ITEM 1A.
RISK FACTORS
Regional and Bilateral Trade Agreements
In the event that the United States government enters into bilateral trade agreements with sugar producing countries, the amount of sugar in the domestic sugar market could be impacted. A change in the supply of sugar could put pressure on the price of sugar, which would impact the Company’s profitability.
Government Programs and Regulations; Legislation
The nature and scope of future legislation and regulation affecting the sugar market cannot be predicted and there can be no assurance that price supports and market protections will continue in their present forms. If the price support programs were eliminated in their entirety, or if certain protections the federal government provides from foreign competitors were materially reduced, the Company could be materially and adversely affected. In such a situation, if the Company were not able to adopt strategies that would allow it to compete effectively in a greatly changed domestic market for sugar, the adverse effects could negatively impact the desirability of growing sugarbeets for delivery to the Company, the Company’s financial results, and the Company’s continued viability.
Unregulated Foreign Competition
Under the current terms of the NAFTA and other government regulations, imports of sugar from Mexico may enter the U.S. market. These imports could oversupply the U.S.
market and negatively affect the price of sugar. The Company, along with the domestic sugar industry, is seeking improvements to NAFTA and is pursuing legal remedies to address the matter. If the sugar industry is unsuccessful in these and any other endeavors it pursues to prevent the influx of Mexican sugar into the U.S. market, there could be adverse financial consequences to the Company and its members.
The Farm Bill
The impact of the Farm Bill on the operations of the Company cannot be completely predicted. The long-term ramifications of the marketing allotment and allocation program depend on the Company’s ability to maintain its marketing allocation on an annual basis and to obtain access, if necessary, to additional allocations at a reasonable price.
Weather and Other Factors
The sugarbeet, as with most other crops, is affected by weather conditions during the growing season. Additionally, weather conditions during the processing season affect the Company’s ability to store sugarbeets held for processing. Growing and storage conditions different from the Company’s expectations may change the quantity and quality of sugarbeets available for processing and therefore may affect the quantity of sugar produced by the Company. A significant reduction in the quantity or quality of sugarbeets harvested resulting from adverse weather conditions, disease (such as rhizomania) or other factors could result in increased per unit processing costs and decreased production, with adverse financial consequences to the Company and its members.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
There are no unresolved written SEC staff comments regarding our periodic or current reports under the Securities Exchange Act of 1934.
ITEM 2.
ITEM 2.
PROPERTIES
The Company operates a single sugarbeet processing factory at Wahpeton, North Dakota that is located in the Red River Valley area of Minnesota-North Dakota. The Company owns the factory, receiving sites, and the land on which they are located.
The properties are adequate to process normal and above normal crop sizes, and for the last three years have averaged a slice rate of 9,100 tons per day. The 2006-crop was the largest tonnage in the history of the Company, producing approximately 3,019,000 tons of sugarbeets. If the Company encounters normal weather patterns, which will in turn provide normal sugarbeet storage conditions, then it does not anticipate having material difficulties in processing the 2006-crop. As of the date of this report, the Company has set new records for daily slice (12,596 tons) and weekly slice (87,779 tons) rates and anticipates achieving above-average slice for the year. Achievement of the levels of slice and sugar production in the factory is due mostly to the quality of the 2006 crop and the Company’s effort to maximize the daily slice rate in order to finish processing of the crop in a timely fashion.
Minn-Dak Yeast, of which the Company is a 100% owner, operates a single yeast manufacturing factory at Wahpeton, North Dakota. Minn-Dak Yeast owns the factory and the
land on which it is located. During fiscal 2006, fresh yeast was produced and sold into the domestic yeast marketplace.
All properties are held subject to a mortgage by the Company’s primary lender.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
From time to time and in the ordinary course of its business, the Company is named as a defendant in legal proceedings related to various issues, including worker’s compensation claims, tort claims and contractual disputes. Other than as provided herein, the Company is not currently involved in legal proceedings that have arisen in the ordinary course of its business, and the Company is also unaware of certain other potential claims that could result in the commencement of legal proceedings. The Company carries insurance that provides protection against certain types of claims.
The Company is subject to extensive federal and state environmental laws and regulations with respect to water and air quality, solid waste disposal and odor and noise control. The Company conducts an ongoing and expanding control program designed to meet these environmental laws and regulations. As disclosed under “ENVIRONMENTAL MATTERS” above, there currently are no pending regulatory enforcement actions and the Company believes that it is in substantial compliance with applicable environmental laws and regulations.
ITEM 4.
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, 2006.
PART II
ITEM 5.
ITEM 5.
MARKET FOR COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
SHAREHOLDER STOCK VALUE
Stock is not purchased in the Company using the traditional valuation methods used for stock commonly bought or sold for personal or institutional investment purposes.
A requirement for owning the Company’s stock includes the shareholder being actively engaged in farming and having an active interest in the crop being produced.
The Company believes a shareholder purchases the Company’s stock in order to secure acreage delivery rights, and therefore is based upon the purchaser’s ability to make a profit by delivering sugarbeets to the Company.
The Company believes each individual shareholder will have a different financial model for its economic analysis of Company stock purchase. Estimates for direct input costs to raise a sugarbeet crop vary significantly from shareholder to shareholder. The Company has no direct knowledge of the total of the direct input costs.
A shareholder is at risk for the size and quality of the sugarbeet crop to be raised. The ability of a shareholder to raise a quality crop of significant quantity to not only cover the shareholder’s input costs, but also provide for a return on stock ownership and stockholder management inputs is key to determining the economic value the Company’s stock holds for the shareholder or potential shareholder.
A shareholder is able to insure the risk of growing a crop through the purchase of Federal Crop Insurance. The Federal Crop Insurance program is managed by RMA a branch of the United States Government. Changes in the Federal Crop Insurance program may have a significant impact on the level of financial risk that a shareholder may be able to insure.
A shareholder is also at financial risk based on the ability of the Company to pay the shareholder a sugarbeet payment that provides him/her with a profit.
Because the return to a shareholder is based upon the results of an entire year, the Company believes reliance upon one quarter of financial activity in comparison to a similar quarter of activity in a prior year is of limited value versus comparisons made at fiscal year end. Quarterly financial statements have significant management judgments regarding the final crop value.
Because the Company and other sugar companies have different methods of describing and paying their shareholders for sugarbeets delivered, the publicly announced payments by companies need to be adjusted for quality, patronage, trucking, and re-hauling costs to arrive at a comparable payment to the shareholder/grower for the delivery of those sugar beets.
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 and may only transfer with the consent of the Board of Directors of the Company. The Company’s shares are not listed for trading on any exchange or quotation system. A number of stock transfers, representing approximately 6% of available stock, were not arms length (estate settlements, estate planning from one generation to the next, etc.) and an accurate value for that stock was not available. Management believes that less than 1% of the Company’s available stock was traded at arm’s length during the fiscal year ended August 31, 2006. Of the stock transferred at arms length, the transfers were made during the first, second and third quarters of the Company’s fiscal year and ranged in price from $2,550 to $2,850 per unit. The fourth quarter did not have any arms length transactions.” The value of stock is highly dependent upon an individual stockholder’s ability to raise sugarbeets successfully both agronomically and financially. Prior to purchasing stock, a potential stockholder is advised to properly research the agronomic aspect of stock ownership.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The following table summarizes selected financial data for each of the last five fiscal years. The selected financial data of the Company should be read in conjunction with the financial statements and related notes included in Item 8. of this report.
(1) Net Proceeds are the Company’s gross revenues, less the costs and expenses of producing, purchasing and marketing sugar, sugar co-products, and yeast, but before payments to members for sugarbeets. (For a more complete description of the calculation of Net Proceeds, see “Description of Business-Growers’ Agreements”.)
(2) Members’ investment includes preferred and common stock, unit retention capital, allocated patronage and retained earnings.
(3) Calculated by dividing the Company’s long-term debt, exclusive of the current maturities of such debt, by equity.
(4) Computed by dividing (i) the sum of Net Proceeds plus fixed charges, plus amortization of capitalized interest by (ii) the sum of interest expense and interest capitalized. The Company does lease certain items, such as some office equipment. Due to the proportionately small amounts involved, an interest factor on lease payments has not been included in the total of the Company’s fixed charges or the calculation of this ratio. See Exhibit 12.
(5) Information for a fiscal year relates to the crop planted and harvested in the preceding calendar year (e.g., information for the fiscal year ended August 31, 2006, relates to the 2005 crop).
(6) Reflects the total amount paid in cash and allocated to individual grower equity accounts for each ton of sugarbeets delivered.
ITEM 7.
