10-K 1 minndak025582_10k.txt MINN-DAK FARMERS COOPERATIVE FORM 10-K 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, 2002 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] Minn-Dak Farmers Cooperative has previously registered securities for offer and sale pursuant to the Securities Act of 1933, as amended (the "Securities Act"). As a result of that previous registration under the Securities Act, under Sections 15(d) and 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Cooperative is obligated to file quarterly reports on form 10-Q, annual reports on Form 10-K and supplemental reports on Form 8-K. However, the Cooperative has not registered any of its securities under Section 12(g) of the Exchange Act. The Cooperative is exempt from any obligation to register its securities under the Exchange Act due to the provisions of Section 12(g)(2)(E), which exempts from Exchange Act registration any security of an issuer, such as the Cooperative, which is a "cooperative association" as defined in the Agricultural Marketing Act of 1929. As a result, those provisions of the Exchange Act, which are applicable only to securities registered under Section 12 of that act, do not apply to shares issued by the Cooperative. The provisions, which do not apply to the Cooperative's shares, include the regulation of proxies under Section 14 of the Exchange Act and the reporting and other obligations of directors, officers and principal stockholders under Section 16 of the Exchange Act. As of November 13, 2002, 488 shares of the Company'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. 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, 2002. 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. 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 488 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 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 4% of the Company's gross revenues for the fiscal year ended August 31, 2002. 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 early March, ventilated beets prior to early April, 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 2.4 million tons of sugarbeets from the 2002 crop, the largest crop ever delivered to the Company. Sugar content of the 2002 crop at harvest was 4% below the average of the five most recent years. Because of the record size of the crop delivered, the Company's production of sugar from the 2002 crop sugarbeets is expected to set a new record for sugar produced. This forward-looking material is based on the Company's expectations regarding the processing of the 2002 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. The Company's initial beet payment estimate totals $38.15 per ton or $.13130869 per harvested/bonus pound of sugar, with the final beet payment determined in October of 2003. For a discussion of the 2001, 2000 and 1999 crops and results of operations for fiscal years 2002, 2001 and 2000, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. MARKETING, CUSTOMERS AND PRICING Since January 1, 1994 United Sugars Corporation ("United Sugars") 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, 2002 the Company had an ownership interest in United Sugars (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, has entered into a "Uniform Member Marketing Agreement" with United Sugars. 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. 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. Any net proceeds from the operation of United Sugars are distributed to the various members on a patronage basis. On November 15, 2002, Southern Minnesota Sugarbeet Cooperative provided United Sugars with a formal, written notice that it intends to leave the United Sugars organization. The Uniform Member Marketing Agreement provides that when a member serves notice of its intent to leave United Sugars it must provide a minimum of fifteen months notice. In this case, Southern Minnesota Sugarbeet Cooperative has provided United Sugars twenty-one months notice. The marketing or financial impact, if any, to United Sugars or to the Company of the departure of this member is not currently known. Southern Minnesota Sugarbeet Cooperative has averaged 11% of United Sugars annual production volume. United Sugars sells industrial bulk sugar, industrial bagged sugar, and retail bagged sugar and specialty sugars. It distributes both cane sugar and beet sugar, and distributes sugar to customers over a large geographical area. United Sugars markets the Company's sugar primarily to industrial users such as confectioners, breakfast cereal manufacturers and bakeries. The customer base of United Sugars 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, 2002, 94% of the Company's sugar was shipped in bulk form, mostly to industrial users, and 6% in bagged powdered sugar. The prices at which United Sugars 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 mostly on a spot basis. Current net selling prices for sugar are forecast to be higher than the prior two years because of : (1) the Federal Government's imposition of marketing allotments, which is provided for in the 2002 Farm Bill; (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 two years. The Company markets its co-products, dried beet pulp and beet molasses, through Midwest Agri-Commodities Company ("Midwest Agri"), a cooperative whose members are the Company, American Crystal Sugar Company and Southern Minnesota Beet Sugar Cooperative. Midwest Agri 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. 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 non-members and is then sold through the efforts of Midwest Agri. 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. Any net proceeds from the operation of Midwest Agri are distributed to the various members and non-members on a patronage basis. For the year ended August 31, 2002, approximately 56% of the Company's beet pulp production was exported to Japan and Europe, and the remaining 44% was sold domestically. The market for beet pulp is affected by the availability and quality of competitive feedstuffs and by the strength of the U.S. dollar relative to local currencies in export markets. Dried beet pulp prices decreased in FY 2002 due to high beginning inventories in Japan, the strength of the dollar against the Yen and Euro, and an abundance of competitive feedstuffs available in both the export and domestic markets. Beet molasses is marketed primarily to yeast manufacturers, pharmaceutical houses, livestock feed mixers and livestock feeders. Beet molasses prices increased in FY 2002 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 9% of the Company's total consolidated net sales revenues during FY 2002. 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"). Minn-Dak Yeast 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 Minn-Dak Yeast's process and is sold through a supply agreement between the two companies. Sensient Technologies Corporation, Milwaukee, Wisconsin, ("Sensient") holds the remaining twenty percent (20%) equity stake. Minn-Dak Yeast Company, Inc. also has a long-term marketing agreement whereby Sensient will buy all production of yeast produced by Minn-Dak Yeast Company, Inc. in return for certain guaranteed sales volumes. That contract will expire in June 2004, but the Company has a unilateral right to extend it another three years. 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 originally contributed approximately $5.2 million in exchange for its 5% ownership position, while the current book value of the investment totals $4.1 million. On November 1, 1997 ProGold signed a 10 year lease agreement with Cargill, Inc. ("Cargill") 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 will 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 will 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 rental payments of a fixed amount. And, while it is not anticipated to happen in the near future, the lease also provides 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 2002 through 2004 (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 2002 crop year the Company's Board of Directors authorized members to plant 1.55 acres per unit. For the 2003 crop year, the Company's Board of Directors has authorized the members to plant 1.45 acres per unit. This reduction in acres is a direct result of the current farm bill sugar allocations. (For a discussion of the current farm bill sugar allocations, see Management's Discussion on Government Programs and Regulations.) 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 allocated in the form of patronage credits to the member's patronage account on the books of the Company. The Company intends to have a new Growers Agreement signed by each of the shareholders for the 2003 crop. The modifications to the agreement are considered minor in nature by the management and board of directors of the Company and addresses incorporating certain growing practice situations into the agreement. 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 involved in very little of 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, 2002, the Company contributed approximately $67,000 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 $86,000 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 a broad range of evolving environmental laws and regulations. These laws and regulations include the Food Quality Protection Act of 1996, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Federal Insecticide, Fungicide and Rodenticide Act and the Comprehensive Environmental Response, Compensation and Liability Act. Currently, the Company is unaware of any areas of non-compliance. The Company has approved a $9.0 MM Steam Dryer project, which is intended to reduce solid waste and air emissions. The projected completion date for this capital expenditure is September 2003. In addition to the Steam Dryer Project, the Company has $.8 MM of environmental capital improvements budgeted for FY 03. Compliance with these laws and related regulations is an ongoing process that, at the current levels of spending, is not expected to have a material effect on the Company's capital expenditures, earnings or competitive position. Environmental concerns are, however, inherent in most major agricultural operations, including those conducted by the Company, and there can be no assurance that the cost of compliance with environmental laws and regulations will not be material. Moreover, it is possible that future developments, such as increasingly strict environmental laws and enforcement policies thereunder, and further restrictions on the use of agricultural chemicals, could result in increased compliance costs. MARKET AND COMPETITION Current U.S. Government statistics estimate total U.S. sugar deliveries at 181.3 million cwt refined for the fiscal year beginning October 1, 2001 