-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OB1wbIqSgav0r8RY2hQZ94xzc7OsrIUKCsxT07qc5iYDoA79Snk6hpTuGZ+i2BeF hDnjokVWVODMUP/7aSfR3A== 0000897101-99-001130.txt : 19991130 0000897101-99-001130.hdr.sgml : 19991130 ACCESSION NUMBER: 0000897101-99-001130 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MINN DAK FARMERS COOPERATIVE CENTRAL INDEX KEY: 0000948218 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - CROPS [0100] IRS NUMBER: 237222188 STATE OF INCORPORATION: ND FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-94644 FILM NUMBER: 99765022 BUSINESS ADDRESS: STREET 1: 7525 RED RIVER RD CITY: WAHPETON STATE: ND ZIP: 58075-9698 BUSINESS PHONE: 7016428411 MAIL ADDRESS: STREET 1: 7525 RED RIVER RD CITY: WAHPETON STATE: ND ZIP: 58075-9698 10-K 1 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, 1999 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 ------------------------- Commission File No. 33-94644 ------------------------- MINN-DAK FARMERS COOPERATIVE (Exact name of registrant as specified in its charter) North Dakota 23-7222188 (State of incorporation) (I.R.S. Employer Identification Number) 7525 Red River Road Wahpeton, North Dakota 58075 (701) 642-8411 (Address of principal executive offices)(Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of November 19, 1999, 475 shares of the Registrant's Common Stock and 72,200 "units" of the Registrant's Preferred Stock, each consisting of 1 share of Class A Preferred Stock, 1 share of Class B Preferred Stock and 1 share of Class C Preferred Stock, were outstanding. There is only a limited, private market for shares of the Company's Common or Preferred Stock, as such shares may be held only by farmer-producers who are eligible for membership in the Company. The Company's shares are not listed for trading on any exchange or quotation system. Although transfers of the Company's shares may occur only with the consent of the Company's Board of Directors, the Company does not verify information regarding the transfer price in connection with such transfers. A number of stock transfers, representing approximately 4% 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, 1999. Of the stock transferred at arms length, the transfers were made during the first, second and third quarters of the Company's fiscal year and range in price from $2,000 to $2,700 per unit. Prices early in the fiscal year ranged from $2,500 to $2,700 per unit while prices in the third and final quarter of trading ranged from $2,000 to $2,300 per unit. 1 DOCUMENTS INCORPORATED BY REFERENCE Certain exhibits to this Report are incorporated by reference from the Company's Registration Statement on Form S-1 (File number 33-94644), declared effective on September 11, 1995 and from the Company's Annual Report on Form 10-K for the fiscal years ended August 31, 1996, 1997 and 1998. 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 475 members. Membership in the Company is limited to sugar beet growers located in those areas of North Dakota and Minnesota within an approximate fifty (50) mile radius of the Company's offices and sugar beet processing facilities in Wahpeton, North Dakota. The Company's facilities allow the members to process their sugar beets into sugar and other products. The products are pooled and then marketed through the services of a marketing agent under contract with the Company. The sugar marketing agent, United Sugars Corporation, is a cooperative association owned by its members, the Company, American Crystal Sugar Company, Southern Minnesota Beet Sugar Cooperative and United States Sugar Corporation. The Company's beet molasses and beet pulp are also marketed through a marketing agent, Midwest Agri-Commodities Company. Midwest Agri-Commodities Company is a cooperative owned by its members, the Company, American Crystal Sugar Company and Southern Minnesota Beet Sugar Cooperative. Minn-Dak's corporate headquarters are located at 7525 Red River Road, Wahpeton, North Dakota 58075 (telephone number (701) 642-8411). Its fiscal year ends August 31. PRODUCTS AND PRODUCTION Minn-Dak is engaged primarily in the production and marketing of sugar from sugar beets. Minn-Dak also markets certain by-products of the sugar it produces, such as beet molasses and beet pulp. The Company also owns an 80% interest in Minn-Dak Yeast Company, Inc., which has facilities located near the Company's sugar production location. Minn-Dak Yeast Company, Inc. produces fresh baker's yeast and provided revenues totaling approximately 4% of the Company's gross revenues for the fiscal year ended August 31, 1999. The Company processes sugar beets grown by its members at its sugar mill located in Wahpeton, North Dakota. The period during which the Company's plant is in operation to process sugar beets into sugar and by-products is referred to as the "campaign." The campaign is expected to begin in September of each year and continues until the available supply of beets has been depleted, which generally occurs in March or April of the following year, depending on the size of the crop. Based on current processing capacity, an average campaign lasts approximately 210-225 days, assuming normal crop yields. Once the sugar beets are harvested, rapid processing is important to maximize sugar extraction and minimize spoilage. Members transport their crop by truck to receiving stations designated by the Company. Beets are then stored in the Company's factory yard and at outlying piling stations until processed. Under the Company's "growers agreement" with its members, the Company furnishes all loading equipment at loading stations and, after delivery of the beets to the Company, pays all freight and mileage charges for hauling the sugar beets from the piling stations to the factory for processing. Minn-Dak's total sugar production is presently influenced by the amount and quality of sugar beets grown by its members, by the processing capacity of the Company's plant and by the ability to store harvested beets. Most of the beet harvest is stored in piles. Although piled sugar beets that have been frozen by the winter temperatures may be stored for extended periods; beets stored in unprotected piles at temperatures above freezing must be processed within approximately 160 days. 2 Sugar beets deteriorate in storage due to the organic nature of their existence. Beets harvested prior to obtaining a root temperature of fifty degrees or less must be processed within seven days or sugar loss will occur and they will deteriorate. The plant start up in the fall is timed to the anticipated end of processing in the spring. The plan of the Company is to finish processing unprotected beets prior to March 10, ventilated beets prior to March 31, and storage shed beets as soon thereafter as is possible. Unprotected beets are "split" by processing the center of the piles first. This method allows the processing of the center beets, which do not freeze and therefore deteriorate more rapidly, at the earliest possible date. Ventilated beets have culverts with air holes running every eleven feet into the pile. Prior to freezing of the beets, air is blown into the piles to bring the pile temperature to an average temperature of approximately thirty-five degrees Fahrenheit. When a week or more of sub zero temperatures are forecast, the fans are turned on when the temperature reaches zero degrees and continues to ventilate until the pile temperature reaches zero to five degrees. Storage shed beets are handled in the same manner as the ventilated beets. The difference between the processes is the building itself, which insulates the beets from sun, wind, and warmer spring temperatures. With the buildings, storage of the beets can run as late as mid to late May of each year. In addition, unprotected and ventilated beets will, in long campaigns, have extra steps taken to extend their life. Beets are sprayed with lime to create a reflectant and reduce the harmful impact from the sun's rays in the spring. Straw is also applied to the sides of some later processed piles to further insulate the beets from sun, wind, and temperature. Once the sugar beets arrive in the factory, the basic steps in producing sugar from them include: washing; slicing into thin strips called "cossettes"; extracting the sugar from the cossettes in a diffuser; purifying the resulting "raw juice" and boiling it, first in an evaporator to thicken it and then in vacuum pans to crystallize the sugar; separating the sugar crystals in a centrifuge; drying the sugar; and storing sugar in bulk form for bulk and bag shipping. The Company's sugar beet by-products include beet molasses and beet pulp. After the extraction of raw juice from the cossettes, the remaining pulp is dried and processed into and sold as animal feeds. The beet molasses is the sugar juice left after all economical means have been taken to extract the sugar from the sugar juice. The beet molasses is sold primarily to yeast and pharmaceutical manufacturers and for use in animal feeds. The beet molasses and beet pulp are marketed through Midwest Agri-Commodities Company. RECENT CROPS The Company's members harvested 2.2 million tons of sugar beets from the 1999 crop. The crop yield for the 1999 crop was a new record harvest, exceeding by 12% the Company's five year average tons per acre. Sugar content of the 1999 crop at harvest was 3% below the average of the five most recent years. The Company's projected production of sugar from the 1999 crop sugar beets is expected to be well above the five year average of sugar produced. This forward-looking material is based on the Company's expectations regarding the processing of the 1999 sugar beet crop; the actual production results obtained by processing those sugar beets could differ materially from the Company's current estimate as a result of factors such as changes in production efficiencies and storage conditions for the Company's sugar beets. For a discussion of the 1998, 1997 and 1996 crops and results of operations for fiscal years 1999, 1998 and 1997, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." 3 MARKETING, CUSTOMERS AND PRICING Since January 1, 1994 United Sugars Corporation, a common marketing agency operating on a cooperative basis, owned by the Company and three other sugar producing companies (American Crystal Sugar Company, Southern Minnesota Beet Sugar Cooperative and United States Sugar Corporation) to market sugar produced by the four member owners, has marketed the Company's sugar. At August 31, 1999 the Company had an ownership interest in United Sugars Corporation (year to date contributed capital) totaling $1.3 million, which represented approximately 11% of the total. The Company, as well as the other members of United Sugars Corporation, has entered into a "Uniform Member Marketing Agreement" with United Sugars Corporation. Under that agreement, the sugar produced by the Company is pooled with sugar produced by the other sugar-producing member owners and is then sold through the efforts of United Sugars Corporation. The Company receives payment for its sugar by receiving its pro rata share of the net proceeds from the sale of the pooled sugar. The net proceeds of such sales represent the gross proceeds of the sale of the sugar, adjusted for the various costs and expenses of marketing the pooled sugar, including the Company's pro rata share of the marketing and sales expenses incurred by United Sugars Corporation. Any net proceeds from the operation of United Sugars Corporation are distributed to the various members on a patronage basis. United Sugars Corporation sells industrial bulk sugar, industrial bagged sugar, retail bagged sugar and specialty sugars. It is able to distribute both cane sugar and beet sugar, and distribute sugar to customers over a large geographical area. The Company's sugar is marketed by United Sugars Corporation primarily to industrial users such as confectioners, breakfast cereal manufacturers and bakeries. The customer base of United Sugars Corporation includes most of the large industrial sugar users. The customer base also includes retail grocery and wholesalers. The Company has no single customer, which accounts for more than ten percent (10%) of its consolidated revenues. For the fiscal year ended August 31, 1999, 96% of the Company's sugar was shipped in bulk form, mostly to industrial users, and 4% in bagged powdered sugar. The prices at which United Sugars Corporation sells the Company's sugar fluctuate periodically based on changes in domestic sugar supply and demand. The largest portion of the Company's sales are contracted one or more quarters in advance, with the effect of stabilizing fluctuations in revenue from quarter to quarter. Retail (grocery) products are sold on a spot basis. Current net selling prices for sugar are forecast to be lower than the prior two years because (1) the domestic market continues to be oversupplied from large domestic crops and excess foreign sugar and (2) consumption is expected to increase less than the long-term US consumption rates. A licensing agreement with Pillsbury Company will allow United Sugars Corporation to sell sugar nationwide under the "Pillsbury" name. United Sugars Corporation has indicated that it believes that the opportunity to distribute sugar nationwide under the Pillsbury name will allow the expansion of its presence in the consumer portion of the sugar market. Currently United Sugars Corporation has initiated sales plans for Pillsbury brand sugar to select geographical locations.. Moving from one phase of the sales plan to the next will be dependent upon the success of the phase currently being implemented. The sales plan that United Sugars Corporation will have to follow to become a nationwide seller of sugar under the Pillsbury name will require several phases of implementation. The Company markets its by-products, dried beet pulp and beet molasses, through Midwest Agri-Commodities Company, a cooperative whose members are the Company, American Crystal Sugar Company and Southern Minnesota Beet Sugar Cooperative. Midwest Agri-Commodities Company markets beet pulp, beet molasses and other liquid livestock feed for its member owners as well as non-members. Beet pulp is marketed to livestock feed mixers and livestock feeders in the United States and foreign markets. The sales and marketing arrangement with Midwest Agri-Commodities Company is evidenced by a "Uniform Member Marketing Agreement." Under