**UNITED STATESSECURITIES 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 Actof 1934

** **

# **Forthe period ended May 31, 2006**

# ** **

**Commission file number:  33-83868**

 

**AMERICAN CRYSTAL SUGAR COMPANY**

(Exact name of registrant 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 of principal executive offices)

 

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

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months, and (2) has been subject to such filing requirements for the past90 days.
| YES    ý | NO    o |
|-----------------------------------|-----------------------------|

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one)
| Large  accelerated filer  o | Accelerated  filer  o | Non-accelerated  filer  ý |
|---------------------------------------|---------------------------------|------------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (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.

 
| ** **                     | ** ** | **Outstanding at**    |
|--------------------------------|------------|-----------------------|
| **Class of Common Stock** | ** ** | **July 5, 2006** |
| **$10 Par Value**              | ** ** | **2,874**             |

 

 

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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.**      | **UNREGISTERED SALES OF EQUITY  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**                                                                                    |                                                |
|             |                                                                                            |                                                |   |
| **SIGNATURES**   |                                                                                            |

 

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**AmericanCrystal Sugar CompanyConsolidated Balance Sheets(Unaudited)(In Thousands)****Assets**

 
| ** **                                    | ** ** | **May 31** | ** ** | **August 31** | ** ** |
|-----------------------------------------------|------------|------------|------------|---------------|------------|
| ** **                                    | ** ** | **2006**   | ** ** | **2005**      | ** ** | **2005*** | ** ** |
| **Current Assets:**                           | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| Cash and Cash  Equivalents                    |       | $          | 193        |          | $          | 512 |   | $ | 337 |   |
| Receivables:                                  |       |       |       |          |       |   |   |
| Trade                                         |       | 45,951     |       | 57,811        |       | 39,752 |   |
| Members                                       |       | 3,884      |       | 3,963         |       | 3,683 |   |
| Other                                         |       | 2,182      |       | 2,605         |       | 3,490 |   |
| Advances to  Related Parties                  |       | 9,298      |       | 16,253        |       | 15,108 |   |
| Inventories                                   |       | 339,975    |       | 290,556       |       | 122,627 |   |
| Prepaid Expenses                              |       | 6,274      |       | 5,623         |       | 5,582 |   |
|                                          |       |       |       |          |       |   |   |
| **Total Current Assets**                      |       | 407,757    |       | 377,323       |       | 190,579 |   |
|                                          |       |       |       |          |       |   |   |
| **Property and Equipment:**                   | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| Land                                          |       | 53,669     |       | 43,655        |       | 53,728 |   |
| Buildings                                     |       | 100,379    |       | 94,568        |       | 96,816 |   |
| Equipment                                     |       | 776,430    |       | 758,069       |       | 767,698 |   |
| Construction in  Progress                     |       | 16,491     |       | 15,599        |       | 14,345 |   |
| Less Accumulated  Depreciation                |       | (637,410   | )          | (602,131      | )          | (602,727 | ) |
|                                          |       |       |       |          |       |   |   |
| **Net Property and Equipment**                |       | 309,559    |       | 309,760       |       | 329,860 |   |
|                                          |       |       |       |          |       |   |   |
| **Net Property and Equipment Held for Lease** |       | 142,920    |       | 153,483       |       | 150,892 |   |
|                                          |       |       |       |          |       |   |   |
| **Other Assets:**                             | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| Investments in  CoBank, ACB                   |       | 13,138     |       | 17,603        |       | 16,716 |   |
| Investments in  Marketing Cooperatives        |       | 6,240      |       | 4,644         |       | 6,060 |   |
| Investments in  Crystech, LLC                 |       | 16,176     |       | 16,153        |       | 15,376 |   |
| Prepaid Pension  Expense                      |       | 45,434     |       | 45,719        |       | 43,789 |   |
| Other Assets                                  |       | 18,930     |       | 25,004        |       | 20,752 |   |
|                                          |       |       |       |          |       |   |   |
| **Total Other Assets**                        |       | 99,918     |       | 109,123       |       | 102,693 |   |
|                                          |       |       |       |          |       |   |   |
| **Total Assets**                              |       | $          | 960,154    |          | $          | 949,689 |   | $ | 774,024 |   |

 

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

* Derived from auditedfinancial statements

 

1

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**American Crystal Sugar Company**

**Consolidated Balance Sheets(Unaudited)(In Thousands)**

**Liabilities and Members’Investments**

 
| ** **                                          | ** ** | **May 31** | ** ** | **August 31** | ** ** |
|-----------------------------------------------------|------------|------------|------------|---------------|------------|
| ** **                                          | ** ** | **2006**   | ** ** | **2005**      | ** ** | **2005*** | ** ** |
| **Current Liabilities:**                            | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| Short-Term Debt                                     |       | $          | 158,815    |          | $          | 162,791 |   | $ | 30,685 |   |
| Current  Maturities of Long-Term Debt               |       | 20,962     |       | 20,947        |       | 20,947 |   |
| Accounts Payable                                    |       | 11,577     |       | 15,561        |       | 27,165 |   |
| Advances Due to  Related Parties                    |       | 8,754      |       | 5,889         |       | 8,031 |   |
| Accrued  Continuing Costs                           |       | 57,126     |       | 51,726        |       | — |   |
| Other Current  Liabilities                          |       | 24,861     |       | 21,996        |       | 22,803 |   |
| Amounts Due  Growers                                |       | 91,958     |       | 58,265        |       | 33,434 |   |
|                                                |       |       |       |          |       |   |   |
| **Total Current Liabilities**                       |       | 374,053    |       | 337,175       |       | 143,065 |   |
|                                                |       |       |       |          |       |   |   |
| **Long-Term Debt, Net of Current Maturities**       |       | 185,781    |       | 217,132       |       | 216,842 |   |
|                                                |       |       |       |          |       |   |   |
| **Accrued Employee Benefits**                       |       | 41,293     |       | 37,561        |       | 37,990 |   |
|                                                |       |       |       |          |       |   |   |
| **Other Liabilities**                               |       | 8,192      |       | 9,125         |       | 8,897 |   |
| ** **                                          |       |       |       |          |       |   |   |
| **Total Liabilities**                               |       | 609,319    |       | 600,993       |       | 406,794 |   |
|                                                |       |       |       |          |       |   |   |
| **Commitments and Contingencies**                   | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
|                                                |       |       |       |          |       |   |   |
| **Minority Interest in ProGold Limited Liability**  |       | 54,987     |       | 50,666        |       | 51,532 |   |
|                                                |       |       |       |          |       |   |   |
| **Members’ Investments:**                      | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| Preferred Stock                                     |       | 38,275     |       | 38,275        |       | 38,275 |   |
| Common Stock                                        |       | 29         |       | 29            |       | 29 |   |
| Additional  Paid-In Capital                         |       | 152,261    |       | 152,261       |       | 152,261 |   |
| Unit Retains                                        |       | 127,617    |       | 130,132       |       | 148,972 |   |
| Equity Retention                                    |       | 2,696      |       | 2,703         |       | 2,703 |   |
| Accumulated  Other Comprehensive Income (Loss)      |       | (832       | )          | (376          | )          | (832 | ) |
| Retained  Earnings (Accumulated Deficit)            |       | (24,198    | )          | (24,994       | )          | (25,710 | ) |
|                                                |       |       |       |          |       |   |   |
| **Total Members’ Investments**                 |       | 295,848    |       | 298,030       |       | 315,698 |   |
|                                                |       |       |       |          |       |   |   |
| **Total Liabilities and Members’ Investments** |       | $          | 960,154    |          | $          | 949,689 |   | $ | 774,024 |   |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

