UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the period ended February 29, 2004

 

Commission file number:  33-83868

 

AMERICAN CRYSTAL SUGAR COMPANY

(Exact name of registrant as specified in its charter)

 

 

101 North Third Street

Moorhead, Minnesota  56560

(Address of principal executive offices)

 

Telephone Number (218) 236-4400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Act).

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

AMERICAN CRYSTAL SUGAR COMPANY

 

FORM 10-Q

 

INDEX

 

PART I	FINANCIAL INFORMATION
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS
	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF OPERATIONS
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.	DISCLOSURE CONTROLS
PART II	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS
ITEM 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5.	OTHER INFORMATION
ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

AMERICAN CRYSTAL SUGAR COMPANY

Consolidated Balance Sheets

(Unaudited)

(Dollars in Thousands)

 

ASSETS

 

		February 29, 2004			February 28, 2003			August 31, 2003*
Current Assets:
Cash and Cash Equivalents		$	629		$	25		$	859
Accounts Receivable:
Trade		90,446			59,102			64,056
Members		—			—			3,993
Other		2,358			2,033			4,403
Advances to Related Parties		3,417			6,845			4,891
Inventories		456,961			376,487			130,981
Prepaid Expenses		5,428			4,931			7,062
Total Current Assets		559,239			449,423			216,245
Property and Equipment:
Land		40,105			36,877			39,393
Buildings		91,438			88,430			90,181
Equipment		794,676			777,908			794,416
Construction-in-Progress		5,594			7,163			4,989
Less: Accumulated Depreciation		(607,986		)	(573,096		)	(586,167		)
Net Property and Equipment		323,827			337,282			342,812
Net Property and Equipment Held for Lease		165,478			—			170,446
Other Assets:
Investments in CoBank, ACB		19,552			14,748			21,685
Investments in Marketing Cooperatives		5,240			2,674			6,166
Investments in ProGold Limited Liability Company		—			42,062			—
Investments in Crystech, LLC		15,863			1,314			15,330
Notes Receivable - Crystech, LLC		—			13,905			—
Other Assets		45,740			27,485			37,067
Total Other Assets		86,395			102,188			80,248
Total Assets		$	1,134,939		$	888,893		$	809,751

 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 

* Derived from Audited Financial Statements.

 

1

 

AMERICAN CRYSTAL SUGAR COMPANY

Consolidated Balance Sheets

(Unaudited)

(Dollars in Thousands)

 

LIABILITIES AND MEMBERS’ INVESTMENTS

 

		February 29, 2004			February 28, 2003			August 31, 2003*
Current Liabilities:
Short-Term Debt		$	217,855		$	143,230		$	49,989
Current Maturities of Long-Term Debt		21,067			20,664			11,282
Accounts Payable		20,320			20,903			23,192
Advances Due to Related Parties		9,577			9,264			4,604
Accrued Continuing Costs (see note 3)		59,195			63,714			—
Other Current Liabilities		20,855			17,343			18,710
Amounts Due Growers		175,771			128,733			58,896
Total Current Liabilities		524,640			403,851			166,673
Long-Term Debt, Net of Current Maturities		261,144			192,714			286,922
Accrued Employee Benefits		32,916			29,330			31,053
Other Liabilities		10,206			3,478			10,988
Total Liabilities		828,906			629,373			495,636
Minority Interest in ProGold Limited Liability Company		45,427			—			43,769
Members’ Investments:
Preferred Stock		38,275			38,275			38,275
Common Stock		30			30			30
Additional Paid-in Capital		152,261			147,960			148,238
Unit Retains		109,022			108,149			125,409
Equity Retention		2,717			2,723			2,719
Accumulated Other Comprehensive Income/(Loss)		(11,900		)	(1,317		)	(11,900		)
Retained Earnings/(Deficit)		(29,799		)	(36,300		)	(32,425		)
Total Members’ Investments		260,606			259,520			270,346
Total Liabilities and Members’ Investments		$	1,134,939		$	888,893		$	809,751

 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 

* Derived from Audited Financial Statements.

 

2

 

AMERICAN CRYSTAL SUGAR COMPANY

Consolidated Statements of Operations

(Unaudited)

(Dollars in Thousands)

 