and ending September 30, 2002. For the same period ending in 2001, total deliveries were 186.9 million cwt. refined. Comparing the two years shows demand reduction of 3.0% for U.S. sugar sellers. After experiencing strong and steady growth during the 1990's, U.S. demand for sugar has stagnated since fiscal year 2000. While October 2001 - July 2002 deliveries to non-industrial end users (such as retail grocers and wholesalers) have increased by 5% relative to the same time period the previous year, same-period deliveries to industrial end users have decreased by 8% from a year earlier. Deliveries are down substantially for the largest three industrial end use sectors: bakery and cereal - 6.9%; confectionery industry - 12.3%; and the multiple use category - 15.8%. While there is no clear explanation for the decline in sugar consumption, the decline coincided with a decline in U.S. economic activity, suggesting that aggregate disposal income and sweetener consumption may be related. Other factors that could have contributed to the decline include: (1) September 11, 2001 (the lowest recorded monthly deliveries of domestic food and beverages in over 10 years); (2) changes in dietary habits and (3) the effect of sugars contained in imported products, which have increased significantly since 1995. The U.S. government forecasts growth between 2002 and 2003 to be approximately 1%, at 183.2 million cwt. refined, indicating deliveries to non-industrial end users will likely increase along with population growth. Also, national economic recovery should help demand for products that contain sugar. A continued problem will be the upward trend in imported products that contain sugar. The Company has no reason to disagree with the U.S. Government's estimate of sugar deliveries for fiscal year 2003. 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 2002. United Sugars, which sells the Company's production through a sugar marketing pool, represents approximately 26% share of the U.S. sugar market. The U.S. 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 U.S. market. Today there are seven sugar sellers, with over 85% of U.S. sugar market share concentrated in the top four sellers, most of which are fully integrated beet and cane suppliers. The Company's main competitors in the domestic market are Imperial Sugar Company, Domino, Amalgamated Sugar Company and California and Hawaii Sugar Company. Competition in the U.S. sugar industry, because sugar is a fungible commodity, is primarily based upon price, customer service and reliability as a supplier. GOVERNMENT PROGRAMS AND REGULATION Domestic sugar prices are supported under a program administered by the United States Department of Agriculture ("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, the Federal Agriculture Improvement and Reform Act of 1996 and now The Farm Security and Rural Investment Act of 2002 (the "Farm Bill"), 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 Farm Bill 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 2002 through 2007. Price support loans are made on a non-recourse basis, which means the sugar processor is able to forfeit sugar to CCC if sugar prices are below the loan rate. However, the Farm Bill also provides that, to the maximum extent possible, the Secretary of Agriculture of the USDA (the "Secretary") shall operate the sugar program at no cost to the Federal Government by avoiding the forfeiture of sugar to CCC. The Farm Bill further provides for the imposition of marketing allotments each crop year for the marketing by processors of sugar processed from sugarbeets and domestically produced sugarcane at a level that the Secretary estimates will be needed to avoid forfeitures of sugar to the CCC. The Secretary only suspends allotments whenever the Secretary estimates or re-estimates, or has reason to believe, that imports of sugar for human consumption will exceed 1,532,000 short tons raw value. Each domestic processor of sugar, which includes the Company, is provided an allocation whenever allotments are in effect, based upon a formula. The Company believes that the amount of allocation it can expect to receive from the Secretary in each year of the Farm Bill may not be sufficient to allow it to sell all of its production of sugar in the domestic for human consumption marketplace. Any amount of sugar produced by the Company within an allotment year that does not have a corresponding allocation will have to be marketed into alternative markets or held until such time that allotments are lifted. The Company anticipates that it will have to adjust its production of sugar each year to more closely match its anticipated allocation. To the extent that the Company has to market any over-allocation sugar into alternative markets, or reduce production to more closely match its anticipated allocation, it is not expected that those decisions would have a material adverse effect on the operations of the Company. Under the General Agreement on Tariffs and Trade Act o f 1990 ("GATT"), tariff rate quotas were implemented for certain sugar producing countries, that provided for a fixed quantity of sugar imports duty-free or subject to minimal duties. Unlimited additional quantities may be imported upon payment of a tariff of 16.21 cents per pound of refined sugar prior to shipment (to date, very little sugar has been imported under this higher tariff level). 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 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. The WTO met again in November 2001 in Doha, Qatar where members launched new multilateral trade negotiations aimed at improving market access, reducing and eventually phasing out of all forms of export subsidies and substantial reductions in trade-distorting domestic support. Any agreements reached at the Millennium Round could represent a threat to the domestic 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") currently 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 have a material adverse affect on 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 9.34 cents in 2002 but decline by approximately 1.5 cents per year until reaching zero in 2008. The Company believes that current low world raw sugar prices make it feasible for Mexican second tier sugar to enter the United States marketplace. In contrast to Mexico's duty free access to the United States sugar market, which is at 250,000 metric tons per year, 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. The recently passed Farm Bill provides price support provisions for sugar. However, 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. EMPLOYEES As of November 9, 2002, the Company had 246 full-time employees, of whom 214 were hourly and 32 were salaried. It also employs approximately 346 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 of Minnesota-North Dakota. The Company owns the factory, receiving sites, and the land on which they are located. The properties are adequate to process normal and above normal crop sizes with a three-year post expansion average slice rate of 9,400 tons per day. The processing factory is anticipating processing the 2002 crop, which is a record size crop, with little difficulty if we have normal weather patterns, which in turn provide normal beet storage conditions. Minn-Dak Yeast Company, Inc, of which the Company is an 80% owner, operates a single yeast manufacturing factory at Wahpeton, North Dakota that 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 2002, fresh yeast was produced and sold into the domestic yeast marketplace. All properties are held subject to a mortgage by the Company's primary lender. 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 that have arisen in the ordinary course of its business, and the Company is also unaware of certain other potential claims that 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, 2002. At the Annual Meeting of Shareholders which is to be held on December 10th, 2002, the following seats on the board of directors will be up for election: District #4, District #5, and District #7. A brief biography of each of the candidates for the open seats follows. DISTRICT #4 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. DISTRICT #5 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. DISTRICT #7 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. PART II ITEM 5. MARKET FOR COMPANY'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. 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 years ended August 31, 2002 and 2001. Of the stock transferred at arms length, the transfers were made during the first, second and third quarters of each of the Company's fiscal years and range in price from $1,450 to $1,600 per unit the first quarter, $1,600 to $1,900 the second quarter and $1,800 to $2,000 the third quarter for the year ended August 31, 2002, and $1,450 to $1,600 per unit during the fiscal year ended August 31, 2001. The fourth quarter did not have any arms length transactions. 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) 2002 2001 2000 1999 1998 Revenues $158,003 $177,899 $170,151 $152,742 $149,574 Distribution of Net Proceeds (1) 84,224 94,620 86,604 63,352 72,084 Total Assets 171,573 161,737 173,001 174,296 184,830 Long-term Debt, including current maturities, Net of bond investments, 1998 61,580 53,205 58,193 61,185 59,798 Members' Investment (2) 76,912 76,203 75,336 79,394 82,082 Property and Equipment Additions, net of Retirements 4,582 914 2,404 2,962 10,893 Working Capital 11,647 11,974 12,234 13,403 11,170 Ratio of Long-Term Debt to Equity (3) .73 .63 .71 .71 .65 Ratio of Net Proceeds to Fixed Charges (4) 23.48 20.25 17.68 13.05 13.92 Dividends Paid on Common Stock 0 0 0 0 0 PRODUCTION DATA (5) Acres harvested 92,395 94,856 102,078 97,336 91,374 PIK Acres 9,881 8,620 0 0 0 Tons purchased (members) 1,666,663 2,062,162 2,201,776 1,772,648 1,721,240 Tons purchased (non-member) 198,770 44,065 Tons purchased per acre harvested 18.04 21.74 21.57 18.21 18.84 Payment to members per ton of sugarbeets delivered, plus allocated patronage and unit retains (6) $46.17 $42.34 $39.19 $35.34 $41.68 Sugar hundredweight Produced, including PIK sugar 5,076,252 6,310,374 5,739,893 4,750,921 4,788,131 Sold, including purchased sugar 5,192,482 6,757,402 5,220,321 5,324,764 4,672,631 Beet pulp pellet tons Produced 78,408 97,731 97,541 100,215 89,263 Sold 85,209 89,282 96,452 127,160 105,270 Beet molasses tons Produced 72,123 92,333 87,417 103,127 78,077 Sold 75,090 91,218 91,829 97,775 70,985 Used for Yeast Production 15,164 17,123 17,745 17,652 18,651
Yeast pounds (in thousands) Produced 22,254 25,582 26,062 26,198 27,191 Sold 22,327 25,421 26,034 26,240 27,227
