Edgar Filing: CHS INC

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A-4


x		Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended August 31, 2003 or

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to .

Commission file number: 0-50150

CHS Inc.

(Exact name of registrant as specified in its charter)


Minnesota		41-0251095
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

5500 Cenex Drive		(651) 355-6000
Inver Grove Heights, Minnesota 55077		(Registrant’s Telephone number,
(Address of principal executive office)		including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

8% Cumulative Redeemable Preferred Stock (Title of Class)

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ü NO ____

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:

Not applicable.

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

YES ____ NO ü

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:

The registrant’s voting and non-voting common equity has no market value (the registrant is a member cooperative).

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

The registrant has no common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.


		Page No.
	PART II.
Item 8	Financial Statements and Supplementary Data		[__]
	PART IV.
Item 15	Exhibits, Financial Statements and Reports Filed on Form 8-K		[__]
SIGNATURES			[__]
Consent of Independent Registered Public Acct Firm
Independent Auditors' Consent
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906

CHS Inc.

Explanatory Note

This Form 10-K/ A-4 amends the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 31, 2003, as previously amended by the Registrant’s Form 10-K/ A-3, Form 10-K/ A-2 and Form 10-K/ A-1. This Form 10-K/A-4 is being filed solely to amend Item 8, Item 15(a)(1) and Item 15(a)(3) to include, pursuant to the requirements of Section 210.3-09 of Regulation S-X and in place of those included in the Registrant’s Annual Report, the separate financial statements of Ventura Foods, LLC and subsidiary, a nonconsolidated 50% owned equity investment. In addition, in connection with the filing of this Form 10-K/ A-4 and pursuant to the rules of the Securities and Exchange Commission, the Registrant is including with this Form 10-K/ A-4 certain currently dated certifications. No other changes have been made to the Annual Report. This Form 10-K/A does not modify or update the disclosure contained in the Form 10-K, as amended by the Form-K/ A-3, Form-K/ A-2 and Form 10-K/ A-1 in any way other than as required to reflect the amendments discussed above and reflected below.

PART II.

Item 8. Financial Statements and Supplementary Data

Item 8 is hereby amended to add and replace the current financial statements of Ventura Foods, LLC and subsidiary, a non-consolidated 50% owned equity investment. The financial statements of Ventura Foods, LLC, which are included in this Form 10-K/A following the signatures, are hereby incorporated by reference in this Item 8.

PART IV.

Item 15. Exhibits, Financial Statements and Reports Filed on Form 8-K

(a)(1) FINANCIAL STATEMENTS

Item 15(a)(1) is hereby amended to add and replace the following:

Ventura Foods, LLC and subsidiary, a non-consolidated 50% owned equity investment


Independent Auditors’ Report			F-30
Consolidated Balance Sheets as of March 31, 2004 and 2003			F-31
Consolidated Statements of Income for the years ended March 31, 2004, 2003 and 2002			F-32
Consolidated Statements of Members’ Capital for the years ended March 31, 2004, 2003 and 2002			F-33
Consolidated Statements of Cash Flows for the years ended March 31, 2004, 2003 and 2002			F-34
Notes to Consolidated Financial Statements for the years ended March 31, 2004, 2003 and 2003			F-35

(a)(3) EXHIBITS


3.1		Articles of Incorporation of the Company, as amended.(13)
3.2		Articles of Amendment to the Articles of Incorporation.(18)
3.3		Bylaws of the Company, as amended.(13)
4.1		Resolution Creating a Series of Preferred Equity to be Designated 8% Cumulative Redeemable Preferred Stock.(14)
4.2		Unanimous Written Consent Resolution of the Board of Directors of Cenex Harvest States Cooperatives Amending the Amended and Restated Resolution Creating a Series of Preferred Equity to be Designated 8% Cumulative Redeemable Preferred Stock.(15)
4.3		Resolution amending a previous Preferred Stock Resolution with respect to the record date for payment of dividends for the Company’s 8% Redeemable Preferred Stock.(17)
4.4		Form of Certificate Representing 8% Cumulative Redeemable Preferred Stock.(15)
10.1		Lease between the Port of Kalama and North Pacific Grain Growers, Inc., dated November 22, 1960.(1)
10.2		Limited Liability Company Agreement for the Wilsey-Holsum Foods, LLC dated July 24, 1996.(1)
10.3		Long Term Supply Agreement between Wilsey-Holsum Foods, LLC and Harvest States Cooperatives dated August 30, 1996.(*)(1)
10.4		TEMCO, LLC Limited Liability Company Agreement between Cargill, Incorporated and Cenex Harvest States Cooperatives dated as of August 26, 2002.(12)
10.5		Cenex Harvest States Cooperatives Supplemental Savings Plan.(7)


10.6		Cenex Harvest States Cooperatives Supplemental Executive Retirement Plan.(7)
10.7		Cenex Harvest States Cooperatives Senior Management Compensation Plan.(7)
10.8		Cenex Harvest States Cooperatives Executive Long-Term Variable Compensation Plan.(7)
10.9		Cenex Harvest States Cooperatives Share Option Plan.(7)
10.9A		Amendment to Cenex Harvest States Share Option Plan, dated June 28, 2001.(10)
10.10		$225,000,000 Note Agreement (Private Placement Agreement) dated as of June 19, 1998 among Cenex Harvest States Cooperatives and each of the Purchasers of the Notes.(2)
10.10A		First Amendment to Note Agreement ($225,000,000 Private Placement), effective September 10, 2003, among CHS Inc. and each of the Purchasers of the notes.(19)
10.11		Credit Agreement (Revolving Loan) dated as of May 21, 2003 among Cenex Harvest States Cooperatives, CoBank, ACB, SunTrust Bank, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., BNP Paribas and the Syndication Parties.(17)
10.12		$200 Million Term Loan Credit Agreement dated as of June 1, 1998 among Cenex Harvest States Cooperatives, CoBank, ACB, and St. Paul Bank for Cooperatives, including Exhibit 2.4 (form of $200 Million Promissory Note).(2)
10.12A		First Amendment to Credit Agreement (Term Loan), effective as of May 31, 1999 among Cenex Harvest States Cooperatives, CoBank, ACB, and St. Paul Bank for Cooperatives.(4)
10.12B		Second Amendment to Credit Agreement (Term Loan) dated May 23, 2000 by and among Cenex Harvest States Cooperatives, CoBank, ACB, St. Paul Bank for Cooperatives and the Syndication Parties.(6)
10.12C		Third Amendment to Credit Agreement (Term Loan) dated May 23, 2001 among Cenex Harvest States Cooperatives, CoBank, ACB, and Parties.(9) the Syndication
10.12D		Fourth Amendment to Credit Agreement (Term Loan) dated May 22, 2002 among Cenex Harvest States Cooperatives, CoBank, ACB and Parties.(11) the Syndication
10.13		Limited Liability Agreement of United Harvest, LLC dated November 9, 1998 between United Grain Corporation and Cenex Harvest States Cooperatives.(3)
10.14		Joint Venture Agreement for Agriliance LLC, dated as of January 1, 2000 among Farmland Industries, Inc., Cenex Harvest States Cooperatives, United Country Brands, LLC and Land O’ Lakes, Inc.(5)
10.15		Employment Agreement dated November 6, 2003 by and between John D. Johnson and CHS Inc.(19)
10.16		CHS Inc. Special Supplemental Executive Retirement Plan.(19)
10.17		Note purchase and Private Shelf Agreement dated as of January 10, 2001 between Cenex Harvest States Cooperatives and The Prudential Insurance Company of America.(8)
10.17A		Amendment No. 1 to Note Purchase and Private Shelf Agreement, dated as of March 2, 2001.(8)


10.18		Note Purchase Agreement and Series D & E Senior Notes dated October 18, 2002.(12)
10.19		2002 Amended and Restated Credit Agreement (364-Day Revolving Loan) dated December 17, 2002 by and among National Cooperative Refinery Association, CoBank, ACB and Farm Credit Bank of Wichita, D/B/A U.S. AgBank, FCB.(16)
10.20		2003 Amended and Restated Credit Agreement ($15 million, 2 Year Facility) dated December 16, 2003 between CoBank, ACB, U.S. AgBank, FCB and the National Cooperative Refinery Association, Inc.(20)
21.1		Subsidiaries of the Registrant.(19)
23.1		Consent of Independent Registered Public Accounting Firm.(21)
23.2		Independent Auditors’ Consent.(21)
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(21)
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(21)
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(21)
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(21)

(*)		Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential portions of Exhibit 10.3 have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

(1)		Incorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-17865), filed February 7, 1997.

(2)		Incorporated by reference to the Company’s Form 10-Q Transition Report for the period June 1, 1998 to August 31, 1998, filed October 14, 1998.

(3)		Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended November 30, 1998, filed January 13, 1999.

(4)		Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended May 31, 1999, filed July 13, 1999.

(5)		Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended February 29, 2000 filed April 11, 2000.

(6)		Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended May 31, 2000, filed July 10, 2000.

(7)		Incorporated by reference to the Company’s Form 10-K for the year ended August 31, 2000, filed November 22, 2000.

(8)		Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended February 28, 2001, filed April 10, 2001.

(9)		Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended May 31, 2001, filed July 3, 2001.

(10)		Incorporated by reference to the Company’s Registration Statement on Form S-2 (File No. 333-65364), filed October 26, 2001.

(11)		Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended May 31, 2002, filed July 3, 2002.

(12)		Incorporated by reference to the Company’s Form 10-K for the year ended August 31, 2002, filed November 25, 2002.

(13)		Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended November 30, 2002, filed January 9, 2003.

(14)		Incorporated by reference to Amendment No. 1 to the Company’s Registration Statement on Form S-2 (File No. 333-101916), dated January 13, 2003.

(15)		Incorporated by reference to Amendment No. 2 to the Company’s Registration Statement on Form S-2 (File No. 333-101916), dated January 23, 2003.

(16)		Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended February 28, 2003, filed April 4, 2003.

(17)		Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended May 31, 2003, filed July 2, 2003.

(18)		Incorporated by reference to the Company’s Form 8-K, filed August 5, 2003.

(19)		Incorporated by reference to the Company’s Form 10-K for the year ended August 31, 2003 filed on November 21, 2003.

(20)		Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended February 29, 2004, filed April 7, 2004.

(21)		Filed herewith.

(b) Reports on Form 8-K

The Company filed an 8-K on June 10, 2004 to add a provision to its existing code of ethics.

(c) Exhibits

The exhibits shown in Item 15(a)(3) above are being filed herewith.

(d) Schedules

None.

Supplemental Information

As a cooperative, the Company does not utilize proxy statements.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


CHS Inc.

By:	/s/ JOHN SCHMITZ	Date:	June 29, 2004

	John Schmitz
Executive Vice President and Chief Financial Officer

CHS INC.

CONSOLIDATED BALANCE SHEETS



			August 31

			2003		2002


			(dollars in thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	168,249	$	108,192
	Receivables			763,780		741,578
	Inventories			801,883		759,663
	Other current assets			178,661		140,944

		Total current assets		1,912,573		1,750,377
Investments				532,893		496,607
Property, plant and equipment				1,122,982		1,057,421
Other assets				239,520		177,322

Total assets			$	3,807,968	$	3,481,727

LIABILITIES AND EQUITIES
Current liabilities:
	Notes payable		$	251,131	$	332,514
	Current portion of long-term debt			14,951		89,032
	Customer credit balances			58,417		26,461
	Customer advance payments			123,383		169,123
	Checks and drafts outstanding			85,239		84,251
	Accounts payable			627,250		517,667
	Accrued expenses			254,415		225,704
	Dividends and equities payable			39,049		56,510

		Total current liabilities		1,453,835		1,501,262
Long-term debt				648,222		483,092
Other liabilities				111,555		118,280
Minority interests in subsidiaries				112,645		89,455
Commitments and contingencies
Equities				1,481,711		1,289,638

Total liabilities and equities			$	3,807,968	$	3,481,727

The accompanying notes are an integral part of the consolidated financial statements.

F-1

CHS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



		For the years ended August 31

		2003			2002			2001


		(dollars in thousands)
Revenues:
	Net sales	$	9,270,734		$	7,156,454		$	7,464,242
	Patronage dividends		3,257			3,885			5,977
	Other revenues		124,542			109,459			116,254

			9,398,533			7,269,798			7,586,473
Cost of goods sold			9,058,951			6,940,926			7,181,433
Marketing, general and administrative			190,582			187,292			184,046

Operating earnings			149,000			141,580			220,994
Gain on legal settlements			(10,867	)		(2,970	)
Interest			48,675			42,455			61,436
Equity income from investments			(47,299	)		(58,133	)		(28,494	)
Minority interests			21,950			15,390			35,098

Income before income taxes			136,541			144,838			152,954
Income taxes			12,700			18,700			(25,600	)

Net income		$	123,841		$	126,138		$	178,554

Distribution of net income:
	Patronage refunds	$	90,000		$	92,900		$	128,900
	Unallocated capital reserve		33,841			33,238			49,654

Net income		$	123,841		$	126,138		$	178,554

The accompanying notes are an integral part of the consolidated financial statements.

