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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, 1997
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 21, 1997, 483 shares of the Registrant's Common Stock
and 66,967 "units" of the Registrant's Preferred Stock, each consisting of 1
share of Class A Preferred Stock, 1 share of Class B Preferred Stock and 1 share
of Class C Preferred Stock, were outstanding. There is only a limited, private
market for shares of the Company's Common or Preferred Stock, as such shares may
be held only by farmer-producers who are eligible for membership in the Company.
The Company's shares are not listed for trading on any exchange or quotation
system. Although transfers of the Company's shares may occur only with the
consent of the Company's Board of Directors, the Company does not verify
information regarding the transfer price in connection with such transfers. A
number of stock transfers, representing approximately 2% of available stock,
were not arms length (estate settlements, estate planning from one generation to
the next, etc.) and an accurate value for that stock was not available.
Management believes less than 1% of the Company's available stock was traded at
arms length during the fiscal year ended 8-31-97. 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 $2,300 to $2,550 per unit.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits to this Report are incorporated by reference
from the Company's Registration Statement on Form S-1 (File number
33-94644), declared effective on September 11, 1995 and from the
Company's Annual Report on Form 10-K for the fiscal year ended August
31, 1996.
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 483 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, and Southern
Minnesota Beet Sugar Cooperative. 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, 1997.
The Company processes sugar beets grown by its members at its sugar
mill located in Wahpeton, North Dakota. The period during which the Company's
plant is in operation to process sugar beets into sugar and by-products is
referred to as the "campaign." The campaign is expected to begin in September of
each year and continues until the available supply of beets has been depleted,
which generally occurs in March or April of the following year, depending on the
size of the crop. Based on current processing capacity, an average campaign
lasts approximately 210-225 days, assuming normal crop yields.
Once the sugar beets are harvested, rapid processing is important to
maximize sugar extraction and minimize spoilage. Members transport their crop by
truck to receiving stations designated by the Company. Beets are then stored in
the Company's factory yard and at outlying piling stations until processed.
Under the Company's "growers agreement" with its members, the Company furnishes
all loading equipment at loading stations and, after delivery of the beets to
the Company, pays all freight and mileage charges for hauling the sugar beets
from the piling stations to the factory for processing.
Minn-Dak's total sugar production is presently influenced by the amount
and quality of sugar beets grown by its members, by the processing capacity of
the Company's plant and by the ability to store harvested beets. Most of the
beet harvest is stored in piles. Although piled sugar beets that have been
frozen by the winter temperatures may be stored for extended periods; beets
stored in unprotected piles at temperatures above freezing must be processed
within approximately 160 days.
Sugar beets deteriorate in storage due to the organic nature of their
existence. Beets harvested prior to obtaining a root temperature of fifty
degrees or less must be processed within seven days or sugar loss will occur and
they will deteriorate. The plant start up in the fall is timed to the
anticipated end processing in the spring. The plan of the Company is, after
completion of the expenditures for plant expansion described herein (see
MINN-DAK FARMERS COOPERATIVE STOCK SALE AND EXPANSION PLAN, in part I Item 1 of
this section), to finish processing unprotected beets prior to March 10,
ventilated beets prior to March 31, and storage shed beets as soon thereafter as
is possible.
Unprotected beets are "split" by processing the center of the piles
first. This method allows the processing of the center beets, which do not
freeze and therefore deteriorate more rapidly, at the earliest possible date.
Ventilated beets have culverts with air holes running every eleven feet
into the pile. Prior to freezing of the beets, air is blown into the piles to
bring the pile temperature to an average temperature of approximately
thirty-five degrees. 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.
After completing expenditures on storage sheds as part of an expansion
(see MINN DAK FARMERS COOPERATIVE STOCK SALE AND EXPANSION PLAN, in Part 1 Item
1 of this section), storage shed beets will be handled in the same manner as the
ventilated beets. The difference between the processes is the building itself,
which insulates the beets from sun, wind, and warmer spring temperatures. With
the buildings, storage of the beets can run as late as mid to late May of each
year.
In addition, unprotected and ventilated beets will, in long campaigns,
have extra steps taken to extend their life. Beets are sprayed with lime to
create a reflectant and reduce the harmful impact from the sun's rays in the
spring. Straw is also applied to the sides of some later processed piles to
further insulate the beets from sun, wind, and temperature.
Once the sugar beets arrive in the factory, the basic steps in
producing sugar from them include: washing; slicing into thin strips called
"cossettes"; extracting the sugar from the cossettes in a diffuser; purifying
the resulting "raw juice" and boiling it, first in an evaporator to thicken it
and then in vacuum pans to crystallize the sugar; separating the sugar crystals
in a centrifuge; drying the sugar; and storing sugar in bulk form for bulk and
bag shipping.
The Company's sugar beet by-products include beet molasses and beet
pulp. After the extraction of raw juice from the cossettes, the remaining pulp
is dried and processed into and sold as animal feeds. The beet molasses is the
sugar juice left after all economical means have been taken to extract the sugar
from the sugar juice. The beet molasses is sold primarily to yeast and
pharmaceutical manufacturers and for use in animal feeds. The beet molasses and
beet pulp are marketed through Midwest Agri-Commodities Company.
RECENT CROPS
The Company's members harvested 1,721,240 tons of sugar beets from
91,374 acres for the 1997 crop. The crop yield of 18.84 tons per acre for the
1997 crop was slightly above average versus the Company's five year average tons
per acre. Sugar content of the 1997 crop at harvest was 17.94%, as compared to
an average of 17.67% for the five most recent years. The Company's projected
production is 4.65 million hundredweight's of sugar from the 1997 crop sugar
beets, well above the five year average of 3.8 million hundredweight. (A
"hundredweight" is equal to one hundred pounds and is hereinafter abbreviated as
cwt.) This forward-looking material is based on the Company's expectations
regarding the processing of the 1997 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 1996, 1995 and 1994 crops and results of
operations for fiscal years 1997, 1996 and 1995, see "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
MARKET AND COMPETITION
According to United States government estimates, the United States
market for sugar during the year beginning on October 1, 1996 and ending on
September 30, 1997 will total approximately 183 million cwt. of sugar. That
estimate for 1997 suggests the continuation of a trend of growth in the market
in recent years at a compounded rate of approximately 2% per year. For example,
from a market of approximately 165 million cwt. in 1992, the total domestic
market grew to a total of approximately 183 million cwt. in 1997. Latest
government estimates indicate a projected domestic market for sugar of 185
million cwt in 1998, a 1.4% increase from 1997. Historical information indicates
that the domestic market growth from year to year has, at times, been above and
below the average growth rate of 2%. The Company continues to believe that
domestic market growth will average approximately the 2% long-term growth rate
trend because nothing in the marketplace dynamics currently would indicate a
change in domestic market usage long-term. Given the size of the domestic
market, the Company's sugar production and sales represented slightly more than
2.0% of the total domestic market for refined sugar in fiscal 1997.
The growth in the market for refined sugar in the late 1980's and into
the 1990's is a reversal of trends in the 1970's and early 1980's, which
resulted in a reduced market for refined sugar. During the 1970's and early
1980's, high fructose corn syrup was increasingly used as a replacement for
refined sugar in certain food products. (The prime example of this trend was the
use of high fructose corn syrup in beverages such as soft drinks.) In addition,
non-nutritive sweeteners such as aspartame were developed for use in food
products.
While high fructose corn syrup and non-nutritive sweeteners constitute
a large portion of the overall sweetener market, the Company believes that the
market for sugar will continue to grow at a rate similar to recent trends
because of increased use of refined sugar and population growth.
The Company's main competitors in the domestic market are beet sugar
processors including Holly Sugar Corporation (a division of Imperial Holly
Corporation), Western Sugar Company (a subsidiary of Tate & Lyle, Inc.), The
Amalgamated Sugar Company, Michigan Sugar Company (wholly-owned by Savannah
Foods and Industries, Inc.) and Monitor Sugar Company, Inc. The Company's
products also compete with cane sugar refined by Savannah Foods and Industries,
Inc., California and Hawaiian Sugar Company, Imperial Holly Corporation and
Domino Sugar (a subsidiary of Tate & Lyle, Inc.). Because sugar is a fungible
commodity, competition for sales volume is based primarily upon price, customer
service and reliability.
According to United States Department of Agriculture (USDA) statistics,
the Red River Valley is generally one of the most cost efficient sugar beet
producing areas in the nation. As a result, the Company's management believes
that it possesses the ability to compete successfully with other American
producers of sugar. In spite of this competitive advantage, substitute sweetener
products and sugar imports could have an adverse effect on the Company's
operations in the future.
