**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

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** **

**FORM 10-Q**

 

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**ý** Quarterly report pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934

** **

# **For the period ended February 28,2005**

# ** **

**Commission file number:  33-83868**

 

**AMERICAN CRYSTAL SUGAR COMPANY**

(Exact name ofregistrant as specified in its charter)

 
| **Minnesota**                                                   | ** ** | **84-0004720**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**101 NorthThird StreetMoorhead, Minnesota  56560**

(Address ofprincipal executive offices)

 

**TelephoneNumber (218) 236-4400**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months, and (2) has been subject to such filing requirements for the past90 days.

 
| YES   ý | NO   o |
|-----------------------------|-----------------------|

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in rule 12b-2 ofthe Act).

 
| YES   o | NO   ý |
|------------------------|----------------------------|

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 
| **Class of Common Stock** | ** ** | **Outstanding at  April 6, 2005** |
|--------------------------------|------------|----------------------------------------|
| **$10 Par  Value**             | ** ** | **2,859**                              |

 

 

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**AMERICANCRYSTAL SUGAR COMPANY**

 

**FORM 10-Q**

 

**INDEX**

 
| **PART I**  | **FINANCIAL INFORMATION** |                                                                                            |
|------------------|---------------------------|-------------------------------------------------------------------------------------------------|
|             |                      |                                                                                            |   |
| ** **       | **ITEM 1.**               | **CONSOLIDATED FINANCIAL  STATEMENTS**                                                          |   |
|             |                      |                                                                                            |   |
| ** **       | ** **                | **CONSOLIDATED BALANCE SHEETS**                                                                 |   |
| ** **       | ** **                |                                                                                            |   |
|             |                      | **CONSOLIDATED  STATEMENTS OF OPERATIONS**                                                      |   |
|             |                      | ** **                                                                                      |   |
| ** **       | ** **                | **CONSOLIDATED  STATEMENTS OF CASH FLOWS**                                                      |   |
|             |                      |                                                                                            |   |
| ** **       | ** **                | **NOTES TO  THE CONSOLIDATED FINANCIAL STATEMENTS**                                             |   |
|             |                      |                                                                                            |   |
| ** **       | **ITEM  2.**              | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION** |   |
| ** **       | **ITEM  3.**              | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                 |   |
| ** **       | **ITEM 4.**               | **CONTROLS AND  PROCEDURES**                                                                    |   |
|             |                      |                                                                                            |   |
| **PART II** | **OTHER INFORMATION**     |                                                                                            |
|             |                      |                                                                                            |   |
| ** **       | **ITEM 1.**               | **LEGAL PROCEEDINGS**                                                                           |   |
| ** **       | **ITEM  2.**              | **CHANGES  IN SECURITIES AND USE OF PROCEEDS**                                                  |   |
| ** **       | **ITEM 3.**               | **DEFAULT UPON  SENIOR SECURITIES**                                                             |   |
| ** **       | **ITEM  4.**              | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                        |   |
| ** **       | **ITEM 5.**               | **OTHER INFORMATION**                                                                           |   |
| ** **       | **ITEM 6.**               | **EXHIBITS  AND REPORTS ON FORM 8-K**                                                      |   |
|             |                      |                                                                                            |   |
| **SIGNATURES**   |                      |                                                                                            |

 

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**AMERICAN CRYSTAL SUGAR COMPANY**

**ConsolidatedBalance Sheets**

**(Unaudited)**

**(Dollars inThousands)**

 

**ASSETS**

 
| ** **                                     | ** ** | **February 28  2005** | ** ** | **February 29  2004** | ** ** | **August 31  2004*** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|---------------------------|------------|
| **Current  Assets:**                           |       |                       |       |                       |       |                      |       |
| Cash and Cash  Equivalents                     |       | $                          | 672        |                       | $          | 629                       |       | $ | 184 |   |
| Accounts Receivable:                           |       |                       |       |                       |       |                      |       |
| Trade                                          |       | 60,932                     |       | 90,446                     |       | 79,185                    |       |
| Members                                        |       | 6                          |       | —                     |       | 5,105                     |       |
| Other                                          |       | 2,267                      |       | 2,137                      |       | 3,605                     |       |
| Advances to  Related Parties                   |       | 9,191                      |       | 2,833                      |       | 13,508                    |       |
| Inventories                                    |       | 401,278                    |       | 456,961                    |       | 129,285                   |       |
| Prepaid Expenses                               |       | 5,131                      |       | 5,428                      |       | 4,846                     |       |
|                                           |       |                       |       |                       |       |                      |       |
| Total Current  Assets                          |       | 479,477                    |       | 558,434                    |       | 235,718                   |       |
|                                           |       |                       |       |                       |       |                      |       |
| **Property  and Equipment:**                   |       |                       |       |                       |       |                      |       |
| Land                                           |       | 43,235                     |       | 40,105                     |       | 43,195                    |       |
| Buildings                                      |       | 94,377                     |       | 91,438                     |       | 93,988                    |       |
| Equipment                                      |       | 761,294                    |       | 794,676                    |       | 809,775                   |       |
| Construction-in-Progress                       |       | 8,849                      |       | 5,594                      |       | 3,118                     |       |
| Less:  Accumulated Depreciation                |       | (594,197                   | )          | (607,986                   | )          | (619,534                  | )          |
|                                           |       |                       |       |                       |       |                      |       |
| Net Property and  Equipment                    |       | 313,558                    |       | 323,827                    |       | 330,542                   |       |
|                                           |       |                       |       |                       |       |                      |       |
| **Net  Property and Equipment Held for Lease** |       | 155,766                    |       | 165,675                    |       | 160,643                   |       |
|                                           |       |                       |       |                       |       |                      |       |
| **Other  Assets:**                             |       |                       |       |                       |       |                      |       |
| Investments in  CoBank, ACB                    |       | 18,045                     |       | 19,552                     |       | 19,069                    |       |
| Investments in  Marketing Cooperatives         |       | 4,601                      |       | 5,240                      |       | 4,487                     |       |
| Investments in  Crystech, LLC                  |       | 15,886                     |       | 15,863                     |       | 15,353                    |       |
| Other Assets                                   |       | 57,294                     |       | 45,542                     |       | 56,343                    |       |
|                                           |       |                       |       |                       |       |                      |       |
| Total Other  Assets                            |       | 95,826                     |       | 86,197                     |       | 95,252                    |       |
|                                           |       |                       |       |                       |       |                      |       |
| Total Assets                                   |       | $                          | 1,044,627  |                       | $          | 1,134,133                 |       | $ | 822,155 |   |

 

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*Derived from audited financial statements.

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

1

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**AMERICAN CRYSTAL SUGAR COMPANY**

**ConsolidatedBalance Sheets**

**(Unaudited)**

**(Dollars inThousands)**

 

