**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

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

 

**For thefiscal year endedAugust 31, 2003**

 

**or**

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

 

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

 

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**AMERICAN CRYSTAL SUGAR COMPANY**

(Exactname of registrant 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)    |

 

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

**NONE**

 

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

**NONE**

 

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Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  ýNo o

 

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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

 

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

 

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As of November 14, 2003, 2,995 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.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

**NONE**

 

 

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# **PART I**

 

*Thisreport contains forward-looking statements and information based uponassumptions by the American Crystal Sugar Company’s management, includingassumptions about risks and uncertainties faced by the Company.  These forward-looking statements can beidentified by the use of forward-looking terminology such as “expects”,“believes”, “will” or similar verbs or expressions.  If any of management’s assumptions prove incorrect or shouldunanticipated circumstances arise, the Company’s actual results couldmaterially 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.*

 

**Item 1.**                                        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, subject to tolerances foroverplanting and underplanting established by the Board of Directors eachyear.  By owning and operating fivesugarbeet processing facilities in the Red River Valley, the Company providesits shareholders with the ability to process their sugarbeets into sugar andagri-products such as molasses, sugarbeet pulp and concentrated separatedby-product (CSB), a by-product of the molasses desugarization process.

 

The Company’s sugar marketing agent, United SugarsCorporation, is a cooperative owned by the Company, Southern Minnesota BeetSugar Cooperative, Minn-Dak Farmers Cooperative and United States SugarCorporation.  The Company’sagri-products 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 is also the controlling member of ProGoldLimited Liability Company, a joint venture which owns a corn wet-milling plantin Wahpeton, North Dakota that is currently being leased to Cargill,Incorporated.  The Company and NewcourtCapital USA own Crystech, LLC which operates the molasses desugarization facilityadjacent to the Company’s processing facility in Hillsboro, North Dakota.

 

In October 2002, the Company, through itswholly-owned subsidiary, Sidney Sugars Incorporated (Sidney Sugars) acquiredthree sugarbeet processing facilities. Sidney Sugars processes sugarbeets (the Sidney Crop) at the Sidney,Montana facility from sugarbeets grown by the non-member growers associatedwith that facility.  The Torrington,Wyoming facility has been leased on a long-term basis to another sugar producerand the Hereford, Texas facility which was idle at the time of the

 

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acquisition and remains idle while the facility is held for sale.  Sidney Sugars is in the process of locatinga buyer for the facility who will use it for purposes other than sugarproduction.  As part of thistransaction, the United States Department of Agriculture (USDA) transferred the rightsto marketing allocations equal to approximately 4.8 percent of the totalallocation for the domestic sugarbeet segment to the Company.  The Company uses a portion of thesemarketing allocations to market the sugar produced at the Sidney, Montanafacility.  Excess allocations are usedby the Company to market sugar pursuant to an agreement between Sidney Sugarsand the Company.

 

InSeptember 2003, the Company, through its wholly-owned subsidiary CrabCreek Sugar Company (Crab Creek), acquired all of the assets of PacificNorthwest Sugar Company, LLC (PNSC), certain assets of Central Leasing ofWashington, LLC (Central Leasing) that were associated with PNSC and the MosesLake, Washington sugarbeet factory previously operated by PNSC and control ofthe sugar production assets owned by Central Leasing associated with the MosesLake, Washington sugarbeet factory for a purchase price of approximately $6.8million.  To accomplish this outcome,Crab Creek entered into various leasing arrangements with Central Leasing suchthat Crab Creek controls the long-term production of sugar at the Moses Lakefacility.  In connection with thisacquisition, the USDA transferred to the Company the sugar marketingallocations formerly allocated to PNSC. Neither Crab Creek nor the Company intends to operate the Moses Lakefacility.

 

The Company’s corporate headquarters are located at101 North Third Street, Moorhead, Minnesota 56560, telephone number(218) 236-4400.  The Company’swebsite is www.crystalsugar.com.  Itsfiscal year ends August 31.

 

**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 and by its ability to store harvestedsugarbeets.

 

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.

 

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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 centerof the 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 stored sugarbeets tofreeze naturally.  The Company alsoutilizes 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. The Company has the capacity to store approximately 28 percent of anaverage Red River Valley crop in ventilated storage sites.  Enclosed cold storage facilities are alsoused to extend the sugarbeet storage period at each of the Company’s five RedRiver Valley factory locations. Enclosed cold storage sites presently have the capacity to coverapproximately 8 percent of an average Red River Valley crop. Sidney Sugars alsoutilizes forced air and passive air sugarbeet pile ventilation techniques.  Sidney Sugars has the capacity to storeapproximately one-third of an average 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 the Company,Southern Minnesota Beet Sugar Cooperative, Minn-Dak Farmers Cooperative andUnited States Sugar Corporation.

 

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. The agri-products produced by the Company and Sidney Sugars are marketedthrough a marketing agent, Midwest Agri-Commodities Company.  Midwest Agri-Commodities Company is acooperative owned by the Company, Minn-Dak Farmers Cooperative, SouthernMinnesota Beet Sugar Cooperative and effective September 1, 2003, MichiganSugar Company.

 

The Company develops and markets sugarbeet seeds withBetaseed, Inc., a Minnesota corporation that is a wholly owned subsidiary ofKWS Kleinwanzlebener Saatzucht, AG, a German seed company that is one of thethree largest seed companies in the world. Through the Betaseed arrangement, the Company has the right to marketits branded seed to its own members. Betaseed has the right to market Betaseed branded seed to the Company’smembers and also to market both the Company’s branded seed and its Betaseedbranded seed in all other markets.

 

The Company is also the controlling member of ProGoldLimited Liability Company, a joint venture which owns a corn wet-milling plantin Wahpeton, North Dakota that is currently being leased to Cargill, Incorporated.  The Company and Newcourt Capital USA ownCrystech, LLC that operates

 

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the molasses desugarization facility adjacent to the Company’sprocessing facility in Hillsboro, North Dakota.

 

**Recent Crops**

 

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 Sidney Crop.

 

The Red River Valley sugarbeet crop, grown during 2001and processed during fiscal 2002, produced a total of approximately 17.8 tonsof sugarbeets per acre from approximately 452,000 acres.  The number of acres harvested was reduced byapproximately 29,000 as a result of member participation in the USDAPayment-In-Kind (PIK) program.  Thisproduction was less than the ten-year average of 19.1 tons per acre for thecrops grown in the years 1991 through 2000. The sugar content of the 2001 crop was 18.04 percent, in comparison to aten-year average for the applicable period of 17.35 percent.  The Company produced a total of approximately25.4 million hundredweight of sugar from the crop.

 

The Red River Valley sugarbeet crop, grown during 2000and processed during fiscal 2001, produced a total of approximately 21.8 tonsof sugarbeets per acre from approximately 442,000 acres.  The number of acres harvested was reduced byapproximately 33,000 as a result of member participation in the PIK program.That production exceeded the ten-year average of 18.3 tons per acre for thecrops grown in the years 1990 through 1999. The sugar content of the 2000 crop was 17.81 percent, in comparison to aten-year average for the applicable period of 17.43 percent.  The Company produced a total ofapproximately 29.0 million hundredweight of sugar from the 2000 sugarbeet crop.

 

For a discussion of the 2002, 2001 and 2000 crops andresults of operations for fiscal years 2003, 2002 and 2001, 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 186 millionhundredweight for the year beginning October 1, 2003 and endingSeptember 30, 2004.  For the sameperiod starting October 2002, total consumption was approximately 181million hundredweight.  Comparing thetwo years shows an increase in demand of approximately 2 percent.

 

The United States refined sugar market has grown overthe past twenty years, despite the demand lost to the substitution of high fructosecorn syrups for sugar in beverages and certain food products.  Non-nutritive sweeteners such as aspartamehave also been developed to substitute for sugar.  Corn sweeteners and non-nutritive sweeteners constitute a largeportion of the overall sweetener market. The Company believes that the UnitedStates market for sugar will remain relatively flat to down slightly in thenear future.

 

The United States sugar industry has been subject toindustry consolidation.  Today there areless than 10 sugar sellers,****with over 70 percent of United Statessugar market share concentrated in the top three sellers, all of which arefully integrated sugarbeet and cane suppliers. The Company’s sugar

 

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production and sales (including Sidney Sugars) represent approximately15 percent of the total domestic market for refined sugar in 2002/2003.  The Company had the right to market, or tohave marketed on its behalf, approximately 31 million hundredweight of sugarfrom the 2002 crop.  Sugar sales byUnited Sugars Corporation, the Company’s marketing agent, representapproximately 26 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, Florida Crystals Incorporated andWestern Sugar Cooperative.  Tate &Lyle North America (Tate & Lyle), a former competitor, exited the U.S.sugar market by selling its sugar processing facilities to Western SugarCooperative and Florida Crystals Incorporated. Because sugar is a fungible commodity, competition in the United Statesindustry is primarily based upon price, customer service and reliability as asupplier.  As mentioned, Imperial recentlysold three processing facilities to the Company.  United Sugars Corporation is currently the largest marketer ofsugar 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 withthe Company covering the growing seasons of 2003 through 2007.  These five-year contracts automaticallyrenew for additional five-year terms unless terminated by one of the parties atthe end of the current term.  Inaddition, each member has an annual contract with the Company specifying thenumber of acres 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 2004 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 foroverplanting and underplanting 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 and deductions,if applicable, are used to adjust the gross beet payment to arrive at the netbeet payment: hauling program allowance and costs, pre-pile quality premium andcosts, minimum payment program allowance and costs, tare incentivepremium/penalty program, late harvest program costs and unit retains.  Members are paid a hauling allowance basedon the distance they must transport sugarbeets for delivery to the Company andmay also receive minimum beet payments and 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 grower contracts, payments to membersfor sugarbeets must be made in at least three installments: (i) on orabout November 15, the Company pays its members an amount equal to 65percent of the Company’s estimate of the grower’s net beet payment;(ii) on or about March 31, the Company pays an amount which combinedwith the November payment equals 90 percent of the 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 theirsugarbeets all proceeds from the sale of the members’ sugar and agri-productsin excess of related member business operating costs, as described above.

 

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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:

 
|                     |   | **2003**                                                |    | **2002** |   | **2001** |   | **2000** |    | **1999** |   | **1998** |   | **1997** |    | **1996** |   | **1995** |   | **1994** |    |
|--------------------------|--------|---------------------------------------------------------|---------|----------|--------|----------|--------|----------|---------|----------|--------|----------|--------|----------|---------|----------|--------|----------|--------|----------|---------|
|                     |   |                                                    |    |     |   |     |   |     |    |     |   |     |   |     |    |     |   |     |   |     |    |
|                     |   | **Distribution  of Net Proceeds Totals (In Thousands)** |    |
|                     |   |                                                    |    |     |   |     |   |     |    |     |   |     |   |     |    |     |   |     |   |     |    |
| Net Proceeds             |   | $                                                       | 361,902 |     | $      | 398,588  |   | $        | 389,039 |     | $      | 358,373  |   | $        | 369,681 |     | $      | 313,007  |   | $        | 373,649 |   | $ | 316,244 |   | $ | 326,693 |   | $ | 266,102 |   |
| PIK Payment              |   | —                                                  |    | (23,497  | )      | (28,067  | )      | —   |    | —   |   | —   |   | —   |    | —   |   | —   |   | —   |    |
| Non-Member (Income)/Loss |   | (5,799                                                  | )       | 733      |   | 1,884    |   | 1,879    |    | 494      |   | 9,679    |   | 18,074   |    | 396      |   | 15       |   | 544      |    |
| Gross Beet Payment       |   | 356,103                                                 |    | 375,824  |   | 362,856  |   | 360,252  |    | 370,175  |   | 322,686  |   | 391,723  |    | 316,640  |   | 326,708  |   | 266,646  |    |
| Unit Retains             |   | (17,486                                                 | )       | (24,154  | )      | (19,239  | )      | (19,299  | )       | (21,332  | )      | (8,545   | )      | (16,611  | )       | (16,040  | )      | (16,648  | )      | (19,328  | )       |
| Member Tax ADJ, Net      |   | —                                                  |    | —   |   | —   |   | —   |    | —   |   | —   |   | —   |    | —   |   | 5,621    |   | 12,585   |    |
| Net Beet Payment         |   | $                                                       | 338,617 |     | $      | 351,670  |   | $        | 343,617 |     | $      | 340,953  |   | $        | 348,843 |     | $      | 314,141  |   | $        | 375,112 |   | $ | 300,600 |   | $ | 315,681 |   | $ | 259,903 |   |

 
|                     |   | **Distribution  of Net Proceeds Per Ton Harvested (1)** | ** ** |
|--------------------------|--------|---------------------------------------------------------|------------|
|                     |   |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Proceeds             |   | $                                                       | 41.36      |   | $ | 49.47 |   | $ | 40.42 |   | $ | 37.11 |   | $ | 34.62 |   | $ | 36.60 |   | $ | 44.95 |   | $ | 39.39 |   | $ | 39.21 |   | $ | 41.25 |   |
| PIK Payment              |   | —                                                  |       | (2.92 | ) | (2.92 | ) | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Non-Member (Income)/Loss |   | (.66                                                    | )          | .09 |   | .20 |   | .20 |   | .05 |   | 1.13 |   | 2.17 |   | 0.05 |   | 0.00 |   | 0.09 |   |
| Gross Beet Payment       |   | 40.70                                                   |       | 46.64 |   | 37.70 |   | 37.31 |   | 34.67 |   | 37.73 |   | 47.12 |   | 39.44 |   | 39.21 |   | 41.34 |   |
| Unit Retains             |   | (2.00                                                   | )          | (3.00 | ) | (2.00 | ) | (2.00 | ) | (2.00 | ) | (1.00 | ) | (2.00 | ) | (2.00 | ) | (2.00 | ) | (3.00 | ) |
| Member Tax ADJ, Net      |   | —                                                  |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 0.68 |   | 1.95 |   |
| Net Beet Payment         |   | $                                                       | 38.70      |   | $ | 43.64 |   | $ | 35.70 |   | $ | 35.31 |   | $ | 32.67 |   | $ | 36.73 |   | $ | 45.12 |   | $ | 37.44 |   | $ | 37.89 |   | $ | 40.29 |   |

 
|                               |   | **Red River  Valley Crop Statistics (1)** | ** ** |
|------------------------------------|--------|-------------------------------------------|------------|
|                               |   |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tons Harvested (In Thousands):     |   | 8,749                                     |       | 8,058 |   | 9,626 |   | 9,657 |   | 10,679 |   | 8,553 |   | 8,313 |   | 8,029 |   | 8,332 |   | 6,450 |   |
| Tons Purchased Per Acre Harvested: |   | 17.5                                      |       | 17.8 |   | 21.8 |   | 19.9 |   | 22.2 |   | 18.5 |   | 18.1 |   | 18.7 |   | 20.2 |   | 16.3 |   |
| Sugar Content of Beets:            |   | 17.0                                      | %          | 18.0 | % | 17.8 | % | 17.4 | % | 17.7 | % | 17.6 | % | 17.3 | % | 16.4 | % | 16.8 | % | 17.6 | % |

 

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(1)                                  Information providedwith respect to net proceeds, gross beet payment, net beet payment, tonsharvested per acre and sugar content of sugarbeets represents an average of thefinancial 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, Montanafactory 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 expiresafter the 2004 crop, after which Sidney Sugars intends to negotiate a newcontract.**

 

## **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 with Sidney Sugars, paymentsto these growers for sugarbeets must be made in three installments followingdelivery of the crop: (i) in November, Sidney Sugars pays the growers anamount equal to 65 percent of the estimated scale payment for that year’s crop;(ii) in April, Sidney Sugars pays an amount, which combined with theNovember payment, equals 90 percent of the estimated scale payment forthat year’s crop; (iii) and in October, Sidney Sugars pays the**

 

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## **remainder of the actual scalepayment.**

 

## **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 relationship.  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 forthe termination to be effective on the August 31 of the subsequentyear.  In the event one of the partiesterminates its Uniform Member Marketing Agreement, the amount of sugar that ismarketed by United Sugars Corporation would decrease.  United Sugars Corporation would also be required to return theexiting member’s capital over a period of five years. On November 15,2002, Southern Minnesota Beet Sugar Cooperative provided a notice oftermination. The termination will be effective August 31, 2004.

 

United Sugars Corporation sells sugar primarily toindustrial users such as confectioners, breakfast cereal manufacturers andbakeries.  For the fiscal year endedAugust 31, 2003, 88.3 percent (by weight) of the sugar was sold toindustrial users.  The remaining portionis marketed by United Sugars Corporation through sugar brokers to wholesalersand retailers under the “Crystal Sugar” and “Pillsbury” brand names and variousprivate labels for household consumption. With regard to brand name sales, the Company licenses the use of the“Crystal” trademark and sub-licenses the use of the “Pillsbury” trademark toUnited Sugars Corporation.

 

United Sugars Corporation markets sugar to customersover a large geographical area.  UnitedSugars Corporation’s customers are located primarily in Illinois, Iowa,Wisconsin, Minnesota, New York, Pennsylvania, California, Florida, Indiana andMissouri.  During fiscal year 2003,United Sugars Corporation’s 10 largest customers accounted for approximately54.8 percent (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 arevery sensitive to the balance between supply and demand in the United Statesmarket.  The largest proportion ofUnited Sugars Corporation’s sugar sales are contracted one or more quarters inadvance, with the effect of stabilizing fluctuations in revenue from quarter toquarter.  Retail (grocery) products aregenerally sold on a spot price basis.

 

The Company markets its and Sidney Sugars’agri-products through Midwest Agri-Commodities Company, a common marketingagency operating on a cooperative basis, whose members are the Company,Minn-Dak Farmers Cooperative and Southern Minnesota Beet SugarCooperative.  Effective September 1,2003, Michigan Sugar Company was admitted as a member of MidwestAgri-Commodities Company.  Sugarbeetpulp is marketed to livestock feed mixers and livestock feeders in

 

8

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the United States and foreign markets. For the year ended August 31, 2003, the majority of the Company’spulp production was exported to Japan and Europe.  The market for sugarbeet pulp is affected by the availability andquality of competitive feedstuffs. Sugarbeet molasses is marketed primarily to yeast manufacturers, livestockfeed mixers and livestock feeders. Total agri-product sales accounted for 8.2 percent of the Company’sconsolidated total revenues during fiscal 2003, of which export sales accountedfor 4.0 percent of such revenues.  Inthe past, agri-products export sales accounted for 3.5 percent of the Company’stotal revenues in 2002 and 3.7 percent in 2001.  These percentages are primarily a function of the average marketprices for sugar, pulp and molasses and are not necessarily indicative offuture relationships between agri-product revenues (both export and domestic)and sugar revenues, because prices of these commodities fluctuate independentlyof 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**

 

### **FarmSecurity and Rural Investment Act of 2002**

 

The Farm Security and Rural Investment Act of 2002(the Farm Bill), enacted on May 13, 2002, replaces the Federal AgricultureImprovement and Reform Act of 1996 (the FAIR Act).  The Farm Bill contains several provisions related to the domesticsugar industry, with the ultimate goal of such provisions to achieve balanceand stability in the U.S. sugar market while minimizing the cost to the Federalgovernment.  The Farm Bill applies tothe 2002 through 2007 crop years. Generally, the Farm Bill restricts imports of foreign sugar, maintainsthe non-recourse loan program established by the FAIR Act, and establishes asystem of marketing allocations for sugarbeet and sugar cane producers in anattempt to balance the supply and demand for sugar in the U.S. domestic sugarmarket.

