**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ý****Annual Report Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934**

 

**For the fiscal year endedAugust 31, 2004**

 

**or**

 

**o****Transition Report Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934**

 

----

 

**Commission File**

**Nos.****33-83868; 333-11693 and 333-32251**

 

----

 

**AMERICAN CRYSTAL SUGAR COMPANY**

(Exact name ofregistrant as specified in its charter)

 
| **Minnesota**                                    | ** ** | **84-0004720**                           |
|--------------------------------------------------|------------|------------------------------------------|
| (State  of incorporation)                        |       | (I.R.S.  Employer Identification Number) |
|                                             |       |                                     |
| **101 North Third Street****Moorhead, MN 56560** | ** ** | **(218) 236-4400**                       |
| (Address of principal executive offices)         |       | (Registrant’s telephone number)     |

 

Securitiesregistered pursuant to Section 12(b) of the Act:

**NONE**

 

Securities registeredpursuant to Section 12(g) of the Act:

**NONE**

 

----

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes  ýNo o

 

----

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. ý

 

----

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in rule 12b-2 of the Act). Yes oNo ý

 

----

 

As of November 15, 2004, 2,873 shares of theRegistrant’s Common Stock and 498,570 shares of the Registrant’s PreferredStock were outstanding.  There is noestablished public market for the Registrant’s Common Stock or PreferredStock.  Although there is a limited,private market for shares of the Registrant’s stock, the Registrant does notobtain information regarding the transfer price in transactions between itsmembers and therefore is unable to estimate the aggregate market value of theRegistrant’s shares held by non-affiliates.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

# **NONE**

 

 

----

 

# **PART I**

# ** **

*This report contains forward-looking statements andinformation based upon assumptions by the American Crystal Sugar Company’smanagement, including assumptions about risks and uncertainties faced by theCompany.  These forward-lookingstatements can be identified by the use of forward-looking terminology such as “expects”,“believes”, “will” or similar verbs or expressions.  If any of management’s assumptions proveincorrect or should unanticipated circumstances arise, the Company’s actualresults could materially differ from those anticipated by such forward-lookingstatements.  The differences could becaused by a number of factors or combination of factors, including, but notlimited to, those factors influencing the Company and its business which aredescribed in this report in the “Important Factors” section below.  Readers are urged to consider these factorswhen evaluating any forward-looking statement. The Company undertakes no obligation to update any forward-lookingstatements in this report to reflect future events or developments.*

 

**Item1.**                                        BUSINESS

** **

**GENERAL**

 

The Company is a Minnesota agricultural cooperativecorporation owned by approximately 3,000 sugarbeet growers in the Minnesota andNorth Dakota portions of the Red River Valley. The Red River Valley is the largest sugarbeet growing area in the UnitedStates, forming a band approximately 35 miles wide on either side of the NorthDakota and Minnesota border and extending approximately 200 miles south fromthe border of the United States and Canada. The Company was organized in 1973 by sugarbeet growers to acquire thebusiness and assets of the American Crystal Sugar Company, then a publicly heldNew Jersey corporation in operation since 1899. The Company currently processes sugarbeets from a base level ofapproximately 500,000 acres in the Red River Valley (the Red River ValleyCrop), subject to tolerances for over-planting and under-planting establishedby the Board of Directors each year.  Byowning and operating five sugarbeet processing facilities in the Red RiverValley, the Company provides its shareholders with the ability to process theirsugarbeets into sugar and agri-products such as molasses, sugarbeet pulp andconcentrated separated by-product (CSB), a by-product of the molassesdesugarization process.

 

In October 2002, the Company, through its wholly-ownedsubsidiary, Sidney Sugars Incorporated (Sidney Sugars) acquired three sugarbeetprocessing facilities.  The Companyprocesses the sugarbeets from approximately 40,000 acres grown by non-membergrowers (the Sidney Crop) at the Sidney, Montana, facility.  The Torrington, Wyoming, facility has beenleased on a long-term basis to another sugar producer and the Hereford, Texas,facility, which was idle at the time of the acquisition, and was sold in July2004.  As part of the acquisitiontransaction by Sidney Sugars, the United States Department of Agriculture(USDA) transferred the rights to marketing allocations equal toapproximately 4.8 percent of the total allocation for the domestic sugarbeetsegment to the Company.  The Company usesa portion of these marketing allocations to market the sugar produced at theSidney, Montana, facility from the Sidney Crop. Excess allocations are used by the Company to market its sugar pursuantto an agreement between Sidney Sugars and the Company.

 

InSeptember 2003, the Company, through its wholly-owned subsidiary Crab CreekSugar Company (Crab Creek), acquired all of the assets of Pacific NorthwestSugar Company, LLC (PNSC), certain assets of Central Leasing of Washington, LLC(Central Leasing) that were associated with PNSC and the Moses Lake, Washingtonsugarbeet factory previously operated by PNSC and control of the sugarproduction assets owned by Central Leasing associated with the Moses Lake,Washington sugarbeet factory for a purchase price of approximately $6.7million.  In addition, Crab Creek entered

 

2

----

 

intovarious contracts with Central Leasing such that Crab Creek controls thelong-term production of sugar at the Moses Lake facility.  In connection with this acquisition, the USDAtransferred to the Company the sugar marketing allocations formerly allocatedto PNSC.  Neither Crab Creek nor theCompany intends to operate the Moses Lake facility.

 

The Company is also the controlling member of ProGoldLimited Liability Company, which owns a corn wet-milling plant in Wahpeton,North Dakota, that is currently being leased to Cargill, Incorporated.  The Company and Newcourt Capital USA ownCrystech, LLC which owns the molasses desugarization facility adjacent to theCompany’s processing facility in Hillsboro, North Dakota.

 

The Company’s sugar marketing agent, United SugarsCorporation, is a cooperative owned by the Company, Minn-Dak FarmersCooperative, Southern Minnesota Beet Sugar Cooperative, and United States SugarCorporation.  Effective August 31, 2004,Southern Minnesota Beet Sugar Cooperative terminated its marketing agreementwith United Sugars Corporation.  TheCompany’s agri-products are marketed through a marketing agent, MidwestAgri-Commodities Company.  MidwestAgri-Commodities Company is a cooperative owned by the Company, Minn-DakFarmers Cooperative, Southern Minnesota Beet Sugar Cooperative and MichiganSugar Company (effective September 1, 2003).

 

The Company’s corporate headquarters are located at101 North Third Street, Moorhead, Minnesota 56560, telephone number(218) 236-4400.  Its fiscal yearends August 31.  The Company’swebsite is www.crystalsugar.com.   TheCompany’s filings with the United States Securities and Exchange Commission canbe accessed by selecting “Links” on the Company’s website or electronic orpaper copies can be obtained free of charge upon request.

 

**Products and Production**

 

The Company and Sidney Sugars are engaged primarily inthe production and marketing of sugar from sugarbeets.  The Company also sells agri-products andsugarbeet seed.  The Company’s totalannual sugar and agri-product production is influenced by the amount andquality of sugarbeets grown by its members and non-members, the processingcapacity of the Company’s plants, by its ability to store harvested sugarbeetsand by government programs and regulations.

 

The Company processes the sugarbeets grown by itsmembers in its five factories located in the Red River Valley area of Minnesotaand North Dakota.  The Red River Valleygrowing area is divided into five factory districts, each containing onesugarbeet processing plant.  SidneySugars processes the sugarbeets acquired from growers (who are not members ofthe Company) in its Sidney, Montana, factory. The period during which the Company’s plants are in operation to processsugarbeets into sugar and agri-products is referred to as the “campaign.”  During the campaign, each of the Company’sfactories operates twenty-four hours per day, seven days per week.  In the Red River Valley, the campaigntypically begins in September and continues until the available supply ofsugarbeets has been depleted, which generally occurs in May of thefollowing year.  Based on currentprocessing capacity, an average campaign lasts approximately 250 days, assumingnormal crop yields.  In Sidney, Montana,the campaign also begins in September and lasts approximately 170 days.

 

Once the sugarbeets are harvested, growers transporttheir crop by truck to receiving stations designated by the Company.  The sugarbeets are then stored in factoryyards and at outlying piling stations until processed.  Most of the sugarbeets are stored outside inpiles.  Frozen sugarbeets may be storedoutside for extended periods, but sugarbeets stored in unprotected piles attemperatures above freezing must be processed within a shorter period of timethan those sugarbeets stored consistently below freezing.  In most years, the cold weather in NorthDakota, Minnesota and Montana offers an advantage to the Company as it permitsthe outdoor storage of sugarbeets in below-freezing weather conditions.

 

3

----

 

In milder climates or years, unprotected piles ofsugarbeets experience cycles of freezing and thawing and are subject to somedeterioration.  When subject to suchfreeze and thaw cycles, sugarbeets on the exterior of piles freezenaturally.  Sugarbeets near the center ofthe piles, however, may not freeze and thus may be subject to spoilage.  In order to avoid spoilage the Companyutilizes a process called “split pile storage” in which sugarbeets from thecenter of the piles are removed for processing first.  Split pile storage permits more of the storedsugarbeets to freeze naturally.  TheCompany also utilizes a ventilation technique to further reduce spoilage.  In this process, fans circulate air throughventilation channels constructed within sugarbeet piles in order to pre-cooland then deep freeze the sugarbeets.  TheCompany has the capacity to store approximately 28 percent of an average RedRiver Valley crop in ventilated storage sites. Enclosed cold storage facilities are also used to extend the sugarbeetstorage period at each of the Company’s five Red River Valley factorylocations.  Enclosed cold storage sitespresently have the capacity to cover approximately 8 percent of an average RedRiver Valley crop. Sidney Sugars also utilizes forced air and passive airsugarbeet pile ventilation techniques. Sidney Sugars has the capacity to store approximately one-third of anaverage Sidney crop in ventilated storage sites.

 

The basic process for producing sugar from sugarbeetsinvolves: washing the sugarbeets; slicing the sugarbeets into thin stripscalled “cossettes”; extracting the sugar from the cossettes in a diffuser;purifying the resulting “raw juice” and boiling it, first in an evaporator tothicken it and then in vacuum pans to crystallize the sugar; separating thesugar crystals from the molasses in a centrifuge; drying the sugar; storingsugar in bulk form and grading and screening the crystals for packaging andbulk shipping.

 

Molasses that remains after the sugar crystals areinitially separated can be further processed to remove more sugar.  The Company processes substantially all ofthe molasses produced at the Red River Valley factories to extract additionalsugar, with approximately one-half of its molasses processed through its EastGrand Forks molasses desugarization facility and the remaining one-half at theHillsboro, North Dakota, desugarization facility.

 

The sugar produced by the Company and Sidney Sugars ispooled and then marketed through the services of a marketing agent undercontract with the Company.  The sugarmarketing agent, United Sugars Corporation, is a cooperative owned by theCompany, Minn-Dak Farmers Cooperative, Southern Minnesota Beet SugarCooperative and United States Sugar Corporation.  Effective August 31, 2004, Southern MinnesotaBeet Sugar Cooperative terminated its marketing agreement with United SugarsCorporation.

 

The sugar production process results in a variety ofagri-products.  After the extraction ofraw juice from the cossettes, the remaining pulp is dried and processed intoanimal feed.  The remaining molasses andCSB from the molasses desugarization process are marketed primarily to yeastmanufacturers and for use in animal feed. Substantially all of the agri-products produced by the Company andSidney Sugars are marketed through a marketing agent, Midwest Agri-CommoditiesCompany.  Midwest Agri-CommoditiesCompany is a cooperative owned by the Company, Minn-Dak Farmers Cooperative,Southern Minnesota Beet Sugar Cooperative and effective September 1, 2003,Michigan Sugar Company.

 

The Company develops and markets sugarbeet seeds withBetaseed, Inc. (Betaseed), a Minnesota corporation that is a wholly ownedsubsidiary of KWS Kleinwanzlebener Saatzucht, AG, a German seed company.  Through the Betaseed arrangement, the Companyhas the right to market its branded seed to its own members.  Betaseed has the right to market Betaseedbranded seed to the Company’s members and also to market both the Company’sbranded seed and its Betaseed branded seed in all other markets.

 

The Company and Sidney Sugars’ processing facilitiesare dependent on certain energy related products such as natural gas andcoke.  Recently, the supply of theseenergy inputs has decreased,

 

4

----

 

resulting in significantincreases in the price of such energy inputs. The Company has entered into short-term contracts to purchase its energyinputs, but pricing of such energy inputs is high and is expected to remainhigh for the foreseeable future.  Thesecurrent and anticipated higher energy input prices have and may materiallyincrease the Company’s cost of production. Such increase may impact the financial results of the Company.

 

The Company is also the controlling member of ProGoldLimited Liability Company, which owns a corn wet-milling plant in Wahpeton,North Dakota, that is currently being leased to Cargill, Incorporated.  The Company and Newcourt Capital USA ownCrystech, LLC, which owns the molasses desugarization facility adjacent to theCompany’s processing facility in Hillsboro, North Dakota.

 

**Operating Segments**

 

TheCompany has identified two reportable operating segments: Sugar andLeasing.  The sugar segment is engagedprimarily in the 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.  For financialinformation by segment see Note 14 of “Notes to the Consolidated FinancialStatements.”

 

**Recent Crops**

 

The Red River Valley sugarbeet crop, grown by the Company’smembers during 2003 and processed during fiscal 2004, produced a total ofapproximately 20.2 tons of sugarbeets per acre from approximately 496,000acres.  This production was greater thanthe ten-year average of 19.1 tons per acre for the crops grown in the years1993 through 2002.  The sugar content ofthe 2003 crop was 18.52 percent, in comparison to a ten-year average for theapplicable period of 17.35 percent.  TheCompany produced a total of approximately 31.0 million hundredweight of sugarfrom the crop.  In addition, SidneySugars produced approximately 2.8 million hundredweight of sugar from the 2003Sidney Crop.

 

The Red River Valley sugarbeet crop, grown by theCompany’s members during 2002 and processed during fiscal 2003, produced atotal of approximately 17.5 tons of sugarbeets per acre from approximately501,000 acres.  This production was lessthan the ten-year average of 19.1 tons per acre for the crops grown in theyears 1992 through 2001.  The sugarcontent of the 2002 crop was 16.97 percent, in comparison to a ten-year averagefor the applicable period of 17.46 percent. The Company produced a total of approximately 24.5 million hundredweightof sugar from the crop.  In addition,Sidney Sugars produced approximately 2.2 million hundredweight of sugar fromthe 2002 Sidney Crop.

 

For a discussion of the 2003 and 2002 crops andresults of operations for fiscal years 2004 and 2003, see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”.

 

**Market and Competition**

 

Current United States government statistics estimatetotal United States sugar consumption at approximately 185 millionhundredweight for the year beginning October 1, 2004 and endingSeptember 30, 2005.  For the sameperiod starting October 2003, total consumption was approximately 184million hundredweight.  Comparing the twoyears shows a slight increase in demand of less than one percent.

 

The United States refined sugar market has grown overthe past twenty years, despite the demand lost to the substitution of highfructose corn syrups for sugar in beverages and certain food products.  Non-nutritive sweeteners such as aspartamehave also been developed to substitute for sugar.  Corn

 

5

----

 

sweeteners and non-nutritivesweeteners constitute a large portion of the overall sweetener market.  Recently, however, the United States refinedsugar market has flattened and the Company believes that the United Statesmarket for sugar will reflect minimal increases or be relatively flat in thenear future.

 

The United States sugar industry has been subject toindustry consolidation.  Today there areless than 10 sugar sellers,****withapproximately 75 percent of United States sugar market share concentrated inthe top three sellers, all of which are fully integrated sugarbeet and canesuppliers.  The Company’s sugarproduction and sales (including Sidney Sugars) represent approximately 18percent of the total domestic market for refined sugar in 2003/2004.  The Company had the right to market, or tohave marketed on its behalf, approximately 32 million hundredweight of sugarfrom the 2003 crop.  Sugar sales byUnited Sugars Corporation, the Company’s marketing agent, representapproximately 31 percent of the United States sugar market.

 

United Sugars Corporation’s main competitors in thedomestic market are Imperial Sugar Corporation, Amalgamated Sugar Company,California & Hawaiian Sugar Company, The American Sugar RefiningCompany and Western Sugar Cooperative.  Becausesugar is a fungible commodity, competition in the United States industry isprimarily based upon price, customer service and reliability as asupplier.  United Sugars Corporation iscurrently the largest marketer of sugar in the United States.

 

## **Grower Contracts with Members**

 

The Company purchases all of its Red River Valleysugarbeets from members under contract with the Company.  All members have five-year contracts with theCompany covering the growing seasons of 2003 through 2007.  These five-year contracts automatically renewfor additional five-year terms unless terminated by one of the parties at theend of the current term.  In addition,each member has an annual contract with the Company specifying the number ofacres the member is obligated to grow during that year.  Each share of Preferred Stock held by amember requires that member to grow one acre of sugarbeets for sale to theCompany.  The Company’s Board ofDirectors has the discretion to adjust the acreage that may be planted for eachshare of Preferred Stock held by the members. For the 2005 crop year, the Board of Directors intends to maintain therelationship between shares of Preferred Stock and acres of sugarbeetproduction at a ratio as close to 1 to 1 as possible, subject to tolerances forover-planting and under-planting established by the Board each year andreductions or increases caused by the Company’s marketing allocationsestablished by the USDA.  The Board of Directors and managementcontinue to review and determine the relationship between the ownership ofPreferred Stock and acreage planting.

 

The gross beet payment is the value of recovered sugarfrom the sugarbeets a member delivers plus the member’s share of agri-productrevenues, minus the member’s share of member business operating costs.  The following allowances, costs anddeductions, if applicable, are used to adjust the gross beet payment to arriveat the net beet payment: hauling program allowance and costs, pre-pile qualitypremium and costs, tare incentive premium/penalty program, late harvest programcosts and unit retains.  Members are paida hauling allowance based on the distance they must transport sugarbeets fordelivery to the Company and may also receive an allowance for early delivery ofsugarbeets prior to the commencement of the stockpiling of harvestedsugarbeets.  The costs of these programsare shared among members on the basis of the net tonnage of sugarbeetsdelivered by each member.

 

Under current contracts, payments to members forsugarbeets must be made in at least three installments: (i) on or aboutNovember 15, the Company pays its members an amount equal to 65 percent ofthe Company’s estimate of the member’s net beet payment; (ii) on or aboutMarch 31, the Company pays an amount, which combined with theNovember payment, equals 90 percent of the member’s estimated net beetpayment; (iii) and not more than 15 days after completion and acceptanceof the audit of the Company’s annual financial statements, the Company pays theremainder of the member’s net beet payment. Except for unit retains, the Company must pay to its members for their

 

6

----

 

sugarbeets all proceeds fromthe sale of the members’ sugar and agri-products in excess of related memberbusiness operating costs, as described above.

 

The following tables summarize the gross beet paymentand net beet payment and certain crop statistics for each of the last 10completed fiscal years, respectively, for the Red River Valley Crop:

 
| ** **                         | ** ** | **2004**                                               | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** | **2000**   | ** ** | **1999**   | ** ** | **1998**   | ** ** | **1997**   | ** ** | **1996**   | ** ** | **1995**   | ** ** |
|------------------------------------|------------|--------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Distribution of Net Proceeds Totals (In Thousands)** | ** ** |
|                               |       |                                                   |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Net Proceeds                       |       | $                                                      | 473,122    |       | $          | 361,902    |       | $          | 398,588    |       | $          | 389,039    |       | $          | 358,373    |       | $          | 369,681    |       | $          | 313,007    |   | $ | 373,649 |   | $ | 316,244 |   | $ | 326,693 |   |
| PIK Payment                        |       | —                                                 |       | —     |       | (23,497    | )          | (28,067    | )          | —     |       | —     |       | —     |       | —     |       | —     |       | —     |       |
| Non-Member (Income) Loss           |       | (4,240                                                 | )          | (5,799     | )          | 733        |       | 1,884      |       | 1,879      |       | 494        |       | 9,679      |       | 18,074     |       | 396        |       | 15         |       |
| Gross Beet Payment                 |       | 468,882                                                |       | 356,103    |       | 375,824    |       | 362,856    |       | 360,252    |       | 370,175    |       | 322,686    |       | 391,723    |       | 316,640    |       | 326,708    |       |
| Unit Retains                       |       | (29,991                                                | )          | (17,486    | )          | (24,154    | )          | (19,239    | )          | (19,299    | )          | (21,332    | )          | (8,545     | )          | (16,611    | )          | (16,040    | )          | (16,648    | )          |
| Member Tax ADJ, Net                |       | —                                                 |       | —     |       | —     |       | —     |       | —     |       | —     |       | —     |       | —     |       | —     |       | 5,621      |       |
| Net Beet Payment                   |       | $                                                      | 438,891    |       | $          | 338,617    |       | $          | 351,670    |       | $          | 343,617    |       | $          | 340,953    |       | $          | 348,843    |       | $          | 314,141    |   | $ | 375,112 |   | $ | 300,600 |   | $ | 315,681 |   |
|                               |       |                                                   |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| ** **                         | ** ** | **Distribution of Net Proceeds Per Ton Harvested (1)** | ** ** |
|                               |       |                                                   |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Net Proceeds                       |       | $                                                      | 47.29      |       | $          | 41.36      |       | $          | 49.47      |       | $          | 40.42      |       | $          | 37.11      |       | $          | 34.62      |       | $          | 36.60      |   | $ | 44.95 |   | $ | 39.39 |   | $ | 39.21 |   |
| PIK Payment                        |       | —                                                 |       | —     |       | (2.92      | )          | (2.92      | )          | —     |       | —     |       | —     |       | —     |       | —     |       | —     |       |
| Non-Member (Income) Loss           |       | (.43                                                   | )          | (.66       | )          | .09        |       | .20        |       | .20        |       | .05        |       | 1.13       |       | 2.17       |       | 0.05       |       | 0.00       |       |
| Gross Beet Payment                 |       | 46.86                                                  |       | 40.70      |       | 46.64      |       | 37.70      |       | 37.31      |       | 34.67      |       | 37.73      |       | 47.12      |       | 39.44      |       | 39.21      |       |
| Unit Retains                       |       | (3.00                                                  | )          | (2.00      | )          | (3.00      | )          | (2.00      | )          | (2.00      | )          | (2.00      | )          | (1.00      | )          | (2.00      | )          | (2.00      | )          | (2.00      | )          |
| Member Tax ADJ, Net                |       | —                                                 |       | —     |       | —     |       | —     |       | —     |       | —     |       | —     |       | —     |       | —     |       | 0.68       |       |
| Net Beet Payment                   |       | $                                                      | 43.86      |       | $          | 38.70      |       | $          | 43.64      |       | $          | 35.70      |       | $          | 35.31      |       | $          | 32.67      |       | $          | 36.73      |   | $ | 45.12 |   | $ | 37.44 |   | $ | 37.89 |   |
| ** **                         | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                               |       | **Red River Valley Crop Statistics (1)**               |       |
|                               |       | ** **                                             |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Tons Harvested (In Thousands):     |       | 10,006                                                 |       | 8,749      |       | 8,058      |       | 9,626      |       | 9,657      |       | 10,679     |       | 8,553      |       | 8,313      |       | 8,029      |       | 8,332      |       |
| Tons Purchased Per Acre Harvested: |       | 20.2                                                   |       | 17.5       |       | 17.8       |       | 21.8       |       | 19.9       |       | 22.2       |       | 18.5       |       | 18.1       |       | 18.7       |       | 20.2       |       |
| Sugar Content of Beets:            |       | 18.5                                                   | %          | 17.0       | %          | 18.0       | %          | 17.8       | %          | 17.4       | %          | 17.7       | %          | 17.6       | %          | 17.3       | %          | 16.4       | %          | 16.8       | %          |

 

----

(1)                   Informationprovided with respect to net proceeds, gross beet payment, net beet payment,tons harvested per acre and sugar content of sugarbeets represents an averageof the financial and production results experienced by the members.  As described elsewhere in this report, thereturn to members for their sugarbeets is based upon the value of the recoveredsugar from the sugarbeets delivered to the Company by each member.  As a result of variations in the sugarcontent of the sugarbeets delivered by the various members to the Company, thepayments received by the various members also vary.

 

## **Grower Contracts between Sidney Sugars Incorporatedand Non-Members**

## ** **

## **All of the sugarbeets processed at the Sidney, Montana,factory are purchased from non-member growers under contract with SidneySugars.  Each non-member grower has atwo-year contract with an annual supplement with Sidney Sugars specifying thenumber of acres the non-member grower is obligated to grow during eachyear.  The current contract expires afterthe 2004 crop, after which Sidney Sugars intends to negotiate a new contract.**

## ** **

## **The price per ton of sugarbeets paid to the growers whodeliver to Sidney Sugars (the Scale Payment) is determined according to thesugarbeet payment scale contained in the grower contract and is calculatedbased on Sidney Sugars’ average net return for sugar from that year’s crop andthe adjusted average sugar content of each grower’s sugarbeets.**

## ** **

## **Under current grower contracts between Sidney Sugars andits growers, payments to these growers for sugarbeets must be made in threeinstallments following delivery of the crop: (i) in**

 

7

----

 

November, Sidney Sugars paysthe growers an amount equal to 65 percent of the estimated Scale Payment forthat year’s crop; (ii) in April, Sidney Sugars pays an amount, whichcombined with the November payment, equals 90 percent of the estimatedScale Payment for that year’s crop; (iii) and in October, Sidney Sugarspays the remainder of the actual Scale Payment.

