CHSCP

SEC Filing Summary: CHS Inc. (Cenex Harvest States Cooperatives)

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended August 31, 1999, representing the first full fiscal year for Cenex Harvest States Cooperatives following the June 1, 1998, merger of Cenex, Inc. and Harvest States Cooperatives. The merger was accounted for as a pooling of interests. The Company is an agricultural cooperative organized for the mutual benefit of its members, primarily located in the Midwest and Northwest United States. Primary business segments include Energy, Agronomy, Grain Merchandising, Oilseed Processing and Refining, Wheat Milling, and Farm Marketing and Supply.

Material Subsequent Event: In September 1999, the Company and Farmland Industries, Inc. signed a transaction agreement to unify the two cooperatives, pending member approval by November 23, 1999.

Key Financial Metrics (Year Ended August 31, 1999)

Segment Performance:

• Grain and Oilseed: $3,309.3 million (29% decrease vs. prior year due to lower prices).
• Energy: $1,345.8 million (28% decrease vs. prior year).
• Oilseed Processing: Net income of $13.2 million (49% decrease vs. prior year).
• Wheat Milling: Net loss of $11.9 million (vs. $5.7 million income in prior year).

Material Changes vs. Prior Comparable Period

Compared to the year ended May 31, 1998:

• Net Income: Decreased by $91.3 million (51%) to $86.0 million. The decline was primarily driven by the absence of a $57.4 million plant food patronage refund received in the prior year and depressed gross margins in food processing and energy operations.
• Revenues: Decreased by approximately $2.0 billion (24%) to $6.3 billion. Grain and oilseed sales dropped $1.3 billion due to a $1.15 per bushel decline in average sales prices. Energy sales fell $0.5 billion due to reduced average sales prices.
• Expenses: Marketing, general, and administrative expenses increased by $22.4 million (18%) due to business segment expansion. Interest expense increased by $7.8 million (23%) due to higher working capital needs and long-term borrowings for capital expenditures.
• Wheat Milling Segment: Incurred a net loss of $11.9 million, a significant deterioration from the prior year's profit, largely due to a reduction in production volume at the Huron mill during a conversion to hard wheat bakery flour and a general deterioration in gross margins.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Strategy:

• Merger with Farmland: The Company is actively pursuing a combination with Farmland Industries, Inc., with a target consummation date of March 1, 2000, subject to member votes.
• Capital Expenditures: The Company expects to spend approximately $139.6 million on property, plant, and equipment in the fiscal year ending August 31, 2000. This includes a new soybean processing plant in Fairmont, Minnesota ($60-$90 million) and continued expansion in wheat milling.
• Organizational Changes: Effective August 1999, Grain Marketing, Wheat Milling, and Oilseed Processing were combined into the "Aligned Grain" division. The Board of Directors will be reduced from 27 to 17 members in December 1999.

Risks and Contingencies:

• Commodity Price Volatility: The Company is exposed to price risks in grain, oilseed, and energy markets. While hedging activities are used to mitigate risk, they also limit gain potential.
• Year 2000 Compliance: Management estimates total remediation costs at $2.0 million, with $1.8 million expensed through August 31, 1999. Risks remain regarding the readiness of external vendors and customers.
• Customer Concentration: In the Oilseed Processing unit, one customer (Ventura Foods, LLC) accounted for 35% of refined oil sales. In Wheat Milling, three customers accounted for 32% of meal sales.
• Legal Proceedings: The Company is involved in various lawsuits incidental to its business, though management does not expect a material impact on financial statements.

Investor Verification Checklist

• Merger Approval: Verify the outcome of the member votes for the Farmland Industries merger scheduled for November 23, 1999.
• Wheat Milling Turnaround: Monitor the performance of the Wheat Milling Defined Business Unit, specifically the volume recovery at the Huron mill and the profitability of the new Mount Pocono facility.
• Patronage Refunds: Confirm the cash portion of patronage refunds for fiscal year 1999, which is expected to be approximately $17.3 million for Equity Participation Units and regular patronage.
• Debt Covenants: Review compliance with restrictive covenants on long-term debt, including minimum working capital levels.
• Year 2000 Status: Assess any post-filing updates regarding Year 2000 system failures or costs incurred by key suppliers and customers.