**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

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** **

**ý**  Quarterlyreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

** **

# **For the period ended May 31, 2004**

 

**Commissionfile number:  33-83868**

 

**AMERICANCRYSTAL 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 North Third Street**

**Moorhead, Minnesota  56560**

(Address ofprincipal executive offices)

 

**Telephone Number (218) 236-4400**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months, and (2) has been subject to such filing requirements for the past 90days.
| YES |   | ý |   | NO |   | o |
|-----|--------|--------|--------|----|--------|---|

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in rule 12b-2 of theAct).
| 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  July 6, 2004** | ** ** |
|---------------------------|--------|-----------------------------------|------------|
| **$10  Par Value**        |   | 2,912                             |       |

 

 

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**AMERICAN CRYSTAL 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.**                | **DEFAULTS  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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**PART I****. FINANCIAL INFORMATION**

 

**Item 1****. Financial Statements**

 

AMERICANCRYSTAL SUGAR COMPANY

Consolidated Balance Sheets

(Unaudited)

(Dollarsin Thousands)

 

ASSETS

 
|                                       |   | **May 31** |      | **August 31,  2003*** |   |
|--------------------------------------------|--------|------------|-----------|-----------------------|--------|
| **2004**                                   |   | **2003**   |
| Current  Assets:                           |   |       |      |                  |   |   |   |
| Cash  and Cash Equivalents                 |   | $          | 766       |                  | $      | 998 |   | $ | 859 |   |
| Accounts  Receivable:                      |   |       |      |                  |   |   |   |
| Trade                                      |   | 78,945     |      | 51,025                |   | 64,056 |   |
| Members                                    |   | 4,752      |      | 4,209                 |   | 3,993 |   |
| Other                                      |   | 2,521      |      | 5,952                 |   | 4,403 |   |
| Advances  to Related Parties               |   | 9,806      |      | 15,450                |   | 4,891 |   |
| Inventories                                |   | 333,916    |      | 286,488               |   | 130,981 |   |
| Prepaid  Expenses                          |   | 5,676      |      | 5,056                 |   | 7,062 |   |
|                                       |   |       |      |                  |   |   |   |
| Total  Current Assets                      |   | 436,382    |      | 369,178               |   | 216,245 |   |
|                                       |   |       |      |                  |   |   |   |
| Property  and Equipment:                   |   |       |      |                  |   |   |   |
| Land                                       |   | 40,105     |      | 37,653                |   | 39,393 |   |
| Buildings                                  |   | 91,481     |      | 88,652                |   | 90,181 |   |
| Equipment                                  |   | 795,446    |      | 780,446               |   | 794,416 |   |
| Construction-in-Progress                   |   | 10,289     |      | 9,577                 |   | 4,989 |   |
| Less:  Accumulated Depreciation            |   | (619,536   | )         | (584,482              | )      | (586,167 | ) |
|                                       |   |       |      |                  |   |   |   |
| Net  Property and Equipment                |   | 317,785    |      | 331,846               |   | 342,812 |   |
|                                       |   |       |      |                  |   |   |   |
| Net  Property and Equipment Held for Lease |   | 163,085    |      | 173,004               |   | 170,446 |   |
|                                       |   |       |      |                  |   |   |   |
| Other  Assets:                             |   |       |      |                  |   |   |   |
| Investments  in CoBank, ACB                |   | 19,581     |      | 22,751                |   | 21,685 |   |
| Investments  in Marketing Cooperatives     |   | 5,287      |      | 2,966                 |   | 6,166 |   |
| Investments  in Crystech, LLC              |   | 16,130     |      | 1,269                 |   | 15,330 |   |
| Notes  Receivable - Crystech, LLC          |   | —     |      | 13,905                |   | — |   |
| Other  Assets                              |   | 47,889     |      | 49,573                |   | 37,067 |   |
|                                       |   |       |      |                  |   |   |   |
| Total  Other Assets                        |   | 88,887     |      | 90,464                |   | 80,248 |   |
|                                       |   |       |      |                  |   |   |   |
| Total  Assets                              |   | $          | 1,006,139 |                  | $      | 964,492 |   | $ | 809,751 |   |

 

The Accompanying Notes are an Integral Part of TheseConsolidated Financial Statements.

 

* Derived from audited financial statements.

 

1

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AMERICANCRYSTAL SUGAR COMPANY

ConsolidatedBalance Sheets

(Unaudited)

(Dollarsin Thousands)

 

LIABILITIESAND MEMBERS’ INVESTMENTS

 
|                                                    |   | **May 31** |      | **August 31,  2003*** |   |
|---------------------------------------------------------|--------|------------|-----------|-----------------------|--------|
| **2004**                                                |   | **2003**   |      |
| Current  Liabilities:                                   |   |       |      |                  |   |   |   |
| Short-Term  Debt                                        |   | $          | 192,000   |                  | $      | 157,242 |   | $ | 49,989 |   |
| Current  Maturities of Long-Term Debt                   |   | 21,082     |      | 20,917                |   | 11,282 |   |
| Accounts  Payable                                       |   | 14,203     |      | 10,929                |   | 23,192 |   |
| Advances  Due to Related Parties                        |   | 9,270      |      | 7,191                 |   | 4,604 |   |
| Accrued  Continuing Costs (see note 3)                  |   | 75,741     |      | 70,073                |   | — |   |
| Other  Current Liabilities                              |   | 21,215     |      | 19,522                |   | 18,710 |   |
| Amounts  Due Growers                                    |   | 65,937     |      | 52,141                |   | 58,896 |   |
|                                                    |   |       |      |                  |   |   |   |
| Total  Current Liabilities                              |   | 399,448    |      | 338,015               |   | 166,673 |   |
|                                                    |   |       |      |                  |   |   |   |
| Long-Term  Debt, Net of Current Maturities              |   | 256,173    |      | 282,240               |   | 286,922 |   |
|                                                    |   |       |      |                  |   |   |   |
| Accrued  Employee Benefits                              |   | 33,324     |      | 30,061                |   | 31,053 |   |
|                                                    |   |       |      |                  |   |   |   |
| Other  Liabilities                                      |   | 9,810      |      | 11,414                |   | 10,988 |   |
|                                                    |   |       |      |                  |   |   |   |
| Total  Liabilities                                      |   | 698,755    |      | 661,730               |   | 495,636 |   |
|                                                    |   |       |      |                  |   |   |   |
| Minority  Interest in ProGold Limited Liability Company |   | 46,590     |      | 42,962                |   | 43,769 |   |
|                                                    |   |       |      |                  |   |   |   |
| Members’  Investments:                             |   |       |      |                  |   |   |   |
| Preferred  Stock                                        |   | 38,275     |      | 38,275                |   | 38,275 |   |
| Common  Stock                                           |   | 29         |      | 30                    |   | 30 |   |
| Additional  Paid-in Capital                             |   | 152,261    |      | 148,237               |   | 148,238 |   |
| Unit  Retains                                           |   | 108,844    |      | 108,010               |   | 125,409 |   |
| Equity  Retention                                       |   | 2,714      |      | 2,721                 |   | 2,719 |   |
| Accumulated  Other Comprehensive Income/(Loss)          |   | (11,900    | )         | (1,317                | )      | (11,900 | ) |
| Retained  Earnings/(Deficit)                            |   | (29,429    | )         | (36,156               | )      | (32,425 | ) |
|                                                    |   |       |      |                  |   |   |   |
| Total  Members’ Investments                        |   | 260,794    |      | 259,800               |   | 270,346 |   |
|                                                    |   |       |      |                  |   |   |   |
| Total  Liabilities and Members’ Investments        |   | $          | 1,006,139 |                  | $      | 964,492 |   | $ | 809,751 |   |

 

The Accompanying Notes are an Integral Part of TheseConsolidated Financial Statements.

