**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-K**

 

**ý****        ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal yearended December 31, 2002**

 

**COMMISSION FILE NO. 333-75804**

** **

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

(ExactName of Registrant as Specified in its Charter)

 

| **South Dakota**                                                       |   | **46-0462968**                         |
|------------------------------------------------------------------------|--------|----------------------------------------|
| (State  of Other Jurisdiction of  Incorporation or Organization)       |   | (I.R.S.  Employer  Identification No.) |
|                                                                   |   |                                   |
| **100 Caspian Avenue, Post Office Box 500, Volga, South Dakota 57071** |
| (Address  of Principal Executive Offices)                              |
|                                                                   |   |                                   |
| **(605) 627-9240**                                                     |
|  (Registrant’s Telephone Number)                             |

 

----

 

SECURITIESREGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:  **NONE**

SECURITIESREGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:  **NONE**

 

----

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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 ý  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K. ý

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).Yes o No ý

 

State the aggregate marketvalue of the voting and non-voting common equity held by non affiliates computed by reference to the price at whichthe common equity was last sold, or the average bid and asked price of suchcommon equity, as of the last business day of the registrant’s most recentlycompleted second fiscal quarter: The aggregate market value of the commonequity of the registrant and its predecessor held by non-affiliates as of June30, 2002 was approximately $42,064,372.50 based on the average sales price ofits predecessor’s equity shares on June 18, 2002, which was the latest date ofsales prior to June 30, 2002.

 

Indicate the number of sharesoutstanding of each of the registrant’s classes of common stock, as of thelatest practicable date:  As of the dateof this filing, there were 14,129,250 Class A capital units of the registrantoutstanding.

** **

** **

----

 

**Part I**

 

**CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING INFORMATION**

 

This information in this annualreport on Form 10-K for the year ended December 31, 2002, contains“forward-looking statements” within the meaning of the private securitieslitigation reform act of 1995 with respect to the business and operations ofSouth Dakota Soybean Processors and our affiliates. In addition, we and ourrepresentatives and agents may from time to time make other written or oralforward-looking statements, including statements contained in our filings withthe Securities and Exchange Commission and our reports to members and securityholders. Words and phrases such as “believe,” “expect,” “anticipate,” “intend,”“plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,”“future,” “potential,” or the negatives of these words, and all similarexpressions identify forward-looking statements. We wish to caution readers notto place undue reliance on any forward-looking statements, which speak only asof the date made.

 

Our forward-looking statementsare subject to risks and uncertainties that could cause actual results todiffer materially from those discussed in the forward-looking statements. Theserisks and uncertainties include, but are not limited to, risks related to thelevel of commodity prices, loss of member business, competition, changes in thetaxation of limited liability companies, compliance with laws and regulations,perceptions of food quality and safety, business interruptions and casualtylosses, access to equity capital, consolidation of producers and customers,alternative energy sources, and the performance of our Soy Processing, OilRefining, and Other business segments. Other risks or uncertainties may bedescribed from time to time in the company’s future filings with the Securitiesand Exchange Commission.

 

We undertake no obligation torevise any forward-looking statements to reflect future events orcircumstances.

 

**Item 1.****                        ****Business**

 

**Industry Information**

 

The soybean processing industryconverts soybeans into soybean meal and crude soybean oil. Food ingredients arethe primary end use for the oil, while the meal is consumed mostly by animals.Crude soybean oil is refined primarily for use in processed foods, such asmargarine, salad dressings, and baked goods and, to a more limited extent, industrialuses. The U.S. soybean processing industry is currently projected to grow at anannual rate of approximately 11⁄2%.

 

Soybean production isconcentrated in the central United States, Brazil, China, and Argentina. In the2002/2003 harvest season, the United States produced approximately 2.7 billionbushels of soybeans. It is estimated that 60% of those soybeans will beprocessed domestically, 35% will be exported as whole soybeans, and 5% will beretained for seed and residual use. Historically, there has been adequatesoybean production in the upper Midwest to supply the local soybean processingindustry, even in years when a substantial amount of soybeans has beenexported.

 

Soybean processing plants, alsoknown as crushing plants, are generally located close to adequate sources ofsoybeans and a strong demand for meal that decreases transportation costs.Poultry and swine dominate the usage for soybean meal in the United States. Onaverage, exports of soybean meal account for 15 to 20% of the total use. Abushel of soybeans

 

2

----

 

typically yields approximately44 pounds of protein-rich meal, and 11 pounds of crude oil when crushed.

 

Refineries are generallylocated close to the crushing plants. Oil is shipped throughout the U. S. andfor export. Approximately 90% of the soybean oil produced in the U.S. isconsumed domestically and the remaining 10% exported. Approximately 96% of thedomestic consumption is used in food applications and 4% is used in industrialapplications.

 

The U.S. soybean processingindustry is comprised primarily of 15 different companies operating 64 plantsin 22 states. It is a mature, consolidated, and vertically-integrated industrywith four companies controlling nearly 85% of the processing. The fourcompanies include Archer Daniels Midland (ADM), Bunge, Cargill, and AgProcessing, Inc. (AGP).

 

Soybean processing margins arecyclical, characteristic of a mature, competitive industry. In addition, whilethe price of soybeans may fluctuate substantially from year to year, the pricesof meal and oil generally track with the soybeans, although not necessarily ona one for one basis, and therefore, margins can be variable.

** **

**Overview of South Dakota Soybean Processors,LLC**

 

In 1993, a group of soybean producers in eastern South Dakota formedSouth Dakota Soybean Processors, referred by many as SDSP, to build thefirst soybean crushing facility in the United States since 1978. The organizers raised funds for theplant from over 2,000 area soybean producers. Ground-breaking ceremonies wereheld in September of 1995 at the plant site on the east side of Volga, SouthDakota. We began operations in late 1996. Originally designed to crush16 million bushels of soybeans per year, our plant capacity has since beenincreased to crush 28 million bushels per year, or more than 80,000 bushels of soybeans per day.This represents a capacity of 1.6% of the total soybean crushing industry.

 

Our primary business is processing locally grown soybeans into soybeanmeal, crude soybean oil, and soybean hulls. In addition to these products, weadded an oil refinery to the Volga site to process crude soybean oil intoR&B (Refined and Bleached) oil. Our soybean meal is primarily sold tolivestock feed companies and independent livestock producers as a high proteinlivestock feed additive. Our R&B oil is sold to an independent oil refinerthrough a supply agreement for further processing into food grade oil. Ourcrude soybean oil is sold to refineries for further processing into foodproducts, as a feed ingredient, and some industrial uses. Our soybean hulls areeither blended back into the soybean meal or sold separately, either pelletedor loose, as a fiber source in livestock diets.

 

We plan to maintain ourcompetitive position in the marketplace by producing a high quality product,and operating a highly efficient operation at the lowest possible cost. At thesame time, we plan to gradually increase our production capability to competemore effectively against higher capacity competitors such as ADM, Cargill, AGP,Bunge, and Cenex Harvest States.

 

We are also taking initiatives to move our products upthe value-added product chain. As part of this effort, we are reviewingindustrial applications in plastics and energy. Finally, we are pursuingstrategic alliances to help meet our overall goals, such as our relationshipwith Urethane Soy Systems Company, Inc. and Minnesota Soybean Processors.

 

Our primary business objectiveis to maximize cash distributions to our members from the profits generatedthrough our operations and investments. At the same time, our managementrecognizes the need to maintain our financial strength, and to consider andimplement growth strategies that will allow us to continue meeting these objectivesover time.

 

3

----

 

**Reorganization**

 

South Dakota Soybean Processorswas originally organized on December 6, 1993, as a South Dakota cooperative,which is entitled to single-level, pass-through tax treatment on incomegenerated through the members’ patronage. This allows the company to pass ourincome on to our members in the form of distributions without first payingtaxes at the company level, similar to a partnership. However, as we have grownthe continuing availability of this advantageous tax treatment was becomingless and less predictable. Accordingly, in 2001 the cooperative’s Board ofDirectors approved a plan to reorganize into a South Dakota limited liabilitycompany (LLC), which may elect to be taxed as either a partnership or acorporation. By reorganizing as an LLC, the board plans to retain our historicsingle-level income tax treatment by electing to be taxed as a partnership.

 

The plan of reorganization wasduly approved by our members at a meeting held on June 20, 2002, and thereorganization became effective July 1, 2002. The transaction was an exchangeof interests whereby the assets and liabilities of the cooperative weretransferred for capital units of the newly formed limited liability company,Soybean Processors, LLC. The capital units were distributed to our members upondissolution of the cooperative at a rate of one capital unit of the LLC foreach share of equity stock owned in the cooperative. The distribution ofcapital units to our members was registered under the Securities Act of 1933.For financial statement purposes, no gain or loss was recorded as a result ofthe exchange transaction. Upon completion of the reorganization, the name ofthe limited liability company was changed to South Dakota Soybean Processors,LLC.

 

Historically,the cooperative’s fiscal year end had been August 31; however, as a limitedliability company we will be required to operate on a December 31 fiscal yearend on a going-forward basis. Our historical financial statements and otherinformation in this report include the operations of our predecessorcooperative prior to the reorganization, and periods subsequent to thereorganization have been restated to a December 31 year end.

 

**Products & Services**

 

Currently, we divide our operations, productsand services, and the related revenues and net income into three segments; SoyProcessing, Oil Refining, and Other. The Soy Processing segment processes wholesoybeans into soybean meal, crude soybean oil, and soybean hulls. The OilRefining segment purchases crude oil from the Soy Processing segment to refineand bleach for sale into the food grade market. The Other segment contains ourinvestments, SoyOyl® revenues and expenses, as well as managementfees for various projects.

** **

**SoyProcessing Segment**

** **
| **Dollars  in Thousands** |   | **Year  Ended December 31,** |    |
|---------------------------|--------|------------------------------|---------|
|                      |   | **2002**                     |    | **2001** |   | **2000** |   |
|                      |   |                         |    |   |   |   |   |
| Revenue                   |   | $                            | 141,942 |   | $ | 148,228 |   | $ | 145,264 |   |
|                      |   |                         |    |   |   |   |   |
| Operating  Income         |   | $                            | 6,888   |   | $ | 7,382 |   | $ | 5,825 |   |
| %  of Revenue             |   | 4.9                          | %       | 5.0 | % | 4.0 | % |
|                      |   |                         |    |   |   |   |   |
| Total  Assets             |   | $                            | 56,094  |   | $ | 56,543 |   | $ | 53,568 |   |

 

4

----

 

In this segment, our products include soybeanmeal, crude soybean oil, and soybean hulls, which are all generated from thesame basic crushing process. Each sixty-pound bushel of soybeans crushed at our Volga plantyields approximately 44 pounds of meal, 11 pounds of oil, and 4 pounds ofhulls, accounting for approximately 68%, 20% and 12%, respectively, of revenuesin this segment for 2002.

 

**Soybean Meal.**  Weproduce approximately 616,000 tons of soybean meal each year. The meal isshipped out by truck and rail car. Primary markets include the local truckmarket, the Pacific Northwest, and exports to Canada. Over the years, we haveshipped meal into 22 states and 4 Canadian Provinces. Significant mealcustomers in 2002 included Land O’ Lakes, Commodity Specialists, and EastmanFeeds out of Winnipeg, Canada.

 

As a commodity, soybean mealsales are highly price sensitive, and we offer substantial discounts to thosecustomers who purchase large quantities of meal. A plant’s protein quality andloading facilities are also factors which are considered by customers.

** **

**Soybean Oil.****Weproduce approximately 157,000 tons of crude soybean oil. Since the completionof our on-site refinery, the majority of the crude soybean oil we produce isfurther refined at the plant site; however, it was previously sold to a varietyof customers in both the U.S. and Canada. Significant crude soybean oilcustomers in 2002 included Cenex Harvest States and Cargill. SDSP is aregistered delivery point for the Chicago Board of Trade (CBOT) soybean oilfutures contract. We deliver crude soybean oil against the CBOT futurescontracts at the Volga site when market conditions dictate. We have also rentedstorage space at other locations to take advantage of the CBOT soybean oildelivery program. We receive a storage payment through the CBOT for all oilthat is delivered into this program.

 

**Soybean Hulls***.*In addition to soybean meal and crude soybeanoil, we produce approximately 49,000 tons of soybean hulls annually. The hullsare either blended back into the soybean meal or sold in a loose or pelletedform as a fiber source for livestock. Soybean hulls are not traded in the futuresmarket. Cash markets include local beef and dairy producers and feed millsthroughout the United States.

 

**Oil Refining Segment**

** **
| **Dollars  in Thousands** |   | **Year  Ended December 31,** |   |
|---------------------------|--------|------------------------------|--------|
|                      |   | **2002**                     |   | **2001** |   | **2000** |   |
|                      |   |                         |   |   |   |   |   |
| Revenue                   |   | $                            | 17,384 |   |   |   |   |   |
|                      |   |                         |   |   |   |   |   |
| Operating  Income         |   | $                            | (381   | ) | $ | — |   | $ | — |   |
| %  of Revenue             |   | -2.2                         | %      |   |   |   |   |
|                      |   |                         |   |   |   |   |   |
| Total  Assets             |   | $                            | 9,815  |   |   |   |   |   |
|                           |        |                              |        |  |  |  |  |  |  |  |

 

5

----

 

The Oil Refining segment beganoperation in August 2002 with the start-up of our on-site refining facilityadjacent to our crushing plant in Volga, South Dakota. The Oil Refining segmentprocesses the crude soybean oil produced by the Soybean Processing segmentthrough a series of processes and filters to create the product known in theindustry as “R&B” (Refined and Bleached) oil.

 

We have an exclusive supplyagreement with a strategic partner, ACH Foods, to provide its facilities with aconsistent supply of R&B oil on a general requirements basis. We have afixed pricing terms established for the first five years, with the option torenegotiate the price thereafter. The oil is transported by rail from our plantto one of ACH Foods’ facilities where it is further processed and then packagedfor the edible oil market.

 

Soapstock is aby-product of the refining process. It consists of the gum material that isremoved from the crude oil in the first stages of the process. The soapstockhas limited market potential, but can be used in feed or processed further intoa product known as lecithin, which is an emulsifier that is used in many edibleand non-edible products. We plan to produce a combination of these twoby-products as we continue in this segment.

** **

**Other Segment**

** **
| **Dollars  in Thousands** |   | **Year  Ended December 31,** |   |
|---------------------------|--------|------------------------------|--------|
|                      |   | **2002**                     |   | **2001** |   | **2000** |   |
|                      |   |                         |   |   |   |   |   |
| Revenue                   |   | $                            | 163    |   | $ | 30 |   | $ | 9 |   |
|                      |   |                         |   |   |   |   |   |
| Operating  Income         |   | $                            | 106    |   | $ | 353 |   | $ | 2 |   |
| %  of Revenue             |   | 65.0                         | %      | 1176.7 | % | 22.2 | % |
|                      |   |                         |   |   |   |   |   |
| Total  Assets             |   | $                            | 4,376  |   | $ | 2,138 |   | $ | 1,462 |   |

 

The other segment consists oftwo primary revenue streams and expenses. They are the sales of modified crudesoybean oil to Urethane Soy Systems Company (USSC) for use in a polyol product,and management fees charged to clients who hire us to perform managementfunctions such as Minnesota Soybean Processors (MnSP).

** **

**Urethane Soy Systems Company, Inc.**

 

USSC is a Princeton, Illinoisbased producer of SoyOyl®, a polyol made from soybean oil. Polyol is a keychemical in foam formulation that reacts with other ingredients to formdifferent types of polyurethane foam, which can be used in a variety ofproducts such as insulation, packaging, furniture padding, carpet backing andfootwear. USSC holds the patent for SoyOyl® and a number of related productionprocesses and industrial uses.

 

We have the exclusive rights to supply soybean oil to USSC to makeSoyOyl® until 2014.We have also been assigned the rights to a patent relating to the modificationof crude soybean oil for use in industrial applications such as manufacturingSoyOyl®. In February 2001, the developer of this process filed anapplication to patent the process with the United States Patent and TrademarkOffice and subsequently assigned the rights to the process and any futurepatent to us. A patent for the process was granted in 2002. Because this patentis only for the initial refining process to prepare crude soybean oil forindustrial uses, and SoyOyl® itself is already patented, we do not anticipate that our SoyOyl®operations would be materially harmedif we did not have this patent.

 

6

----

 

We currently sell 100% of theSoyOyl® we produce to USSC for resale to manufacturers who use it intheir products. If demand for SoyOyl® increases, we will need toexpand our SoyOyl® production facilities. We expect the profits fromSoyOyl® sales to fund the cost of these capital expenditures ifsales increase at a reasonable pace. However, if demand for SoyOyl®increases rapidly, we may need to obtain debt financing or expend cash fundsthat would otherwise be available for distributions to members to expand theproject.

 

We originally purchased a 4%ownership in USSC in May 2000 for $1 million. Effective January 2003, we agreedto invest an additional $8.55 million to acquire a 58% majority ownershipinterest in USSC by purchasing shares from existing shareholders and newlyissued shares from USSC. We will also take over the management of USSC.

 

The Stock Purchase Agreementrequires us to pay $1,377,000 of the purchase price to the USSC shareholders byOctober 27, 2003. The remainder of the purchase price to the shareholdersbecomes due in three equal annual installments of $891,000 on the first,second, and third anniversary of the first payment date. We are required to paythe purchase price to USSC for the newly-issued shares in twelve equal quarterlypayments of $375,000 beginning January 1, 2003. Our Board of Managers isconsidering an offering of additional capital units of SDSP, to finance thebalance of the purchase price to USSC and the shareholders; however, no finaldecision has been reached and other financing alternatives may be considered.

** **

**Minnesota Soybean Processors.**

 

In August 2000, we entered intoan agreement with Minnesota Soybean Processors (MnSP) to provide constructionmanagement for a new soybean processing plant located in Brewster, Minnesota.Under the contract, we will be paid 10% of the total equity raised, and weagreed to reinvest 80% of the construction management fees in equity of the newcompany. We estimate that our percentage ownership in the company will beapproximately 10% after we have completely reinvested the constructionmanagement fees pursuant to our agreement. In addition, we made a total of $1million in interest-free loans backed by retained local earnings available toour members to invest in MnSP. Approximately $500,000 in interest-free loanshas been committed to our members through this program.

 

MnSP completed its equityfundraising in April 2002, raising a total of approximately $29 million.Construction began approximately six months later and is scheduled to becompleted in the fall of 2003. Once MnSP begins production, we will providemanagement and marketing services to MnSP, including the day-to-day managementcontrol of MnSP’s plant under a Services and Management Agreement with MnSPpursuant to which we will be paid primarily on a cost-sharing basis.

 

We also purchased land thatMnSP held an option on near Brewster, Minnesota for $150,000 and built a 63million-pound oil storage tank and loading facilities at that site. Wecurrently use the tank to store oil. The construction cost for the tank wasapproximately $2.6 million. Once MnSP becomes operational, we plan to sellthe land, storage tank, and loading facilities to MnSP. We are currentlynegotiating the terms of the proposed sale and do not currently have adefinitive agreement to sell the tank to MnSP.

 

**NewProjects.**

 

In September of 2001, wereceived a $500,000 matching Value-Added Agricultural Product Market andDevelopment Grant (VADG) from the United States Department of Agriculture. The grantis to help fund the cost of exploring the feasibility of further value addedventures. Under the terms of the grant, the United States Department ofAgriculture will contribute 50% towards the budgeted expenses incurred for ourprojects, up to a total grant of $500,000. To date we

 

7

----

 

havecollected over $100,000 of grant money related to our oil refinery project. Theestimated timeline to complete our remaining projects ranges from June 2001through July 2004.