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.
CRITICAL ACCOUNTING POLICIES
Preparation of the Company’s consolidated financial statements requires estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Management continually evaluates these estimates based on historical experience and other assumptions it believes to be reasonable under the circumstances.
The difficulty in applying these policies arises from the assumptions, estimates and judgements that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions. As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated.
Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. The Company’s critical accounting estimates include the following:
Inventory Valuation
Sugar, pulp, molasses and other agri-product inventories are valued at estimated net realizable value. The Company derives its estimates from sales contracts, recent sales and evaluations of market conditions and trends. Changes in market conditions may cause management’s estimates to differ from actual results.
Property and Equipment, Property and Equipment Held for Lease, and Depreciation
Property and equipment, and property and equipment held for lease are depreciated for financial reporting purposes principally using straight-line methods with estimated useful lives ranging from 3 to 40 years. Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.
The Company reviews its property and equipment, and property and equipment held for lease for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. An impairment loss is recorded when the sum of the future cash flows is less than the carrying amount of the asset. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. There were no impairment losses incurred during the fiscal year covered by this report. However, considerable management judgement is necessary to estimate future cash flows and may differ from actual results.
Defined Benefit Pension Plan
The Company maintains and administers a defined benefit pension plan. The annual cost of this plan can be significantly affected by changes in assumptions and differences between expected and actual experience. The Company utilizes actuarial methods required by SFAS No. 87, “Employers’ Accounting for Pensions,” (SFAS No 87) to account for it defined benefit pension plan. The actuarial methods require numerous assumptions to calculate the net periodic pension benefit expense and the related projected benefit obligations for our defined benefit pension plan. Two of the most significant assumptions are the discount rates and expected long-term rate of return on plan assets. In making these assumptions, we are required to consider current market conditions, including changes in interest assumptions.
Key assumptions used to determine annual pension expense are as follows:
Discount Rate: An assumed discount rate is required to be used in the pension plan actuarial valuation. The discount rate is a significant assumption. The Company’s methodology for selecting the discount rate for the company’s plan is to seek guidance from outside pension experts for an appropriate discount rate.
Expected Return on Plan Assets: The expected long-term rate of return on plan assets should, over time, approximate the actual long-term returns on pension plan assets. The Company’s methodology for selecting the Expected Return on Plan Assets is to seek guidance from outside pension experts for an appropriate rate.
In September of 2006, the FASB issued FAS No. 158 “Employers Accounting for Defined Benefit Pension Plans and other Post Retirement plans”. This pronouncement is anticipated by the Company to cause other comprehensive income/loss in future years. The Company believes, had this pronouncement been effective for this report, the Company would need to recognize $5.4 million in additional unfunded liabilities, $0.3 million in additional recognition of the period May 31, 2006 through August 31, 2006, offset by a $2.3 million deferred tax benefit for a net other comprehensive loss of $3.4 million. The Company expects to adopt this requirement for its fiscal year ending August 31, 2007. The additional requirement “to measure plan assets and benefit obligations as of the end of the fiscal year-end statement of financial position” is expected to be adopted by the Company’s for its fiscal year ending August 31, 2009.
Income Taxes
Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves judgment. The company calculates income taxes in each of the tax jurisdictions in which we operate. This involves estimating current tax exposures in each jurisdiction as well as making judgements regarding the recoverability of deferred tax assets. Tax exposures can involve complex issues and may require an extended period to resolve.
LIQUIDITY AND CAPITAL RESOURCES
Because the Company operates as a cooperative, payment for member-delivered sugarbeets, the principal raw material used in producing the sugar and agri-products it sells, are subordinated to all member business expenses. In addition, actual cash payments to members are spread over a period of approximately one year following delivery of sugarbeet crops to the Company and are net of unit retains and patronage allocated to them, both of which remain available to meet the Company’s capital requirements. This member financing arrangement
may result in an additional source of liquidity and reduced outside financing requirements in comparison to a similar business operated on a non-cooperative basis. However, because sugar is sold throughout the year (while sugarbeets are processed primarily between September and April) and because substantial amounts of equipment are required for its operations, the Company has utilized substantial outside financing on both a seasonal and long-term basis to fund such operations. The short and long-term financing has been primarily provided by Co-Bank (the “Bank”). The Company has a short-term line of credit with the Bank totaling $45.0 million, of which $30.6 million was available as of August 31, 2006. In addition, a $15.0 million supplemental seasonal line was offered by the Bank but was not activated by the Company due to a lack of need. The Company anticipates using the USDA Sugar Loan Provisions contained in the 2002 Farm Bill to provide an additional source of seasonal financing for the 2006 and future crops.
Due to the anticipated size of the 2006 crop payment, the Company believes that an additional $30 million line of seasonal credit, or the use of USDA sugar loans (for a total of $75 million short-term line of credit) will be necessary. The Company believes it’s primary lender, will provide this additional line of credit.
On May 30th, 2006, the Company renewed, through May 31, 2007, the seasonal and term-debt lines of credit with the Bank. Changes to the loan agreements covering these lines of credit included the following:
•
$3.0 million of additional long-term debt was added to the loan agreement to fund investments of the Company;
•
The working capital covenant in the loan agreement was eliminated and replaced by a current ratio covenant;
•
The amortization schedule for the long-term debt was lengthened, which changed repayments to the Bank from $4.8 million per year to $3.3 million per year.
The loan agreements between the Bank and the Company obligate the company to maintain the following financial covenants, and in accordance with GAAP:
•
Maintain a current ratio of no less than 1.10 for the first quarter of a fiscal year and 1.15 for all other quarter and fiscal year ends;
•
Maintain a long-term debt and capitalized leases to equity ratio of not greater than .8:1;
•
Maintain available cash flow to current long-term debt ratio as defined in the agreement of not less than 1.25:1.
As of August 31, 2006 the Company was in compliance with its loan agreement covenants with the Bank.
Working capital increased $1.6 million for fiscal year 2006. The Company funds its capital expenditure and debt retirement needs primarily from operating activities. The Company has approximately 6-years of long-term debt remaining with the Bank and it has two tax exempt bond issues, one with $5.9 million remaining to be paid and one with $13.1 million remaining. The decision to restructure the Company’s long-term debt had been anticipated to be necessary if the Company were to acquire the non-controlling interest in its 80% owned
subsidiary, Minn-Dak Yeast. On April 30, 2006 the Company consummated the acquisition of the 20% non-controlling interest in Minn-Dak Yeast, which in turn triggered the restructuring of the Company’s long-term debt. As of August 31, 2006, the Company achieved its targeted working capital position.
The company has protected itself from interest rate fluctuations through a strategy of using tax-exempt bond financing and a term debt portfolio that fixes rates and maturities into the future on set amounts of debt. The current term debt portfolio is expected to provide the company stable term debt interest rates over the next four years at approximately 90 basis points under current market rates for similar maturities. An increase or decrease in the interest rate market of approximately 100 basis points is expected to be immaterial on the profitability of the Company as a result of its interest rate strategy. Capital expenditures for fiscal year 2006 were $4.7 million, for fiscal year 2005, $4.9 million and for fiscal year 2004, $6.0 million. Capital expenditures for fiscal year 2007 are currently estimated at $4.9 million.
The Bonds are secured by a letter of Credit from Wells Fargo Bank. The letter of credit is ultimately secured by the plant and property of the Company’s facility at Wahpeton, ND.
The Company is not aware of any known trends, demands, commitments, events or uncertainties that will likely result in the Company’s liquidity increasing or decreasing materially.
Other than those items described above, the Company is not aware of any known material trends, either favorable or unfavorable, that would cause the mix of equity to debt or the cost of debt to materially change.
RESULTS OF OPERATIONS
Comparison of the Years Ended August 31, 2006 and 2005
Net payments to members for sugarbeets delivered by the shareholder/growers, decreased by $10.6 million or 13 percent in fiscal year 2006 and totaled $71.6 million. As of August 31, 2006, the board of directors authorized the payment of prior years’ member patronage and per unit retains (including equity payments to estates of deceased shareholders) totaling $3.6 million to shareholders compared to $4.6 million in the previous year. The payment of $3.6 million will leave approximately 4.9 years of prior years’ patronage and per unit retains still outstanding versus the prior year of 7.6 years outstanding.
Revenues for the year ended August 31, 2006 were comprised of Sugar 84%, Pulp 7%, Yeast 5% and Molasses 4%.
During the year ended August 31, 2006, the Company purchased 156,788 tons of sugarbeets from a sugarbeet processor due to a shorter than normal sugarbeet supply from the Company’s shareholder/growers. The purchase comprised 8% of all sugarbeets purchased by the Company for the year.
