Item 1. BUSINESS
GENERAL
The Company is a Minnesota agricultural cooperative corporation owned by approximately 2,900 sugarbeet growers in the Minnesota and North Dakota portions of the Red River Valley. The Red River Valley is the largest sugarbeet growing area in the United States, forming a band approximately 35 miles wide on either side of the North Dakota and Minnesota border and extending approximately 200 miles south from the border of the United States and Canada. The Company was organized in 1973 by sugarbeet growers to acquire the business and assets of the American Crystal Sugar Company, then a publicly held New Jersey corporation in operation since 1899. The Company’s Board of Directors establishes sugarbeet acreage planting requirements in the Red River Valley (the Red River Valley Crop) each year based on factory processing capacity, expected crop quality, government regulations and other factors. Based on the tons of sugarbeets required to meet sugar production levels, the total authorized acres to be planted are allocated ratably to each preferred share held by the members. The Company processed sugarbeets from approximately 494,000 acres for the 2007 crop and expects to process sugarbeets from approximately 421,000 acres for the 2008 crop. By owning and operating five sugarbeet processing facilities in the Red River Valley, the Company provides its shareholders with the ability to process their sugarbeets into sugar and agri-products such as: molasses; sugarbeet pulp; and by-products of the molasses desugarization process, betaine and concentrated separated by-product (CSB).
The Company, through its wholly-owned subsidiary, Sidney Sugars Incorporated (Sidney Sugars), owns two sugarbeet processing facilities. At the Sidney, Montana, facility, the Company processed non-member sugarbeets from approximately 35,000 acres for the 2007 crop and expects to process from approximately 15,000 acres from the 2008 crop. The Torrington, Wyoming, facility has been leased on a long-term basis to another sugar producer.
The Company, through its wholly-owned subsidiary, Crab Creek Sugar Company (Crab Creek), controls the long-term production of sugar at a sugarbeet processing facility at Moses Lake, Washington. Neither Crab Creek nor the Company currently operates or intends to operate the Moses Lake facility.
The Company is the controlling member of ProGold Limited Liability Company (ProGold), which owns a corn wet-milling plant in Wahpeton, North Dakota, that is currently being leased to Cargill, Incorporated (Cargill). On November 6, 2007, ProGold entered into an amended lease agreement with Cargill that superseded and replaced the previous 10 year lease between ProGold and Cargill and provides that (1) Cargill will pay ProGold average annual rental payments equal to $21,900,000, and (2) that the term of the lease be extended until December 31, 2017.
On May 1, 2007, the Company acquired CIT Capital USA Inc.’s 50 percent ownership interest in Crystech, LLC (Crystech) resulting in the Company’s 100 percent ownership of Crystech. Crystech owned the molasses desugarization facility adjacent to the Company’s processing facility in Hillsboro, North Dakota. Effective May 31, 2007, Crystech was dissolved with all assets and liabilities transferred to the Company.
The Company’s sugar marketing agent, United Sugars Corporation (United), is a cooperative owned by the Company, Minn-Dak Farmers Cooperative and United States Sugar Corporation. The Company’s agri-products are marketed through a marketing agent, Midwest Agri-Commodities Company (Midwest). Midwest is a cooperative owned by the Company, Minn-Dak Farmers Cooperative, Southern Minnesota Beet Sugar Cooperative and Michigan Sugar Company.
Operating Segments
The Company has identified two reportable operating segments: Sugar and Leasing. The Sugar segment is engaged primarily in the production and marketing of sugar from sugarbeets. It also sells agri-products and sugarbeet seed. The Leasing segment is engaged in the leasing of a corn wet milling plant used in the production of high-fructose corn syrup. For financial information by segment see Note 12 of “Notes to the Consolidated Financial Statements.”
Principal Products Produced
The Company is engaged primarily in the production and marketing of sugar from sugarbeets. Total sugar sales accounted for 87.2 percent, 88.6 percent and 88.5 percent of the Company’s consolidated total revenues for the years ended August 31, 2008, 2007 and 2006, respectively. United Sugars Corporation, the Company’s sugar marketing agent, sells sugar primarily to industrial users such as confectioners, breakfast cereal manufacturers and bakeries. For the fiscal year ended August 31, 2008, 88.9 percent (by weight) of the sugar was sold to industrial users. The remaining portion is marketed by United Sugars Corporation to wholesalers and retailers under the “Crystal Sugar” and various private labels for household consumption. With regard to brand name sales, the Company licenses the use of the “Crystal” trademark to United Sugars Corporation.
The majority of United Sugars Corporation’s sugar sales are contracted one or more quarters in advance.
The Company also sells agri-products such as: molasses; sugarbeet pulp; betaine and concentrated separated by-product (CSB), by-products of the molasses desugarization process; and sugarbeet seed. Substantially all of the Company’s agri-products are marketed through Midwest Agri-Commodities Company, a common marketing agency. Sugarbeet pulp is marketed to livestock feed mixers and livestock feeders in the United States and foreign markets. A large proportion of the Company’s pulp production is exported to Japan and Europe. The market for sugarbeet pulp is affected by the availability and quality of competitive feedstuffs and foreign exchange rates. Sugarbeet molasses is marketed primarily to yeast manufacturers, livestock feed mixers and livestock feeders. Total agri-product sales accounted for 9.9 percent of the Company’s consolidated total revenues during fiscal 2008, of which export agri-product sales accounted for 4.6 percent of such revenues. Agri-products sales accounted for 8.8 percent and 8.2 percent of the Company’s consolidated total revenues in fiscal 2007 and fiscal 2006, respectively, while agri-product export sales accounted for 3.5 percent and 3.8 percent of the Company’s total revenues in fiscal 2007 and fiscal 2006, respectively.
There is no single customer of United or Midwest attributable to the Company that accounts for 10 percent or more of the revenues of the Company.
The Company’s total annual sugar and agri-product production is influenced by the amount and the quality of sugarbeets grown by its members and non-members, the processing capacity of the Company’s plants, by its ability to store harvested sugarbeets and by government programs and regulations.
Raw Materials
The Company purchases all of its Red River Valley sugarbeets from members under contract with the Company. All members were a party to a five-year contract with the Company covering the growing seasons of 2003 through 2007. In September 2007, the Board of Directors approved a new five year contract for the 2008 through 2012 crop years which will automatically renew for additional five-year terms unless terminated by one of the parties at the end of the current term. In addition, each member has an annual contract with the Company specifying the number of acres the member is obligated to grow during that year. Each share of Preferred Stock held by a member requires that member to grow one acre of sugarbeets, subject to the planting tolerance, for sale to the Company. The Company’s Board of Directors has the discretion to adjust the acreage that is required to be planted for each share of Preferred Stock held by the members. The Company’s Board of Directors set the planting tolerance for the 2008 crop year at .83 acres per Preferred Share, with a planting tolerance of plus or minus .02 (.81 minimum and .85 maximum). Based on current market conditions and processing capacity, the Company estimates planting tolerances for the 2009 crop year and beyond will be in the range of .75 to .85 acres per Preferred Share. The Board of Directors and management regularly review and determine the relationship between the ownership of Preferred Stock and acreage planting.
The gross beet payment is the value of recovered sugar from the sugarbeets a member delivers plus the member’s share of agri-product revenues, minus the member’s share of member business operating costs. The following allowances, costs and deductions, if applicable, are used to adjust the gross beet payment to arrive at the net beet payment: hauling program allowance and costs, pre-pile quality premium and costs, tare incentive premium/penalty program, late harvest program costs and unit retains. Members are paid a hauling allowance based on the distance they must transport sugarbeets for delivery to the Company and may also receive an allowance for early delivery of sugarbeets prior to the commencement of the stockpiling of harvested sugarbeets. The costs of these programs are shared among members on the basis of the net tonnage of sugarbeets delivered by each member.
Under the grower contracts, payments to members for sugarbeets must be made in at least three installments: (i) on or about November 15, the Company pays its members an amount equal to 65 percent of the Company’s estimate of the member’s net beet payment; (ii) on or about March 31, the Company pays an amount, which combined with the November payment, equals 90 percent of the member’s estimated net beet payment; (iii) and not more than 15 days after completion and acceptance of the audit of the Company’s annual consolidated financial statements, the Company pays the remainder of the member’s net beet payment. Except for unit retains, the Company must pay to its members for their sugarbeets all proceeds from the sale of the members’ sugar and agri-products in excess of related member business operating costs, as described above.
All of the sugarbeets processed at the Sidney, Montana, factory are purchased from non-member growers under contract with Sidney Sugars. Each non-member grower has an annual contract with Sidney Sugars specifying the number of acres the non-member grower is obligated to grow during each year.
The price per ton of sugarbeets paid to the growers who deliver to Sidney Sugars (the Scale Payment) is determined according to the sugarbeet payment scale contained in the grower contract and is calculated based on Sidney Sugars’ average net return for sugar from that year’s crop, the adjusted average sugar content of each grower’s sugarbeets and sugarbeet storage results.
Under grower contracts between Sidney Sugars and its growers, payments to these growers for sugarbeets must be made in three installments following delivery of the crop: (i) in November, Sidney Sugars pays the growers an amount equal to 65 percent of the estimated Scale Payment for that year’s crop; (ii) in April, Sidney Sugars pays an amount, which combined with the November payment, equals 90 percent of the estimated Scale Payment for that year’s crop; (iii) and in October, Sidney Sugars pays the remainder of the actual Scale Payment.
Seasonality
The period during which the Company’s plants are in operation to process sugarbeets into sugar and agri-products is referred to as the “campaign.” During the campaign, the Company’s factories operate twenty-four hours per day, seven days per week. In the Red River Valley, the campaign typically begins in September and continues until the available supply of sugarbeets has been depleted, which generally occurs in May of the following year. Based on current processing capacity, an average campaign lasts approximately 250 days, assuming normal crop yields. At the Sidney, Montana factory, the campaign begins in late September or early October. The 2008 campaign lasted 139 days while the 2009 campaign, due to a reduction in acres planted by the non-member growers, is expected to last approximately 60 days.
The sales of sugar and agri-products occur ratably throughout the year with modest increases in sugar sales occurring prior to holiday seasons.
Sales Backlog
The backlog of any unfilled sales orders at August 31, 2008 and 2007, was not material to the Company.
Market and Competition
Current United States government statistics estimate total United States sugar consumption at approximately 200 million hundredweight for the year beginning October 1, 2007 and ending September 30, 2008. For the same period ending September 2007, total consumption was approximately 189 million hundredweight. Comparing the two years shows an increase in demand of approximately six percent.
The United States refined sugar market has grown over the past twenty years, despite the demand lost to the substitution of high fructose corn syrups for sugar in beverages and certain food products. Non-nutritive sweeteners such as aspartame have also been developed to substitute for sugar. Corn sweeteners and non-nutritive sweeteners constitute a large portion of the overall sweetener market. The Company believes that the United States market for sugar will reflect minimal increases or be relatively flat in the near future.
The United States sugar industry has been subject to industry consolidation. Today, there are fewer than 10 sugar sellers, with approximately 73 percent of United States sugar market share concentrated in the top three sellers. The Company’s sugar production and sales represent approximately 18 percent of the total domestic market for refined sugar in 2007/2008. The Company had the right to market, or to have marketed on its behalf, approximately 35 million hundredweight of sugar from the 2007 crop. Sugar sales by United Sugars Corporation, the Company’s marketing agent, represent approximately 28 percent of the United States sugar market.
United is currently the second largest marketer of sugar in the United States. Main competitors in the domestic market are The American Sugar Refining Company; Imperial Sugar Company; Cargill, Incorporated; The Amalgamated Sugar Company LLC; Michigan Sugar Company; and The Western
Sugar Cooperative. Because sugar is a fungible commodity, competition in the United States sugar industry is primarily based upon price, customer service and reliability as a supplier.
Government Programs and Regulations
Food, Conservation and Energy Act of 2008
The Food, Conservation and Energy Act of 2008 (the Farm Bill) enacted in May, 2008, contains several provisions related to the domestic sugar industry, aimed at achieving balance and stability in the U.S. sugar market while minimizing the cost to the Federal government. The Farm Bill applies to the 2008 through 2012 crop years. Generally, the Farm Bill:
· maintains a non-recourse loan program,
· sets a minimum overall allotment quantity for U.S. producers at no less than 85% of domestic consumption,
· maintains a system of marketing allocations for sugarbeet and sugar cane producers,
· restricts imports of foreign sugar and
· provides a new market balancing mechanism to divert any oversupply of sugar from sugar producers to ethanol producers.
Under the Farm Bill, sugar processors can borrow funds on a non-recourse basis from the Commodity Credit Corporation (CCC), with repayment of such funds secured by sugar. If the price of sugar drops below the forfeiture price, the processors can forfeit the sugar securing the loans to the CCC in lieu of repayment. Processors may also obtain CCC loans for “in-process” sugar or syrups at 80 percent of the loan rate.
The Farm Bill incorporates gradual loan rate increases for raw and refined sugar. For raw sugar, the loan rate will increase three-quarters of a cent per pound, raw value, phased-in in quarter-cent increments over crop years 2009-2011. Raw cane loan rates will remain at 18.00 cents/lb in 2008 then rise gradually to 18.75 cents by 2011, and they will remain at 18.75 cents/lb for the 2012 crop year. Refined beet sugar loan rates are set at 22.90 cents/lb for the 2008 crop and thereafter are set at a rate equal to 128.5 percent of the loan rate per pound for raw cane sugar for each of the 2009 through 2012 crop years.
The United States Department of Agriculture (USDA) has historically maintained raw and refined sugar prices above the forfeiture price without cost to the U.S. Treasury by regulating the supply of sugar in the U.S. market through management of a tariff rate quota system. Currently, forty exporting countries retain guaranteed preferential access to the U.S. market under World Trade Organization (WTO) and Free Trade Agreement (FTA) rules. Mexico’s access has been unlimited since January 1, 2008. This Farm Bill sets a minimum overall allotment quantity for U.S. producers at no less than 85% of domestic consumption and provides a market balancing mechanism if there is an oversupply in the domestic sugar market. If the Secretary of Agriculture determines there is an oversupply of sugar, the new market balancing mechanism requires the Secretary to divert the excess sugar from sugar producers to ethanol producers while minimizing the cost to the U.S Treasury. Although the market balancing mechanism will provide sustainability to the sugar industry in the short term, there is no assurance that the sugar-to-ethanol program will be in place after the Farm Bill expires.
The marketing allotments and allocations set forth under the Farm Bill affect the sugar produced from the 2008 crop through the 2012 crop. On an annual basis, the marketing allotments and the corresponding allocation to the Company will dictate the amount of sugar the Company can sell into the
domestic market. The Company’s marketing allocation for the 2008 crop is currently set at approximately 35 million hundredweight. The Company’s allocation may reduce or increase the amount of sugar the Company can market for a given year, thus affecting the number of acres of sugarbeets required for processing to produce that amount of sugar.
North American Free Trade Agreement
The North American Free Trade Agreement (NAFTA) governs sweetener trade between the United States and Mexico. Under the NAFTA, tariffs on over-quota imports of sugar from and exports of sugar to Mexico expired on January 1, 2008. Imports of Mexican sugar could cause material harm to the United States sugar market. The Company has no way to predict the extent to which Mexico will take advantage of its export opportunities.
Regional and Bilateral Free Trade Agreements
Under the current administration, the United States government is pursuing an aggressive agenda on international trade. It is seeking to negotiate new free trade agreements with a number of countries and regions that are major producers of sugar. The primary agreements affecting sugar that are completed or are being negotiated, to the Company’s knowledge, include the Peru Free Trade Agreement, Colombian Free Trade Agreement, Panama Free Trade Agreement, as well as, agreements with the Free Trade Area of the Americas, the Association of Southeast Asian Nations, South Africa, Thailand, and others. The Company believes these agreements, if they reach fruition, could negatively impact the Company’s profitability. If increases in guaranteed access or reductions in sugar tariffs are included in these agreements, excess sugar from these regions could enter the U.S. market and put pressure on domestic sugar prices.
The Peru Free Trade Agreement has been ratified by the U.S. Congress. Negotiations have been completed on the U.S.-Colombian Free Trade Agreement and the U.S.-Panama Free Trade Agreement but they have not been ratified by the U.S. Congress. The Company does not know when these trade agreements will be brought before Congress for a vote.
The Doha Round negotiations of the WTO continue to be pursued by the U.S. Administration and some of its international counterparts. It is unclear at this time whether negotiations will be completed. If the negotiations are completed, the outcome of any negotiated arrangement could have significant adverse consequences for the Company.
The U.S. sugar industry and the Company, as an influential member of such industry, recognize the potential negative impact that could result if these agreements are entered into by the United States and are taking steps to attempt to positively influence the outcome. The Company and the sugar industry intend to continue to focus significant attention on trade issues in the future.