*Derived from audited financial statements

 

2

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**AmericanCrystal Sugar CompanyConsolidated Statements of Operations(Unaudited)(In Thousands)**

 
| ** **                                                            | ** ** | **For the Nine Months** | ** ** | **For the Three Months** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                                            | ** ** | **Ended May 31**        | ** ** | **Ended May 31**         | ** ** |
| ** **                                                            | ** ** | **2006**                | ** ** | **2005**                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Net Revenue**                                                       |       | $                       | 707,585    |                     | $          | 726,517 |   | $ | 258,265 |   | $ | 267,670 |   |
| ** **                                                            |       |                    |       |                     |       |   |   |   |   |
| **Cost of Sales**                                                     |       | 82,799                  |       | 131,026                  |       | 83,565 |   | 72,375 |   |
| ** **                                                            |       |                    |       |                     |       |   |   |   |   |
| **Gross Proceeds**                                                    |       | 624,786                 |       | 595,491                  |       | 174,700 |   | 195,295 |   |
| ** **                                                            |       |                    |       |                     |       |   |   |   |   |
| **Selling, General and Administrative Expenses**                      |       | 146,276                 |       | 145,910                  |       | 48,404 |   | 51,318 |   |
| **Accrued Continuing Costs**                                          |       | 57,126                  |       | 51,726                   |       | (11,589 | ) | 6,887 |   |
| ** **                                                            |       |                    |       |                     |       |   |   |   |   |
| **Operating Proceeds**                                                |       | 421,384                 |       | 397,855                  |       | 137,885 |   | 137,090 |   |
| ** **                                                            |       |                    |       |                     |       |   |   |   |   |
| **Other Income (Expense):**                                           | ** ** | ** **              | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Income                                                       |       | 258                     |       | 240                      |       | 82 |   | 79 |   |
| Interest  Expense, Net                                                |       | (13,962                 | )          | (13,900                  | )          | (4,413 | ) | (4,380 | ) |
| Other, Net                                                            |       | 3,758                   |       | (263                     | )          | 2,823 |   | 67 |   |
|                                                                  |       |                    |       |                     |       |   |   |   |   |
| **Total Other (Expense)**                                             |       | (9,946                  | )          | (13,923                  | )          | (1,508 | ) | (4,234 | ) |
| ** **                                                            |       |                    |       |                     |       |   |   |   |   |
| **Proceeds Before Minority Interest and Income Tax  Expense**         |       | 411,438                 |       | 383,932                  |       | 136,377 |   | 132,856 |   |
| ** **                                                            |       |                    |       |                     |       |   |   |   |   |
| **Minority Interest**                                                 |       | (3,455                  | )          | (3,304                   | )          | (1,303 | ) | (1,360 | ) |
| ** **                                                            |       |                    |       |                     |       |   |   |   |   |
| **Income Tax Expense**                                                |       | (1,060                  | )          | (356                     | )          | (485 | ) | (345 | ) |
| ** **                                                            |       |                    |       |                     |       |   |   |   |   |
| **Net  Proceeds Resulting from Member and Non-Member Business**       |       | $                       | 406,923    |                     | $          | 380,272 |   | $ | 134,589 |   | $ | 131,151 |   |
| ** **                                                            |       |                    |       |                     |       |   |   |   |   |
| **Distributions of Net Proceeds:**                                    | ** ** | ** **              | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Credited to  Members’ Investments:                               |       |                    |       |                     |       |   |   |   |   |
| Non-Member  Business Income                                           |       | $                       | 1,512      |                     | $          | 3,191 |   | $ | 700 |   | $ | 1,868 |   |
| Unit Retains  Declared to Members                                     |       | —                  |       | —                   |       | — |   | — |   |
| Net Credit to  Members’ Investments                              |       | 1,512                   |       | 3,191                    |       | 700 |   | 1,868 |   |
| Payments To/Due  Members for Sugarbeets, Net of Unit Retains Declared |       | 405,411                 |       | 377,081                  |       | 133,889 |   | 129,283 |   |
| **Total**                                                             |       | $                       | 406,923    |                     | $          | 380,272 |   | $ | 134,589 |   | $ | 131,151 |   |

 

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

 

3

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**AmericanCrystal Sugar CompanyConsolidated Statements of Cash FlowsFor the Nine Months Ended May 31(Unaudited)(In Thousands)**

 
| ** **                                                            | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Cash Provided By (Used In) Operating Activities:**                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Proceeds  Resulting from Member and Non-Member Business           |       | $          | 406,923    |       | $          | 380,272 |   |
| Payments To/Due  Members for Sugarbeets, Net of Unit Retains Declared |       | (405,411   | )          | (377,081   | )          |
| Add (Deduct)  Non-Cash Items:                                         |       |       |       |       |       |
| Depreciation and  Amortization                                        |       | 51,153     |       | 50,241     |       |
| Income from  Equity Method Investees                                  |       | (853       | )          | (829       | )          |
| Loss on the  Disposition of Property and Equipment                    |       | 363        |       | 1,549      |       |
| Non-Cash Portion  of Patronage Dividend from CoBank, ACB              |       | (218       | )          | (447       | )          |
| Deferred Gain  Recognition                                            |       | (148       | )          | (148       | )          |
| Minority  Interest in ProGold Limited Liability Company               |       | 3,455      |       | 3,304      |       |
| Changes in  Assets and Liabilities:                                   |       |       |       |       |       |
| Receivables                                                           |       | (5,092     | )          | 23,516     |       |
| Inventories                                                           |       | (217,348   | )          | (161,271   | )          |
| Prepaid Expenses                                                      |       | (692       | )          | (777       | )          |
| Long-Term  Prepaid Pension Expense                                    |       | (1,645     | )          | (15,785    | )          |
| Advances To/Due  to Related Parties                                   |       | 6,533      |       | (4,720     | )          |
| Accounts Payable                                                      |       | (15,588    | )          | (11,502    | )          |
| Accrued  Continuing Costs                                             |       | 57,126     |       | 51,726     |       |
| Other  Liabilities                                                    |       | 4,656      |       | 3,945      |       |
| Amounts Due  Growers                                                  |       | 58,524     |       | (12,222    | )          |
| **Net Cash Used In Operating Activities**                             |       | (58,262    | )          | (70,229    | )          |
| ** **                                                            |       |       |       |       |       |
| **Cash Provided By (Used In) Investing Activities:**                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchases of  Property and Equipment                                  |       | (21,072    | )          | (20,731    | )          |
| Purchases of  Property and Equipment Held for Lease                   |       | (367       | )          | (1,153     | )          |
| Proceeds from  the Sale of Property and Equipment                     |       | 244        |       | 8          |       |
| Equity Refund  from CoBank, ACB                                       |       | 3,796      |       | 1,913      |       |
| Changes in Other  Assets                                              |       | (205       | )          | (546       | )          |
| **Net Cash Used In Investing Activities**                             |       | (17,604    | )          | (20,509    | )          |
| ** **                                                            |       |       |       |       |       |
| **Cash Provided By (Used In) Financing Activities:**                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Proceeds  from Short-Term Debt                                    |       | 128,130    |       | 132,592    |       |
| Proceeds from  Issuance of Long-Term Debt                             |       | 5,000      |       | —     |       |
| Long-Term Debt  Repayment                                             |       | (36,046    | )          | (32,939    | )          |
| Payment of Unit  Retains and Equity Retention                         |       | (21,362    | )          | (8,587     | )          |
| **Net Cash Provided By Financing Activities**                         |       | 75,722     |       | 91,066     |       |
| **Increase/(Decrease) In Cash and Cash Equivalents**                  |       | (144       | )          | 328        |       |
| **Cash and Cash Equivalents, Beginning of Year**                      |       | 337        |       | 184        |       |
| ** **                                                            |       |       |       |       |       |
| **Cash and Cash Equivalents, End of Period**                          |       | $          | 193        |       | $          | 512 |   |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

