-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S6JnJKhojXyaC4nP+W2YZUD4NgMHfFTlVr/SUo9U4h8YDDI52KjD631MY/uZOBKP F4DKUUNhvCkStNfdSy+RaQ== 0000897101-98-001190.txt : 19981201 0000897101-98-001190.hdr.sgml : 19981201 ACCESSION NUMBER: 0000897101-98-001190 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MINN DAK FARMERS COOPERATIVE CENTRAL INDEX KEY: 0000948218 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - CROPS [0100] IRS NUMBER: 237222188 STATE OF INCORPORATION: ND FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-94644 FILM NUMBER: 98760782 BUSINESS ADDRESS: STREET 1: 7525 RED RIVER RD CITY: WAHPETON STATE: ND ZIP: 58075-9698 BUSINESS PHONE: 7016428411 MAIL ADDRESS: STREET 1: 7525 RED RIVER RD CITY: WAHPETON STATE: ND ZIP: 58075-9698 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended AUGUST 31, 1998 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 ------------------------- Commission File No. 33-94644 ------------------------- MINN-DAK FARMERS COOPERATIVE (Exact name of registrant as specified in its charter) North Dakota 23-7222188 (State of incorporation) (I.R.S. Employer Identification Number) 7525 Red River Road Wahpeton, North Dakota 58075 (701) 642-8411 (Address of principal executive offices)(Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of November 19, 1998, 480 shares of the Registrant's Common Stock and 72,200 "units" of the Registrant's Preferred Stock, each consisting of 1 share of Class A Preferred Stock, 1 share of Class B Preferred Stock and 1 share of Class C Preferred Stock, were outstanding. There is only a limited, private market for shares of the Company's Common or Preferred Stock, as such shares may be held only by farmer-producers who are eligible for membership in the Company. The Company's shares are not listed for trading on any exchange or quotation system. Although transfers of the Company's shares may occur only with the consent of the Company's Board of Directors, the Company does not verify information regarding the transfer price in connection with such transfers. A number of stock transfers, representing approximately 2% of available stock, were not arms length (estate settlements, estate planning from one generation to the next, etc.) and an accurate value for that stock was not available. Management believes less than 1% of the Company's available stock was traded at arms length during the fiscal year ended 8-31-98. Of the stock transferred at arms length, the transfers were made during the first, second and third quarters of the Company's fiscal year and range in price from $2,500 to $2,700 per unit. DOCUMENTS INCORPORATED BY REFERENCE Certain exhibits to this Report are incorporated by reference from the Company's Registration Statement on Form S-1 (File number 33-94644), declared effective on September 11, 1995 and from the Company's Annual Report on Form 10-K for the fiscal years ended August 31, 1996 and 1997. ITEM 1. BUSINESS Minn-Dak Farmers Cooperative ("Minn-Dak" or the "Company") is a North Dakota agricultural cooperative that was formed in 1972 and has 480 members. Membership in the Company is limited to sugar beet growers located in those areas of North Dakota and Minnesota within an approximate fifty (50) mile radius of the Company's offices and sugar beet processing facilities in Wahpeton, North Dakota. The Company's facilities allow the members to process their sugar beets into sugar and other products. The products are pooled and then marketed through the services of a marketing agent under contract with the Company. The sugar marketing agent, United Sugars Corporation, is a cooperative association owned by its members, the Company, American Crystal Sugar Company, Southern Minnesota Beet Sugar Cooperative and United States Sugar Corporation. The Company's beet molasses and beet pulp are also marketed through a marketing agent, Midwest Agri-Commodities Company. Midwest Agri-Commodities Company is a cooperative owned by its members, the Company, American Crystal Sugar Company and Southern Minnesota Beet Sugar Cooperative. Minn-Dak's corporate headquarters are located at 7525 Red River Road, Wahpeton, North Dakota 58075 (telephone number (701) 642-8411). Its fiscal year ends August 31. PRODUCTS AND PRODUCTION Minn-Dak is engaged primarily in the production and marketing of sugar from sugar beets. Minn-Dak also markets certain by-products of the sugar it produces, such as beet molasses and beet pulp. The Company also owns an 80% interest in Minn-Dak Yeast Company, Inc., which has facilities located near the Company's sugar production location. Minn-Dak Yeast Company, Inc. produces fresh baker's yeast and provided revenues totaling approximately 5% of the Company's gross revenues for the fiscal year ended August 31, 1998. The Company processes sugar beets grown by its members at its sugar mill located in Wahpeton, North Dakota. The period during which the Company's plant is in operation to process sugar beets into sugar and by-products is referred to as the "campaign." The campaign is expected to begin in September of each year and continues until the available supply of beets has been depleted, which generally occurs in March or April of the following year, depending on the size of the crop. Based on current processing capacity, an average campaign lasts approximately 210-225 days, assuming normal crop yields. Once the sugar beets are harvested, rapid processing is important to maximize sugar extraction and minimize spoilage. Members transport their crop by truck to receiving stations designated by the Company. Beets are then stored in the Company's factory yard and at outlying piling stations until processed. Under the Company's "growers agreement" with its members, the Company furnishes all loading equipment at loading stations and, after delivery of the beets to the Company, pays all freight and mileage charges for hauling the sugar beets from the piling stations to the factory for processing. Minn-Dak's total sugar production is presently influenced by the amount and quality of sugar beets grown by its members, by the processing capacity of the Company's plant and by the ability to store harvested beets. Most of the beet harvest is stored in piles. Although piled sugar beets that have been frozen by the winter temperatures may be stored for extended periods; beets stored in unprotected piles at temperatures above freezing must be processed within approximately 160 days. Sugar beets deteriorate in storage due to the organic nature of their existence. Beets harvested prior to obtaining a root temperature of fifty degrees or less must be processed within seven days or sugar loss will occur and they will deteriorate. The plant start up in the fall is timed to the anticipated end of processing in the spring. The plan of the Company is, after completion of the expenditures for plant expansion described herein (see MINN-DAK FARMERS COOPERATIVE STOCK SALE AND EXPANSION PLAN, in part I Item 1 of this section), to finish processing unprotected beets prior to March 10, ventilated beets prior to March 31, and storage shed beets as soon thereafter as is possible. Unprotected beets are "split" by processing the center of the piles first. This method allows the processing of the center beets, which do not freeze and therefore deteriorate more rapidly, at the earliest possible date. Ventilated beets have culverts with air holes running every eleven feet into the pile. Prior to freezing of the beets, air is blown into the piles to bring the pile temperature to an average temperature of approximately thirty-five degrees farenheit. When a week or more of sub zero temperatures are forecast, the fans are turned on when the temperature reaches zero degrees and continues to ventilate until the pile temperature reaches zero to five degrees. Storage shed beets are handled in the same manner as the ventilated beets. The difference between the processes is the building itself, which insulates the beets from sun, wind, and warmer spring temperatures. With the buildings, storage of the beets can run as late as mid to late May of each year. In addition, unprotected and ventilated beets will, in long campaigns, have extra steps taken to extend their life. Beets are sprayed with lime to create a reflectant and reduce the harmful impact from the sun's rays in the spring. Straw is also applied to the sides of some later processed piles to further insulate the beets from sun, wind, and temperature. Once the sugar beets arrive in the factory, the basic steps in producing sugar from them include: washing; slicing into thin strips called "cossettes"; extracting the sugar from the cossettes in a diffuser; purifying the resulting "raw juice" and boiling it, first in an evaporator to thicken it and then in vacuum pans to crystallize the sugar; separating the sugar crystals in a centrifuge; drying the sugar; and storing sugar in bulk form for bulk and bag shipping. The Company's sugar beet by-products include beet molasses and beet pulp. After the extraction of raw juice from the cossettes, the remaining pulp is dried and processed into and sold as animal feeds. The beet molasses is the sugar juice left after all economical means have been taken to extract the sugar from the sugar juice. The beet molasses is sold primarily to yeast and pharmaceutical manufacturers and for use in animal feeds. The beet molasses and beet pulp are marketed through Midwest Agri-Commodities Company. RECENT CROPS The Company's members harvested 1,772,648 tons of sugar beets from 97,336 acres for the 1998 crop. The crop yield of 18.21 tons per acre for the 1998 crop was slightly below average versus the Company's five year average tons per acre. Sugar content of the 1998 crop at harvest was 17.43%, as compared to an average of 17.53% for the five most recent years. The Company's projected production is 4.49 million hundredweight of sugar from the 1998 crop sugar beets, well above the five year average of 4.2 million hundredweight. (A "hundredweight" is equal to one hundred pounds and is hereinafter abbreviated as cwt.) This forward-looking material is based on the Company's expectations regarding the processing of the 1998 sugar beet crop; the actual production results obtained by processing those sugar beets could differ materially from the Company's current estimate as a result of factors such as changes in production efficiencies and storage conditions for the Company's sugar beets. For a discussion of the 1997, 1996 and 1995 crops and results of operations for fiscal years 1998, 1997 and 1996, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." MARKET AND COMPETITION The United States is the world's largest sugar and sweetener complex. Current US Government statistics estimate total US sugar consumption at 183.4 million cwt for the year beginning 1 October 1997 and ending 30 September 1998. For the same period in 1997, total consumption was 182.6 million cwt. Comparing the two years shows relatively marginal demand growth for US sugar sellers. This slowdown in consumption growth rates is primarily attributable to the decline in the low and non-fat food trend, which used more sugar in product formulations. Continued substitution of corn sweeteners for sugar and import leakages have also contributed to the overall demand slowdown. Despite evidence of a sugar demand slowdown, the US government forecasts growth between 1998 and 1999 to be slightly higher than 2%, which is slightly above trendline and includes consumption increases due to population growth. Although the Company believes that domestic consumption growth could once again approach 2% annually over the longer term, recent trends have pressured growth rates lower and slower growth may be more realistic to assume at the current time. Given the size of the domestic market, the Company's sugar production and sales represented slightly more than 2.5% of the total domestic market for refined sugar in 1997. United Sugars, which sells the Company's production through a sugar marketing pool, represents approximately 25% share of the US sugar market. The US refined sugar market has continued to grow over the past twenty years, despite the enormous amount of demand lost to the substitution of high fructose corn syrups for sugar in beverages and certain food products. Non-nutritive sweeteners such as aspartame have also been developed to substitute for sugar. While corn and non-nutritive sweeteners constitute a large portion of the overall sweetener market, the Company believes that the market for sugar will continue to grow between 1 and 2% per year due to population growth and increased use of sugar in processed foods. The substitution of corn sweeteners for sugar not only reduced demand for sugar in the United States, but also resulted in a high degree of sugar industry consolidation. For example, in 1978 there were 28 sugar producers and sellers in the US market. Today there are eight sugar sellers, with over 75% of US sugar market share concentrated in the top three sellers, all of which are fully integrated beet and cane suppliers. The Company's main competitors in the domestic market are Imperial-Holly-Savannah and Tate & Lyle North America, both of which own and operate cane refineries and beet processing facilities. Competition in the US sugar industry, because sugar is a fungible commodity, is primarily based upon price, customer service and reliability as a supplier. According to United States government estimates, the United States market for sugar during the year beginning on October 1, 1996 and ending on September 30, 1997 will total approximately 183 million cwt. of sugar. That estimate for 1997 suggests the continuation of a trend of growth in the market in recent years at a compounded rate of approximately 2% per year. For example, from a market of approximately 165 million cwt. in 1992, the total domestic market grew to a total of approximately 183 million cwt. in 1997. Latest government estimates indicate a projected domestic market for sugar of 185 million cwt in 1998, a 1.4% increase from 1997. Historical information indicates that the domestic market growth from year to year has, at times, been above and below the average growth rate of 2%. The Company continues to believe that domestic market growth will average approximately the 2% long-term growth rate trend because nothing in the marketplace dynamics currently would indicate a change in domestic market usage long-term. Given the size of the domestic market, the Company's sugar production and sales represented slightly more than 2.0% of the total domestic market for refined sugar in fiscal 1997. According to United States Department of Agriculture (USDA) statistics, the Red River Valley is generally one of the most cost efficient sugar beet producing areas in the nation. As a result, the Company's management believes that it possesses the ability to compete successfully with other American producers of sugar. In spite of this competitive advantage, substitute sweetener products and sugar imports could have an adverse effect on the Company's operations in the future. GOVERNMENT PROGRAMS AND REGULATION Domestic sugar prices are supported under a program administered by the USDA. The program is called the Federal Agriculture Improvement and Reform Act of 1996 (the "FAIR Act"). The USDA maintains sugar prices without cost to the U.S. Treasury by regulating the quantity of sugar imports. The FAIR Act maintains the basic 18 cent per pound loan rate for raw sugar and puts in place a 22.90 cent per pound loan rate for refined beet sugar. Both loan rates are effective for crop years 1996 through 2002. Price support loans are made on a non-recourse basis provided that United States sugar imports for domestic usage exceed 1.5 million short tons raw value in a given fiscal (October through September) year. Loans made on a non-recourse basis enable the sugar processor to forfeit sugar to Commodity Credit Corporation ("CCC") if sugar prices are below the loan rate. If imports during a given year fall below the 1.5 million short tons raw value, loans must be made on a recourse basis, meaning that processors will not be able to forfeit sugar to CCC at its full loan value. In order to recover the full value of a recourse loan, the CCC could require that cash or other assets be provided in addition to the sugar used as collateral when the loan is made. Another provision of the FAIR Act is a one cent per pound penalty paid by processors if the processor defaults on sugar price support loans. Such support prices for sugar are in effect as long as the "Tariff Rate Quota" for imports of sugar is 1.5 million short tons, raw value or more. Under the tariff rate quota implemented October 1, 1990, certain sugar producing countries are assigned a fixed quantity of imports duty-free or subject to minimal duties. Unlimited additional quantities may be imported upon payment of a tariff of 15.38 cents per pound prior to shipment (to date, very little sugar has been imported under this higher tariff level). (Note: the tariff schedule was established at 17 cents on July 1, 1995, 16 cents July 1, 1996 and will reduce by .31 cents each year for years 1997 through 2001, until it reaches 14.45 cents per pound of sugar). Further, imports of sugar under the tariff rate quota are based upon the difference between domestic sugar consumption and domestic sugar production, with one exception. Under the terms of the General Agreement on Tariffs and Trade (GATT) the minimum imports of sugar are established at 1,257,000 short tons, raw value. Therefore, even if the difference between domestic sugar consumption and production are less than 1,257,000 short tons, raw value, GATT will require that 1,257,000 short tons be imported into the United States from the quota holding foreign countries. The current sugar program will expire after the 2002 crop and the nature and scope of future legislation and United States trade policy affecting the sugar market cannot be accurately predicted and there can be no assurance that price supports will continue in their present form beyond the 2002 crop year, or that there will even be enacted a sugar program beyond the existing program. As a result of uncertainty regarding the impact of the absence of price supports if no sugar program existed, the Company cannot accurately predict if any changes in legislation or trade policy would have an impact on the Company and its members, if that impact would be adverse, or the magnitude of such impact. MARKETING, CUSTOMERS AND PRICES Since January 1, 1994 United Sugars Corporation, a cooperative owned by the Company and three other sugar producing companies (American Crystal Sugar Company, Southern Minnesota Beet Sugar Cooperative and United States Sugar Corporation) to market sugar produced by the four member owners, has marketed the Company's sugar. United Sugars Corporation was formed in late 1993, at which time the Company contributed certain assets for the capitalization of it. That contributed capital, along with an obligation to further contribute capital over time, provided the Company with an initial ownership interest in United Sugars Corporation of 13.5%. At August 31, 1998 the Company had an ownership interest in United Sugars Corporation (year to date contributed capital) totaling $1,182,000, which represented 11.8% of the total. Upon completion of the incorporation and capitalization of United Sugars Corporation, the Company entered into a "Uniform Member Marketing Agreement" with United Sugars Corporation. Under that agreement, the sugar produced by the Company is pooled with sugar produced by the other sugar-producing member owners and is then sold through the efforts of United Sugars Corporation. The Company receives payment for its sugar by receiving its pro rata share of the net proceeds from the sale of the pooled sugar. The net proceeds of such sales represent the gross proceeds of the sale of the sugar, adjusted for the various costs and expenses of marketing the pooled sugar, including the Company's pro rata share of the marketing and sales expenses incurred by United Sugars Corporation. Any net proceeds from the operation of United Sugars Corporation are distributed to the various members on a patronage basis. The Company, American Crystal Sugar Company and Southern Minnesota Beet Sugar Cooperative initially owned United Sugars Corporation. On December 1, 1997 United States Sugar Corporation ("USSC"), a grower of sugar cane and other agricultural products, was admitted as a member owner of United Sugars Corporation. As such USSC entered into a Uniform Cane Sugar Marketing Agreement, which will provide that USSC will market all of its refined sugar through United Sugars Corporation. At the time of admission, existing members of United Sugars Corporation, including the Company, were required to enter into amended marketing agreements reflecting the admission of USSC. With the admission of USSC, United Sugars Corporation will be able to distribute both cane sugar and beet sugar, and distribute sugar to customers over a larger geographical area. United Sugars Corporation sells industrial bulk sugar, industrial bagged sugar, retail bagged sugar, and specialty sugars. The Company's sugar is marketed by United Sugars Corporation primarily to industrial users such as confectioners, breakfast cereal manufacturers and bakeries. The customer base of United Sugars Corporation includes most of the large industrial sugar users. The customer base also includes retail grocery and wholesalers. The Company has no single customer, which accounts for more than ten percent (10%) of its consolidated revenues. For the fiscal year ended August 31, 1998, 96% of the Company's sugar was shipped in bulk form, mostly to industrial users, and 4% in bagged powdered sugar. The prices at which United Sugars Corporation sells the Company's sugar fluctuate periodically based on changes in domestic