The impact of the various trade agreements on the Company cannot be assessed at this time due to the uncertainty concerning the terms of the agreements and whether they will ultimately be implemented. It is possible, however, that the passage of various trade agreements could have a material adverse effect on the Company through a reduction in acreage that can be planted by the Company’s shareholders and by the growers for Sidney Sugars Incorporated, and/or a reduction in sugar selling prices, and a corresponding reduction in the beet payment to the shareholders and the Company earnings.
Employees
As of October 1, 2008, the Company had 1,361 full-time employees, of which 1,111 were hourly and 250 were salaried. The Company had 24 part-time employees. In addition, the Company employs approximately 811 hourly seasonal workers, approximately 453 during the sugarbeet harvest and approximately 358 during the remainder of the sugarbeet processing campaign. During the sugarbeet harvest, the Company also contracts with third party agencies for approximately another 1,300 additional workers.
Substantially all of the hourly employees at the Company’s factories, including full-time and seasonal employees, are represented by the Bakery, Confectionery, Tobacco Workers and Grain Millers (BCTGM) AFL-CIO, and are covered by collective bargaining agreements expiring July 31, 2011 for the Red River Valley factory employees and April 30, 2010 for the Sidney, Montana, factory employees. Office, clerical and management employees are not unionized, except for certain office employees at the Moorhead and Crookston, Minnesota, and Hillsboro, North Dakota, factories who are covered by the collective bargaining agreement with the BCTGM. The Company considers its employee relations to be good.
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 compliance program designed to meet these environmental laws and regulations. The Company believes that it is in substantial compliance with applicable environmental laws and regulations. From time to time, however, the Company may be involved in investigations or determinations regarding non-material matters that may arise.
The Company’s Crookston, East Grand Forks and Moorhead, Minnesota factories have experienced hydrogen sulfide emissions from their water treatment ponds that have exceeded permissible limits. On July 19, 2007, the Company received a notice of violation from the Minnesota Pollution Control Agency (MPCA) related to emissions that occurred in fiscal 2005 and 2006. The Company’s Crookston, East Grand Forks and Moorhead, Minnesota factories also experienced hydrogen sulfide emissions from their water treatment ponds in fiscal 2007 and 2008 that exceeded permissible limits. A penalty assessment is currently under consideration by the MPCA. While it is likely that the Company may be assessed penalties and/or fines related to these occurrences, as of the date of this report none have been assessed. Any potential penalties and/or fines, while possibly significant, are not expected to be material to the Company.
All of the Company’s factories contain various types of highly volatile dust from sources such as sugar and sugarbeet pulp pellets. The Company as well as the Occupational Safety and Health Administration (OSHA) have been on heightened awareness subsequent to a sugar dust explosion at a domestic refinery in 2008. The Company is evaluating potential exposure areas and increased remediation efforts to minimize risk. Significant levels of capital expenditures are expected but are not currently estimated.
The Company is also addressing the following environmental matters:
· In October 2007, the East Grand Forks, Minnesota factory failed a stack emission performance test on its pellet cooler. A notice of non-compliance was issued by the MPCA on December 4, 2007 related to this occurrence.
· In November 2007, the Moorhead, Minnesota factory failed a stack emission performance test on its lime kiln. A notice of non-compliance was issued by the MPCA on February 5, 2008 related to this occurrence.
· In November 2007, the Company received a Compliance Monitoring Survey-Letter of Warning from the MPCA for the Crookston Minnesota factory.
· On February 15, 2008, the Montana Department of Environmental Quality (MDEQ) issued a notice of violation related to the retention of environmental monitoring data at the Sidney, Montana factory.
Corrective actions have been taken related to these occurrences. While the Company may be assessed penalties for these occurrences, as of the date of this report none have been assessed. Any potential penalties assessed are not expected to be material to the Company.
Capital expenditures are required to minimize environmental risk. The Company’s capital expenditure budget at the beginning of the current fiscal year included approximately $7.7 million for environmental related projects at the Company’s factory locations. During 2008, an additional $3.6 million was approved. Expenditures during fiscal 2008 on these projects were approximately $3.0 million while total project-to-date spending on these projects has been $6.3 million. Environmental related projects that were placed into service during fiscal 2008 totaled approximately $5.6 million. The amount and timing of any additional capital expenditures that may be required is not currently known.
Available Information
The Company’s corporate headquarters are located at 101 North Third Street, Moorhead, Minnesota 56560, telephone number (218) 236-4400. The Company’s fiscal year ends August 31. The Company’s website is www.crystalsugar.com. The Company files annual, quarterly and periodic reports with the United States Securities and Exchange Commission (SEC). These reports can be accessed by selecting “Links” on the Company’s website or electronic or paper copies can be obtained free of charge upon request. In addition, the Company’s reports may be read or copied at the SEC Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at http://www.sec.gov that contains reports and other information filed electronically about the Company.
Item 1A.
Item 1A. RISK FACTORS
The risks described below together with all of the other information included in this Annual Report on Form 10-K should be considered carefully. The risks and uncertainties described below and elsewhere in this Annual Report on Form 10-K are not the only ones we face. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the beet payments made to our members may decrease, the value of our Preferred Stock could fall, and a member could lose all or part of their investment.
If we do not continue to minimize our operating expenses, we may not be able to compete effectively in our industry.
Our strategy involves, to a substantial degree, maximizing profitability by continuing to control operating expenses. In furtherance of this strategy, we have engaged in ongoing, company-wide efficiency activities intended to increase productivity and reduce costs. These activities have included
realigning and streamlining our operations and optimizing the efficiency of our production facilities. We cannot assure you that our efforts will result in our continued or increased profitability.
While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring us, as of August 31, 2008, to include a report of management on our internal control over financial reporting in our annual reports on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, the independent registered public accounting firm auditing our financial statements will be required, as of August 31, 2010, to attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting. Management has conducted a rigorous review of our internal control over financial reporting in order to assure compliance with the Section 404 requirements. However, if our independent auditors interpret the Section 404 requirements and the related rules and regulations differently from us or if our independent auditors are not satisfied with our internal control over financial reporting or with the level at which it is documented, operated or reviewed, they may, when required, decline to attest to management’s assessment or issue a qualified report.
An oversupply of sugar could adversely affect the price of sugar and our results of operations.
The domestic sugar market is reactive to any oversupply of refined sugar. Many factors can lead to an oversupply of sugar. Excess supply may result in a decline in domestic sugar prices. Lower sugar prices directly impact profitability of selling refined sugar in the United States. If the selling price of sugar decreases, our revenues will decrease which will result in a direct negative impact on our profitability.
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 United States government has been engaged in regional and bilateral trade negotiations with countries that produce sugar. If the United States government enters into bilateral trade agreements with sugar producing countries, the amount of sugar in the domestic sugar market could increase. A change in the supply of sugar could put pressure on the price of sugar, which would impact our profitability.
The success or failure of our business is linked to certain government programs, regulations and legislation that may change in the future.
The nature and scope of future legislation and regulation affecting the sugar market and industry cannot be predicted. The current price supports and market protections for sugar in place may not 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 amount of sugar we can sell, the amount of sugarbeets we can process and the price for which we can sell our sugar may be impacted, which could reduce the profitability of our business. If legislation or government programs change, we may not be able to adopt strategies that would allow us to compete effectively in a greatly changed domestic market for sugar and the adverse effects could negatively impact the desirability of growing sugarbeets for delivery to us for processing, our financial results, and our continued viability.
If we are unable to compete in the sweetener market, our operating results may suffer.
Sugar is a fungible commodity with competition for sales volume based primarily upon customer service, price and reliability, though differences in proximity to various geographic markets within the United States result in differences in freight and shipping costs which in turn generally affect pricing and competitiveness. The overall sweetener market, in addition to sugar, includes corn-based sweeteners, such as regular and high fructose corn syrups, and non-nutritive, high-intensity sweeteners such as aspartame. Differences in functional properties and prices have tended to define the use of these various sweeteners. Although the various sweeteners are not interchangeable in all application, the substitution of other sweeteners for sugar has occurred in certain products, such as soft drinks. We cannot predict the availability, development or potential use of these and other alternative sweeteners and their possible impact on us or our members. We believe that we possess the ability to compete successfully with other producers of sugar in the United States. In spite of this competitive advantage, substitute products could reduce the demand for sugar which could lower the price of sugar, resulting in a change to our operations in the future.
On June 27, 2007, our Board of Directors authorized the planting of Roundup Ready® sugarbeets for the 2008 crop year. Sugar and agri-products produced from Roundup Ready® sugarbeets have received regulatory approval in most of the countries in which we have direct or indirect sales of our products. While the sale of sugar and agri-products from Roundup Ready® sugarbeet seed has been approved in most markets, marketing risks still exist. United Sugars Corporation and Midwest Agri-Commodities, our sugar and agri-product marketing agents, respectively, feel they can successfully sell and distribute products from Roundup Ready® sugarbeets with minimal affect on our revenue. However, customers’ views on the use of products from biotechnology derived crops such as Roundup Ready® sugarbeets may change over time which could negatively impact our profitability.
Our operations are sensitive to energy prices.
The prices we pay for energy related products, such as natural gas, coal and coke, have been volatile and may continue to be volatile. We use substantial amounts of these products in our manufacturing process. We believe that the prices for energy related products including natural gas, coal and coke will continue to be volatile and higher than historical levels. Higher energy prices may also increase the costs of many goods and services we acquire. These higher prices may materially increase our cost of production, thus impacting our financial results.
Quantity and quality of sugarbeets is sensitive to weather and other factors such as seed varieties.
The sugarbeet, as with most other crops, is affected by many factors, including seed varieties and weather conditions during the growing season. Additionally, the quantity of sugarbeets to be processed and weather conditions during the processing season affect our ability to store sugarbeets held for processing. Growing and storage conditions different from what we predict or expect may change the quantity and quality of sugarbeets available for processing and therefore may affect the quantity of the sugar we produce.
A significant decrease in the quantity or quality of sugarbeets harvested due to poor weather conditions would result in higher operating costs and lower earnings.
A significant increase in the quantity or quality of sugarbeets harvested due to good weather conditions or improved seed varieties could result in an unpredictably large quantity of sugarbeets to be processed. If we are required to process a larger than anticipated quantity of sugarbeets we may
experience increased per unit of sugar processing cost which in turn would have an adverse financial consequence to us and our members.
In order to manage the quantity and quality of sugarbeets that are harvested or available for processing, our Grower Contract allows for a reduction in the number of acres to be planted at the beginning of a crop year or harvested at the end of a crop year.
Adequate storage conditions during a processing campaign are critical to ensure that the quantity and quality of sugarbeets available for processing are maintained. If we are not able to obtain or maintain adequate storage conditions, the sugarbeets stored for processing at a later date may deteriorate, resulting in increased production costs, and decreased production which in turn would have an adverse financial consequence to us and our members.
Based on results of recent yield trials and crop results, we expect that new sugarbeet varieties, including Roundup Ready® varieties, may continue to result in increases in the average sugarbeet crop yields over the next five years. As a result, we anticipate that there may continue to be a need to reduce the number of acres of sugarbeets that can be planted by each shareholder in order to match the sugarbeet crop volume to our processing and marketing capacity. This reduction, if necessary, would be accomplished by reducing the per share planting tolerance by an amount that may be material. Assuming there are no changes in other variables, the increased yield per acre expected to result from the continued use of the new sugarbeet varieties would allow shareholders to deliver substantially the same number of tons of sugarbeets to us from fewer acres. Individual shareholder profitability will continue to depend on the circumstances unique to each shareholder.
On January 24, 2008, the Center for Food Safety along with other groups filed a lawsuit against the USDA regarding the decision to deregulate Roundup Ready® sugarbeets, specifically whether a full environmental impact study should have been completed. The Plaintiffs have not asked the Court to prohibit planting of Roundup Ready® sugarbeets. However, if the Court restricts planting in 2009, conventional varieties would need to be utilized which would have a negative impact on our crop yields. Chemical manufacturers have significantly reduced planned production of conventional herbicides due to the rapid increase in planting of Roundup Ready® sugarbeets. Weed control for conventional varieties would be difficult due to an inadequate supply of conventional herbicides. While we are taking precautionary measures, the risk of Roundup Ready® sugarbeet restrictions still exists and the negative financial impact to us and our members could be significant.
If we are unable to manage the quantity and quality of sugarbeets available for processing, we could experience adverse financial consequences that would impact both us and our members.
Increased profitability of alternative crops could adversely affect the desirability of growing sugarbeets.
The prices growers receive from crops other than sugarbeets could impact their decisions as to which crop to plant and how much to plant. Higher prices and increased profitability for alternative crops could negatively impact the desirability of growing sugarbeets for delivery to us for processing, our financial results, and our continued viability.
Federal, state and local environmental laws and regulations may impact our operations.
We are subject to extensive federal and state environmental laws and regulations with respect to water and air quality and solid waste disposal. We conduct on-going programs designed to meet these
environmental laws and regulations. Changes in environmental laws or regulations or complying with existing environmental laws and regulations or enforcement action brought under such environmental laws and regulations might increase the cost of operating our facilities or result in significant capital investment. Any such changes or compliance costs could reduce our profitability.
Item 2.
Item 2. PROPERTY AND PROCESSING FACILITIES
The Company operates five sugarbeet processing factories in the Red River Valley and one in Sidney, Montana. The Company owns all of its factories and the land on which they are located. The factories range in size from 150,000 to 400,000 square feet. These properties are used in the Company’s sugar segment.
The location and processing capacity of the Company’s factories are:
Each of the processing factories includes the physical facilities and equipment necessary to process sugarbeets into sugar. Each factory has space for sugarbeet storage, including ventilated storage sites. The Red River Valley factories also have cold storage facilities. Each of the Red River Valley factories is currently operating at or near its capacity. The Sidney, Montana factory is currently operating at less than full capacity. The Company owns molasses desugarization (MDS) plants at its East Grand Forks and Hillsboro facilities. The MDS plants process molasses to extract additional sugar. The Company has sugar packaging facilities located at the Moorhead, Hillsboro, Crookston, East Grand Forks and Sidney factories.
The Company also owns a sugarbeet processing plant in Torrington, Wyoming. The Torrington, Wyoming, facility is leased on a long-term basis to another sugar company.
ProGold owns a corn wet-milling plant in Wahpeton, North Dakota, which is currently being leased to Cargill. The corn wet-milling plant is capable of processing corn to produce corn sweeteners (including high fructose corn syrups) and various agri-products. This property is used in the Company’s leasing segment. On November 6, 2007, ProGold entered into an amended lease agreement with Cargill that superseded and replaced the previous 10 year lease between ProGold and Cargill and provides that (1) Cargill will pay ProGold average annual rental payments equal to $21,900,000, and (2) that the term of the lease be extended until December 31, 2017.
The Company’s corporate office is located in a 30,000 square foot, two-story office building in Moorhead, Minnesota. The Company also has a 100,000 square foot Technical Services Center situated on approximately 200 acres in Moorhead, Minnesota. The Company owns both facilities. The Company also owns numerous sites as sugarbeet receiving and storage stations located within proximity of their factories. Substantially all non-current assets are mortgaged or pledged as collateral for its indebtedness to various financial institutions.
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. The Company is currently involved in certain legal proceedings which have arisen in the ordinary course of the Company’s business. The Company is also aware of certain other potential claims which could result in the commencement of legal proceedings. The Company carries insurance which provides protection against certain types of claims. With respect to current litigation and potential claims of which the Company is aware, the Company’s management believes that (i) the Company has insurance protection to cover all or a portion of any judgments which may be rendered against the Company with respect to certain claims or actions and (ii) any judgments which may be entered against the Company and which may exceed such insurance coverage or which may arise in actions involving potential liabilities not covered by insurance policies are not likely to have a material adverse effect upon the Company, or its assets or operations.
Another sugar company has appealed to the Ninth Circuit Court of Appeals a decision of the United States District Court relative to a determination and transfer of sugar marketing allocations made by the USDA. The outcome of any contested matter is never certain. If this case is overturned, it could result in the Company experiencing a reduction in marketing allocations equal to the loss of approximately 15,000 acres in future crop years assuming no other related factors were to change.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company’s shareholders during the quarter ended August 31, 2008.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of August 31, 2008, the Company had 2,839 shares of the Common Stock and 498,570 shares of the Preferred Stock issued and outstanding. There is no established public market for the Company’s Common Stock or Preferred Stock, as such shares may be held only by farmer-producers who are eligible for membership in the Company. The Company’s shares are not listed for trading on any exchange or quotation system. Although transfers of the Company’s shares may occur only with the consent of the Board of the Directors, the Company does not obtain information regarding the transfer price in connection with such transfers. As a result, the Company is not able to provide information regarding the prices at which the Company’s shares have been transferred.