## ** **

## **Sales and Marketing**

## ** **

United Sugars Corporation, a common marketing agencyoperating on a cooperative basis, markets the Company and Sidney Sugars’sugar.  The Company is a party to aUniform Member Marketing Agreement with United Sugars Corporation, and marketsits and Sidney Sugars’ sugar through this agreement.  The other members of United SugarsCorporation, Minn-Dak Farmers Cooperative, Southern Minnesota Beet SugarCooperative and United States Sugar Corporation, are parties to similaragreements.  Under these agreements, allof the members market all of their refined sugar on a pooled basis throughUnited Sugars Corporation.  The Companyreceives payment for the sugar that is marketed on its behalf by receiving itspro rata share of the net proceeds from the sale of the pooled sugar.  The net proceeds of such sales represent thegross proceeds from the sale of the sugar, adjusted for the various costs andexpenses of marketing the pooled sugar, including the Company’s and SidneySugars’ pro rata share of the marketing and sales expenses incurred by UnitedSugars Corporation.  Any net proceedsfrom the operation of United Sugars Corporation are distributed to the fourmembers proportionally based on sugar sales.

 

The Uniform Member Marketing Agreements automaticallyrenew on an annual basis unless notice of termination is given by a party.  In order to terminate its agreement, a partymust provide notice of termination by May 1 of the then current year for thetermination to be effective on the August 31 of the subsequent year.  In the event one of the parties terminatesits Uniform Member Marketing Agreement, the amount of sugar that is marketed byUnited Sugars Corporation would decrease.  United Sugars Corporation would also berequired to return the exiting member’s capital over a period of five years. OnNovember 15, 2002, Southern Minnesota Beet Sugar Cooperative provided a noticeof termination. The termination was effective August 31, 2004.  The exit of Southern Minnesota Beet SugarCooperative will decrease the amount of sugar to be marketed by United SugarsCorporation by approximately five to six million hundredweight annually.

 

United Sugars Corporation sells sugar primarily to industrialusers such as confectioners, breakfast cereal manufacturers and bakeries.  For the fiscal year ended August 31,2004, 89.8 percent (by weight) of the sugar was sold to industrial users.  The remaining portion is marketed by UnitedSugars Corporation through sugar brokers to wholesalers and retailers under the“Crystal Sugar” and “Pillsbury” brand names and various private labels forhousehold consumption.  With regard tobrand name sales, the Company licenses the use of the “Crystal” trademark and sub-licensesthe use of the “Pillsbury” trademark to United Sugars Corporation.

 

United Sugars Corporation markets sugar to customersover a large geographical area.  UnitedSugars Corporation’s customers are located primarily in Illinois, Wisconsin,Iowa, Minnesota, New York, Pennsylvania, California, Indiana, Florida andGeorgia.  During fiscal year 2004, UnitedSugars Corporation’s 10 largest customers accounted for approximately 47.7percent (by weight) of the sugar sold.

 

The prices at which United Sugars Corporation sellsthe Company’s sugar fluctuate periodically based on changes in domestic sugarsupply and demand.  Sugar prices are verysensitive to the balance between supply and demand in the United States market.  The largest proportion of United SugarsCorporation’s sugar sales are contracted one or more quarters in advance, withthe effect of stabilizing fluctuations in revenue from quarter to quarter.  Retail (grocery) products are generally soldon a spot price basis.

 

8

----

 

The Company markets its and substantially all ofSidney Sugars’ agri-products through Midwest Agri-Commodities Company, a commonmarketing agency operating on a cooperative basis, whose members are theCompany, Minn-Dak Farmers Cooperative, Southern Minnesota Beet SugarCooperative and Michigan Sugar Company (effective September 1, 2003).  Sugarbeet pulp is marketed to livestock feedmixers and livestock feeders in the United States and foreign markets.  For the year ended August 31, 2004, themajority of the Company’s pulp production was exported to Japan andEurope.  The market for sugarbeet pulp isaffected by the availability and quality of competitive feedstuffs.  Sugarbeet molasses is marketed primarily toyeast manufacturers, livestock feed mixers and livestock feeders.  Total agri-product sales accounted for 7.8percent of the Company’s consolidated total revenues during fiscal 2004, ofwhich export sales accounted for 3.7 percent of such revenues.  In the past, agri-products export salesaccounted for 4.0 percent of the Company’s total revenues in 2003 and 3.5percent in 2002.  These percentages areprimarily a function of the average market prices for sugar, pulp and molassesand are not necessarily indicative of future relationships between agri-productrevenues (both export and domestic) and sugar revenues, because prices of thesecommodities fluctuate independently of each other.

 

There is no single customer of United SugarsCorporation or Midwest Agri-Commodities Company attributable to the Companythat accounts for 10% or more of the revenues of the Company.

 

## **Government Programs and Regulations**

## ** **

### **Farm Security and Rural Investment Act of 2002**

###  

The Farm Security and Rural Investment Act of 2002(the Farm Bill) was enacted on May 13, 2002 and replaced the FederalAgriculture Improvement and Reform Act of 1996 (the FAIR Act).  The Farm Bill contains several provisionsrelated to the domestic sugar industry, with the ultimate goal of such provisionsto achieve balance and stability in the U.S. sugar market while minimizing thecost to the Federal government.  The FarmBill applies to the 2002 through 2007 crop years.  Generally, the Farm Bill restricts imports offoreign sugar, maintains the non-recourse loan program established by the FAIRAct, and establishes a system of marketing allocations for sugarbeet and sugarcane producers in an attempt to balance the supply and demand for sugar in theU.S. domestic sugar market.

 

Under the FAIR Act and now the Farm Bill, sugarprocessors can borrow funds on a non-recourse basis from the Commodity CreditCorporation (CCC), with repayment of such funds secured by sugar.  When the price of sugar drops below theforfeiture price, the processors can forfeit the sugar securing the loans tothe CCC in lieu of repayment.  Processorsmay also obtain CCC loans for “in-process” sugar or syrups at 80 percent of theloan rate.

 

The USDA has historically maintained sugar pricesabove the forfeiture price without cost to the U.S. Treasury by regulating thesupply of sugar in the U.S. market through regulating the quantity of sugarimports.  Under the Tariff Rate Quota(TRQ) implemented October 1, 1990, sugar producing countries are allowed toexport a fixed quantity of sugar into the United States duty-free or subject tominimal duties.  Unlimited additionalquantities may be exported to the United States upon payment of a tariff of15.36 cents per pound prior to shipment. To date, only immaterial quantities of sugar have been imported underthis higher tariff level.

 

The Farm Bill sets an 18 cent per pound loan rate forraw cane sugar and a 22.90 cent per pound loan rate for refined beetsugar.  Both loan rates are effective forthe 2003 year crop.  The FAIR Actrequired a one cent per pound penalty be paid by processors if the processorforfeits on sugar price support loans. The Farm Bill has terminated any penalties for forfeitures.

 

Under the FAIR Act, all sugar processors (includingthe Company) were required to remit to the CCC a non-refundable marketingassessment equivalent to 1.1794 percent of the raw cane sugar loan rate of 18cents per pound.  The assessment forfiscal years 1997 through 2003 was increased to 1.47425

 

9

----

 

percent of the raw cane sugarloan rate of 18 cents per pound.  TheFarm Bill has terminated any marketing assessment.

 

In order to reduce the risk of sugar forfeitures tothe CCC and to provide balance in the marketplace, the Farm Bill establishesannual flexible marketing allotments for both cane and beet sugarprocessors.  The USDA determines theoverall allotment quantity (OAQ) for the U.S. domestic sugar market for eachcrop year by estimating sugar consumption, adding stocks expected to be carriedinto the succeeding year, and then subtracting 1,532,000 short tons, raw valueof sugar (the maximum level of imports allowed before marketing allotments areexpected to be suspended), and subtracting carry-in stocks of sugar, includingCCC inventory.  Once the USDA hasdetermined the OAQ for a crop year, it then determines each allotment for beetand cane sugar by multiplying the OAQ by 54.35 percent for beet and 45.65percent for cane.  An individualprocessor’s allocation of the allotment for a crop year is determined byformula set forth in the Farm Bill. Sugarbeet processor allocations are based on each sugar processor’ssugar production history, while sugar cane processor allocations are based onpast marketings, ability to market and past processings.  The USDA annually establishes individualprocessor’s allocations.  The Company’smarketing allocation for both the 2004 and 2003 crops was approximately 32million hundredweight.

 

Under the Farm Bill, a processor may market sugar inexcess of its allocation if such sales (i) enable another processor to meet itsallocation, (ii) facilitate the export of sugar or (iii) are made for nonhumanconsumption.  The USDA can assess apenalty equal to three times the U.S. market value of any quantity of sugarmarketed in excess of a processor’s allocation. The Farm Bill and its related regulations do not allow marketingallocations to be traded among processors. The Farm Bill does, however, provide for the transfer of allocationsassociated with a particular processing facility in the event ownership of thefacility is transferred.

 

The marketing allotments and allocations set forthunder the Farm Bill affect the sugar processed from the 2002 crop through the2007 crop.  On an annual basis, themarketing allotments, and the corresponding allocation to the Company, willdetermine the amount of sugar the Company can sell into the domesticmarket.  The Company’s allocation mayreduce the amount of sugar the Company can market for a given year, thusreducing the number of acres of sugarbeets required for processing.

 

### **Payment-In-Kind Program**

###  

The USDA implemented a Payment-In-Kind (PIK) programfor sugar producers throughout the United States during fiscal year 2002.  The PIK program was intended to alleviate theoversupply of sugar in the United States by giving a producer refined sugar inexchange for the producer’s agreement to destroy sugarbeets that would producea comparable amount of sugar.  Under thePIK program, the Company’s members were paid to destroy a portion of their 2001sugarbeet crop.  Payments to the Company’smembers were made by the USDA in the form of PIK certificates to be exchangedfor government owned sugar.  The Companyentered into PIK Certificate Purchase Agreements with its members to purchasethe PIK certificates they received from the USDA and to reduce the members’delivery obligations to the Company to the extent sugarbeets were destroyedunder the PIK program.  The purchaseprice for the PIK certificates reflected an allocation of the Company’s fixedcosts to account for the reduction of sugarbeets available for processing.

 

The PIK Certificate Purchase Agreement authorized theCompany to require additional direct capital investments by membersparticipating in the PIK program.  Theamount of the equity contribution is calculated per hundredweight of PIKcertificates and is approximately equivalent (on a Company-wide average basis)to the unit retain declared by the Company on the corresponding year’ssugarbeet crop.  All refunds andretirements of equity retains must be approved by the Company’s Board ofDirectors.

 

10

----

 

As a result of the PIK program, the 2001 sugarbeetcrop harvested by the Company’s members was reduced by approximately 29,000acres.  The Company received approximately1.2 million hundredweight of sugar in exchange for the 2001 crop PIKcertificates.

 

The Farm Bill authorizes the USDA to implement apre-plant PIK program to help offset any oversupply.  There was no PIK program for fiscal 2003 orfiscal 2004.  In the event the USDAimplements the PIK program again, the Company and its members will have toenter into new agreements.

 

### **North American Free Trade Agreement**

###  

Under the terms of the original North American FreeTrade Agreement (NAFTA) text, Mexico would have been allowed to ship any excessproduction of sugar into the United States if Mexico were to achieve netsurplus producer status two years in a row. Concerned that Mexico’s productive capabilities and possible conversionto the use of high fructose corn sweeteners could quickly change Mexico from anet sugar importer to a net sugar exporter, the U.S. sugar industry insistedthat NAFTA be modified to delay Mexico’s access to the U.S. market.  To embody these modifications, a side letteragreement on sugar was negotiated by the United States and Mexico prior topassage of NAFTA.  The side letteragreement gives Mexico incrementally larger but capped volumes of duty-freeaccess to the U.S. market, and an ability to export additional quantities ofsugar to the United States if Mexico pays a gradually descending second tiertariff.  The side letter agreementestablishes a common market between the United States and Mexico in sugar by2008.

 

The government of Mexico has indicated that it doesnot agree that the side letter agreement to NAFTA is binding, and has filed aNAFTA Article XX challenge to the United States’ implementation of the sideletter agreement.  At this time, it isnot known when, or if, a ruling will be received on the Article XX challenge.  If the side letter agreement to the NAFTA isruled to be invalid, the Company could be materially and adversely affected.

 

The Company is concerned that low world sugar pricesand a trade conflict between the United States and Mexico over sweeteners couldpermit de facto acceleration of the second tier tariffs under the side letteragreement.  Under the NAFTA tariffschedule, second tier sugar tariffs were set at approximately 12 cents for 2000and decline by approximately 1.5 cents per year until reaching zero in2008.  Low world raw sugar prices and thecurrent second tier tariff make it economically viable for Mexican sugar toenter the United States this year, if the Mexican interests so choose.

 

Under the current terms of the NAFTA and the sideletter agreement, the Company is concerned that imports from Mexico couldoversupply the U.S. market, forcing sugar prices significantly lower.  The Company, along with the domestic sugarindustry, is seeking negotiated changes to the NAFTA and may also pursue legalremedies to address the matter.  If thesugar industry is unsuccessful in these or any other endeavors it pursues toprevent the influx of Mexican sugar into the U.S. market, there could beadverse financial consequences to the Company and its members.

 

### **Regional and Bilateral Free Trade Agreements**

###  

The United States government is pursuing an aggressiveagenda on international trade.  It isseeking to negotiate new free trade agreements with a number of countries andregions that are major producers of sugar. The Company believes these agreements, if they reach fruition, couldnegatively impact the Company’s profitability. The primary agreements under consideration, to the Company’s knowledge,are the Free Trade Area of the Americas; the Central American Free TradeAgreement; the Australian Free Trade Agreement; the Andean Free TradeAgreement; the Thailand Free Trade Agreement; and the South African CustomsUnion Free Trade Agreement.  Many of thecountries included in these agreements are major sugar producers andexporters.  If increases in guaranteedaccess or reductions in sugar tariffs are included in these agreements, excesssugar from these regions could

 

11

----

 

enter the U.S. market and putpressure on domestic sugar prices.  TheU.S. sugar industry and the Company, as an influential member of such industry,recognize the potential negative impact that would result if these agreementsare entered into by the United States and are taking steps to attempt to managethe situation.  The Company and the sugarindustry intend to continue to focus significant attention on trade issues inthe future.

 

## **ProGold Limited Liability Company**

## ** **

The Company is one of two members of ProGold LimitedLiability Company (ProGold).  ProGold wasinitially formed by the Company, Minn-Dak Farmers Cooperative and GoldenGrowers Cooperative.  Effective May 1,2003, the Company acquired Minn-Dak Farmers Cooperative’s five percentownership interest in ProGold.  Thisacquisition resulted in an increase in the Company’s ownership in ProGold to 51percent, while Golden Growers Cooperative continues to own 49 percent.  As a result of this acquisition, the Companyalso controls the board of governors of ProGold.  ProGold owns a corn wet-milling plant capableof processing corn to produce corn sweeteners (including high fructose cornsyrups) and various agri-products.

 

Due to the Company’s resulting controlling ownershipinterest in ProGold, the Company began to consolidate ProGold in its financialstatements as of May 1, 2003.  Thefinancial statements for prior periods have not been restated and therefore donot include consolidated data pertaining to ProGold prior to May 1, 2003.

 

The corn wet-milling plant is leased to Cargill,Incorporated under an operating lease that commenced on November 1, 1997 andits initial term will terminate on December 31, 2007.

 

## **Crystech, LLC**

## ** **

The Company and Newcourt Capital USA, Inc. (Newcourt)formed Crystech, LLC (Crystech), a Delaware limited liability company, onMay 28, 1998.  Crystech was formedto construct and operate a molasses desugarization facility in Hillsboro, NorthDakota.  The Company and Newcourt eachown a 50 percent membership interest in Crystech.  The original financing of the facility includedapproximately $86 million of secured debt placed by Newcourt with aconsortium of lenders, and approximately $14 million in subordinated debtheld by the Company.  During fiscal 2003,the Company agreed to convert the $14 million of subordinated debt owed to itby Crystech into Preferred Equity.  Whilethe ownership of this Preferred Equity does not change the Company’s membershipstatus, the ownership of Preferred Equity does result in the Company having theright to receive annually 7.5 percent of Crystech’s net income or approximately$1.0 million each year.

 

The Company has a 12-year Tolling Services Agreementwith Crystech whereby the Company pays the full cost of processing sugarbeetmolasses delivered to the facility, with title and risk of loss to the productremaining with the Company throughout the process.  The Tolling Services Agreement may beterminated by the Company if the specific operational processing performancerequired of Crystech in the contract is not maintained.  The Company has also entered into anOperations and Maintenance Agreement with Crystech by which the Company isresponsible for operating and maintaining the facility throughout the term ofthe Tolling Services Agreement.  Thefacility has a capacity to process approximately 200,000 tons of softenedmolasses annually for conversion to sugar and other agri-products.  During fiscal 2004, Crystech processedapproximately 211,000 tons of softened molasses.

 

**Employees**

 

As of August 31, 2004, the Company had****1,216full-time employees, of which 1,000 were hourly and 216 were salaried andSidney Sugars had 126 full-time employees, of which 104 were hourly and 22 weresalaried.  The Company had 14 part-timeemployees and Sidney Sugars had 3 part-time employees.

 

12

----

 

In addition, the Companyemploys approximately 674 hourly seasonal workers, approximately 341 during thesugarbeet harvest and approximately 333 during the remainder of the sugarbeetprocessing campaign. ** **Sidney Sugars also employs approximately 147 hourly seasonalworkers, approximately 40 during the sugarbeet harvest and approximately 101during the remainder of the sugarbeet processing campaign.  During the sugarbeet harvest, the Company andSidney Sugars also contract with third party agencies for approximately another1,200 additional workers in the Red River Valley and approximately 135additional workers in Sidney, Montana.

 

Substantially all of the hourly employees at thefactories of both the Company and Sidney Sugars, including full-time andseasonal employees, are represented by the Bakery, Confectionery, TobaccoWorkers and Grain Millers (BCTGM) AFL-CIO, and are covered by collectivebargaining agreements expiring July 31, 2011 for the Red River Valleyfactory employees and April 30, 2005 for the Sidney, Montana, factoryemployees.  In August 2004, the Companycompleted negotiations on the current collective bargaining agreement for theRed River Valley factory employees. 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.  The Companyconsiders its employee relations to be excellent.

 

Substantially all employees of the Company and SidneySugars who meet eligibility requirements of age and length of service arecovered by one of the Company’s two multiple-employer defined benefitretirement plans.  Plan A (nonunionemployees) and Plan B (union employees) are defined benefit, noncontributoryplans.  The plans provide for vesting infive years with benefits for early retirement, normal retirement and disabilityor death.  The Company’s policy is tofund pension costs accrued.  The planswere fully funded for vested benefits as of February 28, 2004, the end ofthe most recent plan year.  Union andnonunion employees are also eligible to participate in 401(k) savings plans.

 

### **EnvironmentalMatters**

###  

The Company is subject toextensive federal and state environmental laws and regulations with respect towater and air quality, solid waste disposal and odor and noise control.  The Company conducts an on-going programdesigned to meet these environmental laws and regulations.  The Company believes that it is insubstantial compliance with applicable environmental laws and regulations.  The Company cannot predict whether futurechanges in environmental laws or regulations might increase the cost of operatingits facilities and conducting its business. Any such changes could have adverse financial consequences for theCompany.

 

On May 21, 2003, Sidney Sugars received an Enforcement Action for AirQuality Violation letter from the Montana Department of Environmental Qualityfor alleged violations of allowed particulate emissions at the Sidney, Montana,facility.  On December 5, 2003, theMontana Department of Environmental Quality and Sidney Sugars entered into anAdministrative Order on Consent (Consent Order) resolving this matter.  The Consent Order, among other matters,required Sidney Sugars to pay an administrative civil penalty of $52,104.  The seller of the Sidney, Montana, factoryhas indemnified Sidney Sugars for the amounts that were payable for thisaction.

 

The Company is currently conducting an environmental remediation planat its Moorhead and Crookston, Minnesota, factories and at its Drayton, NorthDakota, factory.  The total cost of thisplan is approximately $2.4 million of which $ .5 million was recognized infiscal 2003 and $1.9 million was recognized in fiscal 2002.

 

13

----

 

## **Important Factors**

## ** **

The financial results of the Company’s operations maybe directly and materially affected by many factors, including prevailingprices of sugar and agri-products, the Company’s ability to market its sugarcompetitively, the weather, government programs and regulations, internationaltrade agreements and costs and expenses. Beyond the factors that may impact the Company’s business generally, theCompany is involved in several ventures as discussed above that may alsomaterially affect the financial results of the Company’s operations.

 

### **Market Supply**

###  

The domestic sugar market is reactive to anyoversupply of refined sugar.  Excesssupply may result in a decline in domestic sugar prices.  Lower sugar prices adversely affectprofitability of selling refined sugar in the United States, resulting in adirect negative impact on the Company.

 

**Regional and Bilateral Trade Agreements**

 

In the event the United States government enters intobilateral trade agreements with sugar producing countries, the amount of sugarin the domestic sugar market could be impacted. A change in the supply of sugar could put pressure on the price ofsugar, which would impact the Company’s profitability.

 

### **Government Programs and Regulations; Legislation**

###  

The nature and scope of future legislation andregulation affecting the sugar market cannot be predicted and there can be noassurance that price supports and market protections will continue in theirpresent forms.  If the price supportprograms were eliminated in their entirety, or if certain protections thefederal government provides from foreign competitors were materially reduced, theCompany could be materially and adversely affected.  In such a situation, if the Company were notable to adopt strategies that would allow it to compete effectively in agreatly changed domestic market for sugar, the adverse effects could negativelyimpact the desirability of growing sugarbeets for delivery to the Company, theCompany’s financial results, and the Company’s continued viability.

 

**Unregulated Foreign Competition**

 

Under the current terms of the NAFTA and othergovernment regulations, imports of sugar from Mexico may enter the U.S.market.  These imports could oversupplythe U.S. market and negatively affect the price of sugar.  The Company, along with the domestic sugarindustry, is seeking improvements to NAFTA and is also pursuing legal remediesto address the matter.  If the sugarindustry is unsuccessful in these and any other endeavors it pursues to preventthe influx of Mexican sugar into the U.S. market, there could be adversefinancial consequences to the Company and its members.

 

### **The Farm Bill**

###  

The impact of the Farm Bill on the operations of theCompany cannot be completely predicted. The long term ramifications of the marketing allotment and allocationprogram depend on the Company’s ability to maintain its marketing allocation onan annual basis and to obtain access, if necessary, to additional allocationsat a reasonable price.

 

**Competition**

 

Sugar is a fungible commodity with competition forsales volume based primarily upon customer service, price and reliability,though differences in proximity to various geographic markets within the UnitedStates result in differences in freight and shipping costs which in turngenerally affect pricing and competitiveness. The overall sweetener market, in addition to sugar, includes corn-basedsweeteners,

 

14

----

 

such as regular and highfructose corn syrups, and non-nutritive, high-intensity sweeteners such asaspartame.  Differences in functionalproperties and prices have tended to define the use of these various sweeteners.  Although the various sweeteners are notinterchangeable in all applications, the substitution of other sweeteners forsugar has occurred in certain products, such as soft drinks.  The Company is not able to predict the availability,development or potential use of these and other alternative sweeteners andtheir possible impact on the Company and its members.  The Company’s management believes that itpossesses the ability to compete successfully with other producers of sugar inthe United States.  In spite of this competitiveadvantage, substitute products and sugar imports could have a material andadverse effect on the Company’s operations in the future.

 

**Energy Prices**

 

The prices paid by thecompany for energy related products, such as natural gas and coke, have recentlyincreased significantly due to supply and demand imbalances.  The Company uses substantial amounts of theseproducts in its manufacturing process. The Company believes that the prices for energy related products willremain high and will very likely increase. These higher prices may materially increase the cost of production ofthe Company, thus impacting the financial results of the Company.

 

**Weather and Other Factors**

 

The sugarbeet, as with most other crops, is affectedby weather conditions during the growing season.  Additionally, weather conditions during theprocessing season affect the Company’s ability to store sugarbeets held forprocessing.  Growing and storageconditions different from the Company’s expectations may change the quantity andquality of sugarbeets available for processing and therefore may affect thequantity of sugar produced by the Company. A significant reduction in the quantity or quality of sugarbeetsharvested resulting from adverse weather conditions, disease (such as rhizomania) or other factors couldresult in increased per unit processing costs and decreased production, withadverse financial consequences to the Company and its members.

 

**Item2.**                                        PROPERTYAND PROCESSING FACILITIES

** **

The Company operates five sugarbeet processingfactories in the Red River Valley and Sidney Sugars operates one in Sidney,Montana.  The Company owns all of itsfactories and the land on which they are located.  The factories range in size from 150,000 to400,000 square feet.

 

The location and processing capacity of the Companyand Sidney Sugars’ factories are:

 
| **Location**         | ** ** | **Approximate Daily Slicing Capacity  (Tons of Sugarbeets)** | ** ** |
|----------------------|------------|--------------------------------------------------------------|------------|
| Crookston, MN        |       | 5,900                                                        |       |
| East Grand Forks, MN |       | 9,300                                                        |       |
| Moorhead, MN         |       | 5,900                                                        |       |
| Drayton, ND          |       | 6,700                                                        |       |
| Hillsboro, ND        |       | 8,200                                                        |       |
| Sidney, MT           |       | 6,400                                                        |       |

 

Each of the processing factories includes the physicalfacilities and equipment necessary to process sugarbeets into sugar.  Each factory has space for sugarbeet storage,including ventilated storage sites.  TheRed River Valley factories also have cold storage sites.  Each of these facilities is currentlyoperating at or near its capacity.  TheCompany owns a molasses desugarization (MDS) plant at its East Grand Forksfacility and owns 50 percent of Crystech which owns the MDS plant adjacent tothe

 

15

----

 

Hillsboro factory.  The MDS plants process molasses to extractadditional sugar.  The Company and SidneySugars have sugar packaging facilities located at the Moorhead, Hillsboro,Crookston, East Grand Forks and Sidney factories.

 

Sidney Sugars also owns a sugarbeet processing plantin Torrington, Wyoming.  The Torrington,Wyoming, facility is leased on a long-term basis to another sugar company.

