**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 

| **ý****        ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Forthe fiscal year ended December 31, 2003**

 

**COMMISSIONFILE NO. 333-75804**

 

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

(Exact Name 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.) |

 

**100Caspian Avenue, Post Office Box 500, Volga, South Dakota 57071**

(Address of Principal Executive Offices)

 

**(605)627-9240**

(Registrant’s Telephone Number)

 

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

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

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes  ý   No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  ý

 

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

 

State the aggregate market value of the voting and non-voting commonequity held by non affiliates computed by reference to the price at which the common equity was lastsold, or the average bid and asked price of such common equity, as of the lastbusiness day of the registrant’s most recently completed second fiscal quarter:The aggregate market value of the common equity of the registrant and itspredecessor held by non-affiliates as of June 30, 2003 was approximately$43,400,000 based on the average sales price of its predecessor’s equity shareson June 18, 2002, which was the latest date of trading prior toJune 30, 2003.

 

Indicate the number of shares outstanding of each of the registrant’sclasses of common stock, as of the latest practicable date:  As of the date of this filing, there were28,258,500 Class A capital units of the registrant outstanding.

 

 

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**PartI**

 

# **CAUTIONARYSTATEMENT REGARDINGFORWARD-LOOKING INFORMATION**

# ** **

This information in this annual report on Form 10-K for the year endedDecember 31, 2003, contains “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995 with respect tothe business and operations of South Dakota Soybean Processors and ouraffiliates.  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 statements are subject to risks and uncertaintiesthat could cause actual results to differ materially from those discussed inthe forward-looking statements. These risks and uncertainties include, but arenot limited to, risks related to the level of commodity prices, loss of member business,competition, changes in the taxation of limited liability companies, compliancewith laws and regulations, perceptions of food quality and safety, businessinterruptions and casualty losses, access to equity capital, consolidation ofproducers and customers, alternative energy sources, and the performance of ourSoybean Processing, Refining, Polyurethane and Other business segments. Otherrisks or uncertainties may be described from time to time in our future filingswith the Securities and Exchange Commission.

 

We undertake no obligation to revise any forward-looking statements toreflect future events or circumstances.

 

**Item1.****                         Business**

 

**Overview**

 

SouthDakota Soybean Processors, LLC (SDSP) owns and operates a soybean processingplant, a SoyOylÒ production facility and a soybean oilrefinery in Volga, South Dakota.  Webegan producing crude soybean oil, soybean meal and soybean hulls in late1996,  and since then we have expandedour business to include the development of new product lines and managementservices.  In 2000, we began providingmanagement services to Minnesota Soybean Processors (MnSP) and will obtain aminority interest in MnSP in 2004.  In2002, we began refining crude soybean oil into a product known as refined andbleached oil, and in early 2003, we became the majority owner and assumedmanagement control of Urethane Soy Systems Company (USSC), which producesSoyOylÒ, a bio-based polyurethane product made fromsoybean oil.

 

Our main business consistsof processing locally grown soybeans into soybean meal and soybean oil.  Soybean meal is primarily sold to resellers,feed mills, and to livestock producers as livestock feed.  Since the completion of our refiningfacility in 2002, we have processed most of our crude soybean oil into refined and bleached oil.  We sell our refined and bleached oil to amanufacturer of various retail and bulk food products where it is furtherprocessed for human consumption.

 

We plan to maintain a competitive position in the marketplace byproducing high quality products, operating a highly efficient operation at thelowest possible cost, and adding value to our products.  We plan to increase our cost efficiency byincreasing daily production capacity and to add value to our products byinvesting in further processing of our products and developing and reviewingnew applications for our products in the plastics and energy fields.

 

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Our primary business objective is to maximize cash distributions to ourmembers from the profits generated through our operations and investments. Atthe same time, our management recognizes the need to maintain our financialstrength, and to consider and implement growth strategies that will allow us tocontinue meeting these objectives over time.

 

SDSP was originally organized as a South Dakota cooperative in 1993 andreorganized as a South Dakota limited liability company in July 2002.  Our members are primarily farmers in SouthDakota and neighboring states.  Ouroffices are located at 100 Caspian Avenue, Post Office Box 500, Volga, SouthDakota 57071, and our telephone number is (605) 627-9240.

 

**Industry Information**

 

The soybean processing industry converts soybeans into soybean meal,soybean hulls and soybean oil. Food ingredients are the primary end use for theoil, while the meal and hulls are mostly consumed by animals. Crude soybean oilis refined for use as salad and cooking oil, baking and frying fat, and to amore limited extent, for industrial uses. Oil World 2020 projects that the U.S. soybean processing industry willgrow at an annual rate of approximately 1 to 11⁄2%.

 

Soybean production is concentrated in the central U.S., Brazil, Chinaand Argentina. In the 2003/2004 harvest season, the U.S. produced approximately2.4 billion bushels of soybeans or approximately 53% of estimated worldproduction.  The industry’s tradeassociations and the USDA estimate that approximately 63% of U.S. producedsoybeans are processed domestically, 32% are exported as whole soybeans, and 5%are retained for seed and residual use. Historically, there has been adequate soybean production in the upperMidwest to supply the local soybean processing industry.

 

Soybean processing facilities are generally located close to adequatesources of soybeans and a strong demand for meal to decrease transportationcosts. Poultry and swine dominate soybean meal consumption in the UnitedStates. On average, exports of soybean meal account for 15 to 20% of totalproduction. A bushel of soybeans typically yields approximately 48 pounds ofmeal, and 11 pounds of crude oil when processed.

 

Soybean oil refineries are generally located close to processingplants. Oil is shipped throughout the U.S. and for export.  Approximately 97% of domestic oil productionis used in food applications and 3% in industrial applications.