Because the number of acres of sugarbeets a member may grow for sale to the Company is directly related to the number of shares of Preferred Stock owned, a limited, private market for Preferred Stock exists. It is not anticipated that a general public market for the Company’s shares of Common Stock or Preferred Stock will develop due to the limitations on transfer and the various membership requirements which must be satisfied in order to acquire such shares.
A member desiring to sell his or her Common Stock or Preferred Stock must first offer them to the Company for purchase at par value. If the Company declines to purchase such shares, either class may be sold to a new member (i.e., another farm operator not already a member) and Preferred Stock may be sold to one or more existing members or farm operators approved for membership, in each case subject to approval by the Board of Directors. To date, the Company’s Board of Directors has not exercised the Company’s right of first refusal to purchase preferred shares offered for sale by its members. Because the Company does not require parties seeking approval for transfers to provide
information regarding the transfer price, the Company does not possess verifiable information regarding the transfer price involved in recent transfers of the Company’s Preferred Stock.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The selected financial data of the Company should be read in conjunction with the consolidated financial statements and related notes included in Appendix A of this report.
(1) Net Proceeds are the Company’s gross revenues, less the costs and expenses of producing and marketing sugar, agri-products and sugarbeet seed, but before payments to members for sugarbeets. (For a more complete description of the calculation of the payment to members for sugarbeets, see “Item 1. Business - Raw Materials.”)
(2) Calculated by dividing the Company’s long term debt, exclusive of the current maturities of such debt, by members’ investments.
(3) Information for a fiscal year relates to the crop planted and harvested in the preceding calendar year (i.e., information for the fiscal year ended August 31, 2008 relates to the crop of 2007). Crop data reflect the combined data of the Red River Valley crop and the Sidney crop.
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial conditions and results of operations of the Company should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in Appendix A of this report.
Liquidity and Capital Resources
Under the Company’s Bylaws and Grower Contracts, payments 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, the beet payment made to member growers and non-member growers are paid in three payments over the course of a year, and the payments are made net of any anticipated or declared unit retain for the crop. These procedures have the effect of providing the Company with an additional source of short-term financing. This financing arrangement may result in an additional source of liquidity and reduced need for outside financing in comparison to a similar business operated on a non-cooperative basis.
Because sugar is sold throughout the year (while sugarbeets are processed primarily in the fall, winter and spring) 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 its operations. The majority of such financing has been provided by a consortium of lenders led by CoBank, ACB.
The Company has long-term debt availability with CoBank, ACB of $185.0 million, of which $53.3 million in loans and $70.3 million in long-term letters of credit were outstanding as of August 31, 2008. The unused long-term line of credit as of August 31, 2008 was $61.4 million. In addition, the Company has long-term debt outstanding, as of August 31, 2008, of $50 million from a private placement of Senior Notes that occurred in September of 1998; $4.3 million from a private placement of Senior Notes that occurred in January of 2003; $70.4 million from ten separate issuances of Pollution Control and Industrial Development Revenue Bonds; and a term loan with Bank of North Dakota of $.8 million.
The Company also has a seasonal line of credit with a consortium of lenders led by CoBank, ACB of $345 million, of which there was no outstanding balance as of August 31, 2008, and a line of credit with Wells Fargo Bank for $1 million, of which there was no outstanding balance as of August 31, 2008. The Company’s commercial paper program provides short-term borrowings of up to $325 million of which approximately $15.3 million was outstanding as of August 31, 2008. The Company had $2.3 million of short-term letters of credit outstanding as of August 31, 2008. The unused short-term line of credit as of August 31, 2008 was $328.4 million. Any borrowings under the commercial paper program along with outstanding short-term letters of credit will act to reduce the available credit under the CoBank, ACB seasonal line of credit by a commensurate amount.
The Company had outstanding commitments totaling $4.3 million as of August 31, 2008 for equipment and construction contracts related to various capital and maintenance projects.
As of August 31, 2008, Midwest had outstanding short-term debt with CoBank, ACB of $3.2 million, of which $1.8 million was guaranteed by the Company.
The net cash provided by operations was $82.5 million for the year ended August 31, 2008, as compared to $95.6 million for the previous year. This decrease of $13.1 million was primarily due to changes in the amount due growers of $41.9 million, accounts payable of $15.0, other liabilities of $16.4, unit retains withheld of $12.4 million, and advances to related parties of $9.2 million, which were partially offset by the changes in inventories of $70.0 million and receivables of $13.5 million. Amounts
due growers changed primarily as the result of a lower grower payment for the 2007 crop as compared to the 2006 crop. The change in unit retains withheld was also due to the smaller Red River Valley crop this year and a reduction in the amount withheld per ton from $3 per ton to $2 per ton. The change in inventories was due primarily to a decrease in the quantity of products and unprocessed sugarbeet inventories this year as compared to last year which resulted from the early campaign start-up last year.
The net cash used in investing activities was $41.9 million for the year ended August 31, 2008, as compared to $64.3 million for the previous year. The decrease of $22.4 million was primarily related to decreased purchases of property and equipment.
The net cash used in financing activities was $40.7 million for the year ended August 31, 2008 as compared to $31.4 million for the previous year. This increase of $9.3 million was primarily due to increased payments on short term debt of $29.4 million and increased unit retain payments of $1.3 million, partially offset by decreased payments on long term debt of $16.5 million and increased proceeds from the issuance of long term debt of $4.9 million.
The Company anticipates that the funds necessary for working capital requirements and future capital expenditures will be derived from operations and unit retains along with short-term and long-term borrowings.
The following table provides information regarding the Company’s contractual obligations as of August 31, 2008:
(1) Accrued Employee benefits of $1.9 million with corresponding offsetting assets and requiring no future payments have been excluded from the amounts presented. Other Long-Term Liabilities of $2.1 million, which relate to deferred revenue also requiring no future payments, have also been excluded from the table.
(2) The Company does not expect to make any contributions to the defined benefit pension plans during the next fiscal year. Contributions for future years are not known at this time and therefore are not included in the above table. The Company expects to make contributions in the next fiscal year of approximately $116,000 related to Supplemental Executive Retirement Plans. This amount is reflected in Other Long-Term Obligations in the above table.
Critical Accounting Policies and Estimates
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 we believe to be reasonable under the circumstances.
The difficulty in applying these policies arises from the assumptions, estimates and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions. As the difficulty
increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated.
Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. The Company’s critical accounting estimates include the following:
Inventory Valuation
Sugar, pulp, molasses and other agri-product inventories are valued at estimated net realizable value. The Company derives its estimates from sales contracts, recent sales and evaluations of market conditions and trends. Changes in market conditions may cause management’s estimates to differ from actual results.
Property 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. Considerable management judgment is necessary to estimate future cash flows and may differ from actual results.
Intangible Assets and Amortization
Intangible assets are amortized for financial reporting purposes principally using straight-line methods based on the expected useful lives of the assets. Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.
Pension Plan and Other Post-Retirement Benefits
Accumulated plan benefits are those future periodic payments, including lump-sum distributions, which are attributable under the Company’s Pension Plan and Post-Retirement Plan to the service employees have rendered. Accumulated plan benefits include benefits expected to be paid to retired or vested terminated employees or their beneficiaries; beneficiaries of employees who have died; and present employees or their beneficiaries.
The actuarial present value of accumulated plan benefits is determined by an actuary and is the amount that results from applying actuarial assumptions to adjust the accumulated plan benefits to reflect the time value of money and the probability of payment.
The significant actuarial assumptions used in the determination of the actuarial present value of accumulated pension plan benefits for fiscal 2008 were as follows: Valuation Funding Method - Entry age normal, frozen initial liability; Life Expectancy - RP-2000 Mortality Table; Retirement Age - graded rates from 1 percent retiring at age 55 to 100 percent retired by age 70 ; Investment Return - 8.00 percent compounded annually for funding; Discount Rate- 7.04 percent compounded annually; Salary Scale - 3.5 percent compounded annually (Plan A only).
The significant actuarial assumptions used in the determination of the actuarial present value of accumulated post-retirement benefits for fiscal 2008 were as follows: Healthcare Cost Trend - a 9.0 percent annual rate of increase in the per capita cost of covered healthcare benefits for participants under age 65 was assumed for 2008. The rate is assumed to decline to 5.0 percent over the next five years. For participants age 65 and older, a 10.0 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2008. The rate is assumed to decline to 6.0 percent over the next five years; Discount Rate- 7.04 percent compounded annually.
Actual events may differ from the assumptions used and may result in plan benefit payments differing significantly from these current estimates.
Self-Insurance
The Company is self-insured for a portion of the risks related to workers’ compensation claims and employees’ health insurance. The estimate of self-insurance liability is based upon known claims and an estimate of incurred but not reported (IBNR) claims. IBNR claims are estimated using historical claims lag information received by a third party claims administrator. Actual events may differ from the assumptions used and may result in claim payments differing from the current estimates.
Results of Operations
The Company’s operational results and the resulting beet payment to members and growers are substantially dependent on market factors, including domestic prices for refined sugar. These factors are continuously influenced by a wide variety of market forces, including domestic sugarbeet and cane production, weather conditions and United States’ farm and trade policy, which the Company is unable to predict.
In addition, highly variable weather conditions during the growing, harvesting and processing seasons, as well as diseases and insects, may materially affect the quality and quantity of sugarbeets available for purchase as well as the unit costs of raw materials and processing.
Comparison of the Years Ended August 31, 2008 and 2007
Due to the large size of the 2007 Red River Valley crop, the Company, for the second consecutive year, commenced the harvest and processing of the crop in August as compared to a typical start-up in September. All the costs incurred prior to the beginning of the Company’s 2008 fiscal year that related to receiving and processing the 2007 sugarbeet crop were deferred in fiscal 2007 and recognized in fiscal 2008. Similarly, the net realizable values of products produced prior to the beginning of the Company’s 2008 fiscal year that related to the 2007 sugarbeet crop were deferred in fiscal 2007 and recognized in fiscal 2008.
The harvest of the Red River Valley and Sidney sugarbeet crops grown during 2007 and processed during fiscal 2008 produced a total of 12.5 million tons of sugarbeets, or approximately 23.6 tons of sugarbeets per acre from approximately 529,000 acres. This represents a decrease in total tons harvested of approximately 3.0 percent compared to the 2006 crop. The sugar content of the 2007 crop is 18.1 percent as compared to the 18.2 percent sugar content of the 2006 crop. The Company produced a total of approximately 36.6 million hundredweight of sugar from the 2007 crop, a decrease of approximately 1.6 percent compared to the 2006 crop. As of August 31, 2008, the Company had approximately 192,000 hundredweight of sugar produced from the 2007 crop that exceeded the marketing allocation limit for the time period of October 1, 2007 to September 30, 2008.
Revenue for the year ended August 31, 2008 was $1.2 billion, an increase of $9.8 million from the year ended August 31, 2007. The table below reflects the percentage changes in product revenues, prices and volumes for the year ended August 31, 2008, as compared to the year ended August 31, 2007.
The substantial increase in the revenue and volume of betaine sold is primarily due to increased availability of saleable product resulting from a higher beginning inventory level as of September 1, 2007 as compared to the inventory level as of September 1, 2006.
Rental revenue on the ProGold operating lease was $24.2 million and $24.9 million for the years ended August 31, 2008 and 2007, respectively.
Cost of sales for the year ended August 31, 2008, exclusive of payments to members for sugarbeets, increased $54.8 million as compared to the year ended August 31, 2007. This increase was primarily related to the following:
· The change in the net realizable value of the product inventories from the beginning of the reporting period is recorded on the balance sheet as either an increase or decrease to inventories with a corresponding dollar for dollar adjustment to cost of sales on the statement of operations. The decrease in the net realizable value of product inventories for the year ended August 31, 2008 was $5.8 million as compared to an increase of $40.4 million for the year ended August 31, 2007 resulting in a $46.2 million unfavorable change in the cost of sales between the two years as shown in the table below:
Change in the Net Realizable Value of Product Inventories
(1) The change is primarily due to a 47 percent increase in the hundredweight of sugar inventory as of August 31, 2007 as compared to August 31, 2006 partially offset by a 10 percent decrease in the per hundredweight net realizable value of sugar inventory as of August 31, 2007 as compared to August 31, 2006.
(2) The change is primarily due to lower quantities of products as of August 31, 2008 as compared to August 31, 2007.
· An impairment loss of $11.9 million related to the property and equipment at the Sidney, Montana facility was recognized in 2008 and included in cost of sales.
· The cost recognized associated with the non-member sugarbeets decreased $4.4 million for the year ended August 31, 2008, when compared to the same period last year. This decrease was primarily due to an 11.7 percent decrease in tons purchased.
Selling, general and administrative expenses increased $20.7 million for the year ended August 31, 2008, as compared to the year ended August 31, 2007. Selling expenses increased $22.6 million primarily due to the increase in the volumes of products sold and increased transportation rates resulting in increased shipping and handling expenses. General and administrative expenses decreased $ 1.9 million due to general cost decreases.
Interest expense decreased $5.2 million for the year ended August 31, 2008, as compared to the year ended August 31, 2007. This reflects a decrease in the average borrowing levels and lower average interest rates for both short-term and long-term debt.
Non-member business activities resulted in a loss of $4.8 million for the year ended August 31, 2008, as compared to a gain of $2.3 million for the year ended August, 2007. The decrease was primarily related to the impairment loss for Sidney Sugars Incorporated partially offset by increased income from the activities of ProGold.
Payments to members for sugarbeets, net of unit retains declared, decreased by $39.2 million from $563.4 million in 2007 to $524.2 million in 2008. This decrease was primarily due to lower sugar selling prices and fewer tons harvested partially offset by increased agri-product selling prices and a lower per ton unit retain withheld.
Comparison of the Years Ended August 31, 2007 and 2006
Due to the large size of the 2006 Red River Valley crop, the Company instituted an eight percent reduction in the number of acres harvested by its members, approximately 40,000 acres, in order to manage the quantity and quality of the sugarbeets available for processing during fiscal 2007. Also due to the large size of the 2006 Red River Valley crop, the Company commenced the harvest and processing of the crop in August of 2006 as compared to a typical start-up in September. All the costs incurred prior to the beginning of the Company’s 2007 fiscal year that related to receiving and processing the 2006 sugarbeet crop were deferred in fiscal 2006 and recognized in fiscal 2007. Similarly, the net realizable values of products produced prior to the beginning of the Company’s 2007 fiscal year that related to the 2006 sugarbeet crop were deferred in fiscal 2006 and recognized in fiscal 2007.
The harvest of the sugarbeet crop (Red River Valley crop and Sidney crop) grown during 2006 and processed during fiscal 2007 produced a total of 12.8 million tons of sugarbeets, or approximately 25.3 tons of sugarbeets per acre from approximately 507,000 acres. This represents an increase in total tons harvested of approximately 33.4 percent compared to the 2005 crop. The sugar content of the 2006 crop was 18.2 percent as compared to the 18.0 percent sugar content of the 2005 crop. The Company produced a total of approximately 37.2 million hundredweight of sugar from the 2006 crop, an increase of approximately 25.1 percent compared to the 2005 crop. The Company experienced higher sales volumes for most of its products this fiscal year as compared to the previous fiscal year and the average selling prices for most of these products increased due to supply and demand factors. Net Proceeds from Member and Non-Member Business for fiscal 2007 were 35.1 percent higher than in fiscal 2006. This increase is primarily the result of the increased size and quality of the crop harvested and processed in 2007.
Revenue for the year ended August 31, 2007, was $1.2 billion, an increase of $216.5 million from 2006. The table below reflects the percentage changes in product revenues, prices and volumes for the year ended August 31, 2007, as compared to the previous year.
The substantial increase in the volume of molasses sold was a result of the increased amount of molasses available from the larger crop this year exceeding the ability to process the molasses through the desugarization facilities. The decrease in the volume of betaine sold was primarily a result of the timing of sales this year as compared to last year.
Rental revenue on the ProGold operating lease was $24.9 million and $25.1 million for the years ended August 31, 2007 and 2006, respectively.
Cost of sales for the year ended August 31, 2007, exclusive of payments to members for sugarbeets, increased $19.6 million as compared to fiscal 2006. This increase was primarily related to the following:
· Operating costs increased $41.5 million primarily as a result of harvesting 33.4 percent more sugarbeets and processing 29.4 percent more sugarbeets during fiscal 2007 as compared to the previous year. Improved factory slice efficiencies, lower coal costs and reduced energy usage partially offset the impact of the volume increases.
· The costs associated with sugar purchased to meet customer needs decreased by $1.7 million from 2006 due to the earlier campaign start-up and increased sugar production this year.