GOVERNMENT PROGRAMS AND REGULATION
Domestic sugar prices are supported under a program administered by the
USDA. The program is called the Federal Agriculture Improvement and Reform Act
of 1996 (the "FAIR Act"). The USDA maintains sugar prices without cost to the
U.S. Treasury by regulating the quantity of sugar imports. The FAIR Act
maintains the basic 18 cent per pound loan rate for raw sugar and puts in place
a 22.90 cent per pound loan rate for refined beet sugar. Both loan rates are
effective for crop years 1996 through 2002. Price support loans are made on a
non-recourse basis provided that United States sugar imports for domestic usage
exceed 1.5 million short tons raw value in a given fiscal (October through
September) year. Loans made on a non-recourse basis enable the sugar processor
to forfeit sugar to Commodity Credit Corporation ("CCC") if sugar prices are
below the loan rate.
If imports during a given year fall below the 1.5 million short tons
raw value, loans must be made on a recourse basis, meaning that processors will
not be able to forfeit sugar to CCC at its full loan value. In order to recover
the full value of a recourse loan, the CCC could require that cash or other
assets be provided in addition to the sugar used as collateral when the loan is
made.
Another new 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 16 cents per pound prior to shipment (to date, very
little sugar has been imported under this higher tariff level). (Note: the
tariff schedule was established at 17 cents on July 1, 1995, 16 cents July 1,
1996 and will reduce by .31 cents each year for years 1997 through 2001, until
it reaches 14.45 cents per pound of sugar). Further, imports of sugar under the
tariff rate quota are based upon the difference between domestic sugar
consumption and domestic sugar production, with one exception. Under the terms
of the General Agreement on Tariffs and Trade (GATT) the minimum imports of
sugar are established at 1,257,000 short tons, raw value. Therefore, even if the
difference between domestic sugar consumption and production are less
than 1,257,000 short tons, raw value, GATT will require that 1,257,000 short
tons be imported into the United States from the quota holding foreign
countries.
The current sugar program will expire after the 2002 crop and the
nature and scope of future legislation and United States trade policy affecting
the sugar market cannot be accurately predicted and there can be no assurance
that price supports will continue in their present form beyond the 2002 crop
year, or that there will even be enacted a sugar program beyond the existing
program. As a result of uncertainty regarding the impact of the absence of price
supports if no sugar program existed, the Company cannot accurately predict if
any changes in legislation or trade policy would have an impact on the Company
and its members, if that impact would be adverse, or the magnitude of such
impact.
Revenue Canada (the Canadian Department of Revenue) initiated an
investigation in March 1995 regarding the trade "dumping" of sugar by foreign
exporters of sugar to Canada. This investigation included inquiries of United
Sugars Corporation and the Company and involved an examination of potential
"unfair" foreign subsidies and the injury that they may have caused to the
Canadian sugar industry. After a lengthy investigation the Department made a
determination that "dumping" did occur by foreign exporters. In November 1995
the Canadian International Trade Tribunal found that there was no injury to the
Canadian sugar industry caused by U.S.-based exporters. But they did determine
that "future" damages could result to members of the Canadian sugar industry,
and that remedial action was appropriate. The outcome of the action was the
imposition of duties on imports of foreign sugar into Canada. Such an outcome
ended the Company's ability to market sugar into Canada. During fiscal year 1997
& 1996, the Company, through United Sugars Corporation, exported no sugar into
Canada, compared to a total of approximately 108,000 cwt. (the Company's share)
of sugar in fiscal year 1995. That 108,000 cwt. quantity of sugar represented
approximately 2.5% of the total 1994 crop sugar produced by the Company. The
Company does not expect to sell sugar into Canada again in the foreseeable
future.
MARKETING, CUSTOMERS AND PRICES
Until December 31, 1993 the Company marketed most of its sugar through
the efforts of North Central Sugar Marketing, a sugar marketing cooperative
jointly owned by the Company and Southern Minnesota Beet Sugar Cooperative.
Since January 1, 1994 United Sugars Corporation, a cooperative owned by the
Company, Southern Minnesota Beet Sugar Cooperative and American Crystal Sugar
Company to market sugar produced by the three cooperatives, have marketed the
Company's sugar.
United Sugars Corporation was formed in late 1993, at which time the
Company contributed certain assets for the capitalization of it. That
contributed capital, along with an obligation to further contribute capital over
time, provided the Company with an initial ownership interest in United Sugars
Corporation of 13.5%. At August 31, 1997 the Company had an ownership interest
in United Sugars Corporation (initial
contributed capital plus additional fixed assets) totaling $1,042,000, which
represented 12.8% of the total.
Upon completion of the incorporation and capitalization of United
Sugars Corporation, the Company entered into a "Uniform Member Marketing
Agreement" with United Sugars Corporation. Under that agreement, the sugar
produced by the Company is pooled with sugar produced by American Crystal Sugar
Company and Southern Minnesota Beet Sugar Cooperative 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. 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, 1997, 94% of the
Company's sugar was shipped in bulk form, mostly to industrial users, and 6% in
bagged powdered sugar. Fiscal year 1996 was the first year that the Company has
shipped other than bulk sugar for United Sugars Corporation, and represents a
consolidated effort by the members of United Sugars Corporation to create the
most efficient method for the production of the different sugar products needed.
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 sugar
prices are less than last fiscal year because (1) the domestic market was
oversupplied with foreign sugar (through USDA's incorrect estimate of domestic
production and consumption) and (2) this year's domestic crop is estimated to be
7% higher than last year's, thus creating even more supply.
On September 15, 1997 United Sugars Corporation entered into a
Transaction Agreement with United States Sugar Corporation ("USSC"), a grower of
sugar cane and other agricultural products, providing for the admission of USSC
as a member of United Sugars Corporation. At the date of this Report, all
documents necessary for closing on the Transaction Agreement have been delivered
into escrow, and a final closing is expected to occur on December 1, 1997. At
such time as USSC formally becomes a member of United Sugars Corporation, United
Sugars Corporation
and USSC will enter into a Uniform Cane Sugar Marketing Agreement, which will
provide that USSC will market all of its refined sugar through United Sugars
Corporation. At such time, existing members of United Sugars Corporation,
including the Company, will be required to enter into amended marketing
agreements reflecting the admission of USSC. With the admission of USSC, United
Sugars Corporation will be able to distribute both cane sugar and beet sugar,
and distribute sugar to customers over a larger geographical area.
A recently executed licensing agreement with Pillsbury Company will
allow United Sugars Corporation to sell sugar nationwide under the "Pillsbury"
name. United Sugars Corporation has indicated that it believes that the
opportunity to distribute sugar nationwide under the Pillsbury name will allow
the expansion of its presence in the consumer portion of the sugar market, with
the goal of expanding the portion of its members' sugar sold in that higher
margin segment of the sugar market. During fiscal year 1997, United Sugars
Corporation initiated the sales plan for Pillsbury brand sugar to select
geographical locations.
The Company markets 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. Beet pulp
is marketed to livestock feed mixers and livestock feeders in the United States
and foreign markets. For the year ended August 31, 1997, approximately 43% of
the Company's pulp production was exported to Japan, approximately 30% was
exported to Europe and the remaining 27% was sold domestically. The market for
beet pulp is affected by the availability and quality of competitive feedstuffs.
Beet molasses is marketed primarily to yeast manufacturers, pharmaceutical
houses, livestock feed mixers and livestock feeders. By-product sales accounted
for approximately 10% of the Company's total consolidated net sales revenues
during fiscal 1997. 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, hold the remaining
twenty percent equity stake. Minn-Dak Yeast Company, Inc. also has a long-term
marketing agreement whereby Universal Foods Corporation will buy production of
baker's yeast produced by Minn-Dak Yeast Company, Inc. in return for certain
guaranteed sales volumes.
MINN-DAK FARMERS COOPERATIVE STOCK SALE AND EXPANSION PLANS
The strategic plan of the Company calls for an expansion of its
processing capacity as well as its length of operating season. This strategic
plan was undertaken in order to increase its chances of continuing to be a
long-term viable, profitable business for its shareholders. Expansion of the
processing capabilities of the plant will bring about certain economies of
scale. The Company currently believes that the expansion program will provide
the Company with certain processing efficiencies and resulting financial
benefits. However, the Company cannot say with certainty that the Company's
financial performance following the expansion will exceed the Company's
historical performance. The Company's beliefs with regard to the benefits of the
expansion plan are based on the Company's expectations regarding the increased
processing efficiencies which the Company hopes to obtain; the actual production
results, processing efficiencies and resulting financial performance obtained as
a result of the expansion program may differ materially from the Company's
current estimates as a result of factors such as changes in the costs of
production, differences in the price obtained upon sales of the Company's
products, changes in the regulatory and market environment in which the Company
operates and a variety of other factors beyond the Company's control.
The Company's original plans were to expend approximately $87 million
over a three year period beginning with the fiscal year ended August 31, 1996
for improvements and additions to its facilities. Estimated capital expenditures
for factory improvements were $32 million, beet receiving and beet storage
capital expenditures were $40 million and environmental improvement capital
expenditures were $15 million. At August 31, 1997, two years after the start of
the Company's strategic expansion plan, $56 million of capital has been expended
toward the completion of the expanded facilities.