On April 30, 2006, the Company acquired the non-controlling 20% interest in its Minn-Dak Yeast subsidiary from Sensient Technologies Corporation.
Revenue for the year ended August 31, 2006, decreased 7 percent or $12.7 million from 2005. Revenue from total sugar sales decreased $16.1 million or 10 percent reflecting a 19 percent decrease in cwt. sold, and a 9 percent increase in the average net selling price per cwt. Revenue from co-products decreased 10 percent, reflecting a decrease of 22 percent in volume, offset by a 12 percent increase in the average selling price per ton. The decrease in volume of sugar and co-products sold from the 2005-crop is attributable to the lower crop size and quality when compared to the 2004 crop of sugarbeets delivered by shareholder/growers.
Revenues from yeast sales increased 28 percent reflecting an increase in volume of 8 percent, and an increase of 20% in the price of yeast due to a change in the marketing arrangement. A different marketing arrangement changed the methodology used in the determination of the selling price for yeast.
The value of finished product inventories in fiscal year 2006 increased $.5 million from fiscal year 2005.
Cost of product sold, on a consolidated basis, exclusive of grower payments for sugarbeets and cost of outside purchased sugarbeets, remained the same. However, the Company’s costs decreased $1.5 million and Minn-Dak Yeast’s costs increased $1.5 million.
Of the $1.5 million decrease in the Company’s cost of product sold, the cost of operations decreased due to a shorter processing season. Offsetting those costs somewhat were maintenance costs, which increased as a result of the late start (October rather than September) of the 2005-crop processing period. The offsetting increase of $1.5 million in cost of product sold by Minn-Dak Yeast was due to a $0.6 million increase in the cost of molasses (29% price increase and 10% volume increase), $0.6 million of purchased cream yeast (no purchases in prior fiscal year) and $0.3 million increase in the cost of chemicals, due primarily to the increase in volume of production.
Sales and Distribution costs decreased $8.1 million or 22 percent. Decreases are mainly the result of lower costs of purchased sugar (less volume) and the lower cost of marketing allocations (less volume). General and Administrative expenses decreased $.4 million or 6 percent. Employee costs and trade association dues were the primary reasons for the decrease. Interest expense increased $.6 reflecting a lower level of debt and an increased rate of interest.
Overall, the cost per cwt. of sugar produced increased 18 percent versus the prior year due to a 1 percent increase in costs and a 17 percent reduction in sugar produced.
Other business income increased $.2 million in fiscal year 2006 due primarily to transactions related to the acquisition of 100% ownership in Minn-Dak Yeast, offset by less patronage dividends received from other cooperatives.
Comparison of the Years Ended August 31, 2005 and 2004
Net payments to members for sugarbeets delivered by the shareholder/growers, decreased by $19.5 million or 19 percent in fiscal year 2005 and totaled $82.6 million. As of August 31, 2005, the board of directors authorized the payment of prior years’ member patronage and per unit retains (including equity payments to estates of deceased shareholders) totaling $4.6 million to shareholders compared to $4.5 million in the previous year. The payment of $4.6 million will leave approximately 7.6 years of prior years’ patronage and per unit retains still outstanding versus the prior year of 7.9 years outstanding.
Revenues for the year ended August 31, 2005 were comprised of Sugar 85%, Pulp 8%, Yeast 4% and Molasses 3%.
Revenue for the year ended August 31, 2005, decreased 5 percent or $9.3 million from 2004. Revenue from total sugar sales decreased $11.4 million or 7 percent reflecting an 8 percent decrease in cwt sold, and a 1 percent increase in the average net selling price per cwt. Revenue from co-products increased 1 percent, reflecting a decrease of 14 percent in volume, offset by a 15 percent increase in the average selling price per ton. The decrease in volume of sugar and co-products sold is attributable to the lower sugar content, less marc in the sugarbeets, and high purity in the 2004 crop of sugarbeets delivered by shareholder/growers.
Revenues from yeast sales increased 2 percent reflecting an increase in volume of 9 percent, and a decrease in price of 7 percent.
The value of finished product inventories in fiscal year 2005 decreased $2.9 million from fiscal year 2004, a result of lower sugar and molasses inventories at fiscal year end.
Cost of product sold, exclusive of grower payments for sugarbeets, increased $3.3 million or 6.3 percent. Of the $3.3 million, $3.2 is attributed to the Company’s operation and $0.1 million is attributed to the Minn-Dak Yeast operation.
Of the $3.2 million increase in the Company’s cost of product sold, the cost of operations and maintenance increased as a result of wet harvest conditions when compared to a crop with normal harvest conditions. Excess mud reduced pile storage effectiveness, total sugar available for extraction, and reduced the daily factory throughput. As a result, less sugar was extracted, while the Company encountered higher daily operating costs. Daily operating costs were negatively impacted due to the use of more chemicals, coal, coke, and limerock, which, in turn, were further compounded by a rise in energy costs associated with the production and shipment of those operating materials.
Sales and Distribution costs increased $7.1 million or 24 percent. Increases are mainly the result of the cost of purchased sugar and the cost of marketing allocations. General and Administrative expenses increased $.2 million or 3 percent. Employee costs and trade association dues were the primary reasons for the increase. Interest expense decreased less than $.1 million reflecting a lower level of debt and an increased rate of interest.
Overall, the cost per cwt of sugar produced increased 16 percent versus the prior year due to a 7 percent increase in costs and a 9 percent reduction in sugar produced.
Other business income increased $.4 million in fiscal year 2005 due primarily to increased patronage dividends from other cooperatives.
Estimated Fiscal Year 2007 Information
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 2006 sugarbeet crop. Given the nature of the estimates required in connection with the payments to members for their sugarbeets, this discussion includes forward-looking statements regarding the quantity of sugar to be produced from the 2006 sugarbeet crop, the net selling price for the sugar and co-products produced by the Company and the Company’s operating costs. These forward-looking statements are based largely upon the Company’s expectations and estimates of future events; as a result, they are subject to a variety of risks and uncertainties. Some of those estimates, such as the selling price for the Company’s products, the quantity of sugar produced from the sugarbeet crop, changes in plant production efficiencies and sugarbeet storage conditions are beyond the Company’s control. The actual results experienced by the Company could differ materially from the forward-looking statements contained herein.
The Company’s members harvested 3.0 million tons of sugarbeets from the 2006 crop, the largest harvested crop in Company history. Sugar content of the 2006 crop at harvest was 1% below the average of the five most recent years. The Company is projecting the sugar production from the 2006-crop to be the largest in Company history. From the revenues generated from the sale of products produced from each ton of sugarbeets must be deducted the Company’s operating and fixed costs. Revenues for the crop-year 2006 are expected to be 49% above the 2005 crop-year due to increased sugar production, offset by lower prices. The deduction of operating costs results in an estimated 2006 crop gross payment to growers for sugarbeets of $121.4 million, which is $49.8 million more than that of the 2006 crop year of $71.6 million. The 2006 crop sugarbeet payment increased as a result of more harvested tons, more sugar per ton of sugarbeets harvested and higher molasses prices; and was decreased by higher operating costs and lower sugar and pulp prices. The Company does not expect to be able to repeat the record crop results in the future unless it can experience the same weather pattern and growing conditions as the 2006 crop.
The Company’s initial sugarbeet payment estimate totals $40.21 per ton or $0.134844 per harvested/bonus pound of sugar, with the final sugarbeet payment determined in October of 2007. This projected payment per pound is 5% less than the final 2005 crop payment per pound, but 4% more than the original projected 2005 crop payment per pound. The projected 2006 crop payment per ton results from what management believes is a consistent approach to forecasting sugar production and sugar production costs. While the crop has been harvested, it is still at risk for adverse storage conditions, which may mean that actual results may differ from forecast.
The Company anticipates challenges in the areas of refined sugar storage, and due to the much larger record crop, will need to take extraordinary steps to preserve the raw sugarbeet inventory for processing during the spring of 2007. The Company began processing the 2006-crop on September 1, 2006 in anticipation of a larger than normal crop and the need to process this crop prior to the deterioration of unprotected sugarbeets in storage during the spring of 2007. Business changes made to become more efficient in the re-hauling of the sugarbeets appears to be working well and which should result in the piled sugarbeets to be more timely processed, thereby reducing spoilage and increasing sugar production. The factory, during the current campaign, has set a number of new records for the most sugarbeets sliced in a day and week and the most sugar produced in a day and a week.
