**UNITED STATES**

**SECURITIES 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  the fiscal year ended August 31, 2002** |
|                                           |                                                                                          |
| **or**                                         |
|                                           |
| **o**                                          | **Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |

 

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**CommissionFile**

**Nos.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 StreetMoorhead, 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 checkmark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ýNo o

 

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Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý

 

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As of November 15,2002, 3,035 shares of the Registrant’s Common Stock and 498,570 shares of theRegistrant’s Preferred Stock were outstanding. There is no established public market for the Registrant’s Common Stockor Preferred Stock.  Although there is alimited, private market for shares of the Registrant’s stock, the Registrantdoes not obtain information regarding the transfer price in transactionsbetween its members and therefore is unable to estimate the aggregate marketvalue of the Registrant’s shares held by non-affiliates.

 

DOCUMENTSINCORPORATED BY REFERENCE

**NONE**

 

 

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# **PART I**

 

*This report contains forward-lookingstatements and information based upon assumptions by the American Crystal SugarCompany’s management, including assumptions about risks and uncertainties facedby the Company.  These forward-lookingstatements can be identified by the use of forward-looking terminology such as“expects”, “believes”, “will” or similar verbs or expressions.  If any of management’s assumptions proveincorrect or should unanticipated circumstances arise, the Company’s actualresults could materially differ from those anticipated by such forward-lookingstatements.  The differences could becaused by a number of factors or combination of factors, including, but not limitedto, those factors influencing the Company and its business which are describedin 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 aMinnesota agricultural cooperative corporation owned by approximately 3,000sugarbeet growers in the Minnesota and North Dakota portions of the Red RiverValley.  The Red River Valley is thelargest sugarbeet growing area in the United States, forming a bandapproximately 35 miles wide on either side of the North Dakota and Minnesotaborder and extending approximately 200 miles south from the border of theUnited States and Canada.  The Companywas organized in 1973 by sugarbeet growers to acquire the business and assetsof the American Crystal Sugar Company, then a publicly held New Jerseycorporation in operation since 1899. The Company currently processes sugarbeets from a base level ofapproximately 500,000 acres, subject to tolerances for overplanting andunderplanting established by the Board of Directors each year.  By owning and operating five sugarbeetprocessing facilities in the Red River Valley, the Company provides itsshareholders 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’ssugar marketing agent, United Sugars Corporation, is a cooperative owned by theCompany, Southern Minnesota Beet Sugar Cooperative, Minn-Dak FarmersCooperative and United States Sugar Corporation.  The Company’s agri-products are marketed through a marketingagent, Midwest Agri-Commodities Company. Midwest Agri-Commodities Company is a cooperative whose members are theCompany, Minn-Dak Farmers Cooperative and Southern Minnesota Beet Sugar Cooperative.

 

The Company isalso one of three members of ProGold Limited Liability Company, a joint venturewhich owns a corn wet-milling plant in Wahpeton, North Dakota that is currentlybeing leased to Cargill, Incorporated.  TheCompany and Newcourt Capital USA own Crystech, LLC which operates the molassesdesugarization facility adjacent to the Company’s processing facility inHillsboro, North Dakota.

 

In October 2002,the Company, through its wholly-owned subsidiary, Sidney Sugars Incorporated(SSI) acquired three sugarbeet processing facilities located in Torrington,Wyoming; Sidney, Montana; and Hereford, Texas from Holly Sugar Corporation(Holly), a wholly-owned subsidiary of Imperial Sugar Company (Imperial) forapproximately $35 million.  SSI willprocess sugarbeets (the Sidney Crop) at the Sidney, Montana facility fromsugarbeets grown by growers

 

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associated with thatfacility.  The Torrington, Wyomingfacility has been leased to Western Sugar Cooperative (Western) and theHereford, Texas facility will remain idle.

 

The Company’scorporate headquarters are located at 101 North Third Street, Moorhead,Minnesota 56560, telephone number (218) 236-4400.  The Company’s website iswww.crystalsugar.com.  Its fiscal yearends August 31.

 

**Products and Production**

 

The Company isengaged primarily in the production and marketing of sugar fromsugarbeets.  The Company also sellsagri-products and sugarbeet seed.  TheCompany’s total annual sugar and agri-product production is influenced by theamount and quality of sugarbeets grown by its members, the processing capacityof the Company’s plants and by its ability to store harvested sugarbeets.

 

The Companyprocesses sugarbeets grown by its members in its five factories located in theRed River Valley area of Minnesota and North Dakota.  The growing area is divided into five factory districts, eachcontaining one sugarbeet processing plant. 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 is operated twenty-four hours per day, seven days per week.  The campaign typically begins in Septemberand continues until the available supply of sugarbeets has been depleted, whichgenerally occurs in May of the following year.  Based on current processing capacity, an average campaign lastsapproximately 250 days, assuming normal crop yields.

 

Once thesugarbeets are harvested, members transport their crop by truck to receivingstations designated by the Company.  Thesugarbeets are then stored in factory yards and at outlying piling stationsuntil processed.  Most of the sugarbeetsare stored outside in piles.  Frozensugarbeets may be stored outside for extended periods, but sugarbeets stored inunprotected piles at temperatures above freezing must be processed within ashorter period of time than those sugarbeets stored consistently belowfreezing.  In most years, the coldweather in North Dakota and Minnesota offers an advantage to the Company as itpermits the outdoor storage of sugarbeets in below-freezing weather conditions.

 

In milder climatesor years, unprotected piles of sugarbeets experience cycles of freezing andthawing and are subject to some deterioration. When subject to such freeze and thaw cycles, sugarbeets on the exteriorof piles freeze naturally.  Sugarbeetsnear the center of the piles, however, may not freeze and thus may be subjectto spoilage.  In order to avoid spoilagethe Company utilizes a process called “split pile storage” in which sugarbeetsfrom the center of the piles are removed for processing first.  Split pile storage permits more of thestored sugarbeets to freeze naturally. The Company also utilizes a ventilation technique to further reducespoilage.  In this process, fanscirculate air through ventilation channels constructed within sugarbeet pilesin order to pre-cool and then deep freeze the sugarbeets.  The Company has the capacity to storeapproximately 28 percent of an average crop in ventilated storage sites.  Enclosed cold storage facilities are alsoused to extend the sugarbeet storage period at each of the Company’s factorylocations.  Enclosed cold storage sitespresently have the capacity to cover approximately 8 percent of an averagecrop.

 

The basic processfor producing sugar from sugarbeets involves: washing the sugarbeets; slicingthe sugarbeets into thin strips called “cossettes”; extracting the sugar fromthe cossettes in a diffuser; purifying the resulting “raw juice” and boilingit, first in an evaporator to thicken it and then in vacuum pans to crystallizethe sugar; separating the sugar crystals from the molasses in a centrifuge;drying the sugar; storing sugar in bulk form and grading and screening thecrystals for packaging and bulk shipping.

 

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Molasses thatremains after the sugar crystals are initially separated can be furtherprocessed to remove more sugar.  Priorto fiscal 2000, the Company processed approximately one-half of its molassesthrough its East Grand Forks molasses desugarization facility to extractadditional sugar.  In February, 2000,the Hillsboro, North Dakota desugarization facility became operational and, asa result, substantially all of its molasses is processed to extract additionalsugar.

 

The Company’ssugar is pooled and then marketed through the services of a marketing agentunder contract with the Company.  Thesugar marketing agent, United Sugars Corporation, is a cooperative owned by theCompany, Southern Minnesota Beet Sugar Cooperative, Minn-Dak FarmersCooperative and United States Sugar Corporation.

 

The sugarproduction process results in a variety of agri-products.  After the extraction of raw juice from thecossettes, the remaining pulp is dried and processed into animal feed.  The remaining molasses and CSB from themolasses desugarization process are marketed primarily to yeast manufacturersand for use in animal feed.  TheCompany’s agri-products are marketed through a marketing agent, MidwestAgri-Commodities Company.  MidwestAgri-Commodities Company is a cooperative whose members are the Company,Minn-Dak Farmers Cooperative and Southern Minnesota Beet Sugar Cooperative.

 

The Company developsand markets sugarbeet seeds with Betaseed, Inc., a Minnesota corporation thatis a wholly owned subsidiary of KWS Kleinwanzlebener Saatzucht, AG, a Germanseed company that is one of the three largest seed companies in the world.  Through the Betaseed arrangement, theCompany has the right to market its branded seed to its own members.  Betaseed has the right to market Betaseedbranded seed to the Company’s members and also to market both the Company’sbranded seed and its Betaseed branded seed in all other markets.

 

The Company isalso one of three members of ProGold Limited Liability Company, a joint venturewhich owns a corn wet-milling plant in Wahpeton, North Dakota that is currentlybeing leased to Cargill, Incorporated.  TheCompany and Newcourt Capital USA own Crystech, LLC that operates the molassesdesugarization facility adjacent to the Company’s processing facility inHillsboro, North Dakota.

** **

**Recent Crops**

 

The sugarbeetcrop, grown by the Company’s members during 2002 that will be processed duringfiscal 2003, produced a total of approximately 17.6 tons of sugarbeets per acrefrom approximately 495,000 acres.  Thisproduction was less than the ten-year average of 19.1 tons per acre for thecrops grown in the years 1992 through 2001. The sugar content of the 2002 crop was 16.93 percent, in comparison to aten-year average for the applicable period of 17.46 percent.  The Company has begun processing thesugarbeets produced from the 2002 crop and expects to produce a total ofapproximately 24.3 million hundredweight of sugar from the crop grown by itsmembers.  In addition, SSI will produceapproximately 2.5 million hundredweight of sugar from the Sidney Crop.  There was no United States Department ofAgriculture (USDA) Payment-In-Kind (PIK) program for the 2002 crop.

 

The sugarbeetcrop, grown during 2001 and processed during fiscal 2002, produced a total ofapproximately 17.8 tons of sugarbeets per acre from approximately 453,000acres.  The number of acres harvestedwas reduced by approximately 29,000 as a result of member participation in thePIK program.  This production was lessthan the ten-year average of 19.1 tons per acre for the crops grown in theyears 1991 through 2000.  The sugarcontent of the 2001 crop was 18.0 percent, in comparison to a ten-year averagefor the applicable period of 17.35 percent. The Company produced a total of approximately 25.4 million hundredweightof sugar from the crop.

 

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The sugarbeetcrop, grown during 2000 and processed during fiscal 2001, produced a total ofapproximately 21.8 tons of sugarbeets per acre from approximately 442,000acres.  The number of acres harvestedwas reduced by approximately 33,000 as a result of member participation in thePIK program. That production exceeded the ten-year average of 18.3 tons peracre for the crops grown in the years 1990 through 1999.  The sugar content of the 2000 crop was 17.81percent, in comparison to a ten-year average for the applicable period of 17.43percent.  The Company produced a totalof approximately 29.0 million hundredweight of sugar from the 2000 sugarbeetcrop.

 

For a discussionof the 2001, 2000 and 1999 crops and results of operations for fiscal years2002, 2001 and 2000, see “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”.

 

**Market and Competition**

 

Current UnitedStates government statistics estimate total United States sugar consumption at182.8 million hundredweight for the year beginning October 1, 2002 andending September 30, 2003.  For thesame period starting October 2001, total consumption was 191.4 millionhundredweight.  Comparing the two yearsshows a decline in demand of approximately 4.7 percent.

 

The United Statesrefined sugar market has grown over the past twenty years, despite the demandlost to the substitution of high fructose corn syrups for sugar in beveragesand certain food products. Non-nutritive sweeteners such as aspartame have also been developed tosubstitute for sugar.  Corn and non-nutritivesweeteners constitute a large portion of the overall sweetener market. TheCompany believes that the United States market for sugar will remain relativelyflat to down slightly in the near future.

 

The United Statessugar industry has been subject to industry consolidation.  Today there are less than 10 sugar sellers,****withover 70 percent of United States sugar market share concentrated in the topthree sellers, all of which are fully integrated sugarbeet and canesuppliers.  The Company’s sugarproduction and sales represent approximately 14 percent of the total domesticmarket for refined sugar in 2001/2002. Sugar sales by United Sugars Corporation, the Company’s marketing agent,represent approximately 26 percent of the United States sugar market.

 

United SugarCorporation’s main competitors in the domestic market are Imperial, AmalgamatedSugar Company, California & Hawaiian Sugar Company, Florida CrystalsIncorporated and Western.  Tate &Lyle North America (Tate & Lyle), a former competitor, exited the U.S.sugar market by selling its sugar processing facilities to Western and FloridaCrystals.  Because sugar is a fungiblecommodity, competition in the United States industry is primarily based upon price,customer service and reliability as a supplier.  As mentioned, Imperial recently sold three processing facilitiesto the Company.  Imperial is still thelargest marketer of sugar in the United States.

 

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** **

## **Grower Contracts**with Members

 

The Companypurchases all of its sugarbeets from members under contract with theCompany.  All members have five-yearcontracts with the Company covering the growing seasons of 1998 through 2002.  Each member is obligated to enter into a newfive-year contract for subsequent years. In addition, each member has an annual contract with the Companyspecifying the number of acres the member is obligated to grow during thatyear.  Each share of Preferred Stockheld by a member requires that member to grow one acre of sugarbeets for saleto the Company.  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. It is the current intention of the Board of Directors and managementthat the relationship between shares of Preferred Stock and acres of sugarbeetproduction be maintained at a ratio as close to 1 to 1 as possible, subject totolerances for overplanting and underplanting established by the Board eachyear and reductions or increases caused by the Company’s marketing allocationsestablished by the USDA.

 

The gross beetpayment is the value of recovered sugar from the sugarbeets a member deliversplus the member’s share of agri-product revenues, minus the member’s share of memberbusiness operating costs.  The followingallowances, costs and deductions, if applicable, are used to adjust the grossbeet payment to arrive at the net beet payment: hauling program allowance andcosts, pre-pile quality premium and costs, minimum payment program allowanceand costs, tare incentive premium/penalty program 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 currentgrower contracts, payments to members for sugarbeets must be made in at leastthree installments: (i) on or about November 15, the Company pays itsmembers an amount equal to 65 percent of the Company’s estimate of the grower’snet beet payment; (ii) on or about March 31, the Company pays anamount which combined with the November payment equals 90 percent of theestimated net beet payment; (iii) and not more than 15 days aftercompletion and acceptance of the audit of the Company’s annual financial statements,the Company pays the remainder of the member’s net beet payment.  Except for unit retains, the Company mustpay to its members for their sugarbeets all proceeds from the sale of themembers’ sugar and agri-products in excess of related member business operatingcosts, as described above.

 

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The followingtables summarize the gross beet payment and net beet payment and certain cropstatistics for each of the last 10 completed fiscal years, respectively:

 
|                                |   | **2002**                                               |       | **2001** |       | **2000** |       | **1999** |       | **1998** |       | **1997** |       | **1996** |       | **1995** |       | **1994** |       | **1993** |       |   |
|-------------------------------------|--------|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|--------|
|                                |   |                                                   | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |   |
|                                |   | **Distribution of Net Proceeds Totals (In Thousands)** | ** ** |     |
|                                |   |                                                   |       |     |       |     |       |     |       |     |       |     |       |     |       |     |       |     |       |     |       |   |
| Net  Proceeds                       |   | $                                                      | 398,588    |     | $          | 389,039  |       | $        | 358,373    |     | $          | 369,681  |       | $        | 313,007    |     | $          | 373,649  |       | $        | 316,244    |   | $ | 326,693 |   | $ | 266,102 |   | $ | 309,255 |   |   |
| PIK  Payment                        |   | (23,497                                                | )          | (28,067  | )          | 0        |       | 0        |       | 0        |       | 0        |       | 0        |       | 0        |       | 0        |       | 0        |       |   |
| Non-Member  Loss                    |   | 733                                                    |       | 1,884    |       | 1,879    |       | 494      |       | 9,679    |       | 18,074   |       | 396      |       | 15       |       | 544      |       | 77       |       |   |
| Gross  Beet Payment                 |   | $                                                      | 375,824    |     | $          | 362,856  |       | $        | 360,252    |     | $          | 370,175  |       | $        | 322,686    |     | 391,723    |     | $          | 316,640  |       | $      | 326,708 |   | $ | 266,646 |   | $ | 309,332 |   |   |
| Unit  Retains                       |   | (24,154                                                | )          | (19,239  | )          | (19,299  | )          | (21,332  | )          | (8,545   | )          | (16,611  | )          | (16,040  | )          | (16,648  | )          | (19,328  | )          | (20,223  | )          |   |
| Member  Tax ADJ, Net                |   | 0                                                      |       | 0        |       | 0        |       | 0        |       | 0        |       | 0        |       | 0        |       | 5,621    |       | 12,585   |       | 447      |       |   |
| Net  Beet Payment                   |   | $                                                      | 351,670    |     | $          | 343,617  |       | $        | 340,953    |     | $          | 348,843  |       | $        | 314,141    |     | $          | 375,112  |       | $        | 300,600    |   | $ | 315,681 |   | $ | 259,903 |   | $ | 289,556 |   |   |
|                                |   |                                                   |       |     |       |     |       |     |       |     |       |     |       |     |       |     |       |     |       |     |       |   |
|                                |   | **Distribution of Net Proceeds Per Ton Harvested(1)**  | ** ** |     |
|                                |   |                                                   |       |     |       |     |       |     |       |     |       |     |       |     |       |     |       |     |       |     |       |   |
| Net  Proceeds                       |   | $                                                      | 49.47      |     | $          | 40.42    |       | $        | 37.11      |     | $          | 34.62    |       | $        | 36.60      |     | $          | 44.95    |       | $        | 39.39      |   | $ | 39.21 |   | $ | 41.25 |   | $ | 45.83 |   |   |
| PIK  Payment                        |   | (2.92                                                  | )          | (2.92    | )          | 0.00     |       | 0.00     |       | 0.00     |       | 0.00     |       | 0.00     |       | 0.00     |       | 0.00     |       | 0.00     |       |   |
| Non-Member  Loss                    |   | .09                                                    |       | .20      |       | .20      |       | .05      |       | 1.13     |       | 2.17     |       | 0.05     |       | 0.00     |       | 0.09     |       | 0.01     |       |   |
| Gross  Beet Payment                 |   | $                                                      | 46.64      |     | $          | 37.70    |       | $        | 37.31      |     | $          | 34.67    |       | $        | 37.73      |     | $          | 47.12    |       | $        | 39.44      |   | $ | 39.21 |   | $ | 41.34 |   | $ | 45.84 |   |   |
| Unit  Retains                       |   | (3.00                                                  | )          | (2.00    | )          | (2.00    | )          | (2.00    | )          | (1.00    | )          | (2.00    | )          | (2.00    | )          | (2.00    | )          | (3.00    | )          | (3.00    | )          |   |
| Member  Tax ADJ, Net                |   | 0.00                                                   |       | 0.00     |       | 0.00     |       | 0.00     |       | 0.00     |       | 0.00     |       | 0.00     |       | 0.68     |       | 1.95     |       | 0.07     |       |   |
| Net  Beet Payment                   |   | $                                                      | 43.64      |     | $          | 35.70    |       | $        | 35.31      |     | $          | 32.67    |       | $        | 36.73      |     | $          | 45.12    |       | $        | 37.44      |   | $ | 37.89 |   | $ | 40.29 |   | $ | 42.91 |   |   |
|                                |   |                                                   |       |     |       |     |       |     |       |     |       |     |       |     |       |     |       |     |       |     |       |   |
|                                |   | **Crop Statistics(1)**                                 | ** ** |
| Tons  Harvested (In Thousands):     |   | 8,058                                                  |       | 9,626    |       | 9,657    |       | 10,679   |       | 8,553    |       | 8,313    |       | 8,029    |       | 8,332    |       | 6,450    |       | 6,748    |       |   |
| Tons  Purchased Per Acre Harvested: |   | 17.8                                                   |       | 21.8     |       | 19.9     |       | 22.2     |       | 18.5     |       | 18.1     |       | 18.7     |       | 20.2     |       | 16.3     |       | 16.9     |       |   |
| Sugar  Content of Beets:            |   | 18.0                                                   | %          | 17.8     | %          | 17.4     | %          | 17.7     | %          | 17.6     | %          | 17.3     | %          | 16.4     | %          | 16.8     | %          | 17.6     | %          | 18.0     | %          |   |
|                                     |        |                                                        |            |          |            |          |            |          |            |          |            |          |            |          |            |          |            |          |            |          |            |        |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)           Information provided with respect tonet proceeds, gross beet payment, net beet payment, tons harvested per acre andsugar content of sugarbeets represents an average of the financial andproduction results experienced by the members. As described elsewhere in this Report, the return to members for theirsugarbeets is based upon the value of the recovered sugar from the sugarbeetsdelivered to the Company by each member. As a result of variations in the sugar content of the sugarbeetsdelivered by the various members to the Company, the payments received by thevarious members also vary.