 

The U.S. soybean processing industry is comprised primarily of 15different companies operating 65 plants in 22 states.  It is a mature, consolidated and vertically-integrated industrywith four companies controlling nearly 85% of the processing. Those fourcompanies are Archer Daniels Midland (ADM), Bunge, Cargill and Ag Processing,Inc. (AGP).  The U.S. vegetable oil(including soybean oil) refining industry is divided between oilseed processorsand independent vegetable oil refiners. The oilseed processors operate approximately 80% of the vegetable oilrefining capacity in the U.S., and ADM, Bunge, Cargill and AGP operateapproximately 65% of the oil refining capacity.  The three largest independent vegetable oil refiners are ACHFoods, Smuckers (P&G), and ConAgra (Hunt-Wesson).

 

Soybean crushing and refining margins are cyclical, characteristic of amature, competitive industry. In addition, while the price of soybeans mayfluctuate substantially from year to year, the prices of meal and oil generallytrack with the soybeans, although not necessarily on a one for one basis, andtherefore, margins can be variable.

 

Thesoybean industry has worked diligently to introduce soy products as bio-basedsubstitutes for various petroleum-based products.  Such products include biodiesel, soy ink, lubricants, candles andplastics.

 

**Reorganization**

 

South Dakota Soybean Processors was originally organized onDecember 6, 1993, as a South

 

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Dakota cooperative, which is entitled to single-level, pass-through taxtreatment on income generated through the members’ patronage. This allowed usto pass our income on to our members in the form of distributions without firstpaying taxes at the company level, similar to a partnership. However, as wegrew, the continuing availability of this advantageous tax treatment wasbecoming less and less secure. 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.  As an LLC, we plan toretain our historic single-level income tax treatment by electing to be taxedas a partnership.

 

The plan of reorganization was duly approved by our members at ameeting held on June 20, 2002, and the reorganization became effectiveJuly 1, 2002. The transaction was an exchange of interests whereby theassets and liabilities of the cooperative were transferred for capital units ofthe newly formed limited liability company, Soybean Processors, LLC. Thecapital units were distributed to our members upon dissolution of thecooperative at a rate of one capital unit of the LLC for each share of equity stockowned in the cooperative. The distribution of capital units to our members wasregistered under theSecurities Act of 1933. For financial statement purposes, no gain orloss was recorded as a result of the exchange transaction. Upon completion ofthe reorganization, the name of the limited liability company was changed toSouth Dakota Soybean Processors, LLC.

 

**Products &Services**

 

Currently, we divide our operations, products and services, and therelated revenues and net income into four segments; Soybean Processing,Refining, Polyurethane and Other. The Soybean Processing segment processeswhole soybeans into soybean meal and crude soybean oil. The Refining segmentprocesses crude oil from the Soybean Processing segment to refine and bleachthe oil for sale into the food grade market. The Polyurethane segmentmodifies crude soybean oil to produce SoyOylÒ, which is sold exclusively by USSC, and theOther segment contains businessoperations, such as management services, that do not fit under one of the firstthree segments.

 

**Soybean ProcessingSegment**

 

In this segment, we crush and process soybeans to extract the soybeanoil from the protein and fiber portions of the soybean.  Our Soybean Processing products includesoybean meal and crude soybean oil, accounting for approximately 85% and 15%, respectively, ofrevenues in this segment for 2003.

 

**SoybeanMeal and Hulls.** Approximately 80% of the weight of the soybeans that we process annuallyis sold as soybean meal or hulls. The meal and hulls are shipped out by truckand rail car.  Primary markets includethe local truck market, the Pacific Northwest, and exports to Canada.  Currently our significant meal customersinclude Land O’ Lakes and Commodity Specialists.

 

**SoybeanOil.****Wecurrently extract crude soybean oil at a level equal to approximately 20% of the weight ofthe soybeans that we process annually. Crude soybean oil produced by this segment is transferred to theRefining and Polyurethane Segments. Depending upon market conditions, excess crude soybean oil is sold toother soybean oil refiners, stored for future use, or delivered against ChicagoBoard of Trade (CBOT) futures contracts since our Volga plant site is aregistered delivery point for the CBOT soybean oil futures contract.  We receive a storage payment through theCBOT for all oil that is delivered into this program.

 

**Refining Segment**

 

The Refining segment began operations in August 2002 with thestart-up of our on-site refining facility adjacent to our crushing plant inVolga, South Dakota. The Refining segment processes the crude soybean oilproduced by the Soybean Processing segment through a series of processes andfilters to create a product known in the industry as refined and bleachedoil.  This segment refined approximately80% of the crude soybean oil produced by the Soybean Processing segment in2003.

 

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We have an exclusive supply agreement with ACH Foods to provide itsfacilities with a consistent supply of refined and bleached oil on a generalrequirements basis. We have a fixed pricing established for the first fiveyears, with the option to renegotiate the price thereafter. The oil istransported by rail from our plant to one of ACH Foods’ facilities, where it isfurther processed for the edible oil market.

 

**Polyurethane Segment**

 

Inthe Polyurethane segment, we process crude soybean oil to produce SoyOyl®,a bio-based polyurethane product made from specially processed crude soybeanoil that has been developed for use as a replacement for certain petrochemicalproducts.  SoyOyl is relatively new in the market and has been undergoingresearch and development in recent years.  SDSP does the initial crudeoil processingat the Volga, South Dakota facility and ships itdirectly to USSC’s customer.

 

USSC developed SoyOyl and is now responsible for its marketing.  SoyOyl is a kind of polyol, which is a keychemical in foam formulation. It 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 patents for SoyOyl and a number of related productionprocesses and industrial uses.  We havethe exclusive rights to supply soybeanoil for USSC’s sales of SoyOyl until2014 and have agreed not to sell soybean oil to any other company in theplastics industry. We have also been assigned the rights to a patent relatingto the modification of crude soybean oil for use in industrial applications suchas manufacturing SoyOylthat provides cost advantages over otherprocess techniques.

