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As filed with the Securities and Exchange Commission on December 6, 2004

Registration No. 333-          

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM S-2

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933


CHS INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
     
Minnesota   41-0251095
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

5500 Cenex Drive

Inver Grove Heights, Minnesota 55077
(651) 355-6000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

David Kastelic

Senior Vice President and General Counsel
CHS Inc.
5500 Cenex Drive
Inver Grove Heights, Minnesota 55077
(651) 355-3712
Fax (651) 355-4554

(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copy to:

R. Kirkland Cozine
Michael W. Clausman
Dorsey & Whitney LLP
50 South Sixth Street
Minneapolis, Minnesota 55402
(612) 340-2600
Fax (612) 340-8738

    Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

    If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o

    If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this form, check the following box.  o

    If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

    If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  o

    If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

    If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  o

CALCULATION OF REGISTRATION FEE

         


Proposed Maximum Amount of
Title of Each Class of Aggregate Registration
Securities to be Registered Offering Price Fee(1)

8% Cumulative Redeemable Preferred Stock
  $20,000,000   $2,534


(1)  On July 18, 2001, the Registrant filed with the Securities and Exchange Commission a registration statement on Form S-2 (No. 333-65364) for the registration of 50,000,000 shares of 8% Preferred Stock. By Post-Effective Amendment No. 1 to Form S-2 filed February 25, 2003, the Registrant terminated the offering pursuant to Registration Statement No. 333-65364. At the time of such termination, 40,545,126 shares of 8% Preferred Stock remained unsold and the amount of the filing fee associated with those unsold shares was $10,136.28. Pursuant to Rule 457(p) under the Securities Act, on November 26, 2003, the Registrant offset $1,051.70 of such unused filing fee against its filing of a registration statement on Form S-2 (No. 333-110810) for the registration of the offer and sale of shares of 8% Cumulative Redeemable Preferred Stock. After that offset, the amount of the filing fee associated with the unsold shares of 8% Preferred Stock that remained was $9,084.58. Pursuant to Rule 457(p) under the Securities Act, the Registrant is offsetting $2,534 of such unused filing fee against the filing fee due in connection with this Registration Statement, resulting in a new net paid filing fee of $0.00.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a) of the Securities Act, may determine.


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION

DATED December 6, 2004

PROSPECTUS

           Shares

(CHS LOGO)

CHS Inc.

8% Cumulative Redeemable Preferred Stock

           We are issuing up to 794,597 shares of our 8% Cumulative Redeemable Preferred Stock to redeem up to $20,000,000 of our “patrons’ equities” that have been outstanding for longer than 10 years and that are held by non-individual active members whose pro-rata share of the redemption amount is equal to or greater than $500, subject to the exceptions described below in “Plan of Distribution.” See “Membership in CHS and Authorized Capital — Patrons’ Equities” for a description of patrons’ equities and our annual pro rata redemptions of patrons’ equities. The amount of patrons’ equities that will be redeemed with each share of preferred stock issued will be $                    , which is the greater of $25.17 (equal to the $25.00 liquidation preference per share of preferred stock plus $0.17 of accumulated dividends from and including January 1, 2005 to and including January 31, 2005) or the closing price for one share of the preferred stock on The NASDAQ National Market on a trading day within ten days of January 31, 2005 that is selected by management. We will not issue any fractional shares of preferred stock. The amount of patrons’ equities that would otherwise be issued as a fractional share to any member will instead be retained as part of that member’s patrons’ equities. There will not be any cash proceeds from the issuance of the preferred stock. However, by issuing shares of preferred stock in redemption of patrons’ equities we will make the cash that we would otherwise have used to redeem those patrons’ equities available for working capital purposes.

           Holders of the preferred stock are entitled to receive cash dividends at the rate of $2.00 per share per year. Dividends are payable quarterly in arrears when, as and if declared on March 31, June 30, September 30 and December 31 of each year (each, a “payment date”), except that if a payment date is a Saturday, Sunday or legal holiday, the dividend is paid without interest on the next day that is not a Saturday, Sunday or legal holiday. Dividends payable on the preferred stock are cumulative. The preferred stock is subject to redemption and has the preferences described in this prospectus. The preferred stock is not convertible into any of our other securities and is non-voting except in certain limited circumstances.

           The preferred stock is traded on The NASDAQ National Market under the trading symbol “CHSCP.” On December 3, 2004 the closing price of the preferred stock was $27.72 per share.

           Ownership of our preferred stock involves risks. See “Risk Factors” beginning on page 7.

           We expect to issue the preferred stock on or about January 31, 2005.

           Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

CHS Inc.

5500 Cenex Drive
Inver Grove Heights, Minnesota 55077
(651) 355-6000

The date of this prospectus is           , 2005.


TABLE OF CONTENTS

IMPORTANT INFORMATION ABOUT THIS PROSPECTUS
PROSPECTUS SUMMARY
RISK FACTORS
USE OF PROCEEDS
BUSINESS
ENERGY
COUNTRY OPERATIONS AND SERVICES
GRAIN MARKETING
PROCESSED GRAINS AND FOODS
PRICE RISK AND HEDGING
EMPLOYEES
MEMBERSHIP IN CHS AND AUTHORIZED CAPITAL
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DESCRIPTION OF THE PREFERRED STOCK
COMPARISON OF RIGHTS OF HOLDERS OF PATRONS’ EQUITIES AND RIGHTS OF HOLDERS OF PREFERRED STOCK
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
PLAN OF DISTRIBUTION
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PART II.
SIGNATURES
EXHIBIT INDEX
Statement of Computation of Ratios
Consent of Independent Registered Public Accounting Firm
Independent Auditor's Consent
Power of Attorney


Table of Contents

TABLE OF CONTENTS

         
Page

IMPORTANT INFORMATION ABOUT THIS PROSPECTUS
    1  
PROSPECTUS SUMMARY
    2  
RISK FACTORS
    7  
USE OF PROCEEDS
    12  
BUSINESS
    12  
MEMBERSHIP IN CHS AND AUTHORIZED CAPITAL
    27  
SELECTED CONSOLIDATED FINANCIAL DATA
    31  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    34  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    51  
DESCRIPTION OF THE PREFERRED STOCK
    52  
COMPARISON OF RIGHTS OF HOLDERS OF PATRONS’ EQUITIES AND RIGHTS OF HOLDERS OF PREFERRED STOCK
    57  
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
    57  
PLAN OF DISTRIBUTION
    61  
LEGAL MATTERS
    62  
EXPERTS
    62  
WHERE YOU CAN FIND MORE INFORMATION
    62  
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
    63  
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
    F-i  

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IMPORTANT INFORMATION ABOUT THIS PROSPECTUS

        You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized any other person to provide you with different or additional information. This prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities to which it relates. We are not making an offer of these securities in any state where the offer is not permitted. The information in this prospectus is current as of the date on the front of this prospectus.

        References in this prospectus, and the documents incorporated by reference in this prospectus, to “CHS,” “CHS Cooperatives,” “Cenex Harvest States Cooperatives,” the “Company,” “we,” “our” and “us” refer to CHS Inc., a Minnesota cooperative, and its subsidiaries. We maintain a web site at http://www.chsinc.com. Information contained in our website does not constitute part of this prospectus.

        All references to “preferred stock” in this prospectus are to our 8% Cumulative Redeemable Preferred Stock unless the context requires otherwise.

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PROSPECTUS SUMMARY

        The following summary highlights information we present in greater detail elsewhere in this prospectus and in the information incorporated by reference in it. This summary may not contain all of the information that is important to you and you should carefully consider all of the information that is important to you and you should consider all of the information contained or incorporated by reference in this prospectus. This prospectus contains forward-looking statements that are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. These factors include those listed under “Risk Factors” and elsewhere in this prospectus.

CHS Inc.

        CHS Inc. (CHS or the Company) is one of the nation’s leading integrated agricultural companies. As a cooperative, we are owned by farmers and ranchers and their local cooperatives from the Great Lakes to the Pacific Northwest and from the Canadian border to Texas. We also have preferred stockholders that own shares of our 8% Cumulative Redeemable Preferred Stock which is listed on the NASDAQ National Market under the symbol CHSCP. We buy commodities from and provide products and services to our members and other customers, both domestic and international. We provide a wide variety of products and services, from initial agricultural inputs such as fuels, farm supplies, crop nutrients and crop protection products, to agricultural outputs that include grains and oilseeds, grain and oilseed processing and food products. A portion of our operations are conducted through equity investments and joint ventures whose operating results are not fully consolidated with our results; rather, a proportionate share of the income or loss from those entities is included as a component in our net income under the equity method of accounting. For the fiscal year ended August 31, 2004, our total revenues were $11.1 billion, and net income was $221.3 million.

        Our operations are organized into five business segments: Agronomy, Energy, Country Operations and Services, Grain Marketing and Processed Grains and Foods. Together these business segments create vertical integration to link producers with consumers. The first two segments, Agronomy and Energy, produce and provide for the wholesale distribution of crop production inputs. The third segment, Country Operations and Services, serves as the Company-owned retailer of a portion of these crop inputs and also serves as the first handler of a significant portion of the crops marketed and processed by us. The fourth segment, Grain Marketing, purchases and resells grains and oilseeds originated by the Country Operations and Services segment, by member cooperatives and also by third parties. The fifth business segment, Processed Grains and Foods, converts grains and oilseeds into value-added products.

        Only producers of agricultural products and associations of producers of agricultural products may be members of CHS. Our earnings derived from cooperative business are allocated to patrons based on the volume of business they do with us. We allocate these earnings to our members in the form of patronage refunds (which are also called patronage dividends) in cash and patron’s equities, which may be redeemed over time. Earnings derived from non-members, which are not allocated patronage are taxed at regular corporate rates and are retained by us as unallocated capital reserve. We also receive patronage refunds from the cooperatives in which we are a member, if those cooperatives have earnings to distribute and we qualify for patronage refunds from them.

        The origins of CHS Inc. date back to the early 1930s with the founding of the predecessor companies of Cenex, Inc. and Harvest States Cooperatives. Cenex Harvest States Cooperatives emerged as the result of the merger of the two entities in 1998. In August 2003 we changed our name to CHS Inc. We are headquartered in Inver Grove Heights, Minnesota. Our address is 5500 Cenex Drive, Inver Grove Heights, Minnesota 55077. Our telephone number is (651) 355-6000.

 
Agronomy

        Through our Agronomy business segment, we are engaged in the manufacture of crop nutrients and the wholesale distribution of crop nutrients and crop protection products. We conduct our agronomy operations primarily through two investments — a 20% cooperative ownership interest in CF Industries,

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Inc. (CF Industries) and, effective May 1, 2004, a 50% ownership interest in Agriliance, LLC (Agriliance). CF Industries manufactures crop nutrient products, particularly nitrogen and phosphate fertilizers, and is one of the largest suppliers to Agriliance. Agriliance is one of North America’s largest wholesale distributors of crop nutrients, crop protection products and other agronomy products based on sales. Our minority ownership interest in CF Industries and 50% ownership interest in Agriliance are treated as investments, and, therefore, those entities’ revenues and expenses are not reflected in our operating results. Our interest in CF Industries is treated as a cost method investment and our interest in Agriliance is treated as an equity method investment. CF Industries and Agriliance each have their own line of financing, without recourse to CHS.
 
Energy

        We are the nation’s largest cooperative energy company based on revenues and identifiable assets, with operations that include petroleum refining and pipelines; the supply, marketing and distribution of refined fuels (gasoline, diesel, and other energy products); the blending, sale and distribution of lubricants; and the wholesale supply of propane. Our Energy business segment processes crude oil into refined petroleum products at refineries in Laurel, Montana (wholly-owned) and McPherson, Kansas (an entity in which CHS has an approximately 74.5% ownership interest) and sells those products under the Cenex brand to member cooperatives and others through a network of approximately 1,600 independent retail sites, including approximately 800 that operate Cenex/Ampride convenience stores.

 
Country Operations and Services

        Our Country Operations and Services business segment purchases a variety of grains from our producer members and other third parties, and provides cooperative members and producers with access to a full range of products and services including farm supplies, programs for crop and livestock production, hedging and insurance services, and agricultural operations financing. Country Operations and Services operates at 289 locations dispersed throughout Minnesota, North Dakota, South Dakota, Nebraska, Montana, Idaho, Washington and Oregon. Most of these locations purchase grain from farmers and sell agronomy products, energy products and feed to those same producers and others, although not all locations provide every product and service.

 
Grain Marketing

        We are the nation’s largest cooperative marketer of grain and oilseed based on grain storage capacity and grain sales, handling about 1.1 billion bushels annually. During fiscal year 2004, we purchased approximately 69% of our total grain volumes from individual and cooperative association members and the Country Operations and Services business segment, with the balance purchased from third parties. We arrange for the transportation of the grains either directly to customers or to Company-owned or leased grain terminals and elevators awaiting delivery to domestic and foreign purchasers. We primarily conducts our Grain Marketing operations directly, but do conduct some of our business through two 50% owned joint ventures.

 
Processed Grain and Foods

        The Processed Grains and Foods business segment converts raw agricultural commodities into ingredients for finished food products or into finished consumer food products. We have focused on areas that allow us to utilize the products supplied by member producers. These areas are oilseed processing, wheat milling and foods.

The Issuance

        We are issuing up to 794,597 shares of our 8% Cumulative Redeemable Preferred Stock to redeem up to $20,000,000 of our “patrons’ equities” that have been outstanding for longer than 10 years and that are held by non-individual active members whose pro rata share of the redemption amount is equal to or

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greater than $500, subject to the exceptions described below in “Plan of Distribution.” See “Membership in CHS and Authorized Capital — Patrons’ Equities” for a description of patrons’ equities and our annual pro rata redemptions of patrons’ equities. The amount of patrons’ equities that will be redeemed with each share of preferred stock issued will be $                    , which is the greater of $25.17 (equal to the $25.00 liquidation preference per share of preferred stock plus $0.17 of accumulated dividends from and including January 1, 2005 to and including January 31, 2005) or the closing price for one share of the preferred stock on The NASDAQ National Market on a trading day within ten days of January 31, 2005 that is selected by management. We will not issue any fractional shares of preferred stock. The amount of patrons’ equities that would otherwise be issued as a fractional share to any member will instead be retained as part of that member’s patrons’ equities. There will not be any cash proceeds from the issuance of the preferred stock. However, by issuing shares of preferred stock in redemption of patrons’ equities we will make the cash that we would otherwise have used to redeem those patrons’ equities available for working capital purposes.

Terms of the Preferred Stock

 
     Dividends Holders of the preferred stock are entitled to receive cash dividends at the rate of $2.00 per share per year when, as and if declared by our board of directors. Dividends are cumulative and are payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year (each, a “payment date”), except that if a payment date is a Saturday, Sunday or legal holiday, the dividend is paid without interest on the next day that is not a Saturday, Sunday or legal holiday.
 
     Liquidation Rights In the event of our liquidation, holders of the preferred stock are entitled to receive $25.00 per share plus all dividends accumulated and unpaid on the shares to and including the date of liquidation, subject, however, to the rights of any of our securities that rank senior or on parity with the preferred stock.
 
     Rank As to payment of dividends and as to distributions of assets upon the liquidation, dissolution or winding up of CHS, whether voluntary or involuntary, the preferred stock ranks prior to:
 
• any patronage refund;
• any other class or series of our capital stock designated by our board of directors as junior to the preferred stock; and
• our common stock, if any.
 
Shares of any class or series of our capital stock that are not junior to the preferred stock, rank equally with the preferred stock as to the payment of dividends and the distribution of assets.
 
     Redemption at our Option We may not redeem the preferred stock prior to February 1, 2008. On or after that date we may, at our option, redeem the preferred stock, in whole or from time to time in part, for cash at a price of $25.00 per

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share plus all dividends accumulated and unpaid on that share to and including the date of redemption.
 
     Redemption at the Holder’s Option In the event of a change in control initiated by our board of directors, holders of the preferred stock will have the right, for a period of 90 days from the date of the change in control, to require us to repurchase their shares of preferred stock at a price of $25.00 per share plus all dividends accumulated and unpaid on that share to and including the date of redemption. “Change in control” is defined in “Description of the Preferred Stock-Redemption at the Holder’s Option.”
 
     No Exchange or Conversion Rights, No      Sinking Fund The preferred stock is not exchangeable for or convertible into shares of any other shares of our capital stock or any other securities or property. The preferred stock is not subject to the operation of any purchase, retirement or sinking fund.
 
     Voting Rights Holders of the preferred stock do not have voting rights, except as required by applicable law; provided, that the affirmative vote of two-thirds of the outstanding preferred stock will be required to approve:
 
• any amendment to our articles of incorporation or the resolutions establishing the terms of the preferred stock if the amendment adversely affects the rights or preferences of the preferred stock; or
• the creation of any class or series of equity securities having rights senior to the preferred stock as to the payment of dividends or distribution of assets upon the liquidation, dissolution or winding up of CHS.
 
     No Preemptive Rights Holders of the preferred stock have no preemptive right to acquire shares of any class or series of our capital stock.
 
     Trading The preferred stock is listed on The NASDAQ National Market under the symbol “CHSCP”.
 
     Comparison of Rights Holders of the preferred stock have different rights from those of holders of patrons’ equities. See “Comparison of Rights of Holders of Patrons’ Equities and Rights of Holders of Preferred Stock.”
 
     Risk Factors Ownership of our preferred stock involves risks. See “Risk Factors” beginning on page 7.

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Summary Consolidated Financial Data

        The selected consolidated financial data below has been derived from our consolidated financial statements for the periods indicated below. The selected consolidated financial information for August 31, 2004, 2003 and 2002 should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this filing.

Summary Consolidated Financial Data

                                           
2004 2003 2002 2001 2000





(dollars in thousands)
Income Statement Data:
                                       
Revenues:
                                       
 
Net sales
  $ 10,909,333     $ 9,270,734     $ 7,156,454     $ 7,464,242     $ 8,248,413  
 
Other revenues
    141,303       122,578       107,351       117,378       102,965  
     
     
     
     
     
 
      11,050,636       9,393,312       7,263,805       7,581,620       8,351,378  
Cost of goods sold
    10,604,245       9,060,555       6,940,050       7,177,135       8,051,057  
Marketing, general and administrative
    208,284       183,757       182,175       183,491       155,266  
     
     
     
     
     
 
Operating earnings
    238,107       149,000       141,580       220,994       145,055  
Gain on sale of investment
    (14,666 )                                
Gain on legal settlements
    (692 )     (10,867 )     (2,970 )                
Interest
    51,625       48,675       42,455       61,436       57,566  
Equity income from investments
    (79,022 )     (47,299 )     (58,133 )     (28,494 )     (28,325 )
Minority interests
    33,830       21,950       15,390       35,098       24,546  
     
     
     
     
     
 
Income before income taxes
    247,032       136,541       144,838       152,954       91,268  
Income taxes
    25,700       12,700       18,700       (25,600 )     3,880  
     
     
     
     
     
 
Net income
  $ 221,332     $ 123,841     $ 126,138     $ 178,554     $ 87,388  
     
     
     
     
     
 
Balance Sheet Data (August 31):
                                       
 
Working capital
  $ 493,440     $ 458,738     $ 249,115     $ 305,280     $ 214,223  
 
Net property, plant and equipment
    1,249,655       1,122,982       1,057,421       1,023,872       1,034,768  
 
Total assets
    4,031,292       3,807,968       3,481,727       3,057,319       3,172,680  
 
Long-term debt, including current maturities
    683,818       663,173       572,124       559,997       510,500  
 
Total equities
    1,628,086       1,481,711       1,289,638       1,261,153       1,164,426  
Ratio of earnings to fixed charges and preferred dividends(1)
    3.9 x     3.0 x     3.4 x     3.4 x     2.6 x

  (1)  For purposes of computing the ratio of earnings to fixed charges and preferred dividends, earnings consist of earnings before income taxes on consolidated operations, distributed income from equity investees and fixed charges. Fixed charges consist of interest expense and one-third of rental expense, considered representative of that portion of rental expense estimated to be attributable to interest.

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RISK FACTORS

        You should be aware that ownership of our preferred stock involves risks. In consultation with your own financial and legal advisers, you should carefully consider the following discussion of risks that we believe to be significant, together with the other information contained or incorporated by reference in this prospectus, including the section entitled “Special Note Regarding Forward-Looking Statements” and our consolidated financial statements and the notes to them. The value of any preferred stock that you own may decline and you could lose the entire value of your preferred stock.

Risks Related to our Operations

        OUR REVENUES AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY CHANGES IN COMMODITY PRICES. Our revenues and earnings are affected by market prices for commodities such as crude oil, natural gas, grain, oilseeds, and flour. Commodity prices generally are affected by a wide range of factors beyond our control, including weather, disease, insect damage, drought, the availability and adequacy of supply, government regulation and policies, and general political and economic conditions. We are also exposed to fluctuating commodity prices as the result of our inventories of commodities, typically grain and petroleum products, and purchase and sale contracts at fixed or partially fixed prices. At any time, our inventory levels and unfulfilled fixed or partially fixed price contract obligations may be substantial. Increases in market prices for commodities that we purchase without a corresponding increase in the prices of our products or our sales volume or a decrease in our other operating expenses could reduce our revenues and net income.

        In our energy operations, profitability depends largely on the margin between the cost of crude oil that we refine and the selling prices that we obtain for our refined products. Prices for both crude oil and for gasoline, diesel fuel and other refined petroleum products fluctuate widely. Factors influencing these prices, many of which are beyond our control, include:

  •  levels of worldwide and domestic supplies;
 
  •  capacities of domestic and foreign refineries;
 
  •  the ability of the members of OPEC to agree to and maintain oil price and production controls, and the price and level of foreign imports;
 
  •  political instability or armed conflict in oil-producing regions;
 
  •  the level of consumer demand;
 
  •  the price and availability of alternative fuels;
 
  •  the availability of pipeline capacity; and
 
  •  domestic and foreign governmental regulations and taxes.

        The long-term effects of these and other conditions on the prices of crude oil and refined petroleum products are uncertain and ever-changing. Accordingly, we expect our margins on and the profitability of our energy business to fluctuate, possibly significantly, over time.

        OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED IF OUR MEMBERS WERE TO DO BUSINESS WITH OTHERS RATHER THAN WITH US. We do not have an exclusive relationship with our members and our members are not obligated to supply us with their products or purchase products from us. Our members often have a variety of distribution outlets and product sources available to them. If our members were to sell their products to other purchasers or purchase products from other sellers, our revenues would decline and our results of operations could be adversely affected.

        WE PARTICIPATE IN HIGHLY COMPETITIVE BUSINESS MARKETS IN WHICH WE MAY NOT BE ABLE TO CONTINUE TO COMPETE SUCCESSFULLY. We operate in several highly competitive business segments and our competitors may succeed in developing new or enhanced products that are better than ours, and may be more successful in marketing and selling their products than we are

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with ours. Competitive factors include price, service level, proximity to markets, product quality and marketing. In some of our business segments, such as Energy, we compete with companies that are larger, better known and have greater marketing, financial, personnel and other resources. As a result, we may not be able to continue to compete successfully with our competitors.

        CHANGES IN FEDERAL INCOME TAX LAWS OR IN OUR TAX STATUS COULD INCREASE OUR TAX LIABILITY AND REDUCE OUR NET INCOME. Current federal income tax laws, regulations and interpretations regarding the taxation of cooperatives, which allow us to exclude income generated through business with or for a member (patronage income) from our taxable income, could be changed. If this occurred, or if in the future we were not eligible to be taxed as a cooperative, our tax liability would significantly increase and our net income significantly decrease.

        WE INCUR SIGNIFICANT COSTS IN COMPLYING WITH APPLICABLE LAWS AND REGULATIONS. ANY FAILURE TO MAKE THE CAPITAL INVESTMENTS NECESSARY TO COMPLY WITH THESE LAWS AND REGULATIONS COULD EXPOSE US TO FINANCIAL LIABILITY. We are subject to numerous federal, state and local provisions regulating our business and operations and we incur and expect to incur significant capital and operating expenses to comply with these laws and regulations. We may be unable to pass on those expenses to customers without experiencing volume and margin losses. For example, capital expenditures for upgrading our refineries, largely to comply with regulations requiring the reduction of sulfur levels in refined petroleum products, are expected to be approximately $87.0 million for our Laurel, Montana refinery and $311.0 million for the National Cooperative Refinery Association’s (NCRA) McPherson, Kansas refinery, of which $49.2 million had been spent at the Laurel refinery and $131.0 million had been spent by NCRA at the McPherson refinery as of August 31, 2004. We expect all of these compliance capital expenditures at the refineries to be completed by December 31, 2005, and anticipate funding these projects with a combination of cash flows from operations and debt proceeds.

        We establish reserves for the future cost of meeting known compliance obligations, such as remediation of identified environmental issues. However, these reserves may prove inadequate to meet our actual liability. Moreover, amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of currently unknown compliance issues may require us to make material expenditures or subject us to liabilities that we currently do not anticipate. Furthermore, our failure to comply with applicable laws and regulations could subject us to administrative penalties and injunctive relief, civil remedies including fines and injunctions, and recalls of our products.

        ENVIRONMENTAL LIABILITIES COULD ADVERSELY AFFECT OUR RESULTS AND FINANCIAL CONDITION. Many of our current and former facilities have been in operation for many years and, over that time, we and other operators of those facilities have generated, used, stored and disposed of substances or wastes that are or might be considered hazardous under applicable environmental laws, including chemicals and fuels stored in underground and above-ground tanks. Any past or future actions in violation of applicable environmental laws could subject us to administrative penalties, fines and injunctions. Moreover, future or unknown past releases of hazardous substances could subject us to private lawsuits claiming damages and to adverse publicity.

        ACTUAL OR PERCEIVED QUALITY, SAFETY OR HEALTH RISKS ASSOCIATED WITH OUR PRODUCTS COULD SUBJECT US TO LIABILITY AND DAMAGE OUR BUSINESS AND REPUTATION. If any of our food or feed products became adulterated or misbranded, we would need to recall those items and could experience product liability claims if consumers were injured as a result. A widespread product recall or a significant product liability judgment could cause our products to be unavailable for a period of time or a loss of consumer confidence in our products. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. In addition, general public perceptions regarding the quality, safety or health risks associated with particular

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food or feed products, such as the concern regarding genetically modified crops, could reduce demand and prices for some of the products associated with our businesses. To the extent that consumer preferences evolve away from products that our members or we produce for health or other reasons, such as the growing demand for organic food products, and we are unable to develop products that satisfy new consumer preferences, there will be a decreased demand for our products.

        OUR OPERATIONS ARE SUBJECT TO BUSINESS INTERRUPTIONS AND CASUALTY LOSSES; WE DO NOT INSURE AGAINST ALL POTENTIAL LOSSES AND COULD BE SERIOUSLY HARMED BY UNEXPECTED LIABILITIES. Our operations are subject to business interruptions due to unanticipated events such as explosions, fires, pipeline interruptions, transportation delays, equipment failures, crude oil or refined product spills, inclement weather and labor disputes. For example:

  •  our oil refineries and other facilities are potential targets for terrorist attacks that could halt or discontinue production;
 
  •  our inability to negotiate acceptable contracts with unionized workers in our operations could result in strikes or work stoppages; and
 
  •  the significant inventories that we carry could be damaged or destroyed by catastrophic events, extreme weather conditions or contamination.

        We maintain insurance against many, but not all, potential losses or liabilities arising from these operating hazards, but uninsured losses or losses above our coverage limits are possible. Uninsured losses and liabilities arising from operating hazards could have a material adverse effect on our financial position or results of operations.

        OUR COOPERATIVE STRUCTURE LIMITS OUR ABILITY TO ACCESS EQUITY CAPITAL. As a cooperative, we may not sell common equity in our company. In addition, existing laws and our articles of incorporation and bylaws contain limitations on dividends of 8% of any preferred stock that we may issue. These limitations restrict our ability to raise equity capital and may adversely affect our ability to compete with enterprises that do not face similar restrictions.

        CONSOLIDATION AMONG THE PRODUCERS OF PRODUCTS WE PURCHASE AND CUSTOMERS FOR PRODUCTS WE SELL COULD ADVERSELY AFFECT OUR REVENUES AND OPERATING RESULTS. Consolidation has occurred among the producers of products we purchase, including crude oil and grain, and it is likely to continue in the future. Consolidation could increase the price of these products and allow suppliers to negotiate pricing and other contract terms that are less favorable to us. Consolidation also may increase the competition among consumers of these products to enter into supply relationships with a smaller number of producers resulting in potentially higher prices for the products we purchase.

        Consolidation among purchasers of our products and in wholesale and retail distribution channels has resulted in a smaller customer base for our products and intensified the competition for these customers. For example, ongoing consolidation among distributors and brokers of food products and food retailers has altered the buying patterns of these businesses, as they have increasingly elected to work with product suppliers who can meet their needs nationwide rather than just regionally or locally. If these distributors, brokers, and retailers elect not to purchase our products, our sales volumes, revenues, and profitability could be significantly reduced.

        IF OUR CUSTOMERS CHOSE ALTERNATIVES TO OUR REFINED PETROLEUM PRODUCTS OUR REVENUES AND PROFITS MAY DECLINE. Numerous alternative energy sources currently under development could serve as alternatives to our gasoline, diesel fuel and other refined petroleum products. If any of these alternative products become more economically viable or preferable to our products for environmental or other reasons, demand for our energy products would decline. Demand for our gasoline, diesel fuel and other refined petroleum products also could be adversely affected by increased fuel efficiencies.