## ** **

## **Sales andMarketing**

 

United SugarsCorporation, a common marketing agency operating on a cooperative basis,markets the Company’s sugar.  TheCompany is a party to a Uniform Member Marketing Agreement with United SugarsCorporation.  The other members ofUnited Sugars Corporation, Minn-Dak Farmers Cooperative, Southern MinnesotaBeet Sugar Cooperative and United States Sugar Corporation, are parties tosimilar agreements.  SSI will alsomarket its sugar through United Sugars Corporation.  Under these agreements, all of the members market all of theirrefined sugar on a pooled basis through United Sugars Corporation.  The Company receives payment for its sugarby receiving its pro rata share of the net proceeds from the sale of the pooledsugar.  The net proceeds of such salesrepresent the gross proceeds from the sale of the sugar, adjusted for thevarious costs and expenses of marketing the pooled sugar, including theCompany’s 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 production.

 

The Uniform MemberMarketing Agreements automatically renew on an annual basis unless notice oftermination is given by a party.  Inorder to terminate its agreement, a party must provide notice of termination byMay 1 of the then current year for the termination to be effective on theAugust 31 of the subsequent year.  Inthe event one of the parties terminates its Uniform Member Marketing

 

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Agreement, the amount ofsugar that is marketed by United Sugars Corporation would decrease.  United Sugars Corporation would also berequired to return the exiting member’s capital over a period of five years. OnNovember 15, 2002, Southern Minnesota Beet Sugar Cooperative provided a noticeof termination. The termination will be effective August 31, 2004.

 

United SugarsCorporation sells sugar primarily to industrial users such as confectioners,breakfast cereal manufacturers and bakeries. For the fiscal year ended August 31, 2002, 87.5 percent (by weight)of the sugar was sold to industrial users. The remaining portion is marketed by United Sugars Corporation throughsugar brokers to wholesalers and retailers under the “Crystal Sugar” and“Pillsbury” brand names and various private labels for householdconsumption.  With regard to brand namesales, the Company licenses the use of the “Crystal” trademark and sub-licensesthe use of the “Pillsbury” trademark to United Sugars Corporation.

 

United SugarsCorporation markets sugar to customers over a large geographical area.  United Sugars Corporation’s customers arelocated primarily in Illinois, Iowa, Wisconsin, Minnesota, Pennsylvania, NewYork, Tennessee, California, Michigan and Indiana.  During fiscal year 2002, United Sugars Corporation’s 10 largestcustomers accounted for approximately 51.9 percent (by weight) of the sugarsold.

 

The prices atwhich United Sugars Corporation sells the Company’s sugar fluctuateperiodically based on changes in domestic sugar supply and demand.  Sugar prices are very sensitive to thebalance between supply and demand in the United States market.  The largest proportion of United SugarsCorporation’s sugar sales are contracted one or more quarters in advance, withthe effect of stabilizing fluctuations in revenue from quarter to quarter.  Retail (grocery) products are sold on a spotprice basis.

 

The Companymarkets its agri-products through Midwest Agri-Commodities Company, a commonmarketing agency operating on a cooperative basis, whose members are theCompany, Minn-Dak Farmers Cooperative and Southern Minnesota Beet SugarCooperative.  SSI will also market itsagri-products through Midwest Agri-Commodities Company.  Sugarbeet pulp is marketed to livestock feedmixers and livestock feeders in the United States and foreign markets.  For the year ended August 31, 2002, themajority of the Company’s pulp production was exported to Japan and Europe.  The market for sugarbeet pulp is affected bythe availability and quality of competitive feedstuffs.  Sugarbeet molasses is marketed primarily toyeast manufacturers, livestock feed mixers and livestock feeders.  Total agri-product sales accounted for 7.2percent of the Company’s total revenues during fiscal 2002, of which exportsales accounted for 3.5 percent of such revenues.  In the past, agri-products export sales accounted for 3.7 percentof the Company’s total revenues in 2001 and 4.1 percent in 2000.  These percentages are primarily a functionof the average market prices for sugar, pulp and molasses and are notnecessarily indicative of future relationships between agri-product revenues(both export and domestic) and sugar revenues, because prices of thesecommodities fluctuate independently of each other.

 

There is no singlecustomer of United Sugars Corporation or Midwest Agri-Commodities Companyattributable to the Company that accounts for 10% or more of the revenues ofthe Company.

## ** **

## **GovernmentPrograms and Regulation**s

 

**Farm Security and Rural InvestmentAct of 2002**

 

The Farm Securityand Rural Investment Act of 2002 (the Farm Bill), enacted on May 13, 2002,replaces the Federal Agriculture Improvement and Reform Act of 1996 (the FAIRAct).  The Farm Bill contains severalprovisions related to the domestic sugar industry, with an ultimate goal ofsuch provisions to achieve balance and stability in the U.S. sugar market whileminimizing the cost to the Federal government. The Farm Bill applies to the 2002 through 2007 crop years.  Generally, the Farm Bill restricts importsof foreign sugar, maintains the non-recourse loan program established by theFAIR

 

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Act, and establishes a system of marketing allocations for sugarbeetand sugar cane producers in an attempt to balance the supply and demand forsugar in the U.S. domestic sugar market.

 

Under the FAIR Actand now the Farm Bill, sugar processors can borrow funds on a non-recoursebasis from the Commodity Credit Corporation (CCC), with repayment of such fundssecured by sugar.  When the price ofsugar drops below the forfeiture price, the processors can forfeit the sugarsecuring the loans to the CCC in lieu of repayment.  Processors may also obtain CCC loans for “in-process” sugar orsyrups at 80 percent of the loan rate.

 

The USDA hashistorically maintained sugar prices above the forfeiture price without cost tothe U.S. Treasury by regulating the supply of sugar in the U.S. market throughregulating the quantity of sugar imports. Under the Tariff Rate Quota (TRQ) implemented October 1, 1990, sugarproducing countries are allowed to export a fixed quantity of sugar into theUnited States duty-free or subject to minimal duties.  Unlimited additional quantities may be exported to the UnitedStates upon payment of a tariff of 15.36 cents per pound prior toshipment.  To date, only immaterialquantities of sugar have been imported under this higher tariff level.

 

The Farm Bill setsan 18 cent per pound loan rate for raw cane sugar and a 22.90 cent per poundloan rate for refined beet sugar.  Bothloan rates are effective for the 2002 year crop.  The FAIR Act required a one cent per pound penalty be paid byprocessors if the processor forfeits on sugar price support loans.  The Farm Bill has terminated any penaltiesfor forfeitures.

 

Under the FAIRAct, all sugar processors (including the Company) were required to remit to theCCC a non-refundable marketing assessment equivalent to 1.1794 percent of theraw cane sugar loan rate of 18 cents per pound.  The assessment for fiscal years 1997 through 2003 was increasedto 1.47425 percent of the raw cane sugar loan rate of 18 cents per pound.  The Farm Bill has terminated the currentmarketing assessment.

 

In order to reducethe risk of sugar forfeitures to the CCC and to provide balance in themarketplace, the Farm Bill establishes annual flexible marketing allotments forboth cane and beet sugar processors. The USDA will determine the overall allotment quantity (OAQ) for theU.S. domestic sugar market for each crop year by estimating sugar consumption,adding stocks expected to be carried into the succeeding year, and thensubtracting 1,532,000 short tons, raw value of sugar (the required level ofimports), and carry-in stocks of sugar, including CCC inventory.  Once the USDA has determined the OAQ for acrop year, it will then determine the allotment for beet and cane sugar bymultiplying the OAQ by 54.35 percent for beet and 45.65 percent for cane.  An individual processor’s allocation of theallotment for a crop year is determined by formula set forth in the FarmBill.  Sugarbeet processor allocationsare based on each sugar processor’s sugar production history, while sugar caneprocessor allocations are based on past marketings, ability to market and pastprocessings.  The USDA will annuallyestablish individual processor’s allocations. The Company’s marketing allocation for the 2002 crop is approximately 28million hundredweight.

 

Under the FarmBill, a processor may market sugar in excess of its allocation if such sales(i) enable another processor to meet its allocation, (ii) facilitate the exportof sugar or (iii) are made for nonhuman consumption.  The USDA can assess a penalty equal to three times the U.S.market value of any quantity of sugar marketed in excess of a processor’sallocation.  The Farm Bill and itsrelated regulations do not allow marketing allocations to be traded amongprocessors.  The Farm Bill does,however, provide for the transfer of allocations associated with a particularprocessing facility in the event ownership of the facility is transferred.

 

The marketingallotments and allocations set forth under the Farm Bill affect the sugarprocessed from the 2002 crop through the 2007 crop.  On an annual basis, the marketing allotments, and thecorresponding allocation to the Company, will determine the amount of sugar theCompany can sell into

 

9

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the domestic market.  TheCompany’s allocation may reduce the amount of sugar the Company can market fora given year, thus reducing the number of acres of sugarbeets required forprocessing.

### ** **

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

 

The USDAimplemented a Payment-In-Kind (PIK) program for sugar producers throughout theUnited States during fiscal years 2002 and 2001.  The PIK program was intended to alleviate the oversupply of sugarin the United States by giving a producer refined sugar in exchange for theproducer’s agreement to destroy sugarbeets that would produce a comparableamount of sugar.  Under the PIK program,the Company’s members were paid to destroy a portion of their 2001 and 2000sugarbeet crops.  Payments to theCompany’s members were made by the USDA in the form of PIK certificates to beexchanged for government owned sugar. The Company entered into PIK Certificate Purchase Agreements with itsmembers to purchase the PIK certificates they received from the USDA and toreduce the members’ delivery obligations to the Company to the extentsugarbeets were destroyed under the PIK program.  The purchase price for the PIK certificates reflected anallocation of the Company’s fixed costs to account for the reduction ofsugarbeets available for processing.

 

The PIKCertificate Purchase Agreement authorized the Company to require additionaldirect capital investments by members participating in the PIK program.  The amount of the equity contribution iscalculated per hundredweight of PIK certificates and is approximatelyequivalent (on a Company-wide average basis) to the unit retain declared by theCompany on the corresponding year’s sugarbeet crop.  The Company has a policy whereby the Company refunds, to theentity legally entitled thereto, the equity retains attributable to a deceasedor totally and permanently disabled former shareholder.

 

As a result of thePIK program, the 2001 sugarbeet crop harvested by the Company’s members wasreduced by approximately 29,000 acres. The Company received approximately 1.2 million hundredweight of sugar inexchange for the 2001 crop PIK certificates. The 2000 sugarbeet crop harvested by the Company’s members was reducedby approximately 33,000 acres.  The PIKcertificates received were exchanged for approximately 1.6 millionhundredweight of sugar.

 

The Farm Billauthorizes the USDA to implement a pre-plant PIK program to help offset anyoversupply.  At this time, there is noPIK program for fiscal 2003.

### ** **

**NorthAmerican Free Trade Agreement**

 

Under the terms ofthe original North American Free Trade Agreement (NAFTA) text, Mexico would have been allowed to ship any excess productionof sugar into the United States if Mexico were to achieve net surplus producerstatus two years in a row.  Concernedthat Mexico’s productive capabilities and possible conversion to the use ofhigh fructose corn sweeteners could quickly change Mexico from a net sugarimporter to a net sugar exporter, the U.S. sugar industry insisted that NAFTAbe 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 ofMexico has indicated that it does not agree that the side letter agreement toNAFTA is binding, and has filed a NAFTA Article XX challenge to the UnitedStates’ implementation of the side letter agreement.  At this time, it is not known when, or if, a ruling will bereceived on the Article XX challenge. If the side letter agreement to the NAFTA is ruled to be invalid, theCompany could be materially and adversely affected.

 

10

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The Company isconcerned that low world sugar prices and a trade conflict between the UnitedStates and Mexico over sweeteners could permit de facto acceleration of thesecond tier tariffs under the side letter agreement.  Under the NAFTA tariff schedule, second tier sugar tariffs wereset at approximately 12 cents for 2000 and decline by approximately 1.5 centsper year until reaching zero in 2008. Low world raw sugar prices and the current second tier tariff make iteconomically viable for Mexican sugar to enter the United States this year, ifthe Mexican interests so choose.

 

Under the currentterms of the NAFTA and the side letter agreement, the Company is concerned thatimports from Mexico could oversupply the U.S. market, forcing sugar pricessignificantly lower.  The Company, alongwith the domestic sugar industry, is seeking negotiated changes to the NAFTAand may also pursue legal remedies to address the matter.  If the sugar industry is unsuccessful inthese or any other endeavors it pursues to prevent the influx of Mexican sugarinto the U.S. market, there could be adverse financial consequences to theCompany and its members.

** **

**JointVenture: ProGold Limited Liability Company**

 

The Company is oneof three members of ProGold Limited Liability Company (ProGold).  ProGold was formed to serve as a jointventure between the Company, Minn-Dak Farmers Cooperative and Golden GrowersCooperative.  The joint venture owns acorn wet-milling plant capable of processing corn to produce corn sweeteners(including high fructose corn syrups) and various agri-products.  The Company has a 46 percent membershipinterest in ProGold, while Golden Growers Cooperative has a 49 percent interestand Minn-Dak Farmers Cooperative has a 5 percent interest in ProGold.

 

ProGold andCargill, Incorporated entered into an operating lease under which Cargillleases ProGold’s corn wet-milling plant. The lease commenced on November 1, 1997, and the initial term willterminate on December 31, 2007.

 

**JointVenture: Crystech, LLC**

 

The Company andNewcourt Capital USA, Inc. (Newcourt) formed Crystech, LLC (Crystech), aDelaware limited liability company, on May 28, 1998.  Crystech was formed to construct and operatea molasses desugarization facility in Hillsboro, North Dakota.  The Company and Newcourt each own a 50percent 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 from theCompany.

 

The Company has a12-year Tolling Services Agreement with Crystech whereby the Company pays the fullcost of processing sugarbeet molasses delivered to the facility, with title andrisk of loss to the product remaining with the Company throughout theprocess.  The Tolling Services Agreementmay be terminated by the Company if the specific operational processingperformance required of Crystech in the contract is not maintained.  The Company has also entered into anOperations and Maintenance Agreement with Crystech by which the Company isresponsible for operating and maintaining the facility throughout the term ofthe Tolling Services Agreement.  Thefacility has a capacity to process approximately 200,000 tons of softenedmolasses annually for conversion to sugar and other agri-products.  During fiscal 2002, approximately 175,000tons of softened molasses were processed.

 

**Employees**

 

As ofAugust 31, 2002, the Company had 1,243 full-time employees, of which 1,040were hourly and 203 were salaried.  TheCompany had 37 part-time employees.  Inaddition, the Company employs approximately 649 hourly seasonal workers,approximately 320 during the sugarbeet harvest and approximately 329 during theremainder of the sugarbeet processing campaign.  The Company also

 

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contracts with a third party agency for approximately another 1,200additional workers during the sugarbeet harvest.

 

Substantially allof the hourly employees at the factories, including full-time and seasonalemployees, are represented by the Bakery, Confectionery, Tobacco Workers andGrain Millers (BCTGM) AFL-CIO, and are covered by a collective bargainingagreement expiring July 31, 2004. Office, clerical and management employees are not unionized, except forcertain office employees at the Moorhead and Crookston, Minnesota, andHillsboro, North Dakota, factories who are covered by the collective bargainingagreement with the BCTGM.  The Companyconsiders its employee relations to be excellent.

 

Substantially allemployees who meet eligibility requirements of age and length of service arecovered by one of the Company’s two defined benefit retirement plans.  Plan A (nonunion employees) and Plan B(union employees) are defined benefit, noncontributory plans.  The plans provide for vesting in five yearswith benefits for early retirement, normal retirement and disability ordeath.  The Company’s policy is to fundpension costs accrued.  The plans werefully funded for vested benefits as of February 28, 2002, the end of themost recent plan year.  Union andnonunion employees are also eligible to participate in 401(k) savings plans.

 

**EnvironmentalMatters**

 

The Company issubject to extensive federal and state environmental laws and regulations withrespect to water and air quality, solid waste disposal and odor and noisecontrol.  The Company conducts anon-going program designed to meet these environmental laws andregulations.  The Company believes thatit is in substantial compliance with applicable environmental laws andregulations.  The Company cannot predictwhether future changes in environmental laws or regulations might increase thecost of operating its facilities and conducting its business.  Any such changes could have adversefinancial consequences for the Company.

 

The Companyreceived a Notice of Violation from the State of Minnesota on April 5, 2001 foralleged violations of the Minnesota hydrogen sulfide standard, performance testreporting requirements and air emission permit requirements at the Crookston,Moorhead and East Grand Forks factories. The Company is currently involved in negotiations with the MinnesotaPollution Control Agency (MPCA) with the intent of concluding a stipulationagreement with regard to the alleged violation and related penalties.  Management believes it will be able to negotiatea satisfactory resolution and that the outcome of the alleged violation shouldnot have a material adverse effect on the Company’s financial condition. TheCompany has accrued the expected costs associated with the anticipatedpenalties.

 

The Company iscurrently conducting an environmental remediation plan at its Moorhead andCrookston Minnesota factories. In fiscal 2002, the Company recorded a liabilityand an expense of approximately $1.9 million associated with the estimatedcosts of the remediation plan.

** **

**ImportantFactors**

 

The financialresults of the Company’s operations may be directly and materially affected bymany factors, including prevailing prices of sugar and agri-products, theCompany’s ability to market its sugar competitively, the weather, governmentprograms and regulations, and costs and expenses.  Beyond the factors that may impact the Company’s businessgenerally, the Company is involved in several ventures as discussed above thatmay also materially affect the financial results of the Company’s operations.

 

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**MarketSupply**

 

The domestic sugarmarket is reactive to any oversupply of refined sugar.  Excess supply may result in a decline indomestic sugar prices.  Lower sugarprices adversely affect profitability of selling refined sugar in the UnitedStates, resulting in a direct negative impact on the Company.

 

**Government Programs and Regulations;Legislation**

 

The nature andscope of future legislation and regulation affecting the sugar market cannot bepredicted and there can be no assurance that price supports and marketprotections will continue in their present forms.  If the price support programs were eliminated in their entirety,or if certain protections the federal government provides from foreigncompetitors were materially reduced, the Company could be materially andadversely affected.  In such asituation, if the Company were not able to adopt strategies that would allow itto compete effectively in a greatly changed domestic market for sugar, theadverse effects could negatively impact the desirability of growing sugarbeetsfor delivery to the Company, the Company’s financial results, and the Company’scontinued viability.

 

**UnregulatedForeign Competition**

** **

Under the currentterms of the NAFTA and other government regulations, imports of sugar fromMexico may enter the U.S. market.  Theseimports could oversupply the U.S. market and negatively affect the price ofsugar.  The Company, along with thedomestic sugar industry, is seeking improvements to NAFTA and is also pursuinglegal remedies to address the matter. If the sugar industry is unsuccessful in these and any other endeavorsit pursues to prevent the influx of Mexican sugar into the U.S. market, therecould be adverse financial consequences to the Company and its members.

 

**TheFarm Bill**

 

The impact of the Farm Bill on the operations of theCompany cannot be completely predicted. The continued loan programs provided for in the Farm Bill areanticipated to have the same impact as the FAIR Act loan programs.  The long term ramifications of the marketingallotment program depend on the Company’s ability to maintain its marketingallocation on an annual basis and to obtain access, if necessary, to additionalallocations at a reasonable price.