Although the Company does not anticipate any difficulty in obtaining the necessary seasonal financing for this crop, the additional dollar volume will require the Company to either increase on a temporary basis its line of credit with Co-Bank, and/or utilize the USDA sugar loan program.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in the interest rates, exchange rates, commodity prices, equity prices and other market changes. Market risk is attributed to all market-risk sensitive financial instruments, including long-term debt.
The Company’s long-term debt interest costs are stabilized through the use of multi-year interest rate locks on various amounts and terms through its primary lender Co-Bank. This strategy allows the Company to project future interest costs and cash flows with a reasonable degree of accuracy.
The Company has long-term tax-exempt bonds using a variable interest rate. Borrowing levels have been $19.1 million for 2006, $21.0 million for 2005 and $22.0 million for 2004. The historic interest rates for these instruments have been under 5% with an anticipated fluctuation of less than 1% per year.
The Company’s short-term debt will vary from year to year based on the short-term interest rate market. Average short-term debt borrowing levels have been $24.7 million for 2006, $26.3 million for 2005 and $25.0 million for 2004. Because each year’s short-term debt is closely associated with a crop year, the interest fluctuations will have a direct impact on the final grower sugarbeet payment.
The Company will from time to time have a purchase obligation in foreign currency as a result of approved capital expenditure projects, and may reduce the risk of currency exchange by forward purchasing the applicable currency required for the expenditure.
The Company does not believe that it is subject to any material market risk exposure with respect to interest rates, exchange rates, commodity prices, equity prices and other market changes that would require disclosure under this item.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company for the fiscal years ended August 31, 2006, 2005 and 2004 have been audited by Eide Bailly, LLP, independent registered public accounting firm. Such consolidated financial statements have been included herein in reliance upon the report of Eide Bailly, LLP. The consolidated financial statements of the Company are included in Appendix A to this annual report.
ITEM 9.
ITEM 9.
CHANGES IN OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on accounting and financial disclosure.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Sarbanes-Oxley Act: The Sarbanes-Oxley Act continues to have the interpretation of its rules reviewed and changed. The Company’s intent is to be in compliance with the rules and interpretations of these rules as they are promulgated. As of this writing, compliance with all applicable Sarbanes-Oxley rules for the Company has been deferred until August 31, 2008. The below listed areas of activity are not to be considered an all inclusive list, rather an indication of how the Company’s Board of Directors and Management are approaching future compliance requirements.
Audit Committee: The audit committee is active in the oversight of the Company’s accounting, auditing, and key risk management areas. The Company’s bylaws require any board member to be actively engaged in the production of sugarbeets, therefore, the financial expert requirement for the audit committee is restricted to the pool of available directors who are eligible to serve on the audit committee. Therefore there is no financial expert, as defined within the provisions contained in the Sarbanes-Oxley law, that serves on the Audit Committee. The Audit Committee has formulated a confidential and anonymous employee system to allow employees to report concerns regarding questionable accounting or auditing matters. The Audit Committee has adopted a code of ethics policy for top management.
The Audit Committee has reviewed and discussed separately with management, the independent auditors, and within the Audit Committee the financial statements and the quality of accounting principles and significant judgments affecting the financial statements contained in this 10-k report. As a result of these reviews and discussions, the Audit Committee considers the financial statements contained in this 10-k report to be fairly presented.
Internal Controls: The Company’s payments to growers are derived from crop pools with each year’s harvest creating a “Crop Pool”. It is the Company’s practice to use accounting methods to allocate revenues and costs in a manner that such revenues and expenses associated with each pool are consistently applied on a year-to-year and a pool-to-pool basis. The Company has formalized a process where-by the material risks associated with the Company are determined, documented as to how these risks are to be managed and, where appropriate, reviewed by the Audit Committee.
Listed below are two internal control material weaknesses discovered by the Company’s Accounting staff during the fiscal year ended August 31, 2006:
1.
During the review of the 2nd quarter 10-Q for FY 2006, it was discovered the finished goods inventory was not properly reconciled prior to the filing of the 10-q, and it was corrected and controls put in place to prevent future errors. At the same time, management also re-evaluated how it was valuing finished goods inventory and thick juice inventory. It was determined that thick juice inventory should be recorded at net realizable value (“NRV”), instead of cost, for the interim financial statements in order to be consistent with accounting principles that would be applied at fiscal year end if any thick juice were present. It was also determined that the NRV for products should
take into account year to date activity and the most current estimate of sales price to arrive at a calculated NRV for any inventory to be valued at NRV.
2.
During the fiscal year ended August 31, 2006, reliance was made upon an improper schedule to calculate the final 2005-crop grower payment. This payment was improperly calculated to be $320,000 more than the calculation using the correct schedule. Although the Company considers the dollar amount of the error to be immaterial, it has determined the lack of proper controls was a material matter. The company has put into place new preventive measures to correct this internal control deficiency.
The Company’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 240.13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934) as of a date within ninety days before the filing date of this annual report. Based on that review and evaluation, which included inquiries made to certain other employees of the Company and based solely upon the above two material weaknesses, the chief executive officer and chief financial officer have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were ineffective as regards to material weakness. The evaluation has not revealed any fraud, intentional misconduct, or concealment on the part of Company personnel. These weaknesses have been remediated and new internal control procedures instituted whereby critical accounts are properly reconciled on a periodic and annual basis. The Company does not anticipate further difficulties in these areas.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
ITEM 10.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY IDENTIFICATION OF DIRECTORS
The table below lists the current directors of the Company. The board of directors consists of one director from each district. Directors must be common shareholders or representatives of common shareholders belonging to the district they represent and are elected by the members of that district. In the case of a common shareholder who is other than a natural person, a duly appointed or elected representative of such common shareholder may serve as a director. The directors have been elected to serve three-year terms expiring in December of the years indicated in the table below. One director is elected each year from three selected districts. Brief biographies for each of the directors are included after the table.
1)
Mr. Etten’s term as a director of the Company from District #8-Lyngaas expires on December 5, 2006.
2)
Mr. Steiner’s term as a director of the Company from District #6-Yaggie expires on December 5, 2006.
3)
Mr. Theede’s term as director of the Company from District #1-Tyler expires on December 5, 2006.
Dale Blume graduated from the NDSU with a degree in Ag Economics in 1973. He began farming in 1971 and continues to be actively farming today. Mr. Blume is one of the Company’s original stockholders. Mr. Blume is a member of the Grant County FSA Board, the Delaware Township Board, and is a director at the First State Bank in Kensington, MN. He is also the co-chairman of the administrative council and on the financial committee of the United Methodist Church in Herman. He serves as the ex-officio member on the board of directors for Minn-Dak Yeast.
Dennis Butenhoff has been a director since 2004 and serves on the board of directors of Minn-Dak Yeast. Mr. Butenhoff graduated from Barnesville High School, Barnesville, MN in 1965. Prior to serving his country in the military, Mr. Butenhoff attended North Dakota State University for 4 years, focusing on ag economics. He has been farming in the Baker/Barnesville area since 1967. Mr. Butenhoff has served Trinity Lutheran Church as a Sunday school teacher and church elder.
Brent Davison has been a director since 2003 and is one of Minn-Dak’s representatives to the American Sugarbeet Growers Association in Washington, DC. Mr. Davison earned his B.S. degree in Education at Concordia University, Moorhead, MN, graduating in 1972. Mr. Davison taught school in Warren, MN from 1972 until coming home to farm near Tintah, Minnesota area in 1974. He is currently serving on the Tintah Township Board and is a former volunteer fireman and first responder.
Douglas Etten has been a director since 1997 and is currently serving as the board vice chairman. Mr. Etten has been farming near Foxhome, MN since graduating from Concordia College in Business and Math in 1974. Etten also serves on the board of directors for United Sugars Corporation. He is also one of Minn-Dak’s representatives to the American Sugarbeet Growers Association in Washington, DC.
Michael Hasbargen has been a director since 1993 and is currently serving as board chairman. He has also served as vice chairman. Mr. Hasbargen has been farming near Breckenridge, MN since graduating from NDSU in Ag Economics in 1967. Mr. Hasbargen also serves on the board of directors of United Sugars Corporation, Midwest Agri-Commodities Company, and Minn-Dak Yeast. Mr. Hasbargen is the brother-in-law of Mr. Steven Caspers, Executive Vice President & Chief Financial Officer.
Dennis Klosterman has been a director since 2004. Mr. Klosterman graduated from Wahpeton High School in Wahpeton in 1978. He began farming with his father and brother in the Mooreton, ND area in 1979 while attending North Dakota State College of Science and North Dakota State University. Mr. Klosterman has, and continues to, serve his community and church in several areas. He is a member and past chairman of the Company’s Political Action Committee. Mr. Klosterman is a member of various farm and commodity organizations.