· At the end of each reporting period, product inventories are recorded at their net realizable value. The change in the net realizable value of the product inventories from the beginning of the reporting period is recorded on the balance sheet as either an increase or decrease to inventories with a corresponding dollar for dollar adjustment to cost of sales on the statement of operations. The increase in the net realizable value of product inventories for the year ended August 31, 2007 was $40.4 million as compared to an increase of $21.0 million for the year ended August 31, 2006 resulting in a $19.4 million favorable change in the cost of sales between the two years as shown in the table below:
Change in the Net Realizable Value of Product Inventories
(1) The change is primarily due to a 21 percent increase in the per hundredweight net realizable value of sugar inventory as of August 31, 2006 as compared to August 31, 2005.
(2) The change is primarily due to a 47 percent increase in the hundredweight of sugar inventory as of August 31, 2007 as compared to August 31, 2006 partially offset by a 10 percent decrease in the per hundredweight net realizable value of sugar inventory as of August 31, 2007 as compared to August 31, 2006.
Selling, general and administrative expenses increased $35.6 million from 2006. Selling expenses increased $34.3 million primarily due to an increase in the volume of sugar, pulp and molasses sold resulting in increased shipping and handling expenses. General and Administrative expenses increased $1.3 million due to general cost increases.
Interest expense increased $1.2 million in 2007 as compared to the previous year. This reflects an increased average borrowing level and a higher average interest rate for short-term debt partially offset by a lower average balance and a lower average interest rate for long-term debt.
The decrease of $3.4 million in Other, Net was primarily the result of the receipts of sales tax and property tax refunds of $3.0 million in 2006.
Non-member business activities resulted in a gain of $2.3 million in 2007, as compared to a gain of $2.2 million in 2006. The slight increase was primarily due to increased earnings from the activities of ProGold partially offset by reduced income from Sidney Sugars.
Payments to members for sugarbeets, net of unit retains declared, increased by $147.0 million from $416.4 million in 2006 to $563.4 million in 2007. This was primarily due to the increased size and quality of the crop harvested and processed in 2007.
2008 Crop and Estimated Fiscal Year 2009 Information
This discussion contains the Company’s current estimate of the results to be obtained from the Company’s processing of the 2008 sugarbeet crop. This discussion includes forward-looking statements regarding the quantity of sugar to be produced from the 2008 sugarbeet crop. 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. The actual results experienced by the Company could differ materially from the forward-looking statements contained herein.
The harvest of the Red River Valley and the Sidney sugarbeet crops grown during 2008 is estimated to produce a total of 10.7 million tons of sugarbeets, or approximately 25.3 tons of sugarbeets per acre from approximately 423,000 acres. This represents a decrease in total tons harvested of approximately 14.1 percent compared to the 2007 crop. The sugar content of the 2008 crop is estimated to be 17.6 percent as compared to the 18.1 percent sugar content of the 2007 crop. The Company expects to produce a total of approximately 30.2 million hundredweight of sugar from the 2008 crop, a decrease of approximately 17.5 percent compared to the 2007 crop.
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 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
The consolidated financial statements of the Company for the fiscal years ended August 31, 2008, 2007 and 2006 have been audited by Eide Bailly LLP, an 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 AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
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-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of August 31, 2008. Based on that review and evaluation, which included inquiries made to certain other employees of the Company, the chief executive officer and chief financial officer have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, are effective in ensuring that information relating to the Company required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management, including the chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, because of changes in conditions, the effectiveness of internal control may vary over time.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of August 31, 2008, using criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework and concluded that the Company maintained effective internal control over financial reporting as of August 31, 2008 based on these criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that may have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Board of Directors
The Board of Directors of the Company consists of three directors from each of the five Red River Valley factory districts. Directors must hold common stock of the Company or must be representatives of such shareholders belonging to the district they represent and are elected by the members of that district. In the case of a holder of common stock who is other than a natural person, a duly appointed or elected representative of such shareholder may serve as a director. The directors were elected to serve three-year terms expiring in December of the years indicated in the table below. One director is elected each year from each Red River Valley factory district. A director cannot serve more than four consecutive three-year terms.
The table below lists certain information concerning current directors of the Company.
Below is the biographical information on each Director.
Michael A. Astrup. Mr. Astrup has been a director since 1996 and has served as Chairman since 2007. Mr. Astrup has been a farmer since 1976, with his farming operations located near Dilworth, Minnesota. Mr. Astrup serves on the Board of Directors of United Sugars Corporation, the Board of Directors of Midwest Agri-Commodities Company, the Board of Governors of ProGold Limited Liability Company and is a director of the American Sugarbeet Growers Association.
Neil C. Widner. Mr. Widner has been a director since 2000 and has served as Vice-Chairman since 2007. Mr. Widner has farmed near Stephen, Minnesota, since 1973. Mr. Widner serves on the Board of Directors of United Sugars Corporation, the Board of Governors of ProGold Limited Liability Company and as a director for the American Sugarbeet Growers Association.
William Baldwin. Mr. Baldwin has been a director since 2004. Mr. Baldwin has been farming in the Drayton Factory District since 1966 and is the President of Baldwin Farms Incorporated. Mr. Baldwin is the past President of the Red River Valley Sugarbeet Growers Association, served on the American Sugarbeet Growers Executive Committee and is currently serving on the Farm Service Agency, State Committee.
Richard Borgen. Mr. Borgen has been a director since 1997. Mr. Borgen has farmed east of Perley, Minnesota, since 1967 and has served as a director on the Perley Co-op Elevator Board for nine years and the Norman County West school board for 10 years.
John Brainard. Mr. Brainard has been a director since 2005. Mr. Brainard has been a sugarbeet grower since 1998. Mr. Brainard is a past director of the Minnesota Farm Bureau and has served on the executive committee of the Red River Valley Sugarbeet Growers Association. Mr. Brainard currently serves as a director of the American Sugarbeet Growers Association.
Brian R. Erickson. Mr. Erickson has been a director since 2005. Mr. Erickson has been a sugarbeet grower for over 20 years. Mr. Erickson has served as a director and Chairman of the East Grand Forks Economic Development and Housing Authority. Mr. Erickson currently serves on the Board of Directors of Midwest Agri-Commodities Company.
Robert M. Green. Mr. Green has been a director since 2005. Mr. Green has been a sugarbeet grower since 1976. Mr. Green served 12 years as a director of the Red River Valley Sugarbeet Growers Association and is currently a director of the Wells Fargo Bank in Grafton, ND. Mr. Green serves as a director for the American Sugarbeet Growers Association.
John F. Gudajtes. Mr. Gudajtes has been a director since 2003. Mr. Gudajtes has farmed in the Minto, North Dakota area since 1967 and is the President of Gudajtes Farms. Mr. Gudajtes is a past President of the Walsh County Historical Society.
Curtis E. Haugen. Mr. Haugen has been a director since 2001. Mr. Haugen has been a farmer since 1981 and farms near Argyle, Minnesota. Mr. Haugen serves on the Board of Directors of United Sugars Corporation and is serving as a director and President of the Farmer’s Union Oil Company, Oslo, Minnesota.
William A. Hejl. Mr. Hejl was elected as a director in 2007. Mr. Hejl has farmed near Amenia, North Dakota since 1987. Mr. Hejl currently serves as a director of the American Sugarbeet Growers Association and is a manager of the Rush River Water Resource District. Mr. Hejl also served as President of the Red River Valley Sugarbeet Growers Association and as President of the World Association of Beet and Cane Growers.
Curtis Knutson. Mr. Knutson was elected as a director in 2007. Mr. Knutson has farmed near Fisher, Minnesota for 36 years. Mr. Knutson currently serves on the Polk County Extension Board.
Francis L. Kritzberger. Mr. Kritzberger has been a director since 1996. Mr. Kritzberger has previously served as a director with the Company, from July 30, 1989 until July 30, 1993. Mr. Kritzberger has been a farmer since 1964. Mr. Kritzberger serves on the Board of Governors of ProGold Limited Liability Company and is also on the Board of Directors of the North Dakota Council of Cooperatives.
Jeff D. McInnes. Mr. McInnes has been a director since 2001. Mr. McInnes co-manages a 4,000 acre farming operation near Hillsboro, North Dakota. Mr. McInnes is the founder and manager of the Basement Traders Marketing Club, a grain marketing association in Hillsboro. Mr. McInnes serves on the Board of Governors of ProGold Limited Liability Company.
Ronald E. Reitmeier. Mr. Reitmeier has been a director since 1996, and has been a farmer since 1968. Mr. Reitmeier is the President of R&J Crop Production Inc. Mr. Reitmeier has served as a member of the Board of Directors of PKM Electric Co-op of Warren, Minnesota, for 19 years and as its Chairman of the Board since 2004. Mr. Reitmeier previously served on the Fisher, Minnesota, School Board for 18 years, as President of the Polk County Farmers Union and Chairman of the Minnesota Farmers Union Executive Committee of County Chairpersons.
Steve Williams. Mr. Williams has been a director since 2006. Mr. Williams has farmed near Fisher, Minnesota since 1987. Mr. Williams serves on the Board of Directors of the American Sugarbeet Growers Association and served as its President from 2006 to 2008. Mr. Williams is also a director of the Sugar Association, the Halstad Cooperative Telephone Company, and the Eldred Farmers Elevator. Mr. Williams served as a director of the Red River Valley Sugarbeet Growers Association from 1998 to 2007, and served as its Chairman from 2003 to 2007.
Audit Committee and Audit Committee Financial Expert
The Audit Committee assists the Board of Directors in fulfilling its oversight responsibilities relating to the Company’s financial reporting and controls, the annual independent audit of the Company’s consolidated financial statements and the legal compliance and ethics programs as established by management and the Board of Directors. The Audit Committee selects the independent public accountants, approves the fees and the scope and procedural plans of the audits of the Company’s consolidated financial statements. The Audit Committee administers the Company’s employee complaint program and handles, on behalf of the full Board of Directors, any issues that arise under the Company’s Code of Ethics. The Audit Committee has a charter that is available from the Company upon request.
As of August 31, 2008, the Board of Directors of the Company has determined that there is no audit committee financial expert serving on the Audit Committee. The Company is a cooperative formed in accordance with the Minnesota cooperative law of the State of Minnesota. In accordance with the Minnesota cooperative law, the Amended and Restated Articles of Incorporation of the Company and the Amended and Restated Bylaws of the Company, the Board of Directors must be composed of members of the Company (the holders of common stock). Membership in the Company is limited to agricultural producers who are actively involved in the production of sugarbeets. Based on the state law requirements for both membership and board service, the Company is unable to recruit outside of its membership to elect to its Board of Directors and its audit committee an individual that possesses the attributes of an “audit committee financial expert” as defined by the SEC. To date, the Company has been unable to recruit from its membership an individual to serve on the Board of Directors that possesses the attributes of an “audit committee financial expert.”
The Audit Committee has reviewed and discussed with management and Eide Bailly LLP our audited consolidated financials statements contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2008. The Audit Committee also discussed with Eide Bailly LLP the matters required to be discussed pursuant to SAS No. 61 (Codification of Statements of Auditing Standards, AU Section 380), which includes, among other items, matters related to the conduct of the audit of our consolidated financial statements.
The Audit Committee has received and reviewed the written disclosures and the letter from Eide Bailly LLP required by the applicable requirements of the Public Company Accounting Oversight Board regarding Eide Bailly LLP’s communications with the Audit Committee concerning its independence from the Company and has discussed with Eide Bailly LLP its independence from the Company.
Based on the review and discussions referred to above, the Audit Committee recommended to the Board that the audited financial statements be included in our Annual Report on Form 10-K for our fiscal year ended August 31, 2008 for filing with the Commission.
On August 31, 2008, the members of the Audit Committee were John Brainard (Committee Chair), Brian R. Erickson, Robert M. Green, William A. Hejl, Curtis E. Haugen and Ronald E. Reitmeier.
Company Officers
The table below lists the officers of the Company for the fiscal year covered by this report, none of whom owns any shares of Common Stock or Preferred Stock. Officers are elected annually by the Board of Directors.
David A. Berg. Mr. Berg was named the Company’s President in March 2007 and assumed the role as the Company’s Chief Executive Officer in October 2007. Mr. Berg served as the Company’s Vice President-Operations and Chief Operations Officer from January 2004 to March 2007. Mr. Berg was the Company’s Vice President-Agriculture during the period December 2000 to January 2004 and the Company’s Vice President-Administration during the period from October 1998 to December 2000. Mr. Berg currently serves on the Boards of Directors of United Sugars Corporation, Midwest Agri-Commodities Company and Sidney Sugars Incorporated.
James J. Horvath. Mr. Horvath served as the Company’s President and Chief Executive Officer from May 1998 until March 2007. Mr. Horvath continued to serve as the Company’s Chief Executive Officer until his retirement in October 2007.
Thomas S. Astrup. Mr. Astrup was named the Company’s Vice President-Finance and Chief Financial Officer in May 2007. Mr. Astrup was named the Chief Operating Officer and Chief Financial Officer of Sidney Sugars Incorporated in May 2007. Mr. Astrup served as the Company’s Vice President-Agriculture from 2004 to 2007. Mr. Astrup was the Company’s Vice President-Administration from 2000 to 2004 and the Company’s Corporate Controller, Assistant Treasurer and Assistant Secretary from 1999 to 2000. Mr. Astrup currently serves on the Board of Directors for Sidney Sugars Incorporated and on the ProGold Limited Liability Company Board of Governors.
Joseph J. Talley. Mr. Talley was named the Company’s Chief Operating Officer in May 2007. Mr. Talley was named as the Chairman of the Board and Chief Executive Officer of Sidney Sugars Incorporated in May 2007. Mr. Talley served as the Company’s Vice President-Finance and Chief Financial Officer of the Company from 2003 to 2007. Mr. Talley was the Company’s Vice President-Finance from 1998 to 2003. Mr. Talley also served as Chief Operating Officer of Sidney Sugars Incorporated from 2002 to 2007. He currently serves on the Board of Governors for ProGold Limited Liability Company.
Brian F. Ingulsrud. Mr. Ingulsrud was named the Company’s Vice President-Administration in February 2004. From 2000 to 2004, he served as the Company’s Corporate Controller, Assistant Secretary and Assistant Treasurer.
Teresa A. Warne. Ms. Warne was named the Company’s Corporate Controller, Chief Accounting Officer, Assistant Treasurer and Assistant Secretary in March 2008. Prior to joining the Company, Ms. Warne was the Director of Accounting with Caribou Coffee Company at its corporate headquarters in Brooklyn Center Minnesota from 2006 to 2008. Ms. Warne previously was employed with Northwest Airlines where she held various financial positions from 1999 to 2006.
Daniel C. Mott. Mr. Mott became the Company’s Secretary in 1999. Previously, he had served as Assistant Secretary since 1995. Mr. Mott also serves as the Company’s General Counsel. He is a Shareholder in the law firm of Fredrikson & Byron, P.A. Mr. Mott is not an employee of the Company.
Samuel S. M. Wai. Mr. Wai was named the Company’s Treasurer and Assistant Secretary in 1999. Mr. Wai also serves as Treasurer of the American Crystal Sugar Political Action Committee and on the Board of Directors of the Institute of Cooperative Financial Officers.
Mark L. Lembke. Mr. Lembke was named the Company’s Assistant Secretary and Assistant Treasurer in 1996 and also currently serves as the Company’s Finance Administration Manager.
Ronald K. Peterson. Mr. Peterson was named the Company’s Assistant Secretary and Assistant Treasurer in 1993 and also currently serves as the Company’s Accounting and Systems Manager.
David L. Malmskog. Mr. Malmskog was named the Company’s Assistant Secretary and Assistant Treasurer in 1998 and also currently serves as the Company’s Director-Economic Analysis and Business Development.
Lisa M. Maloy. Ms. Maloy was named the Company’s Assistant Secretary in 2002 and also currently serves as the Company’s Treasury Operations Manager.
Code of Ethics
The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller as well as all employees and Directors of the Company. The Company will provide at no charge a copy of the code of ethics to any person who requests a copy by sending a written request to the Company’s headquarters, attention of the Chief Executive Officer of the Company.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview
This compensation discussion and analysis addresses the compensation paid to the individuals who served as our Chief Executive Officer, President , Chief Financial Officer, Chief Operating Officer and Vice President of Administration for fiscal year 2008, all of whom are identified on the Summary Compensation Table immediately following this report (“Named Executive Officers”). Immediately following this compensation discussion and analysis is the Compensation Committee Report of the Board of Directors (the “Committee Report”). Members of the Compensation Committee were in their role for fiscal year 2008.