**LIABILITIES AND MEMBERS’INVESTMENTS**

 
| ** **                                                  | ** ** | **February 28** | ** ** | **February 29** | ** ** | **August 31** | ** ** |
|-------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                  | ** ** | **2005**             | ** ** | **2004**             | ** ** | **2004***          | ** ** |
| **Current  Liabilities:**                                   |       |                 |       |                 |       |               |       |
| Short-Term Debt                                             |       | $                    | 165,363    |                 | $          | 217,855            |       | $ | 30,199 |   |
| Current  Maturities of Long-Term Debt                       |       | 20,932               |       | 20,917               |       | 20,932             |       |
| Accounts Payable                                            |       | 20,311               |       | 20,197               |       | 27,063             |       |
| Advances Due to  Related Parties                            |       | 10,608               |       | 8,771                |       | 7,864              |       |
| Accrued Continuing  Costs (See Note 5)                      |       | 44,839               |       | 59,195               |       | —             |       |
| Other Current  Liabilities                                  |       | 19,588               |       | 21,126               |       | 20,500             |       |
| Amounts Due  Growers                                        |       | 148,114              |       | 175,771              |       | 70,487             |       |
|                                                        |       |                 |       |                 |       |               |       |
| Total Current  Liabilities                                  |       | 429,755              |       | 523,832              |       | 177,045            |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Long-Term  Debt, Net of Current Maturities**              |       | 223,108              |       | 260,290              |       | 250,086            |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Accrued  Employee Benefits**                              |       | 36,627               |       | 32,916               |       | 33,939             |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Other  Liabilities**                                      |       | 9,497                |       | 11,062               |       | 10,297             |       |
|                                                        |       |                 |       |                 |       |               |       |
| Total  Liabilities                                          |       | 698,987              |       | 828,100              |       | 471,367            |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Commitments  and Contingencies (See Note 11)**            |       |                 |       |                 |       |               |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Minority  Interest in ProGold Limited Liability Company** |       | 49,306               |       | 45,427               |       | 47,362             |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Members’  Investments:**                             |       |                 |       |                 |       |               |       |
| Preferred Stock                                             |       | 38,275               |       | 38,275               |       | 38,275             |       |
| Common Stock                                                |       | 29                   |       | 30                   |       | 29                 |       |
| Additional  Paid-in Capital                                 |       | 152,261              |       | 152,261              |       | 152,261            |       |
| Unit Retains                                                |       | 130,299              |       | 109,022              |       | 138,714            |       |
| Equity Retention                                            |       | 2,708                |       | 2,717                |       | 2,708              |       |
| Accumulated  Other Comprehensive Income/(Loss)              |       | (376                 | )          | (11,900              | )          | (376               | )          |
| Retained  Earnings/(Deficit)                                |       | (26,862              | )          | (29,799              | )          | (28,185            | )          |
|                                                        |       |                 |       |                 |       |               |       |
| Total Members’  Investments                            |       | 296,334              |       | 260,606              |       | 303,426            |       |
|                                                        |       |                 |       |                 |       |               |       |
| Total  Liabilities and Members’ Investments            |       | $                    | 1,044,627  |                 | $          | 1,134,133          |       | $ | 822,155 |   |

 

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* Derived from audited financial statements.

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

2

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**AMERICANCRYSTAL SUGAR COMPANY**

**ConsolidatedStatements of Operations**

**(Unaudited)**

**(Dollars inThousands)**

 
| ** **                                                            | ** ** | **For the Six Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **February 28**         | ** ** | **February 29**           | ** ** | **February 28** | ** ** | **February 29** | ** ** |
| ** **                                                            | ** ** | **2005**                     | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                  |       |                         |       |                           |       |   |   |   |   |
| **Net  Revenue**                                                      |       | $                            | 458,847    |                           | $          | 472,076 |   | $ | 211,511 |   | $ | 241,872 |   |
| **Cost of  Sales**                                                    |       | 58,651                       |       | 5,322                          |       | 534 |   | 12,336 |   |
|                                                                  |       |                         |       |                           |       |   |   |   |   |
| **Gross  Proceeds**                                                   |       | 400,196                      |       | 466,754                        |       | 210,977 |   | 229,536 |   |
|                                                                  |       |                         |       |                           |       |   |   |   |   |
| **Selling,  General and Administrative Expenses**                     |       | 94,592                       |       | 90,667                         |       | 43,175 |   | 47,768 |   |
| **Accrued  Continuing Costs (See Note 5)**                            |       | 44,839                       |       | 59,195                         |       | 24,218 |   | 17,064 |   |
|                                                                  |       |                         |       |                           |       |   |   |   |   |
| **Operating  Proceeds**                                               |       | 260,765                      |       | 316,892                        |       | 143,584 |   | 164,704 |   |
|                                                                  |       |                         |       |                           |       |   |   |   |   |
| **Other  Income/(Expense)**                                           |       |                         |       |                           |       |   |   |   |   |
| Interest Income                                                       |       | 161                          |       | 125                            |       | 29 |   | 8 |   |
| Interest Expense                                                      |       | (9,520                       | )          | (10,333                        | )          | (5,088 | ) | (5,423 | ) |
| Other, Net                                                            |       | (330                         | )          | 641                            |       | (219 | ) | 545 |   |
| Total Other  (Expense)                                                |       | (9,689                       | )          | (9,567                         | )          | (5,278 | ) | (4,870 | ) |
|                                                                  |       |                         |       |                           |       |   |   |   |   |
| **Proceeds  before Minority Interest and Income Tax Expense**         |       | 251,076                      |       | 307,325                        |       | 138,306 |   | 159,834 |   |
|                                                                  |       |                         |       |                           |       |   |   |   |   |
| **Minority  Interest**                                                |       | (1,944                       | )          | (1,658                         | )          | (1,022 | ) | (846 | ) |
|                                                                  |       |                         |       |                           |       |   |   |   |   |
| **Income  Tax Expense**                                               |       | (11                          | )          | (5                             | )          | (11 | ) | (5 | ) |
| **Net  Proceeds Resulting from Member and Non-Member Business**       |       | $                            | 249,121    |                           | $          | 305,662 |   | $ | 137,273 |   | $ | 158,983 |   |
|                                                                  |       |                         |       |                           |       |   |   |   |   |
| **Distribution  of Net Proceeds:**                                    |       |                         |       |                           |       |   |   |   |   |
| Credited/(Charged)  to Members’ Investments:                     |       |                         |       |                           |       |   |   |   |   |
| Non-Member  Business Income                                           |       | $                            | 1,323      |                           | $          | 2,626 |   | $ | 768 |   | $ | 1,360 |   |
| Unit Retains  Declared to Members                                     |       | —                       |       | —                         |       | — |   | — |   |
| Net Credit to  Members’ Investments                              |       | 1,323                        |       | 2,626                          |       | 768 |   | 1,360 |   |
| Payments to/due  Members for Sugarbeets, Net of Unit Retains Declared |       | 247,798                      |       | 303,036                        |       | 136,505 |   | 157,623 |   |
|                                                                  |       |                         |       |                           |       |   |   |   |   |
| **Total**                                                             |       | $                            | 249,121    |                           | $          | 305,662 |   | $ | 137,273 |   | $ | 158,983 |   |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

3

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**American Crystal Sugar Company**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