 

* Derived from audited financial statements.

 

2

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AMERICAN CRYSTAL SUGARCOMPANY

Consolidated Statements of Operations

(Unaudited)

(Dollars in Thousands)

 
|                                                                   |   | **For the Nine Months Ended  May 31** |    | **For the Three Months Ended  May 31** |   |
|------------------------------------------------------------------------|--------|---------------------------------------|---------|----------------------------------------|--------|
|                                                                   |   | **2004**                              |    | **2003**                               |   | **2004** |   | **2003** |   |
|                                                                   |   |                                  |    |                                   |   |   |   |   |   |
| Net  Revenue                                                           |   | $                                     | 746,603 |                                   | $      | 614,796 |   | $ | 274,527 |   | $ | 221,738 |   |
| Cost  of Product Sold                                                  |   | 77,129                                |    | 81,855                                 |   | 71,807 |   | 62,360 |   |
|                                                                   |   |                                  |    |                                   |   |   |   |   |   |
| Gross  Proceeds                                                        |   | 669,474                               |    | 532,941                                |   | 202,720 |   | 159,378 |   |
|                                                                   |   |                                  |    |                                   |   |   |   |   |   |
| Selling,  General & Administrative Expenses                        |   | 139,052                               |    | 119,920                                |   | 48,385 |   | 39,944 |   |
| Accrued  Continuing Costs (see note 3)                                 |   | 75,741                                |    | 70,073                                 |   | 16,546 |   | 6,359 |   |
|                                                                   |   |                                  |    |                                   |   |   |   |   |   |
| Operating  Proceeds                                                    |   | 454,681                               |    | 342,948                                |   | 137,789 |   | 113,075 |   |
|                                                                   |   |                                  |    |                                   |   |   |   |   |   |
| Other  Income/(Expense)                                                |   |                                  |    |                                   |   |   |   |   |   |
| Interest  Income                                                       |   | 158                                   |    | 1,128                                  |   | 33 |   | 338 |   |
| Interest  Expense                                                      |   | (14,767                               | )       | (11,440                                | )      | (4,434 | ) | (3,856 | ) |
| Other,  Net                                                            |   | 1,077                                 |    | 2,210                                  |   | 436 |   | 731 |   |
| Other  (Expense)                                                       |   | (13,532                               | )       | (8,102                                 | )      | (3,965 | ) | (2,787 | ) |
|                                                                   |   |                                  |    |                                   |   |   |   |   |   |
| Proceeds  before Minority Interest and  Income Tax Expense             |   | 441,149                               |    | 334,846                                |   | 133,824 |   | 110,288 |   |
|                                                                   |   |                                  |    |                                   |   |   |   |   |   |
| Minority  Interest                                                     |   | (2,821                                | )       | (335                                   | )      | (1,163 | ) | (335 | ) |
|                                                                   |   |                                  |    |                                   |   |   |   |   |   |
| Income  Tax (Expense)                                                  |   | (92                                   | )       | (8                                     | )      | (87 | ) | (14 | ) |
| Net  Proceeds Resulting from  Member and Non-Member Business           |   | $                                     | 438,236 |                                   | $      | 334,503 |   | $ | 132,574 |   | $ | 109,939 |   |
|                                                                   |   |                                  |    |                                   |   |   |   |   |   |
| Distribution  of Net Proceeds:                                         |   |                                  |    |                                   |   |   |   |   |   |
| Credited/(Charged)  to Members’ Investments:                      |   |                                  |    |                                   |   |   |   |   |   |
| Non-Member  Business Income                                            |   | $                                     | 2,995   |                                   | $      | 2,068 |   | $ | 369 |   | $ | 144 |   |
| Unit  Retains Declared to Members                                      |   | —                                |    | —                                 |   | — |   | — |   |
| Net  Credit to Members’ Investments                               |   | 2,995                                 |    | 2,068                                  |   | 369 |   | 144 |   |
| Payments  to/due Members for Sugarbeets, Net  of Unit Retains Declared |   | 435,241                               |    | 332,435                                |   | 132,205 |   | 109,795 |   |
|                                                                   |   |                                  |    |                                   |   |   |   |   |   |
| Total                                                                  |   | $                                     | 438,236 |                                   | $      | 334,503 |   | $ | 132,574 |   | $ | 109,939 |   |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

3

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AMERICANCRYSTAL SUGAR COMPANY

Consolidated Statements of Cash Flows

(Unaudited)

(DollarsIn Thousands)

 
|                                                                                     |   | **For the Nine Months Ended  May 31** |    |
|------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                                     |   | **2004**                              |    | **2003** |   |
| Cash Provided By/(Used  In) Operations:                                                  |   |                                  |    |   |   |
| Net Proceeds Resulting  from Member and Non-Member Business                              |   | $                                     | 438,236 |   | $ | 334,503 |   |
| Payments to/due Members  for Sugarbeets, Net of Unit Retains Declared                    |   | (435,241                              | )       | (332,435 | ) |
| Add/(Deduct) Non-Cash  Items:                                                            |   |                                  |    |   |   |
| Depreciation and  Amortization                                                           |   | 51,041                                |    | 42,596 |   |
| (Income) from Equity  Method Investees                                                   |   | (843                                  | )       | (1,942 | ) |
| Loss on the Disposition  of Property and Equipment                                       |   | 317                                   |    | 312 |   |
| Non-Cash Portion of  Patronage Dividend from CoBank, ACB                                 |   | (542                                  | )       | (276 | ) |
| Deferred Gain  Recognition                                                               |   | (148                                  | )       | (148 | ) |
| Minority Interest in  ProGold Limited Liability Company                                  |   | 2,821                                 |    | 335 |   |
| Changes in Assets and  Liabilities:                                                      |   |                                  |    |   |   |
| Receivables                                                                              |   | (13,766                               | )       | 7,137 |   |
| Inventories                                                                              |   | (202,935                              | )       | (169,925 | ) |
| Prepaid Expenses                                                                         |   | 1,386                                 |    | 773 |   |
| Long-Term Prepaid  Pension Expense                                                       |   | (11,892                               | )       | (12,175 | ) |
| Advances To/Due to  Related Parties                                                      |   | (249                                  | )       | (14 | ) |
| Accounts Payable                                                                         |   | (8,989                                | )       | (7,232 | ) |
| Accrued Continuing  Costs                                                                |   | 75,741                                |    | 70,073 |   |
| Other Liabilities                                                                        |   | 3,654                                 |    | 7,062 |   |
| Amounts Due Growers                                                                      |   | 7,041                                 |    | (27,105 | ) |
| Net Cash (Used In)  Operations                                                           |   | (94,368                               | )       | (88,461 | ) |
|                                                                                     |   |                                  |    |   |   |
| Cash Provided By/(Used  In) Investing Activities:                                        |   |                                  |    |   |   |
| Purchases of Property  and Equipment                                                     |   | (14,944                               | )       | (17,201 | ) |
| Purchases of Property  and Equipment Held for Lease                                      |   | (909                                  | )       | (215 | ) |
| Proceeds from the Sale  of Property and Equipment                                        |   | 123                                   |    | 130 |   |
| Equity Refund from  CoBank, ACB                                                          |   | 2,646                                 |    | 1,749 |   |
| Investments in  Marketing Cooperatives                                                   |   | 1,049                                 |    | (666 | ) |
| Acquistion of Equity  Interest in ProGold Limited Liability Company,Net of Cash Acquired |   | —                                |    | (9,766 | ) |
| Acquistion by Sidney  Sugars Incorporated                                                |   | —                                |    | (35,185 | ) |
| Acquisition by Crab  Creek Sugar Company                                                 |   | (5,763                                | )       | — |   |
| Changes in Other Assets                                                                  |   | 4,581                                 |    | 43 |   |
| Net Cash (Used In)  Investing Activities                                                 |   | (13,217                               | )       | (61,111 | ) |
|                                                                                     |   |                                  |    |   |   |
| Cash Provided By/(Used  In) Financing Activities:                                        |   |                                  |    |   |   |
| Net Proceeds  from/(Payments on) Short-Term Debt                                         |   | 142,011                               |    | 150,242 |   |
| Proceeds from Issuance  of Long-Term Debt                                                |   | —                                |    | 31,000 |   |
| Long-Term Debt  Repayment                                                                |   | (21,971                               | )       | (19,759 | ) |
| Proceeds from Issuance  of Stock                                                         |   | 4,022                                 |    | 5,168 |   |
| Payment of Unit Retains  & Equity Retention                                          |   | (16,570                               | )       | (16,103 | ) |
| Net Cash Provided by  Financing Activities                                               |   | 107,492                               |    | 150,548 |   |
|                                                                                     |   |                                  |    |   |   |
| Increase/(Decrease) In  Cash and Cash Equivalents                                        |   | (93                                   | )       | 976 |   |
| Cash and Cash Equivalents,  Beginning of Year                                            |   | 859                                   |    | 22 |   |
|                                                                                     |   |                                  |    |   |   |
| Cash and Cash  Equivalents, End of Period                                                |   | $                                     | 766     |   | $ | 998 |   |