 

USSC’s sales personnel are located throughoutthe upper Midwest, and USSC is completing new research and developmentlaboratories at our Volga site.  DowChemical is a primary customer of USSC utilizing SoyOyl in its BiobalanceÒproduct, a polyurethane carpet backing.  John Deere also uses SoyOyl in its Harvest FormÒproduct, a rigid polyurethane combine shield.

 

We originally purchased a 4% ownership inUSSC in May 2000 for $1 million. Effective January 2003, we agreed toinvest an additional $8.55 million to acquire a 58% majority ownership interestin USSC by purchasing shares from existing shareholders and newly issued sharesfrom USSC.  We also agreed to take overthe management of USSC.  We currentlyhold six of the nine seats on USSC’s board of directors, and our CEO is alsothe president of USSC.  InOctober 2003, we paid $1,377,000 of the purchase price to the USSCshareholders. The remainder of the purchase price to the shareholders becomesdue in three equal annual installments of $891,000 payable in October ofeach year.

 

**Other Segment**

 

TheOther segment includes all items not related to one of the other threereportable segments.   In 2003,revenues in this segment were generated primarily from construction managementfees for overseeing the general construction of a 100,000 bushel per daysoybean processing facility built by Minnesota Soybean Processors (MnSP) inBrewster, Minnesota.  In addition, at times we earn miscellaneous incomefor consulting fees or the completion of feasibility studies or otherprojects.  The revenue from suchactivities also falls into this segment.

 

In August 2000, we entered into anagreement with MnSP to provide construction management for its new soybeanprocessing plant. Under the contract, we were paid 10% of the total equityraised, and we agreed to reinvest 80% of the construction management fees inequity of MnSP.  MnSP completed itsequity fundraising in April 2002, raising a total of approximately $29million. Construction began approximately six months later and was completed inNovember 2003.

 

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We plan to make our required reinvestment inMnSP in the second quarter of 2004 by transferring a 63 million-pound oilstorage tank and loading facilities that we constructed on land adjacent to theMnSP site.   In exchange for suchtransfer, we will receive approximately 7% of MnSP’s outstanding shares.

 

In addition, we made approximately $500,000in interest-free loans backed by retained local earnings to our members toinvest in MnSP.  These loans will berepaid through member distributions.

 

As MnSP begins production, we are providingmanagement 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 are paid primarily on a cost-sharing basis.  Costs for various employees, such as commercial,accounting, and engineering employees, and other administrative expenses willbe allocated between SDSP and MnSP based on the volume of soybeans processed ateach plant.  Rodney Christianson, ourChief Executive Officer has general management and oversight responsibilitiesof MnSP under this Agreement.

 

MnSP plans to start construction in 2004 on a30 million gallon biodiesel refinery adjacent to its soybean processingfacility.

 

**Raw Materials andSuppliers**

 

We procure soybeans from local soybean producers and country elevators.In 2003 soybean production in South Dakota was approximately 113 millionbushels down from 2002’s crop of 127 million bushels, primarily due to dryweather conditions. We control the flow of soybeans into the plant with acombination of pricing and contracting options. Threats to the soybean supplyinclude weather, changes in government programs, and competition from otherprocessors and export markets. Our refining plant and Polyurethane segmentprocure their entire supply of crude soybean oil from our crushing plant.

 

##### ***Utilities***

##### *** ***

We use natural gas and electricity to operate the crushing and refiningplants. Natural gas is used in the boilers for process heat and for dryingsoybeans. NorthWestern Energy provides natural gas service to the plant on aninterruptible basis. We are at risk to adverse price fluctuations in thenatural gas market, but we have the capability to use fuel oil as a back up fornatural gas if delivery is interrupted or market conditions dictate. We employforward contracting to offset some of this risk. Our electricity is supplied bythe City of Volga. A long term contract on electricity offsets some of ourprice exposure on electrical rates.

 

**Employees**

 

We currently employ approximately 95 individuals. All but 18 of ouremployees are full-time. We have no unions or other collective bargainingagreements.

 

**Sales, Marketing andCustomers**

 

Our primary meal markets are the local truck market (typically within200 miles of our Volga plant), the Western U.S. (Washington, Oregon andCalifornia), and exports (to Canada). Our primary soybean oil market is Illinois and is served by rail.  Our rail service is provided by the Dakota,Minnesota and Eastern (DM&E) rail line, with connections to theBurlington-Northern Santa Fe (BNSF) and the Union Pacific (UP).  The table presented below lists thepercentage of sales by quantity of product sold within various markets for2003.

 

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|                      |   | **Soybean  Meal** |   | **Crude  Soybean Oil** |   | **Refined  Oil** |   |
|---------------------------|--------|-------------------|--------|------------------------|--------|------------------|--------|
|                      |   |              |   |                   |   |             |   |
| Local                     |   | 34                | %      | 45                     | %      | —           |   |
| Other U.S. States         |   | 52                | %      | 52                     | %      | 100              | %      |
| Export (including Canada) |   | 14                | %      | 3                      | %      |             |   |

 

**Competition**

 

We are the only significant hexane extraction plant in South Dakota andwe believe that we have approximately 9% of the soybean processing capacity inthe Upper Midwest and about 1% in the United States.  We plan to maintain our competitive position in the market byproducing high quality product and operating a highly efficient operation atthe lowest possible cost, and adding value to our products.  We plan to increase our cost efficiency byincreasing daily production capacity, adding value to our products by investingin further processing of our products and developing and reviewing newapplications for our products in the plastics and energy fields.

 

**Government Regulationand Environmental Matters**

 

Hexane recovery is closely monitored by the Environmental ProtectionAgency. New regulations effective inApril 2004 require that the amount of hexane lost in the extractionprocess not exceed 0.2 gallons per ton of soybean oil produced on a rolling12-month average.  Our productionprocess currently meets this requirement.