F-2

CHS INC.

CONSOLIDATED STATEMENTS OF EQUITIES

AND COMPREHENSIVE INCOME


														Oilseed									Accumulated
		Capital			Nonpatronage						Wheat			Processing						Unallocated			Other			Allocated
		Equity			Equity			Preferred			Milling			& Refining			Patronage			Capital			Comprehensive			Capital			Total
		Certificates			Certificates			Stock			EPUs			EPUs			Refunds			Reserve			Income (Loss)			Reserve			Equities


		(dollars in thousands)
For the years ended August 31, 2003, 2002 and 2001
Balances, September 1, 2000		$	940,880		$	28,509					$	9,246		$	4,182		$	61,180		$	114,736		$	(2,427	)	$	8,120		$	1,164,426
Patronage and equity retirement determination			17,474															26,220												43,694
Patronage distribution			60,304															(87,400	)		967									(26,129	)
Equities retired			(18,662	)		(74	)																							(18,736	)
Equities issued			5,481																											5,481
Equity Participation Units issued															1,045						(1,045	)								—
Equity Participation Units redeemed												(9,066	)		(5,227	)														(14,293	)
Other, net			(120	)		(277	)					(180	)								445						(70	)		(202	)
Comprehensive income:
	Net income																	128,900			49,654									178,554
	Other comprehensive income																							512						512

Total comprehensive income																														179,066

Dividends and equities payable			(33,484	)														(38,670	)											(72,154	)

Balances, August 31, 2001			971,873			28,158						—			—			90,230			164,757			(1,915	)		8,050			1,261,153
Patronage and equity retirement determination			33,484															38,670												72,154
Patronage distribution			92,484															(128,900	)		(3,666	)								(40,082	)
Equities retired			(31,099	)		(46	)																							(31,145	)
Equities issued			2,600																											2,600
Preferred stock issued, net								$	9,325												(3,428	)								5,897
Preferred stock dividends																					(240	)								(240	)
Other, net			(106	)		(339	)														100									(345	)
Comprehensive income:
	Net income																	92,900			33,238									126,138
	Other comprehensive loss																							(49,982	)					(49,982	)

Total comprehensive income																														76,156

Dividends and equities payable			(28,640	)														(27,870	)											(56,510	)

Balances, August 31, 2002			1,040,596			27,773			9,325			—			—			65,030			190,761			(51,897	)		8,050			1,289,638
Patronage and equity retirement determination			28,639															27,870												56,509
Patronage distribution			61,784															(92,900	)		4,638									(26,478	)
Equities retired			(31,092	)		(52	)																							(31,144	)
Equities issued			350																											350
Preferred stock issued, net									86,379												(3,895	)								82,484
Preferred stock redeemed									(2,002	)																				(2,002	)
Preferred stock dividends																					(3,575	)								(3,575	)
Other, net			(2,440	)		(3	)		—												(4	)								(2,447	)
Comprehensive income:
	Net income																	90,000			33,841									123,841
	Other comprehensive income																							33,584						33,584

Total comprehensive income																														157,425

Dividends and equities payable			(10,800	)														(27,000	)		(1,249	)								(39,049	)

Balances, August 31, 2003		$	1,087,037		$	27,718		$	93,702		$	—		$	—		$	63,000		$	220,517		$	(18,313	)	$	8,050		$	1,481,711

The accompanying notes are an integral part of the consolidated financial statements.

F-3

CHS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



				For the years ended August 31

				2003			2002			2001


				(dollars in thousands)
Cash flows from operating activities:
	Net income			$	123,841		$	126,138		$	178,554
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization			111,347			103,986			109,180
		Noncash net income from equity investments			(47,299	)		(58,133	)		(28,494	)
		Minority interests			21,950			15,390			35,098
		Noncash portion of patronage dividends received			(1,795	)		(2,327	)		(3,896	)
		Loss (gain) on sale of property, plant and equipment			741			(6,418	)		(13,941	)
		Deferred tax expense (benefit)			9,000			4,400			(46,625	)
		Other, net			4,052			5,467			(801	)
		Changes in operating assets and liabilities:
			Receivables		(18,669	)		(32,517	)		147,922
			Inventories		(25,692	)		(255,107	)		39,248
			Other current assets and other assets		(83,347	)		(86,636	)		(24,128	)
			Customer credit balances		30,238			(12,025	)		1,707
			Customer advance payments		(45,740	)		59,988			(22,800	)
			Accounts payable and accrued expenses		135,310			92,781			(130,142	)
			Other liabilities		2,569			9,079			13,050

Net cash provided by (used in) operating activities					216,506			(35,934	)		253,932

Cash flows from investing activities:
	Acquisition of property, plant and equipment				(175,689	)		(140,169	)		(97,610	)
	Proceeds from disposition of property, plant and equipment				26,886			20,205			35,263
	Investments				(43,478	)		(6,211	)		(14,247	)
	Equity investments redeemed				35,939			37,689			30,104
	Investments redeemed				8,467			6,310			1,672
	Changes in notes receivable				(6,630	)		(22,031	)		533
	Acquisitions of intangibles				(767	)		(29,501	)		(7,328	)
	Acquisitions of working capital, net				(13,030	)		(5,750	)		(1,103	)
	Distribution to minority owners				(4,444	)		(7,413	)		(19,256	)
	Other investing activities, net				(507	)		(685	)		1,775

Net cash used in investing activities					(173,253	)		(147,556	)		(70,197	)

Cash flows from financing activities:
	Changes in notes payable				(81,383	)		235,319			(120,731	)
	Long-term debt borrowings				175,000			30,000			116,861
	Principal payments on long-term debt				(89,512	)		(17,968	)		(67,364	)
	Payments on derivative instruments				(7,574	)
	Changes in checks and drafts outstanding				988			(3,557	)		3,722
	Proceeds from sale of preferred stock, net of expenses				82,484			5,897
	Redemptions of preferred stock				(2,002	)
	Preferred stock dividends paid				(3,575	)		(240	)
	Retirements of equity				(31,144	)		(31,145	)		(18,736	)
	Equity Participation Units redeemed										(14,293	)
	Cash patronage dividends paid				(26,478	)		(40,082	)		(26,129	)

Net cash provided by (used in) financing activities					16,804			178,224			(126,670	)

Net increase (decrease) in cash and cash equivalents					60,057			(5,266	)		57,065
Cash and cash equivalents at beginning of period					108,192			113,458			56,393

Cash and cash equivalents at end of period				$	168,249		$	108,192		$	113,458

The accompanying notes are an integral part of the consolidated financial statements.

F-4

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	Summary of Significant Accounting Policies:


	*Organization:*

Effective August 5, 2003, Cenex Harvest States Cooperatives changed its name to CHS Inc. (CHS or the Company). CHS is an agricultural cooperative organized for the mutual benefit of its members. Members of the cooperative are located throughout the United States. In addition to grain marketing, oilseed processing and refining, foods and wheat milling, the Company provides its patrons with energy and agronomy products as well as other farm supplies. Sales are both domestic and international.

Effective September 1, 2000, the Company’s Board of Directors approved a resolution providing for the computation of patronage distributions based on earnings for financial statement purposes rather than federal income tax basis earnings. On December 1, 2000, this resolution was ratified by the Company’s members, the by-laws were amended and beginning with fiscal year 2001 patronage distributions have been calculated based on financial statement earnings. The by-laws further provide that an amount of up to 10% of the distributable annual net savings from patronage sources be added to the unallocated capital reserve as determined by the Board of Directors.


	*Consolidation:*

The consolidated financial statements include the accounts of CHS and all of its wholly-owned and majority-owned subsidiaries, including National Cooperative Refinery Association (NCRA). The effects of all significant intercompany transactions have been eliminated.

On September 1, 1999, NCRA and Farmland Industries, Inc. (Farmland) formed Cooperative Refining, LLC (CRLLC), which was established to operate and manage the refineries and related pipelines and terminals of NCRA and Farmland. On December 31, 2000, NCRA and Farmland signed an Agreement of Dissolution and dissolved CRLLC.

During 2000, the Company entered into a series of transactions, the result of which was the exchange of its agronomy operations, consisting primarily of its interests in and ownership of the Cenex/ Land O’Lakes Agronomy Company and Agro Distribution, LLC and related entities for a 25% equity ownership interest in Agriliance, LLC (Agriliance). Agriliance is a distributor of crop nutrients, crop protection products and other agronomy inputs and services formerly owned by the Company, Land O’Lakes, Inc. (Land O’Lakes) and Farmland. The company accounts for the Agriliance investment under the equity method.

During 2003 and 2002, the Company had various other acquisitions, which have been accounted for using the purchase method of accounting. Operating results of the acquisitions are included in the consolidated financial statements since the respective acquisition dates. The respective purchase prices were allocated to the assets and liabilities acquired based upon the estimated fair values. The excess purchase price over the estimated fair values of the net assets acquired has been reported as identifiable intangible assets and goodwill.


	*Cash Equivalents:*

Cash equivalents include short-term highly liquid investments with original maturities of three months or less at date of acquisition.


	*Inventories:*

Grain, processed grain, oilseed and processed oilseed are stated at net realizable values which approximates market values. All other inventories are stated at the lower of cost or market. Costs for inventories produced or modified by the Company through a manufacturing process include fixed and

F-5

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

variable production costs and raw material costs, and in-bound freight costs for raw materials over the amount charged to cost of goods sold. Costs for inventories purchased for resale include the cost of products and any freight incurred to place the products at the Company’s point of sales. The cost of certain energy inventories (wholesale refined products, crude oil and asphalt) is determined on the last-in, first-out (LIFO) method; all other inventories of non-grain products purchased for resale are valued on the first-in, first-out (FIFO) and average cost methods.


	*Derivative Financial Instruments:*

The Company enters into exchange-traded commodity futures and options contracts to hedge its exposure to price fluctuations on energy, grain and oilseed transactions to the extent considered practicable for minimizing risk. Futures and options contracts used for hedging are purchased and sold through regulated commodity exchanges. Fluctuations in inventory valuations, however, may not be completely hedged, due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas and in part to the Company’s assessment of its exposure from expected price fluctuations. The Company also manages its risks by entering into fixed price purchase contracts with pre-approved producers and establishing appropriate limits for individual suppliers. Fixed price sales contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. The Company is exposed to loss in the event of nonperformance by the counterparties to the contracts; however, the Company does not anticipate nonperformance by counterparties.

Commodity trading in futures and options contracts is a natural extension of cash market trading. The commodity futures and options markets have underlying principles of increased liquidity and longer trading periods than the cash market, and hedging is one method of reducing exposure to price fluctuations. The Company’s use of the derivative instruments described above reduces the effects of price volatility, thereby protecting against adverse short-term price movements while somewhat limiting the benefits of short-term price movements. Changes in market value of derivative instruments described above are recognized in the consolidated statements of operations in the period such changes occur. The fair value of futures and options contracts are determined primarily from quotes listed on regulated commodity exchanges. Fixed price purchase and sales contracts are with various counterparties, and the fair values of such contracts are determined from the market price of the underlying product. At August 31, 2003, the Company’s derivative assets and liabilities were $54.5 million and $46.5 million, respectively. At August 31, 2002, the Company’s derivative assets and liabilities were $53.8 million and $67.9 million, respectively.


	Commodity Price Risk

The Company utilizes futures and options contracts offered through regulated commodity exchanges to reduce price risk. The Company is exposed to risk of loss in the market value of inventories and fixed or partially fixed purchase and sale contracts. In order to reduce that risk, the Company generally takes opposite and offsetting positions using futures contracts or options. Certain commodities cannot be hedged with futures or options contracts because such contracts are not offered for these commodities by regulated commodity exchanges. Inventories and purchase contracts for those commodities are hedged with forward sales contracts, to the extent practical, in order to arrive at a net commodity position within the formal position limits set by the Company and deemed prudent for each of those commodities. Commodities for which future contracts and options are available are also typically hedged with forward contracts, with futures and options used to hedge within position limits the remaining portion. These futures and options contracts and forward purchase and sales contracts used to hedge against commodity price changes are effective economic hedges of price risk, but they are not designated as, and accounted for as, hedging instruments for accounting purposes.