 

**Non-Cash Investing and FinancingActivities:**In September 2003, a note payable in the amountof $969,000 was issued in connection with the acquisition by Crab Creek SugarCompany.

 

The Accompanying Notesare an Integral Part of These Consolidated Financial Statements.

 

4

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# **AMERICAN CRYSTAL SUGAR COMPANY**

**NOTES****TO THECONSOLIDATED FINANCIAL STATEMENTS**

**FORTHE NINE MONTHS AND THREE MONTHS ENDED**

**MAY31, 2004 AND 2003**

 

**Note 1:  Basis of Presentation**

 

The unauditedconsolidated financial statements of American Crystal Sugar Company (theCompany) contained herein have been prepared pursuant to the rules and regulationsof the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica.  However, in the opinion ofmanagement, all adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation have been 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.

 

Sidney Sugars was formed infiscal 2003 under the laws of the State of Minnesota, and on October 7, 2002,acquired three sugarbeet processing facilities and the related marketingallocations associated with such facilities. Activities associated with Sidney Sugars are considered non-memberbusiness.

 

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 (See Note 8).

 

Effective May 1, 2003, theCompany acquired an additional five percent ownership interest in ProGold,resulting in an increase in the Company’s ownership in ProGold to 51percent.  Due to the Company’s resultingcontrolling ownership interest in ProGold, effective May 1, 2003, the Companybegan to include ProGold in its consolidated financial statements.  The financial statements for prior periodshave not been restated and therefore do not include consolidated datapertaining to ProGold prior to May 1, 2003.

 

Allmaterial inter-company transactions have been eliminated.

 

The operatingresults for the nine month period ended May 31, 2004 are not necessarilyindicative of the results that may be expected for the year ended August 31,2004.

 

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 2003 RedRiver Valley sugarbeet crop (RRV crop).  The amount paid to non-member growers for sugarbeets (non-memberbeet payment) depends on the future selling prices of sugar and the relatedselling expenses associated with the 2003 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 for the year endedAugust 31, 2003.

 

Certainreclassifications have been made to the May 31, 2003 consolidated financialstatements to conform with the May 31, 2004 presentation.

 

5

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**Note 2:  Inventories**

 

The majorcomponents of inventories are as follows (In Thousands):

 
|                                                                     |   | **05/31/04** |    | **05/31/03** |   | **8/31/03** |   |
|--------------------------------------------------------------------------|--------|--------------|---------|--------------|--------|-------------|--------|
| Refined  Sugar, Pulp, Molasses, Other  Agri-Products and Sugar Beet Seed |   | $            | 315,824 |         | $      | 268,283     |   | $ | 111,259 |   |
| Unprocessed  Sugarbeets                                                  |   | —       |    | —       |   | —      |   |
| Maintenance  Parts & Supplies                                        |   | 18,092       |    | 18,205       |   | 19,722      |   |
|                                                                     |   |         |    |         |   |        |   |
| Total  Inventories                                                       |   | $            | 333,916 |         | $      | 286,488     |   | $ | 130,981 |   |

 

Sugar, pulp, molasses and other agri-productsinventories are valued at estimated net realizable value.  Unprocessed sugarbeets are valued at theestimated gross beet payment. Maintenance parts & supplies and beet seed inventories are valued atthe lower of average cost or market.

 

**Note 3:  Accrued Continuing Costs**

 

For interimreporting, the Net Proceeds from Member Business is based on the forecastedgross beet payment and the percentage of the tons of sugarbeets processed tothe total estimated 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 continuingcosts represent 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 inthe Consolidated Financial Statements as a cost on the Consolidated Statementsof Operations and as a current liability on the Consolidated Balance Sheets.

 

**Note 4:  Members’ Investments**

 
|              |   | **Par Value** |   | **Shares  Authorized** |    | **Shares  Issued  & Outstanding** |    |
|-------------------|--------|---------------|--------|------------------------|---------|---------------------------------------|---------|
| Preferred  Stock: |   |          |   |                   |    |                                  |    |
| July  6, 2004     |   | $             | 76.77  |                   | 600,000 |                                  | 498,570 |   |
| May  31, 2004     |   | $             | 76.77  |                   | 600,000 |                                  | 498,570 |   |
| August  31, 2003  |   | $             | 76.77  |                   | 600,000 |                                  | 498,570 |   |
| May  31, 2003     |   | $             | 76.77  |                   | 600,000 |                                  | 498,570 |   |
|              |   |          |   |                   |    |                                  |    |
| Common  Stock:    |   |          |   |                   |    |                                  |    |
| July  6, 2004     |   | $             | 10.00  |                   | 4,000   |                                  | 2,912   |   |
| May  31, 2004     |   | $             | 10.00  |                   | 4,000   |                                  | 2,905   |   |
| August  31, 2003  |   | $             | 10.00  |                   | 4,000   |                                  | 2,995   |   |
| May  31, 2003     |   | $             | 10.00  |                   | 4,000   |                                  | 2,995   |   |

 

**Note 5:  Interest Paid**

 

Interest paid, net ofamounts capitalized, was $13.5 million and $10.3 million for the nine monthsended May 31, 2004 and 2003, respectively.