 

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. Processors may also obtain CCC loans for “in-process” sugar or syrups at80 percent of the loan 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 allowedto export a fixed quantity of sugar into the United States duty-free or subjectto minimal 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 effectivefor the 2002 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 percent of the raw canesugar loan rate of 18 cents per pound. The Farm Bill has terminated the current marketing assessment.

 

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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 the 2002 crop was approximately 31 millionhundredweight.  The Company’s marketingallocation for the 2003 crop is approximately 32 million 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-KindProgram**

 

The USDA implemented a Payment-In-Kind (PIK) programfor sugar producers throughout the United States during fiscal years 2002 and2001.  The PIK program was intended toalleviate the oversupply of sugar in the United States by giving a producerrefined sugar in exchange for the producer’s agreement to destroy sugarbeetsthat would produce a comparable amount of sugar.  Under the PIK program, the Company’s members were paid to destroya portion of their 2001 and 2000 sugarbeet crops.  Payments to the Company’s members were made by the USDA in theform of PIK certificates to be exchanged for government owned sugar.  The Company entered into PIK CertificatePurchase Agreements 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.

 

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.

 

As a result of the PIK program, the 2001 sugarbeetcrop harvested by the Company’s members was reduced by approximately 29,000acres.  The Company receivedapproximately 1.2 million

 

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hundredweight of sugar in exchange for the 2001 crop PIKcertificates.  The 2000 sugarbeet cropharvested by the Company’s members was reduced by approximately 33,000acres.  The PIK certificates receivedwere exchanged for approximately 1.6 million hundredweight of sugar.

 

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.

 

### **NorthAmerican 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 a netsugar importer to a net sugar exporter, the U.S. sugar industry insisted thatNAFTA 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 theside letter agreement.  At this time, itis not known when, or if, a ruling will be received on the Article XXchallenge.  If the side letter agreementto the NAFTA is ruled to be invalid, the Company could be materially andadversely 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 andthe current 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.

 

### **Regionaland 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 and the South African Customs UnionFree Trade Agreement.  Many of thecountries included in these agreements are major sugar producers andexporters.  If reductions in sugartariffs are included in these agreements, eventually excess sugar from theseregions could enter the U.S. market and put pressure on domestic sugarprices.  The U.S. sugar industry and theCompany, as an influential member of such industry, recognize the potentialnegative impact that would result if these agreements are entered into by theUnited States and are taking steps to attempt to manage the situation.

 

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The Company and the sugar industry intend to continue to focus a greatdeal of attention on trade issues in the future.

 

## **Joint Venture: ProGold Limited Liability Company**

 

The Company is one of two members of ProGold LimitedLiability Company (ProGold).  ProGoldwas initially formed to serve as a joint venture between the Company, Minn-DakFarmers Cooperative and Golden Growers Cooperative.  On April 24, 2003, the Company acquired Minn-Dak FarmersCooperative’s five percent ownership interest in ProGold, effective May 1,2003.  This acquisition results in anincrease in the Company’s ownership in ProGold to 51 percent, while GoldenGrowers Cooperative continues to own 49 percent.  As a result of this acquisition, the Company also controls theboard of governors of ProGold.  ProGoldowns a corn wet-milling plant capable of processing corn to produce cornsweeteners (including high fructose corn syrups) and various agri-products.

 

Due to the Company’s resulting controlling ownershipinterest in ProGold, effective May 1, 2003, the Company began to includeProGold in its consolidated financial statements.  The financial statements for prior periods have not been restatedand therefore do not include consolidated data pertaining to ProGold prior toMay 1, 2003.

 

The corn wet-milling plant is leased under anoperating lease that commenced on November 1, 1997 and its initial termwill terminate on December 31, 2007.

 

## **Joint Venture: 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 included approximately$86 million of secured debt placed by Newcourt with a consortium oflenders, and approximately $14 million in subordinated debt held by theCompany.  During fiscal 2003, theCompany agreed to convert the $14 million of subordinated debt owed to it byCrystech 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 be terminated by the Companyif the specific operational processing performance required of Crystech in thecontract is not maintained.  The Companyhas also entered into an Operations and Maintenance Agreement with Crystech bywhich the Company is responsible for operating and maintaining the facilitythroughout the term of the Tolling Services Agreement.  The facility has a capacity to processapproximately 200,000 tons of softened molasses annually for conversion tosugar and other agri-products.  Duringfiscal 2003, approximately 211,000 tons of softened molasses were processed.

 

**Employees**

 

As of August 31, 2003, the Company had****1,203full-time employees, of which 991 were hourly and 212 were salaried and SidneySugars had 148 full-time employees, of which 124 were hourly and 24 weresalaried.  The Company had 24 part-timeemployees and Sidney Sugars had 4 part-time employees.  In addition, the Company employsapproximately 553 hourly seasonal workers, approximately 242 during thesugarbeet harvest and approximately 311 during the remainder of the sugarbeetprocessing

 

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campaign. ** **Sidney Sugarsalso employs approximately 157 hourly seasonal workers, approximately 50during the sugarbeet harvest and approximately 107 during the remainder of thesugarbeet processing campaign.  Duringthe sugarbeet harvest, the Company and Sidney Sugars also contract with thirdparty agencies for approximately another 1,200 additional workers in the RedRiver Valley and approximately 135 additional 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, 2004 for the Red River Valleyfactory employees and April 30, 2005 for the Sidney, Montana factoryemployees.  Office, clerical andmanagement employees are not unionized, except for certain office employees atthe Moorhead and Crookston, Minnesota, and Hillsboro, North Dakota, factorieswho are covered by the collective bargaining agreement with the BCTGM.  The Company considers its employee relationsto 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, 2003, the end ofthe most recent plan year.  Union andnonunion employees are also eligible to participate in 401(k) savings plans.

 

### **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 on-going program designed to meet theseenvironmental laws and regulations.  TheCompany believes that it is in substantial compliance with applicableenvironmental laws and regulations.  TheCompany cannot predict whether future changes in environmental laws orregulations might increase the cost of operating its facilities and conductingits business.  Any such changes couldhave adverse financial consequences for the Company.

 

The Company received a Notice of Violation from theState of Minnesota on April 5, 2001 for alleged violations of theMinnesota hydrogen sulfide standard, performance test reporting requirementsand air emission permit requirements at the Crookston, Moorhead and East GrandForks factories.  On August 5,2003, the Company and the Minnesota Pollution Control Agency (MPCA) enteredinto a stipulation agreement with regard to this matter.  This agreement required the Company, amongother conditions, to pay penalties in the amount of $117,000. The Company hasimplemented a hydrogen sulfide remediation plan at a total estimated cost of $5.0million, of which $2.0 million was spent in 2003 and the remaining $3.0 millionto be spent in 2004.

 

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. Sidney Sugars iscurrently involved in negotiations with the Montana Department of EnvironmentalQuality with the intent of concluding a stipulation agreement with regard tothe alleged violation and the related penalties of approximately $84,000.Management believes it will negotiate a satisfactory resolution and that theoutcome should not have a material adverse effect on the Company’s financialposition.  The seller of theSidney, Montana factory is required to indemnify Sidney Sugars for any amountsthat may be payable for this action.

 

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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.

 

## **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.

 

### **MarketSupply**

 

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 affect profitabilityof selling refined sugar in the United States, resulting in a direct negativeimpact on the Company.

 

**Regionaland 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 priceof sugar, which would impact the Company’s profitability.

 

### **GovernmentPrograms 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,the Company 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.

 

**UnregulatedForeign 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.

 

### **TheFAIR Act and the Farm Bill**

 

The impact of the FAIR Act and the Farm Bill on theoperations of the Company cannot be completely predicted.  The long term ramifications of the marketingallotment and allocation program depend on the Company’s ability to maintainits marketing allocation on an annual basis and to obtain access, if necessary,to additional allocations at a reasonable price.

 

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**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, such as regular and high fructose corn syrups, and non-nutritive,high-intensity sweeteners such as aspartame. Differences in functional properties and prices have tended to definethe use of these various sweeteners. Although the various sweeteners are not interchangeable in allapplications, the substitution of other sweeteners for sugar has occurred incertain products, such as soft drinks. The Company is not able to predict the availability, development orpotential use of these and other alternative sweeteners and their possibleimpact on the Company and its members. The Company’s management believes that it possesses the ability tocompete successfully with other producers of sugar in the United States.  In spite of this competitive advantage,substitute products and sugar imports could have a material and adverse effecton the Company’s operations in the future.

 

**Weatherand Other Factors**

 

The sugarbeet, as with most other crops, is affectedby weather conditions during the growing season.  Additionally, weather conditions during the processing seasonaffect the Company’s ability to store sugarbeets held for processing.  Growing and storage conditions differentfrom the Company’s expectations may change the quantity and quality ofsugarbeets available for processing and therefore may affect the quantity ofsugar produced by the Company.  Asignificant reduction in the quantity or quality of sugarbeets harvestedresulting from adverse weather conditions, disease or other factors couldresult in increased per unit processing costs and decreased production, withadverse financial consequences to the Company and its members.

 

**Item 2.**                                        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 to 400,000 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 sugarbeetstorage, including ventilated storage sites. The Red 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 participates in a joint venture that owns and operates a MDS plantat the Hillsboro facility.  The MDSplants process molasses to extract additional sugar.  The Company and

 

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Sidney Sugars have sugar packaging facilities located at the Moorhead,Hillsboro, Crookston, East Grand Forks and Sidney factories.

 

Sidney Sugars also owns sugarbeet processing plants inHereford, Texas and Torrington, Wyoming. The Hereford, Texas facility is idle and will remain idle while it isheld for sale.  The Torrington, Wyomingfacility is leased on a long-term basis to another sugar company.

 

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, and owns numerous sites as sugarbeet receiving and storagestations.  All of the Company’sproperty, plant and equipment (excluding current assets) is mortgaged orpledged as collateral for its indebtedness to various financial institutions.

 

**Item 3.**                                        LEGALPROCEEDINGS

 

From time to time and in the ordinary course of itsbusiness, the Company is named as a defendant in legal proceedings related tovarious issues, including worker’s compensation claims, tort claims andcontractual disputes.  The Company 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 by insurancepolicies are not likely to have a material adverse effect upon the Company, orits assets or operations.

 

**Item 4.**                                        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, 2003.

 

# **PART II**

 

**Item 5.**                                        MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

As of August 31, 2003, the Company had 2,995shares of the 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

 

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Stock or Preferred Stock will develop due to the limitations ontransfer and the various membership requirements which must be satisfied inorder to acquire such shares.

 

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 theCompany’s right of first refusal to purchase shares offered for sale by itsmembers.  In the absence of the exerciseof such right of first refusal, the Company is aware of sales of PreferredStock at prices in excess of the par value of those shares.  Because the Company does not require partiesseeking approval for transfers to provide information regarding the transferprice, the Company does not possess verifiable information regarding thetransfer price involved in recent transfers of the Company’s Preferred Stock.

 

**Item 6.**                                        SELECTEDFINANCIAL DATA

 

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

 
|                                                  |   | **Fiscal  Year Ended August 31,** |    |
|-------------------------------------------------------|--------|----------------------------------------|---------|
|                                                  |   | **(In  Thousands, except for ratios)** |    |
|                                                  |   | **2003**                               |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                  |   |                                   |    |   |   |   |   |   |   |   |   |
| Net Revenues                                          |   | $                                      | 829,246 |   | $ | 775,288 |   | $ | 866,362 |   | $ | 731,432 |   | $ | 843,968 |   |
| Net Proceeds (1)                                      |   | $                                      | 361,902 |   | $ | 398,588 |   | $ | 389,039 |   | $ | 358,373 |   | $ | 369,681 |   |
| Total Assets                                          |   | $                                      | 809,751 |   | $ | 622,693 |   | $ | 641,445 |   | $ | 739,719 |   | $ | 667,824 |   |
| Long-Term Debt,  Net of Current Maturities            |   | $                                      | 286,922 |   | $ | 182,371 |   | $ | 201,416 |   | $ | 230,905 |   | $ | 233,135 |   |
| Members’  Investments                            |   | $                                      | 270,346 |   | $ | 268,667 |   | $ | 255,660 |   | $ | 249,330 |   | $ | 241,286 |   |
| Property and  Equipment Additions, net of retirements |   | $                                      | 46,578  |   | $ | 15,281 |   | $ | 21,851 |   | $ | 42,088 |   | $ | 58,693 |   |
| Working Capital                                       |   | $                                      | 49,572  |   | $ | 58,282 |   | $ | 45,341 |   | $ | 53,613 |   | $ | 56,733 |   |
| Ratio of  Long-Term Debt to Equity (2)                |   | 1.06:1                                 |    | .68:1 |   | .79:1 |   | .93:1 |   | .97:1 |   |

 
|                                                |   | **Fiscal  Year Ended August 31,**                                               |   |
|-----------------------------------------------------|--------|--------------------------------------------------------------------------------------|--------|
|                                                |   | **(In Thousands, except for tons purchased per acre and Net  Beet Payment per ton)** |   |
| **Red River Valley Production Data (3)**            |   | **2003**                                                                             |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                |   |                                                                                 |   |   |   |   |   |   |   |   |   |
| Acres harvested                                     |   | 501                                                                                  |   | 453 |   | 442 |   | 486 |   | 481 |   |
| Tons purchased                                      |   | 8,749                                                                                |   | 8,058 |   | 9,626 |   | 9,657 |   | 10,679 |   |
| Tons purchased  per acre harvested                  |   | 17.5                                                                                 |   | 17.8 |   | 21.8 |   | 19.9 |   | 22.2 |   |
| Gross beet payment  per ton of sugarbeets purchased |   | $                                                                                    | 40.70  |   | $ | 46.64 |   | $ | 37.70 |   | $ | 37.31 |   | $ | 34.67 |   |
| Sugar  hundredweight                                |   |                                                                                 |   |   |   |   |   |   |   |   |   |
| Produced                                            |   | 24,527                                                                               |   | 25,395 |   | 29,035 |   | 26,646 |   | 25,453 |   |
| PIK Sugar  Receipts                                 |   | —                                                                               |   | 1,177 |   | 1,561 |   | — |   | — |   |
| Sold, including  purchased sugar                    |   | 24,991                                                                               |   | 26,806 |   | 32,445 |   | 24,756 |   | 27,552 |   |
| Purchased sugar  sold                               |   | 465                                                                                  |   | 288 |   | 3 |   | 230 |   | 798 |   |
| Pulp, Molasses  and CSB tons                        |   |                                                                                 |   |   |   |   |   |   |   |   |   |
| Produced                                            |   | 684                                                                                  |   | 612 |   | 749 |   | 784 |   | 921 |   |
| Sold                                                |   | 653                                                                                  |   | 636 |   | 701 |   | 803 |   | 1,042 |   |
|                                                     |        |                                                                                      |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

17

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(1)                                  Net Proceeds are theCompany’s gross revenues, less the costs and expenses of producing andmarketing sugar, agri-products and sugarbeet seed, but before payments tomembers for sugarbeets.  Payments to bemade to members for the delivery of sugarbeets are liabilities of theCompany.  (For a more completedescription of the calculation of Net Proceeds, see “Item 1.  Business - Growers’ Contracts.”)

 

(2)                                  Calculated bydividing the Company’s long term debt, exclusive of the current maturities ofsuch debt, by members’ investments.

 

(3)                                  Information for afiscal year relates to the crop planted and harvested in the preceding calendaryear (e.g., information for the fiscal year ended August 31, 2003 relatesto the crop of 2002).

 

**Item 7.**                                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

 

*Thefollowing discussion of the financial conditions and results of operations ofthe Company should be read in conjunction with the Company’s consolidated financialstatements and notes thereto included elsewhere in 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.

 

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 such 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****$211.9 million, of which $181.8million is currently outstanding.  Inaddition, the Company has long-term debt outstanding of $50 million from aprivate placement of Senior Notes that occurred in September of 1998;$18.3 million from a private placement of Senior Notes that occurred inJanuary of 2003; $43.3 million from nine separate issuances ofPollution Control and Industrial Development Revenue Bonds; and a term loanwith Bank of North Dakota of $4.8 million. The Company also has a seasonal line of credit with a consortium oflenders lead by CoBank, ACB of $235 million and a line of credit withWells Fargo Bank for $1 million. As of August 31, 2003, there was no outstanding balance on theseasonal line of credit with CoBank, ACB. There was no line of credit balance outstanding with Wells Fargo Bank asof August 31, 2003. As of August 31, 2003 the Company had $50 millionof short term borrowing in commercial paper. Any borrowings under the commercial paper program will act to reduce theavailable credit under the CoBank, ACB seasonal line of credit by acommensurate amount.

 

**Critical Accounting Policies and Estimates**

 

Preparation of the Company’s consolidated financialstatements requires estimates and judgments to be made that affect the amountsof assets, liabilities, revenues and expenses reported.

 

18

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Such decisionsinclude the selection of the appropriate accounting principles to be appliedand the assumptions on which to base accounting estimates.  Managementcontinually evaluates these estimates based on historical experience and otherassumptions we believe to be reasonable under the circumstances.

 

The difficulty in applying these policies arises fromthe assumptions, estimates and judgments that have to be made currently aboutmatters that are inherently uncertain, such as future economic conditions,operating results and valuations as well as management intentions.  As thedifficulty increases, the level of precision decreases, meaning that actualresults can and probably will be different from those currently estimated.

 

Estimates are considered to be critical if they meetboth of the following criteria: (1) the estimate requires assumptions aboutmaterial matters that are uncertain at the time the accounting estimates aremade, and (2) other materially different estimates could have been reasonablymade or material changes in the estimates are reasonably likely to occur fromperiod to period. The Company’s critical accounting estimates include thefollowing:

 

*Inventory Valuation*

 

Sugar, pulp, molasses and other agri-productinventories are valued at estimated net realizable value. The Company derivesits estimates from sales contracts, recent sales and evaluations of marketconditions and trends. Changes in market conditions may cause management’sestimates to differ from actual results.

 

*Property, Equipment and Depreciation*

 

Property and equipment 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.

 

The Company reviews its property and equipment 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 impairment losses incurred during the year. However,considerable management judgment is necessary to estimate future cash flows andmay differ from actual results.

 

*Pension Plan Benefits*

 

Accumulated plan benefits are those future periodicpayments, including lump-sum distributions that are attributable under thePension Plan’s provisions to the service employees have rendered. Accumulatedplan benefits include benefits expected to be paid to retired or vestedterminated employees or their beneficiaries; beneficiaries of employees whohave died; and present employees or their beneficiaries.

 

The actuarial present value of accumulated planbenefits is determined by an actuary and is the amount that results fromapplying actuarial assumptions to adjust the accumulated plan benefits toreflect the time value of money and the probability of payment.

 

The significant actuarial assumptions used in thedetermination of the actuarial present value of accumulated plan benefits forfiscal 2003 were as follows: *Valuation Funding Method* - Entry agenormal, frozen initial liability;  *LifeExpectancy* - 1983 group annuity mortality;  *Retirement Age Plan A*- 35 percent of eligible participantsretire at age 60, the remaining participants at age 65;  *Retirement Age*

 

19

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*Plan B*- 25 percentof eligible participants retire at age 60, the remaining participants at age 65*;  Investment Return -*8.25 percentcompounded annually for funding*;  Discount*Rate- 6.17 percent compounded annually; *SalaryScale* - 3.5 percent compounded annually, Plan A only.