that agreement, the beet pulp and beet molasses produced by the Company is pooled with beet pulp and beet molasses produced by the other producing member owners and is then sold through the efforts of Midwest Agri-Commodities Company. The Company receives payment for its beet pulp and beet molasses by receiving its pro rata share of the net proceeds from the sale of the pooled beet pulp and beet molasses. The net proceeds of such sales represent 4 the gross proceeds of the sale of the beet pulp and beet molasses, adjusted for the various costs and expenses of marketing the pooled beet pulp and beet molasses, including the Company's pro rata share of the marketing and sales expenses incurred by Midwest Agri-Commodities Company. Any net proceeds from the operation of Midwest Agri-Commodities Company are distributed to the various members on a patronage basis. For the year ended August 31, 1999, approximately 50% of the Company's pulp production was exported to Japan and Europe, and the remaining 50% was sold domestically. The market for beet pulp is affected by the availability and quality of competitive feedstuffs. Dried beet pulp prices declined significantly in FY 1998 and again in FY 1999 due the Asian economic crisis, revisions in European grain policies and the worldwide surplus of feed stuffs. Beet molasses is marketed primarily to yeast manufacturers, pharmaceutical houses, livestock feed mixers and livestock feeders. Beet molasses prices declined as well in FY 1998 and again in FY 1999 due to competitive pressures brought about by excess available supplies worldwide. By-product sales accounted for approximately 8% of the Company's total consolidated net sales revenues during FY 1999. This relationship is primarily a function of the average market prices for sugar, beet pulp, beet molasses and fresh yeast and is not necessarily indicative of future relationships between by-product, fresh yeast and sugar revenues, because prices of these products fluctuate independently of each other. The Company is an eighty percent equity owner of Minn-Dak Yeast Company, Inc. Minn-Dak Yeast Company, Inc. manufactures fresh baker's yeast in a plant located adjacent to the Company's sugar plant in Wahpeton, North Dakota. The Company started the yeast business in 1989 in order to add value to its by-product beet molasses. Beet molasses is the main ingredient (growth medium) in the fermentation process used to grow baker's yeast to commercial volumes. A portion of the Company's beet molasses production is used in the Minn-Dak Yeast Company, Inc.'s process and is sold through a supply agreement between the two companies. Universal Foods Corporation, Milwaukee, Wisconsin, holds the remaining twenty percent equity stake. Minn-Dak Yeast Company, Inc. also has a long-term marketing agreement whereby Universal Foods Corporation will buy all production of baker's yeast produced by Minn-Dak Yeast Company, Inc. in return for certain guaranteed sales volumes. JOINT VENTURE WITH PROGOLD LIMITED LIABILITY COMPANY Minn-Dak is a five percent (5%) equity owner in ProGold Limited Liability Company ("ProGold"). ProGold was formed in 1994 by three entities for the purpose of building a plant to produce from corn and market high fructose corn syrup; and to produce and market corn gluten feed, corn gluten meal and corn germ, all co-products produced by the plant. The other two equity owners are American Crystal Sugar Company, Moorhead, Minnesota (46% ownership share) and Golden Growers Cooperative, Fargo, North Dakota (49% ownership share). The Company has contributed approximately $5.2 million in exchange for its 5% ownership position. Because of unexpected market conditions, ProGold the business, as it was structured as of August 31, 1997, was expected to suffer significant losses for several years Given the continued expectation of significant losses for several years for ProGold, on September 30, 1997 ProGold entered into a letter of intent with Cargill, Inc. ("Cargill") for Cargill to lease ProGold's corn wet-milling plant. On November 1, 1997 ProGold signed a 10 year lease agreement with Cargill, which expires on October 31, 2007, to lease ProGold's corn wet-milling plant. Under the lease arrangement, the Company and the other ProGold members would retain ownership of the plant, while Cargill will operate the plant and sell the finished products. ProGold will receive rental payments in a base amount fixed for each year during the term of the lease. ProGold would also receive supplemental rent equal to fifty percent (50%) of the amount by which earnings before taxes from operations of the facility exceeds a specified base. Cargill has also entered into a corn supply agreement with ProGold, pursuant to which ProGold is obligated to deliver approximately 15 million bushels of corn per fiscal year. Cargill will pay ProGold a market price for any corn delivered to Cargill under the corn supply agreement. 5 The arrangement between ProGold and Cargill also specifies a variety of alternatives that may take effect upon expiration of the initial lease. These alternatives include agreeing to enter into another long-term lease upon mutually agreeable terms and conditions, or ProGold could offer to sell to Cargill, at fair market value, a fifty percent (50%) or one hundred percent 100% ownership interest in ProGold. To date the lease with Cargill has provided ProGold, as an entity, with (i) rental payments of a fixed amount, with the opportunity to receive supplemental rental payments in the event that the ProGold facility is operated profitably and (ii) the right to pay for corn delivered by ProGold for processing at the facility at market prices. 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 sugar beets from members under contract with the Company. All members have three-year contracts with the Company covering the growing seasons of 1999 through 2001 (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 sugar beets for sale to the Company. The Company's Board of Directors has the discretion to adjust the acreage, which may be planted for each Unit of Preferred Stock held by the members. For the 1999 crop year the Company's Board of Directors authorized members to plant 1.40 acres per unit. For the 2000 crop, the Company's Board of Directors authorized members to plant 1.45 acres per unit Under the terms of the Growers Agreement, each member receives payment for his or her sugar beets based on a price per pound of extractable sugar. The price per pound of extractable sugar is determined by dividing the total grower distribution of net proceeds (less the amount credited to members investment from member patronage and credited to retained earnings from non-member patronage) by the total of members' pounds of extractable sugar. Extractable pounds of sugar are obtained by the processing of beet samples taken from members' sugar beets during harvest. Each member's grower payment is obtained by multiplying that member's total pounds of extractable sugar times the price per pound of extractable sugar as determined above. Under the Growers Agreement, each member receives an initial installment of the payment for his or her sugar beets on or about November 15, soon after delivery of his or her crop to the Company. That initial installment is subject to adjustment by the Cooperative's Board of Directors and management, but will not exceed 65% of the estimated price per pound of extractable sugar. A second installment is paid in early February; that installment, in combination with the first installment, will not exceed 70% of the estimated price per pound of extractable sugar. A third installment is paid in early April, with the aggregate of all installments paid to that date not to exceed 80% of the estimated price per pound of extractable sugar. A fourth installment payment is paid in early July, with the total of installment payments to that date not to exceed 95% of the estimated price per pound of extractable sugar. The final payment is determined after the end of the Company's fiscal year, ending on August 31, and is in an amount necessary to bring the total of all payments to the price to be paid per pound of extractable sugar to all growers during the applicable fiscal year. In addition, the Company's annual patronage net income, which is equal to the Company's sales less all expenditures and member beet payments, is distributed to the members on the basis of the pounds of extractable sugar obtained from each of the members' sugar beets; such amounts are distributed in either cash payments or in the form of patronage credits to the member's patronage credit account on the books of the Company. 6 COMPANY DISTRICTS The Company's by-laws provide that the Company's members are to be divided into districts for the purposes of voting and the election of members of the Board of Directors. Those districts do not have specific geographic boundaries but, instead, contain a loosely defined area representing the area served by a particular piling station to which members deliver their sugar beets for storage until the sugar beets are to be processed. When a member joins the Company, he or she is assigned to a particular district based upon criteria including: (i) the physical location of the shareholder's sugar beet growing acres relative to a piling site, (ii) if the previous criteria do not clearly indicate the district to which the shareholder should be assigned, then the physical location of the shareholder's base of farming operations relative to a piling site (some members deliver sugar beets to more than one piling site due to the locations of their various fields, even though they are assigned to membership in only one district) and (iii) if the first two criteria do not provide a clear indication of the district to which the shareholder should be assigned, then the shareholder is given the option of being assigned to the district which would best serve the needs of that shareholder. Given that shareholders are assigned to districts based upon ease of delivery of harvested sugar beets and because shareholders own different numbers of Units of Preferred Stock, each district includes a different number of acres of sugar beet production and, therefore, a different quantity of sugar beets delivered to the Company. However, none of the districts provides the Company with a materially disproportionate quantity of the sugar beets produced by the Company's members. While the allocation of members to the various districts has a significant impact on the election of directors, the Company does not believe that the districts represent a significant factor in the day-to-day business operations of the Company. RESEARCH AND DEVELOPMENT The Company is not involved in its own research and development activities, but does participate in some sugar industry research and development activities. Any research findings are then shared by the entire sugar industry. Participatory research and development is accomplished through such organizations as Beet Sugar Development Foundation, Sugar Association, and North Dakota/Minnesota Research and Education Board. The Company participates in the organizations listed above through the efforts of its representatives to the boards of directors of those entities. The Company's representatives, either a member of the Company's Board of Directors or a management employee of the Company, allow the Company to participate in and help direct agricultural and factory operations research and development activities carried out by the listed organizations. Those organizations also have established various committees on which the Company has placed certain of its employees. That practice is designed to provide the company with direct access to any research and development information available from the applicable committees. (Through its employees, the Beet Sugar Development Foundation also provides some legislative and lobbying efforts on a national level. Those efforts are directed at maintaining funding for the various federal sugarbeet research facilities.) None of the Company's employees or directors devotes a significant portion of their time and energies to the activities described in this section; instead, such efforts are a minor portion of their continuing duties on behalf of the Company. During the fiscal year ended on August 31, 1999, the Company contributed approximately $62,000 to the North Dakota/Minnesota Research and Education Board to fund that entity's research and development activities. $13,000 was given to the Beet Sugar Development Foundation in connection with their research activities, and $65,000 to the Sugar Association for their research activities and membership dues. The Company also has established a sugar beet seed committee, which reviews the performance of new and existing sugar beet seed varieties. The committee then advises the Board of Directors with regard to those sugar beet seed varieties that should be approved for use by the Company's shareholders. 