 

6

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**Note 6: ****NetPeriodic Pension and Post-Retirement Costs**

 

The following schedules providethe components of the Net Periodic Pension and Post-Retirement Costs for theNine Months and Three months ended May 31, 2004 and 2003:

 

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

(InThousands)

 
|                                   |   | **For the Nine Months Ended  May 31,** |   | **For the Three Months Ended  May 31,** |   |
|----------------------------------------|--------|----------------------------------------|--------|-----------------------------------------|--------|
|                                   |   | **2004**                               |   | **2003**                                |   | **2004** |   | **2003** |   |
| Service  Cost                          |   | $                                      | 2,079  |                                    | $      | 1,744 |   | $ | 693 |   | $ | 610 |   |
| Interest  Cost                         |   | 4,512                                  |   | 4,392                                   |   | 1,504 |   | 1,535 |   |
| Expected  Return on Plan Assets        |   | (4,469                                 | )      | (4,160                                  | )      | (1,490 | ) | (1,454 | ) |
| Multiple  Employer Adjustment          |   | (257                                   | )      | (74                                     | )      | (86 | ) | (26 | ) |
| Amortization  of Net Transition Assets |   | (93                                    | )      | (95                                     | )      | (31 | ) | (33 | ) |
| Amortization  of Prior Service Costs   |   | 408                                    |   | 418                                     |   | 136 |   | 146 |   |
| Amortization  of Net (Gain) Loss       |   | 1,499                                  |   | 662                                     |   | 500 |   | 231 |   |
| Net  Periodic Pension Cost             |   | $                                      | 3,679  |                                    | $      | 2,887 |   | $ | 1,226 |   | $ | 1,009 |   |

 

***Components of Net Periodic Post-Retirement Cost***

(InThousands)

 
|                               |   | **For the Nine Months Ended  May 31,** |   | **For the Three Months Ended  May 31,** |   |
|------------------------------------|--------|----------------------------------------|--------|-----------------------------------------|--------|
|                               |   | **2004**                               |   | **2003**                                |   | **2004** |   | **2003** |   |
| Service  Cost                      |   | $                                      | 840    |                                    | $      | 604 |   | $ | 280 |   | $ | 205 |   |
| Interest  Cost                     |   | 1,322                                  |   | 1,082                                   |   | 441 |   | 368 |   |
| Amortization  of Net (Gain) Loss   |   | 342                                    |   | 15                                      |   | 114 |   | 5 |   |
| Net  Periodic Post-Retirement Cost |   | $                                      | 2,504  |                                    | $      | 1,701 |   | $ | 835 |   | $ | 578 |   |

 

Forthe nine months ended May 31, 2004, the Company had made contributions ofapproximately $15.2 million related to pensions.  No additional amounts are expected to be contributed prior to theend of the current fiscal year.  TheCompany has made payments for Post-Retirement benefits of approximately $ .9million for the nine months ended May 31, 2004 and expects total payments forthe current fiscal year to be approximately $1.2 million.

 

# **Note 7: Short-Term Debt**

 

The Company has a seasonal line of credit with a consortium of lendersled by CoBank, ACB of $280 million and a line of credit with Wells FargoBank for $1 million.  The Company’scommercial paper program provides short-term borrowings of up to $225million.  Any borrowings under the commercial paper program will act toreduce the available credit under the CoBank, ACB seasonal line of credit by acommensurate amount.  The Company alsoutilizes the Commodity Credit Corporation (CCC) to meet its short-termborrowing needs.

 

As of May 31,2004, the Company had outstanding commercial paper of $192.0****millionat an average interest rate of 1.36% and maturity dates between June 1, 2004and July 15, 2004.  The Company had nooutstanding short-term debt with CoBank, ACB or the CCC as of May 31, 2004.

 

As of May 31,2003, the Company had outstanding commercial paper of $157.2****millionat an average interest rate of 1.54% and maturity dates between June 2, 2003and July 31, 2003.  The Company had nooutstanding short-term debt with CoBank, ACB or the CCC as of May 31, 2003.

 

7

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**Note 8: Crab Creek Sugar Company**

 

On September 8, 2003, theCompany, through its wholly-owned subsidiary Crab Creek Sugar Company (CrabCreek), acquired all of the assets of Pacific Northwest Sugar Company, LLC(PNSC), certain assets of Central Leasing of Washington, LLC (Central Leasing)that were associated with PNSC and the Moses Lake, Washington sugarbeet factorypreviously operated by PNSC and control of the sugar production assets owned byCentral Leasing associated with the Moses Lake, Washington sugarbeet factoryfor a purchase price of approximately $6.7 million.  To accomplish this outcome, Crab Creek entered into variousarrangements with Central Leasing such that Crab Creek controls the long-termproduction of sugar at the Moses Lake facility.  In connection with this acquisition, the USDA transferred to theCompany the sugar marketing allocations formerly allocated to PNSC.  Neither Crab Creek nor the Company intendsto operate the Moses Lake facility.

 

**Note 9: Segment Reporting**

 

The Company hasidentified two reportable segments: Sugar and Leasing.  The sugar segment is engaged primarily inthe production 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 leasingsegment has a major customer that accounts for all of that segment’s revenue.

 

Summarizedfinancial information concerning the Company’s reportable segments for the ninemonths and three months ended May 31, 2004 and 2003 is shown below:

 
|                                 |   | **For the Nine Months Ended May 31,  2004** |    |
|--------------------------------------|--------|---------------------------------------------|---------|
|                                 |   | **(Dollars In Thousands)**                  |    |
|                                 |   | **Sugar**                                   |    | **Leasing** |   | **Eliminations** |   | **Consolidated** |   |
| Net  Revenue from External Customers |   | $                                           | 727,156 |   | $ | 19,447 |   | $ | — |   | $ | 746,603 |   |
| Gross  Proceeds                      |   | $                                           | 659,001 |   | $ | 10,473 |   | $ | — |   | $ | 669,474 |   |
| Depreciation  and Amortization       |   | $                                           | 42,776  |   | $ | 8,265 |   | $ | — |   | $ | 51,041 |   |
| Interest  Income                     |   | $                                           | 154     |   | $ | 4 |   | $ | — |   | $ | 158 |   |
| Interest  Expense                    |   | $                                           | 10,143  |   | $ | 4,624 |   | $ | — |   | $ | 14,767 |   |
| Income  from Equity Method Investees |   | $                                           | 3,779   |   | $ | — |   | $ | (2,936 | ) | $ | 843 |   |
| Other  Income/(Expense), Net         |   | $                                           | 4,038   |   | $ | (25 | ) | $ | (2,936 | ) | $ | 1,077 |   |
| Net  Proceeds                        |   | $                                           | 438,236 |   | $ | 5,758 |   | $ | (5,758 | ) | $ | 438,236 |   |
|                                 |   |                                        |    |   |   |   |   |   |   |
| Capital  Expenditures                |   | $                                           | 14,944  |   | $ | 909 |   | $ | — |   | $ | 15,853 |   |