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        OUR AGRONOMY BUSINESS IS DEPRESSED AND COULD CONTINUE TO UNDERPERFORM IN THE FUTURE. Demand for agronomy products in general has been adversely affected in recent years by drought and poor weather conditions, idle acreage and development of insect and disease-resistant crops. These factors could cause Agriliance, LLC, an agronomy marketing and distribution venture in which we have a 50% interest, to be unable to operate at profitable margins. In addition, these and other factors, including fluctuations in the price of natural gas and other raw materials, an increase in recent years in domestic and foreign production of fertilizer, and intense competition within the industry, in particular from lower-cost foreign producers, have created particular pressure on producers of fertilizers. As a result, CF Industries, Inc., a fertilizer manufacturer in which we hold a minority cooperative interest, has suffered significant losses in recent years as it has incurred increased prices for raw materials and manufacturing costs for those materials, but has been unable to pass those increased costs on to its customers.

        TECHNOLOGICAL IMPROVEMENTS IN AGRICULTURE COULD DECREASE THE DEMAND FOR OUR AGRONOMY AND ENERGY PRODUCTS. Technological advances in agriculture could decrease the demand for crop nutrients, energy and other crop input products and services that we provide. Genetically engineered seeds that resist disease and insects, or that meet certain nutritional requirements, could affect the demand for our crop nutrients and crop protection products. Demand for fuel that we sell could decline as technology allows for more efficient usage of equipment.

        WE OPERATE SOME OF OUR BUSINESS THROUGH JOINT VENTURES IN WHICH OUR RIGHTS TO CONTROL BUSINESS DECISIONS ARE LIMITED. Several parts of our business, including in particular, our agronomy business segment and portions of our grain marketing, wheat milling and foods businesses, are operated through joint ventures with third parties. By operating a business through a joint venture, we have less control over business decisions than we have in our wholly-owned or majority-owned businesses. In particular, we generally cannot act on major business initiatives in our joint ventures without the consent of the other party or parties in those ventures.

Risks Related to the Preferred Stock

        THE PREFERRED STOCK MAY NOT CONTINUE TO QUALIFY FOR LISTING ON THE NASDAQ NATIONAL MARKET. Although the preferred stock is listed on The NASDAQ National Market, it may not continue to qualify for listing. For example, we may be unable to satisfy the requirements regarding “independent” directors as now or subsequently in effect. If our preferred stock were delisted, the liquidity of the market for the preferred stock could be reduced, possibly significantly.

        THE TRADING MARKET FOR THE PREFERRED STOCK MAY NOT BE MAINTAINED, WHICH MAY LIMIT YOUR ABILITY TO RESELL YOUR SHARES. The trading market for the preferred stock may not be maintained or provide any significant liquidity. If you decide to sell your preferred stock there may be either no or only a limited number of potential buyers. This, in turn, may affect the price you receive for your preferred stock or your ability to sell your preferred stock at all.

        IF YOU ARE ABLE TO RESELL YOUR PREFERRED STOCK, MANY FACTORS MAY AFFECT THE PRICE YOU RECEIVE, WHICH MAY BE LOWER THAN YOU BELIEVE TO BE APPROPRIATE. As with other publicly traded securities, many factors could affect the market price of our preferred stock. In addition to those factors relating to CHS and the preferred stock described elsewhere in this “Risk Factors” section and elsewhere in this prospectus, the market price of our preferred stock could be affected by conditions in and perceptions of agricultural and energy markets and companies and also by broader, general market, political and economic conditions.

Furthermore, U.S. stock markets have experienced price and volume volatility that has affected many companies’ stock prices, often for reasons unrelated to the operating performance of those companies. Fluctuations such as these also may affect the market price of our preferred stock. As a result of these factors, you may only be able to sell your preferred stock at prices below those you believe to be appropriate. The trading price for the preferred stock may at any time be less than its issue price pursuant to this prospectus or its liquidation value.

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        ISSUANCES OF SUBSTANTIAL AMOUNTS OF PREFERRED STOCK COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR PREFERRED STOCK. From time to time in the future we expect to again issue shares of preferred stock to our members in redemption of a portion of their patrons’ equities or other equity securities and may do so as frequently as annually. We expect these shares to be freely tradeable upon issuance to our members, and some or all members who receive preferred stock may seek to sell their shares in the public market. Furthermore, from time to time we may sell additional shares of preferred stock to the public. Future issuances or sales of our preferred stock or the availability of our preferred stock for sale may adversely affect the market price for our preferred stock or our ability to raise capital by offering equity securities.

        THE TERMS OF THE PREFERRED STOCK ARE FIXED AND CHANGES IN MARKET CONDITIONS, INCLUDING MARKET INTEREST RATES, MAY DECREASE THE MARKET PRICE FOR THE PREFERRED STOCK. The terms of the preferred stock, such as the 8% dividend rate, the amount of the liquidation preference and the redemption terms, are fixed and will not change, even if market conditions with respect to these terms fluctuate. This may mean that you could obtain a higher return from an investment in other securities. It also means that an increase in market interest rates is likely to decrease the market price for the preferred stock.

        YOU WILL HAVE LIMITED VOTING RIGHTS. As a holder of the preferred stock, you will be entitled to vote only on actions that would amend, alter or repeal our articles of incorporation or the resolutions establishing the preferred stock if the amendment, alteration or repeal would adversely affect the rights or preferences of the preferred stock or that would create a series of senior equity securities. You will not have the right to vote on actions customarily subject to shareholder vote or approval, including the election of directors, the approval of significant transactions, and other amendments to our articles of incorporation that would not adversely affect the rights and preferences of the preferred stock.

        PAYMENT OF DIVIDENDS ON THE PREFERRED STOCK IS NOT GUARANTEED. Although dividends on the preferred stock accumulate, our board of directors must approve the actual payment of those dividends. Our board of directors can elect at any time or from time to time, and for an indefinite duration, not to pay the accumulated dividends. Our board of directors could do so for any reason, including the following:

  •  unanticipated cash requirements;
  •  the need to make payments on our indebtedness;
  •  concluding that the payment of dividends would cause us to breach the terms of any agreement, such as financial ratio covenants; or
  •  determining that the payment of dividends would violate applicable law regarding unlawful distributions to shareholders.

        WE CAN REDEEM THE PREFERRED STOCK AT OUR DISCRETION, WHICH REDEMPTION MAY BE AT A PRICE LESS THAN ITS MARKET PRICE AND MAY LIMIT THE TRADING PRICE FOR THE PREFERRED STOCK. We have the option of redeeming your shares at any time on or after February 1, 2008 for $25.00 per share plus any accumulated and unpaid dividends. If we redeem your shares, the redemption price may be less than the price you might receive if you were to sell your shares in the open market. In addition, the fact that the shares are redeemable may limit the price at which they trade.

        THE AMOUNT OF YOUR LIQUIDATION PREFERENCE OR REDEMPTION PAYMENT IS FIXED AND YOU WILL HAVE NO RIGHT TO RECEIVE ANY GREATER PAYMENT REGARDLESS OF THE CIRCUMSTANCES. The payment due upon a liquidation or redemption is fixed at $25.00 per share plus accumulated and unpaid dividends. If we have value remaining after payment of this amount, you will have no right to participate in that value. If the market price for our preferred stock is greater than the redemption price, you will have no right to receive the market price from us upon liquidation or redemption.

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        YOUR LIQUIDATION RIGHTS WILL BE SUBORDINATE TO THOSE OF HOLDERS OF OUR INDEBTEDNESS AND OF ANY SENIOR EQUITY SECURITIES WE HAVE ISSUED OR MAY ISSUE IN THE FUTURE AND MAY BE SUBJECT TO THE EQUAL RIGHTS OF OTHER EQUITY SECURITIES. There are no restrictions in the terms of the preferred stock on our ability to incur indebtedness. We can also, with the consent of two-thirds of the outstanding preferred stock, issue preferred equity securities that are senior with respect to liquidation payments to the preferred stock. If we were to liquidate our business, we would be required to repay all of our outstanding indebtedness and to satisfy the liquidation preferences of any senior equity securities that we may issue in the future before we could make any distributions to holders of our preferred stock. We could have insufficient cash available to do so, in which case you would not receive any payment on the amounts due you. Moreover, there are no restrictions on our ability to issue preferred equity securities that rank on a parity with the preferred stock as to liquidation preferences and any amounts remaining after the payment of senior securities would be split equally among all holders of those securities, which might result in your receiving less than the full amount due you.

USE OF PROCEEDS

        The           shares of preferred stock that are being issued pursuant to this prospectus and the registration statement of which it is a part are being issued to redeem $20,000,000 of our “patrons’ equities” that have been outstanding for longer than 10 years and that are held by non-individual active members whose pro rata portion of the total amount of patrons’ equities to be redeemed is equal to or greater than $500, subject to the exceptions described below in “Plan of Distribution”. See “Membership and Authorized Capital — Patrons’ Equities” for a discussion of patrons’ equities and our redemption of them. There will not be any cash proceeds from the issuance of preferred stock. However, by issuing shares of preferred stock in redemption of patrons’ equities we will make the cash that we would otherwise have used to redeem those patrons’ equities available for working capital purposes.

BUSINESS

        We are one of the nation’s leading integrated agricultural companies. As a cooperative, we are owned by farmers and ranchers and their local cooperatives from the Great Lakes to the Pacific Northwest and from the Canadian border to Texas. We also have preferred stockholders that own shares of our 8% Cumulative Redeemable Preferred Stock which is listed on the NASDAQ National Market under the symbol CHSCP. We buy commodities from and provide products and services to our members and other customers, both domestic and international. We provide a wide variety of products and services, from initial agricultural inputs such as fuels, farm supplies, crop nutrients and crop protection products, to agricultural outputs that include grains and oilseeds, grain and oilseed processing and food products. A portion of our operations are conducted through equity investments and joint ventures whose operating results are not fully consolidated with our results; rather, a proportionate share of the income or loss from those entities is included as a component in our net income under the equity method of accounting. For the fiscal year ended August 31, 2004, our total revenues were $11.1 billion, and net income was $221.3 million.

        Our operations are organized into five business segments: Agronomy, Energy, Country Operations and Services, Grain Marketing and Processed Grains and Foods. Together these business segments create vertical integration to link producers with consumers. The first two segments, Agronomy and Energy, produce and provide for the wholesale distribution of crop production inputs. The third segment, Country Operations and Services, serves as the Company-owned retailer of a portion of these crop inputs and also serves as the first handler of a significant portion of the crops marketed and processed by us. The fourth segment, Grain Marketing, purchases and resells grains and oilseeds originated by the Country Operations and Services segment, by member cooperatives and also by third parties. The fifth business segment, Processed Grains and Foods, converts grains and oilseeds into value-added products.

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        Only producers of agricultural products and associations of producers of agricultural products may be members of CHS. Our earnings derived from cooperative business are allocated to patrons based on the volume of business they do with us. We allocate these earnings to our members in the form of patronage refunds (which are also called patronage dividends) in cash and patron’s equities, which may be redeemed over time. Earnings derived from non-members, which are not allocated patronage are taxed at regular corporate rates and are retained by us as unallocated capital reserve. We also receive patronage refunds from the cooperatives in which we are a member, if those cooperatives have earnings to distribute and we qualify for patronage refunds from them.

        Our origins date back to the early 1930s with the founding of the predecessor companies of Cenex, Inc. and Harvest States Cooperatives. CHS emerged as the result of the merger of the two entities in 1998, and is headquartered in Inver Grove Heights, Minnesota. In August 2003, we changed our name from Cenex Harvest States Cooperatives to CHS Inc.

        The international sales information and segment information in Notes 2 and 11 to the consolidated financial statements are incorporated by reference into the following business segment descriptions.

        The business segment financial information presented below does not represent the results that would have been obtained had the relevant business segment been operated as an independent business.

AGRONOMY

Overview

        Through the Agronomy business segment, we are engaged in the manufacture of crop nutrients and the wholesale distribution of crop nutrients and crop protection products. We conduct our agronomy operations primarily through two investments — a 20% cooperative ownership interest in CF Industries, Inc. (CF Industries) and, effective May 1, 2004, a 50% ownership interest in Agriliance, LLC (Agriliance). CF Industries manufactures crop nutrient products, particularly nitrogen and phosphate fertilizers, and is one of the largest suppliers to Agriliance. Agriliance is one of North America’s largest wholesale distributors of crop nutrients, crop protection products and other agronomy products based on sales.

        There is significant seasonality in the sale of crop nutrients and crop protection products and services, with peak activity coinciding with the planting and input seasons.

        Our minority ownership interest in CF Industries and 50% ownership interest in Agriliance are treated as investments, and therefore, those entities’ revenues and expenses are not reflected in our operating results. Our interest in CF Industries is treated as a cost method investment and our interest in Agriliance is treated as an equity method investment. CF Industries and Agriliance each have their own line of financing, without recourse to the CHS.

Operations

        CF Industries. CF Industries is an interregional agricultural cooperative involved in the manufacturing of crop nutrient products. It is one of North America’s largest producers of nitrogen and phosphate fertilizers. Through its members, CF Industries’ nitrogen and phosphate fertilizer products reach farmers and ranchers in 48 states and two Canadian provinces. CF Industries conducts its operations primarily from the following facilities:

  •  a nitrogen manufacturing and processing facility at Donaldsonville, Louisiana;
 
  •  a phosphate mine and phosphate fertilizer plant in central Florida; and
 
  •  a 66% ownership interest in a nitrogen fertilizer manufacturing and processing facility in Alberta, Canada.

        Agriliance. Agriliance is one of the nation’s largest wholesale distributors of crop nutrients (fertilizers) and crop protection products (insecticides, fungicides and pesticides) based on sales,

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accounting for an estimated 17% of the U.S. market for crop nutrients and approximately 24% of the U.S. market for crop protection products. As a wholesale distributor, Agriliance has warehouse, distribution and service facilities located throughout the country. Agriliance also owns and operates retail agricultural units primarily in the southern United States. In addition, Agriliance blends and packages crop protection products under the Agri Solutions brand. Agriliance purchased approximately 34% of its fertilizer from CF Industries during fiscal year 2004, and its other suppliers include IMC, PCS, PIC and Koch. Most of Agriliance’s crop protection products are purchased from Monsanto, Syngenta, Dow, Bayer, Dupont and BASF.

        Agriliance was formed in 2000 when CHS, Farmland Industries Inc. (Farmland) and Land O’Lakes, Inc. (Land O’Lakes) contributed their respective agronomy businesses to the new company in consideration for ownership interests in the venture. We hold our interests in Agriliance through United Country Brands, LLC (UCB), a wholly-owned holding company.

        In April 2003, we acquired a 13.1% additional economic interest in the crop protection products business of Agriliance (the “CPP Business”) for a cash payment of $34.3 million. After the transaction, the economic interests in Agriliance were owned 50% by Land O’Lakes, 25% plus an additional 13.1% of the CPP Business by us and 25% less 13.1% of the CPP Business by Farmland. The ownership or governance interests in Agriliance did not change with the purchase of this additional economic interest. Agriliance’s earnings were split among the members based upon the respective economic interests of each member.

        On April 30, 2004, we purchased all of Farmland’s remaining interests in Agriliance and UCB for $27.5 million in cash. We now own 50% of the economic and governance interests in Agriliance. We continue to account for the investment using the equity method of accounting.

Products and Services

        CF Industries manufactures crop nutrient products, primarily nitrogen and phosphate fertilizers and potash. Agriliance wholesales and retails crop nutrient products and crop protection products that include insecticides, fungicides, and pesticides. In addition, Agriliance blends and packages 7% of the products it sells under the Agri Solutions brand. Agriliance also provides field and technical services, including soil testing, adjuvant and herbicide formulation, application and related services.

Sales and Marketing; Customers

        CF Industries sells its crop nutrient products to large agricultural cooperatives and distributors. Its largest customers are Land O’Lakes, CHS and seven other regional cooperatives that wholesale the products to their members. Agriliance distributes agronomy products through approximately 2,200 local cooperatives from Ohio to the West Coast and from the Canadian border south to Kansas. Agriliance also provides sales and services through 48 Agriliance Service Centers and other retail outlets. Agriliance’s largest customer is the Company’s Country Operations and Services business segment. In 2004, Agriliance sold approximately $1.2 billion of crop nutrient products and approximately $2.3 billion of crop protection and other products.

Industry; Competition

        Regulation. The Agronomy business segment’s operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the Environmental Protection Agency, the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to environment, air and water; reporting storage of hazardous wastes; the transportation, handling and disposition of wastes; and the labeling of pesticides and similar substances. Failure to comply with these laws, regulations and rules could subject CF Industries, Agriliance or CHS to administrative penalties, injunctive relief, civil remedies and possible recalls of products. We believe that CF Industries and Agriliance are in compliance with these laws, regulations and

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rules in all material respects and do not expect continued compliance to have a material effect on our capital expenditures, earnings or competitive position.

        CF Industries. North American fertilizer producers operate in a highly competitive, global industry. Commercial fertilizers are world-traded commodities and producers compete principally on the basis of price and service. Many of the raw materials that are used in fertilizer production, such as natural gas, are often more expensive in the U.S. than other parts of the world. Crop nutrient margins and earnings have historically been cyclical; large profits generated throughout the mid-1990’s attracted additional capital and expansion and the industry now suffers from excess capacity. These factors have produced depressed margins for North American fertilizer manufacturers over the past several years, although recently fertilizer margins have stabilized.

        CF Industries competes with numerous domestic and international crop nutrient manufacturers.

        Agriliance. The wholesale and retail distribution of agronomy products is highly competitive and dependent upon relationships with agricultural producers, local cooperatives and growers, proximity to producers and local cooperatives and competitive pricing. Moreover, the crop protection products industry is mature with slow growth predicted for the future, which has led distributors and suppliers to turn to consolidation and strategic partnerships to benefit from economies of scale and increased market share. Agriliance competes with other large agronomy distributors, as well as other regional or local distributors and retailers. Agriliance competes on the strength of its relationships with the members of CHS and members of Land O’Lakes, its purchasing power and competitive pricing, and its attention to service in the field.

        Major competitors of Agriliance in crop nutrient distribution include Agrium, The Mosaic Company, Koch, UAP and United Suppliers. Major competitors of Agriliance in crop protection products distribution include Helena, UAP, Tenkoz and numerous smaller distribution companies.

Summary Operating Results

        We account for our Agronomy business segment as follows:

        CF Industries. Our investment in CF Industries of $153 million on August 31, 2004 is carried on the balance sheet at cost, including allocated qualified patronage. Since CF Industries is a cooperative, we recognize income from the investment only if we receive qualified patronage refunds. In each of the years 1998 through 2003, CF Industries generated operating losses, none of which were allocated to its owners. Historically, crop nutrients manufacturing earnings have been cyclical in nature. 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. We will continue to perform impairment tests annually, including reviewing operating results, or as circumstances dictate, which could result in an impairment to our CF Industries investment.

        Agriliance. At August 31, 2004 our equity investment in Agriliance was $167.6 million. We recognize earnings from Agriliance using the equity method of accounting, which results in us including our ownership percentage of Agriliance’s net earnings as equity income from investments. We apply related internal expenses against those earnings.

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        Summary operating results and identifiable assets for the Agronomy business segment for the fiscal years ended August 31, 2004, 2003 and 2002 are shown below:

                           
2004 2003 2002



(dollars in thousands)
Revenues:
                       
 
Net sales
                       
 
Other revenues
  $ (15 )   $ (84 )   $ (89 )
     
     
     
 
      (15 )     (84 )     (89 )
Cost of goods sold
                       
Marketing, general and administrative
    8,482       8,138       8,957  
     
     
     
 
Operating losses
    (8,497 )     (8,222 )     (9,046 )
Interest
    (352 )     (974 )     (1,403 )
Equity income from investments
    (35,725 )     (20,773 )     (13,425 )
     
     
     
 
Income before income taxes
  $ 27,580     $ 13,525     $ 5,782  
     
     
     
 
Total identifiable assets — August 31
  $ 327,448     $ 285,906     $ 242,015  
     
     
     
 

ENERGY

Overview

        We are the nation’s largest cooperative energy company based on revenues and identifiable assets, with operations that include petroleum refining and pipelines; the supply, marketing and distribution of refined fuels (gasoline, diesel, and other energy products); the blending, sale and distribution of lubricants; and the wholesale supply of propane. The Energy business segment processes crude oil into refined petroleum products at refineries in Laurel, Montana (wholly-owned) and McPherson, Kansas (an entity in which we have an approximately 74.5% ownership interest) and sells those products under the Cenex brand to member cooperatives and others through a network of approximately 1,600 independent retail sites, including approximately 800 that operate Cenex/ Ampride convenience stores.

Operations

        Laurel Refinery. Our Laurel, Montana refinery processes medium and high sulfur crude oil into refined petroleum products that primarily include gasoline, diesel, and asphalt. The Laurel refinery sources approximately 90% of its crude oil supply from Canada, with the balance obtained from domestic sources. Laurel has access to Canadian and northwest Montana crude through our wholly-owned Front Range Pipeline, LLC and other common carrier pipelines. The Laurel refinery also has access to Wyoming crude via common carrier pipelines from the south.

        The Laurel facility processes approximately 55,000 barrels of crude oil per day to produce refined products that consist of approximately 42% gasoline, 30% diesel and other distillates and 28% asphalt and other residual products. Refined fuels produced at Laurel, Montana are available via the Yellowstone Pipeline to western Montana terminals and to Spokane and Moses Lake, Washington, south via common carrier pipelines to Wyoming terminals and Denver, Colorado, and east via our wholly-owned Cenex Pipeline, LLC to Glendive, Montana, and Minot and Fargo, North Dakota.

        McPherson Refinery. The McPherson, Kansas refinery is owned and operated by the National Cooperative Refinery Association (NCRA), of which we own approximately 74.5%. The McPherson refinery processes low and medium sulfur crude oil into gasoline, diesel and other distillates, propane, and other products. McPherson sources approximately 95% of its crude oil from Kansas, Oklahoma, and Texas through NCRA-owned and common carrier pipelines.

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        The McPherson refinery processes approximately 80,000 barrels of crude oil per day to produce refined products that consist of approximately 57% gasoline, 34% diesel and other distillates, and 9% propane and other products. Approximately 90% of the refined fuels are shipped via NCRA’s proprietary products pipeline to its terminal in Council Bluffs, Iowa and to other markets via common carrier pipelines. The remaining refined fuel products are loaded into trucks at the refinery.

        Other Energy Operations. We own and operate a propane terminal, four asphalt terminals and three lubricants blending and packaging facilities. We also own and lease a fleet of liquid and pressure trailers and tractors, which are used to transport refined fuels, propane, anhydrous ammonia and other products.

Products and Services

        The Energy business segment produces and sells (primarily wholesale) gasoline, diesel, propane, asphalt, lubricants, and other related products and provides transportation services. It obtains the petroleum products that it sells both from the Laurel and McPherson refineries and from third parties.

Sales and Marketing; Customers

        We make approximately 70% of our refined fuel sales to members, with the balance sold to non-members. Sales are made wholesale to member cooperatives and through a network of independent retailers that operate convenience stores under the Cenex/ Ampride tradename. We sold approximately 1.4 billion gallons of gasoline and approximately 1.3 billion gallons of diesel fuel in fiscal year 2004. We also blend, package and wholesale auto and farm machinery lubricants to both members and non-members. In fiscal year 2004, energy operations sold approximately 21 million gallons of lube oil. We are one of the nation’s largest propane wholesalers based on revenues. In fiscal year 2004, energy operations sold approximately 766 million gallons of propane. Most of the propane sold in rural areas is for heating and agricultural usage. Annual sales volumes of propane vary greatly depending on weather patterns and crop conditions.

Industry; Competition

        Regulation. Governmental regulations and policies, particularly in the areas of taxation, energy and the environment, have a significant impact on the Company’s Energy business segment. The Energy business segment’s operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the Environmental Protection Agency, the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to environment, air and water; reporting storage of hazardous wastes; the transportation, handling and disposition of wastes; and the labeling of pesticides and similar substances. Failure to comply with these laws, regulations and rules could subject us (and, in the case of the McPherson refinery, NCRA) to administrative penalties, injunctive relief, civil remedies and possible recalls of products. We believe that we and NCRA are in compliance with these laws, regulations and rules in all material respects and do not expect continued compliance to have a material effect on capital expenditures, earnings or competitive position of either CHS or NCRA.

        Like many other refineries, the Energy business segment’s refineries are currently focusing their capital spending on reducing pollution. In particular, these refineries are currently working to comply with the Environmental Protection Agency low sulfur fuel regulations required by 2006, which are intended to lower the sulfur content of gasoline and diesel. We currently expect that the cost of compliance will be approximately $87.0 million for our Laurel, Montana refinery and $311.0 million for NCRA’s McPherson, Kansas refinery, of which $49.2 million had been spent at the Laurel refinery and $131.0 million had been spent by NCRA at the McPherson refinery as of August 31, 2004. We expect all of these compliance capital expenditures at the refineries to be complete by December 31, 2005, and anticipate funding these projects with a combination of cash flows from operations and debt proceeds.

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        The energy business is highly cyclical. Demand for crude oil and energy products are driven by the condition of local and worldwide economies, local and regional weather patterns and taxation relative to other energy sources which can significantly affect the price of refined fuels products. Most of our energy product market is located in rural areas, so sales activity tends to follow the planting and harvesting cycles. More fuel-efficient equipment, reduced crop tillage, depressed prices for crops, weather conditions, and government programs, which encourage idle acres, may all reduce demand for our energy products.

        The refining and wholesale fuels business is very competitive. Among our competitors are some of the world’s largest integrated petroleum companies, which have their own crude oil supplies, distribution and marketing systems. We also compete with smaller domestic refiners and marketers in the midwestern and northwestern United States, with foreign refiners who import products into the United States and with producers and marketers in other industries supplying other forms of energy and fuels to consumers. Given the commodity nature of the end products, profitability in the refining and marketing industry depends largely on margins, as well as operating efficiency, product mix, and costs of product distribution and transportation. The retail gasoline market is highly competitive, with much larger competitors that have greater brand recognition and distribution outlets throughout the country and the world. CHS owned and non-owned retail outlets are located primarily in the northwestern, midwestern and southern United States.

Summary Operating Results

        Summary operating results and identifiable assets for the Energy business segment for the fiscal years ended August 31, 2004, 2003 and 2002 are shown below:

                           
2004 2003 2002



(dollars in thousands)
Revenues:
                       
 
Net sales
  $ 4,028,248     $ 3,648,093     $ 2,657,689  
 
Other revenues
    9,193       5,655       857  
     
     
     
 
      4,037,441       3,653,748       2,658,546  
Cost of goods sold
    3,784,260       3,470,726       2,483,359  
Marketing, general and administrative
    66,493       63,740       66,731  
     
     
     
 
Operating earnings
    186,688       119,282       108,456  
Gain on sale of investment
    (14,666 )                
Interest
    13,819       16,401       16,875  
Equity (income) loss from investments
    (1,399 )     (1,353 )     1,166  
Minority interests
    32,507       20,782       14,604  
     
     
     
 
Income before income taxes
  $ 156,427     $ 83,452     $ 75,811  
     
     
     
 
Intersegment sales
  $ (121,199 )   $ (94,209 )   $ (67,367 )
     
     
     
 
Total identifiable assets — August 31
  $ 1,591,254     $ 1,449,652     $ 1,305,828  
     
     
     
 

COUNTRY OPERATIONS AND SERVICES

Overview

        The Country Operations and Services business segment purchases a variety of grains from our producer members and other third parties, and provides cooperative members and producers with access to a full range of products and services including farm supplies, programs for crop and livestock production, hedging and insurance services, and agricultural operations financing. Country Operations and Services operates at 289 locations dispersed throughout Minnesota, North Dakota, South Dakota, Nebraska, Montana, Idaho, Washington and Oregon. Most of these locations purchase grain from farmers and sell

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agronomy products, energy products and feed to those same producers and others, although not all locations provide every product and service.

Products and Services

        Grain Purchasing. We are one of the largest country elevator operators in North America based on revenues. Through a majority of its elevator locations, the Country Operations and Services business segment purchases grain from member and non-member producers and other elevators and grain dealers. Most of the grain purchased is either sold through our Grain Marketing business segment or used for local feed and processing operations. For the year ended August 31, 2004, the Country Operations and Services business segment purchased approximately 318 million bushels of grain, primarily wheat (140 million bushels), corn (90 million bushels) and soybeans (47 million bushels). Of these bushels, 267 million were purchased from members and 248 million were sold through the Grain Marketing business segment.

        Other Products. Country Operations and Services manufactures and sells other products, both directly and through ownership interests in other entities. These include seed; crop nutrients; energy products; animal feed ingredients, supplements and products; animal health products; crop protection products; and processed sunflowers. We sell agronomy products at 160 locations, feed products at 126 locations and energy products at 103 locations.

        Financial Services. We have provided open account financing to more than 130 CHS members that are cooperatives (cooperative association members) in the past year. These arrangements involve the discretionary extension of credit in the form of term and seasonal loans and can also be used as a clearing account for settlement of grain purchases and as a cash management tool. A substantial part of the term and seasonal loans are sold to the National Bank for Cooperatives (CoBank), with CoBank purchasing up to 100% of any loan. Our guarantee exposure on these loans at August 31, 2004 was approximately $5.9 million. Through our wholly-owned subsidiary Fin-Ag, Inc. we provide seasonal cattle feeding and swine financing loans, facility financing loans and crop production loans. Most loans are sold to Pro Partners (an affiliate of CoBank) under a program separate from that described above, under which we have guaranteed a portion of the loans. Our exposure at August 31, 2004 was approximately $25.1 million. Our borrowing arrangements allow for us to retain up to $110.0 million of loans in aggregate for both finance programs, or to sell the loans and extend guarantees up to $150.0 million in aggregate.