7 ENVIRONMENTAL MATTERS The Company is subject to many federal, state and local regulations that govern air and water emissions, and solid and hazardous waste storage and disposal. Currently, the Company is meeting all its obligations in water, solid waste and hazardous waste. On June 2, 1998 the Company entered an amended consent agreement and joint motion to amend Civil No. 97-164 with the State of North Dakota. To resolve past air violations the Company agreed to pay a $150,000 civil penalty for the violations. However, the agreement also specified that if the Company took certain actions before specified dates up to $110,000 of the penalty would be dismissed. The company paid $40,000 of the penalty. There are four separate actions outlined in the consent agreement that the Company must undertake in order to demonstrate compliance with the consent agreement and to obtain a dismissal of up to $110,000 in fines. As of this writing, the Company has met its obligation in three of the actions, which should result in a reduction in the civil penalty of $85,000. The one remaining condition stipulates that, if the company maintains compliance for the annual period ending November 16, 2000, the remaining $25,000 shall be suspended and ultimately dismissed at that time. There is no reason at this time to believe that the Company will not be in compliance in the year ended November 16, 2000. The Company cannot accurately predict the extent to which future changes in environmental laws or regulations will affect the cost of operating its facilities and conducting its business. However, any changes could have adverse financial consequences for the Company and its members. EMPLOYEES As of August 31, 1999, the Company had 263 full-time employees, of whom 229 were hourly and 34 were salaried. It also employs approximately 332 additional hourly seasonal workers during the sugar beet harvest and processing campaign. In January 1995 the Company concluded the negotiations for a collective bargaining agreement with the American Federation of Grain Millers (AFL-CIO) union for its factory employee group. The written contract is in effect from January 23, 1995 through May of the year 2000. Office, clerical, management and harvest employees are not unionized. Full time employees are provided with health and dental insurance, a defined benefit pension retirement plan, a 401(k) retirement savings plan, a short and long-term disability plan, term life insurance, and vacation and holiday pay plans. Seasonal workers are provided some of the above employee benefits. The Company considers its employee relations to be excellent. ITEM 2. PROPERTIES The Company operates a single sugarbeet processing factory at Wahpeton, North Dakota that is located in the Red River Valley. The Company owns the factory, receiving sites, and the land on which they are located. The 1997 crop set new records for average daily slice rate and sugar production while the 1998 crop set a new record for tons sliced. The 1999 crop forecast of factory operations assumes a minimum increase of 10% in each of these areas. The Company's processing factory is exceeding the rated design capacity following the plant expansion which was completed in recent years. Minn-Dak Yeast Company, Inc. of which Minn-Dak is an 80% owner, operates a single yeast processing factory at Wahpeton, North Dakota which is located in the Red River Valley. Minn-Dak Yeast Company, Inc. owns the factory and the land on which it is located. During fiscal 1999 fresh yeast was produced and sold into the domestic yeast marketplace. Minn-Dak Yeast Company's processing factory is exceeding its initial rated design capacity. 8 ITEM 3. LEGAL PROCEEDINGS From time to time and in the ordinary course of its business, the Company is named as a defendant in legal proceedings related to various issues, including worker's compensation claims, tort claims and contractual disputes. Other than as provided herein, the Company is not currently involved in legal proceedings which have arisen in the ordinary course of its business, and the Company is also unaware of certain other potential claims which could result in the commencement of legal proceedings. The Company carries insurance that provides protection against certain types of claims. The Company is subject to extensive federal and state environmental laws and regulations with respect to water and air quality, solid waste disposal and odor and noise control. The Company conducts an ongoing and expanding control program designed to meet these environmental laws and regulations. Except as disclosed under "ENVIRONMENTAL MATTERS" above, there currently are no pending regulatory enforcement actions and the Company believes that it is in substantial compliance with applicable environmental laws and regulations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Company's shareholders during the quarter ended August 31, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is only a limited, private market for shares of the Company's Common or Preferred Stock, as such shares may be held only by farmer-producers who are eligible for membership in the Company. The Company's shares are not listed for trading on any exchange or quotation system. Although transfers of the Company's shares may occur only with the consent of the Company's Board of Directors, the Company does not verify information regarding the transfer price in connection with such transfers. A number of stock transfers, representing approximately 4% 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, 1999. Of the stock transferred at arms length, the transfers were made during the first, second and third quarters of the Company's fiscal year and ranged in price from $2,000 to $2,700 per unit. Stock transferred at arms length early in the fiscal year ranged in price from $2,500 to $2,700 per unit, while stock transferred at arms length during the third trading quarter ranged in price from $2,000 to $2,300 per unit. 9 ITEM 6. SELECTED FINANCIAL DATA The following table summarizes selected financial data for each of the last five completed fiscal years. The selected financial data of the Company should be read in conjunction with the financial statements and related notes included elsewhere in this Report. Fiscal Year Ended August 31,(1)
FINANCIAL DATA (Numbers in Thousands) 1999 1998 1997 1996 1995 Revenues $ 152,742 $ 149,574 $ 139,730 $ 114,335 $ 133,302 Net Proceeds(1) 63,352 72,084 74,239 56,872 75,422 Total Assets 174,296 184,830 171,896 136,361 98,927 Long-term Debt, including current maturities, Net of bond investments, 1998, 1997 & 1996 61,185 59,798 58,252 55,809 28,269 Members' Investment(2) 79,394 82,082 73,646 57,324 43,992 Property and Equipment Additions, net of Retirements 2,962 10,893 24,547 34,457 9,202 Working Capital 13,403 11,170 10,163 11,845 9,295 Ratio of Long-Term Debt to Members' Investment(3) .72 .66 .76 .93 .59 Ratio of Net Proceeds to Fixed Charges(4) 13.05 13.92 14.92 16.76 26.38 PRODUCTION DATA(5) Acres harvested 97,336 91,374 82,575 74,802 75,878 Tons purchased (members) 1,772,648 1,721,240 1,506,646 1,458,917 1,636,094 Tons purchased (non-member) 198,770 44,065 Tons purchased per acre harvested 18.21 18.84 18.25 19.47 21.56 Net beet payment paid to member per ton of sugar beets delivered, plus allocated patronage and unit retains(6) 35.34 41.68 49.97 38.34 46.41 Sugar hundredweight Produced 4,750,921 4,788,131 4,136,172 3,348,629 4,358,241 Sold, including purchased sugar 5,324,764 4,672,631 3,794,313 3,841,443 3,988,284 Pulp tons Produced 100,215 89,263 77,042 77,352 92,139 Sold 127,160 105,270 82,705 74,743 93,284 Molasses tons Produced 103,127 78,077 64,377 61,194 62,516 Sold 80,325 51,939 45,182 43,882 46,768 Yeast pounds (in thousands) Produced 26,198 27,191 23,127 25,556 17,511 Sold 26,240 27,227 23,193 25,495 17,436
(1) Net Proceeds are the Company's gross revenues, less the costs and expenses of producing, purchasing and marketing sugar, sugar by-products, and yeast, but before payments to members for sugar 10 beets. (For a more complete description of the calculation of Net Proceeds, see "Description of Business-Growers' Agreements".) (2) Members' investment includes preferred and common stock, unit retention capital, allocated patronage and retained earnings (deficit). (3) Calculated by dividing the Company's long-term debt, exclusive of the current maturities of such debt, by members' investments. (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, 1999, relates to the 1998 crop). (6) Reflects the total amount paid in cash and allocated to individual grower equity accounts for each ton of beets delivered. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Company's financial statements and notes included elsewhere in this Report. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual future results may differ materially from those anticipated in the forward-looking statements contained in this section; such differences could arise as a result of a variety of factors including, but not limited to, the market and regulatory factors described elsewhere in this Report. LIQUIDITY AND CAPITAL RESOURCES Because the Company operates as a cooperative, payments for member-delivered sugar beets, the principal raw material used in producing the sugar and agri-products it sells, are subordinated to all member business expenses. In addition, actual cash payments to members are spread over a period of approximately one year following delivery of sugar beet crops to the Company and are net of unit retains and patronage allocated to them, all three of which remain available to meet the Company's capital requirements. This member financing arrangement may result in an additional source of liquidity and reduced outside financing requirements in comparison to a similar business operated on a non-cooperative basis. However, because sugar is sold throughout the year (while sugar beets are processed primarily between September and April) and because substantial amounts of equipment are required for its operations, the Company has utilized substantial outside financing on both a seasonal and long-term basis to fund such operations. The majority of such financing has been provided by Co-Bank (the "Bank"). The Company has a short-term line of credit with the Bank in 1999 of $55,000,000. The various loan agreements between the Bank and the Company obligate the Company to the following significant loan conditions: invest in Class C or other stock of the bank, as may be designated, in such amounts as may be prescribed by the board of directors of the bank; maintain working capital of not less than $8.0 million; maintain a current ratio of not less than 1.2:1.0; maintain long-term debt to equity ratio of no greater than 1.05:1; and obtain prior consent from the bank to pay cash patronage dividends in excess of 35% of qualified patronage income. As of August 31, 1999, the Company was in compliance with its loan agreements. Working capital increased $2.2 million for fiscal year 1999. This increase was primarily the result of restructuring the Company's long-term and short-term debt to achieve financial ratio's resulting in lowered interest costs. As of August 31, 1999, the Company exceeded the targeted working capital position of $12.0 million. On July 1, 1999, The Company's prior primary lender, St Paul Bank, merged with CoBank. The merger with CoBank has not, and is not expected to negatively impact the Company's borrowing abilities. Capital expenditures for fiscal year 1997 were $26.0 million, fiscal year 1998 was $10.9 million, and fiscal year 1999 was $5.2 million. Capital expenditures for fiscal year 2000 are currently estimated at $3.8 million. The capital expenditures for fiscal year 1997 and 1998 were mostly made up of assets needed to complete the Company's three year expansion plan that was undertaken starting in fiscal year 1996. COMPARISON OF THE YEARS ENDED AUGUST 31, 1999, AND 1998 Revenue for the year ended August 31, 1999 increased 14.6% or $21.4 million from 1998. Revenue from total sugar sales increased 16.7% reflecting a 1.0% increase in the average selling price per cwt and a 15.7% increase in cwt. sold. Revenue from pulp and molasses increased 4.3% reflecting a decrease of 25.9% in the average selling price per ton and 21.6% increase in volume. Revenues from yeast sales decreased 5.8% reflecting a price decrease of 2.2% and a decrease in volume of 3.6%. 12 Finished product inventories decreased $10.6 million in 1999 primarily due to lower volumes of ending sugar inventory. Cost of product produced, exclusive of payments for sugar beets and grower trucking increased $3.7 million. The increase is primarily due to an 8.8% increase in sugar beets purchased and an increase in non-allocated costs such as plant depreciation, taxes and insurance of 9.2%. Sales and Distribution costs increased $3.2 million or 11.5%. General and Administrative expenses increased $0.1 million or 2.0%. Interest expense decreased $0.1 million or 2.0%. The cost per cwt produced increased 11.4%, primarily due to the quality of the crop. Non-member business income increased $0.4 million in fiscal year 1999. This increase was primarily due to the reduction in losses associated with the Company's investment in Pro-Gold. Net payments to members for sugar beets decreased by $8.2 million in 1999. This decrease was primarily due to a slightly higher volume but lower quality of the beets delivered by members in 1999 versus 1998, and the result of higher selling prices for sugar, but lower selling prices for pulp and molasses. COMPARISON OF THE YEARS ENDED AUGUST 31, 1998, AND 1997 Revenue for the year ended August 31, 1998 increased 7.0% or $9.8 million from 1997. Revenue from total sugar sales increased 16.1% reflecting a 4.7% decrease in the average selling price per cwt and a 20.8% increase in cwt. sold. Revenue from pulp sales decreased 7.8% reflecting a decrease of 31.9% in the average selling price per ton and 24.1% increase in volume. Revenue from molasses sales decreased 0.1% reflecting a decrease of 15.1% in the average selling price per ton and a 15.0% increase in volume. Revenues from yeast sales increased 11.1% reflecting a price decrease of 6.3% and an increase in volume of 17.4%. Finished product inventories increased $6.2 million in 1998 primarily due higher volumes of ending sugar inventory. Cost of product produced, exclusive of payments for sugar beets and grower trucking increased $5.7 million. The increase is primarily due to a 17% increase in sugar beets purchased and an increase in non-allocated costs such as plant depreciation, taxes and insurance of 27%. Sales and Distribution costs increased $2.9 million or 13.2%. General and Administrative expenses increased $0.3 million or 7.4%. Interest expense increased $1.1 million or 24.4%. The cost per cwt produced increased 3.7%. Non-member business income increased $1.4 million in fiscal year 1998. This decrease was primarily due to the reduction in losses associated with the Company's investment in Pro-Gold, and to increased net income from the Minn-Dak Yeast Company, Inc. subsidiary operations. Net payments to members for sugar beets increased by $.9 million in 1998. This increase was primarily due to a higher volume but lower quality of the beets delivered by members in 1998 versus 1997, and because of lower selling prices for sugar, pulp and molasses. ESTIMATED FISCAL YEAR 2000 INFORMATION The agreements between the Company and its members regarding the delivery of sugar beets to the Company require payment for members' sugar beets in several installments throughout the year. As only the final payment is made after the close of the fiscal year in question, the first payments to members for their sugar beets are based upon the Company's then-current estimates of the financial results to be obtained from processing the crop in question and the