10-K405 1 minndak014893_10k.txt MINN-DAK FARMERS COOPERATIVE FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended AUGUST 31, 2001 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 ------------------------- Commission File 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. [X] As of November 26, 2001, 497 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 6% 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 that less than 1% of the Company's available stock was traded at arm's length during the fiscal year ended August 31, 2001. 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 $1,450 to $1,600 per unit. DOCUMENTS INCORPORATED BY REFERENCE None 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 497 members. Membership in the Company is limited to sugarbeet growers located in those areas of North Dakota and Minnesota within an approximate fifty (50) mile radius of the Company's offices and sugarbeet processing facilities in Wahpeton, North Dakota. The Company's facilities allow the members to process their sugarbeets 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 association 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 Any statements regarding future market prices, anticipated costs, agricultural results, operating results and other statements that are not historical facts contained in this annual report are forward-looking statements. The words "expect", "project", "estimate", "believe", "anticipate", "plan", "intend", "could", "may", "predict", and similar expressions are also intended to identify forward-looking statements. Such statements involve risks, uncertainties and assumptions, including, without limitation, market factors, the effect of weather and economic conditions, farm and trade policy, the available supply of sugar, available quantity and quality of sugarbeets and other factors detailed elsewhere in this and other Company filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. The Company is engaged primarily in the production and marketing of sugar from sugarbeets. The Company also markets certain co-products of the sugar it produces, such as beet molasses and beet pulp pellets. 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 3% of the Company's gross revenues for the fiscal year ended August 31, 2001. The Company processes sugarbeets 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 sugarbeets into sugar and co-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 sugarbeets 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 sugarbeets from the piling stations to the factory for processing. The Company's total sugar production is influenced by the amount and quality of sugarbeets 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 sugarbeets 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. Sugarbeets 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 as soon as possible 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 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 Fahrenheit. 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 May of each year. In addition, unprotected and ventilated beets will, in long campaigns, have extra steps taken to extend their life. Beets can be sprayed with lime to create a reflectant and reduce the harmful impact from the sun's rays in the spring. Straw can also be applied to the sides of some later processed piles to further insulate the beets from sun, wind, and temperature. Once the sugarbeets 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 sugarbeet co-products include beet molasses and beet pulp pellets. 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 pellets are marketed through Midwest Agri-Commodities Company. RECENT CROPS The Company's members harvested 1.7 million tons of sugarbeets from the 2001 crop. In the late summer of 2001, the USDA instituted a government cost savings program called Payment In Kind (PIK) that compensated growers for destroying sugarbeet acres. Of the 106,000 planted acres, 9% were converted to the PIK program and 4% were lost due to adverse growing conditions making the 2001 crop harvested acres 3% below the 2000 crop harvested acres. Sugar content of the 2001 crop at harvest was 2% below the average of the five most recent years. The Company's projected production of sugar from the 2001 crop sugarbeets is expected to be well below the five-year average of sugar produced. This forward-looking material is based on the Company's expectations regarding the processing of the 2001 sugarbeet crop; the actual production results obtained by processing those sugarbeets 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 sugarbeets. For a discussion of the 2000, 1999 and 1998 crops and results of operations for fiscal years 2001, 2000 and 1999, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." MARKETING, CUSTOMERS AND PRICING Since January 1, 1994 United Sugars Corporation, a common marketing agency operating on a cooperative basis, 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. At August 31, 2001 the Company had an ownership interest in United Sugars Corporation (year to date contributed capital) totaling $1.2 million, which represented approximately 13% of the total. The Company, as well as the other members of United Sugars Corporation, has 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. United Sugars Corporation sells industrial bulk sugar, industrial bagged sugar, and retail bagged sugar and specialty sugars. It is able to distribute both cane sugar and beet sugar, and distribute sugar to customers over a large geographical area. United Sugars Corporation markets the Company's sugar 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, 2001, 95% of the Company's sugar was shipped in bulk form, mostly to industrial users, and 5% 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. Bulk sugar, the largest portion of the Company's sales, is 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 higher than the prior two years because (1) the domestic market supply for sugar is down due to reduced production from beet processors and (2) government ownership of sugar (Commodity Credit Corporation) has been reduced, thereby not being as great a negative influence on sugar pricing as in the previous year. The Company markets its co-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. A "Uniform Member Marketing Agreement" evidences the sales and marketing arrangement with Midwest Agri-Commodities Company. 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, 2001, approximately 70% of the Company's beet pulp production was exported to Japan and Europe, and the remaining 30% was sold domestically. The market for beet pulp is affected by the availability and quality of competitive feedstuffs. Dried beet pulp prices increased in FY 2000 and again in FY 2001 due to improvement in the Asian economy, reduced availability of dried beet pulp, and overall improvements in competitive feedstuffs prices. Beet molasses is marketed primarily to yeast manufacturers, pharmaceutical houses, livestock feed mixers and livestock feeders. Beet molasses prices increased as well in FY 2000 and again in FY 2001 due to shrinking supplies of domestically produced molasses and improvement in worldwide prices for beet molasses and competitive commodities. Co-product sales accounted for approximately 8% of the Company's total consolidated net sales revenues during FY 2001. 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 co-product, fresh yeast and sugar revenues, because prices of these products fluctuate independently of each other. The Company is an eighty percent (80%) 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 co-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. Sensient Technologies Corporation, Milwaukee, Wisconsin, holds the remaining twenty percent (20%) equity stake. Minn-Dak Yeast Company, Inc. also has a long-term marketing agreement whereby Sensient Technologies Corporation will buy all production of yeast produced by Minn-Dak Yeast Company, Inc. in return for certain guaranteed sales volumes. 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). The Company has contributed approximately $5.2 million in exchange for its 5% ownership position. Because of unexpected market conditions that were expected to generate significant losses for several years, ProGold signed a 10 year lease agreement with Cargill, Inc. ("Cargill") on November 1, 1997, to lease ProGold's corn wet-milling plant. Under the lease arrangement, which expires on October 31, 2007, 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 exceed a specified base. 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. To date the lease with Cargill has provided 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. As a result, the lease arrangement has provided protection from the exposure of the risks of participation in the corn sweetener market, including a 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 sugarbeets from members under contract with the Company. All members have three-year contracts with the Company covering the growing seasons of 2001 through 2003 (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 the Company prior to the automatic renewal has given notice of termination. 