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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
   FORM 10-K/A-4   x
    
    Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended August 31, 2003 oro
    
    Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from  to.
 Commission file number: 0-50150   CHS Inc.  Minnesota
    
    41-0251095(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)5500 Cenex Drive
    
    (651) 355-6000Inver Grove Heights, Minnesota 55077
    
    (Registrants Telephone number,(Address of principal executive office)
    
    including area code)
   SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 8% Cumulative Redeemable Preferred Stock
(Title of Class)
   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES  ü   NO   ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: Not applicable. Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES  ____   NO  ü State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the registrants most recently completed
second fiscal quarter: The registrants voting and non-voting common equity has no market value
(the registrant is a member cooperative). Indicate the number of shares outstanding of each of the registrants
classes of common stock, as of the latest practicable date: The registrant has no common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None.




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Page No.PART II.Item 8
    
    Financial Statements and Supplementary Data
    
    
    [__]PART IV.Item 15
    
    Exhibits, Financial Statements and Reports Filed on Form 8-K
    
    
    [__]SIGNATURES
    
    
    
    
    
    
    [__]Consent of Independent Registered Public Acct FirmIndependent Auditors' ConsentCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  CHS Inc. Explanatory Note This Form 10-K/ A-4 amends the Registrants Annual Report on Form 10-K for
the fiscal year ended August 31, 2003, as previously amended by the
Registrants Form 10-K/ A-3, Form 10-K/ A-2 and Form 10-K/ A-1. This Form
10-K/A-4 is being filed solely to amend Item 8, Item 15(a)(1) and Item 15(a)(3)
to include, pursuant to the requirements of Section 210.3-09 of Regulation S-X
and in place of those included in the Registrants Annual Report, the separate
financial statements of Ventura Foods, LLC and subsidiary, a nonconsolidated
50% owned equity investment. In addition, in connection with the filing of
this Form 10-K/ A-4 and pursuant to the rules of the Securities and Exchange
Commission, the Registrant is including with this Form 10-K/ A-4 certain
currently dated certifications. No other changes have been made to the Annual
Report. This Form 10-K/A does not modify or update the disclosure contained in
the Form 10-K, as amended by the Form-K/ A-3, Form-K/ A-2 and Form 10-K/ A-1 in
any way other than as required to reflect the amendments discussed above and
reflected below. 
 PART II. 
 Item 8. Financial Statements and Supplementary Data Item 8 is hereby amended to add and replace the current financial statements of
Ventura Foods, LLC and subsidiary, a non-consolidated 50% owned equity
investment. The financial statements of Ventura Foods, LLC, which are included
in this Form 10-K/A following the signatures, are hereby incorporated by
reference in this Item 8. 
 PART IV. 
 Item 15. Exhibits, Financial Statements and Reports Filed on Form 8-K (a)(1) FINANCIAL STATEMENTS




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Item 15(a)(1) is hereby amended to add and replace the following: Ventura Foods, LLC and subsidiary, a non-consolidated 50% owned equity
investment Independent Auditors Report
    
    
    F-30Consolidated Balance Sheets as of March 31, 2004 and 2003
    
    
    F-31Consolidated Statements of Income for the years ended March 31, 2004, 2003 and 2002
    
    
    F-32Consolidated Statements of Members Capital for the years ended March 31, 2004, 2003 and 2002
    
    
    F-33Consolidated Statements of Cash Flows for the years ended March 31, 2004, 2003 and 2002
    
    
    F-34Notes to Consolidated Financial Statements for the years ended March 31, 2004, 2003 and 2003
    
    
    F-35
 (a)(3) EXHIBITS 3.1
    
    Articles of Incorporation of the Company, as amended.(13)3.2
    
    Articles of Amendment to the Articles of Incorporation.(18)3.3
    
    Bylaws of the Company, as amended.(13)4.1
    
    Resolution Creating a Series of Preferred Equity to be Designated 8% Cumulative Redeemable Preferred Stock.(14)4.2
    
    Unanimous Written Consent Resolution of the Board of Directors of Cenex Harvest States Cooperatives Amending the Amended and Restated
Resolution Creating a Series of Preferred Equity to be Designated 8% Cumulative Redeemable Preferred Stock.(15)4.3
    
    Resolution amending a previous Preferred Stock Resolution with respect to the record date for payment of dividends for the
Companys 8% Redeemable Preferred Stock.(17)4.4
    
    Form of Certificate Representing 8% Cumulative Redeemable Preferred Stock.(15)10.1
    
    Lease between the Port of Kalama and North Pacific Grain Growers, Inc., dated November 22, 1960.(1)10.2
    
    Limited Liability Company Agreement for the Wilsey-Holsum Foods, LLC dated July 24, 1996.(1)10.3
    
    Long Term Supply Agreement between Wilsey-Holsum Foods, LLC and Harvest States Cooperatives dated August 30, 1996.(*)(1)10.4
    
    TEMCO, LLC Limited Liability Company Agreement between Cargill, Incorporated and Cenex Harvest States Cooperatives dated as
of August 26, 2002.(12)10.5
    
    Cenex Harvest States Cooperatives Supplemental Savings Plan.(7)




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10.6
    
    Cenex Harvest States Cooperatives Supplemental Executive Retirement Plan.(7)10.7
    
    Cenex Harvest States Cooperatives Senior Management Compensation Plan.(7)10.8
    
    Cenex Harvest States Cooperatives Executive Long-Term Variable Compensation Plan.(7)10.9
    
    Cenex Harvest States Cooperatives Share Option Plan.(7)10.9A
    
    Amendment to Cenex Harvest States Share Option Plan, dated June 28, 2001.(10)10.10
    
    $225,000,000 Note Agreement (Private Placement Agreement) dated as of June 19, 1998 among Cenex Harvest States Cooperatives and each of the Purchasers of the Notes.(2)10.10A
    
    First Amendment to Note Agreement ($225,000,000 Private Placement), effective September 10, 2003, among CHS Inc. and each of
the Purchasers of the notes.(19)10.11
    
    Credit Agreement (Revolving Loan) dated as of May 21, 2003 among Cenex Harvest States Cooperatives, CoBank, ACB, SunTrust Bank,
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., BNP Paribas and the Syndication Parties.(17)10.12
    
    $200 Million Term Loan Credit Agreement dated as of June 1, 1998 among Cenex Harvest States Cooperatives, CoBank, ACB, and St. Paul Bank for Cooperatives, including Exhibit 2.4 (form of $200 Million Promissory Note).(2)10.12A
    
    First Amendment to Credit Agreement (Term Loan), effective as of May 31, 1999 among Cenex Harvest States Cooperatives, CoBank, ACB, and St. Paul Bank
for Cooperatives.(4)10.12B
    
    Second Amendment to Credit Agreement (Term Loan) dated May 23, 2000 by and among Cenex Harvest States Cooperatives, CoBank, ACB, St. Paul Bank for
Cooperatives and the Syndication Parties.(6)10.12C
    
    Third Amendment to Credit Agreement (Term Loan) dated May 23, 2001 among Cenex Harvest States Cooperatives, CoBank, ACB, and Parties.(9) the Syndication10.12D
    
    Fourth Amendment to Credit Agreement (Term Loan) dated May 22, 2002 among Cenex Harvest States Cooperatives, CoBank, ACB and Parties.(11) the Syndication10.13
    
    Limited Liability Agreement of United Harvest, LLC dated November 9, 1998 between United Grain Corporation and Cenex Harvest States Cooperatives.(3)10.14
    
    Joint Venture Agreement for Agriliance LLC, dated as of January 1, 2000 among Farmland Industries, Inc., Cenex Harvest States Cooperatives, United Country Brands, LLC and Land O Lakes, Inc.(5)10.15
    
    Employment Agreement dated November 6, 2003 by and between John D. Johnson and CHS Inc.(19)10.16
    
    CHS Inc. Special Supplemental Executive Retirement Plan.(19)10.17
    
    Note purchase and Private Shelf Agreement dated as of January 10, 2001 between Cenex Harvest States Cooperatives and The Prudential Insurance Company
of America.(8)10.17A
    
    Amendment No. 1 to Note Purchase and Private Shelf Agreement, dated as of March 2, 2001.(8)




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10.18
    
    Note Purchase Agreement and Series D & E Senior Notes dated October 18, 2002.(12)10.19
    
    2002 Amended and Restated Credit Agreement (364-Day Revolving Loan) dated December 17, 2002 by and among National Cooperative
Refinery Association, CoBank, ACB and Farm Credit Bank of Wichita, D/B/A U.S. AgBank, FCB.(16)10.20
    
    2003 Amended and Restated Credit Agreement ($15 million, 2 Year Facility) dated December 16, 2003 between
CoBank, ACB, U.S. AgBank, FCB and the National Cooperative Refinery Association, Inc.(20)21.1
    
    Subsidiaries of the Registrant.(19)23.1
    
    Consent of Independent Registered Public Accounting Firm.(21)23.2
    
    Independent Auditors Consent.(21)31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(21)31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(21)32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(21)32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(21)
   (*)
    
    Pursuant to Rule 406 of the Securities Act of 1933, as amended,
confidential portions of Exhibit 10.3 have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.(1)
    
    Incorporated by reference to the Companys Registration Statement on Form
S-1 (File No. 333-17865), filed February 7, 1997.(2)
    
    Incorporated by reference to the Companys Form 10-Q Transition Report
for the period June 1, 1998 to August 31, 1998, filed October 14, 1998.(3)
    
    Incorporated by reference to the Companys Form 10-Q for the quarterly
period ended November 30, 1998, filed January 13, 1999.(4)
    
    Incorporated by reference to the Companys Form 10-Q for the quarterly
period ended May 31, 1999, filed July 13, 1999.(5)
    
    Incorporated by reference to the Companys Form 10-Q for the quarterly
period ended February 29, 2000 filed April 11, 2000.(6)
    
    Incorporated by reference to the Companys Form 10-Q for the quarterly
period ended May 31, 2000, filed July 10, 2000.(7)
    
    Incorporated by reference to the Companys Form 10-K for the year ended
August 31, 2000, filed November 22, 2000.




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(8)
    
    Incorporated by reference to the Companys Form 10-Q for the quarterly
period ended February 28, 2001, filed April 10, 2001.(9)
    
    Incorporated by reference to the Companys Form 10-Q for the quarterly
period ended May 31, 2001, filed July 3, 2001.(10)
    
    Incorporated by reference to the Companys Registration Statement on Form
S-2 (File No. 333-65364), filed October 26, 2001.(11)
    
    Incorporated by reference to the Companys Form 10-Q for the quarterly
period ended May 31, 2002, filed July 3, 2002.(12)
    
    Incorporated by reference to the Companys Form 10-K for the year ended
August 31, 2002, filed November 25, 2002.(13)
    
    Incorporated by reference to the Companys Form 10-Q for the quarterly
period ended November 30, 2002, filed January 9, 2003.(14)
    
    Incorporated by reference to Amendment No. 1 to the Companys
Registration Statement on Form S-2 (File No. 333-101916), dated January 13, 2003.(15)
    
    Incorporated by reference to Amendment No. 2 to the Companys
Registration Statement on Form S-2 (File No. 333-101916), dated January 23, 2003.(16)
    
    Incorporated by reference to the Companys Form 10-Q for the quarterly
period ended February 28, 2003, filed April 4, 2003.(17)
    
    Incorporated by reference to the Companys Form 10-Q for the quarterly
period ended May 31, 2003, filed July 2, 2003.(18)
    
    Incorporated by reference to the Companys Form 8-K, filed August 5,
2003.(19)
    
    Incorporated by reference to the Companys Form 10-K for the year ended
August 31, 2003 filed on November 21, 2003.(20)
    
    Incorporated by reference to the Companys Form 10-Q for the quarterly
period ended February 29, 2004, filed April 7, 2004.(21)
    
    Filed herewith. (b) Reports on Form 8-K The Company filed an 8-K on June 10, 2004 to add a provision to its existing code of ethics. (c) Exhibits The exhibits shown in Item 15(a)(3) above are being filed herewith. (d) Schedules None. Supplemental Information As a cooperative, the Company does not utilize proxy statements.




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized. CHS Inc.By:
    
    /s/ JOHN SCHMITZ
    
    Date:
    
    June 29, 2004John SchmitzExecutive Vice President and Chief Financial Officer




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CHS INC.

CONSOLIDATED BALANCE SHEETS

|                                   |                                   |                           |           |         |           |   |           |         |           | 
|---------------------------------- | --------------------------------- | ------------------------- | --------- | ------- | --------- | - | --------- | ------- | --------- | 
|                                   |                                   |                          
|                                   |                                   | August 31                
|                                   |                                   |                          
|                                   |                                   | 2003                      |           | 2002   
|                                   |                                   |                           |           |        
|                                   |                                   |                          
|                                   |                                   | (dollars in thousands)   
|ASSETS                            
|Current assets:                    |                                   |                           |           |         |           |   |           |        
|                                   | Cash and cash equivalents         |                           | $         | 168,249 |           |   | $         | 108,192 |          
|                                   | Receivables                       |                           |           | 763,780 |           |   |           | 741,578 |          
|                                   | Inventories                       |                           |           | 801,883 |           |   |           | 759,663 |          
|                                   | Other current assets              |                           |           | 178,661 |           |   |           | 140,944 |          
|                                   |                                   |                           |           |         |           |   |           |        
|                                   |                                   | Total current assets      |           |         | 1,912,573 |   |           |         | 1,750,377 | 
|Investments                        |                                   |                           | 532,893   |         |           |   | 496,607   |        
|Property, plant and equipment      |                                   |                           | 1,122,982 |         |           |   | 1,057,421 |        
|Other assets                       |                                   |                           | 239,520   |         |           |   | 177,322   |        
|                                   |                                   |                           |           |         |           |   |           |        
|Total assets                       |                                   | $                         | 3,807,968 |         |           | $ | 3,481,727 |        
|                                   |                                   |                           |           |         |           |   |           |        
|LIABILITIES AND EQUITIES          
|Current liabilities:               |                                   |                           |           |         |           |   |           |        
|                                   | Notes payable                     |                           | $         | 251,131 |           |   | $         | 332,514 |          
|                                   | Current portion of long-term debt |                           |           | 14,951  |           |   |           | 89,032  |          
|                                   | Customer credit balances          |                           |           | 58,417  |           |   |           | 26,461  |          
|                                   | Customer advance payments         |                           |           | 123,383 |           |   |           | 169,123 |          
|                                   | Checks and drafts outstanding     |                           |           | 85,239  |           |   |           | 84,251  |          
|                                   | Accounts payable                  |                           |           | 627,250 |           |   |           | 517,667 |          
|                                   | Accrued expenses                  |                           |           | 254,415 |           |   |           | 225,704 |          
|                                   | Dividends and equities payable    |                           |           | 39,049  |           |   |           | 56,510  |          
|                                   |                                   |                           |           |         |           |   |           |        
|                                   |                                   | Total current liabilities |           |         | 1,453,835 |   |           |         | 1,501,262 | 
|Long-term debt                     |                                   |                           | 648,222   |         |           |   | 483,092   |        
|Other liabilities                  |                                   |                           | 111,555   |         |           |   | 118,280   |        
|Minority interests in subsidiaries |                                   |                           | 112,645   |         |           |   | 89,455    |        
|Commitments and contingencies      |                                   |                           |           |         |           |   |           |        
|Equities                           |                                   |                           | 1,481,711 |         |           |   | 1,289,638 |        
|                                   |                                   |                           |           |         |           |   |           |        
|Total liabilities and equities     |                                   | $                         | 3,807,968 |         |           | $ | 3,481,727 |        
|                                   |                                   |                           |           |         |           |   |           |        