 

Actual events may differ from the assumptions used andmay result in plan benefit payments differing significantly from the current estimate.

 

## **Results of Operations**

 

U.S. sugar consumption growth rates averagedapproximately 1.6 percent annually during the 1990’s.  Sugar consumption growth rates are a function of populationgrowth, which has increased slightly over the past five years, and food markettrends.  The Company believes that sugarconsumption will be relatively flat to down slightly in the near future.

 

The Company’s operational results and the resultingbeet payment to members are substantially dependent on market factors, includingdomestic prices for refined sugar. These factors are continuously influenced by a wide variety of marketforces, including domestic sugarbeet and cane production, weather conditionsand United States farm and trade policy, which the Company is unable topredict.

 

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.

 

**Comparison of the Years EndedAugust 31, 2003 and 2002**

 

Revenue for the year ended August 31, 2003, was$829.2 million, 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 Separated By-Product (CSB), aby-product of the molasses desugarization process, increased 5.3 percent due toan 8.6 percent increase in the average selling price per ton, partially offsetby a 3.1 percent decrease in the volume of CSB sold.  Rental revenue on the ProGold operating lease was $8.6 million.

 

Cost of product sold, exclusive of payments to membersfor sugarbeets, 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 August 31,2003.  Direct processing costs for sugarand pulp increased 25.1 percent.  Thiswas due to harvesting 17.7 percent more sugarbeets (9.2 percent of the increasewas attributable to the Sidney crop) and processing 16.4 percent moresugarbeets (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 8.8 percent reflectinghigher purchased power costs, insurance costs, and costs related to theoperations of Sidney Sugars.  The changein product inventories impacted the cost of product sold favorably by $3.0million primarily due to an increase in the net realizable value for sugar. Thevalue for sugar inventories as of August 31, 2003 increased compared tothe prior year due to a slightly higher inventory level and a higher netrealizable value per hundredweight. The cost associated with sugar purchased tomeet customer needs was up $7.6 million due to delaying the commencement of the2002 Red River Valley crop campaign. The 2002 Red

 

20

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River Valley cropcampaign startup was delayed because of adverse planting and growing conditionswhich slowed the maturity of the crop. As a result, additional sugar was required to be purchased to servicecustomers during this delay.  Costsrelated to ProGold were $4.0 million.

 

Selling, general and administrative expenses increased$3.9 million from 2002.  Sellingexpenses increased $4.0 million primarily due to the increase in the volume of sugar soldalong with increased warehousing costs and additional costs related to SidneySugars.  General andAdministrative 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.

 

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 the investment in ProGold.  The lossin fiscal 2002 was comprised mainly of activities related to the investment inProGold.

 

Payments to members forPIK certificates, net of equity retention declared, during fiscal 2002 amountedto $22.3 million.  There were no PIKpayments during 2003.

 

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

 

**Comparison of the Years EndedAugust 31, 2002 and 2001**

 

Revenue for the year ended August 31, 2002, was$775.3 million, a decrease of $91.1 million from 2001.  Revenue from total sugar sales decreased11.1 percent due to a 17.4 percent decrease in hundredweight sold, partiallyoffset by a 7.6 percent increase in the average selling price perhundredweight.  Revenue from pulp salesdecreased 4.2 percent due to a 5.1 percent decrease in the average sellingprice per ton, partially offset by a .9 percent increase in the volume of pulptons sold.  Revenue from molasses salesdecreased 35.2 percent due to a 53.6 percent decrease in the volume of molassessold, partially offset by a 39.6 percent increase in the average selling priceper ton.  Revenue from sales ofConcentrated Separated By-Product (CSB), a by-product of the molassesdesugarization process, decreased 2.3 percent due to a 12.2 percent decrease inthe volume of CSB sold, partially offset by an 11.3 percent increase in theaverage selling price per ton.

 

Cost of product sold, exclusive of payments forsugarbeets and PIK certificates, decreased $73.2 million as compared to fiscal2001.  Direct processing costs for sugarand pulp decreased 21.5 percent due to harvesting 16.3 percent fewer sugarbeetsand processing 16.4 percent less sugarbeets. The decrease was also due to costreduction efforts and lower natural gas prices.  The change in product inventories impacted the cost of productsold favorably by $50.4 million.  Thiswas primarily due to the value of the carryover sugar inventory as ofAugust 31, 2000, which was sold in fiscal 2001, and was approximately$43.0 million higher than the value of the carryover sugar inventory as ofAugust 31, 2001, which was sold in fiscal 2002.  The higher inventory level as of August 31, 2000 consistedlargely

 

21

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of sugar pledgedto the CCC, which was forfeited during the first quarter of fiscal 2001.  The value for sugar inventories as ofAugust 31, 2002 increased compared to the prior year due to a slightlyhigher inventory level and a higher net realizable value per hundredweight. Thecost associated with sugar purchased to meet customer needs was up $6.5 milliondue to delaying the commencement of the 2002 crop campaign.  The 2002 Crop campaign startup was delayedbecause of adverse planting and growing conditions which slowed the maturity ofthe crop.

 

Selling, general and administrative expenses decreased$22.2 million from 2001.  Sellingexpenses decreased $21.8 million primarily due to lower freight and warehousingcosts for sugar due in part to the decrease in hundredweight sold.  General and Administrative costs decreased $..4 million due to lower personnel costs and other general cost reductions.

 

Interest income decreased $1.2 million from last yearprimarily due to a lower average balance of investments and slightly lowerinterest rates.

 

Interest expense decreased $5.4 million from last yearprimarily due to lower long-term and short-term interest rates and loweraverage borrowing levels.

 

Non-member business activities resulted in a loss of $..7 million in 2002, as compared to a loss of $1.9 million in 2001.  The losses in both fiscal years werecomprised mainly of activities related to the investment in ProGold.

 

Payments to members forPIK certificates, net of equity retention declared, decreased by $4.2 millionfrom $26.5 million in 2001 to $22.3 million in 2002.

 

Payments to members forsugarbeets, net of unit retains declared, increased by $8.1 million from $343.6million in 2001 to $351.7 million in 2002.

 

### **Comparison of the Years EndedAugust 31, 2001 and 2000**

 

Revenuefor the year ended August 31, 2001, was $866.4 million, an increase of$134.9 million from 2000.  Revenue fromtotal sugar sales increased 19.2 percent due to a 31.1 percent increase inhundredweight sold, partially offset by a 9.0 percent decrease in the averageselling price per hundredweight. Revenue from pulp sales increased 8.8 percent due to a 14.8 percentincrease in the average selling price per ton partially offset by a 5.2 percentdecrease in the volume of pulp sold. Revenue from molasses sales decreased 37.4 percent due to a 52.6 percentdecrease in the volume of molasses sold partially offset by a 32.1 percentincrease in the average selling price per ton. Revenue from the sales CSB increased 58.5 percent due to a 13.6 percentincrease in sales volume and a 39.4 percent increase in the average sellingprice per ton.  The decrease in salesvolume of molasses and the increase in sales volume of CSB was primarily theresult of the Crystech molasses desugarization facility at Hillsboro, NorthDakota, becoming operational in February 2000.

 

Cost of product sold,exclusive of payments for sugarbeets and PIK certificates increased $89.6million.  Direct processing costs forsugar and pulp increased 12.3 percent due to the processing 3.2 percent moresugarbeets, higher costs for natural gas and twelve months versus seven monthsof tolling charges from Crystech.  Fixedand committed expenses increased 2.9 percent, reflecting higher depreciationand insurance costs.  The costassociated with sugar purchased to meet customer needs decreased $6.2 milliondue to minimal activity during fiscal 2001. Change in inventories impacted the cost of product sold unfavorably by$78.2 million.

 

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Selling expensesincreased $17.3 million primarily due to increased sugar sales volume.  General and administrative expensesincreased 1.8 percent due to general cost increases.

 

Interest expensedecreased $2.7 million due to lower long-term and short-term interest rates andlower average borrowing levels.

 

Non-member activitiesresulted in a loss of $ 1.9 million in both 2001 and 2000.  The loss in each year was primarilycomprised of activities related to the investment in ProGold.

 

Payments to members forPIK certificates, net of equity retention declared, were $26.5 million in 2001.

 

Payments to members forsugarbeets, net of unit retains declared, increased by $2.6 million from $341.0million in 2000 to $343.6 million in 2001.

 

## **Recent Acquisitions**

 

OnSeptember 8, 2003, the Company, through its wholly-owned subsidiary CrabCreek Sugar Company (Crab Creek), acquired all of the assets of PacificNorthwest Sugar Company, LLC (PNSC), certain assets of Central Leasing ofWashington, LLC (Central Leasing) that were associated with PNSC and the MosesLake, Washington sugarbeet factory previously operated by PNSC and control ofthe sugar production assets owned by Central Leasing associated with the MosesLake, Washington sugarbeet factory for a purchase price of approximately $6.8million.  To accomplish this outcome,Crab Creek entered into various leasing arrangements with Central Leasing suchthat Crab Creek controls the long-term production of sugar at the Moses Lakefacility.  In connection with thisacquisition, the USDA transferred to the Company the sugar marketing allocationsformerly allocated to PNSC.  Neither CrabCreek nor the Company intends to operate the Moses Lake facility.

 

## **2003 Crop and Estimated Fiscal Year 2004 Information**

 

This discussion contains a summary of the Company’sand Sidney Sugars’ current estimates of the financial results to be obtainedfrom the Company’s and Sidney Sugars’ processing of the 2003 sugarbeetcrops.  Given the nature of theestimates required in connection with the payments to members and non-membersfor their sugarbeets, this discussion includes forward-looking statements regardingthe quantity of sugar to be produced from the 2003 sugarbeet crops, the netselling price for the sugar and agri-products produced by the Company and theCompany’s operating costs.  Theseforward-looking statements are based largely upon the Company’s expectationsand estimates of future events; as a result, they are subject to a variety ofrisks and uncertainties.  Some of thoseestimates, such as the selling price for the Company’s products and thequantity of sugar produced from the sugarbeet crops, are beyond the Company’scontrol.  The actual results experiencedby the Company and Sidney Sugars could differ materially from theforward-looking statements contained herein.

 

As noted earlier, the Growers’ Contracts between theCompany and its members and Sidney Sugars and the growers in Sidney, Montanaregarding the delivery of sugarbeets to the Company and Sidney Sugars requirepayment for sugarbeets in multiple installments throughout the year afterharvest of the applicable sugarbeet crop. As only the final payment is made after the close of the fiscal year inquestion, the first two payments to members and non-members for sugarbeets are,of necessity, based upon the Company’s and Sidney Sugars’ then-currentestimates of the beet payments arising from the processing of the crops inquestion and the subsequent sale of the products obtained from processing thosesugarbeets.

 

23

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The completed harvest of the sugarbeet crop grown bymembers during 2003 produced a total of 10.0 million tons of sugarbeets,or approximately 20.1 tons of sugarbeets per acre from approximately 496,000acres.  This production was greater thanthe ten-year average of 19.1 tons per acre for crops grown in the years 1993through 2002.  The sugar content of the2003 crop is 18.45 percent in comparison to a ten year average for theapplicable period of approximately 17.35 percent.  The Company expects to produce a total of approximately29.7 million hundredweight of sugar from the 2003 crop, an increase ofapproximately 21.0 percent compared to the 2002 crop.  Such sugar production provides a total sugar recovery ofapproximately 298 pounds of sugar for each ton of sugarbeets harvested by theCompany.

 

The 2003 Sidney Crop consisted of approximately976,000 tons of sugarbeets, or approximately 23.7 tons of sugarbeets per acrefrom approximately 41,000 acres.  Thesugar content of the Sidney Crop is 18.8 percent.  The Company expects to produce a total of approximately 2.8million hundredweight of sugar from the Sidney Crop.

 

## **The Company’s Current Strategic Plan**

 

In order to obtain the best selling price for itsproducts, the Company intends to focus on sales and marketing strategies thatallow the Company to provide its customers with an appropriate mixture of theCompany’s products.  The Company plansto optimize its customer mix, improve logistics and continue to evaluate andimprove its customer performance.

 

To pursue the goal of maintaining and improving uponits current status as a low cost producer, the Company intends to focus onworking with its members to increase the productivity of the members’ sugarbeetfarming operations.  The Company expectsto focus on, among others, programs for nitrogen management and new seedvarieties.  At the factory level, theCompany plans to focus on cost reductions and pursue on-going maintenanceinitiatives and targeted capital improvements. After completing several large strategic capital projects in recentyears, the Company currently intends to focus its efforts on strengthening itsbalance sheet while pursuing maintenance capital and high-return strategiccapital projects.

 

**Item 7A.**                               Quantitativeand Qualitative Disclosures about Market Risk

 

Market risk is the risk of loss to future earnings, tofair values or to future cash flows that may result from changes in the priceof a financial instrument.  The value ofa financial instrument may change as a result of changes in the interest rates,exchange rates, commodity prices, equity prices and other market changes.  Marketrisk is attributed to all market-risk sensitive financial instruments,including long term debt.

 

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

 

The following table provides information regarding theCompany’s contractual obligations as of August 31, 2003:

 
| **(In Thousands)**                 |   | **Total** |    | **Less than  One Year** |   | **One to  Three Years** |   | **Four to  Five  Years** |    | **After Five  Years** |   |
|------------------------------------|--------|-----------|---------|-------------------------|--------|-------------------------|--------|--------------------------|---------|-----------------------|--------|
| Long-Term  Debt                    |   | $         | 298,204 |                    | $      | 11,282                  |   | $                        | 95,841  |                  | $      | 65,969 |   | $ | 125,112 |   |
| Purchase  Obligations              |   | 29,279    |    | 16,659                  |   | 10,695                  |   | 1,426                    |    | 499                   |   |
| Other  Long-Term Obligations       |   | 927       |    | 123                     |   | 369                     |   | 246                      |    | 189                   |   |
|                               |   |      |    |                    |   |                    |   |                     |    |                  |   |
| **Total  Contractual Obligations** |   | $         | 328,410 |                    | $      | 28,064                  |   | $                        | 106,905 |                  | $      | 67,641 |   | $ | 125,800 |   |

 

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**Item 8.**                                        FINANCIALSTATEMENTS

 

The consolidated financial statements of the Companyfor the fiscal years ended August 31, 2003, 2002 and 2001 have beenaudited by Eide Bailly LLP, independent certified public accountants.  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

 

**Item 9A.**                               CONTROLSAND PROCEDURES

 

The Company’s chief executive officer and chieffinancial officer have reviewed and evaluated the effectiveness of theCompany’s disclosure controls and procedures (as defined in Rules 240.13a-15(e)and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of theend of the period covered by this annual report.  Based on that review and evaluation, which included inquiriesmade to certain other employees of the Company, the chief executive officer andchief financial officer have concluded that the Company’s current disclosurecontrols and procedures, as designed and implemented, are reasonably adequateto ensure that they are provided with material information relating to theCompany required to be disclosed in the reports the Company files or submitsunder the Securities Exchange Act of 1934.

 

There have not been any significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of their evaluation.  There were no significant deficiencies or materialweaknesses identified, and therefore no corrective actions were taken.

 

# **PART III**

 

**Item 10.**                                 DIRECTORSAND EXECUTIVE OFFICERS

 

**Board of Directors**

 

The Board of Directors of the Company consists ofthree directors from each of the five factory districts.  Directors must hold common stock of theCompany or must be representatives of such shareholders belonging to thedistrict they represent and 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 inDecember of the years indicated in the table below.  One director is elected each year from eachfactory district.  A director cannotserve more than four consecutive three-year terms.

 

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The table below lists certain information concerningcurrent directors of the Company. 

 
| **Name and Address**                                             |   | **Age** |       | **Factory  District** |       | **Director  Since** |       | **Term  Expires  Dec.** |       |
|------------------------------------------------------------------|--------|---------|------------|-----------------------|------------|---------------------|------------|-------------------------|------------|
|                                                             |   |    | ** ** |                  | ** ** |                | ** ** |                    | ** ** |
| Michael A. Astrup  PO Box 219  Dilworth, MN 56529                |   | 50      |       | Moorhead              |       | 1996                |       | 2005                    |       |
|                                                             |   |    |       |                  |       |                |       |                    | ** ** |
| Jerry D. Bitker  1694 Co. Highway #19  Halstad, MN 56548         |   | 55      |       | Hillsboro             |       | 1996                |       | 2005                    |       |
|                                                             |   |    |       |                  |       |                |       |                    | ** ** |
| Richard Borgen  1544 Co. Highway #39  Perley, MN 56574           |   | 54      |       | Moorhead              |       | 1997                |       | 2003                    |       |
|                                                             |   |    |       |                  |       |                |       |                    | ** ** |
| Paul J. Driscoll  PO Box 555  East Grand Forks, MN 56721         |   | 58      |       | East Grand Forks      |       | 2000                |       | 2003                    |       |
|                                                             |   |    |       |                  |       |                |       |                    | ** ** |
| Curtis Haugen  45508 300th St. NW  Argyle, MN 56713              |   | 42      |       | East Grand Forks      |       | 2001                |       | 2004                    |       |
|                                                             |   |    |       |                  |       |                |       |                    |       |
| Lonn M. Kiel  36044 275th Ave. S.W.  Crookston, MN 56716         |   | 50      |       | Crookston             |       | 1994                |       | 2003                    |       |
|                                                             |   |    |       |                  |       |                |       |                    | ** ** |
| David J. Kragnes  10600 60th St. N.  Felton, MN 56536            |   | 51      |       | Moorhead              |       | 1995                |       | 2004                    |       |
|                                                             |   |    |       |                  |       |                |       |                    | ** ** |
| Francis L. Kritzberger  RR #1, Box 22  Hillsboro, ND 58045       |   | 58      |       | Hillsboro             |       | 1996                |       | 2003                    |       |
|                                                             |   |    |       |                  |       |                |       |                    | ** ** |
| Patrick D. Mahar  RR 1, Box 363  Cavalier, ND 58220-9789         |   | 61      |       | Drayton               |       | 1993                |       | 2005                    |       |
|                                                             |   |    |       |                  |       |                |       |                    |       |
| Jeff McInnes  RR 2 Box 140  Hillsboro, ND 58045                  |   | 46      |       | Hillsboro             |       | 2001                |       | 2004                    |       |
|                                                             |   |    |       |                  |       |                |       |                    |       |
| Ronald E. Reitmeier  30928 220th St. S.W.  Fisher, MN 56723      |   | 57      |       | Crookston             |       | 1996                |       | 2005                    |       |
|                                                             |   |    |       |                  |       |                |       |                    | ** ** |
| Jim A. Ross  RR 1, Box 5  Fisher, MN 56723                       |   | 53      |       | Crookston             |       | 1998                |       | 2004                    |       |
|                                                             |   |    |       |                  |       |                |       |                    | ** ** |
| G. Terry Stadstad  1774 22nd Avenue NE  Grand Forks, ND 58203    |   | 60      |       | East Grand Forks      |       | 1993                |       | 2005                    |       |
|                                                             |   |    |       |                  |       |                |       |                    | ** ** |
| Robert Vivatson  (Chairman)  PO Box 631  Cavalier, ND 58220 |   | 53      |       | Drayton               |       | 1992                |       | 2004                    |       |
|                                                             |   |    |       |                  |       |                |       |                    |       |
| Neil Widner  PO Box 47  Stephen, MN 56757                        |   | 52      |       | Drayton               |       | 2000                |       | 2003                    |       |

 

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Belowis 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 theAmerican Sugarbeet 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 eastof Perley, Minnesota, since 1967 and has served as a director on the PerleyCo-op Elevator Board for nine years and the Norman County West school board for10 years.  Mr. Borgen also serves on theBoard of Governors of ProGold Limited Liability Company.