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 sugarbeets 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 2001 crop year the Company's Board of Directors authorized members to plant 1.45 acres per unit. Under the terms of the Growers Agreement, each member receives payment for his or her sugarbeets 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' sugarbeets 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 sugarbeets 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' sugarbeets; 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 sugarbeets for storage until the sugarbeets 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 sugarbeet 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 sugarbeets 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 sugarbeets and because shareholders own different numbers of Units of Preferred Stock, each district includes a different number of acres of sugarbeet production and, therefore, a different quantity of sugarbeets delivered to the Company. However, none of the districts provides the Company with a materially disproportionate quantity of the sugarbeets 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, 2001, the Company contributed approximately $83,000 to the North Dakota/Minnesota Research and Education Board to fund that entity's research and development activities. $16,000 was given to the Beet Sugar Development Foundation in connection with their research activities, and $87,000 to the Sugar Association for their research activities and membership dues. The Company also has established a sugarbeet seed committee, which reviews the performance of new and existing sugarbeet seed varieties. The committee then advises the Board of Directors with regard to those sugarbeet 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. The Company has approved a budget of $1.6 million to be spent on environmental capital projects during the fiscal year ended on August 31, 2002. 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 November 16, 2001, the Company had 243 full-time employees, of whom 209 were hourly and 34 were salaried. It also employs approximately 320 additional hourly seasonal workers during the sugar beet harvest and processing campaign. In August 2000 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 June 1, 2000 through May 31st of the year 2005. Office, clerical, management and harvest employees are not unionized. Full time employees are provided with health and dental insurance, a defined benefit pension 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. Minn-Dak Yeast Company, Inc. of which the Company 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 2001, fresh yeast was produced and sold into the domestic yeast marketplace. All properties are held subject to a mortgage by the Company's primary lendor. 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. 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, 2001. At the Annual Meeting of Shareholders which is to be held on December 4th, 2001, the following seats on the board of directors will be up for election: District #9, District #2, and District #3. A brief biography of each of the candidates for the open seats follows. DISTRICT #9 VICTOR KRABBENHOFT (incumbent) 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. Mr. Krabbenhoft is running unopposed. DISTRICT #2 RUSSELL MAUCH (incumbent) has been a director since 1998. Mr. Mauch graduated from North Dakota State University in 1977 with a B.S. in agriculture. From 1979 to 1981 Mr. Mauch was a commercial and ag loan officer for First Bank Corporation in Valley City, ND. Mr. Mauch has been farming near Barney, ND since 1981. Mr. Mauch also serves on the board of directors for Minn-Dak Yeast Company and on the board of directors for Midwest Agri-Commodities Company. Mr. Mauch is running unopposed. DISTRICT #3 EDWARD MOEN, JR. (incumbent) has been a director since 1989 and is currently serving as board treasurer. Mr. Moen has been farming near Galchutt, ND since 1945. Mr. Moen is running unopposed. 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 6% of available stock in the fiscal year ended August 31, 2001 and approximately 4% of available stock in the fiscal year ended August 31, 2000, 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 that less than 1% of the Company's available stock was traded at arm's length during the fiscal year ended August 31, 2001 and less than 2% was traded during the fiscal year ended August 31, 2000. Of the stock transferred at arms length, the transfers were made during the first, second and third quarters of each of the Company's last two fiscal years and they ranged in price from $1,450 to $1,600 per unit during the fiscal year ended August 31, 2001, and from $2,200 to $1,600 per unit in the fiscal year ended August 31, 2000 with the prices early in fiscal year 2000 ranging from $2,200 to $1,800 per unit while prices in the third and final quarter of fiscal year 2000 ranged from $1,800 to $1,600 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, FINANCIAL DATA (Numbers in Thousands) 2001 2000 1999 1998 1997 Revenues $ 177,899 $ 170,151 $ 152,742 $ 149,574 $ 139,730 Net Proceeds(1) 94,620 86,604 63,352 72,084 74,239 Total Assets 161,737 173,001 174,296 184,830 171,896 Long-term Debt, including current maturities, Net of bond investments, 1998 & 1997 53,205 58,193 61,185 59,798 58,252 Members' Investment(2) 76,203 75,336 79,394 82,082 73,646 Property and Equipment Additions, net of Retirements 914 2,404 2,962 10,893 24,547 Working Capital 11,974 12,234 13,403 11,170 10,163 Ratio of Long-Term Debt to Equity(3) .63 .71 .71 .65 .75 Ratio of Net Proceeds to Fixed Chgs(4) 20.25 17.68 13.05 13.92 14.92 Dividends Paid on Common Stock 0 0 0 0 0 PRODUCTION DATA(5) Acres harvested 94,856 102,086 97,336 91,374 82,575 PIK Acres 8,620 0 0 0 0 Tons purchased (members) 2,062,162 2,201,776 1,772,648 1,721,240 1,506,646 Tons purchased (non-member) 198,770 44,065 Tons purchased per acre harvested 21.74 21.57 18.21 18.84 18.25 Net beet payment paid to members per ton of sugarbeets delivered, plus allocated patronage and unit retains(6) $ 42.34 $ 39.19 $ 35.34 $ 41.68 $ 49.97 Sugar hundredweight Produced, including PIK sugar 6,310,374 5,739,893 4,750,921 4,788,131 4,136,172 Sold, including purchased sugar 6,757,402 5,220,321 5,324,764 4,672,631 3,794,313 Beet pulp pellet tons Produced 97,731 97,541 100,215 89,263 77,042 Sold 89,282 96,452 127,160 105,270 82,705 Beet molasses tons Produced 92,333 87,417 103,127 78,077 64,377 Sold 73,782 75,029 80,325 51,939 45,182 Used for Yeast Production 17,123 17,745 17,652 18,651 17,282 Yeast pounds (in thousands) Produced 25,582 26,062 26,198 27,191 23,127 Sold 25,421 26,034 26,240 27,227 23,193
(1) Net Proceeds are the Company's gross revenues, less the costs and expenses of producing, purchasing and marketing sugar, sugar by-products, and yeast, 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".) (2) Members' investment includes preferred and common stock, unit retention capital, allocated patronage and retained earnings (deficit). (3) Calculated by dividing the Company's long-term debt, exclusive of the current maturities of such debt, by equity. (4) 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. See Exhibit 12. (5) 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, 2001, relates to the 2000 crop). (6) 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, payment for member-delivered sugarbeets, the principal raw material used in producing the sugar and co-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 sugarbeet 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 sugarbeets 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 Co-Bank (the "Bank"). The Company has a short-term line of credit with the Bank in 2001 of $45,000,000. Additional short-term financing requirements are provided through the Department of Agriculture's CCC sugar loan program. The loan agreement 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 $9.0 million; maintain a current ratio of not less than 1.2:1.0; maintain long-term debt to equity ratio of no greater than 0.8:1; and maintain an available cash to current long-term debt ratio as defined in the agreement of not less than 1.25:1.0. As of August 31, 2001, the Company was in compliance with all loan covenants in its loan agreement. The loan agreement is secured with a first lien on substantially all property and equipment and current assets of the Company. Sources for future Long-Term Debt payments are primarily plant depreciation resulting from normal operations. During fiscal year 2000, the Company sold certain notes receivable with recourse. The Company's contingent liability related to these notes totaled $2.6 million as of August 31, 2001. Working capital decreased $0.3 million for fiscal year 2001. As of August 31, 2001, the Company achieved its targeted working capital position. The company has protected itself from interest rate fluctuations through the use of tax exempt financing and a term debt portfolio that fixes rates into the future for set amounts of debt. The current term debt portfolio is expected to provide the company stable term debt interest rates over the next four years at approximately 150 basis points over current market rates for similar maturities. An increase or decrease in the interest rate market of 100 basis points is expected to have little or no impact on the profitability of the company. Capital expenditures for fiscal year 1999 were $5.2 million, fiscal year 2000 was $4.7 million and fiscal year 2001 was $3.1 million. Capital expenditures for fiscal year 2002 are currently estimated at $3.1 million. COMPARISON OF THE YEARS ENDED AUGUST 31, 2001 AND 2000 Revenue for the year ended August 31, 2001 increased 5% or $7.75 million from 2000. Revenue from total sugar sales increased $25.46 million or 18% reflecting a 29% increase in cwt. sold, partially offset by an 11% decrease in the average selling price per cwt. Revenue from co-products increased $1.61 million or 13% reflecting an increase of 18% in the average selling price per ton, partially offset by a 5% decrease in volume. Revenues from yeast sales increased $0.28 million or 5% reflecting a price increase of 7%, partially offset by a decrease in volume of 2%. The value of finished product inventories in fiscal year 2001 decreased $19.60 million more than they decreased in fiscal year 2000 primarily due to the change in the value of ending sugar inventory. The change in the value of ending sugar inventory vs. the prior year was the result of less sugar on hand than in the prior year, and at a lower price. The ending sugar inventory