**(Dollars In Thousands)**

 
| ** **                                                                                                                                                                                     | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **February 28**         | ** ** | **February 29** | ** ** |
| ** **                                                                                                                                                                                     | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| **Cash  Provided By/(Used In) Operations:**                                                                                                                                                    |       |                         |       |   |   |
| Net Proceeds  Resulting from Member and Non-Member Business                                                                                                                                    |       | $                            | 249,121    |   | $ | 305,662 |   |
| Payments to/due  Members for Sugarbeets, Net of Unit Retains Declared                                                                                                                          |       | (247,798                     | )          | (303,036 | ) |
| Add/(Deduct)  Non-Cash Items:                                                                                                                                                                  |       |                         |       |   |   |
| Depreciation and  Amortization                                                                                                                                                                 |       | 34,860                       |       | 35,430 |   |
| (Income) from  Equity Method Investees                                                                                                                                                         |       | (562                         | )          | (571 | ) |
| Loss on the  Disposition of Property and Equipment                                                                                                                                             |       | 1,248                        |       | 390 |   |
| Deferred Gain  Recognition                                                                                                                                                                     |       | (99                          | )          | (99 | ) |
| Minority  Interest in ProGold Limited Liability Company                                                                                                                                        |       | 1,944                        |       | 1,658 |   |
| Changes in  Assets and Liabilities:                                                                                                                                                            |       |                         |       |   |   |
| Receivables                                                                                                                                                                                    |       | 24,691                       |       | (20,805 | ) |
| Inventories                                                                                                                                                                                    |       | (271,993                     | )          | (325,980 | ) |
| Prepaid Expenses                                                                                                                                                                               |       | (285                         | )          | 1,634 |   |
| Long-Term  Prepaid Pension Expense                                                                                                                                                             |       | (1,823                       | )          | (8,712 | ) |
| Advances To/Due  to Related Parties                                                                                                                                                            |       | 7,061                        |       | 6,900 |   |
| Accounts Payable                                                                                                                                                                               |       | (6,752                       | )          | (2,872 | ) |
| Accrued  Continuing Costs                                                                                                                                                                      |       | 44,839                       |       | 59,195 |   |
| Other  Liabilities                                                                                                                                                                             |       | 973                          |       | 3,260 |   |
| Amounts Due  Growers                                                                                                                                                                           |       | 77,627                       |       | 116,875 |   |
| Net Cash (Used  In) Operations                                                                                                                                                                 |       | (86,948                      | )          | (131,071 | ) |
|                                                                                                                                                                                           |       |                         |       |   |   |
| **Cash  Provided By/(Used In) Investing Activities:**                                                                                                                                          |       |                         |       |   |   |
| Purchases of  Property and Equipment                                                                                                                                                           |       | (12,280                      | )          | (9,115 | ) |
| Purchases of  Property and Equipment Held for Lease                                                                                                                                            |       | (655                         | )          | (550 | ) |
| Proceeds from  the Sale of Property and Equipment                                                                                                                                              |       | 2                            |       | 39 |   |
| Equity Refund  from CoBank, ACB                                                                                                                                                                |       | 1,024                        |       | 2,133 |   |
| Investments in  Marketing Cooperatives                                                                                                                                                         |       | —                       |       | 1,049 |   |
| Acquisition by  Crab Creek Sugar Company                                                                                                                                                       |       | —                       |       | (5,763 | ) |
| Changes in Other  Assets                                                                                                                                                                       |       | (426                         | )          | 4,545 |   |
| Net Cash (Used  In) Investing Activities                                                                                                                                                       |       | (12,335                      | )          | (7,662 | ) |
|                                                                                                                                                                                           |       |                         |       |   |   |
| **Cash  Provided By/(Used In) Financing Activities:**                                                                                                                                          |       |                         |       |   |   |
| Net Proceeds  from/(Payments on) Short-Term Debt                                                                                                                                               |       | 135,164                      |       | 167,866 |   |
| Long-Term Debt  Repayment                                                                                                                                                                      |       | (26,978                      | )          | (16,997 | ) |
| Proceeds from  Issuance of Stock                                                                                                                                                               |       | —                       |       | 4,023 |   |
| Payment of Unit  Retains & Equity Retention                                                                                                                                           |       | (8,415                       | )          | (16,389 | ) |
| Net Cash  Provided By Financing Activities                                                                                                                                                     |       | 99,771                       |       | 138,503 |   |
| Increase/(Decrease)  In Cash and Cash Equivalents                                                                                                                                              |       | 488                          |       | (230 | ) |
| Cash and Cash  Equivalents, Beginning of Year                                                                                                                                                  |       | 184                          |       | 859 |   |
|                                                                                                                                                                                           |       |                         |       |   |   |
| Cash and Cash  Equivalents, End of Period                                                                                                                                                      |       | $                            | 672        |   | $ | 629 |   |
|                                                                                                                                                                                           |       |
| **Non-Cash  Investing and Financing Activities:**In September 2003,  a note payable in the amount of $969,000 was issued in connection with the  acquisition by Crab Creek Sugar Company. |       |

 

The AccompanyingNotes are an Integral Part of These Consolidated Financial Statements.

 

4

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# **AMERICAN CRYSTAL SUGARCOMPANY**

**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THESIX MONTHS AND THREE MONTHS ENDED**

**FEBRUARY 28,2005 AND FEBRUARY 29, 2004**

**(Unaudited)**

 

**Note 1:  Basis of Presentation**

 

The unauditedconsolidated financial statements of American Crystal Sugar Company (theCompany) contained herein have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission.  Accordingly, they do not include all theinformation and footnotes required by accounting principles generally acceptedin the United States of America. However, in the opinion of management, all adjustments, consisting ofnormal recurring accruals, considered necessary for a fair presentation havebeen included.

 

The Company’s consolidatedfinancial statements are comprised of: American Crystal Sugar Company; itswholly-owned subsidiaries Sidney Sugars Incorporated (Sidney Sugars) and CrabCreek Sugar Company (Crab Creek); and ProGold Limited Liability Company(ProGold), a limited liability company in which the Company holds a 51 percentownership interest.

 

Crab Creek was formed infiscal 2003 under the laws of the State of Minnesota, and on September 8,2003, acquired the control of a sugarbeet processing facility and the relatedmarketing allocations associated with such facility.

 

Allmaterial inter-company transactions have been eliminated.

 

The operating results forthe six month period ended February 28, 2005 are not necessarilyindicative of the results that may be expected for the year ended August 31,2005.

 

The amount paid toshareholders for sugarbeets (member beet payment) depends on the future sellingprices of sugar and agri-products as well as processing and other costsincurred during the remainder of the fiscal year associated with the 2004 RedRiver Valley sugarbeet crop (RRV crop). The amount paid to non-member growers for sugarbeets (non-member beetpayment) depends on the future selling prices of sugar and the related selling expensesassociated with the 2004 Sidney sugarbeet crop (Sidney crop).  For the purposes of this report, the amountof the beet payments, future revenues and costs have been estimated.  Therefore, adjustments with respect to theseestimates may be necessary in the future, as additional information becomesavailable.

 

These financialstatements should be read in conjunction with the consolidated financialstatements and notes included in the Company’s Annual Report on Form 10-Kfor the year ended August 31, 2004.

 

Certain reclassificationshave been made to the February 29, 2004 and the August 31, 2004consolidated financial statements to conform with the February 28, 2005presentation.  These reclassificationshad no effect on previously reported results of operations or Members’Investments.

 

5

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**Note 2:  Inventories**

 

The major components ofinventories are as follows (In Thousands):

 
| ** **                                                             | ** ** | **02/28/05** | ** ** | **02/29/04** | ** ** | **8/31/04** | ** ** |
|------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|-------------|------------|
| Refined Sugar,  Pulp, Molasses, Other Agri-Products and Sugarbeet Seed |       | $            | 260,769    |         | $          | 312,836     |       | $ | 107,812 |   |
| Unprocessed  Sugarbeets                                                |       | 119,699      |       | 126,603      |       | —      |       |
| Maintenance  Parts & Supplies                                 |       | 20,810       |       | 17,522       |       | 21,473      |       |
|                                                                   |       |         |       |         |       |        |       |
| Total  Inventories                                                     |       | $            | 401,278    |         | $          | 456,961     |       | $ | 129,285 |   |

 

Sugar, pulp, molasses andother agri-products inventories are valued at estimated net realizablevalue.  Unprocessed sugarbeets are valuedat the estimated gross beet payment. Maintenance parts & supplies and sugarbeet seed inventories arevalued at the lower of average cost or market.

 

# **Note3: Short-Term Debt**

# ** **

TheCompany has a seasonal line of credit with a consortium of lenders led byCoBank, ACB of $265 million and a line of credit with Wells Fargo Bank for$1 million.  The Company’scommercial paper program provides short-term borrowings of up to $225 million. Any borrowings under the commercial paper program along with outstandingshort-term letters of credit will act to reduce the available credit under theCoBank, ACB seasonal line of credit by a commensurate amount.  The Company also utilizes the CommodityCredit Corporation (CCC) to meet its short-term borrowing needs.

 

As of February 28,2005, the Company had outstanding commercial paper of $165.4****million at an average interest rate of 2.8% and maturitydates between March 1, 2005 and May 31, 2005.  The Company had no outstanding short-termdebt with CoBank, ACB or the CCC as of February 28, 2005. The Company had$5.9 million of short-term letters of credit outstanding as of February 28,2005.