sugar supply and demand. The largest portion of the Company's sales are contracted one or more quarters in advance, with the effect of stabilizing fluctuations in revenue from quarter to quarter. Retail (grocery) products are sold on a spot basis. Current net selling prices for sugar are forecast to be similar to the prior fiscal year and less than two years ago because (1) the domestic market continues to be oversupplied with foreign sugar (through USDA's incorrect estimate of domestic production and consumption), (2) this year's domestic crop is estimated to be marginally higher than last year's, thus creating even more supply and (3) consumption is expected to increase less than the long-term US consumption rate because of increased imports of sugar-containing products and the decline of the low or non-fat food trend. A licensing agreement with Pillsbury Company will allow United Sugars Corporation to sell sugar nationwide under the "Pillsbury" name. United Sugars Corporation has indicated that it believes that the opportunity to distribute sugar nationwide under the Pillsbury name will allow the expansion of its presence in the consumer portion of the sugar market, with the goal of expanding the portion of its members' sugar sold in that higher margin segment of the sugar market. During fiscal year 1997, United Sugars Corporation initiated phase I of the sales plan for Pillsbury brand sugar to select geographical locations. FY 1998 continued the implementation of phase I of the sales plan, as well as making plans to implement phase II of the sales plan. Moving from one phase of the sales plan to the next will be dependent upon the success of the phase currently being implemented. The sales plan that United Sugars Corporation will follow to become a nationwide seller of sugar under the Pillsbury name will require several phases of implementation. The Company markets its by-products, dried beet pulp and beet molasses, through Midwest Agri-Commodities Company, a cooperative whose members are the Company, American Crystal Sugar Company and Southern Minnesota Beet Sugar Cooperative. Midwest Agri-Commodities Company markets beet pulp, beet molasses and other liquid livestock feed for its member owners as well as non-members. Beet pulp is marketed to livestock feed mixers and livestock feeders in the United States and foreign markets. The sales and marketing arrangement with Midwest Agri-Commodities Company is evidenced by a "Uniform Member Marketing Agreement." Under that agreement, the beet pulp and beet molasses produced by the Company is pooled with beet pulp and beet molasses produced by the other producing member owners and is then sold through the efforts of Midwest Agri-Commodities Company. The Company receives payment for its beet pulp and beet molasses by receiving its pro rata share of the net proceeds from the sale of the pooled beet pulp and beet molasses. The net proceeds of such sales represent the gross proceeds of the sale of the beet pulp and beet molasses, adjusted for the various costs and expenses of marketing the pooled beet pulp and beet molasses, including the Company's pro rata share of the marketing and sales expenses incurred by Midwest Agri-Commodities Company. Any net proceeds from the operation of Midwest Agri-Commodities Company are distributed to the various members on a patronage basis. For the year ended August 31, 1998, approximately 26% of the Company's pulp production was exported to Japan, approximately 36% was exported to Europe and the remaining 38% was sold domestically. The market for beet pulp is affected by the availability and quality of competitive feedstuffs. Dried beet pulp prices declined significantly in FY 1998 due the Asian economic crisis, revisions in European grain policies and the worldwide surplus of feed stuffs. Beet molasses is marketed primarily to yeast manufacturers, pharmaceutical houses, livestock feed mixers and livestock feeders. Beet molasses prices declined as well in FY 1998 due to competitive pressures brought about by excess available supplies worldwide. By-product sales accounted for approximately 9% of the Company's total consolidated net sales revenues during FY 1998. This relationship is primarily a function of the average market prices for sugar, beet pulp, beet molasses and fresh yeast and is not necessarily indicative of future relationships between by-product, fresh yeast and sugar revenues, because prices of these products fluctuate independently of each other. The Company is an eighty percent equity owner of Minn-Dak Yeast Company, Inc. Minn-Dak Yeast Company, Inc. manufactures fresh baker's yeast in a plant located adjacent to the Company's sugar plant in Wahpeton, North Dakota. The Company started the yeast business in 1989 in order to add value to its by-product beet molasses. Beet molasses is the main ingredient (growth medium) in the fermentation process used to grow baker's yeast to commercial volumes. A portion of the Company's beet molasses production is used in the Minn-Dak Yeast Company, Inc.'s process and is sold through a supply agreement between the two companies. Universal Foods Corporation, Milwaukee, Wisconsin, holds the remaining twenty percent equity stake. Minn-Dak Yeast Company, Inc. also has a long-term marketing agreement whereby Universal Foods Corporation will buy all production of baker's yeast produced by Minn-Dak Yeast Company, Inc. in return for certain guaranteed sales volumes. MINN-DAK FARMERS COOPERATIVE STOCK SALE AND EXPANSION PLANS In 1995, the Company put in place a strategic plan calling for an expansion of its processing capacity as well as its length of operating season. This strategic plan was undertaken in order to increase its chances of continuing to be a long-term viable, profitable business for its shareholders. Expansion of the processing capabilities of the plant were to bring about certain economies of scale. The Company believed the expansion program would provide the Company with certain processing efficiencies and resulting financial benefits. However, the Company could not say with certainty the Company's financial performance following the expansion would exceed the Company's historical performance. The Company's beliefs with regard to the benefits of the expansion plan were based on the Company's expectations regarding the increased processing efficiencies the Company expected to obtain. The actual production results, processing efficiencies and resulting financial performance obtained as a result of the expansion program could have differed materially from the Company's expansion estimates as a result of factors such as changes in the costs of production, differences in the price obtained upon sales of the Company's products, changes in the regulatory and market environment in which the Company operates and a variety of other factors beyond the Company's control. The Company's original plans were to expend approximately $87 million over a three year period beginning with the fiscal year ended August 31, 1996 for improvements and additions to its facilities. Estimated capital expenditures for factory improvements were $32 million, beet receiving and beet storage capital expenditures were $40 million and environmental improvement capital expenditures were $15 million. At August 31, 1998, three years after the start of the Company's strategic expansion plan, the expansion is materially complete. $37.4 million was raised through the sale of the Units subscribed and sold via the Company's 1995 stock offering. The funds generated from the stock offering have been used to assist in paying for the costs associated with expansion. Shareholder subscribers paid for the units of stock sold by the Company over a three-year period beginning in January 1996. The stock offering provided for payments of 32 percent of the value of the stock purchased, or $12.1 million in January 1996; 43 percent, or $15.6 million in January 1997; and the balance of 26 percent, or $9.7 million in January 1998. The Company has received all of the 1996, 1997 and 1998 annual installments from its shareholder subscribers. Those costs not covered through the stock offering were primarily funded through a long-term debt agreement with the St. Paul Bank for Cooperatives (a cooperative lending institution that is the Company's traditional long-term debt lender) who provided the construction financing and is the principal lender. In addition to the funding provided by the St. Paul Bank for Cooperatives, in fiscal year 1996 the Company was able to secure additional funding for the expansion project through a lease from Richland County. Funding was through low interest, fifteen-year tax exempt solid waste disposal bonds in the amount of $12.0 million. The bonds were structured with zero principle amortization for the first three years and increasing balance amortization for the next 12 years, the first three years being $.7 million, $.8 million, and $.8 million. These bonds were required to be secured by a Letter of Credit from a non-government agency bank (Norwest Bank North Dakota) who in turn was secured by a Collateral Agreement from the St. Paul Bank for Cooperatives, the Company's primary lender. Solid waste disposal bonds are available under certain conditions where a by-product of manufacturing must be further manufactured or refined to produce a salable product and/or reduce the amount of solid waste produced by a manufacturing plant. In the Company's primary case, the funds were used to fund further manufacturing of a by-product to produce a salable product. The long-term debt created by this expansion will be repaid with funds generated through depreciation, income tax savings, and reduced costs per cwt. of production. (Depreciation expense is a non-cash expense that under the Company's accounting procedures reduces the amounts available for payments to the Company's members. The resources represented by such non-cash expenses are available as a source of working capital for the Company, which may be used for payment of long-term debt.) As of August 31, 1998, approximately $2.0 million remains to be expended for expansion of the Company's facilities. Because the financing was set up prior to August 31, 1998, working capital was $2.0 million higher than anticipated, but will be reduced by the $2.0 million in the fiscal year ending August 31, 1999 as a result of the remaining expansion expenditures. As of November 18, 1998 the projected final cost of the expansion project appears to be 3% to 5% below the $87 million allowed in the expansion plan. The expansion plan called for the 1998 crop to be processed at a slice rate of 7,500 tons of beets per day. Plant operations for the 1998 crop through November 18, 1998 indicate the processing efficiencies will exceed the expansion benchmark of 7,500 tons of beets per day by 1% to 5%. The beet storage and handling facilities are in place and meeting or exceeding the expansion goals. The environmental goals have been met (see ENVIRONMENTAL MATTERS). JOINT VENTURE WITH PROGOLD LIMITED LIABILITY COMPANY Minn-Dak is a five percent (5%) equity owner in ProGold Limited Liability Company ("ProGold"). ProGold was formed in 1994 by three entities for the purpose of building a plant to produce from corn and market high fructose corn syrup; and to produce and market corn gluten feed, corn gluten meal and corn germ, all co-products produced by the plant. The other two equity owners are American Crystal Sugar Company, Moorhead, Minnesota (46% ownership share) and Golden Growers Cooperative, Fargo, North Dakota (49% ownership share). American Crystal Sugar Company is a cooperative that produces sugar from sugar beets and has approximately 2,300 stockholder-growers that grow sugar beets on approximately 460,000 acres of land. Golden Growers Cooperative is a cooperative of corn growers that was formed in 1994 by approximately 2,000 shareholder-farmers (located in the three state area of North and South Dakota and Minnesota). The Company has contributed approximately $5.2 million in exchange for its 5% ownership position, American Crystal Sugar Company has contributed approximately $48.0 million for its 46% ownership share and Golden Growers Cooperative $51.0 million for its 49% ownership share. ProGold's plant became fully operational in late 1996 and the products produced through operation of the corn wet-milling facility are being sold through the efforts of Cargill, Inc. Because of unexpected market conditions, ProGold the business, as it was structured as of August 31, 1997, was expected to suffer significant losses for several years. To the extent that ProGold's operations would not result in a profit, the Company would receive distributions from ProGold in an amount less than the Company's cost to acquire corn delivered to ProGold for processing (the Company, as part owner of ProGold, has a contractual obligation to deliver its proportionate share of corn to ProGold's plant). To the extent that the Company's reserves and working capital would not be able to satisfy the Company's proportionate share of ProGold's expected losses, the Company would have been required to withhold appropriate amounts from member beet payments or borrow long-term debt. However, because of the continued expectation of significant losses for several years for ProGold, on September 30, 1997 ProGold entered into a letter of intent with Cargill, Inc. ("Cargill") for Cargill to lease ProGold's corn wet-milling plant. On November 1, 1997 ProGold signed a 10 year lease agreement with Cargill, which expires on October 31, 2007, to lease ProGold's corn wet-milling plant. Under the lease arrangement, the Company and the other ProGold members would retain ownership of the plant, while Cargill will operate the plant and sell the finished products. ProGold will receive rental payments in a base amount fixed for each year during the term of the lease. ProGold would also receive supplemental rent equal to fifty percent (50%) of the amount by which earnings before taxes from operations of the facility exceeds a specified base. Cargill will also enter into a corn supply agreement with ProGold, pursuant to which ProGold will be obligated to deliver approximately 15 million bushels of corn per fiscal year. The Company's obligation to deliver corn to ProGold will be terminated as part of the transactions. Cargill will pay ProGold a market price for any corn delivered to Cargill under the corn supply agreement. The arrangement between ProGold and Cargill also specifies a variety of alternatives that may take effect upon expiration of the initial lease. These alternatives include agreeing to enter into another long-term lease upon mutually agreeable terms and conditions, or ProGold could offer to sell to Cargill, at fair market value, a fifty percent (50%) or one hundred percent 100% ownership interest in ProGold. As the terms of the lease with Cargill are to provide ProGold, as an entity, with (i) rental payments of a fixed amount, with the opportunity to receive supplemental rental payments in the event that the ProGold facility is operated profitably and (ii) payment for corn delivered by ProGold for processing at the facility at market prices, the lease arrangement is expected to provide protection from the exposure of risks of participation in the corn sweetener market, including the risk of future, material financial losses by ProGold and the necessity of additional capital investment from the Company to cover such future losses. GROWERS' AGREEMENTS The Company purchases virtually all of its sugar beets from members under contract with the Company. All members have three-year contracts with the Company covering the growing seasons of 1998 through 2000 (the "Growers' Agreements"). At the end of each year, the Growers Agreement automatically extends for an additional year, so that such agreements always have a remaining term of three years, unless notice of termination has been given by the Company prior to the automatic renewal. In that situation, the agreement will not renew, but will continue in effect for the two year period then remaining under the agreement. Each Unit of Preferred Stock currently entitles a member to grow 1.35 acres of sugar beets for sale to the Company. The Company's Board of Directors has the discretion to adjust the acreage, which may be planted for each Unit of Preferred Stock held by the members. For the 1998 crop year the Company's Board of Directors authorized members to plant 1.35 acres per unit. For the 1999 crop, the Company's Board of Directors authorized members to plant 1.40 acres per unit. Under the terms of the Growers Agreement, each member receives payment for his or her sugar beets based on a price per pound of extractable sugar. The price per pound of extractable sugar is determined by dividing the total grower distribution of net proceeds (less the amount credited to members investment from member patronage and credited to retained earnings from non-member patronage) by the total of members' pounds of extractable sugar. Extractable pounds of sugar are obtained by the processing of beet samples taken from members' sugar beets during harvest. Each member's grower payment is obtained by multiplying that member's total pounds of extractable sugar times the price per pound of extractable sugar as determined above. Under the Growers Agreement, each member receives an initial installment of the payment for his or her sugar beets on or about November 15, soon after delivery of his or her crop to the Company. That initial installment is subject to adjustment by the Cooperative's Board of Directors and management, but will not exceed 65% of the estimated price per pound of extractable sugar. A second installment is paid in early February; that installment, in combination with the first installment, will not exceed 70% of the estimated price per pound of extractable sugar. A third installment is paid in early April, with the aggregate of all installments paid to that date not to exceed 80% of the estimated price per pound of extractable sugar. A fourth installment payment is paid in early July, with the total of installment payments to that date not to exceed 95% of the estimated price per pound of extractable sugar. The final payment is determined after the end of the Company's fiscal year, ending on August 31, and is in an amount necessary to bring the total of all payments to the price to be paid per pound of extractable sugar to all growers during the applicable fiscal year. In addition, the Company's annual patronage net income, which is equal to the Company's sales less all expenditures and member beet payments, is distributed to the members on the basis of the pounds of extractable sugar obtained from each of the members' sugar beets; such amounts are distributed in either cash payments or in the form of patronage credits to the member's patronage credit account on the books of the Company. COMPANY DISTRICTS The Company's by-laws provide that the Company's members are to be divided into districts for the purposes of voting and the election of members of the Board of Directors. Those districts do not have specific geographic boundaries but, instead, contain a loosely defined area representing the area served by a particular piling station to which members deliver their sugar beets for storage until the sugar beets are to be processed. When a member joins the Company, he or she is assigned to a particular district based upon criteria including: (i) the physical location of the shareholder's sugar beet growing acres relative to a piling site, (ii) if the previous criteria do not clearly indicate the district to which the shareholder should be assigned, then the physical location of the shareholder's base of farming operations relative to a piling site (some members deliver sugar beets to more than one piling site due to the locations of their various fields, even though they are assigned to membership in only one district) and (iii) if the first two criteria do not provide a clear indication of the district to which the shareholder should be assigned, then the shareholder is given the option of being assigned to the district which would best serve the needs of that shareholder. Given that shareholders are assigned to districts based upon ease of delivery of harvested sugar beets and because shareholders own different numbers of Units of Preferred Stock, each district includes a different number of acres of sugar beet production and, therefore, a different quantity of sugar beets delivered to the Company. However, none of the districts provides the Company with a materially disproportionate quantity of the sugar beets produced by the Company's members. While the allocation of members to the various districts has a significant impact on the election of directors, the Company does not believe that the districts represent a significant factor in the day-to-day business operations of the Company. RESEARCH AND DEVELOPMENT The Company is not involved in its own research and development activities, but does participate in some sugar industry research and development activities. Any research findings are then shared by the entire sugar industry. Participatory research and development is accomplished through such organizations as Beet Sugar Development Foundation, Sugar Association, and North Dakota/Minnesota Research and Education Board. The Company participates in the organizations listed above through the efforts of its representatives to the boards of directors of those entities. The Company's representatives, either a member of the Company's Board of Directors or a management employee of the Company, allow the Company to participate in and help direct agricultural and factory operations research and development activities carried out by the listed organizations. Those organizations also have established various committees on which the Company has placed