was higher in fiscal year 2000 as a result of market conditions and anticipated Commodity Credit Corporation sugar loan forfeitures. Cost of product produced, exclusive of grower payments for sugarbeets, decreased $0.4 million. The decrease is primarily due to a 3% decrease in processing and maintenance costs, partially offset by a 7% increase in beet costs - those costs incurred by the cooperative in the growing and delivering of sugarbeets. Sales and Distribution costs increased $1.49 million or 6%. Increases are the result of a 29% increase in the volume of sugar sold for the year. However, unit sales and distribution costs of sugar and co-products decreased for the year. General and Administrative expenses increased less than 1%. Interest expense decreased $0.3 million or 5% due to reduced rates of interest and lower levels of debt. Overall, the cost per cwt of sugar produced decreased 3%, primarily due to the quality of the crop. Other business expense decreased $1.15 million in fiscal year 2001. This decrease was primarily due to higher patronage dividends from other cooperatives, and lower write-downs and losses on disposal of equipment. Net payments to members for sugarbeets, which include payments for payment-in-kind certificates from the Commodity Credit Corporation, increased by $3.3 million in fiscal year 2001. This increase was primarily due to a higher per ton beet payment coupled with the payment-in-kind certificates; and partially offset by decreased tons harvested. COMPARISON OF THE YEARS ENDED AUGUST 31, 2000 AND 1999 Revenue for the year ended August 31, 2000 increased 11.4% or $17.4 million from 1999. Revenue from total sugar sales decreased 1.6% reflecting a 2.5% decrease in the average selling price per cwt and a 0.9% increase in cwt. sold. Revenue from co-products decreased 5.1% reflecting an increase of 12.3% in the average selling price per ton and 17.4% decrease in volume. Revenues from yeast sales decreased 11.4% reflecting a price decrease of 10.6% and a decrease in volume of 0.8%. Finished product inventories increased $10.5 million in fiscal year 2000 primarily due to higher volumes of ending sugar inventory resulting from market conditions and anticipated sugar loan forfeitures. Cost of product produced, exclusive of payments for sugarbeets and grower trucking increased $0.6 million. The increase is primarily due to an 11.7% increase in sugarbeets processed and an increase in non-allocated costs such as plant depreciation, taxes and insurance of 4.0%. Sales and Distribution costs, net of CCC assessment fees, decreased less than $0.1 million or 0.2%. Fiscal year 2000 had no CCC assessment fees compared to fiscal year 1999 with $1.3 million. General and Administrative expenses increased $0.4 million or 7.4%. Interest expense decreased $0.1 million or 1.3%. The cost per cwt produced decreased 15.5%, primarily due to the quality of the crop. Non-member business income decreased $0.4 million in fiscal year 2000. This decrease was primarily due to lower fresh yeast selling prices and cost allocations associated with the Company's investment in Minn-Dak Yeast Company. Net payments to members for sugarbeets increased by $23.7 million in fiscal year 2000. This increase for 2000, vs. 1999 was primarily due to 24.2% higher volume of sugarbeets delivered, higher quality sugarbeets delivered, better storage conditions and higher selling prices for co-products. This was partially offset by lower selling prices for sugar. ESTIMATED FISCAL YEAR 2002 INFORMATION The agreements between the Company and its members regarding the delivery of sugarbeets to the Company require payment for members' sugarbeets 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 sugarbeets 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 sugarbeets. 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 2001 sugarbeet crop. Given the nature of the estimates required in connection with the payments to members for their sugarbeets, this discussion includes forward-looking statements regarding the quantity of sugar to be produced from the 2001 sugarbeet crop, the net selling price for the sugar and co-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 sugarbeet 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 sugarbeet crop grown during 2001 was less that of the prior year in total tons delivered due to lower yields and the PIK program, which resulted in less harvested acres (see section entitled "Recent Crops"). The sugar content of the 2001 crop was less than that of the prior year and the five year average for sugar. The Company expects to produce less hundredweight of sugar from the 2001sugarbeet crop than the prior year, and also less than the five year average production of sugar, due to the lower tons of beets delivered and the lower sugar content of those beets. From the revenues generated from the sale of products produced from each ton of sugarbeets must be deducted the Company's operating and fixed costs. Revenues for the crop year 2001 are expected to be significantly below the 2000 crop year due to reduced production of sugar and co-products. The deduction of those operating costs results in a 2001 crop gross payment to growers estimated to be less than that of the prior crop year. OTHER INFORMATION The Company is not aware of any impact resulting from new FASB, GAAP, or SEC rules. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET AND COMPETITION Current US Government statistics estimate total US sugar consumption at 189.3 million cwt for the year beginning 1 October 2000 and ending 30 September 2001. For the same period ending in 2000, total consumption was 188.3 million cwt. Comparing the two years shows demand growth of 1.0% for US sugar sellers. The US government forecasts growth between 2001 and 2002 to be slightly less than 2%, at 192.9 million cwt., which approximates trend line and includes consumption increases due to population growth. The Company believes that domestic consumption growth will trend to growth rates of 1 to 2% per year due to population growth. Given the size of the domestic market, the Company's sugar production and sales represent between 2 and 3% of the total domestic market for refined sugar in 2000. 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. 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 Sugar Company, Tate & Lyle North America, Amalgamated Sugar Company, and California and Hawaii Sugar Company. 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 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 a material 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. Under the current program, which was initiated in 1981 and extended under the Food Security Act of 1985, the Food, Agriculture, Conservation and Trade Act of 1990 and the Federal Agriculture Improvement and Reform Act of 1996 (the "FAIR Act"), the price of sugar is required to be maintained above the price at which producers could forfeit sugar to repay non-recourse loans obtained through the Commodity Credit Corporation (CCC). 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 14.45 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 was reduced by .31 cents each year for years 1997 through 2001, until it reached 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. In November 1999, the so-called Millennium Round of the World Trade Organization (WTO) began in Seattle, Washington with the goal of continuing to move toward multilateral free trade in all sectors. Any agreements reached at the Millennium Round could represent a threat to the sugar industry because sugar is one of the most highly protected sectors within world agricultural trade and is thus a target for reform. The trend toward liberalization will most likely focus on the minimum import requirement of 1,257,000 short tons. There will likely be a movement to raise the minimum import requirement, and if successful, such a movement could cause additional supply/demand pressure in the United States. The Company believes the North American Free Trade Agreement ("NAFTA") represents the most serious public policy challenge to itself and the domestic sugar industry. Under the terms of the original NAFTA text, Mexico would have been allowed to ship any excess production of sugar into the United States if Mexico were to achieve net surplus producer status two years in a row. Concerned that Mexico's productive capabilities and possible conversion to the use of high fructose corn sweeteners could quickly change Mexico from a net sugar importer to a net sugar exporter, the U.S. sugar industry insisted that NAFTA be changed to delay Mexico's access to the U.S. market. To embody these changes, a side agreement on sugar was reached prior to passage of NAFTA to give Mexico incrementally larger but capped volumes of duty-free access, and an ability to send additional quantities if it were to pay a gradually descending second tier tariff. The side agreement establishes a common market between the United States and Mexico in sugar by 2008. The side agreement has recently been contested by Mexico as invalid, contending that the side agreement was not signed by Mexico. To date, the United States has contended that the side agreement is valid and has dealt with sugar imports from Mexico accordingly. The two countries continue to negotiate over this issue and the Company cannot predict the outcome of those negotiations. However, should Mexico prevail on this issue with the United States, the Company believes that imports from Mexico could increase dramatically and therefore adversely affect the domestic price of sugar. The Company is concerned that low world sugar prices and a trade conflict between the U.S. and Mexico over high fructose corn sweeteners could permit de facto acceleration of the side agreement under NAFTA. Under the NAFTA tariff schedule, second tier sugar tariffs are set at approximately 10.89 cents in 2000 but decline by approximately 1.5 cents per year until