    related to pending environmental investigation, remediation and monitoring costs which are    probable and which can be reasonably estimated.  As of May 31, 2002, we had recorded    a liability of $22.1 million related to our estimate of environmental matters at    various National Priority List sites and other sites where no claim or assessment has been    made.  We have also accrued $4.9 million in environmental costs associated with plant    closures.  These accruals may increase or decrease materially and may materially    impact our results of operations and financial position as:

 

·         additional information    becomes known;

·         technology available    for clean-up and remediation improves;

·         management decides to    close certain facilities which have environmental closure plans in effect;

·         new environmental laws    are enacted and/or existing environmental laws are amended or  rescinded; and 

·         additional potentially    responsible parties are identified and/or previously identified potentially                responsible parties    file for bankruptcy protection.

 

*Bankruptcy Proceedings. *As a result of the filing of Debtors'    petitions under Chapter 11 of the Bankruptcy Code, Farmland's unaudited Condensed    Consolidated Financial Statements have been prepared in accordance with AICPA Statement of    Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization    under the Bankruptcy Code".  SOP 90-7 does not change the application of    generally accepted accounting principles in the preparation of financial statements.     However, it does require that the financial statements for the periods including and    subsequent to filing the Chapter 11 petition distinguish transactions and events that are    directly associated with the reorganization from the ongoing operations of the    business.  

 

SOP 90-7 requires (a) that pre-petition liabilities that are subject to    compromise be segregated in Farmland's unaudited Condensed Consolidated Balance Sheet as    Liabilities Subject to Compromise and (b) that revenues, expenses, realized gains and    losses, and provisions for losses resulting from the reorganization of the Debtors be    reported separately as Reorganization expenses in our unaudited Condensed Consolidated    Statements of Operations.  As a result of the reorganization proceedings under    Chapter 11, the Debtors may be required to take actions which may cause assets  to be    realized, or liabilities to be liquidated, for amounts other than those reflected in the    unaudited Condensed Consolidated Financial Statements.

 

The plan of reorganization being developed by the Debtors is subject to    approval by various creditors and must be approved and confirmed by the Court.  Once    the plan of reorganization has been confirmed, the amounts and characterization of    liabilities currently disclosed in our unaudited Condensed Consolidated Financial    Statements could change materially.  As of May 31, 2002, our Liabilities Subject to    Compromise balance was $943.8 million.

 

As debtors-in-possession, the Debtors, subject to any required Court    approval, may elect to assume or reject real estate leases, employment contracts, personal    property leases, service contracts, and other unexpired executory pre-petition    contracts.  We cannot presently determine with certainty the ultimate aggregate    liability that will result from the filing and settlement of claims related to any    rejected contracts and, as a result, no allowance has been recorded for these items.

 

*Accounting for income taxes*.  As part of the process of    preparing our unaudited Condensed Consolidated Financial Statements we are required to    estimate our income taxes in each of the jurisdictions in which we operate.  This    process involves estimating our actual current tax expense, estimating the portion of our    results related to transactions with members, and assessing temporary differences    resulting from differing treatment of items for tax and accounting purposes relating to    nonmember business.  These differences result in deferred tax assets and liabilities,    which are included within our consolidated balance sheet.  We then assess the    likelihood that our deferred tax assets will be recovered from future taxable income or    through implementation of available tax planning strategies.  To the extent we    believe that recovery is not likely, we establish a valuation allowance.  To the    extent we establish a valuation allowance or increase this allowance in a period, we    include an expense within the tax provision in the statement of operations.

 

Significant management judgment is required in determining our provision    for income taxes, our deferred tax assets and liabilities and any valuation allowance    recorded against our net deferred tax assets.  As of May 31, 2002, we have not    recorded a valuation allowance.  However, future decisions made by our Board, future    decisions made by the Court, future operating results or changes in tax laws may adversely    affect our ability to recover some or all of our deferred tax assets and could materially    impact our results of operations and financial position.

 

*Valuation of long-lived and intangible assets, including goodwill*.     We assess the impairment of long-lived assets, identifiable intangibles, and goodwill    whenever events or changes in circumstances indicate that the carrying value may not be    recoverable.  Factors we consider important which could trigger an impairment review    include the following:

 

·         significant    underperformance relative to expected historical or projected future operating results;

·         significant changes in    the manner of our use of the acquired assets or the strategy for our overall                business; and

·         significant negative    industry or economic trends.

 

When we determine that the carrying value of long-lived assets, identified    intangibles and goodwill may not be recoverable based upon the existence of one or more of    the above indicators of impairment, we measure any impairment based on a projected    discounted cash flow method using a discount rate determined by our management to be    commensurate with the risk inherent in our current business model.  A change in    events or circumstances, including the decision to hold an asset for sale or to abandon an    asset, resulting in an impairment charge to enterprise-wide software, goodwill or other    long-lived assets could have a material impact on our results of operations and financial    position.  Changes in circumstances may occur as a result of decisions made by our    Board, or as a result of decisions made by the Court.  Enterprise-wide software (our    largest identified intangible asset), goodwill, and property, plant and equipment had net    book values of $28.5 million, $29.4 million and $943.4 million, respectively, at    May 31, 2002.  Significant components of property, plant and equipment    included our refinery, our crop production manufacturing plants, and our meat slaughtering    and processing facilities.  If the Board or the Court determines that any of these    assets should be held for sale, the estimated net realizable proceeds from the sale of    these assets may be materially less than the current net book value of these assets.     The resulting change to reduce the asset from net book value to net realizable value could    have a material impact on our results of operations and financial position.

 

Events and changes in circumstances, including a continued downturn in our    crop production, liquidity issues, and our filing under Chapter 11 of the Bankruptcy Code,    resulted in our assessment that the carrying value of certain long-term assets and    intangible assets were impaired.  The carrying values of goodwill, other intangible    assets and property, plant and equipment were impaired by $21.4 million, $3.8    million, and $23.3 million, respectively during the three month period ended May 31, 2002.

 

Management is currently evaluating the impact that Statement of Financial    Accounting Standard ("SFAS") No. 142 "Goodwill and Other Intangible    Assets" and SFAS No. 144 "Accounting for the Impairment or Disposal of    Long-Lived Assets" could have on our financial statements (see Recent Accounting    Pronouncements).

 

*Derivative financial and commodity instruments.*  Exchange    traded instruments are valued at their closing price posted by the exchange.  We use    exchange closing prices, primarily the New York Mercantile Exchange, to value    over-the-counter instruments.  Volatility in commodity prices may materially impact    the value of these instruments and may materially impact our results of operations and    financial position.

 

We also hold a natural gas contract which has been deemed a derivative    instrument and which expires in 2010.  As an active market does not exist over this    timeframe, we obtain forward price estimates from an independent third party.  Based    on these price estimates, we value this contract by calculating estimated cash flows and    discounting these cash flows to a net present value.  Changes in the estimated    forward cash price or in the appropriate discount rate may materially impact the value of    these instruments and may materially impact our results of operations and financial    position.

 

*Discontinued operations.*  During February 2002, we adopted a    formal plan to dispose of our international grain trading subsidiaries, primarily through    the orderly liquidation of our business.  Tradigrain's remaining assets primarily    consist of trade and issuance receivables.  Such receivables may be difficult to    fully collect during the windup of operations.  As a part of our accounting process    we have established reserves to reduce these receivables to our best estimate of net    proceeds.  However, we may collect more or less proceeds than we have    estimated.  Collection of more or less proceeds than estimated could have a material    effect on our results of operations and financial position.  Furthermore, the length    of time required to liquidate our operations could vary from our estimate, which would    affect total general and administrative expenses incurred during this liquidation. Either    acceleration or delay of the liquidation could have a material impact on our results of    operations.  Under current applicable generally accepted accounting principles    (Accounting Principles Board ("APB") Opinion No. 30), we are required to    estimate and accrue estimated operating losses during the liquidation period as well as    any estimated loss we will incur on final liquidation of assets and settlement of    liabilities.  As of May 31, 2002, we did not accrue either a loss for future    operations or liquidation loss, as management estimates that the liquidation will not    result in a loss in a future period.  If actual events differ from our estimates,    there could be a material impact on our results of operations and financial position.