 

ProGold Limited Liability Company owns a cornwet-milling plant in Wahpeton, North Dakota, that is currently being leased toCargill, Incorporated.  The cornwet-milling plant is capable of processing corn to produce corn sweeteners(including high fructose corn syrups) and various agri-products

 

The Company’s corporate office is located in a 30,000square foot, two-story office building in Moorhead, Minnesota.  The Company also has a 100,000 square footTechnical Services Center situated on approximately 200 acres in Moorhead,Minnesota.  The Company owns bothfacilities.  The Company and SidneySugars also own numerous sites as sugarbeet receiving and storage stationslocated within proximity of their factories. All of the Company’s property, plant and equipment (excluding currentassets) is mortgaged or pledged as collateral for its indebtedness to variousfinancial institutions.

 

**Item3.**                                        LEGALPROCEEDINGS

** **

From time to time and in the ordinary course of itsbusiness, the Company is named as a defendant in legal proceedings related to variousissues, including worker’s compensation claims, tort claims and contractualdisputes.  The Company is currentlyinvolved in certain legal proceedings which have arisen in the ordinary courseof the Company’s business.  The Companyis also aware of certain other potential claims which could result in thecommencement of legal proceedings.  TheCompany carries insurance which provides protection against certain types ofclaims.  With respect to currentlitigation and potential claims of which the Company is aware, the Company’smanagement believes that (i) the Company has insurance protection to coverall or a portion of any judgments which may be rendered against the Companywith respect to certain claims or actions and (ii) any judgments which maybe entered against the Company and which may exceed such insurance coverage orwhich may arise in actions involving potential liabilities not covered byinsurance policies are not likely to have a material adverse effect upon theCompany, or its assets or operations.

 

As of the date of thisreport, four administrative proceedings have been brought against the UnitedStates Department of Agriculture (USDA) seeking reversal of prior decisionsregarding the determination and transfer of sugar marketing allocations made bythe USDA or an agency under the USDA. These proceedings are in various stages of the applicable administrativeprocess.  While the Company is not aparty to any of these administrative proceedings, it is, solely or incoordination with other sugar processors, an intervenor in these administrativeproceedings.  The Company does notanticipate that the decisions in these proceedings will result in the USDAreversing its current decisions on sugar marketing allocations and its pasttransfers of such sugar marketing allocations. The outcome of any contested matter, however, is never certain and theeventual decision may result in a change in the current sugar marketingallocations.  In the event theseproceedings are decided in a manner that reduces the Company’s sugarallocations, the amount of sugar the Company can produce and market may beadversely impacted.

 

16

----

 

**Item4.**                                        SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

** **

No matters were submitted to a vote of the Company’sshareholders during the quarter ended August 31, 2004.

 

# **PART II**

# ** **

**Item5.**                                        MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

** **

As of August 31, 2004, the Company had 2,873 shares ofthe Common Stock and 498,570 shares of the Preferred Stock issued andoutstanding.  There is no establishedpublic market for the Company’s Common Stock or Preferred Stock, as such sharesmay be held only by farmer-producers who are eligible for membership in theCompany.  The Company’s shares are notlisted for trading on any exchange or quotation system.  Although transfers of the Company’s sharesmay occur only with the consent of the Board of the Directors, the Company doesnot obtain information regarding the transfer price in connection with suchtransfers.  As a result, the Company isnot able to provide information regarding the prices at which the Company’sshares have been transferred.

 

Because the number of acres of sugarbeets a member maygrow for sale to the Company is directly related to the number of shares ofPreferred Stock owned, a limited, private market for Preferred Stockexists.  It is not anticipated that ageneral public market for the Company’s shares of Common Stock or PreferredStock will develop due to the limitations on transfer and the variousmembership requirements which must be satisfied in order to acquire suchshares.

 

A member desiring to sell his or her Common Stock orPreferred Stock must first offer them to the Company for purchase at parvalue.  If the Company declines topurchase such shares, either class may be sold to a new member (i.e., anotherfarm operator not already a member) and Preferred Stock may be sold to one ormore existing members or farm operators approved for membership, in each casesubject to approval by the Board of Directors. To date, the Company’s Board of Directors has not exercised the Company’sright of first refusal to purchase shares offered for sale by its members.  In the absence of the exercise of such rightof first refusal, the Company is aware of sales of Preferred Stock at prices inexcess of the par value of those shares. Because the Company does not require parties seeking approval fortransfers to provide information regarding the transfer price, the Company doesnot possess verifiable information regarding the transfer price involved inrecent transfers of the Company’s Preferred Stock.

 

17

----

 

**Item6.**                                        SELECTEDFINANCIAL DATA

** **

The selected financial data of the Company should beread in conjunction with the consolidated financial statements and relatednotes included in Appendix A of this Report.

 
| ** **                                            | ** ** | **Fiscal Year Ended August 31,  (In Thousands, except for ratios)** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2004**                                                            | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                  |       |                                                                |       |   |   |   |   |   |   |   |   |
| Net Revenues                                          |       | $                                                                   | 1,033,088  |   | $ | 829,246 |   | $ | 775,288 |   | $ | 866,362 |   | $ | 731,432 |   |
| Net Proceeds (1)                                      |       | $                                                                   | 473,122    |   | $ | 361,902 |   | $ | 398,588 |   | $ | 389,039 |   | $ | 358,373 |   |
| Total Assets                                          |       | $                                                                   | 822,326    |   | $ | 809,751 |   | $ | 622,693 |   | $ | 641,445 |   | $ | 739,719 |   |
| Long-Term Debt, Net of Current Maturities             |       | $                                                                   | 250,086    |   | $ | 286,922 |   | $ | 182,371 |   | $ | 201,416 |   | $ | 230,905 |   |
| Members’ Investments                             |       | $                                                                   | 303,426    |   | $ | 270,346 |   | $ | 268,667 |   | $ | 255,660 |   | $ | 249,330 |   |
| Property and Equipment Additions, net of  retirements |       | $                                                                   | 30,347     |   | $ | 46,578 |   | $ | 15,281 |   | $ | 21,851 |   | $ | 42,088 |   |
| Working Capital                                       |       | $                                                                   | 58,673     |   | $ | 49,572 |   | $ | 58,282 |   | $ | 45,341 |   | $ | 53,613 |   |
| Ratio of Long-Term Debt to Equity (2)                 |       | .82:1                                                               |       | 1.06:1 |   | .68:1 |   | .79:1 |   | .93:1 |   |

 
| ** **                                          | ** ** | **Fiscal Year Ended August 31,  (In Thousands, except for Tons purchased per acre harvested  and Gross beet payment per ton of sugarbeets purchased)** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2004**                                                                                                                                               | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **Red  River Valley Crop Data (3)**                 |       |                                                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Acres harvested                                     |       | 496                                                                                                                                                    |       | 501 |   | 453 |   | 442 |   | 486 |   |
| Tons purchased                                      |       | 10,006                                                                                                                                                 |       | 8,749 |   | 8,058 |   | 9,626 |   | 9,657 |   |
| Tons purchased per acre harvested                   |       | 20.2                                                                                                                                                   |       | 17.5 |   | 17.8 |   | 21.8 |   | 19.9 |   |
| Gross beet payment per ton of sugarbeets  purchased |       | $                                                                                                                                                      | 46.86      |   | $ | 40.70 |   | $ | 46.64 |   | $ | 37.70 |   | $ | 37.31 |   |
| Sugar hundredweight                                 |       |                                                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Produced                                            |       | 30,983                                                                                                                                                 |       | 24,527 |   | 25,395 |   | 29,035 |   | 26,646 |   |
| PIK Sugar Receipts                                  |       | —                                                                                                                                                 |       | — |   | 1,177 |   | 1,561 |   | — |   |
| Sold, including purchased sugar                     |       | 30,994                                                                                                                                                 |       | 24,991 |   | 26,806 |   | 32,445 |   | 24,756 |   |
| Purchased sugar sold                                |       | 33                                                                                                                                                     |       | 465 |   | 288 |   | 3 |   | 230 |   |
| Pulp, Molasses and CSB tons                         |       |                                                                                                                                                   |       |   |   |   |   |   |   |   |   |
| Produced                                            |       | 773                                                                                                                                                    |       | 684 |   | 612 |   | 749 |   | 784 |   |
| Sold                                                |       | 764                                                                                                                                                    |       | 653 |   | 636 |   | 701 |   | 803 |   |
|                                                     |            |                                                                                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)           Net Proceeds are the Company’s grossrevenues, less the costs and expenses of producing and marketing sugar,agri-products and sugarbeet seed, but before payments to members forsugarbeets.  Payments to be made tomembers for the delivery of sugarbeets are liabilities of the Company.  (For a more complete description of thecalculation of Net Proceeds, see “Item 1. Business – Growers’ Contracts.”)

 

(2)           Calculated by dividing the Company’slong term debt, exclusive of the current maturities of such debt, by members’investments.

 

(3)           Information for a fiscal year relatesto the crop planted and harvested in the preceding calendar year (e.g.,information for the fiscal year ended August 31, 2004 relates to the crop of2003).

 

18

----

 

**Item7.**                                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

** **

*The following discussion of the financialconditions and results of operations of the Company should be read inconjunction with the Company’s consolidated financial statements and notesthereto included in Appendix A of this report.*

 

## **Liquidity and Capital Resources**

## ** **

Under the Company’s Bylaws and Grower Contracts,payments for member delivered sugarbeets, the principal raw material used inproducing the sugar and agri-products the Company sells, are subordinated toall member business expenses.  Inaddition, the beet payment made to members is paid in three payments over thecourse of a year, and the payments are made net of the anticipated unit retainfor the crop.  These procedures have theeffect of providing the Company with an additional source of short-termfinancing.  This member financingarrangement may result in an additional source of liquidity and reduced needfor outside financing in comparison to a similar business operated on anon-cooperative basis.

 

The cash provided by operations, for the year ended August 31, 2004 of$83.9 million, was primarily the result of the 2003 crop unit retains withheldfrom members of $30.0 million, non-member income of $4.2 million, net non-cashexpenses of $58.8 million and an increase in liabilities of $18.6 million.  This was partially offset by the increases inreceivables and advances to related parties of $20.8 million and pension plancontributions of $11.2 million.

 

In fiscal 2004, the net cash used in investing activities of $24.9million was primarily related to purchases of property and equipment and theacquisition by Crab Creek Sugar Company.

 

The net cash used in financing activities, for fiscal2004 of $59.7 million, was primarily comprised of net payments on short-termdebt of $19.8 million, payments on long-term debt of $27.2 million and thepayment of unit retains and equity retention to members of $16.7 million.  The Company also received the final amountdue from the 1997 stock sale of $4.0 million.

 

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.

 

Because sugar is sold throughout the year (whilesugarbeets are processed primarily in the fall and winter) 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 lead byCoBank, ACB.  The Company has long-termdebt availability with CoBank, ACB of****$200.6 million,of which $158.3 million was outstanding as of August 31, 2004.  In addition, the Company has long-term debtoutstanding of $50 million from a private placement of Senior Notes thatoccurred in September of 1998; $15.7 million from a private placement of SeniorNotes that occurred in January of 2003; $43.0 million from nine separateissuances of Pollution Control and Industrial Development Revenue Bonds; and aterm loan with Bank of North Dakota of $4.0 million.  The Company also has a seasonal line ofcredit with a consortium of lenders lead by CoBank, ACB of $265 millionand a line of credit with Wells Fargo Bank for $1 million.  As of August 31, 2004, there was nooutstanding balance on the seasonal line of credit with CoBank, ACB.  There was no line of credit balanceoutstanding with Wells Fargo Bank as of August 31, 2004.  As of August 31, 2004, the Company had $30.2million of short

 

19

----

 

term borrowing in commercialpaper.  Any borrowings under thecommercial paper program will act to reduce the available credit under theCoBank, ACB seasonal line of credit by a commensurate amount.

 

The following table provides information regarding theCompany’s contractual obligations as of August 31, 2004:

 
| **(In Thousands)**                | ** ** | **Total** | ** ** | **Less than  One Year** | ** ** | **One to  Three Years** | ** ** | **Four to Five  Years** | ** ** | **After Five  Years** | ** ** |
|-----------------------------------|------------|-----------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------|------------|
| Long-Term Debt                    |       | $         | 271,018    |                    | $          | 20,932                  |       | $                       | 132,887    |                  | $          | 26,074 |   | $ | 91,125 |   |
| Purchase Obligations              |       | 24,713    |       | 18,817                  |       | 4,527                   |       | 888                     |       | 481                   |       |
| Other Long-Term Obligations       |       | 1,843     |       | 273                     |       | 646                     |       | 466                     |       | 458                   |       |
| Pension Plan Contributions (1)    |       | 6,000     |       | 6,000                   |       |                    |       |                    |       |                  |       |
| **Total Contractual Obligations** |       | $         | 303,574    |                    | $          | 46,022                  |       | $                       | 138,060    |                  | $          | 27,428 |   | $ | 92,064 |   |
|                                   |            |           |            |                         |            |                         |            |                         |            |                       |            |  |  |  |  |  |  |

 

----

(1) The Company expects to contribute approximately $6.0 million to thepension plans during the next fiscal year. Contributions for future years are not known at this time and thereforeare not included in the above table.

 

**Critical Accounting Policies and Estimates**

 

Preparation of theCompany’s consolidated financial statements requires estimates and judgments tobe made that affect the amounts of assets, liabilities, revenues and expensesreported.  Such decisions include the selection of the appropriateaccounting principles to be applied and the assumptions on which to baseaccounting estimates.  Management continually evaluates these estimatesbased on historical experience and other assumptions we believe to bereasonable under the circumstances.

 

The difficulty in applyingthese policies arises from the assumptions, estimates and judgments that haveto be made currently about matters that are inherently uncertain, such asfuture economic conditions, operating results and valuations as well asmanagement intentions.  As the difficulty increases, the level ofprecision decreases, meaning that actual results can and probably will bedifferent from those currently estimated.

 

Estimates are consideredto be critical if they meet both of the following criteria: (1) the estimaterequires assumptions about material matters that are uncertain at the time theaccounting estimates are made, and (2) other materially different estimatescould have been reasonably made or material changes in the estimates arereasonably likely to occur from period to period. The Company’s criticalaccounting estimates include the following:

 

Inventory Valuation

 

Sugar, pulp, molasses andother agri-product inventories are valued at estimated net realizable value.The Company derives its estimates from sales contracts, recent sales andevaluations of market conditions and trends. Changes in market conditions maycause management’s estimates to differ from actual results.

 

*Property and Equipment, Property and Equipment Heldfor Lease, and Depreciation*

 

Property and equipment,and property and equipment held for lease are depreciated for financialreporting purposes principally using straight-line methods with estimateduseful lives ranging from 3 to 45 years. Economic circumstances or otherfactors may cause management’s estimates of expected useful lives to differfrom actual.

 

20

----

 

The Company reviews itsproperty and equipment, and property and equipment held for lease forimpairment whenever events indicate that the carrying amount of the asset maynot be recoverable.  An impairment lossis recorded when the sum of the future cash flows is less than the carryingamount of the asset.  An impairment lossis measured as the amount by which the carrying amount of the asset exceeds itsfair value.  There were no impairmentlosses incurred during the fiscal year covered by this report.  However, considerable management judgment isnecessary to estimate future cash flows and may differ from actual results.

 

*Pension Plan Benefits*

 

Accumulated plan benefitsare those future periodic payments, including lump-sum distributions, that areattributable under the Company’s Pension Plan to the service employees haverendered. Accumulated plan benefits include benefits expected to be paid toretired or vested terminated employees or their beneficiaries; beneficiaries ofemployees who have died; and present employees or their beneficiaries.

 

The actuarial presentvalue of accumulated plan benefits is determined by an actuary and is theamount that results from applying actuarial assumptions to adjust theaccumulated plan benefits to reflect the time value of money and theprobability of payment.

 

The significant actuarialassumptions used in the determination of the actuarial present value ofaccumulated plan benefits for fiscal 2004 were as follows: *ValuationFunding Method* - Entry age normal, frozen initial liability; *Life Expectancy* - 1983 group annuity mortality; *Retirement Age –*graded rates from 1 percent retiring at age55 to 100 percent retired by age 70*;  Investment Return -*8.25 percentcompounded annually for funding*;  Discount* Rate- 6.84 percentcompounded annually;  *Salary Scale* - 3.5 percent compounded annually (Plan Aonly).

 

Actual events may differfrom the assumptions used and may result in plan benefit payments differingsignificantly from these current estimates.

 

## **Results of Operations**

 

U.S. sugar consumptiongrowth rates averaged approximately 1.6 percent annually during the 1990’s.  Sugar consumption growth rates are a functionof population growth, which has increased slightly over the past five years,and food market trends.  United States’government statistics estimate total United States sugar consumption atapproximately 184 million hundredweight for the year beginningOctober 1, 2003 and ending September 30, 2004.  For the same period startingOctober 2002, total consumption was approximately 181 millionhundredweight.  Comparing the two yearsshows an increase in demand of approximately two percent. The Company believesthat sugar consumption will reflect minimal increases or be relatively flat inthe near future.

 

The Company’s operational results and the resultingbeet payment to members and growers are substantially dependent on marketfactors, including domestic prices for refined sugar.  These factors are continuously influenced bya wide variety of market forces, including domestic sugarbeet and caneproduction, weather conditions and United States’ farm and trade policy, whichthe Company is unable to predict.

 

In addition, highly variable weather conditions duringthe growing, harvesting and processing seasons, as well as diseases andinsects, may materially affect the quality and quantity of sugarbeets availablefor purchase as well as the unit costs of raw materials and processing.

 

21

----

**Comparison of the Years Ended August 31, 2004 and2003**

 

Revenue for the year ended August 31, 2004, was $1.0billion, an increase of $203.8 million from 2003.  Revenue from total sugar sales increased 24.1percent due to a 25.0 percent increase in the hundredweight sold partiallyoffset by a 0.7 percent decrease in the average selling price perhundredweight.  Revenue from pulp salesincreased 20.9 percent due to a 17.1 percent increase in the volume of pulptons sold and a 3.2 percent increase in the average selling price per ton.  Revenue from molasses sales increased 35.3percent due to a 41.5 percent increase in the volume of molasses sold,partially offset by a 4.4 percent decrease in the average selling price perton.  The increases in the volume of productssold were due primarily to the additional sales associated with the larger cropin the Red River Valley and a full year of production at the Sidney, Montana,factory.  Revenue from sales ofConcentrated Separated By-Product (CSB), a by-product of the molassesdesugarization process, decreased 11.2 percent due to a 20.8 percent decreasein the average selling price per ton, partially offset by a 12.1 percentincrease in the volume of CSB sold. Rental revenue on the ProGold Limited Liability Company (ProGold)operating lease was $25.8 million as compared to $8.6 million last year.  This difference was the result of theconsolidation of ProGold which commenced on May 1, 2003.

 

Cost of sales for the year ended August 31, 2004,exclusive of payments to members for sugarbeets, increased $47.5 million ascompared to fiscal 2003.  The costrecognized associated with the non-member sugarbeets (Sidney crop) was $44.9million for the year ended August 31, 2004, an increase of $13.2 million ascompared to the prior year.  Thisincrease was primarily due to a 32.6 percent increase in the tons of sugarbeetspurchased.  Direct processing costs forsugar and pulp increased 15.3 percent. This was primarily the result of harvesting 15.8 percent more andprocessing 16.4 percent more sugarbeets than in fiscal 2003.  Higher natural gas prices, increased coalcosts and higher labor costs also added to this increase.  Fixed and committed expenses increased 7.0percent reflecting higher labor and benefit costs, increased maintenance costsand costs related to a full year of operations of the Sidney, Montana,factory.  The change in the netrealizable value of product inventories impacted the cost of product soldunfavorably by $16.5 million.  The costsassociated with sugar purchased to meet customer needs decreased $13.1 milliondue to the normal commencement of the 2003 Red River Valley crop campaign.  The 2002 Red River Valley crop campaignstartup was delayed because of adverse planting and growing conditions whichslowed the maturity of the crop.  As aresult, additional sugar was required to be purchased to service customersduring this delay.  Costs related toProGold were $12.0 million as compared to $4.0 million last year.  This difference was the result of theconsolidation of ProGold which commenced on May 1, 2003.

 

Selling, general and administrative expenses increased$36.7 million from 2003.  Sellingexpenses increased $32.1 million primarily due to the increases in the volume of products sold.  General and Administrative expenses increased$4.6 million due in part to higher employee benefit costs, increased industrymembership activity and general cost increases.

 

Interest income decreased $1.4 million from last yearprimarily due to the conversion of the Note Receivable from Crystech, LLC intoPreferred Equity, which occurred at the end of fiscal 2003.

 

Interest expense increased $3.3 million from lastyear. This was the result of the consolidation of ProGold along with anincreased average borrowing level for short-term debt, partially offset bylower long-term and short-term interest rates and a lower average borrowinglevel for long-term debt.

 

22

----

 

Non-member business activities resulted in a gain of$4.2 million in 2004, as compared to a gain of $5.8 million in 2003.  The gain in both years was due primarily toactivities related to Sidney Sugars.

 

Payments tomembers for sugarbeets, net of unit retains declared, increased by $100.3million from $338.6 million in 2003 to $438.9 million in 2004. This wasprimarily due to the increased size and quality of the crop processed in 2004.

 

**Comparison of the Years Ended August 31, 2003 and2002**

 

Revenue for the year ended August 31, 2003, was $829.2million, an increase of $54.0 million from 2002.  Revenue from total sugar sales increased 3.7percent due to a 2.6 percent increase in the average selling price perhundredweight and a 1.0 percent increase in hundredweight sold.  Revenue from pulp sales increased 14.0percent due to an 8.6 percent increase in the average selling price per ton anda 5.1 percent increase in the volume of pulp tons sold.  Revenue from molasses sales increased 133.7percent due to a 155.2 percent increase in the volume of molasses sold,partially offset by an 8.4 percent decrease in the average selling price perton.  This increase in the volume ofmolasses sold was due primarily to the additional sales associated with themolasses produced at the Sidney, Montana, factory.  Revenue from sales of Concentrated SeparatedBy-Product (CSB), a by-product of the molasses desugarization process,increased 5.3 percent due to an 8.6 percent increase in the average sellingprice per ton, partially offset by a 3.1 percent decrease in the volume of CSBsold.  Rental revenue on the ProGoldoperating lease was $8.6 million.

 

Cost of sales, exclusive of payments to members forsugarbeets, increased $84.0 million as compared to fiscal 2002.  The cost associated with the cost ofnon-member sugarbeets (Sidney crop) was $31.8 million for the year ended August31, 2003.  Direct processing costs forsugar and pulp increased 25.1 percent. This was due to harvesting 17.7 percent more sugarbeets (9.2 percent ofthe increase was attributable to the Sidney crop) and processing 16.4 percentmore sugarbeets (10.2 percent of the increase was attributable to the Sidneycrop).  Higher natural gas prices andincreased coal costs also added to this increase.  Fixed and committed expenses increased 8.8percent reflecting higher purchased power costs, insurance costs, and costsrelated to the operations of the Sidney, Montana, factory.  The change in the net realizable value ofproduct inventories impacted the cost of product sold favorably by $3.0 million.  The costs associated with sugar purchased tomeet customer needs were up $7.6 million due to delaying the commencement ofthe 2002 Red River Valley crop campaign. The 2002 Red River Valley crop campaign startup was delayed because ofadverse planting and growing conditions which slowed the maturity of thecrop.  As a result, additional sugar wasrequired to be purchased to service customers during this delay.  Costs related to ProGold were $4.0 million.

 

Selling, general and administrative expenses increased$3.9 million from 2002.  Selling expensesincreased $4.0 million primarily due to the increase in the volume of sugar sold along with increasedwarehousing costs and additional costs related to Sidney Sugars.  General and Administrative costs decreased $..1 million due to general cost reductions.

 

Interest income decreased $ .5 million from 2001primarily due to a lower average balance of investments and slightly lowerinterest rates.

 

Interest expense increased $2.3 million from 2001resulting from the consolidation of ProGold, increased average borrowing levelsfor short-term debt and increased average borrowing rates on long-term debt,partially offset by lower long-term average borrowing levels and lowershort-term interest rates.

 

23

----

 

Non-member business activities resulted in a gain of$5.8 million in 2003, as compared to a loss of $ .7 million in 2002.  The gain in 2003 was due primarily toactivities related to Sidney Sugars partially offset by the activities relatedto ProGold.  The loss in fiscal 2002 wascomprised mainly of activities related to ProGold.

 

Payments tomembers for PIK certificates, net of equity retention declared, during fiscal2002 amounted to $22.3 million.  Therewere no PIK payments during 2003.

 

Payments to membersfor sugarbeets, net of unit retains declared, decreased by $13.1 million from$351.7 million in 2002 to $338.6 million in 2003.

 

## **2004 Crop and Estimated Fiscal Year 2005 Information**

 

This discussion contains a summary of the Company’s and Sidney Sugars’current estimates of the financial results to be obtained from the Company’sand Sidney Sugars’ processing of the 2004 sugarbeet crops.  Given the nature of the estimates required inconnection with the payments to members and non-members for their sugarbeets,this discussion includes forward-looking statements regarding the quantity ofsugar to be produced from the 2004 sugarbeet crops, the net selling price forthe sugar and agri-products produced by the Company and the Company’s operatingcosts.  These forward-looking statementsare based largely upon the Company’s expectations and estimates of futureevents; as a result, they are subject to a variety of risks anduncertainties.  Some of those estimates,such as the selling price for the Company’s products and the quantity of sugarproduced from the sugarbeet crops, are beyond the Company’s control.  The actual results experienced by the Companyand Sidney Sugars could differ materially from the forward-looking statementscontained herein.