 

As part of a Compliance Plan with the South Dakota and FederalDepartments of Environment and Natural Resources, we installed a new zeroprocess discharge system to replace our conventional wastewater system and arecurrently in compliance with our surface water discharge permits. We areobligated to provide ongoing compliance reports to the Department ofEnvironment and Natural Resources.

 

We maintain a spill prevention plan that contains the necessaryprocedures to minimize spill events and provide emergency notification, ifnecessary. It also contains the required information pertaining to spillcontainment procedures in the event a spill does occur, and the proper spillclean-up procedures. The plan places us in compliance with the provision of 40CFR, Part 112, of the Federal Regulations on oil pollution prevention, and theprovisions of SARA, *Superfund Amendments and Reauthorization Act, 1986*.It also addresses all known potentially polluting materials at our plant. Atthis time, we do not generate any known hazardous wastes at our plant.

 

We also maintain an EPA Facility Response Plan. This plan is alsoprepared according to the guidelines of 40 CFR, Part 112, and pursuant to theOil Pollution Act of 1990. This plan is designed to emphasize oil spillprevention and oil spill response preparedness.

 

**Item2.****                         Properties**

 

We conduct our operations in all of our segments principally from ourfacilities in Volga, South Dakota.  Weown our facilities at Volga, and they serve as collateral for our creditfacilities.  We also store crude soybeanoil from our Soybean Processing segment at our facility in Brewster,Minnesota.  In addition, USSC leasesoffice space for a portion of it sales staff in Princeton, Illinois.

 

**Item3.****                         LegalProceedings**

 

From time to time in the ordinary course of our business, we may benamed as a defendant in legal proceedings related to various issues, includingwithout limitation, workers’ compensation claims, tort claims, or contractualdisputes. We carry insurance that provides protection against generalcommercial liability claims, claims against our directors, officers andemployees, business interruption,

 

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automobile liability, and workers’ compensation claims. Except asdescribed below, we are not currently involved in any material legalproceedings and are not aware of any potential claims.

 

OnJanuary 28, 2003, we were served with notice that we had been named as adefendant in a breach of contract suit in the circuit court of Cook County,Illinois, along with a number of other individual defendants, including ourChief Executive Officer, Rodney Christianson. The plaintiff, James Jackson, wasan employee of USSC whose services were terminated shortly after we became themajority owner in early January 2003. Mr. Jackson claims that he waswrongfully terminated and that the defendants unjustly interfered with hisemployment contract and committed fraud in connection with our acquisition of acontrolling interest in USSC. He is claiming nearly $1 million incompensatory damages and $5 million in punitive damages. Based upon ourinvestigation of the facts surrounding the case, we believe that Mr. Jackson’semployment contract was not properly authorized and that his claims aresubstantially without merit. We are vigorously defending the action; however,we cannot provide any assurance that we will be successful in disposing of thecase or that any costs of settlement or damages would not be material if we areunable to get the case dismissed.  Weanticipate entering into mediation negotiations with Mr. Jackson in the secondquarter of 2004. Under the terms of our stock purchase agreement with USSC, webelieve that we would be entitled to indemnification from USSC for our costs tosettle or defend the suit, although since we now own 58% of USSC we will notreceive dollar-for-dollar indemnification from USSC.

 

**Item4.****                         Submissionof Matters to a Vote of Security Holders**

 

Therewere no matters submitted to a vote of security holders in the quarter endingDecember 31, 2003.

 

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**Part II**

 

**Item5.****                         Marketfor Registrant’s Common Equity and Related Stockholder Matters**

 

Neither SDSP, nor our predecessor cooperative, sold any equitysecurities during the past three years ended December 31, 2003.

 

As of March 30, 2004, we had 28,258,500 Class A capital unitsoutstanding, held by 2,098 members. There is currently no active trading market for our capital units.

 

The following table is the trading history of our capital units andequity shares of our predecessor cooperative (prior to the capital unit split)by quarter for the past two years.

 
| **Quarter**         |   | **Low Bid** |   | **High Bid** |   | **Average  Bid**    |   | **# of Units  Traded** |
|---------------------|--------|-------------|--------|--------------|--------|---------------------|--------|------------------------|
|                |   |        |   |         |   |                |   |                   |
| 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 |   |                   |
| Jan – Mar 2003 |   |        |   |         |   | No Trading Activity |   |                   |
| Apr – Jun 2003 |   |        |   |         |   | No Trading Activity |   |                   |
| Jul – Sep 2003 |   |        |   |         |   | No Trading Activity |   |                   |
| Oct – Dec 2003 |   |        |   |         |   | No Trading Activity |   |                   |

 

In 2002, we paid total cash distributions to our members in the amountof $5.5 million (19.53¢ per capital unit on a post-adjusted capital unit splitbasis).  In 2003, we paid total cashdistributions to our members in the amount of $2.5 million (9.0¢ per capitalunit).

 

As an LLC, we must strictly restrict transfers of our capital units inorder to preserve our preferential single-level tax status.  Our capital units may not be traded on anynational securities exchange or in any over-the-counter market.  All transfers must be in accordance with ourCapital Unit Transfer System, as it may be amended by the Board of Managersfrom time to time. Our Capital Unit Transfer System prohibits any transfer thatwould result in the loss of our partnership tax status.

 

Pursuant to our Operating Agreement, aminimum of 2,500 capital units is required for membership. In addition to thetransfer restrictions described above, the Board also retains the right toredeem the capital units at $.20 per unit in the event a member attempts todispose of the units in a manner not in conformity with the OperatingAgreement, if a member becomes a holder of less than 2,500 units, becomes anowner (directly or indirectly) of more than 1.5% of the issued and outstandingcapital units or becomes bankrupt. Earnings, losses and cash distributions areallocated to members based on their percentage of capital unit ownership. OurOperating Agreement also provides that cash equal to at least 30% of net incomewill be distributed annually to members subject to certain limitations,including minimum net income of $500,000, restrictions imposed by debt andcredit instruments, or as restricted by law in the event of insolvency.