 

**Competition**

 

Sugar is afungible commodity with competition for sales volume based primarily uponcustomer service, price and reliability, though differences in proximity tovarious geographic markets within the United States result in differences infreight and shipping costs which in turn generally affect pricing andcompetitiveness.  The overall sweetenermarket, in addition to sugar, includes corn-based sweeteners, such as regularand high fructose corn syrups, and non-nutritive, high-intensity sweetenerssuch as aspartame.  Differences infunctional properties and prices have tended to define the use of these varioussweeteners.  Although the varioussweeteners are not interchangeable in all applications, the substitution ofother sweeteners for sugar has occurred in certain products, such as softdrinks.  The Company is not able topredict the availability, development or potential use of these and otheralternative sweeteners and their possible impact on the Company and its members.  The Company’s management believes that itpossesses the ability to compete successfully with other producers of sugar inthe United States.  In spite of thiscompetitive advantage, substitute products and sugar imports could have amaterial and adverse effect on the Company’s operations in the future.

 

**Weather and Other Factors**

 

The sugarbeet, aswith most other crops, is affected by weather conditions during the growingseason.  Additionally, weatherconditions during the processing season affect the Company’s ability to

 

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store sugarbeets held forprocessing.  Growing and storageconditions different from the Company’s expectations may change the quantityand quality of sugarbeets available for processing and therefore may affect thequantity of sugar produced by the Company. A significant reduction in the quantity or quality of sugarbeetsharvested resulting from adverse weather conditions, disease or other factorscould result in increased per unit processing costs and decreased production,with adverse financial consequences to the Company and its members.

 

**Item 2.****                                        PROPERTYAND PROCESSING FACILITIES**

 

The Companyoperates five sugarbeet processing factories in the Red River Valley.  The Company owns all of its factories andthe land on which they are located.  Thefactories range in size from 150,000 to 400,000 square feet.

 

The location andprocessing capacity of the Company’s 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                                                         |   |

 

Each of theprocessing factories includes the physical facilities and equipment necessaryto process sugarbeets into sugar.  Eachfactory has space for sugarbeet storage, including ventilated and cold storagesites.  Each of the Company’s facilitiesis currently operating at or near its capacity.  The Company owns a molasses desugarization (MDS) plant at itsEast Grand Forks facility and participates in a joint venture that owns andoperates a MDS plant at the Hillsboro facility.  The MDS plants process molasses to extract additional sugar.  The Company’s sugar packaging facilities arelocated at the Moorhead, Hillsboro, Crookston and East Grand Forks factories.

 

The Company’scorporate office is located in a 30,000 square foot, two-story office buildingin Moorhead, Minnesota.  The Companyalso has a 100,000 square foot Technical Services Center situated onapproximately 200 acres in Moorhead, Minnesota.  The Company owns both facilities, and owns numerous sites assugarbeet receiving and storage stations. All of the Company’s property, plant and equipment (excluding currentassets) is mortgaged or pledged as collateral for its indebtedness to variousfinancial institutions.

 

**Item 3.****                                        LEGALPROCEEDINGS**

 

From time to timeand in the ordinary course of its business, the Company is named as a defendantin legal proceedings related to various issues, including worker’s compensationclaims, tort claims and contractual disputes. The Company is currently involved in certain legal proceedings whichhave arisen in the ordinary course of the Company’s business.  The Company is also aware of certain otherpotential claims which could result in the commencement of legal proceedings.  The Company carries insurance which providesprotection against certain types of claims. With respect to current litigation and potential claims of which theCompany is aware, the Company’s management believes that (i) the Companyhas insurance protection to cover all or a portion of any judgments which maybe rendered against the Company with respect to certain claims or actions and(ii) any judgments which may be entered against the Company and which mayexceed such insurance coverage or which may

 

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arise in actionsinvolving potential liabilities not covered by insurance policies are notlikely to have a material adverse effect upon the Company, or its assets oroperations.

 

**Item 4.****                                        SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters weresubmitted to a vote of the Company’s shareholders during the quarter endedAugust 31, 2002.

** **

**PART II**

 

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

 

As of August 31, 2002,the Company had 3,035 shares of the Common Stock and 498,570 shares of thePreferred Stock issued and outstanding. There is no established public market for the Company’s Common Stock orPreferred Stock, as such shares may be held only by farmer-producers who areeligible for membership in the Company. The Company’s shares are not listed for trading on any exchange orquotation system.  Although transfers ofthe Company’s shares may occur only with the consent of the Board of theDirectors, the Company does not obtain information regarding the transfer pricein connection with such transfers.  As aresult, the Company is not able to provide information regarding the prices atwhich the Company’s shares have been transferred.

 

Because the numberof acres of sugarbeets a member may grow for sale to the Company is directlyrelated to the number of shares of Preferred Stock owned, a limited, privatemarket for Preferred Stock exists.  Itis not anticipated that a general public market for the Company’s shares ofCommon Stock or Preferred Stock will develop due to the limitations on transferand the various membership requirements which must be satisfied in order toacquire such shares.

 

A member desiringto sell his or her Common Stock or Preferred Stock must first offer them to theCompany for purchase at par value.  Ifthe Company declines to purchase such shares, either class may be sold to a newmember (i.e., another farm operator not already a member) and Preferred Stockmay be sold to one or more existing members or farm operators approved formembership, in each case subject to approval by the Board of Directors.  To date, the Company’s Board of Directorshas not exercised the Company’s right of first refusal to purchase sharesoffered for sale by its members.  In theabsence of the exercise of such right of first refusal, the Company is aware ofsales of Preferred Stock at prices in excess of the par value of thoseshares.  Because the Company does notrequire parties seeking approval for transfers to provide information regardingthe transfer price, the Company does not possess verifiable informationregarding the transfer price involved in recent transfers of the Company’sPreferred Stock.

 

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**Item 6.****                                        SELECTEDFINANCIAL DATA**

 

The selectedfinancial data of the Company should be read in conjunction with the financialstatements and related notes included elsewhere in this Annual Report.

                
|                                      |   | **Fiscal  Year Ended August 31,  (In Thousands, except for ratios)** |    |
|-------------------------------------------|--------|----------------------------------------------------------------------|---------|
|                                      |   | **2002**                                                             |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                      |   |                                                                 |    |   |   |   |   |   |   |   |   |
| Net Revenues                              |   | $                                                                    | 775,288 |   | $ | 866,362 |   | $ | 731,432 |   | $ | 843,968 |   | $ | 676,625 |   |
| Net Proceeds(1)                           |   | $                                                                    | 398,588 |   | $ | 389,039 |   | $ | 358,373 |   | $ | 369,681 |   | $ | 313,007 |   |
| Total Assets                              |   | $                                                                    | 622,693 |   | $ | 641,445 |   | $ | 739,719 |   | $ | 667,824 |   | $ | 648,118 |   |
| Long-Term Debt, Net of Current Maturities |   | $                                                                    | 182,371 |   | $ | 201,416 |   | $ | 230,905 |   | $ | 233,135 |   | $ | 194,695 |   |
| Members’ Investments                 |   | $                                                                    | 268,667 |   | $ | 255,660 |   | $ | 249,330 |   | $ | 241,286 |   | $ | 224,843 |   |
| Property and Equipment                    |   |                                                                 |    |   |   |   |   |   |   |   |   |
| Additions, net of retirements             |   | $                                                                    | 15,281  |   | $ | 21,851 |   | $ | 42,088 |   | $ | 58,693 |   | $ | 98,992 |   |
| Working Capital                           |   | $                                                                    | 58,282  |   | $ | 45,341 |   | $ | 53,613 |   | $ | 56,733 |   | $ | 30,357 |   |
| Ratio of Long-Term Debt to Equity(2)      |   | .68:1                                                                |    | .79:1 |   | .93:1 |   | .97:1 |   | .87:1 |   |

 
|                                               |   | **Fiscal  Year Ended August 31,  (In Thousands, except for tons purchased per acre and Net Beet  Payment per ton)** |   |
|----------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|--------|
| **Production Data(3)**                             |   | **2002**                                                                                                            |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                               |   |                                                                                                                |   |   |   |   |   |   |   |   |   |
| Acres harvested                                    |   | 453                                                                                                                 |   | 442 |   | 486 |   | 481 |   | 462 |   |
| Tons purchased                                     |   | 8,058                                                                                                               |   | 9,626 |   | 9,657 |   | 10,679 |   | 8,553 |   |
| Tons purchased per acre harvested                  |   | 17.8                                                                                                                |   | 21.8 |   | 19.9 |   | 22.2 |   | 18.5 |   |
| Gross beet payment per ton of sugarbeets purchased |   | $                                                                                                                   | 46.64  |   | $ | 37.70 |   | $ | 37.31 |   | $ | 34.67 |   | $ | 37.73 |   |
| Sugar hundredweight                                |   |                                                                                                                |   |   |   |   |   |   |   |   |   |
| Produced                                           |   | 25,395                                                                                                              |   | 29,035 |   | 26,646 |   | 25,453 |   | 21,528 |   |
| PIK Sugar Receipts                                 |   | 1,177                                                                                                               |   | 1,561 |   |   |   |   |   |   |   |
| Sold, including purchased sugar                    |   | 26,806                                                                                                              |   | 32,445 |   | 24,756 |   | 27,552 |   | 21,735 |   |
| Purchased sugar sold                               |   | 288                                                                                                                 |   | 3 |   | 230 |   | 798 |   | 901 |   |
| Pulp, Molasses and CSB tons                        |   |                                                                                                                |   |   |   |   |   |   |   |   |   |
| Produced                                           |   | 612                                                                                                                 |   | 749 |   | 784 |   | 921 |   | 771 |   |
| Sold                                               |   | 636                                                                                                                 |   | 701 |   | 803 |   | 1,042 |   | 728 |   |
|                                                    |        |                                                                                                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

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

 

(3)           Information for a fiscal year relatesto the crop planted and harvested in the preceding calendar year (e.g.,information for the fiscal year ended August 31, 2002 relates to the crop of2001).

 

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**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 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 along-term debt availability with CoBank, ACB of****$132.4 million, ofwhich $101.3 million is currently outstanding. In addition, the Company has long-term debt outstanding of$50 million from a private placement of Senior Notes that occurred inSeptember of 1998; $43.5 million from nine separate issuances of Pollution Control and Industrial DevelopmentRevenue Bonds; and a term loan with Bank of North Dakota of $5.6 million.  The Company also has a seasonal line ofcredit with a consortium of lenders lead by CoBank, ACB of $180 millionand a line of credit with Wells Fargo Bank for $3 million.  As of August 31, 2002, $7 million wasoutstanding on the seasonal line of credit with CoBank, ACB.  There was no line of credit balanceoutstanding with Wells Fargo Bank as of August 31, 2002.

** **

**CriticalAccounting Policies and Estimates**

 

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

 

The difficulty inapplying these policies arises from the assumptions, estimates and judgmentsthat have to be made currently about matters that are inherently uncertain,such as future economic conditions, operating results and valuations as well asmanagement intentions.  As the difficulty increases, the level ofprecision decreases, meaning that actual results can and probably will bedifferent from those currently estimated.

 

Estimates areconsidered to be critical if they meet both of the following criteria: (1) theestimate requires assumptions about material matters that are uncertain at thetime the accounting estimates are made, and (2) other materially differentestimates could have been reasonably made or material changes in the estimatesare reasonably likely to occur from period to period. The Company’s criticalaccounting estimates include the following:

 

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*Inventory Valuation*

 

Sugar, pulp,molasses and other agri-product inventories are valued at estimated netrealizable value. The Company derives its estimates from sales contracts,recent sales and evaluations of market conditions and trends. Changes in marketconditions may cause management’s estimates to differ from actual results.

* *

*Property, Equipment and Depreciation*

 

Property andequipment are depreciated for financial reporting purposes principally usingstraight-line methods with estimated useful lives ranging from 3 to 45 years.Economic circumstances or other factors may cause management’s estimates ofexpected useful lives to differ from actual.

 

The Companyreviews its property and equipment for impairment whenever events indicate thatthe carrying amount of the asset may not be recoverable.  An impairment loss is recorded when the sumof the future cash flows is less than the carrying amount of the asset.  An impairment loss is measured as the amountby which the carrying amount of the asset exceeds its fair value. There were noimpairment losses incurred during the year. However, considerable managementjudgment is necessary to estimate future cash flows and may differ from actualresults.

* *

*PensionPlan Benefits*

 

Accumulated planbenefits are those future periodic payments, including lump-sum distributionsthat are attributable under the Pension Plan’s provisions to the serviceemployees have rendered. Accumulated plan benefits include benefits expected tobe paid to retired or vested terminated employees or their beneficiaries;beneficiaries of employees who have died; and present employees or theirbeneficiaries.

 

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

 

The significantactuarial assumptions used in the determination of the actuarial present valueof accumulated plan benefits for fiscal 2002 were as follows: *ValuationFunding Method* - Entry age normal, frozen initial liability;  *Life Expectancy* - 1983 group annuitymortality;  *Retirement Age Plan A*- 35percent of eligible participants retire at age 60, the remaining participantsat age 65;  *Retirement Age Plan B*- 25percent of eligible participants retire at age 60, the remaining *participantsat age 65;  Investment Return - 8.5percent compounded annually for funding; Discount* Rate- 7.5 percent compounded annually;  *Salary Scale* - 4.0 percent compoundedannually, Plan A only.

 

Actual events maydiffer from the assumptions used and may result in plan benefit paymentsdiffering 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,including domestic 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, that the Company is unable to predict.

 

18

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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.

** **

**Comparisonof the Years Ended August 31, 2002 and 2001**

 

Revenue for the year ended August 31, 2002, was $775.3million, a decrease of $91.1 million from 2001.  Revenue from total sugar sales decreased 11.1 percent due to a17.4 percent decrease in hundredweight sold, partially offset by a 7.6 percentincrease in the average selling price per hundredweight.  Revenue from pulp sales decreased 4.2percent due to a 5.1 percent decrease in the average selling price per ton,partially offset by a .9 percent increase in the volume of pulp tons sold.  Revenue from molasses sales decreased 35.2percent due to a 53.6 percent decrease in the volume of molasses sold,partially offset by a 39.6 percent increase in the average selling price perton.  Revenue from sales of ConcentratedSeparated By-Product (CSB), a by-product of the molasses desugarizationprocess, decreased 2.3 percent due to a 12.2 percent decrease in the volume ofCSB sold, partially offset by an 11.3 percent increase in the average sellingprice 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 of August31, 2000, which was sold in fiscal 2001, and was approximately $43.0 millionhigher than the value of the carryover sugar inventory as of August 31, 2001,which was sold in fiscal 2002.  Thehigher inventory level as of August 31, 2000 consisted largely of sugar pledgedto the CCC, which was forfeited during the first quarter of fiscal 2001.  The value for sugar inventories as of August31, 2002 increased compared to the prior year due to a slightly higher inventorylevel and a higher net realizable value per hundredweight. The cost associatedwith sugar purchased to meet customer needs was up $6.5 million due to delayingthe commencement of the 2002 crop campaign. The 2002 Crop campaign startup was delayed because of adverse plantingand growing conditions which slowed the maturity of the 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 Limited LiabilityCompany.

 

Payments to members for PIK certificates, net ofequity retention declared, decreased by $4.2 million from $26.5 million in 2001to $22.3 million in 2002.

 

19

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Payments to members for sugarbeets, net of unitretains declared, increased by $8.1 million from $343.6 million in 2001 to$351.7 million in 2002.

###  

### **Comparisonof the Years Ended August 31, 2001 and 2000**

 

Revenue for the year ended August 31, 2001, was $866.4million, an increase of $134.9 million from 2000.  Revenue from total sugar sales increased 19.2 percent due to a31.1 percent increase in hundredweight sold, partially offset by a 9.0 percentdecrease in the average selling price per hundredweight.  Revenue from pulp sales increased 8.8percent due to a 14.8 percent increase in the average selling price per tonpartially offset by a 5.2 percent decrease in the volume of pulp sold.  Revenue from molasses sales decreased 37.4percent due to a 52.6 percent decrease in the volume of molasses sold partiallyoffset by a 32.1 percent increase in the average selling price per ton.  Revenue from the sales CSB increased 58.5percent due to a 13.6 percent increase in sales volume and a 39.4 percentincrease in the average selling price per ton. The decrease in sales volume of molasses and the increase in salesvolume of CSB was primarily the result of the Crystech molasses desugarizationfacility at Hillsboro, North Dakota, which became operational on February 1,2000.

 

Cost of product sold, exclusive of payments forsugarbeets and PIK certificates increased $89.6 million.  Direct processing costs for sugar and pulpincreased 12.3 percent due to the processing 3.2 percent more sugarbeets,higher costs for natural gas and twelve months versus seven months of tollingcharges from Crystech.  Fixed andcommitted expenses increased 2.9 percent, reflecting higher depreciation andinsurance costs.  The cost associatedwith sugar purchased to meet customer needs decreased $6.2 million due tominimal activity during fiscal 2001. Change in inventories impacted the cost of product sold unfavorably by$78.2 million.

 

Selling expenses increased $17.3 million primarily dueto increased sugar sales volume. General and administrative expenses increased 1.8 percent due to generalcost increases.

 

Interest expense decreased $2.7 million due to lowerlong-term and short-term interest rates and lower average borrowing levels.

 

Non-member activities resulted in a loss of $ 1.9million in both 2001 and 2000.  The lossin each year was primarily comprised of activities related to the investment inProGold.

 

Payments to members for PIK certificates, net ofequity retention declared, were $26.5 million in 2001.

 

Payments to members for sugarbeets, net of unitretains declared, increased by $2.6 million from $341.0 million in 2000 to$343.6 million in 2001.

 

**Comparisonof the Years Ended August 31, 2000 and 1999**

 

Revenue for the year ended August 31, 2000, was $731.4million, a decrease of $112.6 million from 1999.  Revenue from total sugar sales decreased 12.2 percent, reflectinga 10.2 percent decrease in hundredweight sold and a 2.3 percent decrease in theaverage selling price per hundredweight. Revenue from pulp sales decreased 7.6 percent due to an 18.4 percentdecrease in the volume of tons sold, partially offset by a 13.3 percentincrease in the average selling price per ton. Revenue from molasses sales decreased 50.9 percent due to a 52.4 percentdecrease in the volume of molasses sold, partially offset by a 3.1 percentincrease in the average selling price per ton. Revenue from sales of CSB

 

20

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increased 32.9percent due to a 90.1 percent increase in the volume of CSB sold, partiallyoffset by a 30.1 percent decrease in the average selling price per ton.  The decrease in sales volume of molasses andthe increase in sales volume of CSB was primarily the result of the operationof the Crystech molasses desugarization facility at Hillsboro, North Dakota,which became operational on February 1, 2000.

 

Cost of product sold, exclusive of payments forsugarbeets, decreased $77.4 million. Direct processing costs for sugar and pulp increased 9.3 percentprimarily due to the commencement of tolling charges from Crystech, partiallyoffset by reduced costs of harvesting and the processing fewer tons.  Fixed and committed expenses increased 0.1percent reflecting slightly higher depreciation and maintenance costs.  The cost associated with sugar purchased tomeet customer needs was down $15.4 million due to the decrease in purchasedsugar activity in distant geographic markets. The change in inventories impacted the cost of product sold favorably by$72.5 million.

 

Selling expenses decreased $27.7 million due to loweragri-product freight costs and the suspension of the Commodity CreditCorporation sugar marketing assessment fee as of September 1, 1999.  General and administrative expensesincreased approximately 3.8 percent due to general cost increases.

 

Interest income increased $1.4 million primarily dueto interest on the Crystech notes receivable.

 

Interest expense increased $ .7 million primarily dueto higher average interest rates.

 

Non-member business activities resulted in a loss of$1.9 million in 2000, as compared to a loss of $ .5 million in 1999.  This change was primarily the result of thegain on the sale of certain sugarbeet seed assets to Betaseed, Inc. reflectedin 1999, offset by increased income from the investment in ProGold.

 

Payments to members for sugarbeets, net of unitretains declared, decreased by $7.8 million from $348.8 million to $341.0million.  The decrease was primarilyattributable to a 9.6 percent decrease in tons harvested partially offset by ahigher per-ton beet payment.

## ** **

## **RecentAcquisitions**

 

On October 7, 2002 the Company, through SSI, acquiredthree sugarbeet processing facilities and the related marketing allocationsassociated with such facilities from Holly for approximately $35 million.

 

The Hereford, Texas facility was idle at the time ofthe acquisition and will remain idle for the foreseeable future.  The Torrington, Wyoming facility has beenleased, on a long-term basis, to Western, who will continue to operate thefacility to process sugarbeets delivered by the growers currently supplying thefacility and from its own growers.  Thelease payments due under the long-term lease are nominal.