$37.4 million will be raised through the sale of the Units subscribed
and sold via the Company's 1995 stock offering. The funds generated from the
stock offering have been and will continue to be used to assist in paying for
the costs associated with expansion. The units of stock sold by the Company will
be paid for by shareholder subscribers over a three year period beginning in
January 1996. The stock offering provides for payment of 32 percent of the value
of the stock purchased, or $12.1 million in January 1996; 43 percent, or $15.6
million in January 1997; and the balance of 26 percent, or $9.7 million in
January 1998. The Company has received all of the 1996 and 1997 annual
installments from its shareholder subscribers.
Those costs not covered through the stock offering will be primarily
funded through a long term debt agreement with the St. Paul Bank for
Cooperatives (a cooperative lending institution who is the Company's traditional
long term debt lender) who is providing the construction financing and is the
principal lender.
In addition to the funding provided by the St. Paul Bank for
Cooperatives, in fiscal year 1996 the Company was able to secure
additional funding for the expansion project through a lease from Richland
County. Funding was through low interest, fifteen year tax exempt solid waste
disposal bonds in the amount of $12.0 million. The bonds were structured with
zero principle amortization for the first three years and $1.0 million per year
of principle amortization for the next 12 years. These bonds were required to be
secured by a Letter of Credit from a non-government agency bank (Norwest Bank
North Dakota) who in turn was secured by a Letter of Credit from the St. Paul
Bank for Cooperatives, the Company's primary lender. Solid waste disposal bonds
are available under certain conditions where a by-product of manufacturing must
be further manufactured or refined to produce a salable product and/or reduce
the amount of solid waste produced by a manufacturing plant. In the Company's
primary case, the funds were used to fund further manufacturing of a by-product
to produce a salable product.
The long-term debt created by this expansion will be repaid with funds
generated through depreciation, income tax savings, and reduced costs per cwt of
production. (Depreciation expense is a non-cash expense that under the Company's
accounting procedures reduces the amounts available for payments to the
Company's members. The resources represented by such non-cash expenses are
available as a source of working capital for the Company, which may be used for
payment of long-term debt.)
As of August 31, 1997 $56 million of the projected $87 million had been
spent to expand the Company's facilities. Major capital jobs that have been
completed include, for the agricultural side of the business, three beet storage
buildings and two beet pilers for the factory yards location; expansion of three
additional remote beet piling sites including additional beet pilers; new
roadways and weigh scales for the factory yards location; and a new beet quality
and tare analysis lab. Major capital jobs that have been completed for the
factory side of the business include a new beet slicer station, new beet
cossette mixer, new continuous high raw pan, additional pulp presses, new beet
wash house system, new diffusion tower, new heaters, new pulp dryer
environmental control system, additional thick juice storage tanks, new standard
liquor filters, new finished product storage tanks for beet molasses and beet
pulp, new evaporators, new granulator, additional waste water treatment systems
and a new water storage pond.
For fiscal year 1998, the final year of the three year plan to expand
the facilities, additional capital jobs to be completed are located in the
factory and include a new mud filter system, a new sugar juice pre-treatment
system, changes to the sugar juice carbonation station, modification of
granulated sugar pans and the purchase of a number of large juice pumps and pump
drives. While actual individual capital expenditures within the plan can and
have cost more or less than the budgeted individual components of the original
plan, that is not unusual for a large undertaking of this magnitude. The
expansion plan as of August 31, 1997 was on schedule, still within budget and
processing capacity goals are being achieved.
JOINT VENTURE WITH PROGOLD LIMITED LIABILITY COMPANY
Minn-Dak is a five percent (5%) equity owner in ProGold Limited
Liability Company ("ProGold"). ProGold was formed in 1994 by three entities for
the purpose of building a plant to produce from corn and market high fructose
corn syrup; and to produce and market corn gluten feed, corn gluten meal and
corn germ, all co-products produced by the plant. The other two equity owners
are American Crystal Sugar Company, Moorhead, Minnesota (46% ownership share)
and Golden Growers Cooperative, Fargo, North Dakota (49% ownership share).
American Crystal Sugar Company is a cooperative that produces sugar from sugar
beets and has approximately 2,300 stockholder-growers that grow sugar beets on
approximately 460,000 acres of land. Golden Growers Cooperative is a cooperative
of corn growers that was formed in 1994 by approximately 2,000
shareholder-farmers (located in the three state area of North and South Dakota
and Minnesota). The Company has contributed approximately $5.2 million in
exchange for its 5% ownership position, American Crystal Sugar Company has
contributed approximately $48.0 million for its 46% ownership share and Golden
Growers Cooperative $51.0 million for its 49% ownership share.
ProGold's plant became fully operational in late 1996 and has obtained
certification to ship finished product from its significant customers. The
products produced through operation of the corn wet-milling facility are being
sold through the efforts of United Sugars Corporation and Midwest
Agri-Commodities Company.
Because of unexpected market conditions, ProGold the business, as it
was structured as of August 31, 1997, is expected to suffer significant losses
for several years. To the extent that ProGold's operations would not result in a
profit, the Company would receive distributions from ProGold in an amount less
than the Company's cost to acquire corn delivered to ProGold for processing (the
Company, as part owner of ProGold, has a contractual obligation to deliver its
proportionate share of corn to ProGold's plant). To the extent that the
Company's reserves and working capital would not be able to satisfy the
Company's proportionate share of ProGold's expected losses, the Company would be
required to withhold appropriate amounts from member beet payments or borrow
long-term debt.
However, because of the continued expectation of significant losses for
several years for ProGold, on September 30, 1997 ProGold entered into a letter
of intent with Cargill, Inc. ("Cargill") for Cargill to lease ProGold's corn
wet-milling plant. On November 1, 1997 ProGold signed a 10 year lease agreement
with Cargill, which expires on October 31, 2007, to lease ProGold's corn
wet-milling plant. Under the lease arrangement, the Company and the other
ProGold members would retain ownership of the plant, while Cargill will operate
the plant and sell the finished products. ProGold will receive rental payments
in a base amount fixed for each year during the term of the lease. ProGold would
also receive supplemental rent equal to fifty percent (50%) of the amount by
which earnings before taxes from operations of the facility exceeds a specified
base. Cargill will also enter into a corn supply agreement with ProGold,
pursuant to which ProGold will be obligated to deliver approximately 15 million
bushels of corn per fiscal year. The Company's obligation to deliver corn to
ProGold will be terminated as part of the transactions. Cargill will pay ProGold
a market price for any corn delivered to Cargill under the corn supply
agreement.
The arrangement between ProGold and Cargill also specifies a variety of
alternatives that may take effect upon expiration of the initial lease. These
alternatives include agreeing to enter into another long term lease upon
mutually agreeable terms and conditions, or ProGold could offer to sell to
Cargill, at fair market value, a fifty percent (50%) or one hundred percent 100%
ownership interest in ProGold.
As the terms of the lease with Cargill are to provide ProGold, as an
entity, with (i) rental payments of a fixed amount, with the opportunity to
receive supplemental rental payments in the event that the ProGold facility is
operated profitably and (ii) payment for corn delivered by ProGold for
processing at the facility at market prices, the lease arrangement is expected
to provide protection from the exposure of risks of participation in the corn
sweetener market, including the risk of future, material financial losses by
ProGold and the necessity of additional capital investment from the Company to
cover such future losses.
GROWERS' AGREEMENTS
The Company purchases virtually all of its sugar beets from members
under contract with the Company. All members have three-year contracts with the
Company covering the growing seasons of 1997 through 1999 (the "Growers'
Agreements"). At the end of each year, the Growers Agreement automatically
extends for an additional year, so that such agreements always have a remaining
term of three years, unless notice of termination has been given by the Company
prior to the automatic renewal. In that situation, the agreement will not renew,
but will continue in effect for the two year period then remaining under the
agreement. Each Unit of Preferred Stock currently entitles a member to grow 1.35
acres of sugar beets for sale to the Company. The Company's Board of Directors
has the discretion to adjust the acreage, which may be planted for each Unit of
Preferred Stock held by the members. For the 1997 crop year the Company's Board
of Directors authorized members to plant 1.35 acres per unit.
Under the terms of the Growers Agreement, each member receives payment
for his or her sugar beets based on a price per pound of extractable sugar. The
price per pound of extractable sugar is determined by dividing the total grower
distribution of net proceeds (less the amount credited to members investment
from member patronage and credited to retained earnings from non-member
patronage) by the total of members' pounds of extractable sugar. Extractable
pounds of sugar are obtained by the processing of beet samples taken from
members' sugar beets during harvest. Each member's grower payment is obtained by
multiplying that
member's total pounds of extractable sugar times the price per pound of
extractable sugar as determined above.