 

As noted earlier, the Growers’ Contracts between the Company and itsmembers and Sidney Sugars and the growers in Sidney, Montana, regarding thedelivery of sugarbeets to the Company and Sidney Sugars require payment forsugarbeets in multiple installments throughout the year after harvest of theapplicable sugarbeet crop.  As only thefinal payment is made after the close of the fiscal year in question, the firsttwo payments to members and non-members for sugarbeets are, of necessity, basedupon the Company’s and Sidney Sugars’ then-current estimates of the beetpayments arising from the processing of the crops in question and thesubsequent sale of the products obtained from processing those sugarbeets.

 

The completedharvest of the sugarbeet crop grown by members during 2004 produced a total of9.7 million tons of sugarbeets, or approximately 19.4 tons of sugarbeetsper acre from approximately 498,000 acres. This production was slightly less than the ten-year average of 19.5 tonsper acre for crops grown in the years 1994 through 2003.  The sugar content of the 2004 crop is 17.5percent in comparison to a ten year average for the applicable period ofapproximately 17.45 percent.  The Companyexpects to produce a total of approximately 28.2 million hundredweight of sugarfrom the 2004 crop, a decrease of approximately nine percent compared to the2003 crop.  Such sugar productionprovides a total sugar recovery of approximately 291 pounds of sugar for eachton of sugarbeets harvested by the Company.

 

The 2004Sidney Crop consisted of approximately 790,000 tons of sugarbeets, orapproximately 19.7 tons of sugarbeets per acre from approximately 40,000acres.  The sugar content of the SidneyCrop is 18.7 percent.  The Companyexpects to produce a total of approximately 2.3 million hundredweight of sugarfrom the Sidney Crop.

 

24

----

 

**TheCompany’s Current Strategic Plan**

** **

In order toobtain the best selling price for its products, the Company intends to focus onsales and marketing strategies that allow the Company to provide its customerswith an appropriate mixture of the Company’s products.  The Company plans to optimize its customermix, improve logistics and continue to evaluate and improve its customerperformance.

 

To pursue the goal of maintaining and improving upon its current statusas a low cost producer, the Company intends to focus on working with itsmembers to increase the productivity of the members’ sugarbeet farmingoperations.  The Company expects to focuson, among others, programs for nitrogen management and new seed varieties.  At the factory level, the Company plans tofocus on cost reductions and pursue on-going maintenance initiatives andtargeted capital improvements.  Aftercompleting several large strategic capital projects in recent years, theCompany currently intends to focus its efforts on strengthening its balancesheet while pursuing maintenance capital and high-return strategic capitalprojects.

 

**Item 7A.****                          QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Market risk is the risk of loss to future earnings, to fair values orto future cash flows that may result from changes in the price of a financialinstrument.  The value of a financialinstrument may change as a result of changes in the interest rates, exchangerates, 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 it is subject to any material marketrisk exposure with respect to interest rates, exchange rates, commodity prices,equity prices and other market changes that would require disclosure under thisitem.

 

**Item 8.****                                   FINANCIALSTATEMENTS**

 

The consolidated financial statements of the Company for the fiscalyears ended August 31, 2004, 2003 and 2002 have been audited by Eide BaillyLLP, independent registered public accounting firm.  Such consolidated financial statements havebeen included herein in reliance upon the report of Eide Bailly LLP.  The consolidated financial statements of theCompany are included in Appendix A to this annual report.

 

**Item 9.**                                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None

 

**Item9A.**                            CONTROLSAND PROCEDURES

 

The Company’schief executive officer and chief financial officer have reviewed and evaluatedthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the SecuritiesExchange Act of 1934) as of the end of the period covered by this annualreport.  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 all material respects to ensure that they areprovided with material information relating to the Company required to bedisclosed in the reports the Company files or submits under the SecuritiesExchange Act of 1934.

 

25

----

 

There have notbeen any significant changes in the Company’s internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation.  There were nosignificant deficiencies or material weaknesses identified and therefore nocorrective actions were taken.

 

**PART III**

** **

**Item 10.**                            DIRECTORSAND EXECUTIVE OFFICERS

** **

**Boardof Directors**

 

The Board of Directors of the Company consists of three directors fromeach of the five factory districts. Directors must hold common stock of the Company or must berepresentatives of such shareholders belonging to the district they representand are elected by the members of that district.  In the case of a holder of common stock whois other than a natural person, a duly appointed or elected representative ofsuch shareholder may serve as a director. The directors were elected to serve three-year terms expiring in December ofthe years indicated in the table below. One director is elected each year from each factory district.  A director cannot serve more than fourconsecutive three-year terms.

 

The tablebelow lists certain information concerning current directors of the Company.

 
| **Name  and Address**                                    | ** ** | **Age**    | ** ** | **Factory District** | ** ** | **Director  Since** | ** ** | **Term Expires  Dec.** |
|----------------------------------------------------------|------------|------------|------------|----------------------|------------|---------------------|------------|------------------------|
| ** **                                               | ** ** | ** ** | ** ** | ** **           | ** ** | ** **          | ** ** | ** **             |
| Michael A. Astrup  PO Box 219  Dilworth, MN 56529        |       | 51         |       | Moorhead             |       | 1996                |       | 2005                   |
| ** **                                               | ** ** | ** ** | ** ** | ** **           | ** ** | ** **          | ** ** | ** **             |
| Jerry D. Bitker  1694 Co. Highway #19  Halstad, MN 56548 |       | 56         |       | Hillsboro            |       | 1996                |       | 2005                   |
| ** **                                               | ** ** | ** ** | ** ** | ** **           | ** ** | ** **          | ** ** | ** **             |
| Richard Borgen  1544 Co. Highway #39  Perley, MN 56574   |       | 55         |       | Moorhead             |       | 1997                |       | 2006                   |
| ** **                                               | ** ** | ** ** | ** ** | ** **           | ** ** | ** **          | ** ** | ** **             |
| John Gudajtes  15363 County Road 15  Minto, ND 58261     |       | 56         |       | East Grand Forks     |       | 2003                |       | 2006                   |
| ** **                                               | ** ** | ** ** | ** ** | ** **           | ** ** | ** **          | ** ** | ** **             |
| Curtis Haugen  45508 300th St. NW  Argyle, MN 56713      |       | 43         |       | East Grand Forks     |       | 2001                |       | 2004                   |
|                                                     |       |       |       |                 |       |                |       |                   |
| Lonn M. Kiel  36044 275th Ave. S.W.  Crookston, MN 56716 |       | 51         |       | Crookston            |       | 1994                |       | 2006                   |
| ** **                                               | ** ** | ** ** | ** ** | ** **           | ** ** | ** **          | ** ** | ** **             |
| David J. Kragnes  10600 60th St. N.  Felton, MN 56536    |       | 52         |       | Moorhead             |       | 1995                |       | 2004                   |

 

26

----

 
| Francis L. Kritzberger  RR #1, Box 22  Hillsboro, ND 58045     |       | 59         |       | Hillsboro        |       | 1996       |       | 2006       |
|----------------------------------------------------------------|------------|------------|------------|------------------|------------|------------|------------|------------|
| ** **                                                     | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** |
| Patrick D. Mahar  502 E. 3rd Ave. S.  Cavalier, ND 58220-9789  |       | 61         |       | Drayton          |       | 1993       |       | 2005       |
|                                                           |       |       |       |             |       |       |       |       |
| Jeff McInnes  RR 2 Box 140  Hillsboro, ND 58045                |       | 47         |       | Hillsboro        |       | 2001       |       | 2004       |
|                                                           |       |       |       |             |       |       |       |       |
| Ronald E. Reitmeier  30928 220th St. S.W.  Fisher, MN 56723    |       | 59         |       | Crookston        |       | 1996       |       | 2005       |
| ** **                                                     | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** |
| Jim A. Ross  25669 328th Ave. S.W.  Fisher, MN 56723           |       | 54         |       | Crookston        |       | 1998       |       | 2004       |
| ** **                                                     | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** |
| G. Terry Stadstad  1774 22nd Avenue NE  Grand Forks, ND 58203  |       | 61         |       | East Grand Forks |       | 1993       |       | 2005       |
| ** **                                                     | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** |
| Robert Vivatson (Chairman)  13743 Pegg Rd.  Cavalier, ND 58220 |       | 54         |       | Drayton          |       | 1992       |       | 2004       |
|                                                           |       |       |       |             |       |       |       |       |
| Neil Widner  PO Box 47  Stephen, MN 56757                      |       | 53         |       | Drayton          |       | 2000       |       | 2006       |

 

Below is the biographical information on each Director.

 

**Michael A. Astrup.**  Mr. Astrup has been a director since1996.  Mr. Astrup has been a farmersince 1976, with his farming operations located near Dilworth, Minnesota.  Mr. Astrup is a Director of the AmericanSugarbeet Growers Association.

** **

**Jerry D. Bitker.**  Mr. Bitker has been a director since1996 and has been a farmer since 1974 near Halstad and Ada, Minnesota.

** **

**Richard Borgen.**  Mr. Borgen has been a director since1997.  Mr. Borgen has farmed east ofPerley, Minnesota, since 1967 and has served as a director on the Perley Co-opElevator Board for nine years and the Norman County West school board for 10years.  Mr. Borgen also serves on theBoard of Governors of ProGold Limited Liability Company.

** **

**John Gudajtes. **Mr. Gudajtes was elected a director in 2003.  Mr. Gudajtes has farmed in the Minto NorthDakota, area since 1967 and is the President of Gudajtes Farms.  Mr. Gudajtes is also the owner of QualityBean of Minto, North Dakota.  Mr.Gudajtes has been the President of Walsh County Historical Society for twoyears.

 

27

----

 

**Curtis Haugen. **Mr. Haugen has been a director since 2001.  Mr. Haugen has been a farmer since 1981****and farms near Argyle, Minnesota.  Mr. Haugen is serving as a director andPresident of the Farmer’s Union Oil Company, Oslo, Minnesota.

** **

**Lonn M. Kiel.**  Mr. Kiel has been a director since 1994and has been farming near Crookston, Minnesota, since 1982.  Mr. Kiel is the president of KielCorporation.

** **

**David J. Kragnes.**  Mr. Kragnes has been a director since1995.  Mr. Kragnes has been a farmersince 1972, with his farming operation located near Felton, Minnesota.  Mr. Kragnes serves on the Board ofDirectors of United Sugars Corporation and is also a director for the AmericanSugarbeet Growers Association.

** **

**Francis L. Kritzberger.**  Mr. Kritzberger has been a directorsince 1996.  Mr. Kritzberger haspreviously served as a director with the Company, from July 30, 1989 untilJuly 30, 1993.  Mr. Kritzbergerhas been a farmer since 1964. Mr. Kritzberger serves on the Board of Directors of the NorthDakota Council of Cooperatives.

** **

**Patrick D. Mahar.**  Mr. Mahar has been a director since 1993and has been a farmer since 1962. Mr. Mahar is currently a partner of Mahar Farms near Cavalier,North Dakota.  Mr. Mahar previouslyserved as president of the Red River Valley Sugarbeet Growers Association,Fargo, North Dakota, and as president of the American Sugarbeet Growers Association,Washington, D.C.  Mr. Mahar iscurrently serving as a director for Midwest Agri-Commodities Company and alsoon the Boards of Directors of United Valley Bank and Farmers Co-op Elevator,both of Cavalier, North Dakota.

** **

**Jeff McInnes.**  Mr. McInnes has been a director since2001.  Mr. McInnes co-manages a3,300 acre farming operation near Hillsboro, North Dakota.  Mr. McInnes is the founder and managerof the Basement Traders Marketing Club, a grain marketing association inHillsboro.

** **

**Ronald E. Reitmeier.**  Mr. Reitmeier has been a director since1996, and has been a farmer since 1968. Mr. Reitmeier is the President of R&J Crop Production Inc.  Mr. Reitmeier has served as Vice Chairman onthe Board of Directors of PKM Electric Co-op of Warren, Minnesota, for 19 yearsand as its Chairman of the Board since 2004. Mr. Reitmeier previously served on the Fisher, Minnesota, School Boardfor 18 years, as President of the Polk County Farmers Union and Chairman of theMinnesota Farmers Union Executive Committee of County Chairpersons.

** **

**Jim A. Ross.**  Mr. Ross has been a director since1998.  Mr. Ross has farmed near Fisher,Minnesota, since 1971 and is a board member of Fisher Fuel and HardwareCooperative.  Mr. Ross also serves on theBoard of Governors of ProGold Limited Liability Company.

** **

**G.****TerryStadstad.**  Mr. Stadstadhas been a director since 1993 and has been farming near Grand Forks, NorthDakota, since 1965.  Mr. Stadstadserves on the Board of Directors of United Sugars Corporation and as theChairman of the Board of Governors of ProGold Limited Liability Company.

** **

**Robert Vivatson.**  Mr. Vivatson has been a director since1992 and has served as Chairman since 2001. Operating as a farmer near Cavalier, North Dakota, since 1975,Mr. Vivatson is a partner of Vivatson Bros. and President of Vivatson FarmsInc.  Mr. Vivatson is serving on theBoard of Directors of United Sugars Corporation, Midwest Agri CommoditiesCompany, the United Valley Bank of Cavalier and Grand Forks and the Board ofGovernors of ProGold Limited Liability Company.

 

28

----

 

**Neil Widner. **Mr. Widner has been a director since 2000.  Mr. Widner has farmed near Stephen,Minnesota, since 1973.

 

The Board of Directors meets monthly. For fiscal year 2004, the Company provided its directors with compensationconsisting of (i) a payment of $400 per month, (ii) a per diempayment of $250 for each day spent on Company activities, including boardmeetings and other Company functions, and (iii) reimbursement of expensesfor attendance at Board of Directors’ meetings. The Chairman of the Board of Directors receives a payment of $900 permonth, rather than $400 per month; the Chairman also receives a per diem in theamount of $250 for each day spent on Company activities.

 

The Board of Directors has approved an increase in the monthlycompensation paid to directors to $500 per month for fiscal 2005, with futureannual increases of $25 per month for each fiscal year after fiscal 2005.  The monthly compensation payment for theChairman of the Board of Directors increases to $1,000 per month for fiscal2005, with future annual increases of $25 per month for each fiscal year after2005.

 

Under the terms of the Board of Directors Deferred Compensation Plan,members of the Board of Directors can elect to defer receipt of their monthlyand per diem compensation.  This is anannual irrevocable election made prior to January 1 of each calendar year thefees are to be paid.  The amounts are deferreduntil either withdrawal from the Board of Directors by a member or untilretirement from the member’s regular employment or business, but not beyond age65.  Two payment options are available atthe election of the participant. Payments can be received in a single lump sum or in equal installmentsover a period of up to ten years.  TheBoard of Directors, at its discretion, can elect to distribute the remainingbalance at any time.  Interest is earnedon the amounts deferred based on the five year Treasury bond rate.  Currently, there is one member who haselected to participate in this plan.  Theamount deferred, as of August 31, 2004 was $172,000.

 

**AuditCommittee and Audit Committee Financial Expert**

** **

The AuditCommittee assists the Board of Directors in fulfilling its oversightresponsibilities relating to the Company’s financial reporting and controls,the internal audit function, the annual independent audit of the Company’sconsolidated financial statements and the legal compliance and ethics programsas established by management and the Board of Directors.  The Audit Committee selects the independentpublic accountants, subject to approval of the Board of Directors, approvesaudit fees, and reviews the scope and procedural plans of the audit.  The Audit Committee administers the Company’semployee complaint program and handles, on behalf of the full Board ofDirectors, any issues that arise under the Company’s Code of Ethics.  On August 31, 2004, the members of the AuditCommittee were David J. Kragnes (Committee Chair), John Gudajtes, CurtisHaugen, Jeff McInnes and Neil Widner.

 

As of August 31, 2004, the Board of Directors of the Company hasdetermined that there is no audit committee financial expert serving on theAudit Committee.  The Company is acooperative formed in accordance with the Minnesota cooperative law of theState of Minnesota.  In accordance withthe Minnesota cooperative law, the Amended and Restated Articles of theIncorporation of the Company and the Amended and Restated Bylaws of theCompany, the Board of Directors must be composed of members of the Company (theholders of common stock).  Membership inthe Company is limited to agricultural producers who are actively involved inthe production of sugar beets.  Based onthe state law requirements for both membership and board service, the Companyis unable to recruit outside of its membership to elect to its Board ofDirectors and its audit committee an individual that possesses the attributesof an “audit committee financial expert” as defined by the SEC.  Todate, the Company has

 

29

----

 

been unable to recruit from itsmembership an individual to serve on the Board of Directors that possesses theattributes of an “audit committee financial expert.”

 

**ExecutiveOfficers**

 

The table below lists the principal officers of the Company, none ofwhom owns any shares of Common Stock or Preferred Stock.  Officers are elected annually by the Board ofDirectors.

 
| **Name**            | ** ** | **Age**    | ** ** | **Position**                                                                        |
|---------------------|------------|------------|------------|-------------------------------------------------------------------------------------|
| ** **          | ** ** | ** ** | ** ** | ** **                                                                          |
| James J.  Horvath   |       | 59         |       | President  and Chief Executive Officer                                              |
| Thomas S.  Astrup   |       | 35         |       | Vice  President- Agriculture                                                        |
| David A.  Berg      |       | 50         |       | Vice  President-Operations and Chief Operations Officer                             |
| Brian F.  Ingulsrud |       | 41         |       | Vice  President-Administration                                                      |
| Joseph J.  Talley   |       | 44         |       | Vice  President-Finance and Chief Financial Officer                                 |
| Daniel C.  Mott     |       | 45         |       | Secretary                                                                           |
| Samuel S. M.  Wai   |       | 50         |       | Treasurer  and Assistant Secretary                                                  |
| Mark P.  Kalvoda    |       | 32         |       | Corporate  Controller, Assistant Secretary and Assistant Treasurer                  |
| Mark L.  Lembke     |       | 48         |       | Finance  Administration Manager, Assistant Secretary and Assistant Treasurer   |
| David L.  Malmskog  |       | 47         |       | Director  Business Development, Assistant Secretary and Assistant Treasurer    |
| Ronald K.  Peterson |       | 49         |       | Accounting  & Systems Manager, Assistant Secretary and Assistant Treasurer |
| Lisa M.  Maloy      |       | 40         |       | Treasury  Operations Manager and Assistant Secretary                                |

 

**James J.Horvath.** Mr. Horvath was named President and Chief Executive Officer in May,1998.  He served as Chief FinancialOfficer from 1996 to 1998.  From 1994 to1996, Mr. Horvath served as the Company’s Vice President-Joint Ventures aswell as Chief Manager and Chief Operating Officer of ProGold Limited LiabilityCompany.  Mr. Horvath also served asthe Company’s Vice President-Finance from 1985 to 1994.  Mr. Horvath currently serves on theBoards of Directors of United Sugars Corporation and Midwest Agri-CommoditiesCompany.

 

**Thomas S. Astrup**.  Mr. Astrup was named the Company’s VicePresident-Agriculture in February 2004. Mr. Astrup served as the Company’s Vice President-Administration from2000 to 2004 and as the Company’s Corporate Controller, Assistant Treasurer andAssistant Secretary from 1999 to 2000. From 1997 until 1999, he held the position of Controller for MidwestAgri-Commodities Company.  He was the CorporateAccountant for ProGold Limited Liability Company from 1994 to 1997.

 

30

----

 

**David A.Berg.**  Mr. Bergwas named Vice President-Operations and Chief Operations Officer in January2004.  He was Vice President-Agricultureduring the period December 2000 to January 2004 and Vice President-Administrationduring the period from October 1998 to December 2000.  During the period from 1994 to 1998,Mr. Berg served as the Company’s Vice President-Business Development, VicePresident-Strategic Planning, Director-Market Information, Manager of Marketingand Analysis and Manager-Economic Research. Mr. Berg currently serves on the ProGold Limited Liability Company Boardof Governors and as Chairman of the Crystech, LLC Board of Managers.

 

**Brian F.Ingulsrud.**  Mr.Ingulsrud was named Vice President-Administration in February 2004.  From 2000 to 2004, he served as the CorporateController, Assistant Secretary and Assistant Treasurer.   Mr. Ingulsrud served as Director of AgricultureStrategy and Development from 1999 to 2000, Financial Planning Manager from1997 until 1998, and Factory Offices Manager from 1995 until 1997.

** **

**Joseph J. Talley.**  Mr. Talley currently serves as VicePresident-Finance and Chief Financial Officer of the Company and also as ChiefOperating Officer of Sidney Sugars Incorporated. Mr. Talley was named VicePresident-Finance in 1998, Chief Operating Officer of Sidney SugarsIncorporated in 2002 and Chief Financial Officer of the Company in 2003.  He served as the Company’s Treasurer andFinance Director, Assistant Treasurer and Assistant Secretary from 1996 untilhis appointment as Vice President-Finance. Mr. Talley served as Finance Director of ProGold Limited LiabilityCompany from 1994 through 1996.  Hecurrently serves on the Board of Governors for ProGold Limited Liability Company.  Prior to 1994, Mr. Talley was a partnerwith the accounting firm of Eide Helmeke & Co.

** **

**Daniel C. Mott.**  Mr. Mott became the Company’s Secretaryduring 1999.  Previously, he had servedas Assistant Secretary since 1995.  Mr.Mott also serves as the Company’s General Counsel.  He is a Shareholder in the law firm ofFredrikson & Byron, P.A.  Mr. Mott isnot an employee of the Company.

** **

**Samuel S. M. Wai.**  Mr. Wai was named the Company’sTreasurer and Assistant Secretary in 1999. He served as the Company’s Corporate Controller from 1996 until 1999 andwas the Company’s Treasurer from 1985 to 1996. He held various financial positions with the Company from 1979 to1985.  Mr. Wai also serves on theBoard of Managers of Crystech, LLC and as Treasurer of the American CrystalSugar Political Action Committee.  Mr.Wai also serves on the Board of Directors of the Institute of CooperativeFinancial Officers.

** **

**Mark P. Kalvoda.**  Mr. Kalvoda was named Assistant Secretary andAssistant Treasurer in 2004.  He was employedby the Company in 2004 and currently serves as the Corporate Controller.  Prior to his employment with the Company, Mr.Kalvoda held various financial positions within Hormel Foods Corporation.

** **

**Mark L. Lembke.**  Mr. Lembke was named Assistant Secretaryand Assistant Treasurer in 1996.  Hecurrently serves as Finance Administration Manager.  Mr. Lembke served as the Company’sCorporate Accounting Manager from 1995 to 1999. From 1987 through 1995, Mr. Lembke served as Factory AccountingSupervisor.

** **

**Ronald K. Peterson.**  Mr. Peterson has served as AssistantTreasurer and Assistant Secretary since 1993. He currently holds the position of Accounting and Systems Manager.  From 1996 to 1999 Mr. Peterson was theFinancial Systems Manager and from 1991 to 1995 served as the Company’sCorporate Accounting Manager. Mr. Peterson has held various financial positions with the Companysince 1979.

** **

**David L. Malmskog.**  Mr. Malmskog currently serves asDirector-Economic Analysis and Business Development and was appointed AssistantSecretary and Assistant Treasurer in 1998. Mr. Malmskog has held various financial positions with the Companysince 1980.

 

31

----

 

**Lisa M. Maloy.**Ms. Maloycurrently serves as Treasury Operations Manager and was appointed AssistantSecretary in 2002.  Prior to joining theCompany in 1997, Ms. Maloy was a tax attorney with Ernst & Young LLP inMinneapolis, Minnesota.

 

**Code ofEthics**

 

The Company has adopted a code of ethics that appliesto its principal executive officer, principal financial officer, principalaccounting officer or controller and certain other senior financialpersonnel.  The Company will provide atno charge a copy of the code of ethics to any person who requests a copy bysending a written request to the Company’s headquarters, attention of the ChiefExecutive Officer of the Company.

 

**Item11.**                                 EXECUTIVECOMPENSATION

 

The following table summarizes the amount of compensation paid forservices rendered to the Company during the fiscal year ended August 31,2004 and the two prior fiscal years to those persons serving as the Company’sChief Executive Officer, to the four other most highly compensated currentexecutive officers of the Company whose cash compensation exceeded $100,000 perannum and to one former executive officer whose cash compensation exceeded$100,000 per annum.