** **

**Raw Materials and Suppliers**

 

We procure soybeans through anetwork of local soybean producers and country elevators. In 2002 soybeanproduction in a 50-mile radius of the plant was approximately 35 millionbushels or 1.25 times the plant needs. Production of soybeans in South Dakotahas averaged approximately 140 million bushels over the last three years. Wecontrol the flow of soybeans into the plant with a combination of price andcontracting options. Threats to the soybean supply include weather, changes ingovernment programs, and competition from other processors and export markets.The refining plant receives its entire supply of crude soybean oil from ourcrushing plant.

** **

**Utilities**

 

We use natural gas andelectricity to operate the crushing and refining plant. Natural gas is used inthe boilers for process heat, and for soybean drying. NorthWestern Energyprovides natural gas service to the plant on an interruptible basis. We are atrisk to adverse price fluctuations in the natural gas market, but we do havethe capability to use fuel oil as a back up for natural gas if marketconditions dictate. We employ forward contracting to offset some of this risk.Our electricity is supplied by the City of Volga. A long term contract onelectricity helps offset some of the price exposure on electrical rates.

** **

**Sales, Marketing and Customers**

 

Our principal markets can bebroken into two segments: local (South Dakota, Minnesota, and the Canadianprovidence of Saskatchewan), and the Pacific Northwest (considered a regionalmarket consisting of the states of Oregon, Washington, and the NorthwestCanadian Providences of Alberta and British Columbia). Favorable freight ratesare the primary motivator in determining demand for commodity products. Wegenerally deliver to local markets by truck and to the regional markets byrail. Our rail service is provided by the DM&E rail line, with connectionsto the Burlington-Northern Santa Fe (BNSF) and the Union Pacific (UP) for mealand crude oil shipments.  The BNSF is theprimary carrier into the Pacific Northwest, and the UP is used forapproximately 50% of the shipments in the California market.  Refined oil is shipped via the DM&E,Canada Pacific and Canada National lines. The table presented below lists the percentage of sales by quantity ofproduct sold within various markets for 2002.

*** ***
|                      |   | **Soybean  Meal** |   | **Soybean  Oil** |   | **Soybean  Hulls** |   | **Refined  Oil** |   |
|---------------------------|--------|-------------------|--------|------------------|--------|--------------------|--------|------------------|--------|
| South Dakota              |   | 14                | %      | 1                | %      | 46                 | %      |             |   |
| Minnesota                 |   | 14                | %      | 65               | %      | 21                 | %      |             |   |
| Other U.S. States         |   | 54                | %      | 29               | %      | 33                 | %      | 100              | %      |
| Export (including Canada) |   | 17                | %      | 5                | %      | 1                  | %      |             |   |

 

We generally market and sellall of our products ourselves instead of using brokers. We sell the majority ofour products using “shipment” or “to ship” contracts which are either priced(meaning the entire price of the commodity has been established includingfutures price, basis, and freight) or basis only (which means only the basisand freight have been fixed).

** **

**Competition**

 

We are the only significanthexane extraction plant in South Dakota and we believe that we haveapproximately 17% of the soybean crushing market in the Upper Midwest and 1% inthe United States based on our crush capacity of 80,000 bushels per day. Weplan to maintain our

8

----

 

competitive position in themarket place by producing a high quality product and operating a highlyefficient operation at the lowest possible cost. At the same time, we plan togradually increase our production capability to compete more effectivelyagainst higher capacity competitors like ADM, Cargill, Bunge, Ag Processors,and Cenex Harvest States.

** **

**Government Regulation and Environmental Matters**

 

Hexane recovery is critical inthe crushing operation and is closely monitored by the Environmental ProtectionAgency. Current regulations require thatthe amount of hexane lost in the extraction process not exceed 0.3 gallons perton of soybean oil produced on a rolling 12-month average, and our productionprocess currently meets this requirement. New regulations will take effect in2004, which will require that the amount of hexane lost in the extractionprocess not exceed 0.2 gallons per ton of soybean meal produced on a rolling12-month average. Our current loss levels meet this requirement.

 

As part of a Compliance Planwith the South Dakota and Federal Departments of Environment and NaturalResources, we installed a new zero process discharge system to replace ourconventional wastewater system and are currently in compliance with our surfacewater discharge permits. We are obligated to provide ongoing compliance reportsto the Department of Environment and Natural Resources. Capital expenditurestowards this project were approximately $481,000.

 

We maintain a spill preventionplan that contains the necessary procedures to minimize spill events andprovide emergency notification, if necessary. It also contains the requiredinformation pertaining to spill containment procedures in the event a spilldoes occur, and the proper spill clean-up procedures. The plan places us incompliance with the provision of 40 CFR, Part 112, of the Federal Regulationson oil pollution prevention, and the provisions of SARA, *Superfund Amendments andReauthorization Act, 1986*. It also addresses all known potentiallypolluting materials at our plant. At this time, there are no known hazardouswastes generated at our plant.

 

We also maintain an EPAFacility Response Plan. This plan is also prepared according to the guidelinesof 40 CFR, Part 112, and pursuant to the Oil Pollution Act of 1990. This planis designed to emphasize oil spill prevention and oil spill responsepreparedness.

** **

**Employees**

 

We currently employ 88individuals, consisting of 17 employees in administration, commercial andsupport service, and 71 in the plant. All but 19 of our employees arefull-time. We have no unions or other collective bargaining agreements.

 

**Item 2.****                        ****Properties**

 

We conduct our operations inthree principal facilities; one is used for actual product production, one forcrude soybean oil storage, and one as an administration office. We are in theprocess of analyzing our current space needs for the administration office, andbelieve that additional space will be available at a reasonable cost to meetour needs.

 

The following table provides adescription of our principal facilities. We own each of the facilities listedbelow and they all serve as collateral for our credit facilities.

 

9

----

 
| **Location**         |   | **Function**                       |   | **Segment**                      |
|----------------------|--------|------------------------------------|--------|----------------------------------|
| Volga, South Dakota  |   | Production Facility                |   | Soy Processing and  Oil Refining |
|                 |   |                               |   |                             |
| Volga, South  Dakota |   | Administration office              |   | All                              |
|                 |   |                               |   |                             |
| Brewster,  Minnesota |   | Oil Tank & Loadout  Facilities |   | Soy Processing                   |

 

**Item 3.****                        ****Legal Proceedings**

 

From time to time in the ordinary course ofour business, we may be named as a defendant in legal proceedings related tovarious issues, including without limitation, workers’ compensation claims,tort claims, or contractual disputes. We carry insurance that providesprotection against general commercial liability claims, claims against ourdirectors, officers and employees, business interruption, automobile liability,and workers’ compensation claims. Except as described below, we are notcurrently involved in any material legal proceedings and are not aware of anypotential claims.

 

On January 28, 2003, we were served withnotice that we had been named as a defendant in a breach of contract suit inthe circuit court of Cook County, Illinois, along with a number of otherindividual defendants, including our Chief Executive Officer, RodneyChristianson. The plaintiff, James Jackson, was an employee of USSC whoseservices were terminated shortly after we became the majority owner in earlyJanuary 2003. Mr. Jackson claims that he was wrongfully terminated and that thedefendants unjustly interfered with his employment contract and committed fraudin connection with our acquisition of a controlling interest in USSC. He isclaiming nearly $1 million in compensatory damages and $5 million inpunitive damages. Based upon our investigation of the facts surrounding thecase, we believe that Mr. Jackson’s employment contract was not properlyauthorized and that his claims are substantially without merit. We arevigorously defending the action; however, we cannot provide any assurance thatwe will be successful in disposing of the case or that any costs of settlementor damages would not be material if we are unable to get the case dismissed.Under the terms of our stock purchase agreement with USSC, we believe that wewould be entitled to indemnification from USSC for our costs to settle ordefend the suit.

 

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

 

There were no matters submitted to a vote ofsecurity holders in the quarter ending December 31, 2002.

 

10

----

 

**Part II**

 

**Item 5.****                        ****Market for Registrant’s Common Equity and Related StockholderMatters**

 

Neither SDSP, nor ourpredecessor cooperative, sold any equity securities during the past three yearsended December 31, 2002.

 

On December 31, 2002, we had14,129,250 Class A capital units outstanding, held by 2,095 members. There iscurrently no active trading market for our capital units.

 

The following table is thetrading history of our capital units and equity shares of our predecessorcooperative by quarter for the past two years.

 
| **Quarter**         |   | **Low Bid** |   | **High Bid**        |   | **Average Bid** |   | **# of Units Traded** |
|---------------------|--------|-------------|--------|---------------------|--------|-----------------|--------|-----------------------|
|                |   |        |   |                |   |            |   |                  |
| Jan – Mar 2001 |   | 2.59        |   | 2.77                |   | 2.64            |   | 84,000                |
| Apr – Jun 2001 |   | 2.55        |   | 2.74                |   | 2.65            |   | 67,500                |
| Jul – Sep 2001 |   | 2.86        |   | 2.92                |   | 2.89            |   | 12,500                |
| Oct – Dec 2001 |   | 2.49        |   | 2.94                |   | 2.73            |   | 26,250                |
| Jan – Mar 2002 |   | 2.84        |   | 3.05                |   | 2.95            |   | 62,500                |
| Apr – Jun 2002 |   | 3.01        |   | 3.24                |   | 3.07            |   | 47,500                |
| Jul – Sep 2002 |   |        |   | No Trading Activity |   |            |
| Oct – Dec 2002 |   |        |   | No Trading Activity |   |            |

 

In the last two fiscal years,our predecessor cooperative paid cash distributions to our members in theamount of $5.7 million (40.56¢ per share) in October 2001, and $5.5 million(39.06¢ per share) in August 2002.

 

As an LLC, we must strictlyrestrict transfers of our capital units in order to preserve our preferentialsingle-level tax status. Capital units may not be traded on any nationalsecurities exchange or in any over-the-counter market. All transfers must be inaccordance with our capital unit transfer system, as it maybe amended by theBoard of Managers from time to time. We will not recognize any transfer thatwould result in the loss of our partnership tax status.

 

Pursuantto our Operating Agreement, a minimum of 2,500 capital units is required formembership. In addition to the transfer restrictions described above, the Boardalso retains the right to redeem the capital units at $.20 per unit in theevent a member attempts to dispose of the units in a manner not in conformitywith the Operating Agreement, if a member becomes a holder of less than 2,500units, becomes an owner (directly or indirectly) of more than 1.5% of theissued and outstanding capital units or becomes a bankrupt member. As a resultof the reorganization, the delivery of soybeans under the previous memberdelivery agreements is no longer required as an obligation of membership.Earnings, losses, and cash distributions are allocated to members based ontheir percentage of capital unit ownership. Our Operating Agreement alsoincludes provisions whereby cash equal to a minimum 30% of net income will bedistributed to members subject to certain limitations, including minimum netincome of $500,000, restrictions imposed by debt and credit instruments, or asrestricted by law in the event of insolvency.

 

**Item6.****           SelectedFinancial Data**

 

Thefollowing table sets forth selected financial data of South Dakota SoybeanProcessors, LLC and our predecessor cooperative for the periods indicated.Historically, the cooperative’s fiscal 

 

11

----

 

yearend had been August 31; however, we converted to a December 31 fiscal year endas part of the reorganization. The historical financial information in thetable below includes audited and unaudited financial data of our predecessorcooperative prior to the effectiveness of the reorganization on July 1, 2002.Periods prior to the reorganization have been restated to a December 31 yearend. The audited financial statements included in Item 8 of this report havebeen audited by our independent auditors, Eide Bailly LLP.

 
|                                    |   | **Years Ended December 31,** |   |
|-----------------------------------------|--------|------------------------------|--------|
|                                    |   | **2002**                     |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                    |   |                         |   |   |   |   |   |   |   |   |   |
| Bushels  Processed                      |   | 27,963,507                   |   | 26,924,542 |   | 26,832,064 |   | 24,553,153 |   | 23,794,142 |   |
|                                    |   |                         |   |   |   |   |   |   |   |   |   |
| Statement  of Operations Data:          |   |                         |   |   |   |   |   |   |   |   |   |
| Revenues:                               |   |                         |   |   |   |   |   |   |   |   |   |
| Net  Sales                              |   | 159,488,645                  |   | 148,258,146 |   | 145,273,300 |   | 128,146,355 |   | 161,081,915 |   |
| Patronage  Income                       |   | 36,801                       |   | 1,460,386 |   | 1,779,755 |   | 660,623 |   | 1,123,014 |   |
| CBOT  Storage Income                    |   | 1,867,769                    |   | 1,629,420 |   | 1,436,184 |   | 1,432,260 |   | 1,623,539 |   |
| Agent  Fee Income                       |   | 258,988                      |   | 463,896 |   | 450,674 |   | 417,049 |   | 463,858 |   |
| Management  Fees & Misc.            |   | 1,286,340                    |   |   |   |   |   |   |   |   |   |
|                                    |   | 162,938,543                  |   | 151,811,848 |   | 148,939,913 |   | 130,656,287 |   | 164,292,326 |   |
| Costs  & Expenses:                  |   |                         |   |   |   |   |   |   |   |   |   |
| Cost  of goods sold                     |   | 152,583,964                  |   | 141,359,124 |   | 140,293,625 |   | 125,954,573 |   | 154,346,780 |   |
| Marketing  & Administrative Expense |   | 2,679,633                    |   | 2,234,248 |   | 1,768,207 |   | 1,783,460 |   | 2,090,874 |   |
| Interest  Expense                       |   | 542,220                      |   | 483,223 |   | 1,050,880 |   | 723,031 |   | 1,030,022 |   |
| Income  Tax Expense                     |   | 520,000                      |   |   |   |   |   |   |   | 482 |   |
| Net  Income                             |   | 6,612,726                    |   | 7,735,253 |   | 5,827,201 |   | 2,195,223 |   | 6,824,168 |   |
|                                    |   |                         |   |   |   |   |   |   |   |   |   |
| Shares  Outstanding                     |   | 14,129,250                   |   | 14,129,250 |   | 14,129,250 |   | 14,129,250 |   | 14,129,250 |   |
| Net  Income per Share                   |   | $                            | 0.47   |   | $ | 0.55 |   | $ | 0.41 |   | 0.16 |   | $ | 0.48 |   |
|                                    |   |                         |   |   |   |   |   |   |   |   |   |
| Balance  Sheet Data:                    |   |                         |   |   |   |   |   |   |   |   |   |
| Working  Capital                        |   | 5,363,332                    |   | 4,212,055 |   | 3,173,651 |   | 2,380,942 |   | 1,779,559 |   |
| Net  Property, Plant & Equipment    |   | 33,761,185                   |   | 31,892,837 |   | 31,872,946 |   | 33,963,308 |   | 33,957,965 |   |
| Total  Assets                           |   | 70,284,896                   |   | 58,680,968 |   | 55,030,320 |   | 50,955,893 |   | 50,865,199 |   |
| Long-Term  Obligations                  |   | 10,234,523                   |   | 8,346,078 |   | 8,649,420 |   | 12,819,873 |   | 10,384,964 |   |
| Members  Equity                         |   | 33,875,593                   |   | 32,779,725 |   | 30,771,474 |   | 25,518,926 |   | 26,755,559 |   |
|                                    |   |                         |   |   |   |   |   |   |   |   |   |
| Other  Data                             |   |                         |   |   |   |   |   |   |   |   |   |
| Capital  Expenditures                   |   | 4,645,020                    |   | 2,718,740 |   | 720,956 |   | 2,658,400 |   | 2,859,883 |   |
|                                         |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 7.****                        ****Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

* *

*You should read the following discussionalong with our financial statements and the notes to our financial statementsincluded elsewhere in this report. The following discussion containsforward-looking statements that are subject to risks, uncertainties, andassumptions. Our actual results, performance, and achievements may differmaterially from those expressed in, or implied by, these forward-lookingstatements. See “Cautionary Statement Regarding Forward-Looking Information” atthe beginning of this report.*

 

**CompanyProfile**

 

South Dakota Soybean Processorsowns and operates an 80,000 bushel per day soybean processing plant in Volga,South Dakota that began production of crude soybean oil, soybean meal, andsoybean hulls in late 1996. Since then we have expanded our business to includethe

 

12

----

 

development of new products andmanagement services, and in August 2002, we began refining crude soybean oilinto a product known as “R&B”, refined and bleached oil. In compliance withfinancial accounting standards, we are reporting on three segments in the followingdiscussion: Soy Processing, Oil Refining, and Other business operations that donot fit under Soy Processing or Oil Refining.

 

The following discussionrelates to financial data of South Dakota Soybean Processors, LLC and thepredecessor cooperative for the periods indicated. Historically, thecooperative’s fiscal year end had been August 31; however, we converted to aDecember 31 fiscal year end as part of the reorganization. The historicalfinancial information discussed below includes audited and unaudited financialdata of our predecessor cooperative prior to the effectiveness of thereorganization on July 1, 2002. Periods prior to the reorganization have beenrestated to a December 31 year end. The audited financial statements includedin Item 8 of this report have been audited by our independent auditors, EideBailly LLP.

 

**Results of Operations**

 

The following table presents,for the periods indicated, the relative composition of selected statement ofincome data for our various segments:

 
|                                |   | **Year Ended December 31,** |   |
|-------------------------------------|--------|-----------------------------|--------|
|                                |   | **2002**                    |   | **2001** |   | **2000** |   |
| **Dollars  in Thousands**           |   | **$**                       |   | ***%*****of****Revenue** |   | **$** |   | ***%*****of****Revenue** |   | **$** |   | ***%*****of****Revenue** |   |
|                                |   |                        |   |   |   |
| Revenue  from external customers:   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Soybean  Processing                 |   | 141,942                     |   |   |   | 148,228 |   |   |   | 145,264 |   |   |   |
| Oil  Refining                       |   | 17,384                      |   |   |   |   |   |   |   |   |   |   |   |
| Other                               |   | 163                         |   |   |   | 30 |   |   |   | 9 |   |   |   |
| Total                               |   | 159,489                     |   |   |   | 148,258 |   |   |   | 145,273 |   |   |   |
|                                |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Gross  Profit                       |   | 6,905                       |   | 4.3 | % | 6,899 |   | 4.7 | % | 4,980 |   | 3.4 | % |
|                                |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| General  and Administrative expense |   | 2,680                       |   | 1.7 | % | 2,234 |   | 1.5 | % | 1,768 |   | 1.2 | % |
| Other  Operating expense (income)   |   | (2,908                      | )      | -1.8 | % | (3,070 | ) | -2.1 | % | (2,616 | ) | -1.8 | % |
|                                |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Operating  Income:                  |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Soybean  Processing                 |   | 6,888                       |   | 4.3 | % | 7,382 |   | 5.0 | % | 5,825 |   | 4.0 | % |
| Oil  Refining                       |   | (381                        | )      | -0.2 | % |   |   | 0.0 | % |   |   | 0.0 | % |
| Other                               |   | 106                         |   | 0.1 | % | 353 |   | 0.2 | % | 2 |   | 0.0 | % |
| Total                               |   | 6,613                       |   | 4.1 | % | 7,735 |   | 5.2 | % | 5,827 |   | 4.0 | % |

 

We only began refining crudeoil and implemented the corresponding Oil Refining segment in August 2002, andthus, revenue and operating income in that segment have been limited.Accordingly, the discussions in the following sections describing the variancesbetween revenue and operating income relate primarily to the Soy Processing andOther segments.

 

**YearEnded December 31, 2002 Compared to the Year Ended December 31, 2001**

 

***Revenue*.**Revenue increased $11.2 million or 7.4% to $159.5 million for the yearended December 31, 2002, from $148.3 million for the year ended December 31,2001. The improvement was due to increases in the quantity of meal sold, aswell as the higher commodity sales prices received for the products. Onaverage, the quantity of meal sales were up by 2.3%

 

13

----

 

and the quantity of crude andrefined oil sales remained approximately the same. The sales price of mealincreased on average 1.2% for the year ended December 31, 2002 over the yearended December 31, 2001, and the sales price of crude oil increased by 5.1%. Inaddition, there is approximately 10% additional revenue due to the refining ofoil.