 

SSI will operate the Sidney, Montana facility.  The campaign for the 2002 crop commenced onSeptember 25, 2002, with a total of 863,000 tons of sugarbeets harvested, witha total production of approximately****2.5 million hundredweight of sugarexpected to be produced from the 2002 crop. Approximately 127,000 tons of beets from the 2002 crop had beenharvested prior to October 7, 2002. This portion of the crop and the resultingsugar produced from those beets remained the property of Holly.

 

21

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As part of the entire transaction with Holly, SSIacquired the rights to marketing allocations equal to an estimated 4.8673% ofthe total allocation for the domestic sugarbeet segment.  SSI will use a portion of these marketingallocations to market the sugar produced at the Sidney, Montana facility.  Any excess allocations will be available tothe Company pursuant to an agreement between SSI and the Company.

## ** **

## **2002 Crop andEstimated Fiscal Year 2003 Information**

 

This discussioncontains a summary of the Company’s current estimates of the financial resultsto be obtained from the Company’s processing of the 2002 sugarbeet crop.  Given the nature of the estimates requiredin connection with the payments to members for their sugarbeets, thisdiscussion includes forward-looking statements regarding the quantity of sugarto be produced from the 2002 sugarbeet crop, the net selling price for thesugar and agri-products produced by the Company and the Company’s operatingcosts.  These forward-looking statementsare based largely upon the Company’s expectations and estimates of futureevents; as a result, they are subject to a variety of risks anduncertainties.  Some of those estimates,such as the selling price for the Company’s products and the quantity of sugarproduced from the sugarbeet crop, are beyond the Company’s control.  The actual results experienced by the Companycould differ materially from the forward-looking statements contained herein.

 

As noted earlier,the Growers’ Contracts between the Company and its members regarding thedelivery of sugarbeets to the Company require payment for members’ sugarbeetsin three installments throughout the year after harvest of the applicablesugarbeet crop.  As only the finalpayment is made after the close of the fiscal year in question, the first twopayments to members for their sugarbeets are, of necessity, based upon the Company’sthen-current estimates of the net beet payment arising from the processing ofthe crop in question and the subsequent sale of the products obtained fromprocessing those sugarbeets.

 

The completedharvest of the sugarbeet crop grown by members during 2002 produced a total of8.7 million tons of sugarbeets, or approximately 17.6 tons of sugarbeetsper acre from approximately 495,000 acres. This production was less than the ten-year average of 19.1 tons per acrefor crops grown in the years 1992 through 2001.  The sugar content of the 2002 crop is 16.93 percent in comparisonto a ten year average for the applicable period of approximately 17.46percent.  The Company expects to producea total of approximately 24.3 million hundredweight of sugar from the 2002crop, a decrease of approximately 4.2 percent compared to the 2001 crop.  Such sugar production provides a total sugarrecovery of approximately 276 pounds of sugar for each ton of sugarbeetsharvested by the Company.

 

The Sidney Cropconsisted of approximately 863,000 tons of sugarbeets, or approximately 19.1tons of sugarbeets per acre from approximately 45,000 acres.  The sugar content of the Sidney Crop is17.94 percent.  The Company expects toproduce a total of approximately 2.5 million hundredweight of sugar from theSidney Crop.

## ** **

## **The Company’sCurrent Strategic Plan**

 

In order to obtainthe best selling price for its products, the Company intends to focus on salesand marketing strategies that allow the Company to provide its customers withan appropriate mixture of the Company’s products.  The Company plans to optimize its customer mix, improve logisticsand continue to evaluate and improve its customer performance.

 

To pursue the goalof maintaining and improving upon its current status as a low cost producer,the Company intends to focus on working with its members to increase theproductivity of the members’ sugarbeet farming operations.  The Company expects to focus on, amongothers, programs for nitrogen management and new seed varieties.  At the factory level, the Company plans tofocus on cost

 

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reductions and pursue on-going maintenance initiatives and targetedcapital improvements.  After completingseveral large strategic capital projects in recent years, the Company currentlyintends to focus its efforts on strengthening its balance sheet while pursuingmaintenance capital and high-return strategic capital projects.

 

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

 

Market risk is therisk of loss to future earnings, to fair values or to future cash flows thatmay result from changes in the price of a financial instrument.  The value of a financial instrument maychange as a result of changes in the interest rates, exchange rates, commodityprices, equity prices and other market changes.  Market risk is attributed to all market-risk sensitive financialinstruments, including long term debt.

 

The Company doesnot believe that there is any material market risk exposure with respect tointerest rates, exchange rates, commodity prices, equity prices and othermarket changes that would require disclosure under this item.

 

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

 

The financialstatements of the Company for the fiscal years ended August 31, 2002, 2001 and2000 have been audited by Eide Bailly LLP, independent certified publicaccountants.  Such financial statementshave been included herein in reliance upon the report of Eide Bailly LLP.  The financial statements of the Company areincluded in Appendix A to this annual report.

 

**Item 9.****       CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None

 

# **PART III**

 

**Item 10.****                                 DIRECTORSAND EXECUTIVE OFFICERS**

 

**Board of Directors**

 

The Board ofDirectors of the Company consists of three directors from each of the fivefactory districts.  Directors must holdcommon stock of the Company or must be representatives of such shareholdersbelonging to the district they represent and are elected by the members of thatdistrict.  In the case of a holder ofcommon stock who is other than a natural person, a duly appointed or electedrepresentative of such shareholder may serve as a director.  The directors were elected to servethree-year terms expiring in December of the years indicated in the tablebelow.  One director is elected eachyear from each factory district.  Adirector cannot serve more than four consecutive three-year terms.

 

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The table belowlists certain information concerning current directors of the Company. 

 
| **Name and  Address**                                                 |   | **Age** |   | **Factory District** |   | **Director  Since** |   | **Term Expires  Dec.** |
|-----------------------------------------------------------------------|--------|---------|--------|----------------------|--------|---------------------|--------|------------------------|
|                                                                  |   |    |   |                 |   |                |   |                   |
| Michael A. Astrup  PO Box 219  Dilworth, MN 56529                     |   | 49      |   | Moorhead             |   | 1996                |   | 2002                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| Jerry D. Bitker  1694 Co. Highway #19  Halstad, MN 56548              |   | 54      |   | Hillsboro            |   | 1996                |   | 2002                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| Richard Borgen  1544 Co. Highway #39  Perley, MN 56574                |   | 53      |   | Moorhead             |   | 1997                |   | 2003                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| Paul J. Driscoll  PO Box 555  East Grand Forks, MN 56721              |   | 57      |   | East  Grand Forks    |   | 2000                |   | 2003                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| Curtis Haugen45508 300th St. NW  Argyle, MN 55108                     |   | 41      |   | East  Grand Forks    |   | 2001                |   | 2004                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| Lonn M. Kiel  RR 3, Box 71  Crookston, MN 56716                       |   | 49      |   | Crookston            |   | 1994                |   | 2003                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| David J. Kragnes  10600 60th St. N.  Felton, MN 56536                 |   | 50      |   | Moorhead             |   | 1995                |   | 2004                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| Francis L. Kritzberger  RR #1, Box 22  Hillsboro, ND 58045            |   | 57      |   | Hillsboro            |   | 1996                |   | 2003                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| Patrick D. Mahar  RR 1, Box 363  Cavalier, ND 58220-9789              |   | 60      |   | Drayton              |   | 1993                |   | 2002                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| Jeff McInnes  RR 2 Box 140  Hillsboro, ND 58045                       |   | 45      |   | Hillsboro            |   | 2001                |   | 2004                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| Ronald E. Reitmeier  RR 1, Box 49  Fisher, MN 56723                   |   | 56      |   | Crookston            |   | 1996                |   | 2002                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| Jim A. Ross  RR 1, Box 5  Fisher, MN 56723                            |   | 52      |   | Crookston            |   | 1998                |   | 2004                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| G. Terry Stadstad  1774 22nd Avenue NE  Grand Forks, ND 58203         |   | 59      |   | East  Grand Forks    |   | 1993                |   | 2002                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| Robert Vivatson  (Chairman)  PO Box 631  Cavalier, ND 58220 |   | 52      |   | Drayton              |   | 1992                |   | 2004                   |
|                                                                  |   |    |   |                 |   |                |   |                   |
| Neil Widner  PO Box 47  Stephen, MN 56757                             |   | 51      |   | Drayton              |   | 2000                |   | 2003                   |

 

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Below is the biographicalinformation 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 since 1996 and has been afarmer since 1974 near Halstad and Ada, Minnesota.

 

**Richard Borgen.**  Mr. Borgen has been a director since 1997.  Mr. Borgen has farmed east of Perley,Minnesota, since 1967 and has served as a director on the Perley Co-op ElevatorBoard for nine years and the Norman County West school board for 10 years.

 

**Paul J. Driscoll. **Mr.Driscoll has been a director since 2000. Mr. Driscoll has farmed in the East Grand Forks, Minnesota, area formany years.  Mr. Driscoll currentlyserves on the Marshall Polk Rural Water Board, the Minnesota Rural WaterFinance Authority, the Huntsville Township Board and the Northwest TechnicalCollege Advisory Board.

 

**Curtis Haugen. **Mr.Haugen has been a director since 2001. Mr. Haugen has been a farmer since 1981****and farms near Argyle,Minnesota.  Mr. Haugen hascompleted his twelfth year as a director of the Red River Valley SugarbeetGrowers Association.  Mr. Haugen isserving as a director and President of the Farmer’s Union Oil Company, Oslo,Minnesota.

 

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

 

**David J. Kragnes.**  Mr. Kragnes has been a director since 1995.  Mr. Kragnes has been a farmer since1972, 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 since 1993 and has been afarmer since 1962.  Mr. Mahar iscurrently a partner of Mahar Farms near Cavalier, North Dakota.  Mr. Mahar previously

 

25

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served as president ofthe Red River Valley Sugarbeet Growers Association, Fargo, North Dakota, and aspresident of the American Sugarbeet Growers Association, Washington, D.C.  Mr. Mahar is currently serving as adirector for Midwest Agri-Commodities Company and also on the Boards ofDirectors of United Valley Bank and Farmers Co-op Elevator, both of Cavalier,North Dakota.

 

**Jeff McInnes.**  Mr. McInnes has been a director since 2001.  Mr. McInnes co-manages a 3,300 acrefarming operation near Hillsboro, North Dakota.  Mr. McInnes is the founder and manager of the BasementTraders Marketing Club, a grain marketing association in Hillsboro.  Mr. McInnes is a director and thechairman 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 has served on the Board of Directors of PKM ElectricCo-op for 18 years.

 

**Jim A. Ross.**  Mr. Ross has been a director since 1998.  Mr. Ross has farmed near Fisher, Minnesota,since 1971 and is a board member of Fisher Fuel and Hardware Cooperative.

 

**G.****Terry Stadstad.**  Mr. Stadstad has been a director since 1993 and has beenfarming near Grand Forks, North Dakota, since 1965.  Mr. Stadstad serves on the Board of Directors of UnitedSugars Corporation and the Board of Governors of ProGold Limited LiabilityCompany.

 

**Robert Vivatson.**  Mr. Vivatson has been a director since 1992.  Operating as a farmer near Cavalier, NorthDakota, since 1975, Mr. Vivatson is a partner of Vivatson Bros. andPresident 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 LimitedLiability Company.

 

**Neil Widner. **Mr.Widner has been a director since 2000. Mr. Widner has farmed near Stephen, Minnesota, since 1973.  Mr. Widner currently serves as a director ofFarmers Grain in Stephen, Minnesota.

 

The Board ofDirectors meets monthly.  For fiscalyear 2002, the Company provided its directors with compensation consisting of(i) a payment of $200 per month, (ii) a per diem payment of $200 foreach day spent on Company activities, including board meetings and otherCompany functions, and (iii) reimbursement of expenses for attendance atBoard of Directors’ meetings.  TheChairman of the Board of Directors receives a payment of $500 per month, ratherthan $200 per month; the Chairman also receives a per diem in the amount of$200 for each day spent on Company activities.

 

For fiscal years2003, 2004 and 2005 the Board has approved an increase in the monthlycompensation paid to directors to $300 per month for fiscal 2003, $400 permonth for fiscal 2004 and $500 per month for fiscal 2005, with future annualincreases of $25 per month for each fiscal year after fiscal 2005, with a perdiem payment of $250 for each day spent on Company activities.  The monthly compensation payment for theChairman of the Board to $800 per month for fiscal 2003, $900 per month forfiscal 2004 and $1,000 per month for fiscal 2005, with future annual increasesof $25 per month for each fiscal year after 2005.

 

Under the terms ofthe Board of Directors Deferred Compensation Plan, members of the Board ofDirectors can elect to defer receipt of their monthly and per diemcompensation.  This is an annualirrevocable election made prior to January 1, of each calendar year the feesare to be paid.  The amounts aredeferred until either withdrawal from the Board of Directors by a member oruntil retirement from the Board member’s regular employment or business, butnot beyond age 65.  Two payment optionsare

 

26

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available at the election of the participant.  Payments can be received in a single lump sum or in equalinstallments over a period of up to ten years. The Board of Directors, at its discretion, can elect to distribute theremaining balance at any time.  Interestis earned on the amounts deferred based on the five year Treasury bondrate.  Currently, there is one Boardmember who has elected to participate in this plan.  The amount deferred, as of August 31, 2002 was $127,000.

 

**Executive Officers**

 

The table belowlists the principal officers of the Company, none of whom owns any shares ofCommon Stock or Preferred Stock. Officers are elected annually by the Board of Directors.

 
| **Name**            |   | **Age** |   | **Position**                                                                        |
|---------------------|--------|---------|--------|-------------------------------------------------------------------------------------|
|                |   |    |   |                                                                                |
| James  J. Horvath   |   | 57      |   | Chief  Executive Officer                                                            |
| Thomas  S. Astrup   |   | 33      |   | Vice  President-Administration                                                      |
| David  A. Berg      |   | 48      |   | Vice  President-Agriculture                                                         |
| Joseph  J. Talley   |   | 42      |   | Vice  President-Finance                                                             |
| David  A. Walden    |   | 49      |   | Vice  President-Operations                                                          |
| Daniel  C. Mott     |   | 43      |   | Secretary                                                                           |
| Samuel  S. M. Wai   |   | 48      |   | Treasurer  and Assistant Secretary                                                  |
| Brian  Ingulsrud    |   | 39      |   | Corporate  Controller, Assistant Secretary and Assistant Treasurer                  |
| Mark  L. Lembke     |   | 46      |   | Finance  Administration Manager, Assistant Secretary and Assistant Treasurer   |
| Ronald  K. Peterson |   | 47      |   | Accounting  & Systems Manager, Assistant Secretary and Assistant Treasurer |
| David  L. Malmskog  |   | 45      |   | Director  Business Development, Assistant Secretary and Assistant Treasurer    |

 

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

 

**Thomas S. Astrup**.  Mr. Astrup was named the Company’s Vice President-Administrationin 2000.  Mr. Astrup served as theCompany’s Corporate Controller, Assistant Treasurer and Assistant Secretaryfrom 1999 to 2000.  From 1997 until1999, he held the position of Controller for Midwest Agri-CommoditiesCompany.  He was the Corporate Accountantfor ProGold Limited Liability Company from 1994 to 1997.

 

**David A. Berg.**  Mr. Berg was named Vice President–Agriculture in December2000.  He was VicePresident-Administration during the period from October 1998 to December 2000.  During the period from 1994 to 1998,Mr. Berg served as the Company’s Vice President-Business Development, VicePresident-Strategic Planning, Director-Market Information, Manager of Marketingand Analysis and Manager-Economic Research.

 

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**Joseph J. Talley.**  Mr. Talley was named Vice President-Finance in 1998.  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 July 1994,Mr. Talley was a partner with the accounting firm of Eide Helmeke &Co.

 

**David A. Walden.**  Mr. Walden was elected Vice President-Operations inJanuary 1998.  He served asProduction Manager from 1995 until 1998. He joined the Company in 1979 as a Resident Engineer at the Crookstonfacility and has held positions of Engineering and Maintenance Superintendent,Production Superintendent, Assistant Operations Manager and MaintenanceManager.  Mr. Walden also serves as thechairman of the Board of Managers of Crystech LLC.

 

**Daniel C. Mott.**  Mr. Mott became the Company’s Secretary during 1999.  Previously, he had served as AssistantSecretary since 1995.  Mr. Mott alsoserves as the Company’s General Counsel. He is a Partner in the law firm of Oppenheimer Wolff & DonnellyLLP.  Mr. Mott is not an employee of theCompany.

 

**Samuel S. M. Wai.**  Mr. Wai was named the Company’s Treasurer and AssistantSecretary in 1999.  He served as theCompany’s Corporate Controller from 1996 until 1999 and was the Company’s Treasurerfrom 1985 to 1996.  He held variousfinancial positions with the Company from 1979 to 1985.  Mr. Wai also serves on the Board ofManagers of Crystech LLC and as Treasurer of the American Crystal SugarPolitical Action Committee.  Mr. Waialso serves on the Board of Directors of the Institute of Cooperative FinancialOfficers.

 

**Brian Ingulsrud.**  Mr. Ingulsrud was named as the Corporate Controller, AssistantSecretary and Assistant Treasurer in 2000.  Mr. Ingulsrud served as Director of Agriculture Strategy and Developmentfrom 1999 to 2000, Financial Planning Manager from 1997 until 1998, and FactoryOffices Manager from 1995 until 1997.

 

**Mark L. Lembke.**  Mr. Lembke was named Assistant Secretary and AssistantTreasurer in 1996.  He currently servesas Finance Administration Manager. Mr. Lembke served as the Company’s Corporate Accounting Managerfrom 1995 to 1999.  From 1987 through1995, Mr. Lembke served as Factory Accounting 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. Peterson has held various financial positions with the Companysince 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.

 

**Item 11.****                                 EXECUTIVECOMPENSATION**

 

The followingtable summarizes the amount of compensation paid for services rendered to theCompany during the fiscal year ended August 31, 2002 and the two priorfiscal years to those persons serving as the Company’s Chief Executive Officerand to the four other most highly compensated current executive officers of theCompany whose cash compensation exceeded $100,000 per annum.

 

28

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** **

**SUMMARY COMPENSATION TABLE**

 
|                            |   | **Annual Compensation** |   | **Long-Term Compensation  Payouts** |    |
|---------------------------------|--------|-------------------------|--------|-------------------------------------|---------|
|                            |   | **Year**                |   | **Salary  ($)**                     |    | **Incentive  Compensation****($)** |   | **Other Annual  Compensation  ($)(1)** |   | **1995 Plan  Payouts  ($)(2)** |   | **1999 Plan  Payouts  ($)(2)** |   |
|                            |   |                    |   |                                |    |   |   |   |   |   |   |   |   |
| James J. Horvath                |   | 2002                    |   | $                                   | 433,860 |   | $ | 342,155 |   | $ | 40,056 |   | N/A |   | $ | 4,879 |   |
| Chief Executive Officer         |   | 2001                    |   | $                                   | 410,762 |   | $ | 279,335 |   | $ | 38,181 |   | $ | 6,450 |   | — |   |
|                            |   | 2000                    |   | $                                   | 405,865 |   | $ | 257,645 |   | $ | 26,954 |   | $ | 4,437 |   | — |   |
|                            |   |                    |   |                                |    |   |   |   |   |   |   |   |   |
| Thomas S. Astrup                |   | 2002                    |   | $                                   | 157,085 |   | $ | 77,077 |   | $ | 8,458 |   | N/A |   | — |   |
| Vice President -Administration* |   | 2001                    |   | $                                   | 119,060 |   | $ | 88,566 |   | $ | 6,019 |   | N/A |   | — |   |
|                            |   | 2000                    |   | $                                   | 93,556  |   | $ | 19,749 |   | $ | 9,745 |   | N/A |   | — |   |
|                            |   |                    |   |                                |    |   |   |   |   |   |   |   |   |
| David A. Berg                   |   | 2002                    |   | $                                   | 196,923 |   | $ | 112,490 |   | $ | 19,824 |   | N/A |   | $ | 1,038 |   |
| Vice President-Agriculture      |   | 2001                    |   | $                                   | 179,077 |   | $ | 100,800 |   | $ | 19,099 |   | $ | 2,409 |   | — |   |
|                            |   | 2000                    |   | $                                   | 171,077 |   | $ | 119,016 |   | $ | 14,162 |   | $ | 2,393 |   | — |   |
|                            |   |                    |   |                                |    |   |   |   |   |   |   |   |   |
| Joseph J. Talley                |   | 2002                    |   | $                                   | 202,032 |   | $ | 127,225 |   | $ | 18,632 |   | N/A |   | $ | 1,038 |   |
| Vice President -Finance         |   | 2001                    |   | $                                   | 181,615 |   | $ | 91,592 |   | $ | 17,953 |   | N/A |   | — |   |
|                            |   | 2000                    |   | $                                   | 171,077 |   | $ | 98,136 |   | $ | 13,648 |   | N/A |   | — |   |
|                            |   |                    |   |                                |    |   |   |   |   |   |   |   |   |
| David A. Walden                 |   | 2002                    |   | $                                   | 198,000 |   | $ | 103,464 |   | $ | 19,072 |   | N/A |   | $ | 1,038 |   |
| Vice President -Operations      |   | 2001                    |   | $                                   | 185,000 |   | $ | 84,431 |   | $ | 18,398 |   | N/A |   | — |   |
|                            |   | 2000                    |   | $                                   | 171,077 |   | $ | 89,784 |   | $ | 14,025 |   | N/A |   | — |   |
|                                 |        |                         |        |                                     |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

*       Effective December 11, 2000

 

(1)           Includes the cost of additional lifeinsurance coverage, car allowance, costs of tax return preparation, Company401(k) matching contributions, Company matching SERP contributions, flexiblespending taxable cash, and flexible spending dollars into 401(k).