 

**SUMMARY COMPENSATION TABLE**

 
| ** **                     | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Long-Term  Compensation  Payouts (2)** | ** ** |
|--------------------------------|------------|------------|------------|-------------------------|------------|------------------------------------------|------------|
| ** **                     | ** ** | **Year**   | ** ** | **Salary**              | ** ** | **Incentive  Compensation**              | ** ** | **Other Annual  Compensation (1)** | ** ** | ** ** |
|                           |       |       |       |                    |       |                                     |       |   |   |   |   |
| James J. Horvath               |       | 2004       |       | $                       | 462,652    |                                     | $          | 313,875 |   | $ | 38,315 |   | $ | 83,828 |   |
| President and Chief Executive  |       | 2003       |       | $                       | 446,703    |                                     | $          | 200,359 |   | $ | 42,000 |   | $ | 23,479 |   |
| Officer                        |       | 2002       |       | $                       | 433,860    |                                     | $          | 342,155 |   | $ | 40,056 |   | $ | 4,879 |   |
|                           |       |       |       |                    |       |                                     |       |   |   |   |   |
| Thomas S. Astrup               |       | 2004       |       | $                       | 189,475    |                                     | $          | 90,048 |   | $ | 10,487 |   | $ | 5,453 |   |
| Vice President-Agriculture*    |       | 2003       |       | $                       | 173,497    |                                     | $          | 52,851 |   | $ | 10,579 |   | $ | 527 |   |
|                           |       | 2002       |       | $                       | 157,085    |                                     | $          | 77,077 |   | $ | 8,458 |   | — |   |
|                           |       |       |       |                    |       |                                     |       |   |   |   |   |
| David A. Berg                  |       | 2004       |       | $                       | 227,731    |                                     | $          | 110,000 |   | $ | 21,245 |   | $ | 18,211 |   |
| Vice President-Operations and  |       | 2003       |       | $                       | 211,000    |                                     | $          | 87,969 |   | $ | 20,941 |   | $ | 5,022 |   |
| Chief Operations Officer**     |       | 2002       |       | $                       | 196,923    |                                     | $          | 112,490 |   | $ | 19,824 |   | $ | 1,038 |   |
|                           |       |       |       |                    |       |                                     |       |   |   |   |   |
| Brian F. Ingulsrud             |       | 2004       |       | $                       | 137,552    |                                     | $          | 51,075 |   | $ | 8,290 |   | — |   |
| Vice President-Administration* |       | 2003       |       | $                       | 119,480    |                                     | $          | 21,098 |   | $ | 7,604 |   | — |   |
|                           |       | 2002       |       | $                       | 114,694    |                                     | $          | 23,895 |   | $ | 7,245 |   | — |   |
|                           |       |       |       |                    |       |                                     |       |   |   |   |   |
| Joseph J. Talley               |       | 2004       |       | $                       | 229,077    |                                     | $          | 128,296 |   | $ | 20,998 |   | $ | 18,325 |   |
| Vice President-Finance and     |       | 2003       |       | $                       | 211,001    |                                     | $          | 100,643 |   | $ | 21,408 |   | $ | 5,039 |   |
| Chief Financial Officer        |       | 2002       |       | $                       | 202,032    |                                     | $          | 127,225 |   | $ | 18,632 |   | $ | 1,038 |   |
|                           |       |       |       |                    |       |                                     |       |   |   |   |   |
| David A. Walden                |       | 2004       |       | $                       | 222,308    |                                     | $          | 18,854 |   | $ | 16,337 |   | $ | 18,476 |   |
| Director Factory Operations*** |       | 2003       |       | $                       | 211,877    |                                     | $          | 63,751 |   | $ | 20,786 |   | $ | 5,060 |   |
|                           |       | 2002       |       | $                       | 198,000    |                                     | $          | 103,464 |   | $ | 19,072 |   | $ | 1,038 |   |

 

----

*                               EffectiveFebruary 9, 2004

**                        EffectiveJanuary 12, 2004

***                 EffectiveJanuary 26, 2004

 

32

----

 

----

(1)                                  Includesthe cost of additional life insurance coverage, car allowance, costs of taxreturn preparation, Company 401(k) matching contributions, Company matchingSERP contributions, flexible spending taxable cash, and flexible spendingdollars into 401(k).

 

(2)                                  Representsthe “profit per acre payments” made to the executive under the Company’s LTIPplan (described below).  The profit peracre payments are determined by subtracting from the Company’s beet payment peracre the average cost of production per acre incurred by the Company’s membersand multiplying the result by the number of vested contract rights held by theexecutive.

 

**EmploymentAgreement with CEO**

 

Effective May 15, 1998, the Company and Mr. Horvath enteredinto an agreement regarding Mr. Horvath’s employment by the Company.  The agreement provides that Mr. Horvathshall serve as an “at will” employee at the pleasure of the Board ofDirectors.  The agreement also containsthe provision of a three-year non-compete/non-solicitation agreement with Mr. Horvath,grants the Board of Directors the authority to establish Mr. Horvath’s basecompensation each year, and also provides that he may participate in otherbenefit plans offered by the Company.

 

If Mr. Horvath’s employment terminates with the Company withoutcause or he incurs a termination due to disability after age 60,Mr. Horvath is entitled to receive reimbursement for the cost of medicaland dental coverage for himself and his spouse from the date of terminationthrough their respective deaths; life insurance coverage equal to his basesalary on the date of termination until he attains age 65, from age 65 to 70equal to 50 percent of his base salary on the date of termination, and afterage 70 equal to 25 percent of his base salary on the date of termination; andsupplemental pension benefits equal to the difference between the cumulativemonthly amount of the retirement benefit Mr. Horvath would have receivedunder Retirement Plan A and the Supplemental Executive Retirement Plan (SERP)computed as though Mr. Horvath continued his employment to age 65 assumingcompensation equal to that in effect as of the date of termination ofemployment and had attained 30 years of service with no reduction in benefitson account of an election by Mr. Horvath for any death benefit to be paid tohis spouse under the Retirement Plan A and the cumulative monthly amount of theretirement benefits actually paid to Mr. Horvath under Retirement Plan Aand the Supplemental Executive Retirement Plan (SERP).

 

If Mr. Horvath’s employment terminates with the Company withoutcause after age 60 and Mr. Horvath subsequently dies, or ifMr. Horvath dies prior to terminating his employment with the Company,Mr. Horvath’s spouse is entitled to receive monthly payments for theremainder of her life equal to the difference between the cumulative monthlyamount of the retirement benefit Mr. Horvath would have received underRetirement Plan A and the Supplemental Executive Retirement Plan (SERP)computed as though Mr. Horvath continued his employment to age 65 assumingcompensation equal to that in effect as of the date of termination ofemployment and had attained 30 years of service, with no reduction in benefitson account of an election by Mr. Horvath for any death benefit to be paid tohis spouse under the Retirement Plan A and the cumulative monthly amount of theretirement benefits actually payable to his spouse under Retirement Plan A andthe Supplemental Executive Retirement Plan (SERP).

 

33

----

 

**IncentivePlans**

** **

**Annual Incentive Plan**

 

The Company’s salaried employees are entitled to participate in anannual incentive program that provides for cash awards based partially on theperformance of the Company and partially on achievement of certain performanceobjectives.  The performance objectivesof the CEO are determined by the Board of Directors.  The performance objectives of otherexecutives are determined by the CEO. The amount of the incentive bonus is dependent on the employee’s responsibilities,the performance of the Company and the results of the employee’s evaluation forthe fiscal year.

** **

**Long-Term Incentive Plan**

 

Under this plan, which became effective in fiscal 2000, awards arebased upon progress towards achieving certain long-term strategic objectivesestablished by the Board of Directors. Incentive awards under the plan range from 0 to 40 percent of basecompensation for the Vice Presidents and from 0 to 80 percent of basecompensation for the CEO.  The actualamount of the award available to a given individual is based upon thecollective performance level of participants as determined by the Board ofDirectors.  Awards paid under the planmay be paid in the form of cash paid to the employee’s Supplemental ExecutiveRetirement Plan, as discussed below, or in the form of contract rights, in eachcase as determined by the Board of Directors. All awards will be subject to a three year vesting schedule.  The Board of Directors retains the discretionto determine the amount of any cash awards and/or contract rights to be madeavailable to plan participants with respect to a given fiscal year.

 

In fiscal 2004, 316.69 contract rights were granted at a stated valueof $1,750 per contract right or a total stated value of $554,212.  As of August 31, 2004, there were 1,673.29contract rights, at a total stated value of $2.9 million, issued andoutstanding, 1,089.69 of which were vested. The table below lists the executives named in the compensation table whohave been granted and hold contract rights.

 

**Long-Term Incentive Plan Awards**

 
| ** **             | ** ** | **Fiscal 2004  Contract Rights** | ** ** | **Total Contract Rights Held** | ** ** | **Fiscal 2004  Representative  Payout (1)** | ** ** |
|------------------------|------------|----------------------------------|------------|--------------------------------|------------|---------------------------------------------|------------|
| **Executive Officers** | ** ** | **Granted**                      | ** ** | **Stated Value**               | ** ** | **Granted**                                 | ** ** | **Vested** | ** ** | **Stated Value** | ** ** | ** ** |
| ** **             | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| James J. Horvath       |       | 176.17                           |       | $                              | 308,295    |                                        | 936.01     |   | 619.22 |   | $ | 1,638,020 |   | $ | 83,828 |   |
| Thomas S. Astrup       |       | 36.37                            |       | $                              | 63,648     |                                        | 121.57     |   | 58.12 |   | $ | 212,752 |   | $ | 5,453 |   |
| David A. Berg          |       | 43.63                            |       | $                              | 76,355     |                                        | 213.15     |   | 136.45 |   | $ | 373,014 |   | $ | 18,211 |   |
| Brian F. Ingulsrud     |       | 16.57                            |       | $                              | 29,006     |                                        | 16.57      |   | — |   | $ | 29,006 |   | $ | — |   |
| Joseph J. Talley       |       | 43.95                            |       | $                              | 76,908     |                                        | 214.37     |   | 137.35 |   | $ | 375,142 |   | $ | 18,325 |   |
| David A. Walden        |       | —                           |       | —                         |       | 171.62                                      |       | 138.55 |   | $ | 300,334 |   | $ | 18,476 |   |

 

34

----

 

----

(1)                                  Theamount shown represents a representative amount, determined for the last fiscalyear, with respect to “profit per acre payments”, which are non-stock pricebased payments.  The profit per acrepayments are determined by subtracting from the Company’s net beet payment peracre the average cost of production per acre incurred by the Company’s membersand multiplying the result by the number of vested contract rights held by theexecutive.  Based on that formula, theCompany must provide a beet payment per acre to its members equal to theaverage cost of production for an acre of sugarbeets in order for executivesholding contract rights to obtain any payment of profit per acre payments.  Given the method of determining the profitper acre payments, there is no maximum payment amount.

 

**RetirementPlans**

 

The Company and Sidney Sugars have established noncontributory, definedbenefit retirement plans which are available to all eligible employees of theCompany and Sidney Sugars.  Thoseemployees who are covered by a collective bargaining agreement participate inPlan B, while employees who are not subject to a collective bargainingagreement, including the executive officers listed on the Summary CompensationTable, participate in pension Plan A. The benefits of the plans are funded by periodic Company contributionsto a retirement trust which invests the Company’s contributions and theearnings from such contributions in order to pay the benefits to theemployees.  The plans provide for thepayment of monthly retirement benefits determined under a calculation based onyears of service and a participant’s compensation.  Retirement benefits are paid to participantsupon normal retirement at the age of 65 or later or upon early retirement.  The plans also provide for the payment ofcertain disability and death benefits.

 

Certain executive employees of the Company are eligible to participatein a “Supplemental Executive Retirement Plan.” Subject to the discretion of the Board of Directors, the plan providesfor the Company to credit to the account of each executive eligible toparticipate in the Supplemental Plan amounts equal to (i) the differencebetween amounts actually contributed to the Company’s 401(k) plan on behalf ofthe executive and the amounts which could have been contributed if certainprovisions of the Internal Revenue Code did not prohibit the contribution ofsuch amounts and (ii) the difference between the benefits actually payable tothe executive under the provisions of Retirement Plan “A” and the amounts whichwould be payable under Retirement Plan “A” if certain provisions of theInternal Revenue Code did not prohibit the payment of such benefits.  In addition, the executive may elect to defera portion of his or her compensation, ranging from 2 percent to 20 percent, byregular payroll deductions under the Supplemental Plan, and may also defer 100percent of all incentive compensation and profits-per-acre payments.  The Supplemental Plan is an “unfunded” plan,with all amounts to be paid under the Supplemental Plan to be paid from thegeneral assets of the Company when due and also to be subject to the claims ofthe Company’s creditors.

 

The table below shows the approximate annual pension benefits payableto executive officers at normal retirement under Retirement Plan A, as well asa non-qualified supplemental benefit plan. The compensation covered by the pension program is based on an employee’sannual salary and incentive compensation. Amounts payable are computed on the basis of a straight life annuity andare not reduced for social security benefits or other offsets.

 

35

----

** **

**American Crystal Sugar Company**

**2004 Calculation**

**Plan A Qualified and Non-Qualified Supplemental Benefits**

 
| ** **       | ** ** | **Years of Service** | ** ** |
|------------------|------------|----------------------|------------|
| **Remuneration** | ** ** | **15**               | ** ** | **20** | ** ** | **25** | ** ** | **30** | ** ** | **35** | ** ** |
|             |       |                 |       |   |   |   |   |   |   |   |   |
| $125,000         |       | $                    | 23,473     |   | $ | 31,297 |   | $ | 39,122 |   | $ | 46,946 |   | $ | 46,946 |   |
| $150,000         |       | $                    | 28,723     |   | $ | 38,297 |   | $ | 47,872 |   | $ | 57,446 |   | $ | 57,446 |   |
| $175,000         |       | $                    | 33,973     |   | $ | 45,297 |   | $ | 56,622 |   | $ | 67,946 |   | $ | 67,946 |   |
| $200,000         |       | $                    | 39,223     |   | $ | 52,297 |   | $ | 65,372 |   | $ | 78,446 |   | $ | 78,446 |   |
| $225,000         |       | $                    | 44,473     |   | $ | 59,297 |   | $ | 74,122 |   | $ | 88,946 |   | $ | 88,946 |   |
| $250,000         |       | $                    | 49,723     |   | $ | 66,297 |   | $ | 82,872 |   | $ | 99,446 |   | $ | 99,446 |   |
| $300,000         |       | $                    | 60,223     |   | $ | 80,297 |   | $ | 100,372 |   | $ | 120,446 |   | $ | 120,446 |   |
| $400,000         |       | $                    | 81,223     |   | $ | 108,297 |   | $ | 135,372 |   | $ | 162,446 |   | $ | 162,446 |   |
| $450,000         |       | $                    | 91,723     |   | $ | 122,297 |   | $ | 152,872 |   | $ | 183,446 |   | $ | 183,446 |   |
| $500,000         |       | $                    | 102,223    |   | $ | 136,297 |   | $ | 170,372 |   | $ | 204,446 |   | $ | 204,446 |   |
| $600,000         |       | $                    | 123,223    |   | $ | 164,297 |   | $ | 205,372 |   | $ | 246,446 |   | $ | 246,446 |   |
| $700,000         |       | $                    | 144,223    |   | $ | 192,297 |   | $ | 240,372 |   | $ | 288,446 |   | $ | 288,446 |   |
| $800,000         |       | $                    | 165,223    |   | $ | 220,297 |   | $ | 275,372 |   | $ | 330,446 |   | $ | 330,446 |   |
| $900,000         |       | $                    | 186,223    |   | $ | 248,297 |   | $ | 310,372 |   | $ | 372,446 |   | $ | 372,446 |   |
| $1,000,000       |       | $                    | 207,223    |   | $ | 276,297 |   | $ | 345,372 |   | $ | 414,446 |   | $ | 414,446 |   |

 

The five executive officers named in the Summary Compensation Table whoare currently employees of the Company, have years of service under the plan asfollows: Mr. Horvath has served for 19 years; Mr. Astrup has servedfor 10 years; Mr. Berg has served for 17 years; Mr. Ingulsrud has served for 13years; and Mr. Talley has served for 10 years.

 

The Company maintains Section 401(k) plans that permit employees toelect to set aside, on a pre-tax and after-tax basis, a portion of their grosscompensation in trust to pay future retirement benefits.  The Company matches 100 percent of thenonunion and eligible union year-round participant’s pre-tax contribution up to4 percent and 2 percent respectively of their gross earnings.  The total annual addition to any employee’saccount in any calendar year may not exceed the lesser of (i) $40,000 or(ii) 100 percent of annual compensation less the amount of the employermatch and the employee deferral.  Forcalendar 2004, the employee pre-income tax contribution is limited to $13,000and an additional $3,000 of Catch-up contributions, if applicable.  Benefits under the 401(k) plans can begin tobe paid to the employee upon the close of the plan year in which one of thefollowing events has occurred: the date the employee attains age 591⁄2, the datethe employee terminates his service with the employer and the date specified ina written election made by the employee to receive benefits no later thanApril 1 of the year following the calendar year in which the employeeretires, dies, becomes disabled, reaches age 701⁄2 or is terminated.

 

**Item12.    SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

Under state law and the Company’s Bylaws, each member of the cooperativeis entitled to one vote, regardless of the number of shares the memberholds.  The Common Stock of the Companyis voting stock and each member of the Company holds one share of Common Stock.  The Preferred Stock of the Company isnon-voting stock.  The Company’s stockcan only be held by individuals who are

 

36

----

 

sugarbeet growers.  None of the officers or executives of theCompany hold stock of the Company.  Asmembers of the cooperative, each director owns one share of Common Stock and isentitled to one vote.  As a group, thedirectors generally own approximately 2 to 3 percent of the outstandingPreferred Stock.

 

**Item13.    CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

** **

Each of the Company’s directors is also a sugarbeet farmer and ashareholder member or representative of a shareholder member of theCompany.  By virtue of their status assuch members of the Company, each director or the member he represents sellssugarbeets to the Company and receives payments for those sugarbeets.  Such payments for sugarbeets often exceed$60,000.  Such payments, however, arereceived by the directors or the entities they represent on exactly the samebasis as payments received by other members of the Company for the delivery oftheir sugarbeets.  Except for thesugarbeet sales described in the preceding sentences, none of the directors orexecutive officers of the Company have engaged in any other transactions withthe Company involving amounts in excess of $60,000.

 

**Item14.    PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

** **

The followingtable presents fees for professional audit services rendered by Eide Bailly LLPfor the audits of the Company’s and consolidated companies’ annual financialstatements for the years ended August 31, 2004 and 2003 and fees for otherservices rendered by Eide Bailly LLP during those periods.

 
| **(In Thousands)** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Audit Fees         |       | $        | 121        |     | $          | 102 |   |
| Audit-Related Fees |       | 45       |       | 64       |       |
| Tax Fees           |       | 43       |       | 33       |       |
| All Other Fees     |       | —   |       | —   |       |
| Total              |       | $        | 209        |     | $          | 199 |   |

 

**Audit Fees.**  The Audit Fees set forth above include theaggregate fees billed by Eide Bailly LLP to the Company for audit servicesrelated to the audit of the Company’s and consolidated companies’ annualfinancial statements and review of the statements included in the Company’squarterly reports on Form 10-Q for fiscal 2004 and fiscal 2003.

** **

**Audit-Related Fees.**  The Audit-Related Fees set forth aboveinclude the aggregate fees billed byEide Bailly LLP to the Company and consolidated companies for assurance andrelated services provided by Eide Bailly LLP related to the performance of theaudit or review of the Company’s financial statements for fiscal 2004 andfiscal 2003.  These services include:Benefit Plan audits; Sarbanes-Oxley Act advisory services; and accountingresearch.

** **

**Tax Fees.**  The Tax Fees set forth above include theaggregate fees billed by Eide Bailly LLPto the Company and consolidatedcompanies for professional services rendered by Eide Bailly for taxcompliance, tax advice and tax planning for fiscal 2004 and fiscal 2003.  Theseservices include tax return preparation, tax planning and tax research.

** **

**All Other Fees.**  The All Other Fees set forth above includethe aggregate fees billed by Eide Bailly LLP to the Company and consolidated companies forprofessional services provided by Eide

 

37

----

 

Bailly LLP to the Company and consolidated companies.  There were no other fees paid to Eide BaillyLLP for fiscal 2004 or fiscal 2003.

The Company’s Audit Committeepre-approves all professional services provided by Eide Bailly LLP to theCompany.  Annually, management presentsthe Audit Committee with proposals for such services.  At that time, the Audit Committee approves ordisapproves the professional services. The Audit Committee approved all****of the services and the fees billedfor such services to the Company that are included above.  The Audit Committee makes its decisions onthe approval of services with due consideration given to maintaining theindependence of the principal accountant. None of the hours expended onthe audit of the 2004 financial statements were attributed to work performed bypersons who were not employed full time on a permanent basis by Eide BaillyLLP.

 

38

----

** **

**PART IV**

** **

**Item15.    EXHIBITS, FINANCIAL STATEMENTSCHEDULES, AND REPORTS ON FORM 8-K.**

 
| (a)    |   | Documents filed as part of this report                                                                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                           |   |
|   |   | 1.                                                                                                             | Consolidated Financial Statements |
|   |   |                                                                                                           | Report of Independent Registered Public Accounting Firm |
|   |   |                                                                                                           | Consolidated Statements of Operations for the Years Ended  August 31, 2004, 2003 and 2002 |
|   |   |                                                                                                           | Consolidated Balance Sheets as of August 31, 2004 and 2003 |
|   |   |                                                                                                           | Consolidated Statements of Changes in Members’  Investments for the Years Ended August 31, 2004, 2003 and 2002 |
|   |   |                                                                                                           | Consolidated Statements of Cash Flows for the Years Ended  August 31, 2004, 2003 and 2002 |
|   |   |                                                                                                           | Notes to the Consolidated Financial Statements |
|   |   |                                                                                                           |   |
|   |   | 2.                                                                                                             | Financial Statement Schedules |
|   |   |                                                                                                           | None |
|   |   |                                                                                                           |   |
|   |   | 3.                                                                                                             | The exhibits to this Annual Report on Form 10-K are listed in the  Exhibit Index on pages E-1 to E-4 of this report |
|   |   |                                                                                                           |   |
| (b)    |   | Reports on Form 8-K                                                                                            |
|   |   |                                                                                                           |
|   |   | None                                                                                                           |
|   |   |                                                                                                           |
| (c)    |   | Exhibits                                                                                                       |
|   |   |                                                                                                           |
|   |   | The response to this portion of Item 15 is included as a separate  section of this Annual Report on Form 10-K. |

** **

**39**

----

 

**SIGNATURES**

** **

Pursuant to the requirements of Section 13 or 15 of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, onNovember 24, 2004.

 
|     | AMERICAN CRYSTAL SUGAR COMPANY |
|----------|--------------------------------|
|     | By:                            | /s/ JAMES J.  HORVATH | * * |
|     |                           | *President  and Chief Executive Officer* |
| * * | * *                       | * * |
| * * | Dated:  November 24, 2004 |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed by the following persons on behalf of theregistrant in the capacities and on the dates indicated.

 
| **Signature**               | ** ** | **Title**                              | ** **                                  | **Date**   |
|-----------------------------|------------|----------------------------------------|---------------------------------------------|------------|
| ** **                  | ** ** | ** **                             | ** **                                  | ** ** |
| /s/ JAMES J.  HORVATH       |       |                                   | President  and Chief Executive Officer      |       | November 24,  2004 |
|                        |       | (Principal  Executive Officer)         |                                        |       |
|                        |       |                                   |                                        |       |
| /s/ JOSEPH  J. TALLEY       |       |                                   | Vice  President-Finance and Chief Financial |       | November 24,  2004 |
|                        |       | Officer  (Principal Financial Officer) |                                        |       |
|                        |       |                                   |                                        |       |
| /s/ MARK P.  KALVODA        |       |                                   | Corporate  Controller                       |       | November 24,  2004 |
|                        |       | (Principal  Accounting Officer)        |                                        |       |
|                        |       |                                   |                                        |       |
| /s/ MICHAEL  A. ASTRUP      |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ JERRY D.  BITKER        |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ RICHARD  BORGEN         |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ JOHN  GUDAJTES          |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ CURTIS  HAUGEN          |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ LONN M.  KIEL           |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ DAVID J.  KRAGNES       |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ FRANCIS  L. KRITZBERGER |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ PATRICK  D. MAHAR       |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ JEFF  MCINNES           |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ RONALD  E. REITMEIER    |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ JIM A.  ROSS            |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ G. TERRY  STADSTAD      |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ ROBERT  VIVATSON        |       |                                   | Director                                    |       | November 24,  2004 |
|                        |       |                                   |                                        |       |   |
| /s/ NEIL  WIDNER            |       |                                   | Director                                    |       | November 24,  2004 |

** **

**40**

----

 

**APPENDIXA**

** **

**INDEX TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

 
| **AMERICAN CRYSTAL SUGAR COMPANY**                                                                                        |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|
| CONSOLIDATED  FINANCIAL STATEMENTS:                                                                                       |   |
| Report  of Independent Registered Public Accounting Firm                                                                  |   |
| Consolidated  Statements of Operations for the Years Ended August 31, 2004, 2003 and  2002                           |   |
| Consolidated Balance Sheets  as of August 31, 2004 and 2003                                                          |   |
| Consolidated  Statements of Changes in Members’ Investments for the Years Ended  August 31, 2004, 2003 and 2002 |   |
| Consolidated  Statements of Cash Flows for the Years Ended August 31, 2004, 2003 and  2002                           |   |
| Notes to  the Consolidated Financial Statements                                                                           |   |

 

A-1

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Audit Committee of American Crystal Sugar Company

Moorhead, Minnesota

 

We have audited the accompanying consolidated balancesheets of American Crystal Sugar Company (a Minnesota cooperative corporation)as of August 31, 2004 and 2003, and the related consolidated statements ofoperations, changes in members’ investments and cash flows for the years endedAugust 31, 2004, 2003 and 2002. These consolidated financial statements are the responsibility of theCompany’s management.  Our responsibilityis to express an opinion on these consolidated financial statements based onour audits.