(1) Net Proceeds are the Company's gross revenues, less the costs and expenses of producing, purchasing and marketing sugar, sugar co-products, and yeast, but before payments to members for sugarbeets. (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, 2002, relates to the 2001 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. EXTERNAL RISK FACTORS THAT MAY AFFECT THE COMPANY o Regulatory: The Company's ability to become more efficient through growth can be adversely affected by the amount of product it is allowed to market in the United States. o Imports and Quota Circumvention: To the extent that sugar imports and quota circumvention cause the supply to increase in the United States, available markets and pricing could be adversely affected. See management discussion on Government Programs and Regulations. o Weather: Weather conditions affect the Company's operations. Weather impacts the size and quality of the crop, which impacts the Company's ability to lessen per unit fixed costs. Weather impacts the storage conditions, which may cause a decreased sugar production yield from sugarbeets as a result of poor storage conditions. o Raw Material Costs: The costs of raw materials may adversely impact the final net return to the growers. o Other Factors: Variables, such as crop failures, federal agricultural programs and international trade agreements may unfavorably impact the Company's operations. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Preparation of the Company's financial statements requires estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Management continually evaluates these estimates based on historical experience and other assumptions we believe to be reasonable under the circumstances. The difficulty in applying these policies arises from the assumptions, estimates and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions. As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. The Company's critical accounting estimates include the following: INVENTORY VALUATION Sugar, pulp, molasses and other agri-product inventories are valued at estimated net realizable value. The Company derives its estimates from sales contracts, recent sales and evaluations of market conditions and trends. Changes in market conditions may cause management's estimates to differ from actual results. PROPERTY, EQUIPMENT AND DEPRECIATION Property and equipment are depreciated for financial reporting purposes principally using straight-line methods with estimated useful lives ranging from 3 to 40 years. Economic circumstances or other factors may cause management's estimates of expected useful lives to differ from actual. The Company reviews its property and equipment for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. An impairment loss is recorded when the sum of the future cash flows is less than the carrying amount of the asset. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. There were no impairment losses incurred during the year. However, considerable management judgment is necessary to estimate future cash flows and may differ from actual results. PENSION PLAN BENEFITS Accumulated plan benefits are those future periodic payments, including lump-sum distributions that are attributable under the Pension Plan's provisions to the service employees have rendered. Accumulated plan benefits include benefits expected to be paid to retired or vested terminated employees or their beneficiaries; beneficiaries of employees who have died; and present employees or their beneficiaries. The actuarial present value of accumulated plan benefits is determined by an actuary and is the amount that results from applying actuarial assumptions to adjust the accumulated plan benefits to reflect the time value of money and the probability of payment. The significant actuarial assumptions used in the determination of the actuarial present value of accumulated plan benefits for fiscal 2002 were as follows: Valuation Funding Method - Entry age normal, frozen initial liability; Life Expectancy - 1983 group annuity mortality; Retirement Age - participants retire at age 65; Investment Return - 8.00 percent compounded annually for funding; Discount Rate- 7.5 percent compounded annually; Salary Scale - 5.0 percent compounded annually. Actual events may differ from the assumptions used and may result in plan benefit payments differing significantly from the current estimate. 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 agri-products it sells, are subordinated to all member business expenses. In addition, actual cash payments to members are spread over a period of approximately one year following delivery of 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 short and long-term financing has been primarily provided by Co-Bank (the "Bank"). The Company has a short-term line of credit with the Bank totaling $45.0 million and successfully completed its annual renewal of this financing arrangement in March 2002 covering a one year period ending May 31, 2003. The Company anticipates using the USDA Sugar Loan Provisions contained in the 2002 Farm Bill to provide an additional source of seasonal financing for the 2002 and future crops. The loan agreements between the Bank and the Company obligate the company to maintain the following financial covenants, and in accordance with GAAP: o Maintain working capital of not less than $9.0 million as of August 31, 2002. o Maintain a long-term debt and capitalized leases to equity ratio of not greater than .8:1. o Maintain a current ratio of not less than 1.2:1.0 based on monthly financial statements and attain a current ratio of not less than 1.2:1.0 based on fiscal year end audits. o Maintain available cash to current long-term debt ratio as defined in the agreement of not less than 1.25:1. As of August 31, 2002 the Company was in compliance with its loan agreement covenants with the Bank. During fiscal year 2000, the Company sold certain notes receivable with recourse. The Company's contingent liability related to these notes totaled $2.3 million as of August 31, 2002. Working capital decreased $0.3 million for fiscal year 2002. As of August 31, 2002, the Company achieved its targeted working capital position. The company has protected itself from interest rate fluctuations through a strategy using tax-exempt bond financing and a term debt portfolio that fixes rates and maturities into the future on 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 160 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 additional impact on the profitability of the Company as a result of its interest rate strategy. Capital expenditures for fiscal year 2000 were $4.7 million, fiscal year 2001 were $3.1 million and Fiscal year 2002 were $4.8 million. Capital expenditures for fiscal year 2003 are currently estimated at $10.5 million, of which $7.0 million will be associated with the major capital expenditure involving the installation of a steam dryer for beet pulp.
Payments Due by Period ----------------------------------- ------------------ -------------- ------------------ ------------------- ------------------ Contractual Less Obligations Total Than 1 1 - 3 4 -5 After 5 Year Years Years Years ----------------------------------- ------------------ -------------- ------------------ ------------------- ------------------ Long-Term Debt $37.9MM $ 4.8MM $14.4MM $ 9.6MM $ 9.1MM ----------------------------------- ------------------ -------------- ------------------ ------------------- ------------------ Capital Lease Obligations $23.7MM $ .9MM $ 3.6MM $ 3.7MM $15.5MM ----------------------------------- ------------------ -------------- ------------------ ------------------- ------------------ Operating Leases $ 2.4MM $ .9MM $ 1.0MM $ .2MM $ .3MM ----------------------------------- ------------------ -------------- ------------------ ------------------- ------------------ Unconditional Purchase Obligations $ 3.5MM $ 3.5MM 0 0 0 ----------------------------------- ------------------ -------------- ------------------ ------------------- ------------------ Other Long-Term Obligations 0 0 0 0 0 ----------------------------------- ------------------ -------------- ------------------ ------------------- ------------------ Total Contractual Cash Obligations $67.5MM $10.1MM $19.0MM $13.5MM $24.9MM ----------------------------------- ------------------ -------------- ------------------ ------------------- ------------------
The Company has elected to install a steam dryer to dry its beet pulp at a cost of approximately $9.0 MM, with a construction completion date of September 2003. The funding for this investment will be in the form of a capital lease supported by tax-exempt bonds. On February 28, 2002, the Company completed a transaction whereby $14.0 MM of tax-exempt bonds was secured. Of the $14.0 MM in bonds, $9.0 MM was estimated for the steam dryer project, $1.5 MM for solid waste projects currently in process and $3.5 MM for anticipated future solid waste project needs. The Company used $2.9 MM of the Bond Proceeds for the steam dryer project and solid waste projects for the fiscal year ended August 31, 2002. The Bond Proceeds of $14.0 MM were required to be sold in a single transaction. The proceeds from these bonds are held in trust until the funds are spent on approved projects. The bond transaction and restricted bond investments associated with the transaction are subject to arbitrage compliance rules for solid waste tax-exempt bond projects. The Bonds are secured by a letter of Credit from Wells Fargo Bank. The letter of credit is ultimately secured by the plant and property of the Company's facility at Wahpeton, ND. The Steam Dryer Purchase agreement was entered into in April 2002. As part of the Steam Dryer purchase, the Company has allocated $1 million of its $45 million seasonal line of credit for the required Commercial Letter of Credit contained in the Steam Dryer Purchase Contract. In addition, because portions of the contract are in Euro funds, the Company has entered into forward purchase Euro contracts to hedge against currency fluctuations during this contract period. The Company is not aware of any known trends, demands, commitments, events or uncertainties that will likely result in the Company's liquidity increasing or decreasing in any material way. Other than those items described above, the Company is not aware of any known material trends, either favorable or unfavorable, that would cause the mix of equity to debt or the cost of debt to materially change. COMPARISON OF THE YEARS ENDED AUGUST 31, 2002 AND 2001 Revenue for the year ended August 31, 2002 decreased 11.2% or $19.9 million from 2001. Revenue from total sugar sales decreased $29.1 million or 18% reflecting a 23% decrease in cwt. sold, partially offset by a 6% increase in the average selling price per cwt. Revenue from co-products remained approximately the same reflecting an increase of 10% in the average selling price per ton, offset by a 10% decrease in volume. Revenues from yeast sales decreased $0.22 million or 4% reflecting a price increase of 8%, offset by a decrease in volume of 12%. The value of finished product inventories in fiscal year 2002 increased $.4 million, from fiscal year 2001. Cost of product produced, exclusive of grower payments for sugarbeets, decreased $2.9 million. The decrease is primarily due to a 19% decrease in crop size. The decrease in the crop size was due to a combination of crop growing conditions and the Federal Government's Payment In Kind (PIK) program. Sales and Distribution costs decreased $4.17 million or 15%. Decreases are the result of a 23% decrease in the volume of sugar sold for the year along with a 10% decrease in the volume of co-products sold for the year. However, unit sales and distribution costs of sugar increased 9%, while co-products increased 2% for the year General and Administrative expenses decreased $.1 million or 2%. Interest expense decreased $1.18 million or 24% due to reduced rates of interest and lower levels of debt. Overall, the cost per cwt of sugar produced increased 17%, primarily due to the reduced size of the crop and the effect it had on the allocation of fixed costs on a per unit basis. Other business income increased $1.16 million in fiscal year 2002. This change from expense to income 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, decreased by $9.5 million in fiscal year 2002. This decrease was primarily due to 19% fewer tons of harvested beets, similar payment-in-kind certificates coupled with a 9.7% increase per ton beet payment. 