 

*Inventory valuation*.  Our crude oil and refined petroleum    products are valued at the lower of last-in, first-out ("LIFO") cost or    market.  Valuing these products at the lower of first-in, first-out    ("FIFO") cost or market could have a material impact on our net income and    financial position.  During certain prior quarters, using FIFO inventory costing,    applied on a consistent basis, would have increased or decreased pre-tax income for that    quarter by as much as $20.0 million.

 

A lower of cost or market charge is not recognized for declines in    inventory values of crude oil and refined petroleum products in our interim results of    operations if management reasonably expects that market price decline is temporary and    that the market price will exceed LIFO carrying values as of fiscal year end.     However, given the volatility of market prices, no assurance can be provided that the    market value of petroleum inventories will exceed their carrying value at our year-end.

 

Our other businesses value inventories at the lower of FIFO cost or    market.  During periods of significant price variability, valuation of these    inventories at the lower of LIFO cost or market, applied on a consistent basis, would    likely have a material impact on our results of operations and financial position.

 

All of our inventories, whether valued at the lower of LIFO or market or    the lower of FIFO or market, involve commodity products which are subject to large price    movements.  Such large price movements could result in significant lower of cost or    market write-downs to our inventories, which may have a material impact on our results of    operations and financial position.

 

*Pension cost and prepaid pension cost.* Our pension cost and    our prepaid pension cost are dependent on assumptions used in calculating such    amounts.  These assumptions include discount rates, health care cost trend rates,    benefits earned, interest cost, expected return on plan assets, mortality rates, and other    factors.  In accordance with accounting principles generally accepted in the United    States, actual results that differ from the assumptions are accumulated and amortized over    future periods and, therefore, generally affect recognized expense and the recorded asset    or obligation in future periods.  After evaluation of the number of employee    terminations we have made in the last 24 months, during the three months ended May 31,    2002 we determined that a partial plan termination had occurred.  This resulted in a    $3.2 million charge to reflect in vesting for certain unvested employees, primarily former    employees at our closed Dubuque, Iowa pork plant, who were terminated with less than five    years of employment.  While management believes that the assumptions used to record    pension expense and prepaid pension cost are appropriate, differences in actual experience    or changes in assumptions may have a material impact on our results of operations and    financial position.

 

**Financial Condition, Liquidity and Capital Resources**

 

As a general matter, Farmland's liquidity depends principally on cash flow    from operations and our access to debt capital.  On May 31, 2002, due to    significantly limited liquidity, the Debtors filed voluntary petitions for protection    under Chapter 11 of the Bankruptcy Code.  The filings were made in order to    facilitate the restructuring of the Debtors' trade liabilities, debt, and other    obligations.  The Debtors are currently operating as debtors-in-possession under the    supervision of the Court.  (See Management's Discussion and Analysis of Financial    Condition and Results of Operations--Petition for Relief Under Chapter 11 of the United    States Bankruptcy Code.)

 

Farmland has historically maintained two primary sources for debt capital:    (1) bank lines of credit and (2) a historically substantially continuous but, as noted    below, now suspended public offering of its subordinated debt and demand loan securities. 

 

On February 7, 2002, Farmland and a syndicate of banks, including Deutsche    Bank Trust Company Americas, Rabobank, and CoBank, entered into the Pre-petition Credit    Facility.  The Chapter 11 petition filings constituted an event of default under the    terms of our Pre-petition Credit Facility.  As of the Petition Date, the Debtors were    indebted under the Pre-petition Credit Facility in the amount of $399.7 million    (consisting of $233.0 million in revolving loans, $31.7 million of letters of credit    obligations and a $135.0 million term loan) plus additional fees and expenses.  The    Pre-petition Credit Facility was collateralized by a substantial portion of our accounts    receivable, inventories, property plant and equipment and intangible assets.  

 

Subsequent to the Petition Date, the Debtors requested and received    approval from the Court to use cash proceeds received from collections of pre-petition    accounts receivable for working capital needs on an interim basis, up to a maximum amount    of $3.0 million, until such time as debtor-in-possession financing could be    arranged.  

 

Subsequent to May 31, 2002, the Debtors and a syndicate of banks,    including Deutsche Bank Trust Company Americas, entered into the DIP Credit Facility,    which was subsequently revised and approved by the Court, to provide up to $306.0 million    in post-petition financing.  The DIP Credit Facility expires on the occurrence of an    event that constitutes commitment termination date as defined in the agreement or, if no    such event has occurred, on November 30, 2003.  All outstanding borrowings under the    DIP Credit Facility are due and payable on the commitment termination date.  

 

The DIP Credit Facility is collateralized by a first priority priming lien    in all assets of the Debtors including all real, personal and mixed property, both    tangible and intangible, but excluding rights in respect to avoidance actions approved by    the Court under the Bankruptcy Code.  The DIP Credit Facility also allows for super    priority administrative expense claim status in the Chapter 11 cases with priority over    certain other administrative expenses of the kind specified or ordered pursuant to any    provision of the Bankruptcy Code.  By terms of the DIP Facility, Farmland must file a    plan of reorganization no later than November 27, 2002.  The DIP Credit Facility    includes various restrictive covenants prohibiting the Debtors from, among other things,    incurring additional indebtedness, permitting any liens or encumbrances to be placed on    property or assets, making investments, or becoming liable for any contingent obligations,    all as defined in the agreement.

 

The $306.0 million DIP Credit Facility is comprised of two components: a    $25.0 million Tranche A component and a $281.0 million Tranche B component.  Our    ability to borrow under the DIP Credit Facility is limited by several factors, including:

 

·         the maximum aggregate    amount of each of Tranche A and Tranche B of the DIP Credit Facility  is limited to    $306.0 million;

·         the amount available    under Tranche B is determined periodically through the use of a borrowing  base    formula based on the amount and nature of our inventory, receivables and required      reserves; 

·         we are subject to two    budget covenants contained in the DIP Credit Facility, one that specifies  the    maximum amount of the DIP Credit Facility that can be utilized and the second that    requires a minimum amount of excess availability under the borrowing base, all as    described in the agreement; and

·         we are required to    comply with all of the other terms and conditions of the DIP Credit Facility. 

 

Interest on the DIP Credit Facility is variable and is based on a 2.50%    spread over the higher of (1) the Prime Rate or (2) the rate which is 50 basis points in    excess of the Federal Funds Effective Rate.  Commitment fees of up to 100 basis    points are allowed on the unused portion of the DIP Credit Facility.

 

Commitment fees up to 100 basis points are allowed on the unused portion    of  Tranche A of the DIP Credit Facility.  Subsequent to the execution of the    DIP Credit Facility, cash received by the Debtors from their operations is generally    applied to pay the revolving loans outstanding under  the Pre-petition Credit    Facility and may then be advanced under the DIP Credit Facility as liquidity needs    dictate.  As calculated at June 30, 2002, availability under the DIP Credit    Facility was approximately $57.4 million.