 

**Paul J. Driscoll. **Mr. Driscoll has been adirector since 2000.  Mr. Driscoll hasfarmed in the East Grand Forks, Minnesota, area for many years.  Mr. Driscoll currently serves on theMarshall Polk Rural Water Board, the Minnesota Rural Water Finance Authority,the Huntsville Township Board and the Northwest Technical College AdvisoryBoard.

 

**Curtis Haugen. **Mr. Haugen has been adirector since 2001.  Mr. Haugen hasbeen 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 afarmer since 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. Kritzberger has been a farmer since 1964.  Mr. Kritzberger serves on the Board ofDirectors of the North Dakota Council of Cooperatives.

 

**Patrick D. Mahar.**  Mr. Mahar has been a director since1993 and has been a farmer since 1962. Mr. Mahar is currently a partner of Mahar Farms near Cavalier,North Dakota.  Mr. Mahar previously

 

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servedas 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.  Mr. McInnes is a directorand the chairman of the Hillsboro Economic Development Corporation.

 

**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 18years.  Mr. Reitmeier previously servedon the Fisher, Minnesota School Board for 18 years, as President of the PolkCounty Farmers Union and Chairman of the Minnesota Farmers Union ExecutiveCommittee 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 onthe Board 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 the Board ofGovernors of ProGold Limited Liability Company.

 

**Robert Vivatson.**  Mr. Vivatson has been a director since1992.  Operating as a farmer nearCavalier, North Dakota, since 1975, Mr. Vivatson is a partner of VivatsonBros. and President of Vivatson Farms Inc. Mr. Vivatson is serving on the Board of Directors of United SugarsCorporation, Midwest Agri Commodities Company, the United Valley Bank ofCavalier and Grand Forks and the Board of Governors of ProGold Limited LiabilityCompany.

 

**Neil Widner. **Mr. Widner has been adirector since 2000.  Mr. Widner hasfarmed near Stephen, Minnesota, since 1973. Mr. Widner currently serves as a director of Farmers Grain in Stephen, Minnesota.

 

The Board of Directors meets monthly.  For fiscal year 2003, the Company providedits directors with compensation consisting of (i) a payment of $300 permonth, (ii) a per diem payment of $250 for each day spent on Companyactivities, including board meetings and other Company functions, and(iii) reimbursement of expenses for attendance at Board of Directors’meetings.  The Chairman of the Board ofDirectors receives a payment of $800 per month, rather than $300 per month; theChairman also receives a per diem in the amount of $250 for each day spent onCompany activities.

 

For fiscal years 2004 and 2005, the Board has approvedan increase in the monthly compensation paid to directors to $400 per month forfiscal 2004 and $500 per month for fiscal 2005, with future annual increases of$25 per month for each fiscal year after fiscal 2005.  The monthly compensation payment for the Chairman of the Boardincreases to $900 per month for fiscal 2004 and $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 DeferredCompensation Plan, members of the Board of Directors can elect to defer receiptof their monthly and per diem compensation. This is an annual

 

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irrevocable election made prior to January 1, of each calendaryear the fees are to be paid.  Theamounts are deferred until either withdrawal from the Board of Directors by amember or until retirement from the Board member’s regular employment orbusiness, but not beyond age 65.  Twopayment options are available at the election of the participant.  Payments can be received in a single lumpsum or in equal installments over a period of up to ten years.  The Board of Directors, at its discretion,can elect to distribute the remaining balance at any time.  Interest is earned on the amounts deferredbased on the five year Treasury bond rate. Currently, there is one Board member who has elected to participate inthis plan.  The amount deferred, as ofAugust 31, 2003 was $148,000.

 

**Audit Committee and Audit CommitteeFinancial Expert**

 

The Audit Committee assists the Board of Directors infulfilling its oversight responsibilities relating to the Company’s financialreporting and controls, the internal audit function, the annual independentaudit of the Company’s financial statements and the legal compliance and ethicsprograms as established by management and the Board of Directors.  The Audit Committee selects the independentpublic accountants, subject to approval of the Board of Directors, and reviewsthe scope and procedural plans of the audit. The Audit Committee administers the Company’s employee complaint programand handles, on behalf of the full Board of Directors, any issues that ariseunder the Company’s Code of Ethics.  OnAugust 31, 2003, the members of the Audit Committee were Jeff McInnes,Neil Widner, and David J. Kragnes (Committee Chair).

 

As of August 31, 2003, the Board of Directors ofthe Company has determined that there is no audit committee financial expertserving on the Audit Committee.  TheCompany is a cooperative formed in accordance with the Minnesota cooperativelaw of the State of Minnesota.  Inaccordance with the Minnesota cooperative law, the Amended and Restated Articlesof the Incorporation of the Company and the Amended and Restated Bylaws of theCompany, the board must be composed of members of the Company (the holders ofcommon stock).  Membership in theCompany is limited to agricultural producers who are actively involved in theproduction of sugar beets.  Based on thestate law requirements for both membership and board service, the Company isunable to recruit outside of its membership to elect to its Board of Directorsand its audit committee an individual that possesses the attributes of an“audit committee financial expert” as defined by the SEC.  Todate, the Company has been unable to recruit from its membership an individualto serve on the Board of Directors that possesses the attributes of an “auditcommittee financial expert.”

 

**Executive Officers**

 

The table below lists the principal officers of theCompany, none of whom owns any shares of Common Stock or Preferred Stock.  Officers are elected annually by the Boardof Directors.

 
| **Name**           |   | **Age** |   | **Position**                                                                        |
|--------------------|--------|---------|--------|-------------------------------------------------------------------------------------|
|               |   |    |   |                                                                                |
| James J. Horvath   |   | 58      |   | President and Chief  Executive Officer                                              |
| Thomas S. Astrup   |   | 34      |   | Vice  President-Administration                                                      |
| David A. Berg      |   | 49      |   | Vice President-  Agriculture                                                        |
| Joseph J. Talley   |   | 43      |   | Vice President-Finance  and Chief Financial Officer                                 |
| David A. Walden    |   | 50      |   | Vice  President-Operations                                                          |
| Daniel C. Mott     |   | 44      |   | Secretary                                                                           |
| Samuel S. M. Wai   |   | 49      |   | Treasurer and Assistant  Secretary                                                  |
| Brian Ingulsrud    |   | 40      |   | Corporate Controller,  Assistant Secretary and Assistant Treasurer                  |
| Mark L. Lembke     |   | 47      |   | Finance Administration  Manager, Assistant Secretary and Assistant Treasurer   |
| Ronald K. Peterson |   | 48      |   | Accounting &  Systems Manager, Assistant Secretary and Assistant Treasurer |
| David L. Malmskog  |   | 46      |   | Director Business  Development, Assistant Secretary and Assistant Treasurer    |
| Lisa M. Maloy      |   | 39      |   | Treasury Operations  Manager and Assistant Secretary                                |

 

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**James J. Horvath.**  Mr. Horvath was named President andChief Executive Officer in May, 1998. He served as Chief Financial Officer from 1996 to 1998.  From 1994 to 1996, Mr. Horvath servedas the Company’s Vice President-Joint Ventures as well as Chief Manager andChief Operating Officer of ProGold Limited Liability Company.  Mr. Horvath also served as theCompany’s Vice President-Finance from 1985 to 1994.  Mr. Horvath currently serves on the Boards of Directors ofUnited Sugars Corporation and Midwest Agri-Commodities Company.

 

**Thomas S. Astrup**.  Mr. Astrup was named the Company’s VicePresident-Administration in 2000.  Mr.Astrup served 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 theCorporate Accountant for ProGold Limited Liability Company from 1994 to 1997.

 

**David A. Berg.**  Mr. Berg was named VicePresident-Agriculture in December 2000. He was Vice President-Administration during the period fromOctober 1998 to December 2000. During the period from 1994 to 1998, Mr. Berg served as theCompany’s Vice President-Business Development, Vice President-StrategicPlanning, Director-Market Information, Manager of Marketing and Analysis andManager-Economic Research.  Mr. Bergcurrently serves on the ProGold Limited Liability Company’s Board of Governors.

 

**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 LiabilityCompany.  Prior to 1994, Mr. Talleywas a partner with the accounting firm of Eide Helmeke & Co.

 

**David A. Walden.**  Mr. Walden was named VicePresident-Operations in January 1998. He served as Production Manager from 1995 until 1998.  He joined the Company in 1979 as a ResidentEngineer at the Crookston facility and has held positions of Engineering andMaintenance Superintendent, Production Superintendent, Assistant OperationsManager and Maintenance Manager.  Mr.Walden also serves as the chairman of the Board of Managers of Crystech LLC.

 

**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 Partner in the law firm of Fredrikson & Byron,P.A.  Mr. Mott is not an employee of theCompany.

 

**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

 

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PoliticalAction Committee.  Mr. Wai also serves onthe Board of Directors of the Institute of Cooperative Financial Officers.

 

**Brian Ingulsrud.**  Mr. Ingulsrud was named as the CorporateController, Assistant Secretary and Assistant Treasurer in 2000.   Mr. Ingulsrud served as Director ofAgriculture Strategy and Development from 1999 to 2000, Financial PlanningManager from 1997 until 1998, and Factory Offices Manager from 1995 until 1997.

 

**Mark L. Lembke.**  Mr. Lembke was named AssistantSecretary and Assistant Treasurer in 1996. He currently 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 FactoryAccounting Supervisor.

 

**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. Petersonhas held various financial positions with the Company since 1979.

 

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

 

**Lisa M. Maloy.**  Ms. Maloy currently serves as Treasury Operations Managerand was appointed Assistant Secretary in 2002. Prior to joining the Company in 1997, Ms. Maloy was a tax attorneywith Ernst & Young LLP in Minneapolis, Minnesota.

 

**Code of Ethics**

 

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 financial personnel.  The Company will provide at no charge a copyof the code of ethics to any person who requests a copy by sending a writtenrequest to the Company’s headquarters, attention of the Chief Executive Officerof the Company.

 

**Item 11.**                                 EXECUTIVECOMPENSATION

 

The following table summarizes the amount ofcompensation paid for services rendered to the Company during the fiscal yearended August 31, 2003 and the two prior fiscal years to those personsserving as the Company’s Chief Executive Officer and to the four other mosthighly compensated current executive officers of the Company whose cashcompensation exceeded $100,000 per annum.

 

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**SUMMARYCOMPENSATION TABLE**

 
|                            |   | **Annual  Compensation** |   | **Long-Term  Compensation  Payouts** |    |
|---------------------------------|--------|--------------------------|--------|--------------------------------------|---------|
|                            |   | **Year**                 |   | **Salary**                           |    | **Incentive  Compensation** |   | **Other  Annual  Compensation** |   | **1995 Plan  Payouts** |   | **1999 Plan  Payouts** |   |
|                            |   |                     |   | **($)**                              |    | **($)** |   | **($)(1)** |   | **($)(2)** |   | **($)(2)** |   |
|                            |   |                     |   |                                 |    |   |   |   |   |   |   |   |   |
| James  J. Horvath               |   | 2003                     |   | $                                    | 446,703 |   | $ | 200,359 |   | $ | 42,000 |   | N/A |   | $ | 23,479 |   |
| President and Chief Executive   |   | 2002                     |   | $                                    | 433,860 |   | $ | 342,155 |   | $ | 40,056 |   | N/A |   | $ | 4,879 |   |
| Officer                         |   | 2001                     |   | $                                    | 410,762 |   | $ | 279,335 |   | $ | 38,181 |   | $ | 6,450 |   | — |   |
|                            |   |                     |   |                                 |    |   |   |   |   |   |   |   |   |
| Thomas  S. Astrup               |   | 2003                     |   | $                                    | 173,497 |   | $ | 52,851 |   | $ | 10,579 |   | N/A |   | $ | 527 |   |
| Vice President -Administration* |   | 2002                     |   | $                                    | 157,085 |   | $ | 77,077 |   | $ | 8,458 |   | N/A |   | — |   |
|                            |   | 2001                     |   | $                                    | 119,060 |   | $ | 88,566 |   | $ | 6,019 |   | N/A |   | — |   |
|                            |   |                     |   |                                 |    |   |   |   |   |   |   |   |   |
| David  A. Berg                  |   | 2003                     |   | $                                    | 211,000 |   | $ | 87,969 |   | $ | 20,941 |   | N/A |   | $ | 5,022 |   |
| Vice  President-Agriculture     |   | 2002                     |   | $                                    | 196,923 |   | $ | 112,490 |   | $ | 19,824 |   | N/A |   | $ | 1,038 |   |
|                            |   | 2001                     |   | $                                    | 179,077 |   | $ | 100,800 |   | $ | 19,099 |   | $ | 2,409 |   | — |   |
|                            |   |                     |   |                                 |    |   |   |   |   |   |   |   |   |
| Joseph  J. Talley               |   | 2003                     |   | $                                    | 211,001 |   | $ | 100,643 |   | $ | 21,408 |   | N/A |   | $ | 5,039 |   |
| Vice  President -Finance and    |   | 2002                     |   | $                                    | 202,032 |   | $ | 127,225 |   | $ | 18,632 |   | N/A |   | $ | 1,038 |   |
| Chief  Financial Officer        |   | 2001                     |   | $                                    | 181,615 |   | $ | 91,592 |   | $ | 17,953 |   | N/A |   | — |   |
|                            |   |                     |   |                                 |    |   |   |   |   |   |   |   |   |
| David  A. Walden                |   | 2003                     |   | $                                    | 211,877 |   | $ | 63,751 |   | $ | 20,786 |   | N/A |   | $ | 5,060 |   |
| Vice  President -Operations     |   | 2002                     |   | $                                    | 198,000 |   | $ | 103,464 |   | $ | 19,072 |   | N/A |   | $ | 1,038 |   |
|                            |   | 2001                     |   | $                                    | 185,000 |   | $ | 84,431 |   | $ | 18,398 |   | N/A |   | — |   |

 

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*                                         EffectiveDecember 11, 2000

 

(1)                                  Includes the cost ofadditional life insurance coverage, car allowance, costs of tax returnpreparation, Company 401(k) matching contributions, Company matching SERPcontributions, flexible spending taxable cash, and flexible spending dollarsinto 401(k).

 

(2)                                  Represents the“profit per acre payments” made to the executive under the Company’s 1995 and1999 LTIP plans (described below).  Theprofit per acre payments are determined by subtracting from the Company’s beetpayment per acre the average cost of production per acre incurred by theCompany’s members and multiplying the result by the number of vested contractrights held by the executive.

 

**Employment Agreement with CEO**

 

Effective May 15, 1998, the Company andMr. Horvath entered into an agreement regarding Mr. Horvath’semployment by the Company.  Theagreement provides that Mr. Horvath shall serve as an “at will” employeeat the pleasure of the Board of Directors. The agreement also contains the provision of a three-yearnon-compete/non-solicitation agreement with Mr. Horvath, grants the Boardof Directors the authority to establish Mr. Horvath’s base compensation eachyear, and also provides that he may participate in other benefit plans offered bythe Company.

 

If Mr. Horvath’s employment terminates with theCompany without cause or he incurs a termination due to disability after age60, Mr. Horvath is entitled to receive reimbursement for the cost ofmedical and dental coverage for himself and his spouse from the date oftermination through their

 

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respective deaths; life insurance coverage equal to his base salary onthe date of termination until he attains age 65, from age 65 to 70 equal to 50percent of his base salary on the date of termination, and after age 70 equalto 25 percent of his base salary on the date of termination; and supplementalpension benefits equal to the difference between the cumulative monthly amountof the retirement benefit Mr. Horvath would have received under RetirementPlan A and the Supplemental Executive Retirement Plan (SERP) computed as thoughMr. Horvath continued his employment to age 65 assuming compensation equalto that in effect as of the date of termination of employment and had attained30 years of service with no reduction in benefits on account of an election byMr. Horvath for any death benefit to be paid to his spouse under the RetirementPlan A and the cumulative monthly amount of the retirement benefits actuallypaid to Mr. Horvath under Retirement Plan A and the Supplemental ExecutiveRetirement Plan (SERP).

 

If Mr. Horvath’s employment terminates with theCompany without cause after age 60 and Mr. Horvath subsequently dies, orif Mr. 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).

 

**Incentive Plans**

 

**AnnualIncentive Plan**

 

The Company’s salaried employees are entitled toparticipate in an annual incentive program that provides for cash awards basedpartially on the performance of the Company and partially on achievement ofcertain performance objectives.  Theperformance objectives of 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’sresponsibilities, the performance of the Company and the results of theemployee’s evaluation for the fiscal year.

 

**1995 Plan**

 

During 2001, the 1995 Long-Term Incentive Plan wasterminated and all contract rights cancelled. The participants in the 1995 Plan were compensated for the value ofvested benefits under the 1995 Plan. The Company adopted the 1995 Plan, which provided deferred compensationto certain key executives of the Company, on September 1, 1995.  This 1995 Plan created financial incentivesto reward executives for long-term commitment to the Company and forsuccessfully implementing the Company’s long-term growth strategies.  Such incentives were based upon contractrights that were available to the executive under the terms of the 1995 Plan,the value of which was related to the value of the Preferred Stock of theCompany.  The 1995 Plan allowedparticipants to purchase a limited number of contract rights at the end of eachthree-year cycle.  The 1995 Planestablished both minimum and maximum ownership levels.  When an executive reached their minimumownership level, he or she could sell any vested shares over the minimum to anyqualified grower.  The executive or hisestate could also sell any vested shares at the time of his termination,disability or death.  At the point ofsale, the contract right became a share of Preferred Stock which the Companyissued to the purchasing

 

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grower.  The executive receivedthe proceeds of the sale, less appropriate taxes.  The long-term cost of the stock was not to the Company, but tothe grower who eventually purchased the stock from the executive.  The 1995 Plan also provided for annualpayments of “profit per acre payments” to executives holding contractrights.  The profit per acre paymentswere determined by subtracting from the Company’s beet payment per acre theaverage cost of production per acre incurred by the Company’s members andmultiplying the result by the number of vested contract rights held by theexecutive.  The contract rights acquiredunder this plan terminate five years after the executive’s employment with theCompany is terminated, if not exercised by the executive.  This 1995 Plan was replaced by the 1999Long-Term Incentive Plan discussed below.

 

**1999 Plan**

 

In June of 1999, the Board of Directors adoptedthe 1999 Long-Term Incentive Plan, which became effective in fiscal year2000.  Under this plan, awards are basedupon 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 base compensationfor the CEO.  The actual amount of theaward available to a given individual is based upon the collective performancelevel of participants as determined by the Board of Directors.  Awards paid under the plan may be paid inthe form of cash paid to the employee’s Supplemental Executive Retirement Plan,as discussed below, or in the form of contract rights, in each case asdetermined by the Board of Directors. All awards will be subject to a three year vesting schedule.  The Board of Directors retains thediscretion to determine the amount of any cash awards and/or contract rights tobe made available to plan participants with respect to a given fiscal year.