Under the Growers Agreement, each member receives an initial
installment of the payment for his or her sugar beets on or about November 15,
soon after delivery of his or her crop to the Company. That initial installment
is subject to adjustment by the Cooperative's Board of Directors and management,
but will not exceed 65% of the estimated price per pound of extractable sugar. A
second installment is paid in early February; that installment, in combination
with the first installment, will not exceed 70% of the estimated price per pound
of extractable sugar. A third installment is paid in early April, with the
aggregate of all installments paid to that date not to exceed 80% of the
estimated price per pound of extractable sugar. A fourth installment payment is
paid in early July, with the total of installment payments to that date not to
exceed 95% of the estimated price per pound of extractable sugar. The final
payment is determined after the end of the Company's fiscal year, ending on
August 31, and is in an amount necessary to bring the total of all payments to
the price to be paid per pound of extractable sugar to all growers during the
applicable fiscal year. In addition, the Company's annual patronage net income,
which is equal to the Company's sales less all expenditures and member beet
payments, is distributed to the members on the basis of the pounds of
extractable sugar obtained from each of the members' sugar beets; such amounts
are distributed in either cash payments or in the form of patronage credits to
the member's patronage credit account on the books of the Company.
COMPANY DISTRICTS
The Company's by-laws provide that the Company's members are to be
divided into districts for the purposes of voting and the election of members of
the Board of Directors. Those districts do not have specific geographic
boundaries but, instead, contain a loosely defined area representing the area
served by a particular piling station to which members deliver their sugar beets
for storage until the sugar beets are to be processed. When a member joins the
Company, he or she is assigned to a particular district based upon criteria
including (i) the physical location of the shareholder's sugar beet growing
acres relative to a piling site and (ii) if the previous criteria do not clearly
indicate the district to which the shareholder should be assigned, 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.)
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, 1997, the Company
contributed approximately $53,000 to the North Dakota/Minnesota Research and
Education Board to fund that entity's research and development activities.
$11,000 was given to the Beet Sugar Development Foundation in connection with
their research activities, and $40,000 to the Sugar Association for their
research activities and membership dues.
The Company also has established a sugar beet seed committee, which
reviews the performance of new and existing sugar beet seed varieties. The
committee then advises the Board of Directors with regard to those sugar beet
seed varieties that should be approved for use by the Company's shareholders.
ENVIRONMENTAL MATTERS
The Company is subject to many federal, state and local regulations
that govern air and water emissions, and solid and hazardous waste storage and
disposal. Currently, the Company is
meeting all its obligations in water, solid waste and hazardous waste. On March
31, 1997 the Company received a NOTICE OF VIOLATION (NOV) Administrative No.
97-677 APC N.D.C.C 23-25 from William J. Delmore, Assistant Attorney General for
the State of North Dakota. The NOV outlined permit violations from three
emission sources: the pulp dryer, the main boilers and the sugar dryer-cooler.
To resolve the violations, the North Dakota Department of Health and the Company
entered into a consent agreement in which the Company agreed to pay a $125,000
civil penalty for the violations. However, the agreement also specified that if
the Company took certain actions before specified dates up to $125,000 of the
penalty would be dismissed.
There are six separate actions outlined in the consent agreement that
the Company must undertake in order to resolve the violations outlined in the
NOV. As of this writing, the Company has met its obligation in four of the
actions, which should result in a reduction in the civil penalty of $85,000.
Because the Company is not in compliance with the consent agreement
with respect to its dryer emissions, it will have to pay the civil penalty
specified in the consent agreement with the State of North Dakota, plus it faces
the possibility of further penalties of up to $25,000 per day for every day the
dryer is operated out of compliance. The Company will conduct tests and study
the pulp-dryer equipment to determine what changes are necessary to operate
within compliance of the permit. The present strategy for dryer operations is to
operate the pulp dryer at a reduced total throughput until further testing. If
the recently installed diffusion and pulp-pressing equipment performs up to
design specifications, the pulp presses will remove additional water from the
pulp. This, in turn, will result in fewer tons of water to the pulp dryer so the
Company will be able to operate it at a reduced rate, but still dry all of the
pulp. If the equipment does not perform up to specifications, the Company will
have to sell or dispose of a portion of its pulp.
To maintain compliance with the boiler, the Company must obtain a
supply of low-sodium coal. At this time there is insufficient data to project
the cost to the Company to make that switch. The Company may face further
noncompliance fines for burning higher-sodium coal until a low-sodium-coal
source can be located.
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, 1997, the Company had 234 full-time employees, of whom
206 were hourly and 28 were salaried. It also employs approximately 295
additional hourly seasonal workers during the sugar beet harvest and
processing campaign. In January 1995 the Company concluded the negotiations for
a collective bargaining agreement with the American Federation of Grain Millers
(AFL/CIO) union for its factory employee group. The written contract is in
effect from January 23, 1995 through May of the year 2000. Office, clerical,
management and harvest employees are not unionized. Full time employees are
provided with health and dental insurance, a defined benefit pension or
retirement plan, a 401(k) retirement savings plan, a short and long-term
disability plan, term life insurance, and vacation and holiday pay plans.
Seasonal workers are provided some of the above employee benefits. The Company
considers its employee relations to be excellent.
ITEM 2. PROPERTIES
The Company operates a single sugarbeet processing factory at Wahpeton,
North Dakota that is located in the Red River Valley. The Company owns the
factory, receiving sites, and the land on which they are located. The 1994 crop
set new records for average daily slice rate (6,967 of beets tons per day),
total tons sliced (1,535,961 tons), and sugar production (4,400,000 cwt.). With
the planned expansion (as more fully explained in Item 1 under the heading
entitled MINN-DAK FARMERS COOPERATIVE STOCK SALE AND EXPANSION PLANS, the plant
is projected to have the minimum capacity to slice 7,500 tons per day and the
$15,200,000 spent on special ventilated storage and beet storage buildings
should extend the number of days the factory is able to process beets.
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 1997, 23.1 million pounds of yeast were
produced.
ITEM 3. LEGAL PROCEEDINGS
From time to time and in the ordinary course of its business, the
Company is named as a defendant in legal proceedings related to various issues,
including worker's compensation claims, tort claims and contractual disputes.
Other than as provided herein, the Company is not currently involved in legal
proceedings which have arisen in the ordinary course of its business and the
Company is also unaware of certain other potential claims which could result in
the commencement of legal proceedings. The Company carries insurance that
provides protection against certain types of claims.
The Company is subject to extensive federal and state environmental
laws and regulations with respect to water and air quality, solid waste disposal
and odor and noise control. The Company conducts an ongoing and expanding
control program designed to meet these environmental laws and regulations.
Except as disclosed under "ENVIRONMENTAL MATTERS" above, there currently are no
pending regulatory enforcement actions and the
Company believes that it is in substantial compliance with applicable
environmental laws and regulations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders
during the quarter ended August 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is only a limited, private market for shares of the Company's
Common or Preferred Stock, as such shares may be held only by farmer-producers
who are eligible for membership in the Company. The Company's shares are not
listed for trading on any exchange or quotation system. Although transfers of
the Company's shares may occur only with the consent of the Company's Board of
Directors, the Company does not verify information regarding the transfer price
in connection with such transfers. A number of stock transfers, representing
approximately 2% of available stock, were not arms length (estate settlements,
estate planning from one generation to the next, etc.) and an accurate value for
that stock was not available. Management believes less than 1% of the Company's
available stock was traded at arms length during the fiscal year ended August
31, 1997. 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 $2,300 to $2,550 per unit.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data for each of the
last five completed fiscal years. The selected financial data of the Company
should be read in conjunction with the financial statements and related notes
included elsewhere in this Report.
Fiscal Year Ended August 31,(1)
FINANCIAL DATA
(Numbers in Thousands) 1997 1996 1995 1994 1993
Revenues $139,730 $114,335 $133,302 $81,422 $119,416
Net Proceeds Before Accounting Change 74,239 56,872 75,422 33,643 70,609
Cumulative Effect of Accounting Change(1) 0 0 0 1,350 0
Net Proceeds(2) 74,239 56,872 75,422 34,993 70,609
Total Assets 174,386 138,270 99,991 74,771 82,954
Long-term Debt, including current maturities,
Net of bond investments, 1997 & 1996 58,252 55,809 28,269 17,096 17,911
Members' Investment(3) 73,646 57,324 43,992 44,153 41,804
Property and Equipment Additions, net of
Retirements 24,547 34,457 9,202 2,041 5,811
Working Capital 10,163 11,845 9,295 8,034 7,362
Ratio of Long-Term Debt to Members'
Investment(4) .76 .93 .59 0.33 0.40
Ratio of Net Proceeds to Fixed Charges(5) 14.92 16.76 26.38 22.62 45.48
PRODUCTION DATA(6)
Acres harvested 82,575 74,915 75,878 67,086 65,888
Tons purchased 1,506,646 1,458,918 1,636,094 834,545 1,350,659
Tons purchased per acre harvested 18.25 19.47 21.56 12.44 20.50
Net beet payment paid to member per ton of
sugar beets delivered, plus allocated
patronage and unit retains(7) 49.97 38.34 46.41 40.17 52.00
Sugar hundredweight
Produced 4,168,620 3,363,250 4,384,485 2,499,307 4,000,566
Sold, including purchased sugar 3,794,313 3,841,443 3,988,284 3,027,614 3,351,156
Pulp tons
Produced 76,307 77,352 92,139 50,536 80,884
Sold 82,705 74,743 93,284 49,212 78,709
Molasses tons
Produced 64,377 61,194 62,516 37,170 51,153
Sold 45,182 43,882 46,768 14,821 31,956
Yeast pounds (in thousands)
Produced 23,127 25,556 17,511 21,853 22,064
Sold 23,193 25,495 17,436 21,853 22,064
(1) On September 1, 1993, the Company adopted Statement of Financial Accounting
Standards Statement #109 (SFAS 109), "Accounting for Income Taxes". The
cumulative effect of application of the new standard resulted in a benefit
from income taxes. See Note 6 to the financial statements for a more
detailed description of the accounting change.