reaching zero in 2008. Low world raw sugar prices could make it feasible for Mexican sugar to enter the United States earlier than 2008. In contrast to Mexico's duty free access to the United States sugar market (which rises from 25,000 metric tons to 250,000 metric tons per year in fiscal year 2001) NAFTA contains no restrictions on second tier imports. Under the current terms of NAFTA and the side agreement, the Company is concerned that imports from Mexico could oversupply the U.S. market forcing sugar prices significantly lower. Any fluctuation in the price of sugar has a direct impact on any sugarbeet payments that are made to members. The Company, along with the domestic sugar industry, is seeking improvements to NAFTA and is also pursuing legal remedies to address the matter. If the sugar industry is unsuccessful in these or any other endeavors it pursues to prevent the influx of Mexican sugar into the U.S. market, there could be adverse financial consequences to the Company and its members. From fiscal years 1990 to 1996, the sugar industry was required to remit to the Commodity Credit Corporation a nonrefundable marketing assessment equivalent to 1.1794 percent of the raw cane sugar loan rate of 18 cents per pound. The Federal Agriculture Improvement and Reform Act of 1996 increased the assessment for fiscal year 1997 though 2003 to 1.47425 percent of the raw cane sugar loan rate of 18 cents per pound. In response to the downturn in the agriculture economy, congress included a provision in the fiscal year 2000 federal agricultural appropriations bill to alleviate the sugar industry from paying the assessment for fiscal years 2000 and 2001. Thus, from October 1, 1999 to September 30, 2001, the Company was not required to pay a marketing assessment to the Commodity Credit Corporation. The Senate recently passed an appropriations bill that includes provisions to defer payment of the assessment fee for the period of October 1, 2001 to September 30, 2002 until September 30, 2002. No such provision exists for the House of Representatives appropriation bill, so a conference committee of both houses, and ultimately the full Senate and House and the President will decide if the provision to defer payment is maintained in the final passage of the bill. 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. Recently, the House of Representatives passed a new ten year farm bill to replace the farm bill that is due to expire in 2002. At this writing the Senate Agriculture Committee has also passed a new five year farm bill to replace the farm bill expiring in 2002, but the bill has not yet been debated or voted on by the full Senate. While both versions of the new proposed farm bill contain a sugar provision that includes most of what the sugar industry desires in a new farm bill for sugar, there can be no assurances as to what the final version of a new farm bill might look like or if it will contain favorable price supports. If the price support program including the Tariff Rate Quota system described above, were eliminated in its entirety, or if the protection the United States' price support program provides from foreign competitors were materially reduced, the Company could be materially and adversely effected. In such a situation if the Company were not able to adopt strategies that would allow it to compete effectively in a greatly changed domestic market for sugar, the adverse affects could impact the Company's continued viability and the desirability of grower sugarbeets for delivery to the Company. 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, 2001, 2000, and 1999, 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 auditing standards generally accepted in the United States of America. 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, 2001, 2000, and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Eide Bailly, LLP Fargo, North Dakota October 2, 2001 MINN-DAK FARMERS COOPERATIVE CONSOLIDATED BALANCE SHEETS AUGUST 31, 2001, 2000, AND 1999
------------------------------------------------------------------------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ ASSETS CURRENT ASSETS Cash $ 459,046 $ 2,504,566 $ 546,345 ------------ ------------ ------------ Current portion of long-term note receivable 2,551 2,551 311,677 ------------ ------------ ------------ Receivables Trade accounts 13,868,003 11,115,705 16,236,385 Growers 3,796,044 3,996,356 4,056,821 Other 1,398,926 632,549 3,066,400 ------------ ------------ ------------ 19,062,973 15,744,610 23,359,606 ------------ ------------ ------------ Advances to affiliates - Midwest Agri-Commodities Co. and United Sugars Corporation 414,046 -- -- ------------ ------------ ------------ Inventories Refined sugar, pulp and molasses to be sold on a pooled basis 18,648,520 27,737,385 17,218,658 Nonmember refined sugar 4,199 2,642 1,389 Yeast 120,575 87,511 62,965 Materials and supplies 5,886,136 5,561,471 5,004,645 Beet -- -- 710,000 ------------ ------------ ------------ 24,659,430 33,389,009 22,997,657 ------------ ------------ ------------ Deferred charges 1,085,108 1,122,838 1,194,291 ------------ ------------ ------------ Prepaid expenses 289,866 251,628 232,021 ------------ ------------ ------------ Other 527,000 543,000 587,550 ------------ ------------ ------------ Total current assets 46,500,020 53,558,202 49,229,147 ------------ ------------ ------------ PROPERTY, PLANT AND EQUIPMENT Land and land improvements 21,187,079 20,968,468 20,423,153 Buildings 35,969,830 35,591,877 35,377,950 Factory equipment 112,347,634 111,922,358 110,134,188 Other equipment 3,415,648 3,527,618 3,463,000 Construction in progress 25,866 21,980 229,981 ------------ ------------ ------------ 172,946,057 172,032,301 169,628,272 Less accumulated depreciation 70,058,956 65,281,136 60,441,602 ------------ ------------ ------------ 102,887,101 106,751,165 109,186,670 ------------ ------------ ------------ LONG-TERM NOTES RECEIVABLE, NET OF CURRENT PORTION 25,508 28,058 2,915,360 ------------ ------------ ------------ OTHER ASSETS Investment in stock of other corporations, unconsolidated marketing subsidiaries and other cooperatives 11,183,783 10,407,956 10,043,102 Deferred income taxes 89,000 1,240,000 1,962,000 Other 1,052,014 1,015,827 960,220 ------------ ------------ ------------ 12,324,797 12,663,783 12,965,322 ------------ ------------ ------------ $161,737,426 $173,001,208 $174,296,499 ============ ============ ============
See Notes to Consolidated Financial Statements.
----------------------------------------------------------------------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ LIABILITIES AND MEMBERS' INVESTMENT CURRENT LIABILITIES Short-term notes payable $ 10,965,000 $ 15,458,800 $ 17,780,000 ------------ ------------ ------------ Current portion of long-term debt 3,610,417 3,012,500 3,012,500 Current portion of capital lease 815,000 775,000 730,000 ------------ ------------ ------------ 4,425,417 3,787,500 3,742,500 ------------ ------------ ------------ Accounts payable Trade 1,842,796 2,223,574 2,891,768 Growers 14,816,615 16,927,545 8,340,333 ------------ ------------ ------------ 16,659,411 19,151,119 11,232,101 ------------ ------------ ------------ Advances to affiliates - Midwest Agri-Commodities Co. and United Sugars Corporation -- 201,242 374,589 ------------ ------------ ------------ Accrued liabilities 2,476,011 2,725,105 2,696,649 ------------ ------------ ------------ Total current liabilities 34,525,839 41,323,766 35,825,839 LONG-TERM DEBT, NET OF CURRENT PORTION 39,100,000 43,910,416 46,172,917 OBLIGATION UNDER CAPITAL LEASE 9,680,000 10,495,000 11,270,000 OTHER 964,617 846,765 686,463 COMMITMENTS AND CONTINGENCIES (NOTE 11) -- -- -- ------------ ------------ ------------ Total liabilities 84,270,456 96,575,947 93,955,219 ------------ ------------ ------------ MINORITY INTEREST IN EQUITY OF SUBSIDIARY 1,263,581 1,089,320 946,924 ------------ ------------ ------------ MEMBERS' INVESTMENT Preferred stock Class A - 100,000 shares authorized, $105 par value; 72,200 shares issued and outstanding 7,581,000 7,581,000 7,581,000 Class B - 100,000 shares authorized $75 par value; 72,200 shares issued and outstanding 5,415,000 5,415,000 5,415,000 Class C - 100,000 shares authorized, $76 par value; 72,200 shares issued and outstanding 5,487,200 5,487,200 5,487,200 ------------ ------------ ------------ 18,483,200 18,483,200 18,483,200 Common stock, 600 shares authorized, $250 par value; 497, 484, and 473, shares issued and outstanding in 2001, 2000, and 1999, respectively 124,250 121,000 118,250 Paid in capital in excess of par 32,094,407 32,094,407 32,094,407 Unit retention capital 6,476,360 7,148,159 7,560,034 Qualified allocated patronage 3,415,570 3,816,607 3,854,558 Nonqualified allocated patronage 14,466,641 12,894,627 16,822,063 Retained earnings 1,142,961 777,941 461,844 ------------ ------------ ------------ 76,203,389 75,335,941 79,394,356 ------------ ------------ ------------ $161,737,426 $173,001,208 $174,296,499 ============ ============ ============
MINN-DAK FARMERS COOPERATIVE CONSOLIDATED STATEMENTS OF OPERATIONS AUGUST 31, 2001, 2000, AND 1999