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, due to additional acres and favorable growing conditions, offset by the PIK program. 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. ESTIMATED FISCAL YEAR 2003 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 2002 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 2002 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 Company's members harvested 2.4 million tons of sugarbeets from the 2002 crop, the largest crop ever delivered to the Company. Sugar content of the 2002 crop at harvest was 4% below the average of the five most recent years because of crop growing conditions. Because of the record size of the crop delivered, the Company's production of sugar from the 2002 crop sugarbeets is expected to set a new record for sugar produced. This forward-looking material is based on the Company's expectations regarding the processing of the 2002 sugar beet 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. The Company's initial beet payment estimate totals $38.15 per ton or $.13130869 per harvested/bonus pound of sugar, with the final beet payment determined in October of 2003. This projected payment is less than the final 2001 crop payment per ton/pound, but higher than the original projected 2001 crop payment per ton/pound. The lower projected 2002 crop payment results from lower sugar content of the beets delivered, additional estimated costs to the Company in the areas of business insurance, allocation purchase costs and higher quality and quantity shrink for the stored 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 2002 are expected to be significantly above the 2001 crop year due to increased production of sugar and co-products. The deduction of those operating costs results in a 2002 crop gross payment to growers for sugarbeets of $95.7 MM which is estimated to be more than that of the 2001 crop year of $76.9MM. The 2002 crop beet payment increase results from significantly more harvested tons (more acres harvested and higher yield) and because growers did not have PIK program payments (the 2001 crop generated $6.8MM of payments to growers for destroyed beets resulting from the 2001 PIK program). OTHER INFORMATION: SARBANES-OXLEY ACT The newly enacted Sarbanes-Oxley Act has a number of provisions that are currently in the rule making process or if finalized, the interpretation of those rules continues to be an ongoing process. The Company is making every reasonable effort to be in compliance with the new rules and is taking the steps it feels appropriate to be in a position to be in compliance with proposed rules. The below listed areas of activity are not to be considered an all inclusive list, rather an indication of how the Company's Board of Directors and Management are approaching future compliance requirements. AUDIT COMMITTEE: The audit committee is intending to re-organize following the December 2002 annual meeting. The intention of the re-organized audit committee will be to become even more active in the oversight of the Company's accounting, auditing, and key risk management areas. The Company's bylaws require any board member to be actively engaged in the production of sugarbeets, therefore, the audit committee membership pool is restricted to the pool of available directors. The Audit Committee is currently reviewing options for a confidential and anonymous employee system to allow employees to report concerns regarding questionable accounting or auditing matters. INTERNAL CONTROLS: The Company's payments to growers are derived from crop pools with each year's harvest creating a "Crop Pool". It is the Company's practice to make every reasonable effort to allocate revenues and costs in such a manner the revenues and expenses associated with each pool are materially correct and accounting methods are consistently applied on a year-to-year and a pool-to-pool basis. During fiscal year 2003, the Company anticipates formalizing a process where-by the material risks associated with the Company are listed and how those risks are managed will be documented and, where appropriate, reviewed by the Audit Committee. The Company's chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 240.13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934) as of a date within ninety days before the filing date of this annual report. Based on that review and evaluation, which included inquiries made to certain other employees of the Company, the chief executive officer and chief financial officer have concluded that the Company's current disclosure controls and procedures, as designed and implemented, are reasonably adequate to ensure that they are provided with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934. CODE OF ETHICS: It has been the Company's practice to have each manager sign a "Conflict of Interest" statement annually, which the CEO of the Company reviewed and signed. It is not known specifically how this form and process will need to be modified to meet the final rules, however, when these rules are finalized the Company intends to be in full compliance. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's long-term debt interest costs are stabilized through the use of multi-year interest rate locks on various amounts and terms through its primary lender Co-Bank. This strategy allows the Company to project future interest costs and cash flows with a reasonable degree of accuracy. The Company's short-term debt will vary from year to year based on the short-term interest rate market. Average short-term debt borrowing levels have been $23.5MM for 2002, $22.5MM for 2001 and $23.8MM for 2000. Because each year's short-term debt is closely associated with a crop year, the interest fluctuations will have a direct impact on the final grower beet payment. The Company has $23.7MM of Solid Waste Disposal Bonds which are qualifed for tax exempt treatment. These bonds are variable rate bonds with a history of interest rates under 5%. The Company will from time to time have a purchase obligation in foreign currency as a result of capital improvement projects. Currently, the Company has 1,5 Million Euro of obligations, connected with the steam dryer project, that is forward contracted to protect the Company against currency fluctuations. 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 association) as of August 31, 2002, 2001, and 2000, and the related consolidated statements of operations, change 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, 2002, 2001, and 2000, 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 3, 2002 MINN-DAK FARMERS COOPERATIVE CONSOLIDATED BALANCE SHEETS AUGUST 31, 2002, 2001, AND 2000 --------------------------------------------------------------------------------
2002 2001 2000 ------------ ------------ ------------ ASSETS CURRENT ASSETS Cash $ 756,619 $ 459,046 $ 2,504,566 ------------ ------------ ------------ Current portion of long-term note receivable 2,551 2,551 2,551 ------------ ------------ ------------ Receivables Trade accounts 13,069,048 13,868,003 11,115,705 Growers 4,157,019 3,796,044 3,996,356 Other 16,575 1,398,926 632,549 ------------ ------------ ------------ 17,242,642 19,062,973 15,744,610 ------------ ------------ ------------ Advances to affiliates - Midwest Agri-Commodities Co. and United Sugars Corporation 134,940 414,046 - ------------ ------------ ------------ Inventories Refined sugar, pulp and molasses to be sold on a pooled basis 19,071,596 18,648,520 27,737,385 Nonmember refined sugar 56,375 4,199 2,642 Yeast 125,108 120,575 87,511 Materials and supplies 5,796,190 5,886,136 5,561,471 ------------ ------------ ------------ 25,049,269 24,659,430 33,389,009 ------------ ------------ ------------ Deferred charges 1,084,792 1,085,108 1,122,838 ------------ ------------ ------------ Prepaid expenses 351,866 289,866 251,628 ------------ ------------ ------------ Other 1,126,000 527,000 543,000 ------------ ------------ ------------ Total current assets 45,748,679 46,500,020 53,558,202 ------------ ------------ ------------ PROPERTY, PLANT AND EQUIPMENT Land and land improvements 21,734,422 21,187,079 20,968,468 Buildings 36,086,826 35,969,830 35,591,877 Factory equipment 114,062,256 112,347,634 111,922,358 Other equipment 3,310,981 3,415,648 3,527,618 Construction in progress 2,333,477 25,866 21,980 ------------ ------------ ------------ 177,527,962 172,946,057 172,032,301 Less accumulated depreciation 76,510,304 70,058,956 65,281,136 ------------ ------------ ------------ 101,017,658 102,887,101 106,751,165 ------------ ------------ ------------ LONG-TERM NOTES RECEIVABLE, NET OF CURRENT PORTION 238,177 25,508 28,058 ------------ ------------ ------------ OTHER ASSETS Investment in stock of other corporations, unconsolidated marketing subsidiaries and other cooperatives 12,574,385 11,183,783 10,407,956 Deferred income taxes - 89,000 1,240,000 Investment restricted for capital lease projects 11,063,169 - - Other 931,199 654,141 600,919 ------------ ------------ ------------ 24,568,753 11,926,924 12,248,875 ------------ ------------ ------------ $171,573,267 $161,339,553 $172,586,300 ============ ============ ============
See Notes to Consolidated Financial Statements.