 

(2)           Represents the “profit per acrepayments” made to the executive under the Company’s 1995 and 1999 LTIP plans(described below).  The profit per acrepayments are determined by subtracting from the Company’s beet payment per acrethe average cost of production per acre incurred by the Company’s members andmultiplying the result by the number of contract rights held by the executive.

 

**Employment Agreement with CEO**

 

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

 

If  Mr. Horvath’s employment terminateswith the Company without cause or he incurs a termination due to disabilityafter age 60, Mr. Horvath is entitled to receive reimbursement for thecost of medical and dental coverage for himself and his spouse from the date oftermination through their

 

29

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respective deaths; lifeinsurance coverage equal to his base salary on the date of termination until heattains age 65, from age 65 to 70 equal to 50 percent of his base salary on thedate of termination, and after age 70 equal to 25 percent of his base salary onthe date of termination; and supplemental pension benefits equal to thedifference between the cumulative monthly amount of the retirement benefitMr. Horvath would have received under Retirement Plan A and theSupplemental 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 attained 30years of service with no reduction in benefits on account of an election by Mr.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 terminateswith the Company without cause after age 60 and Mr. Horvath subsequentlydies, or if Mr. Horvath dies prior to terminating his employment with theCompany, Mr. Horvath’s spouse is entitled to receive monthly payments forthe remainder of her life equal to the difference between the cumulativemonthly amount of the retirement benefit Mr. Horvath would have receivedunder Retirement Plan A and the Supplemental Executive Retirement Plan (SERP)computed as though Mr. Horvath continued his employment to age 65 assumingcompensation equal to that in effect as of the date of termination ofemployment and had attained 30 years of service, with no reduction in benefitson account of an election by Mr. Horvath for any death benefit to be paid tohis spouse under the Retirement Plan A and the cumulative monthly amount of theretirement benefits actually payable to his spouse under Retirement Plan A andthe Supplemental Executive Retirement Plan (SERP).

 

**Incentive Plans**

 

**Annual Incentive Plan**

 

The Company’ssalaried employees are entitled to participate in an annual incentive programthat provides for cash awards based partially on the performance of the Companyand partially on achievement of certain performance objectives.  The performance objectives of the CEO aredetermined by the Board of Directors. The performance objectives of other executives are determined by theCEO.  The amount of the incentive bonusis dependent on the employee’s responsibilities, the performance of the Companyand the results of the employee’s evaluation for the fiscal year.

 

**1995 Plan**

 

During 2001, the1995 Long-Term Incentive Plan was terminated and all contract rights cancelled. The participants in the 1995 Plan werecompensated for the value of vested benefits under the 1995 Plan.  The Company adopted the 1995 Plan, whichprovided deferred compensation to certain key executives of the Company, onSeptember 1, 1995.  This 1995 Plancreated financial incentives to reward executives for long-term commitment tothe Company and for successfully implementing the Company’s long-term growthstrategies.  Such incentives were basedupon contract rights that were available to the executive under the terms ofthe 1995 Plan, the value of which was related to the value of the PreferredStock of the Company.  The 1995 Planallowed participants to purchase a limited number of contract rights at the endof each three-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 

 

30

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grower.  The executive received the proceeds of thesale, less appropriate taxes.  Thelong-term cost of the stock was not to the Company, but to the grower whoeventually purchased the stock from the executive.  The 1995 Plan also provided for annual payments of “profit peracre payments” to executives holding contract rights.  The profit per acre payments were determined by subtracting fromthe Company’s beet payment per acre the average cost of production per acreincurred by the Company’s members and multiplying the result by the number ofcontract rights held by the executive. The contract rights acquired under this plan terminate five years afterthe executive’s employment with the Company is terminated, if not exercised bythe executive.  This 1995 Plan wasreplaced by the 1999 Long-Term Incentive Plan discussed below.

 

**1999 Plan**

 

In June of 1999,the Board of Directors adopted the 1999 Long-Term Incentive Plan, which becameeffective in fiscal year 2000.  Underthis plan, awards are based upon progress towards achieving certain long-termstrategic objectives established by the Board of Directors.  Incentive awards under the plan range from 0to 40 percent of base compensation for the Vice Presidents and from 0 to 80percent of base compensation for the CEO. The actual amount of the award available to a given individual is basedupon the collective performance level of participants as determined by theBoard of Directors.  Awards paid underthe plan may be paid in the form of cash paid to the employee’s SupplementalExecutive Retirement Plan, as discussed below, or in the form of contractrights, in each case as determined by the Board of Directors.  All awards will be subject to a three yearvesting schedule.  The Board ofDirectors retains the discretion to determine the amount of any cash awardsand/or contract rights to be made available to plan participants with respectto a given fiscal year.

 

In fiscal 2002,307.1 contract rights were granted at a stated value of $1,500 per contractright or a total stated value of $460,648. In fiscal 2002, the Board of Directors increased the value of the 802.68contract rights issued prior to fiscal 2002 from $1,000 to $1,500 per contractright, for a total increase in the stated value of $401,341. As of August 31,2002, there were 1,109.78 contract rights, at a total stated value of $1.7million, issued and outstanding, 388.15 of which were vested.  The table below lists the executives namedin the compensation table who have been granted and hold contract rights.

 

**1999 Plan**

 

**Long-Term Incentive Plan Awards**

 
| **Executive Officers** |   | **Fiscal  2002  Contract Rights** |   | **Total  Contract Rights Held** |    | **Fiscal  2002 Representative  Payout(1)** |   |
|------------------------|--------|-----------------------------------|--------|---------------------------------|---------|-------------------------------------------------|--------|
| **Granted**            |   | **Stated  Value**                 |   | **Granted**                     |    | **Vested**                                      |   | **Stated  Value** |
|                   |   |                              |   |                            |    |                                            |   |   |   |   |   |   |   |
| James J. Horvath       |   | 162.82                            |   | $                               | 244,240 |                                            | 630.32 |   | 229.44 |   | $ | 945,477 |   | $ | 4,879 |   |
| Thomas S. Astrup       |   | 30.67                             |   | $                               | 46,008  |                                            | 59.92  |   | 9.75 |   | $ | 89,883 |   | — |   |
| David A. Berg          |   | 37.87                             |   | $                               | 56,800  |                                            | 138.85 |   | 49.32 |   | $ | 208,270 |   | $ | 1,038 |   |
| Joseph J. Talley       |   | 37.87                             |   | $                               | 56,800  |                                            | 139.75 |   | 49.62 |   | $ | 209,620 |   | $ | 1,038 |   |
| David A. Walden        |   | 37.87                             |   | $                               | 56,800  |                                            | 140.94 |   | 50.02 |   | $ | 211,420 |   | $ | 1,038 |   |

 

31

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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 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 hasestablished noncontributory, defined benefit retirement plans which areavailable to all eligible employees of the Company.  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 executiveemployees of the Company are eligible to participate in a “SupplementalExecutive Retirement Plan.”  Subject tothe discretion of the Board of Directors, the plan provides for the Company tocredit to the account of each executive eligible to participate in theSupplemental Plan amounts equal to (i) the difference between amountsactually contributed to the Company’s 401(k) plan on behalf of the executiveand the amounts which could have been contributed if certain provisions of theInternal Revenue Code did not prohibit the contribution of such amounts and(ii) the difference between the benefits actually payable to the executiveunder the provisions of Retirement Plan “A” and the amounts which would bepayable under Retirement Plan “A” if certain provisions of the Internal RevenueCode did not prohibit the payment of such benefits.  In addition, the executive may elect to defer a portion of his orher compensation, ranging from 2 percent to 20 percent, by regular payrolldeductions under the Supplemental Plan, and may also defer 100 percent of allincentive compensation and profits-per-acre payments.  The Supplemental Plan is an “unfunded” plan, with all amounts tobe paid under the Supplemental Plan to be paid from the general assets of theCompany when due and also to be subject to the claims of the Company’screditors.

 

The table belowshows the approximate annual pension benefits payable to executive officers atnormal retirement under Retirement Plan A, as well as a non-qualifiedsupplemental benefit plan.  Thecompensation covered by the pension program is based on an employee’s annualsalary and incentive compensation. Amounts payable are computed on the basis of a straight life annuity andare not reduced for social security benefits or other offsets.

 

32

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**American Crystal Sugar Company**

**2002 Calculation**

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

 
|             |      |   | **Years of Service** |   |
|------------------|-----------|--------|----------------------|--------|
| **Remuneration** |      | **15** |                 | **20** |   | **25** |   | **30** |   | **35** |   |
|             |      |   |                 |   |   |   |   |   |   |   |   |   |
| $                | 125,000   |   |                 | $      | 23,883 |   | $ | 31,844 |   | $ | 39,806 |   | $ | 47,767 |   | $ | 47,767 |   |
| $                | 150,000   |   |                 | $      | 29,133 |   | $ | 38,844 |   | $ | 48,556 |   | $ | 58,267 |   | $ | 58,267 |   |
| $                | 175,000   |   |                 | $      | 34,383 |   | $ | 45,844 |   | $ | 57,306 |   | $ | 68,767 |   | $ | 68,767 |   |
| $                | 200,000   |   |                 | $      | 39,633 |   | $ | 52,844 |   | $ | 66,056 |   | $ | 79,267 |   | $ | 79,267 |   |
| $                | 225,000   |   |                 | $      | 44,883 |   | $ | 59,844 |   | $ | 74,806 |   | $ | 89,767 |   | $ | 89,767 |   |
| $                | 250,000   |   |                 | $      | 50,133 |   | $ | 66,844 |   | $ | 83,556 |   | $ | 100,267 |   | $ | 100,267 |   |
| $                | 300,000   |   |                 | $      | 60,633 |   | $ | 80,844 |   | $ | 101,056 |   | $ | 121,267 |   | $ | 121,267 |   |
| $                | 400,000   |   |                 | $      | 81,633 |   | $ | 108,844 |   | $ | 136,056 |   | $ | 163,267 |   | $ | 163,267 |   |
| $                | 450,000   |   |                 | $      | 92,133 |   | $ | 122,844 |   | $ | 153,556 |   | $ | 184,267 |   | $ | 184,267 |   |
| $                | 500,000   |   |                 | $      | 102,633 |   | $ | 136,844 |   | $ | 171,056 |   | $ | 205,267 |   | $ | 205,267 |   |
| $                | 600,000   |   |                 | $      | 123,633 |   | $ | 164,844 |   | $ | 206,056 |   | $ | 247,267 |   | $ | 247,267 |   |
| $                | 700,000   |   |                 | $      | 144,633 |   | $ | 192,844 |   | $ | 241,056 |   | $ | 289,267 |   | $ | 289,267 |   |
| $                | 800,000   |   |                 | $      | 165,633 |   | $ | 220,844 |   | $ | 276,056 |   | $ | 331,267 |   | $ | 331,267 |   |
| $                | 900,000   |   |                 | $      | 186,633 |   | $ | 248,844 |   | $ | 311,056 |   | $ | 373,267 |   | $ | 373,267 |   |
| $                | 1,000,000 |   |                 | $      | 207,633 |   | $ | 276,844 |   | $ | 346,056 |   | $ | 415,267 |   | $ | 415,267 |   |

 

The five executiveofficers named in the Summary Compensation Table who are currently employees ofthe Company, have years of service under the plan as follows: Mr. Horvathhas served for 17 years; Mr. Astrup has served for 8 years; Mr. Berg hasserved for 15 years; Mr. Talley has served for 8 years; and Mr. Waldenhas served for 23 years.

 

The Companymaintains Section 401(k) plans that permit employees to elect to set aside, ona pre-tax and after-tax basis, a portion of their gross compensation in trustto pay future retirement benefits.  TheCompany matches 100 percent of the nonunion and union year-round participant’spre-tax contribution up to 4 percent and 2 percent respectively of their grossearnings.  The total annual pre-incometax addition to any employee’s account in any calendar year may not exceed thelesser of (i) $40,000 or (ii) 100 percent of annual compensation lessthe amount of the employer match and the employee deferral.  For calendar 2002, the employee pre-incometax contribution is limited to $11,000. Benefits under the 401(k) plans can begin to be paid to the employeeupon the close of the plan year in which one of the following events hasoccurred: the date the employee attains age 591⁄2, the date the employeeterminates his service with the employer and the date specified in a writtenelection made by the employee to receive benefits no later than April 1 ofthe year following the calendar year in which the employee retires, dies,becomes disabled, reaches age 701⁄2 or is terminated.

 

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

 

Under state lawand the Company’s Bylaws, each member of the cooperative is entitled to onevote, regardless of the number of shares the member holds.  The Common Stock of the Company is votingstock and each member of the Company holds one share of Common Stock.  The Preferred Stock of the Company isnon-voting stock.  The Company’s stockcan only be held by individuals who are sugarbeet growers.  None of the officers or executives of theCompany hold stock of the Company.  As

 

33

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members of thecooperative, each director owns one share of Common Stock and is entitled toone vote.  As a group, the directorsgenerally own approximately 2 to 3 percent of the outstanding Preferred Stock.each year.

 

**Item 13.****                                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Each of theCompany’s directors is also a sugarbeet farmer and a shareholder member orrepresentative of a shareholder member of the Company.  By virtue of their status as such members ofthe Company, each director or the member he represents sells sugarbeets to theCompany and receives payments for those sugarbeets.  Such payments for sugarbeets often exceed $60,000.  Such payments, however, are received by thedirectors or the entities they represent on exactly the same basis as paymentsreceived by other members of the Company for the delivery of theirsugarbeets.  Except for the sugarbeetsales described in the preceding sentences, none of the directors or executiveofficers of the Company have engaged in any other transactions with the Companyinvolving amounts in excess of $60,000.

 

**Item 14.****                                 CONTROLSAND PROCEDURES**

 

The Company’schief executive officer and chief financial officer have reviewed and evaluatedthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Rules 240.13a-14(c) and 15d-14(c) promulgated under the SecuritiesExchange Act of 1934) as of a date within ninety days before the filing date ofthis annual report.  Based on thatreview and evaluation, which included inquiries made to certain other employeesof the Company, the chief executive officer and chief financial officer haveconcluded that the Company’s current disclosure controls and procedures, asdesigned and implemented, are reasonably adequate to ensure that they areprovided with material information relating to the Company required to bedisclosed in the reports the Company files or submits under the SecuritiesExchange Act of 1934.

 

There have notbeen any significant changes in the Company’s internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation.  There were nosignificant deficiencies or material weaknesses identified, and therefore no correctiveactions were taken.

 

34

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# **PART IV**

 

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

 

(a)       Documents filed as part ofthis report

 

1.        Financial Statements

Report ofIndependent Auditors

Balance Sheets asof August 31, 2002 and 2001

Statements ofOperations for the Years Ended August 31, 2002, 2001 and 2000

Statements ofChanges in Members’ Investments for the Years Ended August 31, 2002, 2001and 2000

Statements of CashFlows for the Years Ended August 31, 2002, 2001 and 2000

Notes to FinancialStatements

 

2.        Financial StatementSchedules

None

 

3.             Theexhibits to this Annual Report on Form 10-K are listed in the Exhibit Index onpages E-1 to E-4 of this report

 

(b)       Reports on Form 8-K

 

The Company filedthe following current report on Form 8-K during the quarter ending on August31, 2002.

 

(i)       Currentreport on Form 8-K, dated July 8, 2002, under item 9 reporting projected grossbeet payment increase.

 

(c)       Exhibits

 

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

 

35

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15 of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized, on November 27, 2002.

 

 
|   | AMERICAN CRYSTAL SUGAR COMPANY |
|--------|--------------------------------|
|   | By:                            | /s/ JAMES J. HORVATH |   |
|   |                           | *Chief Executive Officer* |

 

Dated: November 27,2002

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned by the following persons on behalf of the registrant in the capacitiesand on the dates indicated.

 
| **Signature**               |   | **Title**                       |   | **Date**                |
|-----------------------------|--------|---------------------------------|--------|-------------------------|
|                        |   |                            |   |                    |
| /s/  JAMES J. HORVATH       |   | Chief  Executive Officer        |   | November 27,  2002 |
|                        |   | (Principal  Executive Officer)  |   |                    |
| /s/  JOSEPH J. TALLEY       |   | Vice  President-Finance         |   | November 27,  2002 |
|                        |   | (Principal  Financial Officer)  |   |                    |
| /s/  BRIAN INGULSRUD        |   | Corporate  Controller           |   | November 27,  2002 |
|                        |   | (Principal  Accounting Officer) |   |                    |
| /s/  MICHAEL A. ASTRUP      |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  JERRY D. BITKER        |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  RICHARD BORGEN         |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  PAUL J. DRISCOLL       |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  CURTIS HAUGEN          |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  LONN M. KIEL           |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  DAVID J. KRAGNES       |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  FRANCIS L. KRITZBERGER |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  PATRICK D. MAHAR       |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  JEFF MCINNES           |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  RONALD E. REITMEIER    |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  JIM A. ROSS            |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  G. TERRY STADSTAD      |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  ROBERT VIVATSON        |   | Director                        |   | November 27,  2002 |
|                        |   |                            |   |                    |
| /s/  NEIL WIDNER            |   | Director                        |   | November 27,  2002 |

 

36

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**CERTIFICATIONS**

 

I, James J. Horvath,President and Chief Executive Officer of American Crystal Sugar Company,certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-K of American Crystal Sugar Company(the registrant);

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (theEvaluation Date); and

 

c)                                      presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors:

 

a)                                      allsignificant deficiencies in the design or operation of the internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

November 27, 2002

 

37

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I, Joseph J. Talley, Vice President-Finance and Chief Financial Officerof American Crystal Sugar Company, certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-K of American Crystal Sugar Company(the registrant);

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (theEvaluation Date); and

 

c)                                      presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors:

 

a)                                      allsignificant deficiencies in the design or operation of the internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

November 27, 2002

 

38

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**APPENDIX A**

 

**INDEX TO FINANCIAL STATEMENTS**

 
| **AMERICAN CRYSTAL SUGAR COMPANY**                                                                           |
|--------------------------------------------------------------------------------------------------------------|
| FINANCIAL STATEMENTS:                                                                                        |
| Report of Independent  Auditors                                                                              |
| Statements  of Operations for the Years Ended August 31, 2002, 2001 and 2000                            |
| Balance Sheets as of August 31,  2002 and 2001                                                          |
| Statements  of Changes in Members’ Investments for the Years Ended August 31, 2002,  2001 and 2000 |
| Statements  of Cash Flows for the Years Ended August 31, 2002, 2001 and 2000                            |
| Notes to the  Financial Statements                                                                           |