certain of its employees. That practice is designed to provide the company with direct access to any research and development information available from the applicable committees. (Through its employees, the Beet Sugar Development Foundation also provides some legislative and lobbying efforts on a national level. Those efforts are directed at maintaining funding for the various federal sugarbeet research facilities.) None of the Company's employees or directors devotes a significant portion of their time and energies to the activities described in this section; instead, such efforts are a minor portion of their continuing duties on behalf of the Company. During the fiscal year ended on August 31, 1998, the Company contributed approximately $60,000 to the North Dakota/Minnesota Research and Education Board to fund that entity's research and development activities. $11,000 was given to the Beet Sugar Development Foundation in connection with their research activities, and $40,000 to the Sugar Association for their research activities and membership dues. The Company also has established a sugar beet seed committee, which reviews the performance of new and existing sugar beet seed varieties. The committee then advises the Board of Directors with regard to those sugar beet seed varieties that should be approved for use by the Company's shareholders. ENVIRONMENTAL MATTERS The Company is subject to many federal, state and local regulations that govern air and water emissions, and solid and hazardous waste storage and disposal. Currently, the Company is meeting all its obligations in water, solid waste and hazardous waste. On June 2, 1998 the Company entered an AMENDED CONSENT AGREEMENT AND JOINT MOTION TO AMEND Civil No. 97-164 with the State of North Dakota. To resolve past air violations the Company agreed to pay a $150,000 civil penalty for the violations. However, the agreement also specified that if the Company took certain actions before specified dates up to $110,000 of the penalty would be dismissed. The company paid $40,000 of the penalty. There are four separate actions outlined in the consent agreement that the Company must undertake in order to demonstrate compliance with the consent agreement. As of this writing, the Company has met its obligation in two of the actions, which should result in a reduction in the civil penalty of $60,000. The remaining two conditions stipulate that, if the company maintains compliance for the annual periods ending November 16, 1999 and November 16, 2000, $25,000 for each year shall be suspended and ultimately dismissed at the end of each period. There is no reason at this time to think that company will not be in compliance the following two years. The Company cannot accurately predict the extent to which future changes in environmental laws or regulations will affect the cost of operating its facilities and conducting its business. However, any changes could have adverse financial consequences for the Company and its members. EMPLOYEES As of August 31, 1998, the Company had 263 full-time employees, of whom 231 were hourly and 32 were salaried. It also employs approximately 325 additional hourly seasonal workers during the sugar beet harvest and processing campaign. In January 1995 the Company concluded the negotiations for a collective bargaining agreement with the American Federation of Grain Millers (AFL/CIO) union for its factory employee group. The written contract is in effect from January 23, 1995 through May of the year 2000. Office, clerical, management and harvest employees are not unionized. Full time employees are provided with health and dental insurance, a defined benefit pension or retirement plan, a 401(k) retirement savings plan, a short and long-term disability plan, term life insurance, and vacation and holiday pay plans. Seasonal workers are provided some of the above employee benefits. The Company considers its employee relations to be excellent. ITEM 2. PROPERTIES The Company operates a single sugarbeet processing factory at Wahpeton, North Dakota that is located in the Red River Valley. The Company owns the factory, receiving sites, and the land on which they are located. The 1997 crop set new records for average daily slice rate (7,596 of beets tons per day), total tons sliced (1,641,184 tons), and sugar production (4,789,000 cwt.). Minn-Dak Yeast Company, Inc. of which Minn-Dak is an 80% owner, operates a single yeast processing factory at Wahpeton, North Dakota which is located in the Red River Valley. Minn-Dak Yeast Company, Inc. owns the factory and the land on which it is located. During fiscal 1998, 27.2 million pounds of fresh yeast were produced. ITEM 3. LEGAL PROCEEDINGS From time to time and in the ordinary course of its business, the Company is named as a defendant in legal proceedings related to various issues, including worker's compensation claims, tort claims and contractual disputes. Other than as provided herein, the Company is not currently involved in legal proceedings which have arisen in the ordinary course of its business and the Company is also unaware of certain other potential claims which could result in the commencement of legal proceedings. The Company carries insurance that provides protection against certain types of claims. The Company is subject to extensive federal and state environmental laws and regulations with respect to water and air quality, solid waste disposal and odor and noise control. The Company conducts an ongoing and expanding control program designed to meet these environmental laws and regulations. Except as disclosed under "ENVIRONMENTAL MATTERS" above, there currently are no pending regulatory enforcement actions and the Company believes that it is in substantial compliance with applicable environmental laws and regulations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Company's shareholders during the quarter ended August 31, 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is only a limited, private market for shares of the Company's Common or Preferred Stock, as such shares may be held only by farmer-producers who are eligible for membership in the Company. The Company's shares are not listed for trading on any exchange or quotation system. Although transfers of the Company's shares may occur only with the consent of the Company's Board of Directors, the Company does not verify information regarding the transfer price in connection with such transfers. A number of stock transfers, representing approximately 2% of available stock, were not arms length (estate settlements, estate planning from one generation to the next, etc.) and an accurate value for that stock was not available. Management believes less than 1% of the Company's available stock was traded at arms length during the fiscal year ended August 31, 1998. Of the stock transferred at arms length, the transfers were made during the first, second and third quarters of the Company's fiscal year and ranged in price from $2,500 to $2,700 per unit. ITEM 6. SELECTED FINANCIAL DATA The following table summarizes selected financial data for each of the last five completed fiscal years. The selected financial data of the Company should be read in conjunction with the financial statements and related notes included elsewhere in this Report. Fiscal Year Ended August 31,(1)
FINANCIAL DAT (Numbers in Thousands) 1998 1997 1996 1995 1994 Revenues $ 149,574 $ 139,730 $ 114,335 $ 133,302 $ 81,422 Net Proceeds Before Accounting Change 72,084 74,239 56,872 75,422 33,643 Cumulative Effect of Accounting Change(1) 0 0 0 0 1,350 Net Proceeds(2) 72,084 74,239 56,872 75,422 34,993 Total Assets 184,830 171,896 136,361 98,927 74,117 Long-term Debt, including current maturities, Net of bond investments, 1998, 1997 & 1996 59,798 58,252 55,809 28,269 17,096 Members' Investment(3) 82,082 73,646 57,324 43,992 44,153 Property and Equipment Additions, net of Retirements 10,893 24,547 34,457 9,202 2,041 Working Capital 11,170 10,163 11,845 9,295 8,034 Ratio of Long-Term Debt to Members' Investment(4) .66 .76 .93 .59 0.33 Ratio of Net Proceeds to Fixed Charges(5) 13.92 14.92 16.76 26.38 22.62 PRODUCTION DATA(6) Acres harvested 91,374 82,575 74,915 75,878 67,086 Tons purchased (members) 1,721,240 1,506,646 1,458,918 1,636,094 834,545 ons purchased (non-member) 40,000 73,963 Tons purchased per acre harvested 18.84 18.25 19.47 21.56 12.44 Net beet payment paid to member per ton of sugar beets delivered, plus allocated patronage and unit retains(7) 41.68 49.97 38.34 46.41 40.17 Sugar hundredweight Produced 4,789,081 4,168,620 3,363,250 4,384,485 2,499,307 Sold, including purchased sugar 4,672,631 3,794,313 3,841,443 3,988,284 3,027,614 Pulp tons Produced 89,263 76,307 77,352 92,139 50,536 Sold 105,270 82,705 74,743 93,284 49,212 Molasses tons Produced 77,939 64,377 61,194 62,516 37,170 Sold 51,939 45,182 43,882 46,768 14,821 Yeast pounds (in thousands) Produced 27,191 23,127 25,556 17,511 21,853 Sold 27,227 23,193 25,495 17,436 21,853
(1) On September 1, 1993, the Company adopted Statement of Financial Accounting Standards Statement #109 (SFAS 109), "Accounting for Income Taxes". The cumulative effect of application of the new standard resulted in a benefit from income taxes. See Note 6 to the financial statements for a more detailed description of the accounting change. (2) Net Proceeds are the Company's gross revenues, less the costs and expenses of producing, purchasing and marketing sugar, sugar by-products, yeast, dietary fiber and resale commodities, but before payments to members for sugar beets. (For a more complete description of the calculation of Net Proceeds, see "Description of Business-Growers' Agreements".) (3) Members' investment includes preferred and common stock, unit retention capital, allocated patronage and retained earnings (deficit). (4) Calculated by dividing the Company's long-term debt, exclusive of the current maturities of such debt, by members' investments. (5) Computed by dividing (i) the sum of Net Proceeds plus fixed charges, plus amortization of capitalized interest by (ii) the sum of interest expense and interest capitalized. The Company does lease certain items, such as some office equipment. Due to the proportionately small amounts involved, an interest factor on lease payments has not been included in the total of the Company's fixed charges or the calculation of this ratio. (6) Information for a fiscal year relates to the crop planted and harvested in the preceding calendar year (e.g., information for the fiscal year ended August 31, 1996, relates to the 1995 crop). (7) Reflects the total amount paid in cash and allocated to individual grower equity accounts for each ton of beets delivered. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Company's financial statements and notes included elsewhere in this Report. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual future results may differ materially from those anticipated in the forward-looking statements contained in this section; such differences could arise as a result of a variety of factors including, but not limited to, the market and regulatory factors described elsewhere in this Report. LIQUIDITY AND CAPITAL RESOURCES Because the Company operates as a cooperative, payments for member-delivered sugar beets, the principal raw material used in producing the sugar and agri-products it sells, are subordinated to all member business expenses. In addition, actual cash payments to members are spread over a period of approximately one year following delivery of sugar beet crops to the Company and are net of unit retains and patronage allocated to them, all three of which remain available to meet the Company's capital requirements. This member financing arrangement may result in an additional source of liquidity and reduced outside financing requirements in comparison to a similar business operated on a non-cooperative basis. However, because sugar is sold throughout the year (while sugar beets are processed primarily between September and April) and because substantial amounts of equipment are required for its operations, the Company has utilized substantial outside financing on both a seasonal and long-term basis to fund such operations. The majority of such financing has been provided by the St. Paul Bank for Cooperatives (the "Bank"). The Company has a short-term line of credit with the Bank in 1998 of $55,000,000. The various loan agreements between the Bank and the Company obligate the Company to the following significant loan conditions; invest in Class C or other stock of the bank, as may be designated, in such amounts as may be prescribed by the board of directors of the bank; maintain working capital of not less than $7.0 million; maintain a current ratio of not less than 1.2:1.0; maintain long-term debt to equity ratio of no greater than 1:1; obtain prior consent from the bank to pay cash patronage dividends in excess of 35% of qualified patronage income as required by the Internal Revenue Service to qualify the entire patronage dividend as an income tax deduction. As of August 31, 1998, the Company was in compliance with its loan agreements. Working capital increased $1.0 million for fiscal year 1998. This increase was the result of funding the entire expansion project (see MINN-DAK FARMERS COOPERATIVE STOCK SALE AND EXPANSION PLANS) while at August 31, 1998 approximately $2.0 million still remained to be expended on the expansion project. The expansion project is anticipated to expend approximately 3% to 5% less than the original estimate causing a positive impact on the working capital and Ratio of Long-Term Debt to Members' Equity. As of August 31, 1998, the targeted working capital position was approximately $7.0 million. Management's estimated working capital target for August 31, 1999 approximates $7.5 million. Discussions with the Company's primary lender have indicated a desire on the part of the lender to have the Company increase it's working capital to a level approximating $10 - $12 million. If the Company were to agree to the lender's suggestions, working capital would be increased by shifting to long-term debt in place of short-term or seasonal debt. Such a move would increase working capital as well as the Long-term Debt to Members' Equity Ratio. On October 22, 1998, The Company's primary lender, St Paul Bank, entered into a letter of intent with CoBank, ACB, to merge operations effective July 1, 1999. A definitive merger agreement and plan is anticipated to be completed during the fourth quarter of 1998 and is subject to approval by the lender's regulator and stockholders. The lender's stockholders are expected to vote on the plan during the first part of 1999. The merger with CoBank is not expected to negatively impact the Company's borrowing abilities. Capital expenditures for fiscal year 1996 were $34.6 million, fiscal year 1997 were $26.0 million, and fiscal year 1998 were $10.9 million. Capital expenditures for fiscal year 1999 are currently estimated at $6.3 million, $2.0 million resulting from the Company's strategy of expanding capacity and improving operating efficiencies. In fiscal 1996, the Company was able to secure a lease from Richland County, North Dakota funded by low interest, fifteen year tax exempt solid waste disposal bonds in the amount of $12.0 million with zero principal amortization for the first three years and increasing balance amortization for the next 12 years, the first three years being $.7 million, $.8 million, and $.8 million. These bonds were required to be secured by a Letter of Credit from a non-government agency bank (Norwest Bank North Dakota) who in turn was secured by a Collateral Agreement with the St. Paul Bank for Cooperatives, the Company's primary lender. Solid waste disposal bonds are available under certain conditions where a by-product of manufacturing must be further manufactured or refined to produce a salable product and/or reduce the amount of solid waste produced by a manufacturing plant. In the Company's primary case, the funds were used to fund further manufacturing of a by-product to produce a salable product. (See Part I, Item 1 "MINN-DAK FARMERS COOPERATIVE STOCK SALE AND EXPANSION PLANS".) COMPARISON OF THE YEARS ENDED AUGUST 31, 1998, AND 1997 Revenue for the year ended August 31, 1998 increased 7.0% or $9.8 million from 1997. Revenue from total sugar sales increased 16.1% reflecting a (4.7%) decrease in the average selling price per cwt and a 20.8% increase in cwt. sold. Revenue from pulp sales decreased 7.8% reflecting an decrease of (31.9%) in the average selling price per ton and 24.1% increase in volume. Revenue from molasses sales decreased (0.1%) reflecting a decrease of (15.1%) in the average selling price per ton and a 15.0% increase in volume. Revenues from yeast sales increased 11.1% reflecting a price decrease of (6.3%) and an increase in volume of 17.4%. Finished product inventories increased $6.2 million in 1998 primarily due higher volumes of ending sugar inventory. Cost of product produced, exclusive of payments for sugar beets and grower trucking, increased $5.7 million. The increase is primarily due to a 17% increase in sugar beets purchased and an increase in non-allocated costs such as plant depreciation, taxes and insurance of 27%. Sales and Distribution costs increased $2.9 million or 13.2%. General and Administrative expenses increased $0.3 million or 7.4%. Interest expense increased $1.1 million or 24.4%. The cost per cwt produced increased 3.7%. Non-member business income increased $1.4 million in fiscal year 1998. This decrease was primarily due to the reduction in losses associated with the Company's investment in Pro-Gold, and to increased net income from the Minn-Dak Yeast Company, Inc. subsidiary operations. Net payments to members for sugar beets increased by $.9 million in 1998. This increase was primarily due to a higher volume but lower quality of the beets delivered by members in 1998 versus 1997, and because of lower selling prices for sugar, pulp and molasses. COMPARISON OF THE YEARS ENDED AUGUST 31, 1997, AND 1996 Revenue for the year ended August 31, 1997 increased 22% or $25.4 million from 1996. Revenue from total sugar sales increased 4.2% reflecting a 5.8% increase in the average selling price per cwt and a 1.6% decrease in cwt. sold. Revenue from pulp sales decreased 2.8% reflecting an increase of 10.7% in volume and 12.2% decrease in the average selling price per ton. Revenue from molasses sales increased 4.3% reflecting a 3.0% increase in volume and an increase of 1.3% in the average selling price per ton. Revenues from yeast sales decreased 7.6% reflecting a decrease in volume of 9.0% and an increase of 1.6% in the average selling price per pound. Finished product inventories increased $13.8 million in 1997 primarily due higher volumes of ending sugar inventory. Cost of product sold, exclusive of payments for sugar beets, increased $2.6 million. The increase is primarily due to the increased non-allocated costs such as plant depreciation, taxes and insurance. Sales and Distribution costs increased $1.9 million. General and Administrative expenses increased $0.4 million. Interest expense increased $1.4 million. Non-member business income decreased $2.0 million in fiscal year 1997. This decrease was primarily due to the recording of losses generated from the Company's investment in ProGold, and to decreased net income from the Minn-Dak Yeast Company, Inc. subsidiary operations. Net payments to members for sugar beets increased by $17.0 million in 1997. This increase was primarily due to a higher volume and higher quality of the beets delivered by members in 1997 versus 1996, and because of higher selling prices for sugar. ESTIMATED FISCAL YEAR 1999 INFORMATION The agreements between the Company and its members regarding the delivery of sugar beets to the Company require payment for members' sugar beets in several installments throughout the year. As only the final payment is made after the close of the fiscal year in question, the first payments to members for their sugar beets are based upon the Company's then-current estimates of the financial results to be obtained from processing the crop in question and the subsequent sale of the products obtained from processing those sugar beets. This discussion contains a summary of the Company's current estimates of the financial results to be obtained from the Company's processing of the 1998 sugar beet crop. Given the nature of the estimates required in connection with the payments to members for their sugar beets, this discussion includes forward-looking statements regarding the quantity of sugar to be produced from the 1998 sugar beet crop, the net selling price for the sugar and by-products produced by the Company and the Company's operating costs. These forward-looking statements are based largely upon the Company's expectations and estimates of future events; as a result, they are subject to a variety of risks and uncertainties. Some of those estimates, such as the selling price for the Company's products and the quantity of sugar produced from the sugar beet crop, are beyond the Company's control. The actual results experienced by the Company could differ materially from the forward-looking statements contained herein. The recently completed harvest of the sugar beet crop grown during 1998 produced a total of 1,772,648 tons of sugar beets. The sugar content on the 1998 crop is 17.43%. The Company expects to produce a total of approximately 4,488,000 hundredweight of sugar from the 1998 sugar beet crop. Based on marketing information developed by United Sugars Corporation, the Company's current estimate is that the average net selling price of the Company's sugar will be approximately $23.00 per hundredweight. From the revenues generated from the sale of products produced from each ton of sugar beets must be deducted the Company's operating and fixed