Purpose and Philosophy
We believe that strong leadership is a key component of success. To be successful, we must be able to attract, retain and motivate leaders with the skills necessary to excel in an integrated cooperative environment and understand key business and technical matters related to the diverse business influences that result from growers and owners, marketing partnerships and activities, technical manufacturing processes, and government policy. Our goal is to provide a competitive compensation package to our Named Executive Officers combining total direct compensation, retirement income and other benefits.
Total direct compensation, which includes base salary, short-term cash incentive compensation and long-term incentive compensation, is measured against comparable companies in the market in which we compete.
We believe the market in which we compete for executive talent consists of companies with similar characteristics to the Company, for example, manufacturing companies with similar revenues in similar geographies. We further believe that the market also includes privately owned businesses in general and exclusively as it relates to long-term incentive compensation because of the structure and nature of our business. Therefore, we have compared our compensation versus compensation data points for these types of companies (our market).
In 2007, our management, on behalf of the Compensation Committee and Board of Directors, retained Towers Perrin, an outside compensation consultant (“Compensation Consultant”), to prepare market-based compensation data comparing compensation information for our Named Executive Officers with that of executive officers in our market. This analysis used market data from published national survey sources, including Towers Perrin and Watson Wyatt. In addition, pay data from the proxy materials from a group of comparative companies was referenced. This group of companies, together with the survey sources, was intended to represent the market in which we believe we compete for executive talent and includes:
· Actuant Corporation
· Ameron International Corp.
· Arctic Cat Inc.
· Barnes Group Inc.
· Brady Corporation
· Constar International Inc.
· Donaldson Company, Inc.
· Gardner Denver, Inc.
· Graco Inc.
· Herman Miller, Inc.
· IDEX Corporation
· Imperial Sugar Company
· JLG Industries, Inc.
· Magellan Midstream Partners, L.P.
· Milacron Inc.
· Mine Safety Appliances Co
· Minn-Dak Farmers Cooperative
· MSC Industrial Direct Co.
· OMNOVA Solutions Inc.
· Packaging Corporation of America
· Rayonier Inc.
· Schweitzer-Mauduit International, Inc.
· Stewart & Stevenson Services, Inc.
· Sybron Dental Specialties
· The Toro Company
· Thomas & Betts Corporation
This data was provided to the Compensation Committee in early 2007, and was utilized to establish market based pay practices for each of the Named Executive Officer positions.
Our base salary midpoint for our President and Chief Executive Officer is projected to represent less than the median of the market and total direct compensation is projected to be near the lower quartile of the market. Currently, we generally target our other Named Executive Officers’ base salary midpoint near the median of the market and total direct compensation near the lower quartile of our market. The Compensation Committee determined that total direct compensation as established was appropriate and reflects the compensation principles outlined in this report.
While market based information is important in terms of setting pay practices, it is not the only factor considered when making individual executive compensation decisions. Other factors considered when making individual executive compensation decisions include individual roles and responsibilities, performance, reporting structure and internal pay relationships.
Process
The Compensation Committee of the Board of Directors is responsible for annually reviewing and recommending to the Board of Directors the base salary and performance objectives for the incentive compensation (both short-term and long-term) of the President and Chief Executive Officer, as well as the performance objectives for long-term incentive compensation for all Named Executive Officers. Board action on recommendations is taken by a vote of all of the directors, none of whom are members of management. Decisions on executive compensation made by the Compensation Committee, the Board or the President and Chief Executive Officer have been guided by our compensation philosophy discussed above.
Our President and Chief Executive Officer sets base salary and the annual performance objectives for the short-term incentive compensation for the other Named Executive Officers. The prospective base salary and annual performance objectives for the other Named Executive Officers are reviewed with the Board of Directors prior to being finalized by the President and Chief Executive Officer.
On March 21, 2007, our Board of Directors elected David Berg as President and determined his base salary for the remainder of fiscal year 2007. Prior to this election, James Horvath served as our Chief Executive Officer, until he retired, on October 18, 2007. Upon Mr. Horvath’s retirement, Mr. Berg continued as President and assumed the position of Chief Executive Officer at which time his base salary increased to reflect his new responsibilities as President and Chief Executive Officer as determined by the Board of Directors at the time of his election. In connection with his election, Mr. Berg was given responsibility for reviewing and determining the base salaries for the other Named Executive Officers.
Elements of Compensation
The elements of compensation paid to our Named Executive Officers for 2008 are as follows:
· Base salary
· Short-term cash incentive compensation
· Long-term incentive compensation
· Retirement and other benefits
· Perquisites
· Severance for our President and Chief Executive Officer
Each of the above are more completely described below.
Base Salary
The objective of the level of base salary paid to our Named Executive Officers is to reflect individual roles and responsibilities, performance, reporting structure, and internal pay relationships with respect to market competitiveness. All established base salaries for fiscal year 2008 for our Named Executive Officers were in accordance with our compensation philosophy described earlier in this report.
The base salary for our Chief Executive Officer, Mr. Horvath, was approved by the Board of Directors on September 27, 2006. At the same time, the Chief Executive Officer determined the initial base salaries for the other Named Executive Officers for the first part of fiscal year 2007. Mr. Horvath’s salary remained the same during fiscal year 2008 until his retirement. After Mr. Berg was named President in March of 2007, he re-positioned the other Named Executive Officers and determined their base salaries for the remainder of 2007 and for the fiscal year 2008.
The fiscal year 2008 base salary of our President and Chief Executive Officer, Mr. Berg, was set by the Board of Directors in March 2007 based on the comparable market data provided by our Compensation Consultant. For the portion of fiscal year 2008 that Mr. Horvath served as Chief Executive Officer, his salary remained the same as it was in 2007.
Short-Term Cash Incentive Compensation
Our short-term cash incentive compensation is designed to reward the Named Executive Officers for their individual performance and our financial performance for the most recently completed fiscal year. Short-term cash incentive compensation is paid in cash following the close of the fiscal year.
Short-term cash incentive compensation provides an annual cash incentive opportunity, expressed as a percent of base salary, for our Named Executive Officers who meet performance objectives. For fiscal year 2008, our President and Chief Executive Officer had an opportunity to receive an additional 45% of his base salary, and the other Named Executive Officers had an opportunity to receive an additional 35% of their base salary, by meeting “target” performance levels. Actual awards are determined based on the different performance levels achieved by the Named Executive Officers. The potential for short-term cash incentive compensation ranges from 0% for unsatisfactory performance to a maximum of 90% for outstanding performance for the Chief Executive Officer. The potential for short-term cash incentive compensation ranges from 0% for unsatisfactory performance to a maximum of 70% for outstanding performance for our other Named Executive Officers.
The President and Chief Executive Officer’s performance objectives were weighted with 50% of the potential award based on our overall financial performance and 50% of the potential award based on the President and Chief Executive Officer’s individual performance objectives as established by the Board of Directors. For the other Named Executive Officers, annual performance objectives were determined by the President and Chief Executive Officer at the beginning of fiscal year 2008, with 40% based on our overall financial performance and 60% based on the achievement of individual performance objectives, including personal effectiveness. Our overall financial performance objectives are based on the final gross beet payment for the fiscal year and total on-farm profits. Total on farm profits are equal to total gross beet payment minus the product of Total Harvested Acres multiplied by On-Farm Costs per Acre. On-Farm Cost per Acre is based on the Red River Valley Report from the Minnesota and North Dakota Farm Business Management Education Program.
The individual performance objectives of our Named Executive Officers are derived primarily from our strategic initiatives, which are comprised of ten general strategies:
· Trade and policy leadership
· Cost and revenue management
· Agricultural gold standards
· Beet storage excellence
· Balanced and maximized slice and recovery
· Maintenance excellence
· Product quality
· Safety
· Training
· Technology and automation
Each Named Executive Officer, based on his area of responsibility, is tasked with objectives based on our strategies. Mr. Horvath had no performance objectives for fiscal year 2008 due to his anticipated retirement. As indicated above, Mr. Berg’s performance objectives for fiscal year 2008 were set by the Board of Directors. The performance objectives for fiscal year 2008 for our other Named Executive Officers were set by Mr. Berg at the beginning of fiscal year 2008.
The Board of Directors rated the President and Chief Executive Officer at the end of the fiscal year with respect to his achievement of his performance objectives, and his short-term cash incentive compensation for fiscal year 2008 is based on this rating. The President and Chief Executive Officer rated the other Named Executive Officers with respect to their individual achievement of their performance objectives and each of them received a short-term cash incentive compensation award based on that rating.
Long-Term Incentive Compensation
Long-term incentive compensation provides an incentive opportunity, expressed as a percent of base salary, for our Named Executive Officers as a group who meet performance objectives. For fiscal year 2008, our President and Chief Executive Officer had an opportunity to receive an additional 40% of his base salary and the other Named Executive Officers had an opportunity to receive an additional 20% of their base salary assuming target performance levels. Actual awards are determined based on the performance level achieved by the Named Executive Officers as a group. The potential for long-term incentive compensation ranges from 0% for unsatisfactory performance to a maximum of 80% for outstanding performance for the President and Chief Executive Officer. The potential for long-term incentive compensation ranges from 0% for unsatisfactory performance to a maximum of 40% for outstanding performance for our other Named Executive Officers. Unlike our short-term cash incentive compensation, long-term incentive compensation awards are based on the performance level of our Named Executive Officers as a group. Forty-five percent (45%) of the performance objectives were based on the fiscal year’s actual on-farm profits as compared to historical profit levels while the other 55% was based on an assessment made by the Board of Directors regarding achievement of specific long-term performance objectives as established by the Board of Directors.
Our 2005 Long-Term Incentive Plan (2005 Plan) sets forth long-term incentive compensation available to our Named Executive Officers. Our 2005 Plan is designed to provide financial incentive awards through deferred compensation to reward the Named Executive Officers for long-term strategic performance and to encourage long-term commitment to our organization. Originally, our long-term incentive compensation was set forth in our 1999 Long-Term Incentive Plan (1999 Plan) which has been replaced by our 2005 Plan. Even though the 2005 Plan replaced the 1999 Plan, vested awards under the 1999 Plan are still governed by the 1999 Plan. The 1999 Plan and the 2005 Plan are substantially similar.
Under the 2005 Plan, a long-term incentive award may be granted to a Named Executive Officer in the form of contract rights, cash, or in a combination of both cash and contract rights (incentive awards). The value of any contract rights granted is determined by our Board of Directors. To date, all incentive awards granted have been in the form of contract rights. Incentive awards vest over a three-year period, with the first vesting occurring one year after the grant. Vested incentive awards may be redeemed at the discretion of the Named Executive Officer and must be redeemed upon certain other events causing a termination of employment. Redemptions are in the form of cash payments that may be deferred by the Named Executive Officer. Named Executive Officers receive a profit per acre payment for vested contract rights based on the average profit per acre paid to our shareholders. Profit per acre payments are made to the Named Executive Officers in the same manner as our shareholders receive their crop payments. Profit per acre payments can be taken in cash or deferred until a later date. The Board of Directors retains the discretion to determine the amount of any incentive awards to be made available to the Named Executive Officers with respect to a given fiscal year.
On September 24, 2008, 282.15 contract rights were granted to Named Executive Officers with respect to performance for the fiscal year ended August 31, 2008 at a value of $1,750 per contract right. Correspondingly, the redemption value of the contract rights previously granted to the Named Executive Officers under the 1999 and 2005 Plans were decreased from $2,100 to $1,750 per contract right. Effective as of August 31, 2008, there were a total of 1,220.68 contract rights issued and outstanding to the Named Executive Officers under the 1999 and 2005 Plans, of which 616.68 were vested.
Retirement and other benefits
Retirement benefits are an important tool in achieving overall compensation objectives because they provide a financial security component and promote retention. Our Named Executive Officers participate in our retirement plans like any other employee. In addition, we provide a Supplemental Executive Retirement Plan (SERP) for our Named Executive Officers, which is a non-qualified defined contribution and defined benefit plan designed to replace benefits executives would have received if not for limits imposed by Code Section 401(a)(17) and 402(g). The Named Executive Officers may elect to defer a portion of base salary by regular payroll deductions, and may also defer 100% of all short-term incentive compensation and long-term incentive compensation awards or payments related to any such awards. All long term incentive deferrals are held in a long term incentive plan trust, all other deferrals are held in a SERP trust. Both have two investment options and are subject to the claims of our creditors. The pension component of the SERP is “unfunded” with all amounts to be paid from our general assets, to the extent available, when due.
Our Named Executive Officers participate in our fully insured long-term disability program for all nonunion employees to provide income protection in the event of permanent disability. The long-term disability plan is part of the core benefits we provide. The long-term disability plan provides a benefit equal to 60% of base pay with a maximum monthly benefit of $10,000. The Named Executive Officers pay tax on the value of the long-term disability premium, and as a result if they become
disabled their benefit will not be taxable. Other nonunion employees are not taxed on the value of their long-term disability premium; therefore if they become disabled their benefit will be taxable. For the Named Executive Officers, we began imputing the value of the premium to provide a tax-free benefit to partially offset the impact of receiving a disability benefit less than 60% of base pay because of the $10,000 monthly benefit limitation.
Perquisites
Our Compensation Committee and the Board of Directors believe perquisites should be modest, reasonable in terms of cost, aligned with business needs and comparative to other salaried employees. Named Executive Officers may receive some or all of the following perquisites while employed: car allowance, cell phone, minimum of 4 weeks annual vacation accrual, reimbursement for income tax preparation and executive physicals. Additionally, the President and Chief Executive Officer is provided with a country club membership. The above-described perquisites cease upon retirement or separation of service with us.
Severance
If Mr. Horvath had been terminated without cause prior to his retirement he would have been entitled to receive a post-termination severance payment equal to three years of his base salary in effect on the date of such termination. All such rights terminated upon his retirement in October 2007.
If we terminate Mr. Berg without cause he is entitled to receive a post-termination severance payment equal to two years of his base salary in effect on the date of termination. There are no compensatory plans or arrangements providing for payments to any of the other Named Executive Officers in conjunction with any termination of employment with us, including without limitation resignation, severance, retirement or constructive termination of employment by the Company. Furthermore, there are no such plans or arrangements providing for payments to any of the Named Executive Officers in conjunction with a change of control or change in such Named Executive Officer’s responsibilities.
Employment Agreements
Prior to his retirement, we had an employment agreement with Mr. Horvath. The agreement provided that Mr. Horvath served as an “at will” employee at the pleasure of the Board of Directors. The agreement also included a three-year non-compete/non-solicitation agreement with Mr. Horvath, granted the Board of Directors the authority to establish Mr. Horvath’s base salary each year, and provided that he could participate in other benefit plans offered to employees.
On September 28, 2005, Mr. Horvath’s original employment agreement was amended. Prior to this amendment, the employment agreement contained certain provisions that were a disincentive to Mr. Horvath continuing his employment with us beyond September 30, 2005 and other provisions that required amendment as a result of recent changes in the tax laws. The amendment: (1) eliminated the disincentive to Mr. Horvath to continue his employment with us; (2) changed certain vacation accruals so that Mr. Horvath accrued additional vacation days; and (3) made certain other changes required to comply with the recent changes to the tax laws.
The present value, as of August 31, 2008, of providing medical and dental coverage to Mr. Horvath per the employment agreement was approximately $91,000. The present value of the supplemental pension benefits provided per the employment agreement and the present value of the
SERP were approximately $1.8 million and $1.6 million, respectively, as of January 2008. Mr. Horvath elected to receive a lump sum payout of the supplemental pension benefits provided under the employment agreement and the benefits provided by the SERP. The lump sum payouts occurred in January 2008.
We entered into an employment agreement with Mr. Berg effective March 21, 2007. The agreement provides that Mr. Berg shall serve as an “at will” employee at the pleasure of the Board of Directors. The agreement also includes a two-year non-compete/non-solicitation agreement with Mr. Berg. Mr. Berg will receive a gross base salary for serving as President with this base salary to increase at the time Mr. Berg assumes the position of President and Chief Executive Officer. Thereafter, the agreement grants the Board of Directors the authority to establish Mr. Berg’s base salary each year, and also provides that he may participate in other benefit plans offered to all employees.
Compensation Committee Report
The Compensation Committee of the Company’s Board of Directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Form 10-K.
Members of the Compensation Committee:
Jeff D. McInnes, Chairman
John Brainard
Brian R. Erickson
John F. Gudajtes
Curtis E. Haugen
Steve Williams
Summary Compensation Table
The following table summarizes the compensation of the Named Executive Officers for the fiscal years ended August 31, 2008 and 2007. The Named Executive Officers are the Company’s Chief Executive Officer, Chief Financial Officer and the three other most highly compensated executive officers of the Company.
2008 SUMMARY COMPENSATION TABLE
(1) Amounts shown are not reduced to reflect the Named Executive Officers’ elections, if any, to defer compensation into the Supplemental Executive Retirement Plan (SERP).