 

In fiscal 2003, 246.82 contract rights were granted ata stated value of $1,750 per contract right or a total stated value of$431,943.  In fiscal 2003, the Board ofDirectors increased the value of the 1,109.78 contract rights issued prior tofiscal 2003 from $1,500 to $1,750 per contract right, for a total increase inthe stated value of $277,445. As of August 31, 2003, there were 1,356.6contract rights, at a total stated value of $2.4 million, issued andoutstanding, 758.08 of which were vested. The table below lists the executives named in the compensation table whohave been granted and hold contract rights. 

 

**1999 Plan**

 

**Long-Term Incentive Plan Awards**

 
|                   |   | **Fiscal  2003  Contract Rights** |   | **Total  Contract Rights Held** |    | **Fiscal  2003  Representative  Payout (1)** |   |
|------------------------|--------|-----------------------------------|--------|---------------------------------|---------|----------------------------------------------|--------|
| **Executive Officers** |   | **Granted**                       |   | **Stated  Value**               |    | **Granted**                                  |   | **Vested** |   | **Stated  Value** |   |   |
|                   |   |                              |   |                            |    |                                         |   |   |   |   |   |   |   |
| James  J. Horvath      |   | 129.53                            |   | $                               | 226,669 |                                         | 759.84 |   | 439.55 |   | $ | 1,329,725 |   | $ | 23,479 |   |
| Thomas  S. Astrup      |   | 25.28                             |   | $                               | 44,240  |                                         | 85.20  |   | 29.73 |   | $ | 149,104 |   | $ | 527 |   |
| David  A. Berg         |   | 30.67                             |   | $                               | 53,678  |                                         | 169.52 |   | 95.60 |   | $ | 296,659 |   | $ | 5,022 |   |
| Joseph  J. Talley      |   | 30.67                             |   | $                               | 53,678  |                                         | 170.42 |   | 96.20 |   | $ | 298,234 |   | $ | 5,039 |   |
| David  A. Walden       |   | 30.67                             |   | $                               | 53,678  |                                         | 171.62 |   | 97.00 |   | $ | 300,334 |   | $ | 5,060 |   |

 

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(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.

 

**Retirement Plans**

 

The Company and Sidney Sugars has establishednoncontributory, defined benefit retirement plans which are available to alleligible employees of the Company and Sidney Sugars.  Those employees who are covered by a collective bargainingagreement participate in Plan B, while employees who are not subject to acollective bargaining agreement, including the executive officers listed on theSummary Compensation Table, participate in pension Plan A.  The benefits of the plans are funded byperiodic Company contributions to a retirement trust which invests theCompany’s contributions and the earnings from such contributions in order topay the benefits to the employees.  Theplans provide for the payment of monthly retirement benefits determined under acalculation based on years 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 areeligible to participate in a “Supplemental Executive Retirement Plan.”  Subject to the discretion of the Board ofDirectors, the plan provides for the Company to credit to the account of each executiveeligible to participate in the Supplemental Plan amounts equal to (i) thedifference between amounts actually contributed to the Company’s 401(k) plan onbehalf of the executive and the amounts which could have been contributed ifcertain provisions of the Internal Revenue Code did not prohibit thecontribution of such amounts and (ii) the difference between the benefitsactually payable to the executive under the provisions of Retirement Plan “A”and the amounts which would be payable under Retirement Plan “A” if certainprovisions of the Internal Revenue Code did not prohibit the payment of suchbenefits.  In addition, the executivemay elect to defer a portion of his or her compensation, ranging from 2 percentto 20 percent, by regular payroll deductions under the Supplemental Plan, andmay also defer 100 percent of all incentive compensation and profits-per-acrepayments.  The Supplemental Plan is an“unfunded” plan, with all amounts to be paid under the Supplemental Plan to bepaid from the general assets of the Company when due and also to be subject tothe claims of the Company’s creditors.

 

The table below shows the approximate annual pensionbenefits payable to executive officers at normal retirement under RetirementPlan A, as well as a non-qualified supplemental benefit plan.  The compensation covered by the pensionprogram is based on an employee’s annual salary and incentivecompensation.  Amounts payable arecomputed on the basis of a straight life annuity and are not reduced for socialsecurity benefits or other offsets.

 

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**American Crystal Sugar Company2003 CalculationPlan A Qualified and Non-Qualified Supplemental Benefits**

 
|             |   | **Years of  Service** |    |
|------------------|--------|-----------------------|---------|
| **Remuneration** |   | **15**                |    | **20** |   | **25** |   | **30** |   | **35** |   |
|             |   |                  |    |   |   |   |   |   |   |   |   |
| $125,000         |   | $                     | 23,612  |   | $ | 31,483 |   | $ | 39,353 |   | $ | 47,224 |   | $ | 47,224 |   |
| $150,000         |   | $                     | 28,862  |   | $ | 38,483 |   | $ | 48,103 |   | $ | 57,724 |   | $ | 57,724 |   |
| $175,000         |   | $                     | 34,112  |   | $ | 45,483 |   | $ | 56,853 |   | $ | 68,224 |   | $ | 68,224 |   |
| $200,000         |   | $                     | 39,362  |   | $ | 52,483 |   | $ | 65,603 |   | $ | 78,724 |   | $ | 78,724 |   |
| $225,000         |   | $                     | 44,612  |   | $ | 59,483 |   | $ | 74,353 |   | $ | 89,224 |   | $ | 89,224 |   |
| $250,000         |   | $                     | 49,862  |   | $ | 66,483 |   | $ | 83,103 |   | $ | 99,724 |   | $ | 99,724 |   |
| $300,000         |   | $                     | 60,362  |   | $ | 80,483 |   | $ | 100,603 |   | $ | 120,724 |   | $ | 120,724 |   |
| $400,000         |   | $                     | 81,362  |   | $ | 108,483 |   | $ | 135,603 |   | $ | 162,724 |   | $ | 162,724 |   |
| $450,000         |   | $                     | 91,862  |   | $ | 122,483 |   | $ | 153,103 |   | $ | 183,724 |   | $ | 183,724 |   |
| $500,000         |   | $                     | 102,362 |   | $ | 136,483 |   | $ | 170,603 |   | $ | 204,724 |   | $ | 204,724 |   |
| $600,000         |   | $                     | 123,362 |   | $ | 164,483 |   | $ | 205,603 |   | $ | 246,724 |   | $ | 246,724 |   |
| $700,000         |   | $                     | 144,362 |   | $ | 192,483 |   | $ | 240,603 |   | $ | 288,724 |   | $ | 288,724 |   |
| $800,000         |   | $                     | 165,362 |   | $ | 220,483 |   | $ | 275,603 |   | $ | 330,724 |   | $ | 330,724 |   |
| $900,000         |   | $                     | 186,362 |   | $ | 248,483 |   | $ | 310,603 |   | $ | 372,724 |   | $ | 372,724 |   |
| $1,000,000       |   | $                     | 207,362 |   | $ | 276,483 |   | $ | 345,603 |   | $ | 414,724 |   | $ | 414,724 |   |

 

The five executive officers named in the SummaryCompensation Table who are currently employees of the Company, have years ofservice under the plan as follows: Mr. Horvath has served for 18 years;Mr. Astrup has served for 9 years; Mr. Berg has served for 16 years;Mr. Talley has served for 9 years; and Mr. Walden has served for 24years.

 

The Company maintains Section 401(k) plans thatpermit employees to elect to set aside, on a pre-tax and after-tax basis, aportion of their gross compensation in trust to pay future retirementbenefits.  The Company matches 100percent of the nonunion and eligible union year-round participant’s pre-taxcontribution up to 4 percent and 2 percent respectively of their grossearnings.  The total annual addition toany employee’s account in any calendar year may not exceed the lesser of(i) $40,000 or (ii) 100 percent of annual compensation less theamount of the employer match and the employee deferral.  For calendar 2003, the employee pre-incometax contribution is limited to $12,000 and an additional $2,000 of catch-upcontributions, if applicable.  Benefitsunder the 401(k) plans can begin to be paid to the employee upon the close ofthe plan year in which one of the following events has occurred: the date theemployee attains age 591⁄2, the date the employee terminates his service with theemployer and the date specified in a written election made by the employee toreceive benefits no later than April 1 of the year following the calendaryear in which the employee retires, dies, becomes disabled, reaches age 701⁄2 oris terminated.

 

**Item 12.**                                 SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Under state law and the Company’s Bylaws, each memberof the cooperative is entitled to one vote, regardless of the number of sharesthe member holds.  The Common Stock ofthe Company is voting stock and each member of the Company holds one share ofCommon Stock.  The Preferred Stock ofthe Company is non-voting stock.  TheCompany’s stock can only be held by individuals who are 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

 

36

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a group, the directors generally own approximately 2 to 3 percent ofthe outstanding Preferred Stock. each year.

 

**Item 13.**                                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

Each of the Company’s directors is also a sugarbeetfarmer and a shareholder member or representative of a shareholder member ofthe Company.  By virtue of their statusas such 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.

 

37

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**PART IV**

 

**Item 15.**                                 EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

 

(a)                                  Documents filed aspart of this report

 
| 1.     | Consolidated Financial Statements                                                                                         |
|--------|---------------------------------------------------------------------------------------------------------------------------|
|   | Report of Independent  Auditors                                                                                           |
|   | Consolidated  Statements of Operations for the Years Ended August 31, 2003, 2002 and  2001                           |
|   | Consolidated Balance Sheets  as of August 31, 2003 and 2002                                                          |
|   | Consolidated  Statements of Changes in Members’ Investments for the Years Ended  August 31, 2003, 2002 and 2001 |
|   | Consolidated Statements  of Cash Flows for the Years Ended August 31, 2003, 2002 and 2001                            |
|   | Notes to  the Consolidated Financial Statements                                                                           |

 

2.                                       FinancialStatement Schedules

None

 

3.                                       Theexhibits to this Annual Report on Form 10-K are listed in the Exhibit Index onpages E-1 to E-5 of this report

 

(b)                                 Reportson Form 8-K

 

None

 

(c)                                  Exhibits

 

The response to thisportion of Item 15 is included as a separate section of this Annual Reporton Form 10-K.

 

38

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized, on November 26, 2003.

 
|   |   | AMERICAN CRYSTAL SUGAR  COMPANY |
|--------|--------|---------------------------------|
|   |   | By:                             | /s/ JAMES J. HORVATH |   |   |
|   |   |                            | *President and Chief Executive Officer* |   |
|   |   |                            |   |   |
|   |   | Dated:  November 26, 2003  |   |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed by the following persons onbehalf of the registrant in the capacities and on the dates indicated.

 
| **Signature**               |   | **Title**                                   |   | **Date**               |
|-----------------------------|--------|---------------------------------------------|--------|------------------------|
|                        |   |                                        |   |                   |
| /s/ JAMES J. HORVATH        |   | President and Chief  Executive Officer      |   | November 26, 2003 |
|                        |   | (Principal Executive  Officer)              |   |                   |
| /s/ JOSEPH J. TALLEY        |   | Vice President-Finance  and Chief Financial |   | November 26, 2003 |
|                        |   | Officer (Principal  Financial Officer)      |   |                   |
| /s/ BRIAN INGULSRUD         |   | Corporate Controller                        |   | November 26, 2003 |
|                        |   | (Principal Accounting  Officer)             |   |                   |
| /s/ MICHAEL A. ASTRUP       |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ JERRY D. BITKER         |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ RICHARD BORGEN          |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ PAUL J. DRISCOLL        |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ CURTIS HAUGEN           |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ LONN M. KIEL            |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ DAVID J. KRAGNES        |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ FRANCIS L.  KRITZBERGER |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ PATRICK D. MAHAR        |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ JEFF MCINNES            |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ RONALD E. REITMEIER     |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ JIM A. ROSS             |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ G. TERRY STADSTAD       |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ ROBERT VIVATSON         |   | Director                                    |   | November 26, 2003 |
|                        |   |                                        |   |                   |
| /s/ NEIL WIDNER             |   | Director                                    |   | November 26, 2003 |

 

39

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**APPENDIXA**

 

**INDEX TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

 
| **AMERICAN CRYSTAL SUGAR COMPANY**                                                                                        |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|
| CONSOLIDATED  FINANCIAL STATEMENTS:                                                                                       |   |
| Report of Independent  Auditors                                                                                           |   |
| Consolidated  Statements of Operations for the Years Ended August 31, 2003, 2002 and  2001                           |   |
| Consolidated Balance Sheets  as of August 31, 2003 and 2002                                                          |   |
| Consolidated  Statements of Changes in Members’ Investments for the Years Ended  August 31, 2003, 2002 and 2001 |   |
| Consolidated  Statements of Cash Flows for the Years Ended August 31, 2003, 2002 and  2001                           |   |
| Notes to  the Consolidated Financial Statements                                                                           |   |

 

A-1

----

 

**REPORT OF INDEPENDENT AUDITORS**

 

To the Members of American Crystal Sugar CompanyMoorhead, Minnesota

 

We have audited theaccompanying consolidated balance sheets of American Crystal Sugar Company (aMinnesota cooperative corporation) as of August 31, 2003 and 2002, and therelated consolidated statements of operations, changes in members’ investmentsand cash flows for the years ended August 31, 2003, 2002 and 2001.  These consolidated financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide 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, 2003 and 2002, and the results of theiroperations and their cash flows for the years ended August 31, 2003, 2002and 2001, in conformity with accounting principles generally accepted in theUnited States of America.

 
| /s/ EIDE BAILLY LLP    |   |
|------------------------|--------|
|                   |
| Minneapolis, Minnesota |
| October 8, 2003   |

 

A-2

----

 

**AMERICAN CRYSTAL SUGARCOMPANYCONSOLIDATED STATEMENTS OFOPERATIONSFOR THE YEARS ENDED AUGUST 31**(InThousands)

** **
|                                                            |   | **2003**    |        | **2002**   |   | **2001** |       |
|-----------------------------------------------------------------|--------|-------------|-------------|------------|--------|----------|------------|
| **Net  Revenue**                                                |   | **$**       | **829,246** | ** ** | $      | 775,288  |       | $ | 866,362 |   |
|                                                            |   |        |        |       |   |     |       |
| **Cost  of Sales**                                              |   | **290,831** | ** **  | 206,789    |   | 279,978  |       |
|                                                            |   |        |        |       |   |     |       |
| **Gross  Proceeds**                                             |   | **538,415** | ** **  | 568,499    |   | 586,384  |       |
|                                                            |   |        | ** **  |       |   |     |       |
| **Selling,  General and Administrative Expenses**               |   | **163,280** | ** **  | 159,376    |   | 181,607  |       |
|                                                            |   |        | ** **  |       |   |     |       |
| **Operating  Proceeds**                                         |   | **375,135** | ** **  | 409,123    |   | 404,777  |       |
|                                                            |   |        | ** **  |       |   |     |       |
| **Other  Income (Expense):**                                    |   |        | ** **  |       |   |     |       |
| Interest  Income                                                |   | **1,520**   | ** **  | 2,009      |   | 3,232    |       |
| Interest  Expense, Net                                          |   | **(16,871** | **)**       | (14,578    | )      | (19,973  | )          |
| Other,  Net                                                     |   | **3,334**   | ** **  | 2,098      |   | 1,112    |       |
|                                                            |   |        | ** **  |       |   |     |       |
| **Total  Other (Expense)**                                      |   | **(12,017** | **)**       | (10,471    | )      | (15,629  | )          |
|                                                            |   |        |        |       |   |     |       |
| **Proceeds  Before Minority Interest and Income Tax Expense**   |   | **363,118** | ** **  | 398,652    |   | 389,148  |       |
|                                                            |   |        |        |       |   |     |       |
| **Minority  Interest**                                          |   | **(1,142**  | **)**       | —     |   | —   |       |
|                                                            |   |        |        |       |   |     |       |
| **Income  Tax Expense**                                         |   | **(74**     | **)**       | (64        | )      | (109     | )          |
|                                                            |   |        |        |       |   |     |       |
| **Net Proceeds Resulting from Member  and Non-Member Business** |   | **$**       | **361,902** |       | $      | 398,588  | ** ** | $ | 389,039 |   |
|                                                            |   |        | ** **  |       |   |     |       |
| **Distributions  of Net Proceeds:**                             |   |        | ** **  |       |   |     |       |
| Credited  (Charged) to Members’ Investments:               |   |        | ** **  |       |   |     |       |
| Non-Member  Business Income/(Loss)                              |   | **$**       | **5,799**   | ** ** | $      | (733     | )          | $ | (1,884 | ) |
| Equity  Retention Declared to Members                           |   | **—**  | ** **  | 1,177      |   | 1,560    |       |
| Unit  Retains Declared to Members                               |   | **17,486**  | ** **  | 24,154     |   | 19,239   |       |
| Net  Credit to Members’ Investments                        |   | **23,285**  | ** **  | 24,598     |   | 18,915   |       |
| Payments  to Members for PIK Certificates,                      |   |        | ** **  |       |   |     |       |
| Net  of Equity Retention Declared                               |   | **—**  | ** **  | 22,320     |   | 26,507   |       |
| Payments  to Members for Sugarbeets,                            |   |        | ** **  |       |   |     |       |
| Net  of Unit Retains Declared                                   |   | **338,617** | ** **  | 351,670    |   | 343,617  |       |
| **Total**                                                       |   | **$**       | **361,902** | ** ** | $      | 398,588  |       | $ | 389,039 |   |

 

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

 

A-3

----

 

**AMERICAN CRYSTAL SUGARCOMPANYCONSOLIDATED BALANCE SHEETSAUGUST 31**(InThousands)Assets

 
|                                              |   | **2003**     |        | **2002** |   |
|---------------------------------------------------|--------|--------------|-------------|----------|--------|
| **Current  Assets:**                              |   |         |        |     |   |
| Cash  and Cash Equivalents                        |   | **$**        | **859**     |     | $      | 22 |   |
| Receivables:                                      |   |         |        |     |   |
| Trade                                             |   | **64,056**   |        | 60,812   |   |
| Members                                           |   | **3,993**    |        | 3,987    |   |
| Other                                             |   | **4,403**    |        | 1,465    |   |
| Advances  to Related Parties                      |   | **4,891**    |        | 11,336   |   |
| Inventories                                       |   | **130,981**  |        | 115,656  |   |
| Prepaid  Expenses                                 |   | **7,062**    |        | 5,732    |   |
|                                              |   |         |        |     |   |
| **Total  Current Assets**                         |   | **216,245**  |        | 199,010  |   |
|                                              |   |         |        |     |   |
| **Property  and Equipment:**                      |   |         |        |     |   |
| Land                                              |   | **39,393**   |        | 33,806   |   |
| Buildings                                         |   | **90,181**   |        | 86,647   |   |
| Equipment                                         |   | **794,416**  |        | 759,972  |   |
| Construction  in Progress                         |   | **4,989**    |        | 5,154    |   |
| Less  Accumulated Depreciation                    |   | **(586,167** | )           | (546,960 | )      |
|                                              |   |         |        |     |   |
| **Net  Property and Equipment**                   |   | **342,812**  |        | 338,619  |   |
|                                              |   |         |        |     |   |
| **Net  Property and Equipment Held for Lease**    |   | **170,446**  |        | —   |   |
|                                              |   |         |        |     |   |
| **Other  Assets:**                                |   |         |        |     |   |
| Investments  in CoBank, ACB                       |   | **21,685**   |        | 15,430   |   |
| Investments  in Marketing Cooperatives            |   | **6,166**    |        | 2,064    |   |
| Investments  in ProGold Limited Liability Company |   | **—**   |        | 38,051   |   |
| Investments  in Crystech, LLC                     |   | **15,330**   |        | 1,403    |   |
| Notes  Receivable - Crystech, LLC                 |   | **—**   |        | 13,905   |   |
| Other  Assets                                     |   | **37,067**   |        | 14,211   |   |
|                                              |   |         |        |     |   |
| **Total  Other Assets**                           |   | **80,248**   |        | 85,064   |   |
|                                              |   |         |        |     |   |
| **Total  Assets**                                 |   | **$**        | **809,751** |     | $      | 622,693 |   |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