 
|                                 |   | **For the Nine Months Ended May 31,  2003** |    |
|--------------------------------------|--------|---------------------------------------------|---------|
|                                 |   | **(Dollars In Thousands)**                  |    |
|                                 |   | **Sugar**                                   |    | **Leasing** |   | **Eliminations** |   | **Consolidated** |   |
| Net  Revenue from External Customers |   | $                                           | 612,521 |   | $ | 2,275 |   | $ | — |   | $ | 614,796 |   |
| Gross  Proceeds                      |   | $                                           | 531,662 |   | $ | 1,279 |   | $ | — |   | $ | 532,941 |   |
| Depreciation  and Amortization       |   | $                                           | 41,679  |   | $ | 917 |   | $ | — |   | $ | 42,596 |   |
| Interest  Income                     |   | $                                           | 1,128   |   | $ | — |   | $ | — |   | $ | 1,128 |   |
| Interest  Expense                    |   | $                                           | 10,852  |   | $ | 588 |   | $ | — |   | $ | 11,440 |   |
| Income  from Equity Method Investees |   | $                                           | 2,291   |   | $ | — |   | $ | (349 | ) | $ | 1,942 |   |
| Other  Income/(Expense), Net         |   | $                                           | 2,559   |   | $ | — |   | $ | (349 | ) | $ | 2,210 |   |
| Net  Proceeds                        |   | $                                           | 334,503 |   | $ | 684 |   | $ | (684 | ) | $ | 334,503 |   |
|                                 |   |                                        |    |   |   |   |   |   |   |
| Capital  Expenditures                |   | $                                           | 33,017  |   | $ | 215 |   | $ | — |   | $ | 33,232 |   |

 

8

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|                                 |   | **For the Three Months Ended May 31,  2004** |    |
|--------------------------------------|--------|----------------------------------------------|---------|
|                                 |   | **(Dollars In Thousands)**                   |    |
|                                 |   | **Sugar**                                    |    | **Leasing** |   | **Eliminations** |   | **Consolidated** |   |
| Net  Revenue from External Customers |   | $                                            | 267,989 |   | $ | 6,538 |   | $ | — |   | $ | 274,527 |   |
| Gross  Proceeds                      |   | $                                            | 199,176 |   | $ | 3,544 |   | $ | — |   | $ | 202,720 |   |
| Depreciation  and Amortization       |   | $                                            | 12,854  |   | $ | 2,757 |   | $ | — |   | $ | 15,611 |   |
| Interest  Income                     |   | $                                            | 32      |   | $ | 1 |   | $ | — |   | $ | 33 |   |
| Interest  Expense                    |   | $                                            | 3,288   |   | $ | 1,146 |   | $ | — |   | $ | 4,434 |   |
| Income  from Equity Method Investees |   | $                                            | 1,483   |   | $ | — |   | $ | (1,211 | ) | $ | 272 |   |
| Other  Income/(Expense), Net         |   | $                                            | 1,647   |   | $ | — |   | $ | (1,211 | ) | $ | 436 |   |
| Net  Proceeds                        |   | $                                            | 132,574 |   | $ | 2,375 |   | $ | (2,375 | ) | $ | 132,574 |   |
|                                 |   |                                         |    |   |   |   |   |   |   |
| Capital  Expenditures                |   | $                                            | 5,829   |   | $ | 359 |   | $ | — |   | $ | 6,188 |   |

 
|                                 |   | **For the Three Months Ended May 31,  2003** |    |
|--------------------------------------|--------|----------------------------------------------|---------|
|                                 |   | **(Dollars In Thousands)**                   |    |
|                                 |   | **Sugar**                                    |    | **Leasing** |   | **Eliminations** |   | **Consolidated** |   |
| Net  Revenue from External Customers |   | $                                            | 219,463 |   | $ | 2,275 |   | $ | — |   | $ | 221,738 |   |
| Gross  Proceeds                      |   | $                                            | 158,099 |   | $ | 1,279 |   | $ | — |   | $ | 159,378 |   |
| Depreciation  and Amortization       |   | $                                            | 12,683  |   | $ | 917 |   | $ | — |   | $ | 13,600 |   |
| Interest  Income                     |   | $                                            | 338     |   | $ | — |   | $ | — |   | $ | 338 |   |
| Interest  Expense                    |   | $                                            | 3,268   |   | $ | 588 |   | $ | — |   | $ | 3,856 |   |
| Income  from Equity Method Investees |   | $                                            | 1,142   |   | $ | — |   | $ | (349 | ) | $ | 793 |   |
| Other  Income/(Expense), Net         |   | $                                            | 1,080   |   | $ | — |   | $ | (349 | ) | $ | 731 |   |
| Net  Proceeds                        |   | $                                            | 109,939 |   | $ | 684 |   | $ | (684 | ) | $ | 109,939 |   |
|                                 |   |                                         |    |   |   |   |   |   |   |
| Capital  Expenditures                |   | $                                            | 6,609   |   | $ | 215 |   | $ | — |   | $ | 6,824 |   |

 
|                         |   | **As of May 31, 2004**     |    |
|------------------------------|--------|----------------------------|---------|
|                         |   | **(Dollars In Thousands)** |    |
|                         |   | **Sugar**                  |    | **Leasing** |   | **Eliminations** |   | **Consolidated** |   |
| Property  and Equipment, Net |   | $                          | 317,782 |   | $ | 3 |   | $ | — |   | $ | 317,785 |   |
| Assets  Held for Lease, Net  |   | $                          | —  |   | $ | 163,085 |   | $ | — |   | $ | 163,085 |   |
| Identifiable  Assets         |   | $                          | 879,253 |   | $ | 175,378 |   | $ | (48,492 | ) | $ | 1,006,139 |   |

 
|                         |   | **As of May 31, 2003**     |    |
|------------------------------|--------|----------------------------|---------|
|                         |   | **(Dollars In Thousands)** |    |
|                         |   | **Sugar**                  |    | **Leasing** |   | **Eliminations** |   | **Consolidated** |   |
| Property  and Equipment, Net |   | $                          | 331,839 |   | $ | 7 |   | $ | — |   | $ | 331,846 |   |
| Assets  Held for Lease, Net  |   | $                          | —  |   | $ | 173,004 |   | $ | — |   | $ | 173,004 |   |
| Identifiable  Assets         |   | $                          | 823,962 |   | $ | 185,246 |   | $ | (44,716 | ) | $ | 964,492 |   |

 

**Note 10: Recently Issued AccountingPronouncements**

 

The Financial AccountingStandards Board (FASB) has issued FASB Staff Position (FSP) FAS-106-2, whichprovides accounting guidance related to the Medicare Prescription Drug,Improvement, and Modernization Act of 2003. This FSP becomes effective for the Company on September 1, 2004.  The Company has a post-retirement plan forcertain non-union employees that currently coordinates with Medicare’s medicalcoverage and provides tiered prescription drug coverage.  The Company has initially determined thatthe plan is not actuarially equivalent to Medicare Part D and therefore expectsthat the application of this FSP will have no material effect on the amountsrecorded for post-retirement benefits.

 

9

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**Item2**.   Management’s Discussion and Analysis ofResults of Operations and Financial Condition for the Nine Months and ThreeMonths Ended May 31, 2004 and 2003

 

This reportcontains forward-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. The Company’s actual results could differ materially from thoseindicated.  Important factors that couldcause or contribute to such differences include, without limitation, marketfactors, weather and general economic conditions, farm and trade policy,available quantity and quality of sugarbeets. For a more complete discussion of “Important Factors”, please refer tothe Company’s 2003 Form 10-K.