 

***GrossProfit.*** Gross profit remained approximately evenat $6.9 million for the year ended December 31, 2002, and 2001. Productionexpenses were $1.0 million, or 9.0%, higher in 2002 than 2001. The additionalexpenses of the new refinery accounted for 8.33% of this expense. Utilitieswere significantly lower in 2002, dropping 7.2%, and hexane usage was down by6.9% due to the upgrades to equipment to meet EPA regulations for 2004. Thecost of product sold increased by 6.2% primarily due to lower board margins in2002. The largest increase for 2002 was the Freight Expense and Rail Costs. Therail lease expense increased with the addition of 100 new tank cars to ourfleet. The majority of the increase is due to higher freight rates in 2002, andthe trend to ship more products by rail. This increase however is offset byhigher freight income recognized in the revenue section.

 

***Generaland Administrative Expense.***General andAdministrative expense increased $445,000 or 19.9% for the year ended December31, 2002, compared to the same period in 2001. The increase consists of anincrease by 35.8% in professional fees related to the conversion of thecooperative to a limited liability company, and additional wages and benefits.

 

***InterestExpense***. Interest expense increased $59,000, or12.2% for the year ended December 31, 2002, compared to the same period in2001. The increase was due to slightly higher debt levels throughout the year,caused by carrying larger values in accounts receivable and inventory, and theearly payment of patronage due to the reorganization. At December 31, 2002, wehad outstanding debt of $10.2 million, borrowed at 3.57% interest. At December31, 2001, we had outstanding debt of $10.7 million, borrowed at 4.11%. The increasein accounts receivable is due to the extended payment terms granted for thesales of R&B oil compared to the normal terms for the sales of crudesoybean oil. The R&B oil is sold on 25-day terms, compared to the crude oilsold on “Cash Receipt of Invoice” terms. Inventory was carried at a highervalue because of the large volume of crude oil stored offsite due to higheranticipated values in storing oil, versus selling in the current market.

 

***NetIncome****.* Net income decreased $1.1 million or14.5% to $6.6 million for the year ending December 31, 2002, from $7.7 millionfor the year ending December 31, 2001. This primarily is a result of theincrease in administration expense of $445,000 as explained above, a $1.4million decrease in patronage dividend income from Harvest States, and incometax expense of $520,000 incurred as a result from the change in organizationalstructure to an LLC. Offsetting the higher expenses was $1.4 million of incomefrom management fees.

 

**Year Ended December 31, 2001 Compared to the Year EndedDecember 31, 2000**

 

***Revenue.***Revenue increased $3.3 million or 2.3% to $148.3 million for the year endedDecember 31, 2001, from $145.3 million for the year ended December 31, 2000.The improvement was due to an increase in the quantity of meal sold, as well asthe higher commodity sales prices received for the products. On average, thequantity of meal sales was up by 1.1% and the quantity of crude and refined oilsales was down 5.1%, reflecting the decision to place more oil in storage, ratherthan sell it. The sales price of meal increased on average 2.6% for the yearended December 31, 2001, compared to the year ended December 31, 2000, and thesales price of oil increased by 4.0%.

 

***GrossProfit.*** Gross profit increased $1.9 million, or38.5%, to $6.9 million for the year ended December 31, 2001, from $5.0 millionfor the year ended December 31, 2000. The cost of

 

14

----

 

product sold decreased by $2.0million in 2001, as we saw the board margins rise by an average of 13¢ perbushel, which was offset by a commodity basis decline of approximately 6.2¢ perbushel. There was an increase in freight and rail costs of $2.6 million as weshipped more products by rail instead of truck. The increase in freight expensewas offset by freight income reported in the net revenue amount. We alsoincurred an increase in production expense of 4.9%. This was primarily a resultof increased natural gas costs to operate the plant. Total utility costs were8.3% higher in 2001 over the year ended December 31, 2000.

 

***Generaland Administrative Expense.***General andAdministrative expense increased $466,000 or 26.4% for the year ended December31, 2001, compared to the same period in 2000. Professional fees rose 272% dueto initial work preparing for the conversion from a cooperative to an LLCorganization. The only other category with a large change was the wages andbenefit category with an increase of 18.2%. This is largely the result ofincreased net income, and the corresponding profit sharing expense due to ouremployees.

 

***InterestExpense****.* Interest expense decreased $568,000, or54.0% for the year ended December 31, 2001, compared to the same period in2000. The decrease is primarily a result of the much lower interest ratesduring 2001. At December 31, 2001, we had outstanding debt of $10.7 million,borrowed at 4.11% interest. At December 31, 2000, we had outstanding debt of$10.6 million, borrowed at 8.59%.

 

***NetIncome****.* Net income increased $1.9 million or32.7% to $7.7 million for the year ending December 31, 2001, from $5.8 millionfor the year ending December 31, 2000. This is a result of an additional $1.4million in operating profit, $568,000 less interest expense, and an additional$206,000 of oil storage income, offset by $319,000 less patronage dividendincome from Cenex Harvest States.

 

**Segment Disclosures**

 

Currently we divide ourrevenues and net income into three segments, Soy Processing, Oil Refining, andOther. The Soy Processing segment contains the actual revenues and expenses toprocess whole soybeans into soybean meal, crude soybean oil, and soybean hulls.The Oil Refining segment purchases crude oil from the Soy Processing segment torefine and bleach for sale into the food grade market. The Other segmentcontains our investments, SoyOyl® revenues and expenses, as well asmanagement fees for various projects.

 

***SoyProcessing.*** Soy Processing is the primary segmentof our business. The discussions in the preceding sections describe thevariances between revenue and operating income relating to the Soy Processingsegment, and the table below presents our Soy Processing segment results forthe last three years.

** **
| **Dollars  in Thousands** |   | **Year Ended December 31,** |    |
|---------------------------|--------|-----------------------------|---------|
|                      |   | **2002**                    |    | **2001** |   | **2000** |   |
|                      |   |                        |    |   |   |   |   |
| Revenue                   |   | $                           | 141,942 |   | $ | 148,228 |   | $ | 145,264 |   |
|                      |   |                        |    |   |   |   |   |
| Operating Income          |   | $                           | 6,888   |   | $ | 7,382 |   | $ | 5,825 |   |
| %  of Revenue             |   | 4.9                         | %       | 5.0 | % | 4.0 | % |

 

Prior to the change inorganization to a LLC, we received patronage income from all of the pounds ofcrude oil sold to Cenex Harvest States. The patronage income was based on netincome in their refinery segment, and was allocated to us in January of eachyear. We accrued the patronage based on the quarterly filings with theSecurities and Exchange Commission of

 

15

----

 

Cenex Harvest States. For theyears ending December 31, 2002, 2001, and 2000, that income was $37,000, $1.5million, and $1.8 million, respectively. Due to the change in ourorganizational structure, we are no longer eligible to receive patronage incomeon crude oil sold to Cenex Harvest States; however, with the installation ofour on-site refining equipment, the amount of crude soybean oil sold to CenexHarvest States will be very limited in the future.

 

***OilRefining.*** Our oil refining plant began operationsin August 2002. The following table sets forth results of our Oil Refiningsegment for the last three years, followed by a discussion of this segment.Since we only began refining crude oil and implemented the corresponding OilRefining segment in August 2002, revenue and operating income in this segmenthave been limited and are not representative of annualized results.

 
| **Dollars  in Thousands** |   | **Year  Ended December 31,** |   |
|---------------------------|--------|------------------------------|--------|
|                      |   | **2002**                     |   | **2001** |   | **2000** |   |
|                      |   |                         |   |   |   |   |   |
| Revenue                   |   | $                            | 17,384 |   |   |   |   |   |
|                      |   |                         |   |   |   |   |   |
| Operating  Income         |   | $                            | (381   | ) | $ | — |   | $ | — |   |
| %  of Revenue             |   | -2.2                         | %      |   |   |   |   |
|                           |        |                              |        |  |  |  |  |  |  |  |

 

Revenue in the Oil Refiningsegment for the year ended December 31, 2002 was $17.4 million. There were norevenues in 2001 for this segment. The $17.4 million of revenue was based on77.7 million pounds of R&B oil sold, as well as 3.7 million pounds ofsoapstock sold.

 

The operating loss for the OilRefining segment for the year ended December 31, 2002 was $382,000. This wasdue to high overhead caused by the start-up of the segment. Extra labor wasused to get the equipment operational to meet the deadline imposed by thesupply agreement, and extensive training of personnel was needed for thestart-up activities. We received $112,000 in 2002 from the USDA based on aValue-Added Development Grant that offset some of the additional costs.

 

***Other***.The Other segment contains income and expenses not related to either SoyProcessing or Oil Refining. The two primary sources of revenue in this segmenthave been from sales of SoyOyl® and management income from the MnSPconstruction project. At times, we also earn miscellaneous income for thecompletion of feasibility studies or other projects, and the income from theseprojects will fall into this category. The following table sets forth resultsof our Other segment for the last three years, followed by a discussion of therevenue and operating income relating to this segment.

 
| **Dollars  in Thousands** |   | **Year Ended December 31,** |   |
|---------------------------|--------|-----------------------------|--------|
|                      |   | **2002**                    |   | **2001** |   | **2000** |   |
|                      |   |                        |   |   |   |   |   |
| Revenue                   |   | $                           | 163    |   | $ | 30 |   | $ | 9 |   |
|                      |   |                        |   |   |   |   |   |
| Operating  Income         |   | $                           | 106    |   | $ | 353 |   | $ | 2 |   |
| %  of Revenue             |   | 65.0                        | %      | 1176.7 | % | 22.2 | % |

 

We recognize management incomefrom MnSP as it is earned based on percentage of completion of the project. Theproject was divided into four stages, and a period was established for eachstage. We adjust the time period each month if a particular stage appears thatit will take longer to complete than anticipated. For the year ended December31, 2002, we recognized management income of $1.2 million.  Allocated expenses against the managementincome were $248,197, and $0 for the years ended December 31, 2002 and 2001,respectively.

 

16

----

 

SoyOylÒremains in the development stages and our revenues from its sales for the yearsended December 31, 2002 and 2001 were not material, and no expenses wereallocated to our SoyOylÒ operations for theyears ended December 31, 2002 and 2001.

 

**Liquidity and Capital Resources**

 

The followingtable shows our cash flows for the last three years:

 
|                                                  |   | **Year Ended December 31,** |   |
|-------------------------------------------------------|--------|-----------------------------|--------|
| **Dollars  in Thousands**                             |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                                  |   |                        |   |   |   |   |   |
| Continuing Operations:                                |   |                        |   |   |   |   |   |
| Net cash provided by operating activities             |   | 10,964                      |   | 9,459 |   | 6,619 |   |
| Net cash (used) by investing activities               |   | (6,990                      | )      | (1,787 | ) | (1,701 | )  |
| Net cash (used) by financing activities               |   | (5,978                      | )      | (5,665 | ) | (4,918 | )  |
|                                                  |   |                        |   |   |   |   |   |
| Net (decrease) increase in cash and cash  equivalents |   | (2,004                      | )      | 2,007 |   | — |   |

 

**Cash Flows from Operations**

 

Operating activities provided$10.9 million for the year ended December 31, 2002, compared to $9.5 millionfor the year ended December 31, 2001. The primary changes from 2001 included$1.1 million less net income in 2002, offset by a significant $1.5 millionreduction in non-cash patronage allocations from Cenex Harvest States, areduction in working capital needs of $893,000, and additional depreciationexpense of $289,000.

 

Operating activities provided$9.5 million for the year ended December 31, 2001, compared to $6.6 million forthe year ended December 31, 2000, a change of $2.8 million. The primary changesfrom 2000 included additional net income of $1.9 million in 2001, and areduction in working capital needs of $1.2 million, offset by $345,000 lessdepreciation expense.

 

**Cash Flows from Investing Activity**

 

Investing activities used $7.0million during the year ended December 31, 2002. This $7.0 million ofexpenditures consisted of $4.6 million for equipment purchases for the plantand $2.3 million towards the construction of an oil storage tank at Brewster, Minnesota.Included in the $4.6 million of plant equipment expenditures are $4.1 millionin costs associated with the addition of the oil refinery of in 2002. The other$500,000 was spent on miscellaneous projects to meet maintenance orenvironmental requirements or improve efficiencies within the plant.

 

In August 2000, we entered intoan agreement with MnSP for certain construction management services for its newsoybean processing plant in Brewster, Minnesota. We agreed to reinvest aminimum of 80% of the fees we earn under the agreement in MnSP equitysecurities. To date, we have earned approximately $1.5 million under theagreement, but we will not make the required investment in MnSP untilconstruction is completed, which is currently scheduled for fall of 2003. Wehave also committed to make $500,000 in interest free loans to our membersbacked by retained local earnings for investment in MnSP. Funds will beprovided from excess credit on the revolving term debt.

 

17

----

 

On December 10, 2002, weentered into a Stock Purchase Agreement with USSC and six of its shareholdersfor a controlling interest in USSC for a total purchase price of approximately$8.55 million. The closing of the transaction occurred on January 1, 2003, andno funds were paid to USSC or the shareholders during 2002.

 

For additional informationabout our MnSP and USSC investments, see Item 1. Business – Products andServices – Other Segment.

 

**Cash Flows from Financing Activity**

 

Cash flows from financingactivities used $6.0 million during the year ended December 31, 2002. The $6.0million in expenditures consisted of $5.5 million paid to our members in a cashdistribution, and $455,000 in principal payments on long-term debt.

 

Cash flows from financingactivities used $5.7 million during the year ended December 31, 2001. Theexpenditures consisted of a $5.7 million cash distribution to our members,$992,000 in principal payments on long-term debt, and $1.1 million in proceedsfrom other long-term debt.

 

CoBank is our primary lender.Effective February 26, 2002, we have two lines of credit established withCoBank to meet the needs of the company. The first is a revolving long-termloan agreement. Under the terms of this loan, we began with a $16.0 millioncredit line that increases in increments to $21.0 million by May 1, 2003, andthen reduces by $1.3 million approximately every six months thereafter with afinal payment equal to the remaining unpaid principal balance of the loan onMarch 20, 2011. The revolving loan is set up so we can borrow funds as neededup to the credit line maximum, and pay down whenever excess cash is available.Once we pay it down, the credit line increases, and we have full access toborrow those funds again if needed. We pay a 0.5% annual commitment fee on anyfunds not borrowed.

 

The second credit line is arevolving working capital loan agreement that expires on March 31, 2005, unlessextended by CoBank. The primary purpose of this loan is to finance inventoryand receivables. The maximum availability under this credit line ranges from$6.0 million to $10.0 million for particular commitment periods during the termof the loan to match our anticipated needs with respect to carrying inventory.For example, we have higher lines established during the months of Octoberthrough May to cover the carrying costs of soybeans that are piled outsideduring the harvest season. Borrowing base reports and financial statements arerequired monthly to justify the balance borrowed on this line. We pay a 0.25%annual commitment fee on any funds not borrowed; however, we have the option toreduce these credit lines during any given commitment period listed in theagreement to avoid incurring the commitment fee on funds not borrowed.

 

Both CoBank loans are set upwith a variable rate option. The variable rate is set by CoBank and changesweekly, on the first business day of each week. We also have a fixed rateoption on both loans allowing us to fix rates for any period between one dayand the entire commitment period. We can get a fixed rate quote from CoBank atany time and lock-in the interest rate on all or a part of our borrowings thatare available for fixing. Both CoBank loans are secured by substantially all ofour assets and are subject to compliance with standard financial covenants andthe maintenance of certain financial ratios. The balance borrowed on therevolving term loan was $9.9 million, and $10.1 million as of December 31,2002 and 2001, respectively. There were no advances outstanding on the workingcapital credit line at December 31, 2002 and 2001, respectively. The interestrate on both the revolving term and the working capital credit line as ofDecember 31, 2002, and 2001 was 3.57%, and 4.11% respectively.

 

We had a loan administered bythe South Dakota Governor’s Office of Economic Development. This loan is anAgriculture Processing and Export fund loan (APEX). The principal was in the

 

18

----

 

original amount $150,000financed at 5% per annum. This loan had a balloon payment at the end of sixyears, which was on December 1, 2002. We also had a Revolving EconomicDevelopment and Initiative Fund (REDI), administered by the South DakotaGovernor’s Office of Economic Development that was originally $1.05 million,financed at 3% annually with a balloon payment after 5 years. This loan maturedon December 1, 2001.

 

Principal payments on the APEXloan for the year ended December 31, 2002 were $125,182, and $5,467 for theyear ended December 31, 2001. Principal payments on the REDI loan were $0 and$887,090 for the year ended December 31, 2002 and 2001 respectively. Thebalance borrowed on the APEX loan was $0 and $125,182 on December 31, 2002 and2001 respectively.

 

We have a note payable to theBrookings County Railroad Authority. This note is a ten-year note for $575,000,financed at 5%, which matures on September 1, 2007. Semi-annual principal andinterest payments are due in February and August. Railroad track sidingslocated at the plant secure the note. Principal payments on the BrookingsCounty Railroad Authority note were $55,538 and $52,862 for the years endedDecember 31, 2002 and 2001 respectively.

 

We have a long-term payablecontract with the City of Volga for an error in the billing of electricity dueto a faulty city meter that occurred between 1996 and 1999. Payments are madeat a rate of $3,229 per month without interest. The contract matures onDecember 31, 2003. Payments of $38,748 were made in both of the twelve-month periodsending December 31, 2002 and December 31, 2001.

 

We have a note payable with theButler Machinery Company to finance a new caterpillar skid steer. Payments aremade annually in October for $4,377, at 0% interest. The note matures onOctober 31, 2004. Payments of $4,377 and $0 were made during the twelve-monthperiods ending December 31, 2002, and 2001 respectively.

 

The following table shows ouraggregate long-term debt obligation commitments for the periods presented.

 
| **(Dollars in Thousands)**                                 |   | **Total** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   |
|------------------------------------------------------------|--------|-----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|
|                                                       |   |      |   |     |   |     |   |     |   |     |   |     |   |           |   |
| Minimum Principal  Payments on Long-Term  Debt Obligations |   | 10,245    |   | 101      |   | 2,266    |   | 2,264    |   | 2,268    |   | 2,271    |   | 1,075          |   |

 

**OffBalance Sheet Financing Arrangements**

 

**LeaseCommitments**

 

We have commitments underoperating leases for rail cars, various types of vehicles, lab and officeequipment, and oil storage tanks.

 

We lease 299 hopper rail carsand 10 oil tank cars from GE Capital. There are five separate leases, threewith 18-year terms, and one with a 5-year term. The final lease expires inDecember 2018. These leases require aggregate monthly payments of $123,890.There is an additional lease with Trinity Capital for 100 oil tank cars, withmonthly lease payments of $38,300. Lease expense for rail cars was $1.9 millionand $1.4 million for the years ending December 31, 2002 and 2001, respectively.The hopper rail cars earn mileage credit from the railroad through a subleaseprogram. Mileage credit income was $1.45 million and $1.43 million for theyears ending December 31, 2002 and 2001, respectively.

 

19

----

 

In addition to the rail carleases, we have several operating leases for various equipment and storagefacilities. Total equipment lease expense, other than rail cars, was $668,867for the year ending December 31, 2002 and $339,650 for the year ending December31, 2001. Some of these leases include purchase options; however, none are fora value less than fair market value at the end of the lease.

 
| **(Dollars in thousands)**                           |   | **Total** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   |
|------------------------------------------------------|--------|-----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|
|                                                 |   |      |   |     |   |     |   |     |   |     |   |     |   |           |   |
| Minimum  Rail Car Operating Lease Payments           |   | 21,581    |   | 1,946    |   | 1,946    |   | 1,946    |   | 1,899    |   | 1,730    |   | 12,114         |   |
|                                                 |   |      |   |     |   |     |   |     |   |     |   |     |   |           |   |
| Minimum  Equipment and Tank Operating Lease Payments |   | 230       |   | 112      |   | 41       |   | 41       |   | 31       |   | 5        |   |           |   |
|                                                 |   |      |   |     |   |     |   |     |   |     |   |     |   |           |   |
| Total  Lease Commitments                             |   | 21,811    |   | 2,058    |   | 1,987    |   | 1,987    |   | 1,930    |   | 1,735    |   | 12,114         |   |

 

**Recent Accounting Pronouncements**

 

The Financial AccountingStandards Board has recently issued pronouncements regarding Accounting forAsset Retirement Obligations, Accounting for Impairment or Disposal ofLong-Lived Assets, and Accounting for Costs Associated with Exit or DisposalActivities. We are currently reviewing these pronouncements, but do not expecttheir implementation to have a significant effect on the financial statements.