 

In August 2001, Farmland National Beef Packing Company, L.P.    ("FNBPC") established a five year, $225.0 million credit facility with a    syndicate of banks.  This facility provides for a line of credit for up to $100.0    million and a term loan of $125.0 million, both of which are nonrecourse to Farmland and    not available to Farmland for general purposes.  Borrowings under the credit facility    are collateralized by substantially all the assets of FNBPC and are subject to certain    financial covenants.  FNBPC was in compliance with all covenants at May 31,    2002.  At May 31, 2002, FNBPC had borrowings of $149.8 million, and $17.2 million of    the facility was being utilized to support letters of credit.  At May 31, 2002,    availability under the line of credit was approximately $82.8 million.  FNBPC was not    included in the Chapter 11 reorganization filings.

 

During February 2002, a decision was made to dispose of our international    grain trading subsidiaries, Tradigrain, through an orderly liquidation of assets and    settlement of liabilities.  The disposal plan consists primarily of the termination    of normal activity, the sale of existing inventories, the collection of receivables, and    the settlement of trade and financing liabilities.  Our Switzerland subsidiary, which    held the primary credit facility to fund the operations of all Tradigrain subsidiaries,    filed for creditor protection at that time and all unused lines of credit were    rescinded.  Continuing financing is negotiated with the banks on an as needed    basis.  All obligations of Tradigrain are nonrecourse to Farmland and Farmland's    other affiliates.  

 

Other borrowing arrangements with banks and financial institutions are    also maintained by certain of our subsidiaries that were not included in the Chapter 11    filings. Under such arrangements, at May 31, 2002, $4.3 million was borrowed, and an    additional $2.6 million was utilized to support letters of credit.  These liabilities    are nonrecourse to Farmland.

 

Under our subordinated debt and demand loan program, which was suspended    on October 31, 2000, we offered unsecured debt securities on a best-efforts basis through    our wholly-owned broker-dealer subsidiary, Farmland Securities Company.  The types of    debt securities offered in this debt program included certificates payable on demand and    subordinated debenture bonds. Holders of the subordinated debenture bonds, under certain    circumstances, had the option to request the early redemption of outstanding debt    securities.  During the nine months ended May 31, 2002, as a result of demands for    payment of demand loan securities, regular maturities and early requests for redemptions    of subordinated debenture bonds, the outstanding balance of demand certificates decreased    by $5.6 million to $12.0 million, and the outstanding balance of subordinated debenture    bonds decreased by $59.5 million  to $475.8 million.  As a result of the May 31,    2002 petition filings by the Debtors under Chapter 11 of the Bankruptcy Code, all payments    of unsecured debt securities of the Debtors, including the demand loan certificates and    the subordinated debenture bonds, and accumulated interest thereon have been suspended and    we are no longer accruing interest on the outstanding balances.  The balances    outstanding as of the Petition Date are considered pre-petition claims, and as such all    future distributions will be subject to the final terms established in the Debtors' plan    of reorganization as confirmed by the Court.

 

Leveraged leasing has been utilized to finance railcars and a significant    portion of our crop production equipment.

 

Farmland has issued and outstanding two million shares of 8% Series A    Cumulative Redeemable Preferred Shares (the "Preferred Shares") with an    aggregate liquidation preference of $100.0 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.  We did not    make the May 1, 2002 dividend payment on the Preferred Shares that was previously declared    by our Board of Directors.  The status of the Preferred Shares will be subject to the    final terms established in the Debtors' plan of reorganization as confirmed by the Court.

 

As a cooperative, we could not sell our voting common equity in    traditional public or private markets.  Instead, equity was raised largely from    payment of the noncash portion of patronage refunds with common stock and associate member    common stock and from net income on transactions with nonmembers.

 

Farmland's operating activities provided $223.9 million in net cash ($99.0    million from continuing operations and $124.9 million from discontinued operations) during    the nine months ended May 31, 2002, a $62.2 million decrease as compared to $286.1 million    provided in the same period last year.  The decrease in net cash provided by    operations is primarily due to a net loss of $236.0 million recognized during the nine    months ended May 31, 2002 as compared to a $37.1 million loss during the same period last    year.  This increase in net loss is partially offset by a $169.3 million improvement    related to changes in our working capital requirements, primarily from decreased accounts    receivable and inventory.  The decreases in our working capital requirements are    primarily related to our decision to exit our petroleum marketing and distribution    business, the formation of our ADM/Farmland venture and discontinuing our international    grain trading activities.

 

Farmland's investing activities used $177.4 million in net cash during the    nine months ended May 31, 2002, a $124.2 million increase as compared to $53.2 million in    the same period last year.  The primary use of cash was to purchase the leased    facility at Coffeyville, Kansas which produces nitrogen-based crop nutrients.  The    total purchase price of approximately $261 million included cash of approximately $206    million and the application of $55 million of prepaid lease payments.  Therefore,    only $206 million is reflected as a capital expenditure in our unaudited Condensed    Consolidated Statements of Cash Flows.  Through this transaction, we also    extinguished approximately $220 million of off-balance sheet lease commitments.

 

Farmland's financing activities used $46.5 million in net cash during the    nine months ended May 31, 2002, a $186.5 million decrease as compared to $232.9 million    used in the same period last year.  Due to decreases in cash provided by operations    and increased cash used for investing activities we had significantly less cash remaining    to use toward reducing our debt then we did during the same period last    year.     

 

 

**Results of Operations**

 

**General factors affecting results of operations**

 

***     Seasonality***

 

In view of the seasonality of Farmland's businesses, it must be emphasized    that the results of operations for the periods presented are not necessarily indicative of    the results for a full fiscal year.  

 

***     Volatility***

 

We operate in the crop production, petroleum, feed, refrigerated foods and    grain businesses.  Our 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, and    currency fluctuations, tariffs and other factors affecting United States imports and    exports.  In addition, various federal and state regulations intended to protect the    environment encourage farmers to reduce the use of fertilizers and other chemicals.     Global variables which affect supply, demand and price of crude oil, refined fuels,    natural gas, livestock, grain and other commodities may impact our operations.     Historically, changes in the cost 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    the factors mentioned above may impact our future operations.  For example, at times    during the last few years, the results of our crop production business have been adversely    affected by a combination of high natural gas prices and competition from imports.     In addition, earlier this year, use of nitrogen-based crop nutrients for wheat application    was reduced as a result of drought conditions experienced in Oklahoma and Texas, and use    of nitrogen-based crop nutrients for corn application was reduced as a result of    excessively wet weather in the eastern corn-belt.  Also, changes in the prices of    crude oil and refined fuels have caused, and will continue to cause, significant    variations in the results of our petroleum business.

 

     ***Crop Production***

 

To enhance the efficiency in marketing crop production products to our    members, on January 1, 2000, Farmland, Land O'Lakes, and Cenex Harvest States combined    their crop production marketing functions into a new venture, Agriliance.  Farmland    now sells most of our manufactured product to Agriliance.  

 

To better manage our crop nutrient inventories with existing demand, we    temporarily idled part or all of our plants at Beatrice, Nebraska, Dodge City, Kansas,    Enid, Oklahoma and Fort Dodge, Iowa for approximately half of our third quarter.     During June 2002, all plants, except Dodge City, Kansas and Coffeyville, Kansas were    temporarily idled.  We resumed production at the Beatrice, Nebraska and Fort Dodge,    Iowa plants and part of the Enid, Oklahoma plant on July 1, 2002.  We currently plan    to resume production at the remaining ammonia plant, in Enid, Oklahoma, during September    2002.  In an effort to increase our cost efficiency, we have ceased manufacturing    operations at our plant in Lawrence, Kansas, which produced high cost UAN and was our    oldest and most inefficient plant.  We have also closed our plant in Pollock,    Louisiana, which was geographically distant from Agriliance's primary marketing    area.  Earlier this year, use of nitrogen-based crop nutrients for wheat application    was reduced as a result of drought conditions experienced in Texas and Oklahoma.     During the spring season, application of nitrogen-based crop nutrients for corn planting    was less than forecasted due to wet weather in the eastern corn-belt.  