costs, which are currently estimated to be $27.80 per ton. The deduction of those operating costs results in an estimated gross beet payment of $35.80 per ton of sugar beets YEAR 2000 The Company has developed preliminary plans to address the possible exposures related to the impact on its computer systems of the Year 2000. Key customers and suppliers have been contacted with no significant concerns being brought to the Company's attention. The Company has upgraded its accounting system and anticipates it operations systems to be ready for the Year 2000. The financial impact of making the required systems changes is not expected to be material to the Company's consolidated financial position, results of operations or cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITOR'S REPORT The Board of Directors Minn-Dak Farmers Cooperative Wahpeton, North Dakota We have audited the accompanying consolidated balance sheets of Minn-Dak Farmers Cooperative (a North Dakota cooperative) as of August 31, 1998, 1997, and 1996, and the related consolidated statements of operations, changes in members' investments and cash flows for the years then ended. These financial statements are the responsibility of the cooperative's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Minn-Dak Farmers Cooperative as of August 31, 1998, 1997, and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. MINN-DAK FARMERS COOPERATIVE CONSOLIDATED BALANCE SHEETS AUGUST 31, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ ASSETS CURRENT ASSETS: Cash $ 1,849,003 $ 1,234,541 $ 853,102 ------------ ------------ ------------ Current portion of long-term note receivable 288,093 216,475 -- ------------ ------------ ------------ Receivables: Trade accounts 13,586,827 12,648,938 10,293,751 Growers 3,539,710 2,818,976 2,840,447 Other 458,400 987,579 323,231 ------------ ------------ ------------ 17,584,937 16,455,493 13,457,429 ------------ ------------ ------------ Advances to affiliate 2,897,718 887,640 160,585 ------------ ------------ ------------ Inventories: Refined sugar, pulp and molasses to be sold on a pooled basis 27,803,954 21,576,181 7,748,715 Nonmember refined sugar 326,289 112,301 468,322 Yeast 78,994 88,711 108,704 Materials and supplies 5,210,663 4,698,784 4,026,951 Other 71,950 81,630 97,626 ------------ ------------ ------------ 33,491,850 26,557,607 12,450,318 ------------ ------------ ------------ Deferred charges 1,273,039 1,249,154 1,119,274 ------------ ------------ ------------ Prepaid expenses 246,112 191,663 176,526 ------------ ------------ ------------ Property and equipment available for sale 587,550 616,050 789,350 ------------ ------------ ------------ Total current assets 58,218,302 47,408,623 29,006,584 ------------ ------------ ------------ PROPERTY, PLANT AND EQUIPMENT: Land and land improvements 20,133,021 16,545,767 11,956,354 Buildings 34,735,639 30,258,910 22,254,129 Factory equipment 103,921,887 82,001,703 72,462,793 Other equipment 3,699,820 2,810,128 2,200,809 Construction in progress 4,176,148 24,156,551 22,352,000 ------------ ------------ ------------ 166,666,515 155,773,059 131,226,085 Less accumulated depreciation 56,097,673 51,523,574 48,551,028 ------------ ------------ ------------ 110,568,842 104,249,485 82,675,057 ------------ ------------ ------------ LONG-TERM NOTES RECEIVABLE, NET OF CURRENT PORTION 2,944,020 2,381,228 -- ------------ ------------ ------------ OTHER ASSETS: Investments restricted for capital lease projects 4,058,048 7,514,242 Investment in stock of other corporations, unconsolidated marketing subsidiaries and other cooperatives 9,601,940 9,425,112 12,663,265 Deferred income taxes 2,652,000 3,450,000 3,450,000 Other 845,140 923,383 1,051,761 ------------ ------------ ------------ 13,099,080 17,856,543 24,679,268 ------------ ------------ ------------ $184,830,244 $171,895,879 $136,360,909 ============ ============ ============
1998 1997 1996 ------------- ------------- ------------- LIABILITIES AND MEMBERS' INVESTMENT CURRENT LIABILITIES: Short-term notes payable $ 26,855,000 $ 19,890,000 $ -- ------------- ------------- ------------- Current portion of long-term debt 5,612,500 2,512,500 2,512,500 ------------- ------------- ------------- Accounts payable: Trade 5,123,520 3,532,551 5,915,793 Growers 5,970,930 8,334,605 6,063,827 ------------- ------------- ------------- 11,094,450 11,867,156 11,979,620 ------------- ------------- ------------- Accrued liabilities 3,485,909 2,975,558 2,669,019 ------------- ------------- ------------- Total current liabilities 47,047,859 37,245,214 17,161,139 LONG-TERM DEBT, NET OF CURRENT PORTION 42,185,417 47,797,917 48,810,417 OBLIGATION UNDER CAPITAL LEASE 12,000,000 12,000,000 12,000,000 OTHER 747,766 688,608 728,296 COMMITMENTS AND CONTINGENCIES (NOTE 12) -- -- -- ------------- ------------- ------------- Total liabilities 101,981,042 97,731,739 78,699,852 ------------- ------------- ------------- MINORITY INTEREST IN EQUITY OF SUBSIDIARY 767,481 517,727 337,439 ------------- ------------- ------------- MEMBERS' INVESTMENT: Preferred stock: Class A - 100,000 shares authorized in 1998, 1997, and 1996, $105 par value; 72,200, 66,967, and 58,525 shares issued and outstanding in 1998, 1997, and 1996, respectively 7,581,000 7,031,535 6,145,125 Class B - 100,000 shares authorized in 1998, 1997, and 1996, $75 par value; 72,200, 66,967, and 58,525 shares issued and outstanding in 1998, 1997, and 1996, respectively 5,415,000 5,022,525 4,389,375 Class C - 100,000 shares authorized in 1998, 1997, and 1996, $76 par value; 72,200, 66,967, and 58,525 shares issued and outstanding in 1998, 1997, and 1996, respectively 5,487,200 5,089,492 4,447,900 ------------- ------------- ------------- 18,483,200 17,143,552 14,982,400 Common stock, 600 shares authorized in 1998, 1997 and 1996, $250 par value; issued and outstanding 484, 481, and 481, shares in 1998, 1997, and 1996 respectively 121,000 120,250 120,250 Paid in capital in excess of par 32,094,407 23,753,005 10,296,457 Unit retention capital 7,584,237 6,739,547 6,262,469 Qualified allocated patronage 3,981,031 4,081,381 3,720,385 Nonqualified allocated patronage 20,071,517 22,497,263 21,575,006 Retained earnings (deficit) (253,671) (688,585) 366,651 ------------- ------------- ------------- 82,081,721 73,646,413 57,323,618 ------------- ------------- ------------- $ 184,830,244 $ 171,895,879 $ 136,360,909 ============= ============= =============
See Notes to Consolidated Financial Statements MINN-DAK FARMERS COOPERATIVE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED AUGUST 31, 1998, 1997, AND 1996
- ------------------------------------------------------------------------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- REVENUE: From sales of sugar, sugar by-products, and yeast, net of discounts $ 149,573,584 $ 139,729,701 $ 114,334,522 ------------- ------------- ------------- EXPENSES: Production costs of sugar, by-products, and yeast 41,854,177 33,446,952 30,872,535 Sales and distribution costs 24,697,769 21,822,495 19,955,374 General and administrative 4,906,549 4,567,869 4,213,379 Interest 5,372,221 4,315,823 2,898,338 ------------- ------------- ------------- 76,830,716 64,153,139 57,939,626 ------------- ------------- ------------- OTHER INCOME (EXPENSE) (659,048) (1,337,294) 476,775 ------------- ------------- ------------- NET PROCEEDS RESULTING FROM MEMBER AND NON-MEMBER BUSINESS $ 72,083,820 $ 74,239,268 $ 56,871,671 ============= ============= ============= DISTRIBUTION OF NET PROCEEDS: Credited to members' investment: Components of net income: Income (loss) from non-member business $ 335,688 $ (1,055,236) $ 929,738 Patronage income -- 4,382,934 1,620,262 ------------- ------------- ------------- Net income 335,688 3,327,698 2,550,000 Unit retention capital 884,562 948,246 1,389,899 ------------- ------------- ------------- Net credit to members' investment 1,220,250 4,275,944 3,939,899 Payments to members for sugarbeets, net of unit retention capital 70,863,570 69,963,324 52,931,772 ------------- ------------- ------------- NET PROCEEDS RESULTING FROM MEMBER AND NONMEMBER BUSINESS $ 72,083,820 $ 74,239,268 $ 56,871,671 ============= ============= =============
See Notes to Consolidated Financial Statements. MINN-DAK FARMERS COOPERATIVE CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' INVESTMENT FOR THE YEARS ENDED AUGUST 31, 1998, 1997, AND 1996
- -------------------------------------------------------------------------------------------------------- PAID IN CAPITAL UNIT PREFERRED COMMON IN EXCESS OF RETENTION STOCK STOCK PAR VALUE CAPITAL ----------- ----------- ----------- ----------- BALANCE, AUGUST 31, 1995 $13,312,000 $ 86,500 $ $ 5,421,441 STOCK: Sales - common (10 shares) 2,500 Repurchases - common (12 shares) (3,000) Stock offering (137 common shares, 6525 preferred shares) 1,670,400 34,250 10,400,850 Stock issue costs (104,393) UNIT RETENTION CAPITAL: Revolvement (548,871) Proceeds 1,389,899 REVOLVEMENT OF PRIOR YEARS' ALLOCATED PATRONAGE ECONOMIC DEVELOPMENT GRANT RECEIVED BY INVESTEE NET INCOME FOR THE YEAR ENDED AUGUST 31, 1996 ACCRUED PAYMENT OF CURRENT YEAR'S QUALIFIED ALLOCATED PATRONAGE ----------- ----------- ----------- ----------- BALANCE, AUGUST 31, 1996 14,982,400 120,250 10,296,457 6,262,469 STOCK: Sales - common (8 shares) 2,000 Repurchases - common (8 shares) (2,000) Sales - preferred (8,442 shares) 2,161,152 13,456,548 UNIT RETENTION CAPITAL: Revolvement (471,168) Proceeds 948,246 REVOLVEMENT OF PRIOR YEARS' ALLOCATED PATRONAGE NET INCOME FOR THE YEAR ENDED AUGUST 31, 1997 ACCRUED PAYMENT OF CURRENT YEAR'S QUALIFIED ALLOCATED PATRONAGE ----------- ----------- ----------- ----------- BALANCE, AUGUST 31, 1997 17,143,552 120,250 23,753,005 6,739,547 STOCK: Sales - common (10 shares) 2,500 Repurchases - common (8 shares) (1,750) Sales - preferred (5,233 shares) 1,339,648 8,341,402 UNIT RETENTION CAPITAL: Revolvement (39,872) Proceeds 884,562 REVOLVEMENT OF PRIOR YEARS' ALLOCATED PATRONAGE ECONOMIC DEVELOPMENT GRANT RECEIVED BY INVESTEE NET INCOME FOR THE YEAR ENDED AUGUST 31, 1998 ----------- ----------- ----------- ----------- BALANCE, AUGUST 31, 1998 $18,483,200 $ 121,000 $32,094,407 $ 7,584,237 =========== =========== =========== ===========
[WIDE TABLE CONTINUED FROM PREVIOUS PAGE]
- ---------------------------------------------------------------------------------------------------- QUALIFIED NON-QUALIFIED RETAINED ALLOCATED ALLOCATED EARNINGS PATRONAGE PATRONAGE (DEFICIT) TOTAL ----------- ----------- ----------- ----------- BALANCE, AUGUST 31, 1995 $ 4,646,400 $21,157,010 $ (630,917) $43,992,434 STOCK: Sales - common (10 shares) 2,500 Repurchases - common (12 shares) (3,000) Stock offering (137 common shares, 6525 preferred shares) 12,105,500 Stock issue costs (104,393) UNIT RETENTION CAPITAL: Revolvement (548,871) Proceeds 1,389,899 REVOLVEMENT OF PRIOR YEARS' ALLOCATED PATRONAGE (1,239,315) (720,266) (1,959,581) ECONOMIC DEVELOPMENT GRANT RECEIVED BY INVESTEE 67,830 67,830 NET INCOME FOR THE YEAR ENDED AUGUST 31, 1996 482,000 1,138,262 929,738 2,550,000 ACCRUED PAYMENT OF CURRENT YEAR'S QUALIFIED ALLOCATED PATRONAGE (168,700) (168,700) ----------- ----------- ----------- ----------- BALANCE, AUGUST 31, 1996 3,720,385 21,575,006 366,651 57,323,618 STOCK: Sales - common (8 shares) 2,000 Repurchases - common (8 shares) (2,000) Sales - preferred (8,442 shares) 15,617,700 UNIT RETENTION CAPITAL: Revolvement (471,168) Proceeds 948,246 REVOLVEMENT OF PRIOR YEARS' ALLOCATED PATRONAGE (1,027,404) (1,324,677) (2,352,081) NET INCOME FOR THE YEAR ENDED AUGUST 31, 1997 2,136,000 2,246,934 (1,055,236) 3,327,698 ACCRUED PAYMENT OF CURRENT YEAR'S QUALIFIED ALLOCATED PATRONAGE (747,600) (747,600) ----------- ----------- ----------- ----------- BALANCE, AUGUST 31, 1997 4,081,381 22,497,263 (688,585) 73,646,413 STOCK: Sales - common (10 shares) 2,500 Repurchases - common (8 shares) (1,750) Sales - preferred (5,233 shares) 9,681,050 UNIT RETENTION CAPITAL: Revolvement (39,872) Proceeds 884,562 REVOLVEMENT OF PRIOR YEARS' ALLOCATED PATRONAGE (100,350) (2,425,746) (2,526,096) ECONOMIC DEVELOPMENT GRANT RECEIVED BY INVESTEE 99,226 99,226 NET INCOME FOR THE YEAR ENDED AUGUST 31, 1998 335,688 335,688 ----------- ----------- ----------- ----------- BALANCE, AUGUST 31, 1998 $ 3,981,031 $20,071,517 $ (253,671) $82,081,721 =========== =========== =========== ===========
See Notes to Consolidated Financial Statements. MINN-DAK FARMERS COOPERATIVE CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31, 1998, 1997, AND 1996
- -------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Income allocated to members' investment $ 335,688 $ 3,327,698 $ 2,550,000 Add (deduct) noncash items: Depreciation and amortization 5,980,837 4,458,900 3,061,758 Equipment disposals - loss 220,932 301,851 51,765 Discount on redemption of estate payout (63,610) (55,407) Noncash investment in Progold 185,527 (185,527) Net loss allocated from unconsolidated marketing subsidiaries 521,060 1,630,249 91,083 Noncash portion of patronage capital credits (736,751) (652,922) (562,047) Retention of nonqualified unit retains 884,562 948,246 1,389,899 Deferred income taxes 728,000 Decrease (increase) in cash surrender of officer life insurance 10,709 (36,170) 9,904 Changes in operating assets and liabilities: Accounts receivable and advances (3,139,522) (3,110,306) (107,706) Inventory and prepaid expenses (6,988,692) (14,122,426) 9,671,057 Deferred charges 46,115 (129,880) (212,795) Other assets 28,500 (20,719) Accounts payable, advances, and accrued liabilities 733,016 (903,623) 2,057,694 ------------ ------------ ------------ Net cash provided by (used in) operating activities (1,253,629) (8,529,317) 17,979,893 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposition of property, plant and equipment 40,676 5,474 4,055 Capital expenditures (8,293,687) (22,249,794) (30,066,812) Proceeds from sale of investments 29,710 Investment in stock of other corporations, unconsolidated marketing subsidiaries and other cooperatives (139,941) (583,117) (5,915,938) Issuance of note receivable (757,114) Proceeds on note receivable 225,000 Net proceeds from patronage refunds and equity revolvements 92,503 32,762 30,601 Minority interest in equity of subsidiaries 249,754 180,289 255,910 ------------ ------------ ------------ Net cash used by investing activities (8,582,809) (22,584,676) (35,692,184) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Sale and repurchase of common stock, net 750 (500) Net proceeds from issuance of short-term debt 6,965,000 19,890,000 (13,877,000) Proceeds from issuance of long-term debt 29,000,000 Proceeds from sale of stock 9,681,050 15,617,700 12,001,107 Payment of financing fees (185,671) (185,671) (406,111) Payment of long-term debt (2,512,500) (1,012,500) (5,945,914) Payment of unit retains and allocated patronage (3,497,729) (2,814,097) (2,493,196) ------------ ------------ ------------ Net cash provided by financing activities 10,450,900 31,495,432 18,278,386 ------------ ------------ ------------ NET CHANGE IN CASH 614,462 381,439 566,095 CASH, BEGINNING OF YEAR 1,234,541 853,102 287,007 ------------ ------------ ------------ CASH, END OF YEAR $ 1,849,003 $ 1,234,541 $ 853,102 ============ ============ ============
1998 1997 1996 ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for: Interest $ 4,244,771 $ 3,683,034 $ 2,472,853 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Board approval of unit retention capital and allocated patronage revolvement $ 2,383,126 $ 2,658,897 $ 2,508,452 ============ ============ ============ Transfer of property and equipment available for sale to property and equipment $ 22,850 ============ Acquisition of property $ 267,000 Issuance of notes receivable 2,597,703 Issuance of long-term advances 102,295 ============ Reduction of investment $ 2,966,998 ============ Board approval of distribution of cash portion of qualified allocated patronage $ 719,600 $ 168,700 ============ ============ Increase in note receivable by reduction of advances $ 102,296 ============ Increase in investment from receipt of Economic Development Grant $ 99,226 $ 67,830 ============ ============ Acquisition of equipment under capital lease $ 4,058,048 $ 3,456,194 4,485,758 Acquisition of investment restricted for capital lease projects 7,514,242 Reduction in investment restricted for capital lease projects (4,058,048) (3,456,194) ------------ ------------ ------------ Proceeds from issuance of obligation under capital lease $ -- $ -- $ 12,000,000 ============ ============ ============
See Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 1998, 1997, and 1996 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CONCENTRATIONS OF RISK Principles of Consolidation - The financial statements include the accounts of Minn-Dak and its subsidiary, Minn-Dak Yeast Company, Inc. (Minn-Dak Yeast) which is 80% owned by the cooperative. Inventories - Inventories of refined sugar, pulp and molasses to be sold on a pooled basis are valued at net realizable value, while third-party purchased refined sugar to be sold on a pooled basis is valued at the lower of cost or market. Inventories of dietary pulp fiber, yeast, and materials and supplies are valued at the lower of average cost or market. In valuing inventories at net realizable value, the cooperative, in effect sells the remaining inventory to the subsequent years sugar and by-product pool. Deferred Charges - Agricultural development and labor procurement costs incurred in connection with the beet crop to be harvested in September and October are deferred and subsequently charged to expense during the ensuing processing period. Property, Plant, Equipment and Depreciation - Property, plant and equipment are stated at cost. Additions, renewals and betterments are capitalized, whereas expenditures for maintenance and repairs are charged to expense. The cost and related accumulated depreciation of assets retired or sold are removed from the appropriate asset and depreciation accounts and the resulting gain or loss is reflected in income. It is the policy of the cooperative to provide depreciation based on methods designed to amortize the cost of the properties over their estimated useful lives. Property, plant and equipment are depreciated for financial reporting purposes, principally using declining balance methods, with estimated useful lives ranging from 8 to 40 years. Statutory lives and methods are used for income tax reporting purposes. Indirect costs capitalized were $588,605, $449,149, and $435,686 for the years ended August 31, 1998, 1997, and 1996. Construction-period-interest capitalized for the years ended August 31, 1998, 1997, and 1996, were $199,417, $953,944, and $669,347, respectively. Equity Value Investments - The investments in United Sugars Corporation, Midwest Agri-Commodities Company and ProGold Limited Liability Company are accounted for using the equity method, wherein the investment is recorded at the amount of the underlying equity in the net assets of the investments and adjusted to recognize the cooperative's share of the undistributed earnings or losses. Investments in Other Cooperatives - The investments in stocks and capital credits of other cooperatives are stated at cost, plus the cooperative's share of allocated patronage and capital credits. Income Taxes - A consolidated federal income tax return is filed for the cooperative and its subsidiary. Deferred income taxes are provided for in the timing of certain temporary deductions/increases for financial and income tax reporting purposes. Significant temporary differences are as follows: 1. When nonqualified unit retention capital and allocated patronage are elected by the board of directors, the cooperative is not allowed an income tax deduction until they are distributed in cash to the member-producers, whereas qualified unit retention capital and allocated patronage are deducted when declared. 2. Depreciation - For financial reporting purposes, the companies use straight-line and accelerated methods of depreciation with lives of 8 to 40 years, while, for income tax purposes, the companies use required statutory depreciable lives and methods. 3. Non-qualified patronage credits from investments in other cooperatives - For financial statement purposes, the companies recognize income when the patronage credit notification is received while, for income tax purposes, the companies recognize income when the patronage is received in cash. 4. Inventory capitalization - For income tax reporting purposes, certain overhead costs are included as a part of inventory costs in accordance with inventory capitalization rules. These costs are charged to expense as incurred for financial reporting purposes. 5. Deferred compensation - For financial reporting purposes, deferred compensation is charged to expense as amounts are accrued. For income tax purposes, deferred compensation is deductible when paid. 6. Recognition of vacation pay - For financial reporting purposes, vacation pay is charged to expense as accrued, whereas, for income tax purposes, vacation pay is deducted when paid. Accounting estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Uninsured Cash Balance - The company maintains cash balances at various financial institutions throughout the United States. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At times during the year, the company's balances exceeded this limit. Reclassifications - Certain amounts have been reclassified in the 1997 and 1996 financial statements. The reclassifications have no effect on the results of operations. NOTE 2 - NATURE OF OPERATIONS AND CONCENTRATION OF CREDIT RISK Nature of Operations - Minn-Dak is a North Dakota cooperative corporation owned by its member-growers for the purpose of processing sugarbeets and marketing sugar and by-products. Minn-Dak Yeast is a North Dakota corporation engaged primarily in the production and marketing of bakers yeast. The majority of the net proceeds from Minn-Dak is from member business, whereas Minn-Dak Yeast is considered non-member business. Credit risk - The cooperative and subsidiary grant credit to food processors located throughout the United States. In addition, the cooperative grants credit to members for sugarbeet seed, located in North Dakota and Minnesota. NOTE 3 - NOTES RECEIVABLE The cooperative's notes receivable total $3,232,113 and $2,597,703 as of August 31, 1998 and 1997, respectively. They are due from United Sugars member processors. The notes receivable are unsecured, with a variable interest rate, currently 8.5%. The notes will be received in equal annual installments through August 31, 2011. The notes are subordinated to St. Paul Bank for Cooperatives. The current portion of the notes are $288,093, and $216,475 as of August 31, 1998 and 1997, respectively. NOTE 4 - INVESTMENTSThe investment in stock of other corporations, unconsolidated marketing subsidiaries and other cooperatives consists of the following: 1998 1997 1996 United Sugars Corporation $ 864,903 $ 820,641 $ 3,292,816 Midwest Agri-Commodities 21,947 11,748 40,835 ProGold, LLC 3,398,894 3,920,776 5,246,666 St. Paul Bank for Cooperatives 2,956,944 2,505,512 2,151,143 R.S.R. Electric Cooperative 2,321,556 2,134,431 1,870,859 Other 37,696 32,004 60,946 ----------- ----------- ----------- Total $ 9,601,940 $ 9,425,112 $12,663,265 NOTE 5 - SHORT-TERM DEBT Information regarding short-term debt at August 31, 1998, 1997, and 1996, is as follows: 1998 1997 1996 Seasonal loan with St. Paul Bank for Cooperatives, due January 31, 1999, interest variable, currently at 6.51% $26,855,000 $19,890,000 $ -- The cooperative has a $70,000,000 seasonal line of credit with the St. Paul Bank for Cooperatives. The line is secured with a first lien on substantially all property and equipment and current assets of Minn-Dak. Maximum borrowings, average borrowing levels and average interest rates for short-term debt for the years ended August 31, 1998, 1997, and 1996, are as follows: August 31 1998 1997 1996 Maximum borrowings $96,570,000 $82,580,000 $59,566,800 Average borrowing levels $81,260,846 $70,785,583 $50,578,800 Average interest rates 6.48% 6.43% 6.25% NOTE 6 - LONG-TERM DEBT Information regarding long-term debt at August 31, 1998, 1997, and 1996, is as follows:
1998 1997 1996 Term loan with the St. Paul Bank for Cooperatives, due in varying principal repayments through February 29, 2008, interest of 8.5%, with a first lien on substantially all property and equipment and current assets of Minn-Dak $47,750,000 $50,250,000 $51,250,000 Term loan with R.S.R. Electric Cooperative, Inc., due October 12, 2002, interest free, unsecured 47,917 60,417 72,917 ---------- ----------- ----------- 47,797,917 50,310,417 51,322,917 Less current maturities (5,612,500) (2,512,500) (2,512,500) ----------- ----------- ----------- $42,185,417 $47,797,917 $48,810,417
As to the loan with the St. Paul Bank for Cooperatives, the cooperative has agreed to the following significant loan conditions: 1. Invest in Class C or other stock of the bank, as may be designated, in such amounts as may be prescribed by the board of directors of the bank. 2. Maintain working capital of not less than $7 million, maintain a current ratio of not less than 1.2:1.0, and maintain a long-term debt to equity ratio of no greater than 1:1. 3. Obtain prior consent from the bank to pay cash patronage dividends in excess of 35% of qualified patronage income as required by the Internal Revenue Service to qualify the entire patronage dividend as an income tax deduction. Minn-Dak has complied with the terms of its loan agreement for the years ended August 31, 1998, 1997, and 1996. In addition, Minn-Dak can make special advance payments on its term loans with the St. Paul Bank for Cooperatives after its seasonal loans have been paid in full, with the understanding that the special advance payments will be readvanced subject to the reinstatement provisions, prior to the granting of any new seasonal loans. Any such advance payments are subject to a commitment fee of .25% of the daily unadvanced commitment. Interest expense, net of amount capitalized, totaled $5,372,221, $4,315,823, and $2,898,338, for 1998, 1997, and 1996, respectively. Interest capitalized totaled $199,417, $953,944, and $669,347 for 1998, 1997, and 1996, respectively. Principal amounts due on all the cooperative's long-term debt are as follows: Years Ending August 31: 1999 $ 5,612,500 2000 5,612,500 2001 5,612,500 2002 5,610,417 2003 5,600,000 Thereafter 19,750,000 ------------ $ 47,797,917 NOTE 7 - OBLIGATIONS UNDER CAPITAL LEASES The cooperative has a capital lease with Richland County, North Dakota for equipment relating to solid waste disposal. The county has financed the leased assets with a bond issue and accordingly have structured the cooperative's lease payments to correspond with the bond issue's interest and principal requirements. Details relative to the cooperatives obligations under the lease agreement are as follows:
1998 Final Current 1997 1996 Payee Interest Maturity Portion Total Total Total Richland County, North Dakota 4.85% 1/11 $582,000 $16,345,935 $16,927,935 $17,509,844 Less amount representing interest 582,000 4,345,935 4,927,935 5,509,844 -------- ----------- ----------- ----------- $ -- $12,000,000 $12,000,000 $12,000,000
Minimum future principal payments required on the obligations under capital leases are as follows: Years Ending August 31: 2000 $ 730,000 2001 775,000 2002 815,000 2003 860,000 Thereafter 8,820,000 ------------ $ 12,000,000 NOTE 8 - MEMBERS' INVESTMENT AND GROWER PAYMENTS The ownership of nondividend bearing common stock is restricted to a "member-producer," as defined in the bylaws of Minn-Dak. Each member-producer shall own only one share of common stock and is entitled to one vote at any meeting of the members. Each member-producer is required to purchase one unit of preferred stock for each base acre of sugar beet crops grown under a grower's contract with Minn-Dak. A unit consists of one share each of Class A, Class B and Class C preferred stock. The preferred shares are nonvoting and nondividend bearing. All transfers and sales of stock must be approved by the board of directors. During the fiscal year 1995, the board of directors voted and approved to offer additional common stock at $250 per share and 20,200 units of its preferred stock at $1,850 per unit. 137 common shares were sold in January 1996. The cooperative called for the payment of preferred stock units of 5,233 in January 1998; 8,442 in January 1997 and 6,525 in January 1996. Minn-Dak's net income, determined in accordance with generally accepted accounting principles consistently applied, shall be distributed annually on the basis of dollar volume of patronage, in cash or in the form of credits to each member-producer's patronage credit account as established on the books of the cooperative. In the event of a loss in any one year, the cooperative shall act in such a manner as to first recoup the loss from those patrons who were patrons in the year in which the loss occurred. Under the terms of Minn-Dak's beet growing contracts with each of its member-producers, Minn-Dak is obligated to pay the member-producers for beets delivered at a price per pound of extractable sugar. However, if, in the opinion of the St. Paul Bank for Cooperatives, the working capital position of the cooperative is insufficient, Minn-Dak shall retain from the price to be paid per ton for beets such amounts as are deemed by the bank to be necessary for operations, the deductions to be made at such time as the bank shall require. The amount so retained shall be evidenced in the records of Minn-Dak by equity credits in favor of the growers. The board of directors has the power to determine whether such retains shall be "qualified" or "nonqualified" for income tax purposes. For the year ended August 31, 1998, Minn-Dak had retained $860,729 and $23,833, respectively for facilities expansion and frozen beet storage. For the year ended August 31, 1997, Minn-Dak had retained $753,329 and $194,917, respectively for sugar silo storage and frozen beet storage. For the year ended August 31, 1996, Minn-Dak had retained $1,389,899 for sugar silo storage and frozen beet storage. For 1998, 1997, and 1996, the retainage is based on $.50 per ton of beets delivered for facilities expansion and sugar silo storage, and the lesser of the maximum obligation required or $.50 per ton of beets delivered for frozen beet storage. During the year ended August 31, 1996, Minn-Dak revolved the remaining 30% of the unit retains and allocated patronage for the fiscal year ended August 31, 1989, and 35% for the fiscal year ended August 31, 1990, totaling $2,508,452. During the year ended August 31, 1997, Minn-Dak revolved the remaining 65% of the unit retains and allocated patronage for the fiscal year ended August 31, 1990, totaling $2,658,897. In addition, unit retains and allocated patronage owned by an estate were redeemed at a discount. The discount represented the difference between the book value of these items, totaling $164,352, and the present value of the estimated future redemptions. During the year ended August 31, 1998, Minn-Dak revolved 35% of the allocated patronage for the fiscal year ended August 31, 1991, totaling $2,383,126. In addition, unit retains and allocated patronage owned by an estate were redeemed at a discount. The discount represented the difference between the book value of these items, totaling $183,924, and the present value of the estimated future redemptions. NOTE 9 - INCOME TAXES Minn-Dak Farmers Cooperative is a nonexempt cooperative as described under Section 1381(a)(2) of the Internal Revenue Code of 1986. Accordingly, net margins from business done with member patrons, which are allocated and paid as prescribed in Section 1382 of the Code, will be taxable to the members and not to the cooperative. To the extent that net margins are not allocated and paid as stated above or arise from business done with non-members, the cooperative shall have taxable income subject to corporate income tax rates. The significant components of deferred tax assets and liabilities included on the balance sheet at August 31, 1998, 1997, and 1996, are as follows:
1998 1997 1996 Deferred tax assets: Non-qualified unit retains and allocated patronage due to members $ 11,060,000 $ 11,700,000 $ 10,600,000 Other 1,898,000 1,000,000 1,300,000 ------------ ------------ ------------ Gross deferred tax assets 12,958,000 12,700,000 11,900,000 Less valuation allowance (1,441,000) (1,120,000) (1,200,000) ------------ ------------ ------------ Total deferred tax assets 11,517,000 11,580,000 10,700,000 ------------ ------------ ------------ Deferred tax liabilities: Depreciation 7,560,000 6,860,000 6,200,000 Other 935,000 970,000 750,000 ------------ ------------ ------------ Total deferred tax liabilities 8,495,000 7,830,000 6,950,000 ------------ ------------ ------------ $ 3,022,000 $ 3,750,000 $ 3,750,000 Classified as follows: Current asset $ 370,000 $ 300,000 $ 300,000 Long-term asset 2,652,000 3,450,000 3,450,000 ------------ ------------ ------------ Net deferred tax asset $ 3,022,000 $ 3,750,000 $ 3,750,000
A provision for income taxes related to non-member income from Minn-Dak Yeast Company, totaling $278,000, for the year ended August 31, 1998 is included in other expense. The cooperative has had non-member losses in prior years. These losses have been used to offset member income for income tax reporting. Accordingly, there is no benefit from income taxes recorded for the years ended August 31, 1997 and 1996. NOTE 10 - EMPLOYEES' PENSION PLAN The cooperative has a non-contributory defined benefit plan which covers substantially all employees who meet certain requirements of age, length of service and hours worked per year. The benefits provided are based upon the employee's average monthly compensation during the previous three highest consecutive years multiplied by a formula and the participant's service ratio. It is the cooperative's funding policy to contribute to the plan at least the minimum amount required by ERISA as determined by the actuarial firm. The 1998 assumed discount rate was 7.5%. The assumed discount rate for 1997 and 1996 was 8%. The expected long-term rate of return on plan assets was estimated to be 8% per year and future salary increases were estimated to be 5.0% per year in 1998, and 5.5% per year in 1997 and 1996. The assets of the cooperative plan are maintained via insurance contracts with Lincoln National Life Insurance Company of Fort Wayne, Indiana, and mutual funds with Strong Funds of Milwaukee, Wisconsin. The following table sets forth the plan's funded status at August 31, 1998, 1997, and 1996:
1998 1997 1996 Actuarial present value of benefit obligations: Vested benefit obligation $ (6,430,093) $ (5,177,415) $ (4,130,135) Accumulated benefit obligation $ (6,476,120) $ (5,219,255) $ (4,314,938) Projected benefit obligation $(10,125,507) $ (8,638,721) $ (7,096,231) Plan assets at fair value 8,051,707 6,414,126 5,514,202 ------------ ------------ ------------ Projected benefit obligation in excess of plan assets (2,073,800) (2,224,595) (1,582,029) Unrecognized net (gain)/loss 977,175 1,179,157 523,555 Unrecognized prior service cost 464,816 519,689 574,562 Unrecognized net asset at adoption date (September 1, 1987) (99,747) (118,013) (136,279) ------------ ------------ ------------ Pension liability (731,556) (643,762) (620,191) Less current portion 291,095 194,929 144,213 ------------ ------------ ------------ Long-term pension liability $ (440,461) $ (448,833) $ (475,978)
The net periodic pension cost for the years ended August 31, 1998, 1997, and 1996, includes the following components:
1998 1997 1996 Service cost-benefits earned during the period $ 487,480 $ 394,073 $ 313,069 Interest cost on projected benefit obligation 698,420 549,957 442,520 Actual return on plan assets (1,283,388) (645,048) (753,673) Net amortization and deferral 811,386 225,476 421,406 ----------- ----------- ----------- Net periodic pension cost $ 713,898 $ 524,458 $ 423,322
NOTE 11 - ENVIRONMENTAL MATTERS Minn-Dak is subject to extensive federal and state environmental laws and regulations with respect to water and air quality, solid waste disposal and odor and noise control. Minn-Dak conducts an ongoing and expanding control program designed to meet these environmental laws and regulations. While Minn-Dak will continue to have ongoing environmental compliance issues, currently there are no pending regulatory enforcement actions and Minn-Dak believes that it is in substantial compliance with applicable environmental laws and regulations. Minn-Dak cannot predict whether future changes in environmental laws or regulations might increase the cost of operating its facilities and conducting its business. Any such changes could have financial consequences for Minn-Dak and its members. NOTE 12 - COMMITMENTS AND CONTINGENCIES Minn-Dak is subject to various lawsuits and claims which arise in the ordinary course of its business. While the results of such litigation and claims cannot be predicted with certainty, management believes the disposition of all such proceedings, individually or in aggregate, should not have a material adverse effect on the company's financial position, results of operations or cash flows. Minn-Dak participates in a multi-employer, self-funded employee medical insurance plan with Minn-Dak Yeast Company. The terms of the plan call for the reimbursements to the plan administrator for all claims paid, up to a maximum amount of $30,000 per employee per year and an aggregate maximum of $1,400,000 per year. NOTE 13 - INVESTMENT IN MARKETING COOPERATIVES Minn-Dak has formed common marketing agency agreements with United Sugars Corporation (United Sugars) and Midwest Agri-Commodities (Midwest) to be the exclusive marketing agents for all products produced by them and other member processors. Minn-Dak's ownership requirement in United Sugars is calculated periodically and is based on the average volume of sugar produced during the five previous fiscal years. The investment is accounted for on the equity method and the amount of sales and related costs recognized by each member processor is allocated based on their pro-rata share of production for the year. Minn-Dak provided United Sugars with cash advances on an ongoing basis for operating and marketing expenses incurred. During the years ended August 31, 1998, 1997, and 1996, Minn-Dak had advanced $20,263,037, $16,327,321, and $14,948,115, respectively. Minn-Dak had outstanding advances due from (to) United Sugars of $1,970,529, ($279,011), and ($958,905), for the years ended August 31, 1998, 1997, and 1996, respectively. In December, 1997, United States Sugar Corporation (USSC) became an equity member of United Sugars. United Sugars will market all of the sugar refined by USSC under the same terms as other members. USSC began shipping sugar in September, 1998. They are expected to have annual capacity of approximately 10 million hundredweight. Minn-Dak has a one-third ownership interest in Midwest. The amount of the investment is accounted for using the equity method. All beet pulp and a portion of the molasses produced is sold by Midwest as an agent for Minn-Dak. The amount of sales and related costs to be recognized by each owner is allocated based on their pro-rata share of production for the year. The owners provide Midwest with cash advances on an ongoing basis for operating and marketing expenses incurred by Midwest. Minn-Dak advanced Midwest $1,545,691, $1,627,978, $2,157,891, respectively, during the years ended August 31, 1998, 1997, and 1996. Minn-Dak had outstanding advances due from Midwest of $927,189, $1,166,651, and $1,119,490, as of August 31, 1998, 1997, and 1996, respectively. The owners are guarantors of the short-term line of credit Midwest has with the St. Paul Bank for Cooperatives (bank). NOTE 14 - OPERATING LEASES The cooperative is a party to various operating leases for vehicles and equipment. Future minimum payments for the years ending August 31 under these obligations are approximately as follows: 1999 1,342,000 2000 1,028,000 2001 917,000 2002 903,000 2003 342,000 Thereafter 635,000 Operating lease and contract expenses for the years ended August 31, 1998, 1997, and 1996, totaled approximately $1,386,000, $662,000, and $713,000, respectively. NOTE 15 - STOCK TRANSFER RESTRICTION The cooperative has entered into an agreement with Minn-Dak Yeast's minority shareholder, whereby neither party shall sell, option or transfer its interest in Minn-Dak Yeast to any person, firm or corporation (third party) without first offering, in writing, the other party the right to acquire such interest on the same terms. If the offer is not accepted by the offeree within 30 days, the offeror may sell, option or transfer its interest to the third party within 120 days after expiration of the 30-day period. NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is generally defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. Quoted market prices are generally not available for the company's financial instruments. Accordingly, fair values are based on judgments regarding anticipated cash flows, future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. Changes in the assumptions could significantly affect the estimates. The following methods and assumptions were used by the company to estimate fair value of the financial instruments, and the estimated fair values of the company's financial instruments as of August 31, 1998, 1997, and 1996, are as follows: Investments - The investment in St. Paul Bank for Cooperatives, R.S.R. Electric Cooperative, Inc. and all other cooperatives are stated at cost, plus the cooperative's share of allocated patronage and capital credits. The investment in United Sugars Corporation, Midwest Agri-Commodities and ProGold Limited Liability Company are accounted for using the equity method, wherein the investment is recorded at the amount of the underlying equity in the net assets of the investments and adjusted to recognize the cooperative's share of the undistributed earnings or losses. Minn-Dak Farmers Cooperative believes it is not practicable to estimate the fair value without incurring excessive costs because there is no established market for this stock and it is inappropriate to estimate future cash flows which are largely dependent on future patronage earnings of the investment. Long-term debt - The fair value of obligations under long-term debt are estimated based on the quoted market prices for the same or similar issues or on the current rates offered for debt of similar maturities. Obligations under capital leases - The fair value of obligations under capital leases, was based on present value models using current financing rates available to the cooperative. At August 31, 1998, 1997, and 1996, the carrying value of obligations under capital leases was $12,000,000 and the estimated fair value was $9,800,000. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT IDENTIFICATION OF DIRECTORS The table below lists the current directors of Minn-Dak Farmers Cooperative. The Board of Directors consists of one director from each district. Directors must be common shareholders or representatives of common shareholders belonging to the district they represent and are elected by the members of that district. In the case of a common shareholder who is other than a natural person, a duly appointed or elected representative of such common shareholder may serve as a director. The directors have been elected to serve three-year terms expiring in December of the years indicated in the table below. One director is elected each year from three selected districts. Brief biographies for each of the directors and directors-elected are included after the table.