------------------------------------------------------------------------------------------------------- 2001 2000 1999 ------------- ------------- ------------- REVENUE From sales of sugar, sugar by-products, and yeast, net of discounts $ 177,898,591 $ 170,151,248 $ 152,741,993 ------------- ------------- ------------- EXPENSES Production costs of sugar, by-products, and yeast sold 44,492,963 44,866,025 50,330,497 Sales and distribution costs 28,099,266 26,610,203 27,913,271 General and administrative 5,465,219 5,418,727 5,002,270 Interest 4,920,260 5,198,876 5,264,307 ------------- ------------- ------------- 82,977,708 82,093,831 88,510,345 ------------- ------------- ------------- OTHER EXPENSE (301,011) (1,453,810) (879,326) ------------- ------------- ------------- NET PROCEEDS RESULTING FROM MEMBER AND NON-MEMBER BUSINESS $ 94,619,872 $ 86,603,607 $ 63,352,322 ============= ============= ============= DISTRIBUTION OF NET PROCEEDS Credited to members' investment Components of net income Income from non-member business $ 365,020 $ 316,097 $ 715,515 Patronage income 4,624,324 -- -- ------------- ------------- ------------- Net income 4,989,344 316,097 715,515 Unit retention capital -- -- 4,630 ------------- ------------- ------------- Net credit to members' investment 4,989,344 316,097 720,145 Payments to members for sugarbeets, net of unit retention capital 82,696,795 86,287,510 62,632,177 Payments to members for PIK certificates 6,933,733 -- -- ------------- ------------- ------------- Total payments to members 89,630,528 86,287,510 62,632,177 NET PROCEEDS RESULTING FROM MEMBER AND NONMEMBER BUSINESS $ 94,619,872 $ 86,603,607 $ 63,352,322 ============= ============= =============
See Notes to Consolidated Financial Statements. MINN-DAK FARMERS COOPERATIVE CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' INVESTMENT AUGUST 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------------------------------- Paid in Capital Unit Preferred Common in Excess of Retention Stock Stock Par Value Capital ----------- ----------- --------------- ------------ BALANCE, AUGUST 31, 1998 18,483,200 121,000 $ 32,094,407 $ 7,584,237 Stock Sales - common (3 shares) 750 Repurchases - common (14 shares) (3,500) Unit retention capital Revolvement (28,833) Proceeds 4,630 Revolvment of prior years' allocated patronage Net income for the year ended August 31, 1999 ----------- ----------- ------------ ------------ BALANCE, AUGUST 31, 1999 18,483,200 118,250 32,094,407 7,560,034 Stock Sales - common (22 shares) 5,500 Repurchases - common (11 shares) (2,750) Revolvement of unit retention capital (411,875) Revolvment of prior years' allocated patronage Net income for the year ended August 31, 2000 ----------- ----------- ------------ ------------ BALANCE, AUGUST 31, 2000 18,483,200 121,000 32,094,407 7,148,159 Stock Sales - common (26 shares) 6,500 Repurchases - common (13 shares) (3,250) Revolvement of unit retention capital (671,799) Revolvment of prior years' allocated patronage Net income for the year ended August 31, 2001 ----------- ----------- ------------ ------------ BALANCE, AUGUST 31, 2001 18,483,200 124,250 $ 32,094,407 $ 6,476,360 =========== =========== ============ ============
[WIDE TABLE CONTINUED FROM ABOVE]
-------------------------------------------------------------------------------------------------------- Qualified Non-Qualified Retained Allocated Allocated Earnings Patronage Patronage (Deficit) Total ------------ ------------ ------------ ------------ BALANCE, AUGUST 31, 1998 $ 3,981,031 $ 20,071,517 $ (253,671) $ 82,081,721 Stock Sales - common (3 shares) 750 Repurchases - common (14 shares) (3,500) Unit retention capital Revolvement (28,833) Proceeds 4,630 Revolvment of prior years' allocated patronage (126,473) (3,249,454) (3,375,927) Net income for the year ended August 31, 1999 715,515 715,515 ------------ ------------ ------------ ------------ BALANCE, AUGUST 31, 1999 3,854,558 16,822,063 461,844 79,394,356 Stock Sales - common (22 shares) 5,500 Repurchases - common (11 shares) (2,750) Revolvement of unit retention capital (411,875) Revolvment of prior years' allocated patronage (37,951) (3,927,436) (3,965,387) Net income for the year ended August 31, 2000 316,097 316,097 ------------ ------------ ------------ ------------ BALANCE, AUGUST 31, 2000 3,816,607 12,894,627 777,941 75,335,941 Stock Sales - common (26 shares) 6,500 Repurchases - common (13 shares) (3,250) Revolvement of unit retention capital (671,799) Revolvment of prior years' allocated patronage (401,037) (3,052,310) (3,453,347) Net income for the year ended August 31, 2001 4,624,324 365,020 4,989,344 ------------ ------------ ------------ ------------ BALANCE, AUGUST 31, 2001 $ 3,415,570 $ 14,466,641 $ 1,142,961 $ 76,203,389 ============ ============ ============ ============
MINN-DAK FARMERS COOPERATIVE CONSOLIDATED STATEMENTS OF CASH FLOWS AUGUST 31, 2001, 2000, AND 1999
---------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ OPERATING ACTIVITIES Income allocated to members' investment $ 4,989,344 $ 316,097 $ 715,515 Add (deduct) noncash items Depreciation and amortization 6,806,781 6,731,225 6,591,016 Equipment disposals - loss 321,305 528,422 155,761 Discount on redemption of estate payout -- -- (40,820) Net (income) allocated from unconsolidated marketing subsidiaries (165,514) (142,870) (214,375) Noncash portion of patronage capital credits (779,627) (273,292) (313,463) Deferred income taxes 1,151,000 709,000 730,000 Increase in cash surrender of officer life insurance (42,646) (7,730) (87,628) Stock cancellation - St. Paul Bank for Cooperatives -- 51,138 131,196 Changes in operating assets and liabilities: Accounts receivable and advances (3,933,651) 7,441,649 (2,502,362) Inventory and prepaid expenses 126,579 (10,410,959) 10,508,284 Deferred charges and other 53,730 84,453 38,748 Other assets -- 44,550 -- Accounts payable, accrued liabilities, and other liabilities (2,645,050) 8,031,619 (777,654) ------------ ------------ ------------ NET CASH FROM OPERATING ACTIVITIES 5,882,251 13,103,302 14,934,218 ------------ ------------ ------------ INVESTING ACTIVITIES Proceeds from disposition of property, plant and equipment -- 59,391 12,494 Capital expenditures (3,100,142) (4,709,902) (5,185,083) Investment in stock of other corporations, unconsolidated marketing subsidiaries and other cooperatives -- -- (110,716) Capital adjustment of marketing subsidiary 68,078 -- -- Issuance of note receivable -- (30,609) (283,017) Proceeds on note receivable 2,550 3,227,037 288,093 Net proceeds from patronage refunds and equity revolvements 101,236 133 66,196 Minority interest in equity of subsidiaries 174,261 142,396 179,443 ------------ ------------ ------------ NET CASH USED FOR INVESTING ACTIVITIES (2,754,017) (1,311,554) (5,032,590) ------------ ------------ ------------ FINANCING ACTIVITIES Sale and repurchase of common stock, net 3,250 2,750 (2,750) Net proceeds from issuance of short-term debt 4,070,962 (2,321,200) (9,075,000) Proceeds from issuance of long-term debt -- 1,750,000 2,800,000 Payment of financing fees (135,321) (145,314) (154,726) Payment of long-term debt (4,987,499) (4,742,501) (1,412,500) Retention of nonqualified unit retains -- -- 4,630 Payment of unit retains and allocated patronage (4,125,146) (4,377,262) (3,363,940) ------------ ------------ ------------ NET CASH FROM FINANCING ACTIVITIES (5,173,754) (9,833,527) (11,204,286) ------------ ------------ ------------ NET CHANGE IN CASH (2,045,520) 1,958,221 (1,302,658) CASH, BEGINNING OF YEAR 2,504,566 546,345 1,849,003 ------------ ------------ ------------ CASH, END OF YEAR $ 459,046 $ 2,504,566 $ 546,345 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for Interest $ 4,959,743 $ 4,583,074 $ 4,971,812 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF NON CASH FLOW INFORMATION Reduction of short-term notes payable through the forfeiture of sugar inventory $ 8,564,762 ============
See Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2001, 2000, and 1999 NOTE 1 - PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES PRINCIPAL BUSINESS ACTIVITY Minn-Dak Farmers Cooperative (Minn-Dak) is a North Dakota cooperative association owned by its member-growers for the purpose of processing sugar beets and marketing sugar and by-products. Minn-Dak Yeast Company, Inc. (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 are from member business, whereas Minn-Dak Yeast is considered non-member business. PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of Minn-Dak and its subsidiary, Minn-Dak Yeast, which is 80% owned by the cooperative. 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 sugar beet seed, located in North Dakota and Minnesota. 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. Inventory of yeast is valued at the lower of average cost or market. Materials and supplies are valued at most recent purchase which approximates cost. 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 $63,827, $124,490, and $168,399 for the years ended August 31, 2001, 2000 and 1999. There were no construction period-interest capitalized for the years ended August 31, 2001, 2000 and 1999. 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 non-qualified 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 ESTIMATE 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 2000 and 1999 financial statements to conform with the 2001 presentation. The reclassifications have no effect on the results of operations. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has recently issued pronouncements regarding Business Combinations, Goodwill and Other Intangible Assets, and Accounting for Asset Retirement Obligations. Management is reviewing these pronouncements, but does not expect the implementation of these to have a material effect on the financial statements. NOTE 2 - NOTES RECEIVABLE The cooperative's notes receivable total $28,058, $30,609 and $3,227,037 as of August 31, 2001, 2000 and 1999, respectively. They are due from United Sugars member processors. The notes receivable are unsecured, with a variable interest rate, currently 8.25%. The notes will be received in equal annual installments through August 31, 2012. The notes are subordinated to CoBank in 2001, 2000, and 1999. The current portion of the notes are $2,551, $2,551, and $311,677 as of August 31, 2001, 2000 and 1999, respectively. During 2000, the cooperative sold certain notes receivable with recourse. The cooperative's contingent liability related to these notes totaled $2,603,682 and $2,915,360 as of August 31, 2001 and 2000, respectively. NOTE 3 - INVESTMENTS The investment in stock of other corporations, unconsolidated marketing subsidiaries and other cooperatives consists of the following:
2001 2000 1999 ----------- ----------- ----------- United Sugars Corporation $ 871,944 $ 985,876 $ 1,007,957 Midwest Agri-Commodities 51,823 47,576 43,225 ProGold, LLC 3,842,378 3,635,255 3,474,655 CoBank 3,215,036 2,851,355 2,902,494 Dakota Valley Electric (R.S.R. Electric Cooperative in 1999) 3,071,726 2,758,642 2,486,798 Other 130,876 129,252 127,973 ----------- ----------- ----------- $11,183,783 $10,407,956 $10,043,102 =========== =========== ===========
NOTE 4 - SHORT-TERM DEBT Information regarding short-term debt for the years ended August 31, is as follows:
2001 2000 1999 ----------- ----------- ----------- Seasonal loan with CoBank, due June 1, 2002, interest variable, currently at 4.5% $10,965,000 $ 4,980,000 $17,780,000 CCC notes -- 10,478,800 -- ----------- ----------- ----------- $10,965,000 $15,458,800 $17,780,000 =========== =========== ===========
The cooperative has a $45,000,000 seasonal line of credit with CoBank. 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, is as follows:
2001 2000 1999 ----------- ----------- ----------- Maximum borrowings $45,000,000 $42,030,000 $53,817,000 =========== =========== =========== Average borrowing levels $22,452,092 $23,484,062 $34,660,931 =========== =========== =========== Average interest rates 6.38% 6.84% 6.06% =========== =========== ===========
NOTE 5 - LONG-TERM DEBT Information regarding long-term debt at August 31, is as follows:
2001 2000 1999 ----------- ----------- ----------- Term loan with CoBank, due in varying principal repayments through November 20, 2010, interest variable, currently at 6.5%, with a first lien on substantially all property and equipment and current assets of Minn-Dak located in Wahpeton, North Dakota $42,700,000 $46,900,000 $49,150,000 Long-term interest free note with Dakota Valley Electric Cooperative 10,417 22,916 35,417 ----------- ----------- ----------- 42,710,417 46,922,916 49,185,417 Less current maturities (3,610,417) (3,012,500) (3,012,500) ----------- ----------- ----------- $39,100,000 $43,910,416 $46,172,917 =========== =========== ===========
Minn-Dak has complied with the terms of its loan agreement for the years ended August 31, 2001, 2000 and 1999. In addition, Minn-Dak can make special advance payments on its term loans with CoBank 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 totaled $4,959,743, $5,198,896, and $5,264,307 for 2001, 2000 and 1999, respectively. Principal amounts due on all the cooperative's long-term debt are as follows:
Years ending August 31, --------------------------- 2002 $ 3,610,417 2003 4,800,000 2004 4,800,000 2005 4,800,000 2006 4,800,000 Thereafter 19,900,000 ----------- $42,710,417 ===========
NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASE 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 has 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:
2001 ---------------------------------------------------- FINAL CURRENT 2000 1999 Payee INTEREST MATURITY PORTION TOTAL Total Total ----------------- ---------- ---------- ---------- ----------- ----------- ----------- Richland County, North Dakota 2.35% 1/11 $1,048,864 $11,795,451 $14,510,078 $15,763,935 Less amount representing interest 233,864 1,300,451 3,240,078 3,763,935 ---------- ----------- ----------- ----------- $ 815,000 $10,495,000 $11,270,000 $12,000,000 ========== =========== =========== ===========
Minimum future principal payments required on the obligations under capital lease are as follows:
Years ending August 31, --------------------------- 2002 $ 815,000 2003 860,000 2004 905,000 2005 960,000 2006 1,010,000 Thereafter 5,945,000 ----------- $10,495,000 ===========
The Company has letter of credit arrangements with a bank that provide for short-term secured borrowings totaling approximately $11,000,000 at August 31, 2001. There were no outstanding advances under these letter of credit arrangements at August 31, 2001. NOTE 7 - 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 1.35 planted acres 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. 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 CoBank, 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 years ended August 31, 2001 and 2000, Minn-Dak did not deduct unit retention capital from the members. For the year ended August 31, 1999, Minn-Dak had retained $4,630 for frozen beet storage. For 1999 the retainage is based on $.50 per ton of beets delivered up to the maximum obligation required. For the year ended August 31, 2001, Minn-Dak allocated patronage of $4,624,324 to the members. For the years ended August 31, 2000 and 1999, Minn-Dak did not allocate patronage to the members. During the year ended August 31, 2001, Minn-Dak revolved the remaining 30% of the unit retains and allocated patronage for the fiscal year ended August 31, 1992 and 35% of the unit retains and allocated patronage for the fiscal year ended August 31, 1993, totaling $1,475,742 and $2,647,922, in each respective year, for a total of $4,123,664. In addition, unit retains and allocated patronage owned by certain estates were redeemed at a discount. The discount represented the difference between the book value of these items, totaling $1,482, and the present value of the estimated future redemptions. During the year ended August 31, 2000, Minn-Dak revolved the remaining 15% of the unit retains and allocated patronage for the fiscal year ended August 31, 1991 and 70% of the unit retains and allocated patronage for the fiscal year ended August 31, 1992, totaling $1,148,214 and $3,229,049, in each respective year, for a total of $4,377,263. During the year ended August 31, 1999, Minn-Dak revolved 50% of the unit retains and allocated patronage for the fiscal year ended August 31, 1991, totaling $3,254,163. In addition, unit retains and allocated patronage owned by certain estates were redeemed at a discount. The discount represented the difference between the book value of these items, totaling $150,596, and the present value of the estimated future redemptions. NOTE 8 - 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, is as follows:
2001 2000 1999 ------------ ------------ ------------ Deferred tax assets Non-qualified unit retains and allocated partonage due to members $ 8,377,000 $ 8,017,000 $ 9,753,000 Net operating loss carryforwards 4,641,000 4,379,000 2,730,000 Other 1,137,000 1,560,000 866,000 ------------ ------------ ------------ Gross deferred tax assets 14,155,000 13,956,000 13,349,000 Less valuation allowance (1,058,000) (799,000) (607,000) ------------ ------------ ------------ Total deferred tax assets 13,097,000 13,157,000 12,742,000 ------------ ------------ ------------ Deferred tax liabilities Depreciation 10,161,000 9,351,000 8,544,000 Other 2,520,000 2,223,000 1,906,000 ------------ ------------ ------------ Total deferred tax liabilities 12,681,000 11,574,000 10,450,000 ------------ ------------ ------------ $ 416,000 $ 1,583,000 $ 2,292,000 ============ ============ ============ Classified as follows Current asset $ 327,000 $ 343,000 $ 330,000 Long-term asset 89,000 1,240,000 1,962,000 ------------ ------------ ------------ Net deferred tax asset $ 416,000 $ 1,583,000 $ 2,292,000 ============ ============ ============
A provision for income taxes related to non-member income from Minn-Dak Yeast Company, totaling $659,000, $560,000 and $700,000, for the year ended August 31, 2001, 2000 and 1999, respectively, is included in other expense. The deferred tax asset valuation allowance reduces the estimated amount of the net operating loss carryforwards that will be ultimately realized. NOTE 9 - 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 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, is as follows:
2001 2000 1999 ------------ ------------ ------------ CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 12,447,749 $ 11,857,238 $ 10,125,507 Service cost 628,658 577,611 581,912 Interest cost 942,881 838,130 793,722 Experience (gain)/loss due to participant changes 256,902 (564,471) 566,160 Benefits paid (306,778) (260,759) (210,063) ------------ ------------ ------------ Benefit obligation at end of year 13,969,412 12,447,749 11,857,238 ------------ ------------ ------------ CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 10,963,942 9,553,497 8,205,618 Actual return on plan assets 81,933 881,175 698,039 Employer contribution 506,983 790,029 859,903 Benefits paid (306,778) (260,759) (210,063) ------------ ------------ ------------ Fair value of plan assets at end of year 11,246,080 10,963,942 9,553,497 ------------ ------------ ------------ Funded status (2,723,332) (1,483,807) (2,303,741) Unrecognized net actuarial loss 1,434,769 805,973 1,474,612 Unrecognized prior service cost 693,263 355,070 409,943 Unrecognized transition asset (44,949) (63,215) (81,481) ------------ ------------ ------------ Prepaid (accrued) benefit cost $ (640,249) $ (385,979) $ (500,667) ============ ============ ============
2001 2000 1999 ------------ ------------ ------------ WEIGHTED-AVERAGE ASSUMPTIONS AS OF AUGUST 31 Discount rate 7.5% 7.5% 7.5% Expected return on plan assets 8.0% 8.0% 8.0% Rate of compensation increase 5.0% 5.0% 5.0%
The net periodic pension cost for the years ended August 31, 2001, includes the following components:
2001 2000 1999 ------------ ------------ ------------ COMPONENTS ON NET PERIODIC BENEFIT COST Service cost $ 628,658 $ 577,611 $ 581,912 Interest cost 942,881 838,130 793,722 Expected return on plan assets (878,925) (777,007) (667,728) Amortization of prior service cost 86,905 54,873 54,873 Amortization of transition amount (18,266) (18,266) (18,266) Amortization of other -- -- 38,412 ------------ ------------ ------------ Net periodic benefit cost $ 761,253 $ 675,341 $ 782,925 ============ ============ ============