 

     ***Petroleum***

 

Effective November 30, 2001, our sales mix has been affected by the sale    of our equity interest in Country Energy to Cenex Harvest States.  Previously, our    sales included 41% of all sales sold through our agent, Country Energy.  These sales    included Cenex Harvest States' portion of the output of the NCRA refinery at McPherson,    Kansas, Cenex Harvest States' refinery at Laurel, Montana, and Farmland's refinery at    Coffeyville, Kansas, as well as gasoline and distillates purchased from third parties for    resale, and wholesale propane, lubricants and petroleum products.  Subsequent to the    sale of our interest in Country Energy, our petroleum sales consist of 100% of the output    of our Coffeyville, Kansas refinery.  We no longer participate in sales related to    the refineries at McPherson, Kansas or Laurel, Montana; we no longer participate in the    resale of petroleum products to third parties; and we have substantially discontinued    selling wholesale propane, lubricants and petroleum equipment.  These changes account    for a decrease of approximately $160 million in sales for the nine months ended May 31,    2002 as compared with the same period last year.  Concurrent with the sale of our    interest in Country Energy, we entered into an agreement with Cenex Harvest States whereby    Cenex Harvest States will purchase all refined products produced at our Coffeyville,    Kansas refinery.  The selling price for this production is determined by reference to    daily market prices within our geographic region.

 

During the first week of March 2002, our Coffeyville, Kansas refinery was    shut down for planned major maintenance activities, also referred to as a turnaround, in    order to perform equipment inspections, repairs and capital improvements that could not be    performed while the facility was normally operating.  This turnaround project was    completed and the refinery was placed back on line during the second week of April    2002.  Under our accounting policy for planned major maintenance adopted September 1,    2000, we no longer accrue in advance for turnaround projects.  As a result, we    included in our third quarter operating results expenses of $16.6 million related to the    cost of this turnaround project.

 

     ***Feed***

 

Effective October 1, 2000, Farmland and Land O'Lakes each contributed    substantially all their feed business assets to a newly formed venture (Land O'Lakes    Farmland Feed).  As a result of forming this venture, we did not record any sales for    our feed business during the three and nine months ended May 31, 2002 and the three    months ended May 31, 2001.  We recorded only one month's sales during the nine months    ended May 31, 2001.  

 

     ***World Grain***

 

Effective May 4, 2001, we formed a grain marketing relationship with    Archer Daniels Midland Company (ADM).  ADM/Farmland, Inc., a wholly-owned subsidiary    of ADM, purchased our United States grain inventories and Farmland Atwood, our    wholly-owned grain commission subsidiary.  ADM/Farmland leases and operates our grain    elevators throughout the United States.  These leases are in an amount adequate to    reimburse us for our depreciation and other ownership expenses.  ADM/Farmland obtains    its grain from third party sources.  Farmland also shares in 50% of the earnings or    losses of ADM/Farmland.  As a result, effective from the date of formation of this    venture, sales, cost of sales, selling, general and administrative (SG&A) expenses and    other income generated by this venture are no longer recorded in our unaudited Condensed    Consolidated Statements of Operations.  Our share of the net earnings of this venture    is now included as a component of equity in net income of investees.  During the nine    and three months ended May 31, 2001, for this operation we recognized the following in our    unaudited Condensed Consolidated Statements of Operations:

 

Nine Months Ended        May 31, 2001
Three Months Ended        May 31, 2001
(Amounts in Millions)Sales
$   1,612.3
$     555.9Cost of Sales
$   1,582.0
$     552.1SG&A expenses
$        24.0
$         8.7Other expenses and interest
$        29.8
$       17.1
 

 

During February 2002, a decision was made to dispose of, within one year,    our international grain trading subsidiaries, Tradigrain, through an orderly liquidation    of assets and settlement of liabilities.  Accordingly, the results of our    international grain operations, net of tax, are reflected as a single line item,    "Discontinued Operations," on our unaudited Condensed Consolidated Statements of    Operations for both the nine months and the three months ended May 31, 2001 and    2002.  International grain sales, cost of sales and operating expenses are all    reflected within the loss from discontinued operations in the unaudited Condensed    Consolidated Statements of Operations for all periods presented.  

 

 

Results of Operations for Nine Months Ended May 31, 2002 Compared to Nine    Months Ended May 31, 2001.

 

 

Sales for the nine months ended May 31, 2002 decreased approximately $2.3    billion, or 32%, compared with the same period last year.  This decrease is primarily    due to a decrease in sales recorded in Farmland's unaudited Condensed Consolidated    Statements of Operations resulting from the formation of our ADM/Farmland venture and the    sale of our interest in Country Energy, both as described above, combined with a decrease    in unit selling prices for refined fuels and crop nutrient products, partly offset by    increased sales of refrigerated foods' products.

 

For the nine months ended May 31, 2002, we had a net loss of $236.0    million compared with a net loss of $37.1 million for the same period last year.     Factors which significantly affected earnings for the nine months ended May 31, 2002,    compared with the nine months ended May 31, 2001 include:

 

·         gross margins decreased    $190.7 million primarily as a result of lower margins for our nitrogen-based crop    nutrients, refined fuels and refrigerated foods;

·         as a result of filing    our petitions under Chapter 11 of the Bankruptcy Code, we recognized $54.7 million in    reorganization expenses during the nine months ended May 31, 2002;

·         during the nine month    period ended May 31, 2002 we recognized asset impairments and net restructuring costs of    $49.2 million (current period impairments of $55.6 million less recoveries and reversals    related to prior period impairments of $6.4 million) compared to $79.8 million recognized    in the nine month period ended May 31, 2001;

·         a net loss from    discontinued operations of $35.3 million (net of income tax expense of $4.8 million) for    the nine months ended May 31, 2002 compared with net loss from discontinued operations of    $1.0 million (net of income tax benefit of $1.7 million) for the nine months ended    May 31, 2001;

·         income for the nine    months ended May 31, 2001 included income of $19.8 million (net of income tax expense of    $3.3 million) from the cumulative effect of our change in accounting for derivative    financial and commodity instruments, as required by adoption of Statement of Financial    Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging    Activities", as amended ("SFAS 133"), and planned major maintenance costs;

·         our results for the    nine month period ended May 31, 2001 included $12.6 million of gains recognized on    derivative commodity instruments compared with loss of $4.2 million for the same period    this year; and

·         during the nine months    ended May 31, 2002, we had a pre-tax gain of $18.0 million from the sale of our interest    in Country Energy.

 

     ***Crop Production***

 

For the nine months ended May 31, 2002, our unit sales volume increased by    2% compared with the same period last year.  The average unit selling prices of    nitrogen-based plant foods for the nine months ended May 31, 2002 decreased by 27%, or $57    per ton, compared with the same period last year.  The net impact was a $166.5    million reduction in crop production sales to $469.4 million for the nine months ended May    31, 2002 compared with crop production sales of $635.9 million for the same period last    year.  

 

During the nine months ended May 31, 2001, relatively high natural gas    prices caused industry-wide production of nitrogen-based crop nutrients to be curtailed,    resulting in increased unit selling prices.  

During the nine months ended May 31, 2002, relatively low natural gas    prices encouraged manufacturers to increase production of nitrogen-based crop    nutrients.  As a result, the average unit selling price was 27% lower during the nine    months ended May 31, 2002 as compared to the same period in the prior year.  The    decline in selling price was partially offset by a 20% decline in cost of production, of    which natural gas cost is the major component.  