        Our wholly-owned subsidiary Country Hedging, Inc. (Country Hedging), which is a registered futures commission merchant and a clearing member of both the Minneapolis Grain Exchange and the Kansas City Board of Trade, is a full-service commodity futures and options broker.

        Ag States Agency, LLC (Ag States), is an independent insurance agency in which we hold a majority ownership interest. It sells insurance, including group benefits, property and casualty, and bonding programs. Its approximately 1,600 customers are primarily agricultural businesses, including local cooperatives and independent elevators, petroleum outlets, agronomy, feed and seed plants, implement dealers, fruit and vegetable packers/ warehouses, and food processors.

Industry; Competition

        Regulation. The Country Operations and Services business segment’s operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the Environmental Protection Agency, the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to environment, air and water; reporting storage of hazardous wastes; the transportation, handling and disposition of wastes; and the labeling of pesticides and similar substances. The Country Operations and Services business segment’s operations are also subject to laws and related regulations and rules administered by the United States Department of Agriculture, the Federal Food and Drug Administration, and other federal, state, local and foreign governmental agencies that govern the processing, packaging, storage, distribution, advertising, labeling, quality and safety of feed and grain products. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of

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products. We believe that we are in compliance with these laws, regulations and rules in all material respects and do not expect continued compliance to have a material effect on our capital expenditures, earnings or competitive position.

        Competition. Competitors for the purchase of grain include other elevators and large grain marketing companies. Competitors for farm supply include a variety of cooperatives, privately held and large national companies. We compete primarily on the basis of price, services and patronage.

        Competitors to our financing operations are primarily other financial institutions. We compete primarily on the basis of price, services and patronage. Country Hedging’s competitors include international brokerage firms, national brokerage firms, regional brokerage firms (both cooperatives and non-cooperatives) as well as local introducing brokers, with competition driven by price and level of service. Ag States competes with other insurance agencies, primarily on the basis of price and services.

Summary Operating Results

        Summary operating results and identifiable assets for the Country Operations and Services business segment for the fiscal years ended August 31, 2004, 2003 and 2002 are shown below:

                           
2004 2003 2002



(dollars in thousands)
Revenues:
                       
 
Net sales
  $ 2,227,764     $ 1,885,825     $ 1,474,553  
 
Other revenues
    94,381       84,206       83,361  
     
     
     
 
      2,322,145       1,970,031       1,557,914  
Cost of goods sold
    2,199,700       1,876,811       1,474,392  
Marketing, general and administrative
    70,196       55,887       47,995  
     
     
     
 
Operating earnings
    52,249       37,333       35,527  
Gain on legal settlements
    (692 )     (10,867 )     (2,970 )
Interest
    16,019       14,975       13,851  
Equity income from investments
    (519 )     (788 )     (283 )
Minority interests
    1,323       1,168       786  
     
     
     
 
Income before income taxes
  $ 36,118     $ 32,845     $ 24,143  
     
     
     
 
Intersegment sales
  $ (987,145 )   $ (796,999 )   $ (615,853 )
     
     
     
 
Total identifiable assets — August 31
  $ 862,645     $ 857,523     $ 799,711  
     
     
     
 

GRAIN MARKETING

Overview

        We are the nation’s largest cooperative marketer of grain and oilseed based on grain storage capacity and grain sales, handling about 1.1 billion bushels annually. During fiscal year 2004, we purchased approximately 69% of our total grain volume from individual and cooperative association members and the Country Operations and Services business segment, with the balance purchased from third parties. We arrange for the transportation of the grains either directly to customers or to CHS owned or leased grain terminals and elevators awaiting delivery to domestic and foreign purchasers. We primarily conduct our Grain Marketing operations directly, but do conduct some of our business through two 50% owned joint ventures.

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Operations

        The Grain Marketing segment purchases grain directly and indirectly from agricultural producers primarily in the midwestern and western United States. The purchased grain is typically contracted for sale for future delivery at a specified location, and we are responsible for handling the grain and arranging for its transportation to that location. The sale of grain is recorded after title to the commodity has transferred and final weights, grades and settlement price have been agreed upon. Amounts billed to the customer as part of a sales transaction include the costs for shipping and handling. Our ability to arrange efficient transportation, including loading capabilities onto unit trains, ocean-going vessels, and barges, is a significant part of the services we offers to our customers. Rail, vessel, barge and truck transportation is carried out by third parties, often under long-term freight agreements with us. Grain intended for export is usually shipped by rail or barge to an export terminal, where it is loaded onto ocean-going vessels. Grain intended for domestic use is usually shipped by rail or truck to various locations throughout the country.

        We own export terminals, river terminals, and elevators involved in the handling and transport of grain. River terminals at St. Paul, Savage, and Winona, Minnesota, and Davenport, Iowa are used to load grains onto barges for shipment to both domestic and export customers via the Mississippi River system. Our export terminal at Superior, Wisconsin, provides access to the Great Lakes and St. Lawrence Seaway, and an export terminal at Myrtle Grove, Louisiana serves the Gulf market. In the Pacific Northwest, we conduct our grain marketing operations through United Harvest, LLC (a 50% joint venture with United Grain Corporation), and TEMCO, LLC (a 50% joint venture with Cargill, Incorporated). United Harvest, LLC operates grain terminals in Vancouver and Kalama, Washington, and primarily exports wheat. TEMCO, LLC, operates an export terminal in Tacoma, Washington, and primarily exports corn and soybeans. These facilities serve the Pacific market, as well as domestic grain customers in the western United States. We also own two 110-car shuttle-receiving elevator facilities in Friona, Texas and Collins, Mississippi that serve large-scale feeder cattle, dairy and poultry producers in those regions. In 2003, we opened an office in Sao Paulo, Brazil, for the procurement of soybeans for the Grain Marketing segment’s international customers.

        The Grain Marketing segment purchases most of its grain during the summer and fall harvest period. Because of our geographic location and the fact that we are further from our export facilities, grain tends to be sold later than in other parts of the country. However, as many producers have significant on-farm storage capacity and in light of our own storage capacity, the Grain Marketing business segment buys and ships grain throughout the year. Due to the amount of grain purchased and held in inventory, the Grain Marketing business segment has significant working capital needs at various times of the year. The amount of borrowings for this purpose, and the interest rate charged on those borrowings, directly affect the profitability of the Grain Marketing segment.

Products and Services

        The primary grains purchased by the Grain Marketing business segment for the year ended August 31, 2004 were corn (456 million bushels), wheat (389 million bushels) and soybeans (286 million bushels). Of the total grains purchased by the Grain Marketing business segment during the year ended August 31, 2004, 603 million bushels were purchased from our individual and cooperative association members, 248 million bushels were purchased from the Country Operations and Services business segment and the remainder were purchased from third parties.

Sales and Marketing; Customers

        Purchasers include domestic and foreign millers, maltsters, feeders, crushers, and other processors. To a much lesser extent purchasers include intermediaries and distributors. Grain marketing operations are not dependent on any one customer. The Grain Marketing segment has supply relationships calling for delivery of grain at prevailing market prices.

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Industry; Competition

        Regulation. The Grain Marketing business segment’s operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the Environmental Protection Agency, the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to environment, air and water; reporting storage of hazardous wastes; the transportation, handling and disposition of wastes. The Grain Marketing business segment’s operations are also subject to laws and related regulations and rules administered by the United States Department of Agriculture, the Federal Food and Drug Administration, and other federal state, local and foreign governmental agencies that govern the processing, packaging, storage, distribution, advertising, labeling, quality and safety of food and grain products. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of products. We believe that we are in compliance with these laws, regulations and rules in all material respects and do not expect continued compliance to have a material effect on our capital expenditures, earnings or competitive position.

        Competition. The Grain Marketing business segment competes for both the purchase and the sale of grain. Competition is intense and margins are low. Some competitors are integrated food producers, which may also be customers. A few major competitors have substantially greater financial resources than we do.

        In the purchase of grain from producers, location of the delivery facility is a prime consideration, but producers are increasingly willing to truck grain longer distances for sale. Price is affected by the capabilities of the facility; for example, if it is cheaper to deliver to a customer by unit train than by truck, a facility with unit train capability provides a price advantage. We believe that our relationships with individual members serviced by local Country Operations and Services locations and with cooperative members gives us a broad origination capability.

        The Grain Marketing business segment competes for grain sales based on price, services and ability to provide the desired quantity and quality of grains. Location of facilities is a major factor in the ability to compete. Grain marketing operations compete with numerous grain merchandisers, including major grain merchandising companies such as Archer Daniels Midland (ADM), Cargill, Incorporated (Cargill), ConAgra, Bunge and Louis Dreyfus, each of which handle grain volumes of more than one billion bushels annually.

        The results of the grain marketing business may be adversely affected by relative levels of supply and demand, both domestic and international, commodity price levels (including grain prices reported on national markets) and transportation costs and conditions. Supply is affected by weather conditions, disease, insect damage, acreage planted and government regulations and policies. Demand may be affected by foreign governments and their programs, relationships of foreign countries with the United States, the affluence of foreign countries, acts of war, currency exchange fluctuations and substitution of commodities. Demand may also be affected by changes in eating habits, by population growth, and by increased or decreased per capita consumption of some products.

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Summary Operating Results

        Summary operating results and identifiable assets for the Grain Marketing business segment for the fiscal years ended August 31, 2004, 2003 and 2002 are shown below:

                           
2004 2003 2002



(dollars in thousands)
Revenues:
                       
 
Net sales
  $ 5,006,029     $ 4,139,226     $ 3,281,469  
 
Other revenues
    28,710       25,676       22,399  
     
     
     
 
      5,034,739       4,164,902       3,303,868  
Cost of goods sold
    5,006,704       4,133,677       3,272,985  
Marketing, general and administrative
    25,071       21,072       22,213  
     
     
     
 
Operating earnings
    2,964       10,153       8,670  
Interest
    5,874       4,738       4,807  
Equity (income) loss from investments
    (11,413 )     1,673       (4,257 )
     
     
     
 
Income before income taxes
  $ 8,503     $ 3,742     $ 8,120  
     
     
     
 
Intersegment sales
  $ (45,103 )   $ (2,435 )   $ (69,561 )
     
     
     
 
Total identifiable assets — August 31
  $ 487,807     $ 450,415     $ 481,232  
     
     
     
 

PROCESSED GRAINS AND FOODS

Overview

        The Processed Grains and Foods business segment converts raw agricultural commodities into ingredients for finished food products or into finished consumer food products. We have focused on areas that allow us to utilize the products supplied by member producers. These areas are oilseed processing, wheat milling and foods.

        Regulation. The Processed Grains and Foods business segment’s operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the Environmental Protection Agency, the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to environment, air and water; reporting storage of hazardous wastes; the transportation, handling and disposition of wastes. The Processed Grains and Foods business segment’s operations are also subject to laws and related regulations and rules administered by the United States Department of Agriculture, the Federal Food and Drug Administration, and other federal state, local and foreign governmental agencies that govern the processing, packaging, storage, distribution, advertising, labeling, quality and safety of food and grain products. Failure to comply with these laws, regulations and rules could subject us or our foods partners to administrative penalties, injunctive relief, civil remedies and possible recalls of products. We believe that we are in compliance with these laws, regulations and rules in all material respects and do not expect continued compliance to have a material effect on our capital expenditures, earnings or competitive position.

 
Oilseed Processing

        Our oilseed processing operations convert soybeans into soybean meal, soyflour, crude soyoil, refined soybean oil and associated by-products. These operations are conducted at a facility in Mankato, Minnesota that can crush 39 million bushels of soybeans on an annual basis, producing approximately 940,000 short tons of soybean meal and 460 million pounds of crude soybean oil. The same facility is able to produce approximately 1 billion pounds of refined soybean oil annually. Another crushing facility in

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Fairmont, Minnesota has a crushing capacity and crude soyoil output similar to the Mankato facility. The facility in Fairmont became operational in the first quarter of fiscal 2004.

        Our oilseed processing operations produce three primary products: refined oils, soybean meal and soyflour. Refined oils are used in processed foods, such as margarine, shortening, salad dressings and baked goods and, to a lesser extent for certain industrial uses for plastics, inks and paints. Soybean meal has a high-protein content and is used for feeding livestock. Soyflour is used in the baking industry, as a milk replacement in animal feed and in industrial applications.

        Our soy processing facilities are located in areas with a strong production base of soybeans and end-user market for the meal and soyflour. We purchase virtually all of our soybeans from members. The oilseed crushing operations currently produce approximately 85% of the crude oil that we refine, and purchases the balance from outside suppliers.

        Our customers for refined oil are principally large food product companies located throughout the United States. However, over 50% of the customers are located in the Midwest due to lower freight costs and slightly higher profitability potential. The largest customer for refined oil products is Ventura Foods, LLC (Ventura Foods), in which we hold a 50% ownership interest and with which we have a long-term supply agreement to supply minimum quantities of edible soybean oils as long as we maintain a minimum 25.5% ownership interest and our price is comparative with other suppliers of the product. Our sales to Ventura Foods were $94.5 million in fiscal year 2004. We also sell soymeal to almost 600 customers, primarily feed lots and feed mills in southern Minnesota. Land O’Lakes/ Purina Feed, LLC accounts for 18% of soymeal sold and Commodity Specialists Company accounts for 22% of soymeal sold. We sell soyflour to customers in the baking industry both domestically and for export.

        The refined soybean products industry is highly competitive. Major industry competitors include ADM, Cargill, Ag Processing, Inc., and Bunge. These and other competitors have acquired other processors and have expanded existing plants, or have constructed new plants, both domestically and internationally. Price, transportation costs, services and product quality drive competition. We estimate that we have a market share of approximately 4% to 5% of the domestic refined soybean oil market and approximately 4% of the domestic soybean crushing capacity.

        Soybeans are a commodity and their price can fluctuate significantly depending on production levels, demand for the refined products, and other supply and demand factors.

 
Wheat Milling

        In January 2002, we and Cargill formed Horizon Milling, LLC (Horizon Milling), in which we own 24% and Cargill owns the remaining 76%. Horizon Milling is the largest U.S. wheat miller. Sales and purchases of wheat and durum by CHS to Horizon Milling during fiscal year 2004 were $206.2 million and $2.9 million, respectively. Horizon Milling’s advance payments on grain to us were $7.1 million on August 31, 2004, and are included in Customer Advance Payments on the Company’s Consolidated Balance Sheets.

        We lease five mills to Horizon Milling and ceased operations at our Huron, Ohio, mill prior to the formation of Horizon Milling. We have dismantled the milling equipment at Huron, and are currently pursuing the sale of the equipment that has not yet been sold. The Processed Grains and Foods business segment carries an impairment of approximately $5.7 million on the equipment.

 
Foods

        We have two primary areas of focus in the foods area: Ventura Foods, LLC (Ventura Foods) which produces oilseed-based products such as margarine and salad dressing, and which is 50% owned by us, and the production of Mexican foods such as tortillas, tortilla chips and entrees.

        Ventura Foods. Ventura Foods manufactures, packages, distributes and markets bulk margarine, salad dressings, mayonnaise, salad oils, syrups, soup bases and sauces, many of which utilize soybean oil as

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a primary ingredient. Approximately 40% of Ventura Foods’ volume, based on sales revenues, comes from products for which Ventura Foods owns the brand, and the remainder comes from products that it produces for third parties. A variety of Ventura Foods’ product formulations and processes are proprietary to it or its customers. Ventura Foods is the largest manufacturer of margarine in the U.S. and is a major producer of many other products.

        Ventura Foods has 13 manufacturing and distribution locations across the United States. It sources its raw materials, which consist primarily of soybean oil, canola oil, cottonseed oil, peanut oil and various other ingredients and supplies, from various national suppliers, including our oilseed processing operations. It sells the products it manufactures to third parties as a contract manufacturer, as well as directly to retailers, food distribution companies and large institutional food service companies. Ventura Foods sales are approximately 60% in foodservice and the remainder split between retail and industrial customers who use edible oil products as ingredients in foods they manufacture for resale. During Ventura Foods’ 2004 fiscal year, Sysco accounted for 23% of net sales.

        Ventura Foods competes with a variety of large companies in the food manufacturing industry. Some of its major competitors are ADM, Cargill, Bunge, Unilever, ConAgra, ACH, Smuckers, Kraft, and CF Sauer.

        Ventura Foods was created in 1996 and at the time was owned 40% by us and 60% by Wilsey Foods, Inc., a majority owned subsidiary of Mitsui & Co., Ltd. In March 2000, we purchased an additional 10% interest from Wilsey Foods, Inc. bringing our total equity investment in Ventura Foods to 50%. We account for the Ventura Foods investment under the equity method of accounting. At August 31, 2004 our equity investment in Ventura Foods was $107.7 million.

        Mexican Foods. Through our Mexican foods operations, we manufacture, package, and distribute tortillas, tortilla chips and prepared frozen Mexican food products such as burritos and tamales. Sales are to both retail and food service customers. We sell these products under a variety of local and regional brand names and also produce private label products and co-packs for customers. The current operational focus is on establishing profitability and operational efficiency.

        The tortilla and tortilla chip industry in the United States is comprised of a large number of small regional manufacturers and a few dominant manufacturers. We estimate that our Mexican foods operation has approximately a 1.5% share of the national tortilla market and less than a 1% share of the national tortilla chip market. On a national basis, the primary competitors are large chip and snack companies such as Frito Lay. During our fiscal year ended August 31, 2004, U.S. Foods accounted for 13% of Mexican foods’ net sales and Sysco accounted for 11% of net sales.

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Summary Operating Results

        Summary operating results and identifiable assets for the Processed Grains and Foods business segment for the fiscal years ended August 31, 2004, 2003 and 2002 are shown below:

                           
2004 2003 2002



(dollars in thousands)
Revenues:
                       
 
Net sales*
  $ 802,102     $ 491,931     $ 496,084  
 
Other revenues
    2,836       2,411       (1,209 )
     
     
     
 
      804,938       494,342       494,875  
Cost of goods sold
    768,391       473,682       462,655  
Marketing, general and administrative
    31,811       29,715       31,813  
     
     
     
 
Operating earnings (losses)
    4,736       (9,055 )     407  
Interest
    15,307       12,845       9,514  
Equity income from investments
    (29,966 )     (26,056 )     (41,331 )
     
     
     
 
Income before income taxes
  $ 19,395     $ 4,156     $ 32,224  
     
     
     
 
Intersegment sales
  $ (1,363 )   $ (698 )   $ (560 )
     
     
     
 
Total identifiable assets — August 31
  $ 475,004     $ 498,872     $ 439,942  
     
     
     
 


The 2004 net sales increase from 2003 and 2002 is primarily due to the additional crushing capacity of the Fairmont, Minnesota facility that began operation in the first fiscal quarter of 2004.

PRICE RISK AND HEDGING

        Whenever we enter into a commodity purchase commitment we incur risks of carrying inventory, including risks related to price changes and performance (including delivery, quality, quantity and shipment period). We are exposed to risk of loss in the market value of positions held, consisting of inventory and purchase contracts at a fixed or partially fixed price in the event market prices decrease. We are also exposed to risk of loss on our fixed price or partially fixed price sales contracts in the event market prices increase.

        To reduce the price change risks associated with holding fixed price commitments, we generally take opposite and offsetting positions by entering into commodity futures contracts (either a straight futures contract or an options futures contract) on regulated commodity futures exchanges for grain, and regulated mercantile exchanges for refined products and crude oil. The crude oil and most of the grain and oilseed volume handled by us can be hedged. Some grains cannot be hedged because there are no futures for certain commodities. For those commodities, risk is managed through the use of forward sales and various pricing arrangements and to some extent cross-commodity futures hedging. While hedging activities reduce the risk of loss from changing market values of inventory, such activities also limit the gain potential which otherwise could result from changes in market prices of inventory. Our policy is to generally maintain hedged positions in grain. Our profitability from operations is primarily derived from margins on products sold and grain merchandised, not from hedging transactions. Hedging arrangements do not protect against nonperformance by counterparties to contracts, and therefore, contract values are reviewed and adjusted to reflect potential non-performance.

        When a futures contract is entered into, an initial margin deposit must be sent to the applicable exchange or broker. The amount of the deposit is set by the exchange and varies by commodity. If the market price of a short futures contract increases, then an additional maintenance margin deposit would be required. Similarly, if the price of a long futures contract decreases, a maintenance margin deposit would

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be required and sent to the applicable exchange. Subsequent price changes could require additional maintenance margins or could result in the return of maintenance margins.

        At any one time, inventory and purchase contracts for delivery to us may be substantial. We have risk management policies and procedures that include net position limits. These limits are defined for each commodity and include both trader and management limits. This policy, and computerized procedures in grain marketing operations, requires a review by operations management when any trader is outside of position limits and also a review by senior management of the Company if operating areas are outside of position limits. A similar process is used in energy operations. The position limits are reviewed at least annually with our management. We monitor current market conditions and may expand or reduce our risk management policies or procedures in response to changes in those conditions. In addition, all purchase and sales contracts are subject to credit approvals and appropriate terms and conditions.

EMPLOYEES

        At August 31, 2004, we had approximately 6,800 full, part-time and seasonal employees, which included approximately 560 employees of NCRA. Of that total, approximately 1,900 were employed in the Energy segment, 3,520 in the Country Operations and Services segment (including approximately 1,130 seasonal and temporary employees), 440 in the Grain Marketing segment, 710 in the Processed Grains and Foods segment and 230 in corporate and administrative functions. In addition to those employed directly by us, many employees work for the joint ventures in which we have an ownership interest, and are not included in these counts. All of the employees in the Agronomy segment and a portion of the Grain Marketing and Processed Grains and Foods segments are employed in this manner.

        Employees in certain areas are represented by collective bargaining agreements. Refinery and pipeline workers in Laurel, Montana (183 employees), are represented by agreements with two unions (Paper, Allied-Industrial, Chemical and Energy Workers International Union (PACE) and Oil Basin Pipeliners Union (OBP)), for which agreements are in place through 2006 in regard to wages and benefits. The contracts covering the NCRA McPherson, Kansas refinery (260 employees in the PACE union) are also in place through 2006. There are approximately 165 employees in transportation and lubricant plant operations that are covered by other collective bargaining agreements that expire at various times. Production workers in grain marketing operations (142 employees) are represented by agreements with four unions, which expire at various times in 2005 and 2006. Finally, certain production workers in oilseed processing operations are subject to collective bargaining agreements with the American Federation of Grain Millers (120 employees) and the Pipefitters’ Union (2 employees) for which agreements are in place through 2006.

MEMBERSHIP IN CHS AND AUTHORIZED CAPITAL

Introduction

        We are an agricultural membership cooperative organized under Minnesota cooperative law to do business with member and non-member patrons. Patrons, and not CHS, are subject to income taxes on income from patronage sources. We are subject to income taxes on non-patronage-sourced income. See “— Tax Treatment” below.

Distribution of Net Income; Patronage Dividends

        We are required by our organizational documents annually to distribute net earnings derived from patronage business with members, after payment of dividends on equity capital, to members on the basis of patronage, except that our Board of Directors may elect to retain and add to our unallocated capital reserve an amount not to exceed 10% of the distributable net income from patronage business. Net income from non-patronage business may be distributed to members or added to the unallocated capital reserve, in whatever proportions our Board of Directors deems appropriate.

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        These distributions, referred to as “patronage dividends,” may be distributed in cash, patrons’ equities, revolving fund certificates, securities of us or others, or any combination designated by our Board of Directors. Since 1998, our Board of Directors has distributed patronage dividends in the form of 30% cash and 70% patrons’ equities (see “— Patrons’ Equities” below). Our Board of Directors may change the mix in the form of the patronage dividend in the future. In making distributions, our Board of Directors may use any method of allocation that, in its judgment, is reasonable and equitable. Patronage dividends distributed during the years ended August 31, 2004, 2003 and 2002 were $95.2 million ($28.7 million in cash), $88.3 million ($26.5 million in cash) and $132.6 million ($40.1 million in cash), respectively.

Patrons’ Equities

        Patrons’ equities are in the form of a book entry and represent a right to receive cash or other property when redeemed by us. Patrons’ equities form part of our capital, do not bear interest and are not subject to redemption upon request of a member. Patrons’ equities are redeemable only at the discretion of our Board of Directors and in accordance with the terms of the redemption policy adopted by our Board of Directors, which may be modified at any time without member consent. A new policy was adopted effective September 1, 2004, whereby redemptions of capital equity certificates approved by our Board of Directors will be divided into two pools, one for non-individuals (primarily member cooperatives) who may participate in an annual pro-rata program for equities older than 10 years, and another for individual members who are eligible for equity redemptions at age 72 or upon death. The amount that each non-individual member receives under the pro-rata program in any year will be determined by multiplying the dollars available for pro-rata redemptions that year as determined by our Board of Directors, by a fraction, the numerator of which is the amount of patronage certificates older than 10 years held by that member, and the denominator is the sum of the patronage certificates older than 10 years held by all eligible non-individuals.

        Cash redemptions of patrons and other equities during the years ended August 31, 2004, 2003 and 2002 were $10.3 million, $31.1 million and $31.1 million, respectively. An additional $13.0 million of equities were redeemed by issuance of shares of our 8% Cumulative Redeemable Preferred Stock during the year ended August 31, 2004.

Governance

        We are managed by a Board of Directors of not less than 17 persons elected by the members at our annual meeting. Terms of directors are staggered so that no more than seven directors are elected in any year. Our Board of Directors is currently comprised of 17 directors. Our articles of incorporation and bylaws may be amended only upon approval of a majority of the votes cast at an annual or special meeting of the members, except for the higher vote described under “— Certain Antitakeover Measures” below.

Membership

        Membership in CHS is restricted to certain producers of agricultural products and to associations of producers of agricultural products that are organized and operating so as to adhere to the provisions of the Agricultural Marketing Act and the Capper-Volstead Act, as amended. Our Board of Directors may establish other qualifications for membership, as it may from time to time deem advisable.

        As a membership cooperative, we do not have common stock. We may issue equity or debt securities, on a patronage basis or otherwise, to our members. We have has two classes of outstanding membership. Individual members are individuals actually engaged in the production of agricultural products. Cooperative associations are associations of agricultural producers and may be either cooperatives or other associations organized and operated under the provisions of the Agricultural Marketing Act and the Capper-Volstead Act.

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Voting Rights

        Voting rights arise by virtue of membership in CHS, not because of ownership of any equity or debt security. Members that are cooperative associations are entitled to vote based upon a formula that takes into account the equity held by the cooperative in CHS and the average amount of business done with us over the previous three years.

        Members who are individuals are entitled to one vote each. Individual members may exercise their voting power directly or through a patrons’ association associated with a grain elevator, feed mill, seed plant or any other CHS facility (with certain historical exceptions) recognized by our Board of Directors. The number of votes of patrons’ associations is determined under the same formula as cooperative association members.

        Most matters submitted to a vote of the members require the approval of a majority of the votes cast at a meeting of the members, although certain actions require a greater vote. See “Certain Antitakeover Measures” below.

Debt and Equity Instruments

        We may issue debt and equity instruments to our current members and patrons, on a patronage basis or otherwise, and to persons who are neither members nor patrons. Capital equity certificates issued by us are subject to a first lien in favor of us for all indebtedness of the holder to us. As of August 31, 2004, our outstanding capital included patrons’ equities (consisting of capital equity certificates and non-patronage earnings certificates), 8% Cumulative Redeemable Preferred Stock and certain capital reserves.

Distribution of Assets Upon Dissolution; Merger and Consolidation

        In the event of any dissolution, liquidation or winding up of CHS, whether voluntary or involuntary, all debts and liabilities would be paid first according to their respective priorities. After such payment, the holders of the preferred stock would then be entitled to receive out of available assets $25.00 per share plus all dividends accumulated and unpaid on that share, whether or not declared, to and including the date of distribution. This distribution to the holders of the preferred stock would be made before any payment is made or assets distributed to the holders of any security that ranks junior to the preferred stock but after the payment of the liquidation preference of any of securities that rank senior to the preferred stock. After such distribution to the holders of equity capital, any excess would be paid to patrons on the basis of their past patronage. Our bylaws provide for the allocation among the members and nonmember patrons of the consideration received in any merger or consolidation to which we are a party.

Certain Antitakeover Measures

        Our governing documents may be amended upon the approval of a majority of the votes cast at an annual or special meeting. However, if our Board of Directors, in its sole discretion, declares that a proposed amendment to our governing documents involves or is related to a “hostile takeover,” the amendment must be adopted by 80% of the total voting power of the members.

        The approval of not less than two-thirds of the votes cast at a meeting is required to approve a “change of control” transaction which would include a merger, consolidation, liquidation, dissolution, or sale of all or substantially all of our assets. If our Board of Directors determines that a proposed change of control transaction involves a hostile takeover, the 80% approval requirement applies. The term “hostile takeover” is not further defined in the Minnesota cooperative law or our governing documents.

Tax Treatment

        Subchapter T of the Internal Revenue Code sets forth rules for the tax treatment of cooperatives and applies to both cooperatives exempt from taxation under Section 521 of the Internal Revenue Code and to nonexempt corporations operating on a cooperative basis. We are a nonexempt cooperative.

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        As a cooperative, we are not taxed on qualified patronage allocated to our members either in the form of equities or cash. Consequently, such amounts are taxed only at the patron level. However, the amounts of any allocated but undistributed patronage earnings (called non-qualified unit retains) are taxable to us when allocated. Upon redemption of any such non-qualified unit retains, the amount is deductible to us and taxable to the member.

        Income derived by us from non-patronage sources is not entitled to the “single tax” benefit of Subchapter T and is taxed to us at corporate income tax rates.