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

F-1



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CHS INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                      |                             |                               |           |           |  |      |           |           |  |   |           |           | 
|------------------------------------- | --------------------------- | ----------------------------- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                      |                             |                              
|                                      |                             | For the years ended August 31
|                                      |                             |                              
|                                      |                             | 2003                          |           | 2002      |  | 2001
|                                      |                             |                               |           |           |  |     
|                                      |                             |                              
|                                      |                             | (dollars in thousands)       
|Revenues:                             |                             |                               |           |           |  |      |           |           |  |   |           |          
|                                      | Net sales                   |                               | $         | 9,270,734 |  |      | $         | 7,156,454 |  |   | $         | 7,464,242 | 
|                                      | Patronage dividends         |                               |           | 3,257     |  |      |           | 3,885     |  |   |           | 5,977     | 
|                                      | Other revenues              |                               |           | 124,542   |  |      |           | 109,459   |  |   |           | 116,254   | 
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          
|                                      |                             |                               | 9,398,533 |           |  |      | 7,269,798 |           |  |   | 7,586,473 |          
|Cost of goods sold                    |                             |                               | 9,058,951 |           |  |      | 6,940,926 |           |  |   | 7,181,433 |          
|Marketing, general and administrative |                             |                               | 190,582   |           |  |      | 187,292   |           |  |   | 184,046   |          
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          
|Operating earnings                    |                             |                               | 149,000   |           |  |      | 141,580   |           |  |   | 220,994   |          
|Gain on legal settlements             |                             |                               | (10,867   | )         |  |      | (2,970    | )         |  |   |           |          
|Interest                              |                             |                               | 48,675    |           |  |      | 42,455    |           |  |   | 61,436    |          
|Equity income from investments        |                             |                               | (47,299   | )         |  |      | (58,133   | )         |  |   | (28,494   | )        
|Minority interests                    |                             |                               | 21,950    |           |  |      | 15,390    |           |  |   | 35,098    |          
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          
|Income before income taxes            |                             |                               | 136,541   |           |  |      | 144,838   |           |  |   | 152,954   |          
|Income taxes                          |                             |                               | 12,700    |           |  |      | 18,700    |           |  |   | (25,600   | )        
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          
|Net income                            |                             | $                             | 123,841   |           |  | $    | 126,138   |           |  | $ | 178,554   |          
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          
|Distribution of net income:           |                             |                               |           |           |  |      |           |           |  |   |           |          
|                                      | Patronage refunds           |                               | $         | 90,000    |  |      | $         | 92,900    |  |   | $         | 128,900   | 
|                                      | Unallocated capital reserve |                               |           | 33,841    |  |      |           | 33,238    |  |   |           | 49,654    | 
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          
|Net income                            |                             | $                             | 123,841   |           |  | $    | 126,138   |           |  | $ | 178,554   |          
|                                      |                             |                               |           |           |  |      |           |           |  |   |           |          

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

F-2



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CHS INC.

CONSOLIDATED STATEMENTS OF EQUITIES

AND COMPREHENSIVE INCOME


|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |         |  
|------------------------------------------------------ | -------------------------- | ---------------------- | --------- | ------------ |  | --------- | ------ | ------- |  | ---------- | ------ | --------- |  | ----------- | ------ | ------------- |  | --------- | ------ | -------- |  | - | -------- | ------- |  | - | ------- | ------ |  | - | ------- | ------- | - | - | ----- | - |  | - | --------- | ------- | -
|                                                       |                            |                        |           |              |  |           |        |         |  | Oilseed    |        |           |  |             |        | Accumulated   |  |           |        |         
|                                                       |                            | Capital                |           | Nonpatronage |  |           |        | Wheat   |  | Processing |        |           |  | Unallocated |        | Other         |  | Allocated |        |         
|                                                       |                            | Equity                 |           | Equity       |  | Preferred |        | Milling |  | & Refining |        | Patronage |  | Capital     |        | Comprehensive |  | Capital   |        | Total   
|                                                       |                            | Certificates           |           | Certificates |  | Stock     |        | EPUs    |  | EPUs       |        | Refunds   |  | Reserve     |        | Income (Loss) |  | Reserve   |        | Equities
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |         
|                                                       |                            |                       
|                                                       |                            | (dollars in thousands)
|For the years ended August 31, 2003, 2002 and
    2001 |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Balances, September 1, 2000                            |                            | $                      | 940,880   |              |  | $         | 28,509 |         |  |            |        |           |  | $           | 9,246  |               |  | $         | 4,182  |          |  | $ | 61,180   |         |  | $ | 114,736 |        |  | $ | (2,427  | )       |   | $ | 8,120 |   |  | $ | 1,164,426 |        
|Patronage and equity retirement determination          |                            |                        | 17,474    |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | 26,220   |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 43,694    |        
|Patronage distribution                                 |                            |                        | 60,304    |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | (87,400  | )       |  |   | 967     |        |  |   |         |         |   |   |       |   |  |   | (26,129   | )      
|Equities retired                                       |                            |                        | (18,662   | )            |  |           | (74    | )       |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (18,736   | )      
|Equities issued                                        |                            |                        | 5,481     |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 5,481     |        
|Equity Participation Units issued                      |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           | 1,045  |          |  |   |          |         |  |   | (1,045  | )      |  |   |         |         |   |   |       |   |  |   |          |        
|Equity Participation Units redeemed                    |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             | (9,066 | )             |  |           | (5,227 | )        |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (14,293   | )      
|Other, net                                             |                            |                        | (120      | )            |  |           | (277   | )       |  |            |        |           |  |             | (180   | )             |  |           |        |          |  |   |          |         |  |   | 445     |        |  |   |         |         |   |   | (70   | ) |  |   | (202      | )      
|Comprehensive income:                                  |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|                                                       | Net income                 |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          | 128,900 |  |   |         | 49,654 |  |   |         |         |   |   |       |   |  |   |           | 178,554 |  
|                                                       | Other comprehensive income |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         | 512     |   |   |       |   |  |   |           | 512     |  
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Total comprehensive income                             |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 179,066   |        
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Dividends and equities payable                         |                            |                        | (33,484   | )            |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | (38,670  | )       |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (72,154   | )      
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Balances, August 31, 2001                              |                            |                        | 971,873   |              |  |           | 28,158 |         |  |            |        |           |  |             |       |               |  |           |       |          |  |   | 90,230   |         |  |   | 164,757 |        |  |   | (1,915  | )       |   |   | 8,050 |   |  |   | 1,261,153 |        
|Patronage and equity retirement determination          |                            |                        | 33,484    |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | 38,670   |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 72,154    |        
|Patronage distribution                                 |                            |                        | 92,484    |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | (128,900 | )       |  |   | (3,666  | )      |  |   |         |         |   |   |       |   |  |   | (40,082   | )      
|Equities retired                                       |                            |                        | (31,099   | )            |  |           | (46    | )       |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (31,145   | )      
|Equities issued                                        |                            |                        | 2,600     |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 2,600     |        
|Preferred stock issued, net                            |                            |                        |           |              |  |           |        |         |  | $          | 9,325  |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   | (3,428  | )      |  |   |         |         |   |   |       |   |  |   | 5,897     |        
|Preferred stock dividends                              |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   | (240    | )      |  |   |         |         |   |   |       |   |  |   | (240      | )      
|Other, net                                             |                            |                        | (106      | )            |  |           | (339   | )       |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   | 100     |        |  |   |         |         |   |   |       |   |  |   | (345      | )      
|Comprehensive income:                                  |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|                                                       | Net income                 |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          | 92,900  |  |   |         | 33,238 |  |   |         |         |   |   |       |   |  |   |           | 126,138 |  
|                                                       | Other comprehensive loss   |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         | (49,982 | ) |   |       |   |  |   |           | (49,982 | )
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Total comprehensive income                             |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 76,156    |        
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Dividends and equities payable                         |                            |                        | (28,640   | )            |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | (27,870  | )       |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (56,510   | )      
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Balances, August 31, 2002                              |                            |                        | 1,040,596 |              |  |           | 27,773 |         |  |            | 9,325  |           |  |             |       |               |  |           |       |          |  |   | 65,030   |         |  |   | 190,761 |        |  |   | (51,897 | )       |   |   | 8,050 |   |  |   | 1,289,638 |        
|Patronage and equity retirement determination          |                            |                        | 28,639    |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | 27,870   |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 56,509    |        
|Patronage distribution                                 |                            |                        | 61,784    |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | (92,900  | )       |  |   | 4,638   |        |  |   |         |         |   |   |       |   |  |   | (26,478   | )      
|Equities retired                                       |                            |                        | (31,092   | )            |  |           | (52    | )       |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (31,144   | )      
|Equities issued                                        |                            |                        | 350       |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 350       |        
|Preferred stock issued, net                            |                            |                        |           |              |  |           |        |         |  |            | 86,379 |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   | (3,895  | )      |  |   |         |         |   |   |       |   |  |   | 82,484    |        
|Preferred stock redeemed                               |                            |                        |           |              |  |           |        |         |  |            | (2,002 | )         |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | (2,002    | )      
|Preferred stock dividends                              |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   | (3,575  | )      |  |   |         |         |   |   |       |   |  |   | (3,575    | )      
|Other, net                                             |                            |                        | (2,440    | )            |  |           | (3     | )       |  |            |       |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   | (4      | )      |  |   |         |         |   |   |       |   |  |   | (2,447    | )      
|Comprehensive income:                                  |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|                                                       | Net income                 |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          | 90,000  |  |   |         | 33,841 |  |   |         |         |   |   |       |   |  |   |           | 123,841 |  
|                                                       | Other comprehensive income |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         | 33,584  |   |   |       |   |  |   |           | 33,584  |  
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Total comprehensive income                             |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   | 157,425   |        
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Dividends and equities payable                         |                            |                        | (10,800   | )            |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   | (27,000  | )       |  |   | (1,249  | )      |  |   |         |         |   |   |       |   |  |   | (39,049   | )      
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        
|Balances, August 31, 2003                              |                            | $                      | 1,087,037 |              |  | $         | 27,718 |         |  | $          | 93,702 |           |  | $           |       |               |  | $         |       |          |  | $ | 63,000   |         |  | $ | 220,517 |        |  | $ | (18,313 | )       |   | $ | 8,050 |   |  | $ | 1,481,711 |        
|                                                       |                            |                        |           |              |  |           |        |         |  |            |        |           |  |             |        |               |  |           |        |          |  |   |          |         |  |   |         |        |  |   |         |         |   |   |       |   |  |   |           |        

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

F-3



---



##### Table of Contents



CHS INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |          |         |          |  
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------- | -------- | ------- | ------- | -------- | -------- | ------- | -------- | -------- | -------- | ------- | -------- | -
|                                                         |                                                                                                 |                                                         
|                                                         |                                                                                                 | For the years ended August 31                           
|                                                         |                                                                                                 |                                                         
|                                                         |                                                                                                 | 2003                                                     |                                       | 2002     |         | 2001   
|                                                         |                                                                                                 |                                                          |                                       |          |         |        
|                                                         |                                                                                                 |                                                         
|                                                         |                                                                                                 | (dollars in thousands)                                  
|Cash flows from operating activities:                    |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|                                                         | Net income                                                                                      |                                                          | $                                     | 123,841  |         |         | $        | 126,138  |         |          | $        | 178,554  |        
|                                                         | Adjustments to reconcile net income to net cash
    provided by (used in) operating activities: |                                                          |                                       |          |         |         |          |          |         |          |          |          |        
|                                                         |                                                                                                 | Depreciation and amortization                            |                                       |          | 111,347 |         |          |          | 103,986 |          |          |          | 109,180 |         
|                                                         |                                                                                                 | Noncash net income from equity investments               |                                       |          | (47,299 | )       |          |          | (58,133 | )        |          |          | (28,494 | )       
|                                                         |                                                                                                 | Minority interests                                       |                                       |          | 21,950  |         |          |          | 15,390  |          |          |          | 35,098  |         
|                                                         |                                                                                                 | Noncash portion of patronage dividends received          |                                       |          | (1,795  | )       |          |          | (2,327  | )        |          |          | (3,896  | )       
|                                                         |                                                                                                 | Loss (gain) on sale of property, plant and
    equipment |                                       |          | 741     |         |          |          | (6,418  | )        |          |          | (13,941 | )       
|                                                         |                                                                                                 | Deferred tax expense (benefit)                           |                                       |          | 9,000   |         |          |          | 4,400   |          |          |          | (46,625 | )       
|                                                         |                                                                                                 | Other, net                                               |                                       |          | 4,052   |         |          |          | 5,467   |          |          |          | (801    | )       
|                                                         |                                                                                                 | Changes in operating assets and liabilities:             |                                       |          |         |         |          |          |         |          |          |          |         |         
|                                                         |                                                                                                 |                                                          | Receivables                           |          |         | (18,669 | )        |          |         | (32,517  | )        |          |         | 147,922  |  
|                                                         |                                                                                                 |                                                          | Inventories                           |          |         | (25,692 | )        |          |         | (255,107 | )        |          |         | 39,248   |  
|                                                         |                                                                                                 |                                                          | Other current assets and other assets |          |         | (83,347 | )        |          |         | (86,636  | )        |          |         | (24,128  | )
|                                                         |                                                                                                 |                                                          | Customer credit balances              |          |         | 30,238  |          |          |         | (12,025  | )        |          |         | 1,707    |  
|                                                         |                                                                                                 |                                                          | Customer advance payments             |          |         | (45,740 | )        |          |         | 59,988   |          |          |         | (22,800  | )
|                                                         |                                                                                                 |                                                          | Accounts payable and accrued expenses |          |         | 135,310 |          |          |         | 92,781   |          |          |         | (130,142 | )
|                                                         |                                                                                                 |                                                          | Other liabilities                     |          |         | 2,569   |          |          |         | 9,079    |          |          |         | 13,050   |  
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Net cash provided by (used in) operating
    activities  |                                                                                                 |                                                          | 216,506                               |          |         |         | (35,934  | )        |         |          | 253,932  |         
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Cash flows from investing activities:                    |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|                                                         | Acquisition of property, plant and equipment                                                    |                                                          |                                       | (175,689 | )       |         |          | (140,169 | )       |          |          | (97,610  | )      
|                                                         | Proceeds from disposition of property, plant and
    equipment                                  |                                                          |                                       | 26,886   |         |         |          | 20,205   |         |          |          | 35,263   |        
|                                                         | Investments                                                                                     |                                                          |                                       | (43,478  | )       |         |          | (6,211   | )       |          |          | (14,247  | )      
|                                                         | Equity investments redeemed                                                                     |                                                          |                                       | 35,939   |         |         |          | 37,689   |         |          |          | 30,104   |        
|                                                         | Investments redeemed                                                                            |                                                          |                                       | 8,467    |         |         |          | 6,310    |         |          |          | 1,672    |        
|                                                         | Changes in notes receivable                                                                     |                                                          |                                       | (6,630   | )       |         |          | (22,031  | )       |          |          | 533      |        
|                                                         | Acquisitions of intangibles                                                                     |                                                          |                                       | (767     | )       |         |          | (29,501  | )       |          |          | (7,328   | )      
|                                                         | Acquisitions of working capital, net                                                            |                                                          |                                       | (13,030  | )       |         |          | (5,750   | )       |          |          | (1,103   | )      
|                                                         | Distribution to minority owners                                                                 |                                                          |                                       | (4,444   | )       |         |          | (7,413   | )       |          |          | (19,256  | )      
|                                                         | Other investing activities, net                                                                 |                                                          |                                       | (507     | )       |         |          | (685     | )       |          |          | 1,775    |        
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Net cash used in investing activities                    |                                                                                                 |                                                          | (173,253                              | )        |         |         | (147,556 | )        |         |          | (70,197  | )       
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Cash flows from financing activities:                    |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|                                                         | Changes in notes payable                                                                        |                                                          |                                       | (81,383  | )       |         |          | 235,319  |         |          |          | (120,731 | )      
|                                                         | Long-term debt borrowings                                                                       |                                                          |                                       | 175,000  |         |         |          | 30,000   |         |          |          | 116,861  |        
|                                                         | Principal payments on long-term debt                                                            |                                                          |                                       | (89,512  | )       |         |          | (17,968  | )       |          |          | (67,364  | )      
|                                                         | Payments on derivative instruments                                                              |                                                          |                                       | (7,574   | )       |         |          |          |         |          |          |          |        
|                                                         | Changes in checks and drafts outstanding                                                        |                                                          |                                       | 988      |         |         |          | (3,557   | )       |          |          | 3,722    |        
|                                                         | Proceeds from sale of preferred stock, net of
    expenses                                      |                                                          |                                       | 82,484   |         |         |          | 5,897    |         |          |          |          |        
|                                                         | Redemptions of preferred stock                                                                  |                                                          |                                       | (2,002   | )       |         |          |          |         |          |          |          |        
|                                                         | Preferred stock dividends paid                                                                  |                                                          |                                       | (3,575   | )       |         |          | (240     | )       |          |          |          |        
|                                                         | Retirements of equity                                                                           |                                                          |                                       | (31,144  | )       |         |          | (31,145  | )       |          |          | (18,736  | )      
|                                                         | Equity Participation Units redeemed                                                             |                                                          |                                       |          |         |         |          |          |         |          |          | (14,293  | )      
|                                                         | Cash patronage dividends paid                                                                   |                                                          |                                       | (26,478  | )       |         |          | (40,082  | )       |          |          | (26,129  | )      
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Net cash provided by (used in) financing
    activities  |                                                                                                 |                                                          | 16,804                                |          |         |         | 178,224  |          |         |          | (126,670 | )       
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Net increase (decrease) in cash and cash
    equivalents |                                                                                                 |                                                          | 60,057                                |          |         |         | (5,266   | )        |         |          | 57,065   |         
|Cash and cash equivalents at beginning of period         |                                                                                                 |                                                          | 108,192                               |          |         |         | 113,458  |          |         |          | 56,393   |         
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         
|Cash and cash equivalents at end of period               |                                                                                                 | $                                                        | 168,249                               |          |         | $       | 108,192  |          |         | $        | 113,458  |         
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |          |          |         