 

Significant factors which caused the loss of the crop production segment    to increase by $158.8 million to a loss of $164.7 million for the nine months ended May    31, 2002 compared with a loss of $6.0 million in the prior year included:  

 

·         margins decreased $41.4    million, primarily as a result of much lower average unit selling prices partly offset by    reduced natural gas costs;

·         during the nine months    ended May 31, 2002, compared with the same period in the prior year, we incurred $10.5    million additional costs associated with temporary plant shutdowns; 

·         during the nine months    ended May 31, 2002, $31.9 million was recorded as asset impairments related to ceasing    manufacturing operations at of our Lawrence, Kansas plant and to closing our Pollock,    Louisiana plant;

·         during the nine months    ended May 31, 2002, $4.6 million in additional environmental accruals were recorded as a    result of plant closures; 

·         during the nine months    ended May 31, 2002, $25.5 million was recorded as an impairment as a result of reducing    investments to their net realizable value;

·         during the nine months    ended May 31, 2001, derivative commodity instruments associated with idled facilities were    sold, resulting in $18.7 million of income recognized;

·         during the nine months    ended May 31, 2001, a $4.8 million gain was recognized from the sale of natural gas    inventories due to the idled plants; and

·         during the nine months    ended May 31, 2001, a nonrecurring gain of $14.6 million was recognized as a result of the    change in accounting methods for derivative commodity instruments upon our required    adoption of SFAS 133.

 

These factors were partially offset by:

 

·         during the nine months    ended May 31, 2002, compared with the same period in the prior year, earnings from    investees increased $3.9 million; and

·         during the nine months    ended May 31, 2002, $3.3 million of gains were realized from the sale of assets.

 

     ***Petroleum***

 

Sales of the petroleum segment decreased $563.7 million, or approximately    43%, for the nine months ended May 31, 2002 compared with the same period last year.     The decrease was primarily related to lower per unit selling prices for gasoline,    distillates and diesel fuels combined with a 12% decrease in units sold.  The    decrease in unit prices for refined fuels was a result of excess supplies across the    country.  These excess supplies were primarily the result of decreased demand after    the terrorist attacks on September 11, 2001 and a mild winter that affected usage of    distillate heating oil.  Also, during periods of relatively high natural gas prices,    power plants will tend to switch from using natural gas to fuel oil to meet their energy    requirements.  Natural gas prices were significantly lower this winter than last    winter, resulting in lower demand by power plants for fuel oil.  Increased demand for    distillates used in the production of jet fuels used for military operations was largely    offset by a decrease in jet fuel demand by commercial aircraft.  The decrease in    units sold resulted primarily from the shutdown of our Coffeyville, Kansas refinery during    March 2002 and a part of April 2002 in order to perform planned major maintenance    activities.  These planned major maintenance activities are also referred to as a    turnaround.

 

Income of the petroleum segment decreased $91.1 million during the nine    months ended May 31, 2002 as compared to the same period last year.  Margins    decreased by $110.7 million primarily due to the narrowing of the spread between crude oil    costs and refined fuel selling prices.  Although the spread had been very strong    during early September 2001, the subsequent decrease in demand and resulting oversupply of    refined products forced the spread levels to five-year lows during our second quarter and    remained at low levels through the third quarter.  Margins were also reduced because    we were unable to produce product during the turnaround period and because we incurred    turnaround expenses, included in cost of sales of approximately $16.6 million.  

 

Other significant factors affecting the decrease in income included:

 

·         during the nine months    ended May 31, 2002, as compared with the same period in the prior year, our income from    investees decreased $8.3 million, primarily as a result of the dissolution of Cooperative    Refining, LLC effective December 31, 2000; and

·         during the nine months    ended May 31, 2001, a nonrecurring gain of $2.4 million was recognized as a result of the    change in accounting methods for derivative commodity instruments as required to comply    with SFAS 133.

 

These factors were offset by:

 

·         during the nine months    ended May 31, 2002, a pre-tax gain of $18.0 million on the sale of our equity interest in    Country Energy to Cenex Harvest States during November 2001; and

·         a decrease of $10.5    million in net interest expense for the nine months ended May 31, 2002, as                compared with the same    period in the prior year.

 

     ***Feed***

 

Our feed segment recorded net income of $3.3 million during the nine    months ended May 31, 2002, an increase of $5.1 million as compared to a net loss of $1.8    million in the same period last year.  The increase is primarily related to    non-recurring changes associated with LOLFF's rationalization of its manufacturing    facilities during the nine months ended May 31, 2001.

 

     ***Refrigerated Foods***

 

During the nine months ended May 31, 2002, sales in the refrigerated foods    segment increased $120.4 million, or 3%, compared with the same period last    year.  This increase is primarily due to an 8% increase in unit sales volume,    partially offset by a 4% decrease in unit selling price.  The increase in unit sales    volume was primarily due to increased slaughter levels resulting from a surplus of cattle    and hogs and increased plant efficiencies.  Unit selling prices in our fresh pork    product lines declined primarily as a result of competing proteins on the domestic market    due to the Russian import ban on poultry products.

 

Income in the refrigerated foods segment increased by $24.2 million during    the nine months ended May 31, 2002 to an income of $29.6 million compared to an    income of $5.5 million in the same period last year.  Margins decreased $6.2 million    during the nine months ended May 31, 2002 as compared with the same period last year due    to lower per unit margins for beef partly offset by higher unit margins for pork and    increased unit volumes.  Margins have been adversely affected by a surplus of    competing proteins on the domestic market due to the Russian import ban on poultry    products.  Our Case Ready product line continues to show improved margins.  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.  This    decrease in margins was offset by a $4.9 million decrease in SG&A expenses (net of    $3.2 million expense recognized as a result of a partial plan termination, see Critical    Accounting Policies - Pension cost and prepaid pension cost), a $24.6 million increase in    other income and a $3.9 million decrease in minority owners' interest in net income of    subsidiaries.  The increase in other income is primarily related to a $17.7 million    reduction in plant shutdown cost incurred last year, a $6.6 million increase in income    from derivative commodity instruments and a $3.0 million reimbursement from our partner in    aLF Ventures of expenses incurred in a prior year, partly offset by a $3.1 million loss    from the sale of our 50% ownership interest in a feedlot in Liberal, Kansas. 

 

***     World Grain***

 

Sales of the world grain segment, excluding our international grain    operations which are classified as discontinued operations, decreased $1.6 billion for the    nine months ended May 31, 2002 compared with the same period last year.  The decrease    was primarily a result of the formation of a contractual grain marketing relationship    between Farmland and ADM, effective May 4, 2001.  As a result, we no longer record    domestic grain sales, cost of sales or operating expenses in our unaudited Condensed    Consolidated Statements of Operations.  

 

World grain incurred a net loss of $38.2 million for the nine months ended    May 31, 2002 compared with a net loss of $24.9 million in the same period last year.     Our international grain operations incurred a loss of $35.3 million (net of income tax    expense of $4.8 million) for the nine months ended May 31, 2002, compared to a loss of    $1.0 million (net of income tax benefit of $1.7 million) last year.  Prior to our    decision to discontinue our international grain operations in February 2002, we had    recognized a loss of $13.3 million for the six month period ended February 28, 2002, a    decrease in income of $18.2 million compared to the same period last year, primarily as a    result of decreased gross margins on commodities sold.  Since that time we have been    winding down our operations by liquidating our inventories, collecting our accounts    receivable, paying our liabilities, selling property plant and equipment and closing down    our trading offices.  In the last three months we have recognized a loss of $17.2    million related to these activities.  Results of our international grain operations    are included in the loss from discontinued operations, net of tax, in our unaudited    Condensed Consolidated Statements of Operations.  The decrease in income from    international operations was partly offset by a $21.0 million improvement, when compared    to last year, in our North American operations, which are now a part of    ADM/Farmland.  This improvement is primarily the result of improving our cost    structure and reducing interest costs through placing our operations in the ADM/Farmland    venture.  