 

Our Operating Agreement prohibits transfers other than through theprocedures specified in our Capital Units Transfer System.  Under this system, all transactions must beapproved by the Board.  The Board willgenerally approve transfers that fall within “safe harbors” contained in thepublicly traded partnership rules under the federal tax code. Permittedtransfers include transfers by gift or sale to qualified family members and transfersupon death.

 

Although we are not currently permitting trading in our capital units,other than for the limited permitted private transfers discussed above that aresubject to the approval of our Board of Managers, we

 

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are in the process of establishing a limited capital units transferservice.  The capital units transferservice is expected to be operated by Variable Investment Advisors, Inc., aregistered broker/dealer, and will also be registered with the Securities andExchange Commission as an alternative trading system.  As currently proposed, our Board of Managers will not permit thenumber of capital units traded through the service each year to exceed twopercent of our total issued and outstanding capital units in order for thecapital units transfer service to fall within “safe harbors” contained in thepublicly traded partnership rules under the federal tax code.  We have requested a private letter rulingfrom the IRS, regarding the contemplated structure of our capital unitstransfer service in order to confirm that it will comply with the IRS’ssafe-harbor provisions for the publicly-traded partnership rules.  We do not expect to receive a response fromthe IRS to our private letter ruling until at least the second quarter of 2004,and we cannot assure that we will receive a favorable ruling.  If we do not receive a favorable ruling, wewill be required to restructure our proposed capital units transfer service andmay not be able to provide it at all.

 

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

 

The following table sets forth selectedfinancial data of South Dakota Soybean Processors, LLC and our predecessorcooperative for the periods indicated. The historical financial information inthe table below includes audited financial data of our predecessor cooperativeprior to the effectiveness of the reorganization on July 1, 2002. Theaudited financial statements included in Item 8 of this report have beenaudited by our independent auditors, Eide Bailly LLP.

 
|                                    |   | **Years  Ended December 31,** |        |
|-----------------------------------------|--------|------------------------------------|-------------|
|                                    |   | **2003**                           |        | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                    |   |                               |        |   |   |   |   |   |   |   |   |
| Bushels Processed                       |   | 28,384,272                         |        | 27,963,507 |   | 26,924,542 |   | 26,832,064 |   | 24,553,153 |   |
|                                    |   |                               |        |   |   |   |   |   |   |   |   |
| Statement of Operations Data:           |   |                               |        |   |   |   |   |   |   |   |   |
| Revenues:                               |   |                               |        |   |   |   |   |   |   |   |   |
| Net Sales                               |   | $                                  | 207,256,575 |   | $ | 159,488,645 |   | $ | 148,258,146 |   | $ | 145,273,300 |   | $ | 128,146,355 |   |
| Patronage Income                        |   | 97,975                             |        | 36,801 |   | 1,460,386 |   | 1,779,755 |   | 660,623 |   |
| CBOT Storage Income                     |   | 1,416,333                          |        | 1,867,769 |   | 1,629,420 |   | 1,436,184 |   | 1,432,260 |   |
| Agent Fee Income                        |   | —                             |        | 258,988 |   | 463,896 |   | 450,674 |   | 417,049 |   |
| Management Fees & Misc.             |   | 1,243,205                          |        | 1,286,340 |   |   |   |   |   |   |   |
| Grant Income                            |   | 253,622                            |        |   |   |   |   |   |   |   |   |
|                                    |   | 210,269,710                        |        | 162,938,543 |   | 151,811,848 |   | 148,939,913 |   | 130,656,287 |   |
| Costs & Expenses:                   |   |                               |        |   |   |   |   |   |   |   |   |
| Cost of goods sold                      |   | 203,022,360                        |        | 152,583,964 |   | 141,359,124 |   | 140,293,625 |   | 125,954,573 |   |
| Marketing & Administrative Expense  |   | 3,639,442                          |        | 2,679,633 |   | 2,234,248 |   | 1,768,207 |   | 1,783,460 |   |
| Interest Expense                        |   | 802,178                            |        | 542,220 |   | 483,223 |   | 1,050,880 |   | 723,031 |   |
| Income Tax Expense (Benefit)            |   | (131,474                           | )           | 520,000 |   |   |   |   |   |   |   |
| Minority Interest in Loss of Subsidiary |   | (457,620                           | )           |   |   |   |   |   |   |   |   |
| Net Income                              |   | 3,394,824                          |        | 6,612,726 |   | 7,735,253 |   | 5,827,201 |   | 2,195,223 |   |
|                                    |   |                               |        |   |   |   |   |   |   |   |   |
| Capital Units Outstanding(1)            |   | 28,258,500                         |        | 28,258,500 |   | 28,258,500 |   | 28,258,500 |   | 28,258,500 |   |
| Net Income per Capital Unit             |   | $                                  | 0.120       |   | $ | 0.235 |   | $ | 0.275 |   | $ | 0.205 |   | $ | 0.078 |   |
|                                    |   |                               |        |   |   |   |   |   |   |   |   |
| Balance Sheet Data:                     |   |                               |        |   |   |   |   |   |   |   |   |
| Working Capital                         |   | $                                  | 9,499,231   |   | $ | 5,363,332 |   | $ | 4,212,055 |   | $ | 3,173,651 |   | $ | 2,380,942 |   |
| Net Property, Plant & Equipment     |   | 31,825,619                         |        | 33,761,185 |   | 31,892,837 |   | 31,872,946 |   | 33,963,308 |   |
| Total Assets                            |   | 81,617,064                         |        | 70,284,896 |   | 58,680,968 |   | 55,030,320 |   | 50,955,893 |   |
| Long-Term Obligations                   |   | 17,664,442                         |        | 10,234,523 |   | 8,346,078 |   | 8,649,420 |   | 12,819,873 |   |
| Members Equity                          |   | 34,730,590                         |        | 33,875,593 |   | 32,779,725 |   | 30,771,474 |   | 25,518,926 |   |
|                                    |   |                               |        |   |   |   |   |   |   |   |   |
| Other Data                              |   | 2,80,342                           |        |   |   |   |   |   |   |   |   |
| Capital Expenditures                    |   | $                                  | 1,016,849   |   | $ | 4,645,020 |   | $ | 2,718,740 |   | $ | 720,956 |   | $ | 2,658,400 |   |

 

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(1) Adjusted for two-for-one capital unitsplit effective June 17, 2003.