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

F-4



---



##### Table of Contents



CHS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




|   |                                                
|-- | -----------------------------------------------
|1. | Summary of Significant Accounting
    Policies:



| |              
| | -------------
| | Organization:

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

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



| |               
| | --------------
| | Consolidation:

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

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

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

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



| |                  
| | -----------------
| | Cash Equivalents:

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



| |             
| | ------------
| | Inventories:

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

F-5



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CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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



| |                                      
| | -------------------------------------
| | Derivative Financial
    Instruments:

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

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



| |                     
| | --------------------
| | Commodity Price Risk

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

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

F-6



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

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



| |                   
| | ------------------
| | Interest Rate Risk

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

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



| |                      
| | ---------------------
| | Foreign Currency Risk

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



| |             
| | ------------
| | Investments:

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



| |                                   
| | ----------------------------------
| | Property, Plant and
    Equipment:

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

F-7



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

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



| |                                          
| | -----------------------------------------
| | Goodwill and Other Intangible
    Assets:

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

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



| |                     
| | --------------------
| | Revenue Recognition:

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



| |                            
| | ---------------------------
| | Environmental Expenditures:

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



| |              
| | -------------
| | Income Taxes:

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

F-8



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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



| |                      
| | ---------------------
| | Comprehensive Income:

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



| |                  
| | -----------------
| | Use of Estimates:

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



| |                                      
| | -------------------------------------
| | Recent Accounting
    Pronouncements:

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

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

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

F-9



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

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



| |                   
| | ------------------
| | Reclassifications:

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

2.     Receivables:

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

|                                      |  |                        |         |      |  |   |         | 
|------------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                                      |  | 2003                   |         | 2002
|                                      |  |                        |         |     
|                                      |  |                       
|                                      |  | (dollars in thousands)
|Trade                                 |  | $                      | 748,398 |      |  | $ | 717,888 | 
|Other                                 |  |                        | 47,000  |      |  |   | 49,846  | 
|                                      |  |                        |         |      |  |   |         | 
|                                      |  |                        | 795,398 |      |  |   | 767,734 | 
|Less allowances for doubtful accounts |  |                        | 31,618  |      |  |   | 26,156  | 
|                                      |  |                        |         |      |  |   |         | 
|                                      |  | $                      | 763,780 |      |  | $ | 741,578 | 
|                                      |  |                        |         |      |  |   |         | 

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

|                              |  |                       |       |      |  |      |       |  |  |   |       | 
|----------------------------- |  | --------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                              |  | 2003                  |       | 2002 |  | 2001
|                              |  |                       |       |      |  |     
|                              |  |                      
|                              |  | (dollars in millions)
|Africa                        |  | $                     | 99    |      |  | $    | 135   |  |  | $ | 138   | 
|Asia                          |  |                       | 815   |      |  |      | 407   |  |  |   | 403   | 
|Europe                        |  |                       | 156   |      |  |      | 282   |  |  |   | 255   | 
|North America, excluding U.S. |  |                       | 367   |      |  |      | 298   |  |  |   | 317   | 
|South America                 |  |                       | 166   |      |  |      | 100   |  |  |   | 101   | 
|                              |  |                       |       |      |  |      |       |  |  |   |       | 
|                              |  | $                     | 1,603 |      |  | $    | 1,222 |  |  | $ | 1,214 | 
|                              |  |                       |       |      |  |      |       |  |  |   |       | 

F-10



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


3.     Inventories:

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

|                            |  |                        |         |      |  |   |         | 
|--------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                            |  | 2003                   |         | 2002
|                            |  |                        |         |     
|                            |  |                       
|                            |  | (dollars in thousands)
|Grain and oilseed           |  | $                      | 370,381 |      |  | $ | 393,095 | 
|Energy                      |  |                        | 292,095 |      |  |   | 229,981 | 
|Feed and farm supplies      |  |                        | 95,589  |      |  |   | 91,138  | 
|Processed grain and oilseed |  |                        | 42,688  |      |  |   | 36,264  | 
|Other                       |  |                        | 1,130   |      |  |   | 9,185   | 
|                            |  |                        |         |      |  |   |         | 
|                            |  | $                      | 801,883 |      |  | $ | 759,663 | 
|                            |  |                        |         |      |  |   |         | 

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

4.     Investments:

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

|                |                            |                        |         |         |  |   |         |         | 
|--------------- | -------------------------- | ---------------------- | ------- | ------- |  | - | ------- | ------- | 
|                |                            | 2003                   |         | 2002   
|                |                            |                        |         |        
|                |                            |                       
|                |                            | (dollars in thousands)
|Cooperatives:   |                            |                        |         |         |  |   |         |        
|                | CF Industries, Inc.        |                        | $       | 152,996 |  |   | $       | 152,996 | 
|                | CoBank ACB (CoBank)        |                        |         | 22,505  |  |   |         | 30,069  | 
|                | Ag Processing, Inc.        |                        |         | 24,481  |  |   |         | 25,797  | 
|                | Land OLakes, Inc.         |                        |         | 27,105  |  |   |         | 26,232  | 
|Joint ventures: |                            |                        |         |         |  |   |         |        
|                | Ventura Foods, LLC         |                        |         | 107,464 |  |   |         | 108,981 | 
|                | United Country Brands, LLC |                        |         | 129,286 |  |   |         | 86,175  | 
|                | TEMCO, LLC                 |                        |         | 9,087   |  |   |         | 8,414   | 
|Other           |                            |                        | 59,969  |         |  |   | 57,943  |        
|                |                            |                        |         |         |  |   |         |        
|                |                            | $                      | 532,893 |         |  | $ | 496,607 |        
|                |                            |                        |         |         |  |   |         |        

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

F-11



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

|                        |  |                        |         |      |  |   |         | 
|----------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                        |  | 2003                   |         | 2002
|                        |  |                        |         |     
|                        |  |                       
|                        |  | (dollars in thousands)
|Current assets          |  | $                      | 193,632 |      |  | $ | 171,084 | 
|Non-current assets      |  |                        | 231,649 |      |  |   | 231,045 | 
|Current liabilities     |  |                        | 227,400 |      |  |   | 133,230 | 
|Non-current liabilities |  |                        | 21,738  |      |  |   | 90,819  | 

|             |  |                        |           |      |  |      |           |  |  |   |         | 
|------------ |  | ---------------------- | --------- | ---- |  | ---- | --------- |  |  | - | ------- | 
|             |  | 2003                   |           | 2002 |  | 2001
|             |  |                        |           |      |  |     
|             |  |                       
|             |  | (dollars in thousands)
|Net sales    |  | $                      | 1,165,823 |      |  | $    | 1,013,475 |  |  | $ | 925,962 | 
|Gross profit |  |                        | 155,274   |      |  |      | 181,217   |  |  |   | 161,405 | 
|Net income   |  |                        | 42,837    |      |  |      | 75,368    |  |  |   | 71,148  | 

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

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

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

F-12



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

|                        |  |                        |           |      |  |   |         | 
|----------------------- |  | ---------------------- | --------- | ---- |  | - | ------- | 
|                        |  | 2003                   |           | 2002
|                        |  |                        |           |     
|                        |  |                       
|                        |  | (dollars in thousands)
|Current assets          |  | $                      | 1,249,941 |      |  | $ | 922,958 | 
|Non-current assets      |  |                        | 119,615   |      |  |   | 134,247 | 
|Current liabilities     |  |                        | 1,083,743 |      |  |   | 700,903 | 
|Non-current liabilities |  |                        | 27,061    |      |  |   | 107,960 | 

|                         |  |                        |           |      |  |      |           |  |  |   |           | 
|------------------------ |  | ---------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                         |  | 2003                   |           | 2002 |  | 2001
|                         |  |                        |           |      |  |     
|                         |  |                       
|                         |  | (dollars in thousands)
|Net sales                |  | $                      | 3,485,623 |      |  | $    | 3,625,849 |  |  | $ | 4,072,248 | 
|Earnings from operations |  |                        | 67,239    |      |  |      | 57,604    |  |  |   | 50,423    | 
|Net income               |  |                        | 60,741    |      |  |      | 47,044    |  |  |   | 25,053    | 

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

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

5.     Property,
Plant and Equipment:

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

|                                               |  |                        |           |      |  |   |           | 
|---------------------------------------------- |  | ---------------------- | --------- | ---- |  | - | --------- | 
|                                               |  | 2003                   |           | 2002
|                                               |  |                        |           |     
|                                               |  |                       
|                                               |  | (dollars in thousands)
|Land and land improvements                     |  | $                      | 60,453    |      |  | $ | 63,045    | 
|Buildings                                      |  |                        | 380,940   |      |  |   | 371,107   | 
|Machinery and equipment                        |  |                        | 1,508,963 |      |  |   | 1,470,475 | 
|Office and other                               |  |                        | 68,369    |      |  |   | 62,144    | 
|Construction in progress                       |  |                        | 159,555   |      |  |   | 71,540    | 
|                                               |  |                        |           |      |  |   |           | 
|                                               |  |                        | 2,178,280 |      |  |   | 2,038,311 | 
|Less accumulated depreciation and amortization |  |                        | 1,055,298 |      |  |   | 980,890   | 
|                                               |  |                        |           |      |  |   |           | 
|                                               |  | $                      | 1,122,982 |      |  | $ | 1,057,421 | 
|                                               |  |                        |           |      |  |   |           | 

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

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

F-13



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


6.     Other
Assets:

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

|                                                                                              |  |                        |         |      |  |   |         | 
|--------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                                                                                              |  | 2003                   |         | 2002
|                                                                                              |  |                        |         |     
|                                                                                              |  |                       
|                                                                                              |  | (dollars in thousands)
|Goodwill                                                                                      |  | $                      | 27,052  |      |  | $ | 27,926  | 
|Customer lists, less accumulated amortization of
    $5,112 and $3,511, respectively          |  |                        | 9,414   |      |  |   | 8,447   | 
|Non-compete covenants, less accumulated
    amortization of $11,774 and $2,896, respectively  |  |                        | 1,766   |      |  |   | 11,204  | 
|Other intangible assets, less accumulated
    amortization of $1,986 and $2,462, respectively |  |                        | 14,607  |      |  |   | 15,795  | 
|Prepaid pension and other benefit assets                                                      |  |                        | 151,389 |      |  |   | 54,230  | 
|Deferred tax asset                                                                            |  |                        | 28,689  |      |  |   | 50,544  | 
|Notes receivable                                                                              |  |                        | 1,991   |      |  |   | 4,822   | 
|Other                                                                                         |  |                        | 4,612   |      |  |   | 4,354   | 
|                                                                                              |  |                        |         |      |  |   |         | 
|                                                                                              |  | $                      | 239,520 |      |  | $ | 177,322 | 
|                                                                                              |  |                        |         |      |  |   |         | 

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

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

F-14



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


7.     Notes Payable
and Long-Term Debt:

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

|                     |                                                                                                                                        |                              |                |                 |  |      |         |         |  |   |         |         | 
|-------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | -------------- | --------------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                     |                                                                                                                                        |                             
|                     |                                                                                                                                        | Interest rates at August 31,
|                     |                                                                                                                                        |                             
|                     |                                                                                                                                        | 2003                         |                | 2003            |  | 2002
|                     |                                                                                                                                        |                              |                |                 |  |     
|                     |                                                                                                                                        |                             
|                     |                                                                                                                                        | (dollars in thousands)      
|Notes payable (a)(i) |                                                                                                                                        |                              | 1.63% to 1.96% |                 |  | $    | 251,131 |         |  | $ | 332,514 |        
|                     |                                                                                                                                        |                              |                |                 |  |      |         |         |  |   |         |        
|Long-term debt:      |                                                                                                                                        |                              |                |                 |  |      |         |         |  |   |         |        
|                     | Revolving term loans from cooperative and other
    banks, payable in installments through 2009, when the balance is
    due (b)(c)(i) |                              |                | 2.14% to 13.00% |  |      | $       | 168,032 |  |   | $       | 254,962 | 
|                     | Private placement, payable in equal installments
    beginning in 2008 through 2013 (d)(i)                                             |                              |                | 6.81%           |  |      |         | 225,000 |  |   |         | 225,000 | 
|                     | Private placement, payable in installments
    beginning in 2007 through 2018 (e)(i)                                                   |                              |                | 4.96% to 5.60%  |  |      |         | 175,000 |  |   |         |        | 
|                     | Private placement, payable in equal installments
    beginning in 2005 through 2011 (f)(i)                                             |                              |                | 7.43% to 7.90%  |  |      |         | 80,000  |  |   |         | 80,000  | 
|                     | Industrial Revenue Bonds, payable in installments
    through 2011 (g)                                                                 |                              |                | 5.23% to 12.97% |  |      |         | 5,831   |  |   |         | 7,444   | 
|                     | Other notes and contracts (h)                                                                                                          |                              |                | 5.70% to 12.17% |  |      |         | 9,310   |  |   |         | 4,718   | 
|                     |                                                                                                                                        |                              |                |                 |  |      |         |         |  |   |         |        
|Total long-term debt |                                                                                                                                        |                              |                |                 |  |      | 663,173 |         |  |   | 572,124 |        
|Less current portion |                                                                                                                                        |                              |                |                 |  |      | 14,951  |         |  |   | 89,032  |        
|                     |                                                                                                                                        |                              |                |                 |  |      |         |         |  |   |         |        
|Long-term portion    |                                                                                                                                        |                              |                |                 |  | $    | 648,222 |         |  | $ | 483,092 |        
|                     |                                                                                                                                        |                              |                |                 |  |      |         |         |  |   |         |        

|                                              |                 |      |  |       |  |  |  |       | 
|--------------------------------------------- | --------------- | ---- |  | ----- |  |  |  | ----- | 
|                                              |                 | 2003 |  | 2002 
|                                              |                 |      |  |      
|Weighted average interest rates at August 31: |                 |      |  |       |  |  |  |      
|                                              | Short-term debt |      |  | 1.83% |  |  |  | 2.58% | 
|                                              | Long-term debt  |      |  | 6.52% |  |  |  | 6.38% | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The Company finances its working capital needs
    through short-term lines of credit with a syndication of banks.
    The Company has a 364-day credit facility of
    $600.0 million, all of which is committed, and of which
    $250.0 million was outstanding on August 31, 2003. In
    addition to this short-term line of credit, the Company has a
    364-day credit facility dedicated to NCRA with a syndication of
    banks in the amount of $30.0 million, all of which is
    committed, with no amounts outstanding on August 31, 2003.
    Other miscellaneous notes payable totaled $1.1 million at
    August 31, 2003.
|   
|(b) | The Company established a $100.0 million
    three-year revolving credit facility with a syndication of
    banks. On August 31, 2003, the Company had no outstanding
    balance on this facility.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(c) | The Company established a long-term credit
    agreement which committed $200.0 million of long-term
    borrowing capacity to the Company through May 31, 1999, of which
    $164.0 million was drawn before the expiration date of that
    commitment. On August 31, 2003, $137.8 million was
    outstanding. NCRA term loans of $15.0 million are
    collateralized by NCRAs investment in CoBank.                                                                                                                                                                                                                                  
|   
|(d) | The Company entered into a private placement with
    several insurance companies for long-term debt in the amount of
    $225.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(e) | In October 2002, the Company entered into a
    private placement with several insurance companies for long-term
    debt in the amount of $175.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-15