 

**Comparison of the Nine Months Ended May 31, 2004 and2003**

 

Revenuefor the nine months ended May 31, 2004, was $746.6 million, an increase of$131.8 million from the same period last year. Revenue from total sugar sales increased 19.7 percent due to a 19.8percent increase in the hundredweight sold partially offset by a 0.1 percentdecrease in the average selling price per hundredweight.  Revenue from pulp sales increased 17.0percent due to a 14.6 percent increase in the volume of pulp tons sold and by a2.1 percent increase in the average selling price per ton.  Revenue from molasses sales increased 74.6percent due to an 85.1 percent increase in the volume of molasses sold,partially offset by a 5.7 percent decrease in the average selling price perton.  The increase in the volume ofproducts sold was due primarily to the additional sales associated with thelarger crop in the Red River Valley and production at the Sidney, Montanafactory.  Revenue from sales ofConcentrated Separated By-Product (CSB), a by-product of the molassesdesugarization process, decreased 12.8 percent due to a 20.9 percent decreasein the average selling price per ton partially offset by a 10.3 percentincrease in the volume of CSB sold. Rental revenue on the ProGold operating lease was $19.4 million ascompared to $2.3 million last year. This difference was the result of the consolidation of ProGold whichcommenced on May 1, 2003.

 

Costof product sold for the nine months ended May 31, 2004, exclusive of paymentsto members for sugarbeets, decreased $4.7 million as compared to the sameperiod last year.  The cost recognizedassociated with the non-member sugarbeets (Sidney crop) was $44.0 million forthe nine months ended May 31, 2004, an increase of $12.8 million when comparedto the same period last year.  Directprocessing costs for sugar and pulp increased 18.1 percent.  This was primarily due to harvesting 15.8percent more sugarbeets and processing 16.5 percent more sugarbeets than infiscal 2003.  Increased processing costswere also the result of higher prices for natural gas, major supplies andhigher labor costs.  Fixed and committedexpenses increased 6.0 percent reflecting higher labor and benefit costs and increasedcosts related to the operations of Sidney Sugars.  The change in product inventories impacted the cost of productsold favorably by $34.4 million.  Thevalue for sugar inventories as of May 31, 2004 increased compared to the prioryear due to a higher inventory level partially offset by a lower net realizablevalue per hundredweight.  The costassociated with purchased sugar decreased by $2.9 million due to no delay inthe startup of the 2003 crop campaign. The delayed startup last year resulted in the requirement to purchaseadditional sugar to service customers during the delay.  Costs related to ProGold were $9.0 millionas compared to $1.0 million last year. This difference was the result of the consolidation of ProGold whichcommenced on May 1, 2003.  Costs relatedto Crab Creek Sugar were $1.0 million.

 

Selling,general and administrative expenses for the nine months ended May 31, 2004,increased $19.1 million as compared to the same period last year.  Selling expenses increased $17.1 millionprimarily due to the increases in the volume of products sold.  General and Administrative costs increased $2.1 million due in part to higher employee benefit costs along with othergeneral cost increases.

 

Interestincome for the nine months ended May 31, 2004, decreased $ 1.0 million when comparedto the same period last year.  This wasprimarily due to the conversion of the Note Receivable from Crystech intoPreferred Equity, which occurred at the end of last year.

 

Interestexpense for the nine months ended May 31, 2004, increased $ 3.3 million ascompared to the same period last year. This was the result of the consolidation of ProGold along with anincreased

 

10

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average borrowing level forshort-term debt, partially offset by lower long-term and short-term interestrates.

 

Non-memberbusiness activities resulted in a gain of $ 3.0 million for the nine monthsended May 31, 2004, as compared to a gain of $ 2.1 million for the same periodlast year.  The gain in both periods wasdue primarily to activities related to Sidney Sugars partially offset by theactivities related to ProGold.

 

**Comparison of the Three Months Ended May 31, 2004 and2003**

 

Revenuefor the three months ended May 31, 2004, was $274.5 million, an increase of$52.8 million from the same period last year. Revenue from total sugar sales increased 22.7 percent due to a 21.9percent increase in the hundredweight sold and a 0.6 percent increase in theaverage selling price per hundredweight. Revenue from pulp sales increased 91.3 percent due to a 93.1 percentincrease in the volume of pulp tons sold partially offset by a 0.9 percentdecrease in the average selling price per ton. Revenue from molasses sales increased 21.1 percent due to a 26.4 percentincrease in the volume of molasses sold, partially offset by a 4.2 percentdecrease in the average selling price per ton. The increase in the volume of products sold was due primarily to theadditional sales associated with the larger crop in the Red River Valley andthe production at the Sidney, Montana factory. Revenue from sales of CSB decreased 12.5 percent due to a 30.4 percentdecrease in the average selling price per ton partially offset by a 25.7percent increase in the volume of CSB sold. Rental revenue on the ProGold operating lease was $6.5 million and $2.3million for the three months ended May 31, 2004 and 2003, respectively.  This difference was the result of theconsolidation of ProGold which commenced on May 1, 2003.

 

Costof product sold for the three months ended May 31, 2004, exclusive of paymentsto members for sugarbeets, increased $ 9.4 million as compared to the sameperiod last year.  The cost recognizedassociated with the non-member sugarbeets (Sidney crop) was $ .2 million forthe three months ended May 31, 2004 an increase of $ .4 million when comparedto the same period last year.  Directprocessing costs for sugar and pulp increased 9.3 percent.  Increased processing costs resulted formhigher prices for natural gas, major supplies and higher labor costs.  Costs also increased due to processing 12.6percent more sugarbeets in the three months ended May 31, 2004, than for thesame period last year.  Fixed andcommitted expenses increased 1.7 percent reflecting higher labor and benefitcosts and insurance costs.  The changein product inventories impacted the cost of product sold unfavorably by $6.2million due primarily to decreases in sugar and pulp inventories.  The cost associated with purchased sugardecreased by $ .2 million due primarily to lower sales volume.  Costs related to ProGold were $3.0 millionas compared to $1.0 million last year. This difference was the result of the consolidation of ProGold whichcommenced on May 1, 2003.  Costs relatedto Crab Creek Sugar were $ .3 million.

 

Selling,general and administrative expenses for the three months ended May 31, 2004increased $ 8.4 million as compared to the same period last year.  Selling expenses increased $8.3 millionprimarily due to the increases in the volume of products sold.  General and Administrative costs increased $..1 million due in part to higher employee benefit costs along with othergeneral cost increases.

 

Interestincome for the three months ended May 31, 2004 decreased $ .3 million whencompared to the same period last year. This was primarily due to the conversion of the Note Receivable fromCrystech into Preferred Equity, which occurred at the end of last year.

 

Interestexpense increased $ .6 million for the three months ended May 31, 2004, ascompared to the same period last year. This was the result of the consolidation of ProGold and an increasedaverage borrowing level for short-term debt, partially offset by lowerlong-term and short-term interest rates.

 

Non-memberbusiness activities resulted in a gain of $ .4 million for the three monthsended May 31, 2004, as compared to a gain of $ .1 million for the same periodlast year.  The gain in both periods wasdue primarily to activities related to Sidney Sugars partially offset by the activitiesrelated to ProGold.