 

     ***Other Operating Units***

 

Segment income for other operating units was $4.5 million for the nine    months ended May 31, 2002, an increase of $30.9 million compared with a loss of $26.4    million in the prior year.  This improvement is primarily a result of our decision in    May 2001 to close Heartland Wheat Growers, our subsidiary that produced wheat gluten at a    facility in Russell, Kansas.  When the decision was made to close the facility    because of prolonged depressed wheat gluten prices, we recorded an asset impairment of    $15.5 million and an accrual for anticipated shutdown costs of $4.9 million.     Subsequent to the plant closure, we sold the assets of the plant.  As a result of the    sale in October 2001, we recognized a gain on the sale of assets of $3.5 million and    reversed part of the shutdown accrual in the amount of $2.7 million.  Also, there was    a reduction of $4.1 million in SG&A expenses due to Farmland's decision to exit    non-strategic businesses, partially offset by reorganization expense of $3.3 million    recognized as a result of closing, concurrent with our bankruptcy filing, our wholly-owned    subsidiary, Northeast Arkansas Oil Company LLC (NEA).  NEA leased and operated 16    convenience stores in northeast Arkansas.

 

     ***Selling, General and Administrative    Expenses***

 

For the nine months ended May 31, 2002, SG&A expenses from continuing    operations decreased $30.6 million, or approximately 11%, from the same period last    year.  SG&A expenses directly associated with business segments decreased $27.6    million.  The decrease is primarily related to the formation of our Land O'Lakes    Farmland Feed and ADM/Farmland joint ventures and to our exiting of certain non-strategic    businesses.  This decrease is partly offset by a $8.7 million increase in crop    production's SG&A expense primarily from the $3.8 million write down of deferred    software costs and the recognition of $4.6 million in additional environmental closure    expense related to our Lawrence, Kansas and Pollock, Louisiana plants.  

 

**     *Restructuring and Other Charges***

 

We incurred restructuring and other charges of $49.2 million (current    period restructuring costs of $55.6 million less recoveries and reversals related to prior    period restructuring costs of $6.4 million) for the nine months ended May 31, 2002, a    decrease of $30.6 million compared with restructuring and other charges of    $79.8 million in the same period last year.  Restructuring and other charges    directly associated with business segments decreased by $4.2 million primarily related to    our decision to close certain facilities and exit non-strategic businesses, as more fully    described in the above segment discussion.  Restructuring and other charges not    directly associated with business segments decreased by $26.3 million, as we recorded a    charge last year to write-off a portion of our enterprise-wide integrated software system    associated with businesses which have been closed, sold or contributed to ventures.

 

The following is the effect of our restructuring charges (income) on    segment income:

 

 

Nine Months Ended
May 31
May 31
2001
2002
(Amounts in Millions)Crop Production$
-0-$
55.2 Petroleum
2.7
-0- Feed
-0-
-0- Refrigerated Foods
17.2
-0- World Grain
12.0
-0- Other
47.9
(6.0)Restructuring and other charges$
79.8$
49.2 
 

 

     ***Interest Expense***

 

Interest expense from continuing operations decreased $24.6 million for    the nine months ended May 31, 2002, compared with the same period last year due primarily    to decrease in our average outstanding borrowings and our average borrowing rate.

 

     ***Other Income***

 

Other income decreased $23.5 million for the nine months ended May 31,    2002 compared with the same period last year.  Other income directly associated with    business segments decreased $19.7 million, as more fully described in the above segment    discussion.  Other income not directly associated with business segments decreased    $4.5 million for the nine months ended May 31, 2002 compared with the same period    last year, primarily related to the $4.4 million gain recognized during the same period    last year on the sale of our 50% equity interest in One System Group, LLC, a provider of    information services.

 

     **Reorganization Expenses**

 

Reorganization expenses of $54.7 million during the nine months ended May    31, 2002 consist of cost associated with the Chapter 11 proceedings that are not directly    attributable to the on-going operations of Farmland.  Such costs include $53.0    million for the recognition of asset impairments, primarily related to goodwill and other    assets associated with businesses that will be closed or discontinued, the remaining    balances of deferred loan origination fees and security commissions, and $1.7 million in    professional fees.  For segment reporting, Reorganization expenses have been included    as a component of unallocated corporate expenses.

 

     ***Tax Benefit***

 

The income tax benefit from continuing operations increased $43.3 million    for the nine months ended May 31, 2002, compared with the same period last year    primarily due to the increase in our loss from continuing operations before income taxes,    partly offset by a decrease in our estimated effective tax rate.  The decrease in the    effective tax rate is a result of our current estimate of the percentage of annual loss    which will be patronage-sourced in 2002 compared to 2001.

 

 

**Results of Operations for Three Months Ended May 31, 2002 Compared to    Three Months Ended May 31, 2001.**

 

Sales for the three months ended May 31, 2002 decreased approximately    $976.8 million, or 38%, compared with the same period last year.  This decrease was    primarily due to a decrease in sales recorded in Farmland's unaudited Condensed    Consolidated Statements of Operations resulting from the formation of our ADM/Farmland    venture, the sale of our interest in Country Energy, and decreases in unit selling prices    for refined fuels and nitrogen-based crop nutrients.

 

For the three months ended May 31, 2002, we had net loss of $189.5 million    compared with a net loss of $42.4 million for the same period last year.  Factors    which significantly affected earnings for the three months ended May 31, 2002, compared    with the three months ended May 31, 2001 included:

 

·         gross margins decreased    $125.3 million primarily as a result of lower margins for our nitrogen-based crop    nutrients, refined fuels and refrigerated foods; 

·         as a result of filing    our petitions under Chapter 11 of the Bankruptcy Code, we recognized $54.7 million in    reorganization expenses during the three months ended May 31, 2002;

·         during the three month    period ended May 31, 2002 we recognized asset impairments and restructuring costs of $55.6    million compared to $79.8 million recognized in the three month period ended May 31, 2001;    and 

·         a net loss from    discontinued operations of $21.1 million (net of income tax expense of $3.9 million) for    the three months ended May 31, 2002 compared with net loss from discontinued operations of    $6.9 million (net of income tax benefit of $0.7 million) for the three months ended May    31, 2001.

 

***     Crop Production***

 

Sales of the crop production segment were $181.7 million for the three    months ended May 31, 2002 compared with sales of $296.7 million for the same period last    year.  The decrease was primarily due to a 29% decrease in unit selling prices,    combined with a 13% decrease in unit sales, primarily because of adverse weather    conditions.  During the three months ended May 31, 2001, relatively high natural gas    prices caused industry-wide production of nitrogen-based crop nutrients to be curtailed,    resulting in increased unit selling prices.  During the three months ended May 31,    2002, relatively low natural gas prices encouraged manufacturers to increase production of    nitrogen-based crop nutrients.  As a result, average unit selling prices were lower    during the three months ended May 31, 2002 as compared to the same period in the prior    year.  The decline in selling price was partially offset by a decline in the cost of    production, of which the cost of natural gas is a major component.

 

Significant factors which caused the loss of the crop production segment    to increase by $82.8 million to a loss of $86.7 million for the three months ended May 31,    2002 compared with a loss of $3.9 million in the prior year included:

 

·         margins decreased $9.5    million, primarily as a result of much lower average unit selling prices partly offset by    reduced natural gas costs;

·         during May 2002, $35.5    million was recorded as asset impairments related ceasing manufacturing operations at our    Lawrence, Kansas plant and to closing our Pollock, Louisiana plant;

·         during May 2002, $23.3    million was recorded as an impairment as a result of reducing our equity investments in    Farmland Hydro L.P., Frontier Fertilizer and Chemical Co. and Pinnacle Barge Company to    their estimated net realizable values;

·         during May 2002, $4.6    million in additional environmental accruals were recorded as a result of plant closures;    and

·         during the three months    ended May 31, 2002, compared with the same period in the prior year, we incurred $8.8    million in additional costs associated with temporary plant shutdowns.