(2) Net Proceeds are the Company's gross revenues, less the costs and expenses
of producing, purchasing and marketing sugar, sugar by-products, yeast,
dietary fiber and resale commodities, but before payments to members for
sugar beets. (For a more complete description of the calculation of Net
Proceeds, see "Description of Business-Growers' Contracts".)
(3) Members' investment includes preferred and common stock, unit retention
capital, allocated patronage and retained earnings (deficit).
(4) Calculated by dividing the Company's long-term debt, exclusive of the
current maturities of such debt, by members' investments.
(5) Computed by dividing (i) the sum of Net Proceeds plus fixed charges, plus
amortization of capitalized interest by (ii) the sum of interest expense
and interest capitalized. The Company does lease certain items, such as
some office equipment. Due to the proportionately small amounts involved,
an interest factor on lease payments has not been included in the total of
the Company's fixed charges or the calculation of this ratio.
(6) Information for a fiscal year relates to the crop planted and harvested in
the preceding calendar year (e.g., information for the fiscal year ended
August 31, 1996, relates to the 1995 crop).
(7) Reflects the total amount paid in cash and allocated to individual grower
equity accounts for each ton of beets delivered.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
financial statements and notes included elsewhere in this Report. This
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual future results may differ materially from
those anticipated in the forward-looking statements contained in this section;
such differences could arise as a result of a variety of factors including, but
not limited to, the market and regulatory factors described elsewhere in this
Report.
LIQUIDITY AND CAPITAL RESOURCES
Because the Company operates as a cooperative, payments for
member-delivered sugar beets, the principal raw material used in producing the
sugar and agri-products it sells, are subordinated to all member business
expenses. In addition, actual cash payments to members are spread over a period
of approximately one year following delivery of sugar beet crops to the Company
and are net of unit retains and patronage allocated to them, all three of which
remain available to meet the Company's capital requirements. This member
financing arrangement may result in an additional source of liquidity and
reduced outside financing requirements in comparison to a similar business
operated on a non-cooperative basis. However, because sugar is sold throughout
the year (while sugar beets are processed primarily between September and April)
and because substantial amounts of equipment are required for its operations,
the Company has utilized substantial outside financing on both a seasonal and
long-term basis to fund such operations. The majority of such financing has been
provided by the St. Paul Bank for Cooperatives (the "Bank"). The Company has a
short-term line of credit with the Bank in 1997 of $50,000,000.
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 $6.75 million; maintain a current ratio of not less than 1.2:1.0;
obtain prior consent from the bank to pay cash patronage dividends in excess of
35% of qualified patronage income as required by the Internal Revenue Service to
qualify the entire patronage dividend as an income tax deduction. As of August
31, 1997, the Company was in compliance with its loan agreements.
Working capital decreased $1.7 million for fiscal year 1997. This
decrease was the result of the difference between the 1996 excess working
capital, amount of estimated long term debt borrowing anticipated to be needed
to cover projected year end capital project demands on working capital and the
amount that was actually needed. The targeted working capital position was
approximately $7.0 million. Management's estimated working capital target for
August 31, 1998 will again approximate $7.0 million.
Capital expenditures for fiscal year 1995 were $12.1 million, fiscal
year 1996 was $34.6 million, and fiscal year 1997 was $26.0 million. Capital
expenditures for fiscal year 1998 are currently estimated at $15.2 million,
$13.2 million resulting from the Company's strategy of expanding capacity and
improving operating efficiencies.
The Company anticipates that the funds necessary for compliance with
the Bank's working capital requirements and future capital expenditures will be
derived from the net proceeds of a stock offering that was completed in 1996,
Company depreciation, unit retains, non-patronage income, and long-term
borrowing. Those costs not covered through the stock offering will be funded
through a long-term debt agreement, with the Bank who is the principal lender.
The long-term debt created by this expansion will be repaid with funds generated
through depreciation, income tax savings, and reduced costs per cwt of
production. (Depreciation expense is a non-cash expense that under the Company's
accounting procedures reduces the amounts available for payments to the
Company's members. The resources represented by such non-cash expenses are
available as a source of working capital for the Company, which may be used for
payment of long-term debt.) The strategic plan of the Company calls for the
economies of scale generated by the expansion project to first be applied to the
long-term debt associated with the project. The initial operational savings and
working capital considerations will be used to pay off the incremental debt for
the project. After the incremental long-term debt has been satisfied, the
Company believes that the shareholders will see the savings through operations
and other working capital considerations being reflected in higher per ton beet
payments, all other factors affecting the per ton payments being equal. As
discussed elsewhere in this report, the Company currently believes that the
expansion program will provide the Company with certain processing efficiencies
and resulting financial benefits. However, the Company cannot say with certainty
that the Company's financial performance following the expansion will exceed the
Company's historical performance. The Company's beliefs with regard to the
benefits of the expansion plan are based on the Company's expectations regarding
the increased processing efficiencies which the Company hopes to obtain; the
actual production results, processing efficiencies and resulting financial
performance obtained as a result of factors such as changes in the costs of
production, differences in the price obtained upon sales of the Company's
products, changes in the regulatory and market environment in which the Company
operates and a variety of other factors beyond the Company's control.
In fiscal 1996, the Company was able to secure a lease from Richland
County, North Dakota funded by low interest, fifteen year tax exempt solid waste
disposal bonds in the amount of $12.0 million with zero principal amortization
for the first three years and $1.0 million per year of principal amortization
for the next 12 years. These bonds were required to be secured by a Letter of
Credit from a non-government agency bank (Norwest Bank North Dakota) who in turn
was secured by a Letter of Credit from the St. Paul Bank for Cooperatives, the
Company's primary lender. Solid waste disposal bonds are available under certain
conditions where a by-product of manufacturing must be further manufactured or
refined to produce a salable product and/or reduce the amount of solid waste
produced by a manufacturing plant. In the Company's primary case, the funds were
used to fund further manufacturing of a by-product to produce a salable product.
(See Part 1, Item 1 "MINN-DAK FARMERS COOPERATIVE STOCK SALE AND EXPANSION
PLANS".)
COMPARISON OF THE YEARS ENDED AUGUST 31, 1997, AND 1996
Revenue for the year ended August 31, 1997 increased 22% or $25.4
million from 1996. Revenue from total sugar sales increased 4.2% reflecting a
5.8% increase in the average selling price per cwt and a 1.6% decrease in cwt.
sold. Revenue from pulp sales decreased 2.8% reflecting an increase of 10.7% in
volume and 12.2% decrease in the average selling price per ton. Revenue from
molasses sales increased 4.3% reflecting a 3.0% increase in volume and an
increase of 1.3% in the average selling price per ton.
Revenues from yeast sales decreased 7.6% reflecting a decrease in
volume of 9.0% and an increase of 1.6% in the average selling price per pound.
Finished product inventories increased $13.8 million in 1997 primarily due
higher volumes of ending sugar inventory.
Cost of product sold, exclusive of payments for sugar beets, increased
$2.6 million. The increase is primarily due to the increased non-allocated costs
such as plant depreciation, taxes and insurance. Sales and Distribution costs
increased $1.9 million. General and Administrative expenses increased $0.4
million. Interest expense increased $1.4 million.
Non-member business income decreased $2.0 million in fiscal year 1997.
This decrease was primarily due to the recording of losses generated from the
Company's investment in ProGold, and to decreased net income from the Minn-Dak
Yeast Company, Inc. subsidiary operations.
Net payments to members for sugar beets increased by $17.0 million in
1997. This increase was primarily due to a higher volume and higher quality of
the beets delivered by members in 1997 versus 1996, and because of higher
selling prices for sugar.
COMPARISON OF THE YEARS ENDED AUGUST 31, 1996, AND 1995
Revenue for the year ended August 31, 1996 decreased $18.9 million from
1995. Revenue from total sugar sales decreased 0.8% reflecting a 2.5% increase
in the average selling price per cwt and a 3.3% decrease in cwt. sold. Revenue
from pulp sales decreased 10.5% reflecting a reduction of 19.9% in volume and
11.7% increase in the average selling price per ton. Revenue from molasses sales
decreased 3.9% reflecting a 6.2% decrease in volume and an increase of 2.4% in
the average selling price per pound. The decrease in volumes for sugar, pulp and
molasses was primarily due to the lower quality (sugar and purity) of the beets
delivered and quantity (tons) delivered for 1996.