(2) Represents the stated value of contract rights that were earned in the fiscal year, which was the year performance targets were achieved. Amounts also reflect the change in value of the contract rights granted to the executives in prior years. At August 31, 2008, the Board of Directors decreased the value of previously granted contract rights from $2,100 to $1,750. Contract rights vest equally over a three year period. For further information regarding the Long-Term Incentive Plan, see “Compensation Discussion and Analysis” within this Form 10-K.
(3) Represents the Profit-Per-Acre payments that were earned in the fiscal year, which was the year performance targets were achieved.
(4) Components of Change in Pension Value and NQDC Earnings. See table below for details:
Change in Pension Value and Nonqualified Deferred Compensation Earnings
(A) Represents the change in the present value of the accumulated benefits provided by the plan or agreement.
(B) Interest is considered to be preferential if the rate paid to the executive exceeds 120% of the applicable long-term federal rate under the Interal Revenue Code. Amounts reported reflect only the interest that exceeds 120% of the applicable long-term federal rate.
(5) Includes the cost of additional life insurance coverage, imputed value of long-term disability insurance, car allowance, reimbursement of health club dues, costs of tax return preparation, Company 401(k) matching contributions, Company matching SERP contributions, flexible spending taxable cash and flexible spending dollars into 401(k).
Grants of Plan-Based Awards
The following table discloses the grants of plan-based awards to each of the Company’s Named Executive Officers for the current year related to the 2005 Long-Term Incentive Plan (LTIP). The amounts of these awards that were expensed are shown in the Summary Compensation Table. The table below also discloses the estimated future payouts related to contract rights under the 2005 LTIP, Short-Term Incentive Plan (STIP) and the Profit-Per-Acre (PPA) payment under the 2005 LTIP. Mr. Horvath received no grants or awards due to his retirement.
Grants of Plan-Based Awards Table
(1) The “Target” amounts represent contract rights at the 8/31/2008 stated value of $1,750 per contract right. These rights vest to the executive over three years. Theoretically, the minimum received for these contract rights could be $0 and there is no maximum.
(2) The amounts indicated represent future potential payments under the Short-Term Incentive Plan (STIP) based on the executives’ salary as of August 31, 2008.
(3) The “Target” amount represents future Profit Per Acre (PPA) annual payments that will be paid to executives upon vesting and assuming a similar beet payment and on-farm costs to that experienced in fiscal year 2008. PPA payments are only paid on vested contract rights. Theoretically the minimum payment could be $0 and there is no maximum.
Pension Benefits
The table below reflects information for the Named Executive Officers pertaining to the Company’s Pension Plan, Supplemental Executive Retirement Plan and Special Employment Agreements.
(1) Footnote (10), “Employee Benefit Plans”, of the Company’s Notes to the Consolidated Financial Statements discloses the significant assumptions used in calculating this benefit.
(2) Refer to the Compensation, Discussion and Analysis (CD&A) section within this Form 10-K for a description of this benefit plan.
Non-Qualified Deferred Compensation
The table below reflects information for the Named Executive Officers pertaining to non-qualified deferred compensation. All non-qualified deferred compensation listed below is subject to claims of the Company’s creditors.
(1) Executives may defer from 2% to 20% of eligible earnings above the limit for a qualified plan and up to 100% of incentive compensation (which includes short-term incentive comp, profit per acre payments and proceeds from the sale of contract rights). These amounts are included in the Summary Compensation Table.
(2) Represents Company 401k matching above the IRS limit for a qualified plan. These amounts are included in the “All Other Compensation” column of the Summary Compensation Table.
(3) Preferential interest included here as well as in the NQDC column of the Summary Compensation Table are as follows: Mr. Horvath - $27,804, Mr. Berg - $4,164, Mr. Astrup - $1,071, Mr. Talley - $14,844, and Mr. Ingulsrud - $149. Executives have the option of investing funds in an S&P 500 index fund or in a money market fund guaranteeing interest at prime as of January 2 of each calendar year. The 2008 and 2007 calendar year rates were 7.25% and 8.25%, respectively.
(4) Distributions occur upon termination of employment and can be in a lump sum or in equal installments over a period not to exceed ten years.
Potential Payments upon Termination or Change-In-Control
Prior to his retirement, Mr. Horvath’s employment agreement contained termination and change of control payments. As of the filing of this report, Mr. Horvath’s retirement has become effective and such termination and change of control payments are no longer applicable.
On March 21, 2007, the Company and Mr. Berg entered into an agreement regarding Mr. Berg’s employment by the Company. The agreement provides that Mr. Berg shall serve as an “at will” employee at the pleasure of the Board of Directors. The agreement also contains the provision of a two-year non-compete/non-solicitation agreement with Mr. Berg, grants the Board of Directors the authority to establish Mr. Berg’s base compensation each year, and also provides that he may participate in other incentive compensation and benefit programs available to the Company’s executive officers.
If Mr. Berg is terminated without cause he will be eligible for severance pay equal to two times his then current base salary. The present value of Mr. Berg’s Supplemental Executive Retirement Plan was approximately $188,000 as of August 31, 2008.
Compensation of Directors
The Board of Directors meets monthly. For fiscal year 2008, the Company provided its directors with compensation consisting of (i) a payment of $575 per month, (ii) a per diem payment of $250 increasing to $300 effective March 1, 2008, for each day spent on Company activities, including board meetings and other Company functions, and (iii) reimbursement of expenses associated with director responsibilities. The Chairman of the Board of Directors received payments of $1,075 per month increasing to $2,075 effective March 1, 2008; the Chairman also received a per diem in the amount of $250 increasing to $300 effective March 1, 2008, for each day spent on Company activities. The monthly compensation paid to directors and the Chairman increases by $25 per month each fiscal year.
Under the terms of the Board of Directors Deferred Compensation Plan, members of the Board of Directors can elect to defer receipt of their monthly and per diem compensation. This is an annual irrevocable election made prior to January 1 of each calendar year the fees are to be paid. The amounts are deferred until the earliest of the board member’s withdrawal from the Board of Directors, the board member’s death or attainment of age 65. Two payment options are available at the election of the participant. Payments can be received in a single lump sum or in equal installments over a period of up to ten years. The Board of Directors, at its discretion, can elect to distribute the remaining balance at any time. Interest is earned on the amounts deferred based on the five year Treasury bond rate. Currently, there is one member who has elected to participate in this plan. The amount deferred, as of August 31, 2008, was approximately $92,000.
The table below reflects director compensation for the year ended August 31, 2008.
(1) Consists of fees of $575 per month to Directors and $1,075 increasing to $2,075 effective March 1, 2008, to the Chairman of the Board. The Chairman and Directors also receive a per diem fee of $250 increasing to $300 effective March 1, 2008, for each day spent on Company activities.
(2) Term expired in December of 2007.
(3) Term began in December of 2007.
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. None of the officers or executives of the Company hold stock of the Company. As members of the cooperative, each director owns one share of Common Stock and is entitled to one vote. As a group, the directors generally own approximately 2 to 3 percent of the outstanding Preferred Stock.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Each of the Company’s directors is also a sugarbeet farmer and a shareholder member or representative of a shareholder member of the Company. 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 may exceed $120,000. Such payments, however, are received by the directors or the entities they represent on exactly the same basis as payments 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 $120,000.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional audit services rendered by Eide Bailly LLP for the audits of the Company’s and consolidated companies’ annual financial statements for the years ended August 31, 2008 and 2007 and fees for other services rendered by Eide Bailly LLP during those periods.
Audit Fees. The Audit Fees set forth above include the aggregate fees billed by Eide Bailly LLP to the Company for audit services related to the audit of the Company’s and consolidated companies’ annual financial statements and review of the statements included in the Company’s quarterly reports on Form 10-Q for fiscal 2008 and fiscal 2007.
Audit-Related Fees. The Audit-Related Fees set forth above include the aggregate fees billed by Eide Bailly LLP to the Company and consolidated companies for assurance and related services provided by Eide Bailly LLP related to the performance of the audit or review of the Company’s financial statements for fiscal 2008 and fiscal 2007. These services included Benefit Plan audits.
Tax Fees. The Tax Fees set forth above include the aggregate fees billed by Eide Bailly LLP to the Company and consolidated companies for professional services rendered by Eide Bailly for tax compliance, tax advice and tax planning for fiscal 2008 and fiscal 2007. These services include tax return preparation, tax planning and tax research.
All Other Fees. The All Other Fees set forth above include the aggregate fees billed by Eide Bailly LLP to the Company and consolidated companies for professional services provided by Eide Bailly LLP to the Company and consolidated companies. There were no other fees paid to Eide Bailly LLP for fiscal 2008 or fiscal 2007.
The Company’s Audit Committee pre-approves all professional services provided by Eide Bailly LLP to the Company. The Audit Committee approved all of the services and the fees billed for such services to the Company that are included above. The Audit Committee makes its decisions on the approval of services with due consideration given to maintaining the independence of the principal accountant. None of the hours expended on the audit of the 2008 financial statements were attributed to work performed by persons who were not employed full time on a permanent basis by Eide Bailly LLP.
PART III
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report
1. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the Years Ended August 31, 2008, 2007 and 2006
Consolidated Balance Sheets as of August 31, 2008 and 2007
Consolidated Statements of Changes in Members’ Investments and Comprehensive Income for the Years Ended August 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the Years Ended August 31, 2008, 2007 and 2006
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
None
3. The exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index on pages E-1 to E-4 of this report
(b) Exhibits
The response to this portion of Item 15 is included as a separate section of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 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, on November 26, 2008.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ DAVID A. BERG
President and Chief Executive Officer
November 26,
(Principal Executive Officer)
/s/ THOMAS S. ASTRUP
Vice President-Finance and Chief Financial
November 26,
Officer (Principal Financial Officer)
/s/ TERESA A. WARNE
Corporate Controller
November 26,
(Principal Accounting Officer)
/s/ MICHAEL A. ASTRUP
Director (Chairman)
November 26,
/s/ NEIL C. WIDNER
Director (Vice-Chairman)
November 26,
/s/ WILLIAM BALDWIN
Director
November 26,
/s/ RICHARD BORGEN
Director
November 26,
/s/ JOHN BRAINARD
Director
November 26,
/s/ BRIAN R. ERICKSON
Director
November 26,
/s/ ROBERT M. GREEN
Director
November 26,
/s/ JOHN F. GUDAJTES
Director
November 26,
/s/ CURTIS E. HAUGEN
Director
November 26,
/s/ WILLIAM HEJL
Director
November 26,
/s/ CURTIS KNUTSON
Director
November 26,
/s/ FRANCIS L. KRITZBERGER
Director
November 26,
/s/ JEFF D. MCINNES
Director
November 26,
/s/ RONALD E. REITMEIER
Director
November 26,
/s/ STEVE WILLIAMS
Director
November 26,
APPENDIX A
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN CRYSTAL SUGAR COMPANY
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm
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Consolidated Statements of Operations for the Years Ended August 31, 2008, 2007 and 2006
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Consolidated Balance Sheets as of August 31, 2008 and 2007
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Consolidated Statements of Changes in Members’ Investments and Comprehensive Income for the Years Ended August 31, 2008, 2007 and 2006
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Consolidated Statements of Cash Flows for the Years Ended August 31, 2008, 2007 and 2006
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Notes to the Consolidated Financial Statements
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A-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of American Crystal Sugar Company
Moorhead, Minnesota
We have audited the accompanying consolidated balance sheets of American Crystal Sugar Company and Subsidiaries as of August 31, 2008 and 2007, and the related consolidated statements of operations, changes in members’ investments and comprehensive income, and cash flows for the years ended August 31, 2008, 2007, and 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal controls 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 express no 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 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 American Crystal Sugar Company and Subsidiaries as of August 31, 2008 and 2007, and the results of their operations and their cash flows for the years ended August 31, 2008, 2007, and 2006, in conformity with accounting principles generally accepted in the United States of America.
/s/ EIDE BAILLY LLP
Sioux Falls, South Dakota
October 10, 2008
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American Crystal Sugar Company
Consolidated Statements of Operations
For the Years Ended August 31
(In Thousands)
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
A-3
American Crystal Sugar Company
Consolidated Balance Sheets
August 31
(In Thousands)
Assets
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
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American Crystal Sugar Company
Consolidated Balance Sheets
August 31
(In Thousands)
Liabilities and Members’ Investments
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
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American Crystal Sugar Company
Consolidated Statements of Changes in Members’ Investments and Comprehensive Income
For the Years Ended August 31
(In Thousands)
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
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American Crystal Sugar Company
Consolidated Statements of Cash Flows
For the Years Ended August 31
(In Thousands)
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
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American Crystal Sugar Company
Notes to the Consolidated Financial Statements
(1) PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES:
Organization
American Crystal Sugar Company (the Company) is a Minnesota agricultural cooperative corporation which processes and markets sugar as well as sugarbeet pulp, molasses, concentrated separated by-product (CSB), betaine (collectively, agri-products) and sugarbeet seed. Business done with its shareholders (members) constitutes “patronage business” as defined by the Internal Revenue Code, and the net proceeds therefrom are credited to members’ investments in the form of unit retains or distributed to members in the form of payments for sugarbeets. Members are paid the net amounts realized from the current year’s production less member operating costs determined in conformity with accounting principles generally accepted in the United States of America.
Basis of Presentation
The Company’s consolidated financial statements are comprised of American Crystal Sugar Company, its wholly-owned subsidiaries Sidney Sugars Incorporated (Sidney Sugars) and Crab Creek Sugar Company (Crab Creek), and ProGold Limited Liability Company (ProGold), a limited liability company in which the Company holds a 51 percent ownership interest.
On May 1, 2007, the Company acquired CIT Capital USA Inc.’s 50 percent ownership interest in Crystech, LLC (Crystech) resulting in the Company’s 100 percent ownership of Crystech. Due to the Company’s resulting controlling ownership interest in Crystech, effective May 1, 2007, the Company began to include Crystech in its consolidated financial statements. Effective May 31, 2007, Crystech was dissolved with all assets and liabilities transferred to the Company.
All material inter-company transactions have been eliminated.
Revenue Recognition
Revenue from the sale of sugar, agri-products and seed is recorded when the product is delivered to the customer. Operating lease revenue is recognized as earned ratably over the term of the lease.
Operating Lease
ProGold owns a corn wet milling facility which it leases under an operating lease. On November 6, 2007, ProGold entered into an amended operating lease agreement with Cargill, Incorporated that superseded and replaced the previous ten year lease agreement. Payments are to be received monthly under the lease, which runs through December 31, 2017. The operating lease revenue is recognized as earned ratably over the term of the lease and to the extent that amounts received exceed amounts earned, deferred revenue is recorded. Expenses (including depreciation and interest) are charged against such revenue as incurred. The lease contains provisions for extension or modification of the lease terms at the end of the lease period. The lease also contains provisions for increased payments to be received during the lease period related to the plant’s capital additions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company places its temporary cash investments with high credit quality financial institutions. At times, such investments may be in excess of the applicable insurance limit.
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Accounts Receivable and Credit Policies
The Company grants credit, individually and through its marketing cooperatives, to its customers, which are primarily companies in the food processing industry located throughout the United States.
Trade receivables are uncollateralized customer obligations due under normal trade terms requiring payment within 15 to 90 days from the invoice date. The receivables are non-interest bearing. Trade receivables are stated at the amount billed to the customer. 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.
Ongoing credit evaluations of customers’ financial condition are performed and the Company maintains a reserve for potential credit losses. The carrying amount of trade receivables is reduced by a valuation allowance that reflects the Company’s best estimate of the amounts that will not be collected.
Inventories
Sugar, pulp, molasses and other agri-products inventories are valued at estimated net realizable value. Maintenance parts and supplies and sugarbeet seed inventories are valued at the lower of average cost or market. Sugarbeets are valued at the projected gross per-ton beet payment related to that year’s crop.
Net Property and Equipment
Property and equipment are recorded at cost less impairment under FAS No. 144. See Note 4 to the consolidated financial statements. Indirect costs and construction period interest are capitalized as a component of the cost of qualified assets. Property and equipment are depreciated for financial reporting purposes principally using straight-line methods with estimated useful lives ranging from 3 to 33 years.
Net Property and Equipment Held for Lease
Net property and equipment held for lease are stated at cost. Depreciation on assets placed in service is provided using the straight-line method with estimated useful lives ranging from 5 to 40 years.
Impairment of Long Lived Assets
The Company reviews its long lived assets 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. An impairment loss of approximately $11.9 million was recognized in 2008. See Note 4 to the consolidated financial statements. The fair value of assets is a significant estimate and it is at least reasonably possible that a change in the estimate could occur in the near term.