		For the Six Months Ended						For the Three Months Ended
		February 29, 2004			February 28, 2003			February 29, 2004			February 28, 2003
Net Revenue		$	472,076		$	393,058		$	241,872		$	191,847
Cost of Product Sold		5,322			19,495			12,336			(19,964		)
Gross Proceeds		466,754			373,563			229,536			211,811
Selling, General & Administrative Expenses		90,667			79,976			47,768			40,185
Accrued Continuing Costs (see note 3)		59,195			63,714			17,064			37,873
Operating Proceeds		316,892			229,873			164,704			133,753
Other Income/(Expense)
Interest Income		125			790			8			360
Interest Expense		(10,333		)	(7,584		)	(5,423		)	(4,102		)
Other, Net		641			1,479			545			761
Other (Expense)		(9,567		)	(5,315		)	(4,870		)	(2,981		)
Proceeds before Minority Interest and Income Tax Expense		307,325			224,558			159,834			130,772
Minority Interest		(1,658		)	—			(846		)	—
Income Tax (Expense)/Benefit		(5		)	6			(5		)	6
Net Proceeds Resulting from Member and Non-Member Business		$	305,662		$	224,564		158,983			130,778
Distribution of Net Proceeds:
Credited/(Charged) to Members’ Investments:
Non-Member Business Income		$	2,626		$	1,924		$	1,360		$	1,125
Unit Retains Declared to Members		—			—			—			—
Net Credit to Members’ Investments		2,626			1,924			1,360			1,125
Payments to/due Members for Sugarbeets, Net of Unit Retains Declared		303,036			222,640			157,623			129,653
Total		$	305,662		$	224,564		$	158,983		$	130,778

 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 

3

 

AMERICAN CRYSTAL SUGAR COMPANY

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars In Thousands)

 

		For the Six Months Ended
		February 29, 2004			February 28, 2003
Cash Provided By/(Used In) Operations:
Net Proceeds Resulting from Member and Non-Member Business		$	305,662		$	224,564
Payments to/due Members for Sugarbeets, Net of Unit Retains Declared		(303,036		)	(222,640		)
Add/(Deduct) Non-Cash Items:
Depreciation and Amortization		35,430			28,996
(Income) from Equity Method Investees		(571		)	(1,149		)
Loss on the Disposition of Property and Equipment		390			159
Deferred Gain Recognition		(99		)	(99		)
Minority Interest in ProGold Limited Liability Company		1,658			—
Changes in Assets and Liabilities:
Receivables		(20,351		)	5,236
Inventories		(325,980		)	(259,993		)
Prepaid Expenses		1,634			801
Long-Term Prepaid Pension Expense		(8,712		)	1,617
Advances To/Due to Related Parties		6,446			10,663
Accounts Payable		(2,872		)	2,741
Accrued Continuing Costs		59,195			63,714
Other Liabilities		3,260			3,312
Amounts Due Growers		116,875			49,487
Net Cash (Used In) Operations		(131,071		)	(92,591		)
Cash Provided By/(Used In) Investing Activities:
Purchases of Property and Equipment		(9,115		)	(10,593		)
Purchases of Property and Equipment Held for Lease		(550		)	—
Proceeds from the Sale of Property and Equipment		39			91
Equity Refund from CoBank, ACB		2,133			682
Investments in Marketing Cooperatives		1,049			(463		)
Acquistion by Sidney Sugars Incorporated		—			(35,184		)
Acquisition by Crab Creek Sugar Company		(5,763		)	—
Changes in Other Assets		4,545			(60		)
Net Cash (Used In) Investing Activities		(7,662		)	(45,527		)
Cash Provided By/(Used In) Financing Activities:
Net Proceeds from/(Payments on) Short-Term Debt		167,866			136,230
Proceeds from Issuance of Long-Term Debt		—			31,000
Long-Term Debt Repayment		(16,997		)	(18,038		)
Proceeds from Issuance of Stock		4,023			4,891
Payment of Unit Retains & Equity Retention		(16,389		)	(15,962		)
Net Cash Provided by Financing Activities		138,503			138,121
Increase (Decrease) In Cash and Cash Equivalents		(230		)	3
Cash and Cash Equivalents, Beginning of Year		859			22
Cash and Cash Equivalents, End of Period		$	629		$	25

 

Non-Cash Investing and Financing Activities: In September 2003, a note payable in the amount of $969,000 was issued in connection with the acquisition by Crab Creek Sugar Company.

 

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

 

4

 

AMERICAN CRYSTAL SUGAR COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS AND THREE MONTHS ENDED

FEBRUARY 29, 2004 AND FEBRUARY 28, 2003

 

Note 1:   Basis of Presentation

 

The unaudited consolidated financial statements of American Crystal Sugar Company (the Company) contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America.  However, in the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.

 

The Company’s consolidated financial statements are comprised of American Crystal Sugar Company, its wholly-owned subsidiaries Sidney Sugars Incorporated (Sidney Sugars) and Crab Creek Sugar Company (Crab Creek), and ProGold Limited Liability Company (ProGold), a limited liability company in which the Company holds a 51 percent ownership interest.

 

Sidney Sugars was formed in fiscal 2003 under the laws of the State of Minnesota, and on October 7, 2002, acquired three sugarbeet processing facilities and the related marketing allocations associated with such facilities.  Activities associated with Sidney Sugars are considered non-member business.

 

Crab Creek was formed in fiscal 2003 under the laws of the State of Minnesota, and on September 8, 2003, acquired the control of a sugarbeet processing facility and the related marketing allocations associated with such facility (See Note 7).