 

A-1

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**REPORT OFINDEPENDENT AUDITORS**

 

To the Members ofAmerican Crystal Sugar Company

Moorhead, Minnesota

 

We have auditedthe accompanying balance sheets of the American Crystal Sugar Company (aMinnesota cooperative corporation) as of August 31, 2002 and 2001, and therelated statements of operations, changes in members’ investments and cashflows for the years ended August 31, 2002, 2001 and 2000.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted ouraudits in accordance with auditing standards generally accepted in the UnitedStates of America.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the financial position of the American Crystal Sugar Company as ofAugust 31, 2002 and 2001, and the results of its operations and its cashflows for the years ended August 31, 2002, 2001 and 2000, in conformitywith accounting principles generally accepted in the United States of America.

 
| /s/ EIDE BAILLY LLP |   |
|---------------------|--------|

 

October 3, 2002,except for Note 15 for which the date is October 10, 2002Bloomington, Minnesota

 

A-2

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** **

**AMERICAN CRYSTAL SUGAR COMPANY**

**STATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED AUGUST 31**

**(InThousands)**

** **
|                                                                        |   | **2002**    |        | **2001**   |   | **2000** |       |
|-----------------------------------------------------------------------------|--------|-------------|-------------|------------|--------|----------|------------|
| **Net Revenue**                                                             |   | **$**       | **775,288** | ** ** | $      | 866,362  |       | $ | 731,432 |   |
|                                                                        |   |        |        |       |   |     |       |
| **Cost of Product Sold**                                                    |   | **206,789** | ** **  | 279,978    |   | 190,365  |       |
|                                                                        |   |        |        |       |   |     |       |
| **Gross Proceeds**                                                          |   | **568,499** | ** **  | 586,384    |   | 541,067  |       |
|                                                                        |   |        | ** **  |       |   |     |       |
| **Selling, General and Administrative Expenses**                            |   | **159,376** | ** **  | 181,607    |   | 163,803  |       |
|                                                                        |   |        | ** **  |       |   |     |       |
| **Operating Proceeds**                                                      |   | **409,123** | ** **  | 404,777    |   | 377,264  |       |
|                                                                        |   |        | ** **  |       |   |     |       |
| **Other Income (Expense):**                                                 |   |        | ** **  |       |   |     |       |
| Interest Income                                                             |   | **2,009**   | ** **  | 3,232      |   | 3,202    |       |
| Interest Expense, Net                                                       |   | **(14,578** | **)**       | (19,973    | )      | (22,645  | )          |
| Other, Net                                                                  |   | **2,098**   | ** **  | 1,112      |   | 615      |       |
|                                                                        |   |        | ** **  |       |   |     |       |
| **Total Other (Expense)**                                                   |   | **(10,471** | **)**       | (15,629    | )      | (18,828  | )          |
|                                                                        |   |        |        |       |   |     |       |
| **Proceeds Before Income Taxes**                                            |   | **398,652** | ** **  | 389,148    |   | 358,436  |       |
|                                                                        |   |        |        |       |   |     |       |
| **Income Tax Expense**                                                      |   | **(64**     | **)**       | (109       | )      | (63      | )          |
|                                                                        |   |        |        |       |   |     |       |
| **Net Proceeds Resulting from Member and Non-Member Business**              |   | **$**       | **398,588** |       | $      | 389,039  | ** ** | $ | 358,373 |   |
|                                                                        |   |        | ** **  |       |   |     |       |
| **Distributions of Net Proceeds:**                                          |   |        | ** **  |       |   |     |       |
| Credited (Charged) to Members’  Investments:                           |   |        | ** **  |       |   |     |       |
| Non-Member Business (Loss)                                                  |   | **$**       | **(733**    | **)**      | $      | (1,884   | )          | $ | (1,879 | ) |
| Equity Retention Declared to  Members                                       |   | **1,177**   | ** **  | 1,560      |   | —   |       |
| Unit Retains Declared to  Members                                           |   | **24,154**  | ** **  | 19,239     |   | 19,299   |       |
| Net Credit to Members’  Investments                                    |   | **24,598**  | ** **  | 18,915     |   | 17,420   |       |
| 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           |   | **351,670** | ** **  | 343,617    |   | 340,953  |       |
| **Total**                                                                   |   | **$**       | **398,588** | ** ** | $      | 389,039  |       | $ | 358,373 |   |

 

The Accompanying Notesare an Integral Part of These Financial Statements.

 

A-3

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**AMERICAN CRYSTAL SUGAR COMPANY**

**BALANCE SHEETS**

**AUGUST 31**

**(InThousands)**

**Assets**

 
|                                              |   | **2002**     |        | **2001**   |   |
|---------------------------------------------------|--------|--------------|-------------|------------|--------|
| **Current Assets:**                               |   |         | ** **  |       |   |
| Cash and Cash Equivalents                         |   | **$**        | **22**      | ** ** | $      | 5,902 |   |
| Receivables:                                      |   |         | ** **  |       |   |
| Trade                                             |   | **60,812**   | ** **  | 67,332     |   |
| Members                                           |   | **3,987**    | ** **  | 3,300      |   |
| Other                                             |   | **1,465**    | ** **  | 1,553      |   |
| Advances to Related Parties                       |   | **11,336**   | ** **  | 14,924     |   |
| Inventories                                       |   | **115,656**  | ** **  | 104,269    |   |
| Prepaid Expenses                                  |   | **5,732**    | ** **  | 2,758      |   |
|                                              |   |         |        |       |   |
| **Total Current Assets**                          |   | **199,010**  | ** **  | 200,038    |   |
|                                              |   |         |        |       |   |
| **Property and Equipment:**                       |   |         | ** **  |       |   |
| Land                                              |   | **33,806**   | ** **  | 32,511     |   |
| Buildings                                         |   | **86,647**   | ** **  | 84,949     |   |
| Equipment                                         |   | **759,972**  | ** **  | 754,482    |   |
| Construction in Progress                          |   | **5,154**    | ** **  | 1,453      |   |
| Less Accumulated Depreciation                     |   | **(546,960** | **)**       | (510,015   | )      |
|                                              |   |         |        |       |   |
| **Net Property and Equipment**                    |   | **338,619**  | ** **  | 363,380    |   |
|                                              |   |         |        |       |   |
| **Other Assets:**                                 |   |         | ** **  |       |   |
| Investments in CoBank, ACB                        |   | **15,430**   | ** **  | 15,676     |   |
| Investments in Marketing  Cooperatives            |   | **2,064**    | ** **  | 1,638      |   |
| Investments in ProGold Limited  Liability Company |   | **41,007**   | ** **  | 38,533     |   |
| Investments in Crystech, LLC                      |   | **1,403**    | ** **  | 1,545      |   |
| Notes Receivable - Crystech,  LLC                 |   | **13,905**   | ** **  | 13,905     |   |
| Long-Term Prepaid Pension  Expense                |   | **6,548**    | ** **  | 3,231      |   |
| Other Assets                                      |   | **4,707**    | ** **  | 3,499      |   |
|                                              |   |         |        |       |   |
| **Total Other Assets**                            |   | **85,064**   | ** **  | 78,027     |   |
|                                              |   |         |        |       |   |
| **Total Assets**                                  |   | **$**        | **622,693** | ** ** | $      | 641,445 |   |

 

The Accompanying Notesare an Integral Part of These Financial Statements.

 

A-4

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**AMERICAN CRYSTAL SUGAR COMPANY**

**BALANCE SHEETS**

**AUGUST 31**

**(InThousands)**

**Liabilitiesand Members’ Investments**

 
|                                                   |   | **2002**    |        | **2001**   |   |
|--------------------------------------------------------|--------|-------------|-------------|------------|--------|
| **Current Liabilities:**                               |   |        | ** **  |       |   |
| Short-Term Debt                                        |   | **$**       | **7,000**   | ** ** | $      | 13,963 |   |
| Current Maturities of Long-Term  Debt                  |   | **18,045**  | ** **  | 19,070     |   |
| Accounts Payable                                       |   | **18,163**  | ** **  | 19,775     |   |
| Advances Due to Related Parties                        |   | **3,092**   | ** **  | 3,568      |   |
| Other Current Liabilities                              |   | **15,182**  | ** **  | 15,555     |   |
| Amounts Due Members                                    |   | **79,246**  | ** **  | 82,766     |   |
|                                                   |   |        |        |       |   |
| **Total Current Liabilities**                          |   | **140,728** | ** **  | 154,697    |   |
|                                                   |   |        |        |       |   |
| **Long-Term Debt, Net of Current Maturities**          |   | **182,371** | ** **  | 201,416    |   |
|                                                   |   |        |        |       |   |
| **Other Liabilities**                                  |   | **30,927**  | ** **  | 29,672     |   |
|                                                   |   |        |        |       |   |
| **Total Liabilities**                                  |   | **354,026** | ** **  | 385,785    |   |
|                                                   |   |        |        |       |   |
| **Commitments and Contingencies (See Note 14 and 15)** |   |        | ** **  |       |   |
|                                                   |   |        |        |       |   |
| **Members’ Investments:**                         |   |        | ** **  |       |   |
| Preferred Stock                                        |   | **38,275**  | ** **  | 38,275     |   |
| Common Stock                                           |   | **30**      | ** **  | 31         |   |
| Additional Paid-In Capital                             |   | **143,069** | ** **  | 137,241    |   |
| Unit Retains                                           |   | **124,101** | ** **  | 116,480    |   |
| Equity Retention                                       |   | **2,733**   | ** **  | 1,560      |   |
| Accumulated Other Comprehensive  Income (Loss)         |   | **(1,317**  | **)**       | (436       | )      |
| Retained Earnings (Accumulated  Deficit)               |   | **(38,224** | **)**       | (37,491    | )      |
|                                                   |   |        |        |       |   |
| **Total Members’ Investments**                    |   | **268,667** | ** **  | 255,660    |   |
|                                                   |   |        |        |       |   |
| **Total Liabilities and Members’ Investments**    |   | **$**       | **622,693** | ** ** | $      | 641,445 |   |

 

The Accompanying Notesare an Integral Part of These Financial Statements.

 

A-5

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**AMERICAN CRYSTAL SUGAR COMPANY**

**STATEMENTS OF CHANGES IN MEMBERS’INVESTMENTS**

**FORYEARS 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, 1999**                   |   | **$**                | **38,275** | ** **        | **$**      | **30**                           | ** ** | **$**             | **123,948** | ** **            | **$**      | **116,849**                                         | ** ** | **$**                                          | **—** | ** **  | **$**      | **(4,088**                              | **)**      | **$** | **(33,728** | **)** | **$** | **241,286** | ** ** |   | ** ** |
| Non-Member  Business (Loss)                    |   | —               |       | —            |       | —                           |       | —            |        | —                |       | —                                              |       | (1,879                                         | )          | (1,879      | )          | $                                       | (1,879     | ) |
| Pension  Liability Adjustment                  |   | —               |       | —            |       | —                           |       | —            |        | —                |       | 3,433                                               |       | —                                         |       | 3,433       |       | 3,433                                   |       |
| Unit  Retains Withheld fromMembers             |   | —               |       | —            |       | —                           |       | 19,299            |        | —                |       | —                                              |       | —                                         |       | 19,299      |       | —                                  |       |
| Payments  to Estates andDisabled  Individuals  |   | —               |       | —            |       | —                           |       | (401              | )           | —                |       | —                                              |       | —                                         |       | (401        | )          | —                                  |       |
| Payments  of 1992 Crop UnitRetains to  Members |   | —               |       | —            |       | —                           |       | (19,531           | )           | —                |       | —                                              |       | —                                         |       | (19,531     | )          | —                                  |       |
| Stock  Issued, Net                             |   | —               |       | —            |       | 7,123                            |       | —            |        | —                |       | —                                              |       | —                                         |       | 7,123       |       | —                                  |       |
|                                           |   |                 |       |              |       |                             |       |              |        |                  |       |                                                |       |                                           |       |        |       |                                    |       |
| **Balance, August 31, 2000**                   |   | **38,275**           | ** ** | **30**            | ** ** | **131,071**                      | ** ** | **116,216**       | ** **  | **—**            | ** ** | **(655**                                            | **)**      | **(35,607**                                    | **)**      | **249,330** | ** ** | **$**                                   | **1,554**  | ** ** |
| Non-Member  Business (Loss)                    |   | —               |       | —            |       | —                           |       | —            |        | —                |       | —                                              |       | (1,884                                         | )          | (1,884      | )          | $                                       | (1,884     | ) |
| Pension  Liability Adjustment                  |   | —               |       | —            |       | —                           |       | —            |        | —                |       | 219                                                 |       | —                                         |       | 219         |       | 219                                     |       |
| Unit  Retains Withheld fromMembers             |   | —               |       | —            |       | —                           |       | 19,239            |        | —                |       | —                                              |       | —                                         |       | 19,239      |       | —                                  |       |
| Equity  Retention                              |   | —               |       | —            |       | —                           |       | —            |        | 1,560                 |       | —                                              |       | —                                         |       | 1,560       |       | —                                  |       |
| Payments  to Estates andDisabled  Individuals  |   | —               |       | —            |       | —                           |       | (217              | )           | —                |       | —                                              |       | —                                         |       | (217        | )          | —                                  |       |
| Payments  of 1993 Crop UnitRetains 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 fromMembers             |   | **—**           | ** ** | **—**        | ** ** | **—**                       | ** ** | **24,154**        | ** **  | **—**            | ** ** | **—**                                          | ** ** | **—**                                     | ** ** | **24,154**  | ** ** | **—**                              | ** ** |
| Equity  Retention                              |   | **—**           | ** ** | **—**        | ** ** | **—**                       | ** ** | **—**        | ** **  | **1,177**             | ** ** | **—**                                          | ** ** | **—**                                     | ** ** | **1,177**   | ** ** | **—**                              | ** ** |
| Payments  to Estates andDisabled  Individuals  |   | **—**           | ** ** | **—**        | ** ** | **—**                       | ** ** | **(290**          | **)**       | **(4**                | **)**      | **—**                                          | ** ** | **—**                                     | ** ** | **(294**    | **)**      | **—**                              | ** ** |
| Payments  of 1994 Crop UnitRetains 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** | **)** |

 

The Accompanying Notesare an Integral Part of These Financial Statements.

 

A-6

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**AMERICAN CRYSTAL SUGAR COMPANY**

**STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED AUGUST 31**

**(InThousands)**

 
|                                                                       |   | **2002**     |        | **2001**   |   | **2000** |   |
|----------------------------------------------------------------------------|--------|--------------|-------------|------------|--------|----------|--------|
| **Cash Provided By (Used In) Operating Activities:**                       |   |         | ** **  |       |   |     |   |
| Net Proceeds Resulting from  Member and Non-Member Business                |   | **$**        | **398,588** |       | $      | 389,039  |   | $ | 358,373 |   |
| Payments to Members for  Sugarbeets, Net of Unit Retains Declared          |   | **(351,670** | **)**       | (343,617   | )      | (340,953 | )      |
| Payments to Members for PIK Certificates,  Net of EquityRetention Declared |   | **(22,320**  | **)**       | (26,507    | )      | —   |   |
| Add (Deduct) Non-Cash Items:                                               |   |         | ** **  |       |   |     |   |
| Depreciation and Amortization                                              |   | **40,389**   | ** **  | 40,427     |   | 37,562   |   |
| Income from Equity Method  Investees                                       |   | **(2,828**   | **)**       | (69        | )      | (1,298   | )      |
| Loss on the Disposition of  Property and Equipment                         |   | **839**      | ** **  | 1,170      |   | 1,216    |   |
| Non-Cash Portion of Patronage  (Dividend)/Loss from CoBank, ACB       |   | **(437**     | **)**       | (541       | )      | 292      |   |
| Deferred Gain Recognition                                                  |   | **(197**     | **)**       | (197       | )      | (197     | )      |
| Changes in Assets and  Liabilities:                                        |   |         | ** **  |       |   |     |   |
| Receivables                                                                |   | **5,921**    | ** **  | (18,402    | )      | 22,109   |   |
| Inventories                                                                |   | **(11,387**  | **)**       | (61,379    | )      | (35,977  | )      |
| Prepaid Expenses                                                           |   | **(2,546**   | **)**       | (894       | )      | (360     | )      |
| Long-Term Prepaid Pension  Expense                                         |   | **(5,668**   | **)**       | (1,508     | )      | (1,723   | )      |
| Advances To/Due to Related  Parties                                        |   | **3,112**    | ** **  | (10,982    | )      | 22,045   |   |
| Accounts Payable                                                           |   | **(1,612**   | **)**       | (6,516     | )      | 33       |   |
| Other Liabilities                                                          |   | **1,153**    | ** **  | 1,451      |   | 4,052    |   |
| Amounts Due Members                                                        |   | **(3,520**   | **)**       | 29,100     |   | 17,968   |   |
| **Net Cash Provided By (Used In) Operating Activities**                    |   | **47,817**   | ** **  | (9,425     | )      | 83,142   |   |
|                                                                       |   |         |        |       |   |     |   |
| **Cash Provided By (Used In) Investing Activities:**                       |   |         | ** **  |       |   |     |   |
| Purchases of Property and  Equipment                                       |   | **(16,258**  | **)**       | (23,063    | )      | (43,935  | )      |
| Proceeds from the Sale of  Property and Equipment                          |   | **138**      | ** **  | 42         |   | 631      |   |
| Investments in CoBank, ACB                                                 |   | **683**      | ** **  | —     |   | —   |   |
| Investments in Crystech, LLC                                               |   | **—**   | ** **  | —     |   | (47      | )      |
| Issuance of Notes Receivable -  Crystech, LLC                              |   | **—**   | ** **  | —     |   | (2,022   | )      |
| Changes in Other Assets                                                    |   | **(517**     | **)**       | (1,723     | )      | 2,032    |   |
| **Net Cash (Used In) Investing Activities**                                |   | **(15,954**  | **)**       | (24,744    | )      | (43,341  | )      |
|                                                                       |   |         |        |       |   |     |   |
| **Cash Provided By (Used In) Financing Activities:**                       |   |         | ** **  |       |   |     |   |
| Net Proceeds (Payments) on Short-Term  Debt                                |   | **(6,963**   | **)**       | 12,095     |   | 43,196   |   |
| Proceeds from Long-Term Debt                                               |   | **—**   | ** **  | 14,841     |   | 17,000   |   |
| Long-Term Debt Repayment                                                   |   | **(20,070**  | **)**       | (44,185    | )      | (19,220  | )      |
| Issuance of Stock                                                          |   | **5,827**    | ** **  | 6,171      |   | 7,123    |   |
| Payment of Unit Retains                                                    |   | **(16,537**  | **)**       | (18,975    | )      | (19,932  | )      |
| **Net Cash Provided By (Used In) Financing Activities**                    |   | **(37,743**  | **)**       | (30,053    | )      | 28,167   |   |
| **Increase (Decrease) In Cash and Cash Equivalents**                       |   | **(5,880**   | **)**       | (64,222    | )      | 67,968   |   |
| **Cash and Cash Equivalents, Beginning of Year**                           |   | **5,902**    | ** **  | 70,124     |   | 2,156    |   |
|                                                                       |   |         | ** **  |       |   |     |   |
| **Cash and Cash Equivalents, End of Year**                                 |   | **$**        | **22**      | ** ** | $      | 5,902    |   | $ | 70,124 |   |

 

The Accompanying Notesare an Integral Part of These Financial Statements.

 

A-7

----

 

**American Crystal Sugar Company**

**Notesto the Financial Statements**

 

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

 

*Organization*

 

American Crystal Sugar Company (the Company) is a Minnesotaagricultural cooperative corporation which processes and markets sugar,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.

* *

*Revenue Recognition*

 

Revenue from thesale of sugar, agri-products and seed is recorded when the product is shippedto the customer.

* *

*Cash and Cash Equivalents*

 

The Companyconsiders all highly liquid investments with a maturity of three months or lesswhen purchased to be cash equivalents. The Company places its temporary cash investments with high creditquality financial institutions.  Attimes, such investments may be in excess of the applicable insurance limit.

* *

*Receivables*

 

The Company grantscredit, individually and through its marketing cooperatives, to its customers,which are primarily companies in the food processing industry locatedthroughout the United States.  Ongoingcredit evaluations of customers’ financial condition are performed and theCompany maintains a reserve for potential credit losses.