Term Expires Name and Address Age District Director Since in December - ---------------- --- -------- -------------- ----------- Robert Breuer 302 Mooreton Avenue North Mooreton, ND 58061 66 District #2 - Factory West 1984 1998(1) Douglas Etten RR #2, Box 65 Foxhome, MN 56543 47 District #8 - Lyngaas 1997 2000 Michael Hasbargen RR #2, Box 71 Breckenridge, MN 56520 53 District #4 - Factory East 1993 1999 John Hought RR #2, Box 9 Foxhome, MN 56543 57 District #6 - Yaggie 1985 2000 Victor Krabbenhoft RR #2, Box 45 Glyndon, MN 56547 49 District #9 - Peet 1989 1998(2) Jack Lacey RR #1, Box 66 Wendell, MN 56590 57 District #5 - Hawes 1993 1999 Jerry Meyer 1433 15th Street North Wahpeton, ND 58075 60 District #1 - Tyler 1994 2000 Edward Moen 17060 County Road 8 Colfax, ND 58018 72 District #3 - Gorder 1989 1998(3) Paul Summer RR #2, Box 84 Herman, MN 56248 56 District #7 - Lehman 1993 1999
- ------------ (1) Mr. Breuer's term as a director of the Company from District #2-Factory West expires on December 8, 1998. (2) Mr. Krabbenhoft's term as a director of the Company from District #9-Peet expires on December 8, 1998. (3) Mr. Moen's term as director of the Company from District #3-Gorder expires on December 8, 1998. ROBERT BREUER has been a director since 1984 and is a former chairman. Mr. Breuer has been farming since 1958 near Mooreton, ND. He serves on the board of directors for Minn-Dak Yeast Company and on the Mooreton City Council, Mooreton, ND. DOUGLAS ETTEN has been a director since 1997. Mr. Etten has been farming near Foxhome, MN since graduating from Concordia College in Business and Math in 1974. MICHAEL HASBARGEN has been a director since 1992 and is currently serving as board vice chairman. Mr. Hasbargen has been farming near Breckenridge, MN since graduating from NDSU in Ag Economics in 1967. Mr. Hasbargen also serves on the board of directors of United Sugars Corporation and Midwest Agri-Commodities Company. JOHN HOUGHT has been a director since 1985. Mr. Hought has been farming near Foxhome, MN since 1959. He also serves on the board of directors for Minn-Dak Yeast Company. VICTOR KRABBENHOFT has been a director since 1989, currently serves as board chairman, and is a former vice chairman. Mr. Krabbenhoft has been farming near Glyndon, MN since 1971. He also serves on the board of directors for Midwest Agri-Commodities Company, United Sugars Corporation, and Minn-Dak Yeast Company; and is one of Minn-Dak's representatives to the American Sugarbeet Growers Association in Washington, DC. JACK LACEY has been a director since 1993. Mr. Lacey has been farming with his wife, Sharon, near Wendell, MN since 1963. He serves as one of Minn-Dak representatives to the American Sugarbeet Growers Association in Washington, DC. JERRY MEYER has been a director since 1994. Mr. Meyer has been farming near Fairmount, ND since 1958. He also services on the board of directors for Minn-Dak Yeast Company. ED MOEN has been a director since 1989 and is currently serving as board treasurer. Mr. Moen has been farming near Galchutt, ND since 1945. He also serves on the board of directors for Midwest Agri-Commodities Company. PAUL SUMMER has been a director since 1993 and is currently serving as board secretary. Mr. Summer has been farming near Herman, MN since 1963. He also serves on the board for Midwest Agri-Commodities Company. The Board of Directors meet monthly. The Company provides its directors with minimal compensation, consisting of (i) a payment of $225.00 per meeting for regular and special board meetings, (ii) the greater (a) $112.50 for any day in which directors partake in activities on the Company's behalf for under five hours or (b) $225.00 for any day in which directors partake in activities on the Company's behalf for five hours or more. The Chairman of the Board of Directors also receives a flat $200.00 per month. EXECUTIVE OFFICERS The table below lists the principal officers of the Company, none of whom owns any common or preferred shares. The president and chief executive officer, executive vice president and chief financial officer, vice president agriculture, vice president engineering, and vice president operations are elected annually by the Board of Directors to serve on the board. Brief biographies for each of the officers are included after the table. Name Age Position - ---- --- -------- Larry D. Steward 60 President and Chief Executive Officer Steven M. Caspers 48 Executive Vice President and Chief Financial Officer Thomas D. Knudsen 44 Vice President, Agriculture John E. Groneman 62 Vice President, Engineering Richard K. Richter 58 Vice President, Operations Jerald W. Pierson 59 Director of Human Resources Jeffrey L. Carlson 43 Director of Technical Services John S. Nyquist 43 Purchasing Manager Patricia J. Estes 58 Director of Communications Kevin R. Shannon 43 Safety Director LARRY D. STEWARD joined Minn-Dak Farmers Cooperative in December, 1990 as president and chief executive officer. Mr. Steward serves on the boards of United Sugars Corporation, and Midwest Agri-Commodities. He is chairman of the board of Minn-Dak Yeast Company, Inc. Mr. Steward is a trustee of United States Beet Sugar Association and a director on the board of the National Council of Farmer Cooperatives based in Washington, DC. Prior to joining Minn-Dak, Mr. Steward was midwest sales manager for Harborlite Corporation. From 1963 to 1988 Mr. Steward was employed by Great Western Sugar Company, Denver, Colorado and from 1984 to 1988 he served as its vice president. Mr. Steward holds a degree in chemistry and math from the University of Nebraska, Kearney, Nebraska. STEVEN M. CASPERS is a graduate of the University of North Dakota with a bachelor of science in business administration and a major in accounting. He has been employed at Minn-Dak Farmers Cooperative since May 5, 1974 and is active in numerous local civic and fraternal organizations, and national, industry related boards and committees. He is president of Minn-Dak Yeast Company and services on the boards of directors of Midwest Agri-Commodities, United Sugars Corporation and ProGold, LLC. JOHN E. GRONEMAN is a graduate of Colorado State University with a bachelor of science in engineering. He began his experience in the sugar industry in 1960, this includes five years as a factory manager. Mr. Groneman began employment with Minn-Dak Farmers Cooperative on March 1, 1974. THOMAS D. KNUDSEN is a graduate of North Dakota State University with a bachelor of science in horticulture and has attended the Beet Sugar Institute at Fort Collins, Colorado. He began employment with the Company on May 24, 1977. RICHARD R. RICHTER has completed both the beet and sugar end coursework of the Beet Sugar Institute of Fort Collins, Colorado. He began his sugar industry experience in 1958 with employment at Minn-Dak Farmers Cooperative beginning in August of 1976. JERALD W. PIERSON is a graduate of Black Hills State University with 29 years human resources experience beginning in 1968. He is active in numerous local civic and fraternal organizations including North Dakota Workers Compensation and the North Dakota Job Service Employer Committee. He began his employment with the Company on March 15, 1982. JEFFREY L. CARLSON is a graduate of the University of Minnesota-Morris with a bachelor of arts in chemistry and the University of North Dakota with a Ph.D in physical chemistry. He began his career as a research chemist and an assistant professor in 1986. Mr. Carlson began his employment with Minn-Dak Farmers Cooperative on June 4, 1990. JOHN S. NYQUIST attended the North Dakota State College of Science, majoring in accounting and computer programs. Mr. Nyquist began his purchasing and inventory control experience in 1975 in the Company storeroom. Mr. Nyquist is active in local civic and fraternal organizations and the National Association of Purchasing Managers. Mr. Nyquist began employment with Minn-Dak Farmers Cooperative on September 15, 1975. PATRICIA J. ESTES is a graduate of Moorhead State University with a bachelor of science in mass communications and master of arts in liberal arts. Ms. Estes is active in local civic organizations and began her publication-communications experience in 1973. Ms. Estes began full-time employment with the Company on December 26, 1989. KEVIN R. SHANNON attended Taylor Institute and Vanguard Vo-Tech, majoring in instrumentation. He is active in local civic organizations. Mr. Shannon began his technical and supervisory career in 1974. His employment with the Company began on June 1, 1983. Prior to becoming the safety director in September of 1992, Mr. Shannon was Minn-Dak's tare lab supervisor. ITEM 11. EXECUTIVE COMPENSATION The following table summarizes the amount of compensation paid for services rendered to the Company during the fiscal year ended August 31, 1998 and the two prior fiscal years to those persons serving as the Company's Chief Executive Officer and to the other most highly compensated executive officers of the Company whose cash compensation exceeded $100,000 per annum. SUMMARY COMPENSATION TABLE
Name and Other Annual All Other Total Principal Position Year Salary Bonus Compensation Compensation Compensation - ------------------ ---- ------ ----- ------------ ------------ ------------ (1) (2) Larry Steward 1998 $199,385 $ 58,012 $19,709 $29,046 $306,152 President & CEO 1997 $192,562 $ 50,500 $17,304 $19,364 $279,730 1996 $178,017 $ 48,900 $15,111 $242,028 Steven Caspers 1998 $120,854 $ 30,000 $16,936 $167,790 EVP & CFO 1997 $116,276 $ 25,500 $19,582 $161,358 1996 $111,365 $ 24,000 $19,562 $154,927 Thomas D Knudsen 1998 $ 88,779 $ 14,500 $15,670 $118,949 VP Agriculture 1997 $ 86,077 $ 13,500 $16,453 $116,030 1996 $ 82,348 $ 13,000 $ 2,677 $ 98,025 Richard K Richter 1998 $ 88,579 $ 14,500 $ 4,648 $107,727 VP Operations 1997 $ 85,210 $ 13,500 $ 4,138 $102,848 1996 $ 82,414 $ 13,000 $ 3,400 $ 95,414 John E Groneman 1998 $ 84,068 $ 13,500 $ 5,454 $103,022 VP Engineering 1997 $ 80,897 $ 12,500 $16,989 $110,386 1996 $ 78,055 $ 12,000 $10,692 $100,747
- ----------------------------- 1) In addition to the salary and bonus described above, Mr. Steward, Mr. Caspers, Mr. Knudsen, Mr. Richter, and Mr. Groneman are provided with "Other Annual Compensation," which includes the value of the excess life insurance cost, individual LTD plan, sold vacation, and Company match of the 401(k) plan. In fiscal 1996, the company adopted a new policy whereby Supervisory, Professional and Management employees are required on or before their anniversary date in 1999, to attain and maintain their vacation and floating holiday hour combined balance at two hundred and forty (240) hours or less. While not encouraged, the cash optioning of vacation and floating holiday accrued hours is allowable. Employees with account balances in excess of 240 hours may elect to cash option up to fifty percent (50%) of the number of hours exceeding 240. Employees at or below the 240 hour limit may elect to cash option fifty percent (50%) of their combined vacation and floating holiday annually accrued hours. Management employees are eligible for performance bonuses, which are partially based upon on the performance of the Company and partially on achievement of certain management performance objectives. The President and CEO determine those performance objectives for officers and significant other management employees of the Company and by the Board of Directors for the President and CEO. The Company has entered into an employment agreement with Mr. Steward, which establishes his salary and benefits as an employee of the Company. The agreement may terminate on sixty days written notice by either party for any reason. Mr. Steward has been employed by the Company for eight years and, therefore, would be affected by the table limits on the qualified benefits table below. In 1992, the Company undertook a compensation review study to determine that its employees' compensation was commensurate with responsibilities of the various Company positions, and that the compensation was equitable between jobs within the Company and externally competitive with other comparable jobs and responsibilities within the Company's geographic region. A national compensation consultant called Hay Management Consultants performed the compensation review study. This study was made of all management employees, including Mr. Steward, and non-union employees. As of August 31, 1998 all employees' wages had been adjusted to levels consistent with the Hay Management Consultants findings and recommendations. The Company continues to consult with Hay Management Consultants in order to maintain fair and equitable compensation for its employees. 2) Beginning in fiscal year 1997, supplemental executive retirement plan contributions are being made on behalf of Mr. Steward. The amount contributed for fiscal year 1998 was $29,046. RETIREMENT PLANS Management employees are also eligible to participate in the Company's defined benefit retirement plan as well as its 401(k) retirement savings plan, each of which are described below. The Company has established a noncontributory, defined benefit retirement plan, which is available to all eligible employees of the Company. The benefits of the plan are funded by periodic contributions by the Company to a retirement trust that invests the contributions and earnings from such contributions to pay benefits to employees. The plan provides for the payment of a monthly retirement benefit determined under a formula based on years of service and each employee's compensation level. See "Executive Compensation--Qualified Benefits Table." Benefits are paid to the employees upon reaching early (age 55 or older) or normal (age 65) retirement age. The plan also provides for the payment of certain disability and death benefits. The Company maintains a Section 401(k) retirement savings plan that permits employees to elect to set aside, on a pre-tax basis, a portion of their gross compensation in trust to pay future retirement benefits. Effective on April 1, 1995, the Company began providing a matching contribution of 25% of each employee's first 4% of compensation that is set aside under the plan. The match increases over time until it reaches 75% of the first 4% in the year 1999. The amounts set aside by each employee and the Company vests immediately and are paid to each employee upon the happening of certain events, all as more fully described in the master plan document. During 1998, Federal law limited employee pre-tax income contributions to $10,000 for each participating employee. Benefits under the 401(k) plan begin to be paid to the employee: (i) upon the attainment of normal retirement age (65), or if the employee chooses, any time after attaining early retirement date (age 55); (ii) the date the employee terminates employment with the Company; or (iii) a pre-retirement distribution equal to the value of the employees 401(k) account, provided the employee has attained age 59 1/2 and provided a written consent of the spouse (if married). Effective September 1, 1996 certain executive employees of the Company became eligible to participate in a "Supplemental Executive Retirement Plan." That plan was adopted by the Company's Board of Directors on January 21, 1997. Subject to the discretion of the Board of Directors, the plan provides for the Company to credit to the account of each executive eligible to participate in the Supplemental Plan amounts equal to the difference between the benefits actually payable to the executive under the provisions of the defined benefit retirement plan and the amounts which would have been payable under the defined benefit retirement plan if certain provisions of the Internal Revenue Code did not prohibit the payment of such benefits. QUALIFIED BENEFITS TABLE The following table reflects the estimated annual benefits payable to a fully-vested executive officer of the Cooperative under the defined benefit retirement plan upon retirement at age 65, after 15, 20, 25, 30, and 35 years of annual service at the compensation levels set forth hereon: Pension Compensation Years of Service 15 20 25 30 35 $125,000 $ 27,666 $ 36,888 $ 46,111 $ 55,333 $ 64,555 $150,000 $ 33,666 $ 44,888 $ 56,111 $ 67,333 $ 78,555 $175,000 $ 36,066 $ 48,088 $ 60,111 $ 72,133 $ 84,155 $200,000 $ 36,066 $ 48,088 $ 60,111 $ 72,133 $ 84,155 $225,000 $ 36,066 $ 48,088 $ 60,111 $ 72,133 $ 84,155 $250,000 $ 36,066 $ 48,088 $ 60,111 $ 72,133 $ 84,155 $275,000 $ 36,066 $ 48,088 $ 60,111 $ 72,133 $ 84,155 $300,000 $ 36,066 $ 48,088 $ 60,111 $ 72,133 $ 84,155 $325,000 $ 36,066 $ 48,088 $ 60,111 $ 72,133 $ 84,155 $350,000 $ 36,066 $ 48,088 $ 60,111 $ 72,133 $ 84,155 $375,000 $ 36,066 $ 48,088 $ 60,111 $ 72,133 $ 84,155 The two executive officers named in the Summary Compensation Table have years of service under the plan as follows: Mr. Steward has served for 8 years; Mr. Caspers has served for 24 years. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table presents certain information with respect to the ownership of shares of preferred stock as of November 19, 1998, by each director. Each shareholder has direct ownership with respect to the share shown as beneficially owned, except as otherwise indicated in a footnote. To the Company's knowledge, as of November 19, 1998, no person owned beneficially more than 5% of the Company's outstanding shares and none of the principal officers listed above owned any such shares. Name Position with Company No. of Shares % of Shares - ---- --------------------- ------------- ----------- Robert Breuer Director 160 less than 1% Douglas Etten Director 450 less than 1% Michael Hasbargen Director 375 less than 1% John Hought Director 270 less than 1% Victor Krabbenhoft Director 245 less than 1% Jack Lacey (1) Director 250 less than 1% Jerry Meyer Director 460 less than 1% Ed Moen Director 180 less than 1% Paul Summer (2) Director 222 less than 1% All Directors 2612 3.62% (1) Mr. Lacey's shares are held and grown under the name of Jack Lacey Company. (2) Mr. Summer's shares are grown under the name of P V Unlimited Corp. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Each of the Company's directors is also a sugar beet grower or a shareholder member or representative of a shareholder member. By virtue of their status as such members of the Company, each director or the member he represents sells sugar beets to the Company and receives payments for those sugar beets. Such payments for sugar beets often exceed $60,000. However, such payments are received by the directors or the entities they represent on exactly the same basis as payments are received by other members of the Company for the delivery of their sugar beets. Except for the sugar beet sales described in the preceding sentences, none of the directors or executive officers of the Company have engaged in any other transactions with the Company involving amounts in excess of $60,000. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K FINANCIAL STATEMENT SCHEDULES None REPORTS ON FORM 8-K The Company was not required to and did not file any reports on Form 8-K during the three months ended August 31, 1998. EXHIBITS Index - ----- ** 3(i) Articles of Amendment to the Articles of Incorporation of Minn-Dak Farmers Cooperative * 3(ii) Articles of Incorporation of Minn-Dak Farmers Cooperative *** 3(iii) Amended Bylaws of Minn-Dak Farmers Cooperative ** 10(a) Growers' Agreement (three-year Agreement) (example of agreement which each Shareholder is required to sign) 10(b) Uniform Member Marketing Agreement by and between United Sugars Corporation and Minn-Dak Farmers Cooperative * 10(d) Capitalization Agreement by and among Southern Minnesota Beet Sugar Cooperative, Minn-Dak Farmers Cooperative, American Crystal Sugar Company, and United Sugars Corporation * 10(e) Memorandum of Understanding and Uniform Member Agreement by and between Midwest Agri-Commodities Company and Minn-Dak Farmers Cooperative * 10(f) Molasses Purchase Contract by and between Minn-Dak Farmers Cooperative and Universal Foods Corporation (Confidential Treatment for certain sections) * 10(g) Yeast Purchase Contract by and between Universal Foods Corporation and Minn-Dak Yeast Company, Inc. (Confidential Treatment for certain sections) * 10(i) Operating Agreement of ProGold Limited Liability Company * 10(j) ProGold Limited Liability Company Member Control Agreement * 10(k) Agreement for Electrical Service ** 10(l) Agreements for Coal Supply, Transportation, and Oiling Service (Confidential Treatment Requested as to certain provisions) * 10(m) Minn-Dak Farmers Cooperative Pension Plan * 10(n) Larry D. Steward Employment Agreement * 10(o) Management Consulting Agreement between Minn-Dak Yeast Company and Universal Foods Corporation, (Confidential Treatment for certain sections) *** 10(p) Amendment to Minn-Dak Farmers Cooperative Pension Plan 12 Statement re Computation of Ratio of Net Proceeds to Fixed Charges * 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 27 Financial Data Schedule - ------------------- * Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 33-94644), declared effective September 11, 1995. ** Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996 as filed on November 21, 1996. *** Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997 as filed on November 25, 1997. SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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. MINN-DAK FARMERS COOPERATIVE BY /s/ Larry D. Steward ----------------------------------- LARRY D. STEWARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DUTIES INDICATED. SIGNATURE TITLE REPORT DATE - --------- ----- ----------- /s/ Larry D. Steward President and 11-24-98 - --------------------------- Chief Executive Officer Larry D. Steward /s/ Steven M. Caspers Vice President - Finance 11-24-98 - --------------------------- Steven M. Caspers /s/ Allen E. Larson Controller 11-24-98 - --------------------------- Allen E. Larson /s/ Robert Breuer Director 11-24-98 - --------------------------- Robert Breuer /s/ Victor Krabbenhoft Director 11-24-98 - --------------------------- Victor Krabbenhoft /s/ Douglas Etten Director 11-24-98 - --------------------------- Douglas Etten /s/ Edward Moen, Jr. Director 11-24-98 - --------------------------- Edward Moen, Jr. /s/ Mike Hasbargen Director 11-24-98 - --------------------------- Mike Hasbargen /s/ John Hought Director 11-24-98 - --------------------------- John Hought /s/ Jack Lacey Director 11-24-98 - --------------------------- Jack Lacey /s/ Jerry Meyer Director 11-24-98 - --------------------------- Jerry Meyer /s/ Paul Summer Director 11-24-98 - --------------------------- Paul Summer EX-10.B 2 UNIFORM MEMBER BEET SUGAR MARKETING AGREEMENT EXHIBIT 10.b EXHIBIT 10(b) UNIFORM MEMBER BEET SUGAR MARKETING AGREEMENT THIS AGREEMENT, Made as of the 1st day of December, 1997, by and between United Sugars Corporation, a cooperative association organized under the laws of the State of Minnesota (hereinafter referred to as "Marketing Agent"), and Minn-Dak Farmers Cooperative, a cooperative association organized under the laws of the State of (hereinafter referred to as "Processor"). WITNESSETH WHEREAS, Processor is a producer-owned and Producer operated agricultural cooperative which is organized and operated so as to adhere to the provisions of Section 15(a) of the Agricultural Marketing Act (12 U.S.C., Sec. 1141j(a)), as amended, and the Capper-Volstead Act of 1922 (7 U.S.C., Sec. 291, 292), and which is engaged in the operation of one or more beet sugar processing plants for the purpose of producing one or more forms of refined sugar; and WHEREAS, Marketing Agent is organized and operated so as to adhere to the provisions of Section 15(a) of the Agricultural Marketing Act (12 U.S.C., Sec. 1141j(a)), as amended, and the Capper-Volstead Act of 1922 (7 U.S.C., Sec. 291, 292), for the mutual help and benefit of its members and for the purposes of acting as a marketing agency for its members and of engaging in the business of marketing the refined sugar (whether sold in packages or in bulk) produced by its members, including but not limited to, granulated, liquid, blends, specialty products and corn sweetener (hereinafter referred to as the "Products"); and WHEREAS, Processor is a member of Marketing Agent and wishes to participate with other members of Marketing Agent in developing and maintaining a dependable market for such Products; and WHEREAS, Marketing Agent and Processor desire to enter into a member marketing agreement on a pool basis. NOW, THEREFORE, in consideration of the above, subject to the respective terms, conditions, and obligations of Processor and Marketing Agent herein and the pooling obligations of the other members of Marketing Agent, Marketing Agent and Processor agree as follows: 1. Appointment of Marketing Agent as Sales Agent. (a) Processor appoints and employs Marketing Agent to act as its sole agent in the sales and marketing of all Product produced by Processor during the Term (as hereinafter defined) of this Agreement, and Marketing Agent accepts such appointment and employment and agrees to act as the sales agent and pool administrator in accordance with the terms of this Agreement. (b) Processor agrees that Marketing Agent may employ all such persons and agencies as it determines to be necessary to carry out its obligations under this Agreement. It is understood and agreed that Marketing Agent may market Products under the various trademarks and trade names of Processor (if any) pursuant to a royalty free license agreement with respect to such trademarks and trade names, the form of which agreement shall be mutually agreed upon by Processor and Marketing Agent. (c) Marketing Agent agrees, and is hereby empowered by Processor, to sell in its own name, and pass title on behalf of Processor to, all Product produced by Processor during the Term of this Agreement to such purchasers, at such time or times, at such place or places, in such manner and on such prices or terms as Marketing Agent determines to be in the best interests of Processor and other members of Marketing Agent. (d) Marketing Agent shall have no rights, and nothing herein contained shall be deemed to create rights in Marketing Agent in and to any other products produced by Processor (other than refined sugar), including without limitation, molasses. (e) It is understood and agreed that Marketing Agent may from time to time procure certain Products from third parties in order to meet the requirements of sales contracts or as otherwise determined to be in the best interest of Processor and the other members of Marketing Agent. Processor and Marketing Agent agree that Marketing Agent shall act as an agent for Processor in connection with such purchases of Products and that the costs of acquiring such Products and revenues received from the sale of such Products shall be allocated to Processor and other members of Marketing Agent on the same basis as allocations from the pool for which the Products were purchased. 