 

Effective May 1, 2003, the Company acquired an additional five percent ownership interest in ProGold, resulting in an increase in the Company’s ownership in ProGold to 51 percent.  Due to the Company’s resulting controlling ownership interest in ProGold, effective May 1, 2003, the Company began to include ProGold in its consolidated financial statements.  The financial statements for prior periods have not been restated and therefore do not include consolidated data pertaining to ProGold prior to May 1, 2003.

 

All material inter-company transactions have been eliminated.

 

The operating results for the six month period ended February 29, 2004 are not necessarily indicative of the results that may be expected for the year ended August 31, 2004.

 

The amount paid to shareholders for sugarbeets (member beet payment) depends on the future selling prices of sugar and agri-products as well as processing and other costs incurred during the remainder of the fiscal year associated with the 2003 Red River Valley sugarbeet crop (RRV crop).  The amount paid to non-member growers for sugarbeets (non-member beet payment) depends on the future selling prices of sugar and the related selling expenses associated with the 2003 Sidney sugarbeet crop (Sidney crop).  For the purposes of this report, the amount of the beet payments, future revenues and costs have been estimated.  Therefore, adjustments with respect to these estimates may be necessary in the future, as additional information becomes available.

 

These financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual report for the year ended August 31, 2003.

 

Certain reclassifications have been made to the February 28, 2003 consolidated financial statements to conform with the February 29, 2004 presentation.

 

5

 

Note 2:   Inventories

 

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

 

		02/29/04			02/28/03			8/31/03
Refined Sugar, Pulp, Molasses, Other Agri-Products and Sugar Beet Seed		$	312,836		$	258,079		$	111,259
Unprocessed Sugarbeets		126,603			101,047			—
Maintenance Parts & Supplies		17,522			17,361			19,722
Total Inventories		$	456,961		$	376,487		$	130,981

 

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

 

Note 3:   Accrued Continuing Costs

 

For interim reporting, the Net Proceeds from Member Business is based on the forecasted gross beet payment and the percentage of the tons of sugarbeets processed to the total estimated tons of sugarbeets to process for a given crop year.  The Net Proceeds from the operations of Sidney Sugars is based on the forecasted net income for the fiscal year and the percentage of the tons of non-member sugarbeets processed to the total estimated tons of non-member sugarbeets to process for a given fiscal year.

 

Accrued continuing costs represent the difference between the Net Proceeds as determined above and actual member business crop year and Sidney Sugars fiscal year revenues realized and expenses incurred through the end of the reporting period.  Accrued continuing costs are reflected in the Consolidated Financial Statements as a cost on the Consolidated Statements of Operations and as a current liability on the Consolidated Balance Sheets.

 

Note 4:   Members’ Investments

 

		Par Value			Shares Authorized		Shares Issued & Outstanding
Preferred Stock:
April 7, 2004		$	76.77		600,000		498,570
February 29, 2004		$	76.77		600,000		498,570
August 31, 2003		$	76.77		600,000		498,570
February 28, 2003		$	76.77		600,000		498,570
Common Stock:
April 7, 2004		$	10.00		4,000		2,996
February 29, 2004		$	10.00		4,000		2,971
August 31, 2003		$	10.00		4,000		2,995
February 28, 2003		$	10.00		4,000		3,008

 

Note 5:   Interest Paid

 

Interest paid, net of amounts capitalized, was $8.9 million and $8.8 million for the six months ended February 29, 2004 and February 28, 2003, respectively.

 

6

 

Note 6:   Short-Term Debt

 

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

 

As of February 29, 2004, the Company had outstanding commercial paper of $194.9 million at an average interest rate of 1.34% and maturity dates between March 1, 2004 and May 28, 2004.  In addition, the Company had an outstanding non-recourse loan with the CCC of $23.0 million, against which one million hundredweight of sugar was pledged as collateral.  The CCC loan carried an interest rate of 1.99% and a maturity date of August 31, 2004.  The Company had no outstanding short-term debt with CoBank, ACB as of February 29, 2004.

 

As of February 28, 2003, the Company had outstanding commercial paper of $143.2 million at an average interest rate of 2.02% and maturity dates between March 3, 2003 and June 9, 2003.  The Company had no outstanding short-term debt with CoBank, ACB or the CCC as of February 28, 2003.