        NCRA is not consolidated for tax purposes.

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SELECTED CONSOLIDATED FINANCIAL DATA

        The selected consolidated financial data below has been derived from our consolidated financial statements for the periods indicated below. The selected consolidated financial information for August 31, 2004, 2003 and 2002 should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this filing.

Summary Consolidated Financial Data

                                           
2004 2003 2002 2001 2000





(dollars in thousands)
Income Statement Data:
                                       
Revenues:
                                       
 
Net sales
  $ 10,909,333     $ 9,270,734     $ 7,156,454     $ 7,464,242     $ 8,248,413  
 
Other revenues
    141,303       122,578       107,351       117,378       102,965  
     
     
     
     
     
 
      11,050,636       9,393,312       7,263,805       7,581,620       8,351,378  
Cost of goods sold
    10,604,245       9,060,555       6,940,050       7,177,135       8,051,057  
Marketing, general and administrative
    208,284       183,757       182,175       183,491       155,266  
     
     
     
     
     
 
Operating earnings
    238,107       149,000       141,580       220,994       145,055  
Gain on sale of investment
    (14,666 )                                
Gain on legal settlements
    (692 )     (10,867 )     (2,970 )                
Interest
    51,625       48,675       42,455       61,436       57,566  
Equity income from investments
    (79,022 )     (47,299 )     (58,133 )     (28,494 )     (28,325 )
Minority interests
    33,830       21,950       15,390       35,098       24,546  
     
     
     
     
     
 
Income before income taxes
    247,032       136,541       144,838       152,954       91,268  
Income taxes
    25,700       12,700       18,700       (25,600 )     3,880  
     
     
     
     
     
 
Net income
  $ 221,332     $ 123,841     $ 126,138     $ 178,554     $ 87,388  
     
     
     
     
     
 
Balance Sheet Data (August 31):
                                       
 
Working capital
  $ 493,440     $ 458,738     $ 249,115     $ 305,280     $ 214,223  
 
Net property, plant and equipment
    1,249,655       1,122,982       1,057,421       1,023,872       1,034,768  
 
Total assets
    4,031,292       3,807,968       3,481,727       3,057,319       3,172,680  
 
Long-term debt, including current maturities
    683,818       663,173       572,124       559,997       510,500  
 
Total equities
    1,628,086       1,481,711       1,289,638       1,261,153       1,164,426  

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        The selected financial statement information below has been derived from our five business segments, and Corporate and Other, for the fiscal years ended August 31, 2004, 2003 and 2002. The intercompany sales between segments were $1,154.8 million, $894.3 million and $753.3 million for the fiscal years ended August 31, 2004, 2003 and 2002, respectively.

Summary Financial Data By Business Segment

                                                   
Agronomy Energy


2004 2003 2002 2004 2003 2002






(dollars in thousands)
Revenues:
                                               
 
Net sales
                          $ 4,028,248     $ 3,648,093     $ 2,657,689  
 
Other revenues
  $ (15 )   $ (84 )   $ (89 )     9,193       5,655       857  
     
     
     
     
     
     
 
      (15 )     (84 )     (89 )     4,037,441       3,653,748       2,658,546  
Cost of goods sold
                            3,784,260       3,470,726       2,483,359  
Marketing, general and administrative
    8,482       8,138       8,957       66,493       63,740       66,731  
     
     
     
     
     
     
 
Operating (losses) earnings
    (8,497 )     (8,222 )     (9,046 )     186,688       119,282       108,456  
Gain on sale of investment
                            (14,666 )                
Interest
    (352 )     (974 )     (1,403 )     13,819       16,401       16,875  
Equity (income) loss from investments
    (35,725 )     (20,773 )     (13,425 )     (1,399 )     (1,353 )     1,166  
Minority interests
                            32,507       20,782       14,604  
     
     
     
     
     
     
 
Income before income taxes
  $ 27,580     $ 13,525     $ 5,782     $ 156,427     $ 83,452     $ 75,811  
     
     
     
     
     
     
 
Intersegment sales
                          $ (121,199 )   $ (94,209 )   $ (67,367 )
                             
     
     
 
Total identifiable assets — August 31
  $ 327,448     $ 285,906     $ 242,015     $ 1,591,254     $ 1,449,652     $ 1,305,828  
     
     
     
     
     
     
 
                                                   
Country Operations and Services Grain Marketing


2004 2003 2002 2004 2003 2002






(dollars in thousands)
Revenues:
                                               
 
Net sales
  $ 2,227,764     $ 1,885,825     $ 1,474,553     $ 5,006,029     $ 4,139,226     $ 3,281,469  
 
Other revenues
    94,381       84,206       83,361       28,710       25,676       22,399  
     
     
     
     
     
     
 
      2,322,145       1,970,031       1,557,914       5,034,739       4,164,902       3,303,868  
Cost of goods sold
    2,199,700       1,876,811       1,474,392       5,006,704       4,133,677       3,272,985  
Marketing, general and administrative
    70,196       55,887       47,995       25,071       21,072       22,213  
     
     
     
     
     
     
 
Operating earnings
    52,249       37,333       35,527       2,964       10,153       8,670  
Gain on legal settlements
    (692 )     (10,867 )     (2,970 )                        
Interest
    16,019       14,975       13,851       5,874       4,738       4,807  
Equity income (loss) from investments
    (519 )     (788 )     (283 )     (11,413 )     1,673       (4,257 )
Minority interests
    1,323       1,168       786                          
     
     
     
     
     
     
 
Income before income taxes
  $ 36,118     $ 32,845     $ 24,143     $ 8,503     $ 3,742     $ 8,120  
     
     
     
     
     
     
 
Intersegment sales
  $ (987,145 )   $ (796,999 )   $ (615,853 )   $ (45,103 )   $ (2,435 )   $ (69,561 )
     
     
     
     
     
     
 
Total identifiable assets — August 31
  $ 862,645     $ 857,523     $ 799,711     $ 487,807     $ 450,415     $ 481,232  
     
     
     
     
     
     
 
                                                   
Processed Grains and Foods Corporate and Other


2004 2003 2002 2004 2003 2002






(dollars in thousands)
Revenues:
                                               
 
Net sales
  $ 802,102     $ 491,931     $ 496,084                          
 
Other revenues
    2,836       2,411       (1,209 )   $ 6,198     $ 4,714     $ 2,032  
     
     
     
     
     
     
 
      804,938       494,342       494,875       6,198       4,714       2,032  
Cost of goods sold
    760,918       473,682       462,655                          
Marketing, general and administrative
    39,284       29,715       31,813       6,231       5,205       4,466  
     
     
     
     
     
     
 
Operating earnings (losses)
    4,736       (9,055 )     407       (33 )     (491 )     (2,434 )
Interest
    15,307       12,845       9,514       958       690       (1,189 )
Equity income from investments
    (29,966 )     (26,056 )     (41,331 )             (2 )     (3 )
     
     
     
     
     
     
 
Income (loss) before income taxes
  $ 19,395     $ 4,156     $ 32,224     $ (991 )   $ (1,179 )   $ (1,242 )
     
     
     
     
     
     
 
Intersegment sales
  $ (1,363 )   $ (698 )   $ (560 )                        
     
     
     
                         
Total identifiable assets — August 31
  $ 475,004     $ 498,872     $ 439,942     $ 287,134     $ 265,600     $ 212,999  
     
     
     
     
     
     
 

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Supplementary Financial Information

        Supplementary financial information required by Item 302 of Regulation S-K for the years ended August 31, 2004 and 2003 is presented below. Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto found starting on page F-1.

                                 
2004
November 30,
2003 February 28 May 31 August 31




(unaudited)
(dollars in thousands)
Net sales
  $ 2,489,344     $ 2,654,596     $ 2,817,529     $ 2,947,864  
Total revenues
    2,522,377       2,689,007       2,860,730       2,978,522  
Gross profit
    107,847       60,908       126,495       151,141  
Gain on sale of investment
                    14,666          
Gain on legal settlements
    287       405                  
Net income
    50,739       8,511       81,389       80,693  
                                 
2003
November 30,
2002 February 28 May 31 August 31




(unaudited)
(dollars in thousands)
Net sales
  $ 2,400,596     $ 2,328,154     $ 2,220,455     $ 2,321,529  
Total revenues
    2,435,851       2,353,845       2,250,877       2,352,739  
Gross profit
    97,292       52,409       98,410       84,646  
Gain on legal settlements
    1,797       8,892       178          
Net income (loss)
    40,356       (4,100 )     52,173       35,412  

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

        We are a diversified company, which provides grain, foods and energy resources to businesses and consumers. As a cooperative, we are owned by farmers, ranchers and their local cooperatives from the Great Lakes to the Pacific Northwest and from the Canadian border to Texas. We also have preferred stockholders that own shares of our 8% Cumulative Redeemable Preferred Stock.

        We buy commodities from and provides products and services to members and other customers on a global basis. We provide products and services ranging from grain marketing to food processing and operates petroleum refineries and pipelines. Through a broad range of working partnerships, we market and distribute Cenex® brand energy products, along with agronomic inputs and feed to rural America.

        We have five distinct business segments: Agronomy, Energy, Country Operations and Services, Grain Marketing and Processed Grains and Foods. Together these business segments create vertical integration to link producers with consumers. The first two segments, Agronomy and Energy, produce and provide for the wholesale distribution of crop production inputs. The third segment, Country Operations and Services, serves as the Company-owned retailer of a portion of these crop inputs and also serves as the first handler of a significant portion of the crops marketed and processed by us. The fourth segment, Grain Marketing, purchases and resells grains and oilseeds originated by the Country Operations and Services segment, by member cooperatives and also by third parties. The fifth business segment, Processed Grains and Foods, converts grains and oilseeds into value-added products.

        Summary data for each of these segments for the fiscal years ended August 31, 2004, 2003 and 2002 is shown on prior pages. Except as otherwise specified, references to years indicate the fiscal year ended August 31, 2004 or ended August 31 of the year referenced.

        Corporate administrative expenses are allocated to all five business segments based on either direct usage for services that can be tracked, such as information technology and legal, and other factors or considerations relevant to the costs incurred. A portion of these costs are allocated based on direct usage. Administrative expenses are allocated to all segments, including segments comprised solely of investments and joint ventures.

        Many of the our business activities are highly seasonal and operating results will vary throughout the year. Overall, our income is generally lowest during the second fiscal quarter and highest during the third fiscal quarter. Certain business segments are subject to varying seasonal fluctuations. For example, the Agronomy and Country Operations and Services segments experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. The Grain Marketing segment is subject to fluctuations in volume and earnings based on producer harvests, world grain prices and demand. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the summer and early fall when gasoline and diesel fuel usage is highest. Other energy products, such as propane, experience higher volumes and profitability during the winter heating and crop drying seasons.

        Our revenue can be significantly affected by global market prices for commodities such as petroleum products, natural gas, grains, oilseeds and flour. Changes in market prices for commodities that we purchase without a corresponding change in the selling prices of those products can affect revenues and operating earnings. Commodity prices are affected by a wide range of factors beyond our control, including the weather, crop damage due to disease or insects, drought, the availability and adequacy of supply, government regulations and policies, world events, and general political and economic conditions.

        While our sales and operating results are derived from businesses and operations which are wholly-owned and majority-owned, a portion of business operations are conducted through companies in which we

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hold ownership interests of 50% or less and do not control the operations. We account for these investments primarily using the equity method of accounting, wherein we record our proportionate share of income or loss reported by the entity as equity income from investments, without consolidating the revenues and expenses of the entity in our consolidated statements of operations. These investments principally include our 50% ownership in each of the following companies; Agriliance, LLC (Agriliance), TEMCO, LLC (TEMCO), United Harvest, LLC (United Harvest), Ventura Foods, LLC (Ventura Foods), and the 24% ownership in Horizon Milling, LLC (Horizon).

        Agriliance is owned and governed by Land O’Lakes, Inc. (50%) and United Country Brands, LLC (50%). United Country Brands, LLC, was initially owned and governed 50% by us and 50% by Farmland Industries, Inc. (Farmland), and was formed solely to hold a 50% interest in Agriliance. Initially, our indirect share of earnings (economic interest) in Agriliance was 25%, which was the same as our ownership or governance interest. In April 2003, we acquired an additional 13.1% economic interest in the wholesale crop protection business of Agriliance (the “CPP Business”), which constituted only a part of the Agriliance business operations, for a cash payment of $34.3 million. After the transaction, the economic interests in Agriliance were owned 50% by Land O’Lakes, 25% plus an additional 13.1% of the CPP Business by us and 25% less 13.1% of the CPP Business by Farmland. The ownership or governance interests in Agriliance did not change with the purchase of this additional economic interest. Agriliance’s earnings were split among the members based upon the respective economic interests of each member. On April 30, 2004, we purchased all of Farmland’s remaining interest in Agriliance for $27.5 million in cash. We now own 50% of the economic and governance interests in Agriliance, and continue to account for this investment using the equity method of accounting.

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

Results of Operations

 
Comparison of the Years Ended August 31, 2004 and 2003

        General. We recorded pretax earnings of $247.0 million in fiscal 2004 compared to $136.5 million in fiscal 2003, an increase of $110.5 million (81%). These results reflected increased pretax earnings in each of our business segments.

        The Agronomy segment generated pretax earnings of $27.6 million for the year ended August 31, 2004 compared to $13.5 million in the prior year. This increase in earnings of $14.1 million (104%) is primarily attributable to the acquisition of Farmland’s interests in Agriliance, as previously discussed, which represents $7.3 million of the increase in earnings, and improved Agriliance earnings from operations.

        The Energy segment generated pretax earnings of $156.4 million for the year ended August 31, 2004 compared with $83.5 million in the prior year. This increase in earnings of $72.9 million (87%) is primarily attributable to higher margins on refined fuels products, which resulted mainly from increased global demand. Earnings on lubricants, propane and transportation also improved compared to the previous year.

        The Country Operations and Services segment generated pretax earnings of $36.1 million for the year ended August 31, 2004 compared to $32.8 million in the prior year. This increase in earnings of $3.3 million (10%) resulted primarily from strong operating margins in energy, seed, agronomy and processed sunflower products. In addition, pretax earnings from commodity brokerage and insurance services improved by $0.9 million compared to the prior year. During 2004 and 2003, the Country Operations and Services segment recorded $0.7 million and $10.9 million of earnings, respectively, from the cash settlements of a class action lawsuit alleging illegal price fixing against various feed vitamin product suppliers.

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        The Grain Marketing segment generated pretax earnings of $8.5 million for the year ended August 31, 2004 compared to $3.7 million in the prior year. This increase in earnings of $4.8 million (127%) includes improved earnings in our two exporting joint ventures, TEMCO and United Harvest. Short supplies created strong demands for wheat, corn and soybeans along with favorable ocean freight spreads from the Pacific Northwest to Asia contributed to the improved earnings for these two joint ventures. During the third quarter of fiscal 2004, we, along with several other international grain marketing companies, experienced contract issues with Chinese customers for soybeans. Because the value of soybeans had declined between the date of the contracts and the delivery date, certain Chinese customers indicated their intent of nonperformance on these contracts. At that time, based upon an assessment of the impact of default, we valued those contracts at $18.5 million less than current market value, which was recorded as an addition to cost of goods sold in May 2004. We have since reached resolution on most of those contracts and have established receivables for the expected proceeds. These expected proceeds approximate the valuation placed on the contracts on May 31, 2004, and therefore, there was no additional impact on our net income during the fourth quarter of fiscal 2004.

        The Processed Grains and Foods segment generated pretax earnings of $19.4 million for the year ended August 31, 2004 compared to $4.2 million in the prior year. This increase in earnings of $15.2 million was primarily the result of improved crushing and refining margins within our oilseed processing operations. A poor 2003 harvest of soybeans in the U.S. because of weather conditions coupled with strong export demand put soybeans in short supply which widened soybean meal and oil margins throughout most of fiscal 2004. Earnings from our wheat milling joint venture, Horizon Milling, improved $3.0 million in fiscal 2004 while results from Mexican foods declined $1.1 million. Our share of earnings from Ventura Foods, our packaged foods joint venture, increased $0.9 million compared to the prior year.

        Net Income. Consolidated net income for the year ended August 31, 2004 was $221.3 million compared to $123.8 million for the year ended August 31, 2003, which represents a $97.5 million (79%) increase.

        Net Sales. Consolidated net sales of $10.9 billion for the year ended August 31, 2004 compared to $9.3 billion for the year ended August 31, 2003, which represents a $1.6 billion (18%) increase.

        Energy net sales of $3.9 billion increased $353.2 million (10%) during the year ended August 31, 2004 compared to the year ended August 31, 2003. During the years ended August 31, 2004 and 2003, the Energy segment recorded sales to the Country Operations and Services segment of $121.2 million and $94.2 million, respectively. Intersegment sales are eliminated in deriving consolidated sales but are included for segment reporting purposes. The net sales increase of $353.2 million is comprised of an increase of $578.9 million related to price appreciation and a decrease in sales of $225.7 million because of lower sales volume, primary on refined fuels and propane products. On a more product-specific basis, we own and operate two crude oil refineries from which we produce approximately 60% of the refined fuels products that we sell, the balance is purchased from other U.S. refiners and distributors. Refined fuels net sales increased $317.9 million (13%), of which $444.4 million was related to a net average price increase partially offset by a decrease of $126.5 million related to reduced volumes. The sales price of refined fuels increased $0.17 per gallon (18%) and volumes decreased 4% when comparing the year ended August 31, 2004 with the same period a year ago. Higher crude oil costs and global supply and demand forces contributed to the increase in refined fuels selling prices. The volume of refined fuels sales decreased primarily because of the non-renewal of a supply agreement with another refiner. Propane net sales increased by $33.1 million (7%), of which $84.6 million was related to a net average selling price change partially offset by a decrease of $51.5 million due to reduced volumes compared to the previous year. Propane prices increased $0.10 per gallon (18%) and sales volume decreased 9% in comparison of the same periods the prior year. Higher propane prices reflect lower industry stocks during the later part of 2003 as the result of a cold winter earlier in the calendar year. The lower sales volume for propane during the year ended August 31, 2004 is primarily reflective of a dry autumn which offered minimal opportunity for sales related to crop drying and a relatively warm early winter which reduced demand for home heating as compared to the same period in 2003.

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        Company-wide grain and oilseed net sales of $5.3 billion increased $867.1 million (19%) during the year ended August 31, 2004 compared to the year ended August 31, 2003. Sales to external customers by the Grain Marketing segment totaled $4,960.9 million and $4,136.8 million during the years ended August 31, 2004 and 2003, respectively. Grain sales of the Country Operations and Services segment to external customers during these same periods were $386.0 million and $343.0 million, respectively. Sales of grain between Country Operations and Services and Grain Marketing segments during these same periods were $1,032.2 million and $799.4 million, respectively. These intersegment sales are included for segment reporting purposes, but are eliminated on a consolidated basis. The net sales increase of $867.1 million is attributable to higher grain prices and increased volumes during the year ended August 31, 2004 compared to the same period last fiscal year. The average sales price of all grain and oilseed commodities sold reflected an increase of $0.44 per bushel (11%), which contributed $480.8 million to the increase in net sales. Commodity prices in general increased due to a poor 2003 harvest in the U.S. because of weather conditions which caused a shortage of grains and oilseeds. The average market price per bushel of soybeans, corn and spring wheat were $2.34, $0.37 and $0.25 greater than the prices on those same grains as compared to the year ended August 31, 2003. Volumes increased 8% during the year ended August 31, 2004 compared with the same period of a year ago, and contributed $386.3 million to the increase. Wheat, corn and soybeans reflected the largest volume increases. Demand from Chinese customers increased international exports of soybeans.

        Country operations non-grain net sales of $854.6 million increased by $108.9 million (15%) during the year ended August 31, 2004 compared to the year ended August 31, 2003 primarily the result of increased average selling prices on energy, crop nutrients, seed and processed sunflower products. Overall, the average selling price on these products has increased compared to the previous year. In addition, volumes are up due to acquisitions.

        Processed Grains and Foods segment net sales of $800.7 million increased $309.5 million (63%) during the year ended August 31, 2004 compared to the year ended August 31, 2003. Oilseed processing sales increased $313.4 million, of which $159.6 million was due to higher sales volumes, and $153.8 million was due to price appreciation. The average selling price of processed and refined oilseed products increased $76 per ton and $0.08 per pound, respectively, compared to the previous year. The volume increase is primarily due to the additional volumes from the crushing plant in Fairmont, Minnesota that began operations during the first quarter of fiscal year 2004. The price increase is primarily related to overall global market conditions for soybean oil. Sales of Mexican foods products decreased $3.3 million compared to the year ended August 31, 2003.

        Other Revenues. Other revenues of $141.3 million increased $18.7 million (15%) during the year ended August 31, 2004 compared to the year ended August 31, 2003. The majority of other revenue was generated within the Country Operations and Services and the Grain Marketing segments and derived primarily from services performed through the Country Operations and Services segment’s elevator and agri-service centers, including grain storage, grain cleaning, fertilizer spreading, crop protection product spraying and other services of this nature; the Country Operations and Services segment’s financial services, and the Grain Marketing segment’s service activities at its export terminals for loading vessels. Services revenue within the Country Operations and Services segment increased $5.0 million compared to the previous year, primarily due to increased commissions on commodity hedging and insurance services as a result of increased market share and expanded services offerings and safety and loss credits. Grain marketing services revenues and delivery income increased by $4.5 million compared to the year ended August 31, 2003. The Energy segment received $2.1 million of sulfur allotment recovery for the sale of a portion of its sulfur credits. In addition, we received patronage refunds of $7.7 million during the year ended August 31, 2004, an increase of $4.5 million (137%) compared to the previous year. The increase in patronage refunds is primarily the result of a patronage distribution in one of our cooperative investments, which was related to gains on legal settlements and on the sale of a warehouse facility.

        Cost of Goods Sold. Cost of goods sold of $10.6 billion increased $1.5 billion (17%) during the year ended August 31, 2004 compared to the year ended August 31, 2003.

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        The Energy segment net cost of goods sold increased by $286.5 million (8%) during the year ended August 31, 2004 compared to the same period of the prior year, primarily due to increased average costs, which was partially offset by reduced volumes. On a more product-specific basis, the average cost of refined fuels increased by $0.16 per gallon, which was partially offset by a 4% decrease in volumes compared to the year ended August 31, 2003. The average cost increase on refined fuels is reflective of higher input costs at our two crude oil refineries and higher average prices on the refined products that are purchased for resale compared to the year ended August 31, 2003. The average per unit cost of crude oil purchased for the two refineries increased 15% compared to the previous fiscal year end. We process approximately 55,000 barrels of crude oil per day at our Laurel, Montana refinery and 80,000 barrels of crude oil per day at NCRA’s McPherson, Kansas refinery. The average cost of propane increased $0.11 per gallon, which was partially offset by a 9% decrease in volumes compared to the year ended August 31, 2003. Propane volumes were reduced due to a dry autumn and relatively warm early winter, which was partially offset by an average cost increase due to higher input costs compared to the year ended August 31, 2003.

        The cost of all grains and oilseed procured by us through our Grain Marketing and Country Operations and Services segments increased $857.6 million (19%) compared to the year ended August 31, 2003, primarily the result of a $0.43 (11%) average cost per bushel increase and an 8% increase in volumes compared to the prior year. In addition to higher commodity prices, increased shipping costs and the $18.5 million net effect of the Chinese contract defaults described above contributed to this increase in cost of goods sold.

        Country operations non-grain cost of goods sold increased $105.5 million (13%) during the year ended August 31, 2004 compared to the year ended August 31, 2003, primarily due to an increased average cost per unit on energy products and crop nutrients, and additional volumes from acquisitions.

        The Processed Grains and Foods segment cost of goods sold increased by $294.0 million (62%) compared to the year ended August 31, 2003, which was primarily due to additional volumes of soybeans processed at the new crushing plant in Fairmont, Minnesota, and increased cost of raw materials in oilseed processing.

        Marketing, General and Administrative. Marketing, general and administrative expenses of $208.3 million for the year ended August 31, 2004 increased by $24.5 million (13%) compared to the year ended August 31, 2003. The net increase includes additional expenses due to increased retiree benefit expenses of $4.9 million, higher healthcare costs and other employee related benefits and $5.4 million of additional bad debt expenses in the Country Operations and Services segment.

        Gain on Sale of Investment. During the year ended August 31, 2004, we recorded a gain of $14.7 million within the Energy segment from the sale of a portion of a petroleum crude oil pipeline investment. NCRA exercised its right of first refusal to purchase a partial interest in the pipeline, and subsequently sold a 50% interest to another third party for proceeds of $25.0 million.

        Gain on Legal Settlements. The Country Operations and Services segment received cash of $0.7 million and $10.9 million during the years ended August 31, 2004 and 2003, respectively, from the settlement of a class action lawsuit alleging illegal price fixing against various feed vitamin product suppliers.

        Interest. Interest expense of $51.6 million for the year ended August 31, 2004 increased by $3.0 million (6%) compared to the year ended August 31, 2003. The average level of short-term borrowings increased $93.2 million primarily due to financing higher working capital needs and was partially offset by an average short-term interest rate decrease of 0.4% during the year ended August 31, 2004 compared to the year ended August 31, 2003.

        Equity Income from Investments. Equity income from investments of $79.0 million for the year ended August 31, 2004 increased by $31.7 million (67%) compared to the year ended August 31, 2003. We record equity income or loss from the investments we own 50% or less of our proportionate share of income or loss reported by the entity, without consolidating the revenues and expenses of the entity in our

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consolidated statements of operations. The increase in equity income from investments was primarily attributable to improved earnings from investments within our Agronomy segment of $15.0 million, Grain Marketing segment of $13.1 million and Processed Grain and Foods segment of $3.9 million.

        The Agronomy segment joint ventures generated increased earnings of $15.0 million. In April 2004, we finalized the purchase of additional ownership in Agriliance so that we now own 50%, which accounts for $7.3 million of the increase. In addition, Agriliance recorded increased earnings from operations primarily in wholesale crop protection operations compared to the same period of a year ago. Agriliance recorded improved earnings on its crop protection products, which primarily consist of herbicides and pesticides, due to increased market share. However, the price of these products continues to decline as many come off patent and are replaced by cheaper generic brands. Crop nutrient volumes, which primarily consist of fertilizers and micronutrients, are down 20% over last year, which partially reduced Agriliance earnings. Consistently high and volatile domestic prices for crop nutrient products have created a competitive, global supply environment.

        The Grain Marketing segment recorded increased earnings of $13.1 million, primarily in two exporting joint ventures due to increased export demand and favorable ocean freight spreads from the Pacific Northwest, where the exporting facilities are located, to the Pacific Rim. These factors contributed to a $6.8 million increase in equity income from our investment in TEMCO, a joint venture, which exports primarily corn and soybeans. Similar conditions contributed to a $5.2 million improvement in equity income from our wheat exporting investment in United Harvest.

        The Processed Grains and Foods segment showed increased earnings of $3.9 million, of which $3.0 million was from Horizon, a wheat milling joint venture, due to increased operating efficiencies and demand growth for whole-grain wheat products. Ventura Foods, an oilseed based products and packaged foods joint venture, recorded increased earnings of $0.9 million compared to the previous year.

        Minority Interests. Minority interests of $33.8 million for the year ended August 31, 2004 increased by $11.9 million (54%) compared to the year ended August 31, 2003. This increase was primarily a result of more profitable operations within our majority-owned subsidiaries compared to the prior year and the minority interest net effect of the gain on the sale of the NCRA investment. Substantially all minority interests relate to NCRA, an approximately 74.5% owned subsidiary.

        Income Taxes. Income tax expense of $25.7 million for the year ended August 31, 2004 compares with $12.7 million for the year ended August 31, 2003, resulting in effective tax rates of 10.4% and 9.3%, respectively. The federal and state statutory rate applied to nonpatronage business activity was 38.9% for the years ended August 31, 2004 and 2003. The income taxes and effective tax rate vary each year based upon profitability and nonpatronage business activity during each of the comparable years.

 
Comparison of the Years Ended August 31, 2003 and 2002

        Net Income. Consolidated net income for the year ended August 31, 2003 was $123.8 million compared to $126.1 million for the year ended August 31, 2002, which represents a $2.3 million (2%) decrease. This decrease in profitability is primarily attributable to decreased earnings in the Processed Grains and Foods and Grain Marketing segments, which was partially offset by increased earnings within the Energy, Country Operations and Services and Agronomy segments compared to the year ended August 31, 2002.

        Net Sales. Consolidated net sales of $9.3 billion for the year ended August 31, 2003 increased $2.1 billion (30%) compared to the year ended August 31, 2002.

        Energy net sales of $3.6 billion increased $963.6 million (37%) during the year ended August 31, 2003 compared to the year ended August 31, 2002. Sales for the year ended August 31, 2003 and 2002 were $3,648.1 million and $2,657.7 million, respectively. We eliminated all intersegment sales from the Energy segment to the Country Operations and Services segment of $94.2 million and $67.4 million for the years ended August 31, 2003 and 2002, respectively. Refined fuels net sales increased by $783.2 million, of which $418.0 million was related to a net average price change and $365.2 million was

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related to a net volume change. The sales price of refined fuels increased $0.18 per gallon and volume increased 17% compared to the year ended August 31, 2002. Refined fuels commodity prices increased due to global uncertainty in the energy markets brought on by the ensuing war and the Venezuela disruption. Propane net sales increased by $137.0 million, of which $75.9 million was related to a net volume change and $61.1 million was related to a net average price change. The average sales price of propane increased by $0.09 per gallon and volume increased by 19% compared to the year ended August 31, 2002. Domestic propane inventories were at extremely low levels coming out of the heating season, which supported a higher selling price. Refined fuels and propane volume increases were primarily a result of acquisitions, with the largest acquisition taking place in November 2001, when we purchased for $32.6 million, the wholesale energy business of Farmland Industries, Inc. (Farmland), as well as all interest in Country Energy, LLC a joint venture formerly with Farmland.