Russell Mauch has been a director since 1998 and currently serving as board treasurer. Mr. Mauch graduated from North Dakota State University in 1977 with a B.S. in agriculture. From 1979 to 1981 Mr. Mauch was a commercial and agriculture loan officer for First Bank Corporation in Valley City, ND. Mr. Mauch has been farming near Barney, ND since 1981. Mr. Mauch also serves on the board of directors for United Sugars Corporation and as one Minn-Dak’s representatives to the American Sugarbeet Growers Association in Washington, DC.
Charles Steiner has been a director since 2000. Mr. Steiner has been farming near Foxhome, MN since 1969. Mr. Steiner graduated from the Northwest School of Agriculture, University of Minnesota at Crookston, MN. He also serves on the board of directors for Midwest Agri-Commodities Company and Minn-Dak Yeast.
Alton Theede has been a director since 2003. Mr. Theede has been farming in the Fairmount, North Dakota area since 1966. He earned his B.S. degree in Business
Administration from the University of North Dakota, Grand Forks, ND in 1966. Mr. Theede currently serves on the board of directors for the local CHS (Cenex Harvest States) and is very involved in community service. Mr. Theede has been and continues to be active in serving the congregation of St. Phillips Catholic Church in Hankinson, ND. He serves on the board of directors for Minn-Dak Yeast.
The Board of Directors meets monthly. The Company provides its directors with minimal compensation, consisting of (i) a payment of $250.00 per meeting for regular and special board meetings, (ii) the greater (a) $125.00 for any day in which directors partake in activities on the Company’s behalf that take less than five hours or (b) $250.00 for any day in which directors partake in activities on the Company’s behalf that take five hours or more. The Chairman of the Board of Directors also receives a flat $500.00 per month to compensate for the extra duties associated with that position.
Executive Officers
The table below lists the senior management employees of the Company and Minn-Dak Yeast, none of whom owns any common or preferred shares. Brief biographies for each of the officers are included after the table.
David H. Roche is the Company’s third president and CEO. He joined the Wahpeton, ND based sugar cooperative on March 1, 2001. Mr. Roche began his sugar industry career as a controller for Michigan Sugar Company in 1976. Mr. Roche holds an MBA in Accounting from Michigan State University and became a Certified Public Accountant in 1974. He serves on the boards of United Sugars Corporation and Midwest Agri-Commodities. Mr. Roche is chairman of the board for Minn-Dak Yeast. In addition, he is a trustee of the United States Beet Sugar Association, and a member of the board of directors of The Sugar Association, Washington, D.C.
Steven M. Caspers, the Company’s Executive Vice President and Chief Financial Officer, has held that position since January 1986. He has been employed with the Company
since May 5, 1974. Mr. Caspers is the President of Minn-Dak Yeast, and has held that position since 1994. He is a 1972 graduate of the University of North Dakota with a Bachelor of Science in Business Administration and a major in Accounting. Mr. Caspers is the brother-in-law of Mr. Michael Hasbargen, Director and Chairman.
Allen E. Larson has been serving as the Company’s Controller since 1990. His employment with the Company began on October 26, 1981. Mr. Larson earned a Bachelor of Science degree in Business Administration with a major in Accounting from Minnesota State University Moorhead in 1977.
Thomas D. Knudsen the Company’s Vice President of Agriculture, has held that position since January 1987. He began his employment with the Company on May 24, 1977. Mr. Knudsen graduated from the North Dakota State University with a Bachelor of Science in Horticulture in 1977 and has attended the Beet Sugar Institute at Fort Collins, Colorado.
Greg J. Schmalz is the Company’s Director of Human Resources. He has held that position since beginning his employment with the Company on August 30, 2004. Prior to that date, Mr. Schmalz held the position of Vice President of Human Resources at Bobcat Company. Mr. Schmalz is a 1976 graduate of the University of North Dakota, Grand Forks, with a Bachelor of Arts Degree in Sociology and a Masters Degree in Guidance and Counseling. He is a member of the Society of Human Resources Management and the Agassiz Valley Human Resources Association.
Dr. Jeffrey L. Carlson, the Company’s Vice President of Operations, has held that position since August 2002. Prior to his current position, Mr. Carlson was the Company’s Director of Technical Services. He began his employment with the Company on June 4, 1990. Mr. Carlson is a graduate of the University of Minnesota-Morris with a Bachelor of Arts in Chemistry and the University of North Dakota with a Ph.D. in Physical Chemistry. He received his MBA from North Dakota State University in 2001.
Dr. Richard W. Ames has been serving as the Operations Manager of Minn-Dak Yeast since 1989. He began his employment with the Company in September 1986. Dr. Ames holds a Ph.D. in Chemistry from University of North Dakota, which he earned in 1986. He is an active member of the American Chemical Society.
John S. Nyquist became the Company’s Purchasing Manager in 1994. He began his employment with the Company on September 15, 1975. Mr. Nyquist is active in, and is a past president of, the National Association of Purchasing Managers.
Susan M. Johnson has been serving as the Company’s Communications Manager and Administrative Assistant since December 2003. Prior to that position, Ms. Johnson served as an Administrative Assistant. She began her employment with the Company on June 26, 1978. She has attended, and graduated from, a two-year leadership training program entitled “MARL” Minnesota Agricultural and Rural Leadership.
Kevin R. Shannon has held the position of Safety Director for the Company since September of 1992. He began his employment with the Company on June 1, 1983.
John R. Haugen was promoted to the position of Vice President of Engineering on August 1, 2002. Prior to that date, he served as Director of Engineering. Mr. Haugen began his employment with the Company in 1976. He earned a BS degree in Mechanical Engineering from the University of North Dakota in 1976.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The following table summarizes the amount of compensation paid for services rendered to the Company during the fiscal year ended August 31, 2006 and the two prior fiscal years to those persons serving as the Company’s Chief Executive Officer and to the other most highly compensated executive officers of the Company whose cash compensation exceeded $100,000 per annum.
Summary Compensation Table
1) In addition to the salary and bonus described above, Mr. Roche and Mr. Caspers are provided with “Other Annual Compensation,” which includes the value of the excess life insurance cost, individual LTD plan, sold vacation, and Company match of the 401(k) plan. The company has a policy whereby Supervisory, Professional and Management employees are required to maintain their vacation and floating holiday hour combined carryover balance at two hundred and forty (240) hours or less. While not encouraged, the cash optioning of vacation and floating holiday accrued hours is allowable. Employees with account balances in excess of 240 hours may elect to cash option up to fifty percent (50%) of the number of hours exceeding 240. Employees at or below the 240 hour limit may elect to cash option fifty percent (50%) of their combined vacation and floating holiday annually accrued hours.
Management employees are eligible for performance bonuses, which are partially based upon on the performance of the Company and partially on achievement of certain management performance objectives. The President/CEO determines those performance objectives for officers and significant other management employees of the Company and the Board of Directors determines performance objectives for the President/CEO.
On a periodic basis, the Company undertakes a compensation review study to determine that its employees’ compensation is commensurate with responsibilities of the various Company positions, and that the compensation is equitable between jobs within the Company and externally competitive with other comparable jobs and responsibilities within the Company’s geographic region. A national compensation consultant called Hay Management consultants performs the compensation review study. This study is made of all management
employees, including the president, and non-union employees. From time to time individual employees have had a restudy based upon changes in their areas of responsibilities.
2) Mr. Roche is eligible for payments into a supplemental executive retirement plan. The Company recorded obligations of $37,461, $32,000 and $15,731 for the fiscal years ended August 31 2006, 2005, and 2004, respectively. See the section below on Retirement Plans for further details on the supplemental executive retirement plan.
Retirement Plans
Management employees are eligible to participate in the Company’s defined benefit retirement plan as well as its 401(k) retirement savings plan, each of which are described below.
The Company has established a noncontributory, defined benefit retirement plan, which is available to all eligible employees of the Company. The benefits of the plan are funded by periodic contributions by the Company to a retirement trust that invests the contributions and earnings from such contributions to pay benefits to employees. The plan provides for the payment of a monthly retirement benefit determined under a formula based on years of service and each employee’s compensation level. See “Executive Compensation--Qualified Benefits Table.” Benefits are paid to the employees upon reaching early (age 55 or older) or normal (age 65) retirement age. The plan also provides for the payment of certain disability and death benefits.
Qualified Benefits Table
The following table reflects the estimated annual benefits payable to a fully-vested executive officer of the Company under the defined benefit retirement plan upon retirement at age 65, after 15, 20, 25, 30, and 35 years of annual service at the compensation levels set forth hereon:
Mr. Roche has 5 years of service under the plan.