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(f) | In January 2001, the Company entered into a note
    purchase and private shelf agreement with Prudential Insurance
    Company. A long-term note was issued for $25.0 million and
    a subsequent note for $55.0 million was issued in March
    2001.                                           
|   
|(g) | Industrial Revenue Bonds in the amount of
    $1.6 million are collateralized by property, plant and
    equipment, primarily energy refinery equipment, with a cost of
    approximately $152.0 million, less accumulated depreciation
    of approximately $120.4 million as of August 31, 2003. 
|   
|(h) | Grain Suppliers, LLC, a wholly-owned subsidiary
    of the Company, has other notes payable of $5.4 million
    collateralized by property, plant and equipment, with a cost of
    approximately $8.3 million, less accumulated depreciation of
    approximately $0.2 million on August 31, 2003.
|   
|(i) | The debt is unsecured, however restrictive
    covenants under various agreements have requirements for
    maintenance of minimum working capital levels and other
    financial ratios.                                                                                                          

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

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

|           |  |                        |         | 
|---------- |  | ---------------------- | ------- | 
|           |  | (dollars in thousands)
|2004       |  | $                      | 14,951  | 
|2005       |  |                        | 34,716  | 
|2006       |  |                        | 35,176  | 
|2007       |  |                        | 59,671  | 
|2008       |  |                        | 98,190  | 
|Thereafter |  |                        | 420,469 | 
|           |  |                        |         | 
|           |  | $                      | 663,173 | 
|           |  |                        |         | 

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

8.     Income
Taxes:

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

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

|                    |  |                        |        |      |  |      |         |   |  |   |         |  
|------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                    |  | 2003                   |        | 2002 |  | 2001
|                    |  |                        |        |      |  |     
|                    |  |                       
|                    |  | (dollars in thousands)
|Current             |  | $                      | 3,700  |      |  | $    | 14,300  |   |  | $ | 21,025  |  
|Deferred            |  |                        | 7,300  |      |  |      | (12,700 | ) |  |   | (49,025 | )
|Valuation allowance |  |                        | 1,700  |      |  |      | 17,100  |   |  |   | 2,400   |  
|                    |  |                        |        |      |  |      |         |   |  |   |         |  
|Income taxes        |  | $                      | 12,700 |      |  | $    | 18,700  |   |  | $ | (25,600 | )
|                    |  |                        |        |      |  |      |         |   |  |   |         |  

F-16



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

|                                      |                                                                    |                        |         |        |  |   |         |        | 
|------------------------------------- | ------------------------------------------------------------------ | ---------------------- | ------- | ------ |  | - | ------- | ------ | 
|                                      |                                                                    | 2003                   |         | 2002  
|                                      |                                                                    |                        |         |       
|                                      |                                                                    |                       
|                                      |                                                                    | (dollars in thousands)
|Deferred tax assets:                  |                                                                    |                        |         |        |  |   |         |       
|                                      | Accrued expenses and valuation reserves                            |                        | $       | 53,521 |  |   | $       | 49,236 | 
|                                      | Postretirement health care and deferred
    compensation           |                        |         | 29,153 |  |   |         | 32,671 | 
|                                      | Property, plant and equipment                                      |                        |         | 9,369  |  |   |         | 11,532 | 
|                                      | Alternative minimum tax credit and patronage loss
    carryforward |                        |         | 8,948  |  |   |         | 6,993  | 
|                                      | Other                                                              |                        |         | 19,316 |  |   |         | 12,439 | 
|                                      |                                                                    |                        |         |        |  |   |         |       
|Total deferred tax assets             |                                                                    |                        | 120,307 |        |  |   | 112,871 |       
|                                      |                                                                    |                        |         |        |  |   |         |       
|Deferred tax liabilities:             |                                                                    |                        |         |        |  |   |         |       
|                                      | Pension, including minimum liability                               |                        |         | 34,531 |  |   |         | 2,635  | 
|                                      | Equity method investments                                          |                        |         | 23,310 |  |   |         | 20,482 | 
|                                      | Other                                                              |                        |         |        |  |   |         | 730    | 
|                                      |                                                                    |                        |         |        |  |   |         |       
|Total deferred tax liabilities        |                                                                    |                        | 57,841  |        |  |   | 23,847  |       
|                                      |                                                                    |                        |         |        |  |   |         |       
|Deferred tax assets valuation reserve |                                                                    |                        | (11,765 | )      |  |   | (19,466 | )     
|                                      |                                                                    |                        |         |        |  |   |         |       
|Net deferred tax assets               |                                                                    | $                      | 50,701  |        |  | $ | 69,558  |       
|                                      |                                                                    |                        |         |        |  |   |         |       

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

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

|                                                                    |  |      |       |      |  |      |       |   |  |  |       |   
|------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | --
|                                                                    |  | 2003 |       | 2002 |  | 2001
|                                                                    |  |      |       |      |  |     
|Statutory federal income tax rate                                   |  |      | 35.0  | %    |  |      | 35.0  | % |  |  | 35.0  | % 
|State and local income taxes, net of federal
    income tax benefit |  |      | 3.9   |      |  |      | 3.9   |   |  |  | 3.9   |   
|Patronage earnings                                                  |  |      | (25.7 | )    |  |      | (25.0 | ) |  |  | (32.8 | ) 
|Change in patronage determination                                   |  |      |       |      |  |      | (7.5  | ) |  |  | (22.4 | ) 
|Export activities at rates other than the U.S.
    statutory rate   |  |      | (3.2  | )    |  |      | (1.9  | ) |  |  |       |   
|Deferred tax asset valuation allowance                              |  |      | 1.3   |      |  |      | 11.8  |   |  |  | 1.6   |   
|Other                                                               |  |      | (2.0  | )    |  |      | (3.4  | ) |  |  | (2.0  | ) 
|                                                                    |  |      |       |      |  |      |       |   |  |  |       |   
|Effective tax rate                                                  |  |      | 9.3   | %    |  |      | 12.9  | % |  |  | (16.7 | )%
|                                                                    |  |      |       |      |  |      |       |   |  |  |       |   

F-17



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

|                                     |                                  |                        |         |         |   |      |         |         |   |   |         |          |  
|------------------------------------ | -------------------------------- | ---------------------- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | -------- | -
|                                     |                                  | 2003                   |         | 2002    |   | 2001
|                                     |                                  |                        |         |         |   |     
|                                     |                                  |                       
|                                     |                                  | (dollars in thousands)
|Income before income taxes           |                                  | $                      | 136,541 |         |   | $    | 144,838 |         |   | $ | 152,954 |         
|Financial reporting/tax differences: |                                  |                        |         |         |   |      |         |         |   |   |         |         
|                                     | Environmental reserves           |                        |         | 2,208   |   |      |         | 1,939   |   |   |         | 4,453    |  
|                                     | Oil and gas activities, net      |                        |         | (21,989 | ) |      |         | 1,540   |   |   |         | (22,230  | )
|                                     | Energy inventory market reserves |                        |         | 1,210   |   |      |         | (933    | ) |   |         | (2,441   | )
|                                     | Pension and compensation         |                        |         | (21,966 | ) |      |         | (21,491 | ) |   |         | 8,981    |  
|                                     | Investments in other entities    |                        |         | 117     |   |      |         | 1,898   |   |   |         | 26,495   |  
|                                     | Export activities                |                        |         | (11,253 | ) |      |         | (7,141  | ) |   |         |          |  
|                                     | Other, net                       |                        |         | 1,716   |   |      |         | (2,291  | ) |   |         | 10,038   |  
|                                     | Patronage refund provisions      |                        |         | (90,000 | ) |      |         | (92,900 | ) |   |         | (128,900 | )
|                                     |                                  |                        |         |         |   |      |         |         |   |   |         |         
|Taxable (loss) income                |                                  | $                      | (3,416  | )       |   | $    | 25,459  |         |   | $ | 49,350  |         
|                                     |                                  |                        |         |         |   |      |         |         |   |   |         |         

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

9.     Equities:

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

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

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

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

F-18



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

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

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

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

F-19



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                        
|--- | -----------------------
|10. | Employee Benefit Plans:

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

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

|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |        |  
|--------------------------------------------- | ------------------------------------------------ | ---------------------- | ------- | ---------------- | - | -------------- | ------- | ------- | - | ---- | ------- | ------ | - | - | ------- | ------ | - | - | ------- | ------ | - | - | ------- | ------ | -
|                                              |                                                  |                        |         |                  |   |                |         |        
|                                              |                                                  | Qualified              |         | Non-Qualified    |   |               
|                                              |                                                  | Pension Benefits       |         | Pension Benefits |   | Other Benefits
|                                              |                                                  |                        |         |                  |   |               
|                                              |                                                  | 2003                   |         | 2002             |   | 2003           |         | 2002    |   | 2003 |         | 2002  
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |       
|                                              |                                                  |                       
|                                              |                                                  | (dollars in thousands)
|Change in benefit obligation:                 |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|                                              | Benefit obligation at beginning of period        |                        | $       | 253,868          |   |                | $       | 241,728 |   |      | $       | 14,543 |   |   | $       | 11,836 |   |   | $       | 24,915 |   |   | $       | 22,667 |  
|                                              | Service cost                                     |                        |         | 10,840           |   |                |         | 9,275   |   |      |         | 800    |   |   |         | 1,168  |   |   |         | 648    |   |   |         | 557    |  
|                                              | Interest cost                                    |                        |         | 17,503           |   |                |         | 17,673  |   |      |         | 1,033  |   |   |         | 886    |   |   |         | 1,722  |   |   |         | 1,586  |  
|                                              | Plan participants contributions                  |                        |         | 1,771            |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         | 215    |   |   |         | 189    |  
|                                              | Plan amendments                                  |                        |         |                  |   |                |         | 2,383   |   |      |         |        |   |   |         |        |   |   |         | 88     |   |   |         |        |  
|                                              | Transfers                                        |                        |         |                  |   |                |         | 3,677   |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |        |  
|                                              | Actuarial loss (gain)                            |                        |         | 22,049           |   |                |         | 1,157   |   |      |         | (766   | ) |   |         | 1,607  |   |   |         | 2,527  |   |   |         | 1,716  |  
|                                              | Assumption change                                |                        |         | 4,659            |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         | 1,469  |   |   |         | 638    |  
|                                              | Benefits paid                                    |                        |         | (20,784          | ) |                |         | (22,025 | ) |      |         | (1,776 | ) |   |         | (954   | ) |   |         | (2,329 | ) |   |         | (2,438 | )
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|Benefit obligation at end of period           |                                                  | $                      | 289,906 |                  |   | $              | 253,868 |         |   | $    | 13,834  |        |   | $ | 14,543  |        |   | $ | 29,255  |        |   | $ | 24,915  |       
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|Change in plan assets:                        |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|                                              | Fair value of plan assets at beginning of period |                        | $       | 201,563          |   |                | $       | 230,121 |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |        |  
|                                              | Actual income (loss) on plan assets              |                        |         | 14,915           |   |                |         | (14,810 | ) |      |         |        |   |   |         |        |   |   |         |        |   |   |         |        |  
|                                              | Company contributions                            |                        |         | 84,523           |   |                |         | 4,600   |   |      | $       | 1,776  |   |   | $       | 954    |   |   | $       | 2,114  |   |   | $       | 2,249  |  
|                                              | Participants contributions                       |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         | 215    |   |   |         | 189    |  
|                                              | Net transfers                                    |                        |         |                  |   |                |         | 3,677   |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |        |  
|                                              | Benefits paid                                    |                        |         | (20,784          | ) |                |         | (22,025 | ) |      |         | (1,776 | ) |   |         | (954   | ) |   |         | (2,329 | ) |   |         | (2,438 | )
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|Fair value of plan assets at end of period    |                                                  | $                      | 280,217 |                  |   | $              | 201,563 |         |   | $    |        |        |   | $ |        |        |   | $ |        |        |   | $ |        |       
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|Funded status                                 |                                                  | $                      | (9,689  | )                |   | $              | (52,305 | )       |   | $    | (13,834 | )      |   | $ | (14,543 | )      |   | $ | (29,255 | )      |   | $ | (24,915 | )     
|Employer contributions after measurement date |                                                  |                        |         |                  |   |                | 31,362  |         |   |      | 84      |        |   |   | 32      |        |   |   | 247     |        |   |   | 269     |       
|Unrecognized actuarial loss (gain)            |                                                  |                        | 118,025 |                  |   |                | 85,066  |         |   |      | (899    | )      |   |   | 16      |        |   |   | 707     |        |   |   | (3,505  | )     
|Unrecognized transition obligation            |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   | 9,261   |        |   |   | 10,197  |       
|Unrecognized prior service cost               |                                                  |                        | 7,467   |                  |   |                | 6,502   |         |   |      | 3,503   |        |   |   | 4,067   |        |   |   | (1,076  | )      |   |   | (1,336  | )     
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       
|Prepaid benefit cost (accrued)                |                                                  | $                      | 115,803 |                  |   | $              | 70,625  |         |   | $    | (11,146 | )      |   | $ | (10,428 | )      |   | $ | (20,116 | )      |   | $ | (19,290 | )     
|                                              |                                                  |                        |         |                  |   |                |         |         |   |      |         |        |   |   |         |        |   |   |         |        |   |   |         |       