NOTE 10 - 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 11 - 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. NOTE 12 - 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, 2001, 2000 and 1999, Minn-Dak had advanced $22,204,411, $21,501,838 and $19,645,387, respectively. Minn-Dak had outstanding advances due from United Sugars of $128,764, $249,117 and $117,870, for the years ended August 31, 2001, 2000 and 1999, respectively. During 2001, a distribution of capital of $68,078 was received. 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 $1,974,466, $1,611,326 and $1,543,175, respectively, during the years ended August 31, 2001, 2000 and 1999. Minn-Dak had outstanding advances due from (to) Midwest of $285,282, $(450,359) and $(492,459), as of August 31, 2001, 2000 and 1999, respectively. The owners are guarantors of the short-term line of credit Midwest has with CoBank. NOTE 13 - 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:
Years ending August 31, --------------------------- 2002 $ 1,320,000 2003 937,000 2004 620,000 2005 266,000 2006 139,000 Thereafter 492,000
Operating lease and contract expenses for the years ended August 31, 2001, 2000 and 1999, totaled approximately $1,105,000, $1,206,000 and $1,417,000, respectively. NOTE 14 - 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 15 - 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, 2001, 2000 and 1999, are as follows: INVESTMENTS - The investments in CoBank, Dakota Valley Electric Cooperative, Inc. and all other cooperatives are stated at cost, plus the cooperative's share of allocated patronage and capital credits. The investments in United Sugars Corporation, Midwest Agri-Commodities and ProGold Limited Liability Company are accounted for using the equity method, wherein the investments are 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 LEASE - The fair value of obligations under capital lease was based on present value models using current financing rates available to the cooperative. At August 31, 2001, the carrying value of obligations under capital leases was $10,495,000 and the estimated fair value was $8,200,000. At August 31, 2000, the carrying value of obligations under capital leases was $11,270,000 and the estimated fair value was $9,200,000. At August 31, 1999, 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 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 ---------------- --- -------- -------------- ----------- Douglas Etten 50 District #8 - 1997 2003 3138 370th ST Lyngaas Foxhome, MN 56543 Michael Hasbargen 56 District #4 - 1993 2002 2553 360th ST East Factory Breckenridge, MN 56520 Victor Krabbenhoft 52 District #9 - Peet 1989 2001(1) 416 44th AV S Moorhead, MN 56560 Jack Lacey 59 District #5 - 1993 2002 32936 320th AV Hawes Wendell, MN 56590-9750 Russell Mauch 46 District #2 - 1998 2001(2) 16305 Hwy 13 Factory West Barney, ND 58008 Jerry Meyer 63 District #1 - Tyler 1994 2003 1433 15th Street North Wahpeton, ND 58075
Term Expires Name and Address Age District Director Since in December ---------------- --- -------- -------------- ----------- Edward Moen 75 District #3 - 1989 2001(3) 17060 County Road 8 Gorder Colfax, ND 58018 Charles Steiner 51 District #6 - 2000 2003 2851 310th AV Yaggie Foxhome, MN 56543-9312
1) Mr. Krabbenhoft's term as a director of the Company from District #9-Peet expires on December 4, 2001. 2) Mr. Mauch's term as a director of the Company from District #2-Factory West expires on December 4, 2001. 3) Mr. Moen's term as director of the Company from District #3-Gorder expires on December 4, 2001. 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. Etten also serves on the board of directors for United Sugars Corporation. MICHAEL HASBARGEN has been a director since 1993 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 it one of Minn-Dak's representatives to the American Sugarbeet Growers Association in Washington, DC. Mr. Hasbargen is the brother-in-law of Mr. Steven Caspers, Executive Vice President & Chief Financial Officer. 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's representatives to the American Sugarbeet Growers Association in Washington, DC. RUSSELL MAUCH has been a director since 1998. Mr. Mauch graduated from North Dakota State University in 1977 with a B.S. in agriculture. From 1979 to 1981 Mr. Mauch was a commercial and ag loan officer for First Bank Corporation in Valley City, ND. Mr. Mauch has been farming near Barney, ND since 1981. Mr. Mauch also serves on the board of directors for Minn-Dak Yeast Company and on the board of directors for Midwest Agri-Commodities Company. JERRY MEYER has been a director since 1994. Mr. Meyer has been farming near Fairmount, ND since 1958. He also serves 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. CHARLES STEINER has been a director since 2000. Mr. Steiner has been farming near Foxhome, MN since 1969. Mr. Steiner graduated from the Northwest School of Agriculture, University of Minnesota at Crookston, MN. He also serves on the board of directors for Minn-Dak Yeast 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. 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 that take less than five hours or (b) $225.00 for any day in which directors partake in activities on the Company's behalf that take five hours or more. The Chairman of the Board of Directors also receives a flat $200.00 per month to compensate for the extra duties associated with that position. EXECUTIVE OFFICERS The table below lists the principal officers of the Company, none of whom owns any common or preferred shares. The president/chief executive officer is appointed annually by the Board of Directors to serve on the board. Brief biographies for each of the officers are included after the table. Mr. Larry Steward retired effective September 30, 2000 and as a result, the Board of Directors appointed Mr. Steven M. Caspers to the position of Interim President and Chief Executive Officer. Mr. Caspers appointed Mr. Allen E Larson as Interim Chief Financial Officer. A search was undertaken for a permanent President and Chief Executive Officer and Mr. David H. Roche was hired, effective March 1, 2001 to fill the position of President and Chief Executive Officer. As of March 1, 2001, Mr. Caspers and Mr. Larson also resumed their previous duties. Name Age Position ---- --- -------- David H. Roche 54 President and Chief Executive Office Larry D. Steward 62 President and Chief Executive Officer-retired 9-30-00 Steven M. Caspers 51 Executive Vice President and Chief Financial Officer Allen E. Larson 46 Controller Thomas D. Knudsen 47 Vice President, Agriculture John E. Groneman 65 Vice President, Engineering-retired 11-2-01 Richard K. Richter 61 Vice President, Operations Jerald W. Pierson 62 Director of Human Resources Jeffrey L. Carlson 46 Director of Technical Services John S. Nyquist 45 Purchasing Manager Patricia J. Keough-Wilson 61 Director of Communications Kevin R. Shannon 46 Safety Director John Haugen 49 Director of Engineering DAVID H. ROCHE is Minn-Dak Farmers Cooperative's third president and CEO. He joined the Wahpeton, ND based sugar cooperative on March 1, 2001. He serves on the boards of United Sugars Corporation and Midwest Agri-Commodities. In addition, he is a trustee of the United States Beet Sugar Association, Washington, D.C. Mr. Roche began his 25-year sugar industry career as a controller for Michigan Sugar Company in 1976. He progressed through the ranks until he was named president in 1994. In 1996 he became president of Savannah Foods Industrial and was appointed senior vice president of Savannah Foods & Industries. He retained his position at Michigan Sugar Company, which was owned by Savannah Foods & Industries, during this period. Imperial Sugar Company acquired controlling interest in Savannah in 1998. He was named as a managing director and senior vice president. Mr. Roche holds an MBA in accounting from Michigan State University and became a certified public accountant in 1974. LARRY D. STEWARD joined the Company in December 1990 as president and chief executive officer. Mr. Steward served on the boards of United Sugars Corporation, and Midwest Agri-Commodities. Mr. Steward was 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 the Company, 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. He retired from the Company effective September 30, 2000. 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 with the Company since May 5, 1974. Mr. Caspers is president of Minn-Dak Yeast Company and serves as governor for ProGold, LLC. He also is active in national industry related boards and committees. Mr. Caspers was named interim President and Chief Executive Officer October 1, 2000. Prior to this interim appointment, Mr. Caspers was serving as the Company Executive Vice President and Chief Financial Officer, which is now his current position. Mr. Caspers is the brother-in-law of Mr. Michael Hasbargen, Director and Vice Chairman. ALLEN E. LARSON is a graduate of Moorhead State University with a Bachelor of Science in Business administration and a major in accounting. He has been employed with the Company since October 26, 1981. Mr. Larson was appointed to the position of Interim Chief Financial Officer October 1, 2000. Prior to this interim appointment, Mr. Larson was serving the Company as Controller, which is now his current position. 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 the Company on March 1, 1974. He retired, effective November 2, 2001. 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 with the Company beginning in August of 1976. JERALD W. PIERSON is a graduate of Black Hills State University with 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 the Company 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 the Company on September 15, 1975. PATRICIA J. KEOUGH-WILSON is a graduate of Moorhead State University with a Bachelor of Science in mass communications and Master of Arts in liberal arts. Mrs. Keough-Wilson is active in local civic organizations and began her publication-communications experience in 1973. Mrs. Keough-Wilson 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 the Company's tare lab supervisor. JOHN R. HAUGEN was promoted to the position of Director of Engineering on November 2, 2001. He has been with the Company for 25 years. He started his career with Minn Dak Farmers Cooperative in 1976 as an Assistant Engineer and prior to this promotion held the position of Senior Engineer. John is a graduate of the University of North Dakota and holds a BS in Mechanical Engineering. 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, 2001 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) David Roche 2001 $128,346 $ 0 $27,598 $155,945 President & CEO 2000 $ 0 $ 0 $ 0 $ 0 1999 $ 0 $ 0 $ 0 $ 0 Larry Steward 2001 $ 59,622 $ 0 $23,088 $ 0 $ 82,710 President & CEO- 2000 $219,665 $86,100 $25,281 $ 37,101 $368,147 Retired 9-30-00 1999 $211,178 $69,798 $20,304 $ 30,944 $332,224 Steven Caspers 2001 $180,787 $30,000 $21,991 $232,779 Executive Vice 2000 $129,147 $30,000 $13,165 $172,312 President & CFO 1999 $125,221 $ 0 $14,679 $139,900 Thomas Knudsen 2001 $ 97,557 $14,500 $ 4,302 $116,359 VP Agriculture 2000 $ 94,624 $14,500 $11,380 $120,504 1999 $ 91,813 $ 0 $ 6,405 $ 98,218 Richard Richter 2001 $ 97,350 $14,500 $ 5,729 $117,579 VP Operations 2000 $ 94,457 $14,500 $ 5,196 $114,153 1999 $ 91,663 $ 0 $ 4,796 $ 96,459 John Groneman 2001 $ 92,240 $13,500 $ 4,053 $109,793 VP Engineering- 2000 $ 89,546 $13,500 $ 3,972 $107,018 Retired as of 1999 $ 86,950 $ 0 $ 4,329 $ 91,279 11-2-01