 

Note 7:   Crab Creek Sugar Company

 

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

 

Note 8:   Segment Reporting

 

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

 

7

 

Summarized financial information concerning the Company’s reportable segments for the six months and three months ended February 29, 2004 is shown below:

 

		For the Six Months Ended February 29, 2004
		(Dollars In Thousands)
		Sugar			Leasing			Eliminations			Consolidated
Net Revenue from External Customers		$	459,167		$	12,909		$	—		$	472,076
Gross Proceeds		$	459,825		$	6,929		$	—		$	466,754
Depreciation and Amortization		$	29,922		$	5,508		$	—		$	35,430
Interest Income		$	122		$	3		$	—		$	125
Interest Expense		$	6,855		$	3,478		$	—		$	10,333
Income from Equity Method Investees		$	2,296		$	—		$	(1,725	)	$	571
Other Income/(Expense), Net		$	2,391		$	(25	)	$	(1,725	)	$	641
Net Proceeds		$	305,662		$	3,383		$	(3,383	)	$	305,662
Capital Expenditures		$	9,115		$	550		$	—		$	9,665

 

		For the Three Months Ended February 29, 2004
		(Dollars In Thousands)
		Sugar			Leasing			Eliminations			Consolidated
Net Revenue from External Customers		$	235,398		$	6,474		$	—		$	241,872
Gross Proceeds		$	226,054		$	3,482		$	—		$	229,536
Depreciation and Amortization		$	14,884		$	2,757		$	—		$	17,641
Interest Income		$	7		$	1		$	—		$	8
Interest Expense		$	3,688		$	1,735		$	—		$	5,423
Income from Equity Method Investees		$	1,158		$	—		$	(880	)	$	278
Other Income/(Expense), Net		$	1,425		$	—		$	(880	)	$	545
Net Proceeds		$	158,983		$	1,726		$	(1,726	)	$	158,983
Capital Expenditures		$	4,066		$	294		$	—		$	4,360

 

		As of February 29, 2004
		(Dollars In Thousands)
		Sugar			Leasing			Eliminations			Consolidated
Property and Equipment, Net		$	323,824		$	3		$	—		$	323,827
Assets Held for Lease, Net		$	—		$	165,478		$	—		$	165,478
Identifiable Assets		$	1,004,930		$	177,290		$	(47,281	)	$	1,134,939

 

The Company had only one reportable segment, Sugar, for the six months and three months ended February 28, 2003.

 

Note 9:   Recently Issued Accounting Pronouncements

 

The Financial Accounting Standards Board has issued an amendment to Financial Accounting Standards No. 132, Employer’s Disclosure about Pensions and Other Postretirement Benefits.  Such amendment requires additional disclosures to interim and annual financial statements which are effective for the interim period ending May 31, 2004, but does not change the recognition requirements related to pensions and postretirement benefits.  Management is reviewing this pronouncement to determine its impact on the disclosures in the interim and annual financial statements, but does not expect the implementation of this pronouncement to have a significant impact on the interim or annual financial statements.

 

8

 

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition for the Six Months and Three Months Ended February 29, 2004 and February 28, 2003

 

This report contains forward-looking statements that involve risks and uncertainties.  Such forward-looking statements include, among others, those statements including the words “expect”, “anticipate”, “believe”, “may” and similar expressions.  The Company’s actual results could differ materially from those indicated.  Important factors that could cause or contribute to such differences include, without limitation, market factors, weather and general economic conditions, farm and trade policy, available quantity and quality of sugarbeets.  For a more complete discussion of “Important Factors”, please refer to the Company’s 2003 Form 10-K.

 

Comparison of the Six Months Ended February 29, 2004 and February 28, 2003

 

Revenue for the six months ended February 29, 2004, was $472.1 million, an increase of $79.0 million from the same period last year.  Revenue from total sugar sales increased 18.1 percent due to a 18.6 percent increase in the hundredweight sold partially offset by a .4 percent decrease in the average selling price per hundredweight.  Revenue from pulp sales decreased 4.7 percent due to a 7.4 percent decrease in the volume of pulp tons sold partially offset by a 3.0 percent increase in the average selling price per ton.  Revenue from molasses sales increased 118.3 percent due to a 135.0 percent increase in the volume of molasses sold, partially offset by a 7.1 percent decrease in the average selling price per ton.  The increase in the volume of products sold was due primarily to the additional sales associated with the larger crop in the Red River Valley and production at the Sidney, Montana factory.  Revenue from sales of Concentrated Separated By-Product (CSB), a by-product of the molasses desugarization process, decreased 12.9 percent due to a 16.0 percent decrease in the average selling price per ton partially offset by a 3.7 percent increase in the volume of CSB sold.  Rental revenue on the ProGold operating lease was $12.9 million.

 