 

**CriticalAccounting Policies and Estimates**

 

Preparation of our financialstatements requires estimates and judgments to be made that affect the amountsof assets, liabilities, revenues, and expenses reported. Such decisions includethe selection of the appropriate accounting principles to be applied and theassumptions on which to base accounting estimates. Management continuallyevaluates these estimates based on historical experience and other assumptionswe believe to be reasonable under the circumstances.

 

The difficulty in applyingthese policies arises from the assumptions, estimates and judgments that haveto be made currently about matters that are inherently uncertain, such asfuture economic conditions, operating results and valuations as well asmanagement intentions.  As thedifficulty increases, the level of precision decreases, meaning that actualresults can and probably will be different from those currently estimated.

 

Of the significant accountingpolicies described in the notes to the financial statements, we believe thatthe following may involve a higher degree of estimates, judgments, andcomplexity:

 

*Commitments and Contingencies *

 

Contingencies by their naturerelate to uncertainties that require management to exercise judgment both inassessing the likelihood that a liability has been incurred, as well as inestimating the amount of the potential expense. In conformity with accountingprinciples generally accepted in the United States, we accrue an expense whenit is probable that a liability has been incurred and the amount can bereasonably estimated.

 

20

----

 

*Inventory Valuation** *

 

We account for our inventoriesat estimated net realizable market value. These inventories are agriculturalcommodities that are freely traded, have quoted market prices, may be soldwithout significant further processing, and have predictable and insignificantcosts of disposal. We derive our estimates from local market prices determinedby grain terminals in our area. Processed product price estimates aredetermined by the ending sales contract price as of the close of the final dayof the period. This price is determined by the closing price on the ChicagoBoard of Trade, net of the local basis. Changes in the market values of theseinventories are recognized as a component of cost of goods sold.

 

*Long-Lived Assets *

 

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

 

Long-lived assets, includingproperty, plant and equipment, and investments, are evaluated for impairment onthe basis of undiscounted cash flows whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. An impaired asset is written down to its estimated fair marketvalue based on the best information available. Considerable management judgmentis necessary to estimate future cash flows and they may differ from actual.

 

*Accounting for Derivative Instruments and Hedging Activities*

 

We minimize the effects ofchanges in the price of agricultural commodities by using exchange-tradedfutures and options contracts to minimize our net positions in theseinventories and contracts. We account for these exchange-traded futures andoption contracts, and forward purchase and sales contracts at local marketprices determined by grain terminals in our area. Changes in the market valueof all these contracts are recognized in earnings as a component of cost ofgoods sold.

 

**Item7A.****  Quantitativeand Qualitative Disclosure about Market Risk**

 

***Commodities Risk& Risk Management.***To reduce the price changerisks associated with holding fixed price commodity positions, we generallytake opposite and offsetting positions by entering into commodity futurescontracts (either with a straight futures contract or an options futurescontract) on a regulated commodity futures exchange, the Chicago Board ofTrade. While hedging activities reduce the risk of loss from increasing marketvalues of soybeans, or for decreasing prices of our products, such activitiesalso limit the gain potential which otherwise could result from significantdecreases in market prices of soybeans, or increases in the price of ourproducts. Our policy is generally to maintain a hedged position within limits,but we can be long or short at any time. Our profitability is primarily derivedfrom margins on soybeans processed, not from hedging transactions. Managementdoes not anticipate that its hedging activity will have a significant impact onfuture operating results or liquidity. Hedging arrangements do not protectagainst nonperformance of a cash contract.

 

At any onetime, our inventory and purchase contracts for delivery to the plant may besubstantial. We have risk management policies and procedures that include netposition limits. They are defined by commodity, and include both trader andmanagement limits. This policy and procedure triggers a review by managementwhen any trader is outside of position limits.

 

21

----

 

The positionlimits are reviewed at least annually with the Board of Managers. We monitorcurrent market conditions and may expand or reduce the limits in response to changesin those conditions.

*** ***

***Foreign CurrencyRisk.***We conduct essentially all of our businessin U.S. dollars and have no direct risk regarding foreign currencyfluctuations. Foreign currency fluctuations do however impact the ability offoreign buyers to purchase U.S. agricultural products, including our products,and the competitiveness of and demand for U.S. agricultural products comparedto the same products offered by foreign suppliers.

*** ***

***Interest Rate Risk.***We manage exposure to interest rate changes by using variable rate loanagreements with fixed rate options. Long-term loan agreements can utilize thefixed option through maturity; however, the revolving ability to pay down andborrow back would be eliminated once the funds were fixed.

 

**Item 8.****                                  ****Financial Statements and Supplementary Data**

 

Reference is made to the “Indexto Financial Statements” of South Dakota Soybean Processors, LLC located atpage F-1 of the report, and financial statements and schedules for the yearended December 31, 2002 referenced therein, which are hereby incorporated byreference.

 

**Item 9.****                                  ****Changes in and Disagreements with Accountants on Accountingand Financial Disclosure**

 

None.

 

22

----

 

**Part III**

 

**Item 10.****                           ****Directors and Executive Officers of the Registrant**

 

**Board of Managers**

 

Our Board of Managers consistsof three members of SDSP from each of seven geographic districts, for a totalof 21 Board members. Board members are elected by the members in theirgeographic district to staggered three-year terms, and may not serve more thanthree consecutive three-year terms. The Board currently consists of the groupof 21 individuals who were previously elected to serve on the Board ofDirectors of the predecessor cooperative. These Board members will serve on ourBoard of Managers until the expiration of their original staggered terms on thecooperative’s Board of Directors

 

The table below describesimportant information about the members of the Board of Managers.

 
| **Name,  Address,  Telephone and Board  Position, if any**              |   | **Age** |   | **Board**Member   Since |   | **Current   Term**Expiring |   | **Occupation  and  Background**                                                                                                                                                                                                                                                                                                                                                                                                   |
|-------------------------------------------------------------------------|--------|---------|--------|-------------------------|--------|----------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                    |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Paul Barthel**22308  486th Ave.   Elkton, SD 57026                    |   | **34**  |   | **1996**                |   | **2003**                   |   | **Paul has been a farmer for the past 17 years. He is  a member of the South Dakota Soybean Association, and the South Dakota Corn  Growers. Paul graduated from South Dakota State University in Brookings, SD  in 1992 with a major in Ag Business and minor in Agronomy.**                                                                                                                                                     |
|                                                                    |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **James Call**R.R.3 Box 167  Madison, MN   56256-9102                   |   | 48      |   | 1995                    |   | 2004                       |   | James has been a farmer  for the past 30 years. He belongs to the Minnesota Soybean Growers  Association, Minnesota Corn Growers Association, and is a director of the Lac  Qui Parle Soybean Growers. He is chairperson of the Lac Qui Parle County Farm  Service Agency County Committee, and a Director of the Minnesota Soybean  Research and Promotion Council.                                                              |
|                                                                    |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Paul  W. Casper***President*44095 212th St.Lake Preston, SD57249-9640 |   | **44**  |   | **1994**                |   | **2004**                   |   | **Paul has been a farmer for the past 25 years. He is  a member of the South Dakota Soybean Association, and past 1st Vice  President, South Dakota Corn Growers, National Corn Growers, and South Dakota  Ag Producers Ventures. Paul attended Dakota State University in Madison, SD  for one year.**                                                                                                                           |
|                                                                    |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Dan Feige**45974 232nd St.  Wentworth, SD   57075-9644                |   | 47      |   | 1996                    |   | 2005                       |   | Dan has been a farmer for  the past 21 years. He is a member of the National Corn Growers Association,  the American Soybean Association, and a director on the South Dakota Soybean  Association. He is a past delegate for Associated Milk Producers. Dan  attended the University of South Dakota in Springfield, South Dakota and  received an Associate Degree in Diesel Technology with a minor in Education  and Business. |

 

23

----

 
| **Name,  Address,  Telephone and Board  Position, if any**                |   | **Age** |   | **Board**Member   Since |   | **Current   Term**Expiring |   | **Occupation  and  Background**                                                                                                                                                                                                                                                                                                                                           |
|---------------------------------------------------------------------------|--------|---------|--------|-------------------------|--------|----------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                      |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                      |
| **Marvin Goplen**1671 270th Ave.   Canby, MN 56220   (507) 223-7391       |   | 68      |   | 1995                    |   | 2005                       |   | Marvin has  been a farmer for the past 45 years. He is a member of the Farm Bureau, and  the Minnesota Soybean Association. He is a Director of the Minnesota State  Plowing Organization, and a member of the National Plowing Organization.  Marvin attended the University of Minnesota, St. Paul, MN for 2 years  concentrating in Agriculture                        |
|                                                                      |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                      |
| **Ryan J. Hill**78588 330th Ave.  Worthington, MN  56187-9402             |   | 53      |   | 1995                    |   | 2003                       |   | Ryan has  been a farmer for the past 29 years. He belongs to the National and Minnesota  Corn and Soybean Growers Associations. Ryan attended Worthington Junior  College, and participated in the U.S. Navy Engineering metallurgy program in  1969.                                                                                                                     |
|                                                                      |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                      |
| **Marvin Hope*****Vice President***45886 217th St.  Volga, SD  57071-9355 |   | 66      |   | 1994                    |   | 2005                       |   | Marvin has  been a farmer for the past 45 years. He is a member of the South Dakota  Soybean Association, and the American Soybean Association. He belongs to the  National Corn Growers Association, and the Farm Bureau. Marv attended the  Lutheran Bible Institute in Minneapolis, MN in 1956 and 1957.                                                               |
|                                                                      |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                      |
| **James H. Jepsen**48480 231st St.  Flandreau, SD   57028-6631            |   | 46      |   | 1996                    |   | 2005                       |   | James has  been a farmer for the past 27 years. He is currently a member and was the  former President of the South Dakota Soybean Association. Jim attended South  Dakota State University in Brookings, SD and received an Associate of Arts  Degree in Agriculture and General Ag in 1977.                                                                             |
|                                                                      |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                      |
| **Peter Kontz**47068 223rd St.  Colman, SD 57017                          |   | 60      |   | 1998                    |   | 2004                       |   | Peter has  been a farmer for the past 36 years. He is a member of the South Dakota  Cattlemen’s Association (Treasurer for four years), South Dakota Corn Growers  Association, and the South Dakota Soybean Association. He attended the School  of Agriculture in Brookings, SD.                                                                                   |
|                                                                      |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                      |
| **Bryce Loomis**19989 464th Ave.  Bruce, SD  57220-5113                   |   | 60      |   | 1998                    |   | 2004                       |   | Bryce has  been a farmer and seed sales representative for the past 35 years. He belongs  to the National Corn Growers Association, the South Dakota Soybean Producers  Association, and the Farm Bureau.                                                                                                                                                                 |
|                                                                      |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                      |
| **Gerald Moe**  21469 452nd Ave.   Arlington, SD 57212   (605) 983-5949   |   | 65      |   | 1994                    |   | 2005                       |   | Gerald has  been a farmer for the past 42 years. He also has been a District Sales  Manager for a major seed company for 10 years in the past. He is a member of  the American Soybean Association, as well as Vice Chairman of the Board of  Directors for the Citizens State Bank in Arlington, SD. Gerald attended  Augustana College for one year in Sioux Falls, SD. |

 

24

----

 
| **Name,  Address,  Telephone and Board  Position, if any**                       |   | **Age** |   | **Board**Member   Since |   | **Current   Term**Expiring |   | **Occupation  and  Background**                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------------------------------------------------------------------|--------|---------|--------|-------------------------|--------|----------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                             |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
| **Dale Murphy**  102 E. 2nd Ave.   PO Box 686   White, SD 57276   (605) 629-6181 |   | 72      |   | 1994                    |   | 2003                       |   | Dale is a  retired farmer, and was an active farmer for the past 45 years. He was a  director of the First National Bank in White, SD during 1987-1999. Dale  attended Nettleton Commercial College in Sioux Falls, SD and earned a  certificate in auditing and accounting in 1957.                                                                                                                         |
|                                                                             |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
| **Robert Nelsen**  1173 280th Ave.  Westbrook, MN  56183-1023   (507) 274-5163   |   | 61      |   | 1995                    |   | 2004                       |   | Robert is a  retired farmer and Vice President of Environmental Dust Control. During the  past 40 years, he was an active farmer. He is a member of the American  Highland Cattle Association, and the American Soybean Growers Association,  where he has been a state director. He is State Director for the Murray  County Soy Growers, and belongs to Farm Bureau.                                       |
|                                                                             |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
| **Maurice Odenbrett**  2778 41st St.   Fulda, MN 56131   (507) 425-2624          |   | 57      |   | 1995                    |   | 2005                       |   | Maurice has  been a farmer for the past 38 years. He is a supervisor for the Belfast  Township and serves as Vice Chairperson for the Murray County Township  association.                                                                                                                                                                                                                                   |
|                                                                             |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
| **Daniel Potter**31012 County   Highway 6  Redwood Falls, MN   56283             |   | 71      |   | 1995                    |   | 2003                       |   | Daniel has  been a farmer for the past 52 years. He belongs to the Redwood County  Cattlemen’s Association, and the National Cattlemen’s Association. He is also  a supervisor of the Redwood Soil and Water Conservation District and chairs the  Admin Council.                                                                                                                                  |
|                                                                             |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
| **Corey Schnabel*****Secretary***43555 273rd St.   Freeman, SD   57029-9760      |   | 44      |   | 1994                    |   | 2004                       |   | Corey has  been a farmer for the past 23 years. He belongs to the South Dakota and  National Corn Growers Association, the South Dakota and American Simmental  Association. He currently serves as a director of the South Dakota Corn  Growers Association. Corey is a graduate of Lake Area Technical Institute in  Watertown, South Dakota.  He earned an  Associate degree in Ag Business in 1980. |
|                                                                             |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
| **Rodney Skalbeck**80903 160th St.  Sacred Heart, MN   56285(320)  765-2542      |   | 69      |   | 1995                    |   | 2003                       |   | Rodney has  been a farmer for the past 50 years. He belongs to the Farmers Union, Land  Stewardship Project and is a former Director of the Farm Credit association  where he has had positions as chairman and vice chairman.                                                                                                                                                                               |
|                                                                             |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
| **Lyle R.  Trautman**409  Lakeview St.   Box 83 Lake Benton, MN 

56149          |   | 49      |   | 1996                    |   | 2005                       |   | Lyle has  been a farm operator and manager for the past 29 years. He is a member of the  Lincoln County Soybean Growers Association, the Minnesota Soybean Growers  Association, and the Minnesota Corn Growers Association. He is also a member  of the Lake Benton City Council. Lyle attended Mankato State College for two  years, and University of Minnesota for two quarters.                         |

 

25

----

 
| **Name,  Address,  Telephone and Board  Position, if any**  |   | **Age** |   | **Board**Member   Since |   | **Current   Term**Expiring |   | **Occupation  and  Background**                                                                                                                                                                                                                                                                                                                                                                                             |
|-------------------------------------------------------------|--------|---------|--------|-------------------------|--------|----------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                        |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Delbert Tschakert**16150 442nd Ave.  Florence, SD 57235   |   | 47      |   | 1994                    |   | 2003                       |   | Delbert has  been a farmer for the past 25 years, producing corn, soybeans, and hay  commodities. He is a member of the South Dakota Soybean Association, the  South Dakota Corn Growers Association, and former President of the South  Dakota Soybean Association. Delbert is a graduate of South Dakota State  University in Brookings, SD. In 1977, he received his BS in Ag Communications  with a minor in Economics. |
|                                                        |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Anthony Van Uden**3461 300th Ave.  Cottonwood, MN   56229 |   | 65      |   | 1996                    |   | 2004                       |   | Anthony has  been a farmer for the past 44 years. He is a member of Minnesota Soybean  Association, and the American Legion. He is a past Director of the Farmers  Elevator Company, Cottonwood, MN, Lucas Town board, as Chairman, and the Lyon  County Planning and Zoning Committee.                                                                                                                                     |
|                                                        |   |    |   |                    |   |                       |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Ardon Wek**43958 288th St.  Freeman, SD 57029             |   | 44      |   | 1996                    |   | 2003                       |   | Ardon has  been a farmer for the past 24 years. He is a member of the South Dakota Corn  Growers, and the South Dakota Soybean Association. Ardon graduated from  Mitchell Technical College in Mitchell, SD. His major was Architectural  Drafting, and Building Construction.                                                                                                                                             |

 

**Compensationof Board of Managers**

 

Members of the Board ofManagers are currently provided a per diem payment for services performed inthe amount of $150 for each function requiring more than four hours, and $75for each function requiring less than four hours. In addition to the per diemfee, mileage reimbursement is provided at current IRS rates.

 

**ExecutiveOfficers**

 

The following individuals serveas the executive officers of SDSP in the capacities listed. These officersserve at the discretion of the Board of Managers and can be terminated withoutnotice.

 

| **Name**                |   | **Age** |   | **Position**             |
|-------------------------|--------|---------|--------|--------------------------|
|                    |   |    |   |                     |
| Rodney G.  Christianson |   | 49      |   | Chief  Executive Officer |
| Constance M.  Kelly     |   | 39      |   | Chief  Financial Officer |
| Thomas J.  Kersting     |   | 40      |   | Commercial  Manager      |
| Larry E.  Mahlum        |   | 63      |   | Operations  Manager      |

** **

**Rodney G. Christianson, *Chief Executive Officer*.**Rodney joined us as the Chief Executive Officer when operations began in 1996.With 20 years of service with Cargill, Inc. in its Food, Industrial, andOilseed Sectors, Rodney came to us with significant operational and managerialexperience in the U.S. and Brazil. A member of the management team for theGreenfield construction and start up of Cargill’s sunflower plant in WestFargo, North Dakota, Rodney’s experience helped direct our difficult startuptoward a financially successful first year of operations.

 

26

----

 

Rodney is a Minnesota farmnative, and received his B.S. in Engineering from North Dakota StateUniversity. He holds a Professional Engineer’s License.

 

Rodney has completeresponsibility for our operations.

** **

**Constance M. Kelly, *Chief Financial Officer.***Connie joined us as the Chief Financial Officer when operations began in 1996.She began her career as an accountant at the Gibson City, Illinois soybeanprocessing plant in October of 1985. During the nine years with Central Soyaand Consolidated Nutrition, a joint venture of ADM and AGP, Connie held severalaccounting positions at both a plant and at the corporate headquarters. She hasworked in the general accounting, internal audit, international accounting, andfeed group accounting departments.

 

Connie graduated with a B.S. inAccounting from Illinois State University with an emphasis in InformationSystems, and a minor in Business Administration. She holds a CPA certificatefrom the State of Illinois.

 

Connie is responsible foradministrative functions, which include Accounting, Human Resources, Credit,and Information Systems.

** **

**Thomas J. Kersting, *Commercial Manager.***Tom joined us as the Procurement Manager when operations began in 1996, andsince 1998 has served as the Commercial Manager. Tom was affiliated with CenexHarvest States from July 1988 until May 1996. Tom held such positions as MarketAnalyst/Advisor and Head Procurement Merchandiser for Cenex Harvest Statesthroughout North Dakota, South Dakota, and Minnesota. As a market analyst, Tomassisted grain elevator profitability by using advanced management andmarketing techniques while incorporating specific risk management procedures.