Unrealized gains and losses on futures contracts and options used as economic hedges of grain and oilseed inventories and fixed price contracts are recognized in cost of goods sold for financial reporting on a

F-6

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

monthly basis using market based prices. Inventories and fixed price contracts are marked to fair value using market based prices so that gains or losses on the derivative contracts are offset by gains or losses on inventories and fixed price contracts during the same accounting period.

Unrealized gains and losses on futures contracts and options used as economic hedges of energy inventories and fixed price contracts are recognized in cost of goods sold for financial reporting on a monthly basis using market based prices. The inventories hedged with these derivatives are valued at the lower of cost or market, and fixed price contracts are marked to fair value using market based prices. Certain fixed price contracts related to propane in the Energy segment meet the normal purchase and sales exemption, and thus are not required to be marked to fair value.


	Interest Rate Risk

The Company manages interest expense using fixed and floating rate debt. These debt instruments are carried at amounts approximating estimated fair value. Short-term debt used to finance inventories and receivables is represented by notes payable within thirty days or less so that the blended interest rate to the Company for all such notes approximates current market rates. Long-term debt used to finance non-current assets has various fixed interest rates and is payable at various dates as to minimize the effect of market interest rate changes. The effective interest rate to the Company on fixed rate debt outstanding on August 31, 2003, was approximately 6.5%.

In August 2002, the Company entered into interest rate treasury lock instruments to secure the interest rate related to a portion of its private placement debt issued on October 18, 2002. These instruments were designated and are effective as cash flow hedges for accounting purposes, and accordingly, the loss on settlement was recorded as a component of other comprehensive income. Interest expense for the year ended August 31, 2003, includes $0.7 million related to the interest rate derivatives. The additional interest expense is an offset to the lower actual interest paid on the outstanding debt instruments.


	Foreign Currency Risk

The Company conducts essentially all of its business in U.S. dollars except for grain marketing operations in Brazil, and had minimal risk regarding foreign currency fluctuations during 2003. Foreign currency fluctuations do, however, impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of U.S. agricultural products compared to the same products offered by alternative sources of world supply.


	*Investments:*

Investments in other cooperatives are stated at cost, plus patronage dividends received in the form of capital stock and other equities. Patronage dividends are recorded at the time qualified written notices of allocation are received. Joint ventures and other investments, in which the Company has significant ownership and influence, but not control, are accounted for in the consolidated financial statements under the equity method of accounting. Investments in other debt and equity securities are considered available for sale financial instruments and are stated at market value, with unrealized amounts included as a component of accumulated other comprehensive income (loss).


	*Property, Plant and Equipment:*

Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on the straight-line method by charges to operations at rates based upon the expected useful lives of individual or groups of assets (primarily 15 to 40 years for land improvements and buildings and 3 to 20 years for machinery, equipment, office and other). The cost and

F-7

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

related accumulated depreciation and amortization of assets sold or otherwise disposed of are removed from the related accounts and resulting gains or losses are reflected in operations. Expenditures for maintenance and repairs and minor renewals are expensed, while costs of major renewals and betterments are capitalized.

The Company periodically reviews property, plant and equipment and other long-lived assets in order to assess recoverability based on projected income and related cash flows on an undiscounted basis. Should the sum of the expected future net cash flows be less than the carrying value, an impairment loss would be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset.


	*Goodwill and Other Intangible Assets:*

Effective September 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” This statement discontinued the amortization of goodwill and indefinite-lived intangible assets, subject to periodic impairment testing. At August 31, 2001, goodwill (net of accumulated amortization) prior to the adoption of SFAS No. 142, was $29.2 million and was included as a component of other assets. The effect of adopting the new standard will reduce goodwill amortization expense by approximately $2.0 million annually. No changes to the carrying value of goodwill and other intangible assets were required as a result of the adoption of SFAS No. 142. Subsequent impairment testing is performed annually as well as when a triggering event indicating impairment may have occurred. During 2003, as a result of the impairment testing, the Company believes that no impairments are required.

In 2001, the Company recorded goodwill amortization expense of $2.6 million. Had SFAS No. 142 been in effect during the year ended August 31, 2001, net income would have been $181.1 million.


	*Revenue Recognition:*

The Company provides a wide variety of products and services, from agricultural inputs such as fuels, farm supplies and crop nutrients, to agricultural outputs that include grain and oilseed, processed grains and oilseeds and food products. Grain and oilseed sales are recorded after the commodity has been delivered to its destination and final weights, grades and settlement price have been agreed upon. All other sales are recognized upon transfer of title, which could occur upon either shipment or receipt by the customer, depending upon the contract. Amounts billed to a customer as part of a sales transaction related to shipping and handling are included in net sales. Service revenues are recorded only after such services have been rendered, and are included in other revenues.


	*Environmental Expenditures:*

Liabilities, including legal costs, related to remediation of contaminated properties are recognized when the related costs are considered probable and can be reasonably estimated. Estimates of environmental costs are based on current available facts, existing technology, undiscounted site-specific costs and currently enacted laws and regulations. Recoveries, if any, are recorded in the period in which recovery is considered probable. Liabilities are monitored and adjusted as new facts or changes in law or technology occur. Environmental expenditures are capitalized when such costs provide future economic benefits.


	*Income Taxes:*

The Company is a nonexempt agricultural cooperative and files a consolidated federal income tax return with its 80% or more owned subsidiaries. The Company is subject to tax on income from nonpatronage sources and undistributed patronage-sourced income. Deferred income taxes reflect the

F-8

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for federal and state income tax purposes, at each year end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.


	*Comprehensive Income:*

Comprehensive income (defined as the change in equity of a business enterprise during a period from sources other than those resulting from investments by owners and distribution to owners), primarily includes net income and the effects of minimum pension liability adjustments. Total comprehensive income is reflected in the consolidated statements of equities and comprehensive income.


	*Use of Estimates:*

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


	*Recent Accounting Pronouncements:*

During 2003, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company’s Energy segment operates oil refineries and related pipelines for which the Company would be subject to Asset Retirement Obligations (ARO) if such assets were to be dismantled. The Company, however, expects to operate its refineries and related pipelines indefinitely. Since the time period to dismantle these assets is indeterminate, a corresponding ARO is not estimable and therefore has not been recorded.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” The interpretation addresses consolidation of certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. It also requires consolidation by primary beneficiary. The interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company believes that the effects of adopting this standard will not have a material effect on the Company.

On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statements of cash flows.

F-9

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

SFAS No. 149 is effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. The Company believes that the effects of adopting this standard do not have a material effect on the Company.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in certain circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities which are subject to the provisions for the first fiscal period beginning after December 15, 2003. The Statement is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The Company believes that the effects of adopting this standard will not have a material effect on the Company.


	*Reclassifications:*

Certain reclassifications have been made to prior year’s amounts to conform to current year classifications. In addition, the Company has made changes to net sales and cost of goods sold for years ended August 31, 2002 and 2001, to eliminate certain intercompany sales identified subsequent to the issuance of the 2002 Annual Report. These reclassifications and changes had no effect on previously reported net income, equities and comprehensive income, or cash flows.

2. Receivables:

Receivables as of August 31, 2003 and 2002 are as follows:


	2003		2002


	(dollars in thousands)
Trade	$	748,398	$	717,888
Other		47,000		49,846

		795,398		767,734
Less allowances for doubtful accounts		31,618		26,156

	$	763,780	$	741,578

All international sales are denominated in U.S. dollars. International sales for the years ended August 31, 2003, 2002 and 2001 are as follows:


	2003		2002		2001


	(dollars in millions)
Africa	$	99	$	135	$	138
Asia		815		407		403
Europe		156		282		255
North America, excluding U.S.		367		298		317
South America		166		100		101

	$	1,603	$	1,222	$	1,214

F-10

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. Inventories:

Inventories as of August 31, 2003 and 2002 are as follows:


	2003		2002


	(dollars in thousands)
Grain and oilseed	$	370,381	$	393,095
Energy		292,095		229,981
Feed and farm supplies		95,589		91,138
Processed grain and oilseed		42,688		36,264
Other		1,130		9,185

	$	801,883	$	759,663

As of August 31, 2003, the Company valued approximately 24% of inventories, primarily related to energy, using the lower of cost, determined on the LIFO method, or market (26% as of August 31, 2002). If the FIFO method of accounting for these inventories had been used, inventories would have been higher than the reported amount by $86.3 million and $40.5 million at August 31, 2003 and 2002, respectively.

4. Investments:

Investments as of August 31, 2003 and 2002 are as follows:


		2003		2002


		(dollars in thousands)
Cooperatives:
	CF Industries, Inc.	$	152,996	$	152,996
	CoBank ACB (CoBank)		22,505		30,069
	Ag Processing, Inc.		24,481		25,797
	Land O’Lakes, Inc.		27,105		26,232
Joint ventures:
	Ventura Foods, LLC		107,464		108,981
	United Country Brands, LLC		129,286		86,175
	TEMCO, LLC		9,087		8,414
Other			59,969		57,943

		$	532,893	$	496,607

CHS’s investment in CF Industries, Inc. (CF) is carried at cost, including allocated patronage refunds. Since CF is a cooperative, CHS recognizes income from this investment only when patronage refunds are received. Over the past five years CF has generated operating losses, none of which were allocated to its owners. CHS management has performed the appropriate impairment tests of this investment, and based upon those tests, believes that fair market value exceeds its carrying value. CHS will continue to perform impairment tests annually, including reviewing operating results, or as circumstances dictate, which could result in an impairment to its CF investment.

F-11

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In March 2000, the Company purchased an additional 10% interest in Ventura Foods, LLC, its consumer products and packaging joint venture, for $25.6 million, of which $13.8 million was goodwill. The Company has a 50% interest in this joint venture. The following provides summarized unaudited financial information for Ventura Foods, LLC balance sheets as of August 31, 2003 and 2002, and statements of operations for the twelve months ended August 31, 2003, 2002 and 2001:


	2003		2002


	(dollars in thousands)
Current assets	$	193,632	$	171,084
Non-current assets		231,649		231,045
Current liabilities		227,400		133,230
Non-current liabilities		21,738		90,819


	2003		2002		2001


	(dollars in thousands)
Net sales	$	1,165,823	$	1,013,475	$	925,962
Gross profit		155,274		181,217		161,405
Net income		42,837		75,368		71,148

Effective January 1, 2000, CHS, Farmland and Land O’Lakes created Agriliance, a distributor of crop nutrients, crop protection products and other agronomy inputs and services. At formation, Agriliance managed the agronomy marketing and distribution operations of CHS (which included principally its wholesale agronomy, Cenex/Land O’Lakes Agronomy Company and Agro Distribution, LLC business operations), Farmland and Land O’Lakes, with the Company exchanging the right to use its agronomy operations for 26.455% of the results of the jointly managed operations.

In March 2000, the Company sold 1.455% of its economic interest in the operations collectively managed by Agriliance to Land O’Lakes, resulting in a gain of $7.4 million. This left the Company with a 25% economic interest in such operations. In July 2000, Agriliance secured its own financing, which is without recourse to the Company. Agriliance also purchased the net working capital related to agronomy operations from each of its member owners, consisting primarily of trade accounts receivable and inventories, net of accounts payable. On July 31, 2000, the Company contributed outright its ownership interest in the Cenex/ Land O’Lakes Agronomy Company and in Agro Distribution, LLC, with a total investment of $64.7 million, along with the rest of its wholesale agronomy business, to Agriliance. The Company retained a 25% interest in Agriliance after the outright contribution of its ownership interests in those two ventures and its wholesale agronomy business. Agriliance ownership also includes Farmland (25%) and Land O’Lakes (50%). The interests of the Company and Farmland are held through equal ownership in United Country Brands, LLC, a joint venture holding company whose sole operations consist of the ownership of a 50% interest in Agriliance. The Company’s equity in the joint venture was recorded at the historical carrying value of its ownership in Cenex/ Land O’Lakes Agronomy Company and Agro Distribution, LLC and no gain or loss was recorded on the exchange.

In April 2003, the Company acquired an additional economic interest in the Agriliance wholesale crop protection business (the “CPP Business”), which constitutes only a part of the Agriliance business operations. The Company acquired 13.1% of the CPP Business for a cash payment of $34.3 million. The economic interests in Agriliance are owned 50% by Land O’Lakes, 25% plus an additional 13.1% of the CPP Business by the Company and 25% less 13.1% of the CPP Business by Farmland. The ownership or governance interests in Agriliance did not change. Agriliance’s earnings or losses are split among the members based upon the respective economic interest of each member.