subsequent sale of the products obtained from processing those sugar beets. This discussion contains a summary of the Company's current estimates of the financial results to be obtained from the Company's processing of the 1999 sugar beet crop. Given the 13 nature of the estimates required in connection with the payments to members for their sugar beets, this discussion includes forward-looking statements regarding the quantity of sugar to be produced from the 1999 sugar beet crop, the net selling price for the sugar and by-products produced by the Company and the Company's operating costs. These forward-looking statements are based largely upon the Company's expectations and estimates of future events; as a result, they are subject to a variety of risks and uncertainties. Some of those estimates, such as the selling price for the Company's products and the quantity of sugar produced from the sugar beet crop are beyond the Company's control. The actual results experienced by the Company could differ materially from the forward-looking statements contained herein. The recently completed harvest of the sugar beet crop grown during 1999 exceeded that of the prior year in both tons and tons per acre. The sugar content of the 1999 crop, however, was less than that of the prior year and less than the five year average for sugar . The Company expects to produce more hundredweight of sugar from the 1999 sugar beet crop than the prior year and considerably more than the long-term average production of sugar. From the revenues generated from the sale of products produced from each ton of sugar beets must be deducted the Company's operating and fixed costs. The deduction of those operating costs results in a 1999 crop gross beet payment estimate that will be less than that of the prior crop year. YEAR 2000 The Company has developed plans to address the possible exposures related to the impact on its computer systems of the Year 2000. Key customers and suppliers have been contacted with no significant concerns being brought to the Company's attention. The Company has upgraded its accounting system to be Y2K compliant and believes its operations systems to be ready for the Year 2000 as well. The financial impact of making the required systems changes is not expected to be material to the Company's consolidated financial position, results of operations or cash flows. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET AND COMPETITION Current US Government statistics estimate total US sugar consumption at 191.6 million cwt for the year beginning 1 October 1999 and ending 30 September 2000. For the same period ending in 1999, total consumption was 188.3 million cwt. Comparing the two years shows demand growth of 1.7% for US sugar sellers. The US government forecasts growth between 2000 and 2001 to be slightly higher than 2%, which is slightly above trendline and includes consumption increases due to population growth. The Company believes that domestic consumption growth will trend to growth rates of 1 to 2% per year due to population growth. Given the size of the domestic market, the Company's sugar production and sales represent between 2 and 3% of the total domestic market for refined sugar in 1999. United Sugars, which sells the Company's production through a sugar marketing pool, represents approximately 25% share of the US sugar market. The US refined sugar market has continued to grow over the past twenty years, despite the enormous amount of demand lost to the substitution of high fructose corn syrups for sugar in beverages and certain food products. Non-nutritive sweeteners such as aspartame have also been developed to substitute 14 for sugar. The substitution of corn sweeteners for sugar not only reduced demand for sugar in the United States, but also resulted in a high degree of sugar industry consolidation. For example, in 1978 there were 28 sugar producers and sellers in the US market. Today there are eight sugar sellers, with over 75% of US sugar market share concentrated in the top three sellers, all of which are fully integrated beet and cane suppliers. The Company's main competitors in the domestic market are Imperial Sugar Company, Tate & Lyle North America, Amalgamated Sugar Company, and California and Hawaii Sugar Company Competition in the US sugar industry, because sugar is a fungible commodity, is primarily based upon price, customer service and reliability as a supplier. According to United States Department of Agriculture (USDA) statistics, the Red River Valley is generally one of the most cost efficient sugar beet producing areas in the nation. As a result, the Company's management believes that it possesses the ability to compete successfully with other American producers of sugar. In spite of this competitive advantage, substitute sweetener products and sugar imports could have a material adverse effect on the Company's operations in the future. GOVERNMENT PROGRAMS AND REGULATION Domestic sugar prices are supported under a program administered by the USDA. Under the current program, which was initiated in 1981 and extended under the Food Security Act of 1985, the Food, Agriculture, Conservation and Trade Act of 1990 and the Federal Agriculture Improvement and Reform Act of 1996 (the "FAIR Act"), the price of sugar is required to be maintained above the price at which producers could forfeit sugar to repay non-recourse loans obtained through the Commodity Credit Corporation (CCC). The USDA maintains sugar prices without cost to the U.S. Treasury by regulating the quantity of sugar imports. The FAIR Act maintains the basic 18 cent per pound loan rate for raw sugar and puts in place a 22.90 cent per pound loan rate for refined beet sugar. Both loan rates are effective for crop years 1996 through 2002. Price support loans are made on a non-recourse basis provided that United States sugar imports for domestic usage exceed 1.5 million short tons raw value in a given fiscal (October through September) year. Loans made on a non-recourse basis enable the sugar processor to forfeit sugar to Commodity Credit Corporation ("CCC") if sugar prices are below the loan rate. If imports during a given year fall below the 1.5 million short tons raw value, loans must be made on a recourse basis, meaning that processors will not be able to forfeit sugar to CCC at its full loan value. In order to recover the full value of a recourse loan, the CCC could require that cash or other assets be provided in addition to the sugar used as collateral when the loan is made. Another provision of the FAIR Act is a one cent per pound penalty paid by processors if the processor defaults on sugar price support loans. Such support prices for sugar are in effect as long as the "Tariff Rate Quota" for imports of sugar is 1.5 million short tons, raw value or more. Under the tariff rate quota implemented October 1, 1990, certain sugar producing countries are assigned a fixed quantity of imports duty-free or subject to minimal duties. Unlimited additional quantities may be imported upon payment of a tariff of 15.38 cents per pound prior to shipment (to date, very little sugar has been imported under this higher tariff level). (Note: the tariff schedule was established at 17 cents on July 1, 1995, 16 cents July 1, 1996 and will reduce by .31 cents each year for years 1997 through 2001, until it reaches 14.45 cents per pound of sugar). Further, imports of sugar under the tariff rate quota are based upon the difference between domestic sugar consumption and domestic sugar production, with one exception. Under the terms of the General Agreement on Tariffs and Trade (GATT) the minimum imports of sugar are established at 1,257,000 short tons, raw value. Therefore, even if the difference between domestic sugar consumption and production are less than 1,257,000 short tons, raw value, GATT will require that 1,257,000 short tons be imported into the United States from the quota holding foreign countries. In November 1999, the so-called Millennium Round of the World Trade Organization (WTO) will begin in Seattle, Washington with the goal of continuing to move toward multilateral free trade in all sectors. Any agreements reached at the Millennium Round could represent a threat to the sugar industry 15 because sugar is one of the most highly protected sectors within world agricultural trade and is thus a target for reform. The trend toward liberalization will most likely focus on the minimum import requirement of 1,257,000 short tons. There will likely be a movement to raise the minimum import requirement, and if successful, such a movement could cause additional supply/demand pressure in the United States. The Company believes the North American Free Trade Agreement ("NAFTA") represents the most serious public policy challenge to itself and the domestic sugar industry. Under the terms of the original NAFTA text, Mexico would have been allowed to ship any excess production of sugar into the United States if Mexico were to achieve net surplus producer status two years in a row. Concerned that Mexico's productive capabilities and possible conversion to the use of high fructose corn sweeteners could quickly change Mexico from a net sugar importer to a net sugar exporter, the U.S. sugar industry insisted that NAFTA be changed to delay Mexico's access to the U.S. market. To embody these changes, a side agreement on sugar was reached prior to passage of NAFTA to give Mexico incrementally larger but capped volumes of duty-free access, and an ability to send additional quantities if it were to pay a gradually descending second tier tariff. The side agreement establishes a common market between the United States and Mexico in sugar by 2008. The 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 14 cents in 1999 but decline by approximately 1.5 cents per year until reaching zero in 2008. Low world raw sugar prices could make it feasible for Mexican sugar to enter the United States earlier than 2008. In contrast to Mexico's duty free access to the United States sugar market (which rises from 25,000 metric tons to 250,000 metric tons per year in fiscal year 2001) NAFTA contains no restrictions on second tier imports. Under the current terms of NAFTA and the side agreement, the Company is concerned that imports from Mexico could oversupply the U.S. market, forcing sugar prices significantly lower. Any fluctuation in the price of sugar has a direct impact on any sugarbeet payments that are made to members. The Company, along with the domestic sugar industry, is seeking improvements to NAFTA and is also pursuing legal remedies to address the matter. If the sugar industry is unsuccessful in these or any other endeavors it pursues to prevent the influx of Mexican sugar into the U.S. market, there could be adverse financial consequences to the Company and its members. From fiscal years 1990 to 1996, the sugar industry was required to remit to the Commodity Credit Corporation a nonrefundable marketing assessment equivalent to 1.1794 percent of the raw cane sugar loan rate of 18 cents per pound. The Federal Agriculture Improvement and Reform Act of 1996 increased the assessment for fiscal year 1997 though 2003 to 1.47425 percent of the raw cane sugar loan rate of 18 cents per pound. In response to the downturn in the agriculture economy, congress included a provision in the fiscal year 2000 federal agricultural appropriations bill to alleviate the sugar industry from paying the assessment for fiscal years 2000 and 2001. Thus, from October 1, 1999 to September 30, 2001, the Company will not be required to pay a marketing assessment to the Commodity Credit Corporation. The current sugar program will expire after the 2002 crop and the nature and scope of future legislation and United States trade policy affecting the sugar market cannot be accurately predicted and there can be no assurance that price supports will continue in their present form beyond the 2002 crop year, or that there will even be enacted a sugar program beyond the existing program. 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 which 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. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITOR'S REPORT The Board of Directors Minn-Dak Farmers Cooperative Wahpeton, North Dakota We have audited the accompanying consolidated balance sheets of Minn-Dak Farmers Cooperative (a North Dakota cooperative) as of August 31, 1999, 1998, and 1997, and the related consolidated statements of operations, changes in members' investments and cash flows for the years then ended. These financial statements are the responsibility of the cooperative's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Minn-Dak Farmers Cooperative as of August 31, 1999, 1998, and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Eide Bailly, LLP Fargo, North Dakota October 5, 1999 17 MINN-DAK FARMERS COOPERATIVE CONSOLIDATED BALANCE SHEETS AUGUST 31, 1999, 1998, AND 1997
- ---------------------------------------------------------------------------------------------------------------------- ASSETS 1999 1998 1997 ------------ ------------ ------------ CURRENT ASSETS Cash $ 546,345 $ 1,849,003 $ 1,234,541 ------------ ------------ ------------ Current portion of long-term note receivable 311,677 288,093 216,475 ------------ ------------ ------------ Receivables Trade accounts 16,236,385 13,586,827 12,648,938 Growers 4,056,821 3,539,710 2,818,976 Other 3,066,400 458,400 987,579 ------------ ------------ ------------ 23,359,606 17,584,937 16,455,493 ------------ ------------ ------------ Advances to affiliate -- 2,897,718 887,640 ------------ ------------ ------------ Inventories Refined sugar, pulp and molasses to be sold on a pooled basis 17,218,658 27,803,954 21,576,181 Nonmember refined sugar 1,389 326,289 112,301 Yeast 62,965 78,994 88,711 Materials and supplies 5,004,645 5,210,663 4,698,784 Beet 710,000 -- -- Other -- 71,950 81,630 ------------ ------------ ------------ 22,997,657 33,491,850 26,557,607 ------------ ------------ ------------ Deferred charges 1,194,291 1,273,039 1,249,154 ------------ ------------ ------------ Prepaid expenses 232,021 246,112 191,663 ------------ ------------ ------------ Property and equipment available for sale 587,550 587,550 616,050 ------------ ------------ ------------ Total current assets 49,229,147 58,218,302 47,408,623 ------------ ------------ ------------ PROPERTY, PLANT AND EQUIPMENT Land and land improvements 20,423,153 20,133,021 16,545,767 Buildings 35,377,950 34,735,639 30,258,910 Factory equipment 110,134,188 103,921,887 82,001,703 Other equipment 3,463,000 3,699,820 2,810,128 Construction in progress 229,981 4,176,148 24,156,551 ------------ ------------ ------------ 169,628,272 166,666,515 155,773,059 Less accumulated depreciation 60,441,602 56,097,673 51,523,574 ------------ ------------ ------------ 109,186,670 110,568,842 104,249,485 ------------ ------------ ------------ LONG-TERM NOTES RECEIVABLE, NET OF CURRENT PORTION 2,915,360 2,944,020 2,381,228 ------------ ------------ ------------ OTHER ASSETS Investments restricted for capital lease projects -- -- 4,058,048 Investment in stock of other corporations, unconsolidated marketing subsidiaries and other cooperatives 10,043,102 9,601,940 9,425,112 Deferred income taxes 1,962,000 2,652,000 3,450,000 Other 960,220 845,140 923,383 ------------ ------------ ------------ 12,965,322 13,099,080 17,856,543 ------------ ------------ ------------ $174,296,499 $184,830,244 $171,895,879 ============ ============ ============