Related Parties
The following organizations are considered related parties for financial reporting purposes: United Sugars Corporation (United) and Midwest Agri-Commodities Company (Midwest).
Investments
Investments in CoBank, ACB are stated at cost plus unredeemed patronage refunds received in the form of capital stock. Investments in marketing cooperatives are accounted for using the equity
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method. Investments in Crystech, prior to its dissolution (see note 7), were accounted for using the equity method.
Members’ Investments
Preferred and Common Stock - The ownership of common and preferred stock is restricted to a “farm operator” as defined by the bylaws of the Company. Each shareholder may own only one share of common stock and is entitled to one vote in the affairs of the Company. Each shareholder is required to grow a specified number of acres of sugarbeets in proportion to the shares of preferred stock owned. The preferred shares are non-voting. All transfers of stock must be approved by the Company’s Board of Directors and any shareholder desiring to sell stock must first offer it to the Company for repurchase at its par value. The Company has never exercised this repurchase option for preferred stock. The Company’s articles of incorporation do not allow dividends to be paid on either the common or preferred stock.
Unit Retains - The bylaws authorize the Company’s Board of Directors to require additional direct capital investments by members in the form of a variable unit retain per ton of up to a maximum of 10 percent of the weighted average gross per ton beet payment. All refunds and retirements of unit retains must be approved by the Board of Directors.
Equity Retention - The Payment-In-Kind (PIK) Certificate Purchase Agreement authorizes the Company to require additional direct capital investments by members participating in the PIK program. The amount of the equity contribution is calculated per hundredweight of PIK certificates and is approximately equivalent (on a Company-wide average basis) to the unit retain declared by the Company on the corresponding year’s sugarbeet crop. All refunds and retirements of equity retains must be approved by the Board of Directors.
Accumulated Other Comprehensive Income (Loss) - Accumulated Other Comprehensive Income (Loss) represents the cumulative net increase (decrease) in equity related to the recording of the over-funded or under-funded status of defined benefit postretirement plans, the Company’s portion of the other comprehensive income(loss) of equity method investees and the gain or loss related to foreign currency forward contracts. Consistent with the Company’s treatment of income taxes related to member-source income and expenses, accumulated other comprehensive income (loss) does not include any adjustment for income taxes. For years prior to August 31, 2007, Accumulated Other Comprehensive Income (Loss) represented the cumulative net increase (decrease) in equity related to the recording of the minimum pension liability adjustment.
Retained Earnings (Accumulated Deficit) - Retained earnings represents the cumulative net income (loss) resulting from non-member business and, for years prior to 1996, the difference between member income as determined for financial reporting purposes and for federal income tax reporting purposes.
Interest Expense, Net
The Company earns patronage dividends from CoBank, ACB based on the Company’s share of the net income earned by CoBank, ACB. These patronage dividends are applied against interest expense.
Income Taxes
The Company is a non-exempt cooperative for federal income tax purposes. As such, the Company is subject to corporate income taxes on its net income from non-member sources. The provision for income taxes relates to the results of operations from non-member business, state income taxes and certain other permanent differences between financial and income tax reporting. The Company
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also has various temporary differences between financial and income tax reporting, most notable of which is depreciation.
Deferred tax assets, less any applicable valuation allowance, and deferred tax liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.
Accounting Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Business Risk
The financial results of the Company’s operations may be directly and materially affected by many factors, including prevailing prices of sugar and agri-products, the Company’s ability to market its sugar competitively, the weather, government programs and regulations, and operating costs.
Concentration and Sources of Labor
Substantially all of the hourly employees at the Company’s factories, including full-time and seasonal employees, are represented by the Bakery, Confectionery, Tobacco Workers and Grain Millers (BCTGM) AFL-CIO, and are covered by collective bargaining agreements expiring July 31, 2011 for the Red River Valley factory employees and April 30, 2010 for the Sidney, Montana, factory employees. Office, clerical and management employees are not unionized, except for certain office employees at the Moorhead and Crookston, Minnesota, and Hillsboro, North Dakota, factories who are covered by the collective bargaining agreement with the BCTGM.
Shipping and Handling Costs
The costs incurred for the shipping and handling of products sold are classified in the consolidated financial statements as a selling expense on the Consolidated Statements of Operations. Shipping and handling costs were $185.8 million, $166.0 million and $130.9 million for the years ended August 31, 2008, 2007 and 2006, respectively.
Deferred Costs and Product Values
All costs incurred prior to the end of the Company’s fiscal year that relate to receiving and processing the subsequent year’s sugarbeet crop are deferred. Similarly, the net realizable values of products produced prior to the end of the Company’s fiscal year that relate to the subsequent year’s sugarbeet crop are deferred. The net result of these deferred costs and product values are recorded in the Company’s consolidated balance sheet in “Other Current Liabilities.” There were no deferred costs and product values as of August 31, 2008. Deferred costs and product values were $4.1 million and $2.9 million as of August 31, 2007 and 2006, respectively.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement No. 157, Fair Value Measurements (SFAS 157). This statement defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement becomes effective for the Company in the first quarter of
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fiscal 2009. Relative to SFAS 157, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2. FSP 157-1 amends SFAS 157 to exclude SFAS No. 13, Accounting for Leases, and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the effective date of the application of SFAS 157 for the Company to the first quarter of fiscal 2010 for all non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company does not expect that the adoption of this statement will have a material effect on the Company’s financial statements.
The FASB has issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R). This statement requires the Company to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This requirement became effective and was adopted by the Company as of August 31, 2007. This statement also will require the Company to measure the funded status of a plan as of the date of its year-end statement of financial position. This requirement becomes effective for the Company as of August 31, 2009.
The FASB has issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51. This statement requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Its intention is to eliminate the diversity in practice regarding the accounting for transactions between an entity and noncontrolling interests. This statement becomes effective for the Company in the first quarter of fiscal 2010. The Company does not expect that the adoption of this statement will have a material effect on the Company’s financial statements.
The FASB has issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133. This statement enhances the disclosure requirements for derivatives and hedging activities. This statement becomes effective for the Company in the second quarter of fiscal 2009. The Company does not expect that the adoption of this statement will have a material effect on the Company’s financial statements.
The FASB has issued statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not expect that the adoption of this statement will have a material effect on the Company’s financial statements.
The FASB has issued statement No. 141R, Business Combinations. This statement replaces FASB Statement No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement No. 141 that the acquisition method of accounting (which Statement No. 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This statement becomes effective for the Company in fiscal 2010. The Company does not expect that the adoption of this statement will have a material effect on the Company’s financial statements.
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The FASB has issued FASB Staff Position (FSP) FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This FSP amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. This FSP also amends FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. Further, this FSP clarifies the Board’s intent about the effective date of FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. This FSP becomes effective for the Company on November 30, 2008. The Company does not expect that the adoption of this FSP will have a material effect on the Company’s financial statements.
The FASB has issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement No. 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and other U.S. generally accepted accounting principles (GAAP). This FSP becomes effective for the Company in Fiscal 2010. The Company does not expect that the adoption of this FSP will have a material effect on the Company’s financial statements.
(2) RECEIVABLES:
There was no single customer attributable to the Company that accounted for 10 percent or more of the Company’s total receivables as of August 31, 2008 or August 31, 2007 or that accounted for 10 percent or more of the revenues of the Company for the years ended August 31, 2008, 2007 or 2006.
(3) INVENTORIES:
The major components of inventories as of August 31, 2008 and 2007 are as follows:
(4) NET PROPERTY AND EQUIPMENT:
Indirect costs capitalized were $1.2 million, $1.2 million and $1.1 million in 2008, 2007 and 2006, respectively. Construction period interest capitalized was $ .9 million, $1.1 million and $ .8 million in 2008, 2007 and 2006, respectively. Depreciation expense was $44.4 million, $43.6 million and $42.9 million in 2008, 2007 and 2006, respectively. The Company had outstanding commitments totaling $4.3 million as of August 31, 2008, for equipment and construction contracts related to various capital projects.
In 2008, an impairment loss of $11.9 million related to property and equipment at the Sidney, Montana facility was recognized. The impairment loss is reflected in the Cost of Sales on the
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Consolidated Statements of Operations. The property and equipment at the Sidney, Montana facility is used in the sugar segment.
Sidney Sugars contracts with sugarbeet growers in the Sidney, Montana area. The sugarbeet growers are not owners of Sidney Sugars and therefore have no requirement to grow sugarbeets on an annual basis. Due to the high alternative crop prices compared to contracted sugarbeet prices, many growers are choosing to grow alternative crops. During fiscal year 2008, Sidney Sugars renewed the grower contract for one year covering the 2008 crop (fiscal 2009) due to uncertainty in the industry. Total harvested acres declined from approximately 35,000 acres for the 2007 crop (fiscal 2008) to approximately 15,000 acres for the 2008 crop (fiscal 2009). For fiscal year 2009, Sidney Sugars is projecting a pre-tax net loss and negative cash flows. Sidney Sugars recently reached agreement on a two year contract for the 2009 and 2010 crops (fiscal 2010 and 2011) with the growers. Acreage contracting with the individual growers is currently in progress. There is great uncertainty regarding the number of acres that will actually be contracted for future crops.
Based on undiscounted cash flows, the Company does not believe that the entire carrying amount of the property and equipment at the Sidney, Montana facility is recoverable. The fair value of the property and equipment to be held and used was determined based on numerous scenarios which were weighted according to their respective probability of occurring. These scenarios are based on judgments regarding anticipated cash flows, future expected loss experience, current economic conditions and other factors. Based on this analysis, the fair value of the property and equipment was determined to be approximately $4.3 million compared to a carrying value of approximately $16.2 million resulting in an impairment loss of $11.9 million. The fair value of assets is a significant estimate and it is at least reasonably possible that a change in the estimate could occur in the near term.
(5) NET PROPERTY AND EQUIPMENT HELD FOR LEASE:
ProGold owns a corn wet-milling facility that it leases under an operating lease which runs through December 31, 2017. Under the terms of the operating lease, the lessee manages all aspects of the operations of the ProGold corn wet-milling facility.
Net Property and Equipment Held for Lease are stated at cost, net of accumulated depreciation. Depreciation expense was $11.1 million for each of the years ended August 31, 2008, 2007 and 2006. The components of Net Property and Equipment Held for Lease as of August 31, 2008 and 2007 are shown below:
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Future minimum payments to be received under the lease are as follows:
(6) INVESTMENTS IN MARKETING COOPERATIVES:
The Company has a 66 percent ownership interest and a 33 1/3 percent voting interest in United. The investment is accounted for using the equity method. Substantially all sugar products produced are sold by United as an agent for the Company. The amount of sales and related costs to be recognized by each owner of United is allocated based on its pro rata share of sugar production for the year. The owners provide United with cash advances on an ongoing basis for operating and marketing expenses incurred by United. The Company had outstanding advances to United of $20.0 million and $7.6 million as of August 31, 2008 and 2007, respectively. The Company provides administrative services for United and is reimbursed for costs incurred. The Company was reimbursed $1.0 million, $1.2 million and $1.2 million for services provided during 2008, 2007 and 2006, respectively.
The Company has a 55 percent ownership interest and a 25 percent voting interest in Midwest. The investment is accounted for using the equity method. Substantially all sugarbeet pulp, molasses and other agri-products produced are sold by Midwest as an agent for the Company. The amount of sales and related costs to be recognized by each owner of Midwest is allocated based on its pro rata share of production for each product for the year. The owners provide Midwest with cash advances on an ongoing basis for operating and marketing expenses incurred by Midwest. The Company had outstanding advances from Midwest of $3.3 million and $2.9 million as of August 31, 2008 and 2007, respectively. The Company provides administrative services for Midwest and is reimbursed for costs incurred. The Company was reimbursed $141,000, $129,000 and $121,000 for services provided during 2008, 2007 and 2006, respectively. The owners of Midwest are guarantors of the short-term line of credit Midwest has with CoBank, ACB. As of August 31, 2008, Midwest had outstanding short-term debt with CoBank, ACB of $3.2 million, of which $1.8 million was guaranteed by the Company.
The Company has performed a complete analysis of the conditions set forth in FIN 46(R) and has determined that its investments in United and Midwest do not meet the criteria of Variable Interest Entities and therefore such entities are not consolidated in the Company’s Consolidated Financial Statements.
(7) CRYSTECH, LLC:
On May 1, 2007, the Company acquired CIT Capital USA Inc.’s 50 percent ownership interest in Crystech for $1.5 million. This acquisition resulted in the Company’s 100 percent ownership of Crystech. Due to the Company’s resulting controlling ownership interest in Crystech, effective May 1, 2007, the Company began to include Crystech in its consolidated financial statements. Effective May 31, 2007, Crystech was dissolved with all assets and liabilities transferred to the Company. As a result of the dissolution, the Company eliminated its investment of $17.6 million in Crystech, recorded the value of the buildings and equipment acquired of $2.7 million and $10.6 million, respectively, and settled an inter-company payable of $4.3 million.
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Crystech was a special purpose entity that operated a molasses desugarization facility at the Company’s Hillsboro, North Dakota, sugar factory together with certain sugar processing equipment located at the Hillsboro, North Dakota, and Moorhead, Minnesota, sugar factories. Prior to May 31, 2007, the Company controlled 50 percent of Crystech and accounted for its investment using the equity method.
The Company performed a complete analysis of the conditions set forth in FIN 46(R) and determined that its investment in Crystech, LLC did not meet the criteria of a Variable Interest Entity and therefore, prior to May 1, 2007, Crystech, LLC was not consolidated in the Company’s Consolidated Financial Statements.
The Company had a tolling services agreement with Crystech whereby the Company paid for tolling services for processing sugarbeet molasses delivered to Crystech with title and risk of loss throughout the process maintained by the Company.
On a cumulative basis, the Company received an annual allocation of Crystech’s net income equal to 7.5 percent of the initial value of the Preferred Equity contribution by the Company. Following is summary financial information for Crystech:
(8) LONG-TERM AND SHORT-TERM DEBT:
The long-term debt outstanding as of August 31, 2008 and 2007 is summarized below:
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Minimum annual principal payments for the next five years are as follows:
The Company has a long-term debt line of credit with CoBank, ACB of $185.0 million, of which $53.3 million in loans and $70.3 million in long-term letters of credit were outstanding as of August 31, 2008. The unused long-term line of credit as of August 31, 2008 was $61.4 million.
The short-term debt outstanding as of August 31, 2008 and 2007 is summarized below:
During the year ended August 31, 2008, the Company borrowed from CoBank, ACB, the Commodity Credit Corporation (CCC) and issued commercial paper to meet its short-term borrowing requirements. As of August 31, 2008, the Company had available short-term lines of credit totaling $346.0 million, of which $15.3 million in commercial paper and $2.3 million in short-term letters of credit were outstanding. The unused short-term line of credit as of August 31, 2008 was $328.4 million.
Maximum borrowings, average borrowing levels and average interest rates for short-term debt for the years ended August 31, 2008 and 2007, follow:
The terms of the loan agreements contain prepayment penalties along with certain covenants related to, among other matters, the: level of working capital; ratio of term liabilities to members’ investments; current ratio; level of term debt to net funds generated; and investment in CoBank, ACB stock in amounts prescribed by the bank. Substantially all non-current assets are pledged to the senior lenders to provide security to support the Company’s seasonal and long-term financing. As of August 31, 2008, the Company was in compliance with the terms of the loan agreements.
Interest paid, net of amounts capitalized, was $15.2 million, $20.7 million and $19.6 million for the years ended August 31, 2008, 2007 and 2006, respectively.
(9) OPERATING LEASES:
The Company is party to operating leases for such items as rail cars, computer hardware and vehicles. Cargill, Incorporated has assumed responsibility for the payments on a rail car lease for the duration of that lease. Operating lease expense was $ .9 million, $ 2.6 million and $ 2.1 million for years ended August 31, 2008, 2007 and 2006, respectively. Future minimum payments under these obligations are as follows:
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(10) EMPLOYEE BENEFIT PLANS:
Company-Sponsored Defined Benefit Pension and Other Post-Retirement Benefit Plans
Substantially all employees who meet eligibility requirements of age, date of hire and length of service are covered by a Company-sponsored retirement plan. As of August 31, 2008, the pension plans were funded as required by the funding standards set forth by the Employee Retirement Income Security Act (ERISA). The Company also has non-qualified supplemental executive retirement plans for certain employees.
Employees of the Company who are not members of a collective bargaining unit and who are newly hired, or rehired, and employees who transfer from a union position to a nonunion position on or after September 1, 2007 are not eligible for participation in the defined benefit pension plan. These employees participate in a defined contribution plan as described later in this note.