F-20



---



##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                 |                                      |                        |         |                  |  |                |        |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |         |  
|------------------------------------------------ | ------------------------------------ | ---------------------- | ------- | ---------------- |  | -------------- | ------ | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                                 |                                      |                        |         |                  |  |                |        |        
|                                                 |                                      | Qualified              |         | Non-Qualified    |  |               
|                                                 |                                      | Pension Benefits       |         | Pension Benefits |  | Other Benefits
|                                                 |                                      |                        |         |                  |  |               
|                                                 |                                      | 2003                   |         | 2002             |  | 2003           |        | 2002    |   | 2003 |         | 2002   
|                                                 |                                      |                        |         |                  |  |                |        |         |   |      |         |        
|                                                 |                                      |                       
|                                                 |                                      | (dollars in thousands)
|Amounts recognized on balance sheets consist of: |                                      |                        |         |                  |  |                |        |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        
|                                                 | Accrued benefit liability            |                        | $       | 95,917           |  |                | $      | (11,028 | ) |      | $       | (12,125 | ) |   | $       | (12,809 | ) |   | $       | (20,116 | ) |   | $       | (19,290 | )
|                                                 | Intangible asset                     |                        |         | 2,425            |  |                |        | 6,510   |   |      |         | 253     |   |   |         | 1,485   |   |   |         |         |   |   |         |         |  
|                                                 | Minority interests                   |                        |         |                  |  |                |        | 6,195   |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |         |  
|                                                 | Accumulated other comprehensive loss |                        |         | 17,461           |  |                |        | 68,948  |   |      |         | 726     |   |   |         | 896     |   |   |         |         |   |   |         |         |  
|                                                 |                                      |                        |         |                  |  |                |        |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        
|Net amounts recognized                           |                                      | $                      | 115,803 |                  |  | $              | 70,625 |         |   | $    | (11,146 | )       |   | $ | (10,428 | )       |   | $ | (20,116 | )       |   | $ | (19,290 | )      
|                                                 |                                      |                        |         |                  |  |                |        |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        

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

|                                         |                                    |                        |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |   |      |       |       |   |   |       |      |   |   |       |       |   |   |       |       |   |   |       |       |  
|---------------------------------------- | ---------------------------------- | ---------------------- | ----- | ---------------- | - | -------------- | ----- | ------- | - | ---- | ----- | ------- | - | ---- | ----- | ----- | - | ---- | ----- | ----- | - | - | ----- | ---- | - | - | ----- | ----- | - | - | ----- | ----- | - | - | ----- | ----- | -
|                                         |                                    |                        |       |                  |   |                |       |         |   |     
|                                         |                                    | Qualified              |       | Non-Qualified    |   |               
|                                         |                                    | Pension Benefits       |       | Pension Benefits |   | Other Benefits
|                                         |                                    |                        |       |                  |   |               
|                                         |                                    | 2003                   |       | 2002             |   | 2001           |       | 2003    |   | 2002 |       | 2001    |   | 2003 |       | 2002  |   | 2001
|                                         |                                    |                        |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |   |     
|                                         |                                    |                       
|                                         |                                    | (dollars in thousands)
|Components of net periodic benefit cost:
|                                         | Service cost                       |                        | $     | 10,840           |   |                | $     | 9,275   |   |      | $     | 7,875   |   |      | $     | 800   |   |      | $     | 1,168 |   |   | $     | 631  |   |   | $     | 648   |   |   | $     | 557   |   |   | $     | 566   |  
|                                         | Interest cost                      |                        |       | 17,503           |   |                |       | 17,673  |   |      |       | 17,580  |   |      |       | 1,033 |   |      |       | 886   |   |   |       | 907  |   |   |       | 1,722 |   |   |       | 1,586 |   |   |       | 1,569 |  
|                                         | Expected return on assets          |                        |       | (23,788          | ) |                |       | (21,386 | ) |      |       | (22,855 | ) |      |       |       |   |      |       |       |   |   |       |      |   |   |       |       |   |   |       |       |   |   |       |       |  
|                                         | Prior service cost amortization    |                        |       | 806              |   |                |       | 740     |   |      |       | 619     |   |      |       | 564   |   |      |       | 574   |   |   |       | 574  |   |   |       | (172  | ) |   |       | (197  | ) |   |       | (131  | )
|                                         | Actuarial loss (gain) amortization |                        |       | 2,623            |   |                |       | 1,369   |   |      |       | 231     |   |      |       | 159   |   |      |       | 18    |   |   |       | 144  |   |   |       | (215  | ) |   |       | (505  | ) |   |       | (538  | )
|                                         | Transition amount amortization     |                        |       |                  |   |                |       | (708    | ) |      |       | (874    | ) |      |       |       |   |      |       |       |   |   |       | 13   |   |   |       | 936   |   |   |       | 936   |   |   |       | 936   |  
|                                         | Other                              |                        |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |   |      |       |       |   |   |       |      |   |   |       |       |   |   |       |       |   |   |       | (22   | )
|                                         |                                    |                        |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |   |      |       |       |   |   |       |      |   |   |       |       |   |   |       |       |   |   |       |      
|Net periodic benefit cost                |                                    | $                      | 7,984 |                  |   | $              | 6,963 |         |   | $    | 2,576 |         |   | $    | 2,556 |       |   | $    | 2,646 |       |   | $ | 2,269 |      |   | $ | 2,919 |       |   | $ | 2,377 |       |   | $ | 2,380 |      
|                                         |                                    |                        |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |   |      |       |       |   |   |       |      |   |   |       |       |   |   |       |       |   |   |       |      
|Weighted-average assumptions:            |                                    |                        |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |   |      |       |       |   |   |       |      |   |   |       |       |   |   |       |       |   |   |       |      
|                                         | Discount rate                      |                        |       | 6.30             | % |                |       | 7.10    | % |      |       | 7.30    | % |      |       | 6.00  | % |      |       | 7.25  | % |   |       | 7.50 | % |   |       | 6.30  | % |   |       | 7.10  | % |   |       | 7.30  | %
|                                         | Expected return on plan assets     |                        |       | 9.00             | % |                |       | 9.00    | % |      |       | 9.00    | % |      |       | N/A   |   |      |       | N/A   |   |   |       | N/A  |   |   |       | N/A   |   |   |       | N/A   |   |   |       | N/A   |  
|                                         | Rate of compensation increase      |                        |       | 5.00             | % |                |       | 5.00    | % |      |       | 5.00    | % |      |       | 5.00  | % |      |       | 5.00  | % |   |       | 5.00 | % |   |       | 5.00  | % |   |       | 5.00  | % |   |       | 5.00  | %

F-21



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

|                               |  |                        |         |                  |  |      |         |      |  |   |        |  |  |   |        | 
|------------------------------ |  | ---------------------- | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------ |  |  | - | ------ | 
|                               |  |                        |         |                 
|                               |  | Qualified              |         | Non-Qualified   
|                               |  | Pension Benefits       |         | Pension Benefits
|                               |  |                        |         |                 
|                               |  | 2003                   |         | 2002             |  | 2003 |         | 2002
|                               |  |                        |         |                  |  |      |         |     
|                               |  |                       
|                               |  | (dollars in thousands)
|Projected benefit obligation   |  | $                      | 120,068 |                  |  | $    | 253,868 |      |  | $ | 13,834 |  |  | $ | 14,543 | 
|Accumulated benefit obligation |  |                        | 107,760 |                  |  |      | 243,953 |      |  |   | 12,209 |  |  |   | 12,842 | 
|Fair value of plan assets      |  |                        | 104,560 |                  |  |      | 201,563 |      |  |   |        |  |  |   |        | 

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

|                                                            |  |                        |       |             |  |   |        |  
|----------------------------------------------------------- |  | ---------------------- | ----- | ----------- |  | - | ------ | -
|                                                            |  | 1% Increase            |       | 1% Decrease
|                                                            |  |                        |       |            
|                                                            |  |                       
|                                                            |  | (dollars in thousands)
|Effect on total of service and interest cost
    components |  | $                      | 275   |             |  | $ | (250   | )
|Effect on postretirement benefit obligation                 |  |                        | 2,618 |             |  |   | (2,399 | )

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

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



|    |                   
|--- | ------------------
|11. | Segment Reporting:

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

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

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

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

F-22



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

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

|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|-------------------------------------------- |  | ---------------------- | ------- | ------ |  | ---------- | --------- | --------- |  | ---------- | --------- | --------- |  | ----------- | --------- | ----- |  | - | ------- | - |  | - | ------- | - |  | - | -------- | - |  | - | --------- | -
|                                             |  |                        |         |        |  | Country    |           |           |  |            |           |           |  |             |           |      
|                                             |  |                        |         |        |  | Operations |           |           |  | Processed  |           |           |  |             |           |      
|                                             |  |                        |         |        |  | and        |           | Grain     |  | Grains and |           | Corporate |  | Reconciling |           |      
|                                             |  | Agronomy               |         | Energy |  | Services   |           | Marketing |  | Foods      |           | and Other |  | Amounts     |           | Total
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |      
|                                             |  |                       
|                                             |  | (dollars in thousands)
|For the year ended August 31,
    2003:      |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |  
|Net sales                                    |  |                        |         |        |  | $          | 3,648,093 |           |  | $          | 1,885,825 |           |  | $           | 4,139,226 |       |  | $ | 491,931 |   |  |   |         |   |  | $ | (894,341 | ) |  | $ | 9,270,734 |  
|Patronage dividends                          |  | $                      | (84     | )      |  |            | 415       |           |  |            | 2,467     |           |  |             | 218       |       |  |   | 111     |   |  | $ | 130     |   |  |   |          |   |  |   | 3,257     |  
|Other revenues                               |  |                        |         |        |  |            | 10,461    |           |  |            | 81,739    |           |  |             | 25,458    |       |  |   | 2,300   |   |  |   | 4,584   |   |  |   |          |   |  |   | 124,542   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|                                             |  |                        | (84     | )      |  |            | 3,658,969 |           |  |            | 1,970,031 |           |  |             | 4,164,902 |       |  |   | 494,342 |   |  |   | 4,714   |   |  |   | (894,341 | ) |  |   | 9,398,533 |  
|Cost of goods sold                           |  |                        |         |        |  |            | 3,475,947 |           |  |            | 1,876,811 |           |  |             | 4,133,677 |       |  |   | 466,857 |   |  |   |         |   |  |   | (894,341 | ) |  |   | 9,058,951 |  
|Marketing, general and administrative        |  |                        | 8,138   |        |  |            | 63,740    |           |  |            | 55,887    |           |  |             | 21,072    |       |  |   | 36,540  |   |  |   | 5,205   |   |  |   |          |   |  |   | 190,582   |  
|Gain on legal settlements                    |  |                        |         |        |  |            |           |           |  |            | (10,867   | )         |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | (10,867   | )
|Interest                                     |  |                        | (974    | )      |  |            | 16,401    |           |  |            | 14,975    |           |  |             | 4,738     |       |  |   | 12,845  |   |  |   | 690     |   |  |   |          |   |  |   | 48,675    |  
|Equity (income) loss from investments        |  |                        | (20,773 | )      |  |            | (1,353    | )         |  |            | (788      | )         |  |             | 1,673     |       |  |   | (26,056 | ) |  |   | (2      | ) |  |   |          |   |  |   | (47,299   | )
|Minority interests                           |  |                        |         |        |  |            | 20,782    |           |  |            | 1,168     |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | 21,950    |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Income (loss) before income taxes            |  | $                      | 13,525  |        |  | $          | 83,452    |           |  | $          | 32,845    |           |  | $           | 3,742     |       |  | $ | 4,156   |   |  | $ | (1,179  | ) |  | $ |         |   |  | $ | 136,541   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Intersegment sales                           |  |                        |         |        |  | $          | (94,209   | )         |  | $          | (796,999  | )         |  | $           | (2,435    | )     |  | $ | (698    | ) |  |   |         |   |  | $ | 894,341  |   |  | $ |          |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Goodwill                                     |  |                        |         |        |  | $          | 3,185     |           |  | $          | 262       |           |  |             |           |       |  | $ | 23,605  |   |  |   |         |   |  |   |          |   |  | $ | 27,052    |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Capital expenditures                         |  |                        |         |        |  | $          | 80,837    |           |  | $          | 26,738    |           |  | $           | 5,298     |       |  | $ | 60,576  |   |  | $ | 2,240   |   |  |   |          |   |  | $ | 175,689   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Depreciation and amortization                |  | $                      | 1,247   |        |  | $          | 65,868    |           |  | $          | 21,039    |           |  | $           | 6,718     |       |  | $ | 13,321  |   |  | $ | 3,154   |   |  |   |          |   |  | $ | 111,347   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Total identifiable assets at August 31, 2003 |  | $                      | 285,906 |        |  | $          | 1,449,652 |           |  | $          | 857,523   |           |  | $           | 450,415   |       |  | $ | 498,872 |   |  | $ | 265,600 |   |  |   |          |   |  | $ | 3,807,968 |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  