See Notes to Consolidated Financial Statements. 18
- -------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND MEMBERS' INVESTMENT 1999 1998 1997 ------------- ------------- ------------- CURRENT LIABILITIES Short-term notes payable $ 17,780,000 $ 26,855,000 $ 19,890,000 ------------- ------------- ------------- Current portion of long-term debt 3,012,500 5,612,500 2,512,500 Current portion of capital lease 730,000 -- -- ------------- ------------- ------------- 3,742,500 5,612,500 2,512,500 ------------- ------------- ------------- Accounts payable Trade 2,891,768 5,123,520 3,532,551 Growers 8,340,333 5,970,930 8,334,605 ------------- ------------- ------------- 11,232,101 11,094,450 11,867,156 ------------- ------------- ------------- Advances from affiliate 374,589 -- -- ------------- ------------- ------------- Accrued liabilities 2,696,649 3,485,909 2,975,558 ------------- ------------- ------------- Total current liabilities 35,825,839 47,047,859 37,245,214 LONG-TERM DEBT, NET OF CURRENT PORTION 46,172,917 42,185,417 47,797,917 OBLIGATION UNDER CAPITAL LEASE 11,270,000 12,000,000 12,000,000 OTHER 686,463 747,766 688,608 COMMITMENTS AND CONTINGENCIES (NOTE 11) -- -- -- ------------- ------------- ------------- Total liabilities 93,955,219 101,981,042 97,731,739 ------------- ------------- ------------- MINORITY INTEREST IN EQUITY OF SUBSIDIARY 946,924 767,481 517,727 ------------- ------------- ------------- MEMBERS' INVESTMENT Preferred stock Class A - 100,000 shares authorized in 1999, 1998, and 1997, $105 par value; 72,200, 72,200, and 66,967 shares issued and outstanding in 1999, 1998, and 1997, respectively 7,581,000 7,581,000 7,031,535 Class B - 100,000 shares authorized in 1999, 1998, and 1997, $75 par value; 72,200, 72,200, and 66,967 shares issued and outstanding in 1999, 1998, and 1997, respectively 5,415,000 5,415,000 5,022,525 Class C - 100,000 shares authorized in 1999, 1998, and 1997, $76 par value; 72,200, 72,200, and 66,967 shares issued and outstanding in 1999, 1998, and 1997, respectively 5,487,200 5,487,200 5,089,492 ------------- ------------- ------------- 18,483,200 18,483,200 17,143,552 Common stock, 600 shares authorized in 1999, 1998, and 1997, $250 par value; 473, 484, and 481, shares issued and outstanding in 1999, 1998, and 1997, respectively 118,250 121,000 120,250 Paid in capital in excess of par 32,094,407 32,094,407 23,753,005 Nonqualified unit retention capital 7,560,034 7,584,237 6,739,547 Qualified allocated patronage 3,854,558 3,981,031 4,081,381 Nonqualified allocated patronage 16,822,063 20,071,517 22,497,263 Retained earnings (deficit) 461,844 (253,671) (688,585) ------------- ------------- ------------- 79,394,356 82,081,721 73,646,413 ------------- ------------- ------------- $ 174,296,499 $ 184,830,244 $ 171,895,879 ============= ============= =============
19 MINN-DAK FARMERS COOPERATIVE CONSOLIDATED STATEMENTS OF OPERATIONS AUGUST 31, 1999, 1998, AND 1997
- ------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 ------------- ------------- ------------- REVENUE From sales of sugar, sugar by-products, and yeast, net of discounts $ 152,741,993 $ 149,573,584 $ 139,729,701 ------------- ------------- ------------- EXPENSES Production costs of sugar, by-products, and yeast sold 50,330,497 41,854,177 33,446,952 Sales and distribution costs 27,913,271 24,697,769 21,822,495 General and administrative 5,002,270 4,906,549 4,567,869 Interest 5,264,307 5,372,221 4,315,823 ------------- ------------- ------------- 88,510,345 76,830,716 64,153,139 ------------- ------------- ------------- OTHER INCOME (EXPENSE) (879,326) (659,048) (1,337,294) ------------- ------------- ------------- NET PROCEEDS RESULTING FROM MEMBER AND NON-MEMBER BUSINESS $ 63,352,322 $ 72,083,820 $ 74,239,268 ============= ============= ============= DISTRIBUTION OF NET PROCEEDS Credited to members' investment Components of net income Income (loss) from non-member business $ 715,515 $ 335,688 $ (1,055,236) Patronage income -- -- 4,382,934 ------------- ------------- ------------- Income allocated to members' investment 715,515 335,688 3,327,698 Unit retention capital 4,630 884,562 948,246 ------------- ------------- ------------- Net credit to members' investment 720,145 1,220,250 4,275,944 Payments to members for sugarbeets, net of unit retention capital 62,632,177 70,863,570 69,963,324 ------------- ------------- ------------- NET PROCEEDS RESULTING FROM MEMBER AND NONMEMBER BUSINESS $ 63,352,322 $ 72,083,820 $ 74,239,268 ============= ============= =============
See Notes to Consolidated Financial Statements. 20 MINN-DAK FARMERS COOPERATIVE CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' INVESTMENT AUGUST 31, 1999, 1998, AND 1997
- ----------------------------------------------------------------------------------------------------------------------------------- Paid in Capital Unit Qualified Non-Qualified Retained Preferred Common in Excess of Retention Allocated Allocated Earnings Stock Stock Par Value Capital Patronage Patronage (Deficit) Total ----------- -------- ----------- ----------- ----------- ------------ ---------- ----------- BALANCE, AUGUST 31, 1996 $14,982,400 $120,250 $10,296,457 $ 6,262,469 $ 3,720,385 $21,575,006 $ 366,651 $57,323,618 Stock Sales - common (8 shares) 2,000 2,000 Repurchases - common (8 shares) (2,000) (2,000) Sales - preferred (8,442 shares) 2,161,152 13,456,548 15,617,700 Unit retention capital Revolvement (471,168) (471,168) Proceeds 948,246 948,246 Revolvment of prior years' allocated patronage (1,027,404) (1,324,677) (2,352,081) Income allocated to members' investment 2,136,000 2,246,934 (1,055,236) 3,327,698 Accrued payment of current years' qualified allocated patronage (747,600) (747,600) ----------- -------- ----------- ----------- ----------- ------------ ---------- ----------- BALANCE, AUGUST 31, 1997 17,143,552 120,250 23,753,005 6,739,547 4,081,381 22,497,263 (688,585) 73,646,413 Stock Sales - common (10 shares) 2,500 2,500 Repurchases - common (7 shares) (1,750) (1,750) Sales - preferred (5,233) shares 1,339,648 8,341,402 9,681,050 Unit retention capital Revolvement (39,872) (39,872) Proceeds 884,562 884,562 Revolvment of prior years' allocated patronage (100,350) (2,425,746) (2,526,096) Economic development grant received by investee 99,226 99,226 Income allocated to members' investment 335,688 335,688 ----------- -------- ----------- ----------- ----------- ------------ ---------- ----------- BALANCE, AUGUST 31, 1998 18,483,200 121,000 32,094,407 7,584,237 3,981,031 20,071,517 (253,671) 82,081,721 Stock Sales - common (3 shares) 750 750 Repurchases - common (14 shares) (3,500) (3,500) Unit retention capital Revolvement (28,833) (28,833) Proceeds 4,630 4,630 Revolvment of prior years' allocated patronage (126,473) (3,249,454) (3,375,927) Income allocated to members' investment 715,515 715,515 ----------- -------- ----------- ----------- ----------- ------------ ---------- ----------- BALANCE, AUGUST 31, 1999 $18,483,200 $118,250 $32,094,407 $ 7,560,034 $ 3,854,558 $16,822,063 $ 461,844 $79,394,356 =========== ======== =========== =========== =========== =========== ========== ===========
21 MINN-DAK FARMERS COOPERATIVE CONSOLIDATED STATEMENTS OF CASH FLOWS AUGUST 31, 1999, 1998, AND 1997
- ------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ OPERATING ACTIVITIES Income allocated to members' investment $ 715,515 $ 335,688 $ 3,327,698 Add (deduct) noncash items Depreciation and amortization 6,591,016 5,980,837 4,458,900 Equipment disposals - loss 155,761 220,932 301,851 Discount on redemption of estate payout (40,820) (63,610) (55,407) Net (income) loss allocated from unconsolidated marketing subsidiaries (214,375) 706,587 1,444,722 Noncash portion of patronage capital credits (313,463) (736,751) (652,922) Retention of nonqualified unit retains 4,630 884,562 948,246 Deferred income taxes 730,000 728,000 -- Decrease (increase) in cash surrender of officer life insurance (87,628) 10,709 (36,170) Stock cancellation - St. Paul Bank for Cooperatives 131,196 -- -- Changes in operating assets and liabilities: Accounts receivable and advances (2,502,362) (3,139,522) (3,110,306) Inventory and prepaid expenses 10,508,284 (6,988,692) (14,122,426) Deferred charges 38,748 46,115 (129,880) Other assets -- 28,500 -- Accounts payable, accrued liabilities, and other liabilities (777,654) 733,016 (903,623) ------------ ------------ ------------ NET CASH FROM (USED FOR) OPERATING ACTIVITIES 14,938,848 (1,253,629) (8,529,317) ------------ ------------ ------------ INVESTING ACTIVITIES Proceeds from disposition of property, plant and equipment 12,494 40,676 5,474 Capital expenditures (5,185,083) (8,293,687) (22,249,794) Proceeds from sale of investments -- -- 29,710 Investment in stock of other corporations, unconsolidated marketing subsidiaries and other cooperatives (110,716) (139,941) (583,117) Investment in note receivable (283,017) (757,114) -- Proceeds from note receivable 288,093 225,000 -- Net proceeds from patronage refunds and equity revolvements 66,196 92,503 32,762 Minority interest in equity of subsidiaries 179,443 249,754 180,289 ------------ ------------ ------------ NET CASH USED FOR INVESTING ACTIVITIES (5,032,590) (8,582,809) (22,584,676) ------------ ------------ ------------ FINANCING ACTIVITIES Sale and repurchase of common stock, net (2,750) 750 -- Net proceeds from issuance of short-term debt (9,075,000) 6,965,000 19,890,000 Proceeds from issuance of long-term debt 2,800,000 -- -- Proceeds from sale of preferred stock -- 9,681,050 15,617,700 Payment of financing fees (154,726) (185,671) (185,671) Payment of long-term debt (1,412,500) (2,512,500) (1,012,500) Payment of unit retains and allocated patronage (3,363,940) (3,497,729) (2,814,097) ------------ ------------ ------------ NET CASH FROM (USED FOR) FINANCING ACTIVITIES (11,208,916) 10,450,900 31,495,432 ------------ ------------ ------------ NET CHANGE IN CASH (1,302,658) 614,462 381,439 CASH, BEGINNING OF YEAR 1,849,003 1,234,541 853,102 ------------ ------------ ------------ CASH, END OF YEAR $ 546,345 $ 1,849,003 $ 1,234,541 ============ ============ ============
22
1999 1998 1997 ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for Interest $ 4,971,812 $ 4,244,771 $ 3,683,034 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES Board approval of unit retention capital and allocated patronage revolvement $ 3,254,165 $ 2,383,126 $ 2,658,897 ============ ============ ============ Transfer of property and equipment available for sale to property and equipment $ 22,850 ============ Acquisition of property $ 267,000 Issuance of notes receivable 2,597,703 Issuance of long-term advances 102,295 ------------ Reduction of investment $ 2,966,998 ============ Board approval of distribution of cash portion of qualified allocated patronage $ 719,600 ============ Increase in note receivable by reduction of advances $ 102,296 ============ Increase in investment from receipt of Economic Development Grant $ 99,226 ============ Reduction in investment restricted for capital lease through the acquisition of equipment under capital lease $ 4,058,048 $ 3,456,194 ============ ============
See Notes to Consolidated Financial Statements. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 1999, 1998, and 1997 NOTE 1 - PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES PRINCIPAL BUSINESS ACTIVITY Minn-Dak Farmers Cooperative (Minn-Dak) is a North Dakota cooperative corporation owned by its member-growers for the purpose of processing sugarbeets and marketing sugar and by-products. Minn-Dak Yeast 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 sugarbeet 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 the most recent purchase, which approximates cost. In valuing inventories at net realizable value, the cooperative, in effect sells the remaining inventory to the subsequent years sugar and by-product pool. DEFERRED CHARGES Agricultural development and labor procurement costs incurred in connection with the beet crop to be harvested in September and October are deferred and subsequently charged to expense during the ensuing processing period. PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION Property, plant and equipment are stated at cost. Additions, renewals and betterments are capitalized, whereas expenditures for maintenance and repairs are charged to expense. The cost and related accumulated depreciation of assets retired or sold are removed from the appropriate asset and depreciation accounts and the resulting gain or loss is reflected in income. It is the policy of the cooperative to provide depreciation based on methods designed to amortize the cost of the properties over their estimated useful lives. Property, plant and equipment are depreciated for financial reporting purposes, principally using declining balance methods, with estimated useful lives ranging from 8 to 40 years. Statutory lives and methods are used for income tax reporting purposes. 