 

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**Item7.****                         Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*You should read thefollowing discussion along with our financial statements and the notes to ourfinancial statements included elsewhere in this report. The followingdiscussion contains forward-looking statements that are subject to risks,uncertainties and assumptions. Our actual results, performance and achievementsmay differ materially from those expressed in, or implied by, suchforward-looking statements. See “Cautionary Statement Regarding Forward-LookingInformation” at the beginning of this report.*

 

**Executive Overview**

 

Although our net income for2003 was lower than 2002 and 2001, we performed well in our soybean processingand refining segments and made major progress towards our long-term objectivesof delivering high quality products and services at the lowest possible costsand adding value to our products by investing in further processing of ourproducts and developing and reviewing new applications for our products in theplastics and energy fields.  In late2003, construction on MnSP’s soybean processing facility, which we wereoverseeing, was completed, which will provide us with future cost-sharingsavings.  In January 2003, weassumed management control of USSC and began providing some much needed workingcapital to the company through our share acquisition.  Under our management in 2003, USSC focused on raising the levelof industry experience of its staff, targeting its marketing and sales,increasing its product lines, improving quality control and relocating itsresearch facilities to our Volga, South Dakota plant site.

 

In 2004, we anticipate thatmanagement of the soy market will beone of our most difficult challenges. The soy market is currently benefitingfrom growing demand with improving world economies.  Yet, margin structure will be pressured by the shortfall in the2003 soybean crop in the U.S. and the shrinking South American crop.  We also believe that incidents of “mad cowdisease and “bird influenza” in the U.S. could have a negative impact on thedemand for soybean meal.  On the otherhand, we anticipate that our general and administrative expenses will bereduced significantly in 2004 as a result of our cost-sharing arrangement withMnSP.  We also believe that we will seegrowth in demand for SoyOyl® as customers in the automotive industrycomplete their testing of SoyOyl.

 

Since beginning operationsin 1996, we have returned in excess of 125% of members’ original investment,increased our production capacity by 60%, invested to further process and addvalue to 30% of our revenue stream, and invested in a new and promising marketto use soybean oil, SoyOylÒ, to replace petroleum-based polyol in themanufacturing of polyurethane products.

 

Our strategy will remain thesame as we look forward. We will seek to continue delivering high qualityproducts and services to our customers at the lowest possible cost.  We will also continue our efforts to addvalue to the products we produce with the goal of having 60% of the revenues wegenerate from value-added products, rather than basic soybean meal and crudesoybean oil. In order to continue a maximum value added payment to our memberswe will look to develop strategic business relations with others to achieve ourgoals as we have in the past.

 

**Company Profile**

 

Weown and operate a soybean processing plant, a SoyOylÒ production facility and a soybean oilrefinery in Volga, South Dakota.  Webegan producing crude soybean oil and soybean meal in late 1996, and since thenwe have also expanded our business to include the development of new productlines and management services.  In 2000,we began providing management services to Minnesota Soybean

 

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Processors (MnSP) and will obtain a minority interest in MnSP in2004.  In 2002, we began refining crudesoybean oil into a product known as refined and bleached oil, and in early2003, we became the majority owner and assumed management control of thecompany Urethane Soy Systems Company (USSC), which produces SoyOylÒ,a bio-based polyurethane product made from soybean oil.

 

SDSPwas originally organized as a South Dakota cooperative, and reorganized into aSouth Dakota limited liability company effective July 1, 2002.  The following discussion relates to financialdata of South Dakota Soybean Processors, LLC and the predecessor cooperativefor the periods indicated.  Thehistorical financial information discussed below includes audited financialdata of our predecessor cooperative prior to the effectiveness of thereorganization on July 1, 2002.

 

Whenwe began refining operations in 2002, we started reporting our results byoperational segments because we anticipated that those components of ourbusiness would be managed and evaluated independently; however, since then wehave been processing most of the crude oil we produce into refined and bleachedoil or SoyOyl® instead of selling it, and the production, sales andmarketing of our products have been substantially integrated. Accordingly, inlate 2003, we began the process of reevaluating whether segment reporting isnecessary.  Unless or until we and ourauditors have concluded that segment reporting is not necessary under theapplicable accounting rules, we will continue to provide disclosure foroperating segments.  The discussionbelow covers four segments: Soy Processing, Refining, Polyurethane and Other,which contains business operations that do not fit under one of the first threesegments. Our segments can be generally described as follows:

 

•                  The Soybean Processing segment consists ofour original soybean processing operations in which whole soybeans are crushedand processed into soybean meal and crude soybean oil. The meal is soldprimarily to local customers for animal feed and to customers in the northwesternUnited States and western Canada. The crude soybean oil is primarilytransferred to our Refining segment for further processing into refined andbleached oil or sold to other soybean oil refiners.

 

•                  The Refining segment processes crude soybean oilfrom our crushing plant to a quality standard referred to as refined andbleached oil.  The Refining segmentbegan operations in August 2002. The refined and bleached oil is then sold in accordance with a long-termsupply agreement and delivered to one of our customer’s facilities, where it isthen further processed for human consumption.