 

     ***Petroleum***

 

Sales of the petroleum segment decreased $292.9 million, or approximately    66%, for the three months ended May 31, 2002 compared with the same period last    year.  The decrease was primarily the result of a 51% decrease in units sold combined    with lower unit selling prices for gasoline, distillates and diesel fuels.  The    decrease in units sold was a result of shutting down the refinery for a part of our third    quarter in order to perform a planned turnaround project.  The decrease in unit    prices for refined fuels was a result of excess supplies across the country.  These    excess supplies were the result of decreased demand after the terrorist attacks on    September 11, 2001 and a mild winter that reduced usage of distillate heating oil.     Also, during periods of relatively high natural gas prices, power plants will tend to    switch from using natural gas to fuel oil to meet their energy requirements.  Natural    gas prices were significantly lower this winter than last winter, resulting in lower    demand by power plants for fuel oil.  Increased demand for distillates used in the    production of jet fuels used for military operations was largely offset by a decrease in    jet fuel demand by commercial aircraft.  

 

The petroleum segment incurred a loss of $55.1 million during the three    months ended May 31, 2002, a $94.7 million decrease as compared to income of $39.6 million    in the same period last year.  Margins decreased by $90.5 million primarily due to    the narrowing of the spread between crude oil costs and refined fuel selling prices    resulting from an oversupply of refined products.  Margins were also reduced because    we were unable to produce product during the turnaround period and because we incurred    turnaround expenses, included in cost of sales, of approximately $16.6 million.  In    addition to the decrease in margins, we incurred a decrease of $8.1 million in derivative    income recognized, partly offset by a $3.1 million decrease in net interest expense.     

 

     ***Feed***

 

Income for our feed segment was $0.6 million during both the three months    ended May 31, 2002 and the three months ended May 31, 2001.  Changes in components of    feed's earnings include a $1.1 million decrease in equity in earnings form LOLFF, partly    offset by a decrease in net interest expense of $0.5 million and a gain of $0.4 million    from partial proceeds received from a settlement related to vitamin supplements for animal    feed.  

 

***     Refrigerated Foods***

 

During the three months ended May 31, 2002, sales in the refrigerated    foods segment increased $5.8 million, or 0.5%, compared with the same period last    year.  This increase was primarily due to an 11% increase in unit sales volume,    mostly offset by a 10% decrease in unit selling price.  The increase in unit sales    volume was primarily due to increased slaughter levels resulting from a surplus of cattle    and hogs and increased plant efficiencies.  Unit selling prices in our fresh pork    product lines declined primarily as a result of competing proteins on the domestic market    due to the Russian import ban on poultry products.

 

The refrigerated foods' segment incurred a loss of $3.9 million during the    three months ended May 31, 2002, a $5.1 million improvement as compared with a    loss of $9.0 million in the same period last year.  Margins decreased $18.9 million    during the three months ended May 31, 2002 as compared with the same period last year due    to higher variable costs as a result of increased unit volumes and lower per unit selling    prices.  Margins have been adversely affected by a surplus of competing proteins on    the domestic market due to the Russians import ban on poultry products.  This    decrease in margins is offset by a $2.0 million decrease in SG&A expenses (net of $3.2    million expense recognized as a result of a partial plan termination, see Critical    Accounting Policies - Pension cost and prepaid pension cost), a $19.2 million increase in    other income, and a $4.4 million decrease in minority owners' interest in net income of    subsidiaries.  The increase in other income is primarily related to a $15.4 million    reduction in plant shutdown cost incurred last year and a $3.5 million increase in income    from derivative commodity instruments. 

 

***     World Grain***

 

Sales of the world grain segment decreased $555.9 million for the three    months ended May 31, 2002 compared with the same period last year.  The decrease was    primarily a result of the formation of a contractual grain marketing relationship between    Farmland and ADM, effective May 4, 2001.  As a result, we no longer record domestic    grain sales, cost of sales or operating expenses in our unaudited Condensed Consolidated    Statements of Operations.

 

World grain's loss decreased by $5.7 million during the three months ended    May 31, 2002 to loss of $23.5 million compared with a loss of $29.2 million in the same    period last year.  Our international grain operations incurred a loss of $21.1    million (net of income tax expense of $3.9 million) during the three months ended May 31,    2002, compared with a loss of $6.9 million (net of income tax benefit of $0.7 million) in    the same period last year, primarily as a result of our activities related to winding down    of our international grain operations, including liquidating inventories, collecting    accounts receivables, paying liabilities, selling property plant and equipment, and    closing our trading offices.  The decrease in income from international operations    was offset by a $19.9 million improvement in our North American operations, which are now    a part of ADM/Farmland.  This improvement is primarily the result of improving our    cost structure and reducing interest costs through placing our operations in the    ADM/Farmland venture.

 

     ***Other Operating Units***

 

Segment loss for other operating units was $2.4 million for the three    months ended May 31, 2002, an improvement of $20.2 million compared with a loss of $22.6    million in the prior year.  This improvement was primarily due to significant losses    recognized last year as Farmland made decisions to close certain facilities and exit    non-strategic businesses.  During May 2001, we closed Heartland Wheat Growers, our    subsidiary which produced wheat gluten at a facility in Russell, Kansas, because of    prolonged depressed wheat gluten prices.  When the decision was made to close the    facility, we recorded an asset impairment of $15.5 million and an accrual of $4.9 million    for anticipated shutdown costs.  These improvements were partially offset by    reorganization expense of $3.3 million recognized as a result of the closing, concurrent    with our bankruptcy filing, of our wholly-owned subsidiary, NEA in May 2002.  NEA    leased and operated 16 convenience stores in northeast Arkansas.

 

     ***Selling, General and Administrative    Expenses***

 

For the three months ended May 31, 2002, SG&A expenses decreased $5.2    million, or approximately 5% from the same period last year.  SG&A expenses    directly associated with business segments decreased $1.5 million.  The decrease is    primarily related to the formation of our ADM/Farmland joint venture and to our exiting of    certain non-strategic businesses.  This decrease is partly offset by a $9.5 million    increase for crop production primarily from the $3.8 million write down of deferred    software costs and the recognition of $4.6 million in additional environmental closure    expense related to the Lawrence, Kansas and Pollock, Louisiana plants.       SG&A expenses not directly associated with business segments decreased by $3.6    million.

 

***     Restructuring and Other Charges***

 

We incurred restructuring and other charges of $55.6 million for the three    months ended May 31, 2002, a decrease of $24.2 million compared with restructuring and    other charges of $79.8 million in the same period last year.  Restructuring and other    charges directly associated with business segments increased by $2.1 million primarily    related to our decision to close certain facilities and exit non-strategic businesses, as    more fully described in the above segment discussion.  Restructuring and other    charges not directly associated with business segments decreased $26.3 million, as we    recorded a charge last year to write-off a portion of our enterprise-wide integrated    software system associated with businesses which have been closed, sold or contributed to    ventures.

 

The following is the effect of our restructuring charges on segment    income:

 

 

Three Months Ended
May 31
May 31
2001
2002
(Amounts in Millions)Crop Production$
-0-$
55.2Petroleum
2.7
-0-Feed
-0-
-0-Refrigerated Foods
17.2
-0-World Grain
12.0
-0-Other
47.9
0.4Restructuring and other charges$
79.8$
55.6
 

 

***     Interest Expense***

 

Interest expense from continuing operations decreased $5.1 million for the    three months ended May 31, 2002 compared with the same period last year due primarily to a    decrease in our  average outstanding borrowings and our average borrowing rate.