A-4

----

 

**AMERICAN CRYSTAL SUGAR COMPANYCONSOLIDATED BALANCE SHEETSAUGUST 31**(InThousands)Liabilitiesand Members’ Investments

 
|                                                        |   | **2003**    |        | **2002** |   |
|-------------------------------------------------------------|--------|-------------|-------------|----------|--------|
| **Current  Liabilities:**                                   |   |        |        |     |   |
| Short-Term  Debt                                            |   | **$**       | **49,989**  |     | $      | 7,000 |   |
| Current  Maturities of Long-Term Debt                       |   | **11,282**  |        | 18,045   |   |
| Accounts  Payable                                           |   | **23,192**  |        | 18,163   |   |
| Advances  Due to Related Parties                            |   | **4,604**   |        | 3,092    |   |
| Other  Current Liabilities                                  |   | **18,710**  |        | 15,182   |   |
| Amounts  Due Growers                                        |   | **58,896**  |        | 79,246   |   |
|                                                        |   |        |        |     |   |
| **Total  Current Liabilities**                              |   | **166,673** |        | 140,728  |   |
|                                                        |   |        |        |     |   |
| **Long-Term  Debt, Net of Current Maturities**              |   | **286,922** |        | 182,371  |   |
|                                                        |   |        |        |     |   |
| **Accrued  Employee Benefits**                              |   | **31,053**  |        | 27,453   |   |
|                                                        |   |        |        |     |   |
| **Other  Liabilities**                                      |   | **10,988**  |        | 3,474    |   |
|                                                        |   |        |        |     |   |
| **Total  Liabilities**                                      |   | **495,636** |        | 354,026  |   |
|                                                        |   |        |        |     |   |
| **Commitments  and Contingencies (See Notes 17 and 18)**    |   |        |        |     |   |
|                                                        |   |        |        |     |   |
| **Minority  Interest in ProGold Limited Liability Company** |   | **43,769**  |        | —   |   |
|                                                        |   |        |        |     |   |
| **Members’  Investments:**                             |   |        |        |     |   |
| Preferred  Stock                                            |   | **38,275**  |        | 38,275   |   |
| Common  Stock                                               |   | **30**      |        | 30       |   |
| Additional  Paid-In Capital                                 |   | **148,238** |        | 143,069  |   |
| Unit  Retains                                               |   | **125,409** |        | 124,101  |   |
| Equity  Retention                                           |   | **2,719**   |        | 2,733    |   |
| Accumulated  Other Comprehensive Income (Loss)              |   | **(11,900** | )           | (1,317   | )      |
| Retained  Earnings (Accumulated Deficit)                    |   | **(32,425** | )           | (38,224  | )      |
|                                                        |   |        |        |     |   |
| **Total  Members’ Investments**                        |   | **270,346** |        | 268,667  |   |
|                                                        |   |        |        |     |   |
| **Total  Liabilities and Members’ Investments**        |   | **$**       | **809,751** |     | $      | 622,693 |   |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

A-5

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**AMERICAN CRYSTAL SUGARCOMPANYCONSOLIDATED STATEMENTS OF CHANGESIN MEMBERS’ INVESTMENTSFOR THE YEARS ENDED AUGUST 31**(InThousands)

** **
|                                                |   | **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, 2000**                   |   | **38,275**           | ** ** | **30**            | ** ** | **131,071**                      | ** ** | **116,216**       | ** **  | **—**            | ** ** | **(655**                                            | **)**      | **(35,607**                                    | **)**      | **249,330** | ** ** |                                     | ** ** |
| Non-Member Business (Loss)                          |   | —               |       | —            |       | —                           |       | —            |        | —                |       | —                                              |       | (1,884                                         | )          | (1,884      | )          | $                                        | (1,884     | ) |
| Pension Liability Adjustment                        |   | —               |       | —            |       | —                           |       | —            |        | —                |       | 219                                                 |       | —                                         |       | 219         |       | 219                                      |       |
| Unit Retains Withheld from  Members            |   | —               |       | —            |       | —                           |       | 19,239            |        | —                |       | —                                              |       | —                                         |       | 19,239      |       | —                                   |       |
| Equity Retention                                    |   | —               |       | —            |       | —                           |       | —            |        | 1,560                 |       | —                                              |       | —                                         |       | 1,560       |       |                                     |       |
| Payments to Estates and  Disabled Individuals  |   | —               |       | —            |       | —                           |       | (217              | )           | —                |       | —                                              |       | —                                         |       | (217        | )          | —                                   |       |
| Payments of 1993 Crop Unit  Retains to Members |   | —               |       | —            |       | —                           |       | (18,758           | )           | —                |       | —                                              |       | —                                         |       | (18,758     | )          | —                                   |       |
| Stock Issued, Net                                   |   | —               |       | 1                 |       | 6,170                            |       | —            |        | —                |       | —                                              |       | —                                         |       | 6,171       |       | —                                   |       |
|                                                |   |                 |       |              |       |                             |       |              |        |                  |       |                                                |       |                                           |       |        |       |                                     |       |
| **Balance, August 31, 2001**                   |   | **38,275**           | ** ** | **31**            | ** ** | **137,241**                      | ** ** | **116,480**       | ** **  | **1,560**             | ** ** | **(436**                                            | **)**      | **(37,491**                                    | **)**      | **255,660** | ** ** | **$**                                    | **(1,665** | **)** |
| 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 to Estates and  Disabled Individuals  |   | —               |       | —            |       | —                           |       | (290              | )           | (4                    | )          | —                                              |       | —                                         |       | (294        | )          | —                                   |       |
| Payments of 1994 Crop Unit  Retains to Members |   | —               |       | —            |       | —                           |       | (16,243           | )           | —                |       | —                                              |       | —                                         |       | (16,243     | )          | —                                   |       |
| 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 to Estates and  Disabled Individuals  |   | **—**           | ** ** | **—**        | ** ** | **—**                       | ** ** | **(536**          | **)**       | **(14**               | **)**      | **—**                                          | ** ** | **—**                                     | ** ** | **(550**    | **)**      | **—**                               | ** ** |
| Payments of 1995 Crop Unit  Retains to Members |   | **—**           | ** ** | **—**        | ** ** | **—**                       | ** ** | **(15,642**       | **)**       | **—**            | ** ** | **—**                                          | ** ** | **—**                                     | ** ** | **(15,642** | **)**      | **—**                               | ** ** |
| 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** | **)** |
|                                                     |        |                      |            |                   |            |                                  |            |                   |             |                       |            |                                                     |            |                                                |            |             |            |                                          |            |  |  |  |  |  |  |  |  |  |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

A-6

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**AMERICAN CRYSTAL SUGARCOMPANYCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED AUGUST 31**(InThousands)

 
|                                                                                       |   | **2003**     |        | **2002**   |   | **2001** |   |
|--------------------------------------------------------------------------------------------|--------|--------------|-------------|------------|--------|----------|--------|
| **Cash  Provided By (Used In) Operating Activities:**                                      |   |         | ** **  |       |   |     |   |
| Net  Proceeds Resulting from Member and Non-Member Business                                |   | **$**        | **361,902** | ** ** | $      | 398,588  |   | $ | 389,039 |   |
| Payments  To/Due Members for Sugarbeets, Net of Unit Retains Declared                      |   | **(338,617** | **)**       | (351,670   | )      | (343,617 | )      |
| Payments  To/Due Members for PIK Certificates, Net of Equity Retention Declared            |   | **—**   | ** **  | (22,320    | )      | (26,507  | )      |
| Add  (Deduct) Non-Cash Items:                                                              |   |         | ** **  |       |   |     |   |
| Depreciation  and Amortization                                                             |   | **48,354**   | ** **  | 40,389     |   | 40,427   |   |
| Income  from Equity Method Investees                                                       |   | **(3,829**   | **)**       | (2,828     | )      | (69      | )      |
| Loss  on the Disposition of Property and Equipment                                         |   | **485**      | ** **  | 839        |   | 1,170    |   |
| Non-Cash  Portion of Patronage Dividend from   CoBank, ACB                            |   | **(276**     | **)**       | (437       | )      | (541     | )      |
| Deferred  Gain Recognition                                                                 |   | **(197**     | **)**       | (197       | )      | (197     | )      |
| Minority  Interest in ProGold Limited Liability Company                                    |   | **1,142**    | ** **  | —     |   | —   |   |
| Changes  in Assets and Liabilities:                                                        |   |         | ** **  |       |   |     |   |
| Receivables                                                                                |   | **(4,129**   | **)**       | 5,921      |   | (18,402  | )      |
| Inventories                                                                                |   | **(14,418**  | **)**       | (11,387    | )      | (61,379  | )      |
| Prepaid  Expenses                                                                          |   | **(1,233**   | **)**       | (2,546     | )      | (894     | )      |
| Long-Term  Prepaid Pension Expense                                                         |   | **(10,272**  | **)**       | (5,668     | )      | (1,508   | )      |
| Advances  To/Due to Related Parties                                                        |   | **7,957**    | ** **  | 3,112      |   | (10,982  | )      |
| Accounts  Payable                                                                          |   | **5,017**    | ** **  | (1,612     | )      | (6,516   | )      |
| Other  Liabilities                                                                         |   | **6,589**    | ** **  | 1,153      |   | 1,451    |   |
| Amounts  Due Growers                                                                       |   | **(20,350**  | **)**       | (3,520     | )      | 29,100   |   |
| **Net  Cash Provided By (Used In) Operating Activities**                                   |   | **38,125**   | ** **  | 47,817     |   | (9,425   | )      |
|                                                                                       |   |         |        |       |   |     |   |
| **Cash  Provided By (Used In) Investing Activities:**                                      |   |         | ** **  |       |   |     |   |
| Purchases  of Property and Equipment                                                       |   | **(30,967**  | **)**       | (16,258    | )      | (23,063  | )      |
| Purchases  of Property and Equipment Held for Lease                                        |   | **(400**     | **)**       | —     |   | —   |   |
| Proceeds  from the Sale of Property and Equipment                                          |   | **51**       | ** **  | 138        |   | 42       |   |
| Equity  Refund from CoBank, ACB                                                            |   | **2,816**    | ** **  | 683        |   | —   |   |
| Investments  in Marketing Cooperatives                                                     |   | **(2,093**   | **)**       | —     |   | —   |   |
| Acquisition  of Equity Interest in ProGold Limited Liability Company, Net of Cash Acquired |   | **(9,766**   | **)**       | —     |   | —   |   |
| Acquisition  by Sidney Sugars Incorporated                                                 |   | **(35,184**  | **)**       | —     |   | —   |   |
| Changes  in Other Assets                                                                   |   | **1**        | ** **  | (517       | )      | (1,723   | )      |
| **Net  Cash (Used In) Investing Activities**                                               |   | **(75,542**  | **)**       | (15,954    | )      | (24,744  | )      |
|                                                                                       |   |         |        |       |   |     |   |
| **Cash  Provided By (Used In) Financing Activities:**                                      |   |         | ** **  |       |   |     |   |
| Net  Proceeds from (Payments on) Short-Term Debt                                           |   | **42,989**   | ** **  | (6,963     | )      | 12,095   |   |
| Proceeds  from Issuance of Long-Term Debt                                                  |   | **31,000**   | ** **  | —     |   | 14,841   |   |
| Long-Term  Debt Repayment                                                                  |   | **(24,712**  | **)**       | (20,070    | )      | (44,185  | )      |
| Proceeds  from Issuance of Stock                                                           |   | **5,169**    | ** **  | 5,827      |   | 6,171    |   |
| Payment  of Unit Retains and Equity Retention                                              |   | **(16,192**  | **)**       | (16,537    | )      | (18,975  | )      |
| **Net  Cash Provided By (Used In) Financing Activities**                                   |   | **38,254**   | ** **  | (37,743    | )      | (30,053  | )      |
| **Increase  (Decrease) In Cash and Cash Equivalents**                                      |   | **837**      | ** **  | (5,880     | )      | (64,222  | )      |
| **Cash  and Cash Equivalents, Beginning of Year**                                          |   | **22**       | ** **  | 5,902      |   | 70,124   |   |
|                                                                                       |   |         | ** **  |       |   |     |   |
| **Cash  and Cash Equivalents, End of Year**                                                |   | **$**        | **859**     | ** ** | $      | 22       |   | $ | 5,902 |   |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

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**AmericanCrystal Sugar CompanyNotes to the Consolidated FinancialStatements**

 

**(1)****PRINCIPALACTIVITY 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 6). 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 ofa sugarbeet processing facility and the related marketing allocationsassociated with such facility (See Note 18).

 

On April 24, 2003, the Company acquired anadditional five percent ownership interest in ProGold, effective May 1,2003, resulting in an increase in the Company’s ownership in ProGold to 51percent.  Due to the Company’s resulting controllingownership interest in ProGold, effective May 1, 2003, the Company began toinclude ProGold in its consolidated financial statements.  The financial statements for prior periodshave not been restated and therefore do not include consolidated datapertaining to ProGold prior to May 1, 2003.

 

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 underthe lease, which runs through December 31, 2007.  The lease contains provisions for extension or modification ofthe lease terms at the end of the lease period.  The lease also

 

A-8

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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 cashequivalents.  The Company places itstemporary cash investments with high credit quality financialinstitutions.  At times, such investmentsmay be in excess of the applicable insurance limit.

 

*Accounts Receivable and CreditPolicies*

 

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.

 

Tradereceivables are uncollateralized customer obligations due under normal tradeterms requiring payment within 15 to 90 days from the invoice date.  The receivables are non-interest bearing.  Trade receivables are stated at the amountbilled to the customer.  Payments oftrade receivables are allocated to the specific invoices identified on thecustomer’s remittance advice or, if unspecified, are applied to the earliestunpaid invoices.

 

Ongoingcredit evaluations of customers’ financial condition are performed and theCompany maintains a reserve for potential credit losses.  The carrying amount of trade receivables isreduced by a valuation allowance that reflects management’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.

 

*Property, Equipment and Depreciation*

 

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 Held for 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.

 

*Impairmentof Long Lived Assets*

 

The Company reviews its property and equipment 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

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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 mayown only one share of common stock and is entitled to one vote in the affairsof the 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.  TheCompany has never exercised this repurchase option.  The bylaws do not allow dividends to be paid on either the commonor preferred stock.

 

Unit Retains - The bylaws authorize the Company’s Boardof Directors to require additional direct capital investments by members in theform of a variable unit retain per ton of up to a maximum of 10 percent of theweighted average gross per ton beet payment. All refunds and retirements of unit retains must be approved by theBoard 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 the difference between member income as determined for financialreporting purposes and federal income tax reporting purposes.

 

*Interest Expense, Net*

 

The Company earns patronage dividends from CoBank, ACBbased on the Company’s share of the net income earned by the bank.  These patronage dividends are appliedagainst interest expense.

 

A-10

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*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 inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

*Business Risk*

 

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, and costs andexpenses.

 

*Recently Issued AccountingPronouncements*

 

TheFinancial Accounting Standards Board has recently issued Interpretation No. 46regarding the Consolidation of Variable Interest Entities. This interpretationbecomes effective for the Company in the first quarter of fiscal 2004.  Management does not expect that theimplementation of this interpretation will have a material effect on theCompany’s financial statements.

 

TheFinancial Accounting Standards Board has also recently issued Statement No. 150regarding Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity. This interpretation becomes effective for theCompany in the first quarter of fiscal 2004. Management does not expect thatthe implementation of this interpretation will have a material effect on theCompany’s financial statements.

 

*Shipping and Handling Costs*

 

The costs incurred in 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 $100.2million, $96.9 million and $113.1 million for the years ended August 31,2003, 2002 and 2001, respectively.

 

*Reclassifications*

 

Certain reclassifications have been made to the 2002and 2001 financial statements to conform with the 2003 presentation. Thesereclassifications had no effect on previously reported results of operations orMembers’ Investments.

 

A-11

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**(2)RECEIVABLES:**

 

The Company did not haveany customer that accounted for 10 percent or more of total receivables as ofAugust 31, 2003.  The Company had amajor customer that accounted for approximately 10.3 percent of totalreceivables as of August 31, 2002.

 

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

 

The major components of inventories as ofAugust 31, 2003 and 2002 are as follows:

 
| **(In Thousands)**                                                            |   | **2003**   |        | **2002** |   |
|-------------------------------------------------------------------------------|--------|------------|-------------|----------|--------|
| Refined Sugar,  Pulp, Molasses, other  Agri-Products  and Sugarbeet Seed |   | **$**      | **111,259** |     | $      | 97,693 |   |
| Maintenance Parts and Supplies                                                |   | **19,722** |        | 17,963   |   |
| Total  Inventories                                                            |   | **$**      | **130,981** |     | $      | 115,656 |   |

 

**(4)PROPERTY AND EQUIPMENT:**

 

Indirect costs capitalized were $1.1 million, $ .7million and $ .8 million in 2003, 2002 and 2001, respectively.  Construction period interest capitalized was$ .3 million, $ .1 million and $ .3 million in 2003, 2002 and 2001,respectively. Depreciation expense was $44.0 million, $38.9 million and $38.6million for the years ended August 31, 2003, 2002 and 2001, respectively.The Company had outstanding commitments totaling $3.9 million as ofAugust 31, 2003 for equipment and construction contracts related tovarious capital projects.

 

**(5)****INVESTMENTSIN 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 $4.5 million and $10.9 million as of August 31, 2003and 2002, respectively.  The Companyprovides administrative services for United and is reimbursed for costsincurred.  The Company was reimbursed$1.0 million, $1.3 million and $1.3 million for services provided during 2003,2002 and 2001, respectively.

 

The Company has a 65 percent ownership interest and a33 1/3 percent voting interest in Midwest. The investment is accounted for using the equity method.  All sugarbeet pulp, molasses and otheragri-products produced are sold by Midwest as an agent for the Company.  The amount of sales and related costs to berecognized by each owner of Midwest is allocated based on its pro rata share ofproduction for each product for the year. The owners provide Midwest with cash advances on an ongoing basis foroperating and marketing expenses incurred by Midwest.  The Company had outstanding advances (from) Midwest of $(1.4)million and $( .4) million as of August 31, 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, 2003, Midwest hadoutstanding short-term debt with CoBank, ACB of $2.3 million, of which $1.6million was guaranteed by the Company.

 

A-12

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**(6)****SIDNEYSUGARS INCORPORATED:**

 

OnOctober 7, 2002, the Company, through Sidney Sugars, acquired threesugarbeet processing facilities and the related marketing allocationsassociated with such facilities for a purchase price of approximately $35.2million.