Cost of product sold for the six months ended February 29, 2004, exclusive of payments to members for sugarbeets, decreased $14.2 million as compared to the same period last year.  The cost recognized associated with the non-member sugarbeets (Sidney crop) was $43.8 million for the six months ended February 29, 2004, an increase of $12.4 million when compared to the same period last year.  Direct processing costs for sugar and pulp increased 22.5 percent.  This was primarily due to harvesting 15.7 percent more sugarbeets and processing 18.0 percent more sugarbeets than in fiscal 2003.  The increase in sugarbeets processed this year was primarily due to the delay last year of the 2002 Red River Valley crop processing campaign startup because of adverse planting and growing conditions which slowed the maturity of the crop.  Increased processing costs resulted from higher prices for natural gas and major supplies, increased major supplies usage and higher labor costs.  Fixed and committed expenses increased 8.4 percent reflecting higher costs for wastewater treatment and increased costs related to the operations of Sidney Sugars.  The change in product inventories impacted the cost of product sold favorably by $40.7 million. The value for sugar inventories as of February 29, 2004 increased compared to the prior year due to a higher inventory level partially offset by a lower net realizable value per hundredweight. The cost associated with purchased sugar decreased by $13.7 million due to no delay in the startup of the 2003 crop campaign.  The delayed startup last year resulted in the requirement to purchase additional sugar to service customers during the delay.  Costs related to ProGold were $6.0 million.  Costs related to Crab Creek Sugar were $ .7 million.

 

Selling, general and administrative expenses for the six months ended February 29, 2004, increased $10.7 million as compared to the same period last year.  Selling expenses increased $8.8 million primarily due to the increase in the volume of sugar sold along with higher warehousing costs and additional costs related to Sidney Sugars.  General and Administrative costs increased $1.9 million due in part to higher employee benefit costs along with other general cost increases.

 

Interest income for the six months ended February 29, 2004, decreased $ .7 million when compared to the same period last year. This was primarily due to a lower average balance of investments and slightly lower interest rates.

 

9

 

Interest expense for the six months ended February 29, 2004, increased $2.7 million as compared to the same period last year. This was the result of the consolidation of ProGold along with increased average borrowing levels for short-term and long-term debt, partially offset by lower long-term and short-term interest rates.

 

Non-member business activities resulted in a gain of $2.6 million for the six months ended February 29, 2004, as compared to a gain of $1.9 million for the same period last year.  The gain in both periods was due primarily to activities related to Sidney Sugars partially offset by the activities related to the investment in ProGold.

 

Comparison of the Three Months Ended February 29, 2004 and February 28, 2003

 

Revenue for the three months ended February 29, 2004, was $241.9 million, an increase of $50.0 million from the same period last year.  Revenue from total sugar sales increased 26.9 percent due to a 29.0 percent increase in the hundredweight sold partially offset by a 1.7 percent decrease in the average selling price per hundredweight.  Revenue from pulp sales decreased 21.3 percent due to a 24.6 percent decrease in the volume of pulp tons sold partially offset by a 4.3 percent increase in the average selling price per ton.  Revenue from molasses sales increased 103.3 percent due to a 117.4 percent increase in the volume of molasses sold, partially offset by a 6.5 percent decrease in the average selling price per ton.  The increase in the volume of products sold was due primarily to the additional sales associated with the larger crop in the Red River Valley and the production at the Sidney, Montana factory.  Revenue from sales of Concentrated Separated By-Product (CSB), a by-product of the molasses desugarization process, decreased 7.2 percent due to a 14.8 percent decrease in the average selling price per ton partially offset by an 8.9 percent increase in the volume of CSB sold.  Rental revenue on the ProGold operating lease was $6.5 million for the three months ended February 29, 2004.

 

Cost of product sold for the three months ended February 29, 2004, exclusive of payments to members for sugarbeets, increased $32.3 million as compared to the same period last year.  The cost recognized associated with the non-member sugarbeets (Sidney crop) was $22.4 million for the three months ended February 29, 2004 an increase of $4.2 million when compared to the same period last year.  Direct processing costs for sugar and pulp increased 10.7 percent.  Increased processing costs resulted form higher prices for natural gas and major supplies, increased major supplies usage and higher labor costs.  Costs also increased due to processing 1.3 percent more sugarbeets in the three months ended February 29, 2004, than for the same period last year.  Fixed and committed expenses increased 6.9 percent reflecting higher chemical, coal and limerock costs for wastewater treatment.  The change in product inventories impacted the cost of product sold unfavorably by $21.2 million due primarily to a decrease in sugar inventories. The cost associated with purchased sugar decreased by $ .5 million due primarily to lower sales volume.  Costs related to ProGold were $3.0 million.  Costs related to Crab Creek Sugar were $ .4 million.

 

Selling, general and administrative expenses for the three months ended February 29, 2004 increased $7.6 million as compared to the same period last year.  Selling expenses increased $5.8 million primarily due to the increase in the volume of sugar sold along with increased warehousing costs.  General and Administrative costs increased $1.8 million due in part to higher employee benefit costs along with other general cost increases.

 

Interest income for the three months ended February 29, 2004 decreased $ .4 million when compared to the same period last year. This was primarily due to a lower average balance of investments and slightly lower interest rates.

 

Interest expense increased $1.3 million for the three months ended February 29, 2004, as compared to the same period last year. This was the result of the consolidation of ProGold and increased average borrowing levels for short-term and long-term debt, partially offset by lower long-term and short-term interest rates.