2. Packaging. Processor intends to have the capacity to sell Product in bulk as well as in packages in the sizes set forth on Schedule A hereto. It is understood that production and packaging constraints will limit the volume and mix of packages that can be produced at any one time, and accordingly, Marketing Agent agrees to coordinate orders for packaged Product taking into consideration Processor's production and packaging limitations. 3. Production and Delivery. It is anticipated that Processor will produce Products during its campaign on an approximately even monthly schedule. However, Processor acknowledges that Marketing Agent's requirements may be greater in certain specified months and less in others. Accordingly, subject to mutual agreement of the parties, Marketing Agent will endeavor to coordinate demands with Processor's production and storage capacities. At Marketing Agent's request, Processor will attempt to maximize production in any month in order to accommodate customer demand. 3.1 Product Production Schedules. Processor shall provide to Marketing Agent by June 1 of each Fiscal Year (as hereinafter defined) during the Term a preliminary estimated production schedule (specifying volume and dates) for the next following Fiscal Year and will provide a revised estimated production schedule by July 1 of each such year, reflecting any changes from the June preliminary estimate. Thereafter, the estimated production schedule shall be updated each month. For the purposes of this Agreement, the term "Fiscal Year" shall mean each twelve month period from September 1 through August 31 of the next following calendar year. Marketing Agent and Processor shall jointly develop a production and delivery schedule plan for each Fiscal Year that will attempt to accommodate, as much as reasonably possible, the dual goals of maximizing the price to be paid to Processor and maximizing production efficiencies, with the objective of selling all of Processor's production of Product each year. 3.2 Weekly Delivery Amounts. Estimated weekly delivery schedules, including quantities, and bulk and packaging requirements for each week of each month, shall be agreed upon by the parties at least seven (7) days in advance of the month to which they apply. The parties shall use reasonable efforts, recognizing customer demand, to accommodate each other in setting such schedules. 4. Billing and Collection. All sales made by Marketing Agent shall be billed on invoices of Marketing Agent and all receipts shall be collected by Marketing Agent. 5. Pool Years. Processor's members processes beets and thick juice into refined sugar, generally from September through May ("Beet Processing Season"). Certain other of Marketing Agent's members process cane into feedstock for their refinery from mid-October through March ("Cane Processing Season), and cane feedstock is processed into Product throughout the year, from November through October. Marketing Agent markets Product in one or more pools, each of which begins on September 1 and ends on or about the last day of the applicable Fiscal Year (August 31). Each Beet Processing Season falls substantially within a corresponding Fiscal Year (pool year) of Marketing Agent. In order to include sales of carry-over Product produced by Processor in a given Beet Processing Season in the pool applicable to the Fiscal Year in which the Beet Processing Season occurred, even though delivery may occur following August 31 of such year, the Product to be included in calculating Marketing Agent's pool in each Fiscal Year shall be the amount of Product produced during the applicable Fiscal Year. 6. Price for Product. 6.1 Price. Marketing Agent shall pay to Processor for all Product delivered hereunder, Processor's pro rata share of the Net Pool Price (as hereinafter defined) for each product pool in which Processor participates. 6.2 Product Pools. Marketing Agent and Processor agree that the Products to be sold by Marketing Agent hereunder shall be pooled for each Fiscal Year with Products of the other members of Marketing Agent, as set forth in Section 5 hereof There shall initially be the following three (3) pools for Products: (a) Primary Pool, (b) Export Option Pool, and (c) High Fructose Syrup ("HFS") Pool. The Marketing Agent by action of its Executive Committee shall have the discretion to create additional pools as deemed reasonably necessary for the equitable treatment of all members. As sales are made, the proceeds received by Marketing Agent from the sale of pooled Products received from its members, shall be deposited into the pools for the appropriate Fiscal Year and shall be credited to Processor and the other members of Marketing Agent on the basis of their respective pro rata shares. Processor's pro rata share of the Net Pool Price (as hereinafter defined) of each pool shall be distributed to Processor by Marketing Agent as rapidly as collection and accounting procedures permit. 6.3 Primary Pool. Processor's pro-rata share for the Primary Pool for each Fiscal Year shall be based upon total production, less the amount of Product designated for other alternative or separate pools. With respect to the Primary Pool for each Fiscal Year covered by this Agreement, distributions of the Net Pool Price shall initially be based on Marketing Agent's best estimate of the amount of the Products anticipated to be produced in such year by Processor and each other participant in the pool, and shall be adjusted by Marketing Agent periodically as production figures are more precisely determined. Such adjustments shall reflect an interest charge to be paid by any pool participant who has received excess distributions based on the preliminary production estimates and such interest shall be paid to the pool participant(s) who received less than full distributions. For purposes of this paragraph, interest charges shall be equal to the average of (i) the monthly Commodity Credit Corporation loan rate for the period in question and (ii) the rate charged by Marketing Agent's principal lender for thirty (30) day seasonal fixed rate financing for the period in question. As soon as exact information and production figures are available, Marketing Agent shall determine Processor's final Product price for the Fiscal Year, and appropriate adjustments, together with interest, as provided above, shall be made. Estimated payments shall be made by Marketing Agent to Processor no less frequently than weekly during the Term, and final accounting for each Fiscal Year shall be made no later than the ninetieth day following the last day of each Fiscal Year. 6.4 Export Option and Other Pools. The distribution of Net Pool Price from the Export Option Pool and the HFS Pool (and any other pool established by the Marketing Agent) shall be based on the Product committed by each member to such pool and payments shall be made following the procedure set forth above for Primary Pool payments. 7. Marketing Agent's Books and Records. Marketing Agent shall keep accurate records of costs, sales, and pool proceeds in accordance with sound and generally accepted accounting practices. Said records shall be at all reasonable times fully available for copying and inspection by Processor and/or its certified public accountants. All records of each pool shall be audited annually by independent certified public accountants selected by Marketing Agent. Such audit shall be made available to Processor promptly after completion. 8. Definitions of Net Pool Price. The net proceeds of the product pools for each Fiscal Year (the "Net Pool Price") shall be defined as the gross proceeds realized by Marketing Agent from sales of Products produced by Processor and the other members in each pool, less expenses directly attributable to such pool in accordance with authorized and established rules of Marketing Agent as follows: (a) All costs, charges or expenses attributable to the marketing and sale of pooled Products, including without limitation salaries, wages and other benefits of Marketing Agent's employees, office expense and appropriate consulting fees; (b) All costs of transportation of the pooled Products; provided, however, that to the extent rail transportation is not available from the location of Processor's plants, transportation costs shall be adjusted to reflect the added cost related to transportation from such plants; (c) Insurance premiums paid by Marketing Agent; (d) Interest expense for financing obtained by Marketing Agent; (e) State inspection fees and all other fees and taxes incurred in the marketing of the pooled Products; (f) All charges, fees and expenses paid by Marketing Agent to Processor, any other member of Marketing Agent, or any other person, for advertising or use of trademarks; (g) All costs and expenses reimbursed to Processor or any other member pursuant to Section 16 hereof; (h) All amounts paid by Marketing Agent to any third person for shipping, storage, warehousing or packaging costs or expenses described in Section 16 hereof; (i) All other direct and indirect charges or expenses, including administrative and overhead, attributable to the sale of the pooled Products in the operation of the relevant Product pool; and (j) Depreciation of property and equipment of Marketing Agent. All losses incurred by Marketing Agent as a result of uncollectible accounts receivable shall be allocated to the appropriate Product pool and shall be regarded as a marketing expense in determining the Net Pool Price of that Product pool. 9. Budget and Advance of Marketing Costs. Marketing Agent shall prepare a monthly budget or estimate of all direct and indirect marketing costs for the pools. It is the intention of Marketing Agent to secure independent financing for costs associated with the marketing of Products as reflected in the budget. 10. Product Warranties, Quality Standards, Transfer of Title: Handling of Products of Substandard Quality. (a) It is understood and agreed that title to Products shall remain in the name of Processor until the earlier of (i) such time as title is transferred to a buyer by Marketing Agent on behalf of Processor or (ii) risk of loss passes to Marketing Agent, as provided in Section 12(a)(ii) hereof. All Processor's Products which are delivered to buyers pursuant to Marketing Agent's shipping orders or are delivered to Marketing Agent shall at the time of delivery be free and clear of any liens, attachments, security interests, claims or encumbrances of any kind whatsoever. (b) Marketing Agent shall furnish to Processor from time to time customer specifications for Products prescribing standards and procedures for quality control, storing and shipping of such Products. Initially such standards shall be mutually agreed upon by Marketing Agent and its members, and thereafter from time to time revised in a manner consistent with the Quality Assurance Policy attached hereto as Schedule B. In the absence of an agreement by the parties to another set of standards, the applicable standards shall be those set forth on Schedule C attached hereto. (c) Processor shall observe and comply with any buyer specifications furnished by Marketing Agent. Also, all Products delivered to or at the order of Marketing Agent shall conform to quality and other standards prescribed by applicable state and federal rules and regulations. (d) Product which fails to meet the customer specifications and the agreed standards, or in the absence of agreed standards, the standards set forth on Schedule D hereto shall be considered substandard for purposes of this Agreement. Product of substandard quality, shall, on the joint agreement of Processor and Marketing Agent: (i) be withheld from the product pool and marketed by Marketing Agent as shall be mutually agreed by Marketing Agent and Processor with proceeds of the sale of such Product, less all direct and indirect selling expenses, distributed to Processor, or (ii) remain in the product pool and be charged with the additional costs relating to the substandard quality of the Product. 11. Storage of Product. Processor shall store its Product as the parties shall mutually agree. At the earliest reasonable time after processing commences in each Fiscal Year and as soon as Product has begun to be placed in storage, Processor shall deliver daily inventory reports to Marketing Agent of both feedstock and Product. All Product included in the daily inventory shall be included in the product pool for the appropriate Fiscal Year even though the Product remains on the premises of Processor. Certain storage and warehousing costs and expenses associated with the Products shall be charged to Marketing Agent and be included in the calculation of the Net Pool Price of the Product Pools, as provided in Sections 8(g) and (h) and 16 of this Agreement. 12. Risk of Loss: Insurance: Indemnification. (a) Processor covenants and agrees that it shall bear the risk of loss of all Products produced by Processor or any portion thereof until earlier of the time (i) the Products are shipped to the buyer of the same; or (ii) at the time it is no longer possible to identify the Product as that of Processor (i.e., commingled or processed Product), at which time the risk of loss shall pass to Marketing Agent; provided, however, that Processor shall continue to be the owner of the Product until the Product is sold to the buyer. Whenever Marketing Agent shall have possession or control over the Product prior to sale to the buyer, Marketing Agent shall act strictly as custodian thereof in accordance with the provisions of this Agreement. (b) Processor covenants and agrees, at its sole cost and at all times during the Term (as hereinafter defined) to maintain in force an insurance policy or policies covering loss, theft or damage to the Products from any cause whatsoever until the shipment of the same to the buyer, in amounts not less than the full insurable value thereof, and product liability insurance in amounts required by Marketing Agent from time to time, which product liability insurance shall name Marketing Agent as an additional or a named insured. (c) Marketing Agent covenants and agrees, at all times during the Term of this Agreement, to maintain in force during the period for which it bears the risk of loss, an insurance policy or policies covering loss, theft or damage to the Products from any cause whatsoever in amounts not less than the full insurable value thereof, and product liability insurance in amounts deemed reasonable by Marketing Agent, which product liability insurance shall name Processor as an additional or named insured. (d) Insurance policies shall be taken out with responsible insurance companies licensed to write insurance in Minnesota, in the case of Marketing Agent, and Florida, in the case of Processor, and each shall not be canceled or altered without ten days' written notice to Marketing Agent and Processor. Each party shall furnish the other party with certificates of insurance for policies required hereunder, together with a summary of the terms and conditions of the policy or policies, and the date on which the same expire. (e) Processor hereby agrees to indemnify and hold harmless, Marketing Agent, its members, and their respective employees, from and against any claims, losses or liabilities arising out of, or resulting from, the production, on-site storage or loading of any Products which are marketed by Marketing Agent pursuant to this Agreement. (f) Marketing Agent hereby agrees to indemnify and hold harmless, Processor, and its employees, agents and shareholders from and against any claims, losses or liabilities arising out of, or resulting from, the actions or omissions of Marketing Agent, its employees or agents with respect to the Product, from and after the time risk of loss of Processor's Product transfers. 13. Orders. Regardless of factory or warehouse designation, the proceeds from sales orders shall be credited to the Product pool for the appropriate Fiscal Year as provided in Section 5 hereof Marketing Agent shall consider car loadings, points of destination, capacity of tanks or warehouses, size of inventories stored therein and other pertinent factors in selecting the factory, warehouse or warehouses from which delivery shall be made. 14. Traffic Function. Marketing Agent shall be responsible for performing all normal traffic functions relating to the shipment of all Products produced at Processor's plant, and at the request of Processor, will perform the traffic function for Processor's production inputs. Direct or indirect costs of Marketing Agent associated with the performance of the traffic functions related to Products shall be as a pooled marketing expense in accordance with Section 8 of this Agreement. Marketing Agent's traffic function costs attributable to production inputs shall be allocated to the Processor or member(s) of the pool for whom the input traffic function is provided under this Section 14. 15. Information from Processor. Processor shall, whenever requested by Marketing Agent, furnish to Marketing Agent pooled Products production and related statistical data prepared on a daily basis, and shall make its books and records related thereto available at all reasonable times for inspection by Marketing Agent. Processor shall not be required to release information concerning Processor's proprietary processes or costs (other than reimbursable Asset Costs and Operating Costs (as hereinafter defined)), which costs shall be provided in sufficient detail to satisfy Marketing Agent's reasonable requirements in connection with the reimbursements provided for in Section 16 hereto) or other confidential financial information. Processor further agrees, upon request of Marketing Agent, to furnish Marketing Agent with samples of Products for grading or selling purposes. 16. Reimbursement to Processor. (a) Processor shall be reimbursed by Marketing Agent for its (i) carrying costs of assets associated with Product shipping, packaging, warehousing (including all costs historically included by Marketing Agent as warehousing costs), and storage functions (including storage costs of thick juice from beets or desugarization), including depreciation and interest, and its (ii) operating costs associated with Product shipping, packaging, warehousing (including all costs historically included by Marketing Agent as warehousing costs) and storage functions (including storage costs of thick juice from beets or desugarization) including, without limitation, labor (including direct and indirect costs, such as employee benefits, insurance, etc.), supplies and utilities ("Operating Costs"). Notwithstanding the foregoing, costs associated with thick juice storage shall not be charged to Marketing Agent for any month during which Processor elects to use such storage capacity for purposes other than thick juice storage. (b) Reimbursement for Asset Costs and Operating Costs shall be made monthly and Processor shall provide monthly to Marketing Agent a breakdown of Asset and Operating Costs. Marketing Agent shall pay to Processor the Asset and Operating Costs specified within thirty (30) days of submission of Processor's cost breakdown. In the event there is a dispute regarding the amount of such reimbursement, Marketing Agent shall pay the undisputed amount and if the parties are unable to resolve the disputed amounts within thirty (30) days from the date payment is due, the controversy shall be resolved in the manner provided in Section 23 hereof. 