24 Indirect costs capitalized were $168,399, $588,605, and $449,149 for the years ended August 31, 1999, 1998, and 1997. Construction-period-interest capitalized for the years ended August 31, 1999, 1998, and 1997, were $0, $199,417, and $953,944, respectively. EQUITY VALUE INVESTMENTS The investments in United Sugars Corporation, Midwest Agri-Commodities Company and ProGold Limited Liability Company are accounted for using the equity method, wherein the investment is recorded at the amount of the underlying equity in the net assets of the investments and adjusted to recognize the cooperative's share of the undistributed earnings or losses. INVESTMENTS IN OTHER COOPERATIVES The investments in stocks and capital credits of other cooperatives are stated at cost, plus the cooperative's share of allocated patronage and capital credits. INCOME TAXES A consolidated federal income tax return is filed for the cooperative and its subsidiary. Deferred income taxes are provided for in the timing of certain temporary deductions/increases for financial and income tax reporting purposes. Significant temporary differences are as follows: 1. When nonqualified unit retention capital and allocated patronage are elected by the board of directors, the cooperative is not allowed an income tax deduction until they are distributed in cash to the member-producers, whereas qualified unit retention capital and allocated patronage are deducted when declared. 2. Depreciation - For financial reporting purposes, the companies use straight-line and accelerated methods of depreciation with lives of 8 to 40 years, while, for income tax purposes, the companies use required statutory depreciable lives and methods. 3. Non-qualified patronage credits from investments in other cooperatives - For financial statement purposes, the companies recognize income when the patronage credit notification is received while, for income tax purposes, the companies recognize income when the patronage is received in cash. 4. Inventory capitalization - For income tax reporting purposes, certain overhead costs are included as a part of inventory costs in accordance with inventory capitalization rules. These costs are charged to expense as incurred for financial reporting purposes. 5. Deferred compensation - For financial reporting purposes, deferred compensation is charged to expense as amounts are accrued. For income tax purposes, deferred compensation is deductible when paid. 6. Recognition of vacation pay - For financial reporting purposes, vacation pay is charged to expense as accrued, whereas, for income tax purposes, vacation pay is deducted when paid. ACCOUNTING 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. 25 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 1999, 1998 and 1997 financial statements. The reclassifications have no effect on the results of operations. NOTE 2 - NOTES RECEIVABLE The cooperative's notes receivable total $3,227,037, $3,232,113 and $2,597,703 as of August 31, 1999, 1998 and 1997, respectively. They are due from United Sugars member processors. The notes receivable are unsecured, with a variable interest rate, currently 8.5%. The notes will be received in equal annual installments through August 31, 2011. The notes are subordinated to CoBank in 1999 and St. Paul Bank for Cooperatives in 1998 and 1997. The current portion of the notes are $311,677, $288,093, and $216,475 as of August 31, 1999, 1998 and 1997, respectively. NOTE 3 - INVESTMENTS The investment in stock of other corporations, unconsolidated marketing subsidiaries and other cooperatives consists of the following:
1999 1998 1997 ----------- ----------- ----------- United Sugars Corporation $ 1,007,957 $ 864,903 $ 820,641 Midwest Agri-Commodities 43,225 21,947 11,748 ProGold, LLC 3,474,655 3,398,894 3,920,776 CoBank (St. Paul Bank for Cooperatives, 1998 & 1997) 2,902,494 2,956,944 2,505,512 R.S.R. Electric Cooperative 2,486,798 2,321,556 2,134,431 Other 127,973 37,696 32,004 ----------- ----------- ----------- $10,043,102 $ 9,601,940 $ 9,425,112 =========== =========== ===========
NOTE 4 - SHORT-TERM DEBT Information regarding short-term debt at August 31, 1999, 1998 and 1997, is as follows:
1999 1998 1997 ----------- ----------- ----------- Seasonal loan with CoBank in 1999, and St. Paul Bank for Cooperatives in 1998 and 1997, due January 31, 2000, interest variable, currently at 6.27% $17,780,000 $26,855,000 $19,890,000 =========== =========== ===========
The cooperative has a $55,000,000 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. 26 Maximum borrowings, average borrowing levels and average interest rates for short-term debt for the years ended August 31, 1999, 1998 and 1997, are as follows:
1999 1998 1997 ------------ ------------ ------------ Maximum borrowings $ 55,000,000 $ 50,000,000 $ 50,000,000 ============ ============ ============ Average borrowing levels $ 34,660,931 $ 33,295,462 $ 28,881,692 ============ ============ ============ Average interest rates 5.83% 6.48% 6.43% ============ ============ ============
NOTE 5 - LONG-TERM DEBT Information regarding long-term debt at August 31, 1999, 1998 and 1997, is as follows:
1999 1998 1997 ------------ ------------ ------------ Term loan with CoBank in 1999, and St. Paul Bank for Cooperatives in 1998 and 1997, due in varying principal repayments through February 29, 2008, interest variable, currently at 7.74%, with a first lien on substantially all property and equipment and current assets of Minn-Dak $ 49,150,000 $ 47,750,000 $ 50,250,000 Term loan with R.S.R. Electric Cooperative, Inc., due October 12, 2002, interest free, unsecured 35,417 47,917 60,417 ------------ ------------ ------------ 49,185,417 47,797,917 50,310,417 Less current maturities (3,012,500) (5,612,500) (2,512,500) ------------ ------------ ------------ $ 46,172,917 $ 42,185,417 $ 47,797,917 ============ ============ ============
As to the loan with CoBank, the cooperative has agreed to the following significant loan conditions: 1. Invest in other stock of the bank, as may be designated, in such amounts as may be prescribed by the board of directors of the bank. 2. Maintain working capital of not less than $8 million, maintain a current ratio of not less than 1.2:1.0, and maintain a long-term debt to equity ratio of no greater than 1.05:1. 3. Obtain prior consent from the bank to pay cash patronage dividends in excess of 35% of qualified patronage income. Minn-Dak has complied with the terms of its loan agreement for the years ended August 31, 1999, 1998 and 1997. 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 27 subject to the reinstatement provisions, prior to the granting of any new seasonal loans. Any such advance payments are subject to a commitment fee of .25% of the daily unadvanced commitment. Interest expense, net of amount capitalized, totaled $5,264,307, $5,372,221 and $4,315,823, for 1999, 1998 and 1997, respectively. Interest capitalized totaled $0, $199,417 and $953,944 for 1999, 1998 and 1997, respectively. Principal amounts due on all the cooperative's long-term debt are as follows: Years ending August 31, ----------------------- 2000 $3,012,500 2001 4,012,500 2002 4,810,417 2003 4,800,000 2004 4,800,000 Thereafter 27,750,000 ------------ $ 49,185,417 ============ NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASE The cooperative has a capital lease with Richland County, North Dakota for equipment relating to solid waste disposal. The county has financed the leased assets with a bond issue and accordingly has structured the cooperative's lease payments to correspond with the bond issue's interest and principal requirements. Details relative to the Cooperative's obligations under the lease agreement are as follows:
1999 -------------------------------------------------- FINAL CURRENT 1998 1997 Payee INTEREST MATURITY PORTION TOTAL Total Total - ---------------- ---------- ---------- ----------- ------------ ------------ ------------ Richland County, North Dakota 4.85% 1/11 $ 1,288,397 $ 15,763,935 $ 16,345,935 $ 16,927,935 Less amount representing interest 558,397 3,763,935 4,345,935 4,927,935 ----------- ------------ ------------ ------------ $ 730,000 $ 12,000,000 $ 12,000,000 $ 12,000,000 =========== ============ ============ ============
Minimum future principal payments required on the obligations under capital lease are as follows: Years ending August 31, ----------------------- 2000 $ 730,000 2001 775,000 2002 815,000 2003 860,000 2004 905,000 Thereafter 7,915,000 ------------ $ 12,000,000 ============ 28 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 base acre of sugar beet crops grown under a grower's contract with Minn-Dak. A unit consists of one share each of Class A, Class B and Class C preferred stock. The preferred shares are nonvoting and non-dividend bearing. All transfers and sales of stock must be approved by the board of directors. The cooperative called for the payment of preferred stock units of 0, 5,233 and 8,442 in January 1999, 1998 and 1997, respectively. Minn-Dak's net income, determined in accordance with generally accepted accounting principles consistently applied, shall be distributed annually on the basis of dollar volume of patronage, in cash or in the form of credits to each member-producer's patronage credit account as established on the books of the cooperative. In the event of a loss in any one year, the cooperative shall act in such a manner as to first recoup the loss from those patrons who were patrons in the year in which the loss occurred. Under the terms of Minn-Dak's beet growing contracts with each of its member-producers, Minn-Dak is obligated to pay the member-producers for beets delivered at a price per pound of extractable sugar. However, if, in the opinion of CoBank, the working capital position of the cooperative is insufficient, Minn-Dak shall retain from the price to be paid per ton for beets such amounts as are deemed by the bank to be necessary for operations, the deductions to be made at such time as the bank shall require. The amount so retained shall be evidenced in the records of Minn-Dak by equity credits in favor of the growers. The board of directors has the power to determine whether such retains shall be "qualified" or "nonqualified" for income tax purposes. For the year ended August 31, 1999, Minn-Dak had retained $4,630 for frozen beet storage. For the year ended August 31, 1998, Minn-Dak had retained $860,729 and $23,833, respectively for facilities expansion and frozen beet storage. For the year ended August 31, 1997, Minn-Dak had retained $753,329 and $194,917, respectively for sugar silo storage and frozen beet storage. For 1999, 1998, and 1997, the retainage is based on $.50 per ton of beets delivered up to the maximum obligation required. During the year ended August 31, 1999, Minn-Dak revolved 55% of the unit retains and allocated patronage for the fiscal year ended August 31, 1991, totaling $3,254,163. In addition, unit retains and allocated patronage owned by certain estates were redeemed at a discount. The discount represented the difference between the book value of these items, totaling $150,596, and the present value of the estimated future redemptions. During the year ended August 31, 1998, Minn-Dak revolved 35% of the allocated patronage for the fiscal year ended August 31, 1991, totaling $2,383,126. In addition, unit retains and allocated patronage owned by an estate was redeemed at a discount. The discount represented the difference between the book value of these items, totaling $183,924, and the present value of the estimated future redemptions. During the year ended August 31, 1997, Minn-Dak revolved the remaining 65% of the unit retains and allocated patronage for the fiscal year ended August 31, 1990, totaling $2,658,897. In addition, unit retains and allocated patronage owned by an estate was redeemed at a discount. The discount represented the difference between the book value of these items, totaling $164,352, and the present value of the estimated future redemptions. 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 29 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, 1999, 1998 and 1997 are as follows:
1999 1998 1997 ------------ ------------ ------------ Deferred tax assets Non-qualified unit retains and allocated patronage due to members $ 9,753,000 $ 11,060,000 $ 11,700,000 Other 3,408,000 1,898,000 1,000,000 ------------ ------------ ------------ Gross deferred tax assets 13,161,000 12,958,000 12,700,000 Less valuation allowance (419,000) (1,441,000) (1,120,000) ------------ ------------ ------------ Total deferred tax assets 12,742,000 11,517,000 11,580,000 ------------ ------------ ------------ Deferred tax liabilities Depreciation 8,544,000 7,560,000 6,860,000 Other 1,906,000 935,000 970,000 ------------ ------------ ------------ Total deferred tax liabilities 10,450,000 8,495,000 7,830,000 ------------ ------------ ------------ $ 2,292,000 $ 3,022,000 $ 3,750,000 ============ ============ ============ Classified as follows Current asset $ 330,000 $ 370,000 $ 300,000 Long-term asset 1,962,000 2,652,000 3,450,000 ------------ ------------ ------------ Net deferred tax asset $ 2,292,000 $ 3,022,000 $ 3,750,000 ============ ============ ============
A provision for income taxes related to non-member income from Minn-Dak Yeast Company, totaling $700,000 and $278,000, for the years ended August 31, 1999 and 1998, respectively, is included in other expense. The deferred tax asset valuation allowance reduces the estimated amount that will be ultimately realized. Realization of the deferred tax asset is dependent upon future non-member income during the period that deductible temporary differences and carryforwards are expected to be available to reduce taxable income. NOTE 9 - EMPLOYEES' PENSION PLAN The cooperative has a non-contributory defined benefit plan which covers substantially all employees who meet certain requirements of age, length of service and hours worked per year. The benefits provided are based upon the employee's average monthly compensation during the previous three highest consecutive years multiplied by a formula and the participant's service ratio. It is the cooperative's funding policy to contribute to the plan at least the minimum amount required by ERISA as determined by the actuarial firm. 30 The assets of the cooperative plan are maintained via insurance contracts with Lincoln National Life Insurance Company of Fort Fort Wayne, Indiana and mutual funds with Strong Funds of Milwaukee, Wisconsin. The following table sets forth the plan's funded status at August 31, 1999, 1998 and 1997:
1999 1998 1997 ------------ ------------ ------------ CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 10,125,507 $ 8,638,721 $ 7,096,231 Service cost 581,912 487,480 394,073 Interest cost 793,722 698,420 549,957 Experience (gain)/loss due to participant changes 566,160 572,797 844,471 Benefits paid (210,063) (271,911) (246,011) ------------ ------------ ------------ Benefit obligation at end of year 11,857,238 10,125,507 8,638,721 ------------ ------------ ------------ CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 8,205,618 6,530,368 5,614,503 Actual return on plan assets 698,039 1,283,388 645,048 Employer contribution 859,903 663,773 516,828 Benefits paid (210,063) (271,911) (246,011) ------------ ------------ ------------ Fair value of plan assets at end of year 9,553,497 8,205,618 6,530,368 ------------ ------------ ------------ Funded status (2,303,741) (1,919,889) (2,108,353) Unrecognized net actuarial loss 1,474,612 977,175 1,179,157 Unrecognized prior service cost 409,943 464,816 519,689 Unrecognized transition asset (81,481) (99,747) (118,013) ------------ ------------ ------------ Prepaid (accrued) benefit cost $ (500,667) $ (577,645) $ (527,520) ============ ============ ============ 1999 1998 1997 ------------ ------------ ------------ WEIGHTED-AVERAGE ASSUMPTIONS AS OF AUGUST 31 Discount rate 7.5% 7.5% 8.0% Expected return on plan assets 8.0% 8.0% 8.0% Rate of compensation increase 5.0% 5.0% 5.5%
31 The net periodic pension cost for the years ended August 31, 1999, 1998 and 1997, includes the following components:
1999 1998 1997 ------------ ------------ ------------ COMPONENTS ON NET PERIODIC BENEFIT COST Service cost $ 581,912 $ 487,480 $ 394,073 Interest cost 793,722 698,420 549,957 Expected return on plan assets (667,728) (539,474) (455,534) Amortization of prior service cost 54,873 54,873 54,873 Amortization of transition amount (18,266) (18,266) (18,266) Amortization of other 38,412 30,865 (645) ------------ ------------ ------------ Net periodic benefit cost $ 782,925 $ 713,898 $ 524,458 ============ ============ ============
NOTE 10 - ENVIRONMENTAL MATTERS Minn-Dak is subject to extensive federal and state environmental laws and regulations with respect to water and air quality, solid waste disposal and odor and noise control. Minn-Dak conducts an ongoing and expanding control program designed to meet these environmental laws and regulations. While Minn-Dak will continue to have ongoing environmental compliance issues, currently there are no pending regulatory enforcement actions and Minn-Dak believes that it is in substantial compliance with applicable environmental laws and regulations. Minn-Dak cannot predict whether future changes in environmental laws or regulations might increase the cost of operating its facilities and conducting its business. Any such changes could have financial consequences for Minn-Dak and its members. NOTE 11 - COMMITMENTS AND CONTINGENCIES Minn-Dak is subject to various lawsuits and claims that arise in the ordinary course of its business. While the results of such litigation and claims cannot be predicted with certainty, management believes the disposition of all such proceedings, individually or in aggregate, should not have a material adverse effect on the company's financial position, results of operations or cash flows. Minn-Dak participates in a multi-employer, self-funded employee medical insurance plan with Minn-Dak Yeast Company. The terms of the plan call for the reimbursements to the plan administrator for all claims paid, up to a maximum amount of $30,000 per employee per year and an aggregate maximum of approximately $1,400,000 per year. 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 32 advances on an ongoing basis for operating and marketing expenses incurred. During the years ended August 31, 1999, 1998 and 1997, Minn-Dak had advanced $19,645,387, $20,263,037 and $16,327,321, respectively. Minn-Dak had outstanding advances due from (to) United Sugars of $2,936,798, $1,970,529 and $(279,011), for the years ended August 31, 1999, 1998 and 1997, respectively. In December 1997, United States Sugar Corporation (USSC) became an equity member of United Sugars. United Sugars will market all of the sugar refined by USSC under the same terms as other members. USSC began shipping sugar in September 1998. They are expected to have annual capacity of approximately 10 million hundredweight. Minn-Dak has a one-third ownership interest in Midwest. The amount of the investment is accounted for using the equity method. All beet pulp and a portion of the molasses produced is sold by Midwest as an agent for Minn-Dak. The amount of sales and related costs to be recognized by each owner is allocated based on their pro-rata share of production for the year. The owners provide Midwest with cash advances on an ongoing basis for operating and marketing expenses incurred by Midwest. Minn-Dak advanced Midwest $1,543,175, $1,545,691, and $1,627,978, respectively, during the years ended August 31, 1999, 1998 and 1997. Minn-Dak had outstanding advances due from (to) Midwest of $(492,459), $927,189 and $1,166,651, as of August 31, 1999, 1998 and 1997, respectively. The owners are guarantors of the short-term line of credit Midwest has with the 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, ----------------------- 2000 $ 1,269,000 2001 973,000 2002 876,000 2003 740,000 2004 507,000 Thereafter 558,000 Operating lease and contract expenses for the years ended August 31, 1999, 1998 and 1997, totaled approximately $1,417,000, $1,386,000 and $662,000, 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 33 conditions, risk characteristics of various financial instruments and other factors. Changes in the assumptions could significantly affect the estimates. The company used the following methods and assumptions to estimate fair value of the financial instruments, and the estimated fair values of the company's financial instruments as of August 31, 1999, 1998 and 1997, are as follows: INVESTMENTS - The investment in CoBank, R.S.R. Electric Cooperative, Inc. and all other cooperatives are stated at cost, plus the cooperative's share of allocated patronage and capital credits. The investment in United Sugars Corporation, Midwest Agri-Commodities and ProGold Limited Liability Company are accounted for using the equity method, wherein the investment is recorded at the amount of the underlying equity in the net assets of the investments and adjusted to recognize the cooperative's share of the undistributed earnings or losses. Minn-Dak Farmers Cooperative believes it is not practicable to estimate the fair value without incurring excessive costs because there is no established market for this stock and it is inappropriate to estimate future cash flows which are largely dependent on future patronage earnings of the investment. LONG-TERM DEBT - The fair value of obligations under long-term debt are estimated based on the quoted market prices for the same or similar issues or on the current rates offered for debt of similar maturities. OBLIGATIONS UNDER CAPITAL 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, 1999, 1998, and 1997, the carrying value of obligations under capital leases was $12,000,000 and the estimated fair value was $9,800,000. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 34 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT IDENTIFICATION OF DIRECTORS The table below lists the current directors of Minn-Dak Farmers Cooperative. The Board of Directors consists of one director from each district. Directors must be common shareholders or representatives of common shareholders belonging to the district they represent and are elected by the members of that district. In the case of a common shareholder who is other than a natural person, a duly appointed or elected representative of such common shareholder may serve as a director. The directors have been elected to serve three-year terms expiring in December of the years indicated in the table below. One director is elected each year from three selected districts. Brief biographies for each of the directors and directors-elected are included after the table.
Term Expires Name and Address Age District Director Since in December - ---------------- --- -------- -------------- ----------- Douglas Etten 48 District #8 - Lyngaas 1997 2000 RR #2, Box 65 Foxhome, MN 56543 Michael Hasbargen 54 District #4 - Factory East 1993 1999(1) RR #2, Box 71 Breckenridge, MN 56520 John Hought 58 District #6 - Yaggie 1985 2000 RR #2, Box 9 Foxhome, MN 56543 Victor Krabbenhoft 50 District #9 - Peet 1989 2001 RR #2, Box 45 Glyndon, MN 56547 Jack Lacey 58 District #5 - Hawes 1993 1999(2) RR #1, Box 66 Wendell, MN 56590 Russell Mauch 44 District #2 - Factory West 1998 2001 16305 Hwy 13 Barney, ND 58008 Jerry Meyer 61 District #1 - Tyler 1994 2000 1433 15th Street North Wahpeton, ND 58075
35
Term Expires Name and Address Age District Director Since in December - ---------------- --- -------- -------------- ----------- Edward Moen 73 District #3 - Gorder 1989 2001 17060 County Road 8 Colfax, ND 58018 Paul Summer 57 District #7 - Lehman 1993 1999(3) RR #2, Box 84 Herman, MN 56248
- ---------------- 1) Mr. Hasbargen's term as a director of the Company from District #4-Factory East expires on December 7, 1999. 2) Mr. Lacey's term as a director of the Company from District #5-Hawes expires on December 7, 1999. 3) Mr. Summer's term as director of the Company from District #7-Lehman expires on December 7, 1999. 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 Midwest Agri-Commodities Company. 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. JOHN HOUGHT has been a director since 1985. Mr. Hought has been farming near Foxhome, MN since 1959. He also serves on the board of directors for Minn-Dak Yeast Company and Midwest Agri-Commodities Company. VICTOR KRABBENHOFT has been a director since 1989, currently serves as board chairman, and is a former vice chairman. Mr. Krabbenhoft has been farming near Glyndon, MN since 1971. He also serves on the board of directors for Midwest Agri-Commodities Company, United Sugars Corporation, and Minn-Dak Yeast Company; and is one of Minn-Dak's representatives to the American Sugarbeet Growers Association in Washington, DC. JACK LACEY has been a director since 1993. Mr. Lacey has been farming with his wife, Sharon, near Wendell, MN since 1963. He serves as one of Minn-Dak'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. He then spent 6 months in Hungary on an agricultural exchange program. From 1979 to 1981 Mr. Mauch was a commercial and ag loan officer for First Bank Corporation in Valley City, ND. Mr. Mauch has been farming near Barney, ND since 1981. Mr. Mauch also serves on the board of directors for Minn-Dak Yeast Company. JERRY MEYER has been a director since 1994. Mr. Meyer has been farming near Fairmount, ND since 1958. He also services on the board of directors for Minn-Dak Yeast Company. ED MOEN has been a director since 1989 and is currently serving as board treasurer. Mr. Moen has been farming near Galchutt, ND since 1945. 36 PAUL SUMMER has been a director since 1993 and is currently serving as board secretary. Mr. Summer has been farming near Herman, MN since 1963. He also serves on the board of directors for Midwest Agri-Commodities Company. 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 and chief executive officer, executive vice president and chief financial officer, vice president agriculture, vice president engineering, and vice president operations are elected annually by the Board of Directors to serve on the board. Brief biographies for each of the officers are included after the table. Name Age Position - ---- --- -------- Larry D. Steward 61 President and Chief Executive Officer Steven M. Caspers 49 Executive Vice President and Chief Financial Officer Thomas D. Knudsen 45 Vice President, Agriculture John E. Groneman 63 Vice President, Engineering Richard K. Richter 59 Vice President, Operations Jerald W. Pierson 60 Director of Human Resources Jeffrey L. Carlson 44 Director of Technical Services John S. Nyquist 44 Purchasing Manager Patricia J. Keough-Wilson 59 Director of Communications Kevin R. Shannon 44 Safety Director LARRY D. STEWARD joined Minn-Dak Farmers Cooperative in December 1990 as president and chief executive officer. Mr. Steward serves on the boards of United Sugars Corporation, and Midwest Agri-Commodities. He is chairman of the board of Minn-Dak Yeast Company, Inc. Mr. Steward is a trustee of United States Beet Sugar Association and a director on the board of the National Council of Farmer Cooperatives based in Washington, DC. Prior to joining Minn-Dak, Mr. Steward was midwest sales manager for Harborlite Corporation. From 1963 to 1988 Mr. Steward was employed by Great Western Sugar Company, Denver, Colorado and from 1984 to 1988 he served as its vice president. Mr. Steward holds a degree in chemistry and math from the University of Nebraska, Kearney, Nebraska. STEVEN M. CASPERS is a graduate of the University of North Dakota with a Bachelor of Science in business administration and a major in accounting. He has been employed at Minn-Dak Farmers Cooperative since May 5, 1974. Mr. Caspers is president of Minn-Dak Yeast Company and serves on the boards of directors of Midwest Agri-Commodities, United Sugars Corporation and ProGold, LLC. He also is active in national industry related boards and committees. JOHN E. GRONEMAN is a graduate of Colorado State University with a Bachelor of Science in engineering. He began his experience in the sugar industry in 1960; this includes five years as a factory manager. Mr. Groneman began employment with Minn-Dak Farmers Cooperative on March 1, 1974. 37 THOMAS D. KNUDSEN is a graduate of North Dakota State University with a Bachelor of Science in horticulture and has attended the Beet Sugar Institute at Fort Collins, Colorado. He began employment with the Company on May 24, 1977. RICHARD R. RICHTER has completed both the beet and sugar end coursework of the Beet Sugar Institute of Fort Collins, Colorado. He began his sugar industry experience in 1958 with employment at Minn-Dak Farmers Cooperative beginning in August of 1976. JERALD W. PIERSON is a graduate of Black Hills State University with human resources experience beginning in 1968. He is active in numerous local civic and fraternal organizations including North Dakota Workers Compensation and the North Dakota Job Service Employer Committee. He began his employment with the Company on March 15, 1982. JEFFREY L. CARLSON is a graduate of the University of Minnesota-Morris with a Bachelor of Arts in chemistry and the University of North Dakota with a Ph.D. in physical chemistry. He began his career as a research chemist and an assistant professor in 1986. Mr. Carlson began his employment with Minn-Dak Farmers Cooperative on June 4, 1990. JOHN S. NYQUIST attended the North Dakota State College of Science, majoring in accounting and computer programs. Mr. Nyquist began his purchasing and inventory control experience in 1975 in the Company storeroom. Mr. Nyquist is active in local civic and fraternal organizations and the National Association of Purchasing Managers. Mr. Nyquist began employment with Minn-Dak Farmers Cooperative on September 15, 1975. PATRICIA J. 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 Minn-Dak's tare lab supervisor. 38 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, 1999 and the two prior fiscal years to those persons serving as the Company's Chief Executive Officer and to the other most highly compensated executive officers of the Company whose cash compensation exceeded $100,000 per annum. SUMMARY COMPENSATION TABLE