 

11

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**Regional and Bilateral Free TradeAgreements**

 

TheUnited States Government is pursuing an aggressive agenda on internationaltrade.  It has negotiated the terms ofthe Central American Free Trade Agreement and the Australian Free TradeAgreement.  Both countries and/orregions are major producers of sugar.  Severalother bilateral and regional trade agreements are being negotiated orconsidered by the Bush Administration.  Many of the countries included in these agreementsare major sugar producers and exporters. If reductions in sugar tariffs are included in these agreements,eventually excess sugar from these regions could enter the U.S. market and putpressure on domestic sugar prices.  Theimpact of the various trade agreements on the Company can not be assessed atthis time due to the uncertainty concerning the terms of the agreements andwhether they will ultimately be implemented.  It is possible, however,that the passage of various trade agreements could have a material adverseeffect on the Company through a reduction in acreage that can be planted by theCompany’s shareholders, and/or a reduction in sugar selling prices, and acorresponding reduction in the beet payment to the shareholders.  The magnitudeof the impact can not be determined at this time.

 

**Labor Contract Negotiations**

 

Substantiallyall of the hourly employees at the Red River Valley factories, includingfull-time and seasonal employees, are represented by the Bakery, Confectionery,Tobacco Workers and Grain Millers (BCTGM) AFL-CIO, and are covered by acollective bargaining agreement. Office, clerical and management employees are not unionized, except forcertain office employees at the Moorhead and Crookston, Minnesota, andHillsboro, North Dakota, factories who are covered by the collective bargainingagreement with the BCTGM.

 

TheCompany has entered into contract negotiations with the BCTGM with respect tothe current agreement that expires on July 31, 2004.  The Company anticipates that it will be able to reach anagreement with the BCTGM prior to the expiration of the current agreement, butno assurances can be given that the terms of any contract entered into betweenthe BCTGM and the Company will be favorable to the Company or that the Companywill actually be able to enter into any agreement prior to the expiration ofthe current agreement.

 

**Energy Prices**

 

The prices paid bythe company for energy related products, such as natural gas and coke, haverecently increased significantly due to supply and demand imbalances.  The Company uses substantial amounts ofthese products in its manufacturing process. The Company believes that the prices for energy related products willremain high and will very likely increase. These higher prices may materially increase the cost of production ofthe Company thus impact the financial results of the 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 tomember growers and non-member growers are paid in three payments over thecourse of a year, and the member payments are made net of any anticipated unitretain for the crop.  These procedureshave the effect of providing the Company with an additional source ofshort-term financing.  This memberfinancing arrangement may result in an additional source of liquidity andreduced need for outside financing in comparison to a similar business operatedon a non-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 requiredfor its operations, the

 

12

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Company hasutilized substantial outside financing on both a seasonal and long-term basisto fund such operations.  The majorityof such financing has been provided by a consortium of lenders lead by CoBank,ACB.  The Company has a long-term debtcommitment with CoBank, ACB of****$200.8 million, of which $162.8million was outstanding as of May 31, 2004. In addition, the Company had long-term debt outstanding, as of May 31,2004, of $50 million from a private placement of Senior Notes thatoccurred in September of 1998; $16.4 million from a private placement ofSenior Notes that occurred in January of 2003; $43.0 million from nineseparate issuances of Pollution Control and Industrial Development RevenueBonds, a term loan with Bank of North Dakota of $4.0 million and note payableof   $1.0 million.  The Company also has a seasonal line ofcredit with a consortium of lenders led by CoBank, ACB of $280 million, ofwhich there was no outstanding balance as of May 31, 2004, and a line of creditwith Wells Fargo Bank for $1.0 million. The Company’s commercial paper program provides short-term borrowings ofup to $225 million of which approximately $192.0 million was outstandingas of May 31, 2004.  Any borrowingsunder the commercial paper program will act to reduce the available creditunder the CoBank, ACB seasonal line of credit by a commensurate amount.  The Company had no outstanding loans withthe CCC, as of May 31, 2004.

 

The changes that haveoccurred in the Company’s financial statements from August 31, 2003 to May 31,2004 were primarily due to normal business seasonality, the acquisitionactivities related to Crab Creek and pension plan contributions.  The first nine months of the Company’sfiscal year includes the completion of the sugarbeet harvest and the processingcampaign, the final payments to growers for sugarbeets delivered from the previousyear’s crop and the initial payments to growers for sugarbeets delivered fromthe current year’s crop.  The cash usedin operations of $94.4 million and investing activities of $13.2 million wasfunded primarily through the cash provided by the proceeds from short-termdebt.  The net cash provided byfinancing activities of $107.5 million was primarily comprised of the netproceeds from short-term debt of $142.0 million and proceeds from theinstallment sale of stock of $4.0 million partially offset by the repayment oflong-term debt of $22.0 million and the payment of unit retains of $16.6million.

 

Working capital hasdecreased $12.7 million from $49.6 million at the beginning of the year to$36.9 million as of May 31, 2004 primarily due to additional short-term debt,increased current maturities of long-term debt and an increase in amounts duegrowers partially offset by increased inventories and trade receivables, mostof which are primarily due to normal business seasonality.  Working capital as of May 31, 2004 was $36.9million, an increase of $5.7 million when compared to $31.2 million of workingcapital as of May 31, 2003.  The higherlevel of working capital as of May 31, 2004 was primarily due to increasedinventories and accounts receivable partially offset by increased amounts due growersand higher short-term debt. These changes are primarily due to the larger cropthis year and the resulting higher sugar production and grower beet payment.

 

Capitalexpenditures for the nine months ended May 31, 2004 were $15.9 million.  Capital expenditures for the same period in2003 were $33.2 million which included $15.8 million related to the acquisitionof property and equipment by Sidney Sugars. The Company had outstanding commitments totaling $9.8 million as of May31, 2004 for equipment andconstruction contracts related to various capital and maintenance projects.

 

The Companyanticipates that the funds necessary for working capital requirements andfuture capital expenditures will be derived from operations, short-termborrowings, depreciation, unit retains and long-term borrowings.

 

On September 8, 2003, the Company, through itswholly-owned subsidiary Crab Creek Sugar Company (Crab Creek), acquired all ofthe assets of Pacific Northwest Sugar Company, LLC (PNSC), certain assets ofCentral Leasing of Washington, LLC (Central Leasing) that were associated withPNSC and the Moses Lake, Washington sugarbeet factory previously operated byPNSC and control of the sugar production assets owned by Central Leasingassociated with the Moses Lake, Washington sugarbeet factory for a purchaseprice of approximately $6.7 million.  Toaccomplish this outcome, Crab Creek entered into various arrangements withCentral Leasing such that Crab Creek controls the long-term production of sugarat the Moses Lake facility.  Inconnection with this acquisition, the USDA transferred

 

13

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to the Company the sugar marketing allocations formerlyallocated to PNSC.  Neither Crab Creeknor the Company intends to operate the Moses Lake facility.

 

**Item3**.  Quantitative and QualitativeDisclosures 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**.   Controlsand Procedures

 

The Company’s chief executive officer and chieffinancial officer have reviewed and evaluated the effectiveness of theCompany’s disclosure controls and procedures (as defined in Rules 240.13a-15eand 15d-15e promulgated under the Securities Exchange Act of 1934) as of May31, 2004.  Based on that review andevaluation, which included inquiries made to certain other employees of theCompany, the chief executive officer and chief financial officer have concludedthat the Company’s current disclosure controls and procedures, as designed andimplemented, are reasonably adequate to ensure that they are provided withmaterial information relating to the Company required to be disclosed in thereports the Company files or submits under the Securities Exchange Act of 1934.