 

We conducted our audits inaccordance with standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of American Crystal Sugar Company andsubsidiaries as of August 31, 2004 and 2003, and the results of theiroperations and their cash flows for the years ended August 31, 2004, 2003and 2002, in conformity with accounting principles generally accepted in theUnited States of America.

 
| /s/ EIDE BAILLY LLP       |   |
|---------------------------|--------|
|                      |
| Sioux Falls, South Dakota |
| October 5, 2004      |

 

A-2

----

 

**AmericanCrystal Sugar Company**

**Consolidated Statements of Operations**

**For theYears Ended August 31**

**(InThousands)**

 
| ** **                                                                  | ** ** | **2004**    | ** **    | **2003**   | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------|---------------|------------|------------|----------|------------|
| **Net  Revenue**                                                            | ** ** | **$**       | **1,033,088** | ** ** | $          | 829,246  |       | $ | 775,288 |   |
| ** **                                                                  | ** ** | ** **  | ** **    |       |       |     |       |
| **Cost of  Sales**                                                          | ** ** | **338,368** | ** **    | 290,831    |       | 206,789  |       |
| ** **                                                                  | ** ** | ** **  | ** **    |       |       |     |       |
| **Gross  Proceeds**                                                         | ** ** | **694,720** | ** **    | 538,415    |       | 568,499  |       |
| ** **                                                                  | ** ** | ** **  | ** **    |       |       |     |       |
| **Selling,  General and Administrative Expenses**                           | ** ** | **199,934** | ** **    | 163,280    |       | 159,376  |       |
|                                                                        |       |        | ** **    |       |       |     |       |
| **Operating  Proceeds**                                                     | ** ** | **494,786** | ** **    | 375,135    |       | 409,123  |       |
|                                                                        |       |        | ** **    |       |       |     |       |
| **Other  Income (Expense):**                                                |       |        | ** **    |       |       |     |       |
| Interest Income                                                             | ** ** | **169**     | ** **    | 1,520      |       | 2,009    |       |
| Interest  Expense, Net                                                      | ** ** | **(20,149** | **)**         | (16,871    | )          | (14,578  | )          |
| Other, Net                                                                  | ** ** | **2,097**   | ** **    | 3,334      |       | 2,098    |       |
|                                                                        |       |        | ** **    |       |       |     |       |
| **Total  Other (Expense)**                                                  | ** ** | **(17,883** | **)**         | (12,017    | )          | (10,471  | )          |
| ** **                                                                  | ** ** | ** **  | ** **    |       |       |     |       |
| **Proceeds  Before Minority Interest and Income Tax Expense**               | ** ** | **476,903** | ** **    | 363,118    |       | 398,652  |       |
| ** **                                                                  | ** ** | ** **  | ** **    |       |       |     |       |
| **Minority  Interest**                                                      | ** ** | **(3,593**  | **)**         | (1,142     | )          | —   |       |
| ** **                                                                  | ** ** | ** **  | ** **    |       |       |     |       |
| **Income  Tax Expense**                                                     | ** ** | **(188**    | **)**         | (74        | )          | (64      | )          |
|                                                                        |       |        | ** **    |       |       |     |       |
| **Net  Proceeds Resulting from Member and Non-Member Business**             | ** ** | **$**       | **473,122**   | ** ** | $          | 361,902  |       | $ | 398,588 |   |
| ** **                                                                  | ** ** | ** **  | ** **    |       |       |     |       |
| **Distributions  of Net Proceeds:**                                         |       |        | ** **    |       |       |     |       |
| Credited  (Charged) to Members’ Investments:                           |       |        | ** **    |       |       |     |       |
| Non-Member  Business Income (Loss)                                          | ** ** | **$**       | **4,240**     | ** ** | $          | 5,799    |       | $ | (733 | ) |
| Equity Retention  Declared to Members                                       | ** ** | **—**  | ** **    | —     |       | 1,177    |       |
| Unit Retains  Declared to Members                                           | ** ** | **29,991**  | ** **    | 17,486     |       | 24,154   |       |
| Net Credit to  Members’ Investments                                    | ** ** | **34,231**  | ** **    | 23,285     |       | 24,598   |       |
| Payments to  Members for PIK Certificates, Net of Equity Retention Declared | ** ** | **—**  | ** **    | —     |       | 22,320   |       |
| Payments to  Members for Sugarbeets, Net of Unit Retains Declared           | ** ** | **438,891** | ** **    | 338,617    |       | 351,670  |       |
| **Total**                                                                   | ** ** | **$**       | **473,122**   | ** ** | $          | 361,902  |       | $ | 398,588 |   |

 

The Accompanying Notes arean Integral Part of These Consolidated Financial Statements.

 

A-3

----

 

**American Crystal Sugar Company**

**Consolidated Balance Sheets**

**August 31**

**(In Thousands)**

 

**Assets**

 
| ** **                                     | ** ** | **2004**     |        | **2003** | ** ** |
|------------------------------------------------|------------|--------------|-------------|----------|------------|
| **Current  Assets:**                           |       |         |        |     |       |
| Cash and Cash  Equivalents                     | ** ** | **$**        | **184**     |     | $          | 859 |   |
| Receivables:                                   |       |         |        |     |       |
| Trade                                          | ** ** | **79,185**   |        | 64,056   |       |
| Members                                        | ** ** | **5,105**    |        | 3,993    |       |
| Other                                          | ** ** | **4,085**    |        | 4,403    |       |
| Advances to  Related Parties                   | ** ** | **13,199**   |        | 4,891    |       |
| Inventories                                    | ** ** | **129,285**  |        | 130,981  |       |
| Prepaid Expenses                               | ** ** | **4,846**    |        | 7,062    |       |
|                                           |       |         |        |     |       |
| **Total  Current Assets**                      | ** ** | **235,889**  |        | 216,245  |       |
|                                           |       |         |        |     |       |
| **Property  and Equipment:**                   |       |         |        |     |       |
| Land                                           | ** ** | **43,195**   |        | 39,393   |       |
| Buildings                                      | ** ** | **93,988**   |        | 90,181   |       |
| Equipment                                      | ** ** | **809,775**  |        | 794,416  |       |
| Construction in  Progress                      | ** ** | **3,118**    |        | 4,989    |       |
| Less Accumulated  Depreciation                 | ** ** | **(619,534** | )           | (586,167 | )          |
|                                           |       |         |        |     |       |
| **Net  Property and Equipment**                | ** ** | **330,542**  |        | 342,812  |       |
|                                           |       |         |        |     |       |
| **Net  Property and Equipment Held for Lease** | ** ** | **160,643**  |        | 170,656  |       |
|                                           |       |         |        |     |       |
| **Other  Assets:**                             |       |         |        |     |       |
| Investments in  CoBank, ACB                    | ** ** | **19,069**   |        | 21,685   |       |
| Investments in  Marketing Cooperatives         | ** ** | **4,487**    |        | 6,166    |       |
| Investments in  Crystech, LLC                  | ** ** | **15,353**   |        | 15,330   |       |
| Other Assets                                   | ** ** | **56,343**   |        | 36,857   |       |
|                                           |       |         |        |     |       |
| **Total  Other Assets**                        | ** ** | **95,252**   |        | 80,038   |       |
|                                           |       |         |        |     |       |
| **Total  Assets**                              | ** ** | **$**        | **822,326** |     | $          | 809,751 |   |

 

The Accompanying Notes arean Integral Part of These Consolidated Financial Statements.

 

A-4

----

 

**Liabilities and Members’ Investments**

 
| ** **                                                  | ** ** | **2004**    | ** **  | **2003**   | ** ** |
|-------------------------------------------------------------|------------|-------------|-------------|------------|------------|
| **Current  Liabilities:**                                   |       |        | ** **  |       |       |
| Short-Term Debt                                             | ** ** | **$**       | **30,199**  | ** ** | $          | 49,989 |   |
| Current  Maturities of Long-Term Debt                       | ** ** | **20,932**  | ** **  | 11,282     |       |
| Accounts Payable                                            | ** ** | **27,336**  | ** **  | 23,192     |       |
| Advances Due to  Related Parties                            | ** ** | **8,035**   | ** **  | 4,604      |       |
| Other Current  Liabilities                                  | ** ** | **20,227**  | ** **  | 18,710     |       |
| Amounts Due  Growers                                        | ** ** | **70,487**  | ** **  | 58,896     |       |
|                                                        |       |        | ** **  |       |       |
| **Total  Current Liabilities**                              | ** ** | **177,216** | ** **  | 166,673    |       |
|                                                        |       |        | ** **  |       |       |
| **Long-Term  Debt, Net of Current Maturities**              | ** ** | **250,086** | ** **  | 286,922    |       |
|                                                        |       |        | ** **  |       |       |
| **Accrued  Employee Benefits**                              | ** ** | **33,939**  | ** **  | 31,053     |       |
|                                                        |       |        | ** **  |       |       |
| **Other  Liabilities**                                      | ** ** | **10,297**  | ** **  | 10,988     |       |
|                                                        |       |        | ** **  |       |       |
| **Total  Liabilities**                                      | ** ** | **471,538** | ** **  | 495,636    |       |
|                                                        |       |        | ** **  |       |       |
| **Commitments  and Contingencies (See Note 18)**            |       |        | ** **  |       |       |
|                                                        |       |        | ** **  |       |       |
| **Minority  Interest in ProGold Limited Liability Company** | ** ** | **47,362**  | ** **  | 43,769     |       |
|                                                        |       |        | ** **  |       |       |
| **Members’  Investments:**                             |       |        | ** **  |       |       |
| Preferred Stock                                             | ** ** | **38,275**  | ** **  | 38,275     |       |
| Common Stock                                                | ** ** | **29**      | ** **  | 30         |       |
| Additional Paid-In  Capital                                 | ** ** | **152,261** | ** **  | 148,238    |       |
| Unit Retains                                                | ** ** | **138,714** | ** **  | 125,409    |       |
| Equity Retention                                            | ** ** | **2,708**   | ** **  | 2,719      |       |
| Accumulated  Other Comprehensive Income (Loss)              | ** ** | **(376**    | **)**       | (11,900    | )          |
| Retained  Earnings (Accumulated Deficit)                    | ** ** | **(28,185** | **)**       | (32,425    | )          |
|                                                        |       |        | ** **  |       |       |
| **Total  Members’ Investments**                        | ** ** | **303,426** | ** **  | 270,346    |       |
|                                                        |       |        | ** **  |       |       |
| **Total  Liabilities and Members’ Investments**        | ** ** | **$**       | **822,326** | ** ** | $          | 809,751 |   |

 

The Accompanying Notes arean Integral Part of These Consolidated Financial Statements.

 

A-5

----

 

**American Crystal Sugar Company**

**Consolidated Statements of Changes in Members’Investments**

**For the Years Ended August 31**

**(In Thousands)**

 
| ** **                                                | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Unit  Retains** | ** **  | **Equity  Retention** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Retained  Earnings  (Accumulated  Deficit)** | ** ** | **Total**   | ** ** | **Annual  Comprehensive  Income (Loss)** | ** ** |
|-----------------------------------------------------------|------------|----------------------|------------|-------------------|------------|----------------------------------|------------|-------------------|-------------|-----------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|-------------|------------|------------------------------------------|------------|
| **Balance,  August 31, 2001**                             |       | $                    | 38,275     |              | $          | 31                               |       | $                 | 137,241     |                  | $          | 116,480                                              |       | $                                              | 1,560      |        | $          | (436                                     | )          | $ | (37,491 | ) | $ | 255,660 |   |   |   |
| Non-Member  Business (Loss)                               |       | —               |       | —            |       | —                           |       | —            |        | —                |       | —                                               |       | (733                                           | )          | (733        | )          | $                                        | (733       | ) |
| Pension Liability  Adjustment                             |       | —               |       | —            |       | —                           |       | —            |        | —                |       | (881                                                 | )          | —                                         |       | (881        | )          | (881                                     | )          |
| Unit Retains  Withheld from Members                       |       | —               |       | —            |       | —                           |       | 24,154            |        | —                |       | —                                               |       | —                                         |       | 24,154      |       | —                                   |       |
| Equity Retention                                          |       | —               |       | —            |       | —                           |       | —            |        | 1,177                 |       | —                                               |       | —                                         |       | 1,177       |       | —                                   |       |
| Payments of Unit  Retains and Equity Retention to Members |       | —               |       | —            |       | —                           |       | (16,533           | )           | (4                    | )          | —                                               |       | —                                         |       | (16,537     | )          | —                                   |       |
| Stock Issued, Net                                         |       | —               |       | (1                | )          | 5,828                            |       | —            |        | —                |       | —                                               |       | —                                         |       | 5,827       |       | —                                   |       |
|                                                      |       |                 |       |              |       |                             |       |              |        |                  |       |                                                 |       |                                           |       |        |       |                                     |       |
| **Balance,  August 31, 2002**                             |       | 38,275               |       | 30                |       | 143,069                          |       | 124,101           |        | 2,733                 |       | (1,317                                               | )          | (38,224                                        | )          | 268,667     |       | $                                        | (1,614     | ) |
| Non-Member  Business Income                               |       | —               |       | —            |       | —                           |       | —            |        | —                |       | —                                               |       | 5,799                                          |       | 5,799       |       | $                                        | 5,799      |   |
| Pension Liability  Adjustment                             |       | —               |       | —            |       | —                           |       | —            |        | —                |       | (10,583                                              | )          | —                                         |       | (10,583     | )          | (10,583                                  | )          |
| Unit Retains  Withheld from Members                       |       | —               |       | —            |       | —                           |       | 17,486            |        | —                |       | —                                               |       | —                                         |       | 17,486      |       | —                                   |       |
| Payments of Unit  Retains and Equity Retention to Members |       | —               |       | —            |       | —                           |       | (16,178           | )           | (14                   | )          | —                                               |       | —                                         |       | (16,192     | )          | —                                   |       |
| Stock Issued, Net                                         |       | —               |       | —            |       | 5,169                            |       | —            |        | —                |       | —                                               |       | —                                         |       | 5,169       |       | —                                   |       |
|                                                      |       |                 |       |              |       |                             |       |              |        |                  |       |                                                 |       |                                           |       |        |       |                                     |       |
| **Balance,  August 31, 2003**                             |       | 38,275               |       | 30                |       | 148,238                          |       | 125,409           |        | 2,719                 |       | (11,900                                              | )          | (32,425                                        | )          | 270,346     |       | $                                        | (4,784     | ) |
| Non-Member  Business Income                               | ** ** | **—**           | ** ** | **—**        | ** ** | **—**                       | ** ** | **—**        | ** **  | **—**            | ** ** | **—**                                           | ** ** | **4,240**                                      | ** ** | **4,240**   | ** ** | **$**                                    | **4,240**  | ** ** |
| Pension Liability  Adjustment                             | ** ** | **—**           | ** ** | **—**        | ** ** | **—**                       | ** ** | **—**        | ** **  | **—**            | ** ** | **11,524**                                           | ** ** | **—**                                     | ** ** | **11,524**  | ** ** | **11,524**                               | ** ** |
| Unit Retains  Withheld from Members                       | ** ** | **—**           | ** ** | **—**        | ** ** | **—**                       | ** ** | **29,991**        | ** **  | **—**            | ** ** | **—**                                           | ** ** | **—**                                     | ** ** | **29,991**  | ** ** | **—**                               | ** ** |
| Payments of Unit  Retains and Equity Retention to Members | ** ** | **—**           | ** ** | **—**        | ** ** | **—**                       | ** ** | **(16,686**       | **)**       | **(11**               | **)**      | **—**                                           | ** ** | **—**                                     | ** ** | **(16,697** | **)**      | **—**                               | ** ** |
| Stock Issued, Net                                         | ** ** | **—**           | ** ** | **(1**            | **)**      | **4,023**                        | ** ** | **—**        | ** **  | **—**            | ** ** | **—**                                           | ** ** | **—**                                     | ** ** | **4,022**   | ** ** | **—**                               | ** ** |
|                                                      |       |                 |       |              |       |                             |       |              |        |                  |       |                                                 |       |                                           |       |        |       |                                     |       |
| **Balance,  August 31, 2004**                             | ** ** | **$**                | **38,275** | ** **        | **$**      | **29**                           | ** ** | **$**             | **152,261** | ** **            | **$**      | **138,714**                                          | ** ** | **$**                                          | **2,708**  | ** **  | **$**      | **(376**                                 | **)**      | **$** | **(28,185** | **)** | **$** | **303,426** | ** ** | **$** | **15,764** | ** ** |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

A-6

----

 

**American Crystal Sugar Company**

**Consolidated Statements of Cash Flows**

**For the Years Ended August 31**

**(In Thousands)**

 
| ** **                                                                                 | ** ** | **2004**     | ** **  | **2003**   | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------|-------------|------------|------------|----------|------------|
| **Cash  Provided By (Used In) Operating Activities:**                                      |       |         | ** **  |       |       |     |       |
| Net Proceeds  Resulting from Member and Non-Member Business                                | ** ** | **$**        | **473,122** | ** ** | $          | 361,902  |       | $ | 398,588 |   |
| Payments To/Due  Members for Sugarbeets, Net of Unit Retains Declared                      | ** ** | **(438,891** | **)**       | (338,617   | )          | (351,670 | )          |
| Payments To/Due  Members for PIK Certificates, Net of Equity Retention Declared            | ** ** | **—**   | ** **  | —     |       | (22,320  | )          |
| Add (Deduct)  Non-Cash Items:                                                              |       |         | ** **  |       |       |     |       |
| Depreciation and  Amortization                                                             | ** ** | **56,835**   | ** **  | 48,354     |       | 40,389   |       |
| Income from  Equity Method Investees                                                       | ** ** | **(286**     | **)**       | (4,873     | )          | (2,828   | )          |
| Loss on the  Disposition of Property and Equipment                                         | ** ** | **749**      | ** **  | 485        |       | 839      |       |
| Non-Cash Portion  of Patronage Dividend from CoBank, ACB                                   | ** ** | **(542**     | **)**       | (276       | )          | (437     | )          |
| Gain on the  Disposition of Assets Held for Sale                                           | ** ** | **(1,341**   | **)**       | —     |       | —   |       |
| Deferred Gain  Recognition                                                                 | ** ** | **(197**     | **)**       | (197       | )          | (197     | )          |
| Minority  Interest in ProGold Limited Liability Company                                    | ** ** | **3,593**    | ** **  | 1,142      |       | —   |       |
| Changes in Assets  and Liabilities:                                                        |       |         | ** **  |       |       |     |       |
| Receivables                                                                                | ** ** | **(15,923**  | **)**       | (4,129     | )          | 5,921    |       |
| Inventories                                                                                | ** ** | **1,965**    | ** **  | (14,418    | )          | (11,387  | )          |
| Prepaid Expenses                                                                           | ** ** | **2,216**    | ** **  | (1,233     | )          | (2,546   | )          |
| Long-Term  Prepaid Pension Expense                                                         | ** ** | **(11,196**  | **)**       | (10,272    | )          | (5,668   | )          |
| Advances To/Due  to Related Parties                                                        | ** ** | **(4,877**   | **)**       | 7,957      |       | 3,112    |       |
| Accounts Payable                                                                           | ** ** | **3,994**    | ** **  | 5,017      |       | (1,612   | )          |
| Other  Liabilities                                                                         | ** ** | **3,045**    | ** **  | 6,589      |       | 1,153    |       |
| Amounts Due  Growers                                                                       | ** ** | **11,591**   | ** **  | (20,350    | )          | (3,520   | )          |
| **Net  Cash Provided By Operating Activities**                                             | ** ** | **83,857**   | ** **  | 37,081     |       | 47,817   |       |
| ** **                                                                                 | ** ** | ** **   | ** **  |       |       |     |       |
| **Cash  Provided By (Used In) Investing Activities:**                                      |       |         | ** **  |       |       |     |       |
| Purchases of  Property and Equipment                                                       | ** ** | **(30,045**  | **)**       | (30,967    | )          | (16,258  | )          |
| Purchases of  Property and Equipment Held for Lease                                        | ** ** | **(1,119**   | **)**       | (400       | )          | —   |       |
| Proceeds from  the Sale of Property and Equipment                                          | ** ** | **68**       | ** **  | 51         |       | 138      |       |
| Proceeds from  the Disposition of Assets Held for Sale                                     | ** ** | **1,655**    | ** **  | —     |       | —   |       |
| Equity  Distribution from Crystech, LLC                                                    | ** ** | **1,044**    | ** **  | 1,044      |       | —   |       |
| Equity Refund  from CoBank, ACB                                                            | ** ** | **3,158**    | ** **  | 2,816      |       | 683      |       |
| Investments in  Marketing Cooperatives                                                     | ** ** | **1,068**    | ** **  | (2,093     | )          | —   |       |
| Acquisition of  Equity Interest in ProGold Limited Liability Company, Net of Cash Acquired | ** ** | **—**   | ** **  | (9,766     | )          | —   |       |
| Acquisition by  Sidney Sugars Incorporated                                                 | ** ** | **—**   | ** **  | (35,184    | )          | —   |       |
| Acquisition by  Crab Creek Sugar Company                                                   | ** ** | **(5,763**   | **)**       | —     |       | —   |       |
| Changes in Other  Assets                                                                   | ** ** | **5,053**    | ** **  | 1          |       | (517     | )          |
| **Net  Cash (Used In) Investing Activities**                                               | ** ** | **(24,881**  | **)**       | (74,498    | )          | (15,954  | )          |
| ** **                                                                                 | ** ** | ** **   | ** **  |       |       |     |       |
| **Cash  Provided By (Used In) Financing Activities:**                                      |       |         | ** **  |       |       |     |       |
| Net Proceeds  from (Payments on) Short-Term Debt                                           | ** ** | **(19,790**  | **)**       | 42,989     |       | (6,963   | )          |
| Proceeds from  Issuance of Long-Term Debt                                                  | ** ** | **—**   | ** **  | 31,000     |       | —   |       |
| Long-Term Debt  Repayment                                                                  | ** ** | **(27,186**  | **)**       | (24,712    | )          | (20,070  | )          |
| Proceeds from  Issuance of Stock                                                           | ** ** | **4,022**    | ** **  | 5,169      |       | 5,827    |       |
| Payment of Unit  Retains and Equity Retention                                              | ** ** | **(16,697**  | **)**       | (16,192    | )          | (16,537  | )          |
| **Net  Cash Provided By (Used In) Financing Activities**                                   | ** ** | **(59,651**  | **)**       | 38,254     |       | (37,743  | )          |
| **Increase  (Decrease) In Cash and Cash Equivalents**                                      | ** ** | **(675**     | **)**       | 837        |       | (5,880   | )          |
| **Cash  and Cash Equivalents, Beginning of Year**                                          | ** ** | **859**      | ** **  | 22         |       | 5,902    |       |
| ** **                                                                                 | ** ** | ** **   | ** **  |       |       |     |       |
| **Cash  and Cash Equivalents, End of Year**                                                | ** ** | **$**        | **184**     | ** ** | $          | 859      |       | $ | 22 |   |

 

**Non-CashInvesting and Financing activities:**In September 2003, a note payable in the amount of $969,000 was issuedin connection with the acquisition by Crab Creek Sugar Company.

The Accompanying Notes are an Integral Part of These ConsolidatedFinancial Statements.

 

A-7

----

 

**AmericanCrystal Sugar Company**

**Notes tothe Consolidated Financial Statements**

 

**(1)****PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES:**

 

*Organization*

 

American Crystal Sugar Company (the Company) is aMinnesota agricultural cooperative corporation which processes and marketssugar, sugarbeet pulp, molasses, concentrated separated by-product (CSB) andseed.  Business done with itsshareholders (members) constitutes “patronage business” as defined by theInternal Revenue Code, and the net proceeds therefrom are credited to members’investments in the form of unit retains or distributed to members in the formof payments for sugarbeets.  Members arepaid the net amounts realized from the current year’s production less memberoperating costs determined in conformity with accounting principles generallyaccepted in the United States of America.

 

*Basis of Presentation*

 

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.

 

Sidney Sugars was formed in fiscal 2003 under the lawsof the State of Minnesota, and on October 7, 2002, acquired three sugarbeetprocessing facilities and the related marketing allocations associated withsuch facilities (See Note 11). Activities associated with Sidney Sugars areconsidered non-member business.

 

Crab Creek was formed in fiscal 2003 under the laws ofthe State of Minnesota, and on September 8, 2003, acquired the control of asugarbeet processing facility and the related marketing allocations associatedwith such facility (See Note 12).

 

Effective May 1, 2003, the Company acquired anadditional five percent ownership interest in ProGold resulting in an increasein the Company’s ownership in ProGold to 51 percent.  Due to the Company’s resulting controlling ownership interest inProGold, the Company began to consolidate ProGold in its financial statementsas of May 1, 2003.  The financialstatements for prior periods have not been restated and therefore do notinclude consolidated data pertaining to ProGold prior to May 1, 2003.

 

All material inter-company transactions have beeneliminated.

 

*Revenue Recognition*

 

Revenue from the sale ofsugar, agri-products and seed is recorded when the product is shipped to thecustomer.  Operating lease revenue isrecognized as earned ratably over the term of the lease.

 

*Operating Lease*

 

ProGold owns a corn wetmilling facility which it leases under an operating lease.  Payments are to be received monthly under thelease, which runs through December 31, 2007. The lease contains provisions for extension or modification of the leaseterms at the end of the lease period. The lease also

 

A-8

----

 

contains provisions for increased payments to be received during thelease period related to the facility’s profitability and capital additions.

 

*Cash and Cash Equivalents*

 

The Company considers all highly liquid investmentswith a maturity of three months or less when purchased to be cash equivalents.  The Company places its temporary cashinvestments with high credit quality financial institutions.  At times, such investments may be in excessof the applicable insurance limit.

 

*Accounts Receivable and Credit Policies*

 

The Company grants credit, individually and throughits marketing cooperatives, to its customers, which are primarily companies inthe food processing industry located throughout the United States.

 

Trade receivables areuncollateralized customer obligations due under normal trade terms requiringpayment within 15 to 90 days from the invoice date.  The receivables are non-interestbearing.  Trade receivables are stated atthe amount billed to the customer. Payments of trade receivables are allocated to the specific invoices identifiedon the customer’s remittance advice or, if unspecified, are applied to theearliest unpaid invoices.

 

Ongoing creditevaluations of customers’ financial condition are performed and the Companymaintains a reserve for potential credit losses.  The carrying amount of trade receivables isreduced by a valuation allowance that reflects the Company’s best estimate ofthe amounts that will not be collected.

 

*Inventories*

 

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.  Sugarbeets are valued at the projected grossper-ton beet payment related to that year’s crop.

 

*Net Property and Equipment*

 

Property and equipment are recorded at cost.  Indirect costs and construction periodinterest are capitalized as a component of the cost of qualified assets.  Property and equipment are depreciated forfinancial reporting purposes principally using straight-line methods withestimated useful lives ranging from 3 to 45 years.

 

*Net Property and Equipment Heldfor Lease*

 

Net property andequipment held for lease are stated at cost. Depreciation on assets placed in service is provided using thestraight-line method over the estimated useful lives of the individual assets,ranging from 5 to 40 years.