Revenues from yeast sales increased 26.2% reflecting an increase in
volume of 46.2% and a decrease of 4.8% in the average selling price per pound.
Finished product inventories decreased $7.9 million in 1996 primarily due to the
1995 fiscal year crop having domestic marketing quota's imposed on it and having
that excess quota sugar sold during the 1996 fiscal year.
Cost of product sold, exclusive of payments for sugar beets, increased
$.6 million. Sales and Distribution costs increased $.7 million. General and
Administrative expenses decreased $.2 million. Interest expense increased $.1
million.
Non-member business income increased $1.4 million in fiscal year 1996.
This increase was primarily due to increased net income from the Minn-Dak Yeast
Company subsidiary operations. Minn-Dak Yeast Company, Inc. had encountered
difficult operating conditions in fiscal year 1995 due to sterilization problems
that plagued plant operations for most of the year. That resulted in reduced
throughput, higher operating costs and reduced income. By fiscal year end 1995
the problem had been solved and production volumes were back to normal and unit
costs were down.
This resulted in more normal net income levels for fiscal year 1996.
During the fiscal year ended August 31, 1995, the Company recognized a
loss on disposition of fiber assets of $.9 million. The Company had been
involved in a value-added project where dietary fiber for human consumption
under the trade name of Fibrex would be produced from its beet pulp by-product.
After building a production facility and marketing the product for a number of
years, sufficient sales volume at reasonable prices did not appear obtainable.
One of the major marketing considerations was the inability to get GRAS status
from the FDA. In fiscal year 1995 the Company elected to discontinue with its
attempts to obtain GRAS status and took the necessary steps to discontinue
operations and redirect the use of the assets.
Net payments to members for sugar beets decreased by $20.0 million in
1996. This decrease was primarily due to the lower quality (sugar and purity) of
the beets delivered and quantity (tons) delivered for 1996.
ESTIMATED FISCAL YEAR 1998 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
1997 sugar beet crop. Given the nature of the estimates required in connection
with the payments to members for their sugar beets, this discussion includes
forward-looking statements regarding the quantity of sugar to be produced from
the 1997 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 1997
produced a total of 1,721,240 tons of sugar beets. The sugar content on the 1997
crop is 17.94%. The Company expects to produce a total of approximately
4,651,500 hundredweight of sugar from the 1997 sugar beet crop.
Based on marketing information developed by United Sugars Corporation,
the Company's current estimate is that the average net selling price of the
Company's sugar will be approximately $23.50 per hundredweight.
From the revenues generated from the sale of products produced from
each ton of sugar beets must be deducted the Company's operating and fixed
costs, which are currently estimated to be $26.61 per ton. The deduction of
those operating costs results in an estimated gross beet payment of $41.68 per
ton of sugar beets.
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, 1997, 1996, and 1995,
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, 1997, 1996, and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1997, 1996, AND 1995
1997 1996 1995
------------ ------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 1,234,541 $ 853,102 $ 287,007
------------ ------------ ------------
Current portion of long-term note receivable 216,475
------------
Receivables:
Trade accounts 12,648,938 10,293,751 11,164,406
Growers 2,818,976 2,840,447 2,250,380
Income tax receivable 244,614
------------ ------------ ------------
15,712,528 13,134,198 13,414,786
------------ ------------ ------------
Advances to affiliate 1,909,616 780,442 731,196
------------ ------------ ------------
Inventories:
Refined sugar, pulp and molasses to be sold
on a pooled basis 21,576,181 7,748,715 15,660,336
Nonmember refined sugar 112,301 468,322 109,613
Yeast 88,711 108,704 91,297
Materials and supplies 4,698,784 4,026,951 4,108,359
Other 81,630 97,626 108,014
------------ ------------ ------------
26,557,607 12,450,318 20,077,619
------------ ------------ ------------
Deferred charges 1,249,154 1,119,274 939,868
------------ ------------ ------------
Prepaid expenses 2,402,424 1,789,078 2,220,282
------------ ------------ ------------
Property and equipment available for sale 616,050 789,350 819,150
------------ ------------ ------------
Total current assets 49,898,395 30,915,762 38,489,908
------------ ------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 16,545,767 11,956,354 10,167,650
Buildings 30,258,910 22,254,129 19,244,883
Factory equipment 82,001,703 72,462,793 59,457,833
Other equipment 2,810,128 2,200,809 1,851,931
Construction in progress 24,156,551 22,352,000 6,047,195
------------ ------------ ------------
155,773,059 131,226,085 96,769,492
Less accumulated depreciation 51,523,574 48,551,028 45,686,542
------------ ------------ ------------
104,249,485 82,675,057 51,082,950
------------ ------------ ------------
LONG-TERM NOTES RECEIVABLE, NET OF
CURRENT PORTION 2,381,228
------------
OTHER ASSETS:
Investments restricted for capital lease projects 4,058,048 7,514,242
Investment in stock of other corporations, unconsolidated
marketing subsidiaries and other cooperatives 9,425,112 12,663,265 6,239,135
Deferred income taxes 3,450,000 3,450,000 3,450,000
Other 923,383 1,051,761 728,760
------------ ------------ ------------
17,856,543 24,679,268 10,417,895
------------ ------------ ------------
$174,385,651 $138,270,087 $ 99,990,753
============ ============ ============
See Notes to Consolidated Financial Statements.
1997 1996 1995
------------- ------------- -------------
LIABILITIES AND MEMBERS' INVESTMENT
CURRENT LIABILITIES:
Short-term notes payable $ 19,890,000 $ $ 13,877,000
------------- ------------- -------------
Current portion of long-term debt 2,512,500 2,512,500 2,428,523
------------- ------------- -------------
Accounts payable:
Trade 4,229,434 6,622,505 3,112,788
Growers 8,334,605 6,063,827 6,506,163
------------- ------------- -------------
12,564,039 12,686,332 9,618,951
------------- ------------- -------------
Advances from affiliate 1,792,889 1,202,466 1,064,005
------------- ------------- -------------
Salaries and Wages 828,542 788,095 667,282
Unmatured Interest Payable 875,029 581,445 424,969
Other Accrued Liabilities 1,271,987 1,299,479 1,113,915
------------- ------------- -------------
Total Accrued Liabilities 2,975,558 2,669,019 2,206,166
------------- ------------- -------------
Total current liabilities 39,734,986 19,070,317 29,194,645
LONG-TERM DEBT, NET OF CURRENT PORTION 47,797,917 48,810,417 25,840,308
OBLIGATION UNDER CAPITAL LEASE 12,000,000 12,000,000
OTHER 688,608 728,296 881,837
COMMITMENTS AND CONTINGENCIES (NOTE 12) -- -- --
------------- ------------- -------------
Total liabilities 100,221,511 80,609,030 55,916,790
------------- ------------- -------------
MINORITY INTEREST IN EQUITY OF SUBSIDIARY 517,727 337,439 81,529
------------- ------------- -------------
MEMBERS' INVESTMENT:
Preferred stock:
Class A - 100,000 shares authorized in 1997 and 1996, and 75,000
shares authorized in 1995, $105 par value; 66,967 58,525, and
52,000 shares issued and outstanding in 1997, 1996, and 1995,
respectively 7,031,535 6,145,125 5,460,000
Class B - 100,000 shares authorized in 1997 and 1996, and
75,000 shares authorized in 1995, $75 par value; 66,967
58,525, and 52,000 shares issued and outstanding in 1997,
1996, and 1995, respectively 5,022,525 4,389,375 3,900,000
Class C - 100,000 shares authorized in 1997 and 1996, and
75,000 shares authorized in 1995, $76 par value; 66,967
58,525, and 52,000 shares issued and outstanding in 1997,
1996, and 1995, respectively 5,089,492 4,447,900 3,952,000
------------- ------------- -------------
17,143,552 14,982,400 13,312,000
Common stock, 600 shares authorized in 1997 and 1996, and 440 shares
authorized in 1995; $250 par value; issued and outstanding, 481, 481,
and 346, shares in 1997, 1996, and 1995, respectively 120,250 120,250 86,500
Paid in capital in excess of par 23,753,005 10,296,457
Unit retention capital 6,739,547 6,262,469 5,421,441
Qualified allocated patronage 3,731,381 3,370,385 4,296,400
Nonqualified allocated patronage 22,847,263 21,925,006 21,507,010
Retained earnings (deficit) (688,585) 366,651 (630,917)
------------- ------------- -------------
73,646,413 57,323,618 43,992,434
------------- ------------- -------------
$ 174,385,651 $ 138,270,087 $ 99,990,753
============= ============= =============
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31, 1997, 1996, AND 1995
1997 1996 1995
------------- ------------- -------------
REVENUE:
From sales of sugar, sugar by-products, Fibrex, yeast and resale
commodities, net of discounts, $ 139,729,701 $ 114,334,522 $ 133,301,561
------------- ------------- -------------
EXPENSES:
Production costs of sugar, by-products, Fibrex, yeast and
resale commodities sold 33,446,952 30,872,535 30,318,782
Sales and distribution costs 21,822,495 19,955,374 19,302,651
General and administrative 4,567,869 4,213,379 4,412,248
Interest 4,315,823 2,898,338 2,972,574
Loss on disposition of fiber assets 897,742
------------- ------------- -------------
64,153,139 57,939,626 57,903,997
------------- ------------- -------------
OTHER INCOME (EXPENSE) (1,337,294) 476,775 23,982
------------- ------------- -------------
NET PROCEEDS RESULTING FROM MEMBER AND
NON-MEMBER BUSINESS $ 74,239,268 $ 56,871,671 $ 75,421,546
============= ============= =============
DISTRIBUTION OF NET PROCEEDS:
Credited to members' investment:
Components of net income:
Income (loss) from non-member business $ (1,055,236) $ 929,738 $ (558,608)
Patronage income 4,382,934 1,620,262 1,493,359
------------- ------------- -------------
Net income 3,327,698 2,550,000 934,751
Unit retention capital 948,246 1,389,899 1,636,105
------------- ------------- -------------
Net credit to members' investment 4,275,944 3,939,899 2,570,856
Payments to members for sugarbeets, net of unit
retention capital 69,963,324 52,931,772 72,850,690
------------- ------------- -------------
NET PROCEEDS RESULTING FROM MEMBER AND
NONMEMBER BUSINESS $ 74,239,268 $ 56,871,671 $ 75,421,546
============= ============= =============
See Notes to Consolidated Financial Statements.