 

Thefacility located in Hereford, Texas was idle at the time of the acquisition andwill remain idle while the facility is held for sale.  The facility located in Torrington, Wyoming has been leased, on along-term basis, to another sugar producer. The lease payments due under the long-term lease are nominal.  Sidney Sugars operates the facility locatedat Sidney, Montana.

 

Aspart of the transaction, the Company acquired the rights to marketingallocations equal to approximately 4.8 percent of the total allocation for thedomestic sugarbeet segment.  A portionof these marketing allocations are being used to market the sugar produced atthe Sidney, Montana facility.  Anyexcess allocations are available to the Company.  The sugar produced by Sidney Sugars is marketed through United SugarsCorporation while the agri-products produced are marketed through MidwestAgri-Commodities Company.

 

**(7)****PROGOLDLIMITED LIABILITY COMPANY:**

 

On April 24, 2003, the Company acquiredMinn-Dak Farmer Cooperative’s (Minn-Dak) five percent ownership interest inProGold for $10.3 million, effective May 1, 2003.  This acquisitionresults in an increase in the Company’s ownership in ProGold to 51 percent,while Golden Growers Cooperative continues to own 49 percent.

 

Due to the Company’s resulting controlling ownershipinterest in ProGold, effective May 1, 2003, the Company began to includeProGold in its consolidated financial statements.  Following is summary financial information for ProGold prior toconsolidation:

 
| **(In  Thousands)**                         |   | **August 31,  2002** |      |
|---------------------------------------------|--------|---------------------------|-----------|
| **Current Assets**                          |   | **$**                     | **2,513** | ** ** |
| Long-Term  Assets                           |   | 189,745                   |      |
| Total  Assets                               |   | $                         | 192,258   |   |
|                                        |   |                      |      |
| Current  Liabilities                        |   | $                         | 751       |   |
| Long-Term  Liabilities                      |   | 108,789                   |      |
| Total  Liabilities                          |   | 109,540                   |      |
| Members’  Equity                       |   | 82,718                    |      |
| Total  Liabilities and Members’ Equity |   | $                         | 192,258   |   |

 
| **(In Thousands)**                 |   | **For the  Eight  Months Ended  April 30, 2003** |       | **For the  Year  Ended  August 31, 2002** |   | **For the  Year  Ended  August 31, 2001** |   |
|------------------------------------|--------|-------------------------------------------------------|------------|------------------------------------------------|--------|------------------------------------------------|--------|
| Rental  Revenue on Operating Lease |   | **$**                                                 | **17,026** |                                           | $      | 26,302                                         |   | $ | 26,709 |   |
| Expenses                           |   | **12,751**                                            |       | 20,402                                         |   | 22,567                                         |   |
| Net  Income                        |   | **$**                                                 | **4,275**  |                                           | $      | 5,900                                          |   | $ | 4,142 |   |

 

A-13

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**(8) NET PROPERTY AND EQUIPMENT HELDFOR LEASE:**

 

ProGoldowns a corn wet-milling facility that it leases under an operating lease whichruns through December 31, 2007.  Underthe terms of the operating lease, the lessee manages all aspects of theoperations of the ProGold corn wet-milling facility.

 

NetProperty and Equipment Held for Lease are stated at cost, net of accumulateddepreciation. The components of Property and Equipment Held for Lease as ofAugust 31, 2003 are shown below:

 
|                                      |   | **(In  Thousands)** |    |
|-------------------------------------------|--------|---------------------|---------|
| Land and Land Improvements                |   | $                   | 7,762   |   |
| Buildings                                 |   | 40,855              |    |
| Equipment                                 |   | 197,888             |    |
| Construction in Progress                  |   | 464                 |    |
| Less Accumulated Depreciation             |   | (76,523             | )       |
|                                      |   |                |    |
| Net Property and Equipment Held for Lease |   | $                   | 170,446 |   |

 

Futureminimum payments to be received under the lease are as follows:

 

Fiscalyear ending August 31, (In Thousands)

 
| 2004   |   | $      | 23,452  |   |
|--------|--------|--------|---------|--------|
| 2005   |   | 23,452 |    |
| 2006   |   | 23,452 |    |
| 2007   |   | 23,452 |    |
| 2008   |   | 8,093  |    |
|   |   |   |    |
|   |   | $      | 101,901 |   |

 

**(9)****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.

 

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 cumulativebasis, the Company receives an annual allocation of Crystech’s net income equalto 7.5 percent 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 2002 and 2001.  The Companyalso had outstanding payables to Crystech of approximately $3.2 million and$2.7 million as of August 31, 2003 and 2002,

 

A-14

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respectively, related to the tolling services agreement.  Following is summary financial informationfor Crystech:

 
| **As of  August 31****,****(In Thousands)** |   | **2003**   |       | **2002**   |   |
|--------------------------------------------------|--------|------------|------------|------------|--------|
| **Current Assets**                               |   | **$**      | **3,286**  | ** ** | **$**  | **2,982** | ** ** |
| Long-Term  Assets                                |   | **56,293** |       | 68,783     |   |
| Total  Assets                                    |   | **$**      | **59,579** |       | $      | 71,765 |   |
|                                             |   |       |       |       |   |
| Current  Liabilities                             |   | **$**      | **9,222**  |       | $      | 9,222 |   |
| Long-Term  Liabilities                           |   | **33,787** |       | 59,979     |   |
| Total  Liabilities                               |   | **43,009** |       | 69,201     |   |
| Members’  Equity                            |   | **16,570** |       | 2,564      |   |
| Total  Liabilities and Members’ Equity      |   | **$**      | **59,579** |       | $      | 71,765 |   |

 
| **For the Years Ended August 31,  (In Thousands)** |   | **2003**   |             | **2002** |   | **2001**     |   |
|---------------------------------------------------------|--------|------------|------------------|----------|--------|--------------|--------|
| Revenue                                                 |   | **$**      | **23,070 ** |     | $      | 22,519  |   | $ | 24,052  |   |
| Operating  Expenses                                     |   | **16,890** |             | 16,812   |   | 17,349       |   |
| Other  Expenses                                         |   | **5,036**  |             | 5,937    |   | 6,821        |   |
| Net  Income/(Loss)                                      |   | **$**      | **1,144**        |     | $      | (230         | )      | $ | (118 | ) |

 

**(10)****SEGMENTREPORTING:**

 

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

 

Summarizedfinancial information concerning the Company’s reportable segments is shownbelow:

 
|                                |   | **For the  Year Ended August 31, 2003** |    |
|-------------------------------------|--------|----------------------------------------------|---------|
|                                |   | **(In  Thousands)**                          |    |
|                                |   | **Sugar**                                    |    | **Leasing** |   | **Eliminations** |   | **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 |   | $                                            | 6,062   |   | $ | — |   | $ | (1,189 | ) | $ | 4,873 |   |
| Other Income/(Expense), Net         |   | $                                            | 4,523   |   | $ | — |   | $ | (1,189 | ) | $ | 3,334 |   |
| Net Proceeds                        |   | $                                            | 361,902 |   | $ | 2,332 |   | $ | (2,332 | ) | $ | 361,902 |   |
|                                |   |                                         |    |   |   |   |   |   |   |
| Capital Expenditures                |   | $                                            | 46,783  |   | $ | 400 |   | $ | — |   | $ | 47,183 |   |

 

A-15

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|                        |   | **As of August 31,  2003** |    |
|-----------------------------|--------|---------------------------------|---------|
|                        |   | **(In  Thousands)**             |    |
|                        |   | **Sugar**                       |    | **Leasing** |   | **Eliminations** |   | **Consolidated** |   |
| Property and Equipment, Net |   | $                               | 342,807 |   | $ | 5 |   | $ | — |   | $ | 342,812 |   |
| Assets Held for Lease, Net  |   | $                               | —  |   | $ | 170,446 |   | $ | — |   | $ | 170,446 |   |
| Segment Assets              |   | $                               | 672,718 |   | $ | 182,591 |   | $ | (45,558 | ) | $ | 809,751 |   |

 

The Company had only one reportable segment, Sugar,for the years ended August 31, 2002 and 2001.

 

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

 

Thelong-term debt outstanding as of August 31, 2003 and 2002, is summarizedbelow: 

 
| **(In Thousands)**                                                                                                                                                                                                                                   |   | **2003**    |        | **2002**    |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|-------------|------------|
| **Term Loans from CoBank,  ACB, due in varying amounts through 2008, interest at fixed rates of 6.97% to  8.58%, with senior lien on substantially all non-current assets,**                                                                         |   | **$**       | **181,800** | ** **  | **$**      | **101,300** | ** ** |
| 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                                                           |   | **68,333**  |        | 50,000      |       |
| Term  Loan from the Bank of North Dakota, due in equal amounts through 2009,  interest at a fixed rate of 6.34%, unsecured                                                                                                                           |   | **4,800**   |        | 5,600       |       |
| **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 1.10% as of  August 31, 2003, substantially secured by letters of credit** |   | **43,271**  | ** **  | **43,516**  | ** ** |
| Total Long-Term Debt                                                                                                                                                                                                                                 |   | **298,204** | ** **  | **200,416** | ** ** |
| Less  Current Maturities                                                                                                                                                                                                                             |   | **(11,282** | **)**       | (18,045     | )          |
| Long-Term  Debt, Net of Current Maturities                                                                                                                                                                                                           |   | **$**       | **286,922** |        | $          | 182,371 |   |

 

Minimumannual principal payments for the next five years are as follows:

 
| **(In Thousands)** |   |   |   |
|--------------------|--------|--------|--------|
| 2004               |   | $      | 11,282 |   |
| 2005               |   | 29,932 |   |
| 2006               |   | 32,947 |   |
| 2007               |   | 32,962 |   |
| 2008               |   | 32,977 |   |
|                    |        |        |        |  |

 

As of August 31, 2003, the unused portion of theterm loan line of credit with CoBank, ACB, was $30.1 million.

 

A-16

----

 

The short-term debt outstanding as of August 31,2003 and 2002, is summarized below:

 
| **(In  Thousands)**                                                |   | **2003**   |       | **2002** |   |
|--------------------------------------------------------------------|--------|------------|------------|----------|--------|
| Commercial  Paper, at a fixed interest rate of 1.25%, due 09/12/03 |   | **$**      | **49,989** |     | $      | — |   |
| CoBank,  ACB, at a fixed interest rate of 2.53%, due 09/05/02      |   | **—** |       | 7,000    |   |
| Total  Short-Term Debt                                             |   | **$**      | **49,989** |     | $      | 7,000 |   |

 

During the year ended August 31, 2003, theCompany borrowed from CoBank, ACB, and issued commercial paper to meet itsshort-term borrowing requirements.  Asof August 31, 2003, the Company had available short-term lines of credittotaling $236.0 million.

 

Maximum borrowings, average borrowing levels andaverage interest rates for short-term debt for the years ended August 31,2003 and 2002, follow:

 
| **(In  Thousands, Except Interest Rates)** |   | **2003** |        | **2002**   |   |
|--------------------------------------------|--------|----------|-------------|------------|--------|
| **Maximum Borrowings**                     |   | **$**    | **195,433** | ** ** | **$**  | **189,830** | ** ** |
| Average  Borrowing Levels                  |   | **$**    | **113,142** | ** ** | $      | 96,292 |   |
| Average  Interest Rates                    |   | **1.84** | **%**       | 2.77       | %      |

 

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 are pledged to the seniorlenders to provide security to support the Company’s seasonal and long-termfinancing.

 

Interest paid, net of amounts capitalized, was $17.3million, $15.0 million and $21.1 million for the years ended August 31,2003, 2002 and 2001, respectively.

 

The Company had outstanding letters of credit totaling$47.7 million as of August 31, 2003.

 

**(12)****FAIR VALUEOF 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 aregenerally not 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-TermDebt* - Based upon current borrowing rates with similarmaturities, the fair value of the long-term debt is approximately $309.8million in comparison to the carrying value of $298.2 million.

 

A-17

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*Investmentsin CoBank, ACB, Investments in Marketing Cooperatives, and Investments inCrystech, LLC* - The Company believes it is not practical toestimate the fair value of these investments without incurring excessive costsbecause there is no established market for these securities and equityinterests, and it is inappropriate to estimate future cash flows which arelargely dependent on future earnings of these organizations.

 

**(13)****MEMBERS’INVESTMENTS:**

 

Thefollowing schedule details the Preferred Stock and Common Stock as ofAugust 31, 2003, 2002 and 2001:

 
|                  |   | **Par  Value** |   | **Shares  Authorized** |    | **Shares  Issued  & Outstanding** |    |
|-----------------------|--------|----------------|--------|------------------------|---------|---------------------------------------|---------|
| Preferred  Stock:     |   |           |   |                   |    |                                  |    |
| August 31,  2003 |   | $              | 76.77  |                   | 600,000 |                                  | 498,570 |   |
| August 31,  2002 |   | $              | 76.77  |                   | 600,000 |                                  | 498,570 |   |
| August 31,  2001 |   | $              | 76.77  |                   | 600,000 |                                  | 498,570 |   |
|                  |   |           |   |                   |    |                                  |    |
| Common  Stock:        |   |           |   |                   |    |                                  |    |
| August 31,  2003 |   | $              | 10.00  |                   | 4,000   |                                  | 2,995   |   |
| August 31,  2002 |   | $              | 10.00  |                   | 4,000   |                                  | 3,035   |   |
| August 31,  2001 |   | $              | 10.00  |                   | 4,000   |                                  | 3,134   |   |

 

Related to the 1997 stock offering, the Company received $5.2 million,$5.8 million and $6.2 million from the sale of stock during the years endedAugust 31, 2003, 2002 and 2001, respectively.  The remaining $4.0 million is to be received in 2004.

 

**(14)****EMPLOYEEBENEFIT PLANS:**

 

*Company-Sponsored Defined BenefitPension and Other Post-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 31,2003, the pension plans were funded as required by the funding standards setforth by the Employee Retirement Income Security Act (ERISA).  The Company also has a non-qualifiedsupplemental executive retirement plan for certain employees.

 

The Company has a medical plan and a Medicaresupplement plan which are available to substantially all the Companyretirees.  The costs of these plans areshared by the Company and plan participants.

 

A-18

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The following schedules providethe components of the Net Periodic Pension and Post-Retirement Costs for theyears ended August 31, 2003, 2002 and 2001:

 
| **Components  of Net Periodic Pension Cost  (In Thousands)** |   | **2003**   |       | **2002**   |   | **2001** |   |
|--------------------------------------------------------------|--------|------------|------------|------------|--------|----------|--------|
| Service Cost                                                 |   | **$**      | **2,271**  | ** ** | $      | 1,978    |   | $ | 1,872 |   |
| Interest Cost                                                |   | **5,718**  | ** ** | 5,407      |   | 5,167    |   |
| Expected Return on Plan Assets                               |   | **(5,416** | **)**      | (5,773     | )      | (5,879   | )      |
| Multiple Employer Adjustment                                 |   | **(96**    | **)**      | (81        | )      | (111     | )      |
| Special Termination Benefits                                 |   | —     | ** ** | —     |   | 779      |   |
| Curtailment Loss                                             |   | —     | ** ** | —     |   | 29       |   |
| Amortization of Net Transition Assets                        |   | **(124**   | **)**      | (300       | )      | (296     | )      |
| Amortization of Prior Service Costs                          |   | **544**    | ** ** | 501        |   | 506      |   |
| Amortization of Net (Gain) Loss                              |   | **862**    | ** ** | 207        |   | 60       |   |
| Net Periodic Pension Cost                                    |   | **$**      | **3,759**  | ** ** | $      | 1,939    |   | $ | 2,127 |   |

 
| **Components  of Net Periodic Post-Retirement Cost****(In Thousands)** |   | **2003**  |      | **2002** |   | **2001** |   |
|------------------------------------------------------------------------|--------|-----------|-----------|----------|--------|----------|--------|
| Service Cost                                                           |   | **$**     | **814**   |     | $      | 705      |   | $ | 517 |   |
| Interest Cost                                                          |   | **1,457** |      | 1,312    |   | 1,013    |   |
| Special Termination Benefits                                           |   | —    |      | —   |   | 151      |   |
| Amortization of Net (Gain) Loss                                        |   | **20**    |      | (68      | )      | (274     | )      |
| Net Periodic Post-Retirement Cost                                      |   | **$**     | **2,291** |     | $      | 1,949    |   | $ | 1,407 |   |

 

For measurement purposes, a 12.0 percent annual rateof increase in the per capita cost of covered healthcare benefits forparticipants under age 65 was assumed for 2004.  The rate is assumed to decline to 5.0 percent over the next fiveyears.  For participants age 65 andolder, a 15.0 percent annual rate of increase in the per capita cost of coveredhealthcare benefits was assumed for 2004. The rate is assumed to decline to 6.0 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 assumed healthcare trend rates wouldhave the following effects:

 
| **(In Thousands)**                                                                                   |   | **1% Increase** |   | **1%  Decrease** |   |
|------------------------------------------------------------------------------------------------------|--------|-----------------|--------|------------------|--------|
| Effect  on total service and interest cost components of net periodic post-retirement  benefit costs |   | $               | 496    |             | $      | (388 | ) |
| Effect  on the accumulated post-retirement benefit obligation                                        |   | $               | 5,681  |             | $      | (3,883 | ) |

 

A-19

----

 