 

Tom graduated from theUniversity of Minnesota’s College of Agriculture with a B.S. in AgriculturalBusiness Administration with an emphasis in operations management. Tom is alicensed commodity broker, and our representative with the National OilseedProcessors Association and the Chicago Board of Trade.

 

Tom is responsible for allfutures trading strategies, as well as merchandising commodity products, andsoybean and natural gas procurement.

** **

**Larry E. Mahlum, *Operations Manager*.**Larry joined us as Operations Manager in 1995, after serving in a consultingcapacity for the previous year. Larry has over 30 years experience in the grainprocessing industry through companies such as PJ Anderson, Continental Grain,Specialty Vegetable Oils-Elders Oil Seed, and Continental Milling. As our plantstart-up consultant, Larry’s influence touched everything from engineering firmselection, CEO selection, construction supervision, to operations start-uplogistics. Larry has an in-depth understanding of plant and lab operations andoperations management.

 

Larry was instrumental in thestart-up of the new soybean oil refinery segment, and currently oversees the SoyOyl®development, research, and production processes.

 

**Item 11.****                           ****Executive Compensation**

 

**Compensationof Executive Officers**

** **

**Summary CompensationTable.****The following table sets forth all thecompensation we paid during the years ended December 31, 2002, 2001 and 2000 toour principal executive officer and each officer who was paid over $100,000 inour last fiscal year (the “named executive officers”). No other officersreceived total compensation exceeding $100,000 during the year ended December31, 2002.  

 

27

----

 
|                            |   |            |   | **Annual  Compensation** |   | **Long-Term  Compensation** |   |                                   |   |
|---------------------------------|--------|-----------------|--------|--------------------------|--------|-----------------------------|--------|----------------------------------------|--------|
|                            |   |            |   |                     |   |                        |   |                                   |   | **Awards** |   | **Payouts** |   |   |   |
| **Name and Principal Position** |   | **Year  Ended** |   | **Salary  ($)**          |   | **Bonus  ($)**              |   | **Other  Annual  Compen-  sation ($)** |   | **Restricted    Stock   Award(s)   ($)** |   | **Securities    Underlying   Options/   SARs (#)** |   | **LTIP   Payouts** |   | **All Other**

**Compen-sation  ($)** |   |
|                            |   |            |   |                     |   |                        |   |                                   |   |   |   |   |   |   |   |   |   |
| Rodney G. Christianson          |   | 2002            |   | 200,000                  |   | 64,528                      |   | 3,625                                  |   |   |   |   |   |   |   | 3,597 |   |
| *Chief Executive Officer*       |   | 2001            |   | 186,666                  |   | 100,135                     |   | 3,625                                  |   | — |   | — |   | — |   | 17,208 |   |
|                            |   | 2000            |   | 190,520                  |   | 9,417                       |   | 3,625                                  |   | — |   | — |   | — |   | 14,905 |   |
|                            |   |            |   |                     |   |                        |   |                                   |   |   |   |   |   |   |   |   |   |
| Constance M. Kelly              |   | 2002            |   | 91,500                   |   | 20,000                      |   |                                   |   |   |   |   |   |   |   | 11,306 |   |
| *Chief Financial Officer*       |   | 2001            |   | 82,000                   |   | 32,000                      |   |                                   |   |   |   |   |   |   |   | 9,747 |   |
|                            |   | 2000            |   | 69,000                   |   | —                      |   |                                   |   |   |   |   |   |   |   |   |   |
|                            |   |            |   |                     |   |                        |   |                                   |   |   |   |   |   |   |   |   |   |
| Thomas J. Kersting              |   | 2002            |   | 99,167                   |   | 24,000                      |   |                                   |   |   |   |   |   |   |   | 11,520 |   |
| *Commercial Manager*            |   | 2001            |   | 90,000                   |   | 40,000                      |   |                                   |   |   |   |   |   |   |   | 9,931 |   |
|                            |   | 2000            |   | 73,125                   |   | —                      |   |                                   |   |   |   |   |   |   |   |   |   |
|                            |   |            |   |                     |   |                        |   |                                   |   |   |   |   |   |   |   |   |   |
| Larry E. Mahlum                 |   | 2002            |   | 95,000                   |   | 16,000                      |   |                                   |   |   |   |   |   |   |   |   |   |
| *Operations Manager*            |   | 2001            |   | 95,000                   |   | 33,000                      |   |                                   |   |   |   |   |   |   |   |   |   |
|                            |   | 2000            |   | 82,229                   |   | —                      |   |                                   |   |   |   |   |   |   |   |   |   |

 

Mr. Christianson had athree-year employment agreement with us that expired on August 1, 2002. TheGovernance Committee and Mr. Christianson orally agreed to extend the contractunder the existing terms and conditions for a period of one year expiring onAugust 1, 2003. Under the employment agreement, Mr. Christianson currentlyreceives a monthly salary of $16,666.66 and is entitled to receive an incentivebonus equal to one-half of one percent of net profits before taxes andvalue-added payments, up to $5 million net profit. He is entitled to receive 1%of the total net profits exceeding $5.0 million. Mr. Christianson may elect tohave his incentive bonus paid directly or deferred. Mr. Christianson is alsoentitled to participate in 401(k), healthcare and other retirement and welfarebenefit programs that are generally available to employees and a vehicle to beused for business purposes. Mr. Christianson’s employment contract isterminable at will by the Board of Managers without cause, and may beterminated by Mr. Christianson with 60 days notice.

 

Ms. Kelly and Messrs. Kerstingand Mahlum each have an employment agreement with us that is terminable atwill. Each receives a base salary and is entitled to participate in 401(k),healthcare and other retirement and welfare benefit programs that are generallyavailable to employees, including the employee profit sharing program whichallocates 4% of net profits over $2 million to all employees other thanMr. Christianson. Individual amounts are allocated and distributed toemployees based on a formula that takes into account current salary level, levelof responsibility and the impact of the employee’s position on profits.

 

Messrs. Christianson andKersting and Ms. Kelly also have a deferred compensation plan that provides“phantom” stock based on a three-year vesting period. Under the plan, we willpay an amount equal to the fair market value of the participant’s vestedphantom stock in five annual substantially equal installments beginning uponthe earlier of termination of employment with us or their 65th birthday. Inlieu of participating in the phantom stock plan, Mr. Mahlum receives an amountequal to 2% of the first $10 million, and 1% thereafter, of our net proceedsfrom the sale of all polyol products for a period of 10 years. However, to datewe have not had any significant sales of polyol products and no payments havebeen made under this agreement.

 

28

----

 

**Item 12.****                       SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.**

**                     **

**Ownership by Management**

 

The following table sets forththe beneficial ownership of our outstanding capital units by our Board membersand named executive officers as of March 27, 2003. As of that date, no personbeneficially owned more than 5% of our capital units. 

 
| **Name  and Address********of  Beneficial Owner (1)** |   | **Number of  Votes  Beneficially  Owned** |       | **Voting  Percentage** |       | **Number of   Capital Units   Beneficially   Owned** |       | **Ownership  Percentage** |       |
|-------------------------------------------------------|--------|-------------------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|---------------------------|------------|
|                                                  |   |                                      |       |                   |       |                                                 |       |                      |       |
| Paul Barthel, Manager                                 |   | 1                                         |       |                   | *          | 5,250                                                |       |                      | *          |
| James Call, Manager (2)                               |   | 2                                         |       |                   | *          | 11,000                                               |       |                      | *          |
| Paul Casper, President, Manager                       |   | 1                                         |       |                   | *          | 30,000                                               |       |                      | *          |
| Rodney Christianson, CEO (3)                          |   | 1                                         |       |                   | *          | 5,250                                                |       |                      | *          |
| Dan Feige, Manager                                    |   | 1                                         |       |                   | *          | 15,000                                               |       |                      | *          |
| Marvin Goplen, Manager (4)                            |   | 1                                         |       |                   | *          | 9,000                                                |       |                      | *          |
| Ryan Hill, Manager (5)                                |   | 2                                         |       |                   | *          | 11,250                                               |       |                      | *          |
| Marvin Hope, Vice President, Manager (6)              |   | 1                                         |       |                   | *          | 28,000                                               |       |                      | *          |
| Jim Jepsen, Manager                                   |   | 1                                         |       |                   | *          | 15,000                                               |       |                      | *          |
| Peter Kontz, Manager(7)                               |   | 2                                         |       |                   | *          | 49,500                                               |       |                      | *          |
| Bryce Loomis, Manager (8)                             |   | 1                                         |       |                   | *          | 15,000                                               |       |                      | *          |
| Gerald Moe, Manager (9)                               |   | 1                                         |       |                   | *          | 22,500                                               |       |                      | *          |
| Dale Murphy, Manager (10)                             |   | 1                                         |       |                   | *          | 40,000                                               |       |                      | *          |
| Robert Nelsen, Manager                                |   | 1                                         |       |                   | *          | 11,750                                               |       |                      | *          |
| Maurice Odenbrett, Manager                            |   | 1                                         |       |                   | *          | 18,000                                               |       |                      | *          |
| Daniel Potter, Manager (11)                           |   | 2                                         |       |                   | *          | 8,250                                                |       |                      | *          |
| Corey Schnabel, Secretary, Manager                    |   | 1                                         |       |                   | *          | 7,500                                                |       |                      | *          |
| Rodney Skalbeck, Manager                              |   | 1                                         |       |                   | *          | 52,500                                               |       |                      | *          |
| Lyle Trautman, Manager (12)                           |   | 1                                         |       |                   | *          | 6,750                                                |       |                      | *          |
| Delbert Tschakert, Manager (13)                       |   | 2                                         |       |                   | *          | 21,000                                               |       |                      | *          |
| Tony Van Uden, Manager                                |   | 1                                         |       |                   | *          | 30,000                                               |       |                      | *          |
| Ardon Wek, Manager (14)                               |   | 1                                         |       |                   | *          | 15,000                                               |       |                      | *          |
|                                                  |   |                                      | ** ** |                   | ** ** |                                                 | ** ** |                      | ** ** |
| **Managers and Executive Officers, as a group**       |   | **27**                                    | ** ** | **1.29**               | **%**      | **427,500**                                          | ** ** | **3.03**                  | **%**      |

 

----

| *      |   | Percentage  of shares beneficially owned does not exceed 1% of the class.                                                             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                  |
| (1)    |   | The  addresses for each of the individual managers listed above is set forth under  Board of Managers above.                          |
|   |   |                                                                                                                                  |
| (2)    |   | Includes  4,500 capital units owned of record by Call Farms, Inc. of which Mr. Call is  a co-owner.                                   |
|   |   |                                                                                                                                  |
| (3)    |   | Represents  capital units owned of record by Mr. Christianson’s wife, Heidi Christianson.                                        |
|   |   |                                                                                                                                  |
| (4)    |   | Represents  capital units owned of record by the Marvin and Mary Ann Goplen Revocable  Living Trust of which Mr. Goplen is a trustee. |
|   |   |                                                                                                                                  |
| (5)    |   | Includes  5,000 capital units owned of record by Mr. Hill’s wife, Naomi Hill.                                                    |
|   |   |                                                                                                                                  |
| (6)    |   | Represents  capital units owned of record by the Marvin H. Hope Trust of which Mr. Hope  is a trustee.                                |
|   |   |                                                                                                                                  |
| (7)    |   | Includes  26,500 capital units owned of record by Mr. Kontz’s wife, Alyce Kontz.                                                 |
|   |   |                                                                                                                                  |
| (8)    |   | Represents  capital units owned jointly with Mr. Loomis’s wife, Georgean Loomis.                                                 |
|   |   |                                                                                                                                  |
| (9)    |   | Represents  capital units owned jointly with Mr. Moe’s wife, Kaye Moe.                                                           |
|   |   |                                                                                                                                  |
| (10)   |   | Represents  capital units owned of record by the Dale F. Murphy Revocable Trust of which  Mr. Murphy is a trustee.                    |

 

29

----

 
| (11)   |   | Includes  3,750 capital units owned of record by Potterosa Farms, Inc. of which Mr.  Potter is a co-owner. |
|--------|--------|------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                       |
| (12)   |   | Represents  capital units owned jointly with Mr. Trautman’s wife, Pam Trautman                        |
|   |   |                                                                                                       |
| (13)   |   | Includes  8,750 capital units owned of record by Mr. Tschakert’s wife, Kay Tschakert                  |
|   |   |                                                                                                       |
| (14)   |   | Represents  capital units owned of record jointly with Mr. Wek’s wife, Sheila Wek                     |

 

**Item 13.****                           ****Certain Relationships and Related Transactions**

** **

**Relationships between Board Members,Executive Officers, and Key Employees**

 

Paul Casper is Gerald Moe’sson-in-law; otherwise, no family relationship exists between any of our Boardmembers, officers, or key employees.

 

The individual Board membersand executive officers of the LLC have not entered into, and do not anticipateentering into, any contractual or other transactions between themselves andSDSP, except for continuing employment agreements, as described in Item 11 ofthis report, and the Operating Agreement of SDSP. None of the individual Boardmembers or executive officers received any compensation relative to thedistribution of capital units of the new LLC upon the liquidation of thepredecessor cooperative. However, the Board Members receive a per diem fee andother reimbursement and compensation for their Board services, as described inItem 11. The executive officers receive compensation as executive officers asdescribed in Item 11.

 

**Item 14.****                           ****Controls and Procedures**

 

**Evaluation of Disclosure Controls andProcedures.****Ourchief executive officer and chief financial officer, after evaluating theeffectiveness of our “disclosure controls and procedures” (as defined in Rule13a-14(c) under the Securities Exchange Act of 1934, as amended) as of a date(the “Evaluation Date”) within 90 days before the filing date of this annualreport, have concluded that our disclosure controls and procedures areeffective in ensuring that material information required to be disclosed isincluded in the reports that we file with the Securities and ExchangeCommission.

 

**Changes in Internal Controls.****There were no significant changes in ourinternal controls or, to the knowledge of our management, in other factors thatcould significantly affect these controls subsequent to the Evaluation Date.

 

30

----

 

**Part IV**

 

**Item 15.****                           ****Exhibits, Financial Statement Schedules, and Reports on Form8-K**

 

Thefollowing exhibits and financial statements are filed as part of, or areincorporated by reference into, this report:

 

(a)           Financial Statements and Schedules– Reference is made to the “Index to Financial Statements” of South DakotaSoybean Processors, LLC located at page F-1 of this report for a list of thefinancial statements and schedules for the year ended December 31, 2002included herein.

 

(b)           Reports on Form 8-K - SDSPfiled no reports on Form 8-K during the quarter ended December 31, 2002. OnJanuary 14, 2003, SDSP filed a report on Form 8-K regarding its Stock PurchaseAgreement with Urethane Soy Systems Company, Inc. and certain of itsshareholders dated January 1, 2003.

 

(c)           Exhibits - See Exhibit Indexfollowing the Signature Page to this report. The following exhibits constitutemanagement agreements, compensatory plans, or arrangements Exhibits 10.14,10.17, 10.18, 10.19, 10.20, and 10.21.

 

31

----

 

**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                        |   | SOUTH DAKOTA             |
|-----------------------------|--------|--------------------------|
|                        |   | SOYBEAN  PROCESSORS, LLC |
|                        |   |                     |
|                        |   |                     |
| Dated:  March 27, 2003 |   |                     |
|                        |   | By                       | /s/  Constance M. Kelly |   |
|                        |   |                     | Constance M.  Kelly |
|                        |   |                     | Chief  Financial Officer |

 

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons in the capacities indicated on March 27, 2003.

 
| **SIGNATURE**               |   | **TITLE**                                     |
|-----------------------------|--------|-----------------------------------------------|
|                        |   |                                          |
| /s/ Rodney  G. Christianson |   | Chief  Executive Officer                      |
| Rodney G.  Christianson     |   | (Principal  Executive Officer)                |
|                        |   |                                          |
| /s/  Constance M. Kelly     |   | Chief  Financial Officer                      |
| Constance M.  Kelly         |   | (Principal  Financial and Accounting Officer) |
|                        |   |                                          |
| /s/ Paul  Barthel           |   | Manager                                       |
| Paul Barthel                |   |                                          |
|                        |   |                                          |
| /s/ James  Call             |   | Manager                                       |
| James Call                  |   |                                          |
|                        |   |                                          |
| /s/ Paul W.  Casper         |   | Manager                                       |
| Paul W.  Casper             |   |                                          |
|                        |   |                                          |
| /s/ Robert  E. Nelsen       |   | Manager                                       |
| Robert E.  Nelsen           |   |                                          |
|                        |   |                                          |
| /s/ Dan  Feige              |   | Manager                                       |
| Dan Feige                   |   |                                          |
|                        |   |                                          |
| /s/ Marvin  Goplen          |   | Manager                                       |
| Marvin  Goplen              |   |                                          |
|                        |   |                                          |
| /s/ Ryan J.  Hill           |   | Manager                                       |
| Ryan J. Hill                |   |                                          |
|                        |   |                                          |
| /s/ Marvin  Hope            |   | Manager                                       |
| Marvin Hope                 |   |                                          |

 

32

----

 
| /s/ James H.  Jepsen   |   | Manager |
|------------------------|--------|---------|
| James H.  Jepsen       |   |    |
|                   |   |    |
| /s/ Peter  Kontz       |   | Manager |
| Peter Kontz            |   |    |
|                   |   |    |
| /s/ Bryce  Loomis      |   | Manager |
| Bryce Loomis           |   |    |
|                   |   |    |
| /s/ Gerald  Moe        |   | Manager |
| Gerald Moe             |   |    |
|                   |   |    |
| /s/ Dale F.  Murphy    |   | Manager |
| Dale F.  Murphy        |   |    |
|                   |   |    |
| /s/ Maurice  Odenbrett |   | Manager |
| Maurice  Odenbrett     |   |    |
|                   |   |    |
| /s/ Daniel  Potter     |   | Manager |
| Daniel  Potter         |   |    |
|                   |   |    |
| /s/ Corey  Schnabel    |   | Manager |
| Corey  Schnabel        |   |    |
|                   |   |    |
| /s/ Rodney  Skalbeck   |   | Manager |
| Rodney  Skalbeck       |   |    |
|                   |   |    |
| /s/ Lyle R.  Trautman  |   | Manager |
| Lyle R.  Trautman      |   |    |
|                   |   |    |
| /s/ Delbert  Tschakert |   | Manager |
| Delbert  Tschakert     |   |    |
|                   |   |    |
| /s/ Anthony  VanUden   |   | Manager |
| Anthony  VanUden       |   |    |
|                   |   |    |
| /s/ Ardon  Wek         |   | Manager |
| Ardon Wek              |   |    |

 

33

----

 

**CERTIFICATION**

I, Rodney G. Christiansoncertify that:

** **

**1.****             **Ihave reviewed this annual report on Form 10-K of South Dakota SoybeanProcessors, LLC;

** **

**2.****             **Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

** **

**3.****             **Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

** **

**4.****             **Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

** **

**a.****              **Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

** **

**b.****              **Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

** **

**c.****              **Presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

** **

**5.****             **Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of  registrant’s board of directors (or personsperforming the equivalent functions):

** **

**a.****              **Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

** **

**b.****              **Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

** **

**6.****             **Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|   | **March 27, 2003**                                |   |
|--------|---------------------------------------------------|--------|
|   |                                              |   |
|   |   By  /s/ Rodney G. Christianson   |   |
|   |                                              |   |
|   | Rodney G.  Christianson   Chief Executive Officer |   |

 

34

----

 

**CERTIFICATION**

 

I, Constance M. Kelly certifythat:

 

**1.****             **Ihave reviewed this annual report on Form 10-K of South Dakota SoybeanProcessors, LLC;

** **

**2.****             **Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

** **

**3.****             **Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

** **

**4.****             **Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

** **

**a.****              **Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

** **

**b.****              **Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

** **

**c.****              **Presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

** **

**5.****             **Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of  registrant’s board of directors (or personsperforming the equivalent functions):