 

As of February 29,2004, the Company had outstanding commercial paper of $194.9****million at an average interest rate of 1.34% and maturitydates between March 1, 2004 and May 28, 2004.  In addition, the Company had an outstandingnon-recourse loan with the CCC of $23.0 million, against which one millionhundredweight of sugar was pledged as collateral.  The CCC loan carried an interest rate of1.99% and a maturity date of August 31, 2004.  The Company had no outstanding short-termdebt with CoBank, ACB as of February 29, 2004.

 

**Note 4:  Interest Paid**

 

Interest paid, net ofamounts capitalized, was $9.6 million and $8.9 million for the six months endedFebruary 28, 2005 and February 29, 2004.

 

**Note 5:  Accrued Continuing Costs**

 

For interim reporting,the Net Proceeds from Member Business is based on the forecasted gross beetpayment and the percentage of the tons of sugarbeets processed to the totalestimated tons of sugarbeets to process for a given crop year.  The Net Proceeds from the operations ofSidney Sugars is based on the forecasted net income for the fiscal year and thepercentage of the tons of non-member sugarbeets processed to the totalestimated tons of non-member sugarbeets to process for a given fiscal year.

 

Accrued continuing costsrepresent the difference between the Net Proceeds as determined above andactual member business crop year and Sidney Sugars fiscal year revenuesrealized and expenses incurred through the end of the reporting period.  Accrued continuing costs are reflected in theConsolidated Financial Statements as a cost on the Consolidated Statements ofOperations and as a current liability on the Consolidated Balance Sheets.

 

6

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**Note 6: ****Net Periodic Pension andPost-Retirement Costs**

 

Thefollowing schedules provide the components of the Net Periodic Pension andPost-Retirement Costs for the Six Months and Three Months ended February 28,2005 and February 29, 2004:

 

***Components of Net Periodic Pension Cost***

(InThousands)

 
| ** **                             | ** ** | **For the Six Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|----------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **February 28**         | ** ** | **February 29**           | ** ** | **February 28** | ** ** | **February 29** | ** ** |
| ** **                             | ** ** | **2005**                     | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service Cost                           |       | $                            | 1,633      |                           | $          | 1,386 |   | $ | 817 |   | $ | 693 |   |
| Interest Cost                          |       | 3,543                        |       | 3,008                          |       | 1,771 |   | 1,504 |   |
| Expected Return  on Plan Assets        |       | (4,031                       | )          | (2,980                         | )          | (2,016 | ) | (1,490 | ) |
| Multiple  Employer Adjustment          |       | (79                          | )          | (172                           | )          | (40 | ) | (86 | ) |
| Amortization of  Net Transition Assets |       | (11                          | )          | (62                            | )          | (5 | ) | (31 | ) |
| Amortization of  Prior Service Costs   |       | 512                          |       | 272                            |       | 256 |   | 136 |   |
| Amortization of  Net (Gain) Loss       |       | 665                          |       | 1,000                          |       | 333 |   | 500 |   |
| Net Periodic  Pension Cost             |       | $                            | 2,232      |                           | $          | 2,452 |   | $ | 1,116 |   | $ | 1,226 |   |

 

***Components of Net Periodic Post-RetirementCost***

(InThousands)

 
| ** **                         | ** ** | **For the Six Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **February 28**         | ** ** | **February 29**           | ** ** | **February 28** | ** ** | **February 29** | ** ** |
| ** **                         | ** ** | **2005**                     | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service Cost                       |       | $                            | 550        |                           | $          | 560 |   | $ | 275 |   | $ | 280 |   |
| Interest Cost                      |       | 1,086                        |       | 882                            |       | 543 |   | 441 |   |
| Amortization of  Net (Gain) Loss   |       | 144                          |       | 228                            |       | 72 |   | 114 |   |
| Net Periodic  Post-Retirement Cost |       | $                            | 1,780      |                           | $          | 1,670 |   | $ | 890 |   | $ | 835 |   |

 

Forthe six months ended February 28, 2005, the Company had made contributionsof approximately $3.9 million related to pensions.  An additional $2.1 million is expected to becontributed prior to the end of the current fiscal year.  The Company has made payments forPost-Retirement benefits of approximately $ .5 million for the six months endedFebruary 28, 2005, and expects total payments for the current fiscal yearto be approximately $1.0 million.

 

**Note 7:  Members’ Investments**

 
| ** **              | ** ** | ** **    | ** ** | **Shares**     | ** ** | **Shares Issued**     | ** ** |
|-------------------------|------------|---------------|------------|----------------|------------|-----------------------|------------|
| ** **              | ** ** | **Par Value** | ** ** | **Authorized** | ** ** | **& Outstanding** | ** ** |
| Preferred Stock:        |       |          |       |           |       |                  |       |
| April 6,  2005     |       | $             | 76.77      |           | 600,000    |                  | 498,570    |   |
| February 28,  2005 |       | $             | 76.77      |           | 600,000    |                  | 498,570    |   |
| August 31,  2004   |       | $             | 76.77      |           | 600,000    |                  | 498,570    |   |
| February 29,  2004 |       | $             | 76.77      |           | 600,000    |                  | 498,570    |   |
|                    |       |          |       |           |       |                  |       |
| Common Stock:           |       |          |       |           |       |                  |       |
| April 6,  2005     |       | $             | 10.00      |           | 4,000      |                  | 2,859      |   |
| February 28,  2005 |       | $             | 10.00      |           | 4,000      |                  | 2,868      |   |
| August 31,  2004   |       | $             | 10.00      |           | 4,000      |                  | 2,873      |   |
| February 29,  2004 |       | $             | 10.00      |           | 4,000      |                  | 2,971      |   |

 

7

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**Note 8: Shipping and HandlingCosts**

 

Thecosts incurred for the shipping and handling of products sold are classified inthe financial statements as a selling expense on the Statements ofOperations.  Shipping and handling costswere $59.8 million and $58.1 million for the six months ended February 28,2005 and February 29, 2004, respectively and $28.1 million and $31.2million for the three months ended February 28, 2005 and February 29,2004, respectively.

 

**Note 9: Crab Creek Sugar Company**

 

On September 8,2003, the Company, through its wholly-owned subsidiary Crab Creek Sugar Company(Crab Creek), acquired all of the assets of Pacific Northwest Sugar Company,LLC (PNSC), certain assets of Central Leasing of Washington, LLC (CentralLeasing) that were associated with PNSC and the Moses Lake, Washington,sugarbeet factory previously operated by PNSC and control of the sugarproduction assets owned by Central Leasing associated with the Moses Lake,Washington, sugarbeet factory for a purchase price of approximately $6.7million.  In addition, Crab Creek enteredinto various contracts with Central Leasing such that Crab Creek controls thelong-term production of sugar at the Moses Lake, Washington, facility.  In connection with this acquisition, the USDAtransferred to the Company the sugar marketing allocations formerly allocatedto PNSC.  Neither Crab Creek nor theCompany intends to operate the Moses Lake, Washington, facility.

 

**Note 10: Segment Reporting**

 

The Company hasidentified two reportable segments: Sugar and Leasing.  The sugar segment is engaged primarily in theproduction and marketing of sugar from sugarbeets.  It also sells agri-products and sugarbeetseed.  The leasing segment is engaged inthe leasing of a corn wet-milling plant used in the production of high-fructosecorn syrup sweetener.  The segments aremanaged separately.  There are nointer-segment sales.  The leasing segmenthas a major customer that accounts for all of that segment’s revenue.