        Company-wide grain and oilseed net sales of $4.5 billion increased $1.0 billion (30%) during the year ended August 31, 2003 compared to the year ended August 31, 2002. Sales to external customers by the Grain Marketing segment totaled $4,136.8 million and $3,211.9 million during the years ended August 31, 2003 and 2002, respectively. Grain sales of the Country Operations and Services segment to external customers during these same periods were $343.0 million and $246.2 million, respectively. Sales of grain between Country Operations and Services and Grain Marketing segments during these same periods were $799.4 million and $685.4 million, respectively. These intersegment sales are included for segment reporting purposes, but we eliminate all intersegment sales on a consolidated basis. The net increase in sales was primarily due to an increase of $0.93 (30%) per bushel in the average sales price of all grain and oilseed marketed by us while volumes remained essentially unchanged from the prior year. The net increase in company-wide grain and oilseed of $1.0 billion was primarily related to the price change due to stronger commodity prices and increased international soybean exports.

        Country operations non-grain net sales of $745.8 million increased by $133.3 million (22%) during the year ended August 31, 2003 compared to the year ended August 31, 2002. The net average price and net volume increased on the majority of farm supply products, which consists of seed; plant food; energy products; animal health ingredients, supplements and products; animal health products; and crop nutrient and crop protection products, compared to the prior year. In addition, net sales increased $46.4 million compared to the prior year due to the acquisition of a sunflower processing plant.

        Processed Grains and Foods segment net sales of $491.2 million decreased $4.3 million (1%) during the year ended August 31, 2003 compared to the year ended August 31, 2002. Intersegment sales of $0.7 million and $0.6 million for the years ended August 31, 2003 and 2002, respectively, have been eliminated. Oilseed processing and refining net sales increased $81.4 million primarily due to an average selling price increase of $0.07 per bushel in refined oilseed. In addition, Mexican Foods sales increased $4.1 million compared to the prior year. These sales increases were partially offset by an $89.6 million decrease in sales due to the formation of Horizon Milling, a wheat flour milling and processing joint venture that was formed in January 2002. After that date, we accounted for operating results of Horizon Milling under the equity method of accounting.

        Other Revenues. Other revenues of $122.6 million increased $15.2 million (14%) during the year ended August 31, 2003 compared to the year ended August 31, 2002. The most significant increases were within the Energy, Grain Marketing and Corporate and Other segments compared to the prior year. Patronage refunds received of $3.3 million during the year ended August 31, 2003, decreased $0.6 million (16%) compared to the year ended August 31, 2002, due to reduced patronage dividends from cooperatives.

        Cost of Goods Sold. Cost of goods sold of $9.1 billion increased $2.1 billion (31%) during the year ended August 31, 2003 compared to the year ended August 31, 2002.

        The Energy segment net cost of goods sold increased by $960.5 million (40%) during the year ended August 31, 2003 compared to the prior year, primarily due to refined fuels average cost increase of $778.1 million (46%), which consists of increased average cost of $0.18 per gallon and volume increases of 17% compared to the year ended August 31, 2002. In addition, the average cost of propane increased by

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$138.1 million (43%), of which the average cost increased by $0.10 per gallon and volumes increased by 19% compared to the prior year. Energy cost increases primarily related to the global effects of higher input costs and increased volumes primarily as a result of acquisitions.

        The cost of all grains and oilseed procured by us through our Grain Marketing and Country Operations and Services segments increased by $1.0 billion (30%) compared to the year ended August 31, 2002 primarily due to a $0.92 (30%) average cost per bushel increase while volumes remained essentially unchanged from the prior year. This increase in cost of goods sold was primarily the result of higher commodity prices and increased international exports.

        Country operations non-grain cost of goods sold increased by $129.1 million (12%) during the year ended August 31, 2003 compared to the prior year primarily due to a sunflower processing plant acquisition and increased average cost per unit on most farm supply products.

        Processed Grains and Foods segment cost of goods sold increased by $11.0 million (2%) compared to the year ended August 31, 2002. Oilseed processing and refining cost of goods sold increased $94.6 million, primarily due to the increased cost of raw materials related to oilseed refining of $0.07 per bushel. This increase was partially offset by decreased cost of goods sold of $89.7 million related to the formation of Horizon Milling, as previously discussed.

        Marketing, General and Administrative. Marketing, general and administrative expenses of $183.8 million for the year ended August 31, 2003 increased by $1.6 million (1%) compared to the year ended August 31, 2002. The net increase is primarily due to additional expenses within the Country Operations and Services segment primarily due to a sunflower plant acquisition.

        Gain on Legal Settlements. The Country Operations and Services segment received cash of $10.9 million and $3.0 million during the years ended August 31, 2003 and 2002, respectively, from the settlement of a class action lawsuit alleging illegal price fixing against various feed vitamin product suppliers.

        Interest. Interest expense of $48.7 million for the year ended August 31, 2003 increased by $6.2 million (15%) compared to the year ended August 31, 2002. The average level of short-term borrowings increased $88.1 million primarily due to financing higher working capital needs, which was partially offset by an average short-term interest rate decrease of 0.4% during the year ended August 31, 2003 compared to August 31, 2002. Long-term debt borrowings increased due to an additional $175.0 million of private placement debt that was issued in October 2002.

        Equity Income from Investments. Equity income from investments of $47.3 million for the year ended August 31, 2003 decreased by $10.8 million (19%) compared to the year ended August 31, 2002. We record equity income or loss from the investments we own 50% or less of for our proportionate share of income or loss reported by the entity, without consolidating the revenues and expenses of the entity in our consolidated statements of operations. The decrease in equity income from investments was primarily attributable to decreased earnings in Ventura Foods, which was partially offset by increased earnings in Agriliance compared to the prior year. During the fiscal year ended August 31, 2003, we recorded an additional 13.1% of income from the CPP business of Agriliance, as previously discussed.

        Minority Interests. Minority interests of $22.0 million for the year ended August 31, 2003 increased by $6.6 million (43%) compared to the year ended August 31, 2002. The net change in minority interests during the year ended August 31, 2003 compared to the prior year was primarily a result of more profitable operations within our majority-owned subsidiaries. Substantially all minority interests relate to NCRA, an approximately 74.5% owned subsidiary.

        Income Taxes. Income tax expense of $12.7 million for the year ended August 31, 2003 compares with $18.7 million for the year ended August 31, 2002, resulting in effective tax rates of 9.3% and 12.9%, respectively. The federal and state statutory rate applied to nonpatronage business activity was 38.9% for the years ended August 31, 2003 and 2002. The income taxes and effective tax rate vary each year based upon profitability and nonpatronage business activity during each of the comparable years.

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Liquidity and Capital Resources

        On August 31, 2004, we had working capital, defined as current assets less current liabilities, of $493.4 million and a current ratio, defined as current assets divided by current liabilities, of 1.3 to 1.0 compared to working capital of $458.7 million and a current ratio of 1.3 to 1.0 on August 31, 2003. Working capital increased during fiscal 2004 by $34.7 million despite capital expenditures of $245.1 million, primarily because of strong earnings and the addition of $30.0 million in long-term debt during this period.

        During May 2004, we renewed and expanded our committed lines of revolving credit which are used primarily to finance inventories and receivables. The previously established credit lines consisted of a $600 million 364-day revolver and a $100 million three-year revolver. The new committed credit facilities consist of a $750 million 364-day revolver and $150 million three-year revolver. These credit facilities are established with a syndicate of domestic and international banks, and the inventories and receivables financed with these loans are highly liquid. The terms of the new credit facilities are essentially the same as the terms for the credit facilities they replace. On August 31, 2004, $115.0 million was outstanding on these lines of credit. In September 2004, we borrowed $125.0 million from a group of insurance companies on a long-term basis and used the proceeds to pay down the revolving lines of credit. Our management believes there is adequate liquidity to cover any increase in net operating assets and liabilities in the foreseeable future.

 
Cash Flows from Operations

        Cash flows from operations are generally affected by commodity prices. These commodity prices are affected by a wide range of factors beyond our control, including weather, crop conditions, drought, the availability and the adequacy of supply and transportation, government regulations and policies, world events, and general political and economic conditions. These factors are described in the Risk Factors beginning on page 7 of this prospectus, and may affect net operating assets and liabilities, and liquidity.

        Cash flows provided by operating activities were $333.3 million and $216.5 million for the years ended August 31, 2004 and 2003, respectively. Cash used in operating activities was $35.9 million for the year ended August 31, 2002. Volatility in cash flows from operations between fiscal 2004 and 2003 is primarily the result of increased earnings of $97.5 million (79%) during fiscal 2004 compared to 2003, as well as a decrease in net operating assets and liabilities as a result of decreased grain and oilseed inventories. Volatility in cash flows from operations between fiscal 2003 and 2002 is primarily the result of changing grain prices.

        Operating activities provided net cash of $333.3 million during the year ended August 31, 2004. Net income of $221.3 million, net non-cash expenses of $54.0 million, and a decrease in net operating assets and liabilities of $58.0 million, provided this net cash from operating activities. The primary components of net non-cash expenses included depreciation and amortization of $108.4 million and minority interests of $33.8 million, which were partially offset by income from equity investments of $79.0 million and a pretax gain on the sale of an investment of $14.7 million. The decrease in net operating assets and liabilities was caused primarily by a decrease in grain and oilseed inventories of 25.7 million bushels (63%) in the Country Operations and Services segment, and 5.2 million bushels (14%) in the Grain Marketing segment.

        Operating activities provided net cash of $216.5 million during the year ended August 31, 2003. Net income of $123.8 million and net non-cash expenses of $98.0 million were partially offset by a small increase in net operating assets and liabilities of $5.3 million. The primary components of net non-cash expenses included depreciation and amortization of $111.3 million and minority interests of $22.0 million, which were partially offset by income from equity investments of $47.3 million. Grain and oilseed prices on August 31, 2003 remained at the approximate levels prevailing on August 31, 2002, as market conditions were similar at the end of both fiscal years. Consequently, net operating assets and liabilities at August 31, 2003 changed only slightly compared with those at the prior year-end.

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        Operating activities used net cash of $35.9 million during the year ended August 31, 2002. Net income of $126.1 million and net non-cash expenses of $62.4 million were offset by an increase in net operating assets and liabilities of $224.4 million. The primary components of net non-cash expenses included depreciation and amortization of $104.0 million and minority interests of $15.4 million, which were partially offset by income from equity investments of $58.1 million. The increase in net operating assets and liabilities was caused primarily by increases in the prices of the three primary grain commodities handled by us. Grain and oilseed prices increased considerably at the end of fiscal 2002 in response to drought conditions in parts of the grain production area, which reduced overall market supply and resulted in an increase in grain and oilseed inventory values of $155.6 million compared to that same inventory category of the prior year. The market price of spring wheat, soybeans and corn was higher on August 31, 2002 by $2.15 per bushel (70%), $1.15 per bushel (24%) and $0.45 per bushel (21%), respectively, than at the end of the prior fiscal year. These increases in grain prices also had the affect of increasing hedging margin deposits, which are carried in other current assets, and receivables. These and other less significant factors increased net operating assets and liabilities by $224.4 million and were the largest use of cash from operations. A major part of this increase in net operating assets and liabilities was financed with short-term notes payable. Because the change in short-term notes payable is shown in cash flows from financing activities, this source of cash does not offset the corresponding use of cash as part of the cash flows from operating activities in the Consolidated Statements of Cash Flows.

        We expect our net operating assets and liabilities to remain relatively constant with the levels on August 31, 2004 through most of the first quarter of fiscal 2005. Grain prices have not changed materially during the first two months of fiscal 2005, and harvest for several commodities have been delayed due to wet weather conditions. Production forecasts indicate normal to above normal volumes for most commodities. Anticipation of adequate supply has had the affect of producing grain prices that are generally lower than the prices of a year ago. Although crude oil prices are at a near historical high, related inventories and receivables are turned in a relatively short period, thus mitigating the effect on operating assets and liabilities.

 
Cash Flows from Investing Activities

        For the years ended August 31, 2004, 2003 and 2002, the net cash flows used in our investing activities totaled $181.3 million, $173.3 million and $147.6 million, respectively.

        The acquisition of property, plant and equipment comprised the primary use of cash totaling $245.1 million, $175.7 million and $140.2 million for the years ended August 31, 2004, 2003 and 2002, respectively. These acquisitions of property, plant and equipment included $8.5 million and $6.6 million acquired as part of business acquisitions during the years ended August 31, 2003 and 2002, respectively. Capital expenditures during the year ended August 31, 2003 included $46.0 million for the construction of an oilseed processing facility in Fairmont, Minnesota. The Fairmont facility was essentially complete and operational during the first quarter of fiscal 2004. Also during the first quarter of fiscal 2004, we entered into a sale-leaseback transaction for the Fairmont facility equipment and received cash proceeds of $19.8 million from the sale. For the year ending August 31, 2005, we expect to spend approximately $313.9 million for the acquisition of property, plant and equipment. Capital expenditures primarily related to the U.S. Environmental Protection Agency (EPA) low sulfur fuel regulations required by 2006, are expected to be approximately $87.0 million for our Laurel, Montana refinery and $311.0 million for NCRA’s McPherson, Kansas refinery, of which $49.2 million has been spent at the Laurel refinery and $131.0 million has been spent by NCRA at the McPherson refinery as of August 31, 2004. We expect all of these compliance capital expenditures at the refineries to be complete by December 31, 2005, and anticipate funding these projects with a combination of cash flows from operations and debt proceeds.

        In October 2003, we and NCRA reached agreement with the EPA and the State of Montana’s Department of Environmental Quality and the State of Kansas Department of Health and Environment, regarding the terms of settlements with respect to reducing air emissions at our Laurel, Montana and NCRA’s McPherson, Kansas refineries. These settlements are part of a series of similar settlements that the EPA has negotiated with major refiners under the EPA’s Petroleum Refinery Initiative. The

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settlements, which resulted from nearly three years of discussions, take the form of consent decrees filed with the U.S. District Court for the District of Montana (Billings Division) and the U.S. District Court for the District of Kansas. Each consent decree details specific capital improvements, supplemental environmental projects and operational changes that we and NCRA have agreed to implement at the relevant refinery over the next several years. The consent decrees also require us and NCRA to pay approximately $0.5 million in aggregate civil cash penalties. We and NCRA anticipate that the aggregate capital expenditures related to these settlements will total approximately $25.0 million to $30.0 million over the next seven years. Approximately 50 percent of the expenditures will be made over the first three years. We do not believe that the settlements will have a material adverse affect on us.

        Investments made during the years ended August 31, 2004, 2003 and 2002 totaled $49.8 million, $43.5 million and $6.2 million, respectively. During the year ended August 31, 2004 we purchased all of Farmland’s interest in Agriliance for a cash payment of $27.5 million, as previously discussed. During the year ended August 31, 2003, we purchased an additional 13.1% economic interest of the crop protection business of Agriliance for cash payment of $34.3 million, as previously discussed. Also during the year ended August 31, 2004, NCRA exercised its right of first refusal to purchase a partial interest in a crude oil pipeline for $16.0 million.

        Acquisitions of intangibles were $0.8 million, and $29.5 million for the years ended August 31, 2003 and 2002, respectively. During the year ended August 31, 2002, $26.4 million of the acquisitions of intangibles were related to the purchase of Farmland’s interest in its wholesale energy business, as previously discussed, and represented trademarks, tradenames and non-compete agreements.

        Net working capital acquired in business acquisitions was $13.0 million and $5.8 million, respectively, during the years ended August 31, 2003 and 2002.

        During the years ended August 31, 2004, 2003 and 2002, the changes in notes receivable resulted in decreases in cash flows of $6.9 million, $6.6 million and $22.0 million, respectively, primarily from related party notes receivables at NCRA from its minority owners, Growmark, Inc. and MFA Oil Company.

        Distributions to minority owners for the years ended August 31, 2004, 2003 and 2002 were $15.9 million, $4.4 million and $7.4 million, respectively, and were primarily related to NCRA. NCRA’s cash distributions to members have decreased as a percent of earnings in 2004, 2003 and 2002 when compared to prior years, due to the funding requirements for environmental capital expenditures previously discussed.

        Partially offsetting cash outlays in investing activities were proceeds from the disposition of property, plant and equipment of $34.5 million, $26.9 million and $20.2 million for the years ended August 31, 2004, 2003 and 2002, respectively. During the year ended August 31, 2004, proceeds of $19.8 million were from a sale-leaseback transaction, as previously discussed. During the year ended August 31, 2003, proceeds were primarily from disposals of propane plants and non-strategic locations in the Energy segment, sales of equipment and non-strategic agri-operations locations in the Country Operations and Services segment, and sales of wheat milling equipment. During the year ended August 31, 2002, proceeds were primarily from the disposal of propane plants in the Energy segment and of non-strategic agri-operations locations in the Country Operations and Services segment. Also partially offsetting cash usages were distributions received from joint ventures and investments totaling $74.6 million, $44.4 million and $44.0 million for the years ended August 31, 2004, 2003 and 2002, respectively. During the year ended August 31, 2004, NCRA exercised its right of first refusal to purchase a partial interest in a crude oil pipeline as previously discussed, and subsequently sold a 50% interest in the same pipeline to another third party for proceeds of $25.0 million and recorded a pre-tax gain on the sale of $14.7 million.

 
Cash Flows from Financing Activities

        We finance our working capital needs through short-term lines of credit with a syndication of domestic and international banks. In May 2004, we renewed and expanded our committed lines of revolving credit. The previously established credit lines consisted of a $600.0 million 364-day revolver and

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a $100.0 million three-year revolver. The new committed credit facilities consist of a $750.0 million 364-day revolver and a $150.0 million three-year revolver. The terms of the new credit facilities are essentially the same as the terms of the credit facilities they replaced. In addition to these lines of credit, we have a two-year revolving credit facility dedicated to NCRA, with a syndication of banks in the amount of $15.0 million committed. On August 31, 2004 and 2003 we had total short-term indebtedness outstanding on these various facilities and other short-term notes payable totaling $116.1 million and $251.1 million, respectively. On August 31, 2004 interest rates on these facilities ranged from 2.01% to 2.23%. In October 2002, $175.0 million received from private placement proceeds was used to pay down our 364-day credit facility. In January 2003, $83.0 million of proceeds received from the issuance of our preferred stock (net of brokers commissions of $3.2 million) was also used to pay down the 364-day credit facility.

        In June 1998, we established a five-year revolving credit facility with a syndication of banks, with $200.0 million committed, which expired in May 2003. We had a previous outstanding balance on this facility of $75.0 million on August 31, 2002, of which repayments of $75.0 million were made during the year ended August 31, 2003.

        We finance our long-term capital needs, primarily for the acquisition of property, plant and equipment, with long-term agreements with various insurance companies and banks. In June 1998, we established a long-term credit agreement through the cooperative banks. This facility committed $200.0 million of long-term borrowing capacity to the Company, with repayments through fiscal year 2009. The amount outstanding on this credit facility was $131.2 million and $137.8 million on August 31, 2004 and 2003, respectively. Interest rates on August 31, 2004 ranged from 2.27% to 7.13%. Repayments of $6.6 million were made on this facility during each of the three years ended August 31, 2004, 2003 and 2002.

        Also in June 1998, we completed a private placement offering with several insurance companies for long-term debt in the amount of $225.0 million with an interest rate of 6.81%. Repayments are due in equal annual installments of $37.5 million each in the years 2008 through 2013.

        In January 2001, we entered into a note purchase and private shelf agreement with Prudential Insurance Company. The long-term note in the amount of $25.0 million has an interest rate of 7.9% and is due in equal annual installments of approximately $3.6 million, in the years 2005 through 2011. A subsequent note for $55.0 million was issued in March 2001, related to the private shelf facility. The $55.0 million note has an interest rate 7.43% and is due in equal annual installments of approximately $7.9 million, in the years 2005 through 2011.

        In October 2002, we completed a private placement with several insurance companies for long-term debt in the amount of $175.0 million, which was layered into two series. The first series of $115.0 million has an interest rate of 4.96% and is due in equal semi-annual installments of approximately $8.8 million during the years 2007 through 2013. The second series of $60.0 million has an interest rate of 5.60% and is due in equal semi-annual installments of approximately $4.6 million during fiscal years 2012 through 2018.

        In March 2004, we entered into a note purchase and private shelf agreement with Prudential Capital Group, primarily for the purpose of financing the purchase of Farmland’s interest in Agriliance, as previously discussed. In April 2004, we borrowed $30.0 million under this arrangement. One long-term note in the amount of $15.0 million has an interest rate of 4.08% and is due in full at the end of the six-year term in 2010. Another long-term note in the amount of $15.0 million has an interest rate of 4.39% and is due in full at the end of the seven-year term in 2011.

        Subsequent to the year ended August 31, 2004 (September 21, 2004), we entered into a private placement with several insurance companies for long-term debt in the amount of $125.0 million with an interest rate of 5.25%. The debt is due in equal annual installments of $25.0 million during the fiscal years 2011 through 2015.

        Through NCRA, we had revolving term loans outstanding of $12.0 million and $15.0 million for the years ended August 31, 2004 and 2003, respectively. Interest rates on August 31, 2004 ranged from

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6.48% to 6.99%. Repayments of $3.0 million were made during each of the three years ended August 31, 2004, 2003 and 2002.

        On August 31, 2004, we had total long-term debt outstanding of $683.8 million, of which $155.8 million was bank financing, $510.0 million was private placement debt and $18.0 million was industrial development revenue bonds and other notes and contracts payable. On August 31, 2003, we had long-term debt outstanding of $663.2 million. Our long-term debt is unsecured except for other notes and contracts in the amount of $10.0 million; however, restrictive covenants under various agreements have requirements for maintenance of minimum working capital levels and other financial ratios. We are in compliance with all debt covenants and restrictions as of August 31, 2004.

        The aggregate amount of long-term debt payable as of August 31, 2004 was as follows (dollars in thousands):

         
2005
  $ 35,117  
2006
    35,582  
2007
    60,122  
2008
    98,626  
2009
    117,285  
Thereafter
    337,086  
     
 
    $ 683,818  
     
 

        During the years ended August 31, 2004, 2003 and 2002, we borrowed on a long-term basis $35.5 million, $175.0 million and $30.0 million, respectively, and during the same periods repaid long-term debt of $15.3 million, $89.5 million and $18.0 million, respectively.

        In accordance with our bylaws and by action of the Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each fiscal year. Patronage refunds are calculated based on amounts using financial statement earnings. The cash portion of the patronage distribution is determined annually by our Board of Directors, with the balance issued in the form of capital equity certificates. The patronage earnings from the fiscal year ended August 31, 2003 were primarily distributed during the second quarter of the year ended August 31, 2004. The cash portion of this distribution deemed by our Board of Directors to be 30% was $28.7 million. During the years ended August 31, 2003 and 2002, we distributed cash patronage of $26.5 million and $40.1 million, respectively.

        Cash patronage for the year ended August 31, 2004, deemed by our Board of Directors to be 30% and to be distributed in fiscal year 2005, is expected to be approximately $50.1 million and is classified as a current liability on the August 31, 2004 consolidated balance sheet.

        Effective September 1, 2004, redemptions of capital equity certificates approved by our Board of Directors will be divided into two pools, one for non-individuals (primarily member cooperatives) who will participate in an annual pro-rata program for equities older than 10 years, and another for individual members who are eligible for equity redemptions at age 72 or upon death. The amount that each non-individual member receives under the pro-rata program in any year will be determined by multiplying the dollars available for pro-rata redemptions that year as determined by our Board of Directors, by a fraction, the numerator of which is the amount of patronage certificates older than 10 years held by that member, and the denominator is the sum of the patronage certificates older than 10 years held by all eligible non-individuals. For the years ended August 31, 2004, 2003 and 2002, we redeemed in cash, patronage-related equities in accordance with authorization from our Board of Directors in the amounts of $10.3 million, $31.1 million and $31.1 million, respectively. An additional $13.0 million of capital equity certificates were redeemed in fiscal 2004, by issuance of shares of our 8% Cumulative Redeemable Preferred Stock (New Preferred) pursuant to a registration statement on Form S-2 filed with the Securities and Exchange Commission. The amount of equities redeemed with each share of preferred stock issued was $27.10, which was the closing price per share of the stock on the NASDAQ National Market on March 2, 2004.

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On August 31, 2004, we had 4,226,428 shares of the New Preferred outstanding with a total redemption value of approximately $105.7 million, excluding accumulated dividends.

        We expect cash redemptions related to the year ended August 31, 2004, which are to be distributed in fiscal year 2005, to be approximately $32.1 million. These are classified as a current liability on the August 31, 2004 consolidated balance sheet. We expect to redeem an additional $20.0 million of capital equity certificates in fiscal year 2005 by issuing shares of New Preferred.

        In 2001 and 2002 we issued 9,454,874 shares of 8% Preferred Stock (Old Preferred). In late 2002, we suspended sales of the Old Preferred, and on February 25, 2003 we filed a post-effective amendment to terminate the offering of the Old Preferred shares. In January 2003, our Board of Directors authorized the sale and issuance of up to 3,500,000 shares of New Preferred at a price of $25.00 per share. We 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 gross proceeds of $86.3 million (3,450,000 shares). The New Preferred is listed on the NASDAQ National Market. Expenses related to the issuance of the New Preferred were $3.8 million.

        On March 5, 2003, our 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 us for $1.00 per share unless they were converted into shares of New Preferred. The conversion did not change the base liquidation amount or dividend amount of the Old Preferred, since 25 shares of Old Preferred converted to 1 share of New Preferred. The total Old Preferred converted to the New Preferred was 7,452,439 shares, and the balance of the Old Preferred (2,002,435 shares) was redeemed for cash at $1.00 per share.

        The New Preferred accumulates dividends at a rate of 8% per year, and dividends are payable quarterly.

Off Balance Sheet Financing Arrangements

 
Lease Commitments:

        We have commitments under operating leases for various refinery, manufacturing and transportation equipment, rail cars, vehicles and office space. Some leases include purchase options at not less than fair market value at the end of the lease term.

        Total rental expense for all operating leases, net of rail car mileage credits received from the railroad and sublease income for the years ended August 31, 2004, 2003 and 2002, was $35.3 million, $31.7 million and $30.7 million, respectively.

        Minimum future lease payments required under noncancellable operating leases as of August 31, 2004, were as follows:

         
Total

(Dollars in millions)
2005
  $ 30.4  
2006
    24.5  
2007
    20.0  
2008
    16.6  
2009
    12.0  
Thereafter
    19.3  
     
 
Total minimum future lease payments
  $ 122.8  
     
 

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Guarantees:

        We are a guarantor for lines of credit for related companies of which $32.0 million was outstanding on August 31, 2004. Our bank covenants allow maximum guarantees of $150.0 million. In addition, our 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, 2004.

 
Debt:

        There is no material off balance sheet debt.

Contractual Obligations

        We had certain contractual obligations at August 31, 2004, which require the following payments to be made:

                                         
Payments Due by Period

Less than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years






(dollars in thousands)
Notes payable *
  $ 116,115     $ 116,115                          
Long-term debt *
    683,818       35,117     $ 95,704     $ 215,911     $ 337,086  
Operating leases
    122,795       30,422       44,518       28,605       19,250  
Purchase obligations **
    1,461,168       1,231,274       221,669       1,245       6,980  
Other liabilities ***
    29,770               19,592       8,416       1,762  
     
     
     
     
     
 
Total obligations
  $ 2,413,666     $ 1,412,928     $ 381,483     $ 254,177     $ 365,078  
     
     
     
     
     
 


  *  Included on the consolidated balance sheet.
 **  Purchase obligations are legally binding and enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities; fixed, minimum, or variable price provisions; and timing of the transactions. Of the total purchase obligations, $773.9 million is included in accounts payable and accrued expenses on the consolidated balance sheet.
***  Other liabilities includes deferred compensation, deferred income taxes, accrued turnaround and contractual redemptions, and is included on the consolidated balance sheet. Of the total other liabilities on the consolidated balance sheet of $148.5 million, the timing of the payments of $118.8 million of such liabilities cannot be determined.

Critical Accounting Policies

        Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires the use of estimates as well as management’s judgments and assumptions regarding matters that are subjective, uncertain or involve a high degree of complexity, all of which affect the results of operations and financial condition for the periods presented. We believe that of its significant accounting policies, the following may involve a higher degree of estimates, judgments, and complexity.

 
Allowances for Doubtful Accounts

        The allowances for doubtful accounts are maintained at a level considered appropriate by management based on analyses of credit quality for specific accounts, historical trends of charge-offs and recoveries, and current and projected economic, market and other conditions. Different assumptions, changes in economic circumstances or the deterioration of the financial condition of our customers could result in additional provisions to the allowances for doubtful accounts and increased bad debt expense.

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Inventory Valuation and Reserves

        Grain, processed grains, oilseed and processed oilseeds are stated at net realizable values, which approximates market values. All other inventories are stated at the lower of cost or market. The cost of certain energy inventories (wholesale refined products, crude oil and asphalt), are determined on the last-in, first-out (LIFO) method; all other energy inventories are valued on the first-in, first-out (FIFO) and average cost methods. Estimates are used in determining the net realizable value of grain and oilseed and processed grains and oilseeds inventories. These estimates include the measurement of grain in bins and other storage facilities, which use formulas in addition to actual measurements taken to arrive at appropriate quantity. Other determinations made by management include quality of the inventory and estimates for freight. Grain shrink reserves and other reserves that account for spoilage also affect inventory valuations. If estimates regarding the valuation of inventories or the adequacy of reserves are less favorable than management’s assumptions, then additional reserves or write-downs of inventories may be required.