F-23



---



##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|-------------------------------------------- |  | ---------------------- | ------- | ------ |  | ---------- | --------- | --------- |  | ---------- | --------- | --------- |  | ----------- | --------- | ----- |  | - | ------- | - |  | - | ------- | - |  | - | -------- | - |  | - | --------- | -
|                                             |  |                        |         |        |  | Country    |           |           |  |            |           |           |  |             |           |      
|                                             |  |                        |         |        |  | Operations |           |           |  | Processed  |           |           |  |             |           |      
|                                             |  |                        |         |        |  | and        |           | Grain     |  | Grains and |           | Corporate |  | Reconciling |           |      
|                                             |  | Agronomy               |         | Energy |  | Services   |           | Marketing |  | Foods      |           | and Other |  | Amounts     |           | Total
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |      
|                                             |  |                       
|                                             |  | (dollars in thousands)
|For the year ended August 31,
    2002:      |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |  
|Net sales                                    |  |                        |         |        |  | $          | 2,657,689 |           |  | $          | 1,474,553 |           |  | $           | 3,281,469 |       |  | $ | 496,084 |   |  |   |         |   |  | $ | (753,341 | ) |  | $ | 7,156,454 |  
|Patronage dividends                          |  | $                      | (89     | )      |  |            | 458       |           |  |            | 2,572     |           |  |             | 497       |       |  |   | 260     |   |  | $ | 187     |   |  |   |          |   |  |   | 3,885     |  
|Other revenues                               |  |                        |         |        |  |            | 6,392     |           |  |            | 80,789    |           |  |             | 21,902    |       |  |   | (1,469  | ) |  |   | 1,845   |   |  |   |          |   |  |   | 109,459   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|                                             |  |                        | (89     | )      |  |            | 2,664,539 |           |  |            | 1,557,914 |           |  |             | 3,303,868 |       |  |   | 494,875 |   |  |   | 2,032   |   |  |   | (753,341 | ) |  |   | 7,269,798 |  
|Cost of goods sold                           |  |                        |         |        |  |            | 2,489,352 |           |  |            | 1,474,392 |           |  |             | 3,272,985 |       |  |   | 457,538 |   |  |   |         |   |  |   | (753,341 | ) |  |   | 6,940,926 |  
|Marketing, general and administrative        |  |                        | 8,957   |        |  |            | 66,731    |           |  |            | 47,995    |           |  |             | 22,213    |       |  |   | 36,930  |   |  |   | 4,466   |   |  |   |          |   |  |   | 187,292   |  
|Gain on legal settlements                    |  |                        |         |        |  |            |           |           |  |            | (2,970    | )         |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | (2,970    | )
|Interest                                     |  |                        | (1,403  | )      |  |            | 16,875    |           |  |            | 13,851    |           |  |             | 4,807     |       |  |   | 9,514   |   |  |   | (1,189  | ) |  |   |          |   |  |   | 42,455    |  
|Equity (income) loss from investments        |  |                        | (13,425 | )      |  |            | 1,166     |           |  |            | (283      | )         |  |             | (4,257    | )     |  |   | (41,331 | ) |  |   | (3      | ) |  |   |          |   |  |   | (58,133   | )
|Minority interests                           |  |                        |         |        |  |            | 14,604    |           |  |            | 786       |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | 15,390    |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Income (loss) before income taxes            |  | $                      | 5,782   |        |  | $          | 75,811    |           |  | $          | 24,143    |           |  | $           | 8,120     |       |  | $ | 32,224  |   |  | $ | (1,242  | ) |  | $ |         |   |  | $ | 144,838   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Intersegment sales                           |  |                        |         |        |  | $          | (67,367   | )         |  | $          | (615,853  | )         |  | $           | (69,561   | )     |  | $ | (560    | ) |  |   |         |   |  | $ | 753,341  |   |  | $ |          |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Goodwill                                     |  |                        |         |        |  | $          | 4,059     |           |  | $          | 262       |           |  |             |           |       |  | $ | 23,605  |   |  |   |         |   |  |   |          |   |  | $ | 27,926    |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Capital expenditures                         |  |                        |         |        |  | $          | 54,576    |           |  | $          | 34,305    |           |  | $           | 14,851    |       |  | $ | 35,144  |   |  | $ | 1,293   |   |  |   |          |   |  | $ | 140,169   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Depreciation and amortization                |  | $                      | 1,247   |        |  | $          | 58,701    |           |  | $          | 21,214    |           |  | $           | 6,235     |       |  | $ | 13,436  |   |  | $ | 3,153   |   |  |   |          |   |  | $ | 103,986   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Total identifiable assets at August 31, 2002 |  | $                      | 242,015 |        |  | $          | 1,305,828 |           |  | $          | 799,711   |           |  | $           | 481,232   |       |  | $ | 439,942 |   |  | $ | 212,999 |   |  |   |          |   |  | $ | 3,481,727 |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|For the year ended August 31,
    2001:      |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |  
|Net sales                                    |  |                        |         |        |  | $          | 2,781,243 |           |  | $          | 1,577,268 |           |  | $           | 3,416,239 |       |  | $ | 662,726 |   |  |   |         |   |  | $ | (973,234 | ) |  | $ | 7,464,242 |  
|Patronage dividends                          |  | $                      | 196     |        |  |            | 712       |           |  |            | 3,683     |           |  |             | 840       |       |  |   | 339     |   |  | $ | 207     |   |  |   |          |   |  |   | 5,977     |  
|Other revenues                               |  |                        |         |        |  |            | 4,036     |           |  |            | 80,479    |           |  |             | 22,964    |       |  |   | (238    | ) |  |   | 9,013   |   |  |   |          |   |  |   | 116,254   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|                                             |  |                        | 196     |        |  |            | 2,785,991 |           |  |            | 1,661,430 |           |  |             | 3,440,043 |       |  |   | 662,827 |   |  |   | 9,220   |   |  |   | (973,234 | ) |  |   | 7,586,473 |  
|Cost of goods sold                           |  |                        |         |        |  |            | 2,549,099 |           |  |            | 1,569,884 |           |  |             | 3,416,500 |       |  |   | 619,184 |   |  |   |         |   |  |   | (973,234 | ) |  |   | 7,181,433 |  
|Marketing, general and administrative        |  |                        | 8,503   |        |  |            | 48,432    |           |  |            | 53,417    |           |  |             | 22,396    |       |  |   | 44,870  |   |  |   | 6,428   |   |  |   |          |   |  |   | 184,046   |  
|Interest                                     |  |                        | (4,529  | )      |  |            | 25,097    |           |  |            | 15,695    |           |  |             | 8,144     |       |  |   | 13,026  |   |  |   | 4,003   |   |  |   |          |   |  |   | 61,436    |  
|Equity (income) loss from investments        |  |                        | (7,360  | )      |  |            | 4,081     |           |  |            | (246      | )         |  |             | (4,519    | )     |  |   | (35,505 | ) |  |   | 15,055  |   |  |   |          |   |  |   | (28,494   | )
|Minority interests                           |  |                        |         |        |  |            | 34,713    |           |  |            | 385       |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | 35,098    |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Income (loss) before income taxes            |  | $                      | 3,582   |        |  | $          | 124,569   |           |  | $          | 22,295    |           |  | $           | (2,478    | )     |  | $ | 21,252  |   |  | $ | (16,266 | ) |  | $ |         |   |  | $ | 152,954   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Intersegment sales                           |  |                        |         |        |  | $          | (71,846   | )         |  | $          | (709,910  | )         |  | $           | (190,695  | )     |  | $ | (783    | ) |  |   |         |   |  | $ | 973,234  |   |  | $ |          |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Capital expenditures                         |  |                        |         |        |  | $          | 38,984    |           |  | $          | 32,448    |           |  | $           | 3,715     |       |  | $ | 20,485  |   |  | $ | 1,978   |   |  |   |          |   |  | $ | 97,610    |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Depreciation and amortization                |  | $                      | 1,250   |        |  | $          | 55,343    |           |  | $          | 21,738    |           |  | $           | 4,917     |       |  | $ | 22,304  |   |  | $ | 3,628   |   |  |   |          |   |  | $ | 109,180   |  
|                                             |  |                        |         |        |  |            |           |           |  |            |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  

F-24



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


12. Commitments and
Contingencies:



| |               
| | --------------
| | Environmental:

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

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



| |                             
| | ----------------------------
| | Other Litigation and Claims:

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



| |               
| | --------------
| | Grain Storage:

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



| |            
| | -----------
| | Guarantees:

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

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

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

F-25



---



##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

|                                                                      |  |                        |       |             |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                            |  |                          |            |                                                 |  |                                                                                                                |  |                                                                                                                       |  | 
|--------------------------------------------------------------------- |  | ---------------------- | ----- | ----------- |  | --------- | ------ | --------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ---------- | ----------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | 
|                                                                      |  | Guarantee/             |       | Exposure on |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                            |  |                         
|                                                                      |  | Maximum                |       | August 31,  |  | Nature of |        |                 |  | Triggering                                                                                                                                                            |  | Recourse                                                                                                                                                                                   |  | Assets Held             
|Entities                                                              |  | Exposure               |       | 2003        |  | Guarantee |        | Expiration Date |  | Event                                                                                                                                                                 |  | Provisions                                                                                                                                                                                 |  | as Collateral           
|                                                                      |  |                        |       |             |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                            |  |                         
|                                                                      |  |                        |       |             |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                           
|                                                                      |  | (dollars in thousands) |       |             |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                           
|The Companys Financial Services cooperative
    loans sold to CoBank |  |                        | *     |             |  | $         | 6,667  |                 |  | 10% of the obligations of borrowers (agri-
    cultural cooperatives) under credit agreements for loans sold                                                          |  | None stated, but may be terminated by either
    party upon 60 days prior notice in regard to future
    obligations                                                                       |  | Credit agreement default |            | Subrogation against borrower                    |  | Some or all assets of borrower are held as
    collateral and should be sufficient to cover guarantee exposure
|Fin-Ag, Inc. agricultural loans sold to CoBank                        |  |                        | *     |             |  |           | 43,016 |                 |  | 15% of the obligations of borrowers under credit
    agreements for some of the loans sold, and 100% of the
    obligations of borrowers for the remaining loans sold |  | None stated, but may be terminated by either
    party upon 90 days prior notice in regard to future
    obligations                                                                       |  | Credit agreement default |            | Subrogation against borrower                    |  | Some or all assets of borrower are held as
    collateral and should be sufficient to cover guarantee exposure
|TEMCO, LLC                                                            |  | $                      | 7,500 |             |  |           |        |                 |  | Obligations by TEMCO, LLC under credit agreement                                                                                                                      |  | None stated                                                                                                                                                                                |  | Credit agreement default |            | Subrogation against TEMCO, LLC                  |  | None                                                                                                          
|North Valley Petroleum, LLC                                           |  | $                      | 194   |             |  |           | 179    |                 |  | Obligations by North Valley Petroleum, LLC under
    credit agreement                                                                                                 |  | None stated                                                                                                                                                                                |  | Credit agreement default |            | Subrogation against North Valley Petroleum, LLC |  | None                                                                                                          
|Third parties                                                         |  |                        | *     |             |  |           | 2,413  |                 |  | Surety for, or indemnification of surety for
    sales contracts between affiliates and sellers of grain under
    deferred payment contracts                         |  | Annual renewal on December 1st in regard to
    surety for one third party, otherwise none stated and may be
    terminated by the Company at any time in regard to future
    obligations |  |                          | Nonpayment |                                                 |  | Subrogation against affiliates                                                                                 |  | Some or all assets of borrower are held as
    collateral but might not be sufficient to cover guarantee
    exposure
|                                                                      |  |                        |       |             |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                            |  |                          |            |                                                 |  |                                                                                                                |  |                                                                                                                       |  | 
|                                                                      |  |                        |       |             |  | $         | 52,275 |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                            |  |                          |            |                                                 |  |                                                                                                                |  |                                                                                                                       |  | 
|                                                                      |  |                        |       |             |  |           |        |                 |  |                                                                                                                                                                       |  |                                                                                                                                                                                            |  |                          |            |                                                 |  |                                                                                                                |  |                                                                                                                       |  | 



---



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

F-26



---



##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                   
| | ------------------
| | Lease Commitments:

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

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

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

|                                    |  |                        |        |          |  |           |        |       |  |   |        |  |  |   |         | 
|----------------------------------- |  | ---------------------- | ------ | -------- |  | --------- | ------ | ----- |  | - | ------ |  |  | - | ------- | 
|                                    |  | Rail                   |        |          |  | Equipment |        |      
|                                    |  | Cars                   |        | Vehicles |  | and Other |        | Total
|                                    |  |                        |        |          |  |           |        |      
|                                    |  |                       
|                                    |  | (dollars in thousands)
|2004                                |  | $                      | 9,407  |          |  | $         | 12,141 |       |  | $ | 11,856 |  |  | $ | 33,404  | 
|2005                                |  |                        | 7,447  |          |  |           | 10,158 |       |  |   | 6,842  |  |  |   | 24,447  | 
|2006                                |  |                        | 5,027  |          |  |           | 9,273  |       |  |   | 4,881  |  |  |   | 19,181  | 
|2007                                |  |                        | 4,073  |          |  |           | 4,825  |       |  |   | 3,668  |  |  |   | 12,566  | 
|2008                                |  |                        | 2,914  |          |  |           | 2,240  |       |  |   | 2,061  |  |  |   | 7,215   | 
|Thereafter                          |  |                        | 4,246  |          |  |           | 1,643  |       |  |   | 4,693  |  |  |   | 10,582  | 
|                                    |  |                        |        |          |  |           |        |       |  |   |        |  |  |   |         | 
|Total minimum future lease payments |  | $                      | 33,114 |          |  | $         | 40,280 |       |  | $ | 34,001 |  |  | $ | 107,395 | 
|                                    |  |                        |        |          |  |           |        |       |  |   |        |  |  |   |         | 

13.     Supplemental
Cash Flow and Other Information:

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

|                                        |                                                                            |                        |   |         |   |      |   |         |   |  |   |         |  
|--------------------------------------- | -------------------------------------------------------------------------- | ---------------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                        |                                                                            | 2003                   |   | 2002    |   | 2001
|                                        |                                                                            |                        |   |         |   |     
|                                        |                                                                            |                       
|                                        |                                                                            | (dollars in thousands)
|Net cash paid during the period for:    |                                                                            |                        |   |         |   |      |   |         |   |  |   |        
|                                        | Interest                                                                   |                        | $ | 45,239  |   |      | $ | 44,231  |   |  | $ | 63,034  |  
|                                        | Income taxes                                                               |                        |   | 956     |   |      |   | 27,965  |   |  |   | 11,709  |  
|Other significant noncash transactions: |                                                                            |                        |   |         |   |      |   |         |   |  |   |        
|                                        | Distributions of inventories of minority interests                         |                        |   |         |   |      |   |         |   |  |   | (54,399 | )
|                                        | Capital equity certificates issued in exchange
    for elevator properties |                        |   | 350     |   |      |   | 1,842   |   |  |   | 5,481   |  
|                                        | Equity Participation Units issued                                          |                        |   |         |   |      |   |         |   |  |   | 1,045   |  
|                                        | Exchange of preferred stock                                                |                        |   | 7,452   |   |      |   |         |   |  |   |         |  
|                                        | Accrual of dividends and equities payable                                  |                        |   | (39,049 | ) |      |   | (56,510 | ) |  |   | (72,154 | )
|                                        | Other comprehensive income (loss)                                          |                        |   | 33,583  |   |      |   | (49,982 | ) |  |   | 512     |  

F-27



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


14.     Related Party
Transactions:

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

|            |  |                        |         |      |  |   |         | 
|----------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|            |  | 2003                   |         | 2002
|            |  |                        |         |     
|            |  |                       
|            |  | (dollars in thousands)
|Sales       |  | $                      | 779,857 |      |  | $ | 549,978 | 
|Purchases   |  |                        | 637,357 |      |  |   | 502,450 | 
|Receivables |  |                        | 13,393  |      |  |   | 21,232  | 
|Payables    |  |                        | 29,113  |      |  |   | 18,296  | 

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

15.     Comprehensive
Income:

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

|                                        |  |                        |         |      |  |      |         |   |  |   |         |  
|--------------------------------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                        |  | 2003                   |         | 2002 |  | 2001
|                                        |  |                        |         |      |  |     
|                                        |  |                       
|                                        |  | (dollars in thousands)
|Net income                              |  | $                      | 123,841 |      |  | $    | 126,138 |   |  | $ | 178,554 |  
|Additional minimum pension liability    |  |                        | 36,105  |      |  |      | (48,797 | ) |  |   | (15     | )
|Financial instruments                   |  |                        | 1,045   |      |  |      | (548    | ) |  |   | 527     |  
|Cash flow hedges                        |  |                        | (3,548  | )    |  |      | (637    | ) |  |   |         |  
|Foreign currency translation adjustment |  |                        | (18     | )    |  |      |         |   |  |   |         |  
|                                        |  |                        |         |      |  |      |         |   |  |   |         |  
|Comprehensive income                    |  | $                      | 157,425 |      |  | $    | 76,156  |   |  | $ | 179,066 |  
|                                        |  |                        |         |      |  |      |         |   |  |   |         |  

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

|                                        |  |                        |        |      |  |   |        | 
|--------------------------------------- |  | ---------------------- | ------ | ---- |  | - | ------ | 
|                                        |  | 2003                   |        | 2002
|                                        |  |                        |        |     
|                                        |  |                       
|                                        |  | (dollars in thousands)
|Additional minimum pension liability    |  | $                      | 13,946 |      |  | $ | 50,051 | 
|Financial instruments                   |  |                        | 164    |      |  |   | 1,209  | 
|Cash flow hedges                        |  |                        | 4,185  |      |  |   | 637    | 
|Foreign currency translation adjustment |  |                        | 18     |      |  |   |        | 
|                                        |  |                        |        |      |  |   |        | 
|Accumulated other comprehensive loss    |  | $                      | 18,313 |      |  | $ | 51,897 | 
|                                        |  |                        |        |      |  |   |        | 

F-28



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

-s- PriceWaterhouse Coopers LLP

November 5, 2003

Minneapolis, Minnesota


F-29



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT Members Committee
Ventura Foods, LLC We have audited the accompanying balance sheets of Ventura Foods, LLC (the
Company) as of March 31, 2004 and 2003, and the related statements of income,
members capital and cash flows for the years ended March 31, 2004, 2003 and
2002. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material
respects, the financial position of Ventura Foods, LLC as of March 31, 2004 and
2003, and the results of their operations and their cash flows for the years
ended March 31, 2004, 2003 and 2002 in conformity with accounting principles
generally accepted in the United States of America. As discussed in Note 2 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, effective April 1, 2002. Deloitte & Touche LLP Costa Mesa, California
June 18, 2004 F-30