 

Summarized financialinformation concerning the Company’s reportable segments for the six months andthree months ended February 28, 2005 and February 29, 2004 is shownbelow:

 
| ** **                           | ** ** | **For the Six Months Ended February 28, 2005** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **(Dollars In Thousands)**                          | ** ** |
| ** **                           | ** ** | **Sugar**                                           | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from  External Customers |       | $                                                   | 445,833    |   | $ | 13,014 |   | $ | 458,847 |   |
| Gross Proceeds                       |       | $                                                   | 393,186    |   | $ | 7,010 |   | $ | 400,196 |   |
| Depreciation and  Amortization       |       | $                                                   | 29,328     |   | $ | 5,532 |   | $ | 34,860 |   |
| Interest Income                      |       | $                                                   | 155        |   | $ | 6 |   | $ | 161 |   |
| Interest Expense                     |       | $                                                   | 6,525      |   | $ | 2,995 |   | $ | 9,520 |   |
| Income from  Equity Method Investees |       | $                                                   | 562        |   | $ | — |   | $ | 562 |   |
| Other  Income/(Expense), Net         |       | $                                                   | (330       | ) | $ | — |   | $ | (330 | ) |
| Net Proceeds                         |       | $                                                   | 247,097    |   | $ | 2,024 |   | $ | 249,121 |   |
|                                 |       |                                                |       |   |   |   |   |
| Capital  Expenditures                |       | $                                                   | 12,280     |   | $ | 655 |   | $ | 12,935 |   |

 

8

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| ** **                           | ** ** | **For the Six Months Ended February 29, 2004** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **(Dollars In Thousands)**                          | ** ** |
| ** **                           | ** ** | **Sugar**                                           | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from  External Customers |       | $                                                   | 459,167    |   | $ | 12,909 |   | $ | 472,076 |   |
| Gross Proceeds                       |       | $                                                   | 459,825    |   | $ | 6,929 |   | $ | 466,754 |   |
| Depreciation and  Amortization       |       | $                                                   | 29,922     |   | $ | 5,508 |   | $ | 35,430 |   |
| Interest Income                      |       | $                                                   | 122        |   | $ | 3 |   | $ | 125 |   |
| Interest Expense                     |       | $                                                   | 6,855      |   | $ | 3,478 |   | $ | 10,333 |   |
| Income from  Equity Method Investees |       | $                                                   | 571        |   | $ | — |   | $ | 571 |   |
| Other  Income/(Expense), Net         |       | $                                                   | 666        |   | $ | (25 | ) | $ | 641 |   |
| Net Proceeds                         |       | $                                                   | 303,937    |   | $ | 1,725 |   | $ | 305,662 |   |
|                                 |       |                                                |       |   |   |   |   |
| Capital  Expenditures                |       | $                                                   | 9,115      |   | $ | 550 |   | $ | 9,665 |   |

 
| ** **                           | ** ** | **For the Three Months Ended February 28, 2005** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                           | ** ** | **(Dollars In Thousands)**                            | ** ** |
| ** **                           | ** ** | **Sugar**                                             | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from  External Customers |       | $                                                     | 204,954    |   | $ | 6,557 |   | $ | 211,511 |   |
| Gross Proceeds                       |       | $                                                     | 207,424    |   | $ | 3,553 |   | $ | 210,977 |   |
| Depreciation and  Amortization       |       | $                                                     | 14,670     |   | $ | 2,768 |   | $ | 17,438 |   |
| Interest Income                      |       | $                                                     | 26         |   | $ | 3 |   | $ | 29 |   |
| Interest Expense                     |       | $                                                     | 3,646      |   | $ | 1,442 |   | $ | 5,088 |   |
| Income from  Equity Method Investees |       | $                                                     | 287        |   | $ | — |   | $ | 287 |   |
| Other  Income/(Expense), Net         |       | $                                                     | (219       | ) | $ | — |   | $ | (219 | ) |
| Net Proceeds                         |       | $                                                     | 136,208    |   | $ | 1,065 |   | $ | 137,273 |   |
|                                 |       |                                                  |       |   |   |   |   |
| Capital  Expenditures                |       | $                                                     | 6,495      |   | $ | 378 |   | $ | 6,873 |   |

 
| ** **                           | ** ** | **For the Three Months Ended February 29, 2004** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                           | ** ** | **(Dollars In Thousands)**                            | ** ** |
| ** **                           | ** ** | **Sugar**                                             | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from  External Customers |       | $                                                     | 235,398    |   | $ | 6,474 |   | $ | 241,872 |   |
| Gross Proceeds                       |       | $                                                     | 226,054    |   | $ | 3,482 |   | $ | 229,536 |   |
| Depreciation and  Amortization       |       | $                                                     | 14,884     |   | $ | 2,757 |   | $ | 17,641 |   |
| Interest Income                      |       | $                                                     | 7          |   | $ | 1 |   | $ | 8 |   |
| Interest Expense                     |       | $                                                     | 3,688      |   | $ | 1,735 |   | $ | 5,423 |   |
| Income from  Equity Method Investees |       | $                                                     | 278        |   | $ | — |   | $ | 278 |   |
| Other  Income/(Expense), Net         |       | $                                                     | 545        |   | $ | — |   | $ | 545 |   |
| Net Proceeds                         |       | $                                                     | 158,103    |   | $ | 880 |   | $ | 158,983 |   |
|                                 |       |                                                  |       |   |   |   |   |
| Capital Expenditures                 |       | $                                                     | 4,066      |   | $ | 294 |   | $ | 4,360 |   |

 

9

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| ** **                   | ** ** | **As of February 28, 2005** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **(Dollars In Thousands)**       | ** ** |
| ** **                   | ** ** | **Sugar**                        | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Property and  Equipment, Net |       | $                                | 313,557    |   | $ | 1 |   | $ | 313,558 |   |
| Assets Held for  Lease, Net  |       | $                                | —     |   | $ | 155,766 |   | $ | 155,766 |   |
| Segment Assets               |       | $                                | 876,957    |   | $ | 167,670 |   | $ | 1,044,627 |   |

 
| ** **                   | ** ** | **As of February 29, 2004** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **(Dollars In Thousands)**       | ** ** |
| ** **                   | ** ** | **Sugar**                        | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Property and  Equipment, Net |       | $                                | 323,824    |   | $ | 3 |   | $ | 323,827 |   |
| Assets Held for  Lease, Net  |       | $                                | —     |   | $ | 165,675 |   | $ | 165,675 |   |
| Segment Assets               |       | $                                | 956,843    |   | $ | 177,290 |   | $ | 1,134,133 |   |

 

**Note 11: Legal Proceedings**

 

Asof the date of this report, four administrative proceedings have been broughtagainst the United States Department of Agriculture (USDA) seeking reversal ofprior decisions regarding the determination and transfer of sugar marketingallocations made by the USDA or an agency under the USDA.  These proceedings are in various stages ofthe applicable administrative process. While the Company is not a party to any of these administrativeproceedings, it is, solely or in coordination with other sugar processors, anintervenor in these administrative proceedings. The initial decisions by the USDA in the four proceedings were decidedsuch that the Company would not experience a reduction in its marketingallocations.  The initial decisions bythe USDA were appealed under administrative guidelines promulgated by the USDA.  Two of these appeals were decided such thatthe Company would not experience a reduction in its marketing allocations.  One of the appeals has not yet beencompleted.  The decision in the fourthproceeding, however, if it stands, will result in the Company experiencing areduction in marketing allocations equal to the loss of approximately 25,000acres in future crop years and the recognition of an expense of approximately$3.1 million related to the valuation of these marketing allocations.  Management has determined that an unfavorablefinal outcome from this proceeding is possible but not probable and thereforeno adjustments related to the valuation of these marketing allocations havebeen recognized in the financial statements as of February 28, 2005.  All of the decisions made in theseadministrative proceedings have been appealed by various parties, including theCompany, to a judicial officer of the USDA. Any decision made by a judicial officer of the USDA can be furtherappealed in federal court.