The following schedules set forth a reconciliation ofthe changes in the plans’ benefit obligation and fair value of assets for theyears ending August 31, 2003 and 2002 and a statement of the funded statusand amounts recognized in the Balance Sheets as of August 31, 2003 and2002:

 
|                                           |   | **Pension** |        | **Post-Retirement** |   |
|------------------------------------------------|--------|-------------|-------------|---------------------|--------|
| **(In Thousands)**                             |   | **2003**    |        | **2002**            |   | **2003** |   | **2002** |   |
| ***Change in Benefit  Obligation***            |   |        | ** **  |                |   |   | ** ** |   | ** ** |
| Obligation at the Beginning of the Year        |   | **$**       | **78,339**  | ** **          | $      | 71,616 |   | **$** | **18,556** | ** ** | $ | 17,257 |   |
| Service Cost                                   |   | **2,271**   | ** **  | 1,978               |   | **781** | ** ** | 705 |   |
| Interest Cost                                  |   | **5,718**   | ** **  | 5,407               |   | **1,432** | ** ** | 1,312 |   |
| Plan Participant Contributions                 |   | **—**  | ** **  | —              |   | **645** | ** ** | 707 |   |
| Acquisitions                                   |   | **—**  | ** **  | —              |   | **500** | ** ** | — |   |
| Amendments                                     |   | **—**  | ** **  | 680                 |   | **—** | ** ** | — |   |
| Actuarial (Gain)/Loss                          |   | **16,548**  | ** **  | 2,380               |   | **10,597** | ** ** | (164 | ) |
| Benefits Paid                                  |   | **(3,897**  | **)**       | (3,722              | )      | **(971** | **)** | (1,261 | ) |
| Obligation at the End of the Year              |   | **$**       | **98,979**  | ** **          | $      | 78,339 |   | **$** | **31,540** | ** ** | $ | 18,556 |   |
|                                           |   |        |        |                |   |   |   |   |   |
| ***Change in Plan Assets***                    |   |        |        |                |   |   |   |   |   |
| Fair Value at the Beginning of the Year        |   | **$**       | **65,771**  | ** **          | $      | 65,095 |   | **$** | **—** | ** ** | $ | — |   |
| Actual Return on Plan Assets                   |   | **(2,906**  | **)**       | (4,396              | )      | **—** | ** ** | — |   |
| Plan Participant Contributions                 |   | **—**  | ** **  | —              |   | **645** | ** ** | 707 |   |
| Employer Contributions                         |   | **15,024**  | ** **  | 8,794               |   | **326** | ** ** | 554 |   |
| Benefits Paid                                  |   | **(3,897**  | **)**       | (3,722              | )      | **(971** | **)** | (1,261 | ) |
| Fair Value at the End of the Year              |   | **$**       | **73,992**  | ** **          | $      | 65,771 |   | **$** | **—** | ** ** | $ | — |   |
|                                           |   |        | ** **  |                |   |   | ** ** |   |   |
| ***Funded Status***                            |   |        | ** **  |                |   |   | ** ** |   |   |
| Funded Status as of August 31,            |   | **$**       | **(24,987** | **)**               | $      | (12,568 | ) | **$** | **(31,540** | **)** | $ | (18,556 | ) |
| Unrecognized Net Transition Asset              |   | **(145**    | **)**       | (269                | )      | **—** | ** ** | — |   |
| Unrecognized Actuarial Loss/(Gain)             |   | **43,126**  | ** **  | 19,118              |   | **9,171** | ** ** | (1,347 | ) |
| Unrecognized Prior Service Cost                |   | **2,279**   | ** **  | 2,823               |   | — | ** ** | — |   |
| Adjustment for Multiple Employer Plan          |   | **(348**    | **)**       | —              |   | **—** | ** ** | — |   |
| Net Amount Recognized                          |   | **$**       | **19,925**  | ** **          | $      | 9,104 |   | **$** | **(22,369** | **)** | $ | (19,903 | ) |
|                                           |   |        |        |                |   |   |   |   |   |
| ***Amounts Recognized in the Balance Sheets*** |   |        |        |                |   |   |   |   |   |
| Prepaid Pension Cost                           |   | **$**       | **10,713**  | ** **          | $      | 9,781 |   | **$** | **—** | ** ** | $ | — |   |
| Accrued Benefit Liability                      |   | **(3,451**  | **)**       | (2,911              | )      | **(22,369** | **)** | (19,903 | ) |
| Intangible Asset                               |   | **763**     | ** **  | 917                 |   | **—** | ** ** | — |   |
| Accumulated Other Comprehensive Loss           |   | **11,900**  | ** **  | 1,317               |   | **—** | ** ** | — |   |
| Net Amount Recognized                          |   | **$**       | **19,925**  | ** **          | $      | 9,104 |   | **$** | **(22,369** | **)** | $ | (19,903 | ) |

 

***Change in Additional Minimum Liability (forthe current year)***

 
|                               |   | **2003** |   |
|------------------------------------|--------|----------|--------|
| Other Comprehensive Loss           |   | **$**    | 10,583 |   |
| Intangible Asset Decrease          |   | **$**    | (154   | ) |
| Accrued Pension Liability Increase |   | **$**    | 10,429 |   |

 

A-20

----

 

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

 

***Weighted Average Assumptions as ofAugust 31,***

 
|                                                |   | **Pension** | ** ** | **Post-Retirement** | ** ** |
|-----------------------------------------------------|--------|-------------|------------|---------------------|------------|
|                                                |   | **2003**    |       | **2002**            |       | **2003** |   | **2002** | ** ** |
| Discount Rate                                       |   | **6.17**    | **%**      | 7.50                | %          | **6.17** | **%** | 7.50 | % |
| Expected Return on Plan Assets                      |   | **8.25**    | **%**      | 8.50                | %          | **N/A** | ** ** | N/A |   |
| Rate of Compensation Increase (Non-Union Plan Only) |   | **3.5**     | **%**      | 4.0                 | %          | **N/A** |   | N/A |   |

 

*Long-Term Incentive Plans*

 

During 2001, the 1995 Long-Term Incentive Plan was terminatedand all contract rights were cancelled.

 

The 1999 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 2003, 246.82 contract rights weregranted at a stated value of $1,750 per contract right or a total stated valueof $431,942.  In fiscal 2003, the Boardof Directors increased the value of the 1,109.78 contract rights issued priorto fiscal 2003 from $1,500 to $1,750 per contract right, for a total increasein the stated value of $277,445.  As ofAugust 31, 2003, there were 1,356.6 rights, at a stated value of $2.4million, issued and outstanding, 758.08 of which were vested.

 

*Defined Contribution Plans*

 

The Company has qualified 401(k) plans for alleligible employees.  The plans provide forimmediate 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, $1.5million and $1.5 million for the years ended August 31, 2003, 2002 and 2001,respectively.

 

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

 

Under the United States Department of Agriculture(USDA) Payment- In-Kind (PIK) program, the Company’s members were paid todestroy a portion of their 2001 and 2000 sugarbeet crops.  Payments to the Company’s members were madeby the USDA in the form of PIK certificates to be exchanged for governmentowned sugar.  The Company entered intocontracts with its members to purchase the PIK certificates they received fromthe USDA and to reduce the members’ delivery obligations to the Company to theextent 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.  The 2000 sugarbeet cropharvested by the Company’s members was reduced by approximately 33,000acres.  The Company receivedapproximately 1.6 million hundredweight of sugar during fiscal 2001 in exchangefor the 2000 crop PIK certificates.

 

A-21

----

 

**(16)****INCOMETAXES:**

 

Total income tax payments (refunds) were $(15,710),$(15,400), and $(300) in the years ended August 31, 2003, 2002 and 2001,respectively.

 

As of August 31, 2003, the Company hadaccumulated approximately $25.8 million of net operating loss carry-forwardsfor income tax reporting purposes.  Thenet operating loss carry-forwards expire in the years 2013 through 2022.  The Company’s net deferred tax liability as ofAugust 31, 2003 and 2002 is reflected below.

 

 
| **(In Thousands)**                                                            |   | **2003**   |       | **2002** |   |
|-------------------------------------------------------------------------------|--------|------------|------------|----------|--------|
| Deferred Tax Assets related to non- patronage source  loss carry-forward      |   | **$**      | **10,140** |     | $      | 10,320 |   |
| Deferred Tax Liability related to non-patronage  source temporary differences |   | **12,340** |       | 12,420   |   |
|                                                                          |   |       |       |     |   |
| Net Deferred Tax Liability                                                    |   | **$**      | **2,200**  |     | $      | 2,100 |   |

 

A reconciliation of the Company’s effective tax ratesfor the years ended August 31, 2003, 2002 and 2001 is shown below.

 
|                                  |   | **2003**  |   | **2002** |   | **2001** |   |
|---------------------------------------|--------|-----------|--------|----------|--------|----------|--------|
| 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      | %      |

 

**(17)****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.

 

The Company received a Notice of Violation from theState of Minnesota on April 5, 2001, for alleged violations of theMinnesota hydrogen sulfide standard, performance test reporting requirementsand air emission permit requirements at the Crookston, Moorhead and East GrandForks factories.  On August 5,2003, the Company and the Minnesota Pollution Control Agency (MPCA) enteredinto a stipulation agreement with regard to this matter.  This agreement required the Company, amongother conditions, to pay penalties in the amount of $117,000. The Company hasimplemented a hydrogen sulfide remediation plan at a total estimated cost of$5.0 million, of which $2.0 million was spent in 2003 and the remaining $3.0million to be spent in 2004.

 

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. Sidney Sugars iscurrently involved in negotiations

 

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with the Montana Department of Environmental Quality with the intent ofconcluding a stipulation agreement with regard to the alleged violation and therelated penalties of approximately $84,000. Management believes it willnegotiate a satisfactory resolution and that the outcome should not have amaterial adverse effect on the Company’s financial position. The seller of theSidney, Montana factory is required to indemnify Sidney Sugars for any amountsthat may be payable for this action.

 

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.

 

**(18)****SUBSEQUENTEVENT:**

 

OnSeptember 8, 2003, the Company, through its wholly-owned subsidiary CrabCreek Sugar Company (Crab Creek), acquired all of the assets of PacificNorthwest Sugar Company, LLC (PNSC), certain assets of Central Leasing ofWashington, LLC (Central Leasing) that were associated with PNSC and the MosesLake, Washington sugarbeet factory previously operated by PNSC and control ofthe sugar production assets owned by Central Leasing associated with the MosesLake, Washington sugarbeet factory for a purchase price of approximately $6.8million.  To accomplish this outcome,Crab Creek entered into various leasing arrangements with Central Leasing suchthat Crab Creek controls the long-term production of sugar at the Moses Lakefacility.  In connection with thisacquisition, the USDA transferred to the Company the sugar marketingallocations formerly allocated to PNSC. Neither Crab Creek nor the Company intends to operate the Moses Lakefacility.

 

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**EXHIBITINDEX TO ANNUAL REPORT ON FORM 10-KFOR FISCAL YEAR ENDED AUGUST 31, 2003**

 
| **Item No.** |   |                                                                                                        |   | **Method of  Filing**                                                                                                                                                    |
|--------------|--------|-------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                        |   |                                                                                                                                                                     |
| 3.1          |   | Restated Articles of  Incorporation of American Crystal Sugar Company                                       |   | Incorporated by reference  to Exhibit 3(i) from the Company’s Registration Statement on Form S-1 (File  No. 33-83868), declared effective November 23, 1994.   |
|         |   |                                                                                                        |   |                                                                                                                                                                     |
| 3.2          |   | Restated By-laws of  American Crystal Sugar Company                                                         |   | Incorporated by  reference to Exhibit 3(ii) from the Company’s Registration Statement on Form  S-1 (File No. 333-11693), declared effective November 13, 1996. |
|         |   |                                                                                                        |   |                                                                                                                                                                     |
| 4.1          |   | Restated Articles of  Incorporation of American Crystal Sugar Company                                       |   | See Exhibit 3.1                                                                                                                                                          |
|         |   |                                                                                                        |   |                                                                                                                                                                     |
| 4.2          |   | Restated By-laws of  American Crystal Sugar Company                                                         |   | See Exhibit 3.2                                                                                                                                                          |
|         |   |                                                                                                        |   |                                                                                                                                                                     |
| 10.1         |   | Trademark License  Agreement between Registrant and United Sugars Corporation, dated  November 1, 1993 |   | Incorporated by  reference to Exhibit 10(l) from the Company’s Registration Statement on Form  S-1 (File No. 33-83868), declared effective November 23, 1994.  |
|         |   |                                                                                                        |   |                                                                                                                                                                     |
| 10.2         |   | Form of Operating  Agreement between Registrant and ProGold Limited Liability Company                       |   | Incorporated by  reference to Exhibit 10(u) from the Company’s Registration Statement on Form  S-1 (File No. 33-83868), declared effective November 23, 1994.  |
|         |   |                                                                                                        |   |                                                                                                                                                                     |
| 10.3         |   | Form of Member Control  Agreement between Registrant and ProGold Limited Liability Company                  |   | Incorporated by  reference to Exhibit 10(v) from the Company’s Registration Statement on Form  S-1 (File No. 33-83868), declared effective November 23, 1994.  |

 

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| 10.4   |   | Administrative Services  Agreement between Registrant and ProGold Limited Liability  Company                       |   | Incorporated by  reference to Exhibit 10(w) from the Company’s Registration Statement on Form  S-1 (File No. 33-83868), declared effective November 23, 1994.  |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| +10.5  |   | Coal Supply Agreement  between Registrant and Spring Creek Coal Company, dated August 25, 1995                     |   | Incorporated by  reference to Exhibit 10(y) from the Company’s Registration Statement on Form  S-1 (File No. 333-11693), declared effective November 13, 1996. |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| +10.6  |   | Coal Transportation  Agreement between Registrant and Northern Coal Transportation Company, dated  August 25, 1995 |   | Incorporated by reference  to Exhibit 10(z) from the Company’s Registration Statement on Form S-1 (File  No. 333-11693), declared effective November 13, 1996. |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.7   |   | Pledge Agreement  between Registrant and First Union Trust Company, NA                                                  |   | Incorporated by  reference to Exhibit 10(ee) from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1998.                                |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.8   |   | Indemnity Agreement  between Registrant, Newcourt Capital USA Inc., Crystech, LLC and Crystech  Senior Lender Trust     |   | Incorporated by  reference to Exhibit 10(ff) from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1998.                                |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.9   |   | Tolling Services  Agreement between Crystech, LLC and Registrant                                                        |   | Incorporated by  reference to Exhibit 10(gg) from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1998.                                |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.10  |   | Operations and  Maintenance Agreement between Crystech, LLC and Registrant                                              |   | Incorporated by  reference to Exhibit 10(hh) from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1998.                                |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| +10.11 |   | Limited Liability  Company Agreement of Crystech, LLC                                                                   |   | Incorporated by  reference to Exhibit 10(ii) from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1998.                                |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.12  |   | Master Agreement  between the Registrant and Bakery, Confectionery, Tobacco Workers & Grain  Millers AFL-CIO, CLC   |   | Incorporated by  reference to Exhibit 10.22 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1999                                  |

 

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| 10.13  |   | Registrant’s  Senior Note Purchase Agreement                                                                                                          |   | Incorporated by  reference to Exhibit 10.24 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1999  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                       |   |                                                                                                                                     |
| 10.14  |   | Registrant’s  Senior Note Inter-creditor and Collateral  Agency Agreement                                                                        |   | Incorporated by  reference to Exhibit 10.25 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1999  |
|   |   |                                                                                                                                                       |   |                                                                                                                                     |
| 10.15  |   | Registrant’s  Senior Note Restated Mortgage and Security Agreement                                                                                    |   | Incorporated by  reference to Exhibit 10.26 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1999  |
|   |   |                                                                                                                                                       |   |                                                                                                                                     |
| 10.16  |   | Employment Agreement  between the Registrant and James J. Horvath                                                                                          |   | Incorporated by  reference to Exhibit 10.28 from the Company’s Annual Report on Form 10-K form  the year ended August 31, 1999 |
|   |   |                                                                                                                                                       |   |                                                                                                                                     |
| 10.17  |   | Stipulation Agreement  between Registrant and State of Minnesota Pollution Control Agency, dated  April 4, 2000                                       |   | Incorporated by  reference to Exhibit 10.28 from the Company’s Form 10-Q for the quarter ended  May 31, 2000                   |
|   |   |                                                                                                                                                       |   |                                                                                                                                     |
| 10.18  |   | Board of Directors  Deferred Compensation Plan, dated June 30, 1994                                                                                   |   | Incorporated by  reference to Exhibit 10.29 from the Company’s Annual Report on Form 10K for  the year ended August 31, 2000   |
|   |   |                                                                                                                                                       |   |                                                                                                                                     |
| 10.19  |   | Long Term Incentive  Plan, dated June 23, 1999                                                                                                        |   | Incorporated by  reference to Exhibit 10.31 from the Company’s Annual Report on Form 10K for  the year ended August 31, 2000   |
|   |   |                                                                                                                                                       |   |                                                                                                                                     |
| 10.20  |   | Addendum to Master  Agreement between the Registrant and Bakery, Confectionery, Tobacco Workers  & Grain Millers AFL-CIO, CLC dated July 10, 2001 |   | Incorporated by  reference to Exhibit 10.30 from the Company’s Annual Report on Form 10K for  the year ended August 31, 2001   |
|   |   |                                                                                                                                                       |   |                                                                                                                                     |
| 10.21  |   | Uniform Member Sugar  Marketing Agreement between the Registrant and United Sugars Corporation  dated September 1, 2001.                              |   | Incorporated by  reference to Exhibit 10.27 from the Company’s Form 10-Q for the quarter ended  November 30, 2001              |
|   |   |                                                                                                                                                       |   |                                                                                                                                     |
| 10.22  |   | Uniform Member  Marketing Agreement between the Registrant and Midwest Agri-Commodities  Company dated September 1, 2001.                             |   | Incorporated by  reference to Exhibit 10.28 from the Company’s Form 10-Q for the quarter ended  November 30, 2001              |

 

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| 10.23  |   | Retirement Plan A  Restatement                                                                                        |   | Incorporated by  reference to Exhibit 10.28 from the Company’s Annual Report on Form 10K for  the year ended August 31, 2002 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                  |   |                                                                                                                                   |
| 10.24  |   | Retirement Plan B  Restatement                                                                                        |   | Incorporated by  reference to Exhibit 10.29 from the Company’s Annual Report on Form 10K for  the year ended August 31, 2002 |
|   |   |                                                                                                                  |   |                                                                                                                                   |
| 10.25  |   | Registrant’s  Senior Note Purchase Agreement dated January 15, 2003                                         |   | Incorporated by  reference to Exhibit 10.29 from the Company’s Form 10-Q for the quarter ended  February 28, 2003            |
|   |   |                                                                                                                  |   |                                                                                                                                   |
| 10.26  |   | Growers’ Contract  (5-year Agreement) for the crop years 2003 through 2007                                       |   | Incorporated by  reference to Exhibit 10.30 from the Company’s Form 10-Q for the quarter ended  February 28, 2003            |
|   |   |                                                                                                                  |   |                                                                                                                                   |
| 10.27  |   | Growers’ Contract  (Annual Contract) for crop year 2003.                                                         |   | Incorporated by  reference to Exhibit 10.31 from the Company’s Form 10-Q for the quarter ended  February 28, 2003            |
|   |   |                                                                                                                  |   |                                                                                                                                   |
| +10.28 |   | Beet Loading and  Hauling Agreement between the Registrant and Transystems LLC for the crop  years 2003 through 2007  |   | Incorporated by  reference to Exhibit 10.31 from the Company’s Form 10-Q for the quarter ended  May 31, 2003                 |
|   |   |                                                                                                                  |   |                                                                                                                                   |
| +10.29 |   | 2003 Sugarbeet Delivery  Agreement between Sidney Sugars Incorporated and Growers                                     |   | Incorporated by  reference to Exhibit 10.32 from the Company’s Form 10-Q for the quarter ended  May 31, 2003                 |
|   |   |                                                                                                                  |   |                                                                                                                                   |
| 10.30  |   | Stipulation Agreement  between Registrant and State of Minnesota Pollution Control Agency, dated  August 5, 2003 |   | Filed herewith  electronically                                                                                                         |
|   |   |                                                                                                                  |   |                                                                                                                                   |
| 10.31  |   | Term and Seasonal Loan  Agreements between the Registrant and CoBank, ACB dated July 21, 2003                    |   | Filed herewith  electronically                                                                                                         |
|   |   |                                                                                                                  |   |                                                                                                                                   |
| 21.1   |   | List of Subsidiaries of  the Registrant                                                                               |   | Filed herewith  electronically                                                                                                         |

 

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| 31.1   |   | Rule  13a-14(a)/15(d)-14(a) Certification of the Chief Executive Officer |   | Accompanying herewith  electronically |
|--------|--------|--------------------------------------------------------------------------|--------|---------------------------------------|
|   |   |                                                                     |   |                                  |
| 31.2   |   | Rule  13a-14(a)/15(d)-14(a) Certification of the Chief Financial Officer |   | Accompanying herewith  electronically |
|   |   |                                                                     |   |                                  |
| 32.1   |   | Section 1350  Certification of the Chief Executive Officer               |   | Accompanying herewith  electronically |
|   |   |                                                                     |   |                                  |
| 32.2   |   | Section 1350  Certification of the Chief Financial Officer          |   | Accompanying herewith  electronically |

 

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+                                         Confidentialtreatment under Rule 24b-2 of the Securities and Exchange Act of 1934, asamended, has been granted with respect to designated portions of this document.

 

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