** **

**a.****              **Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

** **

**b.****              **Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

** **

**6.****             **Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions with regardto significant deficiencies and material weaknesses.

 
|   | **March 27, 2003**                            |   |
|--------|-----------------------------------------------|--------|
|   |                                          |   |
|   |   By  /s/ Constance M. Kelly   |   |
|   |                                          |   |
|   | Constance M.  Kelly   Chief Financial Officer |   |

 

35

----

 

**EXHIBIT INDEX**

** **
| **Exhibit  Number** |   | **Description**                                                                                                       |   | **Filed   Herewith** |   | **Incorporated Herein by Reference to**                                                                                                |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------|--------|----------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                  |   |                 |   |                                                                                                                                   |
| 3.1(i)              |   | Articles of  Organization                                                                                             |   |                 |   | Appendix B to the Issuer’s  Prospectus filed with the Commission pursuant to Rule 424(b)(3) on May 24,  2002 (File No. 333-75804) |
|                |   |                                                                                                                  |   |                 |   |                                                                                                                                   |
| 3.1(ii)             |   | Operating  Agreement, as adopted on July 1, 2002                                                                      |   |                 |   | Exhibit 3.1(ii) to the  Issuer’s Form 10-Q filed with the Commission on August 14, 2002                                           |
|                |   |                                                                                                                  |   |                 |   |                                                                                                                                   |
| 3.1(iii)            |   | Articles of  Amendment to Articles of Organization                                                                    |   |                 |   | Exhibit 3.1(iii) to the  Issuer’s Form 10-Q filed with the Commission on August 14, 2002                                          |
|                |   |                                                                                                                  |   |                 |   |                                                                                                                                   |
| 4.1                 |   | Form  of Class A Unit Certificate                                                                                     |   |                 |   | Exhibit  4.1 to the Issuer’s Form S-4 filed with the Commission on December 21, 2001  (File No. 333-75804)                        |
|                |   |                                                                                                                  |   |                 |   |                                                                                                                                   |
| 10.1                |   | Form of  Mortgage and Security Agreement with CoBank dated October 2, 1995                                            |   |                 |   | Exhibit 10.1 to the  Issuer’s Form S-4 filed with the Commission on December 21, 2001 (File No.  333-75804)                       |
|                |   |                                                                                                                  |   |                 |   |                                                                                                                                   |
| 10.2                |   | Master Loan  Agreement with CoBank dated February 26, 2002                                                            |   |                 |   | Exhibit 10.2 to the  Issuer’s Form S-4 filed with the Commission on March 14, 2002 (File No.  333-75804)                          |
|                |   |                                                                                                                  |   |                 |   |                                                                                                                                   |
| 10.3                |   | Revolving  Term Loan Supplement with CoBank dated February 26, 2002                                                   |   |                 |   | Exhibit 10.3 to the  Issuer’s Form S-4 filed with the Commission on March 14, 2002 (File No.  333-75804)                          |
|                |   |                                                                                                                  |   |                 |   |                                                                                                                                   |
| 10.4                |   | Statused  Revolving Credit Supplement with CoBank dated February 26, 2002                                             |   |                 |   | Exhibit 10.4 to the  Issuer’s Form S-4 filed with the Commission on March 14, 2002 (File No.  333-75804)                          |
|                |   |                                                                                                                  |   |                 |   |                                                                                                                                   |
| 10.5                |   | Urethane Soy  Systems Company, Inc. Stock Purchase Agreement dated May 30, 2000                             |   |                 |   | Exhibit 10.5 to the  Issuer’s Form S-4 filed with the Commission on December 21, 2001 (File No.  333-75804)                       |
|                |   |                                                                                                                  |   |                 |   |                                                                                                                                   |
| 10.6                |   | Vegetable  Oil Supply Agreement with Urethane Soy Systems Company, Inc. dated August 2,  1999 and January 10, 2001    |   |                 |   | Exhibit 10.6 to the  Issuer’s Form S-4 filed with the Commission on December 21, 2001 (File No.  333-75804)                       |
|                |   |                                                                                                                  |   |                 |   |                                                                                                                                   |
| 10.7                |   | MnSP  Services and Management Agreement dated August 25, 2000                                                         |   |                 |   | Exhibit 10.7 to the  Issuer’s Form S-4 filed with the Commission on December 21, 2001 (File No.  333-75804)                       |
|                |   |                                                                                                                  |   |                 |   |                                                                                                                                   |
| 10.8                |   | Soybean Oil  Supply Agreement and Equipment Purchase Agreement with ACH Food Companies,  Inc. dated January 15, 2002* |   |                 |   | Exhibit 10.8 to the  Issuer’s Form S-4 filed with the Commission on May 10, 2002 (File No.  333-75804)                            |
|                |   |                                                                                                                  |   |                 |   |                                                                                                                                   |
| 10.9                |   | Railcar  Leasing Agreement with General Electric dated May 14, 1996                                                   |   |                 |   | Exhibit 10.9 to the  Issuer’s Form S-4 filed with the Commission on December 21, 2001 (File No.  333-75804)                       |

 

36

----

 
|   |   |                                                                                                                                              |   |   |   |                                                                                                              |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------|
| 10.10  |   | Track Lease  Agreement with DM&E Railroad dated October 15, 1996                                                                              |   |   |   | Exhibit 10.10 to the  Issuer’s Form S-4 filed with the Commission on December 21, 2001 (File No.  333-75804) |
|   |   |                                                                                                                                              |   |   |   |                                                                                                              |
| 10.11  |   | Land Option  Agreement with Howell Farms dated September 8, 1994 and September 13, 2001                                                           |   |   |   | Exhibit 10.11 to the  Issuer’s Form S-4 filed with the Commission on December 21, 2001 (File No.  333-75804) |
|   |   |                                                                                                                                              |   |   |   |                                                                                                              |
| 10.12  |   | Terminal  Agreement with Westway Terminal Company dated February 1, 2002                                                                          |   |   |   | Exhibit 10.12 to the  Issuer’s Form S-4 filed with the Commission on February 14, 2002 (File No.  333-75804) |
|   |   |                                                                                                                                              |   |   |   |                                                                                                              |
| 10.13  |   | Terminal  Agreement with Kinder Morgan Liquids Terminals LLC dated  April 15, 2001                                                      |   |   |   | Exhibit 10.13 to the  Issuer’s Form S-4 filed with the Commission on December 21, 2001 (File No.  333-75804) |
|   |   |                                                                                                                                              |   |   |   |                                                                                                              |
| 10.14  |   | Rodney  Christianson Employment Agreement dated April 1, 1995                                                                                     |   |   |   | Exhibit 10.14 to the  Issuer’s Form S-4 filed with the Commission on December 21, 2001 (File No.  333-75804) |
|   |   |                                                                                                                                              |   |   |   |                                                                                                              |
| 10.15  |   | Railroad Car  Lease Agreement with Trinity Industries dated February 12, 2002                                                                     |   |   |   | Exhibit 10.15 to the  Issuer’s Form S-4 filed with the Commission on March 14, 2002 (File No.  333-75804)    |
|   |   |                                                                                                                                              |   |   |   |                                                                                                              |
| 10.16  |   | Stock  Purchase Agreement with Urethane Soy Systems, Co. and certain shareholders                                                                 |   |   |   | Exhibit 10.16 to the  Issuer’s Form 8-K filed with the Commission on January 14, 2003                        |
|   |   |                                                                                                                                              |   |   |   |                                                                                                              |
| 10.17  |   | Constance M.  Kelly Employment Agreement dated April 22, 1996                                                                                     |   | X      |   |                                                                                                              |
|   |   |                                                                                                                                              |   |   |   |                                                                                                              |
| 10.18  |   | Thomas  Kersting Employment Agreement dated May 20, 1996                                                                                          |   | X      |   |                                                                                                              |
|   |   |                                                                                                                                              |   |   |   |                                                                                                              |
| 10.19  |   | Larry Mahlum  Employment Agreement dated January 4, 1995                                                                                          |   | X      |   |                                                                                                              |
|   |   |                                                                                                                                              |   |   |   |                                                                                                              |
| 10.20  |   | Deferred  Compensation Plans dated April 1, 1999, February 13, 2001, and July 23, 2001                                                            |   | X      |   |                                                                                                              |
|   |   |                                                                                                                                              |   |   |   |                                                                                                              |
| 10.21  |   | Polyoil  Consulting Services Agreement with Larry Mahlum dated January 1, 2000                                                                    |   | X      |   |                                                                                                              |
|   |   |                                                                                                                                              |   |   |   |                                                                                                              |
| 99.1   |   | Certification  of Chief Executive Officer and Chief Financial Officer Pursuant to Section  906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |   | X      |   |                                                                                                              |

 

----

* The redacted portionsof Exhibit B (2 pages) and Exhibit C (6 pages) toExhibit 10.8 were filed separately with the SEC subject to a request forconfidential treatment dated April 25, 2002.

 

37

----

 

 

 

 

 

 

# ** **

 

 

 

 

 

 

# **SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

 

*** FINANCIAL STATEMENTS***

 

*** DECEMBER 31, 2002 AND 2001***

 

 

 

 

----

 

 

SOUTH DAKOTA SOYBEANPROCESSORS, LLC

 

Table ofContents

 

 

 

 

 
|                                  |                             | **Page** |
|---------------------------------------|----------------------------------|----------|
| **INDEPENDENT AUDITOR’S REPORT** |                             | F-1      |
|                                  |                             |     |
| **FINANCIAL  STATEMENTS**             |                             |     |
|                                  | Balance Sheets                   | F-2      |
|                                  | Operations                       | F-4      |
|                                  | Changes in  Members’ Equity | F-5      |
|                                  | Cash Flows                       | F-6      |
|                                  | Notes to Financial  Statements   | F-8      |
|                                       |                                  |          |  |

 

 

 

 

 

 

 

----

 

 

 

**INDEPENDENTAUDITOR’S REPORT**

 

 

The Board of Managers

**South Dakota Soybean Processors, LLC**

Volga, South Dakota

 

 

We have audited the accompanyingbalance sheets of **South Dakota SoybeanProcessors, LLC** as of December 31, 2002 and 2001, and therelated statements of operations, changes in members’ equity, and cash flowsfor the years ended December 31, 2002, 2001 and 2000.  These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

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

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position of **South DakotaSoybean Processors, LLC**as of December 31, 2002 and 2001, and theresults of its operations and its cash flows for the years ended December 31,2002, 2001 and 2000 in conformity with accounting principles generally acceptedin the United States of America.

 

 

 
| /s/  Eide Bailly LLP |   |
|---------------------------|--------|

 

 

 

Sioux Falls, South Dakota

January 23, 2003

 

 

F-1

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLCBALANCE SHEETS**

**DECEMBER 31, 2002 AND 2001**

 

 
|                                                                 |   | **2002**        |           | **2001**    |   |
|----------------------------------------------------------------------|--------|-----------------|----------------|-------------|--------|
| **ASSETS**                                                           |   |            |           |        |   |
|                                                                 |   |            |           |        |   |
| CURRENT ASSETS                                                       |   |            |           |        |   |
| Cash and cash equivalents                                            |   | **$**           | **11,170**     |        | $      | 2,015,257 |   |
| Trade accounts receivable, less allowance  for                       |   |            |           |        |   |
| uncollectible accounts (2002 — $273,331;  2001 — $226,513) |   | **14,695,709**  |           | 11,230,636  |   |
| Inventories                                                          |   | **13,113,098**  |           | 7,147,177   |   |
| Margin deposits                                                      |   | **927,339**     |           | 1,114,993   |   |
| Prepaid expenses                                                     |   | **482,977**     |           | 259,157     |   |
| Assets held for sale — Building                                 |   | **2,307,819**   |           | —      |   |
| Total current assets                                                 |   | **31,538,112**  |           | 21,767,220  |   |
|                                                                 |   |            |           |        |   |
| PROPERTY AND EQUIPMENT                                               |   | **49,172,714**  |           | 44,579,625  |   |
| Less accumulated depreciation                                        |   | **(15,411,529** | )              | (12,686,788 | )      |
|                                                                 |   | **33,761,185**  |           | 31,892,837  |   |
|                                                                 |   |            |           |        |   |
| OTHER ASSETS                                                         |   |            |           |        |   |
| Investments                                                          |   | **4,928,261**   |           | 5,002,308   |   |
| Other assets, net                                                    |   | **57,338**      |           | 18,603      |   |
|                                                                 |   | **4,985,599**   |           | 5,020,911   |   |
|                                                                 |   |            |           |        |   |
|                                                                 |   | **$**           | **70,284,896** |        | $      | 58,680,968 |   |
|                                                                 |   |            |           |        |   |

 

 

 

 

 

See Accompanying Notes toFinancial Statements

 

F-2

----

 

 
|                                                     |   | **2002**       |           | **2001**   |   |
|----------------------------------------------------------|--------|----------------|----------------|------------|--------|
| **LIABILITIES AND MEMBERS’ EQUITY**                 |   |           |           |       |   |
|                                                     |   |           |           |       |   |
| CURRENT LIABILITIES                                      |   |           |           |       |   |
| Excess of outstanding checks over bank  balance          |   | **$**          | **3,603,838**  |       | $      | 1,576,968 |   |
| Current maturities of long-term debt                     |   | **101,472**    |           | 2,423,843  |   |
| Accounts payable                                         |   | **639,587**    |           | 468,474    |   |
| Accrued commodity purchases                              |   | **20,150,385** |           | 11,683,608 |   |
| Accrued expenses                                         |   | **1,628,022**  |           | 1,362,595  |   |
| Accrued interest                                         |   | **51,476**     |           | 39,677     |   |
| Total current liabilities                                |   | **26,174,780** |           | 17,555,165 |   |
|                                                     |   |           |           |       |   |
| LONG-TERM LIABILITIES                                    |   |           |           |       |   |
| Long-term debt, less current maturities                  |   | **10,143,459** |           | 8,276,078  |   |
| Deferred compensation                                    |   | **91,064**     |           | 70,000     |   |
|                                                     |   | **10,234,523** |           | 8,346,078  |   |
|                                                     |   |           |           |       |   |
| COMMITMENTS                                              |   | **—**     |           | —     |   |
|                                                     |   |           |           |       |   |
| MEMBERS’ EQUITY                                     |   |           |           |       |   |
| Class A Units, no par value                              |   |           |           |       |   |
| 14,129,250 units issued and outstanding                  |   |           |           |       |   |
| (December 31, 2001 has been restated — See  Note 1) |   | **33,875,593** |           | 32,779,725 |   |
|                                                     |   |           |           |       |   |
|                                                     |   | **$**          | **70,284,896** |       | $      | 58,680,968 |   |

 

(See Accompanying Notes toFinancial Statements)

 

F-3

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLCSTATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED DECEMBER 31, 2002, 2001AND 2000**

 
|                                                                                       |   | **2002**        |            | **2001**    |   | **2000**    |   |
|--------------------------------------------------------------------------------------------|--------|-----------------|-----------------|-------------|--------|-------------|--------|
|                                                                                       |   |            |            |        |   |        |   |
| NET REVENUE                                                                                |   | **$**           | **159,488,645** | ** **  | $      | 148,258,146 |   | $ | 145,273,300 |   |
|                                                                                       |   |            | ** **      |        |   |        |   |
| COST OF REVENUE                                                                            |   |            | ** **      |        |   |        |   |
| Cost of product sold                                                                       |   | **128,457,162** | ** **      | 121,012,364 |   | 123,011,594 |   |
| Production                                                                                 |   | **11,707,538**  | ** **      | 10,686,189  |   | 10,182,881  |   |
| Freight and rail                                                                           |   | **12,095,338**  | ** **      | 9,366,185   |   | 6,807,112   |   |
| Brokerage fees                                                                             |   | **323,926**     | ** **      | 294,386     |   | 292,038     |   |
| Total cost of revenue                                                                      |   | **152,583,964** | ** **      | 141,359,124 |   | 140,293,625 |   |
|                                                                                       |   |            | ** **      |        |   |        |   |
| GROSS PROFIT                                                                               |   | **6,904,681**   | ** **      | 6,899,022   |   | 4,979,675   |   |
|                                                                                       |   |            | ** **      |        |   |        |   |
| OPERATING EXPENSES                                                                         |   |            | ** **      |        |   |        |   |
| Administration                                                                             |   | **2,679,633**   | ** **      | 2,234,248   |   | 1,768,207   |   |
| OPERATING PROFIT                                                                           |   | **4,225,048**   | ** **      | 4,664,774   |   | 3,211,468   |   |
|                                                                                       |   |            | ** **      |        |   |        |   |
| OTHER INCOME (EXPENSE)                                                                     |   |            | ** **      |        |   |        |   |
| Interest expense                                                                           |   | **(542,220**    | **)**           | (483,223    | )      | (1,050,880  | )      |
| Other non-operating income                                                                 |   | **3,413,097**   | ** **      | 2,093,316   |   | 1,886,858   |   |
| Patronage dividend income                                                                  |   | **36,801**      | ** **      | 1,460,386   |   | 1,779,755   |   |
| Total other income (expense)                                                               |   | **2,907,678**   | ** **      | 3,070,479   |   | 2,615,733   |   |
|                                                                                       |   |            | ** **      |        |   |        |   |
| NET INCOME BEFORE                                                                          |   |            | ** **      |        |   |        |   |
| INCOME TAXES                                                                               |   | **7,132,726**   | ** **      | 7,735,253   |   | 5,827,201   |   |
|                                                                                       |   |            | ** **      |        |   |        |   |
| INCOME TAX EXPENSE                                                                         |   | **520,000**     | ** **      | —      |   | —      |   |
|                                                                                       |   |            | ** **      |        |   |        |   |
| NET INCOME                                                                                 |   | **$**           | **6,612,726**   | ** **  | $      | 7,735,253   |   | $ | 5,827,201 |   |
|                                                                                       |   |            | ** **      |        |   |        |   |
| BASIC AND DILUTED EARNINGS PER CAPITAL UNIT                                                |   | **$**           | ** 0.47**  | ** **  | $      |  0.55  |   | $ |  0.41 |   |
|                                                                                       |   |            | ** **      |        |   |        |   |
| WEIGHTED AVERAGE NUMBER OF UNITS  OUTSTANDING FOR CALCULATION OF EARNINGS PER CAPITAL UNIT |   | **14,129,250**  |            | 14,129,250  |   | 14,129,250  |   |
|                                                                                       |   |            | ** **      |        |   |        |   |
|                                                                                            |        |                 |                 |             |        |             |        |  |  |  |  |  |  |

 

 

See Accompanying Notes toFinancial Statements

 

F-4

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLCSTATEMENTS OF CHANGES IN MEMBERS'EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2002, 2001AND 2000**

 
|                               |   | **Capital  Units** |   | **Amount** |       |
|------------------------------------|--------|--------------------|--------|------------|------------|
|                               |   |               |   |       |       |
| **BALANCE, JANUARY 1, 2000**       |   | 14,129,250         |   | $          | 25,518,923 |   |
|                               |   |               |   |       |       |
| Net income                         |   | —             |   | 5,827,201  |       |
|                               |   |               |   |       |       |
| Proceeds from members’ equity |   | —             |   | 3,800      |       |
|                               |   |               |   |       |       |
| Distributions to members           |   | —             |   | (578,450   | )          |
|                               |   |               |   |       |       |
| **BALANCE, DECEMBER 31, 2000**     |   | 14,129,250         |   | 30,771,474 |       |
|                               |   |               |   |       |       |
| Net income                         |   | —             |   | 7,735,253  |       |
|                               |   |               |   |       |       |
| Proceeds from members’ equity |   | —             |   | 4,200      |       |
|                               |   |               |   |       |       |
| Distributions to members           |   | —             |   | (5,731,202 | )          |
|                               |   |               |   |       |       |
| **BALANCE, DECEMBER 31, 2001**     |   | 14,129,250         |   | 32,779,725 |       |
|                               |   |               |   |       |       |
| Net income                         |   | —             |   | 6,612,726  |       |
|                               |   |               |   |       |       |
| Proceeds from members’ equity |   | —             |   | 2,200      |       |
|                               |   |               |   |       |       |
| Distributions to members           |   | —             |   | (5,519,058 | )          |
|                               |   |               |   |       |       |
| **BALANCE, DECEMBER 31, 2002**     |   | 14,129,250         |   | $          | 33,875,593 |   |
|                               |   |               |   |       |       |