 

**Item 2.  Management’s Discussion and Analysis of Results of Operations andFinancial Condition for the Six Months and Three Months Ended February 28,2005 and February 29, 2004**

** **

This report containsforward-looking statements that involve risks and uncertainties.  Such forward-looking statements include,among others, those statements including the words “expect”, “anticipate”, “believe”,“may” and similar expressions.  TheCompany’s actual results could differ materially from those indicated.  Important factors that could cause orcontribute to such differences include, without limitation, market factors,weather and general economic conditions, farm and trade policy, availablequantity and quality of sugarbeets.  Fora more complete discussion of “Important Factors”, please refer to the Company’s2004 Form 10-K.

 

10

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**Comparison of the SixMonths Ended February 28, 2005 and February 29, 2004**

 

Revenuefor the six months ended February 28, 2005, was $458.8 million, a decreaseof $13.2 million from the same period last year.  Revenue from total sugar sales decreased 2.9percent due to a 2.6 percent decrease in the hundredweight sold and a .3percent decrease in the average selling price per hundredweight.  Revenue from pulp sales decreased .4 percentdue to a 6.8 percent decrease in the volume of pulp tons sold partially offsetby a 6.8 percent increase in the average selling price per ton.  Revenue from molasses sales decreased 47.1percent due to a 50.0 percent decrease in the volume of molasses sold partiallyoffset by a 5.8 percent increase in the average selling price per ton.  Revenue from sales of Concentrated SeparatedBy-Product (CSB), a by-product of the molasses desugarization process,increased 1.3 percent due to a 15.5 percent increase in the volume of CSB soldpartially offset by a 12.3 percent decrease in the average selling price perton.  Rental revenue on the ProGoldoperating lease was $13.0 million and $12.9 million for the six months ended February 28,2005 and February 29, 2004, respectively.

 

Costof sales for the six months ended February 28, 2005, exclusive of paymentsto members for sugarbeets, increased $53.3 million as compared to the sameperiod last year.  The change in the netrealizable value of product inventories impacted the cost of sales unfavorablyby $49.4 million.  The costs associatedwith sugar purchased to meet customer needs increased by $11.6 million due tothe later campaign start-up this year. The cost recognized associated with the non-member sugarbeets (Sidneycrop) decreased 19.2 percent for the six months ended February 28, 2005when compared to the same period last year. This decrease was due to less beets harvested, a lower projected growerpayment resulting from a lower quality crop and lower projected sugar netselling prices.  Direct processing costsfor sugar and pulp decreased .9 percent. This was due to harvesting 6.9 percent fewer sugarbeets and processing10.9 percent less sugarbeets than last year. The decrease in sugarbeets processed was due to the later campaignstart-up this year in the valley and less sugarbeets harvested at Sidney.  The reduction in direct processing costs waspartially offset by higher prices for natural gas and major supplies.  Fixed and committed expenses increased 4.0percent reflecting general cost increases.

 

Selling,general and administrative expenses for the six months ended February 28,2005 increased $3.9 million as compared to the same period last year.  Selling expenses increased $3.5 millionprimarily due to higher freight and packaging costs.  General and Administrative costs increased $..4 million due in part to increased funding for sugar industry and associationactivities.

 

Interestexpense decreased $ .8 million for the six months ended February 28, 2005,as compared to the same period last year. This was the result of decreased average borrowings levels forshort-term and long-term debt, partially offset by higher short-term interestrates.

 

Non-memberbusiness activities resulted in a gain of $1.3 million for the six months endedFebruary 28, 2005, as compared to a gain of $2.6 million for the sameperiod last year.  The gain in bothperiods was due primarily to activities related to Sidney Sugars partiallyoffset by the activities related to ProGold. The Company expects lower earnings from the operations of Sidney Sugarsthis fiscal year due to the lower quality of the current year sugarbeet cropand reduced selling prices for sugar.

 

**Comparison of the ThreeMonths Ended February 28, 2005 and February 29, 2004**

 

Revenuefor the three months ended February 28, 2005, was $211.5 million, adecrease of $30.4 million from the same period last year.  Revenue from total sugar sales decreased 18.0percent due to a 14.4 percent decrease in the hundredweight sold and a 4.2 percentdecrease in the average selling price per hundredweight.  Revenue from pulp sales increased 3.8 percentdue to a 9.8 percent increase in the average selling price per ton partiallyoffset by a 5.4 percent decrease in the volume of pulp tons sold.  Revenue from molasses sales decreased 58.2percent due to a 64.0 percent decrease in the volume of molasses sold partiallyoffset by a 16.1 percent increase in the average selling price per ton.  Revenue from sales of CSB decreased 19.6percent due to an 8.2 percent decrease in the volume of CSB sold and a 12.5percent decrease in the average selling price per ton.  Rental revenue on the ProGold operating leasewas $6.6 million and $6.5 million for the three months ended February 28,2005 and February 29, 2004, respectively.

 

11

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Costof sales for the three months ended February 28, 2005, exclusive ofpayments to members for sugarbeets, decreased $11.8 million as compared to thesame period last year. The change in the net realizable value of productinventories impacted the cost of sales favorably by $11.2 million.  The cost recognized associated with thenon-member sugarbeets (Sidney crop) decreased 18.2 percent for the three monthsended February 28, 2005 when compared to the same period last year.  This decrease was due to a combination of asmaller crop and a lower projected grower payment resulting from a lowerquality crop and lower projected sugar net selling prices.  Direct processing costs for sugar and pulpincreased 1.2 percent.  This was due tohigher prices for natural gas and other operating supplies. Fixed and committedexpenses increased 3.3 percent reflecting general cost increases.

 

Selling,general and administrative expenses for the three months ended February 28,2005 decreased $4.6 million as compared to the same period last year.  Selling expenses decreased $3.4 millionprimarily due to the decrease in the volume of sugar sold.  General and Administrative costs decreased$1.2 million due to general cost decreases.

 

Interestexpense decreased $ .3 million for the three months ended February 28,2005, as compared to the same period last year. This was the result of decreased average borrowings levels forshort-term and long-term debt, partially offset by higher short-term interestrates.

 

Non-memberbusiness activities resulted in a gain of $ .8 million for the three monthsended February 28, 2005, as compared to a gain of $1.4 million for thesame period last year.  The gain in bothperiods was due primarily to activities related to Sidney Sugars partiallyoffset by the activities related to ProGold. The Company expects lower earnings from the operations of Sidney Sugarsthis fiscal year due to the lower quality of the current year sugarbeet cropand reduced selling prices for sugar.

 

**Regionaland Bilateral Free Trade Agreements**

 

TheUnited States government is pursuing an aggressive agenda on internationaltrade.  It is seeking to negotiate newfree trade agreements with a number of countries and regions that are majorproducers of sugar.  The Company believesthese agreements, if they reach fruition, could negatively impact the Company’sprofitability.  The primary agreementsunder consideration, to the Company’s knowledge, are the Free Trade Area of theAmericas; the Central American Free Trade Agreement; the Andean Free TradeAgreement; the Thailand Free Trade Agreement; the U.S.-Panama Free TradeAgreement; and the South African Customs Union Free Trade Agreement.  Many of the countries included in theseagreements are major sugar producers and exporters.  If increases in guaranteed access orreductions in sugar tariffs are included in these agreements, excess sugar fromthese regions could enter the U.S. market and put pressure on domestic sugarprices.  The U.S. sugar industry and theCompany, as an influential member of such industry, recognize the potentialnegative impact that would result if these agreements are entered into by theUnited States and are taking steps to attempt to manage the situation.  The Company and the sugar industry intend tocontinue to focus significant attention on trade issues in the future.

 

The impact of the varioustrade agreements on the Company can not be assessed at this time due to theuncertainty concerning the terms of the agreements and whether they willultimately be implemented.  It is possible, however, that the passage of various trade agreementscould have a material adverse effect on the Company through a reduction inacreage that can be planted by the Company’s shareholders and by the growersfor Sidney Sugars, and/or a reduction in sugar selling prices, and acorresponding reduction in the beet payment to the shareholders and the Companyearnings.  The magnitude of the impact can not be determined atthis time.