 

Non-member business activities resulted in a gain of $1.4 million for the three months ended February 29, 2004, as compared to a gain of $1.1 million for the same period last year.  The gain in both

 

10

 

periods was due primarily to activities related to Sidney Sugars partially offset by the activities related to the investment in ProGold.

 

Regional and Bilateral Free Trade Agreements

 

The United States Government is pursuing an aggressive agenda on international trade.  It has negotiated the terms of the Central American Free Trade Agreement and the Australian Free Trade Agreement.  Both countries and/or regions are major producers of sugar.  Several other bilateral and regional trade agreements are being negotiated or considered by the Bush Administration.  Many of the countries included in these agreements are major sugar producers and exporters.  If reductions in sugar tariffs are included in these agreements, eventually excess sugar from these regions could enter the U.S. market and put pressure on domestic sugar prices.  The impact of the various trade agreements on the Company can not be assessed at this time due to the uncertainty concerning the terms of the agreements and whether they will ultimately be implemented.  It is possible, however, that the passage of various trade agreements could have a material adverse effect on the Company through a reduction in acreage that can be planted by the Company’s shareholders, and/or a reduction in sugar selling prices, and a corresponding reduction in the beet payment to the shareholders.  The magnitude of the impact can not be determined at this time.

 

Environmental Matters

 

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

 

Liquidity and Capital Resources

 

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

 

Because sugar is sold throughout the year (while sugarbeets are processed primarily in the fall, winter and spring) and because substantial amounts of equipment are required for its operations, the Company has utilized substantial outside financing on both a seasonal and long-term basis to fund such operations.  The majority of such financing has been provided by a consortium of lenders lead by CoBank, ACB.  The Company has a long-term debt commitment with CoBank, ACB of $204.4 million, of which $166.8 million was outstanding as of February 29, 2004.  In addition, the Company had long-term debt outstanding, as of February 29, 2004, of $50 million from a private placement of Senior Notes that occurred in September of 1998; $17.1 million from a private placement of Senior Notes that occurred in January of 2003; $43.3 million from nine separate issuances of Pollution Control and Industrial Development Revenue Bonds, a term loan with Bank of North Dakota of $4.0 million and note payable of $1.0 million.  The Company also has a seasonal line of credit with a consortium of lenders led by CoBank, ACB of $280 million, of which there was no outstanding balance as of February 29, 2004, and a line of credit with Wells Fargo Bank for $1.0 million.  The Company’s commercial paper program provides short-term borrowings of up to $225 million of which approximately $194.9 million was outstanding as of

 

11

 

February 29, 2004.  Any borrowings under the commercial paper program will act to reduce the available credit under the CoBank, ACB seasonal line of credit by a commensurate amount.  The Company also had an outstanding non-recourse loan with the CCC, as of February 29, 2004, of $23.0 million, against which one million hundredweight of sugar was pledged as collateral.

 

The changes that have occurred in the Company’s financial statements from August 31, 2003 to February 29, 2004 were primarily due to normal business seasonality and the acquisition activities related to Crab Creek.  The first six months of the Company’s fiscal year includes the completion of the sugarbeet harvest, start of the processing campaign, the final payments to growers for sugarbeets delivered from the previous year’s crop and the initial payments to growers for sugarbeets delivered from the current year’s crop.  The cash used in operations of $131.1 million and investing activities of $7.7 million was funded primarily through the cash provided by the proceeds from short-term debt.  The net cash provided by financing activities of $138.5 million was primarily comprised of the net proceeds from short-term debt of $167.9 million and proceeds from the installment sale of stock of $4.0 million partially offset by the repayment of long-term debt of $17.0 million and the payment of unit retains of $16.4 million.

 

Working capital has decreased $15.0 million from $49.6 million at the beginning of the year to $34.6 million as of February 29, 2004 primarily due to additional short-term debt, increases in payables and an increase in amounts due growers partially offset by increased inventories.  All of which are primarily related to the commencement of the processing campaign.  Working capital as of February 29, 2004 was $34.6 million, a decrease of $11.0 million when compared to $45.6 million of working capital as of February 28, 2003.  The lower level of working capital as of February 29, 2004 was primarily due to increased amounts due growers and higher short-term debt partially offset by increased inventories and accounts receivable.

 

Capital expenditures for the six months ended February 29, 2004 were $9.7 million.  Capital expenditures for the same period in 2003 were $26.4 million which included $15.8 million related to the acquisition of property and equipment by Sidney Sugars.  The Company had outstanding commitments totaling $5.0 million as of February 29, 2004 for equipment and construction contracts related to various capital projects.

 

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

 

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

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

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

 

12

 

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

 

Item 4.  Controls and Procedures

 

The Company’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 240.13a-15e and 15d-15e promulgated under the Securities Exchange Act of 1934) as of February 29, 2004.  Based on that review and evaluation, which included inquiries made to certain other employees of the Company, the chief executive officer and chief financial officer have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, are reasonably adequate to ensure that they are provided with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934.