---



##### Table of Contents



VENTURA FOODS, LLC BALANCE SHEETS
MARCH 31, 2004 AND 2003 ASSETS (Note 3)
    
    2004
    
    2003CURRENT ASSETS:Cash and cash equivalents (Note 2)
    
    $
    117,783,000
    
    
    $
    2,800,000Trade receivables, net of allowance for doubtful accounts of
$1,929,000 and $1,909,000 at 2004 and 2003, respectively
(Notes 2, 3 and 4)
    
    
    79,877,000
    
    
    
    64,313,000Inventories (Notes 2, 3 and 4)
    
    
    108,605,000
    
    
    
    92,366,000Prepaid expenses and other current assets
    
    
    4,609,000
    
    
    
    5,922,000Due from Wilsey Foods, Inc. (Note 4)
    
    
    
    
    
    
    309,000Derivative contract asset (Notes 2 and 4)
    
    
    31,073,000
    
    
    
    18,703,000Total current assets
    
    
    341,947,000
    
    
    
    184,413,000PROPERTY (Notes 2 and 3):Land, buildings and improvements
    
    
    103,903,000
    
    
    
    102,768,000Machinery and equipment
    
    
    145,001,000
    
    
    
    139,264,000Construction-in-progress
    
    
    13,692,000
    
    
    
    6,905,000Other property
    
    
    13,856,000
    
    
    
    10,798,000Total
    
    
    276,452,000
    
    
    
    259,735,000Less accumulated depreciation and amortization
    
    
    118,074,000
    
    
    
    106,914,000Propertynet
    
    
    158,378,000
    
    
    
    152,821,000GOODWILL, Net of amortization of $18,087,000 at 2004 and
2003 (Notes 2 and 7)
    
    
    43,156,000
    
    
    
    43,156,000TRADEMARKS, Net of amortization of $8,526,000 at 2004 and
2003 (Notes 2 and 7)
    
    
    19,318,000
    
    
    
    19,318,000DEFERRED COMPENSATION PLAN TRUST (Note 5)
    
    
    15,626,000
    
    
    
    13,574,000OTHER ASSETS, Net of amortization of $3,670,000 and $3,520,000
at 2004 and 2003 (Notes 2, 3 and 7)
    
    
    4,319,000
    
    
    
    4,673,000TOTAL
    
    $
    582,744,000
    
    
    $
    417,955,000LIABILITIES AND MEMBERS CAPITAL
    
    
    2004
    
    
    
    2003CURRENT LIABILITIES:Accounts payable (Note 4)
    
    $
    81,199,000
    
    
    $
    58,395,000Accrued liabilities (Note 4)
    
    
    53,325,000
    
    
    
    36,984,000Dividends payable
    
    
    16,091,000
    
    
    
    5,748,000Bank lines of credit (Note 3)
    
    
    
    
    
    
    20,500,000Current portion of long-term debt (Note 3)
    
    
    2,804,000
    
    
    
    74,228,000Derivative contract liability (Notes 2 and 4)
    
    
    21,900,000
    
    
    
    12,162,000Total current liabilities
    
    
    175,319,000
    
    
    
    208,017,000LONG-TERM DEBT (Note 3)
    
    
    195,152,000
    
    
    
    22,950,000DEFERRED COMPENSATION OBLIGATIONS (Note 5)
    
    
    26,513,000
    
    
    
    20,496,000Total liabilities
    
    
    396,984,000
    
    
    
    251,463,000COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)MEMBERS CAPITAL
    
    
    185,760,000
    
    
    
    166,492,000TOTAL
    
    $
    582,744,000
    
    
    $
    417,955,000
 See notes to financial statements. F-31




---



##### Table of Contents



VENTURA FOODS, LLC STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2004, 2003 AND 2002 2004
    
    2003
    
    2002NET SALES (Notes 2 and 5)
    
    $
    1,312,356,000
    
    
    $
    1,096,425,000
    
    
    $
    965,521,000COST OF GOODS SOLD (Notes 2 and 5)
    
    
    1,124,482,000
    
    
    
    912,702,000
    
    
    
    791,061,000GROSS PROFIT
    
    
    187,874,000
    
    
    
    183,723,000
    
    
    
    174,460,000OPERATING EXPENSES:Selling, general and administrative (Notes 2 and 5)
    
    
    111,375,000
    
    
    
    105,424,000
    
    
    
    91,827,000Amortization of intangibles (Notes 2 and 7)
    
    
    83,000
    
    
    
    223,000
    
    
    
    6,227,000Total operating expenses
    
    
    111,458,000
    
    
    
    105,647,000
    
    
    
    98,054,000OPERATING INCOME
    
    
    76,416,000
    
    
    
    78,076,000
    
    
    
    76,406,000INTEREST EXPENSENet (Note 4)
    
    
    8,932,000
    
    
    
    6,785,000
    
    
    
    7,474,000OTHER EXPENSE (INCOME)
    
    
    (1,758,000
    )
    
    
    733,000
    
    
    
    (1,554,000
    )NET INCOME
    
    $
    69,242,000
    
    
    $
    70,558,000
    
    
    $
    70,486,000
 See notes to financial statements. F-32




---



##### Table of Contents



STATEMENTS OF MEMBERS CAPITAL
YEARS ENDED MARCH 31, 2004, 2003 AND 2002 WilseyFoods, Inc.
    
    CHS, Inc.
    
    TotalBALANCEMarch 31, 2001
    
    $
    65,872,000
    
    
    $
    65,872,000
    
    
    $
    131,744,000Net income
    
    
    35,243,000
    
    
    
    35,243,000
    
    
    
    70,486,000Dividends
    
    
    (25,757,000
    )
    
    
    (25,757,000
    )
    
    
    (51,514,000
    )BALANCEMarch 31, 2002
    
    
    75,358,000
    
    
    
    75,358,000
    
    
    
    150,716,000Net income
    
    
    35,279,000
    
    
    
    35,279,000
    
    
    
    70,558,000Dividends
    
    
    (27,391,000
    )
    
    
    (27,391,000
    )
    
    
    (54,782,000
    )BALANCEMarch 31, 2003
    
    
    83,246,000
    
    
    
    83,246,000
    
    
    
    166,492,000Net income
    
    
    34,621,000
    
    
    
    34,621,000
    
    
    
    69,242,000Dividends
    
    
    (24,987,000
    )
    
    
    (24,987,000
    )
    
    
    (49,974,000
    )BALANCEMarch 31, 2004
    
    $
    92,880,000
    
    
    $
    92,880,000
    
    
    $
    185,760,000
 See notes to financial statements. F-33




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##### Table of Contents



VENTURA FOODS, LLC STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002 2004
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    69,242,000
    
    
    $
    70,558,000
    
    
    $
    70,486,000Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    13,437,000
    
    
    
    12,416,000
    
    
    
    12,186,000Amortization of intangibles
    
    
    83,000
    
    
    
    223,000
    
    
    
    6,227,000Impairment of other assets
    
    
    984,000Deferred rent
    
    
    1,095,000
    
    
    
    515,000Loss on disposal of assets
    
    
    646,000
    
    
    
    872,000
    
    
    
    324,000Derivative contract asset
    
    
    (2,632,000
    )
    
    
    2,637,000
    
    
    
    (1,803,000
    )Changes in operating assets and liabilities:Trade receivables
    
    
    (15,564,000
    )
    
    
    (7,174,000
    )
    
    
    (771,000
    )Inventories
    
    
    (16,239,000
    )
    
    
    (29,567,000
    )
    
    
    3,881,000Prepaid expenses and other current assets
    
    
    1,169,000
    
    
    
    (3,639,000
    )
    
    
    (793,000
    )Accounts payable
    
    
    22,804,000
    
    
    
    6,350,000
    
    
    
    (4,491,000
    )Accrued liabilities
    
    
    15,246,000
    
    
    
    10,685,000
    
    
    
    2,893,000Deferred compensation obligations
    
    
    3,965,000
    
    
    
    4,815,000
    
    
    
    4,866,000Due from (to) affiliates
    
    
    309,000
    
    
    
    (309,000
    )
    
    
    47,000Net cash provided by operating activities
    
    
    94,545,000
    
    
    
    68,382,000
    
    
    
    93,052,000CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of property
    
    
    (19,698,000
    )
    
    
    (16,062,000
    )
    
    
    (13,268,000
    )Proceeds from sale of assets
    
    
    58,000
    
    
    
    1,845,000
    
    
    
    69,000Investment in rabbi trust
    
    
    
    
    
    
    
    
    
    
    (13,976,000
    )Other assets
    
    
    (569,000
    )
    
    
    (1,332,000
    )
    
    
    (48,000
    )Net cash used in investing activities
    
    
    (20,209,000
    )
    
    
    (15,549,000
    )
    
    
    (27,223,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowing of long-term debt
    
    
    175,000,000Repayment of long-term debt
    
    
    (74,223,000
    )
    
    
    (12,758,000
    )
    
    
    (12,603,000
    )Net (payments on) borrowings from line of credit
    
    
    (20,500,000
    )
    
    
    12,500,000
    
    
    
    3,000,000Payment to Wilsey Foods, Inc. (Note 1)
    
    
    
    
    
    
    (491,000
    )
    
    
    (487,000
    )Dividends paid
    
    
    (39,630,000
    )
    
    
    (58,584,000
    )
    
    
    (60,589,000
    )Net cash provided by (used in) financing activities
    
    
    40,647,000
    
    
    
    (59,333,000
    )
    
    
    (70,679,000
    )NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    114,983,000
    
    
    
    (6,500,000
    )
    
    
    (4,850,000
    )CASH AND CASH EQUIVALENTSBeginning of period
    
    
    2,800,000
    
    
    
    9,300,000
    
    
    
    14,150,000CASH AND CASH EQUIVALENTSEnd of period
    
    $
    117,783,000
    
    
    $
    2,800,000
    
    
    $
    9,300,000SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATIONCash paid during the period for
interest
    
    $
    6,250,000
    
    
    $
    7,183,000
    
    
    $
    8,129,000
 See notes to financial statements. F-34




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##### Table of Contents



VENTURA FOODS, LLC NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002  1.
    
    GENERAL MATTERSVentura Foods, LLC (the Company) is a processor and distributor of edible
oils used in food preparation and a packager of food products. The Company
sells its products to national and regional restaurant chains, food
wholesalers and retail chains. In April 2002, the Company dissolved its
wholly-owned subsidiary, Ventura Jets, Inc., and consequently no longer
consolidates the financial statements.The Company was formed pursuant to a Joint Venture Agreement (the
Agreement) dated August 30, 1996 between Wilsey Foods, Inc. (Wilsey) and
CHS Inc. (CHS) whereby substantially all the assets and liabilities of
Wilsey and Holsum Foods (a division of CHS) were transferred and assigned,
with certain exclusions, to the Company. Wilsey is a majority owned
subsidiary of Mitsui & Co., Ltd. From the period of inception through March
31, 2000, Wilsey and CHS owned 60% and 40%, respectively, of the Company. On
March 31, 2000, Wilsey sold a 10% interest in the Company to CHS.
Accordingly, Wilsey and CHS each own 50% of the Company.At the formation date, a liability equal to the net deferred income tax
liability of Wilsey at August 30, 1996 was assumed by the Company. The
amount was payable in five equal annual installments of $487,000 plus a
final installment of $491,000. The final installment of $491,000 was paid
during fiscal 2003.2.
    
    ACCOUNTING POLICIESCash and Cash EquivalentsThe Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. Included in accounts payable are bank overdrafts of $1,102,000
and $15,231,000 at March 31, 2004 and 2003, respectively.InventoriesInventories consist of the following at March 31: 2004
    
    2003Bulk oil
    
    $
    46,682,000
    
    
    $
    38,751,000Finished goods
    
    
    40,948,000
    
    
    
    34,119,000Ingredients and supplies
    
    
    20,975,000
    
    
    
    19,496,000Total
    
    $
    108,605,000
    
    
    $
    92,366,000
  Inventories are accounted for at the lower of cost or market, using the
first-in, first-out method. Cost for inventories produced or modified by the
Company through a manufacturing process includes fixed and variable
production costs and raw materials costs, and inbound freight costs. Cost
for inventories purchased for resale includes the cost of the product and freight and
handling costs incurred to place the product at the Companys point of sale. F-35




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##### Table of Contents



Derivative Financial InstrumentsThe Companys use of derivative financial
instruments is limited to forwards, futures and certain other delivery
contracts as discussed below. The Company enters into these contracts to
limit its exposure to price volatility of various food oils that are
critical to its processing and distribution activities. It is the Companys
policy to remain substantially hedged with respect to edible oil product
price risk; derivative contracts are used to maintain this hedged position.
Forward purchase and sales contracts with established market participants as
well as exchange-traded futures contracts are entered into in amounts
necessary to protect against price changes on raw materials needed for the
Companys food oil processing and distribution activities. The Company also
enters into purchase and sales commitments with major suppliers and
customers at a specified premium or discount from a future market price
(Basis Contracts). Additionally, the Companys policies do not permit
speculative trading of such contracts. All of these qualify as derivatives
under Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, and are stated
at market value. Changes in market value are recognized in the statements of
income, through cost of sales, in the periods such changes occur. The market
value of futures contracts, Basis Contracts, and forward purchase and sales
contracts is recorded separately on the balance sheets as derivative
contract assets or liabilities. These contracts have maturities of less than
one year.The following summarizes the Companys various derivative contracts
outstanding at March 31, 2004 and 2003 (pounds and dollars in thousands) NetUnrealizedForward Contracts and Commitments
    
    Pounds
    
    Gain (Loss)March 31, 2004Forward purchases
    
    
    412,000
    
    
    $
    12,164Forward sales
    
    
    630,000
    
    
    
    (19,493
    )Basis purchase
    
    
    810,600
    
    
    
    6,462Basis sales
    
    
    65,100
    
    
    
    (185
    )Futures contracts
    
    
    421,400
    
    
    
    10,2252,339,100
    
    
    $
    9,173March 31, 2003Forward purchases
    
    
    334,100
    
    
    $
    11,060Forward sales
    
    
    433,300
    
    
    
    (6,208
    )Basis purchase
    
    
    259,800
    
    
    
    857Basis sales
    
    
    17,500
    
    
    
    (126
    )Futures contracts
    
    
    146,000
    
    
    
    9581,190,700
    
    
    $
    6,541
  The fair value of futures contracts is determined from quotes listed on the
Chicago Board of Trade or other market makers. Forward purchase and sales
contracts are with various counterparties and the fair values of such
contracts are determined from the market price of the underlying product.The Company is exposed to loss in the event of nonperformance by the other
parties to the contracts. However, the Company does not anticipate
nonperformance by counterparties. F-36




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##### Table of Contents



Property and DepreciationProperty is stated at cost. Depreciation and
amortization are provided for using the straight-line method over the
estimated useful lives of the assets, as follows: Buildings
    