The following schedule reflects the percentage of pension plan assets by asset class as of the latest measurement date, May 31, 2008:
Percentage of Pension Plan Assets by Asset Class as of May 31, 2008
The Investment Committee has the responsibility of managing the operations and administration of American Crystal Sugar Company’s retirement plans and trust. The Investment Committee has an investment policy for the pension plan assets that establishes target asset allocations as shown above. The Investment Committee is committed to diversification to reduce the risk of large losses. To that end, the Investment Committee has adopted policies requiring that each asset class will be diversified and equity exposure will be limited to 85% of the total portfolio value. The stated goal is for each component of the plan to earn a rate of return greater than its corresponding benchmark. Progress of the plan against its return objectives will be measured over a full market cycle.
To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as, the target asset allocation of the pension portfolio. This resulted in the selection of the 8.0% long-term rate of return on assets assumption.
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The development of the discount rate was based on a bond matching model whereby a hypothetical portfolio of bonds with an “AA” or better rating by a nationally recognized debt rating agency was constructed to match the expected benefit payments under the Company’s pension plans through the year 2037. The reinvestment rate for benefit cash flow occurring after 2037 was discounted back to the year 2037 at a rate consistent with the yields on long-term zero-coupon bonds. The resulting present value was treated as additional benefit cash flow for the year 2037 and consistently applied as any other benefit cash flow during the bond matching process.
The Company has a medical plan and a Medicare supplement plan which are available to union retirees and certain non-union retirees. The costs of these plans are shared by the Company and plan participants. The Company’s post-retirement plan for certain non-union employees currently coordinates with Medicare’s medical coverage and provides tiered prescription drug coverage. The Company has determined that this plan is actuarially equivalent to Medicare Part D and therefore qualifies for the Federal subsidy provision in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. This provision allows the Company to receive a subsidy of 28 percent of the dollars spent providing prescription drug coverage beginning in calendar year 2006.
The following schedule reflects the expected pension and post-retirement benefit payments during each of the next five years and the aggregate for the following five years:
The Company does not expect to make any contributions to the defined benefit pension plans during the next fiscal year. The Company expects to make contributions in the next fiscal year of approximately $116,000 related to Supplemental Executive Retirement Plans. The Company also expects to contribute approximately $720,000 to the post-retirement plans during the next fiscal year.
The following schedules provide the components of the Net Periodic Pension and Post-Retirement Costs for the years ended August 31, 2008, 2007 and 2006:
Components of Net Periodic Pension Cost
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Components of Net Periodic Post-Retirement Cost
In fiscal 2007, the Company changed the estimated amortization period for prior service costs. It was determined that the period in which the Company expects to realize economic benefits from plan amendments granting retroactive benefits was shorter than the remaining service period of active employees. Therefore, the amortization period was changed from the remaining service period of active employees to the lesser of seven years or the length of the union contract that included the benefit change.
For measurement purposes, a 9.0 percent annual rate of increase in the per capita cost of covered healthcare benefits for participants under age 65 was assumed for 2008. The rate is assumed to decline to 5.0 percent over the next five years. For participants age 65 and older, a 10.0 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2008. The rate is assumed to decline to 6.0 percent over the next five years.
Assumed healthcare trends can have a significant effect on the amounts reported for healthcare plans. A one percent change in the assumed healthcare trend rates would have the following effects:
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The following schedules set forth a reconciliation of the changes in the plans’ benefit obligation and fair value of assets for the years ending August 31, 2008 and 2007 and a statement of the funded status and amounts recognized in the Balance Sheets and Accumulated Other Comprehensive Income as of August 31, 2008 and 2007:
The accumulated pension benefit obligation was $116.7 million and $124.8 million as of August 31, 2008 and 2007, respectively.
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The estimated amounts that will be amortized from Accumulated Other Comprehensive Income at August 31, 2008 into net periodic benefit cost in fiscal 2009 are as follows:
The assumptions used in the measurement of the Company’s benefit obligations are shown below:
Weighted Average Assumptions as of August 31,
Long-Term Incentive Plan
During 2005, the granting of additional contract rights under the 1999 Long-Term Incentive Plan (1999 Plan) was discontinued with the adoption of the 2005 Long-Term Incentive Plan (2005 Plan). All vested contract rights as of December 31, 2004, remained in the 1999 Plan while all unvested contract rights were transferred to the 2005 Plan. The value of the contract rights remaining in the 1999 Plan is determined by the Board of Directors. During 2008, 309.62 vested contract rights were exercised. As of August 31, 2008, there were 145.45 vested contract rights remaining in the 1999 Plan. At August 31, 2008, the Board of Directors decreased the value of these contract rights from $2,100 to $1,750 per contract right.
2005 Long-Term Incentive Plan
The 2005 Long-Term Incentive Plan provides deferred compensation to certain key executives of the Company. The plan creates financial incentives that are based upon contract rights which are available to the executive under the terms of the plan, the value of which is determined by the Board of Directors. During 2008, 502.59 vested contract rights were exercised. In 2008, 282.15 contract rights were granted at a stated value of $1,750 per contract right. At August 31, 2008, the Board of Directors decreased the value of the 793.08 contract rights previously granted from $2,100 to $1,750 per contract right. As of August 31, 2008, there were 1,075.23 contract rights issued and outstanding at a stated value of $1,750 per contract right, of which 471.23 were vested.
Defined Contribution Plans
The Company has qualified 401(k) plans for all eligible employees. The plans provide for immediate vesting of benefits. Participants may contribute a percentage of their gross earnings each pay period as provided in the participation agreement. The Company matches the non-union and eligible union year-round participants’ contributions up to 4 percent and 2 percent, respectively, of their gross earnings. The Company’s contributions to these plans totaled $1.9 million, $2.0 million and $1.8 million for the years ended August 31, 2008, 2007 and 2006, respectively.
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Employees of the Company who are not members of a collective bargaining unit and who are newly hired, or rehired, and employees who transfer from a union position to a nonunion position on or after September 1, 2007 are no longer eligible for participation in the defined benefit pension plan but receive a 4% non-elective Company Contribution to a defined contribution plan. The Company Contribution has a six year vesting schedule. The Company’s contributions to this plan totaled $29,000 for the year ended August 31, 2008.
(11) MEMBERS’ INVESTMENTS:
The following schedule details the Preferred Stock and Common Stock as of August 31, 2008, 2007 and 2006:
(12) SEGMENT REPORTING:
The Company has identified two reportable segments: Sugar and Leasing. The sugar segment is engaged primarily in the production and marketing of sugar from sugarbeets. It also sells agri-products and sugarbeet seed. The leasing segment is engaged in the leasing of a corn wet milling plant used in the production of high-fructose corn syrup. The segments are managed separately. There are no inter-segment sales. The leasing segment has a major customer that accounts for all of that segment’s revenue.
Summarized financial information concerning the Company’s reportable segments is shown below:
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(13) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of financial instruments 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. 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. These estimates involve uncertainties and matters of judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Long-Term Debt, Inclusive of Current Maturities - Based upon current borrowing rates with similar maturities, the fair value of the long-term debt is approximately $175.7 million in comparison to the carrying value of $178.8 million.
Investments in CoBank, ACB and Investments in Marketing Cooperatives - The Company believes it is not practical to estimate the fair value of these investments without incurring excessive costs because there is no established market for these securities and equity interests, and it is inappropriate to estimate future cash flows which are largely dependent on future earnings of these organizations.
(14) INCOME TAXES:
On September 1, 2007, the Company adopted the provisions of the Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.
The Company had no unrecognized tax benefits on September 1, 2007. No interest or penalties are recognized in the consolidated statements of operations or in the consolidated balance sheets. The Company is no longer subject to U.S. Federal or state income tax examinations by tax authorities for fiscal years 2004 and earlier.
Total income tax payments (refunds) were ($33,000); ($119,000); and $290,000 for the years ended August 31, 2008, 2007 and 2006, respectively.
As of August 31, 2008, the Company had accumulated approximately $14.1 million of net operating loss carry-forwards for income tax reporting purposes. The net operating loss carry-forwards expire in the years 2018 through 2023. The Company’s net deferred tax liability included in Other Liabilities on the Company’s Balance Sheets as of August 31, 2008 and 2007 is reflected below:
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Income tax expense/(benefit) for the years ended August 31, 2008, 2007 and 2006 is as follows:
A reconciliation of the Company’s effective tax rates for the years ended August 31, 2008, 2007 and 2006 is shown below:
(15) 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 compliance program designed to meet these environmental laws and regulations. The Company believes that it is in substantial compliance with applicable environmental laws and regulations. From time to time, however, the Company may be involved in investigations or determinations regarding non-material matters that may arise.
The Company’s Crookston, East Grand Forks and Moorhead, Minnesota factories have experienced hydrogen sulfide emissions from their water treatment ponds that have exceeded permissible limits. On July 19, 2007, the Company received a notice of violation from the Minnesota Pollution Control Agency (MPCA) related to emissions that occurred in fiscal 2005 and 2006. The Company’s Crookston, East Grand Forks and Moorhead, Minnesota factories also experienced hydrogen sulfide emissions from their water treatment ponds in fiscal 2007 and 2008 that exceeded permissible limits. A penalty assessment is currently under consideration by the MPCA. While it is likely that the Company may be assessed penalties and/or fines related to these occurrences, as of the date of this report none have been assessed. Any potential penalties and/or fines, while possibly significant, are not expected to be material to the Company.
The Company is also addressing the following environmental matters:
· In October 2007, the East Grand Forks, Minnesota factory failed a stack emission performance test on its pellet cooler. A notice of non-compliance was issued by the MPCA on December 4, 2007 related to this occurrence.
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· In November 2007, the Moorhead, Minnesota factory failed a stack emission performance test on its lime kiln. A notice of non-compliance was issued by the MPCA on February 5, 2008 related to this occurrence.
· In November 2007, the Company received a Compliance Monitoring Survey-Letter of Warning from the MPCA for the Crookston Minnesota factory.
· On February 15, 2008, the Montana Department of Environmental Quality (MDEQ) issued a notice of violation related to the retention of environmental monitoring data at the Sidney, Montana factory.
Corrective actions have been taken related to these occurrences. While the Company may be assessed penalties for these occurrences, as of the date of this report none have been assessed. Any potential penalties assessed are not expected to be material to the Company.
Capital expenditures are required to minimize environmental risk. The Company’s capital expenditure budget at the beginning of the current fiscal year included approximately $7.7 million for environmental related projects at the Company’s factory locations. During 2008, an additional $3.6 million was approved. Expenditures during fiscal 2008 on these projects were approximately $3.0 million while total project-to-date spending on these projects has been $6.3 million. Environmental related projects that were placed into service during fiscal 2008 totaled approximately $5.6 million. The amount and timing of any additional capital expenditures that may be required is not currently known.
(16) LEGAL MATTERS:
Another sugar company has appealed to the Ninth Circuit Court of Appeals a decision of the United States District Court relative to a determination and transfer of sugar marketing allocations made by the USDA. If this case is overturned, it could result in the Company experiencing a reduction in marketing allocations equal to the loss of approximately 15,000 acres in future crop years assuming no other related factors were to change.
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EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-K
FOR FISCAL YEAR ENDED AUGUST 31, 2008
Item No.
Method of Filing
3.1
Restated Articles of Incorporation of American Crystal Sugar Company
Incorporated by reference to Exhibit 3(i) from the Company’s Registration Statement on Form S-1 (File No. 33-83868), declared effective November 23, 1994.
3.2
Restated By-laws of American Crystal Sugar Company
Incorporated by reference to Exhibit 3(ii) from the Company’s Registration Statement on Form S-1 (File No. 333-11693), declared effective November 13, 1996.
4.1
Restated Articles of Incorporation of American Crystal Sugar Company
See Exhibit 3.1
4.2
Restated By-laws of American Crystal Sugar Company
See Exhibit 3.2
10.1
Form of Operating Agreement between Registrant and ProGold Limited Liability Company
Incorporated by reference to Exhibit 10(u) from the Company’s Registration Statement on Form
S-1 (File No. 33-83868), declared effective November 23, 1994.
10.2
Form of Member Control Agreement between Registrant and ProGold Limited Liability Company
Incorporated by reference to Exhibit 10(v) from the Company’s Registration Statement on Form
S-1 (File No. 33-83868), declared effective November 23, 1994.
10.3
Registrant’s Senior Note Purchase Agreement
Incorporated by reference to Exhibit 10.24 from the Company’s Annual Report on Form 10-K for the year ended August 31, 1999
10.4
Registrant’s Senior Note Inter-creditor and Collateral Agency Agreement
Incorporated by reference to Exhibit 10.25 from the Company’s Annual Report on Form 10-K for the year ended August 31, 1999
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10.5
Registrant’s Senior Note Restated Mortgage and Security Agreement
Incorporated by reference to Exhibit 10.26 from the Company’s Annual Report on Form 10-K for the year ended August 31, 1999
++10.6
Employment Agreement between the Registrant and James J. Horvath
Incorporated by reference to Exhibit 10.28 from the Company’s Annual Report on Form 10-K form the year ended August 31, 1999
++10.7
Board of Directors Deferred Compensation Plan, dated June 30, 1994
Incorporated by reference to Exhibit 10.29 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2000
++10.8
Long Term Incentive Plan, dated June 23, 1999
Incorporated by reference to Exhibit 10.31 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2000
10.9
Uniform Member Marketing Agreement between the Registrant and Midwest Agri-Commodities Company dated September 1, 2001.
Incorporated by reference to Exhibit 10.28 from the Company’s Form 10-Q for the quarter ended November 30, 2001
10.10
Registrant’s Senior Note Purchase Agreement dated January 15, 2003
Incorporated by reference to Exhibit 10.29 from the Company’s Form 10-Q for the quarter ended February 28, 2003
10.11
Growers’ Contract (5-year Agreement) for the crop years 2003 through 2007
Incorporated by reference to Exhibit 10.30 from the Company’s Form 10-Q for the quarter ended February 28, 2003
10.12
Stipulation Agreement between Registrant and State of Minnesota Pollution Control Agency, dated August 5, 2003
Incorporated by reference to Exhibit 10.30 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2003
++10.13
Amendment to Employment Agreement dated September 28, 2005 between the Company and James J. Horvath
Incorporated by reference to Exhibit 10.1 from the Company’s Form 8-K dated September 30, 2005
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++10.14
Long Term Incentive Plan, dated August 24, 2005
Incorporated by reference to Exhibit 10.25 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2005
10.15
Term and Seasonal Loan Agreements between the Registrant and CoBank, ACB dated July 31, 2006
Incorporated by reference to Exhibit 10.24 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2006
10.16
Second Amendment to Amended and Restated Loan Agreement between the Registrant and CoBank, ACB dated November 3, 2006.
Incorporated by reference to Exhibit 10.25 from the Company’s Form 10-Q for the quarter ended November 30, 2006.
++10.17
Employment Agreement dated March 21, 2007 between the Registrant and David A. Berg.
Incorporated by reference to Exhibit 10.26 from the Company’s Form 10-Q for the quarter ended February 28, 2007.
10.18
Third Amendment to Amended and Restated Loan Agreement between the Registrant and CoBank, ACB dated April 2, 2007.
Incorporated by reference to Exhibit 10.22 from the Company’s Form 10-Q for the quarter ended May 31, 2007
10.19
Fourth Amendment to Amended and Restated Loan Agreement between the Registrant and CoBank, ACB dated July 25, 2007.
Incorporated by reference to Exhibit 10.23 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2007
10.20
Growers’ Contract (5-year Agreement) for the crop years 2008 through 2012
Incorporated by reference to Exhibit 10.24 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2007
10.21
Commitment and Acceptance Agreement between the Registrant and CoBank, ACB dated November 6, 2007
Incorporated by reference to Exhibit 10.24 from the Company’s Form 10-Q for the quarter ended November 30, 2007
10.22
Amended and Restated Uniform Member Sugar Marketing Agreement between the Registrant and United Sugars Corporation dated September 20, 2007.
Filed herewith electronically
10.23
Fifth Amendment to Amended and Restated Loan Agreement between the Registrant and CoBank, ACB dated July 23, 2008.
Filed herewith electronically
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21.1
List of Subsidiaries of the Registrant
Filed herewith electronically
31.1
Rule 13a-14(a)/15(d)-14(a) Certification of the Chief Executive Officer
Accompanying herewith electronically
31.2
Rule 13a-14(a)/15(d)-14(a) Certification of the Chief Financial Officer
Accompanying herewith electronically
32.1
Section 1350 Certification of the Chief Executive Officer
Accompanying herewith electronically
32.2
Section 1350 Certification of the Chief Financial Officer
Accompanying herewith electronically
+ Confidential treatment under Rule 24b-2 of the Securities and Exchange Act of 1934, as amended, has been granted with respect to designated portions of this document.
++ A management contract or compensatory plan required to be filed with this report.
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