 

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.  There were no significant deficiencies or material weaknesses identified, and therefore no corrective actions were taken.

 

PART II. OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

From time to time and in the ordinary course of its business, the Company is named as a defendant in legal proceedings related to various issues, including worker’s compensation claims, tort claims and contractual disputes.  The Company is currently involved in certain legal proceedings, which have arisen in the ordinary course of the Company’s business.  The Company is also aware of certain other potential claims, which could result in the commencement of legal proceedings.  The Company carries insurance, which provides protection against certain types of claims.  With respect to current litigation and potential claims of which the Company is aware, the Company’s management believes that (i) the Company has insurance protection to cover all or a portion of any judgments which may be rendered against the Company with respect to certain claims or actions and (ii) any judgments which may be entered against the Company and which may exceed such insurance coverage or which may arise in actions involving potential liabilities not covered by insurance policies are not likely to have a material adverse effect upon the Company, or its assets or operations.

 

Item 2.  Changes in Securities and Use of Proceeds.

 

None

 

Item 3.  Default Upon Senior Securities

 

None

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

None

 

Item 5.  Other Information.

 

None.

 

13

 

Item 6. Exhibits and Reports on Form 8-K

 

(a)   Exhibits

 

Item No.				Method of Filing
3.1		Restated Articles of Incorporation of American Crystal Sugar Company		Incorporated by reference to Exhibit 3(i) from the Company’s Registration Statement on Form S-1 (File No. 33-83868), declared effective November 23, 1994.
3.2		Restated By-laws of American Crystal Sugar Company		Incorporated by reference to Exhibit 3(ii) from the Company’s Registration Statement on Form S-1 (File No. 333-11693), declared effective November 13, 1996.
4.1		Restated Articles of Incorporation of American Crystal Sugar Company		See Exhibit 3.1
4.2		Restated By-laws of American Crystal Sugar Company		See Exhibit 3.2
10.1		Trademark License Agreement between Registrant and United Sugars Corporation, dated November 1, 1993		Incorporated by reference to Exhibit 10(l) from the Company’s Registration Statement on Form S-1 (File No. 33-83868), declared effective November 23, 1994.
10.2		Form of Operating Agreement between Registrant and ProGold Limited Liability Company		Incorporated by reference to Exhibit 10(u) from the Company’s Registration Statement on Form S-1 (File No. 33-83868), declared effective November 23, 1994.
10.3		Form of Member Control Agreement between Registrant and ProGold Limited Liability Company		Incorporated by reference to Exhibit 10(v) from the Company’s Registration Statement on Form S-1 (File No. 33-83868), declared effective November 23, 1994.
10.4		Administrative Services Agreement between Registrant and ProGold Limited Liability Company		Incorporated by reference to Exhibit 10(w) from the Company’s Registration Statement on Form S-1 (File No. 33-83868), declared effective November 23, 1994.
+10.5		Coal Supply Agreement between Registrant and Spring Creek Coal Company, dated August 25, 1995		Incorporated by reference to Exhibit 10(y) from the Company’s Registration Statement on Form S-1 (File No. 333-11693), declared effective November 13, 1996.

 

14

 

+10.6		Coal Transportation Agreement between Registrant and Northern Coal Transportation Company, dated August 25, 1995		Incorporated by reference to Exhibit 10(z) from the Company’s Registration Statement on Form S-1 (File No. 333-11693), declared effective November 13, 1996.
10.7		Pledge Agreement between Registrant and First Union Trust Company, NA		Incorporated by reference to Exhibit 10(ee) from the Company’s Annual Report on Form 10-K for the year ended August 31, 1998.
10.8		Indemnity Agreement between Registrant, Newcourt Capital USA Inc., Crystech, LLC and Crystech Senior Lender Trust		Incorporated by reference to Exhibit 10(ff) from the Company’s Annual Report on Form 10-K for the year ended August 31, 1998.
10.9		Tolling Services Agreement between Crystech, LLC and Registrant		Incorporated by reference to Exhibit 10(gg) from the Company’s Annual Report on Form 10-K for the year ended August 31, 1998.
10.10		Operations and Maintenance Agreement between Crystech, LLC and Registrant		Incorporated by reference to Exhibit 10(hh) from the Company’s Annual Report on Form 10-K for the year ended August 31, 1998.
+10.11		Limited Liability Company Agreement of Crystech, LLC		Incorporated by reference to Exhibit 10(ii) from the Company’s Annual Report on Form 10-K for the year ended August 31, 1998.
10.12		Master Agreement between the Registrant and Bakery, Confectionery, Tobacco Workers & Grain Millers AFL-CIO, CLC		Incorporated by reference to Exhibit 10.22 from the Company’s Annual Report on Form 10-K for the year ended August 31, 1999
10.13		Registrant’s Senior Note Purchase Agreement		Incorporated by reference to Exhibit 10.24 from the Company’s Annual Report on Form 10-K for the year ended August 31, 1999
10.14		Registrant’s Senior Note Inter-creditor and Collateral Agency Agreement		Incorporated by reference to Exhibit 10.25 from the Company’s Annual Report on Form 10-K for the year ended August 31, 1999
10.15		Registrant’s Senior Note Restated Mortgage and Security Agreement		Incorporated by reference to Exhibit 10.26 from the Company’s Annual Report on Form 10-K for the year ended August 31, 1999
10.16		Employment Agreement between the Registrant and James J. Horvath		Incorporated by reference to Exhibit 10.28 from the Company’s Annual Report on Form 10-K form the year ended August 31, 1999
10.17		Stipulation Agreement between Registrant and State of Minnesota Pollution Control Agency, dated April 4, 2000		Incorporated by reference to Exhibit 10.28 from the Company’s Form 10-Q for the quarter ended May 31, 2000