2002 2001 2000 ------------ ------------ ------------ LIABILITIES AND MEMBERS' INVESTMENT CURRENT LIABILITIES Short-term notes payable $ 11,795,000 $ 10,965,000 $ 15,458,800 ------------ ------------ ------------ Current portion of long-term debt 3,600,000 3,610,417 3,012,500 Current portion of capital lease 860,000 815,000 775,000 ------------ ------------ ------------ 4,460,000 4,425,417 3,787,500 ------------ ------------ ------------ Accounts payable Trade 4,807,878 1,842,796 2,223,574 Growers 10,167,008 14,816,615 16,927,545 ------------ ------------ ------------ 14,974,886 16,659,411 19,151,119 ------------ ------------ ------------ Advances to affiliates - Midwest Agri-Commodities Co. and United Sugars Corporation - - 201,242 ------------ ------------ ------------ Accrued liabilities 2,871,298 2,476,011 2,725,105 ------------ ------------ ------------ Total current liabilities 34,101,184 34,525,839 41,323,766 LONG-TERM DEBT, NET OF CURRENT PORTION 34,300,000 39,100,000 43,910,416 OBLIGATION UNDER CAPITAL LEASE 22,820,000 9,680,000 10,495,000 DEFERRED INCOME TAXES 1,400,000 - - OTHER 551,364 566,744 431,857 COMMITMENTS AND CONTINGENCIES (NOTE 11) - - - ------------ ------------ ------------ Total liabilities 93,172,548 83,872,583 96,161,039 ------------ ------------ ------------ MINORITY INTEREST IN EQUITY OF SUBSIDIARY 1,488,645 1,263,581 1,089,320 ------------ ------------ ------------ 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; 488, 497, and 484, shares issued and outstanding in 2002, 2001, and 2000, respectively 122,000 124,250 121,000 Paid in capital in excess of par 32,094,407 32,094,407 32,094,407 Unit retention capital 5,867,806 6,476,360 7,148,159 Qualified allocated patronage 2,910,983 3,415,570 3,816,607 Nonqualified allocated patronage 15,857,824 14,466,641 12,894,627 Retained earnings 1,575,854 1,142,961 777,941 ------------ ------------ ------------ 76,912,074 76,203,389 75,335,941 ------------ ------------ ------------ $171,573,267 $161,339,553 $172,586,300 ============ ============ ============
MINN-DAK FARMERS COOPERATIVE CONSOLIDATED STATEMENTS OF OPERATIONS AUGUST 31, 2002, 2001, AND 2000 --------------------------------------------------------------------------------
2002 2001 2000 ------------- ------------- ------------- REVENUE From sales of sugar, sugar co-products, and yeast, net of discounts $ 158,003,073 $ 177,898,591 $ 170,151,248 ------------- ------------- ------------- EXPENSES Production costs of sugar, co-products, and yeast sold 41,621,710 44,492,963 44,866,025 Sales and distribution costs 23,925,985 28,099,266 26,610,203 General and administrative 5,347,366 5,465,219 5,418,727 Interest 3,741,758 4,920,260 5,198,876 ------------- ------------- ------------- 74,636,819 82,977,708 82,093,831 ------------- ------------- ------------- OTHER INCOME (EXPENSE) 858,183 (301,011) (1,453,810) ------------- ------------- ------------- NET PROCEEDS RESULTING FROM MEMBER AND NON-MEMBER BUSINESS $ 84,224,437 $ 94,619,872 $ 86,603,607 ============= ============= ============= DISTRIBUTION OF NET PROCEEDS Credited to members' investment Components of net income Income from non-member business $ 432,893 $ 365,020 $ 316,097 Patronage income 3,611,367 4,624,324 - ------------- ------------- ------------- Net income credited to member's investment 4,044,260 4,989,344 316,097 Payments to members for sugarbeets, net of unit retention capital 73,340,895 82,696,795 86,287,510 Payments to members for PIK certificates 6,839,282 6,933,733 - ------------- ------------- ------------- Total payments to members 80,180,177 89,630,528 86,287,510 NET PROCEEDS RESULTING FROM MEMBER AND NONMEMBER BUSINESS $ 84,224,437 $ 94,619,872 $ 86,603,607 ============= ============= =============
See Notes to Consolidated Financial Statements. MINN-DAK FARMERS COOPERATIVE CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' INVESTMENT AUGUST 31, 2002, 2001, AND 2000 --------------------------------------------------------------------------------
Paid in Capital Unit Qualified Preferred Common in Excess of Retention Allocated Stock Stock Par Value Capital Patronage ----------- ----------- ----------- ----------- ----------- BALANCE, AUGUST 31, 1999 $18,483,200 $ 118,250 $32,094,407 $ 7,560,034 $ 3,854,558 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) Net income for the year ended August 31, 2000 ----------- ----------- ----------- ----------- ----------- BALANCE, AUGUST 31, 2000 18,483,200 121,000 32,094,407 7,148,159 3,816,607 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) Net income for the year ended August 31, 2001 ----------- ----------- ----------- ----------- ----------- BALANCE, AUGUST 31, 2001 18,483,200 124,250 32,094,407 6,476,360 3,415,570 Stock Sales - common (7 shares) 1,750 Repurchases - common (16 shares) (4,000) Revolvement of unit retention capital (608,554) Revolvment of prior years' allocated patronage (504,587) Net income for the year ended August 31, 2002 ----------- ----------- ----------- ----------- ----------- BALANCE, AUGUST 31, 2002 $18,483,200 $ 122,000 $32,094,407 $ 5,867,806 $ 2,910,983 =========== =========== =========== =========== ===========
[WIDE TABLE CONTINUED FROM ABOVE]
Non-Qualified Retained Allocated Earnings Patronage (Deficit) Total ----------- ----------- ----------- BALANCE, AUGUST 31, 1999 $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 (3,927,436) (3,965,387) Net income for the year ended August 31, 2000 316,097 316,097 ----------- ----------- ----------- BALANCE, AUGUST 31, 2000 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 (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 14,466,641 1,142,961 76,203,389 Stock Sales - common (7 shares) 1,750 Repurchases - common (16 shares) (4,000) Revolvement of unit retention capital (608,554) Revolvment of prior years' allocated patronage (2,220,184) (2,724,771) Net income for the year ended August 31, 2002 3,611,367 432,893 4,044,260 ----------- ----------- ----------- BALANCE, AUGUST 31, 2002 $15,857,824 $ 1,575,854 $76,912,074 =========== =========== ===========
MINN-DAK FARMERS COOPERATIVE CONSOLIDATED STATEMENTS OF CASH FLOWS AUGUST 31, 2002, 2001, AND 2000 --------------------------------------------------------------------------------
2002 2001 2000 ------------ ------------ ------------ OPERATING ACTIVITIES Income allocated to members' investment $ 4,044,260 $ 4,989,344 $ 316,097 Add (deduct) noncash items Depreciation and amortization 6,903,856 6,806,781 6,731,225 Equipment disposals - loss 35,125 321,305 528,422 Net income allocated from unconsolidated marketing subsidiaries (259,722) (165,514) (142,870) Noncash portion of patronage capital credits (1,304,070) (779,627) (273,292) Deferred income taxes 890,000 1,151,000 709,000 Increase in cash surrender of officer life insurance 68,181 (42,646) (7,730) Stock cancellation - St. Paul Bank for Cooperatives - - 51,138 Changes in operating assets and liabilities: Accounts receivable and advances 2,099,437 (3,933,651) 7,441,649 Inventory and prepaid expenses (451,840) 126,579 (10,410,959) Deferred charges and other 316 53,730 84,453 Other assets - - 44,550 Accounts payable, accrued liabilities, and other liabilities (1,304,617) (2,645,050) 8,031,619 ------------ ------------ ------------ NET CASH FROM OPERATING ACTIVITIES 10,720,926 5,882,251 13,103,302 ------------ ------------ ------------ INVESTING ACTIVITIES Investments restricted for capital lease projects (11,063,169) - - Proceeds from disposition of property, plant and equipment 3,638 - 59,391 Capital expenditures (4,812,657) (3,100,142) (4,709,902) Investment in stock of other corporations, unconsolidated marketing subsidiaries and other cooperatives 67,000 - - Capital adjustment of marketing subsidiary - 68,078 - Issuance of note receivable (260,520) - (30,609) Proceeds on note receivable 47,851 2,550 3,227,037 Net proceeds from patronage refunds and equity revolvements 106,189 101,236 133 Minority interest in equity of subsidiaries 225,063 174,261 142,396 ------------ ------------ ------------ NET CASH USED FOR INVESTING ACTIVITIES (15,686,605) (2,754,017) (1,311,554) ------------ ------------ ------------ FINANCING ACTIVITIES Sale and repurchase of common stock, net (2,250) 3,250 2,750 Net proceeds from issuance of short-term debt 830,000 4,070,962 (2,321,200) Proceeds from issuance of long-term debt - - 1,750,000 Proceeds from bond issuance 14,000,000 - - Payment of financing fees (605,756) (135,321) (145,314) Payment of long-term debt (5,625,417) (4,987,499) (4,742,501) Retention of nonqualified unit retains - - - Payment of unit retains and allocated patronage (3,333,325) (4,125,146) (4,377,262) ------------ ------------ ------------ NET CASH FROM FINANCING ACTIVITIES 5,263,252 (5,173,754) (9,833,527) ------------ ------------ ------------ NET CHANGE IN CASH 297,573 (2,045,520) 1,958,221 CASH, BEGINNING OF YEAR 459,046 2,504,566 546,345 ------------ ------------ ------------ CASH, END OF YEAR $ 756,619 $ 459,046 $ 2,504,566 ============ ============ ============ 2002 2001 2000 ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for Interest $ 3,748,816 $ 4,959,743 $ 4,583,074 ============ ============ ============ 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 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 co-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 that approximates cost. In valuing inventories at net realizable value, the cooperative, in effect sells the remaining inventory to the subsequent years sugar and co-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 $106,781, $63,827, and $124,490 for the years ended August 31, 2002, 2001, and 2000. There was construction-period interest capitalized of approximately $9,200 for the year ended August 31, 2002. There were no construction period-interest capitalized for the years ended August 31, 2001 and 2000. 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. 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 2001 and 2000 financial statements to conform to the 2002 presentation. The reclassifications have no effect on the results of operations. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement No. 143 regarding Accounting for Asset Retirement Obligations and Statement No. 144 regarding Accounting for the Impairment or Disposal of Long-Lived Assets. Management does not expect the implementation of these pronouncements to have a significant effect on the financial statements. In December 2001, the American Institute of Certified Public Accountants issued Statement of Position 01-6. This statement of position addresses policies relating to trade accounts and loans receivable. The Company plans to carry all trade accounts and loan receivables until maturity. The statement is not expected to have a material impact on the financial statements. NOTE 2 - NOTES RECEIVABLE On February 11, 2002, the cooperative issued a note receivable in the amount of $260,521, with an interest rate of 9%, to Midwest Agri-Commodities Company. The proceeds of the loan are to be used to make a loan to Michigan Sugar Beet Growers, Inc. pursuant to the Transaction agreement dated August 21, 2001. The note is secured by the assets of Michigan Sugar Beet Growers, Inc. The notes will be received in annual installments through December 1, 2004. The December 1, 2002 amount was received during the year ended 2002; therefore there is not a current portion at August 31, 2002. The amount receivable at August 31, 2002 is $215,220. The cooperative's notes receivable from United Sugars member processors total $25,508, $28,058, and $30,609 as of August 31, 2002, 2001, and 2000, respectively. The notes receivable are unsecured, with a variable interest rate, currently 6.5%. The notes will be received in equal annual installments through August 31, 2012. The notes are subordinated to CoBank in 2002, 2001, and 2000. The current portion of the notes is $2,551 as of August 31, 2002, 2001, and 2000. During 2000, the cooperative sold certain notes receivable with recourse. The cooperative's contingent liability related to these notes totaled $2,292,005, $2,603,682, and $2,915,360 as of August 31, 2002, 2001, and 2000, respectively. NOTE 3 - INVESTMENTS The investment in stock of other corporations, unconsolidated marketing subsidiaries and other cooperatives consists of the following: 2002 2001 2000 ----------- ----------- ----------- United Sugars Corporation $ 820,813 $ 871,944 $ 985,876 Midwest Agri-Commodities 67,675 51,823 47,576 ProGold, LLC 4,137,381 3,842,378 3,635,255 CoBank 3,591,637 3,215,036 2,851,355 Dakota Valley Electric 3,891,994 3,071,726 2,758,642 Other 64,885 130,876 129,252 ----------- ----------- ----------- $12,574,385 $11,183,783 $10,407,956 =========== =========== =========== NOTE 4 - SHORT-TERM DEBT Information regarding short-term debt for the years ended August 31, is as follows: 2002 2001 2000 ----------- ----------- ----------- Seasonal loan with CoBank, due June 31, 2003, interest variable, currently at 3.02% $11,795,000 $10,965,000 $ 4,980,000 CCC notes -- -- 10,478,800 ----------- ----------- ----------- $11,795,000 $10,965,000 $15,458,800 =========== =========== =========== The cooperative has a $44,000,000 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: 2002 2001 2000 ----------- ----------- ----------- Maximum borrowings $45,350,000 $45,000,000 $42,030,000 =========== =========== =========== Average borrowing levels $23,559,231 $22,452,092 $23,484,062 =========== =========== =========== Average interest rates 2.97% 6.38% 6.84% =========== =========== =========== NOTE 5 - LONG-TERM DEBT Information regarding long-term debt at August 31, is as follows:
2002 2001 2000 ------------ ------------ ------------ Term loan with CoBank, due in varying principal repayments through November 20, 2010, interest variable, currently at 3.07%, with a first lien on substantially all property and equipment and current assets of Minn-Dak located in Wahpeton, North Dakota $ 37,900,000 $ 42,700,000 $ 46,900,000 Long-term interest free note with Dakota Valley Electric Cooperative -- 10,417 22,916 ------------ ------------ ------------ 37,900,000 42,710,417 46,922,916 Less current maturities (3,600,000) (3,610,417) (3,012,500) ------------ ------------ ------------ $ 34,300,000 $ 39,100,000 $ 43,910,416 ============ ============ ============
Minn-Dak has complied with the terms of its loan agreement for the years ended August 31, 2002, 2001, and 2000. 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 $3,741,759, $4,959,743, and $5,198,896 for 2002, 2001 and 2000, respectively. Principal amounts due on all the cooperative's long-term debt are as follows: Years ending August 31, ----------------------- 2003 $ 3,600,000 2004 4,800,000 2005 4,800,000 2006 4,800,000 2007 4,800,000 Thereafter 15,100,000 ------------- $ 37,900,000 ============= 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:
2002 ------------------------------------------------- FINAL CURRENT 2001 2000 Payee INTEREST MATURITY PORTION TOTAL Total Total ----- -------- -------- ----------- ----------- ----------- ----------- Richland County, North Dakota 1.65% 1/11 $ 1,010,260 $10,428,880 $11,795,451 $14,510,078 Richland County, North Dakota 1.55% 1/19 217,000 16,412,911 -- -- Less amount representing interest 367,260 3,161,791 1,300,451 3,240,078 ----------- ----------- ----------- ----------- $ 860,000 $23,680,000 $10,495,000 $11,270,000 =========== =========== =========== ===========
Minimum future principal payments required on the obligations under capital lease are as follows: Years ending August 31, ----------------------- 2003 $ 860,000 2004 905,000 2005 960,000 2006 1,725,000 2007 1,815,000 Thereafter 17,415,000 ------------ $ 23,680,000 ============ The Company has letter of credit arrangements with a bank that provide for short-term secured borrowings totaling approximately $25,000,000 at August 31, 2002. There were no outstanding advances under these letter of credit arrangements at August 31, 2002. NOTE 7 - MEMBERS' INVESTMENT AND GROWER PAYMENTS The ownership of non-dividend 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 non-dividend bearing. The board of directors must approve all transfers and sales of stock. Minn-Dak's net income, determined in accordance with generally accepted accounting principles consistently applied, shall be distributed annually on the basis of delivered pounds of sugar, 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 pound of extractable sugar such amounts as are deemed by the bank to be necessary for operations, the deductions to be made at such time as the bank shall require. The amount so retained shall be evidenced in the records of Minn-Dak by equity credits in favor of the growers. The board of directors has the power to determine whether such retains shall be "qualified" or "nonqualified" for income tax purposes. For the year ended August 31, 2002, Minn-Dak allocated patronage of $3,611,367 to the members. For the year ended August 31, 2001, Minn-Dak allocated patronage of $4,624,324 to the members. For the year ended August 31, 2000, Minn-Dak did not allocate patronage to the members. During the year ended August 31, 2002, Minn-Dak revolved 45% of the unit retains and allocated patronage for the fiscal year ended August 31, 1993, totaling $3,333,326. 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 was 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. 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:
2002 2001 2000 ------------ ------------ ------------ Deferred tax assets Non-qualified unit retains and allocated partonage due to members $ 8,690,000 $ 8,377,000 $ 8,017,000 Net operating loss carryforwards 4,092,000 4,247,000 4,379,000 Other 1,240,000 1,137,000 1,560,000 ------------ ------------ ------------ Gross deferred tax assets 14,022,000 13,761,000 13,956,000 Less valuation allowance (510,000) (664,000) (799,000) ------------ ------------ ------------ Total deferred tax assets 13,512,000 13,097,000 13,157,000 ------------ ------------ ------------ Deferred tax liabilities Depreciation 11,174,000 10,161,000 9,351,000 Other 2,812,000 2,520,000 2,223,000 ------------ ------------ ------------ Total deferred tax liabilities 13,986,000 12,681,000 11,574,000 ------------ ------------ ------------ $ (474,000) $ 416,000 $ 1,583,000 ============ ============ ============ Classified as follows Current asset $ 926,000 $ 327,000 $ 343,000 Long-term asset (liability) (1,400,000) 89,000 1,240,000 ------------ ------------ ------------ Net deferred tax asset $ (474,000) $ 416,000 $ 1,583,000 ============ ============ ============
A provision for income taxes related to non-member income from Minn-Dak Yeast Company, totaling $705,000, $659,000, and $560,000, for the year ended August 31, 2002, 2001, and 2000, respectively, is included in other expense. The deferred tax asset valuation allowance reduces the estimated amount of the net operating loss carry forwards that will be ultimately realized. NOTE 9 - EMPLOYEE BENEFIT PLANS 401(k) PLAN The cooperative has a qualified 401(k) employee benefit plan that covers all employees meeting eligibility requirements. The cooperative's contribution to the plan is at a level of 75 percent of employee contributions, up to 4 percent of compensation. Contributions to the plan totaled $299,234, $297,914, and $310,258 for the years ended August 31, 2002, 2001, and 2000, respectively. PENSION PLAN The cooperative has a non-contributory defined benefit plan that covers substantially all employees who meet certain requirements of age, length of service and hours worked per year. The following table sets forth the plan's funded status at August 31:
2002 2001 2000 ------------ ------------ ------------ CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 13,969,412 $ 12,447,749 $ 11,857,238 Service cost 597,884 628,658 577,611 Interest cost 1,041,385 942,881 838,130 Experience (gain)/loss due to participant changes 94,367 256,902 (564,471) Benefits paid (415,375) (306,778) (260,759) ------------ ------------ ------------ Benefit obligation at end of year 15,287,673 13,969,412 12,447,749 ------------ ------------ ------------ CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 11,246,080 10,963,942 9,553,497 Actual return on plan assets (330,029) 81,933 881,175 Employer contribution 793,370 506,983 790,029 Benefits paid (415,375) (306,778) (260,759) ------------ ------------ ------------ Fair value of plan assets at end of year 11,294,046 11,246,080 10,963,942 ------------ ------------ ------------ Funded status (3,993,627) (2,723,332) (1,483,807) Unrecognized net actuarial loss 2,739,419 1,434,769 805,973 Unrecognized prior service cost 621,358 693,263 355,070 Unrecognized transition asset (26,683) (44,949) (63,215) ------------ ------------ ------------ Accrued benefit cost $ (659,533) $ (640,249) $ (385,979) ============ ============ ============
2002 2001 2000 ------ ------ ------ 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, includes the following components:
2002 2001 2000 ----------- ----------- ----------- COMPONENTS ON NET PERIODIC BENEFIT COST Service cost $ 597,884 $ 628,658 $ 577,611 Interest cost 1,041,385 942,881 838,130 Expected return on plan assets (904,338) (878,925) (777,007) Amortization of prior service cost 95,989 86,905 54,873 Amortization of transition amount (18,266) (18,266) (18,266) ----------- ----------- ----------- Net periodic benefit cost $ 812,654 $ 761,253 $ 675,341 =========== =========== ===========
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 may be subject to various lawsuits and claims which arising 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. Management is not aware of any such lawsuits or claims as of August 31, 2002. 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, 2002, 2001, and 2000, Minn-Dak had advanced $19,454,420, $22,204,411, and $21,501,838, respectively. Minn-Dak had outstanding advances due from United Sugars of $190,306, $128,764, and $249,117, for the years ended August 31, 2002, 2001, and 2000, 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 are 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 $1,281,325, $1,974,466, and $1,611,326, respectively, during the years ended August 31, 2002, 2001, and 2000. Minn-Dak had outstanding advances due from (to) Midwest of $(55,366), $285,282, and $(450,359), as of August 31, 2002, 2001, and 2000, 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, ----------------------- 2003 $863,000 2004 574,000 2005 196,000 2006 194,000 2007 77,000 Thereafter 415,000 Operating lease and contract expenses for the years ended August 31, 2002, 2001, and 2000, totaled approximately $1,171,000, $1,105,000, and $1,206,000, 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 offeree does not accept the offer 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, 2002, 2001, and 2000, 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 that 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, 2002, the carrying value of obligations under capital leases was $23,680,000 and the estimated fair value was $23,300,000. 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 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 51 District #8 - Lyngaas 1997 2003 3138 370th ST Foxhome, MN 56543 Michael Hasbargen 57 District #4 - Factory 1993 2002(1) 2553 360th ST East Breckenridge, MN 56520 Victor Krabbenhoft 53 District #9 - Peet 1989 2004 416 44th AV S Moorhead, MN 56560 Jack Lacey 60 District #5 - Hawes 1993 2002(2) 32936 320th AV Wendell, MN 56590-9750 Russell Mauch 47 District #2 - Factory 1998 2004 16305 Hwy 13 West Barney, ND 58008 Jerry Meyer 64 District #1 - Tyler 1994 2003 1433 15th Street North Wahpeton, ND 58075 Edward Moen 76 District #3 - Gorder 1989 2004 17060 County Road 8 Colfax, ND 58018
Term Expires Name and Address Age District Director Since in December ---------------- --- -------- -------------- ----------- Charles Steiner 52 District #6 - Yaggie 2000 2003 2851 310th AV Foxhome, MN 56543-9312 Paul Summer 60 District #7 - Lehman 1993 2002(3) 1509 Lakeside Drive Alexandria, MN 56308