F-12

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following provides summarized financial information for Agriliance balance sheets as of August 31, 2003 and 2002, and statements of operations for the years ended August 31, 2003, 2002 and 2001:


	2003		2002


	(dollars in thousands)
Current assets	$	1,249,941	$	922,958
Non-current assets		119,615		134,247
Current liabilities		1,083,743		700,903
Non-current liabilities		27,061		107,960


	2003		2002		2001


	(dollars in thousands)
Net sales	$	3,485,623	$	3,625,849	$	4,072,248
Earnings from operations		67,239		57,604		50,423
Net income		60,741		47,044		25,053

Disclosure of the fair value of financial instruments to which the Company is a party includes estimates and assumptions which may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Financial instruments are carried at amounts that approximate estimated fair values. Investments in cooperatives and joint ventures have no quoted market prices.

Various agreements with other owners of investee companies and a majority-owned subsidiary set out parameters whereby CHS may buy and sell additional interests in those companies, upon the occurrence of certain events, at fair values determinable as set forth in the specific agreements.

5. Property, Plant and Equipment:

A summary of property, plant and equipment as of August 31, 2003 and 2002 is as follows:


	2003		2002


	(dollars in thousands)
Land and land improvements	$	60,453	$	63,045
Buildings		380,940		371,107
Machinery and equipment		1,508,963		1,470,475
Office and other		68,369		62,144
Construction in progress		159,555		71,540

		2,178,280		2,038,311
Less accumulated depreciation and amortization		1,055,298		980,890

	$	1,122,982	$	1,057,421

In January 2002, the Company formed a limited liability company with Cargill, Incorporated to engage in wheat flour milling and processing. The Company holds a 24% interest in the entity, which is known as Horizon Milling, LLC. The Company is leasing certain of its wheat milling facilities and related equipment to Horizon Milling under an operating lease agreement. The book value of the leased milling assets at August 31, 2003, was $99.4 million, net of accumulated depreciation of $31.3 million.

For the years ended August 31, 2003, 2002 and 2001, the Company capitalized interest of $3.9 million, $2.1 million and $1.2 million, respectively, related to capitalized construction projects.

F-13

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6. Other Assets:

Other assets as of August 31, 2003 and 2002 are as follows:


	2003		2002


	(dollars in thousands)
Goodwill	$	27,052	$	27,926
Customer lists, less accumulated amortization of $5,112 and $3,511, respectively		9,414		8,447
Non-compete covenants, less accumulated amortization of $11,774 and $2,896, respectively		1,766		11,204
Other intangible assets, less accumulated amortization of $1,986 and $2,462, respectively		14,607		15,795
Prepaid pension and other benefit assets		151,389		54,230
Deferred tax asset		28,689		50,544
Notes receivable		1,991		4,822
Other		4,612		4,354

	$	239,520	$	177,322

Intangible assets subject to amortization are provided on a straight-line basis over the number of years that approximate their respective useful lives (ranging from 2 to 15 years). The straight-line method of amortization reflects an appropriate allocation of the cost of intangible assets to earnings in proportion to the amount of economic benefit obtained by the Company in each reporting period. Amortization expenses for the years ended August 31, 2003 and 2002, were $12.2 million and $4.2 million, respectively. The estimated amortization expense related to intangible assets subject to amortization for the next five years will approximate $2.7 million annually.

Through Country Energy, LLC, formerly a joint venture with Farmland, the Company marketed refined petroleum products including gasoline, diesel fuel, propane and lubricants under the Cenex brand. On November 30, 2001, the Company purchased the wholesale energy business of Farmland, as well as all interest in Country Energy, LLC. Based on estimated fair values, $26.4 million of the purchase price was allocated to intangible assets, primarily trademarks, tradenames and non-compete agreements. The intangible assets had a weighted-average life of approximately 12 years. During the year ended August 31, 2003, the Company accelerated the amortization of the non-compete agreement due to Farmland’s July 31, 2003 notification that it intends to liquidate its assets in bankruptcy. The Company had additional amortization expense of $7.5 million during 2003 related to the acceleration, and the asset has a zero book value as of August 31, 2003. The Company also entered into an exclusive two-year supply agreement to purchase, at prevailing market prices, all of the refined fuels production from Farmland’s Coffeyville, Kansas facility. On May 22, 2003, the Company gave notice to Farmland that it will not renew the supply agreement, and the non-renewal is effective November 30, 2003. The Company’s management is confident that alternative sources of supply will be available and that the non-renewal will not have a material affect on the Company.

F-14

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7. Notes Payable and Long-Term Debt:

Notes payable and long-term debt as of August 31, 2003 and 2002 consisted of the following:



		Interest rates at August 31,

		2003		2003		2002


		(dollars in thousands)
Notes payable (a)(i)			1.63% to 1.96%	$	251,131	$	332,514

Long-term debt:
	Revolving term loans from cooperative and other banks, payable in installments through 2009, when the balance is due (b)(c)(i)		2.14% to 13.00%	$	168,032	$	254,962
	Private placement, payable in equal installments beginning in 2008 through 2013 (d)(i)		6.81%		225,000		225,000
	Private placement, payable in installments beginning in 2007 through 2018 (e)(i)		4.96% to 5.60%		175,000		—
	Private placement, payable in equal installments beginning in 2005 through 2011 (f)(i)		7.43% to 7.90%		80,000		80,000
	Industrial Revenue Bonds, payable in installments through 2011 (g)		5.23% to 12.97%		5,831		7,444
	Other notes and contracts (h)		5.70% to 12.17%		9,310		4,718

Total long-term debt					663,173		572,124
Less current portion					14,951		89,032

Long-term portion				$	648,222	$	483,092


		2003		2002

Weighted average interest rates at August 31:
	Short-term debt		1.83%		2.58%
	Long-term debt		6.52%		6.38%


(a)	The Company finances its working capital needs through short-term lines of credit with a syndication of banks. The Company has a 364-day credit facility of $600.0 million, all of which is committed, and of which $250.0 million was outstanding on August 31, 2003. In addition to this short-term line of credit, the Company has a 364-day credit facility dedicated to NCRA with a syndication of banks in the amount of $30.0 million, all of which is committed, with no amounts outstanding on August 31, 2003. Other miscellaneous notes payable totaled $1.1 million at August 31, 2003.

(b)	The Company established a $100.0 million three-year revolving credit facility with a syndication of banks. On August 31, 2003, the Company had no outstanding balance on this facility.

(c)	The Company established a long-term credit agreement which committed $200.0 million of long-term borrowing capacity to the Company through May 31, 1999, of which $164.0 million was drawn before the expiration date of that commitment. On August 31, 2003, $137.8 million was outstanding. NCRA term loans of $15.0 million are collateralized by NCRA’s investment in CoBank.

(d)	The Company entered into a private placement with several insurance companies for long-term debt in the amount of $225.0 million.

(e)	In October 2002, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $175.0 million.

F-15

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(f)	In January 2001, the Company entered into a note purchase and private shelf agreement with Prudential Insurance Company. A long-term note was issued for $25.0 million and a subsequent note for $55.0 million was issued in March 2001.

(g)	Industrial Revenue Bonds in the amount of $1.6 million are collateralized by property, plant and equipment, primarily energy refinery equipment, with a cost of approximately $152.0 million, less accumulated depreciation of approximately $120.4 million as of August 31, 2003.

(h)	Grain Suppliers, LLC, a wholly-owned subsidiary of the Company, has other notes payable of $5.4 million collateralized by property, plant and equipment, with a cost of approximately $8.3 million, less accumulated depreciation of approximately $0.2 million on August 31, 2003.

(i)	The debt is unsecured, however restrictive covenants under various agreements have requirements for maintenance of minimum working capital levels and other financial ratios.

The fair value of long-term debt approximates book value as of August 31, 2003 and 2002.

The aggregate amount of long-term debt payable as of August 31, 2003 is as follows:


	(dollars in thousands)
2004	$	14,951
2005		34,716
2006		35,176
2007		59,671
2008		98,190
Thereafter		420,469

	$	663,173

The Company is in compliance with all debt covenants and restrictions as of August 31, 2003.

8. Income Taxes:

As a result of the Company’s by-law changes during 2001, and the by-law changes of its majority-owned subsidiary (NCRA) in 2002, to distribute patronage based on financial statement earnings, the statutory rate applied to the cumulative differences between financial statement earnings and tax basis earnings, has been changed. In connection with this change the Company recorded a deferred tax benefit of $10.9 million as of August 31, 2002, and $34.2 million as of August 31, 2001. The $10.9 million deferred tax benefit recorded as a result of the change in patronage distribution by NCRA as of August 31, 2002, has been offset by a $10.9 million NCRA valuation allowance. Additional valuation allowances of $1.7 million, $6.2 million and $2.4 million were provided to offset deferred tax benefits generated by NCRA as of August 31, 2003, 2002 and 2001, respectively.

The provision for income taxes for the years ended August 31, 2003, 2002 and 2001 is as follows:


	2003		2002			2001


	(dollars in thousands)
Current	$	3,700	$	14,300		$	21,025
Deferred		7,300		(12,700	)		(49,025	)
Valuation allowance		1,700		17,100			2,400

Income taxes	$	12,700	$	18,700		$	(25,600	)

F-16

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The tax effect of temporary differences of deferred tax assets and liabilities as of August 31, 2003 and 2002 is as follows:


		2003			2002


		(dollars in thousands)
Deferred tax assets:
	Accrued expenses and valuation reserves	$	53,521		$	49,236
	Postretirement health care and deferred compensation		29,153			32,671
	Property, plant and equipment		9,369			11,532
	Alternative minimum tax credit and patronage loss carryforward		8,948			6,993
	Other		19,316			12,439

Total deferred tax assets			120,307			112,871

Deferred tax liabilities:
	Pension, including minimum liability		34,531			2,635
	Equity method investments		23,310			20,482
	Other					730

Total deferred tax liabilities			57,841			23,847

Deferred tax assets valuation reserve			(11,765	)		(19,466	)

Net deferred tax assets		$	50,701		$	69,558

As of August 31, 2003, net deferred tax assets of $22.0 million and $28.7 million are included in current assets and other assets, respectively ($19.0 million and $50.6 million, respectively, as of August 31, 2002). At August 31, 2003, NCRA recognized a valuation allowance for the entire tax benefit associated with its net deferred tax asset, as it is considered more likely than not, based on the weight of available information, that the future tax benefits related to these items will not be realized. At August 31, 2003, NCRA’s net deferred tax assets of $11.8 million were comprised of deferred tax assets of $21.4 million and deferred tax liabilities of $9.6 million. Deferred tax assets are comprised of basis differences related to inventories, investments, lease obligations, accrued liabilities and certain federal and state tax credits. NCRA files a separate tax return and, as such, these items must be assessed independently of the Company’s deferred tax assets when determining recoverability.

The reconciliation of the statutory federal income tax rates to the effective tax rates for the years ended August 31, 2003, 2002 and 2001 is as follows:


	2003			2002			2001

Statutory federal income tax rate		35.0	%		35.0	%		35.0	%
State and local income taxes, net of federal income tax benefit		3.9			3.9			3.9
Patronage earnings		(25.7	)		(25.0	)		(32.8	)
Change in patronage determination					(7.5	)		(22.4	)
Export activities at rates other than the U.S. statutory rate		(3.2	)		(1.9	)
Deferred tax asset valuation allowance		1.3			11.8			1.6
Other		(2.0	)		(3.4	)		(2.0	)

Effective tax rate		9.3	%		12.9	%		(16.7	)%

F-17

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The principal differences between financial statement income and taxable (loss) income for the years ended August 31, 2003, 2002 and 2001 are as follows:


		2003			2002			2001


		(dollars in thousands)
Income before income taxes		$	136,541		$	144,838		$	152,954
Financial reporting/tax differences:
	Environmental reserves		2,208			1,939			4,453
	Oil and gas activities, net		(21,989	)		1,540			(22,230	)
	Energy inventory market reserves		1,210			(933	)		(2,441	)
	Pension and compensation		(21,966	)		(21,491	)		8,981
	Investments in other entities		117			1,898			26,495
	Export activities		(11,253	)		(7,141	)
	Other, net		1,716			(2,291	)		10,038
	Patronage refund provisions		(90,000	)		(92,900	)		(128,900	)

Taxable (loss) income		$	(3,416	)	$	25,459		$	49,350

No tax benefit has been recognized for NCRA’s $13.1 million operating loss that was included in the Company’s August 31, 2003 taxable loss as shown above.

9. Equities:

In accordance with the by-laws and by action of the Board of Directors, annual net savings from patronage sources are distributed to consenting patrons following the close of each year, and are based on amounts using financial statement earnings. The cash portion of the patronage distribution is determined annually by the Board of Directors, with the balance issued in the form of capital equity certificates.

Annual net savings from sources other than patronage may be added to the unallocated capital reserve or, upon action by the Board of Directors, allocated to members in the form of nonpatronage equity certificates. Redemptions are at the discretion of the Board of Directors.