Mr. Caspers has 32 years of service under the plan.
The Company maintains a Section 401(k) retirement savings plan that permits employees to elect to set aside, on a pre-tax basis, a portion of their gross compensation in trust to pay future retirement benefits. The Company provides a matching contribution of 100% of each employee’s first 4% of compensation that is set aside under the plan. The amounts set aside by each employee and the Company vests immediately and are paid to each employee upon the happening of certain events, all of which is more fully described in the master plan document. Federal law limited employee pre-tax income contributions to $15,000 in calendar year 2006 ($15,500 for 2007) for each participating employee age 49 and under, and $20,000 for each participating employee age 50 and older ($20,500 for 2007). Benefits under the 401(k) plan begin to be paid to the employee: (i) upon the attainment of normal retirement age (65), or if the employee chooses, any time after attaining early retirement date (age 55); (ii) the date the employee terminates employment with the Company; or (iii) a pre-retirement distribution equal to the value of the employees 401(k) account, provided the employee has attained age 59 1/2 and provided a written consent of the spouse (if married).
Effective September 1, 1996 certain executive employees of the Company became eligible to participate in a “Supplemental Executive Retirement Plan.” The Company’s Board of Directors adopted that plan on January 21, 1997. Subject to the discretion of the Board of Directors, the plan provides for the Company to credit to the account of each executive eligible to participate in the Supplemental Plan amounts equal to the difference between the benefits actually payable to the executive under the provisions of the defined benefit retirement plan and the amounts which would have been payable under the defined benefit retirement plan if certain provisions of the Internal Revenue Code did not prohibit the payment of such benefits.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Under state law and the Company’s Bylaws, each member of the cooperative is entitled to one vote, regardless of the number of shares the member holds. The Common Stock of the Company is voting stock and each member of the Company holds one share of Common Stock. The Preferred Stock of the Company is non-voting stock. The Company’s stock can only be held by individuals who are sugarbeet growers. To the Company’s knowledge, as of November 3, 2006, no person owned beneficially more than 5% of the Company’s outstanding shares and none of the principal officers listed above owned any such shares. As members of the cooperative, each director owns one share of Common Stock and is entitled to one vote. As a group, the directors own 5.37% of the outstanding Preferred Stock.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Each of the Company’s directors is also a sugarbeet grower or a shareholder member or representative of a shareholder member. By virtue of their status as such members of the Company, each director or the member he represents sells sugarbeets to the Company and receives payments for those sugarbeets. Such payments for sugarbeets often exceed $60,000. However, such payments are received by the directors, or the entities they represent, on exactly the same basis as payments are received by other members of the Company for the delivery of their sugarbeets. Except for the sugarbeet sales described in the preceding sentences, none of the directors or executive officers of the Company have engaged in any other transactions with the Company involving amounts in excess of $60,000.
than detailed in Items 1 thru 3 above total $12,550 for the fiscal year ended August 31, 2006 and $13,200 for the fiscal year ended August 31, 2005.
5.
It is part of the audit committee’s duties to appoint, compensate, and oversee the engagement of, retention, or replacement of, the independent auditors who audit the financial statements of the Company and its subsidiaries. The audit committee approves all audit services to be performed by the independent auditor. The committee ensures that the independent auditor is not engaged to perform any non-audit services that are considered “prohibited activities” by the Sarbanes-Oxley Act.
The audit committee approves 100% of the services described in items 1 thru 4 above.
6.
The percentage of hours expended on the principal accountant’s engagement to audit the Company’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees is zero.
PART IV.
Item 15a. Report of Independent Registered Public Accounting Firm
The Audit Committee
Minn-Dak Farmers Cooperative
Wahpeton, North Dakota
We have audited the accompanying consolidated balance sheets of Minn-Dak Farmers Cooperative (a North Dakota cooperative association) as of August 31, 2006, 2005, and 2004, 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 Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we do not express such an opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2006, 2005, and 2004, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Eide Bailly
Fargo, North Dakota
October 9, 2006
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2006, 2005, AND 2004
See Notes to Consolidated Financial Statements.
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2006, 2005, AND 2004
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 2006, 2005, AND 2004
See Notes to Consolidated Financial Statements.
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ INVESTMENTS
YEARS ENDED AUGUST 31, 2006, 2005, AND 2004
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 2006, 2005, AND 2004
MINN-DAK FARMERS COOPERATIVE
CONSOLIDATED STATEMENTS OF CASHFLOWS
YEARS ENDED AUGUST 31, 2006, 2005, AND 2004
See Notes to Consolidated Financial Statements.
NOTE 1 - PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activity
Minn-Dak Farmers Cooperative (the Company) is a North Dakota cooperative association owned by its member-growers for the purpose of processing sugarbeets and marketing sugar and co-products. Minn-Dak Yeast Company, Inc. (Minn-Dak Yeast) is a North Dakota corporation engaged primarily in the production and marketing of bakers yeast.
The majority of the net proceeds from the Company are from member business, whereas Minn-Dak Yeast is considered non-member business.
Principles of Consolidation
The financial statements include the accounts of the Company and its subsidiary, Minn-Dak Yeast, which, as of May 1, 2006, is 100% owned by the Company.
Receivable and Credit Policy
Trade receivables are uncollateralized customer obligations due under normal trade terms requiring payment within 15 to 90 days from the invoice date. Trade receivables are stated at the amount billed to the customer. Customer account balances with invoices dated over 90 days old are considered delinquent. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices. The carrying amount of trade receivables is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management reviews all trade receivable balances that exceed 90 days from the invoice date and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Additionally, management estimates an allowance to apply to the aggregate trade receivables to create a general allowance covering those amounts. The allowance is based on an evaluation of the receivables account with particular attention paid to the largest customer balances and the risk profile of the entire portfolio.
Credit Risk
The Company and subsidiary grant credit to food processors located throughout the United States and limited Canadian provinces. In addition, the Company grants credit to members located in North Dakota and Minnesota, for sugarbeet seed and limited produced co-products.
Inventories
Inventories of refined sugar, thick juice, pulp and molasses to be sold on a pooled basis are valued at net realizable value, while third-party purchased refined sugar to be sold on a pooled basis is valued at the lower of cost or market. Inventory of yeast is valued at the lower of average cost or market. Materials and supplies are valued at most recent purchase that
approximates cost. During the periods when sugarbeets are purchased from growers, but not yet converted into bin sugar or thick juice, that inventory is valued at grower payment cost. In valuing inventories at net realizable value, the Company, in effect sells the remaining inventory to the subsequent periods sugar and co-product pool.
Deferred Charges
Agricultural development and labor procurement costs incurred in connection with the sugarbeet 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 Company 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.
Capitalized assets include indirect costs such as fringe benefits, interest, and engineering when appropriate. The indirect costs capitalized for the years ended August 31, 2006, 2005, and 2004 were $152,751, $112,067, and $67,824, respectively. There was no construction-period interest capitalized for the years end ended August 31, 2006, 2005 and 2004.
Goodwill and Other Intangible Assets
In accordance with SFAS 142, the Company does not amortize goodwill. The Company evaluates goodwill and other intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recovered.
Investments in Other Corporations, Unconsolidated Marketing Subsidiaries, and Other Cooperatives
Equity Value Investments in Unconsolidated Marketing Investments - The investments in United Sugars Corporation and Midwest Agri-Commodities 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 Company’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 Company’s share of allocated patronage and capital credits.
Income Taxes
A consolidated federal income tax return is filed for the Company and its subsidiary. Deferred income taxes are provided for in the timing of certain temporary deductions/increases for financial and income tax reporting purposes.
Revenue Recognition
During the 2005 fiscal year, the Company modified its accounting policy from recognizing revenue at the point of shipment to recognizing revenue at the point of customer receipt. This change in accounting policy was immaterial to the Statements of Operations.
Accounting Estimate
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Uninsured Cash Balance
The Company maintains cash balances at various financial institutions. 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. The Company does not consider this a material risk.
Impairment and Disposal of Long-Lived Assets
The Company accounts for impairment or disposal of long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Long-lived assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell, and will cease to be depreciated. SFAS No. 144 also requires long-lived assets to be disposed of other than by sale to be considered as held and used until disposed of, requiring the depreciable life to be adjusted as an accounting change.
Shipping and Handling Costs
Shipping and handling costs are included in cost of product sold upon receipt of the Company’s product to its customers as well as the net realizable value calculations of the inventory through allocations from the Company’s marketing Subsidiary.
Advertising
The Company’s advertising costs are expensed as incurred.