4

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# **AMERICANCRYSTAL SUGAR COMPANY**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS AND THREE MONTHS ENDED**

**May 31, 2006 AND 2005**

**(Unaudited)**

 

**Note1:  Basis of Presentation**

 

The unaudited consolidated financial statements ofAmerican Crystal Sugar Company (the Company) contained herein have beenprepared pursuant to the rules and regulations of the Securities and ExchangeCommission.  Accordingly, they do notinclude all the information and footnotes required by accounting principlesgenerally accepted in the United States of America.  However, in the opinion of management, alladjustments, consisting of normal recurring accruals, considered necessary fora fair presentation have been included.

 

The Company’s consolidated financial statements arecomprised of: American Crystal Sugar Company; its wholly-owned subsidiariesSidney Sugars Incorporated (Sidney Sugars) and Crab Creek Sugar Company (CrabCreek); and ProGold Limited Liability Company (ProGold), a limited liabilitycompany in which the Company holds a 51 percent ownership interest.

 

All material inter-company transactions have beeneliminated.

 

The operating results for the nine month periodended May 31, 2006, are not necessarily indicative of the results that maybe expected for the year ended August 31, 2006.

 

The amount paid to shareholders for sugarbeets(member beet payment) depends on the future selling prices of sugar andagri-products as well as processing and other costs incurred during theremainder of the fiscal year associated with the 2005 Red River Valleysugarbeet crop (RRV crop).  The amountpaid to non-member growers for sugarbeets (non-member beet payment) depends onthe future selling prices of sugar and the related selling expenses associatedwith the 2005 Sidney Sugars 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 financial statements should be read inconjunction with the consolidated financial statements and notes included inthe Company’s Annual Report on Form 10-K for the year ended August 31,2005.

 

Certain reclassifications have been made to the May 31,2005, consolidated financial statements to conform with the May 31, 2006,presentation.  These reclassificationshad no effect on previously reported results of operations or Members’Investments.

 

**Note 2:  Inventories**

 

The major components of inventories are as follows(In Thousands):

 
| ** **                                                             | ** ** | **May 31  2006** | ** ** | **May 31  2005** | ** ** | **August 31  2005** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|--------------------------|------------|
| Refined Sugar,  Pulp, Molasses, Other Agri-Products and Sugarbeet Seed |       | $                     | 311,630    |                  | $          | 270,616                  |       | $ | 96,647 |   |
| Maintenance Parts and Supplies                                         |       | 28,345                |       | 19,940                |       | 25,980                   |       |
|                                                                   |       |                  |       |                  |       |                     |       |
| Total Inventories                                                      |       | $                     | 339,975    |                  | $          | 290,556                  |       | $ | 122,627 |   |

 

5

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Sugar, pulp, molasses and other agri-productsinventories are valued at estimated net realizable value.  Maintenance parts and supplies and sugarbeetseed inventories are valued at the lower of average cost or market.

 

# **Note3:  Short-Term Debt**

# ** **

The Company has a seasonal line of credit with aconsortium of lenders led by CoBank, ACB of $280 million and a line ofcredit with Wells Fargo Bank for $1 million.  The Company’s commercial paper programprovides short-term borrowings of up to $225 million.  Any borrowingsunder the commercial paper program along with outstanding short-term letters ofcredit will act to reduce the available credit under the CoBank, ACB seasonalline of credit by a commensurate amount. The Company also utilizes the Commodity Credit Corporation (CCC) to meetits short-term borrowing needs.

 

As of May 31,2006, the Company had outstanding commercial paper of $108.8****million at an average interest rate of 4.88% and maturitydates between June 1, 2006, and June 30, 2006.  The Company also had outstanding short-termdebt with CoBank, ACB of $50.0 million as of May 31, 2006, at an interestrate of 5.67% and a maturity date of June 5, 2006.  The Company had no outstanding short-termdebt with the CCC as of May 31, 2006.  The Company had $6.0 million of short-termletters of credit outstanding as of May 31, 2006.  The unused seasonal line of credit as of May 31,2006, was $166.2 million.

 

As of May 31,2005, the Company had outstanding commercial paper of $112.8****million at an average interest rate of 2.9% and maturitydates between June 1, 2005 and July 29, 2005.  The Company also had $50.0 million ofoutstanding short-term debt with CoBank, ACB as of May 31, 2005 at aninterest rate of 3.84% and a maturity date of July 15, 2005.  The Company had no outstanding short-termdebt with the CCC as of May 31, 2005. The Company had $5.9 million ofshort-term letters of credit outstanding as of May 31, 2005.

 

**Note 4:  Interest Paid**

 

Interest paid, net of amounts capitalized, was $12.8million and $13.4 million for the nine months ended May 31, 2006 and 2005,respectively, and $3.0 million and $3.8 million for the three months ended May 31,2006 and 2005, respectively.

 

**Note 5:  Accrued Continuing Costs**

 

Forinterim reporting, the net proceeds from member business is based on theforecasted gross beet payment and the percentage of the tons of sugarbeetsprocessed to the total estimated tons of sugarbeets to process for a given cropyear.  The net proceeds from theoperations of Sidney Sugars is based on the forecasted net income for thefiscal year and the percentage of the tons of non-member sugarbeets processedto the total estimated tons of non-member sugarbeets to process for a given fiscalyear.

 

Accruedcontinuing costs represent the difference between the net proceeds asdetermined above and actual member business crop year and Sidney Sugars fiscalyear revenues realized and expenses incurred through the end of the reportingperiod.  Accrued continuing costs arereflected in the Consolidated Financial Statements as a cost on the ConsolidatedStatements of Operations and as a current liability on the Consolidated BalanceSheets.