 

There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect these controls subsequent to the date of theirevaluation.  There were no significantdeficiencies or material weaknesses identified, and therefore no correctiveactions were taken.

 

**PART II****. OTHER INFORMATION**

 

#### **Item 1.  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 Company does not

 

14

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anticipatethat the decisions in these proceedings will result in the USDA reversing itscurrent decisions on sugar marketing allocations and its past transfers of suchsugar marketing allocations.  Theoutcome of any contested matter, however, is never certain and the eventualdecision may result in a change in the current sugar marketing allocations.  In the event these proceedings are decidedin a manner that reduces the Company’s sugar allocations, the amount of sugarthe Company can produce and market may be adversely impacted.

 

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

 

None

 

**Item 3.  Default Upon Senior Securities**

 

None

 

### **Item4.  Submission ofMatters to a Vote of Security Holders**

 

None

 

**Item 5.  Other Information.**

 

None.

 

15

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### **Item 6. Exhibits and Reports onForm 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         |   | Trademark License  Agreement between Registrant and United Sugars Corporation, dated November 1,  1993 |   | Incorporated by  reference to Exhibit 10(l) from the Company’s Registration Statement on Form  S-1 (File No. 33-83868), declared effective November 23, 1994.  |
|         |   |                                                                                                        |   |                                                                                                                                                                     |
| 10.2         |   | 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.  |
|         |   |                                                                                                        |   |                                                                                                                                                                     |
| 10.3         |   | 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.  |
|         |   |                                                                                                        |   |                                                                                                                                                                     |
| 10.4         |   | Administrative Services  Agreement between Registrant and ProGold Limited Liability Company                 |   | Incorporated by  reference to Exhibit 10(w) from the Company’s Registration Statement on Form  S-1 (File No. 33-83868), declared effective November 23, 1994.  |
|         |   |                                                                                                        |   |                                                                                                                                                                     |
| +10.5        |   | 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. |

 

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| +10.6  |   | 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. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.7   |   | 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.                                     |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.8   |   | 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.                                     |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.9   |   | 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.                                     |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.10  |   | 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.                                     |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| +10.11 |   | 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.                                     |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.12  |   | Master Agreement  between the Registrant and Bakery, Confectionery, Tobacco Workers & Grain  Millers AFL-CIO, CLC   |   | Incorporated by  reference to Exhibit 10.22 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1999                                       |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.13  |   | 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                                       |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.14  |   | 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                                       |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.15  |   | 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                                       |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.16  |   | 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 for  the year ended August 31, 1999                                       |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.17  |   | 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                                                   |

 

17

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| 10.18  |   | 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 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                  |   |                                                                                                                               |
| 10.19  |   | 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 |
|   |   |                                                                                                                                                  |   |                                                                                                                               |
| 10.20  |   | Addendum to Master  Agreement between the Registrant and Bakery, Confectionery, Tobacco Workers  & Grain Millers AFL-CIO, CLC dated July 10, 2001 |   | Incorporated by  reference to Exhibit 10.30 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 2001 |
|   |   |                                                                                                                                                  |   |                                                                                                                               |
| 10.21  |   | 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             |
|   |   |                                                                                                                                                  |   |                                                                                                                               |
| 10.22  |   | 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             |
|   |   |                                                                                                                                                  |   |                                                                                                                               |
| 10.23  |   | Retirement Plan A  Restatement                                                                                                                        |   | Incorporated by  reference to Exhibit 10.28 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 2002 |
|   |   |                                                                                                                                                  |   |                                                                                                                               |
| 10.24  |   | Retirement Plan B  Restatement                                                                                                                        |   | Incorporated by  reference to Exhibit 10.29 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 2002 |
|   |   |                                                                                                                                                  |   |                                                                                                                               |
| 10.25  |   | Registrant’s  Senior Note Purchase Agreement dated January 15, 2003                                                                         |   | Incorporated by  reference to Exhibit 10.29 from the Company’s Form 10-Q for the quarter ended  February 28, 2003             |
|   |   |                                                                                                                                                  |   |                                                                                                                               |
| 10.26  |   | 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             |
|   |   |                                                                                                                                                  |   |                                                                                                                               |
| 10.27  |   | Growers’ Contract (Annual  Contract) for crop year 2003.                                                                                         |   | Incorporated by  reference to Exhibit 10.31 from the Company’s Form 10-Q for the quarter ended  February 28, 2003             |
|   |   |                                                                                                                                                  |   |                                                                                                                               |
| +10.28 |   | 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                  |
|   |   |                                                                                                                                                  |   |                                                                                                                               |
| +10.29 |   | 2003 Sugarbeet Delivery  Agreement between Sidney Sugars Incorporated and Growers                                                                     |   | Incorporated by  reference to Exhibit 10.32 from the Company’s Form 10-Q for the quarter ended  May 31, 2003                  |
|   |   |                                                                                                                                                  |   |                                                                                                                               |
| 10.30  |   | 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 |
|   |   |                                                                                                                                                  |   |                                                                                                                               |
| 10.31  |   | 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 |

 

18

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| 10.32  |   | Seasonal Loan Agreement  between the Registrant and CoBank, ACB dated November 7, 2003   |   | Incorporated by  reference to Exhibit 10.32 from the Company’s Form 10-Q for the quarter ended  November 30, 2003            |
|--------|--------|------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                     |   |                                                                                                                              |
| 10.33  |   | Amendments  to Registrant’s Senior Note Purchase Agreements dated November 26, 2003 |   | Incorporated by  reference to Exhibit 10.33 from the Company’s Form 10-Q for the quarter ended  November 30, 2003            |
|   |   |                                                                                     |   |                                                                                                                              |
| 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, 2003 |
|   |   |                                                                                     |   |                                                                                                                              |
| 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 the Securities andExchange Act of 1934, as amended, has been granted with respect to designatedportions of this document.

 

 

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

 

The Company filed thefollowing Current Report on Form 8-K during this quarter.

 

(i)  Current Report on Form 8-K, dated March 29,2004, under item 9 stating that the Company announced to its shareholders anincrease in the projected gross beet payment for the 2003 crop.

 

TheCompany also announced that the Board of Directors has set the plantingtolerance for the 2004 crop equal to 98 to 100 percent of stock acres.

 

TheCompany also announced its plans to discuss various trade agreements and theirpotential impact on the Company with its shareholders at spring factorydistrict meetings.

 

 

SIGNATURES

 

 

**Pursuant to the requirement of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.**

 

 
|            |              | **AMERICAN CRYSTAL SUGAR COMPANY** |
|-----------------|-------------------|------------------------------------|
|            |              | **(Registrant)**                   |
|            |              |                               |
|            |              |                               |
| **Date: ** | **July 15, 2004** |                               |   |   | **/s/ Mark Kalvoda** |   |
|            |              |                               | **Mark Kalvoda** |
|            |              |                               | **Corporate Controller,** |
|            |              |                               | **Chief Accounting Officer** |
|            |              |                               | **Duly Authorized Officer** |
|                 |                   |                                    |  |  |  |  |

 

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