 
Derivative Financial Instruments

        We enter into exchange-traded commodity futures and options contracts to hedge our exposure to price fluctuations on energy, grain and oilseed transactions to the extent considered practicable for minimizing risk. We do not use derivatives for speculative purposes. 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 our assessment of our exposure from expected price fluctuations. We also manage our 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 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. We are exposed to loss in the event of nonperformance by the counterparties to the contracts, and therefore, contract values are reviewed and adjusted to reflect potential nonperformance.

 
Pension and Other Postretirement Benefits

        Pension and other postretirement benefits costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with accounting principles generally accepted in the United States of America, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expenses and the recorded obligations in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our pension and other postretirement obligations and future expenses.

 
Deferred Tax Assets

        We assess whether a valuation allowance is necessary to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. While we have considered future taxable income as well as other factors in assessing the need for the valuation allowance, in the event that we were to determine that it would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

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Long-Lived Assets

        Depreciation and amortization of our property, plant and equipment is provided on the straight-line method by charges to operations at rates based upon the expected useful lives of individual or groups of assets. Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.

        All long-lived assets, including property plant and equipment, goodwill, investments in unconsolidated affiliates and other identifiable intangibles, are evaluated for impairment on the basis of undiscounted cash flows at least annually for goodwill, and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair market value based on the best information available. Estimated fair market value is generally measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows and may differ from actual.

 
Environmental Liabilities

        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 these 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. It is often difficult to estimate the cost of environmental compliance, remediation and potential claims given the uncertainties regarding the interpretation and enforcement of applicable environmental laws and regulations, the extent of environmental contamination and the existence of alternate cleanup methods. All liabilities are monitored and adjusted as new facts or changes in law or technology occur and management believes adequate provisions have been made for environmental liabilities. Changes in facts or circumstances may have an adverse impact on our financial results.

Effect of Inflation and Foreign Currency Transactions

        We believe that inflation and foreign currency fluctuations have not had a significant effect on our operations.

Recent Accounting Pronouncements

        In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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). 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. 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. Adoption of this standard did not have a material effect on us.

        In December 2003, the FASB issued SFAS No. 132R, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. This statement requires additional disclosures to be made by employers regarding pensions and other postretirement benefit plans, but does not change the measurement or recognition of those plans. Under this Statement, the disclosure provisions regarding foreign plans and estimated future benefit payments are effective for fiscal years ending after December 15, 2003, and interim periods beginning after December 15, 2003. We have adopted the interim and annual disclosure provisions of this Statement during the current fiscal year.

        In December 2003, the FASB revised FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” The interpretation addresses consolidation of certain entities in which equity investors do

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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 the primary beneficiary. For public entities the interpretation applies to interests in variable interest entities for periods ending after March 15, 2004, our third quarter. Adoption of this standard did not have an effect on us.

        On May 19, 2004, the FASB issued a FASB Staff Position (FSP) regarding SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” FSP 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” discusses the effect of the Medicare Prescription Drug, Improvement and Modernization Act (the Act) enacted on December 8, 2003. FSP 106-2 considers the effect of the two new features introduced in the Act in determining accumulated postretirement benefit obligation (APBO) and net periodic postretirement benefit cost, which may serve to reduce a company’s postretirement benefit costs. Companies may elect to defer accounting for this benefit or may attempt to reflect the best estimate of the impact of the Act on net current periodic costs currently. We have chosen to defer accounting for the benefit until the FASB issues final accounting guidance to resolve various uncertainties related to this legislation. Our measures of APBO and net periodic postretirement benefit costs, as of and for the year ended August 31, 2004, do not reflect the effects of the Act as permitted by the FSP.

        In March 2004, the FASB Emerging Issues Task Force (EITF) reached a consensus on and the FASB ratified EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides guidance for evaluating whether an investment is other-than-temporarily impaired. On September 30, 2004, the FASB issued FSP EITF 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,”’ which delayed the effective date of the application guidance on impairment of securities included within EITF 03-1. We are still evaluating the potential impact of the adoption of EITF 03-1.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk

        We utilize futures and options contracts offered through regulated commodity exchanges to reduce price risk. We are exposed to risk of loss in the market value of inventories and fixed or partially fixed purchase and sales contracts. In order to reduce that risk, we generally take 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 us and deemed prudent for each of those commodities. Commodities for which futures contracts and options are available are also typically hedged first 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, or 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 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 priced 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 using

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market-based prices. The inventories hedged with these derivatives are valued at the lower of cost or fair value, and the 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.

        A 10% adverse change in market prices would not materially affect our results of operations, financial position or liquidity, since our operations have effective economic hedging requirements as a general business practice.

Interest Rate Risk

        We manage interest expense using a mix of 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 us for all such notes approximates current market rates. Long-term debt used to finance non-current assets carries various fixed interest rates and is payable at various dates to minimize the effect of market interest rate changes. The effective interest rate to us on fixed rate debt outstanding on August 31, 2004, was approximately 6.4%; a 10% adverse change in market rates would not materially affect our results of operations, financial position or liquidity.

        In fiscal years 2002 and 2004, we entered into interest rate treasury lock instruments to secure the interest rates related to a portion of our private placement debts issued on October 18, 2002, and September 21, 2004. These instruments were designated and are effective as cash flow hedges for accounting purposes, and accordingly, the net loss on settlements were recorded as a component of other comprehensive income. Interest expense for the years ended August 31, 2004 and 2003, includes $0.9 million and $0.7 million, respectively, 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

        We conduct essentially all of our business in U.S. dollars, except for grain marketing operations in Brazil and some purchases of products from Canada, and had minimal risk regarding foreign currency fluctuations during 2004 and in prior years. 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.

DESCRIPTION OF THE PREFERRED STOCK

        The following section summarizes the material terms and provisions of our preferred stock. This summary is not a complete legal description of our preferred stock, and is qualified in its entirety by reference to our restated articles of incorporation, as amended, our by laws, as amended, and the resolution of our board of directors establishing the preferred stock.

General

        The shares of preferred stock are shares of a series of preferred equity securities created by our board of directors. Subject to the restrictions noted below under “Limitations and Restrictions on Future Issuances,” there is no limit on the number of shares in the series and shares may be issued from time to time. Our board of directors has expressly authorized the initial sale and subsequent transfer of the shares of preferred stock in accordance with our articles of incorporation.

        The shares of preferred stock to be issued as described in this prospectus will be fully paid and nonassessable when issued.

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Rank

        As to payment of dividends and as to distributions of assets upon the liquidation, dissolution or winding up of CHS, whether voluntary or involuntary, the preferred stock ranks prior to:

  •  any patronage refund (as that term is used in our bylaws), whether or not represented by a certificate, and any redemption thereof;
 
  •  any other class or series of our capital stock designated by our board of directors as junior to the preferred stock; and
 
  •  our common stock, if any.

        Shares of any class or series of our capital stock that are not junior to the preferred stock rank equally with the preferred stock as to the payment of dividends and the distribution of assets.

Dividends

        Holders of the preferred stock are entitled to receive quarterly dividends when, as and if declared by our board of directors out of funds legally available for that purpose at the rate of $2.00 per share per year. Dividends are payable on March 31, June 30, September 30 and December 31 of each year (each a “payment date”), except that if a payment date is a Saturday, Sunday or legal holiday, the dividend is payable without interest on the next day that is not a Saturday, Sunday or legal holiday. Dividends on the preferred stock are fully cumulative and accumulate without interest from and including the day immediately following the most recent date as to which dividends have been paid. The most recent date as to which dividends have been paid is September 30, 2004.

        Dividends are computed on the basis of a 360-day year of twelve 30-day months. Each payment of dividends includes dividends to and including the date on which paid.

        Dividends are paid to holders of record as they appear on our books ten business days prior to the relevant payment date. We may, in our sole discretion, pay dividends by any one or more of the following means:

  •  check mailed to the address of the record holder as it appears on our books;
  •  electronic transfer in accordance with instructions provided by the record holder; or
  •  any other means mutually agreed between us and the record holder.

        We may not make any distribution to the holders of any security that ranks junior to the preferred stock unless and until all accumulated and unpaid dividends on the preferred stock and on any other class or series of our capital stock that ranks equally with the preferred stock, including the full dividend for the then-current dividend period, have been paid or declared and set apart for payment. For these purposes, a “distribution” does not include any distribution made in connection with a liquidation, dissolution or winding up, which will be governed by the provisions summarized under “— Liquidation Preference” below.

Liquidation Preference

        In a liquidation, dissolution or winding up of CHS, whether voluntary or involuntary, the holders of the preferred stock are entitled to receive out of our available assets $25.00 per share plus all dividends accumulated and unpaid on that share, whether or not declared, to and including the date of distribution. This distribution to the holders of the preferred stock will be made before any payment is made or assets distributed to the holders of any security that ranks junior to the preferred stock but after the payment of the liquidation preference of any of our securities that rank senior to the preferred stock. Any distribution to the holders of the preferred stock will be made ratably among the holders of the preferred stock and any other of our capital stock which ranks on a parity as to liquidation rights with the preferred stock in proportion to the respective preferential amounts to which each is entitled. After payment in full of the liquidation preference of the shares of preferred stock, the holders of the preferred stock will not participate further in the distribution of our assets.

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        Neither a consolidation or merger with another entity nor a sale or transfer of all or part of our assets for cash, securities or other property will constitute a liquidation, dissolution or winding up if, following the transaction, the preferred stock remains outstanding as duly authorized stock of us or any successor entity.

Redemption

 
At Our Option

        From and after February 1, 2008 we may, at our option, redeem at any time all, or from time to time any portion, of the preferred stock. Any optional redemption will be at a price of $25.00 per share plus all dividends accumulated and unpaid on that share, whether or not declared, to and including the date fixed for redemption. If we redeem less than all of the then outstanding shares of preferred stock, we will designate the shares to be redeemed either by lot or in any other manner that our board of directors may determine or may effect the redemption pro rata. However, we may not redeem less than all of the then outstanding shares of preferred stock until all dividends accumulated and unpaid on all then outstanding shares of preferred stock have been paid for all past dividend periods.

 
At the Holder’s Option

        If at any time there has been a change in control (as defined below), each record holder of shares of the preferred stock will have the right, for a period of 90 days from the date of the change in control, to require us to redeem all or any portion of the shares of preferred stock owned by that record holder. Not later than 130 days after the date of the change in control (or, if that date is a Saturday, Sunday or legal holiday, the next day that is not a Saturday, Sunday or legal holiday) we will redeem all shares the record holder has elected to have redeemed in a written notice delivered to us on or prior to the 90th day after the change in control. The redemption price is $25.00 per share plus all dividends accumulated and unpaid on that share, whether or not declared, to and including the date fixed for redemption.

        A “change in control” will have occurred if, in connection with a merger or consolidation that has been approved by our board of directors (prior to submitting the merger or consolidation to our members for approval), whether or not we are the surviving entity, those persons who were members of our board of directors on January 1, 2003, together with those persons who became members of our board of directors after that date at our annual meeting, have ceased to constitute a majority of our board of directors. Under the Minnesota cooperative statute, our members could initiate a merger or consolidation without the approval of our board of directors; a member-initiated merger or consolidation would not meet this definition and thus would not trigger a redemption right.

 
Mechanics of Redemption

        Not less than 30 days prior to any redemption date pursuant to the exercise of our optional redemption right, we will give written notice to the holders of record of the shares of preferred stock to be redeemed. This notice will specify:

  •  the redemption date;
  •  the redemption price;
  •  the number of shares of preferred stock held by the record holder that are subject to redemption;
  •  the time, place and manner in which the holder should surrender the certificate or certificates, if any, representing the shares of preferred stock to be redeemed, including the steps that a holder should take with respect to any certificates which have been lost, stolen or destroyed or to any uncertificated shares; and
  •  that from and after the redemption date, dividends will cease to accumulate on the shares and the shares will no longer be deemed outstanding.

        On or after the redemption date, once a holder surrenders the certificate or certificates representing the shares of preferred stock called for redemption in the manner provided in the redemption notice or

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takes the appropriate steps with respect to lost, stolen or destroyed certificates or uncertificated shares, the holder will be entitled to receive payment of the redemption price. If fewer than all of the shares of preferred stock represented by a surrendered certificate or certificates are redeemed, we will issue a new certificate representing the unredeemed shares.
 
Effect of Redemption

        From and after the redemption date, if funds necessary for the redemption are and have been irrevocably deposited or set aside, then:

  •  dividends will cease to accumulate with respect to the shares of preferred stock called for redemption;
  •  the shares will no longer be deemed outstanding;
  •  the holders of the shares will cease to be shareholders; and
  •  all rights with respect to the shares of preferred stock will terminate except the right of the holders to receive the redemption price, without interest.
 
Purchases

        We may at any time and from time to time in compliance with applicable law purchase shares of preferred stock on the open market, pursuant to a tender offer or otherwise, at whatever price or prices and other terms we determine. We may not make any purchases at a time when there are accumulated but unpaid dividends for past dividend periods.

Voting

        Except as described below, the holders of the preferred stock have only those voting rights that are required by applicable law. As a result, the holders of the preferred stock have very limited voting rights and, among other things, do not have any right to vote for the election of directors.

        Unless the preferred stock is redeemed pursuant to its terms, the affirmative vote of the holders of at least two-thirds of the outstanding shares of the preferred stock, voting separately as a class, is required:

  •  for any amendment, alteration or repeal, whether by merger or consolidation or otherwise, of our articles of incorporation or the resolutions establishing the terms of the preferred stock, if the amendment, alteration or repeal adversely affects the rights or preferences of the preferred stock; and
  •  to establish, by board resolution or otherwise, any class or series of our equity securities having rights senior to the preferred stock as to the payment of dividends or distribution of assets upon the liquidation, dissolution or winding up of CHS, whether voluntary or involuntary.

        The creation and issuance of any other class of our securities ranking on a parity with or junior to the preferred stock, including an increase in the authorized number of shares of any such securities, will not be deemed to adversely affect the rights or preferences of the preferred stock.

        Our board of director’s ability to authorize, without preferred shareholder approval, the issuance of additional classes or series of preferred stock with conversion and other rights may adversely affect you as a holder of preferred stock or the rights of holders of any series of preferred stock that may be outstanding.

Limitations and Restrictions on Future Issuances

        We may not offer to issue additional shares of preferred stock in exchange for or in redemption of outstanding patrons’ equities or other equity securities held by our members more than one time per calendar year. If, in connection with an offer of this type, any member would receive more than 0.25% of the number of shares of preferred stock outstanding at the end of the prior calendar year, that member will instead be entitled to receive the shares in quarterly installments as nearly equal as possible. In any

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calendar year, we may not issue additional shares of preferred stock in exchange for or in redemption of outstanding patrons’ equities or other equity securities held by our members in excess of:

  •  for issuances during the years 2004, 2005 and 2006, 20% of the number of shares of preferred stock outstanding at the end of the prior calendar year or 400,000 shares, whichever is greater; and
  •  for issuances during any calendar year after the year 2006, 25% of the number of shares of preferred stock outstanding at the end of the prior calendar year or 400,000 shares, whichever is greater.

        We may not issue additional shares of preferred stock in exchange for or in redemption of outstanding patrons’ equities owned by an estate of one of our former individual members or in redemption of outstanding patrons’ equities owned by individual members who have reached age 72, pursuant to our current policy.

No Exchange or Conversion Rights; No Sinking Fund

        Shares of the preferred stock are not exchangeable or convertible into other class or series of our capital stock or other securities or property. The preferred stock is not subject to the operation of a purchase, retirement or sinking fund.

Certain Charter Provisions

        For a description of some of the provisions of our articles of incorporation that might have an effect of delaying, deferring or preventing a change in control of us, see “Membership in CHS and Authorized Capital — Certain Antitakeover Measures.”

        As noted above under “Membership in CHS and Authorized Capital — Debt and Equity Instruments,” under our articles of incorporation all equity we issue (including the preferred stock) is subject to a first lien in favor of us for all indebtedness of the holder to us. However, we have not to date taken, and do not intend to take, any steps to perfect this lien against shares of the preferred stock.

No Preemptive Rights

        Holders of the preferred stock have no preemptive right to acquire shares of any class or series of our capital stock.

Market for the Preferred Stock

        The preferred stock is currently listed on The NASDAQ National Market under the symbol “CHSCP”.

        The following is a listing of the high and low sales prices as listed on The NASDAQ National Market for the preferred stock during our fiscal quarters ended August 31, 2004, May 31, 2004, February 28, 2004, November 30, 2003 and August 31, 2003.

                                         
August 31, May 31, February 28, November 30, August 31,
2004 2004 2004 2003 2003





High Price
    27.35       32.50       29.50       28.10       28.10  
Low Price
    25.60       25.00       26.99       27.00       26.68  

Transfer Agent and Registrar

        Wells Fargo Bank, National Association serves as transfer agent and registrar with respect to the preferred stock.

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COMPARISON OF RIGHTS OF HOLDERS OF PATRONS’ EQUITIES
AND RIGHTS OF HOLDERS OF PREFERRED STOCK

        The following describes the material differences between the rights that the patrons’ equities being redeemed provided to the members of CHS holding them and the rights that the preferred stock provides to the holders. While CHS believes that the description covers the material differences between the two, this summary may not contain all of the information that is important to you. You should carefully read this entire prospectus, including the sections entitled “Membership in CHS and Authorized Capital” and “Description of the Preferred Stock,” and refer to the documents discussed in those sections for a more complete understanding of the differences.

Priority on Liquidation

        In a liquidation, dissolution or winding up of CHS, the rights of a holder of preferred stock rank senior to those of a holder of patrons’ equities.

Dividends

        A holder of patrons’ equities is not entitled to any interest or dividends on those patrons’ equities. A holder of preferred stock is entitled to dividends as described under “Description of the Preferred Stock – Dividends.”

Redemption

        Patrons’ equities are redeemable only at the discretion of our board of directors and in accordance with the terms of the redemption policy adopted by our board of directors, as in effect from time to time. See “Membership in CHS and Authorized Capital — Patrons’ Equities” for a description of the redemption policy as currently in effect. Shares of preferred stock are subject to redemption both at the option of CHS and at the holder’s option under certain circumstances, both as described under “Description of the Preferred Stock — Redemption.”

Voting Rights

        Ownership of patrons’ equities does not, by itself, entail any voting rights, although the amount of patrons’ equities held by a member that is a cooperative association or a member that is part of a patron’s association is considered in the formula used to determine the level of the member’s voting rights of that cooperative association or patron’s association. See “Membership in CHS and Authorized Capital — Voting Rights.” Ownership of preferred stock entails the limited voting rights described under “Description of the Preferred Stock — Voting Rights.”

Transfers

        Patrons’ equities may not be transferred without the approval of our board of directors. Shares of preferred stock are not subject to any similar restrictions on transfer.

Market

        There is no public market for patrons’ equities. The preferred stock is listed on The NASDAQ National Market.

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

        The following summarizes the material federal income tax consequences of the issuance of Shares of our preferred stock in redemption of patrons’ equities (the “Exchange”) and the consequences of the ownership, redemption and disposition of the preferred stock. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), the final, temporary and proposed

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regulations promulgated thereunder and administrative rulings and judicial decisions now in effect, all of which are subject to change (possibly with retroactive effect). This summary addresses only the tax consequences to a person who is a U.S. holder of patrons’ equities or the preferred stock. You are a U.S. holder if you are:

  •  an individual who is a citizen or resident of the U.S.;
 
  •  a corporation (or any entity treated as a corporation for U.S. federal income tax purposes, such as a cooperative) organized under the laws of the U.S. or any political subdivision of the U.S.;
 
  •  an estate if its income is subject to U.S. federal income tax regardless of its source; or
 
  •  a trust if a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust.

        This summary assumes that you will hold your shares of preferred stock as capital assets within the meaning of Section 1221 of the Code. The summary also assumes that all dividends will be paid as they accrue and that, if the preferred stock is redeemed, there will be no dividend arrearages at the time of redemption. The summary does not purport to deal with all aspects of federal income taxation that may be relevant to your receipt of preferred stock pursuant to the Exchange, or your ownership, redemption or disposition of the preferred stock, such as estate and gift tax consequences or tax consequences arising under the laws of any state, local or other taxing jurisdiction. This summary also does not apply to you if you belong to a category of investors subject to special tax rules, such as dealers in securities, financial institutions, insurance companies, tax-exempt organizations, foreign persons, qualified retirement plans, individual retirement accounts, regulated investment companies, U.S. expatriates, pass-through entities or investors in pass-through entities or persons subject to the alternative minimum tax.

        We can give no assurance that the Internal Revenue Service (the “IRS”) will take a similar view with respect to the tax consequences described below. We have not requested, nor do we plan to request, a ruling from the IRS on any tax matters relating to the Exchange or the preferred stock. We strongly encourage you to consult your own tax advisor regarding the federal, state, local, and foreign tax consequences to you of the Exchange and of the ownership, redemption, and disposition of the preferred stock in light of your particular tax circumstances.

The Exchange

        Although no transaction closely comparable to the Exchange, as described in this prospectus, has been the subject of any Treasury regulation, ruling or administrative or judicial decision, we will receive an opinion of Dorsey & Whitney LLP that the exchange of patron’s equities for preferred stock should constitute a recapitalization reorganization within the meaning of Section 368(a)(1)(E) of the Code.

        You should be aware that the opinion of Dorsey & Whitney LLP will be subject to the following qualifications and assumptions: it relies on certifications of relevant facts by us, is based upon provisions of the Code, regulations, and administrative and judicial decisions now in effect, all of which are subject to change (possibly with retroactive effect), is subject to the assumption that the Exchange will be effected in the manner described in this prospectus, and is limited to the federal income tax matters expressly set forth therein. In addition, the opinion assumes that the fair market value of the preferred stock received will equal the fair market value of the patrons’ equities surrendered in exchange therefor. The opinion represents counsel’s legal judgment and is not binding on the IRS or the courts.

        If the Exchange of patrons’ equities for preferred stock constitutes a recapitalization reorganization within the meaning of Section 368(a)(1)(E), the following tax consequences will result:

        1. We will be “a party to a reorganization” within the meaning of Section 368(b) of the Code.
 
        2. We will recognize no gain or loss upon the receipt of the patrons’ equities in exchange for the preferred stock.

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        3. The participants will recognize no gain or loss on the exchange of patrons’ equities for preferred stock, assuming that Section 305(c) of the Code does not apply in connection with the reorganization.
 
        4. Provided the participants recognize no gain or loss on the transaction, the basis of the preferred stock received by the participants in the transaction will be the same as the basis of the patrons’ equities surrendered in exchange therefor.
 
        5. The holding period of the preferred stock received by each participant will include the period during which the participant held the patrons’ equities surrendered in exchange therefor, provided that the patrons’ equities surrendered were held as capital assets on the date of the exchange and assuming that Section 305(c) of the Code does not apply in connection with the reorganization.
 
        6. The preferred stock received by the participants in the Exchange will not constitute “section 306 stock” within the meaning of Section 306(c) of the Code. Accordingly, a disposition of the Preferred Stock will not be subject to Section 306(a) of the Code, which provides generally that the gross proceeds from the sale or redemption of section 306 stock shall be treated either as ordinary income or as a distribution of property to which section 301 of the Code (concerning amounts taxable as dividends) applies.

        Dorsey & Whitney LLP will express no opinion regarding whether a participant in the Exchange will be deemed to receive a distribution to which Section 301 of the Code applies by means of Section 305(c) of the Code. Pursuant to Section 305(c) of the Code and applicable Treasury Regulations, a recapitalization may be deemed to result in the receipt of a taxable stock dividend by some shareholders of a corporation, if the recapitalization is pursuant to a plan to periodically increase a shareholder’s proportionate interest in the assets or earnings and profits of a corporation. The amount of any such deemed stock dividend would generally be equal to the amount of the increase in the shareholder’s proportionate interest in the assets or earnings and profits of a corporation. Although the matter is not free from doubt, we believe, based on the nature of cooperatives and cooperative taxation, and the fact that the members in a cooperative share in the assets and earnings and profits of the cooperative based on annual patronage, that the Exchange is not part of any plan to periodically increase the proportionate interests of any participants. Accordingly, although there is no authority directly on point, we believe that no participant in the exchange should be deemed to receive a taxable stock dividend pursuant to Section 305(c) of the Code. You should consult your own tax advisor about the possibility that Section 305(c) could apply in these circumstances.

Dividends and Other Distributions on the Preferred Stock

        Distributions on the preferred stock are treated as dividends and taxable as ordinary income to the extent of our current or accumulated earnings and profits, as determined for federal income tax purposes taking into account the special rules applicable to cooperatives. Any distribution in excess of our current or accumulated earnings and profits is treated first as a nontaxable return of capital reducing your tax basis in the preferred stock. Any amount in excess of your tax basis is treated as a capital gain.

        Dividends received by corporate holders of the preferred stock may be eligible for a dividends received deduction equal to 70% of the amount of the distribution, subject to applicable limitations, including limitations related to “debt financed portfolio stock” under Section 246A of the Code and to the holding period requirements of Section 246 of the Code. In addition, any amount received by a corporate holder that is treated as a dividend may constitute an “extraordinary dividend” subject to the provisions of Section 1059 of the Code (except as may otherwise be provided in Treasury Regulations yet to be promulgated). Under Section 1059, a corporate holder generally must reduce the tax basis of all of the holder’s shares (but not below zero) by the “nontaxed portion” of any “extraordinary dividend” and, if the nontaxed portion exceeds the holder’s tax basis for the shares, must treat any excess as gain from the sale or exchange of the shares in the year the payment is received. If you are a corporate holder, we strongly

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encourage you to consult your own tax advisor regarding the extent, if any, to which these provisions may apply to you in light of your particular facts and circumstances. Under current law, qualifying dividends received by individual shareholders are taxed at a 15% rate.

Sale or Exchange of Preferred Stock

        On the sale or exchange of the preferred stock to a party other than us, you generally will realize capital gain or loss in an amount equal to the difference between (a) the amount of cash and the fair market value of any property you receive on the sale and (b) your adjusted tax basis in the preferred stock. We strongly encourage you to consult your own tax advisor regarding applicable rates, holding periods and netting rules for capital gains and losses in light of your particular facts and circumstances. Certain limitations exist on the deduction of capital losses by both corporate and noncorporate taxpayers.

Redemption of Preferred Stock

        If we exercise our right to redeem the preferred stock, your surrender of the preferred stock for the redemption proceeds will be treated either as a payment received upon sale or exchange of the preferred stock or as a distribution with respect to all of your equity interests in us. Resolution of this issue will turn on the application of Section 302 of the Code to your individual facts and circumstances.

        The redemption will be treated as gain or loss from the sale or exchange of the preferred stock (as discussed above under “— Sale or Exchange of Preferred Stock”) if:

  •  the redemption is “substantially disproportionate” with respect to you within the meaning of Section 302(b)(2) of the Code; or
 
  •  your interest in the preferred stock and any other equity interest in us is completely terminated (within the meaning of Section 302(b)(3) of the Code) as a result of such redemption; or
 
  •  the redemption is “not essentially equivalent to a dividend” (within the meaning of Section 302(b)(1) of the Code). In general, redemption proceeds are “not essentially equivalent to a dividend” if the redemption results in a “meaningful reduction” of your interest in the issuer.

        In determining whether any of these tests has been met, you must take into account not only shares of preferred stock and other equity interests in us (including patrons’ equities and other equity interests) that you actually own, but also shares and other equity interests that you constructively own within the meaning of Section 318 of the Code.

        If none of the above tests giving rise to sale treatment is satisfied, then a payment made in redemption of the preferred stock will be treated as a distribution that is subject to the tax treatment described above under “— Dividends and other Distributions.” The amount of the distribution will be measured by the amount of cash and the fair market value of property you receive without any offset for your basis in the preferred stock. Your adjusted tax basis in the redeemed shares of preferred stock will be transferred to any of your remaining stock holdings in us. If, however, you have no remaining stock holdings in us, your basis could be lost.

        We strongly encourage you to consult your own tax advisor regarding:

  •  whether the redemption payment will qualify for sale or exchange treatment under Section 302 of the Code or, alternatively, will be characterized as a distribution; and
 
  •  the resulting tax consequences to you in light of your individual facts and circumstances.

Backup Withholding

        We may be required to withhold federal income tax at a rate of 28% from dividends and redemption proceeds paid to you if (i) you fail to furnish us with your correct taxpayer identification number in the manner required (ii) the IRS notifies us that your taxpayer identification number is incorrect (iii) the IRS notifies us that you have failed to report properly certain interest and dividend

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income to the IRS and to respond to notices to that effect or (iv) when required to do so, you fail to certify that you are not subject to backup withholding. Any amounts withheld may be credited against your federal income tax liability.

PLAN OF DISTRIBUTION

        On September 9, 2004, our board of directors authorized us to redeem, on a pro rata basis, up to $20,000,000 of our “patrons’ equities” that have been outstanding for longer than 10 years and that are held by non-individual active members whose pro-rata share of the redemption amount is equal to or greater than $500, subject to the exceptions described below in “Plan of Distribution.” See “Membership in CHS and Authorized Capital — Patrons’ Equities” for a description of patrons’ equities and our annual pro rata redemptions of patrons’ equities. The amount of patrons’ equities that will be redeemed with each share of preferred stock issued will be $          , which is the greater of $25.17 (equal to the $25.00 liquidation preference per share of preferred stock plus $0.17 of accumulated dividends from and including January 1, 2005 to and including January 31, 2005) or the closing price for one share of the preferred stock on The NASDAQ National Market on a trading day within ten days of January 31, 2005 that is selected by management. We will not issue any fractional shares of preferred stock. The amount of patrons’ equities that would otherwise be issued as a fractional share to any member will instead be retained as part of that member’s patrons’ equities.