 

•                  The Polyurethane segment currently consistsof sales of SoyOyl®, a bio-based polyol made from speciallyprocessed crude soybean oil.  SDSPprocesses crude oilat the Volga, South Dakota facility and ships itdirectly to USSC’s customer.  Includedin this segment are the consolidated financial statements of USSC and thefinancial information related to the special processing of crude oil atSDSP.  We implemented this segmentbeginning in January 2003 after we purchased an additional interest inUSSC raising our ownership percentage in the company from 4% to 58%. With thatpurchase, we assumed management control of USSC.

 

•                  The Othersegment includes all items not related to one of the other three reportablesegments.  It consists primarily ofconstruction management fees for overseeing the general construction of theMinnesota Soybean Processors (MnSP) facility. In addition, at times we earn miscellaneous income for the completion offeasibility studies or other projects or consulting fees, and the revenue fromsuch projects also falls into this segment.

 

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**Results of Operations**

 

***Comparison of Years Ended December 31, 2003 and 2002***

 

Readersare directed to Note 17 – Segment Reporting of our audited consolidatedfinancial statements for data on the audited financial results of our fourbusiness segments for the years ended December 31, 2003 and 2002.

 

*Revenue* – Revenue increased from $159.5 million for 2002 to $207 million for2003, an increase of 30%.  The improvement was a result of severalfactors.  Principally, commodity prices increased for all of ourcommodities, and sales of our refined and bleached oil were up 363% for theyear as a result of a full year of operations of our refinery versus 4 monthsin 2002.  Total soybean oil sales wereup 38% due to sales in 2003 of soybean oil held in storage from 2002, a highersoybean oil yield per bushel, and an increase in production in our SoybeanProcessing segment.  We placedsignificant quantities of oil in storage in 2002 because prices were relativelylow and we hoped to realize greater basis improvement in later sales.  Basisobjectives were achieved in 2003 and most of the stored oil was sold andshipped during 2003.  As a result, we sold 95 million more pounds of crudeand refined and bleached oil during 2003 than in 2002.  We do not expectthese higher sales levels of crude and refined and bleached oil to be sustainedin the short-run due to the exhaustion of our stored oil inventory.  Additional information regarding the factorsaffecting our Soybean Processing and Refining revenue is included in thediscussion of those segments below.

 

*Gross Profit* – During 2003, the Company achieved a gross profit of $4.2 millioncompared to a gross profit of $6.9 million in 2002, a 39% decrease.  Total cost of revenue increased by $50.4million, a 33% increase in 2003 versus 2002. The increased cost of revenue wascaused by increased cost of product sold, production and freight costs of $45.7million (36%), $2.3 million (20%), and $2.4 million (20%), respectively. Factors impacting the increased cost of product sold in 2003 include a 1.5%increase in the volume of soybeans processed, 95 million pounds of additionalsoybean oil sales, and increasing commodity prices of soybeans for the SoybeanProcessing segment.. The increased freight cost resulted from higher productvolumes delivered to customers and higher freight rates.  The increasedproduction expense was attributable to higher natural gas prices, increaseddepreciation expense for the refinery assets, and increased labor and personnelexpenses for the refinery operations.

 

*Administrative Expense* – Administrative expense, including selling,general and administrative expenses, increased $960,000, or 36%, for 2003compared to 2002. Much of this increase represents the consolidation of USSC inSDSP’s financial statements for 2003, and corresponding expenses of $896,000related to additional employees, marketing and professional fees. The remainingincrease was due largely to travel expenses related to the USSC acquisition,and travel and relocation expense and search fees for procuring new personnelfor our refinery and construction management projects.

 

*Interest Expense* – Interest expense increased $260,000, or 48%, for the year endedDecember 31, 2003 compared to 2002. The increase was due to higher debtlevels caused by carrying larger values in accounts receivable and inventory,less operating income and capital investments, including our investment inUSSC, partially offset by lower interest rates.  Refined and bleached oilwas in production for all of 2003 versus only the last four months of2002.  Financing longer payment terms for refined and bleached oilreceivables accounted for a portion of the additional interest cost.  Asof December 31, 2003, we had outstanding debt of $17.5 million, most ofwhich consisted of our senior debt and bore interest at an annual rate of 3.47%as of December 31, 2003.  At December 31, 2002, we hadoutstanding debt of $10.1 million, the majority of which bore interest at anannual rate of 3.57%.

 

*Net Income* – Net income for the year ended December 31, 2003 was $3.4million compared to $6.6 million for the same period in 2002, a decrease of$3.2 million, or 48%.  The decrease innet income was primarily a result of the 33% increase in total cost of revenueswhile revenues increased only 30%,

 

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the consolidation of USSC’s operations, and the additional interestexpense resulting from higher debt balances.

 

*Soybean Processing –*Soybean Processing is our largest segment andtherefore, the discussions in the preceding sections are generally tied to thevariances between the revenue and operating income in the Soybean Processingsegment.  Revenue in this segment for sales to external customers was $144million for year ended December 31, 2003 and $142 million for the yearended December 31, 2002.  Sales volumeof meal was relatively unchanged from 2003 to 2002.  During the year endedDecember 31, 2003, sales volume of crude soybean oil, decreased 52%, ascompared to the sales volume during the same period in 2002.  We sold significantly lower volumes of crudesoybean oil in 2003, because we ceased selling most of our crude soybean oilonce we began refining operations in late August 2002.  However, wehad placed significant quantities of crude soybean oil in storage in 2002because prices were relatively low and we hoped to realize greater basisimprovement in later sales.  Those basis objectives were achieved in 2003and most of the stored oil was sold and shipped during 2003.  Lowervolumes in the Soybean Processing segment were offset by higher average salesprices for soybean meal (14%), and crude soybean oil (34%) during 2003. The Soybean Processing segment reported net income for the year endedDecember 31, 2003 of $3.6 million as compared to $6.2 million for the yearended December 31, 2002.