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' INVESTMENT
FOR THE YEARS ENDED AUGUST 31, 1997, 1996, AND 1995
PAID IN CAPITAL
PREFERRED COMMON IN EXCESS OF
STOCK STOCK PAR VALUE
------------ ------------ ------------
BALANCE, AUGUST 31, 1994 $ 13,312,000 $ 86,250
COMMON STOCK:
Sales (4 shares) 1,000
Repurchases (3 shares) (750)
UNIT RETENTION CAPITAL:
Revolvement
Proceeds
REVOLVEMENT OF PRIOR YEARS' ALLOCATED
PATRONAGE
ECONOMIC DEVELOPMENT GRANT RECEIVED
BY INVESTEE
NET INCOME FOR THE YEAR ENDED
AUGUST 31, 1995
ACCRUED PAYMENT OF CURRENT YEAR'S QUALIFIED
ALLOCATED PATRONAGE
------------ ------------
BALANCE, AUGUST 31, 1995 13,312,000 86,500
STOCK:
Sales - common (10 shares) 2,500
Repurchases - common (12 shares) (3,000)
Stock offering (137 common shares, 6525 preferred shares) 1,670,400 34,250 10,400,850
Stock issue costs (104,393)
UNIT RETENTION CAPITAL:
Revolvement
Proceeds
REVOLVEMENT OF PRIOR YEARS' ALLOCATED PATRONAGE
ECONOMIC DEVELOPMENT GRANT RECEIVED BY INVESTEE
NET INCOME FOR THE YEAR ENDED AUGUST 31, 1996
ACCRUED PAYMENT OF CURRENT YEAR'S QUALIFIED
ALLOCATED PATRONAGE
------------ ------------ ------------
BALANCE, AUGUST 31, 1996 14,982,400 120,250 10,296,457
STOCK:
Sales - common (8 shares) 2,000
Repurchases - common (8 shares) (2,000)
Sales - preferred (8,442 shares) 2,161,152 13,456,548
UNIT RETENTION CAPITAL:
Revolvement
Proceeds
REVOLVEMENT OF PRIOR YEARS' ALLOCATED PATRONAGE
NET INCOME FOR THE YEAR ENDED AUGUST 31, 1997
ACCRUED PAYMENT OF CURRENT YEAR'S QUALIFIED
ALLOCATED PATRONAGE
------------ ------------ ------------
BALANCE, AUGUST 31, 1997 $ 17,143,552 $ 120,250 $ 23,753,005
============ ============ ============
UNIT QUALIFIED NON-QUALIFIED RETAINED
RETENTION ALLOCATED ALLOCATED EARNINGS
CAPITAL PATRONAGE PATRONAGE (DEFICIT) TOTAL
----------- ------------ ------------ ------------ ------------
$ 4,513,590 $ 5,751,400 $ 20,611,593 $ (122,309) $ 44,152,524
1,000
(750)
(728,254) (728,254)
1,636,105 1,636,105
(1,617,000) (147,942) (1,764,942)
50,000 50,000
450,000 1,043,359 (558,608) 934,751
(288,000) (288,000)
- ---------------- ------------ ------------ ------------ ------------
5,421,441 4,296,400 21,507,010 (630,917) 43,992,434
2,500
(3,000)
12,105,500
(104,393)
(548,871) (548,871)
1,389,899 1,389,899
(1,239,315) (720,266) (1,959,581)
67,830 67,830
482,000 1,138,262 929,738 2,550,000
(168,700) (168,700)
- ---------------- ------------ ------------ ------------ ------------
6,262,469 3,370,385 21,925,006 366,651 57,323,618
2,000
(2,000)
15,617,700
(471,168) (471,168)
948,246 948,246
(1,027,404) (1,324,677) (2,352,081)
2,136,000 2,246,934 (1,055,236) 3,327,698
(747,600) (747,600)
- ---------------- ------------ ------------ ------------ ------------
$ 6,739,547 $ 3,731,381 $ 22,847,263 $ (688,585) $ 73,646,413
================ ============ ============ ============ ============
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1997, 1996, AND 1995
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income allocated to members' investment $ 3,327,698 $ 2,550,000 $ 934,751
Add (deduct) noncash items:
Depreciation and amortization 4,458,900 3,061,758 2,874,476
Equipment disposals - loss 301,851 51,765 893,990
Discount on redemption of estate payout (55,407)
Noncash investment in Progold (186,977)
Net loss allocated from unconsolidated marketing
subsidiaries 1,630,249 91,083 95,558
Noncash portion of patronage capital credits (652,922) (562,047) (373,096)
Retention of nonqualified unit retains 948,246 1,389,899 1,636,105
Deferred income taxes 550,000
Decrease (increase) in cash surrender of officer life insurance (36,170) 9,904 1,394
Changes in operating assets and liabilities:
Accounts receivable and advances (3,449,354) 231,342 (4,801,087)
Inventory and prepaid expenses (14,720,635) 8,058,505 (10,668,452)
Deferred charges (129,880) (212,795) 76,796
Other assets (20,719) (15,022)
Accounts payable, advances, and accrued liabilities 33,634 3,331,198 544,826
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (8,530,767) 17,979,893 (8,249,761)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of property, plant and equipment 5,474 4,055 35,541
Capital expenditures (22,249,794) (30,066,812) (12,057,422)
Proceeds from sale of investments 31,160
Investment in stock of other corporations, unconsolidated
marketing subsidiaries and other cooperatives (583,117) (5,915,938) (1,714,408)
Net proceeds from patronage refunds and equity revolvements 32,762 30,601 45,859
Minority interest in equity of subsidiaries 180,289 255,910 (84,057)
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (22,583,226) (35,692,184) (13,774,487)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale and repurchase of common stock, net (500) 250
Net proceeds from issuance of short-term debt 19,890,000 (13,877,000) 12,615,000
Proceeds from issuance of long-term debt 29,000,000 13,500,000
Proceeds from sale of stock 15,617,700 12,001,107
Payment of financing fees (185,671) (406,111)
Payment of long-term debt (1,012,500) (5,945,914) (2,326,615)
Payment of unit retains and allocated patronage (2,814,097) (2,493,196) (2,272,332)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 31,495,432 18,278,386 21,516,303
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 381,439 566,095 (507,945)
CASH, BEGINNING OF YEAR 853,102 287,007 794,952
------------ ------------ ------------
CASH, END OF YEAR $ 1,234,541 $ 853,102 $ 287,007
============ ============ ============
(continued on next page)
CONSOLIDATED STATEMENTS OF CASH FLOWS - PAGE 2
1997 1996 1995
------------ ------------ -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 3,683,034 $ 2,472,853 $ 2,335,411
=========== ============ ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Board approval of unit retention capital and allocated patronage
revolvement $ 2,658,897 $ 2,508,452 $ 2,493,196
=========== ============ ===========
Transfer of property and equipment available for sale to property
and equipment $ 22,850
===========
Acquisition of property $ 267,000
Issuance of notes receivable 2,597,703
Issuance of long-term advances 102,295
-----------
Reduction of investment $ 2,966,998
===========
Board approval of distribution of cash portion of qualified
allocated patronage $ 719,600 $ 168,700 $ 288,000
=========== ============ ===========
Increase in investment in unconsolidated marketing subsidiary by
increasing accounts payable $ -- $ -- $ 593,819
=========== ============ ===========
Increase in investment from receipt of Economic Development Grant $ -- $ 67,830 $ 50,000
=========== ============ ===========
Transfer of property and equipment to property and equipment
available for sale $ -- $ -- $ 819,150
=========== ============ ===========
Acquisition of equipment under capital lease $ 3,456,194 $ 4,485,758
Acquisition of investment restricted for capital lease projects 7,514,242
Reduction in investment restricted for capital lease projects (3,456,194)
----------- ------------
Proceeds from issuance of obligation under capital lease $ -- $ 12,000,000 $ --
=========== ============ ===========
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1997, 1996, AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
CONCENTRATIONS OF RISK
Principles of Consolidation - The financial statements include the accounts of
Minn-Dak and its subsidiary, Minn-Dak Yeast Company, Inc. (Minn-Dak Yeast) which
is 80% owned by the cooperative.