 

**EnergyPrices**

 

The prices paid by theCompany for energy related products, such as natural gas and coke, haverecently increased significantly due to supply and demand imbalances.  The Company uses substantial amounts of theseproducts in its manufacturing process. The Company believes that the prices for energy

 

12

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related products will remain high and will very likely increase.  These higher prices may materially increasethe cost of production of the Company, thus impacting the financial results ofthe Company.

 

**Liquidity and Capital Resources**

 

Under the Company’sBylaws and Member Grower Contracts, payments for member delivered sugarbeets,the principal raw material used in producing the sugar and agri-products itsells, are subordinated to all member business expenses.  In addition, the beet payments made to membergrowers and non-member growers are paid in three payments over the course of ayear, and the member payments are made net of any anticipated unit retain forthe crop.  These procedures have theeffect of providing the Company with an additional source of short-termfinancing.  This member financingarrangement may result in an additional source of liquidity and reduced needfor outside financing in comparison to a similar business operated on anon-cooperative basis.

 

Because sugar is soldthroughout the year (while sugarbeets are processed primarily in the fall,winter and spring) and because substantial amounts of equipment are required forits operations, the Company has utilized substantial outside financing on botha seasonal and long-term basis to fund such operations.  The majority of such financing has beenprovided by a consortium of lenders lead by CoBank, ACB.  The Company has a long-term debt line ofcredit with CoBank, ACB of****$234.6 million,of which $133.5 million in loans and $40.9 million in long-term letters ofcredit were outstanding as of February 28, 2005.  The unused long-term line of credit as of February 28,2005 was $60.2 million.  In addition, theCompany had long-term debt outstanding, as of February 28, 2005, of$50 million from a private placement of Senior Notes that occurred in September of1998; $14.3 million from a private placement of Senior Notes that occurredin January of 2003; $43.0 million from nine separate issuances ofPollution Control and Industrial Development Revenue Bonds, and a term loanwith Bank of North Dakota of $3.2 million. The Company also has a seasonal line of credit with a consortium of lendersled by CoBank, ACB of $265 million and a line of credit with Wells FargoBank for $1.0 million, of which there were no outstanding balances as of February 28,2005.  The Company’s commercial paperprogram provides short-term borrowings of up to $225 million of whichapproximately $165.4 million was outstanding as of February 28, 2005.  The Company had $5.9 million of short-termletters of credit outstanding as of February 28, 2005. The unusedshort-term line of credit as of February 28, 2005 was $94.7.  Any borrowings under the commercial paperprogram along with outstanding short-term letters of credit will act to reduce the available creditunder the CoBank, ACB seasonal line of credit by a commensurate amount.  The Company had no outstanding loans with theCCC, as of February 28, 2005.

 

The Company hadoutstanding commitments totaling $11.5 million as of February 28, 2005 for equipment and constructioncontracts related to various capital and maintenance projects.  Included in this amount are outstandingcommitments relating to the construction of a centralized coal distributioncenter for servicing the Red River Valley factories.  The coal distribution center is expected tobe operational in the fall.

 

The changes that haveoccurred in the Company’s financial statements from August 31, 2004 to February 28,2005 were primarily due to normal business seasonality.  The first six months of the Company’s fiscalyear includes: the completion of the sugarbeet harvest; start of the processingcampaign; the final payments to growers for sugarbeets delivered from theprevious year’s crop; and the initial payments to growers for sugarbeetsdelivered from the current year’s crop.

 

The net cash used inoperations was $86.9 million for the six months ended February 28, 2005 ascompared to $131.1 million for the same period last year.  The decrease of $44.2 million was primarilydue to lower inventories of $54.0 million resulting from the later campaignstart-up this year and changes in receivables of $45.5 million. These werepartially offset by decreases in the amount due growers of $39.2 million andaccrued continuing costs of $14.4 million which were caused by smaller cropsand lower projected grower payments this year.

 

The net cash used ininvesting activities was $12.3 million for the six months ended February 28,2005 as compared to $7.7 million for the same period last year.  The increase of $4.6 million was

 

13

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primarily related to increased purchases of propertyand equipment of $3.3 million this year. Capital expenditures for the sixmonths ended February 28, 2005 were $12.9 million as compared to $9.6 million forthe same period in 2004.

 

The net cash provided byfinancing activities was $99.8 million for the six months ended February 28,2005 as compared to $138.5 million for the same period last year.  This decrease of $38.7 million was primarilydue to lower net proceeds from short-term debt of $32.7 million. Therequirement for short-term debt was lower this year due to the delayed campaignstart-up and the lower grower payments for the current year’s crop. Alsocontributing to this decrease was higher long-term debt repayments of $10million partially offset by lower payments of unit retains and equity retention.

 

Working capital decreased$9.0 million from $58.7 million at the beginning of the year to $49.7 millionas of February 28, 2005 primarily due to increased short-term debt andamounts due growers,  partially offset byincreased inventories most of which are primarily due to normal businessseasonality.  Working capital as of February 28,2005 increased $15.1 million when compared to $34.6 million of working capitalas of February 29, 2004.  The higherlevel of working capital as of February 28, 2005 was primarily due to lessshort-term debt, amounts due growers and accrued continuing costs partiallyoffset by lower inventories. These changes were primarily due to the smallercrop and the delayed campaign start-up this year and the resulting lower sugarproduction and forecasted grower beet payments.

 

The Company anticipatesthat the funds necessary for working capital requirements and future capitalexpenditures will be derived from operations, short-term borrowings,depreciation, unit retains and long-term borrowings.

 

**Item 3. Quantitative and Qualitative Disclosures about Market Risk**

** **

Market risk is the risk of loss to future earnings, tofair values or to future cash flows that may result from changes in the priceof a financial instrument.  The value ofa 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-risksensitive financial instruments, including long term debt.

 

The Company does not believe that there is anymaterial market risk exposure with respect to interest rates, exchange rates,commodity prices, equity prices and other market changes that would requiredisclosure under this item.

 

**Item 4.   Controls and Procedures**

** **

The Company’s chiefexecutive officer and chief financial officer have reviewed and evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin Rules 240.13a-15(e) and 15d-15(e) promulgatedunder the Securities Exchange Act of 1934) as of February 28, 2005.  Based on that review and evaluation, whichincluded inquiries made to certain other employees of the Company, the chiefexecutive officer and chief financial officer have concluded that the Company’scurrent disclosure controls and procedures, as designed and implemented, areeffective in ensuring that information relating to the Company required to bedisclosed in the reports the Company files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the Security and Exchange Commission’s rules andforms, including ensuring that such information is accumulated and communicatedto the Company’s management, including the chief executive officer and thechief financial officer, as appropriate to allow timely decisions regardingrequired disclosure.

 

14

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## **PART II.OTHER INFORMATION**

 

#### **Item1.  Legal Proceedings**

#### ** **

From time to time and inthe ordinary course of its business, the Company is named as a defendant inlegal proceedings related to various issues, including worker’s compensationclaims, tort claims and contractual disputes. The Company is currently involved in certain legal proceedings, whichhave arisen in the ordinary course of the Company’s business.  The Company is also aware of certain otherpotential claims, which could result in the commencement of legalproceedings.  The Company carriesinsurance, which provides protection against certain types of claims.  With respect to current litigation andpotential claims of which the Company is aware, the Company’s managementbelieves that (i) the Company has insurance protection to cover all or aportion of any judgments which may be rendered against the Company with respectto certain claims or actions and (ii) any judgments which may be enteredagainst the Company and which may exceed such insurance coverage or which mayarise in actions involving potential liabilities not covered by insurancepolicies are not likely to have a material adverse effect upon the Company, orits assets or operations.