 

 

See Accompanying Notes toFinancial Statements

 

F-5

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLCSTATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31, 2002, 2001AND 2000**

 
|                                                  |   | **2002**       |             | **2001**   |   | **2000**        |   |
|-------------------------------------------------------|--------|----------------|------------------|------------|--------|-----------------|--------|
| OPERATING ACTIVITIES                                  |   |           |             |       |   |            |   |
| Net income                                            |   | **$**          | **6,612,726**    | ** ** | $      | 7,735,253       |   | $ | 5,827,201 |   |
| Charges and credits to net income not affecting cash: |   | ** **     | ** **       |       |   |            |   |
| Depreciation                                          |   | **2,746,383**  | ** **       | 2,457,804  |   | 2,802,343       |   |
| Amortization                                          |   | **4,764**      | ** **       | 4,059      |   | 4,059           |   |
| Loss on sale of fixed assets                          |   | **30,288**     | ** **       | 118,920    |   | 27              |   |
| Non-cash patronage dividends                          |   | **74,298**     | ** **       | (1,460,386 | )      | (1,394,902      | )      |
| Change in assets and liabilities                      |   | **1,495,890**  | ** **       | 603,351    |   | (619,457        | )      |
| NET CASH FROMOPERATING ACTIVITIES                     |   | **10,964,349** |             | 9,459,001  |   | 6,619,271       |   |
|                                                  |   |           | ** **       |       |   |            |   |
| INVESTING ACTIVITIES                                  |   |           | ** **       |       |   |            |   |
| Purchase of investments                               |   | **(250**       | **)**            | —     |   | (1,000,000      | )      |
| Retirement of patronage dividends                     |   | **—**     | ** **       | 809,713    |   | 11,096          |   |
| Purchase of assets held sale — Building          |   | **(2,307,819** | **)**            | —     |   | —          |   |
| Increase in other assets                              |   | **(36,998**    | **)**            |       |   |            |   |
| Proceeds from sales of property and  equipment        |   | **—**     | ** **       | 122,125    |   | 8,948           |   |
| Purchase of property and equipment                    |   | **(4,645,020** | **)**            | (2,718,740 | )      | (720,956        | )      |
| NET CASH USED FORINVESTING ACTIVITIES                 |   | **(6,990,087** | **)**            | (1,786,902 | )      | (1,700,912      | )      |
|                                                  |   |           | ** **       |       |   |            |   |
| FINANCING ACTIVITIES                                  |   |           | ** **       |       |   |            |   |
| Proceeds from members’ equity transactions       |   | **2,200**      | ** **       | 4,200      |   | 3,800           |   |
| Distributions to members                              |   | **(5,519,058** | **)**            | (5,731,202 | )      | (578,450        | )      |
| Payments for debt issue costs                         |   | **(6,500**     | **)**            | —     |   | —          |   |
| Proceeds from long-term debt                          |   | **—**     | ** **       | 1,053,948  |   | 145,293         |   |
| Principal payments on long-term debt                  |   | **(454,991**   | **)**            | (991,615   | )      | (4,488,668      | )      |
| NET CASH USED FOR FINANCING  ACTIVITIES               |   | **(5,978,349** | **)**            | (5,664,669 | )      | (4,918,025      | )      |
|                                                  |   |           | ** **       |       |   |            |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS               |   | **(2,004,087** | **)**            | 2,007,430  |   | 334             |   |
|                                                  |   |           | ** **       |       |   |            |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR          |   | **2,015,257**  | ** **       | 7,827      |   | 7,493           |   |
|                                                  |   |           | ** **       |       |   |            |   |
| CASH AND CASH EQUIVALENTS, END OF YEAR                |   | **$**          | ** 11,170** | ** ** | $      |  2,015,257 |   | $ |  7,827 |   |
|                                                       |        |                |                  |            |        |                 |        |  |  |  |  |  |  |

 

See Accompanying Notes toFinancial Statements

 

F-6

----

 

**STATEMENTS OF CASH FLOWS - page 2**

 
|                               |   |     |        |     |   |     |   |
|------------------------------------|--------|----------|-------------|----------|--------|----------|--------|
| SUPPLEMENTAL DISCLOSURES           |   |     |        |     |   |     |   |
| OF CASH FLOW INFORMATION           |   |     |        |     |   |     |   |
|                               |   |     |        |     |   |     |   |
| **Cash paid during the year for:** |   | **2002** |        | **2001** |   | **2000** |   |
| Interest                           |   | **$**    | **530,421** |     | $      | 628,636  |   | $ | 1,103,149 |   |
|                               |   |     |        |     |   |     |   |
| Income taxes                       |   | **$**    | **520,000** |     | $      | —   |   | $ | — |   |
|                               |   |     |        |     |   |     |   |

 

 

 

 

 

 

 

 

 

 

See Accompanying Notes toFinancial Statements

 

F-7

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLCNOTES TO FINANCIAL STATEMENTS**

 

**NOTE 1 -       PRINCIPALACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES**

 

*Organization*

 

On October 12, 2001, Soybean Processors, LLC (theCompany) was formed.  The initial memberof the LLC was the South Dakota Soybean Processors Cooperative (theCooperative).  The board of directors ofthe Cooperative unanimously approved a plan of reorganization related to anexchange whereby the LLC would acquire the assets and liabilities of theCooperative.  The reorganizationrequired the approval of 75% of the members of the Cooperative who voted on theproposal.  On June 20, 2002, the membersof the South Dakota Soybean Processors Cooperative duly approved thereorganization of the Cooperative into a limited liability company, whichbecame effective on July 1, 2002. Effective July 1, 2002, the LLC acquired the assets and liabilities ofthe Cooperative. The transaction was an exchange of interests whereby theassets and liabilities of the Cooperative were transferred for capital units ofSoybean Processors, LLC.  For financialstatement purposes, no gain or loss was recorded as a result of the exchangetransaction. For income tax purposes, the difference between the tax basis and thefair market value of the assets resulted in an income tax liability discussedin Note 9.

 

As a result of the exchange, the Cooperative wasdissolved on July 1, 2002, and the LLC’s capital units were distributed to themembers of the Cooperative at a rate of one capital unit of the LLC for eachshare of equity stock of the Cooperative. In connection with the reorganization, the LLC changed its name to SouthDakota Soybean Processors, LLC.  Aminimum of 2,500 capital units is required for ownership of the LLC.  Such units will be subject to certaintransfer restrictions.  The LLC willalso retain the right to redeem the units at $.20 per unit in the event amember attempts to dispose of the units in a manner not in conformity with theOperating Agreement, if a member becomes a holder of less than 2,500 units,becomes an owner (directly or indirectly) of more than 1.5% of the issued andoutstanding capital units or becomes a bankrupt member.  The Operating Agreement of the LLC alsoincludes provisions whereby cash equal to a minimum of 30% of net income willbe distributed to unit holders subject to certain limitations.  These limitations include a minimum netincome of $500,000, restrictions imposed by debt and credit instruments or asrestricted by law in the event of insolvency.

 

In connection with the reorganization, the delivery ofsoybeans under the previous member delivery agreements is no longer required asan obligation of membership.  Earnings,losses and cash distributions are allocated to members based on theirpercentage of ownership in the LLC.

 

*Basis of presentation*

 

As a result of thereorganization mentioned above, the financial statements of the prior periodshave been restated to reflect the comparative basis of the Company versus theCooperative.

 

*Cashand cash equivalents*

 

The Company considers all highly liquid debtinstruments with a maturity of three months or less to be cash equivalents.

 

*Accounts receivable*

 

Accounts receivable are carried at cost. Accountsreceivable are considered past due when payments are not received within thirtydays. Generally, these accounts receivable represent amounts due for sale ofsoybean meal, oil, hulls and refined oil.

 

(continued on next page)

 

F-8

----

 

The carrying amount of trade receivables is reduced bya valuation allowance that reflects management’s best estimate of the amountsthat will not be collected.  Managementreviews all receivable balances that exceed 90 days from the invoice date andbased on an assessment of current creditworthiness, estimates the portion, ifany, of the balance that will not be collected.

 

*Inventories*

 

Finished goods (soybean meal, oil, refined oil, andhulls) and raw materials (soybeans) are valued at estimated market value, whichapproximates net realizable value. Supplies and other are stated at the lower of cost determined by thefirst-in, first-out method, or market.

 

*Assetsheld for sale*

 

Assets held for sale arecarried at cost.

 

*Investments*

 

Investments in cooperatives are carried at cost plusthe amount of patronage earnings allocated or estimates of interim allocationsto the Company, less any cash distributions received.

 

The investment in Cenex Harvest States (CHS) iscarried at an amount equal to the patronage allocations received, and estimatedto be received, from that cooperative organization.  The investment in CoBank is carried at an amount equal to theactual patronage allocations received. Patronage allocations represent the Company’s proportionate share of thepatronage earnings of CHS and CoBank.

 

The investments include actual patronage allocationsbased upon written qualified notices of allocation received from CHS and CoBankand estimated patronage allocations expected to be received.  The Company recognizes patronage revenuewhen it is probable that an allocation will be made and when the amount can bereasonably estimated.  The need toestimate patronage allocations arises because of differences between the Company’syear-end and the receipt of the actual allocation notification from CHS.

 

The Company owns a 4% interest in the common stock ofUrethane Soy Systems Company, a non-public company.  This investment is carried at cost.

 

*Propertyand equipment*

 

Property and equipment is stated at cost.  Expenditures for renewals and improvementsthat significantly add to the productive capacity or extend the useful life ofan asset are capitalized.  Expendituresfor maintenance and repairs are charged to expense currently.  When depreciable properties are sold orretired, the cost and accumulated depreciation are eliminated from the accountsand the resultant gain or loss is reflected in income.

 

The Company reviews its property andequipment for impairment whenever events indicate that the carrying amount ofthe asset may not be recoverable. An impairment loss is recorded when the sumof the future cash flows is less than the carrying amount of the asset.  The amount of the loss is determined bycomparing the fair market value of the asset to the carrying amount of theasset.

 

Depreciation is provided for over the estimated usefullives of the individual assets using the straight-line method.  The range of the estimated useful lives usedin the computation of depreciation are as follows:

 
| Buildings and improvements |   | 10-39 years |
|----------------------------|--------|-------------|
| Equipment and furnishings  |   | 3-15 years  |

 

(continued on next page)

 

F-9

----

 

*Otherassets*

 

Other assets are carried at cost.  Loan fees are being amortized on an interestmethod of accounting over the term of the related loans.

 

*Use ofestimates*

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilitiesat the date of the financial statements and reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

 

*Revenue Recognition*

 

Revenue is recognized after the related products areshipped and title has transferred to the customer.  Revenues are presented net of discounts and sales allowances.

 

*Freight*

 

The Company presents allamounts billed to the customer for freight as a component of net revenue.  Costs incurred for freight are reported as acomponent of cost of revenue.

 

*Advertisingcosts*

 

Advertising and promotion costs are expensed asincurred.

 

*Environmental remediation*

 

It is management’s opinion that the amount of anypotential environmental remediation costs will not be material to the Company’sfinancial condition, results of operations, or cash flow; therefore, no accrualhas been recorded.

 

*Recently issued accountingpronouncements*

 

The Financial Accounting Standards Board has recentlyissued pronouncements regarding Accounting for Asset Retirement Obligations,and Accounting for Costs Associated with Exit or Disposal Activities.  Management has reviewed thesepronouncements, and does not expect their implementation to have a significanteffect on the financial statements.

 

*Accounting for derivativeinstruments and hedging activities*

 

All of the Company’s derivatives are designated asnon-hedge derivatives.  The futures andoptions contracts used by the Company are discussed below.  Although the contracts are effectiveeconomic hedges of specified risks, they are not designated as and accountedfor as hedging instruments.

 

The Company, as part of its trading activity, usesfutures and option contracts offered through regulated commodity exchanges toreduce risk.  The Company is exposed torisk of loss in the market value of inventories.  To reduce that risk, the Company generally takes opposite andoffsetting positions using future contracts or options.

 

Unrealized gains and losses on futures and optionscontracts used to hedge soybean, oil and meal inventories are recognized as acomponent of net proceeds for financial reporting. Inventories are recorded atestimated market value, which approximates net realizable value, so that gainsand losses on the derivative contracts are offset by gains and losses oninventories and reflected in earnings currently.

 

(continued on next page)

 

F-10

----

 

*Earnings per share*

 

The ownership structure of the Company is made up ofClass A capital units.  Earnings percapital unit are calculated based on the number of Class A capital units held.

 

For purposes of calculating basic earnings per capitalunit, capital units issued by the Company are considered outstanding on theeffective date of issuance.

 

**NOTE2 -         INVENTORIES**

 
|                         |   | **2002**       |           | **2001**  |   |
|------------------------------|--------|----------------|----------------|-----------|--------|
| Finished goods               |   |           |           |      |   |
| Soy processing               |   | **$**          | **9,550,460**  |      | $      | 2,172,850 |   |
| Refined Oil                  |   | **496,198**    |           | —    |   |
| Other                        |   | **26,609**     |           | —    |   |
| Total                        |   | **10,073,267** |           | 2,172,850 |   |
|                         |   |           |           |      |   |
| Raw materials                |   |           |           |      |   |
| Soy Processing               |   | **2,935,400**  |           | 4,747,091 |   |
| Refined Oil                  |   | **45,262**     |           | —    |   |
| Other                        |   | **9,424**      |           | 109,447   |   |
| Total                        |   | **2,990,086**  |           | 4,856,538 |   |
|                         |   |           |           |      |   |
| Supplies & Miscellaneous |   | **49,745**     |           | 117,789   |   |
|                         |   |           |           |      |   |
| Totals                       |   | **$**          | **13,113,098** |      | $      | 7,147,177 |   |

 

 

Finished goods and rawmaterials are valued at estimated market value, which approximates netrealizable value.  In addition, futuresand option contracts are marked to market through cost of revenues, withunrealized gains and losses recorded in the above inventory amounts.  Supplies and other inventories are stated atthe lower of cost determined by the first-in, first-out method, or market.

 

**NOTE 3 -       MARGINDEPOSITS**

 

The Company maintains deposits with a brokeragefirm.  The deposits are used for riskmanagement.

 

The Company uses futures and option contracts tomanage the risk of commodity price volatility of soybeans, crude soybean oiland soybean meal.  Consistent with itsinventory accounting policy, these contracts are recorded at market value.

 

At December 31, 2002, the Company had contractsmaturing through December 2003.

 

**NOTE 4 -       ASSETSHELD FOR SALE**

 

The Company has entered into aletter of understanding with Minnesota Soybean Processors (MnSP) regarding theterms and conditions of the Company’s investment in a soybean oil storagefacility located in Brewster, MN.  TheCompany will own and operate the facility until MnSP commences its plannedprincipal operations.  Upon commencementof MnSP’s operations, the Company will transfer the facility to MnSP forconsideration equal to the original cost of construction plus the cost of anyimprovements to the facility.

 

(continued on next page)

 

F-11

----

 

**NOTE 5 -       PROPERTYAND EQUIPMENT**

 
|                       |   | **2002**   |       |             |   |
|----------------------------|--------|------------|------------|------------------|--------|
|                       |   |       |       | **Accumulated**  |   |   |   | **2001** |   |
|                       |   | **Cost**   |       | **Depreciation** |   | **Net** |   | **Net** |   |
|                       |   |       |       |             |   |   |   |   |   |
| Land                       |   | $          | 237,643    |             | $      | — |   | **$** | **237,643** |   | $ | 237,643 |   |
| Land improvements          |   | 17,650     |       | 17,650           |   | **—** |   | — |   |
| Buildings and improvements |   | 14,290,569 |       | 2,154,138        |   | **12,136,431** |   | 10,657,444 |   |
| Machinery and equipment    |   | 33,671,947 |       | 12,555,214       |   | **21,116,733** |   | 20,050,215 |   |
| Company vehicles           |   | 111,217    |       | 52,597           |   | **58,620** |   | 60,472 |   |
| Furniture and fixtures     |   | 784,791    |       | 631,930          |   | **152,861** |   | 149,890 |   |
| Construction in progress   |   | 58,897     |       | —           |   | **58,897** |   | 737,173 |   |
|                       |   |       |       |             |   |   |   |   |   |
| Totals                     |   | $          | 49,172,714 |             | $      | 15,411,529 |   | **$** | **33,761,185** |   | $ | 31,892,837 |   |

 

 

 

**NOTE 6 -       INVESTMENTS**

 
|                                 |   | **2002**      |          | **2001**  |   |
|--------------------------------------|--------|---------------|---------------|-----------|--------|
| Investments in associated companies: |   |          |          |      |   |
| Cenex Harvest States                 |   | **$**         | **3,543,333** |      | $      | 3,654,981 |   |
| CoBank                               |   | **384,678**   |          | 347,327   |   |
|                                 |   | **3,928,011** |          | 4,002,308 |   |
| Urethane Soy Systems Company, Inc.   |   | **1,000,000** |          | 1,000,000 |   |
| Minnesota Soybean Processors         |   | **250**       |          | —    |   |
|                                 |   |          |          |      |   |
| Totals                               |   | **$**         | **4,928,261** |      | $      | 5,002,308 |   |

 

**NOTE 7 -       NOTESPAYABLE — SEASONAL LOAN**

 

The Company has entered into a revolving creditagreement with CoBank, which expires April 1, 2005.  The purpose of the credit agreement is to finance the inventoryand accounts receivable of the Company. The Company may borrow up to $6,000,000 between June 1 and September 30and up to $10,000,000 between October 1 and May 31.  Interest is at a variable rate (3.57% at December 31, 2002).  There were no advances outstanding atDecember 31, 2002 and 2001.

 

Advances on the revolving credit agreement are limitedbased upon inventory and accounts receivable, net of soybean accounts payable.

 

(continued on next page)

 

F-12

----

 

**NOTE 8 -       LONG-TERMDEBT**

 
|                                                                                                                                                                                                                          |   | **2002**       |           | **2001**   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|----------------|------------|--------|
|                                                                                                                                                                                                                          |   |           |           |       |   |
| Revolving term loan from CoBank, interest  at variable rates (3.57% at December 31, 2002), secured by substantially  all property and equipment. Loan matures 3/20/2011.                                                      |   | **$**          | **9,874,620**  |       | $      |  10,105,768 |   |
|                                                                                                                                                                                                                          |   |           |           |       |   |
| Note payable to South Dakota Governor’s  Office of Economic Development, due in monthly principal and  interest installments of $990, at 5% secured by a second lien on property and  equipment. Note matured 12/1/2002. |   | **—**     |           | 125,182    |   |
|                                                                                                                                                                                                                          |   |           |           |       |   |
| Note payable to Brookings County Railroad  Authority, due in semi-annual principal and interest installments  of $36,885 at 5% secured  by railroad track assets.  Note  matures 9/1/2007.                               |   | **322,812**    |           | 378,350    |   |
|                                                                                                                                                                                                                          |   |           |           |       |   |
| Contract payable to City of Volga, due in  monthly installments of $3,229 at 0%. Contract matures 12/31/2003.                                                                                                                 |   | **38,745**     |           | 77,489     |   |
|                                                                                                                                                                                                                          |   |           |           |       |   |
| Note payable to Butler Machinery Company,  due in annual principal payments of $4,377 at 0%.  Note matures 10/31/04.                                                                                                     |   | **8,754**      |           | 13,132     |   |
|                                                                                                                                                                                                                          |   | **10,244,931** |           | 10,699,921 |   |
| Less current maturities                                                                                                                                                                                                       |   | **(101,472**   | )              | (2,423,843 | )      |
|                                                                                                                                                                                                                          |   |           |           |       |   |
| Totals                                                                                                                                                                                                                        |   | **$**          | **10,143,459** |       | $      | 8,276,078 |   |
|                                                                                                                                                                                                                               |        |                |                |            |        |  |  |  |  |

 

 

 

The Company entered into an agreement as of February26, 2002 with CoBank to amend and restate its Master Loan Agreement (MLA).  Under the terms and conditions of the MLA,CoBank agrees to make loans to the Company up to $18,200,000 as of August 1,2002 and up to $21,000,000 as of May 1, 2003. Beginning September 2003 the commitment decreases in scheduled periodicincrements of $1,300,000 through March 2011.