 

6

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

 

The following schedulesprovide the components of the Net Periodic Pension and Post-Retirement Costsfor the nine months and three months ended May 31, 2006 and 2005:

 

***Components of Net Periodic Pension Cost***(In Thousands)

 
| ** **                             | ** ** | **For the Nine Months Ended  May 31** | ** ** | **For the Three Months Ended  May 31** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                                       | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service Cost                           |       | $                                                              | 3,167      |                                                            | $          | 2,450 |   | $ | 1,056 |   | $ | 817 |   |
| Interest Cost                          |       | 5,388                                                          |       | 5,314                                                           |       | 1,796 |   | 1,771 |   |
| Expected Return  on Plan Assets        |       | (7,392                                                         | )          | (6,047                                                          | )          | (2,464 | ) | (2,016 | ) |
| Multiple  Employer Adjustment          |       | (44                                                            | )          | (119                                                            | )          | (15 | ) | (40 | ) |
| Amortization of  Net Transition Assets |       | —                                                         |       | (16                                                             | )          | — |   | (5 | ) |
| Amortization of  Prior Service Costs   |       | 1,029                                                          |       | 768                                                             |       | 343 |   | 256 |   |
| Amortization of  Net Loss              |       | 2,240                                                          |       | 998                                                             |       | 747 |   | 333 |   |
| Net Periodic  Pension Cost             |       | $                                                              | 4,388      |                                                            | $          | 3,348 |   | $ | 1,463 |   | $ | 1,116 |   |

 

***Components of Net Periodic Post-Retirement Cost***(In Thousands)

 
| ** **                         | ** ** | **For the Nine Months Ended  May 31** | ** ** | **For the Three Months Ended  May 31** | ** ** |
|------------------------------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                                       | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service Cost                       |       | $                                                              | 1,058      |                                                            | $          | 824 |   | $ | 353 |   | $ | 275 |   |
| Interest Cost                      |       | 1,566                                                          |       | 1,629                                                           |       | 522 |   | 543 |   |
| Amortization of  Net Loss          |       | 290                                                            |       | 215                                                             |       | 97 |   | 72 |   |
| Net Periodic  Post-Retirement Cost |       | $                                                              | 2,914      |                                                            | $          | 2,668 |   | $ | 972 |   | $ | 890 |   |

 

For the nine months ended May 31,2006, the Company contributed $5.2 million to the pension plans.  The Company does not expect to make anyadditional contributions for the remainder of the current fiscal year.  The Company has made payments for post-retirementbenefits of approximately $608,000 for the nine months ended May 31, 2006,and expects total payments for the current fiscal year to be approximately $800,000.

 

**Note 7:  Members’ Investments**

 
| ** **            | ** ** | ** **         | ** ** | **Shares**     | ** ** | **Shares Issued**     | ** ** |
|-----------------------|------------|--------------------|------------|----------------|------------|----------------------------|------------|
| ** **            | ** ** | **Par Value** | ** ** | **Authorized** | ** ** | **& Outstanding** | ** ** |
| Preferred Stock:      |       |               |       |           |       |                       |       |
| July 5,  2006    |       | $                  | 76.77      |           | 600,000    |                       | 498,570    |   |
| May 31,  2006    |       | $                  | 76.77      |           | 600,000    |                       | 498,570    |   |
| August 31,  2005 |       | $                  | 76.77      |           | 600,000    |                       | 498,570    |   |
| May 31,  2005    |       | $                  | 76.77      |           | 600,000    |                       | 498,570    |   |
|                  |       |               |       |           |       |                       |       |
| Common Stock:         |       |               |       |           |       |                       |       |
| July 5,  2006    |       | $                  | 10.00      |           | 4,000      |                       | 2,874      |   |
| May 31,  2006    |       | $                  | 10.00      |           | 4,000      |                       | 2,871      |   |
| August 31,  2005 |       | $                  | 10.00      |           | 4,000      |                       | 2,904      |   |
| May 31,  2005    |       | $                  | 10.00      |           | 4,000      |                       | 2,878      |   |

 

7

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**Note 8:Shipping and Handling Costs**

 

The costs incurred for the shipping and handling ofproducts sold are classified in the financial statements as a selling expenseon the Statements of Operations.  Shippingand handling costs were $93.9 million and $93.7 million for the nine monthsended May 31, 2006 and 2005, respectively and $31.3 million and $33.9million for the three months ended May 31, 2006 and 2005, respectively.

 

**Note 9:Segment Reporting**

 

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

 

Summarizedfinancial information concerning the Company’s reportable segments for the ninemonths and three months ended May 31, 2006 and 2005, is shown below:

 
| ** **                           | ** ** | **For the Nine Months Ended May 31, 2006** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(Dollars In Thousands)**                                          | ** ** |
| ** **                           | ** ** | **Sugar**                                                                     | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from  External Customers |       | $                                                                             | 688,679    |   | $ | 18,906 |   | $ | 707,585 |   |
| Gross Proceeds                       |       | $                                                                             | 614,928    |   | $ | 9,858 |   | $ | 624,786 |   |
| Depreciation and  Amortization       |       | $                                                                             | 42,814     |   | $ | 8,339 |   | $ | 51,153 |   |
| Interest Income                      |       | $                                                                             | 226        |   | $ | 32 |   | $ | 258 |   |
| Interest Expense                     |       | $                                                                             | 11,199     |   | $ | 2,763 |   | $ | 13,962 |   |
| Income from  Equity Method Investees |       | $                                                                             | 853        |   | $ | — |   | $ | 853 |   |
| Other  Income/(Expense), Net         |       | $                                                                             | 2,904      |   | $ | 1 |   | $ | 2,905 |   |
| Net Proceeds                         |       | $                                                                             | 403,327    |   | $ | 3,596 |   | $ | 406,923 |   |
|                                 |       |                                                                          |       |   |   |   |   |
| Capital  Expenditures                |       | $                                                                             | 21,072     |   | $ | 367 |   | $ | 21,439 |   |

 
| ** **                           | ** ** | **For the Nine Months Ended May 31, 2005** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(Dollars In Thousands)**                                          | ** ** |
| ** **                           | ** ** | **Sugar**                                                                     | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from  External Customers |       | $                                                                             | 706,826    |   | $ | 19,691 |   | $ | 726,517 |   |
| Gross Proceeds                       |       | $                                                                             | 584,811    |   | $ | 10,680 |   | $ | 595,491 |   |
| Depreciation and  Amortization       |       | $                                                                             | 41,939     |   | $ | 8,302 |   | $ | 50,241 |   |
| Interest Income                      |       | $                                                                             | 229        |   | $ | 11 |   | $ | 240 |   |
| Interest Expense                     |       | $                                                                             | 10,046     |   | $ | 3,854 |   | $ | 13,900 |   |
| Income from  Equity Method Investees |       | $                                                                             | 829        |   | $ | — |   | $ | 829 |   |
| Other Income/(Expense),  Net         |       | $                                                                             | (1,081     | ) | $ | (11 | ) | $ | (1,092 | ) |
| Net Proceeds                         |       | $                                                                             | 376,833    |   | $ | 3,439 |   | $ | 380,272 |   |
|                                 |       |                                                                          |       |   |   |   |   |
| Capital  Expenditures                |       | $                                                                             | 20,731     |   | $ | 1,153 |   | $ | 21,884 |   |

 