 

15

 

10.18		Board of Directors Deferred Compensation Plan, dated June 30, 1994		Incorporated by reference to Exhibit 10.29 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2000
10.19		Long Term Incentive Plan, dated June 23, 1999		Incorporated by reference to Exhibit 10.31 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2000
10.20		Addendum to Master Agreement between the Registrant and Bakery, Confectionery, Tobacco Workers & Grain Millers AFL-CIO, CLC dated July 10, 2001		Incorporated by reference to Exhibit 10.30 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2001
10.21		Uniform Member Sugar Marketing Agreement between the Registrant and United Sugars Corporation dated September 1, 2001.		Incorporated by reference to Exhibit 10.27 from the Company’s Form 10-Q for the quarter ended November 30, 2001
10.22		Uniform Member Marketing Agreement between the Registrant and Midwest Agri-Commodities Company dated September 1, 2001.		Incorporated by reference to Exhibit 10.28 from the Company’s Form 10-Q for the quarter ended November 30, 2001
10.23		Retirement Plan A Restatement		Incorporated by reference to Exhibit 10.28 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2002
10.24		Retirement Plan B Restatement		Incorporated by reference to Exhibit 10.29 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2002
10.25		Registrant’s Senior Note Purchase Agreement dated January 15, 2003		Incorporated by reference to Exhibit 10.29 from the Company’s Form 10-Q for the quarter ended February 28, 2003
10.26		Growers’ Contract (5-year Agreement) for the crop years 2003 through 2007		Incorporated by reference to Exhibit 10.30 from the Company’s Form 10-Q for the quarter ended February 28, 2003
10.27		Growers’ Contract (Annual Contract) for crop year 2003.		Incorporated by reference to Exhibit 10.31 from the Company’s Form 10-Q for the quarter ended February 28, 2003
+10.28		Beet Loading and Hauling Agreement between the Registrant and Transystems LLC for the crop years 2003 through 2007		Incorporated by reference to Exhibit 10.31 from the Company’s Form 10-Q for the quarter ended May 31, 2003
+10.29		2003 Sugarbeet Delivery Agreement between Sidney Sugars Incorporated and Growers		Incorporated by reference to Exhibit 10.32 from the Company’s Form 10-Q for the quarter ended May 31, 2003
10.30		Stipulation Agreement between Registrant and State of Minnesota Pollution Control Agency, dated August 5, 2003		Incorporated by reference to Exhibit 10.30 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2003
10.31		Term and Seasonal Loan Agreements between the Registrant and CoBank, ACB dated July 21, 2003		Incorporated by reference to Exhibit 10.31 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2003

 

16

 

10.32		Seasonal Loan Agreement between the Registrant and CoBank, ACB dated November 7, 2003		Incorporated by reference to Exhibit 10.32 from the Company’s Form 10-Q for the quarter ended November 30, 2003
10.33		Amendments to Registrant’s Senior Note Purchase Agreements dated November 26, 2003		Incorporated by reference to Exhibit 10.33 from the Company’s Form 10-Q for the quarter ended November 30, 2003
21.1		List of Subsidiaries of the Registrant		Incorporated by reference to Exhibit 21.1 from the Company’s Annual Report on Form 10-K for the year ended August 31, 2003
31.1		Rule 13a-14(a)/15(d)-14(a) Certification of the Chief Executive Officer		Accompanying herewith electronically
31.2		Rule 13a-14(a)/15(d)-14(a) Certification of the Chief Financial Officer		Accompanying herewith electronically
32.1		Section 1350 Certification of the Chief Executive Officer		Accompanying herewith electronically
32.2		Section 1350 Certification of the Chief Financial Officer		Accompanying herewith electronically

 

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

 

 (b) Reports on Form 8-K

 

None

 

 

SIGNATURES

 

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

 

 

			AMERICAN CRYSTAL SUGAR COMPANY
			(Registrant)
Date:	April 14, 2004			/s/ Joseph Talley
				Joseph Talley
				Vice President - Finance,
				Chief Financial Officer
				Duly Authorized Officer

 

17