17. Term of Agreement: Termination. (a) Term. The term of this Agreement shall commence on the date hereof and shall continue through August 31, 2001 (the "initial term") and from Fiscal Year to Fiscal Year thereafter (the "renewal terms") until terminated as provided herein. "Term" shall mean the initial term and any renewal terms, as provided herein. (b) Termination by Producer by Reason of Dissent. During the Term, Processor shall have the right to terminate this Agreement, without penalty, by Notice delivered to Marketing Agent twelve months prior to the effective date of termination, if the Processor dissents from any of the following actions taken by the Marketing Agent: (i) changes in Marketing Agent's strategic plan; (ii) merger of or acquisition by Marketing Agent; (iii) amendment to the Articles of Incorporation or By-Laws of Marketing Agent; or (iv) admission of a new member into the Marketing Agent. (c) Termination by Either Party After the Initial Term. Either party has the right to terminate this Agreement at the end of the initial term and thereafter by giving written notice by registered mail to the other party of such termination as follows: (i) Notice of termination to be effective at the conclusion of the initial term shall be given prior to May 1, 2000. (ii) Notice of termination to be effective at the conclusion of a renewal term shall be given prior to May 1 of a given year to be effective on August 31 of the subsequent year. (d) Termination Pursuant to the By-Laws of the Marketing Agent. In the event membership in the Marketing Agent is terminated pursuant to the provisions of the By-Laws of the Marketing Agent, this Agreement shall terminate effective the date of termination of membership; provided, however, that the Marketing Agent shall have the obligation to purchase from Processor and the Processor shall have the obligation to sell Products in the quantities and under the payment terms provided in this Agreement for the next succeeding twelve (12) month period following termination; further provided, that in no event shall Marketing Agent or Processor be required to take any actions that could jeopardize Marketing Agent's status as a common marketing agent under Capper-Volstead Act. (e) Performance Following Termination. (i) Following termination of this Agreement, as provided in clauses (a), (b), or (c) above, Processor shall have the obligation to sell its pro-rata share of any Product for which Marketing Agent has, as of the date of notice of termination, made commitment to deliver to a third party buyer under the payment terms provided for in this Agreement. (ii) The rights and obligations with respect to the marketing of Processor's Products shall continue in effect until all of such pooled Products have been sold by Marketing Agent and Processor's pro-rata share of the Net Pool Price from sales of pooled Products produced by Marketing Agent's members during such years and reimbursable costs and expenses have been distributed to Processor and Marketing Agent's members. (f) Return of Capital. Upon termination of this Agreement, Processor shall be entitled to have its then capital account returned in five equal annual installments, without interest, in exchange for the cancellation of capital equities held by Processor in the Marketing Agent. Upon the return to Processor of such capital contribution, the Marketing Agent shall cancel capital equities equal to such capital contributions. 18. Marketing Commitments: Indemnifications. (a) Processor represents and warrants that it is not under contract or obligation to sell, market, consign or deliver any of the Products committed to the pools under this Agreement to any other person, firm, association, corporation or other entity. Further, Processor shall defend and hold harmless Marketing Agent from any costs, claims, liabilities, suits or other proceedings or actions of any nature or kind whatsoever arising from or connected with any such prior agreement, contract or arrangement or the termination or cancellation of any prior agreements, contracts or arrangements. (b) Marketing Agent represents and warrants that it has the power and authority to enter into this Agreement, sell the Products committed to the pools and otherwise to fulfill its obligations under this Agreement. Further, Marketing Agent shall defend and hold harmless Processor and its employees, agents and shareholders, from any costs, claims, liabilities, suits or other proceedings or actions of any nature or kind whatsoever arising from or connected with any sales by Marketing Agent of Products hereunder. 19. Compliance with Marketing Agent's Governing Instruments. Processor accepts and agrees to conform to and abide by the provisions of the Articles of Incorporation and Bylaws of Marketing Agent and all amendments thereto during the Term of this Agreement. 20. Marketing Allotments. It is the intention of the parties that all Products produced by Processor during the Term hereof will be marketed by Marketing Agent. In the event government marketing allotments are imposed during the Term hereof, Marketing Agent will continue to market all of Processor's Products; provided that products in excess of Processor's allocated volume shall not be included in the Primary Pool but will be marked as part of an alternative or separate pool. It is the intention of the parties that Processor may elect to have Product in excess of its allocation marketed by Marketing Agent in the current year (in the export market) or carried over by Marketing Agent to the next Fiscal Year. The Net Pool Price of non-pool Product shall be determined in a manner consistent with the provisions of Sections 6.1 and 8 of this Agreement. Marketing allotments attributable to Processor shall be the property of Processor. This provision shall survive the termination or expiration of this Agreement. 21. Interdependent Agreement. Processor agrees that Marketing Agent shall have all fights and remedies provided by law and in the Bylaws of Marketing Agent in the event of a breach or threatened breach by Processor of this Agreement. Marketing Agent represents that all other members either have entered into or will be required to enter into substantially identical member marketing agreements for the marketing of pooled Products produced by the other members. 22. Force Majeure. (a) Neither party shall be liable to the other for failure to perform any part of this Agreement if such failure results from the occurrence of an event of Force Majeure (as hereinafter defined), provided that the party affected by the event (i) notifies the other party of such event promptly upon learning of the occurrence of the event, such Notice (as hereinafter defined) to include the anticipated effect of such event on the performance of such party under this Agreement and (ii) uses its best efforts to minimize delays and/or non-performance caused by such event. (b) Each party shall be completely released from all liability to the other arising as a consequence of any excused performance caused by an event of Force Majeure, including, but not limited to, all claims for incidental, special or consequential damages. (c) For purposes of this Agreement, the term "Force Majeure" shall mean any (i) fire, freeze, accident, explosion, construction delay, hurricane, flood, act of God, inability to obtain electric power or fuel, inability to obtain any required permits or licenses, government law, directive or regulation, or the effect of the application of any governmental law, directive or regulation, or any like contingency, beyond a party's reasonable ability to control or avoid; and (ii) labor dispute or strike, from whatever cause arising and regardless of whether the demands of the employees involved are reasonable and within the affected party's power to concede. 23. Dispute Resolution. 23.1 Any dispute, controversy or claim arising out of or relating to this Agreement that cannot be resolved amicably between the parties shall be finally resolved by arbitration in Chicago, Illinois, or such other location as may be mutually agreed upon, in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), as modified by this Section 23; provided however, that the plaintiff in any claim for damages exceeding $ 10,000,000 may seek judicial resolution in any court of competent Jurisdiction and shall not be subject to this Section 23. Any arbitration shall be held before a panel of three (3) arbitrators mutually agreed to between the parties, one of whom shall be familiar with the sugar industry. If the parties are unable to agree upon the selection and appointment of arbitrators within thirty (30) days of a written demand for arbitration, then arbitrators shall be appointed by the AAA pursuant to its Commercial Arbitration Rules. 23.2 In connection with any such arbitration, the parties further agree to participate in the exchange of information and documentation through discovery pursuant to the rules established by the arbitrators. 23.3 The arbitrators shall have full authority to render any form of legal or equitable relief to address the parties' dispute, including an award of monetary damages and/or injunctive relief, provided, however, that in no event shall the arbitrators have the power to include any element of punitive or exemplary damages in the arbitration award. Judgment upon any award for any legal or equitable relief so rendered by the arbitrators shall be considered final and binding and may be entered in any state or federal court of competent jurisdiction. 24. Complete Agreement. The parties agree that this Agreement constitutes the complete agreement of the parties with respect to the subject matter hereto and there are no oral or other conditions, promises, representations or inducements in addition to oral variance with any of the terms hereof, and that this contract represents the voluntary and clear understanding of both parties fully and completely. 25. Assignment. Neither Processor nor Marketing Agent may assign this agreement without prior written consent of the other party and the other members who have entered into identical pool marketing agreements with Marketing Agent. 26. Waiver of Breach. No waiver of a breach of any of the agreements or provisions contained in this agreement shall be construed to be a waiver of any subsequent breach of the same or of any other provision of this Agreement. 27. Notices. Whenever notice is required by the terms hereof, it shall be given in writing by delivery or by certified or registered mail addressed to the other party at the following address or such other address as a party shall designate by appropriate notice: If to Marketing Agent: United Sugars Corporation 7801 E. Bush Lake Road Bloomington, Minnesota 55439 Attn: President With a copy to: Ralph Morris, Esq. Doherty, Rumble & Butler, P.A. 2800 Minnesota World Trade Center 30 E. 7th Street St. Paul, Minnesota 5510l If to Processor: Minn-Dak Farmers Cooperative 7525 Red River Road Route 1, Box 10 Wahpeton, North Dakota 58075 Attention: CEO If notice is given by mail, it shall be effective two (2) days after mailing. 28. Construction of Terms of Agreement: Modification. The language in all parts of this Agreement shall be constructed as a whole according to its fair meaning and not strictly for or against any party hereto. Headings in this Agreement are for convenience only and are not construed as a part of this Agreement or in any defining, limiting or amplifying the provisions hereof This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and shall not be modified in any manner except by an instrument in writing executed by the parties hereto. In the event any term, covenant, or condition herein contained is held to be invalid or void by any court of competent jurisdiction the invalidity of any such term, covenant or condition shall in no way affect any other term, covenant or condition herein contained. 29. Successors and Assigns. Subject to the other provisions of this Agreement, all of the terms, covenants and conditions of this Agreement shall inure to the benefit of and shall bind the parties hereto and their successors and assigns. IN WITNESS WHEREOF, Marketing Agent and Processor have executed this Agreement effective the day and year first above written. UNITED SUGARS CORPORATION By:_________________________________ Its:__________________________________ MINN-DAK FARMERS COOPERATIVE By:_________________________________ Its:__________________________________ SCHEDULE A PACKAGE SIZES SCHEDULE B QUALITY ASSURANCE MARKETING AGENT SUGARS PURPOSE: The purpose of the Quality Assurance function at Marketing Agent is to provide guidance and direction to operational groups in the development, implementation and maintenance of Quality Systems. Quality Systems are those systems designed to assure products and services of the member companies meet the expectations of the targeted customer segments. The Quality Assurance group will accomplish this through development, implementation and audit of systems and standards will be developed and implemented that define customer expectations as well as documenting the performance of the member companies against those standards. STRATEGY: The vehicle through which the above will be accomplished will be a system of documented policies and procedures defining the activities that will occur within each of the operational groups providing product for sale. The basis for those policies and procedures will be a combination of FDA requirements as well as standards communicated by Marketing Agent's primary customer segments. Policies and procedures that will be defined, include but are not limited to: Product Safety/Regulatory (FDA): Good Manufacturing Practices (21 CFR Part 110 of the Food Drug and Cosmetic Act). HACCP (Hazards Analysis and Critical Control Points) (The two systems noted above are made up of a number of audit and process management activities designed to assure the safety of the product that is produced, stored and distributed by internal facilities as well as outside agents of the company [i.e. copack facilities, facilities that produce and ship product under agreement with Marketing Agent and Outside Distribution Facilities/Public Warehouses]). Product Quality/Functionality: Product Standards for each product sold and distributed through Marketing Agent will be defined. Standards (for product as shipped) will typically be defined by any or all of the following: *Flavor/Odor *Color *Moisture *Ash *Sediment *Visible Specks *Floc *Invert *Specific Rotation *Granulation *Density *Flowability *Pesticides/heavy metals *Specific trace element analysis As defined by the customer segment (i.e. bottling and National Formulary) *Microbiology standards Process Control Systems/Documentation Process Control Systems are those control systems by which each producing facility manages their process to produce product which meet the approved product standards as shipped. Each member facility will document, through a Standard Operating Procedures format, the methods utilized to assure processes are operated in a consistent controllable manner. SCHEDULE C FINE GRAINED SUGARS UNITED SUGARS Our fine grained sugars are produced by crystallizing a thick juice syrup from sugar beets. The crystals are then dried and screened to provide a number of fine grained sugar products which are used in a wide variety of products by food processors. All of our fine grained sugars can be certified to meet specifications of the National Food Processors Association and the National Soft Drink Association upon request. FINE GRANULATED This is the basic sugar used by most food processors. Its fine crystals are ideal for bakery products, cereals, candies, powdered mixes, dairy products and pharmaceutical products. CORDIAL Designed for mixing in liquids, this low-color sugar won't cloud drinks, is free from floc and is very stable when used in alcohol oils. It's used in pharmaceutical products, cordial liquors and specialty candies. GELATIN The fine granulation and faster dissolving properties of Gelatin Sugar make it ideal for powdered drink and gelatine mixes. Its very fine and uniform granulation reduces stratification in the final product. BAKERS SPECIAL Bakers Special is our finest granulated sugar and was developed for the baking industry. It provides fine crumb texture and dissolves easily. It is used in bakery products, cocoa mixes and powdered mixes. It's also used in coating doughnuts and cookies. FINE GRAINED PRODUCTS: Fine Granulated: Cordial: Gelatin: Bakers Special: 25 LB Bag 100 LB Bag 50 LB Bag 50 LB Bag 50 LB Bag 2,000 LB Totes 100 LB Bag 100 LB Bag 100 LB Bag Bulk Rail or Truck 2,000 LB Totes 2,000 LB Totes 2,000 LB Totes Bulk Rail or Truck 2,100 LB Supersack Bulk Rail or Truck FINE GRAINED SUGARS -- TYPICAL ANALYSIS FINE GRANULATED SUGAR COLOR ASH MOISTURE Not more than 35 Not more Not more RBU than .015% than .035% CORDIAL SUGAR COLOR ASH MOISTURE FLOC IRON TURSIDITY Not more than 15 Not more Not more Negative Not more Not less than RBU than .015% than .035% than .05 ppm 100% transmission at 720 nm GELATIN SUGAR COLOR ASH MOISTURE Not more than 45 Not more Not more RBU than .015% than .030% BAKERS SPECIAL SUGAR COLOR ASH MOISTURE Not more than 45 Not more Not more RBU than .015% than .030%
GRAIN SIZE - CUMULATIVE PERCENT RETAINED FINE GRANULATED SUGAR TYLER SIEVE U.S. SIEVE MINIMUM TARGET MAXIMUM 20 20 -- -- 0.5 28 30 1.0 -- 6.5 35 40 21.0 -- 46.5 60 60 56.0 -- 93.5 Passing 80 Passing 80 -- -- 7.0 Passing 100 Passing 100 -- -- 5.0 CORDIAL SUGAR TYLER SIEVE U.S. SIEVE MINIMUM TARGET MAXIMUM 20 20 -- -- 0.5 28 30 1.0 -- 6.5 35 40 21.0 -- 46.5 60 60 56.0 -- 93.5 Passing 80 Passing 80 -- -- 7.0 Passing 100 Passing 100 -- -- 5.0 GELATIN SUGAR TYLER SIEVE U.S. SIEVE MINIMUM TARGET MAXIMUM 28 30 -- 0.1 0.5 35 40 -- 5.0 6.0 60 60 -- 64.0 73.0 Passing 100 Passing 100 -- 6.0 8.0 BAKERS SPECIAL SUGAR TYLER SIEVE U.S. SIEVE MINIMUM TARGET MAXIMUM 35 40 -- 0.1 0.4 48 50 -- 1.7 2.0 Passing 48 Passing 50 98.0 98.3 100.0
COARSE GRAINED SPECIALTY SUGARS UNITED SUGARS Our course grained, easy-handling sugars resist caking, and provide better flowability. As the larger crystals reflect light, they create a sparkling appearance that's ideal for decorating. All of our course grained sugars can be certified to meet specifications of the National Food Processors Association and the National Soft Drink Association upon request. SANDING Our largest grain size, sanding sugar adds a sparkle to baked goods, jelly candies, gumdrops, cotton candy and cookies. COARSE SUGAR With a slightly smaller grain size than sanding, coarse granulated is ideal for pneumatic systems. It provides greater resistance to caking, and is used in candy, dairy products, powdered drink mixes, canning and snack foods. UNIGRAN SUGAR With virtually no fines and a uniform grain size, Unigran was developed specifically for use in hot drink dispensing machines. Its uniform grain size makes it ideal for use in coffee and cocoa mixes, powdered mixes and cereal products. COARSE GRAINED PRODUCTS: Sanding: Coarse: Unigran: 100 LB Bag Bulk Rail or Truck 100 LB Bag COARSE GRAINED SPECIALTY SUGARS UNITED SUGARS TYPICAL ANALYSIS SANDING SUGAR COLOR ASH MOISTURE Not more than 35 RBU Not more than .015% Not more than .030% COARSE GRANULATED SUGAR COLOR ASH MOISTURE Not more than 35 RBU Not more than .015% Not more than .030% UNIGRAN SUGAR COLOR ASH MOISTURE Not more than 35 RBU Not more than .015% Not more than .030% GRAIN SIZE - CUMULATIVE PERCENT RETAINED SANDING SUGAR TYLER SIEVE U.S. SIEVE MINIMUM TARGET MAXIMUM 20 20 3.0 8.0 10.0 28 30 50.0 65.0 70.0 48 50 98.0 99.3 100.0 Passing 48 Passing 50 -- 0.7 2.0 COARSE GRANULATED SUGAR TYLER SIEVE U.S. SIEVE MINIMUM TARGET MAXIMUM 20 20 -- 5.0 10.0 28 30 5.0 25.0 50.0 35 40 50.0 75.0 100.0 Passing 60 Passing 60 -- 2.0 5.0 Passing 80 Passing 80 -- 1.0 2.0 Passing 100 Passing 100 -- 0.5 1.0 UNIGRAN SUGAR TYLER SIEVE U.S. SIEVE MINIMUM TARGET MAXIMUM 28 30 4.0 12.0 20.0 Passing 48 Passing 50 -- -- 10.0 POWDERED SUGARS UNITED SUGARS All our powdered sugars are milled with 3% corn starch to prevent caking to produce a fine, powdered product. In confectionery products it provides excellent mouthfeel and appearance, and its smooth, light texture promotes spreadability in icings. 6X POWDERED SUGAR With its small, uniform particle size, 6X powdered sugar is perfect for a wide range of bakery and confectionery products. It creates smooth, easy-to-spread icings, and when dusted on baked goods, it adds a pleasant sweetness and appearance. 10X POWDERED SUGAR 10X powdered sugar is more finely milled than 6X, and is also ideal for dusting and icing a wide range of bakery and confectionery products. FONDANT AND ICING SUGAR Our finest milled powdered sugar, Fondant Sugar provides excellent smoothness and spreadability. It is an excellent choice for use in cream fillings of candies, icings and dusting bakery products. POWDERED PRODUCTS: 6X: 10X: Fondant & Icing: 25 LB Bag 50 LB Bag 50 LB Bag 50 LB Bag 100 LB Bag 100 LB Bag POWDERED SUGARS UNITED SUGARS TYPICAL ANALYSIS 6X POWDERED SUGAR SUCROSE STARCH MOISTURE Approximately 97.0% Approximately 3.0% Not more than 0.30% 10X POWDERED SUGAR SUCROSE STARCH MOISTURE Approximately 97.0% Approximately 3.0% Not more than 0.30% FONDANT AND ICING SUGAR SUCROSE STARCH MOISTURE Approximately 97.0% Approximately 3.0% Not more than .030% GRAIN SIZE - CUMULATIVE PERCENT RETAINED 6X POWDERED SUGAR TYLER SIEVE U.S. SIEVE MINIMUM TARGET MAXIMUM 100 100 -- 0.5 1.0 150 140 -- 2.0 3.0 200 200 -- 5.0 6.5 Passing 200 Passing 200 93.5 95.0 -- 10X POWDERED SUGAR TYLER SIEVE U.S. SIEVE MINIMUM TARGET MAXIMUM 100 100 -- 0.01 0.01 150 140 -- 1.0 1.4 200 200 -- 3.0 3.8 270 270 -- 6.0 7.8 325 325 -- 12.5 14.8 Passing 325 Passing 325 85.2 87.8 FONDANT AND ICING SUGAR TYLER SIEVE U.S. SIEVE MINIMUM TARGET MAXIMUM Passing 325 Passing 325 98.0 99.0 -- BROWN SUGARS UNITED SUGARS Our brown sugars are coated with a uniquely blended syrup for a rich, molasses flavor and attractive coloring. Their exceptional texture and taste make them ideal for use in a variety of products. LIGHT BROWN This brown sugar has a light, golden brown color. It provides a mild sweet caramel flavor, and is ideal for use in icing, caramel corn and bakery products. DARK BROWN This brown sugar has a rich, deep brown color. It provides a rich, full-bodied molasses flavor and is ideal for use in baked beans, smoked meats, bakery and confectionery products. BROWN PRODUCTS: Light Brown: Dark Brown: 25 LB Bag 50 LB Bag 50 LB Bag 2,000 LB Totes 100 LB Bag 2,000 LB Totes TYPICAL ANALYSIS LIGHT BROWN SUGAR SUCROSE REDUCING SUGARS ASH MOISTURE pH AT 20 C 94.0% +/- 2.0% 3.5% - 4.5% 0.8% - 1.2% 1.7% - 2.4% 5.2 - 6.5 DARK BROWN SUGAR SUCROSE REDUCING SUGARS ASH MOISTURE pH AT 20 C 94.0% +/- 2.0% 3.5% - 4.5% 0.8% - 1.2% 1.7% - 2.4% 5.2 - 6.5 LIQUID TYPE O SUGAR UNITED SUGARS The exacting chemical, physical and microbiological standards of this sugar make it ideal for use in products whose formulation receives limited processing. It is used in dairy products, processed foods, confectionery and beverages. Liquid Type O Sugar can be certified to meet specifications of the National Food Processors Association and the National Soft Drink Association upon request. TYPICAL ANALYSIS LIQUID SUGAR TYPE O ASH TOTAL SOLIDS WEIGHT BY CONDUCTIVITY FLOC SEDIMENT % BY REFRACTOMETER pH, 20 C PER GALLON 20 C COLOR Not more than .025% Negative Not more than 1 ppm 67.5+/-0.2 7.5 Per Gallon 20 C White 11.105 lbs.
EX-12 3 STATEMENT RE: COMPUTATION OF RATIOS EXHIBIT 12 MINN DAK FARMERS COOPERATIVE COMPUTATION OF RATIO OF NET PROCEEDS TO FIXED CHARGES (IN THOUSANDS)
Year Ended August 31, ------------------------------------------------------------- 1998 1997 1996 1995 1994 Earnings: Net proceeds before income taxes from continuing operations 72,084 74,239 56,872 75,422 33,643 Fixed charges, excluding capitalized interest, see below 5,372 4,316 2,898 2,973 1,557 Amortization of capitalized interest 92 55 18 18 18 --------- --------- --------- --------- --------- Net Proceeds 77,548 78,610 59,788 78,413 35,218 ========= ========= ========= ========= ========= Fixed Charges: Interest Expense 5,372 4,316 2,898 2,973 1,557 Interest factor included in rentals(1) -- -- -- -- -- --------- --------- --------- --------- --------- Fixed charges, excluding capitalized interest 5,372 4,316 2,898 2,973 1,557 Interest capitalized 199 954 669 -- -- --------- --------- --------- --------- --------- Fixed charges 5,571 5,270 3,567 2,973 1,557 ========= ========= ========= ========= ========= Ratio of net proceeds to fixed charges 13.92 14.92 16.76 26.38 22.62 ========= ========= ========= ========= =========
(1) The company does lease certain items, such as office equipment. Due to the proportionately small amounts involved, interest on such lease payments has not been included in the total of the company's fixed charges of the calculation of this ratio. EX-23 4 CONSENT OF INDEPENDENT AUDITORS Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated October 5, 1998, with respect to the consolidated financial statements of Minn-Dak Farmers Cooperative for the year ended August 31, 1998, in this Form 10-K (file number 33-94644). November 23, 1998 Eide Bailly LLP Fargo, North Dakota EX-27 5 FINANCIAL DATA SCHEDULE
5 0000948218 MINN-DAK FARMER'S COOP YEAR AUG-31-1998 SEP-01-1997 AUG-31-1998 1,849,003 0 17,584,937 0 33,491,850 58,218,302 166,666,515 56,097,673 184,830,244 47,047,859 12,000,000 0 18,483,200 121,000 63,477,521 184,830,244 149,573,584 148,914,536 66,551,946 66,551,946 4,906,549 0 5,372,221 1,220,250 0 1,220,250 0 0 0 1,220,250 0 0
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