Inventories - Inventories of refined sugar, pulp and molasses to be sold on a
pooled basis are valued at net realizable value, while third-party purchased
refined sugar to be sold on a pooled basis is valued at the lower of cost or
market. Inventories of dietary pulp fiber, yeast, and materials and supplies are
valued at the lower of average cost or market.
In valuing inventories at net realizable value, the cooperative, in effect sells
the remaining inventory to the subsequent years sugar and by-product pool.
Deferred Charges - Agricultural development and labor procurement costs incurred
in connection with the beet crop to be harvested in September and October are
deferred and subsequently charged to expense during the ensuing processing
period.
Property, Plant, Equipment and Depreciation - Property, plant and equipment are
stated at cost. Additions, renewals and betterments are capitalized, whereas
expenditures for maintenance and repairs are charged to expense. The cost and
related accumulated depreciation of assets retired or sold are removed from the
appropriate asset and depreciation accounts and the resulting gain or loss is
reflected in income.
It is the policy of the cooperative to provide depreciation based on methods
designed to amortize the cost of the properties over their estimated useful
lives. Property, plant and equipment are depreciated for financial reporting
purposes, principally using declining balance methods, with estimated useful
lives ranging from 8 to 40 years. Statutory lives and methods are used for
income tax reporting purposes.
Indirect costs capitalized were $449,149, $435,686, and $133,550 for the years
ended August 31, 1997, 1996, and 1995. Construction-period-interest capitalized
for the years ended August 31, 1997, 1996, and 1995, were $953,944, $669,347,
and $8,217, respectively.
Equity Value Investments - The investments in United Sugars Corporation, Midwest
Agri-Commodities Company and ProGold Limited Liability Company are accounted for
using the equity method, wherein the investment is recorded at the amount of the
underlying equity in
the net assets of the investments and adjusted to recognize the cooperative's
share of the undistributed earnings or losses.
Investments in Other Cooperatives - The investments in stocks and capital
credits of other cooperatives are stated at cost, plus the cooperative's share
of allocated patronage and capital credits.
Income Taxes - A consolidated federal income tax return is filed for the
cooperative and its subsidiary. Deferred income taxes are provided for in the
timing of certain temporary deductions/increases for financial and income tax
reporting purposes. Significant temporary differences are as follows:
1. When nonqualified unit retention capital and allocated patronage are
elected by the board of directors, the cooperative is not allowed an income
tax deduction until they are distributed in cash to the member-producers,
whereas qualified unit retention capital and allocated patronage are
deducted when declared.
2. Depreciation - For financial reporting purposes, the companies use
straight-line and accelerated methods of depreciation with lives of 8 to 40
years, while, for income tax purposes, the companies use required statutory
depreciable lives and methods.
3. Non-qualified patronage credits from investments in other cooperatives -
For financial statement purposes, the companies recognize income when the
patronage credit notification is received while, for income tax purposes,
the companies recognize income when the patronage is received in cash.
4. Inventory capitalization - For income tax reporting purposes, certain
overhead costs are included as a part of inventory costs in accordance with
inventory capitalization rules. These costs are charged to expense as
incurred for financial reporting purposes.
5. Deferred compensation - For financial reporting purposes, deferred
compensation is charged to expense as amounts are accrued. For income tax
purposes, deferred compensation is deductible when paid.
6. Recognition of vacation pay - For financial reporting purposes, vacation
pay is charged to expense as accrued, whereas, for income tax purposes,
vacation pay is deducted when paid.
Accounting estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Uninsured Cash Balance - The company maintains cash balances at various
financial institutions throughout the United States. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. At times during the year, the company's balances exceeded this limit.
Reclassifications - Certain amounts have been reclassified in the 1995 and 1996
financial statements. The reclassifications have no effect on the results of
operations.
NOTE 2 - NATURE OF OPERATIONS AND CONCENTRATION OF CREDIT RISK
Nature of Operations - Minn-Dak is a North Dakota Cooperative Corporation owned
by its member-growers for the purpose of processing sugarbeets and marketing
sugar and by-products. Minn-Dak Yeast is a North Dakota corporation engaged
primarily in the production and marketing of bakers yeast.
The majority of the net proceeds from Minn-Dak are from member business, whereas
Minn-Dak Yeast is considered non-member business.
Credit risk - The cooperative and subsidiary grant credit to food processors
located throughout the United States. In addition, the cooperative grants credit
to members for sugarbeet seed, located in North Dakota and Minnesota.
NOTE 3 - NOTES RECEIVABLE
The cooperative's note receivable is due from Southern Minnesota Beet Sugar
Cooperative. The note receivable is unsecured, with a variable interest rate,
currently 8.25%, due August 31, 2010. The notes are subordinated to St. Paul
Bank for Cooperatives. The note represents the equalization of the distribution
of certain property and equipment from United Sugars to its members (Minn-Dak,
American Crystal and Southern Minnesota) on August 31, 1997.
NOTE 4 - INVESTMENTS
The investment in stock of other corporations, unconsolidated marketing
subsidiaries and other cooperatives consists of the following:
1997 1996 1995
United Sugars Corporation $ 820,641 $ 3,292,816 $1,293,969
Midwest Agri-Commodities 11,748 40,835 71,212
ProGold, LLC 3,920,776 5,246,666 1,331,158
St. Paul Bank for Coops 2,505,512 2,151,143 1,802,422
R.S.R. Electric Cooperative 2,134,431 1,870,859 1,689,940
Other 32,004 60,946 50,434
---------- ----------- ----------
Total $9,425,112 $12,663,265 $6,239,135
On September 30, 1997, Cargill, Inc. signed a letter of intent to lease the
ProGold facility. Upon finalizing the agreement, Cargill will take over
operations and marketing of products produced by ProGold.
NOTE 5 - SHORT-TERM DEBT
Information regarding short-term debt at August 31, 1997, 1996, and 1995, is as
follows:
1997 1996 1995
Seasonal loan with St. Paul Bank for
Cooperatives, due December 31, 1997,
interest variable, currently at 8.0% $19,890,000 $ - $13,877,000
The cooperative has a $50,000,000 seasonal line of credit with the St. Paul Bank
for Cooperatives, of which there were advances against it of $19,890,000 and
$13,877,000 at August 31, 1997, and 1995, respectively. The seasonal line of
credit is secured with a first lien on substantially all property and equipment
and current assets of Minn-Dak.
Maximum borrowings, average borrowing levels and average interest rates for
short-term debt for the years ended August 31, 1997, 1996, and 1995, are as
follows:
AUGUST 31
1997 1996 1995
Maximum borrowings $82,580,000 $59,566,800 $30,769,850
Average borrowing levels $70,785,538 $50,578,800 $21,798,100
Average interest rates 6.43% 6.25% 7.00%
NOTE 6 - LONG-TERM DEBT
Information regarding long-term debt at August 31, 1997, 1996, and 1995, is as
follows:
1997 1996 1995
Term loan with the St. Paul Bank for
Cooperatives, due in varying principal
repayments through September 30, 2008,
interest variable, currently at 7.21% to
8.34%, with a first lien on substantially
all property and equipment and current
assets of Minn-Dak $50,250,000 $51,250,000 $28,150,000
Term loan with Norwest Bank of North
Dakota, N.A., due August 31, 1997,
interest free, secured by equipment 33,415
Term loan with R.S.R. Electric
Cooperative, Inc., due October 12,
2002, interest free, unsecured 60,417 72,917 85,416
----------- ----------- -----------
50,310,417 51,322,917 28,268,831
Less current maturities (2,512,500) (2,512,500) (2,428,523)
----------- ----------- -----------
$47,797,917 $48,810,417 $25,840,308
=========== =========== ===========
As to the loan with the St. Paul Bank for Cooperatives, the cooperative has
agreed to the following significant loan conditions:
1. Invest in Class C or other stock of the bank, as may be designated, in