1) Mr. Hasbargen's term as a director of the Company from District #4-Factory East expires on December 10, 2002. 2) Mr. Lacey's term as a director of the Company from District #5-Hawes expires on December 10, 2002. 3) Mr. Summer's term as director of the Company from District #7-Lehman expires on December 10, 2002. 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 1992 and is currently serving as board vice chairman. Mr. Hasbargen has been farming near Breckenridge, MN since graduating from NDSU in Ag Economics in 1967. Mr. Hasbargen also serves on the board of directors of United Sugars Corporation and 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 agriculture 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 and is currently serving as board treasurer. 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. 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 meets 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. Name Age Position ---- --- -------- David H. Roche 55 President and Chief Executive Officer Steven M. Caspers 52 Executive Vice President and Chief Financial Officer Allen E. Larson 47 Controller and Chief Accounting Officer Thomas D. Knudsen 48 Vice President of Agriculture Jerald W. Pierson 63 Director of Human Resources Jeffrey L. Carlson 47 Vice President of Operations John S. Nyquist 47 Purchasing Manager Patricia J. Keough-Wilson 62 Director of Corporate and Public Relations Kevin R. Shannon 48 Safety Director John Haugen 50 Vice President 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 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. 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 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. 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. 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 and to Vice President of Engineering on August 1, 2002. 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. Mr. Haugen 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, 2002 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. The Company does not offer any equity based compensation plans to its employees or directors. SUMMARY COMPENSATION TABLE
Name and Other Annual All Other Total Principal Position Year Salary Bonus Compensation Compensation Compensation ------------------ ---- ------ ----- ------------ ------------ ------------ (1) (2) David Roche 2002 $265,000 $45,000 $ 13,270 $323,270 President & CEO 2001 $128,346 $ 0 $ 27,598 $155,945 2000 $ 0 $ 0 $ 0 $ 0 Steven Caspers 2002 $140,231 $30,000 $ 11,629 $181,861 Executive Vice President 2001 $180,787 $30,000 $ 21,991 $232,779 & CFO 2000 $129,147 $30,000 $ 13,165 $172,312 Thomas Knudsen 2002 $101,352 $15,000 $ 12,239 $128,591 VP Agriculture 2001 $97,557 $14,500 $ 4,302 $116,359 2000 $94,624 $14,500 $ 11,380 $120,504 Richard Richter 2002 $100,357 $15,000 $ 5,973 $121,330 VP Operations 2001 $97,350 $14,500 $ 5,729 $117,579 Retired as of 2000 $94,457 $14,500 $ 5,196 $114,153 9-3-02 Allen Larson 2002 $98,253 $14,000 $ 4,579 $116,832 Controller and 2001 $100,747 $12,000 $ 8,213 $120,959 Chief Accounting 2000 $92,551 $12,000 $ 4,094 $108,645 Officer
---------------------------- 1) In addition to the salary and bonus described above, Mr. Roche, Mr. Caspers, Mr. Knudsen, and Mr. Richter, and Mr. Larson 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. 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 2002 the company instituted a salary range shift. From time to time individual employees have had a restudy based upon changes in their areas of responsibilities. As of August 31, 2002 all employees' wages had been adjusted to levels consistent with the Hay Management Consultants findings and recommendations. 2) Mr. Roche became eligible for payments into a supplemental executive retirement plan upon his completion of one year of service. However, no obligations were recorded onto the Company's books on his behalf in the fiscal year ended August 31, 2002. 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 $11,000 in calendar year 2002 for each participating employee age 49 and under, and $12,000 for each participating employee age 50 and older. The contribution limit for calendar limit was $10,500 for each participating employee, regardless of age. 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 $27,979 $37,306 $46,632 $55,958 $65,285 ---------------------- ------------- --------------- --------------- --------------- -------------- $ 150,000 $34,167 $45,556 $56,945 $68,333 $79,722 ---------------------- ------------- --------------- --------------- --------------- -------------- $ 175,000 $39,117 $52,156 $65,195 $78,233 $91,272 ---------------------- ------------- --------------- --------------- --------------- -------------- $ 200,000 $39,117 $52,156 $65,195 $78,233 $91,272 ---------------------- ------------- --------------- --------------- --------------- -------------- $ 225,000 $39,117 $52,156 $65,195 $78,233 $91,272 ---------------------- ------------- --------------- --------------- --------------- -------------- $ 250,000 $39,117 $52,156 $65,195 $78,233 $91,272 ---------------------- ------------- --------------- --------------- --------------- -------------- $ 275,000 $39,117 $52,156 $65,195 $78,233 $91,272 ---------------------- ------------- --------------- --------------- --------------- -------------- $ 300,000 $39,117 $52,156 $65,195 $78,233 $91,272 ---------------------- ------------- --------------- --------------- --------------- -------------- $ 325,000 $39,117 $52,156 $65,195 $78,233 $91,272 ---------------------- ------------- --------------- --------------- --------------- -------------- $ 350,000 $39,117 $52,156 $65,195 $78,233 $91,272 ---------------------- ------------- --------------- --------------- --------------- -------------- $ 375,000 $39,117 $52,156 $65,195 $78,233 $91,272 ---------------------- ------------- --------------- --------------- --------------- --------------
Mr. Roche has 1 year of service under the plan. Mr. Caspers has 28 years of service under the plan. Mr. Knudsen has 25 years of service under the plan. Mr. Larson has 20 years of service under the plan. Mr. Richter had 26 years of service under the plan as of his retirement date. 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 13, 2002, 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 13, 2002, 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 474 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 406 less than 1% All Directors 2862 3.96% (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, 2002. 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(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 99 906 Certifications --------------------------- * 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. *****Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2001 as filed on November 29, 2001. 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 11-27-02 ------------------------------------ Chief Executive Officer ---------------------------------- David H. Roche /s/ Steven M. Caspers Executive Vice President and 11-27-02 ------------------------------------ Chief Financial Officer ---------------------------------- Steven M. Caspers /s/ Allen E. Larson Controller and 11-27-02 ------------------------------------ Chief Accounting Officer ---------------------------------- Allen E. Larson /s/ Victor Krabbenhoft Director 11-27-02 ------------------------------------ ---------------------------------- Victor Krabbenhoft /s/ Douglas Etten Director 11-27-02 ------------------------------------ ---------------------------------- Douglas Etten /s/ Edward Moen, Jr. Director 11-27-02 ------------------------------------ ---------------------------------- Edward Moen, Jr. /s/ Mike Hasbargen Director 11-27-02 ------------------------------------ ---------------------------------- Mike Hasbargen /s/ Charles Steiner Director 11-27-02 ------------------------------------ ---------------------------------- Charles Steiner /s/ Jack Lacey Director 11-27-02 ------------------------------------ ---------------------------------- Jack Lacey /s/ Russell Mauch Director 11-27-02 ------------------------------------ ---------------------------------- Russell Mauch /s/ Jerry Meyer Director 11-27-02 ------------------------------------ ---------------------------------- Jerry Meyer /s/ Paul Summer Director 11-27-02 ------------------------------------ ---------------------------------- Paul Summer
CERTIFICATION ------------- I, David H. Roche, certify that: 1. I have reviewed this annual report on Form 10-K of Minn Dak Farmers Cooperative; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 27, 2002 /s/ David H. Roche ---------------------------- ------------------------------------- President and Chief Executive Officer CERTIFICATION ------------- I, Steven M. Caspers, certify that: 1. I have reviewed this annual report on Form 10-K of Minn Dak Farmers Cooperative; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 27, 2002 /s/ Steven M. Caspers ---------------------------- ------------------------------------- Executive Vice President and Chief Financial Officer CERTIFICATION ------------- I, Allen E. Larson, certify that: 1. I have reviewed this annual report on Form 10-K of Minn Dak Farmers Cooperative; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 27, 2002 /s/ Allen E. Larson ---------------------------- ------------------------------------- Controller and Chief Accounting Officer