 

***     Other  Income***

 

Other income decreased $18.9 million for the three months ended May 31,    2002 compared with the same period last year.  Other income directly associated with    business segments decreased $19.6 million, as more fully described in the above segment    discussion.  Other income not directly associated with business segments increased    $0.7 million for the three months ended May 31, 2002 compared with the same period last    year.

 

     ***Reorganization Expenses***

 

Reorganization expenses of $54.7 million during the three months ended May    31, 2002 consist of costs associated with the Chapter 11 proceedings that are not directly    attributable to the on-going operations of Farmland.  Such costs include $53.0    million for the recognition of asset impairments, primarily related to goodwill and other    assets associated with businesses that will be closed or discontinued, the remaining    balances of deferred loan origination fees and security commissions, and $1.7 million in    professional fees.  For segment reporting, Reorganization expenses have been included    as a component of unallocated corporate expenses.

 

     ***Tax Benefit***

 

The income tax benefit from continuing operations increased $32.6 million    for the three months ended May 31, 2002 compared with the same period last year    primarily due to the increase in our loss from continuing operations before income taxes,    partly offset by a decrease in our estimated effective tax rate.  The decrease in the    effective tax rate is a result of our current estimate of the percentage of annual loss    which will be patronage-sourced in 2002 compared to 2001.

 

**Recent Accounting Pronouncements**

 

SFAS No. 141 "Business Combinations" is effective for business    combinations 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, which are initiated after June 30, 2001, must    use the purchase method of accounting, and the pooling of interest method of accounting is    prohibited.  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 combinations with cooperatives, implementation of SFAS No.    142 is delayed pending additional interpretive guidance from the FASB.  At May 31,    2002 the carrying value of goodwill in our unaudited Condensed Consolidated Balance Sheets    was $29.4 million.  For the nine month period ended May 31, 2002, Farmland recognized    goodwill amortization of $0.8 million arising from business combinations with    non-cooperatives and $1.9 million from business combinations with cooperatives.     Management is currently reviewing what, if any, impact the provisions of this statement    will have on our financial statements and 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.

 

SFAS 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, a gain or loss would be recognized on settlement.

 

Farmland is required and plans to adopt the provisions of SFAS 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 SFAS 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 Occurring    Events and Transactions", for the disposal of a segment of a business.  However,    it retains the requirement in APB 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.

 

 

Item 3.     QUANTITATIVE AND QUALITATIVE    DISCLOSURES ABOUT MARKET RISK

 

Farmland's grain trading commodity contracts have been materially reduced    since August 31, 2001.  Market risk exposure related to grain trading contracts, as    measured using sensitivity analysis, has been reduced from $15.8 million as of August 31,    2001 to $1.5 million as of May 31, 2002.  Except as described above, Farmland's    market exposure for derivative transactions entered into for the purpose of managing    commodity price risk, foreign currency risk and interest rate risk has not materially    changed since August 31, 2001.  Quantitative and qualitative disclosures about market    risk are contained in Item 7A of our Annual Report on Form 10-K for the year ended August    31, 2001.

 

**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 the assumptions or    basis to be reasonable and makes them in good faith, the assumed facts or basis will    almost always vary from actual results and the differences between the assumed facts or    basis and actual results can be material, depending upon the circumstances.  Where,    in any forward-looking statement, Farmland, or its management, expresses an expectation or    belief as to future results, the expectation or belief is expressed in good faith and    believed to have a reasonable basis, but there can be no assurance that the statement of    expectation or belief will result or be achieved or accomplished.  Such forward    looking statements include, without limitation, statements regarding the seasonal effects    upon the business, the anticipated expenditures for environmental remediation, the    potential capital expenditures required to comply with recently enacted regulations    related to low sulfur gasoline and diesel fuel, the level of capital expenditures and    monetary sanctions which will be required as a result of EPA proceedings, Court approval    of a plan of reorganization, our ability to successfully implement any Court approved plan    of reorganization, the adequacy of the DIP Credit Facility to satisfy our liquidity    requirements, our ability to sell assets held for sale at their estimated net realizable    value, our ability to realize our deferred tax assets, and our ability to liquidate our    Tradigrain operation without incurring future losses.  Discussion containing such    forward-looking statements is found in the material set forth under "Management's    Discussion and Analysis of Financial Condition and Results of Operations" and    "Notes to Condensed Consolidated Financial Statements".

 

Taking into account the foregoing, the following are identified as    important factors that could cause actual results to differ materially from those    expressed in any forward-looking statement made by, or on behalf of, Farmland:

 

1.       Weather patterns (flood, drought,    frost, etc.) or crop failure.

 

2.       Federal or state regulations    regarding agricultural programs 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" included in our Annual Report on Form 10-K for the    year ended August 31, 2001.

 

 

**PART II - OTHER INFORMATION**

 

 

Item 1.     Legal Proceedings

 

In November 1999, Farmland commissioned a voluntary audit at its    Coffeyville, Kansas petroleum refinery to verify compliance with the construction    permitting requirements of the state and federal Clean Air Acts.  We submitted a    report detailing the audit findings to Region VII of the United States Environmental    Protection Agency ("EPA") on September 19, 2000.  In order to satisfy    procedural prerequisites to resolve the findings, on January 17, 2002, EPA issued us a    notice of violation.  The notice of violation seeks both injunctive relief in the    form of installation of additional pollution control equipment and monetary    sanctions.  At this point, it is not possible to determine the cost of control device    installations necessary to satisfy the EPA; however, we believe it is reasonably possible    that the costs may eventually exceed $15 million.  Also, at this stage of these    proceedings it is not possible to predict the final amount of monetary sanctions that will    be necessary to resolve this matter.  However, it is reasonably possible that the    associated monetary sanctions may exceed $100,000.

 

On May 31, 2002, Farmland and certain of our subsidiaries filed voluntary    petitions to reorganize under Chapter 11 of the Bankruptcy Code.  This action is    described in detail in Note 1 of the unaudited Condensed Consolidated Financial    Statements, and is incorporated herein by reference.

 

Item 3.     Defaults Upon Senior Securities

 

(a)               Farmland defaulted on a $9.6 million term loan principal payment due May 31, 2002.     By terms of the governing Credit Agreement, as of May 31, 2002 we were in default in    respect to $264.7 million of revolving loans (including $31.7 million of letters of credit    obligations), and a $135.0 million term loan.  By terms of their respective    indentures, as of May 31, 2002 we were in default on $556.9 million of subordinated    debenture bonds (including $76.3 million of accumulated interest) and $12.0 million of    demand loan certificates.  As of May 31, 2002 we were also in default in respect to    $6.2 million of accrued interest on the above securities.

(b)               Farmland did not pay a $2 million dividend, due May 1, 2002, related to our Series A    cumulative redeemable preferred shares.

 

**Item    6.          Exhibits and Reports on Form    8-K.**

 

***     (a)     Exhibits***

The exhibit listed below is filed as part of Form 10-Q for quarter ended    May 31, 2002.

 
Exhibit No.Description of Exhibit10.(iii)HEmployment agreement between Farmland and Mr. Robert Terry,        dated May 10, 2002
 

***(b)   *Reports on Form 8-K**

 

No reports on Form 8-K were filed during the quarter ended May 31, 2002.

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,    the registrant has duly caused this report to be signed on its behalf by the undersigned    thereunto duly authorized.

 

FARMLAND INDUSTRIES, INC.

(Registrant)

 

 

By:        /s/  STEVEN    R. RHODES

Steven R. Rhodes

Executive Vice President

and Chief Financial Officer

 

Date:  July 15, 2002

 

 

 

 

 

EXHIBIT INDEX

 
Exhibit No.Description of Exhibit10.(iii)HEmployment agreement between Farmland and Mr. Robert Terry,        dated May 10, 2002
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