        We will issue the shares of preferred stock directly to the relevant members. We have not engaged and will not engage any underwriter, broker-dealer, placement agent or similar agent or representative in connection with the issuance of the preferred stock described in this prospectus.

        We will not pay any commissions or other compensation related to the issuance of the shares of preferred stock. We estimate that the total expenses of the issuance will be approximately $          , all of which we will bear.

        Except in the circumstances described below, we will not prepare or distribute stock certificates to represent the shares of preferred stock so issued. Instead, we will issue the shares of preferred stock in book-entry form on the records of our transfer agent for the preferred stock (Wells Fargo Bank, National Association). Members who require a stock certificate should contact Wells Fargo Shareowner Services in writing or by telephoning at the following address:

Wells Fargo Shareowner Services

161 North Concord Exchange
South St. Paul, MN 55075
(800) 468-9716

        Some of our members have pledged their patrons’ equities and made those pledged patrons’ equities the subject of control agreements between us and various financial institutions. For these members, we will prepare stock certificates representing the shares issued in redemption of their patrons’ equities. We will retain those stock certificates subject to our control agreements with the relevant financial institutions until otherwise instructed by the relevant financial institution. We will also instruct the transfer agent to place a “stop transfer” order with respect to those shares. Members whose shares are issued as described in this paragraph may obtain more information by contacting David Kastelic in writing or by telephone at the following address or telephone number:

David Kastelic

Senior Vice President and General Counsel
CHS Inc.
5500 Cenex Drive
Inver Grove Heights, Minnesota 55077
(651) 355-3712

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LEGAL MATTERS

        Dorsey & Whitney LLP, Minneapolis, Minnesota, will provide us with an opinion that the shares of preferred stock issued pursuant to this prospectus have been duly authorized and validly issued and will be fully paid and nonassessable.

EXPERTS

        The consolidated financial statements of CHS Inc. and Subsidiaries as of August 31, 2004 and 2003 and for each of the three years in the period ended August 31, 2004 included in and incorporated by reference in this prospectus have been so included in and incorporated by reference in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

        The consolidated financial statements of Ventura Foods, LLC and Subsidiary incorporated in this prospectus by reference from our Annual Report on Form 10-K for the year ended August 31, 2004 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

        We are subject to the information requirements of the Securities Exchange Act of 1934 and file reports and other information with the Securities and Exchange Commission. Our SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file with the SEC at its Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of its Public Reference Room.

        The SEC allows us to “incorporate by reference” into this prospectus information we have filed with it. The information incorporated by reference is an important part of this prospectus. The information incorporated by reference is considered to be part of this prospectus. We incorporate by reference the documents listed below:

  •  our Annual Report on Form 10-K for the fiscal year ended August 31, 2004,

        You may request a copy of this filing, at no cost, by writing or telephoning us at the following address:

CHS Inc.

Attention: Jodell M. Heller, Controller
5500 Cenex Drive
Inver Grove Heights, Minnesota 55077
(651) 355-5270

        You should rely only on the information provided in or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus and the information incorporated by reference in it include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words and phrases such as “will likely result,” “are expected to,” “is anticipated,” “estimate,” “project” and similar expressions identify forward-looking statements. We wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date made. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. These risks and uncertainties include, but are not limited to, risks related to the level of commodity prices, loss of member business, competition, changes in the taxation of cooperatives, compliance with laws and regulations, environmental liabilities, perceptions of food quality and safety, business interruptions and casualty losses, access to equity capital, consolidation of producers and customers, fluctuations in prices for crude oil and refined petroleum products, alternative energy sources, the performance of our agronomy business, technological improvements and joint ventures. These risks and uncertainties are further described under “Risk Factors” and elsewhere in this prospectus.

        We do not guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which speak only as of the date on which they were made.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CHS INC.

     
Consolidated Balance Sheets as of August 31, 2004 and 2003
  F-1
Consolidated Statements of Operations for the years ended August 31, 2004, 2003 and 2002
  F-2
Consolidated Statements of Equities and Comprehensive Income for the years ended August 31, 2004, 2003 and 2002
  F-3
Consolidated Statements of Cash Flows for the years ended August 31, 2004, 2003 and 2002
  F-4
Notes to Consolidated Financial Statements
  F-5
Report of Independent Registered Public Accounting Firm
  F-31

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CHS INC.

CONSOLIDATED BALANCE SHEETS

                   
August 31

2004 2003


(Dollars in thousands)
ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 136,491     $ 168,249  
 
Receivables
    834,965       763,780  
 
Inventories
    723,893       801,883  
 
Other current assets
    273,355       178,661  
     
     
 
Total current assets
    1,968,704       1,912,573  
Investments
    575,816       532,893  
Property, plant and equipment
    1,249,655       1,122,982  
Other assets
    237,117       239,520  
     
     
 
Total assets
  $ 4,031,292     $ 3,807,968  
     
     
 
 
LIABILITIES AND EQUITIES
Current liabilities:
               
 
Notes payable
  $ 116,115     $ 251,131  
 
Current portion of long-term debt
    35,117       14,951  
 
Customer credit balances
    88,686       58,417  
 
Customer advance payments
    64,042       123,383  
 
Checks and drafts outstanding
    64,584       85,239  
 
Accounts payable
    717,501       627,250  
 
Accrued expenses
    305,650       254,415  
 
Dividends and equities payable
    83,569       39,049  
     
     
 
Total current liabilities
    1,475,264       1,453,835  
Long-term debt
    648,701       648,222  
Other liabilities
    148,526       111,555  
Minority interests in subsidiaries
    130,715       112,645  
Commitments and contingencies
               
Equities
    1,628,086       1,481,711  
     
     
 
Total liabilities and equities
  $ 4,031,292     $ 3,807,968  
     
     
 

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

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CHS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

                           
For the Years Ended August 31

2004 2003 2002



(Dollars in thousands)
Revenues:
                       
 
Net sales
  $ 10,909,333     $ 9,270,734     $ 7,156,454  
 
Other revenues
    141,303       122,578       107,351  
     
     
     
 
      11,050,636       9,393,312       7,263,805  
Cost of goods sold
    10,604,245       9,060,555       6,940,050  
Marketing, general and administrative
    208,284       183,757       182,175  
     
     
     
 
Operating earnings
    238,107       149,000       141,580  
Gain on sale of investment
    (14,666 )                
Gain on legal settlements
    (692 )     (10,867 )     (2,970 )
Interest
    51,625       48,675       42,455  
Equity income from investments
    (79,022 )     (47,299 )     (58,133 )
Minority interests
    33,830       21,950       15,390  
     
     
     
 
Income before income taxes
    247,032       136,541       144,838  
Income taxes
    25,700       12,700       18,700  
     
     
     
 
Net income
  $ 221,332     $ 123,841     $ 126,138  
     
     
     
 
Distribution of net income:
                       
 
Patronage refunds
  $ 166,850     $ 90,000     $ 92,900  
 
Unallocated capital reserve
    54,482       33,841       33,238  
     
     
     
 
Net income
  $ 221,332     $ 123,841     $ 126,138  
     
     
     
 

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

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CHS INC.

CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME

                                                                   
For the Years Ended August 31, 2004, 2003 and 2002

Accumulated
Capital Nonpatronage Unallocated Other Allocated
Equity Equity Preferred Patronage Capital Comprehensive Capital Total
Certificates Certificates Stock Refunds Reserve Income (Loss) Reserve Equities








(Dollars in thousands)
Balances, September 1, 2001
  $ 971,873     $ 28,158             $ 90,230     $ 164,757     $ (1,915 )   $ 8,050     $ 1,261,153  
Dividends 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  
Dividends 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  
Dividends and equity retirement determination
    10,800                       27,000       1,249                       39,049  
Patronage distribution
    66,500                       (90,000 )     (5,222 )                     (28,722 )
Equities retired
    (10,292 )     (47 )                                             (10,339 )
Capital equity certificates exchanged for preferred stock
    (12,990 )             12,990               (150 )                     (150 )
Equities issued
    13,355                                                       13,355  
Preferred stock redeemed, treasury
                                                           
Preferred stock dividends
                                    (7,975 )                     (7,975 )
Other, net
    (7,669 )     (85 )                     (30 )                     (7,784 )
Comprehensive income:
                                                               
 
Net income
                            166,850       54,482                       221,332  
 
Other comprehensive income
                                            11,178               11,178  
                                                             
 
Total comprehensive income
                                                            232,510  
                                                             
 
Dividends and equities payable
    (32,100 )                     (50,060 )     (1,409 )                     (83,569 )
     
     
     
     
     
     
     
     
 
Balances, August 31, 2004
  $ 1,114,641     $ 27,586     $ 106,692     $ 116,790     $ 261,462     $ (7,135 )   $ 8,050     $ 1,628,086  
     
     
     
     
     
     
     
     
 

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

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CHS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

                               
For the Years Ended August 31

2004 2003 2002



(Dollars in thousands)
Cash flows from operating activities:
                       
 
Net income
  $ 221,332     $ 123,841     $ 126,138  
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                       
   
Depreciation and amortization
    108,399       111,347       103,986  
   
Noncash income from equity investments
    (79,022 )     (47,299 )     (58,133 )
   
Minority interests
    33,830       21,950       15,390  
   
Noncash portion of patronage dividends received
    (4,986 )     (1,795 )     (2,327 )
   
Loss (gain) on sale of property, plant and equipment
    775       741       (6,418 )
   
Deferred tax expense
    8,500       9,000       4,400  
   
Gain on sale of investment
    (14,666 )                
   
Other, net
    1,150       4,052       5,467  
   
Changes in operating assets and liabilities:
                       
     
Receivables
    (59,039 )     (18,669 )     (32,517 )
     
Inventories
    88,261       (25,692 )     (255,107 )
     
Other current assets and other assets
    (89,237 )     (83,347 )     (86,636 )
     
Customer credit balances
    27,639       30,238       (12,025 )
     
Customer advance payments
    (59,354 )     (45,740 )     59,988  
     
Accounts payable and accrued expenses
    121,647       135,310       92,781  
     
Other liabilities
    28,060       2,569       9,079  
     
     
     
 
Net cash provided by (used in) operating activities
    333,289       216,506       (35,934 )
     
     
     
 
Cash flows from investing activities:
                       
 
Acquisition of property, plant and equipment
    (245,148 )     (175,689 )     (140,169 )
 
Proceeds from disposition of property, plant and equipment
    34,530       26,886       20,205  
 
Investments
    (49,757 )     (43,478 )     (6,211 )
 
Equity investments redeemed
    65,158       35,939       37,689  
 
Investments redeemed
    9,481       8,467       6,310  
 
Proceeds from sale of investment
    25,000                  
 
Changes in notes receivable
    (6,888 )     (6,630 )     (22,031 )
 
Acquisitions of intangible assets
            (767 )     (29,501 )
 
Acquisitions of working capital, net
            (13,030 )     (5,750 )
 
Distributions to minority owners
    (15,908 )     (4,444 )     (7,413 )
 
Other investing activities, net
    2,248       (507 )     (685 )
     
     
     
 
Net cash used in investing activities
    (181,284 )     (173,253 )     (147,556 )
     
     
     
 
Cash flows from financing activities:
                       
 
Changes in notes payable
    (135,016 )     (81,383 )     235,319  
 
Borrowings on long-term debt
    35,457       175,000       30,000  
 
Principal payments on long-term debt
    (15,299 )     (89,512 )     (17,968 )
 
Payments on derivative financial instruments, net
    (287 )     (7,574 )        
 
Changes in checks and drafts outstanding
    (21,431 )     988       (3,557 )
 
Proceeds from sale of preferred stock, net of expenses
    (151 )     82,484       5,897  
 
Redemptions of preferred stock
            (2,002 )        
 
Preferred stock dividends paid
    (7,975 )     (3,575 )     (240 )
 
Retirements of equities
    (10,339 )     (31,144 )     (31,145 )
 
Cash patronage dividends paid
    (28,722 )     (26,478 )     (40,082 )
     
     
     
 
Net cash (used in) provided by financing activities
    (183,763 )     16,804       178,224  
     
     
     
 
Net (decrease) increase in cash and cash equivalents
    (31,758 )     60,057       (5,266 )
Cash and cash equivalents at beginning of period
    168,249       108,192       113,458  
     
     
     
 
Cash and cash equivalents at end of period
  $ 136,491     $ 168,249     $ 108,192  
     
     
     
 

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

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Table of Contents

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
1. Summary of Significant Accounting Policies:
 
Organization:

        CHS Inc. (CHS or the Company) 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, foods and wheat milling, the Company provides its patrons with energy and agronomy products, as well as other production agricultural inputs. Sales are both domestic and international.

 
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.

        The Company had various 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 the 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 variable production 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 freight incurred to place the products at the Company’s points 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 and therefore, contract values are reviewed and adjusted to reflect potential nonperformance.

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

        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 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 values 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. Included in other current assets on August 31, 2004 and 2003 are derivative assets of $91.3 million and $54.5 million, respectively. Included in accrued expenses on August 31, 2004 and 2003 are derivative liabilities of $110.8 million and $46.5 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 sales 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 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.

        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 using market-based prices. The inventories hedged with these derivatives are valued at the lower of cost or fair value, 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 carries various fixed interest rates and is payable at various dates to minimize the effect of

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

market interest rate changes. The effective interest rate to the Company on fixed-rate debt outstanding on August 31, 2004, was approximately 6.4%.

        In fiscal years 2002 and 2004, the Company entered into interest rate treasury lock instruments to secure the interest rates related to a portion of its private placement debts issued on October 18, 2002, and September 21, 2004. These instruments were designated and are effective as cash flow hedges for accounting purposes and, accordingly, the net loss on settlements were recorded as a component of other comprehensive income. Interest expense for the years ended August 31, 2004 and 2003, includes $0.9 million and $0.7 million, respectively, 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 purchases of products from Canada, and had minimal risk regarding foreign currency fluctuations during 2004 and in prior years. 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 in other revenues 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.

 
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 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:

        Goodwill represents the excess of the purchase price of an acquired entity over the amounts assigned to assets acquired and liabilities assumed. Goodwill is no longer amortized in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, but reviewed for impairment annually, or more frequently if certain impairment conditions arise, on the basis of undiscounted cash flows. After

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

analysis, assets that are deemed to require impairment are written down to fair market value. Other intangible assets consists primarily of trademarks, patents, customer lists and agreements not to compete. 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 5 to 15 years).

 
Revenue Recognition:

        The Company provides a wide variety of products and services, from production 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 prices 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 transactions. 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 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 fiscal 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 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.

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Recent Accounting Pronouncements:

        In May 2003, the Financial Accounting Standards Board (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). 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. 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. Adoption of this standard did not have an effect on the Company.

        In December 2003, the FASB issued SFAS No. 132R, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This statement requires additional disclosures to be made by employers regarding pensions and other postretirement benefit plans, but does not change the measurement or recognition of those plans. Under this Statement, the disclosure provisions regarding foreign plans and estimated future benefit payments are effective for fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. The Company has adopted the interim and annual disclosure provisions of this Statement during the current fiscal year.

        In December 2003, the FASB revised 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 the primary beneficiary. For public entities the interpretation applies to interests in variable interest entities for periods ending after March 15, 2004, the Company’s third quarter. Adoption of this standard did not have an effect on the Company.

        On May 19, 2004, the FASB issued a FASB Staff Position (FSP) regarding SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” FSP 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” discusses the effects of the Medicare Prescription Drug, Improvement and Modernization Act (the Act) enacted on December 8, 2003. FSP 106-2 considers the effect of the two new features introduced in the Act in determining accumulated postretirement benefit obligation (APBO) and net periodic postretirement benefit cost, which may serve to reduce a company’s post-retirement benefit costs. Companies may elect to defer accounting for this benefit or may attempt to reflect the best estimate of the impact of the Act on net periodic costs. The Company has chosen to defer accounting for the benefit until the FASB issues final accounting guidance due to various uncertainties related to this legislation. The Company’s measures of APBO and net periodic postretirement benefit costs as of and for the year ended August 31, 2004 do not reflect the effect of the Act as permitted by the FSP.

        In March 2004, the FASB Emerging Issues Task Force (EITF) reached a consensus on and the FASB ratified EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides guidance for evaluating whether an investment is other-than-temporarily impaired. On September 30, 2004, the FASB issued FSP EITF 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,”’ which delayed the effective date of the application guidance on impairment of securities included within EITF 03-1. The Company is still evaluating the potential impact of the adoption of EITF 03-1.

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Reclassifications:

        Certain reclassifications have been made to prior year’s amounts to conform to current year classifications. 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, 2004 and 2003 are as follows:

                 
2004 2003


(Dollars in thousands)
Trade
  $ 835,066     $ 748,398  
Other
    55,708       47,000  
     
     
 
      890,774       795,398  
Less allowances for doubtful accounts
    55,809       31,618  
     
     
 
    $ 834,965     $ 763,780  
     
     
 

        All international sales are denominated in U.S. dollars. International sales for the years ended August 31, 2004, 2003 and 2002 are as follows:

                         
2004 2003 2002



(Dollars in millions)
Africa
  $ 112     $ 99     $ 135  
Asia
    1,104       815       407  
Europe
    158       156       282  
North America, excluding U.S.
    456       367       298  
South America
    209       166       100  
     
     
     
 
    $ 2,039     $ 1,603     $ 1,222  
     
     
     
 

3.     Inventories:

        Inventories as of August 31, 2004 and 2003 are as follows:

                 
2004 2003


(Dollars in thousands)
Grain and oilseed
  $ 308,207     $ 370,381  
Energy
    277,801       292,095  
Feed and farm supplies
    110,885       95,589  
Processed grain and oilseed
    25,740       42,688  
Other
    1,260       1,130  
     
     
 
    $ 723,893     $ 801,883  
     
     
 

        As of August 31, 2004, the Company valued approximately 24% of inventories, primarily related to energy, using the lower of cost, determined on the LIFO method, or market (24% as of August 31, 2003). If the FIFO method of accounting for these inventories had been used, inventories would have been higher than the reported amount by $160.3 million and $86.3 million at August 31, 2004 and 2003, respectively.

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.     Investments:

        Investments as of August 31, 2004 and 2003 are as follows:

                   
2004 2003


(Dollars in thousands)
Cooperatives:
               
 
CF Industries, Inc. 
  $ 152,996     $ 152,996  
 
Land O’Lakes, Inc. 
    31,057       27,105  
 
Ag Processing, Inc. 
    24,866       24,481  
 
CoBank ACB (CoBank)
    16,625       22,505  
Joint ventures:
               
 
United Country Brands, LLC (Agriliance, LLC)
    167,597       129,286  
 
Ventura Foods, LLC
    107,719       107,464  
 
TEMCO, LLC
    5,776       9,087  
Other
    69,180       59,969  
     
     
 
    $ 575,816     $ 532,893  
     
     
 

        The CHS investment in CF Industries, Inc. (CF) is carried at cost, including allocated patronage refunds. CHS recognizes income from this investment when qualified patronage refunds are received. In each of the years 1998 through 2003, 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 the fair market value exceeds its carrying value. CHS will continue to perform impairment tests annually, or as circumstances dictate, including reviewing operating results, which could result in impairment to its CF investment.

        The Company has a 50% interest in Ventura Foods, LLC, a joint venture, which produces and distributes oilseed-based products. The following provides summarized unaudited financial information for Ventura Foods, LLC balance sheets as of August 31, 2004 and 2003, and statements of operations for the twelve months ended August 31, 2004, 2003 and 2002:

                 
2004 2003


(Dollars in thousands)
Current assets
  $ 286,613     $ 193,632  
Non-current assets
    258,270       231,649  
Current liabilities
    171,269       227,400  
Non-current liabilities
    194,547       21,738  
                         
2004 2003 2002



(Dollars in thousands)
Net sales
  $ 1,425,061     $ 1,165,823     $ 1,013,475  
Gross profit
    167,581       155,274       181,217  
Net income
    44,696       42,837       75,368  

        Agriliance, LLC (Agriliance) is owned and governed by Land O’Lakes, Inc. (50%) and United Country Brands, LLC (50%). United Country Brands, LLC, was initially owned and governed 50% by the Company and 50% by Farmland Industries, Inc. (Farmland), and was formed solely to hold a 50% interest in Agriliance. Initially, the Company’s indirect share of earnings (economic interest) in Agriliance was 25%, which was the same as the Company’s ownership or governance interest. In April 2003, the Company acquired an additional 13.1% economic interest in the wholesale crop protection business of

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Agriliance (the “CPP Business”), which constituted only a part of the Agriliance business operations, for a cash payment of $34.3 million. After the transaction, the economic interests in Agriliance were owned 50% by Land O’Lakes, Inc. 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 with the purchase of this additional economic interest. Agriliance’s earnings were split among the members based upon the respective economic interests of each member. On April 30, 2004, the Company purchased all of Farmland’s remaining interest in Agriliance for $27.5 million in cash. The Company now owns 50% of the economic and governance interests in Agriliance, and continues to account for this investment using the equity method of accounting.

        The following provides summarized financial information for Agriliance balance sheets as of August 31, 2004 and 2003, and statements of operations for the years ended August 31, 2004, 2003 and 2002:

                 
2004 2003


(Dollars in thousands)
Current assets
  $ 1,123,671     $ 1,249,891  
Non-current assets
    123,106       119,615  
Current liabilities
    878,814       1,083,693  
Non-current liabilities
    128,780       27,061  
                         
2004 2003 2002



(Dollars in thousands)
Net sales
  $ 3,477,528     $ 3,485,623     $ 3,625,849  
Earnings from operations
    82,221       67,239       57,604  
Net income
    71,278       60,741       47,044  

        During the year ended August 31, 2004, NCRA exercised its right of first refusal to purchase a partial interest in a crude oil pipeline for $16.0 million, increasing their holding to 100%. NCRA subsequently sold a 50% interest in the same pipeline to another third party for proceeds of $25.0 million and recorded a pre-tax gain on the sale of $14.7 million.

        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.

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
5. Property, Plant and Equipment:

        A summary of property, plant and equipment as of August 31, 2004 and 2003 is as follows:

                 
2004 2003


(Dollars in thousands)
Land and land improvements
  $ 64,709     $ 60,453  
Buildings
    422,545       380,940  
Machinery and equipment
    1,618,428       1,515,976  
Office and other
    65,296       61,356  
Construction in progress
    214,988       159,555  
     
     
 
      2,385,966       2,178,280  
Less accumulated depreciation and amortization
    1,136,311       1,055,298  
     
     
 
    $ 1,249,655     $ 1,122,982  
     
     
 

        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, LLC under an operating lease agreement. The book value of the leased milling assets at August 31, 2004, was $93.6 million, net of accumulated depreciation of $37.1 million.

        For the years ended August 31, 2004, 2003 and 2002, the Company capitalized interest of $2.8 million, $3.9 million and $2.1 million, respectively, related to capitalized construction projects.

        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.

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
6. Other Assets:

        Other assets as of August 31, 2004 and 2003 are as follows:

                 
2004 2003


(Dollars in thousands)
Goodwill
  $ 26,896     $ 27,052  
Customer lists, less accumulated amortization of $7,445 and $5,112, respectively
    7,087       9,414  
Non-compete covenants, less accumulated amortization of $2,115 and $11,774, respectively
    1,638       1,766  
Other intangible assets, less accumulated amortization of $3,113 and $1,986, respectively
    13,498       14,607  
Prepaid pension and other benefit assets
    182,773       151,389  
Deferred tax asset
            28,689  
Notes receivable
    1,186       1,991  
Other
    4,039       4,612  
     
     
 
    $ 237,117     $ 239,520  
     
     
 

        Intangible assets amortization expenses for the years ended August 31, 2004, 2003 and 2002 were $3.8 million, $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 for the first four years, and $1.7 million for the fifth year.

        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 intended 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 had a zero book value as of August 31, 2003.

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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, 2004 and 2003 consisted of the following:

                           
Interest Rates at
August 31, 2004 2004 2003



(Dollars in thousands)
Notes payable(a)(h)
    2.01% to 2.23%     $ 116,115     $ 251,131  
             
     
 
Long-term debt:
                       
 
Revolving term loans from cooperative and other banks, payable in installments through 2009, when the balance is due(b)(h)
    2.27% to 13.00%     $ 155,784     $ 168,032  
 
Private placement, payable in equal installments beginning in 2008 through 2013(c)(h)
    6.81%       225,000       225,000  
 
Private placement, payable in installments beginning in 2007 through 2018(d)(h)
    4.96% to 5.60%       175,000       175,000  
 
Private placement, payable in equal installments beginning in 2005 through 2011(e)(h)
    7.43% to 7.90%       80,000       80,000  
 
Private placement, payable in its entirety in 2010(f)(h)
    4.08%       15,000          
 
Private placement, payable in its entirety in 2011(f)(h)
    4.39%       15,000          
 
Industrial revenue bonds, payable in its entirety in 2011
    5.23%       3,925       5,831  
 
Other notes and contracts(g)
    5.70% to 12.17%       14,109       9,310  
             
     
 
Total long-term debt
            683,818       663,173  
Less current portion
            35,117       14,951  
             
     
 
Long-term portion
          $ 648,701     $ 648,222  
             
     
 
                   
2004 2003


Weighted-average interest rates at August 31:
               
 
Short-term debt
    2.16%       1.83%  
 
Long-term debt
    6.35%       6.52%  


 
(a) The Company finances its working capital needs through short-term lines of credit with a syndication of domestic and international banks. These revolving lines of credit include a 364-day facility of $750.0 million, and a three-year facility of $150.0 million, both of which are committed. On August 31, 2004, $115.0 million was outstanding on the 364-day facility. In addition to these short-term lines of credit, the Company has a two-year credit facility dedicated to NCRA, with a syndication of banks in the amount of $15.0 million, all of which is committed, with no amounts outstanding on August 31, 2004. Other miscellaneous notes payable totaled $1.1 million on August 31, 2004.
 
(b) 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, 2004, $131.2 million was outstanding. NCRA term loans of $12.0 million are collateralized by NCRA’s investment in CoBank.

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
(c) In June 1998, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $225.0 million.
 
(d) 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.
 
(e) 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.
 
(f) In March 2004, the Company entered into a note purchase and private shelf agreement with Prudential Capital Group. In April 2004, two long-term notes were issued for $15.0 million each.
 
(g) Other notes payable of $10.0 million are collateralized by property, plant and equipment, with a cost of approximately $16.9 million, less accumulated depreciation of approximately $1.4 million on August 31, 2004.
 
(h) 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, 2004 and 2003.

        The aggregate amount of long-term debt payable as of August 31, 2004 is as follows:

         
(Dollars in
thousands)
2005
  $ 35,117  
2006
    35,582  
2007
    60,122  
2008
    98,626  
2009
    117,285  
Thereafter
    337,086  
     
 
    $ 683,818  
     
 

        The Company is in compliance with all debt covenants and restrictions as of August 31, 2004.

        On September 21, 2004, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $125.0 million with an interest rate of 5.25%. The debt will be repaid in equal annual installments of $25.0 million during fiscal years 2011 through 2015. The proceeds were used to pay down the Company’s short-term debt.

 
8. Income Taxes:

        In October 2001, NCRA’s members ratified a resolution passed by NCRA’s Board of Directors to compute patronage distributions for all years ending after August 31, 2001, based on earnings for financial statement purposes, rather than amounts reportable for federal income tax purposes. As a result of this by-law change, NCRA’s 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. 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 and $6.2 million were provided to offset deferred tax benefits generated by NCRA as of August 31, 2003 and 2002, respectively. For the year ended August 31, 2004, NCRA decreased its valuation allowance by $5.0 million due to a reduction in NCRA’s deferred tax benefits. The Company recorded a $4.4 million

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

valuation allowance to offset deferred tax benefits relating to a capital loss carryforward in that same period.

        The provision for income taxes for the years ended August 31, 2004, 2003 and 2002 is as follows:

                         
2004 2003 2002



(Dollars in thousands)
Current
  $ 17,200     $ 3,700     $ 14,300  
Deferred
    7,900       7,300       (12,700 )
Valuation allowance
    600       1,700       17,100  
     
     
     
 
Income taxes
  $ 25,700     $ 12,700     $ 18,700  
     
     
     
 

        The tax effect of temporary differences of deferred tax assets and liabilities as of August 31, 2004 and 2003 is as follows:

                   
2004 2003


(Dollars in thousands)
Deferred tax assets:
               
 
Accrued expenses and valuation reserves
  $ 49,151     $ 53,521  
 
Postretirement health care and deferred compensation
    37,067       29,153  
 
Property, plant and equipment
            9,369  
 
Alternative minimum tax credit and loss carryforward
    28,268       8,948  
 
Other
    21,464       19,316  
     
     
 
Total deferred tax assets
    135,950       120,307  
     
     
 
Deferred tax liabilities:
               
 
Pension, including minimum liability
    47,155       34,531  
 
Equity method investments
    7,407       23,310  
 
Property, plant and equipment
    35,737          
 
Other
    1,184          
     
     
 
Total deferred tax liabilities
    91,483       57,841  
     
     
 
Deferred tax assets valuation reserve
    (11,212 )     (11,765 )
     
     
 
Net deferred tax assets
  $ 33,255     $ 50,701  
     
     
 

        As of August 31, 2004, net deferred tax assets of $43.4 million and $10.1 million are included in current assets and other liabilities, respectively ($22.0 million and $28.7 million in current assets and other assets, respectively, as of August 31, 2003). As of August 31, 2004, 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. As of August 31, 2004, NCRA’s net deferred tax assets of $6.8 million were comprised of deferred tax assets of $18.4 million and deferred tax liabilities of $11.6 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.