* *

*Inventories*

 

Sugar, pulp,molasses and other agri-products inventories are valued at estimated netrealizable value.  Maintenance parts andsupplies and sugarbeet seed inventories are valued at the lower of average costor market.  Sugarbeets are valued at theprojected gross per-ton beet payment related to that year’s crop.

* *

*Property, Equipment and Depreciation*

 

Property andequipment are recorded at cost. Indirect costs and construction period interest are capitalized as acomponent of the cost of qualified assets. Property and equipment are depreciated for financial reporting purposesprincipally using straight-line methods with estimated useful lives rangingfrom 3 to 45 years.

 

A-8

----

* *

*Impairment of Long Lived Assets*

 

The Companyreviews its property and equipment for impairment whenever events indicate thatthe carrying amount of the asset may not be recoverable.  An impairment loss is recorded when the sumof the future cash flows is less than the carrying amount of the asset.  An impairment loss is measured as the amountby which the carrying amount of the asset exceeds its fair value. There were noimpairment losses incurred during the year.

* *

*Related Parties*

 

The followingorganizations are considered related parties for financial reporting purposes:United Sugars Corporation (United), Midwest Agri-Commodities Company (Midwest),Crystech, LLC (Crystech) and ProGold Limited Liability Company (ProGold).

* *

*Investments*

 

Investments inCoBank, ACB are stated at cost plus unredeemed patronage refunds received inthe form of capital stock.  Investmentsin marketing cooperatives, ProGold and Crystech are accounted for using theequity method.

* *

*Members’ Investments*

 

Preferred andCommon Stock - The ownership of common and preferred stock is restricted to a“farm operator” as defined by the bylaws of the Company.  Each shareholder may own only one share ofcommon stock and is entitled to one vote in the affairs of the Company.  Each shareholder is required to grow aspecified number of acres of sugarbeets in proportion to the shares ofpreferred stock owned.  The preferredshares are non-voting.  All transfers ofstock must be approved by the Company’s Board of Directors and any shareholderdesiring to sell stock must first offer it to the Company for repurchase at itspar value.  The Company has neverexercised this repurchase option.  Thebylaws do not allow dividends to be paid on either the common or preferredstock.

 

Unit Retains - Thebylaws authorize the Company’s Board of Directors to require additional directcapital investments by members in the form of a variable unit retain per ton ofup to a maximum of 10 percent of the weighted average gross per ton beetpayment.  The Company has a policywhereby the Company refunds, to the entity legally entitled thereto, the unitretains attributable to a deceased or totally and permanently disabled formershareholder.

 

Equity Retention -The Payment-In-Kind (PIK) Certificate Purchase Agreement authorizes the Companyto require additional direct capital investments by members participating inthe PIK program. The amount of the equity contribution is calculated perhundredweight of PIK certificates and is approximately equivalent (on aCompany-wide average basis) to the unit retain declared by the Company on thecorresponding year’s sugarbeet crop. The Company has a policy whereby the Company refunds, to the entitylegally entitled thereto, the equity retains attributable to a deceased ortotally and permanently disabled former shareholder.

 

Accumulated OtherComprehensive Income (Loss) - Accumulated Other Comprehensive Income (Loss)represents the cumulative net increase (decrease) in equity related to therecording of the minimum pension liability adjustment.  Consistent with the Company’s treatment ofincome taxes related to member-source income and expenses, accumulated othercomprehensive income (loss) does not include any adjustment for income taxes.

 

A-9

----

 

Retained Earnings(Accumulated Deficit) - Retained earnings represent the cumulative netincome/(loss) resulting from non-member business and the difference betweenmember income as determined for financial reporting purposes and federal incometax reporting purposes.

 

*Interest Expense, Net*

 

The Company earnspatronage dividends from CoBank, ACB based on the Company’s share of the netincome earned by the bank.  Thesepatronage dividends are applied against interest expense.

* *

*Income Taxes*

 

The Company is anon-exempt cooperative for federal income tax purposes.  As such, the Company is subject to corporateincome taxes on its net income from non-member sources.  The provision for income taxes relates tothe results of operations from non-member business, state income taxes andcertain other permanent differences between financial and income tax reporting.

 

Deferred taxassets, less any applicable valuation allowance, and deferred tax liabilitiesare included in the financial statements at currently enacted income tax ratesapplicable to the period in which the deferred tax assets and liabilities areexpected to be realized or settled.

* *

*Accounting Estimates*

 

The preparation ofthe financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

* *

*Business Risk*

 

The financialresults of the Company’s operations may be directly and materially affected bymany factors, including prevailing prices of sugar and agri-products, theCompany’s ability to market its sugar competitively, the weather, governmentprograms and regulations, and costs and expenses.

* *

*Recently Issued Accounting Pronouncements*

 

The FinancialAccounting Standards Board has issued Statement No. 143 regarding Accountingfor Asset Retirement Obligations and Statement No. 144 regarding Accounting forthe Impairment or Disposal of Long-Lived Assets.  Management does not expect the implementation of thesepronouncements to have a significant effect on the financial statements.

 

In December 2001,the American Institute of Certified Public Accountants issued Statement ofPosition 01-6. This statement of position addresses policies relating to tradeaccounts and loans receivable. The Company plans to carry all trade accountsand loan receivables until maturity. The statement is not expected to have amaterial impact on the financial statements.

* *

*Shipping and Handling Costs*

* *

The costs incurredin the shipping and handling of products sold are classified in the financialstatements as a selling expense on the Statements of Operations.

 

A-10

----

 

*Reclassifications*

 

Certain reclassificationshave been made to the 2001 and 2000 financial statements to conform with the2002 presentation. These reclassifications had no effect on previously reportedresults of operations or Members’ Investments.

 

**(2) RECEIVABLES:**

 

The Company had amajor sugar customer that accounted for approximately 10.3 percent of total receivablesas of August 31, 2002.  The Company alsohad a major agri-product customer that accounted for approximately 10.5 percentof total receivables as of August 31, 2001.

 

**(3) INVENTORIES:**

 

The majorcomponents of inventories are as follows:

 
| **(In Thousands)**                                                            |   | **2002**   |        | **2001** |   |
|-------------------------------------------------------------------------------|--------|------------|-------------|----------|--------|
| Refined Sugar, Pulp, Molasses,  other  Agri-Products and Sugarbeet  Seed |   | **$**      | **97,693**  |     | $      | 86,367 |   |
| Maintenance Parts and Supplies                                                |   | **17,963** |        | 17,902   |   |
| Total Inventories                                                             |   | **$**      | **115,656** |     | $      | 104,269 |   |

 

**(4) PROPERTY AND EQUIPMENT:**

 

Indirect costs capitalizedwere $ .7 million, $ .8 million and $1.1 million in 2002, 2001 and 2000,respectively.  Construction periodinterest capitalized was $ .1 million, $ .3 million and $ .7 million in 2002,2001 and 2000, respectively.

 

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

 

The Company has a57 percent ownership interest and a 25 percent voting interest in United.  The investment is accounted for using theequity method.  All sugar productsproduced are sold by United as an agent for the Company.  The amount of sales and related costs to berecognized by each owner of United is allocated based on its pro rata share ofsugar production for the year.  Theowners provide United with cash advances on an ongoing basis for operating andmarketing expenses incurred by United. The Company had outstanding advances to United of $10.9 million and$14.4 million as of August 31, 2002 and 2001, respectively.  The Company provides administrative servicesfor United and is reimbursed for costs incurred.  The Company was reimbursed $1.3 million, $1.3 million and $1.6million for services provided during 2002, 2001 and 2000, respectively.

 

The Company has a64 percent ownership interest and a 33 1/3 percent voting interest inMidwest.  The investment is accountedfor using the equity method.  Allsugarbeet pulp, molasses and other agri-products produced are sold by Midwestas an agent for the Company.  The amountof sales and related costs to be recognized by each owner of Midwest isallocated based on its pro rata share of production for each product for theyear.  The owners provide Midwest withcash advances on an ongoing basis for operating and marketing expenses incurredby Midwest.  The Company had outstandingadvances (from) Midwest of $( .4) million and $(2.5) million as of August 31,2002 and 2001, respectively.  The ownersof Midwest are guarantors of the short-term line of credit Midwest has withCoBank, ACB.  As of August 31, 2002,Midwest had outstanding short-term debt with CoBank, ACB of $2.6 million, ofwhich $1.6 million was guaranteed by the Company.

 

A-11

----

 

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

 

The Company has a46 percent ownership interest in ProGold. ProGold leases substantially all of its assets to Cargill, Incorporatedunder an operating lease which expires in December 2007.  Following is summary financial informationfor ProGold:

 
| **(In Thousands)**                          |   | **2002**    |        | **2001** |   |     |   |
|---------------------------------------------|--------|-------------|-------------|----------|--------|----------|--------|
|                                        |   |        |        |     |   |     |   |
| Current Assets                              |   | **$**       | **2,513**   |     | 2,932  |     |   |   |
| Long-Term Assets                            |   | **189,745** |        | 199,471  |   |     |   |
| Total Assets                                |   | **$**       | **192,258** |     | $      | 202,403  |   |   |   |
|                                        |   |        |        |     |   |     |   |
| Current Liabilities                         |   | **$**       | **751**     |     | $      | 3,856    |   |   |   |
| Long-Term Liabilities                       |   | **108,789** |        | 121,729  |   |     |   |
| Total Liabilities                           |   | **109,540** |        | 125,585  |   |     |   |
| Members’ Equity                        |   | **82,718**  |        | 76,818   |   |     |   |
| Total Liabilities and Members’  Equity |   | **$**       | **192,258** |     | $      | 202,403  |   |   |   |
|                                        |   |        |        |     |   |     |   |
| **(In Thousands)**                          |   | **2002**    |        | **2001** |   | **2000** |   |
| Rental Revenue on Operating  Lease          |   | **$**       | **26,302**  |     | $      | 26,709   |   | $ | 26,793 |   |
| Expenses                                    |   | **20,402**  |        | 22,567   |   | 23,581   |   |
| Net Income                                  |   | **$**       | **5,900**   |     | $      | 4,142    |   | $ | 3,212 |   |
|                                             |        |             |             |          |        |          |        |  |  |  |  |  |

 

**(7) CRYSTECH, LLC:**

 

Crystech is aspecial purpose entity that operates a molasses desugarization facility at theCompany’s Hillsboro, North Dakota, sugar factory together with certain sugarprocessing equipment located at the Hillsboro, North Dakota, and Moorhead,Minnesota, sugar factories.  The Companyowns 50 percent of Crystech and accounts for its investment using the equitymethod.  The net interest capitalizedrelated to the investment in Crystech totaled $47,000 for the year ended August31, 2000.  The molasses desugarizationfacility became operational on February 1, 2000.

 

The Company has a12-year tolling services agreement with Crystech whereby the Company pays fortolling services for processing sugarbeet molasses delivered to Crystech withtitle and risk of loss throughout the process maintained by the Company.  The tolling agreement may be terminated bythe Company if the specified plant performance is not achieved and maintained.

 

As of August 31,2002 and 2001, the Company had outstanding notes receivable from Crystechtotaling $13.9 million.  The notes aresubordinate to long-term debt of Crystech totaling $55.3 million and $67.6million as of August 31, 2002 and 2001, respectively.  The notes bear interest at fixed rates of6.41 percent to 8.17 percent.  Interestincome related to these notes totaled $1.0 million in 2002, 2001 and 2000.  Repayments of principal are not permitteduntil the senior debt has been paid in full. The subordinated notes are due and payable in December 2007.  The Company also had outstanding payables toCrystech of $2.7 million and $1.2 million as of August 31, 2002 and 2001,respectively, related to the tolling services agreement.  The Company had outstanding receivables of $..1 million as of August 31, 2001, primarily relating to capital expenditurespaid on behalf of Crystech.

 

A-12

----

 

Following issummary financial information for Crystech:

 
| **(In Thousands)**                          |   | **2002**   |       | **2001**   |   |
|---------------------------------------------|--------|------------|------------|------------|--------|
| Current Assets                              |   | **$**      | **2,982**  | ** ** | $      | 1,922 | ** ** |
| Long-Term Assets                            |   | **68,783** |       | 82,471     |   |
| Total Assets                                |   | **$**      | **71,765** |       | $      | 84,393 |   |
|                                        |   |       |       |       |   |
| Current Liabilities                         |   | **$**      | **9,222**  |       | $      | 9,334 |   |
| Long-Term Liabilities                       |   | **59,979** |       | 72,265     |   |
| Total Liabilities                           |   | **69,201** |       | 81,599     |   |
| Members’ Equity                        |   | **2,564**  |       | 2,794      |   |
| Total Liabilities and Members’  Equity |   | **$**      | **71,765** |       | $      | 84,393 |   |

 
| **(In Thousands)** |   | **2002**   |       | **2001**   |   | **2000** |   |
|--------------------|--------|------------|------------|------------|--------|----------|--------|
| Revenue            |   | **$**      | **22,519** | ** ** | $      | 24,052   |   | $ | 14,692 |   |
| Operating Expenses |   | **16,812** |       | 17,349     |   | 10,588   |   |
| Other Expenses     |   | **5,937**  | ** ** | 6,821      |   | 4,282    |   |
| Net Loss           |   | **$**      | **(230**   | **)**      | $      | (118     | )      | $ | (178 | ) |

 

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

 

The long-term debtoutstanding as of August 31, 2002 and 2001, is summarized below: 

 
| **(In Thousands)**                                                                                                                                                                                                                          |   | **2002**    |        | **2001**   |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|------------|------------|
| Term Loans from CoBank, ACB,  due in varying amounts through 2008, interest at fixed rates of 6.01% to  8.58%, with senior lien on substantially all non-current assets,                                                                    |   | **$**       | **101,300** | ** ** | $          | 118,300 | ** ** |
| Term Loans from Insurance  Companies, due in varying amounts from 2018 through 2028, interest at fixed  rates of 7.32% to 7.42%, with senior lien on substantially all non-current  assets                                                  |   | **50,000**  | ** **  | 50,000     |       |
| Term Loan from US Bank Corp, Ag  Credit, due in equal amounts through 2002, interest at a fixed rate of 8.25%,  unsecured                                                                                                                   |   | **—**  | ** **  | 2,000      |       |
| Term Loan from the Bank of  North Dakota, due in equal amounts through 2009, interest at a fixed rate of  6.34%, unsecured                                                                                                                  |   | **5,600**   | ** **  | 6,400      |       |
| 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 2.35% as of August 31,  2002, substantially secured by letters of credit |   | **43,516**  | ** **  | 43,786     | ** ** |
| Total Long-Term Debt                                                                                                                                                                                                                        |   | **200,416** | ** **  | 220,486    | ** ** |
| Less Current Maturities                                                                                                                                                                                                                     |   | **(18,045** | **)**       | (19,070    | )          |
| Long-Term Debt, Net of Current  Maturities                                                                                                                                                                                                  |   | **$**       | **182,371** | ** ** | $          | 201,416 |   |

 

A-13

----

 

Minimum annual principalpayments for the next five years are as follows:

 
| **(In Thousands)** |   |       |       |
|--------------------|--------|------------|------------|
| 2003               |   | **$**      | **18,045** | ** ** |
| 2004               |   | **18,060** | ** ** |
| 2005               |   | **18,075** | ** ** |
| 2006               |   | **18,090** | ** ** |
| 2007               |   | **18,105** | ** ** |
|                    |        |            |            |  |

 

As of August 31,2002, the unused portion of the term loan line of credit with CoBank, ACB, was$32.5 million.

 

The short-termdebt outstanding as of August 31, 2002 and 2001, is summarized below:

 
| **(In Thousands)**                                                 |   | **2002**   |      | **2001** |   |
|--------------------------------------------------------------------|--------|------------|-----------|----------|--------|
| CoBank, ACB, at a fixed  interest rate of 2.53%, due 09/05/02      |   | **$**      | **7,000** |     | $      | — |   |
| Commercial Paper, at a fixed  interest rate of 6.08%, due 10/22/01 |   | **—** |      | 13,963   |   |
| Total Short-Term Debt                                              |   | **$**      | **7,000** |     | $      | 13,963 |   |

 

During the yearended August 31, 2002, the Company borrowed from CoBank, ACB, and the CommodityCredit Corporation, (CCC) and issued commercial paper to meet its short-termborrowing requirements.  As of August31, 2002, the Company had available short-term lines of credit totaling $183.0million.

 

Maximumborrowings, average borrowing levels and average interest rates for short-termdebt for the years ended August 31, 2002 and 2001, follow:

 
| **(In Thousands, Except Interest Rates)** |   | **2002** |        | **2001**   |   |
|-------------------------------------------|--------|----------|-------------|------------|--------|
| Maximum Borrowings                        |   | **$**    | **189,830** | ** ** | $      | 202,673 | ** ** |
| Average Borrowing Levels                  |   | **$**    | **96,292**  |       | $      | 105,817 |   |
| Average Interest Rates                    |   | **2.77** | %           | 6.32       | %      |

 

The terms of theloan agreements contain prepayment penalties along with certain covenantsrelated to, among other matters, the: level of working capital; ratio of termliabilities to members’ investment; current ratio; level of term debt to netfunds generated; and investment in CoBank, ACB stock in amounts prescribed bythe bank.  Substantially all non-currentassets are pledged to the senior lenders to provide security to support theCompany’s seasonal and long-term financing. As of August 31, 2002, the Company was in compliance with the terms ofthe loan agreements.

 

On September 30,2000, the Company forfeited sugar in satisfaction of the CCC loans of $105.3million including accrued interest of $3.8 million.

 

Interest paid, netof amounts capitalized, was $15.0 million, $21.1 million and $19.2 million forthe years ended August 31, 2002, 2001 and 2000, respectively.

 

A-14

----

 

The Company hadoutstanding letters of credit totaling $47.6 million as of August 31, 2002.

 

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

 

The fair value offinancial instruments is generally defined as the amount at which theinstrument could be exchanged in a current transaction between willing parties,other than in a forced liquidation sale. Quoted market prices are generally not available for the Company’sfinancial instruments.  Fair values arebased on judgments regarding anticipated cash flows, future expected lossexperience, current economic conditions, risk characteristics of variousfinancial instruments and other factors. These estimates involve uncertainties and matters of judgment, andtherefore, cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

* *

*Notes Receivable - Crystech, LLC -*Basedon current interest rates with similar maturities, the fair value of the notesreceivable approximates the carrying value.

* *

*Long-Term Debt* -Based upon current borrowing rates with similar maturities, the fair value ofthe long-term debt is approximately $195.8 million in comparison to thecarrying value of $200.4 million.

* *

*Investments in CoBank, ACB,Investments in Marketing Cooperatives, Investments in ProGold Limited LiabilityCompany and Investments in Crystech, LLC* - The Companybelieves it is not practical to estimate the fair value of these investmentswithout incurring excessive costs because there is no established market forthese securities and equity interests, and it is inappropriate to estimatefuture cash flows which are largely dependent on future earnings of theseorganizations.

** **

**(10) MEMBERS’ INVESTMENTS:**

 

The following scheduledetails the Preferred Stock and Common Stock as of August 31, 2002, 2001 and2000:

 

|             |   | **Par  Value** |   | **Shares  Authorized** |    | **Shares Issued  & Outstanding** |    |
|------------------|--------|----------------|--------|------------------------|---------|--------------------------------------|---------|
| Preferred Stock: |   |           |   |                   |    |                                 |    |
| August 31, 2002  |   | $              | 76.77  |                   | 600,000 |                                 | 498,570 |   |
| August 31, 2001  |   | $              | 76.77  |                   | 600,000 |                                 | 498,570 |   |
| August 31, 2000  |   | $              | 76.77  |                   | 600,000 |                                 | 498,570 |   |
|             |   |           |   |                   |    |                                 |    |
| Common Stock:    |   |           |   |                   |    |                                 |    |
| August 31, 2002  |   | $              | 10.00  |                   | 4,000   |                                 | 3,035   |   |
| August 31, 2001  |   | $              | 10.00  |                   | 4,000   |                                 | 3,134   |   |
| August 31, 2000  |   | $              | 10.00  |                   | 4,000   |                                 | 3,006   |   |

 

Related to the 1997 stockoffering, the Company received $5.8 million, $6.2 million and $7.1 million fromthe sale of stock during the years ended August 31, 2002, 2001 and 2000,respectively.  The remaining $9.2million is to be received in installment amounts through 2004.