 

*Impairment of Long Lived Assets*

 

The Company reviews its long lived assets forimpairment whenever events indicate that the carrying amount of the asset maynot be recoverable.  An impairment lossis recorded when the sum of the future cash flows is less than the carryingamount of the asset.  An impairment lossis measured as

 

A-9

----

 

the amount by which the carrying amount of the asset exceeds its fairvalue. There were no impairment losses incurred during the year.

 

*Related Parties*

 

The following organizations are considered relatedparties for financial reporting purposes: United Sugars Corporation (United);Midwest Agri-Commodities Company (Midwest); and Crystech, LLC (Crystech).

 

*Investments*

 

Investments in CoBank, ACB are stated at cost plusunredeemed patronage refunds received in the form of capital stock.  Investments in marketing cooperatives andCrystech are accounted for using the equity method.

 

*Members’ Investments*

 

Preferred and Common Stock - The ownership of commonand preferred stock is restricted to a “farm operator” as defined by the bylawsof the Company.  Each shareholder may ownonly one share of common stock and is entitled to one vote in the affairs ofthe Company.  Each shareholder isrequired to grow a specified number of acres of sugarbeets in proportion to theshares of preferred stock owned.  Thepreferred shares are non-voting.  Alltransfers of stock must be approved by the Company’s Board of Directors and anyshareholder desiring to sell stock must first offer it to the Company forrepurchase at its par value.  The Companyhas never exercised this repurchase option. The bylaws do not allow dividends to be paid on either the common orpreferred stock.

 

Unit Retains - The bylaws authorize the Company’sBoard of Directors to require additional direct capital investments by membersin the form of a variable unit retain per ton of up to a maximum of 10 percentof the weighted average gross per ton beet payment.  All refunds and retirements of unit retainsmust be approved by the Board of Directors.

 

Equity Retention – The Payment-In-Kind (PIK)Certificate Purchase Agreement authorizes the Company to require additionaldirect capital investments by members participating in the PIK program. Theamount of the equity contribution is calculated per hundredweight of PIKcertificates and is approximately equivalent (on a Company-wide average basis)to the unit retain declared by the Company on the corresponding year’ssugarbeet crop.  All refunds andretirements of equity retains must be approved by the Board of Directors.

 

Accumulated Other Comprehensive Income (Loss) -Accumulated Other Comprehensive Income (Loss) represents the cumulative netincrease (decrease) in equity related to the recording of the minimum pensionliability adjustment.  Consistent withthe Company’s treatment of income taxes related to member-source income andexpenses, accumulated other comprehensive income (loss) does not include anyadjustment for income taxes.

 

Retained Earnings (Accumulated Deficit) - Retainedearnings represents the cumulative net income (loss) resulting from non-memberbusiness and, for years prior to 1996, the difference between member income asdetermined for financial reporting purposes and for federal income taxreporting purposes.

 

A-10

----

 

*Interest Expense, Net*

 

The Company earns patronage dividends from CoBank, ACBbased on the Company’s share of the net income earned by CoBank, ACB.  These patronage dividends are applied againstinterest expense.

 

*Income Taxes*

 

The Company is a non-exempt cooperative for federalincome tax purposes.  As such, theCompany is subject to corporate income taxes on its net income from non-membersources.  The provision for income taxesrelates to the results of operations from non-member business, state incometaxes and certain other permanent differences between financial and income taxreporting. The Company also has various temporary differences between financialand income tax reporting, most notably of which is depreciation.

 

Deferred tax assets, less any applicable valuationallowance, and deferred tax liabilities are included in the financialstatements at currently enacted income tax rates applicable to the period inwhich the deferred tax assets and liabilities are expected to be realized orsettled.

 

*Accounting Estimates*

 

The preparation of the financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

*Business Risk*

 

The financial results of the Company’s operations maybe directly and materially affected by many factors, including prevailing pricesof sugar and agri-products, the Company’s ability to market its sugarcompetitively, the weather, government programs and regulations, and costs andexpenses.

 

*Recently Issued Accounting Pronouncements*

 

The Financial AccountingStandards Board has issued an amendment to Financial Accounting Standards No.132, Employer’s Disclosure about Pensions and Other PostretirementBenefits.  Such amendment requiresadditional disclosures to interim and annual financial statements but does notchange the recognition requirements related to pensions and postretirementbenefits. This amendment became effective for the interim period ending May 31,2004.

 

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 that theplan 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.

 

A-11

----

 

*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. Shipping and handling costs were $127.8million, $100.2 million and $96.9 million for the years ended August 31, 2004,2003 and 2002, respectively.

 

*Reclassifications*

 

Certain reclassifications have been made to the 2003and 2002 financial statements to conform with the 2004 presentation. Thesereclassifications had no effect on previously reported results of operations orMembers’ Investments.

 

**(2) RECEIVABLES:**

 

The Company didnot have any customer that accounted for 10 percent or more of totalreceivables as of August 31, 2004 or 2003.

 

**(3)****INVENTORIES:**

 

The major components ofinventories as of August 31, 2004 and 2003 are as follows:

 
| **(In Thousands)**                                                     | ** ** | **2004**   | ** **  | **2003** | ** ** |
|------------------------------------------------------------------------|------------|------------|-------------|----------|------------|
| Refined Sugar,  Pulp, Molasses, Other Agri-Products and Sugarbeet Seed | ** ** | **$**      | **107,812** |     | $          | 111,259 |   |
| Maintenance  Parts and Supplies                                        | ** ** | **21,473** |        | 19,722   |       |
| Total  Inventories                                                     | ** ** | **$**      | **129,285** |     | $          | 130,981 |   |

 

**(4) NET PROPERTY AND EQUIPMENT:**

 

Indirect costscapitalized were $1.1 million, $1.0 million and $ .7 million in 2004, 2003 and2002, respectively.  Construction periodinterest capitalized was $ .3 million, $ .3 million and $ .1 million in 2004,2003 and 2002, respectively. Depreciation expense was $51.6 million, $44.0million and $38.9 million in 2004, 2003 and 2002, respectively. The Company hadoutstanding commitments totaling $3.6 million as of August 31, 2004, forequipment and construction contracts related to various capital projects.

 

**(5) NET PROPERTY AND EQUIPMENTHELD FOR LEASE:**

 

ProGold owns a cornwet-milling facility that it leases under an operating lease which runs throughDecember 31, 2007.  Under the terms ofthe operating lease, the lessee manages all aspects of the operations of the ProGoldcorn wet-milling facility.

 

Net Property andEquipment Held for Lease are stated at cost, net of accumulated depreciation.The components of Net Property and Equipment Held for Lease as of August 31,2004 and 2003 are shown below:

 

A-12

----

 

 
| **(In Thousands)**                         | ** ** | **2004**    | ** **  | **2003**   | ** ** |
|--------------------------------------------|------------|-------------|-------------|------------|------------|
| Land and Land  Improvements                | ** ** | **$**       | **7,795**   | ** ** | $          | 7,762 |   |
| Buildings                                  | ** ** | **40,919**  | ** **  | 40,855     |       |
| Equipment                                  | ** ** | **199,261** | ** **  | 198,266    |       |
| Construction in  Progress                  | ** ** | **319**     | ** **  | 464        |       |
| Less Accumulated  Depreciation             | ** ** | **(87,651** | **)**       | (76,691    | )          |
|                                       |       |        | ** **  |       |       |
| Net Property and  Equipment Held for Lease | ** ** | **$**       | **160,643** | ** ** | $          | 170,656 |   |

 

Future minimum paymentsto be received under the lease are as follows:

 
| **Fiscal year ending August 31,  (In Thousands)** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------|------------|
| 2005                                              |       | $          | 23,452     |   |
| 2006                                              |       | 23,452     |       |
| 2007                                              |       | 23,452     |       |
| 2008                                              |       | 8,093      |       |
|                                              |       |       |       |
| Total                                             |       | $          | 78,449     |   |

 

**(6)****INVESTMENTS IN MARKETING COOPERATIVES:**

 

The Company has a 59 percent ownership interest and a25 percent voting interest in United. The investment is accounted for using the equity method.  All sugar products produced are sold byUnited as an agent for the Company.  Theamount of sales and related costs to be recognized by each owner of United isallocated based on its pro rata share of sugar production for the year.  The owners provide United with cash advanceson an ongoing basis for operating and marketing expenses incurred byUnited.  The Company had outstandingadvances to United of $12.6 million and $4.5 million as of August 31, 2004 and2003, respectively.  The Company providesadministrative services for United and is reimbursed for costs incurred.  The Company was reimbursed $1.0 million, $1.0million and $1.3 million for services provided during 2004, 2003 and 2002,respectively.

 

The Company has a 55 percent ownership interest and a25 percent voting interest in Midwest. The investment is accounted for using the equity method.  Substantially all sugarbeet pulp, molassesand other agri-products produced are sold by Midwest as an agent for theCompany.  The amount of sales and relatedcosts to be recognized by each owner of Midwest is allocated based on its prorata share of production for each product for the year.  The owners provide Midwest with cash advanceson an ongoing basis for operating and marketing expenses incurred by Midwest.  The Company had outstanding advances (from)Midwest of $(4.4) million and $(1.4) million as of August 31, 2004 and 2003,respectively.  The Company providesadministrative services for Midwest and is reimbursed for costs incurred.  The Company was reimbursed $12,000, $13,000and $13,000 for services provided during 2004, 2003 and 2002,respectively.  The owners of Midwest areguarantors of the short-term line of credit Midwest has with CoBank, ACB.  As of August 31, 2004, Midwest hadoutstanding short-term debt with CoBank, ACB of $4.0 million, of which $1.4million was guaranteed by the Company.

 

**(7)****CRYSTECH, LLC:**

 

Crystech is a special purpose entity that operates amolasses desugarization facility at the Company’s Hillsboro, North Dakota,sugar factory together with certain sugar processing equipment located at theHillsboro, North Dakota, and Moorhead, Minnesota, sugar factories.  The Company controls 50 percent of Crystechand accounts for its investment using the equity method.

 

A-13

----

 

The Company has a 12-year tolling services agreementwith Crystech whereby the Company pays for tolling services for processingsugarbeet molasses delivered to Crystech with title and risk of loss throughoutthe process maintained by the Company. The tolling agreement may be terminated by the Company if the specifiedplant performance is not achieved and maintained.

 

During fiscal 2003, the $13.9 million of outstandingnotes receivable issued to the Company from Crystech were converted intoPreferred Equity.  On a cumulative basis,the Company receives an annual allocation of Crystech’s net income equal to 7.5percent of the initial value of the Preferred Equity contribution orapproximately $1.0 million.  Interestincome related to the previously outstanding notes totaled approximately $1.0million in 2003 and 2002.  The Companyalso had outstanding payables to Crystech of approximately $3.5 million and$3.2 million as of August 31, 2004 and 2003, respectively, related to thetolling services agreement.  Following issummary financial information for Crystech:

 
| **As of August 31, (In Thousands)**         | ** ** | **2004**   | ** ** | **2003** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|----------|------------|------------|------------|
| Current Assets                              | ** ** | **$**      | **3,542**  |     | $          | 3,286      |       |   |   |
| Long-Term Assets                            | ** ** | **43,844** |       | 56,293   |       |       |       |
| Total Assets                                | ** ** | **$**      | **47,386** |     | $          | 59,579     |       |   |   |
|                                        |       |       |       |     |       |       |       |
| Current  Liabilities                        | ** ** | **$**      | **9,215**  |     | $          | 9,222      |       |   |   |
| Long-Term  Liabilities                      | ** ** | **21,501** |       | 33,787   |       |       |       |
| Total  Liabilities                          | ** ** | **30,716** |       | 43,009   |       |       |       |
| Members’ Equity                        | ** ** | **16,670** |       | 16,570   |       |       |       |
| Total  Liabilities and Members’ Equity | ** ** | **$**      | **47,386** |     | $          | 59,579     |       |   |   |

 
| **For the Years Ended August 31,  (In Thousands)** | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Revenue                                            | ** ** | **$**      | **21,261** |     | $          | 23,070   |       | $ | 22,519 |   |
| Operating  Expenses                                | ** ** | ** ** | **16,911** |     |       | 16,890   |       |   | 16,812 |   |
| Other Expenses                                     | ** ** | **3,206**  |       | 5,036    |       | 5,937    |       |
| Net Income  (Loss)                                 | ** ** | **$**      | **1,144**  |     | $          | 1,144    |       | $ | (230 | ) |

 

A-14

----

 

**(8) LONG-TERM AND SHORT-TERM DEBT:**

 

The long-term debt outstanding as of August 31, 2004 and 2003 issummarized below:

 
| **(In Thousands)**                                                                                                                                                                                                                          | ** ** | **2004**    | ** **  | **2003**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|
| Term Loans from  CoBank, ACB, due in varying amounts through 2008, interest at fixed rates of  2.36% to 8.57%, with senior lien on substantially all non-current assets                                                                     | ** ** | **$**       | **158,293** | ** ** | $          | 181,800 |   |
| Term Loans from  Insurance Companies, due in varying amounts from 2010 through 2028, interest  at fixed rates of 4.78% to 7.42%, with senior lien on substantially all non-current  assets                                                  | ** ** | **65,714**  | ** **  | 68,333     |       |
| Pollution  Control and Industrial Development Revenue Bonds, due in varying amounts  through 2018, interest at fixed rates of 3.90% to 5.40% and a varying rate of  1.64% as of August 31, 2004, substantially secured by letters of credit | ** ** | **43,011**  | ** **  | 43,271     |       |
| Term Loan from  the Bank of North Dakota, due in equal amounts through 2009, interest at  fixed rates of 3.30% and 6.34%, unsecured                                                                                                         | ** ** | **4,000**   | ** **  | 4,800      |       |
| Total Long-Term  Debt                                                                                                                                                                                                                       | ** ** | **271,018** | ** **  | 298,204    |       |
| Less Current  Maturities                                                                                                                                                                                                                    | ** ** | **(20,932** | **)**       | (11,282    | )          |
| Long-Term Debt,  Net of Current Maturities                                                                                                                                                                                                  | ** ** | **$**       | **250,086** | ** ** | $          | 286,922 |   |

 

Minimum annual principal payments for the next five years are asfollows:

 
| **(In Thousands)** | ** ** | ** ** | ** ** |
|--------------------|------------|------------|------------|
| 2005               |       | $          | 20,932     |   |
| 2006               |       | $          | 25,447     |   |
| 2007               |       | $          | 32,962     |   |
| 2008               |       | $          | 74,477     |   |
| 2009               |       | $          | 20,992     |   |

 

As of August 31, 2004, the unused portion of the termloan line of credit with CoBank, ACB, was $42.3 million.

 

The short-term debt outstanding as of August 31, 2004 and 2003 issummarized below:

 
| **(In Thousands)**                                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Commercial  Paper, at a fixed interest rate of 1.74%, due 9/1/04 | ** ** | **$**    | **30,199** |     | $          | 49,989 |   |
|                                                                  |            |          |            |          |            |  |  |

 

During the year ended August 31, 2004, the Companyborrowed from CoBank, ACB, the Commodity Credit Corporation and issuedcommercial paper to meet its short-term borrowing requirements.  As of August 31, 2004, the Company hadavailable short-term lines of credit totaling $259.9 million.

 

Maximum borrowings, average borrowing levels andaverage interest rates for short-term debt for the years ended August 31, 2004and 2003, follow:

 

A-15

----

 
| **(In Thousands, Except Interest  Rates)** | ** ** | **2004** | ** **  | **2003**   | ** ** |
|--------------------------------------------|------------|----------|-------------|------------|------------|
| Maximum  Borrowings                        | ** ** | **$**    | **257,102** | ** ** | $          | 195,433 |   |
| Average  Borrowing Levels                  | ** ** | **$**    | **146,141** | ** ** | $          | 113,142 |   |
| Average Interest  Rates                    | ** ** | **1.49** | **%**       | 1.84       | %          |

 

The terms of the loan agreements contain prepaymentpenalties along with certain covenants related to, among other matters, the:level of working capital; ratio of term liabilities to members’ investment;current ratio; level of term debt to net funds generated; and investment inCoBank, ACB stock in amounts prescribed by the bank.  Substantially all non-current assets arepledged to the senior lenders to provide security to support the Company’sseasonal and long-term financing.  As ofAugust 31, 2004, the Company was in compliance with the terms of the loanagreements.

 

Interest paid, net of amounts capitalized, was $21.1million, $17.3 million and $15.0 million for the years ended August 31, 2004,2003 and 2002, respectively.

 

The Company had outstanding letters of credit totaling$47.9 million as of August 31, 2004.

 

**(9)****EMPLOYEE BENEFIT PLANS:**

 

*Company-Sponsored Defined Benefit Pension and OtherPost-Retirement Benefit Plans*

 

Substantially all employees who meet eligibilityrequirements of age and length of service are covered by a Company-sponsoredretirement plan.  As of August 31, 2004,the pension plans were funded as required by the funding standards set forth bythe Employee Retirement Income Security Act (ERISA).  The Company also has a non-qualifiedsupplemental executive retirement plan for certain employees.

 

The following schedule reflectsthe percentage of pension plan assets by asset class as of the latestmeasurement date, May 31, 2004:

 

**Percentageof Pension Plan Assets by Asset Class as of May 31, 2004**

 
| **Asset Class**    | ** ** | **Target Range** | ** ** | **Actual Allocation** | ** ** |
|--------------------|------------|------------------|------------|-----------------------|------------|
| Large U.S.  Stocks |       | 20.0%-40.0%      |       | 31.9                  | %          |
| Small U.S.  Stocks |       | 17.5%-27.5%      |       | 21.2                  | %          |
| Non-U.S. Stocks    |       | 17.5%-27.5%      |       | 24.0                  | %          |
| U.S. Bonds         |       | 15.0%-35.0%      |       | 22.9                  | %          |
| Cash               |       | 0.0%-5.0%        |       | 0.0                   | %          |

 

A-16

----

 

The Investment Committee has theresponsibility of managing the operations and administration of AmericanCrystal Sugar Company’s retirement plans and trust.  The Investment Committee has an investmentpolicy for the pension plan assets that establishes target asset allocations asshown above.  The Investment Committee iscommitted to diversification to reduce the risk of large losses.  To that end, the Investment Committee has adoptedpolicies requiring that each asset class will be diversified and equity exposurewill be limited to 85% of the total portfolio value. The stated goal is foreach component of the plan to earn a rate of return greater than itscorresponding benchmark.  Progress of theplan against its return objectives will be measured over a full market cycle.

 

To develop the expectedlong-term rate of return on assets assumption, the Company considered thehistorical returns and the future expectations for returns for each assetclass, as well as, the target asset allocation of the pension portfolio.  This resulted in the selection of the 8.25%long-term rate of return on assets assumption.

 

The following schedule reflectsthe expected pension benefit payments during each of the next five years andthe aggregate for the following five years:

 
| **(In Thousands)** | ** ** | **Expected Benefit Payments** | ** ** |
|--------------------|------------|-------------------------------|------------|
| 2005               |       |                          | $          | 4,003 |   |
| 2006               |       |                          | 4,238      |   |
| 2007               |       |                          | 4,509      |   |
| 2008               |       |                          | 4,775      |   |
| 2009               |       |                          | 5,040      |   |
| 2010-2014          |       |                          | 30,664     |   |
| Total              |       |                          | $          | 53,229 |   |

 

The Company expects tocontribute approximately $6.0 million to the pension plans during the nextfiscal year.

 

The Company has a medical plan and a Medicaresupplement plan which are available to union retirees and certain non-unionretirees.  The costs of these plans areshared by the Company and plan participants.

 

A-17

----

 

The following schedules providethe components of the Net Periodic Pension and Post-Retirement Costs for theyears ended August 31, 2004, 2003 and 2002:

 

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

 
| **(In  Thousands)**                   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Service Cost                          | ** ** | **$**      | **2,772**  | ** ** | $          | 2,271    |       | $ | 1,978 |   |
| Interest Cost                         | ** ** | **6,017**  | ** ** | 5,718      |       | 5,407    |       |
| Expected Return on Plan Assets        | ** ** | **(5,960** | **)**      | (5,416     | )          | (5,773   | )          |
| Multiple Employer Adjustment          | ** ** | **(342**   | **)**      | (96        | )          | (81      | )          |
| Amortization of Net Transition Assets | ** ** | **(124**   | **)**      | (124       | )          | (300     | )          |
| Amortization of Prior Service Costs   | ** ** | **544**    | ** ** | 544        |       | 501      |       |
| Amortization of Net Loss              | ** ** | **1,999**  | ** ** | 862        |       | 207      |       |
| Net Periodic Pension Cost             | ** ** | **$**      | **4,906**  | ** ** | $          | 3,759    |       | $ | 1,939 |   |

 

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

 
| **(In  Thousands)**               | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Service Cost                      | ** ** | **$**     | **1,223**  |     | $          | 814      |       | $ | 705 |   |
| Interest Cost                     | ** ** | **1,924** |       | 1,457    |       | 1,312    |       |
| Amortization of Net (Gain) Loss   | ** ** | **498**   |       | 20       |       | (68      | )          |
| Net Periodic Post-Retirement Cost | ** ** | **$**     | **3,645**  |     | $          | 2,291    |       | $ | 1,949 |   |

 

For measurement purposes, an 11.0 percent annual rateof increase in the per capita cost of covered healthcare benefits forparticipants under age 65 was assumed for 2005. The rate is assumed to decline to 6.0 percent over the next fiveyears.  For participants age 65 andolder, a 14.0 percent annual rate of increase in the per capita cost of coveredhealthcare benefits was assumed for 2005. The rate is assumed to decline to 9.0 percent over the next five years.

 

Assumed healthcare trends can have a significanteffect on the amounts reported for healthcare plans.  A one percent change in the assumedhealthcare trend rates would have the following effects:

 
| **(In Thousands)**                                                                                   | ** ** | **1% Increase** | ** ** | **1% Decrease** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| Effect on total  service and interest cost components of net periodic post-retirement benefit  costs |       | $               | 735        |            | $          | (525 | ) |
| Effect on the  accumulated post-retirement benefit obligation                                        |       | $               | 5,273      |            | $          | (4,244 | ) |

 

A-18

----

 

The following schedules set forth a reconciliation ofthe changes in the plans’ benefit obligation and fair value of assets for theyears ending August 31, 2004 and 2003 and a statement of the funded status andamounts recognized in the Balance Sheets as of August 31, 2004 and 2003:

 
| ** **                                     | ** ** | **Pension** |       | **Post-Retirement** | ** ** |
|------------------------------------------------|------------|-------------|------------|---------------------|------------|
| **(In  Thousands)**                            | ** ** | **2004**    | ** ** | **2003**            |       | **2004** | ** ** | **2003** | ** ** |
| ***Change in Benefit Obligation***             | ** ** | ** **  | ** ** | ** **          |       | ** ** | ** ** | ** ** | ** ** |
| Obligation at the Beginning of the Year        | ** ** | **$**       | **98,979** | ** **          | $          | 78,339 |   | **$** | **31,540** | ** ** | $ | 18,556 |   |
| Service Cost                                   | ** ** | **2,772**   | ** ** | 2,271               |       | **1,223** | ** ** | 781 |   |
| Interest Cost                                  | ** ** | **6,017**   | ** ** | 5,718               |       | **1,924** | ** ** | 1,432 |   |
| Plan Participant Contributions                 | ** ** | **—**  | ** ** | —              |       | **712** | ** ** | 645 |   |
| Acquisitions                                   | ** ** | **—**  | ** ** | —              |       | **—** | ** ** | 500 |   |
| Actuarial (Gain) Loss                          | ** ** | **(6,801**  | **)**      | 16,548              |       | **(1,993** | **)** | 10,597 |   |
| Benefits Paid                                  | ** ** | **(4,031**  | **)**      | (3,897              | )          | **(1,254** | **)** | (971 | ) |
| Obligation at the End of the Year              | ** ** | **$**       | **96,936** | ** **          | $          | 98,979 |   | **$** | **32,152** | ** ** | $ | 31,540 |   |
|                                           | ** ** | ** **  | ** ** |                |       | ** ** | ** ** |   |   |
| ***Change in Plan Assets***                    |       |        | ** ** |                |       |   | ** ** |   |   |
| Fair Value at the Beginning of the Year        | ** ** | **$**       | **73,992** | ** **          | $          | 65,771 |   | **$** | **—** | ** ** | $ | — |   |
| Actual Return on Plan Assets                   | ** ** | **12,972**  | ** ** | (2,906              | )          | **—** | ** ** | — |   |
| Plan Participant Contributions                 | ** ** | **—**  | ** ** | —              |       | **712** | ** ** | 645 |   |
| Employer Contributions                         | ** ** | **15,174**  | ** ** | 15,024              |       | **542** | ** ** | 326 |   |
| Benefits Paid                                  | ** ** | **(4,031**  | **)**      | (3,897              | )          | **(1,254** | **)** | (971 | ) |
| Fair Value at the End of the Year              | ** ** | **$**       | **98,107** | ** **          | $          | 73,992 |   | **$** | **—** | ** ** | $ | — |   |
|                                           |       |        | ** ** |                |       |   | ** ** |   |   |
| ***Funded Status***                            |       |        | ** ** |                |       |   | ** ** |   |   |
| Funded Status as of August 31,                 | ** ** | **$**       | **1,171**  | ** **          | $          | (24,987 | ) | **$** | **(32,152** | **)** | $ | (31,540 | ) |
| Unrecognized Net Transition Asset              | ** ** | **(21**     | **)**      | (145                | )          | **—** | ** ** | — |   |
| Unrecognized Actuarial Loss                    | ** ** | **27,315**  | ** ** | 43,126              |       | **6,680** | ** ** | 9,171 |   |
| Unrecognized Prior Service Cost                | ** ** | **1,734**   | ** ** | 2,279               |       | — | ** ** | — |   |
| Adjustment for Multiple Employer Plan          | ** ** | **(6**      | **)**      | (348                | )          | **—** | ** ** | — |   |
| Net Amount Recognized                          | ** ** | **$**       | **30,193** | ** **          | $          | 19,925 |   | **$** | **(25,472** | **)** | $ | (22,369 | ) |
|                                           | ** ** | ** **  | ** ** |                |       | ** ** | ** ** |   |   |
| ***Amounts Recognized in the Balance Sheets*** |       |        | ** ** |                |       |   | ** ** |   |   |
| Prepaid Pension Cost                           | ** ** | **$**       | **33,688** | ** **          | $          | 10,713 |   | **$** | **—** | ** ** | $ | — |   |
| Accrued Benefit Liability                      | ** ** | **(3,903**  | **)**      | (3,451              | )          | **(25,472** | **)** | (22,369 | ) |
| Intangible Asset                               | ** ** | **32**      | ** ** | 763                 |       | **—** | ** ** | — |   |
| Accumulated Other Comprehensive Loss           | ** ** | **376**     | ** ** | 11,900              |       | **—** | ** ** | — |   |
| Net Amount Recognized                          | ** ** | **$**       | **30,193** | ** **          | $          | 19,925 |   | **$** | **(25,472** | **)** | $ | (22,369 | ) |

 

***Change in Additional Minimum Liability (for the current year)***

 
|                               | ** ** | **2004** | ** ** |       |   | ** ** | ** ** |       |   |
|------------------------------------|------------|----------|------------|------------|--------|------------|------------|------------|--------|
| Other Comprehensive Income         | ** ** | **$**    | **11,524** | ** ** |   |       | ** ** | ** ** |   |   |
| Intangible Asset Decrease          | ** ** | **$**    | **(731**   | **)**      |   |       | ** ** | ** ** |   |   |
| Accrued Pension Liability Decrease | ** ** | **$**    | **12,255** | ** ** |   |       | ** ** | ** ** |   |   |

 

A-19

----

 

The assumptions used in the measurement of theCompany’s benefit obligations are shown below:

 

***Weighted Average Assumptions as of August 31,***

 
| ** **                                          | ** ** | **Pension** | ** ** | **Post-Retirement** | ** ** |
|-----------------------------------------------------|------------|-------------|------------|---------------------|------------|
| ** **                                          | ** ** | **2004**    | ** ** | **2003**            |       | **2004** | ** ** | **2003** |   |
| Discount Rate                                       | ** ** | **6.84**    | **%**      | 6.17                | %          | **6.84** | **%** | 6.17 | % |
| Expected Return on Plan Assets                      | ** ** | **8.25**    | **%**      | 8.25                | %          | **N/A** | ** ** | N/A |   |
| Rate of Compensation Increase (Non-Union Plan Only) |       | **3.5**     | **%**      | 3.5                 | %          | **N/A** | ** ** | N/A |   |

 

*Long-Term Incentive Plan*

 

The Long-Term Incentive Plan provides deferredcompensation to certain key executives of the Company.  The plan creates financial incentives thatare based upon contract rights which are available to the executive under theterms of the plan, the value of which is related to the value of preferredshares of the Company as determined by the Board of Directors.  In fiscal 2004, 316.69 contract rights weregranted at a stated value of $1,750 per contract right or a total stated valueof $554,212.  As of August 31, 2004,there were 1,673.3 rights, at a stated value of $2.9 million, issued andoutstanding, 1,089.69 of which were vested.