Name and Other Annual All Other Total Principal Position Year Salary Bonus Compensation Compensation Compensation - ------------------ ---- ------ ----- ------------ ------------ ------------ (1) (2) Larry Steward 1999 $211,178 $ 69,798 $ 20,304 $ 30,944 $332,224 President & CEO 1998 $199,385 $ 58,012 $ 19,709 $ 29,046 $306,152 1997 $192,562 $ 50,500 $ 17,304 $ 19,364 $279,730 Steven Caspers 1999 $125,221 $ 0 $ 14,679 $139,900 EVP & CFO 1998 $120,854 $ 30,000 $ 16,936 $167,790 1997 $116,276 $ 25,500 $ 19,582 $161,358 Thomas Knudsen 1999 $ 91,813 $ 0 $ 6,405 $ 98,218 VP Agriculture 1998 $ 88,779 $ 14,500 $ 15,670 $118,949 1997 $ 86,077 $ 13,500 $ 16,453 $116,030 Richard Richter 1999 $ 91,663 $ 0 $ 4,796 $ 96,459 VP Operations 1998 $ 88,579 $ 14,500 $ 4,648 $107,727 1997 $ 85,210 $ 13,500 $ 4,138 $102,848 John Groneman 1999 $ 86,950 $ 0 $ 4,329 $ 91,279 VP Engineering 1998 $ 84,068 $ 13,500 $ 5,454 $103,022 1997 $ 80,897 $ 12,500 $ 16,989 $110,386
- ---------------------- 1) In addition to the salary and bonus described above, Mr. Steward, Mr. Caspers, Mr. Knudsen, Mr. Richter, and Mr. Groneman are provided with "Other Annual Compensation," which includes the value of the excess life insurance cost, individual LTD plan, sold vacation, and Company match of the 401(k) plan. In fiscal 1996, the company adopted a new policy whereby Supervisory, Professional and Management employees are required on or before their anniversary date in 1999, to attain and maintain their vacation and floating holiday hour combined balance at two hundred and forty (240) hours or less. While not encouraged, the cash optioning of vacation and floating holiday accrued hours is allowable. Employees with account balances in excess of 240 hours may elect to cash option up to fifty percent (50%) of the number of hours exceeding 240. Employees at or below the 240 hour limit may elect to cash option fifty percent (50%) of their combined vacation and floating holiday annually accrued hours. Management employees are eligible for performance bonuses, which are partially based upon on the performance of the Company and partially on achievement of certain management performance objectives. The President and CEO determine those performance objectives for officers and significant other management employees of the Company and by the Board of Directors for the President and CEO. If minimum Company performance is not achieved in any given year (that performance based upon returns to the Company's shareholders), performance bonuses are not paid to employees. The Company has entered into an employment agreement with Mr. Steward, which establishes his salary and benefits as an employee of the Company. The agreement may terminate on sixty days written 39 notice by either party for any reason. Mr. Steward has been employed by the Company for nine years and, therefore, would be affected by the table limits on the qualified benefits table below. 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 Mr. Steward, and non-union employees. As of August 31, 1998 all employees' wages had been adjusted to levels consistent with the Hay Management Consultants findings and recommendations. The Company continues to consult with Hay Management Consultants in order to maintain fair and equitable compensation for its employees. 2) Beginning in fiscal year 1997, supplemental executive retirement plan obligations are being recorded onto the Company's books on behalf of Mr. Steward. The amount obligated for fiscal year 1999 was $30,944. 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. Effective on April 1, 1995, the Company began providing a matching contribution of 25% of each employee's first 4% of compensation that is set aside under the plan. The match increases over time until it reaches 75% of the first 4% in the year 1999. The amounts set aside by each employee and the Company vests immediately and are paid to each employee upon the happening of certain events, all as more fully described in the master plan document. During 1998 and 1999, Federal law limited employee pre-tax income contributions to $10,000 for each participating employee. Benefits under the 401(k) plan begin to be paid to the employee: (i) upon the attainment of normal retirement age (65), or if the employee chooses, any time after attaining early retirement date (age 55); (ii) the date the employee terminates employment with the Company; or (iii) a pre-retirement distribution equal to the value of the employees 401(k) account, provided the employee has attained age 59 1/2 and provided a written consent of the spouse (if married). Effective September 1, 1996 certain executive employees of the Company became eligible to participate in a "Supplemental Executive Retirement Plan." 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. 40 QUALIFIED BENEFITS TABLE The following table reflects the estimated annual benefits payable to a fully-vested executive officer of the Cooperative under the defined benefit retirement plan upon retirement at age 65, after 15, 20, 25, 30, and 35 years of annual service at the compensation levels set forth hereon: Pension Compensation Years of Service 15 20 25 30 35 $125,000 $ 27,521 $ 36,694 $ 45,868 $ 55,041 $ 64,215 $150,000 $ 33,521 $ 44,694 $ 55,868 $ 67,041 $ 78,215 $175,000 $ 35,921 $ 47,894 $ 59,868 $ 71,841 $ 83,815 $200,000 $ 35,921 $ 47,894 $ 59,868 $ 71,841 $ 83,815 $225,000 $ 35,921 $ 47,894 $ 59,868 $ 71,841 $ 83,815 $250,000 $ 35,921 $ 47,894 $ 59,868 $ 71,841 $ 83,815 $275,000 $ 35,921 $ 47,894 $ 59,868 $ 71,841 $ 83,815 $300,000 $ 35,921 $ 47,894 $ 59,868 $ 71,841 $ 83,815 $325,000 $ 35,921 $ 47,894 $ 59,868 $ 71,841 $ 83,815 $350,000 $ 35,921 $ 47,894 $ 59,868 $ 71,841 $ 83,815 $375,000 $ 35,921 $ 47,894 $ 59,868 $ 71,841 $ 83,815 The two executive officers named in the Summary Compensation Table have years of service under the plan as follows: Mr. Steward has served for 9 years; Mr. Caspers has served for 25 years. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table presents certain information with respect to the ownership of shares of preferred stock as of November 18, 1999, 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 18, 1999, 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% John Hought Director 270 less than 1% Victor Krabbenhoft Director 245 less than 1% Jack Lacey (1) Director 250 less than 1% Russell Mauch (2) Director 254 less than 1% Jerry Meyer Director 460 less than 1% Ed Moen Director 180 less than 1% Paul Summer (3) Director 222 less than 1% All Directors 2706 3.75% 41 (1) Mr. Lacey's shares are held and grown under the name of Jack Lacey Company. (2) Mr. Mauch's shares are grown under the name of RCM Limited Partnership. (3) Mr. Summer's shares are grown under the name of P V Unlimited Corp. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Each of the Company's directors is also a sugar beet grower or a shareholder member or representative of a shareholder member. By virtue of their status as such members of the Company, each director or the member he represents sells sugar beets to the Company and receives payments for those sugar beets. Such payments for sugar beets often exceed $60,000. However, such payments are received by the directors, or the entities they represent, on exactly the same basis as payments are received by other members of the Company for the delivery of their sugar beets. Except for the sugar beet sales described in the preceding sentences, none of the directors or executive officers of the Company have engaged in any other transactions with the Company involving amounts in excess of $60,000. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 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, 1999. 42 ITEM 14(c) EXHIBITS Index - ----- ** 3(i) Articles of Amendment to the Articles of Incorporation of Minn-Dak Farmers Cooperative * 3(ii) Articles of Incorporation of Minn-Dak Farmers Cooperative *** 3(iii) Amended Bylaws of Minn-Dak Farmers Cooperative **10(a) Growers' Agreement (three-year Agreement) (example of agreement which each Shareholder is required to sign) ****10(b) Uniform Member Marketing Agreement by and between United Sugars Corporation and Minn-Dak Farmers Cooperative *10(d) Capitalization Agreement by and among Southern Minnesota Beet Sugar Cooperative, Minn-Dak Farmers Cooperative, American Crystal Sugar Company, and United Sugars Corporation *10(e) Memorandum of Understanding and Uniform Member Agreement by and between Midwest Agri-Commodities Company and Minn-Dak Farmers Cooperative *10(f) Molasses Purchase Contract by and between Minn-Dak Farmers Cooperative and Universal Foods Corporation (Confidential Treatment for certain sections) *10(g) Yeast Purchase Contract by and between Universal Foods Corporation and Minn-Dak Yeast Company, Inc. (Confidential Treatment for certain sections) *10(i) Operating Agreement of ProGold Limited Liability Company *10(j) ProGold Limited Liability Company Member Control Agreement *10(k) Agreement for Electrical Service **10(l) Agreements for Coal Supply, Transportation, and Oiling Service (Confidential Treatment Requested as to certain provisions) *10(m) Minn-Dak Farmers Cooperative Pension Plan *10(n) Larry D. Steward Employment Agreement *10(o) Management Consulting Agreement between Minn-Dak Yeast Company and Universal Foods Corporation, (Confidential Treatment for certain sections) ***10(p) Amendment to Minn-Dak Farmers Cooperative Pension Plan 12 Statement re Computation of Ratio of Net Proceeds to Fixed Charges *21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 27 Financial Data Schedule - ---------------------- * Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 33-94644), declared effective September 11, 1995. ** Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996 as filed on November 21, 1996. *** Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997 as filed on November 25, 1997. ****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. 43 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. MINN-DAK FARMERS COOPERATIVE BY /S/ Larry D. Steward ---------------------------------- LARRY D. STEWARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DUTIES INDICATED. SIGNATURE TITLE REPORT DATE --------- ----- ----------- /s/ Larry D. Steward President and 11-29-99 - ------------------------------- Chief Executive Officer ------------- Larry D. Steward /s/ Steven M. Caspers Vice President - Finance 11-29-99 - ------------------------------- ------------- Steven M. Caspers /s/ Allen E. Larson Controller 11-29-99 - ------------------------------- ------------- Allen E. Larson /s/ Victor Krabbenhoft Director 11-29-99 - ------------------------------- ------------- Victor Krabbenhoft /s/ Douglas Etten Director 11-29-99 - ------------------------------- ------------- Douglas Etten /s/ Edward Moen, Jr. Director 11-29-99 - ------------------------------- ------------- Edward Moen, Jr. /s/ Mike Hasbargen Director 11-29-99 - ------------------------------- ------------- Mike Hasbargen /s/ John Hought Director 11-29-99 - ------------------------------- ------------- John Hought /s/ Jack Lacey Director 11-29-99 - ------------------------------- ------------- Jack Lacey /s/ Russell Mauch Director 11-29-99 - ------------------------------- ------------- Russell Mauch /s/ Jerry Meyer Director 11-29-99 - ------------------------------- ------------- Jerry Meyer /s/ Paul Summer Director 11-29-99 - ------------------------------- ------------- Paul Summer 44 EX-12 2 STATEMENT RE: COMPUTATION OF RATIOS EXHIBIT 12 MINN DAK FARMERS COOPERATIVE COMPUTATION OF RATIO OF NET PROCEEDS TO FIXED CHARGES (IN THOUSANDS)
Year Ended August 31, --------------------- 1999 1998 1997 1996 1995 Earnings: Net proceeds before income taxes from continuing operations 63,352 72,084 74,239 56,872 75,422 Fixed charges, excluding capitalized interest, see below 5,264 5,372 4,316 2,898 2,973 Amortization of capitalized interest 94 92 55 18 18 ------ ------ ------ ------ ------ Net Proceeds 68,710 77,548 78,610 59,788 78,413 ====== ====== ====== ====== ====== Fixed Charges: Interest Expense 5,264 5,372 4,316 2,898 2,973 Interest factor included in rentals (1) 0 0 0 0 0 ------ ------ ------ ------ ------ Fixed charges, excluding capitalized interest 5,264 5,372 4,316 2,898 2,973 Interest capitalized 0 199 954 669 0 ------ ------ ------ ------ ------ Fixed Charges 5,264 5,571 5,270 3,567 2,973 ====== ====== ====== ====== ====== Ratio of net proceeds to fixed charges 13.05 13.92 14.92 16.76 26.38 ====== ====== ====== ====== ======
(1) The company does lease certain items, such as office equipment. Due to the proportionately small amounts involved, interest on such lease payments has not been included in the total of the company's fixed charges of the calculation of this ratio. 45 EX-23 3 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated October 5, 1999, with respect to the consolidated financial statements of Minn-Dak Farmers Cooperative for the year ended August 31, 1999, in this Form 10-K (file number 33-94644). November 24, 1999 Eide Bailly LLP Fargo, North Dakota 46 EX-27 4 FINANCIAL DATA SCHEDULE
5 0000948218 MINN-DAK FARMER'S COOP YEAR AUG-31-1999 SEP-01-1998 AUG-31-1999 546,345 0 23,359,606 0 22,997,657 49,229,147 169,628,272 60,441,602 174,296,499 35,825,839 11,270,000 0 18,483,200 118,250 60,792,906 174,296,499 152,741,993 151,862,667 78,243,768 78,243,768 5,002,270 0 5,264,307 720,145 0 720,145 0 0 0 720,145 0 0
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