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

        The reconciliation of the statutory federal income tax rates to the effective tax rates for the years ended August 31, 2004, 2003 and 2002 is as follows:

                         
2004 2003 2002



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
    (25.8 )     (25.7 )     (25.0 )
Change in patronage determination
                    (7.5 )
Export activities at rates other than the U.S. statutory rate
    (4.5 )     (3.2 )     (1.9 )
Deferred tax asset valuation allowance
    0.2       1.3       11.8  
Other
    1.6       (2.0 )     (3.4 )
     
     
     
 
Effective tax rate
    10.4 %     9.3 %     12.9 %
     
     
     
 
 
9. Equities:

        In accordance with the by-laws and by action of the Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each fiscal 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.

        A new policy was adopted effective September 1, 2004, whereby redemptions of capital equity certificates approved by the Board of Directors will be divided into two pools, one for non-individuals (primarily member cooperatives) who may participate in an annual pro-rata program for equities older than 10 years, and another for individual members who are eligible for equity redemptions at age 72 or upon death. The amount that each non-individual member receives under the pro-rata program in any year will be determined by multiplying the dollars available for pro-rata redemptions, if any that year, as determined by the Board of Directors, by a fraction, the numerator of which is the amount of patronage certificates older than 10 years held by that member, and the denominator is the sum of the patronage certificates older than 10 years held by all eligible non-individuals.

        For the years ended August 31, 2004, 2003 and 2002, the Company redeemed in cash, patronage related equities in accordance with authorization from the Board of Directors in the amounts of $10.3 million, $31.1 million and $31.1 million, respectively. An additional $13.0 million of capital equity certificates were redeemed in fiscal 2004, by issuance of shares of the Company’s 8% Cumulative Redeemable Preferred Stock (New Preferred) pursuant to a registration statement on Form S-2 filed with the Securities and Exchange Commission. The amount of equities redeemed with each share of preferred stock issued was $27.10, which was the closing price per share of the stock on the NASDAQ National Market on March 2, 2004. On August 31, 2004, the Company had 4,226,428 shares of the New Preferred outstanding with a total redemption value of approximately $105.7 million, excluding accumulated dividends.

        The Company expects cash redemptions related to the year ended August 31, 2004, to be distributed in fiscal year 2005, to be approximately $32.1 million and are classified as a current liability on the August 31, 2004 consolidated balance sheet. The Company expects to redeem an additional

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Table of Contents

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$20.0 million of capital equity certificates in fiscal year 2005 by issuing shares of the Company’s New Preferred, pending approval from the Securities and Exchange Commission.

        In 2001 and 2002 the Company issued 9,454,874 shares of 8% Preferred Stock (Old Preferred). In late 2002, the Company suspended sales of the Old Preferred, and on February 25, 2003 the Company filed a post-effective amendment to terminate the offering of the Old Preferred shares. 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 gross proceeds of $86.3 million (3,450,000 shares). The New Preferred is listed on the NASDAQ National Market under the symbol CHSCP. Expenses related to the issuance of the New Preferred were $3.8 million.

        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 31, 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 7,452,439 shares, and the balance of the Old Preferred (2,002,435 shares) was redeemed in cash at $1.00 per share.

        The New Preferred accumulates dividends at a rate of 8% per year, and dividends are payable quarterly.

 
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 sheets status as of August 31, 2004 and 2003 is as follows:

                                                   
Non-Qualified
Qualified Pension Benefits Pension Benefits Other Benefits



2004 2003 2004 2003 2004 2003






(Dollars in thousands)
Change in benefit obligation:
                                               
 
Benefit obligation at beginning of period
  $ 289,906     $ 253,868     $ 13,834     $ 14,543     $ 29,255     $ 24,915  
 
Service cost
    11,548       10,840       601       800       754       648  
 
Interest cost
    17,203       17,503       822       1,033       1,758       1,722  
 
Plan participants contributions
            1,771                               215  
 
Plan amendments
    105                               (839 )     88  
 
Transfers
                                    1,206          
 
Actuarial loss (gain)
    4,539       22,049       77       (766 )     (2,162 )     2,527  
 
Special agreement
                    1,003                          
 
Assumption change
            4,659                       502       1,469  
 
Benefits paid
    (22,865 )     (20,784 )     (2,211 )     (1,776 )     (2,147 )     (2,329 )
     
     
     
     
     
     
 
Benefit obligation at end of period
  $ 300,436     $ 289,906     $ 14,126     $ 13,834     $ 28,327     $ 29,255  
     
     
     
     
     
     
 

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                                   
Non-Qualified
Qualified Pension Benefits Pension Benefits Other Benefits



2004 2003 2004 2003 2004 2003






(Dollars in thousands)
Change in plan assets:
                                               
 
Fair value of plan assets at beginning of period
  $ 280,217     $ 201,563                                  
 
Actual income on plan assets
    31,500       14,915                                  
 
Company contributions
    10,700       84,523     $ 2,211     $ 1,776     $ 2,147     $ 2,114  
 
Participants contributions
                                            215  
 
Benefits paid
    (22,865 )     (20,784 )     (2,211 )     (1,776 )     (2,147 )     (2,329 )
     
     
     
     
     
     
 
Fair value of plan assets at end of period
  $ 299,552     $ 280,217     $        $        $        $     
     
     
     
     
     
     
 
Funded status
  $ (884 )   $ (9,689 )   $ (14,126 )   $ (13,834 )   $ (28,327 )   $ (29,255 )
Employer contributions after measurement date
                    32       84       222       247  
Unrecognized actuarial loss (gain)
    114,401       118,025       130       (899 )     (1,061 )     707  
Unrecognized transition obligation
                                    8,325       9,261  
Unrecognized prior service cost
    6,730       7,467       2,977       3,503       (1,742 )     (1,076 )
Special agreement
                    (1,003 )                        
     
     
     
     
     
     
 
Prepaid benefit cost (accrued)
  $ 120,247     $ 115,803     $ (11,990 )   $ (11,146 )   $ (22,583 )   $ (20,116 )
     
     
     
     
     
     
 
Amounts recognized on balance sheets consist of:
                                               
 
Accrued benefit liability
  $ 120,247     $ 95,917     $ (11,990 )   $ (12,125 )   $ (22,583 )   $ (20,116 )
 
Intangible assets
            2,425               253                  
 
Accumulated other comprehensive loss
            17,461               726                  
     
     
     
     
     
     
 
Net amounts recognized
  $ 120,247     $ 115,803     $ (11,990 )   $ (11,146 )   $ (22,583 )   $ (20,116 )
     
     
     
     
     
     
 

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

        For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for the year ended August 31, 2004. 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, 2004, 2003 and 2002 are as follows:

                                                                           
Non-Qualified
Qualified Pension Benefits Pension Benefits Other Benefits



2004 2003 2002 2004 2003 2002 2004 2003 2002









(Dollars in thousands)
Components of net periodic benefit cost:
                                                                       
 
Service cost
  $ 11,548     $ 10,840     $ 9,275     $ 601     $ 800     $ 1,168     $ 754     $ 648     $ 557  
 
Interest cost
    17,203       17,503       17,673       822       1,033       886       1,758       1,722       1,586  
 
Expected return on assets
    (27,489 )     (23,788 )     (21,386 )                                                
 
Prior service cost amortization
    843       806       740       526       564       574       (174 )     (172 )     (197 )
 
Actuarial loss (gain) amortization
    4,149       2,623       1,369       103       159       18       108       (215 )     (505 )
 
Transition amount amortization
                    (708 )                             936       936       936  
     
     
     
     
     
     
     
     
     
 
Net periodic benefit cost
  $ 6,254     $ 7,984     $ 6,963     $ 2,052     $ 2,556     $ 2,646     $ 3,382     $ 2,919     $ 2,377  
     
     
     
     
     
     
     
     
     
 
Average assumptions:
                                                                       
 
Discount rate
    6.40%       6.30%       7.10%       6.25%       6.00%       7.25%       6.40%       6.30%       7.10%  
 
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
    4.30%       5.00%       5.00%       5.00%       5.00%       5.00%       4.30%       5.00%       5.00%  

        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, 2004 and 2003:

                                 
Qualified Pension Non-Qualified
Benefits Pension Benefits


2004 2003 2004 2003




(Dollars in thousands)
Projected benefit obligation
  $     $ 120,068     $ 14,126     $ 13,834  
Accumulated benefit obligation
          107,760       12,463       12,209  
Fair value of plan assets
          104,560                  

        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
  $ 254     $ (229 )
Effect on postretirement benefit obligation
    2,418       (2,190 )

        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; $8.6 million, $8.5 million and $11.0 million, for the years ended August 31, 2004, 2003 and 2002, respectively.

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

        The Company contributed $10.7 million to qualified pension plans in 2004. Because the plan is fully funded, the Company does not expect to contribute to the pension plans in 2005. The Company expects to pay $2.3 million to participants of the non-qualified pension and postretirement benefit plans during 2005.

        The Company’s retiree benefit payments which reflect expected future service are anticipated to be paid as follows:

                         
Qualified Non-Qualified Other
Pension Benefits Pension Benefits Benefits



(Dollars in thousands)
2005
  $ 30,586     $ 241     $ 2,166  
2006
    22,738       240       2,278  
2007
    26,394       244       2,658  
2008
    24,977       237       2,882  
2009
    26,950       235       3,298  
2010-2014
    150,883       1,134       23,716  

        The Company has master trusts that hold the assets for the cash balance, production and NCRA pension plans. The Company and NCRA have qualified plan committees that set investment guidelines with the assistance of an external consultant. Investment objectives for the Company’s plan assets are to:

  •  Optimize the long-term returns on plan assets at an acceptable level of risk, and
 
  •  Maintain broad diversification across asset classes and among investment managers, and
 
  •  Focus on long-term return objectives.

        Asset allocation targets promote optimal expected return and volatility characteristics given the long-term time horizon for fulfilling the obligations of the pension plans. An annual analysis on the risk versus the return of the investment portfolio is conducted to justify the expected long-term rate of return assumption. The Company generally uses long-term historical return information for the targeted asset mix identified in asset and liability studies. Adjustments are made to the expected long-term rate of return assumption when deemed necessary based upon revised expectations of future investment performance of the overall investment markets.

        The investment portfolio contains a diversified portfolio of investment categories, including domestic and international equities, fixed income securities and real estate. Securities are also diversified in terms of domestic and international securities, short and long-term securities, growth and value equities, large and small cap stocks, as well as active and passive management styles.

        The Committee believes with prudent risk tolerance and asset diversification, the plan should be able to meet its pension obligations in the future.

        The Company’s pension plans’ average asset allocations by asset categories are as follows:

                 
2004 2003


Cash
    2.7%       1.8%  
Debt
    29.9%       29.5%  
Equities
    62.0%       63.2%  
Real estate
    3.8%       3.8%  
Other
    1.6%       1.7%  
     
     
 
Total
    100.0%       100.0%  
     
     
 

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11.     Segment Reporting:

        The Company operates five business segments, which are based on products and services; 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 and Services 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. The 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 and distribution joint venture, and from the sales 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-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.

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Table of Contents

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

        Segment information for the years ended August 31, 2004, 2003 and 2002 is as follows:

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








(Dollars in thousands)
For the year ended August 31, 2004:
                                                               
Net sales
          $ 4,028,248     $ 2,227,764     $ 5,006,029     $ 802,102             $ (1,154,810 )   $ 10,909,333  
Other revenues
  $ (15 )     9,193       94,381       28,710       2,836     $ 6,198               141,303  
     
     
     
     
     
     
     
     
 
      (15 )     4,037,441       2,322,145       5,034,739       804,938       6,198       (1,154,810 )     11,050,636  
Cost of goods sold
            3,784,260       2,199,700       5,006,704       768,391               (1,154,810 )     10,604,245  
Marketing, general and administrative
    8,482       66,493       70,196       25,071       31,811       6,231               208,284  
     
     
     
     
     
     
     
     
 
Operating (losses) earnings
    (8,497 )     186,688       52,249       2,964       4,736       (33 )           238,107  
Gain on sale of investment
            (14,666 )                                             (14,666 )
Gain on legal settlements
                    (692 )                                     (692 )
Interest
    (352 )     13,819       16,019       5,874       15,307       958               51,625  
Equity (income) from investments
    (35,725 )     (1,399 )     (519 )     (11,413 )     (29,966 )                     (79,022 )
Minority interests
            32,507       1,323                                       33,830  
     
     
     
     
     
     
     
     
 
Income (loss) before income taxes
  $ 27,580     $ 156,427     $ 36,118     $ 8,503     $ 19,395     $ (991 )   $     $ 247,032  
     
     
     
     
     
     
     
     
 
Intersegment sales
          $ (121,199 )   $ (987,145 )   $ (45,103 )   $ (1,363 )           $ 1,154,810     $  
             
     
     
     
             
     
 
Goodwill
          $ 3,041     $ 250             $ 23,605                     $ 26,896  
             
     
             
                     
 
Capital expenditures
          $ 187,937     $ 28,537     $ 6,835     $ 18,783     $ 3,056             $ 245,148  
             
     
     
     
     
             
 
Depreciation and amortization
  $ 1,247     $ 57,195     $ 22,087     $ 8,040     $ 15,789     $ 4,041             $ 108,399  
     
     
     
     
     
     
             
 
Total identifiable assets at August 31, 2004
  $ 327,448     $ 1,591,254     $ 862,645     $ 487,807     $ 475,004     $ 287,134             $ 4,031,292  
     
     
     
     
     
     
             
 

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                                                 
Country Processed
Operations Grains Corporate
and Grain and and Reconciling
Agronomy Energy Services Marketing Foods 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  
Other revenues
  $ (84 )     5,655       84,206       25,676       2,411     $ 4,714               122,578  
     
     
     
     
     
     
     
     
 
      (84 )     3,653,748       1,970,031       4,164,902       494,342       4,714       (894,341 )     9,393,312  
Cost of goods sold
            3,470,726       1,876,811       4,133,677       473,682               (894,341 )     9,060,555  
Marketing, general and administrative
    8,138       63,740       55,887       21,072       29,715       5,205               183,757  
     
     
     
     
     
     
     
     
 
Operating (losses) earnings
    (8,222 )     119,282       37,333       10,153       (9,055 )     (491 )           149,000  
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  
     
     
     
     
     
     
             
 
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  
Other revenues
  $ (89 )     857       83,361       22,399       (1,209 )   $ 2,032               107,351  
     
     
     
     
     
     
     
     
 
      (89 )     2,658,546       1,557,914       3,303,868       494,875       2,032       (753,341 )     7,263,805  
Cost of goods sold
            2,483,359       1,474,392       3,272,985       462,655               (753,341 )     6,940,050  
Marketing, general and administrative
    8,957       66,731       47,995       22,213       31,813       4,466               182,175  
     
     
     
     
     
     
     
     
 
Operating (losses) earnings
    (9,046 )     108,456       35,527       8,670       407       (2,434 )           141,580  
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     $  
             
     
     
     
             
     
 
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  
     
     
     
     
     
     
             
 

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

        During the years ended August 31, 2004, 2003 and 2002, the Company received cash proceeds and recorded gains of $0.7 million, $10.9 million and $3.0 million, respectively, related to legal settlements from several vitamin product suppliers against whom the Company alleged certain price-fixing claims.

 
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 $311.0 million for NCRA’s McPherson, Kansas, refinery, of which $49.2 million has been spent at the Laurel refinery and $131.0 million has been spent by NCRA at the McPherson refinery as of August 31, 2004. The Company expects all of these compliance capital expenditures at the refineries to be completed 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, 2004 and 2003, the Company stored grain and processed grain products for third parties totaling $157.1 million and $155.2 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 $32.0 million was outstanding as of August 31, 2004. 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, 2004.

        The Company has adopted FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which requires 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

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Table of Contents

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

        The Company’s obligations pursuant to its guarantees as of August 31, 2004 are as follows:

                                         
Guarantee/ Exposure on
Maximum August 31, Nature of Triggering Assets Held
Entities Exposure 2004 Guarantee Expiration Date Event Recourse Provisions as Collateral








(Dollars in thousands)
The Company’s financial services cooperative loans sold to CoBank
    *     $ 5,927     10% of the obligations of borrowers (agricultural 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
    *       25,076     15% of the obligations of borrowers under credit agreements for some of the loans sold, 50% of the obligations of borrowers for other 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
Horizon Milling, LLC
  $ 5,000             Indemnification and reimbursement of 24% of damages related to Horizon Milling, LLC’s performance under a flour sales agreement   None stated, but may be terminated by any party upon 90 days prior notice in regard to future obligations   Non- performance under flour sale agreement   Subrogation against Horizon Milling, LLC   None
TEMCO, LLC
  $ 15,000             Obligations by TEMCO, LLC under credit agreement   None stated   Credit agreement default   Subrogation against TEMCO, LLC   None

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CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                         
Guarantee/ Exposure on
Maximum August 31, Nature of Triggering Assets Held
Entities Exposure 2004 Guarantee Expiration Date Event Recourse Provisions as Collateral








(Dollars in thousands)
Third parties
    *       1,000     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
             
                         
            $ 32,003                          
             
                         


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.
 
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 term.

        Total rental expense for all operating leases, net of rail car mileage credits received from the railroad and sublease income was $35.3 million, $31.7 million and $30.7 million for the years ended August 31, 2004, 2003 and 2002, respectively. Mileage credits and sublease income totaled $7.2 million, $7.1 million and $9.5 million for the years ended August 31, 2004, 2003 and 2002, respectively.

        Minimum future lease payments, required under noncancellable operating leases as of August 31, 2004 are as follows:

                                 
Rail Equipment
Cars Vehicles and Other Total




(Dollars in thousands)
2005
  $ 8,539     $ 16,207     $ 5,676     $ 30,422  
2006
    6,090       13,233       5,180       24,503  
2007
    5,034       10,392       4,589       20,015  
2008
    4,179       9,133       3,241       16,553  
2009
    3,036       6,110       2,906       12,052  
Thereafter
    9,151       5,511       4,588       19,250  
     
     
     
     
 
Total minimum future lease payments
  $ 36,029     $ 60,586     $ 26,180     $ 122,795  
     
     
     
     
 

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Table of Contents

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
13. Supplemental Cash Flow and Other Information:

        Additional information concerning supplemental disclosures of cash flow activities for the years ended August 31, 2004, 2003 and 2002 is as follows:

                           
2004 2003 2002



(Dollars in thousands)
Net cash paid during the period for:
                       
 
Interest
  $ 52,004     $ 45,239     $ 44,231  
 
Income taxes
    27,997       956       27,965  
Other significant noncash transactions:
                       
 
Capital equity certificates exchanged for preferred stock
    12,990                  
 
Capital equity certificates issued in exchange for elevator properties
    13,355       350       1,842  
 
Exchange of preferred stock
            7,452          
 
Accrual of dividends and equities payable
    (83,569 )     (39,049 )     (56,510 )
 
Other comprehensive income (loss)
    11,178       33,584       (49,982 )
 
14. Related Party Transactions:

        Related party transactions with equity and cooperative investees as of August 31, 2004 and 2003 are as follows:

                 
2004 2003


(Dollars in thousands)
Sales
  $ 1,185,366     $ 779,857  
Purchases
    632,993       637,357  
Receivables
    17,679       13,393  
Payables
    28,118       29,113  

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

 
15. Comprehensive Income:

        The components of comprehensive income, net of taxes, for the years ended August 31, 2004, 2003 and 2002 are as follows:

                         
2004 2003 2002



(Dollars in thousands)
Net income
  $ 221,332     $ 123,841     $ 126,138  
Additional minimum pension liability
    10,016       36,106       (48,797 )
Financial instruments
    698       1,045       (548 )
Cash flow hedges
    356       (3,549 )     (637 )
Foreign currency translation adjustment
    108       (18 )        
     
     
     
 
Comprehensive income
  $ 232,510     $ 157,425     $ 76,156  
     
     
     
 

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Table of Contents

CHS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

        The components of accumulated other comprehensive loss, net of taxes, as of August 31, 2004 and 2003 are as follows:

                 
2004 2003


(Dollars in
thousands)
Additional minimum pension liability
  $ 3,930     $ 13,946  
Financial instruments
    (534 )     164  
Cash flow hedges
    3,829       4,185  
Foreign currency translation adjustment
    (90 )     18  
     
     
 
Accumulated other comprehensive loss
  $ 7,135     $ 18,313  
     
     
 

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Table of Contents

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 at August 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2004, 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

October 28, 2004

Minneapolis, Minnesota

F-31


Table of Contents



Shares

CHS Inc.

8% Cumulative Redeemable Preferred Stock

LOGO


PROSPECTUS


January      , 2005




Table of Contents

PART II.

INFORMATION NOT REQUIRED IN PROSPECTUS

 
Item 14.  Other Expenses of Issuance and Distribution
         
SEC Registration Fee
  $ 0.00 (1)
Accounting Fees and Expenses
       
Legal Fees and Expenses
       
Printing Fees
       
Miscellaneous
       
     
 
Total
  $    
     
 

        All fees and expenses other than the SEC registration fee are estimated. The expenses listed above will be paid by CHS.

(1)  See the “Calculation of Registration Fee” on the facing page of the Company’s initial filing of this registration statement.
 
Item 15.  Indemnification of Officers and Directors

        Section 308A.325 of the Minnesota cooperative law provides that a cooperative may eliminate or limit the personal liability of a director of a cooperative for breach of fiduciary duty as a director in the cooperative’s articles of incorporation, provided, however, that the articles may not limit the liability of a director for:

  •  breach of the director’s duty of loyalty to the cooperative or its members;
 
  •  acts or omissions that are not in good faith or involve intentional misconduct or a knowing violation of law;
 
  •  a transaction from which the director derived an improper personal benefit; or
 
  •  an act or omission occurring before the date when the provision in the articles eliminating or limiting liability becomes effective.

        Article IX of our Articles of Incorporation, as amended to date, eliminates or limits the personal liability of our directors to the greatest extent permitted under Minnesota law.

        Article VI of our Bylaws provides that we shall indemnify each person who is or was a director, officer, manager, employee, or agent of this cooperative, and any person serving at the request of this cooperative as a director, officer, manager, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys’ fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred to the fullest extent to which such directors, officers, managers, employees or agents of an cooperative may be indemnified under Minnesota law, as amended from time to time.

        We maintain directors’ and officers’ liability insurance which covers certain liabilities and expenses of our directors and officers and covers us for reimbursement of payments to our directors and officers in respect of such liabilities and expenses.

 
Item 16.  List of Exhibits
     
Exhibit Description


3.1
  Articles of Incorporation of the Company, as amended.(13)
3.2
  Articles of Amendment to the Articles of Incorporation.(17)
3.3
  Bylaws of the Company, as amended.(13)

II-1


Table of Contents

     
Exhibit Description


4.1
  Resolution Creating a Series of Preferred Equity to be Designated 8% Cumulative Redeemable Preferred Stock.(14)
4.2
  Form of Certificate Representing 8% Cumulative Redeemable Preferred Stock.(15)
4.3
  Unanimous Written Consent Resolution of the Board of Directors Amending the Amended and Restated Resolution Creating a Series of Preferred Equity to be Designated 8% Cumulative Redeemable Preferred Stock.(15)
4.4
  Unanimous Written consent Resolution of the Board of Directors Amending the Amended and Restated Resolution Creating a Series of Preferred Equity to be Designated 8% Cumulative Redeemable Preferred Stock to change the record date for dividends.(16)
5.1
  Opinion of Dorsey & Whitney LLP Regarding Legality of Securities Being Registered (including consent).(23)
8.1
  Opinion of Dorsey & Whitney Regarding Tax Matters (including consent).(23)
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.(21)
10.9A
  Amendment to Cenex Harvest States Share Option Plan, dated June 28, 2001.(10)
10.9B
  Amendment No. 2 to Cenex Harvest States Share Option Plan, dated May 2, 2001.(21)
10.9C
  Amendment No. 3 to Cenex Harvest States Share Option Plan, dated June 4, 2002.(21)
10.9D
  Amendment No. 4 to Cenex Harvest States Share Option Plan, dated April 6, 2004.(21)
10.10
  CHS Inc. Share Option Plan Option Agreement.(21)
10.11
  CHS Inc. Share Option Plan Trust Agreement.(21)
10.11A
  Amendment No. 1 to the Trust Agreement.(21)
10.12
  $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)
10.12A
  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.(18)
10.13
  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.(16)
10.13A
  First Amendment to Credit Agreement dated as of May 20, 2004 between CHS Inc., CoBank, ACB, and the Syndication Parties.(20)
10.14
  $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)

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Exhibit Description


10.14A
  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)
10.14B
  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)
10.14C
  Third Amendment to Credit Agreement (Term Loan) dated May 23, 2001 among Cenex Harvest States Cooperatives, CoBank, ACB, and the Syndication Parties.(9)
10.14D
  Fourth Amendment to Credit Agreement (Term Loan) dated May 22, 2002 among Cenex Harvest States Cooperatives, CoBank, ACB and the Syndication Parties.(11)
10.14E
  Fifth Amendment to Credit Agreement (Term Loan) dated May 21, 2003 by and among Cenex Harvest States Cooperatives, CoBank, ACB and the Syndication Parties.(21)
10.14F
  Sixth Amendment to Credit Agreement (Term Loan) dated as of May 20, 2004 by and among CHS Inc., CoBank, ACB, and the Syndication Parties.(20)
10.15
  Limited Liability Agreement of United Harvest, LLC dated November 9, 1998 between United Grain Corporation and Cenex Harvest States Cooperatives.(3)
10.16
  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)
10.17
  Employment Agreement dated November 6, 2003 by and between John D. Johnson and CHS Inc.(18)
10.18
  CHS Inc. Special Supplemental Executive Retirement Plan.(18)
10.19
  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)
10.19A
  Amendment No. 1 to Note Purchase and Private Shelf Agreement, dated as of March 2, 2001.(8)
10.20
  Note Purchase Agreement and Series D & E Senior Notes dated October 18, 2002.(12)
10.21
  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.(19)
10.22
  Note Purchase and Private Shelf Agreement between CHS Inc. and Prudential Capital Group dated as of April 13, 2004.(20)
12.1
  Statement of Computation of Ratios.(22)
23.1
  Consent of Independent Registered Public Accounting Firm.(22)
23.2
  Independent Auditors’ Consent.(22)
24.1
  Power of Attorney.(22)


  (*)  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.

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  (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 May 31, 2003, filed July 2, 2003.
 
(17)  Incorporated by reference to the Company’s Form 8-K, filed August 5, 2003.
 
(18)  Incorporated by reference to the Company’s Form 10-K for the year ended August 31, 2003 filed on November 21, 2003.
 
(19)  Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended February 29, 2004, filed April 7, 2004.
 
(20)  Incorporated by reference to the Company’s Form 10-Q for the quarterly period ended May 31, 2004, filed July 12, 2004.
 
(21)  Incorporated by reference to the Company’s Form 10-K for the year ended August 31, 2004, filed November 18, 2004.
 
(22)  Filed herewith.
 
(23)  To be filed by amendment.
 
Item 17.  Undertakings

        The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

        Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or

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otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

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SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Inver Grove Heights, State of Minnesota, on December 6, 2004.

  CHS Inc.

  By:  /s/ DAVID KASTELIC

       David Kastelic
       Senior Vice President and General Counsel

        Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.

                 
Name Title Date



 
/s/ JOHN D. JOHNSON

John D. Johnson
  President and Chief Executive Officer (Principal Executive Officer)     December 6, 2004  
 
/s/ JOHN SCHMITZ

John Schmitz
  Executive Vice President and Chief Financial Officer (Principal Financial Officer)     December 6, 2004  
 
/s/ JODELL M. HELLER

Jodell M. Heller
  Vice President and Controller (Principal Accounting Officer)     December 6, 2004  
 
*

Michael Toelle
  Director and Chairman of the Board     December 6, 2004  
 
*

Bruce Anderson
  Director     December 6, 2004  
 
*

Robert Bass
  Director     December 6, 2004  
 
*

David Bielenberg
  Director     December 6, 2004  
 
*

Dennis Carlson
  Director     December 6, 2004  
 
*

Curt Eischens
  Director     December 6, 2004  
 
*

Robert Elliott
  Director     December 6, 2004  


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Name Title Date



 
*

Robert Grabarski
  Director     December 6, 2004  
 
*

Jerry Hasnedl
  Director     December 6, 2004  
 
*

Glen Keppy
  Director     December 6, 2004  
 
*

James Kile
  Director     December 6, 2004  
 
*

Randy Knecht
  Director     December 6, 2004  
 
*

Richard Owen
  Director     December 6, 2004  
 
*

Duane Stenzel
  Director     December 6, 2004  
 
*

Merlin Van Walleghen
  Director     December 6, 2004  
 
*

Steve Fritel
  Director     December 6, 2004  
 
*

Michael Mulcahey
  Director     December 6, 2004  
 
*Executed pursuant to a power of attorney filed with this Registration Statement
 
By:   /s/ DAVID KASTELIC

David Kastelic
Attorney in Fact
        December 6, 2004  


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EXHIBIT INDEX
         
Exhibit No. Description


  Exhibit 12.1     Statement of Computation of Ratios
  Exhibit 23.1     Consent of Independent Registered Public Accounting Firm
  Exhibit 23.2     Independent Auditor’s Consent
  Exhibit 24.1     Power of Attorney