Inactive direct members and patrons and active direct members and patrons age 61 and older on June 1, 1998, are eligible for redemption of their capital equity certificates at age 72 or death. For other active direct members and patrons and member cooperatives, equities will be redeemed annually as determined by the Board of Directors.

On May 31, 1997, the Company completed an offering for the sale of Equity Participation Units (EPUs) in its Wheat Milling Defined Business Unit and its Oilseed Processing and Refining Defined Business Unit to qualified subscribers. Qualified subscribers were identified as Defined Members or representatives of Defined Members who were persons or associations of producers actually engaged in the production of agricultural products. Subscribers were allowed to purchase a portion of their EPUs by exchanging existing patronage certificates. The purchasers of EPUs had the right and obligation to deliver annually the number of bushels of wheat or soybeans equal to the number of units held. Unit holders participated in the net patronage-sourced income from operations of the applicable Defined Business Unit as patronage refunds. Retirements of patrons’ equities attributable to EPUs, were at the discretion of the Board of Directors, and it was the Board’s goal to retire such equity on a revolving basis seven years after declaration.

F-18

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During 2001, the Company’s Board of Directors adopted a resolution to issue, at no charge, to each Defined Member of the Oilseed Processing and Refining Defined Business Unit an additional 1/4 EPU, for each EPU held, due to increased crush volume.

In August 2001, the CHS Board of Directors approved and consummated a plan to end the Defined Investment Program. The Company redeemed all of the EPUs and allocated the assets of the Oilseed Processing and Refining and Wheat Milling Defined Business Units to the Company as provided in the plan. The amounts redeemed to the Oilseed Processing and Refining and Wheat Milling Defined Member EPU holders were $5.2 million and $9.1 million, respectively. Due to loss carry-forwards incurred by the Wheat Milling Defined Business Unit, the plan also provided for the cancellation of all outstanding Preferred Capital Certificates issued to the Wheat Milling EPU holders, totaling $0.2 million. The plan further provided to the Oilseed Processing and Refining Defined Member EPU holders for the redemption of all outstanding Preferred Capital Certificates issued of $0.2 million and a 100% cash distribution during 2002 for the patronage refunds earned for the fiscal year ended August 31, 2001.

In January 2003, the Board of Directors authorized the sale and issuance of up to 3,500,000 shares of 8% Cumulative Redeemable Preferred Stock (New Preferred) at a price of $25.00 per share. The Company filed a registration statement on Form S-2 with the Securities and Exchange Commission registering 3,000,000 shares of the New Preferred (with an additional over-allotment option of 450,000 shares granted to the underwriters), which was declared effective on January 27, 2003. The shares were subsequently sold for proceeds of $86.3 million (3,450,000 shares), and are listed on the NASDAQ National Market. Expenses related to the issuance of the New Preferred were $3.8 million.

The Company had previously suspended sales of its 8% Preferred Stock (Old Preferred) after raising $9.5 million (9,454,874 shares), and on February 25, 2003, the Company filed a post-effective amendment to terminate the offering of the Old Preferred shares. On March 5, 2003, the Company’s Board of Directors authorized the redemption and conversion of the Old Preferred shares. A redemption notification and a conversion election form were sent to holders of the Old Preferred shares on March 21, 2003 explaining that on April 25, 2003 all shares of the Old Preferred would be redeemed by the Company for $1.00 per share unless they were converted into shares of the Company’s New Preferred. The conversion did not change the base liquidation amount or dividend amount of the Old Preferred, since 25 shares of the Old Preferred converted to 1 share of the New Preferred. The total Old Preferred converted to the New Preferred was $7.5 million (7,452,439 shares) and the balance of the Old Preferred (2,002,435 shares) was redeemed in cash at $1.00 per share. As of August 31, 2003, the Company had $93.7 million (3,748,099 shares) of the New Preferred outstanding.

F-19

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


10.	Employee Benefit Plans:

The Company has various pension and other defined benefit and defined contribution plans, in which substantially all employees may participate.

Financial information on changes in benefit obligation and plan assets funded and balance sheet status as of August 31, 2003 and 2002 is as follows:



		Qualified						Non-Qualified
		Pension Benefits						Pension Benefits						Other Benefits

		2003			2002			2003			2002			2003			2002


		(dollars in thousands)
Change in benefit obligation:
	Benefit obligation at beginning of period	$	253,868		$	241,728		$	14,543		$	11,836		$	24,915		$	22,667
	Service cost		10,840			9,275			800			1,168			648			557
	Interest cost		17,503			17,673			1,033			886			1,722			1,586
	Plan participants contributions		1,771												215			189
	Plan amendments					2,383									88
	Transfers					3,677
	Actuarial loss (gain)		22,049			1,157			(766	)		1,607			2,527			1,716
	Assumption change		4,659												1,469			638
	Benefits paid		(20,784	)		(22,025	)		(1,776	)		(954	)		(2,329	)		(2,438	)

Benefit obligation at end of period		$	289,906		$	253,868		$	13,834		$	14,543		$	29,255		$	24,915

Change in plan assets:
	Fair value of plan assets at beginning of period	$	201,563		$	230,121
	Actual income (loss) on plan assets		14,915			(14,810	)
	Company contributions		84,523			4,600		$	1,776		$	954		$	2,114		$	2,249
	Participants contributions														215			189
	Net transfers					3,677
	Benefits paid		(20,784	)		(22,025	)		(1,776	)		(954	)		(2,329	)		(2,438	)

Fair value of plan assets at end of period		$	280,217		$	201,563		$	—		$	—		$	—		$	—

Funded status		$	(9,689	)	$	(52,305	)	$	(13,834	)	$	(14,543	)	$	(29,255	)	$	(24,915	)
Employer contributions after measurement date						31,362			84			32			247			269
Unrecognized actuarial loss (gain)			118,025			85,066			(899	)		16			707			(3,505	)
Unrecognized transition obligation															9,261			10,197
Unrecognized prior service cost			7,467			6,502			3,503			4,067			(1,076	)		(1,336	)

Prepaid benefit cost (accrued)		$	115,803		$	70,625		$	(11,146	)	$	(10,428	)	$	(20,116	)	$	(19,290	)

F-20

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



		Qualified					Non-Qualified
		Pension Benefits					Pension Benefits						Other Benefits

		2003		2002			2003			2002			2003			2002


		(dollars in thousands)
Amounts recognized on balance sheets consist of:
	Accrued benefit liability	$	95,917	$	(11,028	)	$	(12,125	)	$	(12,809	)	$	(20,116	)	$	(19,290	)
	Intangible asset		2,425		6,510			253			1,485
	Minority interests				6,195
	Accumulated other comprehensive loss		17,461		68,948			726			896

Net amounts recognized		$	115,803	$	70,625		$	(11,146	)	$	(10,428	)	$	(20,116	)	$	(19,290	)

For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for the year ended August 31, 2003. The rate was assumed to decrease gradually to 6.0% for 2006 and remain at that level thereafter. Components of net periodic benefit costs for the years ended August 31, 2003, 2002 and 2001 are as follows:



		Qualified									Non-Qualified
		Pension Benefits									Pension Benefits									Other Benefits

		2003			2002			2001			2003			2002			2001			2003			2002			2001


		(dollars in thousands)
Components of net periodic benefit cost:
	Service cost	$	10,840		$	9,275		$	7,875		$	800		$	1,168		$	631		$	648		$	557		$	566
	Interest cost		17,503			17,673			17,580			1,033			886			907			1,722			1,586			1,569
	Expected return on assets		(23,788	)		(21,386	)		(22,855	)
	Prior service cost amortization		806			740			619			564			574			574			(172	)		(197	)		(131	)
	Actuarial loss (gain) amortization		2,623			1,369			231			159			18			144			(215	)		(505	)		(538	)
	Transition amount amortization					(708	)		(874	)								13			936			936			936
	Other																										(22	)

Net periodic benefit cost		$	7,984		$	6,963		$	2,576		$	2,556		$	2,646		$	2,269		$	2,919		$	2,377		$	2,380

Weighted-average assumptions:
	Discount rate		6.30	%		7.10	%		7.30	%		6.00	%		7.25	%		7.50	%		6.30	%		7.10	%		7.30	%
	Expected return on plan assets		9.00	%		9.00	%		9.00	%		N/A			N/A			N/A			N/A			N/A			N/A
	Rate of compensation increase		5.00	%		5.00	%		5.00	%		5.00	%		5.00	%		5.00	%		5.00	%		5.00	%		5.00	%

F-21

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were as follows as of August 31, 2003 and 2002:



	Qualified				Non-Qualified
	Pension Benefits				Pension Benefits

	2003		2002		2003		2002


	(dollars in thousands)
Projected benefit obligation	$	120,068	$	253,868	$	13,834	$	14,543
Accumulated benefit obligation		107,760		243,953		12,209		12,842
Fair value of plan assets		104,560		201,563

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in the assumed health care cost trend rates would have the following effects:


	1% Increase		1% Decrease


	(dollars in thousands)
Effect on total of service and interest cost components	$	275	$	(250	)
Effect on postretirement benefit obligation		2,618		(2,399	)

The Company provides defined life insurance and health care benefits for certain retired employees. The plan is contributory based on years of service and family status, with retiree contributions adjusted annually.

The Company has other contributory defined contribution plans covering substantially all employees. Total contributions by the Company to these plans were $8.5 million, $11.0 million and $6.1 million, for the years ended August 31, 2003, 2002 and 2001, respectively.


11.	Segment Reporting:

The Company manages five business segments, which are based on products and services, and are Agronomy, Energy, Country Operations and Services, Grain Marketing, and Processed Grains and Foods. The Agronomy segment consists of joint ventures and other investments, from which the Company derives investment income based upon the profitability of these investments. The Energy segment derives its revenues through refining, wholesaling and retailing of petroleum products. The Country Operations and Services segment derives its revenues through the origination and marketing of grain, through the retail sales of petroleum and agronomy products, and processed sunflowers, feed and farm supplies. The Country Operations segment also derives revenues from service activities related to crop production. The Grain Marketing segment derives its revenues from the sale of grains and oilseeds and from service activities conducted at its export terminals. Processed Grains and Foods segment derives its revenues from the sales of soybean meal and soybean refined oil, from equity income in two wheat milling joint ventures, from equity income in an oilseed food manufacturing joint venture, and from the sale of Mexican food products.

Reconciling Amounts represent the elimination of sales between segments. Such transactions are conducted at market prices to more accurately evaluate the profitability of the individual business segments.

The Company assigns certain corporate general and administrative expenses to its business segments based on use of such services and allocates other services based on factors or considerations relevant to the costs incurred.

Expenses that are incurred at the corporate level for the purpose of the general operation of the Company are allocated to the segments based upon factors which management considers to be non-

F-22

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

asymmetrical. Nevertheless, due to efficiencies in scale, cost allocations, and intersegment activity, management does not represent that these segments, if operated independently, would report the income before income taxes and other financial information as presented.