Reclassifications
Certain amounts have been reclassified in the fiscal 2005 financial statements to conform to the 2006 presentation. The reclassification has no effect on the results of operations for fiscal 2006.
Recently Issued Accounting Pronouncements
FAS 157 Fair Value Measurements - This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement does not require any new fair value measurements. However the application of this statement may change the accounting practice regarding future mergers and acquisitions at the Company.
FAS 158 Employers Accounting for Defined Benefit Pension Plans and other Post Retirement Plans - This statement requires an employer that is a business entity and sponsors one or more single-employer defined benefit plans to recognize the funded status of a benefit plan, measured as the difference between plan assets at fair value and the benefit obligation in the financial statement.
The Company has a defined benefit pension plan for its employees. This accounting pronouncement may cause the Company to report other comprehensive income in future years. The impact of this pronouncement may be material in nature for the Company.
Concentration and Sources of Labor
The Company’s total regular rated and vacation rated hourly and salaried workforce consists of 442 employees, of which 60% is covered by a collective bargaining agreement. The agreement expires on May 31, 2011.
Risks and Uncertainties
Interest costs - The Company is at risk for interest rate changes in both seasonal and long-term debt. The Company has long-term variable and set rates on a substantial portion of its long-term debt. The variable rate has limited variability on its rate, therefore the Company
does not consider it’s interest rate risk for long-term debt to be material. Short-term debt risk is not expected to have a material impact on the Company’s annual return to its growers.
NOTE 2 - BUSINESS COMBINATIONS
The Company acquired the 20% non-controlling interest in Minn-Dak Yeast from Sensient Technologies Corp. (“Sensient”). The Company now owns 100% of Minn-Dak Yeast. The supplemental disclosure of non-cash investing and financing activities related to the acquisition of the non-controlling interest in Minn-Dak Yeast is shown below.
The acquisition cost for the non-controlling interest of Minn-Dak Yeast that was acquired from Sensient, including purchase price, legal fees and appraisal fees, was $2,768,383.
Intangible assets derived from the purchase of the non-controlling interest in Minn-Dak Yeast include Goodwill, which is not being amortized, and Customer Relations and a Non-Compete Agreement, which are being amortized on a straight-line basis over 15 years. The amortization of these intangible assets for the year ended August 31, 2006 was $12,800. There was no amortization expense for these assets for the years ended August 31, 2005 and 2004.
There are no contingent provisions or Research and Development assets purchased or written off in the purchase agreement between the Company and Sensient.
NOTE 3 - INVESTMENTS
The investment in stock of other corporations, unconsolidated marketing subsidiaries and other cooperatives consists of the following:
NOTE 4 - SHORT-TERM DEBT, LONG-TERM DEBT, AND CAPITAL LEASE PAYABLE
Short-Term Debt
Information regarding short-term debt for the years ended August 31, are as follows:
The Company has a $45,000,000 seasonal line of credit with CoBank, with $30,555,000 available on August 31, 2006. The line is secured with a first lien on substantially all property and equipment and current assets of the Company. The Company also utilizes the USDA’s CCC Sugar Loan Program to provide an additional source of seasonal financing.
Maximum borrowings, average borrowing levels and average interest rates for short-term debt for the years ended August 31, are as follows:
Long-Term Debt
On May 30, 2006, the Company renewed the seasonal and term-debt lines of credit with CoBank.
Information regarding long-term debt at August 31 is as follows:
The Company has complied with the terms of its loan agreement covenants for the years ended August 31, 2006, 2005, and 2004.
In addition, the Company can make special advance payments on its term loans with CoBank after its seasonal loans have been paid in full, with the understanding that the special advance payments will be re-advanced subject to the reinstatement provisions, prior to the granting of any new seasonal loans. Any such advance payments are subject to a commitment fee of .25% of the daily un-advanced commitment.
Interest expense totaled $3,544,118, $2,899,283, and $2,919,624 for 2006, 2005 and 2004, respectively.
Principal amounts due on the Company’s long-term debt are as follows:
Capital Leases
The Company is the lessee of equipment under capital leases, with varying expiration dates. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. This equipment is being depreciated over its estimated useful life. Depreciation of assets under these capital leases is included in depreciation expense for 2006.
Minimum future lease payments under capital leases are as follows:
NOTE 5 - BONDS PAYABLE
The Company financed construction projects related to the processing facility through the sale of Solid Waste Disposal Revenue and Industrial Development Revenue Bonds, Series 1996 and 2002, by Richland County North Dakota. The Company has leased the property and equipment from the County for the sum of the annual principal and interest payments on the bonds. Under the terms of the lease, the Company is responsible for the real estate taxes, insurance, repairs and maintenance, and other costs incident to the ownership of the property. The leased property is included with property and equipment in the financial statements and the bonds have been recorded as a direct obligation of the Company. Ownership of the property and equipment will transfer to the Company when the bonds are repaid in full. The bonds are guaranteed by the Company. The Company has letter of credit arrangements with a bank that provide security for obligations under the bonds payable totaling approximately $19,810,000 at August 31, 2006. There were no outstanding advances under these letter of credit arrangements at August 31, 2006. Details relative to the Company’s obligations under the lease agreement are as follows:
Minimum future principal payments required on the obligations under bonds payable are as follows:
Bond financing costs incurred in connection with the financing of the construction projects related to the processing facility have been capitalized. The Company is amortizing the bond financing costs over the terms of the financing obtained. The effective interest method of amortization is used.
Amortization of bond financing cost was $36,938 for each of the years ended August 31, 2006, 2005 and 2004.
NOTE 6 - MEMBERS’ INVESTMENT AND GROWER PAYMENTS
The ownership of non-dividend bearing common stock is restricted to a “member-producer,” as defined in the by-laws of the Company. Each member-producer shall own only one share of common stock and is entitled to one vote at any meeting of the members. Each member-producer is also required to purchase units of preferred stock and is entitled to grow the maximum acres per unit of preferred stock as is authorized by the Board of Directors each farming year. The Company’s board of directors authorized the members to plant 1.50, 1.45 and 1.57 acres per unit of preferred stock for the fiscal years 2006, 2005 and 2004 respectively. A unit consists of one share each of Class A, Class B and Class C preferred stock. The
preferred shares are nonvoting and non-dividend bearing. All transfers and sales of stock must be approved by the Company’s board of directors.
The Company’s net income, determined in accordance with generally accepted accounting principles consistently applied, shall be distributed annually on the basis of delivered pounds of sugar, in cash or in the form of credits to each member-producer’s patronage credit account as established on the books of the Company. In the event of a loss in any one year, the Company shall act in such a manner as to first recoup the loss from those patrons who were patrons in the year in which the loss occurred.
Under the terms of the Company sugarbeet growing contracts with each of its member-producers, the Company is obligated to pay the member-producers for sugarbeets delivered at a price per pound of extractable sugar. However, if, in the opinion of the Company’s primary lender, CoBank, the working capital position of the Company is insufficient, the Company shall retain from the price to be paid per pound of extractable sugar such amounts as are deemed by the bank to be necessary for operations, the deductions to be made at such time as the bank shall require. The amount so retained shall be evidenced in the records of the Company by equity credits in favor of the growers. The board of directors has the power to determine whether such retains shall be “qualified” or “nonqualified” for income tax purposes.
For the year ended August 31, 2006, the Company allocated patronage of $4,220,538 to the members. For the year ended August 31, 2005, the Company allocated patronage of $5,191,808 to the members. For the year ended August 31, 2004, the Company allocated patronage of $5,128,308 to the members.
During the year ended August 31, 2006, the Company revolved the remaining 55% of the unit retains and allocated patronage for the fiscal year ended August 31, 1997, totaling $2,490,804 and 100% of the unit retains and allocated patronage for the fiscal years ended August 31 1998 and 1999 totaling $870,090, and 6% of the unit retains and allocated patronage for the fiscal year ended August 31, 2001 totaling $259,452 for a grand total revolved of $3,620,346. There were no unit retains or equity withheld during the fiscal year ended August 31, 2000. In addition, during fiscal year 2006, although the grower payable was correctly stated on the August 31, 2005 balance sheet, a misclassification was relied upon to make the final 2004 crop grower payment, resulting in a payment that exceeded the amount that was required. The Company has corrected the grower payment by reducing the 2004 crop allocated patronage by $320,224.
During the year ended August 31, 2005, the Company revolved the remaining 92% of the unit retains and allocated patronage for the fiscal year ended August 31, 1996 and 40% of the unit retains and allocated patronage for the fiscal year ended August 31, 1997, totaling $2,533,592 and $2,008,115 in each respective year, for a total of $4,541,707. In addition, unit retains and allocated patronage owned by certain estates were redeemed at a discount. The discount represented the difference between the book value of these items, totaling $50,102, and the present value of the estimated future redemptions.