8

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| ** **                          | ** ** | **For the Three Months Ended May 31, 2006** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **(Dollars In Thousands)**                  | ** ** |
| ** **                          | ** ** | **Sugar**                                   | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from External Customers |       | $                                           | 252,052    |   | $ | 6,213 |   | $ | 258,265 |   |
| Gross Proceeds                      |       | $                                           | 171,503    |   | $ | 3,197 |   | $ | 174,700 |   |
| Depreciation and Amortization       |       | $                                           | 12,990     |   | $ | 2,779 |   | $ | 15,769 |   |
| Interest Income                     |       | $                                           | 70         |   | $ | 12 |   | $ | 82 |   |
| Interest Expense                    |       | $                                           | 3,886      |   | $ | 527 |   | $ | 4,413 |   |
| Income from Equity Method Investees |       | $                                           | 286        |   | $ | — |   | $ | 286 |   |
| Other Income/(Expense), Net         |       | $                                           | 2,536      |   | $ | 1 |   | $ | 2,537 |   |
| Net Proceeds                        |       | $                                           | 133,233    |   | $ | 1,356 |   | $ | 134,589 |   |
|                                |       |                                        |       |   |   |   |   |
| Capital Expenditures                |       | $                                           | 8,546      |   | $ | 33 |   | $ | 8,579 |   |

 
| ** **                          | ** ** | **For the Three Months Ended May 31, 2005** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **(Dollars In Thousands)**                  | ** ** |
| ** **                          | ** ** | **Sugar**                                   | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from External Customers |       | $                                           | 260,993    |   | $ | 6,677 |   | $ | 267,670 |   |
| Gross Proceeds                      |       | $                                           | 191,625    |   | $ | 3,670 |   | $ | 195,295 |   |
| Depreciation and Amortization       |       | $                                           | 12,611     |   | $ | 2,770 |   | $ | 15,381 |   |
| Interest Income                     |       | $                                           | 74         |   | $ | 5 |   | $ | 79 |   |
| Interest Expense                    |       | $                                           | 3,521      |   | $ | 859 |   | $ | 4,380 |   |
| Income from Equity Method Investees |       | $                                           | 267        |   | $ | — |   | $ | 267 |   |
| Other Income/(Expense), Net         |       | $                                           | (189       | ) | $ | (11 | ) | $ | (200 | ) |
| Net Proceeds                        |       | $                                           | 129,736    |   | $ | 1,415 |   | $ | 131,151 |   |
|                                |       |                                        |       |   |   |   |   |
| Capital Expenditures                |       | $                                           | 8,451      |   | $ | 498 |   | $ | 8,949 |   |

 
| ** **                  | ** ** | **As of  May 31, 2006**     | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **(Dollars  In Thousands)** | ** ** |
| ** **                  | ** ** | **Sugar**                   | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Property and Equipment, Net |       | $                           | 309,559    |   | $ | — |   | $ | 309,559 |   |
| Assets Held for Lease, Net  |       | $                           | —     |   | $ | 142,920 |   | $ | 142,920 |   |
| Segment Assets              |       | $                           | 808,051    |   | $ | 152,103 |   | $ | 960,154 |   |

 
| ** **                  | ** ** | **As of  May 31, 2005**     | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **(Dollars  In Thousands)** | ** ** |
| ** **                  | ** ** | **Sugar**                   | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Property and Equipment, Net |       | $                           | 309,759    |   | $ | 1 |   | $ | 309,760 |   |
| Assets Held for Lease, Net  |       | $                           | —     |   | $ | 153,483 |   | $ | 153,483 |   |
| Segment Assets              |       | $                           | 784,504    |   | $ | 165,185 |   | $ | 949,689 |   |

 

**Note 11:Environmental Matters:**

 

The East Grand Forks, Minnesota factory has recentlyexperienced hydrogen sulfide emissions from its water treatment ponds that haveexceeded permissible limits.  The Companyis working with the Minnesota Pollution Control Agency and is aggressivelyaddressing the situation.  While theCompany may be assessed penalties and/or fines related to this occurrence, asof the date of this report none have been assessed.  Any potential penalties and/or fines are notexpected to be material to the Company. Capital expenditures may be required to prevent future occurrences ofthe emissions.  The amount and timing ofthese potential capital expenditures is not currently known.

 

9

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**Note 12:Legal Matters:**

 

As of the date of this report, four administrativeproceedings have been brought against the United States Department ofAgriculture (USDA) seeking reversal of prior decisions regarding thedetermination and transfer of sugar marketing allocations made by theUSDA.  While the Company is not a party toany of these administrative proceedings, it is, solely or in coordination withother sugar processors, an intervenor in these administrative proceedings.  As of the date of this report, each of theproceedings has completed the administrative process and the decisions by thechief judicial officer of the USDA in each were such that the Company would notexperience a reduction in its marketing allocations.  Any decision made by the chief judicialofficer of the USDA can be further appealed in federal court.  An appeal of one of the decisions wassubsequently filed by another sugar company. If the decision by the chief judicial officer of the USDA in this caseis overturned, it would result in the Company experiencing a reduction inmarketing allocations equal to the loss of approximately 25,000 acres in futurecrop years assuming no other related factors were to change.

 

**Item 2.  Management’s Discussion and Analysis of Results of Operations andFinancial Condition for the Nine Months and Three Months Ended May 31,2006 and 2005**

** **

Thisreport contains forward-looking statements that involve risks anduncertainties.  Such forward-lookingstatements include, among others, those statements including the words “expect”,“anticipate”, “believe”, “may” and similar expressions.  The Company’s actual results could differmaterially from those indicated. Important factors that could cause or contribute to such differencesinclude, without limitation, market factors, weather and general economicconditions, farm and trade policy, available quantity and quality ofsugarbeets.  For a more completediscussion of “Important Factors”, please refer to the Company’s 2005 Form 10-K.

 

**Overview**

 

The harvest of the sugarbeet crop grown during 2005and processed during fiscal 2006 produced a total of 9.6 million tons ofsugarbeets, or approximately 19.0 tons of sugarbeets per acre fromapproximately 507,000 acres.  Thisrepresents a decrease in total tons harvested of approximately 5.8 percentcompared to the 2004 crop.  The sugarcontent of the 2005 crop is 18.2 percent as compared to the 17.8 percent sugarcontent of the 2004 crop.  The Companyexpects to produce a total of approximately 29.8 million hundredweight ofsugar from the 2005 crop, a decrease of approximately 2.4 percent compared tothe 2004 crop. While the Company expects lower production volumes of itsproducts this fiscal year as compared to the previous fiscal year, the averageselling prices for these products are anticipated to increase due to supply anddemand factors.  Net Proceeds from Memberand Non-Member Business for fiscal 2006 are expected to be approximately 8percent higher than in fiscal 2005.  Thisincrease is primarily the result of the anticipated increase in average sellingprices being partially offset by lower production volumes, higher processingcosts and selling expenses.

 

**Comparison of the Nine Months Ended May 31, 2006 and 2005**

 

Revenue for the nine months ended May 31, 2006,was $707.6 million, a decrease of $18.9 million from the same period lastyear.  The table below reflects the percentagechanges in product revenues, prices and volumes for the nine months ended May 31,2006, as compared to the same period last year.

 
| **Product** | ** ** | **Revenue** | ** ** | **Selling Price** | ** ** | **Volume** | ** ** |
|-------------|------------|-------------|------------|-------------------|------------|------------|------------|
| Sugar       |       | -3.0        | %          | 8.4               | %          | -10.5      | %          |
| Pulp        |       | 9.0         | %          | 5.2               | %          | 3.6        | %          |
| Molasses    |       | -25.5       | %          | 20.1              | %          | -37.9      | %          |
| CSB         |       | -2.1        | %          | 16.6              | %          | -16.0      | %          |
| Betaine     |       | 6.9         | %          | 22.5              | %          | -12.8      | %          |

 

10

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Rentalrevenue on the ProGold operating lease was $18.9 million and $19.7 million forthe nine months ended May 31, 2006 and 2005, respectively.