Segment information for the years ended August 31, 2003, 2002 and 2001 is as follows:


							Country
							Operations						Processed
							and			Grain			Grains and			Corporate			Reconciling
	Agronomy			Energy			Services			Marketing			Foods			and Other			Amounts			Total


	(dollars in thousands)
For the year ended August 31, 2003:
Net sales				$	3,648,093		$	1,885,825		$	4,139,226		$	491,931					$	(894,341	)	$	9,270,734
Patronage dividends	$	(84	)		415			2,467			218			111		$	130						3,257
Other revenues					10,461			81,739			25,458			2,300			4,584						124,542

		(84	)		3,658,969			1,970,031			4,164,902			494,342			4,714			(894,341	)		9,398,533
Cost of goods sold					3,475,947			1,876,811			4,133,677			466,857						(894,341	)		9,058,951
Marketing, general and administrative		8,138			63,740			55,887			21,072			36,540			5,205						190,582
Gain on legal settlements								(10,867	)														(10,867	)
Interest		(974	)		16,401			14,975			4,738			12,845			690						48,675
Equity (income) loss from investments		(20,773	)		(1,353	)		(788	)		1,673			(26,056	)		(2	)					(47,299	)
Minority interests					20,782			1,168															21,950

Income (loss) before income taxes	$	13,525		$	83,452		$	32,845		$	3,742		$	4,156		$	(1,179	)	$	—		$	136,541

Intersegment sales				$	(94,209	)	$	(796,999	)	$	(2,435	)	$	(698	)				$	894,341		$	—

Goodwill				$	3,185		$	262					$	23,605								$	27,052

Capital expenditures				$	80,837		$	26,738		$	5,298		$	60,576		$	2,240					$	175,689

Depreciation and amortization	$	1,247		$	65,868		$	21,039		$	6,718		$	13,321		$	3,154					$	111,347

Total identifiable assets at August 31, 2003	$	285,906		$	1,449,652		$	857,523		$	450,415		$	498,872		$	265,600					$	3,807,968

F-23

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


							Country
							Operations						Processed
							and			Grain			Grains and			Corporate			Reconciling
	Agronomy			Energy			Services			Marketing			Foods			and Other			Amounts			Total


	(dollars in thousands)
For the year ended August 31, 2002:
Net sales				$	2,657,689		$	1,474,553		$	3,281,469		$	496,084					$	(753,341	)	$	7,156,454
Patronage dividends	$	(89	)		458			2,572			497			260		$	187						3,885
Other revenues					6,392			80,789			21,902			(1,469	)		1,845						109,459

		(89	)		2,664,539			1,557,914			3,303,868			494,875			2,032			(753,341	)		7,269,798
Cost of goods sold					2,489,352			1,474,392			3,272,985			457,538						(753,341	)		6,940,926
Marketing, general and administrative		8,957			66,731			47,995			22,213			36,930			4,466						187,292
Gain on legal settlements								(2,970	)														(2,970	)
Interest		(1,403	)		16,875			13,851			4,807			9,514			(1,189	)					42,455
Equity (income) loss from investments		(13,425	)		1,166			(283	)		(4,257	)		(41,331	)		(3	)					(58,133	)
Minority interests					14,604			786															15,390

Income (loss) before income taxes	$	5,782		$	75,811		$	24,143		$	8,120		$	32,224		$	(1,242	)	$	—		$	144,838

Intersegment sales				$	(67,367	)	$	(615,853	)	$	(69,561	)	$	(560	)				$	753,341		$	—

Goodwill				$	4,059		$	262					$	23,605								$	27,926

Capital expenditures				$	54,576		$	34,305		$	14,851		$	35,144		$	1,293					$	140,169

Depreciation and amortization	$	1,247		$	58,701		$	21,214		$	6,235		$	13,436		$	3,153					$	103,986

Total identifiable assets at August 31, 2002	$	242,015		$	1,305,828		$	799,711		$	481,232		$	439,942		$	212,999					$	3,481,727

For the year ended August 31, 2001:
Net sales				$	2,781,243		$	1,577,268		$	3,416,239		$	662,726					$	(973,234	)	$	7,464,242
Patronage dividends	$	196			712			3,683			840			339		$	207						5,977
Other revenues					4,036			80,479			22,964			(238	)		9,013						116,254

		196			2,785,991			1,661,430			3,440,043			662,827			9,220			(973,234	)		7,586,473
Cost of goods sold					2,549,099			1,569,884			3,416,500			619,184						(973,234	)		7,181,433
Marketing, general and administrative		8,503			48,432			53,417			22,396			44,870			6,428						184,046
Interest		(4,529	)		25,097			15,695			8,144			13,026			4,003						61,436
Equity (income) loss from investments		(7,360	)		4,081			(246	)		(4,519	)		(35,505	)		15,055						(28,494	)
Minority interests					34,713			385															35,098

Income (loss) before income taxes	$	3,582		$	124,569		$	22,295		$	(2,478	)	$	21,252		$	(16,266	)	$	—		$	152,954

Intersegment sales				$	(71,846	)	$	(709,910	)	$	(190,695	)	$	(783	)				$	973,234		$	—

Capital expenditures				$	38,984		$	32,448		$	3,715		$	20,485		$	1,978					$	97,610

Depreciation and amortization	$	1,250		$	55,343		$	21,738		$	4,917		$	22,304		$	3,628					$	109,180

F-24

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12. Commitments and Contingencies:


	*Environmental:*

The Company is required to comply with various environmental laws and regulations incidental to its normal business operations. In order to meet its compliance requirements, the Company establishes reserves for the probable future costs of remediation of identified issues, which are included in cost of goods sold and marketing, general and administrative expenses in the consolidated statements of operations. The resolution of any such matters may affect consolidated net income for any fiscal period; however, management believes any resulting liabilities, individually or in the aggregate, will not have a material effect on the consolidated financial position, results of operations or cash flows of the Company during any fiscal year.

In connection with certain refinery upgrades and enhancements that are necessary in order to comply with existing environmental regulations, the Company expects to incur additional capital expenditures of approximately $87.0 million for the Company’s Laurel, Montana refinery and $324.0 million for NCRA’s McPherson, Kansas refinery, of which $8.7 million has been spent at the Laurel refinery and $36.5 million has been spent by NCRA at the McPherson refinery as of August 31, 2003. The Company expects all of these compliance capital expenditures at the refineries to be complete by December 31, 2005, and anticipates funding these projects with a combination of cash flows from operations and debt proceeds.


	*Other Litigation and Claims:*

The Company is involved as a defendant in various lawsuits, claims and disputes which are in the normal course of the Company’s business. The resolution of any such matters may affect consolidated net income for any fiscal period; however, management believes any resulting liabilities, individually or in the aggregate, will not have a material effect on the consolidated financial position, results of operations or cash flows of the Company during any fiscal year.


	*Grain Storage:*

As of August 31, 2003 and 2002, the Company stored grain and processed grain products for third parties totaling $155.2 million and $148.0 million, respectively. Such stored commodities and products are not the property of the Company and therefore are not included in the Company’s inventories.


	*Guarantees:*

The Company is a guarantor for lines of credit for related companies of which $52.3 million was outstanding as of August 31, 2003. The Company’s bank covenants allow maximum guarantees of $150.0 million. In addition, the Company’s bank covenants allow for guarantees dedicated solely for NCRA in the amount of $125.0 million. All outstanding loans with respective creditors are current as of August 31, 2003.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The interpretation also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of the guarantee for obligations the guarantor has undertaken in issuing the guarantee.

The Company makes seasonal and term loans to member cooperatives, and its wholly-owned subsidiary, Fin-Ag, Inc., makes loans for agricultural purposes to individual producers. Some of these loans are sold to CoBank, and the Company guarantees a portion of the loans sold. In addition, the Company also guarantees certain debt and obligations under contracts for its subsidiaries and members.

F-25

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s obligations pursuant to its guarantees as of August 31, 2003 are as follows:

Guarantee/

Exposure on

Maximum

August 31,

Nature of

Triggering

Recourse

Assets Held

Entities

Exposure

2003

Guarantee

Expiration Date

Event

Provisions

as Collateral

(dollars in thousands)

The Company’s Financial Services cooperative loans sold to CoBank

6,667

10% of the obligations of borrowers (agri- cultural cooperatives) under credit agreements for loans sold

None stated, but may be terminated by either party upon 60 days prior notice in regard to future obligations

Credit agreement default

Subrogation against borrower

Some or all assets of borrower are held as collateral and should be sufficient to cover guarantee exposure

Fin-Ag, Inc. agricultural loans sold to CoBank

43,016

15% of the obligations of borrowers under credit agreements for some of the loans sold, and 100% of the obligations of borrowers for the remaining loans sold

None stated, but may be terminated by either party upon 90 days prior notice in regard to future obligations

Credit agreement default

Subrogation against borrower

Some or all assets of borrower are held as collateral and should be sufficient to cover guarantee exposure

TEMCO, LLC

7,500

Obligations by TEMCO, LLC under credit agreement

None stated

Credit agreement default

Subrogation against TEMCO, LLC

None

North Valley Petroleum, LLC

194

179

Obligations by North Valley Petroleum, LLC under credit agreement

None stated

Credit agreement default

Subrogation against North Valley Petroleum, LLC

None

Third parties

2,413

Surety for, or indemnification of surety for sales contracts between affiliates and sellers of grain under deferred payment contracts

Annual renewal on December 1st in regard to surety for one third party, otherwise none stated and may be terminated by the Company at any time in regard to future obligations

Nonpayment

Subrogation against affiliates

Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure

52,275


*	The Company’s bank covenants allow for guarantees of up to $150.0 million, but the Company is under no obligation to extend these guarantees. The maximum exposure on any given date is equal to the actual guarantees extended as of that date.

F-26

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Lease Commitments:*

The Company leases approximately 1,900 rail cars with remaining lease terms of one to ten years. In addition, the Company has commitments under other operating leases for various refinery, manufacturing and transportation equipment, vehicles and office space. Some leases include purchase options at not less than fair market value at the end of the leases.

Total rental expense for all operating leases, net of rail car mileage credits received from the railroad and sublease income was $31.7 million, $30.7 million and $35.5 million for the years ended August 31, 2003, 2002 and 2001, respectively. Mileage credits and sublease income were $7.1 million, $9.5 million and $11.0 million for the years ended August 31, 2003, 2002 and 2001, respectively.

Minimum future lease payments, required under noncancellable operating leases as of August 31, 2003 are as follows:


	Rail				Equipment
	Cars		Vehicles		and Other		Total


	(dollars in thousands)
2004	$	9,407	$	12,141	$	11,856	$	33,404
2005		7,447		10,158		6,842		24,447
2006		5,027		9,273		4,881		19,181
2007		4,073		4,825		3,668		12,566
2008		2,914		2,240		2,061		7,215
Thereafter		4,246		1,643		4,693		10,582

Total minimum future lease payments	$	33,114	$	40,280	$	34,001	$	107,395

13. Supplemental Cash Flow and Other Information:

Additional information concerning supplemental disclosures of cash flow activities for the years ended August 31, 2003, 2002 and 2001 is as follows:


		2003			2002			2001


		(dollars in thousands)
Net cash paid during the period for:
	Interest	$	45,239		$	44,231		$	63,034
	Income taxes		956			27,965			11,709
Other significant noncash transactions:
	Distributions of inventories of minority interests								(54,399	)
	Capital equity certificates issued in exchange for elevator properties		350			1,842			5,481
	Equity Participation Units issued								1,045
	Exchange of preferred stock		7,452
	Accrual of dividends and equities payable		(39,049	)		(56,510	)		(72,154	)
	Other comprehensive income (loss)		33,583			(49,982	)		512

F-27

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14. Related Party Transactions:

Related party transactions with equity investees as of August 31, 2003 and 2002 are as follows:


	2003		2002


	(dollars in thousands)
Sales	$	779,857	$	549,978
Purchases		637,357		502,450
Receivables		13,393		21,232
Payables		29,113		18,296

These related party transactions were primarily with Agriliance, CF Industries, Inc., Horizon Milling, TEMCO, LLC and Ventura Foods, LLC.

15. Comprehensive Income:

The components of comprehensive income, net of taxes, for the years ended August 31, 2003, 2002 and 2001 are as follows:


	2003			2002			2001


	(dollars in thousands)
Net income	$	123,841		$	126,138		$	178,554
Additional minimum pension liability		36,105			(48,797	)		(15	)
Financial instruments		1,045			(548	)		527
Cash flow hedges		(3,548	)		(637	)
Foreign currency translation adjustment		(18	)

Comprehensive income	$	157,425		$	76,156		$	179,066

The components of accumulated other comprehensive loss, net of taxes, as of August 31, 2003 and 2002 are as follows:


	2003		2002


	(dollars in thousands)
Additional minimum pension liability	$	13,946	$	50,051
Financial instruments		164		1,209
Cash flow hedges		4,185		637
Foreign currency translation adjustment		18

Accumulated other comprehensive loss	$	18,313	$	51,897

F-28

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Members and Patrons of

CHS Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of equities and comprehensive income and of cash flows present fairly, in all material respects, the financial position of CHS Inc. and subsidiaries as of August 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

-s- PriceWaterhouse Coopers LLP

November 5, 2003

Minneapolis, Minnesota

F-29

INDEPENDENT AUDITORS’ REPORT

Members Committee
Ventura Foods, LLC

We have audited the accompanying balance sheets of Ventura Foods, LLC (the “Company”) as of March 31, 2004 and 2003, and the related statements of income, members’ capital and cash flows for the years ended March 31, 2004, 2003 and 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of Ventura Foods, LLC as of March 31, 2004 and 2003, and the results of their operations and their cash flows for the years ended March 31, 2004, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective April 1, 2002.