 

*Defined Contribution Plans*

 

The Company has qualified 401(k) plans for alleligible employees.  The plans providefor immediate vesting of benefits. Participants may contribute a percentage of their gross earnings eachpay period as provided in the participation agreement.  The Company matches the non-union andeligible union year-round participants’ contributions up to 4 percent and 2percent respectively, of their gross earnings. The Company’s contributions to these plans totaled $1.6 million, $1.6million and $1.5 million for the years ended August 31, 2004, 2003 and 2002, respectively.

 

**(10)****MEMBERS’ INVESTMENTS:**

 

The following schedule details the Preferred Stock andCommon Stock as of August 31, 2004, 2003 and 2002:

 
| ** **       | ** ** | **Par  Value** | ** ** | **Shares  Authorized** | ** ** | **Shares Issued  & Outstanding** | ** ** |
|------------------|------------|----------------|------------|------------------------|------------|--------------------------------------|------------|
| Preferred Stock: |       |           |       |                   |       |                                 |       |
| August 31, 2004  |       | $              | 76.77      |                   | 600,000    |                                 | 498,570    |   |
| August 31, 2003  |       | $              | 76.77      |                   | 600,000    |                                 | 498,570    |   |
| August 31, 2002  |       | $              | 76.77      |                   | 600,000    |                                 | 498,570    |   |
|             |       |           |       |                   |       |                                 |       |
| Common Stock:    |       |           |       |                   |       |                                 |       |
| August 31, 2004  |       | $              | 10.00      |                   | 4,000      |                                 | 2,873      |   |
| August 31, 2003  |       | $              | 10.00      |                   | 4,000      |                                 | 2,995      |   |
| August 31, 2002  |       | $              | 10.00      |                   | 4,000      |                                 | 3,035      |   |

 

The Company received $4.0 million, $5.2 million and $5.8 million in2004, 2003 and 2002, respectively, related to the 1997 stock offering.  The $4.0 million received in 2004 was thefinal amount due from the 1997 stock offering.

 

A-20

----

 

**(11)****SIDNEY SUGARS INCORPORATED:**

 

On October 7, 2002, theCompany, through Sidney Sugars, acquired three sugarbeet processing facilitiesand the related marketing allocations associated with such facilities for apurchase price of approximately $35.2 million. Sidney Sugars operates the facility located at Sidney, Montana.  The facility located in Torrington, Wyoming,has been leased, on a long-term basis, to another sugar producer.  The lease payments due under the long-termlease are nominal.  The facility locatedin Hereford, Texas, was sold in July 2004. As part of the acquisition transaction, the Company acquired the rightsto marketing allocations equal to approximately 4.8 percent of the totalallocation for the domestic sugarbeet segment. A portion of these marketing allocations are being used to market thesugar produced at the Sidney, Montana, facility.  Any excess allocations are available to theCompany.  The sugar produced by SidneySugars is marketed through United while substantially all the agri-productsproduced are marketed through Midwest.

 

**(12)****CRAB CREEK SUGAR COMPANY:**

 

OnSeptember 8, 2003, the Company, through its wholly-owned subsidiary Crab CreekSugar Company (Crab Creek), acquired all of the assets of Pacific NorthwestSugar Company, LLC (PNSC), certain assets of Central Leasing of Washington, LLC(Central Leasing) that were associated with PNSC and the Moses Lake,Washington, sugarbeet factory previously operated by PNSC and control of thesugar production assets owned by Central Leasing associated with the MosesLake, Washington, sugarbeet factory for a purchase price of approximately $6.7million.  In addition, Crab Creek enteredinto various contracts with Central Leasing such that Crab Creek controls thelong-term production of sugar at the Moses Lake, Washington, facility.  In connection with this acquisition, theUnited States Department of Agriculture (USDA) transferred to the Company thesugar marketing allocations formerly allocated to PNSC.  Neither Crab Creek nor the Company intends tooperate the Moses Lake, Washington, facility.

 

**(13)****PROGOLD LIMITED LIABILITY COMPANY:**

 

EffectiveMay 1, 2003, the Company acquired Minn-Dak Farmer Cooperative’s five percentownership interest in ProGold for $10.3 million.  This acquisitionresulted in an increase in the Company’s ownership in ProGold to 51 percent,while Golden Growers Cooperative continued to own 49 percent.  Due to the Company’s resulting controllingownership interest in ProGold, the Company began to consolidate ProGold in itsfinancial statements as of May 1, 2003. Following is summary financial information for ProGold prior toconsolidation:

 
| **(In Thousands)**                 | ** ** | **For the Eight  Months Ended  April 30, 2003** | ** ** | **For the Year  Ended  August 31, 2002** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| Rental Revenue  on Operating Lease |       | $                                               | 17,026     |                                     | $          | 26,302 |   |
| Expenses                           |       | 12,751                                          |       | 20,402                                   |       |
| Net Income                         |       | $                                               | 4,275      |                                     | $          | 5,900 |   |

 

A-21

----

 

**(14)****SEGMENT REPORTING:**

 

The Company has identifiedtwo reportable segments: Sugar and Leasing. The sugar segment is engaged primarily in the production and marketingof sugar from sugarbeets.  It also sellsagri-products and sugarbeet seed.  Theleasing segment is engaged in the leasing of a corn wet milling plant used inthe production of high-fructose corn syrup sweetener.  The segments are managed separately.  There are no inter-segment sales.  The leasing segment has a major customer thataccounts for all of that segment’s revenue.

 

Summarized financialinformation concerning the Company’s reportable segments is shown below:

 
| ** **                           | ** ** | **For the Year Ended August 31, 2004** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| **(In Thousands)**                   | ** ** | **Sugar**                              | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from  External Customers |       | $                                      | 1,007,251  |   | $ | 25,837 |   | $ | 1,033,088 |   |
| Gross Proceeds                       |       | $                                      | 680,854    |   | $ | 13,866 |   | $ | 694,720 |   |
|                                 |       |                                   |       |   |   |   |   |   |   |   |
| Depreciation and  Amortization       |       | $                                      | 45,809     |   | $ | 11,026 |   | $ | 56,835 |   |
| Interest Income                      |       | $                                      | 163        |   | $ | 6 |   | $ | 169 |   |
| Interest Expense                     |       | $                                      | 13,822     |   | $ | 6,327 |   | $ | 20,149 |   |
| Income from  Equity Method Investees |       | $                                      | 286        |   | $ | — |   | $ | 286 |   |
| Other Income  (Expense), Net         |       | $                                      | 2,206      |   | $ | (109 | ) | $ | 2,097 |   |
| Net Proceeds                         |       | $                                      | 465,790    |   | $ | 7,332 |   | $ | 473,122 |   |
|                                 |       |                                   |       |   |   |   |   |
| Capital  Expenditures                |       | $                                      | 30,045     |   | $ | 1,119 |   | $ | 31,164 |   |

 
| ** **                           | ** ** | **For the Year Ended August 31, 2003** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| **(In Thousands)**                   | ** ** | **Sugar**                              | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from  External Customers |       | $                                      | 820,606    |   | $ | 8,640 |   | $ | 829,246 |   |
| Gross Proceeds                       |       | $                                      | 533,756    |   | $ | 4,659 |   | $ | 538,415 |   |
|                                 |       |                                   |       |   |   |   |   |
| Depreciation and  Amortization       |       | $                                      | 44,687     |   | $ | 3,667 |   | $ | 48,354 |   |
| Interest Income                      |       | $                                      | 1,519      |   | $ | 1 |   | $ | 1,520 |   |
| Interest Expense                     |       | $                                      | 14,582     |   | $ | 2,289 |   | $ | 16,871 |   |
| Income from  Equity Method Investees |       | $                                      | 4,873      |   | $ | — |   | $ | 4,873 |   |
| Other Income  (Expense), Net         |       | $                                      | 3,334      |   | $ | — |   | $ | 3,334 |   |
| Net Proceeds                         |       | $                                      | 359,570    |   | $ | 2,332 |   | $ | 361,902 |   |
|                                 |       |                                   |       |   |   |   |   |
| Capital  Expenditures                |       | $                                      | 46,783     |   | $ | 400 |   | $ | 47,183 |   |

 
| ** **                   | ** ** | **As of August 31, 2004** | ** ** |
|------------------------------|------------|---------------------------|------------|
| **(In Thousands)**           | ** ** | **Sugar**                 | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Property and  Equipment, Net |       | $                         | 330,540    |   | $ | 2 |   | $ | 330,542 |   |
| Assets Held for  Lease, Net  |       | $                         | —     |   | $ | 160,643 |   | $ | 160,643 |   |
| Segment Assets               |       | $                         | 650,186    |   | $ | 172,140 |   | $ | 822,326 |   |

 

A-22

----

 
| ** **                   | ** ** | **As of August 31, 2003** | ** ** |
|------------------------------|------------|---------------------------|------------|
| **(In Thousands)**           | ** ** | **Sugar**                 | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Property and  Equipment, Net |       | $                         | 342,807    |   | $ | 5 |   | $ | 342,812 |   |
| Assets Held for  Lease, Net  |       | $                         | —     |   | $ | 170,656 |   | $ | 170,656 |   |
| Segment Assets               |       | $                         | 627,160    |   | $ | 182,591 |   | $ | 809,751 |   |

 

The Company had only onereportable segment, Sugar, for the year ended August 31, 2002.

 

**(15)****FAIR VALUE OF FINANCIAL INSTRUMENTS:**

 

The fair value of financial instruments is generallydefined as the amount at which the instrument could be exchanged in a currenttransaction between willing parties, other than in a forced liquidationsale.  Quoted market prices are generallynot available for the Company’s financial instruments.  Fair values are based on judgments regardinganticipated cash flows, future expected loss experience, current economicconditions, risk characteristics of various financial instruments and otherfactors.  These estimates involveuncertainties and matters of judgment, and therefore, cannot be determined withprecision.  Changes in assumptions couldsignificantly affect the estimates.

 

*Long-Term Debt* - Based uponcurrent borrowing rates with similar maturities, the fair value of thelong-term debt is approximately $281.3 million in comparison to the carryingvalue of $271.0 million.

 

*Investments in CoBank, ACB, Investments inMarketing Cooperatives, and Investments in Crystech, LLC* -The Company believes it is not practical to estimate the fair value of theseinvestments without incurring excessive costs because there is no establishedmarket for these securities and equity interests, and it is inappropriate toestimate future cash flows which are largely dependent on future earnings ofthese organizations.

 

**(16) PAYMENT-IN-KIND PROGRAM:**

 

Under the USDA Payment-In-Kind (PIK) program, theCompany’s members were paid to destroy a portion of their 2001 sugarbeetcrop.  Payments to the Company’s memberswere made by the USDA in the form of PIK certificates to be exchanged forgovernment owned sugar.  The Companyentered into contracts with its members to purchase the PIK certificates theyreceived from the USDA and to reduce the members’ delivery obligations to theCompany to the extent sugarbeets were destroyed under the PIK program.  The purchase price for the PIK certificatesreflected an allocation of the Company’s fixed costs to account for thereduction of sugarbeets available for processing.

 

As a result of the PIK program, the 2001 sugarbeetcrop harvested by the Company’s members was reduced by approximately 29,000acres.  The PIK certificates receivedwere exchanged for approximately 1.2 million hundredweight of sugar duringfiscal 2002.

 

**(17)****INCOME TAXES:**

 

Total income tax payments (refunds) were $69,810,$(15,710), and $(15,400) in the years ended August 31, 2004, 2003 and 2002,respectively.

 

A-23

----

 

As of August 31, 2004,the Company had accumulated approximately $21.4 million of net operating losscarry-forwards for income tax reporting purposes.  The net operating loss carry-forwards expirein the years 2018 through 2022.  TheCompany’s net deferred tax liability as of August 31, 2004 and 2003 isreflected below.

 
| **(In Thousands)**                                                            | ** ** | **2004**   | ** ** | **2003** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|----------|------------|------------|------------|
| Deferred Tax Assets related to non-patronage source loss carry-forwards       |       | **$**      | **11,000** |     | $          | 10,140     |       |   |   |
| Deferred Tax Liability related to non-patronage source temporary  differences |       | **13,300** |       | 12,340   |       |       |       |
|                                                                          |       |       |       |     |       |       |       |
| Net Deferred Tax Liability                                                    | ** ** | **$**      | **2,300**  |     | $          | 2,200      |       |   |   |

 

A reconciliation of theCompany’s effective tax rates for the years ended August 31, 2004, 2003 and2002 is shown below.

 
| ** **                            | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Federal tax expense at statutory rate | ** ** | **35.0**  | **%**      | 35.0     | %          | 35.0     | %          |
| State tax expense at statutory rate   | ** ** | **6.0**   | **%**      | 6.0      | %          | 6.0      | %          |
| Payments to members                   | ** ** | **(41.2** | **)%**     | (41.2    | )%         | (41.2    | )%         |
| Other, net                            | ** ** | **0.3**   | **%**      | 0.3      | %          | 0.3      | %          |
| Effective tax rate                    | ** ** | **0.1**   | **%**      | 0.1      | %          | 0.1      | %          |

 

**(18)****ENVIRONMENTAL MATTERS:**

 

The Company is subject to extensive federal and stateenvironmental laws and regulations with respect to water and air quality, solidwaste disposal and odor and noise control. The Company conducts an ongoing compliance program designed to meetthese environmental laws and regulations. The Company believes that it is in substantial compliance withapplicable environmental laws and regulations. From time to time, however, the Company may be involved ininvestigations or determinations regarding non-material matters that may arise.

 

On May 21, 2003, SidneySugars received an Enforcement Action for Air Quality Violation letter from theMontana Department of Environmental Quality for alleged violations of allowedparticulate emissions at the Sidney, Montana, facility.  On December 5, 2003, the Montana Departmentof Environmental Quality and Sidney Sugars entered into an Administrative Orderon Consent (Consent Order) resolving this matter.  The Consent Order, among other matters,required Sidney Sugars to pay an administrative civil penalty of $52,104.  The seller of the Sidney, Montana, factoryhas indemnified Sidney Sugars for the amounts that were payable for thisaction.

 

The Company is currently conducting an environmentalremediation plan at its Moorhead and Crookston, Minnesota, factories and at itsDrayton, North Dakota, factory.  Thetotal cost of this plan is approximately $2.4 million of which $ .5 million wasrecognized in fiscal 2003 and $1.9 million was recognized in fiscal 2002.

 

A-24

----

 

**EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KFOR FISCAL YEAR ENDED AUGUST 31, 2004**

 
| **Item  No.** | ** ** | ** **                                                                                          | ** ** | **Method of Filing**                                                                                                                                                     |
|---------------|------------|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |       |                                                                                                |       |                                                                                                                                                                     |
| 3.1           |       | Restated Articles of  Incorporation of American Crystal Sugar Company                               |       | Incorporated by  reference to Exhibit 3(i) from the Company’s Registration Statement on Form  S-1 (File No. 33-83868), declared effective November 23, 1994.   |
|          |       |                                                                                                |       |                                                                                                                                                                     |
| 3.2           |       | Restated By-laws of  American Crystal Sugar Company                                                 |       | Incorporated by  reference to Exhibit 3(ii) from the Company’s Registration Statement on Form  S-1 (File No. 333-11693), declared effective November 13, 1996. |
|          |       |                                                                                                |       |                                                                                                                                                                     |
| 4.1           |       | Restated Articles of  Incorporation of American Crystal Sugar Company                               |       | See Exhibit 3.1                                                                                                                                                          |
|          |       |                                                                                                |       |                                                                                                                                                                     |
| 4.2           |       | Restated By-laws of  American Crystal Sugar Company                                                 |       | See Exhibit 3.2                                                                                                                                                          |
|          |       |                                                                                                |       |                                                                                                                                                                     |
| 10.1          |       | Form of Operating  Agreement between Registrant and ProGold Limited Liability Company               |       | Incorporated by  reference to Exhibit 10(u) from the Company’s Registration Statement on Form  S-1 (File No. 33-83868), declared effective November 23, 1994.  |
|          |       |                                                                                                |       |                                                                                                                                                                     |
| 10.2          |       | Form of Member Control  Agreement between Registrant and ProGold Limited Liability Company          |       | Incorporated by  reference to Exhibit 10(v) from the Company’s Registration Statement on Form  S-1 (File No. 33-83868), declared effective November 23, 1994.  |
|          |       |                                                                                                |       |                                                                                                                                                                     |
| +10.3         |       | Coal Supply Agreement  between Registrant and Spring Creek Coal Company, dated August 25, 1995 |       | Incorporated by  reference to Exhibit 10(y) from the Company’s Registration Statement on Form  S-1 (File No. 333-11693), declared effective November 13, 1996. |

 

E-1

----

 
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| +10.4  |   | Coal Transportation  Agreement between Registrant and Northern Coal Transportation Company, dated  August 25, 1995 |   | Incorporated by  reference to Exhibit 10(z) from the Company’s Registration Statement on Form  S-1 (File No. 333-11693), declared effective November 13, 1996. |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.5   |   | Pledge Agreement  between Registrant and First Union Trust Company, NA                                                  |   | Incorporated by  reference to Exhibit 10(ee) from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1998.                                     |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.6   |   | Indemnity Agreement  between Registrant, Newcourt Capital USA Inc., Crystech, LLC and Crystech  Senior Lender Trust     |   | Incorporated by  reference to Exhibit 10(ff) from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1998.                                     |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.7   |   | Tolling Services  Agreement between Crystech, LLC and Registrant                                                        |   | Incorporated by  reference to Exhibit 10(gg) from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1998.                                     |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.8   |   | Operations and  Maintenance Agreement between Crystech, LLC and Registrant                                              |   | Incorporated by reference  to Exhibit 10(hh) from the Company’s Annual Report on Form 10-K for the year  ended August 31, 1998.                                     |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| +10.9  |   | Limited Liability  Company Agreement of Crystech, LLC                                                                   |   | Incorporated by  reference to Exhibit 10(ii) from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1998.                                     |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.10  |   | Registrant’s  Senior Note Purchase Agreement                                                                       |   | Incorporated by  reference to Exhibit 10.24 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1999                                       |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.11  |   | Registrant’s  Senior Note Inter-creditor and Collateral Agency Agreement                                           |   | Incorporated by  reference to Exhibit 10.25 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1999                                       |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.12  |   | Registrant’s  Senior Note Restated Mortgage and Security Agreement                                                 |   | Incorporated by  reference to Exhibit 10.26 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1999                                       |

 

E-2

----

 
|   |   |                                                                                                                      |   |                                                                                                                                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------|
| 10.13  |   | Employment Agreement  between the Registrant and James J. Horvath                                                         |   | Incorporated by  reference to Exhibit 10.28 from the Company’s Annual Report on Form 10-K form  the year ended August 31, 1999 |
|   |   |                                                                                                                      |   |                                                                                                                                |
| 10.14  |   | Stipulation Agreement  between Registrant and State of Minnesota Pollution Control Agency, dated  April 4, 2000           |   | Incorporated by  reference to Exhibit 10.28 from the Company’s Form 10-Q for the quarter ended  May 31, 2000                   |
|   |   |                                                                                                                      |   |                                                                                                                                |
| 10.15  |   | Board of Directors  Deferred Compensation Plan, dated June 30, 1994                                                       |   | Incorporated by  reference to Exhibit 10.29 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 2000  |
|   |   |                                                                                                                      |   |                                                                                                                                |
| 10.16  |   | Long Term Incentive  Plan, dated June 23, 1999                                                                            |   | Incorporated by  reference to Exhibit 10.31 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 2000  |
|   |   |                                                                                                                      |   |                                                                                                                                |
| 10.17  |   | Uniform Member Sugar  Marketing Agreement between the Registrant and United Sugars Corporation  dated September 1, 2001.  |   | Incorporated by  reference to Exhibit 10.27 from the Company’s Form 10-Q for the quarter ended  November 30, 2001              |
|   |   |                                                                                                                      |   |                                                                                                                                |
| 10.18  |   | Uniform Member  Marketing Agreement between the Registrant and Midwest Agri-Commodities  Company dated September 1, 2001. |   | Incorporated by  reference to Exhibit 10.28 from the Company’s Form 10-Q for the quarter ended  November 30, 2001              |
|   |   |                                                                                                                      |   |                                                                                                                                |
| 10.19  |   | Registrant’s  Senior Note Purchase Agreement dated January 15, 2003                                                  |   | Incorporated by  reference to Exhibit 10.29 from the Company’s Form 10-Q for the quarter ended  February 28, 2003              |
|   |   |                                                                                                                      |   |                                                                                                                                |
| 10.20  |   | Growers’ Contract  (5-year Agreement) for the crop years 2003 through 2007                                           |   | Incorporated by  reference to Exhibit 10.30 from the Company’s Form 10-Q for the quarter ended  February 28, 2003              |
|   |   |                                                                                                                      |   |                                                                                                                                |
| +10.21 |   | Beet Loading and  Hauling Agreement between the Registrant and Transystems LLC for the crop  years 2003 through 2007      |   | Incorporated by  reference to Exhibit 10.31 from the Company’s Form 10-Q for the quarter ended  May 31, 2003                   |

 

E-3

----

 
|   |   |                                                                                                                              |   |                                                                                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|
| +10.22 |   | 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                  |
|   |   |                                                                                                                              |   |                                                                                                                               |
| 10.23  |   | 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 |
|   |   |                                                                                                                              |   |                                                                                                                               |
| 10.24  |   | 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 |
|   |   |                                                                                                                              |   |                                                                                                                               |
| 10.25  |   | Supplements to Term and  Seasonal Loan Agreements between the Registrant and CoBank, ACB dated July  20, 2004 and August 13, 2004 |   | Filed herewith  electronically                                                                                                     |
|   |   |                                                                                                                              |   |                                                                                                                               |
| 21.1   |   | List of Subsidiaries of  the Registrant                                                                                           |   | Filed herewith  electronically                                                                                                     |
|   |   |                                                                                                                              |   |                                                                                                                               |
| 31.1   |   | Rule 13a-14(a)/15(d)-14(a)  Certification of the Chief Executive Officer                                                          |   | Accompanying herewith  electronically                                                                                              |
|   |   |                                                                                                                              |   |                                                                                                                               |
| 31.2   |   | Rule 13a-14(a)/15(d)-14(a)  Certification of the Chief Financial Officer                                                          |   | Accompanying herewith  electronically                                                                                              |
|   |   |                                                                                                                              |   |                                                                                                                               |
| 32.1   |   | Section 1350  Certification of the Chief Executive Officer                                                                        |   | Accompanying herewith  electronically                                                                                              |
|   |   |                                                                                                                              |   |                                                                                                                               |
| 32.2   |   | Section 1350  Certification of the Chief Financial Officer                                                                        |   | Accompanying herewith  electronically                                                                                              |

 

----

+              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.

 

E-4

----