 

The MLA contains financial covenants related to themaintenance of working capital and achieving debt service quotients amongaffirmative and negative covenants.

 

It is estimated that theminimum principal payments on long-term debt obligations will be as follows:

 
| For the year ended December 31: |   |      |       |
|---------------------------------|--------|-----------|------------|
| 2003                            |   | $         | 101,472    |   |
| 2004                            |   | 2,265,682 |       |
| 2005                            |   | 2,264,407 |       |
| 2006                            |   | 2,267,668 |       |
| 2007                            |   | 2,271,083 |       |
| Thereafter                      |   | 1,074,619 |       |
|                            |   |      |       |
| Totals                          |   | $         | 10,244,931 |   |

 

 

(continued on next page)

 

 

F-13

----

 

**NOTE 9 -       INCOMETAXES**

 

The Company is taxed as a limited liability company under the Internal RevenueCode.  The income of the company flowsthrough to the members to be taxed at the individual level rather than thecorporate level.  Accordingly, theCompany will have no tax liability.

 

On June 20, 2002, the members approved a plan ofreorganization to convert the Cooperative’s structure from an exemptorganization to a limited liability company. To the extent that the fair market value of the Cooperative’s net assetsexceeded their adjusted tax basis, the Cooperative incurred a federal incometax liability.  The excess of the fairmarket value of the Cooperative’s net assets over their adjusted tax basis wasapproximately $1,530,000. The Company’s effective tax rate is 34%. The State ofSouth Dakota does not have a corporate income tax.  This liability is estimated as follows:

 
|                                          |   | **2002** |        | **2001** |   | **2000** |   |
|-----------------------------------------------|--------|----------|-------------|----------|--------|----------|--------|
|                                          |   |     |        |     |   |     |   |
| Federal income tax expense at statutory rates |   | **$**    | **520,000** |     | $      | —   |   | $ | — |   |
|                                               |        |          |             |          |        |          |        |  |  |  |

 

A reconciliation of income taxat the statutory rate to the Company’s effective rate is as follows:

 
|                                        |   | **2002**  |        | **2001** |    | **2000** |    |
|---------------------------------------------|--------|-----------|-------------|----------|---------|----------|---------|
|                                        |   |      |        |     |    |     |    |
| Computed at the expected statutory rate     |   | **34.0**  | ** %** | 34.0     |  % | 34.0     |  % |
| Patronage exclusion (through June 30, 2002) |   | **(34.0** | **)%**      | (34.0    | )%      | (34.0    | )%      |
|                                        |   |      | ** **  |     |    |     |    |
| Income tax expense — effective rate    |   | **0.0**   | **%**       | 0.0      | %       | 0.0      | %       |
|                                        |   |      | ** **  |     |    |     |    |

 

The net book value of theCompany’s assets exceeds the tax basis of those assets by approximately$8,600,000 at December 31, 2002.

 

**NOTE 10 -     EMPLOYEEBENEFIT PLANS**

 

The Company maintains a 401(k)plan for employees who meet the eligibility requirements set forth in the plandocuments.  The Company matches apercentage of employees’ contributed earnings. The amounts charged to expense under this plan were approximately$49,000, $58,000, and $47,000 for the years ended December 31, 2002, 2001, and2000, respectively.

 

The Company has a deferredcompensation plan with key employees. The agreements have benefits, which vest during a three-yearperiod.  The Company shall make fiveequal annual installments upon retirement of the employees.  The future payments have been discounted at8%.  The amount recognized as expenseduring the years ended December 31, 2002, 2001, and 2000 was $21,064, $34,000,and $19,000, respectively.  The Companyanticipates no payments in the next five years.

 

**NOTE 11 -     OPERATINGLEASES**

 

The Company leases 309 railcars from GE Capital.  The leaserequires monthly payments of $123,890. The leases began in 1996 and have eighteen-year terms.  The Company also leases 100 rail cars fromTrinity Capital.  The lease requiresmonthly payments of $38,300.  Leaseexpense was $1,869,847, $1,472,435, and $1,406,243 for the years ended December31, 2002, 2001, and 2000, respectively. The Company generates revenues from the use of 299 of these rail cars onother railroads.  Such revenues were$1,448,409, $1,427,645, and $1,456,776 for the years ended December 31, 2002,2001, and 2000, respectively.

 

(continued on next page)

 

F-14

----

 

The Company has entered into a sub-lease agreementwith the Dakota, Minnesota & Eastern Railroad Corporation (DME) for thehopper rail cars that it leases from GE Capital.  The Company recognizes revenue from this sub-lease as the hopperrail cars are used by the DME.  Thesub-lease is for a twelve-month period and is renewed annually.  The Company is responsible for allmaintenance of the rail cars.

 

The Company also has a number of other operatingleases for machinery and equipment.  Themost significant other leases are for oil storage tanks.  These leases have varying terms and expirethrough January 31, 2003 and may be automatically renewed.  The leases contain additional charges basedupon oil throughput.  Rental expenseunder these other operating leases was $668,867, $339,650, and $109,038 for theyears ended December 31, 2002, 2001, and 2000, respectively.

 

The following is a schedule offuture minimum rental payments required under these operating leases.

 
|                    |   | **Rail Cars** |       | **Other** |   | **Total**  |   |
|-------------------------|--------|---------------|------------|-----------|--------|------------|--------|
| Year ended December 31: |   |          |       |      |   |       |   |
| 2003                    |   | $             | 1,946,280  |      | $      | 112,212    |   | $ | 2,058,492 |   |
| 2004                    |   | 1,946,280     |       | 41,315    |   | 1,987,595  |   |
| 2005                    |   | 1,946,280     |       | 41,315    |   | 1,987,595  |   |
| 2006                    |   | 1,899,030     |       | 30,616    |   | 1,929,646  |   |
| 2007                    |   | 1,730,080     |       | 4,644     |   | 1,734,724  |   |
| Thereafter              |   | 12,112,810    |       | —    |   | 12,112,810 |   |
|                    |   |          |       |      |   |       |   |
| Totals                  |   | $             | 21,580,760 |      | $      | 230,102    |   | $ | 21,810,862 |   |

 

**NOTE 12 -     CASHFLOW INFORMATION**

 

The following is a schedule ofchanges in assets and liabilities used to determine cash from operatingactivities:

 
|                                            |   | **2002**       |           | **2001**  |   | **2000**   |   |
|-------------------------------------------------|--------|----------------|----------------|-----------|--------|------------|--------|
| (Increase) decrease in assets:                  |   |           |           |      |   |       |   |
| Trade accounts                                  |   | **$**          | **(3,465,073** | )         | $      | (1,064,418 | )      | $ | (1,667,599 | ) |
| Inventories                                     |   | **(5,965,921** | )              | 718,574   |   | (2,179,814 | )      |
| Margin account deposit                          |   | **187,654**    |           | (573,983  | )      | (30,839    | )      |
| Prepaids                                        |   | **(223,820**   | )              | (56,886   | )      | 93,544     |   |
|                                            |   | **(9,467,160** | )              | (976,713  | )      | (3,784,708 | )      |
|                                            |   |           |           |      |   |       |   |
| Increase (decrease) in liabilities:             |   |           |           |      |   |       |   |
| Excess of outstanding checks over bank  balance |   | **2,026,870**  |           | 24,150    |   | (336,532   | )      |
| Accounts payable                                |   | **171,113**    |           | (212,572  | )      | 502,518    |   |
| Accrued commodity purchases                     |   | **8,466,777**  |           | 1,613,556 |   | 2,456,807  |   |
| Accrued expenses                                |   | **277,226**    |           | 120,930   |   | 523,458    |   |
| Deferred compensation                           |   | **21,064**     |           | 34,000    |   | 19,000     |   |
|                                            |   | **10,963,050** |           | 1,580,064 |   | 3,165,251  |   |
|                                            |   |           |           |      |   |       |   |
| Total                                           |   | **$**          | **1,495,890**  |      | $      | 603,351    |   | $ | (619,457 | ) |

 

(continued on next page)

 

F-15

----

 

**NOTE 13 -     FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

Estimated fair values of the Company’s financialinstruments (all of which are held for non-trading purposes) are as follows:

 
|                      |   | **2002**       |       | **2001**       |   |
|---------------------------|--------|----------------|------------|----------------|--------|
|                      |   | **Carrying**   |       | **Fair**       |   | **Carrying** |   | **Fair** |   |
|                      |   | **Amount**     |       | **Value**      |   | **Amount** |   | **Value** |   |
|                      |   |           |       |           |   |   |   |   |   |
| Cash and cash equivalents |   | **$**          | **11,170** | ** **     | **$**  | **11,170** |   | $ | 2,015,257 |   | $ | 2,015,257 |   |
|                      |   |           | ** ** |           |   |   |   |   |   |
| Margin deposits           |   | **927,339**    | ** ** | **927,339**    |   | 1,114,993 |   | 1,114,993 |   |
|                      |   |           | ** ** |           |   |   |   |   |   |
| Long-term debt            |   | **10,244,931** | ** ** | **10,258,941** |   | 10,699,921 |   | 10,521,296 |   |
|                           |        |                |            |                |        |  |  |  |  |  |  |  |  |

 

 

The carrying amount approximates fair value of cashand margin deposits.  The fair value oflong-term debt is based on current rates at which the Company could borrowfunds with similar remaining maturities.

 

The Company has a patronage investment in othercooperatives and common stock in a privately held entity.  There is no market for their patronagecredits or the entity’s common shares, and it was impracticable to estimatefair value of the Company’s investment. The investment is carried on the balance sheet at original cost.

 

**NOTE 14 -     COMMITMENTS**

 

During August 2000, the Company entered into anagreement with Minnesota Soybean Processors Cooperative  (MnSP) for certain services and managementof a proposed soybean processing plant. The agreement provides the Company a fee of 10% of the equity raised byMnSP for the Company’s services related to business planning and constructionmanagement services.  The Company hasagreed to reinvest a minimum of 80% of the fees earned from MnSP in equityunits of MnSP.  Fees earned under thisarrangement were $1,241,591, $301,754 and $0 the years ended December 31, 2002,2001 and 2000, respectively.

 

In addition, the Company has agreed to providemanagement and marketing services to MnSP on a cost-sharing basis.  The agreement is for automatically renewingfive-year periods beginning sixty days before the plant is scheduled to beginoperations.

 

In addition, the Company is making up to $1 million ininterest free loans backed by retained local earnings available for members ofthe Company who invest in MnSP.

 

**NOTE 15 -     BUSINESSCREDIT RISK**

 

The Company maintains its cash balances with variousfinancial institutions. At times during the year, the Company’s balancesexceeded the $100,000 insurance limit of the Federal Deposit InsuranceCorporation.

 

The Company also grants credit to customers throughoutthe United States and Canada.  TheCompany evaluates each customer’s credit worthiness on a case-by-casebasis.  Accounts receivable aregenerally unsecured.  These receivableswere $14,969,040 and $11,457,149 at December 31, 2002 and 2001, respectively.

 

Soybean meal sales accounted for approximately sixty-sixpercent of total revenues for the year ended December 31, 2002 and sixty-eightpercent of total revenues for the years ended December 31, 2001 and 2000.  

 

(continued on next page)

 

F-16

----

 

Approximately twenty-eight percent, twenty-threepercent, and twenty-one percent of these sales were made to one customer forthe years ended December 31, 2002, 2001, and 2000, respectively.  At December 31, 2002 and 2001, this customerowed the Company approximately $1,370,000 and $967,000, respectively.  Soybean oil sales represented approximatelytwenty percent of total revenues for the year ended December 31, 2002 andtwenty-nine percent of sales for the years ended December 31, 2001 and2000.  These sales were primarily to onecustomer. This customer owed the Company approximately $121,000 and $246,000 atDecember 31, 2002 and 2001, respectively. Refined oil sales represented approximately eleven percent of totalrevenues for the year ended December 31, 2002. These sales were primarily to one customer. This customer owed theCompany approximately $4,591,000 at December 31, 2002.

 

Sales by geographic area for these years endedDecember 31, 2002, 2001 and 2000 are as follows:

 
|          |   | **2002**       |            | **2001**   |   | **2000**    |   |
|---------------|--------|----------------|-----------------|------------|--------|-------------|--------|
|          |   |           |            |       |   |        |   |
| United States |   | **$**          | **140,588,645** |       | $      | 130,558,146 |   | $ | 127,973,300 |   |
| Canada        |   | **18,900,000** |            | 17,700,000 |   | 17,300,000  |   |
|          |   |           |            |       |   |        |   |
|          |   | **$**          | **159,488,645** |       | $      | 148,258,146 |   | $ | 145,273,300 |   |

 

The Company is a defendant inlawsuits arising from normal business activities.  Management has reviewed pending litigation with legal counsel andbelieves that those actions are without merit and that the ultimate liability,if any, resulting from them will not materially affect the Company’s financialposition.

 

**NOTE 16 -     SEGMENTREPORTING**

 

The Company organizes itsbusiness units into two reportable segments: soy processing and soybean oilrefining.  Separate management of eachsegment is required because each segment is subject to different marketing,production, and technology strategies. The soy processing segment purchases soybeans and further processes theminto primarily three products: soybean meal, crude soybean oil, and soybeanhulls.  The oil refining segment furtherprocesses the crude soybean oil into a product for sale in commercialapplications.  The segments’ accountingpolicies are the same as those described in the summary of significantaccounting polices.  Market prices areused to report intersegment sales.

 

Segment information for theyears ended December 31, 2002 and 2001 are as follows:

 
|                                  |   | **Soybean**    |        | **Oil**      |   |       |   | **Reconciling** |    |       |   |
|---------------------------------------|--------|----------------|-------------|--------------|--------|------------|--------|-----------------|---------|------------|--------|
|                                  |   | **Processing** |        | **Refining** |   | **Other**  |   | **Items**       |    | **Total**  |   |
| FOR THE YEAR ENDED DECEMBER 31, 2002: |   |           |        |         |   |       |   |            |    |       |   |
|                                  |   |           |        |         |   |       |   |            |    |       |   |
| Sales to external customers           |   | $              | 141,942,209 |         | $      | 17,383,370 |   | $               | 163,066 |       | $      | — |   | $ | 159,488,645 |   |
| Intersegment sales                    |   | 15,055,939     |        | —       |   | —     |   | (15,055,939     | )       | —     |   |
| Interest expense                      |   | 398,533        |        | 135,192      |   | 8,495      |   | —          |    | 542,220    |   |
| Depreciation and amortization         |   | 2,593,432      |        | 118,688      |   | 39,027     |   | —          |    | 2,751,147  |   |
| Income tax expense                    |   | 520,000        |        | —       |   | —     |   | —          |    | 520,000    |   |
| Segment profit (loss)                 |   | 6,888,397      |        | (381,820     | )      | 106,149    |   | —          |    | 6,612,726  |   |
|                                  |   |           |        |         |   |       |   |            |    |       |   |
| Segment assets                        |   | 56,093,952     |        | 9,814,710    |   | 4,376,234  |   | —          |    | 70,284,896 |   |
|                                  |   |           |        |         |   |       |   |            |    |       |   |
| Expenditures for segment assets       |   | (69,553        | )           | 4,714,573    |   | —     |   | —          |    | 4,645,020  |   |
|                                       |        |                |             |              |        |            |        |                 |         |            |        |  |  |  |  |  |

 

 

(continued on next page)

 

F-17

----

 
|                            |   |           |        |         |   |      |   |            |   |       |   |
|---------------------------------|--------|----------------|-------------|--------------|--------|-----------|--------|-----------------|--------|------------|--------|
| FOR THE YEAR ENDED              |   | **Soybean**    |        | **Oil**      |   |      |   | **Reconciling** |   |       |   |
| DECEMBER 31, 2001:              |   | **Processing** |        | **Refining** |   | **Other** |   | **Items**       |   | **Total**  |   |
|                            |   |           |        |         |   |      |   |            |   |       |   |
| Sales to external customers     |   | $              | 148,228,408 |         | $      | —    |   | $               | 29,738 |       | $      | — |   | $ | 148,258,146 |   |
| Intersegment sales              |   | 24,025         |        | —       |   | —    |   | (24,025         | )      | —     |   |
| Interest expense                |   | 449,211        |        | —       |   | 34,012    |   | —          |   | 483,223    |   |
| Depreciation and amortization   |   | 2,424,532      |        | —       |   | 37,331    |   | —          |   | 2,461,863  |   |
| Segment profit (loss)           |   | 7,382,612      |        | —       |   | 352,641   |   | —          |   | 7,735,253  |   |
|                            |   |           |        |         |   |      |   |            |   |       |   |
| Segment assets                  |   | 56,542,773     |        | —       |   | 2,138,195 |   | —          |   | 58,680,968 |   |
|                            |   |           |        |         |   |      |   |            |   |       |   |
| Expenditures for segment assets |   | 2,706,364      |        | —       |   | 12,376    |   | —          |   | 2,718,740  |   |
|                                 |        |                |             |              |        |           |        |                 |        |            |        |  |  |  |  |  |

 

**NOTE 17 -     LEGALPROCEEDINGS**

 

From time-to-time in theordinary course of the Company’s business, the Company may be named as adefendant in legal proceedings related to various issues, including withoutlimitation, workers’ compensation claims, tort claims, or contractualdisputes.  The Company carries insurancethat provides protection against general commercial liability claims, claimsagainst directors, officers and employees, business interruption, automobileliability, and workers’ compensation claims.

 

The Company has been named as adefendant in a breach of contract suit alleging various compensatory andpunitive damages.

 

**NOTE 18 -     SUBSEQUENTEVENT**

 

On December 10, 2002,the Company entered into a Stock Purchase Agreement with Urethane Soy SystemsCompany, Inc. (USSC) and six of its shareholders for a controlling interest inUSSC.  The Company agreed to purchase22,500 shares of USSC common stock from the shareholders for $180.00 per sharefor a total of $4,050,000 and 28,125 newly issued shares from USSC for $160.00per share for a total of $4,500,000. The closing of the transaction occurred on January 1, 2003.

 

The Stock PurchaseAgreement requires the Company to pay $1,377,000 of the purchase price to theshareholders on the earlier of 90 days following the approval of a registrationstatement by the United States Securities and Exchange Commission for sale ofsecurities to pay the purchase price or January 1, 2004; provided, however thatif a registration statement relating to USSC has not been filed by March 2,2003 the Company will be required to make such payment by October 27,2003.  The remainder of the purchaseprice to the shareholders becomes due in three equal annual installments of$891,000 on the first, second, and third anniversary of the first paymentdate.  The Company is required to paythe purchase price to USSC for the newly-issued shares in twelve equalquarterly payments of $375,000 beginning January 1, 2003.

 

Prior to theacquisition, the Company owned approximately 4% of USSC’s outstanding commonstock.  As a result of the stockacquired pursuant to the Stock Purchase Agreement, the Company owns a total ofapproximately 58% of USSC’s outstanding common stock.  USSC is the manufacturer and patent holder of SoyOyl®,a polyol made from soybean oil.

 

 

 

#    #    #    #    #   #

 

F-18

----