During the year ended August 31, 2004, the Company revolved the remaining 25% of the unit retains and allocated patronage for the fiscal year ended August 31, 1994, 100% of the unit
retains and allocated patronage for the fiscal year ended August 31, 1995, and 8% of the unit retains and allocated patronage for the fiscal year ended August 31, 1996, totaling $828,628, $3,475,806, and $213,271 in each respective year, for a total of $4,517,705. In addition, unit retains and allocated patronage owned by certain estates were redeemed at a discount. The discount represented the difference between the book value of these items, totaling $10,605, and the present value of the estimated future redemptions.
NOTE 7 - INVESTMENT IN MARKETING COOPERATIVES
The Company has formed common marketing agency agreements with United Sugars Corporation (United Sugars) and Midwest Agri-Commodities (Midwest) to be the exclusive marketing agents for all products produced by them and other member processors.
The Company’s ownership requirement in United Sugars is calculated periodically and is based on the average volume of sugar produced during the five previous fiscal years. The investment is accounted for on the equity method and the amount of sales and related costs recognized by each member processor is allocated based on their pro-rata share of production for the year. The Company provided United Sugars with cash advances on an ongoing basis for operating and marketing expenses incurred. During the years ended August 31, 2006, 2005, and 2004, the Company had advanced $19,719,946, $23,769,970 and $19,899,596, respectively. The Company had outstanding advances due from United Sugars of $353,465 for the year ended August 31, 2006, $1,104,338 for the year ended August 31, 2005, and outstanding advances due to United Sugars of $364,698, for the year ended August 31, 2004.
The Company has a one-fourth ownership interest in Midwest. The amount of the investment is accounted for using the equity method. All sugarbeet pulp and a portion of the molasses produced are sold by Midwest as an agent for the Company. The amount of sales and related costs to be recognized by each owner is allocated based on their pro-rata share of production for the year. The owners provide Midwest with cash advances on an ongoing basis for operating and marketing expenses incurred by Midwest. The Company advanced Midwest $962,334, 1,060,826 and $1,887,774, respectively, during the years ended August 31, 2006, 2005, and 2004. The Company had outstanding advances due to Midwest of $179,196, $368,409 and $624,164, as of August 31, 2006, 2005, and 2004, respectively. The owners of Midwest are guarantors of the short-term line of credit Midwest has with CoBank.
NOTE 8 - INCOME TAXES
The Company is a nonexempt cooperative as described under Section 1381(a)(2) of the Internal Revenue Code of 1986. Accordingly, net margins from business done with member patrons, which are allocated and paid as prescribed in Section 1382 of the Code, will be taxable to the members and not to the Company. To the extent that net margins are not allocated and paid as stated above or arise from business done with non-members, the Company shall have taxable income subject to corporate income tax rates.
The significant components of deferred tax assets and liabilities included on the balance sheet at August 31, is as follows:
The state and federal operating loss carryforwards totaling approximately $19,700,000 will expire in 2019 through 2025.
Significant temporary timing differences between financial and income tax reporting are as follows:
1.
When non-qualified unit retention capital and allocated patronage are elected by the board of directors, the Company is not allowed an income tax deduction until they are distributed in cash to the member-producers, whereas qualified unit retention capital and allocated patronage are deducted when declared.
2.
Depreciation - For financial reporting purposes, the companies use straight-line and accelerated methods of depreciation with lives of 8 to 40 years, while, for income tax purposes, the companies use required statutory depreciable lives and methods.
3.
Non-qualified patronage credits from investments in other cooperatives - For financial statement purposes, the companies recognize income when the patronage credit notification is received while, for income tax purposes, the companies recognize income when the patronage is received in cash.
4.
Inventory capitalization - For income tax reporting purposes, certain overhead costs are included as a part of inventory costs in accordance with inventory capitalization rules. These costs are charged to expense as incurred for financial reporting purposes.
5.
Recognition of vacation pay - For financial reporting purposes, vacation pay is charged to expense as accrued, whereas, for income tax purposes, vacation pay is deducted in accordance with IRS rules.
6.
Capital leases - For financial reporting purposes, equipment under a capital lease are included in fixed assets and depreciated using a straight line method, with a corresponding liability also recorded. For tax purposes, statutory depreciable lives and methods are used.
7.
As of August 31, 2006, the Company has $1,654,000 in non-member long-term tax liability. This liability resulted from the book to tax differences for Minn-Dak Yeast non-member activity. As of September 1, 2006, Minn-Dak Yeast activity will be classified as member activity. The Company will amortize the $1,654,000 long-term liability over the approximate remaining book life of the Minn-Dak Yeast assets.
NOTE 9 - DEPRECIATION
The Company’s depreciation expense for the years ended August 31, 2006, 2005 and 2004 was $7,750,601, $7,368,561 and $7,290,456, respectively.
NOTE 10 - ENVIRONMENTAL MATTERS
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. While the Company will continue to have ongoing environmental compliance issues, currently there are no pending regulatory enforcement actions and the
Company believes that it is in substantial compliance with applicable environmental laws and regulations.
The Company cannot predict whether future changes in environmental laws or regulations might increase the cost of operating its facilities and conducting its business. Any such changes could have financial consequences for the Company and its members.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
During 2000, the Company sold certain notes receivable with recourse. The Company’s contingent liability related to these notes totaled $370,295 as of August 31, 2006.
NOTE 12 - OPERATING LEASES
The Company is a party to various operating leases for vehicles and equipment. Future minimum payments for the years ending August 31, under these obligations, are as follows:
Operating lease and contract expenses for the years ended August 31, 2006, 2005, and 2004, totaled $869,310, $1,005,937 and $972,504, respectively.
NOTE 13 - EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company has a qualified 401(k) employee benefit plan that covers all employees meeting eligibility requirements. The Company’s matching contribution to the plan is at a level of 100 percent of employee contributions, with a maximum of 4 percent of compensation for the years ended August 31, 2006, 2005, and 2004. Employer contributions to the plan totaled $511,936, $499,862 and $466,114 for the years ended August 31, 2006, 2005, and 2004, respectively.
Pension Plan
The Company has a non-contributory defined benefit plan, which covers substantially all employees who meet certain requirements of age, length of service and hours worked per year.
The following table sets forth the plan’s funded status at August 31:
The net periodic pension cost for the years ended August 31, includes the following components:
The Company’s pension plan weighted-average asset allocation at August 31, 2006, by asset category is as follows:
Contributions
The Company expects to contribute $1,120,000 to its pension plan in 2007.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is generally defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. Quoted market prices are generally not available for the Company’s financial instruments. Accordingly, fair values are based on judgments regarding anticipated cash flows, future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. Changes in the assumptions could significantly affect the estimates.
The following methods and assumptions were used by the Company to estimate fair value of the financial instruments, and the estimated fair values of the Company’s financial instruments as of August 31, 2006, 2005, and 2004, are as follows:
Investments - The investments in CoBank, Dakota Valley Electric Cooperative, Inc. and all other cooperatives are stated at cost, plus the cooperative’s share of allocated patronage and
capital credits. The investments in United Sugars Corporation and Midwest Agri-Commodities are accounted for using the equity method, wherein the investments are recorded at the amount of the underlying equity in the net assets of the investments and adjusted to recognize the cooperative’s share of the undistributed earnings or losses. The Company believes it is not practicable to estimate the fair value without incurring excessive costs because there is no established market for this stock and it is inappropriate to estimate future cash flows, which are largely dependent on future patronage earnings of the investment.
Long-term debt and bonds payable - The fair value of obligations under long-term debt and bonds payable are estimated based on the quoted market prices for the same or similar issues or on the current rates offered for debt of similar maturities.
Item 15c.
Exhibits
Statement re Computation of Ratio of Net Proceeds to Fixed Charges.
Subsidiaries of the Registrant. Incorporated by reference from the Company’s Registration Statement on Form S-1 (File No. 33-94644), declared effective September 11, 1995.
31.1
Certification of the President/Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act.
31.2
Certification of the Executive Vice President/Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act.
31.3
Certification of the Controller/Chief Accounting Officer in accordance with Section 302 of the Sarbanes-Oxley Act.
Certification of the President/Chief Executive Officer and the Executive Vice President/Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act.
99.1
Audit Committee Charter. Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2003 as filed on November 26, 2003.
*Management contract, compensatory plan or arrangement.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DUTIES INDICATED.