Deloitte & Touche LLP

Costa Mesa, California
June 18, 2004

F-30

VENTURA FOODS, LLC

BALANCE SHEETS
MARCH 31, 2004 AND 2003


ASSETS (Note 3)	2004		2003
CURRENT ASSETS:
Cash and cash equivalents (Note 2)	$	117,783,000	$	2,800,000
Trade receivables, net of allowance for doubtful accounts of $1,929,000 and $1,909,000 at 2004 and 2003, respectively (Notes 2, 3 and 4)		79,877,000		64,313,000
Inventories (Notes 2, 3 and 4)		108,605,000		92,366,000
Prepaid expenses and other current assets		4,609,000		5,922,000
Due from Wilsey Foods, Inc. (Note 4)				309,000
Derivative contract asset (Notes 2 and 4)		31,073,000		18,703,000

Total current assets		341,947,000		184,413,000

PROPERTY (Notes 2 and 3):
Land, buildings and improvements		103,903,000		102,768,000
Machinery and equipment		145,001,000		139,264,000
Construction-in-progress		13,692,000		6,905,000
Other property		13,856,000		10,798,000

Total		276,452,000		259,735,000
Less accumulated depreciation and amortization		118,074,000		106,914,000

Property—net		158,378,000		152,821,000
GOODWILL, Net of amortization of $18,087,000 at 2004 and 2003 (Notes 2 and 7)		43,156,000		43,156,000
TRADEMARKS, Net of amortization of $8,526,000 at 2004 and 2003 (Notes 2 and 7)		19,318,000		19,318,000
DEFERRED COMPENSATION PLAN TRUST (Note 5)		15,626,000		13,574,000
OTHER ASSETS, Net of amortization of $3,670,000 and $3,520,000 at 2004 and 2003 (Notes 2, 3 and 7)		4,319,000		4,673,000

TOTAL	$	582,744,000	$	417,955,000

LIABILITIES AND MEMBERS’ CAPITAL		2004		2003
CURRENT LIABILITIES:
Accounts payable (Note 4)	$	81,199,000	$	58,395,000
Accrued liabilities (Note 4)		53,325,000		36,984,000
Dividends payable		16,091,000		5,748,000
Bank lines of credit (Note 3)				20,500,000
Current portion of long-term debt (Note 3)		2,804,000		74,228,000
Derivative contract liability (Notes 2 and 4)		21,900,000		12,162,000

Total current liabilities		175,319,000		208,017,000
LONG-TERM DEBT (Note 3)		195,152,000		22,950,000
DEFERRED COMPENSATION OBLIGATIONS (Note 5)		26,513,000		20,496,000

Total liabilities		396,984,000		251,463,000
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)
MEMBERS’ CAPITAL		185,760,000		166,492,000

TOTAL	$	582,744,000	$	417,955,000

See notes to financial statements.

F-31

VENTURA FOODS, LLC

STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2004, 2003 AND 2002


	2004			2003		2002
NET SALES (Notes 2 and 5)	$	1,312,356,000		$	1,096,425,000	$	965,521,000
COST OF GOODS SOLD (Notes 2 and 5)		1,124,482,000			912,702,000		791,061,000

GROSS PROFIT		187,874,000			183,723,000		174,460,000

OPERATING EXPENSES:
Selling, general and administrative (Notes 2 and 5)		111,375,000			105,424,000		91,827,000
Amortization of intangibles (Notes 2 and 7)		83,000			223,000		6,227,000

Total operating expenses		111,458,000			105,647,000		98,054,000

OPERATING INCOME		76,416,000			78,076,000		76,406,000
INTEREST EXPENSE—Net (Note 4)		8,932,000			6,785,000		7,474,000
OTHER EXPENSE (INCOME)		(1,758,000	)		733,000		(1,554,000	)

NET INCOME	$	69,242,000		$	70,558,000	$	70,486,000

See notes to financial statements.

F-32

STATEMENTS OF MEMBERS’ CAPITAL
YEARS ENDED MARCH 31, 2004, 2003 AND 2002


	Wilsey
	Foods, Inc.			CHS, Inc.			Total
BALANCE—March 31, 2001	$	65,872,000		$	65,872,000		$	131,744,000
Net income		35,243,000			35,243,000			70,486,000
Dividends		(25,757,000	)		(25,757,000	)		(51,514,000	)

BALANCE—March 31, 2002		75,358,000			75,358,000			150,716,000
Net income		35,279,000			35,279,000			70,558,000
Dividends		(27,391,000	)		(27,391,000	)		(54,782,000	)

BALANCE—March 31, 2003		83,246,000			83,246,000			166,492,000
Net income		34,621,000			34,621,000			69,242,000
Dividends		(24,987,000	)		(24,987,000	)		(49,974,000	)

BALANCE—March 31, 2004	$	92,880,000		$	92,880,000		$	185,760,000

See notes to financial statements.

F-33

VENTURA FOODS, LLC

STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002


	2004			2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	69,242,000		$	70,558,000		$	70,486,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		13,437,000			12,416,000			12,186,000
Amortization of intangibles		83,000			223,000			6,227,000
Impairment of other assets		984,000
Deferred rent		1,095,000			515,000
Loss on disposal of assets		646,000			872,000			324,000
Derivative contract asset		(2,632,000	)		2,637,000			(1,803,000	)
Changes in operating assets and liabilities:
Trade receivables		(15,564,000	)		(7,174,000	)		(771,000	)
Inventories		(16,239,000	)		(29,567,000	)		3,881,000
Prepaid expenses and other current assets		1,169,000			(3,639,000	)		(793,000	)
Accounts payable		22,804,000			6,350,000			(4,491,000	)
Accrued liabilities		15,246,000			10,685,000			2,893,000
Deferred compensation obligations		3,965,000			4,815,000			4,866,000
Due from (to) affiliates		309,000			(309,000	)		47,000

Net cash provided by operating activities		94,545,000			68,382,000			93,052,000

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property		(19,698,000	)		(16,062,000	)		(13,268,000	)
Proceeds from sale of assets		58,000			1,845,000			69,000
Investment in rabbi trust								(13,976,000	)
Other assets		(569,000	)		(1,332,000	)		(48,000	)

Net cash used in investing activities		(20,209,000	)		(15,549,000	)		(27,223,000	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing of long-term debt		175,000,000
Repayment of long-term debt		(74,223,000	)		(12,758,000	)		(12,603,000	)
Net (payments on) borrowings from line of credit		(20,500,000	)		12,500,000			3,000,000
Payment to Wilsey Foods, Inc. (Note 1)					(491,000	)		(487,000	)
Dividends paid		(39,630,000	)		(58,584,000	)		(60,589,000	)

Net cash provided by (used in) financing activities		40,647,000			(59,333,000	)		(70,679,000	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		114,983,000			(6,500,000	)		(4,850,000	)
CASH AND CASH EQUIVALENTS—Beginning of period		2,800,000			9,300,000			14,150,000

CASH AND CASH EQUIVALENTS—End of period	$	117,783,000		$	2,800,000		$	9,300,000

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION—Cash paid during the period for interest	$	6,250,000		$	7,183,000		$	8,129,000

See notes to financial statements.

F-34

VENTURA FOODS, LLC

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002

1.		GENERAL MATTERS

		Ventura Foods, LLC (the “Company”) is a processor and distributor of edible oils used in food preparation and a packager of food products. The Company sells its products to national and regional restaurant chains, food wholesalers and retail chains. In April 2002, the Company dissolved its wholly-owned subsidiary, Ventura Jets, Inc., and consequently no longer consolidates the financial statements.

		The Company was formed pursuant to a Joint Venture Agreement (the “Agreement”) dated August 30, 1996 between Wilsey Foods, Inc. (“Wilsey”) and CHS Inc. (“CHS”) whereby substantially all the assets and liabilities of Wilsey and Holsum Foods (a division of CHS) were transferred and assigned, with certain exclusions, to the Company. Wilsey is a majority owned subsidiary of Mitsui & Co., Ltd. From the period of inception through March 31, 2000, Wilsey and CHS owned 60% and 40%, respectively, of the Company. On March 31, 2000, Wilsey sold a 10% interest in the Company to CHS. Accordingly, Wilsey and CHS each own 50% of the Company.

		At the formation date, a liability equal to the net deferred income tax liability of Wilsey at August 30, 1996 was assumed by the Company. The amount was payable in five equal annual installments of $487,000 plus a final installment of $491,000. The final installment of $491,000 was paid during fiscal 2003.

2.		ACCOUNTING POLICIES

		*Cash and Cash Equivalents*—The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Included in accounts payable are bank overdrafts of $1,102,000 and $15,231,000 at March 31, 2004 and 2003, respectively.

		*Inventories—*Inventories consist of the following at March 31:


	2004		2003
Bulk oil	$	46,682,000	$	38,751,000
Finished goods		40,948,000		34,119,000
Ingredients and supplies		20,975,000		19,496,000

Total	$	108,605,000	$	92,366,000

Inventories are accounted for at the lower of cost or market, using the first-in, first-out method. Cost for inventories produced or modified by the Company through a manufacturing process includes fixed and variable production costs and raw materials costs, and inbound freight costs. Cost for inventories purchased for resale includes the cost of the product and freight and handling costs incurred to place the product at the Company’s point of sale.

F-35

		*Derivative Financial Instruments—The Company’s use of derivative financial instruments is limited to forwards, futures and certain other delivery contracts as discussed below. The Company enters into these contracts to limit its exposure to price volatility of various food oils that are critical to its processing and distribution activities. It is the Company’s policy to remain substantially hedged with respect to edible oil product price risk; derivative contracts are used to maintain this hedged position. Forward purchase and sales contracts with established market participants as well as exchange-traded futures contracts are entered into in amounts necessary to protect against price changes on raw materials needed for the Company’s food oil processing and distribution activities. The Company also enters into purchase and sales commitments with major suppliers and customers at a specified premium or discount from a future market price (“Basis Contracts”). Additionally, the Company’s policies do not permit speculative trading of such contracts. All of these qualify as derivatives under Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities*, and are stated at market value. Changes in market value are recognized in the statements of income, through cost of sales, in the periods such changes occur. The market value of futures contracts, Basis Contracts, and forward purchase and sales contracts is recorded separately on the balance sheets as derivative contract assets or liabilities. These contracts have maturities of less than one year.

		The following summarizes the Company’s various derivative contracts outstanding at March 31, 2004 and 2003 (pounds and dollars in thousands)


			Net
			Unrealized
Forward Contracts and Commitments	Pounds		Gain (Loss)
March 31, 2004
Forward purchases		412,000	$	12,164
Forward sales		630,000		(19,493	)
Basis purchase		810,600		6,462
Basis sales		65,100		(185	)
Futures contracts		421,400		10,225

		2,339,100	$	9,173

March 31, 2003
Forward purchases		334,100	$	11,060
Forward sales		433,300		(6,208	)
Basis purchase		259,800		857
Basis sales		17,500		(126	)
Futures contracts		146,000		958

		1,190,700	$	6,541

		The fair value of futures contracts is determined from quotes listed on the Chicago Board of Trade or other market makers. Forward purchase and sales contracts are with various counterparties and the fair values of such contracts are determined from the market price of the underlying product.

		The Company is exposed to loss in the event of nonperformance by the other parties to the contracts. However, the Company does not anticipate nonperformance by counterparties.

F-36

Property and Depreciation—Property is stated at cost. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the assets, as follows:


Buildings		40 years
Leasehold improvements		3—19 years
Machinery and equipment		10—25 years
Other property		3—20 years

Fair Value of Financial Instruments—The Company estimates the fair value of financial instruments using the following methods and assumptions:

Accounts Receivable and Accounts Payable—The carrying amounts approximate fair value due to the short maturities of these instruments.

Lines of Credit—The carrying amounts approximate fair value, as the interest rates are based upon variable reference rates.

Long-Term Debt—The fair value of long-term fixed rate debt is estimated based upon prevailing market interest rates available to the Company. The Company estimates the fair value on the $22,950,000 6.55% fixed rate debt as of March 31, 2004 to be $24,118,000. The Company estimates the fair value on the $175,000,000 senior notes fixed rate debt as of March 31, 2004 to approximate carrying value.

Futures Contracts—The fair value of futures contracts (used for hedging purposes) is determined from quotes listed principally on the Chicago Board of Trade.

		*Concentration of Credit Risk*—During the years ended March 31, 2004, 2003 and 2002, net sales to one customer were 23%, 23% and 22% of total net sales, respectively. This customer represents approximately 19% and 23% of trade receivables at March 31, 2004 and 2003, respectively. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses.

		The Company maintains cash deposits with various financial institutions. The Company periodically evaluates the credit standing of these financial institutions and has not sustained any credit losses relating to such balances.

		*Marketable Securities*—The Company’s marketable securities comprise equity securities that have been classified as trading securities. The equity securities are carried at fair market value based upon quoted market prices. Unrealized (gains) and losses on equity securities are recognized in net income and totaled $(2,052,000) and $666,000 for the years ended March 31, 2004 and 2003, respectively (see Note 5). The Company investments included an enterprise with which it conducted business; an impairment loss of $984,000 was recorded in the year ended March 31, 2004.

		*Goodwill and Trademarks*—The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, effective April 1, 2002, the first day of its 2003 fiscal year. As a result, goodwill and indefinite life intangible assets (“trademarks”) are no longer amortized, but reviewed for impairment annually, or more frequently if certain impairment indicators arise. See Note 7 for the effect of adopting SFAS No. 142.