 

Cost of sales for the nine months ended May 31,2006, exclusive of payments to members for sugarbeets, decreased $48.2 millionas compared to the same period last year. The change in the net realizable value of product inventories impactedthe cost of sales favorably by $52.7 million. The costs associated with sugar purchased to meet customer needsdecreased by $10.8 million due to an earlier campaign start-up this year.  The cost recognized associated with thenon-member sugarbeets increased $2.8 million or 7.9 percent for the nine monthsended May 31, 2006, when compared to the same period last year.  This increase was primarily due to a higherestimated grower payment resulting from an increase in the projected sugar netselling price.  Direct processing costsfor sugar and pulp increased 8.7 percent. The increase in direct processing costs was due to higher prices relatedto energy products and major supplies partially offset by a 5.0 percentdecrease in tons processed.  Fixed andcommitted expenses increased 2.7 percent reflecting general cost increases.

 

Selling, general and administrative expensesincreased $.4 million for the nine months ended May 31, 2006, as comparedto the same period last year.  Sellingexpenses decreased $.1 million due to less sugar sold partially offset by anincrease in freight, warehousing and packaging costs.  General and Administrative expenses increased$.5 million due to general cost increases.

 

Interest expense remained relatively the same forthe nine months ended May 31, 2006 and 2005. This reflects decreasedaverage borrowing levels for long-term debt, partially offset by higher averageborrowing levels and interest rates for short-term debt.

 

Non-member business activities resulted in a gain of$1.5 million for the nine months ended May 31, 2006, as compared to a gainof $3.2 million for the same period last year. The gain in both years was due primarily to activities related to SidneySugars.

 

**Comparison of the Three Months Ended May 31, 2006 and 2005**

 

Revenue for the three months ended May 31,2006, was $258.3 million, a decrease of $9.4 million from the same period lastyear.  The table below reflects thepercentage changes in product revenues, prices and volumes for the three monthsended May 31, 2006, as compared to the same period last year.

 
| **Product** | ** ** | **Revenue** | ** ** | **Selling Price** | ** ** | **Volume** | ** ** |
|-------------|------------|-------------|------------|-------------------|------------|------------|------------|
| Sugar       |       | -3.5        | %          | 15.8              | %          | -16.7      | %          |
| Pulp        |       | 1.8         | %          | 4.8               | %          | -2.9       | %          |
| Molasses    |       | -21.8       | %          | 22.6              | %          | -36.3      | %          |
| CSB         |       | 14.2        | %          | 22.4              | %          | -6.7       | %          |
| Betaine     |       | -5.4        | %          | 26.7              | %          | -25.3      | %          |

 

Rentalrevenue on the ProGold operating lease was $6.2 million and $6.7 million forthe three months ended May 31, 2006 and 2005, respectively.

 

Cost of sales for the three months ended May 31,2006, exclusive of payments to members for sugarbeets, increased $11.2 millionas compared to the same period last year. The change in the net realizable value of product inventories impactedthe cost of sales unfavorably by $17.5 million. The cost recognized associated with the non-member sugarbeets increased$.7 million for the three months ended May 31, 2006, when compared to thesame period last year.  This increase wasprimarily due to a higher estimated grower payment resulting from an increasein the projected sugar net selling price this year.  Direct processing costs for sugar and pulpdecreased 15.6 percent.  This decrease indirect processing costs was due to processing 30.2 percent less tons partiallyoffset by higher prices related to energy products and major supplies.  Fixed and committed expenses increased 1.0percent reflecting general cost increases.

 

11

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Selling, general and administrative expensesdecreased $2.9 million for the three months ended May 31, 2006, ascompared to the same period last year. Selling expenses decreased $ 3.7 million primarily due to 16.7 percentless sugar sold partially offset by an increase in freight, warehousing andpackaging costs.  General andAdministrative expenses increased $.8 million due to general cost increases.

 

Interest expense remained relatively level for thethree months ended May 31, 2006, as compared to the same period last year.This reflects a higher average borrowing level for short-term debt and highershort-term interest rates partially offset by decreased average borrowinglevels for long-term debt.

 

Non-member business activities resulted in a gain of$.7 million for the three months ended May 31, 2006, as compared to a gainof $1.9 million for the same period last year. The gain in both years was due primarily to activities related to SidneySugars.

 

**The Dominican Republic - Central American Free Trade Agreement**

 

The Dominican Republic - Central American Free TradeAgreement (DR-CAFTA) was signed into law on August 2, 2005, and isanticipated to be implemented later in 2006. As a result, the Company expectsan increase in the amount of sugar that will be imported into the UnitedStates. The impact of this trade agreement on the Company can not be fullyassessed at this time. It is possible, however, that the trade agreement couldhave a material adverse effect on the Company through a reduction in acreagethat can be planted by the Company’s shareholders and by the growers for SidneySugars, and/or a reduction in sugar selling prices, and a correspondingreduction in the beet payment to the shareholders and the Company’s earnings.The magnitude of the impact can not be determined at this time.

 

**Regional and Bilateral Free Trade Agreements**

 

The United States government is pursuing anaggressive agenda on international trade. It is seeking to negotiate new freetrade agreements with a number of countries and regions that are majorproducers of sugar. The Company believes these agreements, if they reachfruition, could negatively impact the Company’s profitability. The primaryagreements under consideration, to the Company’s knowledge, are the Free TradeArea of the Americas; the Andean Free Trade Agreement; the Thailand Free TradeAgreement; the U.S.-Panama Free Trade Agreement; and the Association ofSoutheastern Nations Free Trade Agreement. Many of the countries included inthese agreements are major sugar producers and exporters. If increases inguaranteed access or reductions in sugar tariffs are included in theseagreements, excess sugar from these regions could enter the U.S. market and putpressure on domestic sugar prices.

 

Portions of these agreements have beencompleted.  Within the Andean Free TradeAgreement, the U.S.-Peru Free Trade Agreement was signed on April 12,2006.  The U.S.-Columbia Free TradeAgreement is also nearing completion. The Company expects that these two trade agreements will be broughtbefore Congress for a vote in 2007.

 

The Doha Round negotiations of the World TradeOrganization are also underway. Negotiations are expected to reach a critical stage in the summer of2006 and, if progress is made, the Doha Round could be completed by the end of2006.

 

The U.S. sugar industry and the Company, as aninfluential member of such industry, recognize the potential negative impactthat would result if these agreements are entered into by the United States andare taking steps to attempt to manage the situation. The Company and the sugarindustry intend to continue to focus significant attention on trade issues inthe future.