 

Asof the date of this report, four administrative proceedings have been broughtagainst the United States Department of Agriculture (USDA) seeking reversal ofprior decisions regarding the determination and transfer of sugar marketingallocations made by the USDA or an agency under the USDA.  These proceedings are in various stages ofthe applicable administrative process. While the Company is not a party to any of these administrativeproceedings, it is, solely or in coordination with other sugar processors, anintervenor in these administrative proceedings. The initial decisions by the USDA in the four proceedings were decidedsuch that the Company would not experience a reduction in its marketingallocations.  The initial decisions bythe USDA were appealed under administrative guidelines promulgated by the USDA.  Two of these appeals were decided such thatthe Company would not experience a reduction in its marketing allocations.  One of the appeals has not yet beencompleted.  The decision in the fourthproceeding, however, if it stands, will result in the Company experiencing areduction in marketing allocations equal to the loss of approximately 25,000acres in future crop years.  All of thedecisions made in these administrative proceedings have been appealed byvarious parties, including the Company, to a judicial officer of the USDA.  Any decision made by a judicial officer of theUSDA can be further appealed in federal court.

 

Theoutcome of any contested matter is never certain and the eventual decisions ofthe administrative proceedings identified above may result in a change in thecurrent sugar marketing allocations.  Inthe event these proceedings are decided in a manner that reduces the Company’ssugar allocations, the amount of sugar the Company can produce and market maybe adversely impacted.

 

**Item 2. Changes in Securities and Use of Proceeds.**

 

None

 

**Item 3. Default Upon Senior Securities**

 

None

 

### **Item 4.  Submission of Matters to a Vote of SecurityHolders**

### ** **

None

 

**Item 5. Other Information.**

 

None.

 

15

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### **Item 6. Exhibitsand Reports on Form 8-K**

 

(a)          Exhibits

 
| **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        |       | Coal Supply Agreement  between Registrant and Spring Creek Coal Company, dated August 25, 1995                     |       | Incorporated by  reference to Exhibit 10(y) from the Company’s Registration Statement on  Form S-1 (File No. 333-11693), declared effective November 13,  1996.      |
|         |       |                                                                                                                    |       |                                                                                                                                                                                          |
| +10.4        |       | Coal Transportation  Agreement between Registrant and Northern Coal Transportation Company, dated  August 25, 1995 |       | Incorporated by  reference to Exhibit 10(z) from the Company’s Registration Statement on  Form S-1 (File No. 333-11693), declared effective November 13,  1996.      |
|         |       |                                                                                                                    |       |                                                                                                                                                                                          |
| 10.5         |       | Pledge Agreement  between Registrant and First Union Trust Company, NA                                                  |       | Incorporated by  reference to Exhibit 10(ee) from the Company’s Annual Report on  Form 10-K for the year ended August 31, 1998.                                           |
|         |       |                                                                                                                    |       |                                                                                                                                                                                          |
| 10.6         |       | Indemnity Agreement  between Registrant, Newcourt Capital USA Inc., Crystech, LLC and Crystech  Senior Lender Trust     |       | Incorporated by  reference to Exhibit 10(ff) from the Company’s Annual Report on  Form 10-K for the year ended August 31, 1998.                                           |

 

16

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| 10.7   |   | Tolling Services  Agreement between Crystech, LLC and Registrant                                                               |   | Incorporated by  reference to Exhibit 10(gg) from the Company’s Annual Report on  Form 10-K for the year ended August 31, 1998.      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                           |   |                                                                                                                                                     |
| 10.8   |   | Operations and  Maintenance Agreement between Crystech, LLC and Registrant                                                     |   | Incorporated by  reference to Exhibit 10(hh) from the Company’s Annual Report on  Form 10-K for the year ended August 31, 1998.      |
|   |   |                                                                                                                           |   |                                                                                                                                                     |
| +10.9  |   | Limited Liability  Company Agreement of Crystech, LLC                                                                          |   | Incorporated by  reference to Exhibit 10(ii) from the Company’s Annual Report on  Form 10-K for the year ended August 31, 1998. |
|   |   |                                                                                                                           |   |                                                                                                                                                     |
| 10.10  |   | 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        |
|   |   |                                                                                                                           |   |                                                                                                                                                     |
| 10.11  |   | 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        |
|   |   |                                                                                                                           |   |                                                                                                                                                     |
| 10.12  |   | 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        |
|   |   |                                                                                                                           |   |                                                                                                                                                     |
| 10.13  |   | 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       |
|   |   |                                                                                                                           |   |                                                                                                                                                     |
| 10.14  |   | Stipulation Agreement  between Registrant and State of Minnesota Pollution Control Agency, dated  April 4, 2000           |   | Incorporated by  reference to Exhibit 10.28 from the Company’s Form 10-Q for the  quarter ended May 31, 2000                         |
|   |   |                                                                                                                           |   |                                                                                                                                                     |
| 10.15  |   | 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        |
|   |   |                                                                                                                           |   |                                                                                                                                                     |
| 10.16  |   | 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        |
|   |   |                                                                                                                           |   |                                                                                                                                                     |
| 10.17  |   | Uniform Member Sugar  Marketing Agreement between the Registrant and United Sugars Corporation  dated September 1, 2001.  |   | Incorporated by  reference to Exhibit 10.27 from the Company’s Form 10-Q for the  quarter ended November 30, 2001                    |
|   |   |                                                                                                                           |   |                                                                                                                                                     |
| 10.18  |   | 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                    |
|   |   |                                                                                                                           |   |                                                                                                                                                     |
| 10.19  |   | 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                    |

 

17

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| 10.20  |   | 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             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                        |   |                                                                                                                                              |
| +10.21 |   | Beet Loading and  Hauling Agreement between the Registrant and Transystems LLC for the crop  years 2003 through 2007                        |   | Incorporated by  reference to Exhibit 10.31 from the Company’s Form 10-Q for the  quarter ended May 31, 2003                  |
|   |   |                                                                                                                                        |   |                                                                                                                                              |
| 10.22  |   | 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 |
|   |   |                                                                                                                                        |   |                                                                                                                                              |
| 10.23  |   | Term and Seasonal Loan  Agreements between the Registrant and CoBank, ACB dated July 21, 2003                                          |   | Incorporated by  reference to Exhibit 10.31 from the Company’s Annual Report on  Form 10-K for the year ended August 31, 2003 |
|   |   |                                                                                                                                        |   |                                                                                                                                              |
| 10.24  |   | Supplements to Term and  Seasonal Loan Agreements between the Registrant and CoBank, ACB dated  July 20, 2004 and August 13, 2004 |   | Incorporated by  reference to Exhibit 10.25 from the Company’s Annual Report on Form 10-K  for the year ended August 31, 2004 |
|   |   |                                                                                                                                        |   |                                                                                                                                              |
| 21.1   |   | List of Subsidiaries of  the Registrant                                                                                                     |   | Incorporated by  reference to Exhibit 21.1 from the Company’s Annual Report on  Form 10-K for the year ended August 31, 2004  |
|   |   |                                                                                                                                        |   |                                                                                                                                              |
| 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                                                                                                             |

 

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+              Confidential treatment under Rule 24b-2 of theSecurities and Exchange Act of 1934, as amended, has been granted with respectto designated portions of this document.

 

**(b)****          Reports on Form 8-K**

 

None

 

18

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SIGNATURES

 

**Pursuant to the requirement ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.**

 

 
|       | **AMERICAN CRYSTAL SUGAR COMPANY** |
|------------|------------------------------------|
|       | **(Registrant)**                   |
|       |                               |
|       |                               |
| **Date:**  | **April 14, 2005**            | ** ** | ** ** | **/s/ Mark Kalvoda** |   |
|       |                               | **Mark Kalvoda** |
|       |                               | **Corporate Controller,** |
|       |                               | **Chief Accounting Officer** |
| ** ** | ** **                         | **Duly  Authorized Officer** |
|            |                                    |  |  |  |  |

 

19

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