 

A-15

----

 

**(11) EMPLOYEE BENEFIT PLANS:**

* *

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

 

Substantially allemployees who meet eligibility requirements of age and length of service are coveredby a Company-sponsored retirement plan. As of August 31, 2002, the pension plans were funded as required by thefunding standards set forth by the Employee Retirement Income Security Act(ERISA).  The Company also has anon-qualified supplemental executive retirement plan for certain employees.

 

The Company has amedical plan and a Medicare supplement plan which are available tosubstantially all the Company retirees. The costs of these plans are shared by the Company and planparticipants.

 

The following schedules provide the components of the Net PeriodicPension and Post-Retirement Costs as of August 31, 2002, 2001 and 2000:

 

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

 
| **(In Thousands)**                     |   | **2002**   |       | **2001**   |   | **2000** |   |
|----------------------------------------|--------|------------|------------|------------|--------|----------|--------|
| Service Cost                           |   | **$**      | **1,978**  | ** ** | $      | 1,872    |   | $ | 1,625 |   |
| Interest Cost                          |   | **5,407**  | ** ** | 5,167      |   | 4,783    |   |
| Expected Return on Plan Assets         |   | **(5,773** | **)**      | (5,879     | )      | (4,986   | )      |
| Multiple Employer Adjustment           |   | **(81**    | **)**      | (111       | )      | (90      | )      |
| Special Termination Benefits           |   | —     | ** ** | 779        |   | —   |   |
| Curtailment Loss                       |   | —     | ** ** | 29         |   | —   |   |
| Amortization of Net Transition  Assets |   | **(300**   | **)**      | (296       | )      | (296     | )      |
| Amortization of Prior Service  Costs   |   | **501**    | ** ** | 506        |   | 447      |   |
| Amortization of Net (Gain)  Loss       |   | **207**    | ** ** | 60         |   | 138      |   |
| Net Periodic Pension Cost              |   | **$**      | **1,939**  | ** ** | $      | 2,127    |   | $ | 1,621 |   |

 

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

 
| **(In Thousands)**                   |   | **2002**  |       | **2001**   |   | **2000** |   |
|--------------------------------------|--------|-----------|------------|------------|--------|----------|--------|
| Service Cost                         |   | **$**     | **705**    | ** ** | $      | 517      |   | $ | 518 |   |
| Interest Cost                        |   | **1,312** | ** ** | 1,013      |   | 871      |   |
| Special Termination Benefits         |   | —    | ** ** | 151        |   | —   |   |
| Amortization of Prior Service  Costs |   | —    | ** ** | —     |   | 2        |   |
| Amortization of Net (Gain)  Loss     |   | **(68**   | **)**      | (274       | )      | (270     | )      |
| Net Periodic Post-Retirement  Cost   |   | **$**     | **1,949**  | ** ** | $      | 1,407    |   | $ | 1,121 |   |

 

For measurementpurposes, a 10.0 percent annual rate of increase in the per capita cost ofcovered healthcare benefits was assumed for 2003.  The rate is assumed to decline to 5.0 percent over the next fiveyears.

 

Assumed healthcaretrends can have a significant effect on the amounts reported for healthcareplans.  A 1 percent change in theassumed healthcare trend rates would have the following effects:

 
| **(In Thousands)**                                                                                        |   | **1% Increase** |   | **1% Decrease** |   |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------|--------|-----------------|--------|
| Effect on total service and  interest cost components of net periodic post-retirement benefit  costs |   | $               | 343    |            | $      | (274 | ) |
| Effect on the accumulated  post-retirement benefit obligation                                        |   | $               | 2,505  |            | $      | (2,057 | ) |

 

A-16

----

 

The followingschedules set forth a reconciliation of the changes in the plans’ benefitobligation and fair value of assets for the years ending August 31, 2002 and2001 and a statement of the funded status and amounts recognized in the BalanceSheets as of August 31, 2002 and 2001:

 
|                                           |   | **Pension** |        | **Post-Retirement** |   |
|------------------------------------------------|--------|-------------|-------------|---------------------|--------|
| **(In Thousands)**                             |   | **2002**    |        | **2001**            |   | **2002** |   | **2001** |   |
| ***Change in Benefit Obligation***             |   |        | ** **  |                |   |   | ** ** |   | ** ** |
| Obligation at the Beginning of  the Year       |   | **$**       | **71,616**  | ** **          | $      | 64,448 |   | **$** | **17,257** | ** ** | $ | 12,561 |   |
| Service Cost                                   |   | **1,978**   | ** **  | 1,872               |   | **705** | ** ** | 517 |   |
| Interest Cost                                  |   | **5,407**   | ** **  | 5,167               |   | **1,312** | ** ** | 1,013 |   |
| Plan Participant Contributions                 |   | **—**  | ** **  | —              |   | **707** | ** ** | 323 |   |
| Amendments                                     |   | **680**     | ** **  | —              |   | **—** | ** ** | — |   |
| Curtailment Loss                               |   | **—**  | ** **  | 29                  |   | **—** | ** ** | — |   |
| Special Termination Benefits                   |   | **—**  | ** **  | 779                 |   | **—** | ** ** | 151 |   |
| Actuarial (Gain)/Loss                          |   | **2,380**   | ** **  | 2,857               |   | **(164** | **)** | 3,712 |   |
| Benefits Paid                                  |   | **(3,722**  | **)**       | (3,536              | )      | **(1,261** | **)** | (1,020 | ) |
| Obligation at the End of the  Year             |   | **$**       | **78,339**  | ** **          | $      | 71,616 |   | **$** | **18,556** | ** ** | $ | 17,257 |   |
|                                           |   |        |        |                |   |   |   |   |   |
| ***Change in Plan Assets***                    |   |        | ** **  |                |   |   | ** ** |   |   |
| Fair Value at the Beginning of  the Year       |   | **$**       | **65,095**  | ** **          | $      | 65,250 |   | **$** | **—** | ** ** | $ | — |   |
| Actual Return on Plan Assets                   |   | **(4,396**  | **)**       | (787                | )      | **—** | ** ** | — |   |
| Plan Participant Contributions                 |   | **—**  | ** **  | —              |   | **707** | ** ** | 323 |   |
| Employer Contributions                         |   | **8,794**   | ** **  | 4,168               |   | **554** | ** ** | 697 |   |
| Benefits Paid                                  |   | **(3,722**  | **)**       | (3,536              | )      | **(1,261** | **)** | (1,020 | ) |
| Fair Value at the End of the  Year             |   | **$**       | **65,771**  | ** **          | $      | 65,095 |   | **$** | **—** | ** ** | $ | — |   |
|                                           |   |        | ** **  |                |   |   | ** ** |   |   |
| ***Funded Status***                            |   |        | ** **  |                |   |   | ** ** |   |   |
| Funded Status as of August 31,                 |   | **$**       | **(12,568** | **)**               | $      | (6,521 | ) | **$** | **(18,556** | **)** | $ | (17,257 | ) |
| Unrecognized Net Transition  Asset             |   | **(269**    | **)**       | (569                | )      | **—** | ** ** | — |   |
| Unrecognized Actuarial  Loss/(Gain)            |   | **19,118**  | ** **  | 6,775               |   | **(1,347** | **)** | (1,251 | ) |
| Unrecognized Prior Service  Cost               |   | **2,823**   | ** **  | 2,645               |   | **—** | ** ** | — |   |
| Net Amount Recognized                          |   | **$**       | **9,104**   | ** **          | $      | 2,330 |   | **$** | **(19,903** | **)** | $ | (18,508 | ) |
|                                           |   |        |        |                |   |   |   |   |   |
| ***Amounts Recognized in the Balance Sheets*** |   |        |        |                |   |   |   |   |   |
| Prepaid Pension Cost                           |   | **$**       | **9,781**   |                | $      | 4,630 |   | **$** | **—** |   | $ | — |   |
| Accrued Benefit Liability                      |   | **(2,911**  | )           | (2,925              | )      | **(19,903** | ) | (18,508 | ) |
| Intangible Asset                               |   | **917**     |        | 189                 |   | **—** |   | — |   |
| Accumulated Other  Comprehensive Income        |   | **1,317**   |        | 436                 |   | **—** |   | — |   |
| Net Amount Recognized                          |   | **$**       | **9,104**   |                | $      | 2,330 |   | **$** | **(19,903** | ) | $ | (18,508 | ) |

 

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

 
|                                |   | **2002** |   |
|-------------------------------------|--------|----------|--------|
| Other Comprehensive Loss            |   | **$**    | 881    | ** ** |
| Intangible Asset Increase           |   | **$**    | 728    | ** ** |
| Accrued Pension Liability  Increase |   | **$**    | 1,609  | ** ** |

 

 

A-17

----

 

Theassumptions used in the measurement of the Company’s benefit obligations areshown below:

 

***Weighted Average Assumptions as of August31,***

 
|                                                       |   | **Pension** |   | **Post-Retirement** |   |
|------------------------------------------------------------|--------|-------------|--------|---------------------|--------|
|                                                       |   | **2002**    |   | **2001**            |   | **2002** |   | **2001** |   |
| Discount Rate                                              |   | **7.50**    | **%**  | 7.75                | %      | **7.50** | **%** | 7.75 | % |
| Expected Return on Plan Assets                             |   | **8.50**    | **%**  | 9.0                 | %      | **N/A** | ** ** | N/A |   |
| Rate of Compensation Increase   (Non-Union Plan Only) |   | **4.0**     | **%**  | 5.0                 | %      | **N/A** | ** ** | N/A |   |

 

*Long-Term Incentive Plans*

 

During 2001, the1995 Long-Term Incentive Plan was terminated and all contract rights werecancelled.

 

The 1999 Long-TermIncentive Plan provides deferred compensation to certain key executives of theCompany.  The plan creates financialincentives that are based upon contract rights which are available to theexecutive under the terms of the plan, the value of which is related to thevalue of preferred shares of the Company as determined by the Board ofDirectors.  In fiscal 2002, 307.1contract rights were granted at a stated value of $1,500 per contract right ora total stated value of $460,648.  Infiscal 2002, the Board of Directors increased the value of the 802.68 contractrights issued prior to fiscal 2002 from $1,000 to $1,500 per contract right,for a total increase in the stated value of $401,341.  As of August 31, 2002, there were 1,109.78 rights, at a statedvalue of $1.7 million, issued and outstanding, 388.15 of which were vested.

* *

*Defined Contribution Plans*

 

The Company hasqualified 401(k) plans for all eligible employees.  The plans provide for immediate vesting of benefits.  Participants may contribute a percentage oftheir gross earnings each pay period as provided in the participationagreement.  The Company matches thenon-union and union year-round participants’ contributions up to 4 percent and2 percent respectively, of their gross earnings.  The Company’s contributions to these plans totaled $1.5 million,$1.5 million and $1.4 million for the years ended August 31, 2002, 2001 and2000, respectively.

 

**(12) Payment-In-Kind Program:**

 

Under the UnitedStates Department of Agriculture (USDA) Payment- In-Kind (PIK) program, theCompany’s members were paid to destroy a portion of their 2001 and 2000sugarbeet crops.  Payments to theCompany’s members were made by the USDA in the form of PIK certificates to beexchanged for government owned sugar. The Company entered into contracts with its members to purchase the PIKcertificates they received from the USDA and to reduce the members’ deliveryobligations to the Company to the extent sugarbeets were destroyed under the PIKprogram.  The purchase price for the PIKcertificates reflected an allocation of the Company’s fixed costs to accountfor the reduction of sugarbeets available for processing.

 

As a result of thePIK program, the 2001 sugarbeet crop harvested by the Company’s members wasreduced by approximately 29,000 acres. The PIK certificates received were exchanged for approximately 1.2million hundredweight of sugar during fiscal 2002.  The 2000 sugarbeet crop harvested by the Company’s members wasreduced by approximately 33,000 acres. The Company received approximately 1.6 million hundredweight of sugarduring fiscal 2001 in exchange for the 2000 crop PIK certificates.

 

A-18

----

 

**(13) INCOME TAXES:**

 

Total income tax payments(refunds) were $ (15,400), $ (300), and $ (7,600) in the years ended August 31,2002, 2001 and 2000, respectively.

 

As of August 31,2002, the Company had accumulated approximately $25.8 million of net operatingloss carry-forwards.  The net operatingloss carry-forwards expire in the years 2012 through 2022.  The Company has provided a valuationallowance for the entire balance of the deferred tax asset related to the losscarry-forwards. As of August 31, 2002, the Company had a deferred tax liabilityof approximately $2.1 million related to the difference between the book andtax lives of depreciable assets.

 
|                                                                    |   | **2002**       |           | **2001**   |   |
|-------------------------------------------------------------------------|--------|----------------|----------------|------------|--------|
| Deferred tax assets related to non-patronage source  loss carry-forward |   | **$**          | **10,320,000** | ** ** | $      | 7,800,000 |   |
| Less valuation allowance                                                |   | **10,320,000** |           | 7,800,000  |   |
|                                                                    |   |           |           |       |   |
| Net deferred tax asset                                                  |   | **$**          | **—**     |       | $      | — |   |

 
|                                  |   | **2002**  |   | **2001** |   | **2000** |   |
|---------------------------------------|--------|-----------|--------|----------|--------|----------|--------|
| 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      | %      |

 

**(14) ENVIRONMENTAL MATTERS:**

 

The Company issubject to extensive federal and state environmental laws and regulations withrespect to water and air quality, solid waste disposal and odor and noisecontrol.  The Company conducts anongoing compliance program designed to meet these environmental laws andregulations.  The Company believes thatit is in substantial compliance with applicable environmental laws andregulations.  From time to time,however, the Company may be involved in investigations or determinationsregarding non-material matters that may arise.

 

The Companyreceived a Notice of Violation from the State of Minnesota on April 5, 2001,for alleged violations of the Minnesota hydrogen sulfide standard, performancetest reporting requirements and air emission permit requirements at theCrookston, Moorhead and East Grand Forks factories.  The Company is currently involved in negotiations with theMinnesota Pollution Control Agency (MPCA) with the intent of concluding astipulation agreement with regard to the alleged violation and relatedpenalties.  Management believes it willbe able to negotiate a satisfactory resolution and that the outcome of thealleged violation should not have a material adverse effect on the Company’sfinancial condition. The Company has accrued the expected costs associated withthe proposed penalties.

 

The Company iscurrently conducting an environmental remediation plan at its Moorhead andCrookston, Minnesota, factories. In fiscal 2002, the Company recorded aliability and an expense of approximately $1.9 million associated with theestimated costs of the remediation plan.

 

A-19

----

 

**(15) SUBSEQUENT EVENT:**

 

On October 7,2002, the Company concluded a transaction to buy three sugarbeet factories fromImperial Sugar Company for approximately $35 million. The purchase includessugarbeet processing facilities in Sidney, Montana, and Torrington, Wyoming, aswell as a factory in Hereford, Texas.

 

The completedagreement involves the Company leasing the Torrington, Wyoming, factory to theWestern Sugar Cooperative. The Company will continue operating the Sidney,Montana, factory and leave the Hereford, Texas, factory idle. The Sidney,Montana, factory will be operated by Sidney Sugars Incorporated, a wholly-ownedsubsidiary of American Crystal Sugar Company.

 

A-20

----

 

**EXHIBIT INDEX TO ANNUAL REPORT**

**ON FORM 10-K**

**FOR FISCAL YEAR ENDED AUGUST 31, 2002**

 
| **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         |   | Amended and Restated  Loan Agreement between Registrant and US Bank, formerly First Bank National  Association, dated November 22, 1993 |   | Incorporated by  reference to Exhibit 10(q) from the Company’s Registration Statement on Form  S-1 (File No. 33-83868), declared effective November 23, 1994.  |
|         |   |                                                                                                                                         |   |                                                                                                                                                                     |
| 10.3         |   | 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.  |

 

E-1

----

 
| 10.4   |   | Form of Member Control  Agreement between Registrant and ProGold Limited Liability Company                              |   | Incorporated by  reference to Exhibit 10(v) from the Company’s Registration Statement on Form  S-1 (File No. 33-83868), declared effective November 23, 1994.  |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.5   |   | 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.  |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| +10.6  |   | 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. |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| +10.7  |   | 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. |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| +10.8  |   | Trademark License  Agreement between Registrant and The Pillsbury Company, dated as of  April 9, 1997              |   | Incorporated by  reference to Exhibit 10(dd) from the Company’s Registration Statement on Form  S-1 (File No. 333-32251), declared effective October 24, 1997. |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.9   |   | 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.                                     |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.10  |   | 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.                                     |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.11  |   | 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.                                     |
|   |   |                                                                                                                    |   |                                                                                                                                                                     |
| 10.12  |   | 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.                                     |

 

E-2

----

 
| ++10.13 |   | 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. |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                  |   |                                                                                                                                 |
| 10.14   |   | Master Agreement  between the Registrant and Bakery, Confectionery, Tobacco Workers & Grain  Millers AFL-CIO, CLC |   | Incorporated by  reference to Exhibit 10.22 from the Company’s Annual Report on Form 10-K for  the year ended August 31, 1999   |
|    |   |                                                                                                                  |   |                                                                                                                                 |
| 10.15   |   | 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   |
|    |   |                                                                                                                  |   |                                                                                                                                 |
| 10.16   |   | Registrant’s  Senior Note Intercreditor 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   |
|    |   |                                                                                                                  |   |                                                                                                                                 |
| 10.17   |   | 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   |
|    |   |                                                                                                                  |   |                                                                                                                                 |
| 10.18   |   | 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  |
|    |   |                                                                                                                  |   |                                                                                                                                 |
| 10.19   |   | 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                    |
|    |   |                                                                                                                  |   |                                                                                                                                 |
| 10.20   |   | 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    |
|    |   |                                                                                                                  |   |                                                                                                                                 |
| 10.21   |   | 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    |
|    |   |                                                                                                                  |   |                                                                                                                                 |
| 10.22   |   | Growers’ Contract  (5-year Agreement) for the crop years 1998 through 2002                                       |   | Incorporated by  reference to Exhibit 10.29 from the Company’s Form 10-Q for the quarter ended  February 28, 2001               |

 

E-3

----

 
| 10.23  |   | 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 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                  |   |                                                                                                                              |
| 10.24  |   | 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            |
|   |   |                                                                                                                                                  |   |                                                                                                                              |
| 10.25  |   | Uniform Member  Marketing Agreement between the Registrant and Midwest Agri-Commodities  Company dated September 1, 2001.                             |   | Incorporated by  reference to Exhibit 10.28 from the Company’s Form 10-Q for the quarter ended  November 30, 2001            |
|   |   |                                                                                                                                                  |   |                                                                                                                              |
| 10.26  |   | Term and Seasonal Loan  Agreements between the Registrant and CoBank, ACB dated March 27, 2002                                                        |   | Incorporated by  reference to Exhibit 10.27 from the Company’s Form 10-Q for the quarter ended  May 31, 2002                 |
|   |   |                                                                                                                                                  |   |                                                                                                                              |
| 10.27  |   | Growers’ Contract  (Annual Contract) for crop year 2002.                                                                                         |   | Incorporated by  reference to Exhibit 10.28 from the Company’s Form 10-Q for the quarter ended  May 31, 2002                 |
|   |   |                                                                                                                                                  |   |                                                                                                                              |
| 10.28  |   | Retirement Plan A  Restatement                                                                                                                        |   | Filed herewith  electronically                                                                                                    |
|   |   |                                                                                                                                                  |   |                                                                                                                              |
| 10.29  |   | Retirement Plan B  Restatement                                                                                                                        |   | Filed herewith  electronically                                                                                                    |
|   |   |                                                                                                                                                  |   |                                                                                                                              |
| 21.1   |   | List of Subsidiaries of  the Registrant                                                                                                               |   | Filed herewith  electronically                                                                                                    |
|   |   |                                                                                                                                                  |   |                                                                                                                              |

 

----

+              Portions of the Exhibit have been granted confidentialtreatment by the Commission. The omitted portions have been filed separatelywith the Commission.

++           Portions of the Exhibit have been deleted from thepublicly filed document and have been filed separately with the Commission pursuantto a request for confidential treatment.

 

E-4

----