 

The impact of the various trade agreements on theCompany can not be assessed at this time due to the uncertainty concerning theterms of the agreements and whether they will ultimately be implemented. It ispossible, however, that the passage of various trade agreements could have amaterial adverse effect on the Company through a reduction in acreage that canbe planted by the Company’s shareholders and by the growers for Sidney Sugars,and/or a reduction in sugar selling prices, and a 

 

12

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corresponding reduction in the beet paymentto the shareholders and the Company earnings. The magnitude of the impact cannot be determined at this time.

 

**Energy Prices**

 

The prices paid by the Company for energy relatedproducts, such as natural gas, coal and coke, have increased significantly dueto supply and demand imbalances.  TheCompany uses substantial amounts of these products in its manufacturingprocess.  The Company believes that theprices for energy related products including natural gas, coal and coke willremain high although moderate declines in some prices are anticipated forfiscal 2007.  The Company expects thatthe prices for these products will increase approximately 40 percent in fiscal2006 over that of fiscal 2005.  For fiscal2007, the Company expects these energy prices to decrease approximately 9percent from fiscal 2006.  The Companyalso expects that higher fuel prices will increase the costs of many goods andservices it acquires.  These higherprices may materially increase the cost of production, thus impacting thefinancial results of the Company.

 

**Environmental**

 

The East Grand Forks, Minnesota factory has recentlyexperienced hydrogen sulfide emissions from its water treatment ponds that haveexceeded permissible limits.  The Companyis working with the Minnesota Pollution Control Agency and is aggressivelyaddressing the situation.  While theCompany may be assessed penalties and/or fines related to this occurrence, asof the date of this report none have been assessed.  Any potential penalties and/or fines are notexpected to be material to the Company. Capital expenditures may be required to prevent future occurrences ofthe emissions.  The amount and timing ofthese potential capital expenditures is not currently known.

 

**Liquidityand Capital Resources**

 

Under the Company’s Bylaws and Member GrowerContracts, payments for member-delivered sugarbeets, the principal raw materialused in producing the sugar and agri-products it sells, are subordinated to allmember business expenses.  In addition,the beet payments made to member growers and non-member growers are paid inthree payments over the course of a year, and the member payments are made netof any anticipated unit retain for the crop. These procedures have the effect of providing the Company with anadditional source of short-term financing. This member financing arrangement may result in an additional source ofliquidity and reduced need for outside financing in comparison to a similarbusiness operated on a non-cooperative basis.

 

Because sugar is sold throughout the year (whilesugarbeets are processed primarily in the fall, winter and spring) and becausesubstantial amounts of equipment are required for its operations, the Companyhas utilized substantial outside financing on both a seasonal and long-termbasis to fund its operations.  Themajority of such financing has been provided by a consortium of lenders led byCoBank, ACB.

 

The Company has long-term debt availability withCoBank, ACB of****$217.4 million, of which$101.0 million in loans and $51.8 million in long-term letters of credit wereoutstanding as of May 31, 2006.  Theunused long-term line of credit as of May 31, 2006, was $64.6million.  In addition, the Company haslong-term debt outstanding, as of May 31, 2006, of $50 million from aprivate placement of Senior Notes that occurred in September of 1998;$10.7 million from a private placement of Senior Notes that occurred in January of2003; $42.6 million from nine separate issuances of Pollution Control andIndustrial Development Revenue Bonds; and a term loan with Bank of North Dakotaof $2.4 million.

 

The Company also has a seasonal line of credit witha consortium of lenders led by CoBank, ACB of $280 million, against whichthere was $50.0 million outstanding as of May 31, 2006 and a line ofcredit with Wells Fargo Bank for $1 million, against which there was nooutstanding balance as of May 31, 2006. The Company’s commercial paper program provides short-term borrowings ofup to $225 million of which approximately $108.8 million was outstanding as of May 31,2006.  The Company had $6.0 million ofshort-term letters of credit outstanding as of May 31, 2006.  The unused short-term line of 

 

13

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credit as of May 31, 2006, was $116.2million.  Any borrowings under thecommercial paper program along with outstanding short-term letters of creditwill act to reduce the available credit under the CoBank, ACB seasonal line ofcredit by a commensurate amount.

 

The Company had outstanding purchase commitmentstotaling $23.5 million as of May 31, 2006, for equipment and constructioncontracts related to various capital and maintenance projects.

 

The changes that have occurred in the Company’sfinancial statements from August 31, 2005, to May 31, 2006, wereprimarily due to normal business seasonality. The first nine months of the Company’s fiscal year includes: thecompletion of the sugarbeet harvest and the processing campaign; the finalpayments to growers for sugarbeets delivered from the previous year’s crop; andthe initial payments to growers for sugarbeets delivered from the current year’scrop.

 

The Company controls 50 percent of Crystech, LLC, aspecial purpose entity that operates a molasses desugarization facility at theCompany’s Hillsboro, North Dakota sugar factory.  The Company accounts for its investment usingthe equity method.  As of May 31,2006, Crystech had outstanding debt of $12.3 million.

 

The net cash used by operations was $58.3 millionfor the nine months ended May 31, 2006, as compared to $70.2 million forthe same period last year.  This decreaseof $11.9 million was primarily due to changes in the amounts due growers of$70.7 million, advances to/due related parties of $11.3 million and prepaidpension expense of $14.1 million partially offset by changes in inventories of$56.1 million and receivables of $28.6 million. The change in the amounts due growers is primarily the result of a 7.5percent projected increase in grower payments this year as compared to lastyear.  The change in inventories was dueprimarily to an increase in the net realizable value of sugar as of May 31,2006, as compared to that of May 31, 2005.

 

The net cash used in investing activities was $17.6million for the nine months ended May 31, 2006, as compared to $20.5million for same period last year.  Thedecrease of $2.9 million was primarily related to increased equity refunds fromCoBank, ACB this year.

 

The net cash provided by financing activities was$75.7 million for the nine months ended May 31, 2006, as compared to $91.1million for the same period last year. This decrease of $15.4 million was primarily due to the revolvement thisyear of the 1998 crop unit retains of $2.00 per ton versus the revolvement lastyear of the 1997 crop unit retains of $1.00 per ton.

 

The Company anticipates that the funds necessary forworking capital requirements and future capital expenditures will be derivedfrom operations, short-term borrowings, depreciation, unit retains andlong-term borrowings.

 

**Item 3.  Quantitative andQualitative Disclosures about Market Risk**

 

Market risk is the risk of loss to future earnings,to fair values or to future cash flows that may result from changes in theprice of a financial instrument.  Thevalue of a financial instrument may change as a result of changes in theinterest rates, exchange rates, commodity prices, equity prices and othermarket changes.  Market risk isattributed to all market-risk sensitive financial instruments, including longterm 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.