    40 yearsLeasehold improvements
    
    319 yearsMachinery and equipment
    
    1025 yearsOther property
    
    320 years
  Fair Value of Financial InstrumentsThe Company estimates the fair value of
financial instruments using the following methods and assumptions: Accounts Receivable and Accounts PayableThe carrying amounts approximate
fair value due to the short maturities of these instruments. Lines of CreditThe carrying amounts approximate fair value, as the
interest rates are based upon variable reference rates. Long-Term DebtThe fair value of long-term fixed rate debt is estimated
based upon prevailing market interest rates available to the Company. The
Company estimates the fair value on the $22,950,000 6.55% fixed rate debt
as of March 31, 2004 to be $24,118,000. The Company estimates the fair
value on the $175,000,000 senior notes fixed rate debt as of March 31,
2004 to approximate carrying value. Futures ContractsThe fair value of futures contracts (used for hedging
purposes) is determined from quotes listed principally on the Chicago
Board of Trade.  Concentration of Credit RiskDuring the years ended March 31, 2004, 2003 and
2002, net sales to one customer were 23%, 23% and 22% of total net sales,
respectively. This customer represents approximately 19% and 23% of trade
receivables at March 31, 2004 and 2003, respectively. The Company performs
ongoing credit evaluations of its customers and maintains an allowance for
potential credit losses.The Company maintains cash deposits with various financial institutions. The
Company periodically evaluates the credit standing of these financial
institutions and has not sustained any credit losses relating to such
balances.Marketable SecuritiesThe Companys marketable securities comprise equity
securities that have been classified as trading securities. The equity
securities are carried at fair market value based upon quoted market prices.
Unrealized (gains) and losses on equity securities are recognized in net
income and totaled $(2,052,000) and $666,000 for the years ended March 31,
2004 and 2003, respectively (see Note 5). The Company investments included
an enterprise with which it conducted business; an impairment loss of
$984,000 was recorded in the year ended March 31, 2004.Goodwill and TrademarksThe Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, effective April 1, 2002, the first day of its 2003 fiscal
year. As a result, goodwill and indefinite life intangible assets
(trademarks) are no longer amortized, but reviewed for impairment
annually, or more frequently if certain impairment indicators arise. See
Note 7 for the effect of adopting SFAS No. 142.Other identifiable intangible assets consist of patents, deferred financing
costs and other assets, which are amortized using the straight-line method
over 5 to 15 years. F-37




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##### Table of Contents



Impairment of Long-Lived AssetsLong-lived assets, including identifiable
intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, future cash flows
expected to result from the use of the asset and its eventual disposition
are estimated. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the asset,
an impairment loss is recorded under the discounted future cash flow method.Advertising CostsThe Company expenses advertising costs in the period
incurred. For the years ended March 31, 2004, 2003 and 2002, the Company
incurred advertising expenses of approximately $8,366,000, $9,039,000 and
$7,100,000, respectively.Income TaxesThe Company is a limited liability company and has no liability
for federal and state income taxes. Income is taxed to the members based on
their allocated share of taxable income or loss. However, certain states tax
the income of limited liability companies. The Companys liability for such
state income taxes is not significant.Revenue RecognitionThe Company is a processor and distributor of edible
oils used in food preparation and a packager of food products. Revenue is
recognized upon transfer of title to the customer, which occurs generally
upon shipment. In certain instances, title is transferred upon receipt by
the customer, at which time the Company records revenue. Amounts billed to
the customer as part of a sales transaction related to shipping and handling
are included in sales. Revenue is recorded net of discounts, rebates and
certain sales incentives.Use of EstimatesThe preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.Recent Accounting PronouncementsIn June 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. The adoption of SFAS No. 143 did
not have a material impact on the Companys financial statements.In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-03, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in Restructuring). This statement requires
that the fair value of an initial liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred as
opposed to when the entity commits to an exit plan, thereby eliminating the
definition and requirements for recognition of exit costs. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The adoption of SFAS No. 146 did not have
a material impact on the Companys financial statements.On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. The new guidance amends SFAS No. 133 for
decisions made as part of the Derivatives Implementation Group (DIG)
process that effectively required amendments to SFAS No. 133, and decisions
made in connection with other FASB projects dealing with financial
instruments F-38




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##### Table of Contents



and in connection with implementation issues raised in relation to the
application of the definition of a derivative and characteristics of a
derivative that contains financing components. In addition, it clarifies
when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149
did not have a material impact on the Companys financial statements.3.
    
    LINE OF CREDIT AND LONG-TERM DEBTLine of CreditAt March 31, 2004, the Company had a revolving line-of-credit
agreement with a banking group to provide for borrowings of up to an
aggregate of $75,000,000. Outstanding borrowings at March 31, 2004 and 2003
were $0 and $20,500,000, respectively. The applicable interest rates are
based, at the option of the Company, at a London InterBank Offered Rate
(LIBOR) or a term federal funds rate (TFFR) option. The weighted-average
interest rate at March 31, 2003 was 1.72%. The line of credit matures on
December 21, 2004.Long-Term DebtAt March 31, 2003, the Company had term loans with a banking
group with a balance outstanding of $71,605,000. The interest rate
applicable to these term loans is based, at the option of the Company, at a
TFFR-based, LIBOR-based or a fixed rate option. The weighted-average
interest rate on such borrowings at March 31, 2003 was 6.53%. The term loans
with the banking group matured on December 23, 2003.In December 2003, the Company issued, in a private placement, a series of
senior unsecured notes in the aggregate amount of $175,000,000. The Company
issued Series A, B and C notes in the amounts of $40,000,000, $70,000,000
and $65,000,000, respectively. The Series A and C notes have maturity dates
of December 31, 2013 and December 23, 2018, respectively. The notes bear
interest at an annualized rate of 5.65% and 5.95%. Interest is paid
semiannually on June 23 and December 23 and principal is due on the maturity
date. The Series B notes mature on December 23, 2015 and bear interest at an
annualized rate of 5.65%. Interest is paid semiannually on June 23 and
December 23. Beginning on December 23, 2011, the Company is required to
make semi-annual payments of $7,777,778 on December 23 and June 23 through
December 23, 2015 for principal and interest. Accrued interest at March 31,
2004 was $2,771,000. Proceeds from the borrowing in the amount of
$71,600,000 were used to retire the long-term debt described above. The
Company incurred $632,000 of debt issuance costs, included in other assets,
which have been deferred and are being amortized as a component of interest
expense over the term of the notes.The Company has a standby letter of credit available of $10,000,000 as of
March 31, 2004.At March 31, 2004 and 2003, balances outstanding on a term loan with a bank
were $22,950,000 and $25,573,000, respectively. The agreement requires
quarterly principal and interest payments of $1,058,000. The interest rate
on this term loan is fixed at 6.55%. The term loan with the bank matures in
November 2010.The line of credit, term loan agreement and senior notes contain various
covenants, including compliance with debt limitations, members capital
minimums, interest coverage ratio and other financial ratios, restrictions
on mergers, consolidations, sale of assets, transactions with affiliates and
limitations on liens. F-39




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##### Table of Contents



Annual maturities of long-term debt are as follows at March 31, 2004: 2005
    
    $
    2,804,0002006
    
    
    2,987,0002007
    
    
    3,187,0002008
    
    
    3,401,0002009
    
    
    3,629,000Thereafter
    
    
    181,948,000Total
    
    
    197,956,000Less current portion
    
    
    2,804,000Long-term debt
    
    $
    195,152,000
  4.
    
    TRANSACTIONS WITH AFFILIATESPurchases from CHS for the years ended March 31, 2004, 2003 and 2002 were
$83,592,000, $66,682,000 and $47,745,000, respectively. Sales to CHS for the
years ended March 31, 2004, 2003 and 2002 totaled $2,294,000, $1,056,000 and
$883,000, respectively. Included in accounts payable at March 31, 2004 and
2003 were $10,000,000 and $8,035,000, respectively, payable to CHS for
purchases of oil.During the years ended March 31, 2004, 2003, and 2002, the Company recorded
expenses of $10,006,000, $9,402,000 and $8,487,000, respectively, to Mitsui
USA for the Companys participation in Mitsui USAs insurance plans.
Included in accounts payable at March 31, 2004 and 2003 were $1,001,000 and
$790,000, respectively, due to Mitsui USA in connection with the Companys
participation in such plans.Sales to Mitsui USA for the years ended March 31, 2004, 2003 and 2002
totaled $1,231,000, $1,423,000 and $1,406,000, respectively. Included in
trade receivables at March 31, 2004 and 2003 were $133,000 and $123,000,
respectively, of receivables from Mitsui USA for product sales.Forward purchase contracts as of March 31, 2004 included commitments for
purchases of 162,080,000 pounds of oil from CHS. The Company recognized
gains of $763,000, $1,081,000 and $934,000 on such related party commitments
for the years ended March 31, 2004, 2003 and 2002, respectively.5.
    
    EMPLOYEE BENEFIT PLANSThe Company has long-term incentive arrangements for certain key executives.
Benefits under the initial plan were based on earnings over a three-to-five
year period (as defined) from January 1, 1997 through December 31, 2001. An
amount equal to the obligation incurred under the plan was contributed to a
rabbi trust that would be available to general creditors in the event of
bankruptcy. The trust holds investments primarily in marketable securities
that are recorded at market value (classified as trading securities). The
assets in the trust are to be distributed to the employees upon retirement.
The liability under the arrangements was $15,626,000 and $13,574,000 as of
March 31, 2004 and 2003, respectively, and is included in deferred
compensation obligation in the accompanying balance sheets.On January 1, 2002, the Company established new long-term incentive
arrangements with certain key executives. Under these arrangements, the
amount of additional compensation is based on the attainment of cumulative
income-based or equity-based targets over a two- to three-year period. At
the end of the defined periods, assets equaling amounts earned by individual executives
will be contributed to a rabbi trust, unless representatives of Wilsey and
CHS elect to pay such amounts directly to the respective key F-40




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##### Table of Contents



executives. At
March 31, 2004 and 2003, a liability for the plan of $8,017,000 and
$4,702,000, respectively, is included in long-term deferred compensation
obligation in the accompanying balance sheets.For the years ended March 31, 2004, 2003 and 2002, the Company recognized
compensation expense under the long-term incentive arrangements of
$2,148,000, $4,264,000 and $5,658,000, respectively.The Company has a combined 401(k) and defined contribution profit-sharing
plan (the Plan) covering substantially all employees not covered by
collective bargaining agreements. Under the Plan, employees can make annual
voluntary contributions not to exceed the lesser of an amount equal to 15%
of their compensation or limits established by the Internal Revenue Code.
The Company is required, by the Plan, to make certain matching contributions
of up to 4% of each participants salary and may make discretionary
profit-sharing contributions. Expenses under this plan for the years ended
March 31, 2004, 2003 and 2002 were $4,576,000, $6,484,000 and $5,855,000,
respectively. The Company also established a 401(k) defined contribution
plan covering employees under certain collective bargaining agreements.
Under this plan, employees can make annual voluntary contributions of up to
15% of their compensation. Certain of the Companys union employees are
participants in multiemployer plans. Payments to multiemployer pension plans
are negotiated in various collective bargaining agreements and aggregated
$2,660,000, $2,367,000 and $1,162,000 for the years ended March 31, 2004,
2003 and 2002, respectively. The actuarial present value of accumulated plan
benefits and net assets available for benefits to union employees under
these multiemployer pension plans is not available, as the Company does not
administer these plans.Effective January 1, 1999, the Company established a Supplemental Executive
Retirement Plan for certain of its employees. The projected benefit
obligation as of March 31, 2004 and 2003 was $3,922,000 and $2,955,000,
respectively. A liability of $2,862,000 and $2,220,000 as of March 31, 2004
and 2003, respectively, is included in long-term deferred compensation
obligation in the accompanying balance sheets. The plan is unfunded. During
the years ended March 31, 2004, 2003 and 2002, the Company recorded an
expense related to the plan of $642,000, $552,000 and $111,000,
respectively.The assumptions used in the measurement of the Companys benefit obligation
are as follows: March 312004
    
    2003
    
    2002Discount rate
    
    
    6.0
    %
    
    
    6.0
    %
    
    
    7.0
    %Rate of compensation increase
    
    
    3.0
    %
    
    
    3.0
    %
    
    
    3.0
    %
  The Company accrues the actuarially determined amount necessary to fund the
participants benefits in accordance with the requirements of the Employee
Retirement Income Security Act of 1974. F-41




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##### Table of Contents



6.
    
    COMMITMENTS AND CONTINGENCIESFuture minimum annual payments under noncancelable operating leases with
lease terms in excess of one year at March 31, 2004 are as follows: Sublease
    
    Net LeaseGross Rent
    
    Income
    
    Commitment2005
    
    $
    8,186,000
    
    
    $
    942,000
    
    
    $
    7,244,0002006
    
    
    6,551,000
    
    
    
    942,000
    
    
    
    5,609,0002007
    
    
    4,848,000
    
    
    
    942,000
    
    
    
    3,906,0002008
    
    
    3,914,000
    
    
    
    707,000
    
    
    
    3,207,0002009
    
    
    3,351,000
    
    
    
    
    
    
    
    3,351,000Thereafter
    
    
    12,948,000
    
    
    
    
    
    
    
    12,948,000Total
    
    $
    39,798,000
    
    
    $
    3,533,000
    
    
    $
    36,265,000
  Under the lease agreements, the Company is obligated to pay certain property
taxes, insurance and maintenance costs. Certain leases contain renewal and
purchase options. Rental expense for the years ended March 31, 2004, 2003
and 2002 under operating leases totaled $8,336,000, $7,138,000 and
$5,671,000, respectively.The Company is involved from time to time in routine legal matters
incidental to its business. The Company believes that the resolution of such
matters will not have a material adverse effect on the Companys business,
financial condition or results of operations.7.
    
    GOODWILLIn June 2001, the FASB issued SFAS No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. These statements, among other
things, eliminate the pooling-of-interests method of accounting for business
combinations as of June 30, 2001, eliminate the amortization of goodwill and
indefinite life intangible assets for all fiscal years beginning after
December 15, 2001, and require that goodwill and indefinite life intangible
assets be reviewed annually for impairment, or more frequently if impairment
indicators arise. The Company adopted SFAS Nos. 141 and 142 with respect to
new goodwill as of July 1, 2001 and adopted SFAS No. 142 with respect to
existing goodwill and indefinite life intangible assets as of April 1, 2002,
the first day of its 2003 fiscal year. The adoption of SFAS No. 141 did not
impact the Companys financial condition or results of operations. Upon the
adoption of SFAS No. 142, the Company ceased amortizing existing goodwill
and trademarks.The Company completed the transitional test of goodwill and trademarks
during 2003. Based on the result of the test, the Company determined that
there was no impairment of goodwill and trademarks as of April 1, 2002.
Pursuant to SFAS No. 142, goodwill and trademarks will be tested for
impairment at least annually and more frequently if an event occurs which
indicates that goodwill or trademarks may be impaired. Based on the result
of the test, the Company determined that there was no impairment of goodwill
and trademarks as of March 31, 2004 and March 31, 2003. During 2003, the
Company abandoned the use of certain trademarks with a net book value of
$100,000. F-42




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##### Table of Contents



A reconciliation of net income to the amount adjusted for the exclusion of
goodwill and trademarks amortization follows for the years ended March 31: 2004
    
    2003
    
    2002Reported net income
    
    $
    69,242,000
    
    
    $
    70,558,000
    
    
    $
    70,486,000Add:Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    3,972,000Trademark amortization
    
    
    
    
    
    
    
    
    
    
    1,853,000Adjusted net income
    
    $
    69,242,000
    
    
    $
    70,558,000
    
    
    $
    76,311,000
  Amortization expense for other intangible assets subject to amortization was
$83,000, $223,000 and $402,000 for the years ended March 31, 2004, 2003 and
2002, respectively. Estimated annual amortization for each of the years in
the five-year period ending March 31, 2008 is $180,000.8.
    
    SUBSEQUENT EVENTSOn April 2, 2004, the Company purchased the assets of portion packing
company for $7,437,000 before certain closing adjustments. ****** F-43