----------------------------- 1) In addition to the salary and bonus described above, Mr. Roche, 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. The company has a policy whereby Supervisory, Professional and Management employees are required to 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/CEO determines those performance objectives for officers and significant other management employees of the Company and the Board of Directors determines performance objectives for the President/CEO. If minimum Company performance is not achieved in any given year (that performance based upon returns to the Company's shareholders), performance bonuses are not paid to employees. The Company has entered into an employment agreement with Mr. Roche, which establishes his salary and benefits as an employee of the Company. The agreement has an initial term of eighteen months, commencing March 1, 2001 and expiring August 31, 2002. Thereafter, upon renewal of this agreement by the parties, employment shall extend until terminated by the parties. Either party may terminate this agreement by giving written notice to the other party at least ninety days prior to the expiration of any twelve month term. As of September 30, 2000, the Company entered into an employment agreement with Mr. Caspers, which established his salary and benefits while he temporarily filled the position of President and Chief Executive Officer. The agreement continued until April 30, 2001. At the time of the termination of the agreement, Mr. Caspers assumed his previous duties as Executive Vice President and Chief Financial Officer with the same pay and benefits as he had prior to September 30, 2000. On a periodic basis, the Company undertakes a compensation review study to determine that its employees' compensation is commensurate with responsibilities of the various Company positions, and that the compensation is 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 performs the compensation review study. This study is made of all management employees, including the president, and non-union employees. In June of 1997 the company made a range shift and from time to time individual employees have had a restudy based upon changes in their areas of responsibilities. As of August 31, 2001 all employees' wages had been adjusted to levels consistent with the Hay Management Consultants findings and recommendations. 2) Beginning in fiscal year 1997 and continuing until his retirement, supplemental executive retirement plan obligations were recorded onto the Company's books on behalf of Mr. Steward. Mr. Roche will be eligible for the plan, pending approval by the board of directors, upon completion of one year of service. Mr. Caspers is also eligible for the plan, however, no obligations have been recorded on his behalf by the Company. See the section below on Retirement Plans for further details on the supplemental executive retirement plan. 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. The Company provides a matching contribution of 75% of each employee's first 4% of compensation that is set aside under the plan. 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. Federal law limited employee pre-tax income contributions to $10,500 for each participating employee in the calendar years 2001 and 2000. 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." The Company's Board of Directors adopted that plan 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: --------------------------------------------------------------------------- Years of Service --------------------------------------------------------------------------- Pension Compensation 15 20 25 30 35 --------------- ----------- ----------- ----------- ----------- ----------- $ 125,000 $28,147 $37,529 $46,911 $56,293 $65,675 --------------- ----------- ----------- ----------- ----------- ----------- $ 150,000 $34,334 $45,779 $57,224 $68,668 $80,113 --------------- ----------- ----------- ----------- ----------- ----------- $ 175,000 $39,284 $52,379 $65,474 $78,568 $91,663 --------------- ----------- ----------- ----------- ----------- ----------- $ 200,000 $39,284 $52,379 $65,474 $78,568 $91,663 --------------- ----------- ----------- ----------- ----------- ----------- $ 225,000 $39,284 $52,379 $65,474 $78,568 $91,663 --------------- ----------- ----------- ----------- ----------- ----------- $ 250,000 $39,284 $52,379 $65,474 $78,568 $91,663 --------------- ----------- ----------- ----------- ----------- ----------- $ 275,000 $39,284 $52,379 $65,474 $78,568 $91,663 --------------- ----------- ----------- ----------- ----------- ----------- $ 300,000 $39,284 $52,379 $65,474 $78,568 $91,663 --------------- ----------- ----------- ----------- ----------- ----------- $ 325,000 $39,284 $52,379 $65,474 $78,568 $91,663 --------------- ----------- ----------- ----------- ----------- ----------- $ 350,000 $39,284 $52,379 $65,474 $78,568 $91,663 --------------- ----------- ----------- ----------- ----------- ----------- $ 375,000 $39,284 $52,379 $65,474 $78,568 $91,663 --------------- ----------- ----------- ----------- ----------- ----------- Mr. Caspers has 27 years of service under the plan. 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 16, 2001, 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 16, 2001, 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 ---- --------------------- ------------- ----------- Douglas Etten Director 450 less than 1% Michael Hasbargen Director 375 less than 1% Victor Krabbenhoft Director 245 less than 1% Jack Lacey (1) Director 250 less than 1% Russell Mauch (2) Director 354 less than 1% Jerry Meyer Director 260 less than 1% Ed Moen Director 180 less than 1% Paul Summer (3) Director 222 less than 1% Charles Steiner(4) Director 356 less than 1% All Directors 2692 3.73% (1) Mr. Lacey's shares are held and grown under the name of Jack Lacey Company. (2) Mr. Mauch's shares are held and grown under the name of RCM Limited Partnership. (3) Mr. Summer's shares are grown under the name of P V Unlimited Corp. (4) Mr. Steiner's share are held and grown under the name of Steiner and Sons Limited Partnership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Each of the Company's directors is also a sugarbeet 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 sugarbeets to the Company and receives payments for those sugarbeets. Such payments for sugarbeets 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 sugarbeets. Except for the sugarbeet 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 ITEM 14(a) FINANCIAL STATEMENT SCHEDULES None ITEM 14(b) 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, 2001. ITEM 14(c) 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 10(q) Amendment to Minn-Dak Farmers Cooperative Pension Plan 10(r) David H. Roche Employment Agreement 10(s) Agreement with Universal Foods regarding sale of Red Star Yeast & Products Division, (Confidential Treatment requested for certain sections) 12 Statement re Computation of Ratio of Net Proceeds to Fixed Charges *21 Subsidiaries of the Registrant --------------------------- * 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. ****Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998 as filed on November 24, 1998. 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/ David H. Roche ------------------------------------- DAVID H. ROCHE, 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/ David H. Roche President and 11-29-01 ---------------------------- Chief Executive Officer -------------- David H. Roche /s/ Steven M. Caspers Executive Vice President and 11-29-01 ---------------------------- Chief Financial Officer -------------- Steven M. Caspers /s/ Allen E. Larson 11-29-01 ---------------------------- Controller -------------- Allen E. Larson /s/ Victor Krabbenhoft 11-29-01 ---------------------------- Director -------------- Victor Krabbenhoft /s/ Douglas Etten 11-29-01 ---------------------------- Director -------------- Douglas Etten /s/ Edward Moen, Jr. 11-29-01 ---------------------------- Director -------------- Edward Moen, Jr. /s/ Mike Hasbargen 11-29-01 ---------------------------- Director -------------- Mike Hasbargen /s/ Charles Steiner 11-29-01 ---------------------------- Director -------------- Charles Steiner /s/ Jack Lacey 11-29-01 ---------------------------- Director -------------- Jack Lacey /s/ Russell Mauch 11-29-01 ---------------------------- Director -------------- Russell Mauch /s/ Jerry Meyer 11-29-01 ---------------------------- Director -------------- Jerry Meyer /s/ Paul Summer 11-29-01 ---------------------------- Director -------------- Paul Summer