 

14

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**Item4.  Controls and Procedures**

 

The Company’s chief executive officer and chieffinancial officer have reviewed and evaluated the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rules 240.13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934) as of May 31,2006.  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 effective in ensuring that information relating to the Companyrequired to be disclosed in the reports the Company files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the Security and Exchange Commission’s rules andforms, including ensuring that such information is accumulated and communicatedto the Company’s management, including the chief executive officer and thechief financial officer, as appropriate to allow timely decisions regardingrequired disclosure.  There were nochanges in the Company’s internal controls over financial reporting thatoccurred during the Company’s most recent fiscal quarter that may havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

## **PART II. OTHERINFORMATION**

 

#### **Item 1.  Legal Proceedings**

#### ** **

From time to time and in the ordinary course of itsbusiness, the Company is named as a defendant in legal proceedings related tovarious issues, including worker’s compensation claims, tort claims andcontractual disputes.  The Company iscurrently involved in certain legal proceedings, which have arisen in theordinary course of the Company’s business. The Company is also aware of certain other potential claims, which couldresult in the commencement of legal proceedings.  The Company carries insurance, which providesprotection against certain types of claims. With respect to current litigation and potential claims of which theCompany is aware, the Company’s management believes that (i) the Companyhas insurance protection to cover all or a portion of any judgments which maybe rendered against the Company with respect to certain claims or actions and (ii) anyjudgments which may be entered against the Company and which may exceed suchinsurance coverage or which may arise in actions involving potentialliabilities not covered by insurance policies are not likely to have a materialadverse effect upon the Company, or its assets or operations.

 

As of the date of this report, four administrativeproceedings have been brought against the United States Department ofAgriculture (USDA) seeking reversal of prior decisions regarding thedetermination and transfer of sugar marketing allocations made by theUSDA.  While the Company is not a partyto any of these administrative proceedings, it is, solely or in coordinationwith other sugar processors, an intervenor in these administrativeproceedings.  As of the date of thisreport, each of the proceedings has completed the administrative process andthe decisions by the chief judicial officer of the USDA in each were such thatthe Company would not experience a reduction in its marketing allocations.  Any decision made by the chief judicialofficer of the USDA can be further appealed in federal court.  An appeal of one of the decisions wassubsequently filed by another sugar company. If the decision by the chief judicial officer of the USDA in this caseis overturned, it could result in the Company experiencing a reduction inmarketing allocations equal to the loss of approximately 25,000 acres in futurecrop years assuming no other related factors were to change.

 

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**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

None

 

**Item3.  Defaults Upon Senior Securities**

 

None

 

**Item 4.  Submission of Matters toa Vote of Security Holders**

 

None

 

**Item 5.  Other Information.**

 

None.

 

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### **Item 6. Exhibits**

 
| **Item No.** | ** ** | ** **                                                                                                          | ** ** | **Method of Filing**                                                                                                                                                                          |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                |       |                                                                                                                                                                                          |
| 3.1          |       | Restated Articles of Incorporation of American  Crystal Sugar Company.                                              |       | Incorporated by reference to  Exhibit 3(i) from the Company’s Registration Statement on  Form S-1 (File No. 33-83868), declared effective November 23,  1994.   |
| 3.2          |       | Restated By-laws of American Crystal Sugar Company.                                                                 |       | Incorporated by reference to  Exhibit 3(ii) from the Company’s Registration Statement on  Form S-1 (File No. 333-11693), declared effective November 13,  1996. |
| 4.1          |       | Restated Articles of Incorporation of American  Crystal Sugar Company.                                              |       | See Exhibit 3.1.                                                                                                                                                                         |
| 4.2          |       | Restated By-laws of American Crystal Sugar Company.                                                                 |       | See Exhibit 3.2.                                                                                                                                                                         |
| 10.1         |       | Form of Operating Agreement between Registrant  and ProGold Limited Liability Company.                         |       | Incorporated by reference to Exhibit 10(u) from  the Company’s Registration Statement on Form S-1 (File No. 33-83868),  declared effective November 23, 1994.        |
| 10.2         |       | Form of Member Control Agreement between  Registrant and ProGold Limited Liability Company.                    |       | Incorporated by reference to  Exhibit 10(v) from the Company’s Registration Statement on  Form S-1 (File No. 33-83868), declared effective November 23,  1994.  |
| 10.3         |       | 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.                                           |
| 10.4         |       | 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.                                           |
| 10.5         |       | 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.                                           |
| 10.6         |       | 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.                                           |
| +10.7        |       | 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.                                      |

 

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| 10.8    |   | 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.  |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9    |   | 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.  |
| 10.10   |   | 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.  |
| ++10.11 |   | Employment Agreement between the Registrant and  James J. Horvath.                                                            |   | Incorporated by reference to Exhibit 10.28 from  the Company’s Annual Report on Form 10-K form the year ended  August 31, 1999. |
| 10.12   |   | Stipulation Agreement between Registrant and State  of Minnesota Pollution Control Agency, dated April 4, 2000.          |   | Incorporated by reference to Exhibit 10.28 from  the Company’s Form 10-Q for the quarter ended May 31, 2000.                    |
| ++10.13 |   | 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.  |
| ++10.14 |   | 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.  |
| 10.15   |   | 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.               |
| 10.16   |   | 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.               |
| 10.17   |   | 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.               |
| 10.18   |   | 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.               |
| +10.19  |   | 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.                    |
| 10.20   |   | 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.  |

 

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| 10.21   |   | Term and Seasonal Loan Agreements between the  Registrant and CoBank, ACB dated July 21, 2003.                                       |   | Incorporated by reference to Exhibit 10.31 from  the Company’s Annual Report on Form 10-K for the year ended  August 31, 2003. |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22   |   | Crop year 2005, 2006 and 2007 Sugarbeet Delivery  Agreements between Sidney Sugars Incorporated and Growers.                              |   | Incorporated by reference to Exhibit 10.25 from  the Company’s Form 10-Q for the quarter ended May 31, 2005.                   |
| ++10.23 |   | Amendment to Employment  Agreement dated September 28, 2005 between the Company and James J.  Horvath.                               |   | Incorporated by reference to Exhibit 10.1 from  the Company’s Form 8-K dated September 30, 2005.                               |
| 10.24   |   | Supplements to Term and Seasonal Loan Agreements  between the Registrant and CoBank, ACB dated July 8, 2005 and  July 11, 2005. |   | Incorporated by reference to Exhibit 10.24 from  the Company’s Annual Report on Form 10-K for the year ended  August 31, 2005. |
| ++10.25 |   | Long Term Incentive Plan, dated August 24,  2005.                                                                                    |   | Incorporated by reference to Exhibit 10.25 from  the Company’s Annual Report on Form 10-K for the year ended  August 31, 2005. |
| 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, 2005.  |
| 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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+                 Confidentialtreatment under Rule 24b-2 of the Securities and Exchange Act of 1934, asamended, has been granted with respect to designated portions of this document.

 

++          Amanagement contract or compensatory plan required to be filed with this report.

 

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SIGNATURES

 

 

**Pursuantto the requirement of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.**

 

 
| ** ** | **AMERICAN  CRYSTAL SUGAR COMPANY** |                          |
|------------|-------------------------------------|-------------------------------|
| ** ** | **(Registrant)**                    |                          |
|       |                                |                          |
|       |                                |                          |
| **Date:**  | **July 14,  2006**             | ** **                    | ** ** | **/s/  Mark Kalvoda** |   |
| ** ** | ** **                          | **Mark  Kalvoda**             |
| ** ** | ** **                          | **Corporate  Controller,**    |
| ** ** | ** **                          | **Chief  Accounting Officer** |
| ** ** | ** **                          | **Duly Authorized Officer**   |
|            |                                     |                               |  |  |  |  |

 

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