		Other identifiable intangible assets consist of patents, deferred financing costs and other assets, which are amortized using the straight-line method over 5 to 15 years.

F-37

		*Impairment of Long-Lived Assets*—Long-lived assets, including identifiable intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, future cash flows expected to result from the use of the asset and its eventual disposition are estimated. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recorded under the discounted future cash flow method.

		*Advertising Costs*—The Company expenses advertising costs in the period incurred. For the years ended March 31, 2004, 2003 and 2002, the Company incurred advertising expenses of approximately $8,366,000, $9,039,000 and $7,100,000, respectively.

		*Income Taxes*—The Company is a limited liability company and has no liability for federal and state income taxes. Income is taxed to the members based on their allocated share of taxable income or loss. However, certain states tax the income of limited liability companies. The Company’s liability for such state income taxes is not significant.

		*Revenue Recognition*—The Company is a processor and distributor of edible oils used in food preparation and a packager of food products. Revenue is recognized upon transfer of title to the customer, which occurs generally upon shipment. In certain instances, title is transferred upon receipt by the customer, at which time the Company records revenue. Amounts billed to the customer as part of a sales transaction related to shipping and handling are included in sales. Revenue is recorded net of discounts, rebates and certain sales incentives.

		*Use of Estimates*—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

		*Recent Accounting Pronouncements—In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations*, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of SFAS No. 143 did not have a material impact on the Company’s financial statements.

		In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-03, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in Restructuring). This statement requires that the fair value of an initial liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to when the entity commits to an exit plan, thereby eliminating the definition and requirements for recognition of exit costs. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the Company’s financial statements.

		On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group (“DIG”) process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments

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		and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Company’s financial statements.


3.		LINE OF CREDIT AND LONG-TERM DEBT

		*Line of Credit*—At March 31, 2004, the Company had a revolving line-of-credit agreement with a banking group to provide for borrowings of up to an aggregate of $75,000,000. Outstanding borrowings at March 31, 2004 and 2003 were $0 and $20,500,000, respectively. The applicable interest rates are based, at the option of the Company, at a London InterBank Offered Rate (“LIBOR”) or a term federal funds rate (“TFFR”) option. The weighted-average interest rate at March 31, 2003 was 1.72%. The line of credit matures on December 21, 2004.

		*Long-Term Debt*—At March 31, 2003, the Company had term loans with a banking group with a balance outstanding of $71,605,000. The interest rate applicable to these term loans is based, at the option of the Company, at a TFFR-based, LIBOR-based or a fixed rate option. The weighted-average interest rate on such borrowings at March 31, 2003 was 6.53%. The term loans with the banking group matured on December 23, 2003.

		In December 2003, the Company issued, in a private placement, a series of senior unsecured notes in the aggregate amount of $175,000,000. The Company issued Series A, B and C notes in the amounts of $40,000,000, $70,000,000 and $65,000,000, respectively. The Series A and C notes have maturity dates of December 31, 2013 and December 23, 2018, respectively. The notes bear interest at an annualized rate of 5.65% and 5.95%. Interest is paid semiannually on June 23 and December 23 and principal is due on the maturity date. The Series B notes mature on December 23, 2015 and bear interest at an annualized rate of 5.65%. Interest is paid semiannually on June 23 and December 23. Beginning on December 23, 2011, the Company is required to make semi-annual payments of $7,777,778 on December 23 and June 23 through December 23, 2015 for principal and interest. Accrued interest at March 31, 2004 was $2,771,000. Proceeds from the borrowing in the amount of $71,600,000 were used to retire the long-term debt described above. The Company incurred $632,000 of debt issuance costs, included in other assets, which have been deferred and are being amortized as a component of interest expense over the term of the notes.

		The Company has a standby letter of credit available of $10,000,000 as of March 31, 2004.

		At March 31, 2004 and 2003, balances outstanding on a term loan with a bank were $22,950,000 and $25,573,000, respectively. The agreement requires quarterly principal and interest payments of $1,058,000. The interest rate on this term loan is fixed at 6.55%. The term loan with the bank matures in November 2010.

		The line of credit, term loan agreement and senior notes contain various covenants, including compliance with debt limitations, members’ capital minimums, interest coverage ratio and other financial ratios, restrictions on mergers, consolidations, sale of assets, transactions with affiliates and limitations on liens.

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Annual maturities of long-term debt are as follows at March 31, 2004:


2005	$	2,804,000
2006		2,987,000
2007		3,187,000
2008		3,401,000
2009		3,629,000
Thereafter		181,948,000

Total		197,956,000
Less current portion		2,804,000

Long-term debt	$	195,152,000

4.		TRANSACTIONS WITH AFFILIATES

		Purchases from CHS for the years ended March 31, 2004, 2003 and 2002 were $83,592,000, $66,682,000 and $47,745,000, respectively. Sales to CHS for the years ended March 31, 2004, 2003 and 2002 totaled $2,294,000, $1,056,000 and $883,000, respectively. Included in accounts payable at March 31, 2004 and 2003 were $10,000,000 and $8,035,000, respectively, payable to CHS for purchases of oil.

		During the years ended March 31, 2004, 2003, and 2002, the Company recorded expenses of $10,006,000, $9,402,000 and $8,487,000, respectively, to Mitsui USA for the Company’s participation in Mitsui USA’s insurance plans. Included in accounts payable at March 31, 2004 and 2003 were $1,001,000 and $790,000, respectively, due to Mitsui USA in connection with the Company’s participation in such plans.

		Sales to Mitsui USA for the years ended March 31, 2004, 2003 and 2002 totaled $1,231,000, $1,423,000 and $1,406,000, respectively. Included in trade receivables at March 31, 2004 and 2003 were $133,000 and $123,000, respectively, of receivables from Mitsui USA for product sales.

		Forward purchase contracts as of March 31, 2004 included commitments for purchases of 162,080,000 pounds of oil from CHS. The Company recognized gains of $763,000, $1,081,000 and $934,000 on such related party commitments for the years ended March 31, 2004, 2003 and 2002, respectively.

5.		EMPLOYEE BENEFIT PLANS

		The Company has long-term incentive arrangements for certain key executives. Benefits under the initial plan were based on earnings over a three-to-five year period (as defined) from January 1, 1997 through December 31, 2001. An amount equal to the obligation incurred under the plan was contributed to a rabbi trust that would be available to general creditors in the event of bankruptcy. The trust holds investments primarily in marketable securities that are recorded at market value (classified as trading securities). The assets in the trust are to be distributed to the employees upon retirement. The liability under the arrangements was $15,626,000 and $13,574,000 as of March 31, 2004 and 2003, respectively, and is included in deferred compensation obligation in the accompanying balance sheets.

		On January 1, 2002, the Company established new long-term incentive arrangements with certain key executives. Under these arrangements, the amount of additional compensation is based on the attainment of cumulative income-based or equity-based targets over a two- to three-year period. At the end of the defined periods, assets equaling amounts earned by individual executives will be contributed to a rabbi trust, unless representatives of Wilsey and CHS elect to pay such amounts directly to the respective key

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		executives. At March 31, 2004 and 2003, a liability for the plan of $8,017,000 and $4,702,000, respectively, is included in long-term deferred compensation obligation in the accompanying balance sheets.

		For the years ended March 31, 2004, 2003 and 2002, the Company recognized compensation expense under the long-term incentive arrangements of $2,148,000, $4,264,000 and $5,658,000, respectively.

		The Company has a combined 401(k) and defined contribution profit-sharing plan (the “Plan”) covering substantially all employees not covered by collective bargaining agreements. Under the Plan, employees can make annual voluntary contributions not to exceed the lesser of an amount equal to 15% of their compensation or limits established by the Internal Revenue Code. The Company is required, by the Plan, to make certain matching contributions of up to 4% of each participant’s salary and may make discretionary profit-sharing contributions. Expenses under this plan for the years ended March 31, 2004, 2003 and 2002 were $4,576,000, $6,484,000 and $5,855,000, respectively. The Company also established a 401(k) defined contribution plan covering employees under certain collective bargaining agreements. Under this plan, employees can make annual voluntary contributions of up to 15% of their compensation. Certain of the Company’s union employees are participants in multiemployer plans. Payments to multiemployer pension plans are negotiated in various collective bargaining agreements and aggregated $2,660,000, $2,367,000 and $1,162,000 for the years ended March 31, 2004, 2003 and 2002, respectively. The actuarial present value of accumulated plan benefits and net assets available for benefits to union employees under these multiemployer pension plans is not available, as the Company does not administer these plans.

		Effective January 1, 1999, the Company established a Supplemental Executive Retirement Plan for certain of its employees. The projected benefit obligation as of March 31, 2004 and 2003 was $3,922,000 and $2,955,000, respectively. A liability of $2,862,000 and $2,220,000 as of March 31, 2004 and 2003, respectively, is included in long-term deferred compensation obligation in the accompanying balance sheets. The plan is unfunded. During the years ended March 31, 2004, 2003 and 2002, the Company recorded an expense related to the plan of $642,000, $552,000 and $111,000, respectively.

		The assumptions used in the measurement of the Company’s benefit obligation are as follows:


	March 31
	2004			2003			2002
Discount rate		6.0	%		6.0	%		7.0	%
Rate of compensation increase		3.0	%		3.0	%		3.0	%

The Company accrues the actuarially determined amount necessary to fund the participants’ benefits in accordance with the requirements of the Employee Retirement Income Security Act of 1974.

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6.		COMMITMENTS AND CONTINGENCIES

		Future minimum annual payments under noncancelable operating leases with lease terms in excess of one year at March 31, 2004 are as follows:


			Sublease		Net Lease
	Gross Rent		Income		Commitment
2005	$	8,186,000	$	942,000	$	7,244,000
2006		6,551,000		942,000		5,609,000
2007		4,848,000		942,000		3,906,000
2008		3,914,000		707,000		3,207,000
2009		3,351,000				3,351,000
Thereafter		12,948,000				12,948,000

Total	$	39,798,000	$	3,533,000	$	36,265,000

		Under the lease agreements, the Company is obligated to pay certain property taxes, insurance and maintenance costs. Certain leases contain renewal and purchase options. Rental expense for the years ended March 31, 2004, 2003 and 2002 under operating leases totaled $8,336,000, $7,138,000 and $5,671,000, respectively.

		The Company is involved from time to time in routine legal matters incidental to its business. The Company believes that the resolution of such matters will not have a material adverse effect on the Company’s business, financial condition or results of operations.

7.		GOODWILL

		In June 2001, the FASB issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. These statements, among other things, eliminate the pooling-of-interests method of accounting for business combinations as of June 30, 2001, eliminate the amortization of goodwill and indefinite life intangible assets for all fiscal years beginning after December 15, 2001, and require that goodwill and indefinite life intangible assets be reviewed annually for impairment, or more frequently if impairment indicators arise. The Company adopted SFAS Nos. 141 and 142 with respect to new goodwill as of July 1, 2001 and adopted SFAS No. 142 with respect to existing goodwill and indefinite life intangible assets as of April 1, 2002, the first day of its 2003 fiscal year. The adoption of SFAS No. 141 did not impact the Company’s financial condition or results of operations. Upon the adoption of SFAS No. 142, the Company ceased amortizing existing goodwill and trademarks.

		The Company completed the transitional test of goodwill and trademarks during 2003. Based on the result of the test, the Company determined that there was no impairment of goodwill and trademarks as of April 1, 2002. Pursuant to SFAS No. 142, goodwill and trademarks will be tested for impairment at least annually and more frequently if an event occurs which indicates that goodwill or trademarks may be impaired. Based on the result of the test, the Company determined that there was no impairment of goodwill and trademarks as of March 31, 2004 and March 31, 2003. During 2003, the Company abandoned the use of certain trademarks with a net book value of $100,000.

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A reconciliation of net income to the amount adjusted for the exclusion of goodwill and trademarks amortization follows for the years ended March 31:


	2004		2003		2002
Reported net income	$	69,242,000	$	70,558,000	$	70,486,000
Add:
Goodwill amortization						3,972,000
Trademark amortization						1,853,000

Adjusted net income	$	69,242,000	$	70,558,000	$	76,311,000

		Amortization expense for other intangible assets subject to amortization was $83,000, $223,000 and $402,000 for the years ended March 31, 2004, 2003 and 2002, respectively. Estimated annual amortization for each of the years in the five-year period ending March 31, 2008 is $180,000.

8.		SUBSEQUENT EVENTS

		On April 2, 2004, the Company purchased the assets of portion packing company for $7,437,000 before certain closing adjustments.

******

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