 

*Refining –* Revenue in the Refining segment for the year ended December 31,2003 was $62.5 million.  Revenue for2002 for this segment was only $17.4 million, but included less than fourmonths of refining operations, which began in late August 2002.  The$45.1 million increase in sales volume of refined and bleached soybean in 2003versus 2002 is attributable primarily to the fact that we operated the refineryfor less than the full year in 2002 and there were start-up inefficiencies withthe refining process.  A combination of the higher volume, higher refinedand bleach oil sales price, improved refined and bleached oil yields, andimplementation of strategies to maximize the value of refining co-productsresulted in refining revenues increasing to $62.5 million for 2003.  TheRefining segment reported net income of $183,000 for 2003 as compared to a$382,000 net loss for 2002.

 

*Polyurethane* – Consolidated revenue for the Polyurethane segment for the yearsended December 31, 2003 and 2002 was $319,000 and $163,000,respectively.  We continue to work to secure new markets for SoyOyl®but it is not yet a significant part of our business.  The Polyurethanesegment reported a net loss for the years ended December 31, 2003 and 2002of $1,089,000 and $236,000, respectively. The primary difference in consolidated revenue and net losses for 2003versus 2002 resulted from the acquisition of majority ownership in USSC and therelated consolidation of USSC on our financial statements.

 

*Other*– We recognize construction management income on the MnSP project as it isearned at SDSP based on the percentage of completion of the project. Werecognized management income of $1.2 million in each of 2002 and 2003 based onthe percentage of completion of the project.  Allocated expenses againstthe management income were $500,000 and $200,000 for the years endedDecember 31, 2003 and 2002 respectively, consisting primarily ofmanagement and personnel time.

 

TheMnSP construction project was completed in November 2003, and we do notexpect to have significant income in this segment in the near future.  We are currently providing management andmarketing services to MnSP, which are paid for on a cost-reimbursement basis,allocated according to the number of bushels of soybeans processed by the MnSPand SDSP plants, respectively.

 

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

 

*Revenue* – Revenue increased from $148.3 million for the year endedDecember 31, 2001 to $159.5 million for the year ended December 31,2002, an increase of 7.4%.  The improvement was a result of severalfactors:  principally, increased salesvolume of soybean meal, and also slightly increased soybean meal and crudesoybean oil prices in our Soybean Processing segment during the later period and

 

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the replacement of crude soybean oil sales with additional value-addedrefined oil sales in our Refining Segment.  Additional informationregarding the factors affecting our Soybean Processing and Refining revenue isincluded in the discussion of those segments below.

 

*Gross Profit* – Gross profit was relatively unchanged between the years endedDecember 31, 2002 and 2001. Total cost of revenue sold increased by $11.2million, an 8% increase for the year ended December 31, 2002 versus2001.  The increased cost of revenue wascaused by increased cost of product sold, freight and production cost of $7.5million (6%), $2.7 million (29%), and $1 million (9%), respectively. Factors impacting the increased cost of product sold for the year endedDecember 31, 2002 included a 4% increase in the volume of soybeansprocessed and increasing prices for soybeans. The increased freight costresulted from higher product volumes delivered to customers and higher freightrates.  The increased production expense was attributable to increaseddepreciation expense for the refinery assets, and increased labor and personnelexpenses for the refinery operations offset by lower utility costs and lowerhexane chemical costs due to upgrades in our equipment.

 

*Administrative Expense* – Administrative expense, including selling,general and administrative expenses, increased $445,000, or 20%, for the yearended December 31, 2002 compared to the same period in 2001.  The increase consisted of an increase by35.8% in professional fees related to the conversion of the cooperative to alimited liability company, and additional wages and benefits.

 

*Interest Expense* – Interest expense increased $59,000, or 12.2%, for year endedDecember 31, 2002 compared to the same period in 2001. The increase wasdue to higher debt levels caused by carrying larger values in accountsreceivable and inventory, less operating income and early payment of patronagedue to the reorganization, partially offset by lower interest rates.  Webegan production of refined and bleached oil in August 2002. Financing longer payment terms for refined and bleached oil receivablesaccounted for a portion of the additional interest cost.  As of December 31,2002, we had outstanding debt of $10.2 million, most of which consisted of oursenior debt and bore interest at an annual rate of 3.57% as ofDecember 31, 2002.  At December 31, 2001, we had outstandingdebt of $10.7 million, the majority of which bore interest at an annual rate of4.11% as of December 31, 2001.

 

*Net Income* – Net income for the year ended December 31, 2002 was $6.6million compared to $7.7 million for the same period in 2001, a decrease of$1.1 million, or 14.5%. The decrease in net income was primarily a result ofthe increase in administration expense, a decrease in patronage dividend incomefrom Cenex Harvest States as a result of our reduced sales of crude soybean oilto them, and income tax expense of $520,000 incurred as a result of the changein organizational structure to an LLC, offset by $1.2 million of income fromconstruction management fees as discussed below.

 

*Soybean Processing –*Soybean Processing is our largest segment anduntil August 2002 was our only operating segment, other than a small othersegment.  Therefore, the discussions inthe preceding sections are generally tied to the variances between the revenueand operating income in the Soybean Processing segment.  Revenue in thissegment for sales to external customers was $141.9 million for the year endedDecember 31, 2002 and $148.2 million for the year ended December 31,2001.  During the year ended December 31, 2002, sales volume ofsoybean meal increased 2%, while crude soybean oil decreased 28%, as comparedto the sales volume during the same period in 2001.  Higher sales volumes of soybean meal in the year endedDecember 31, 2002 resulted primarily from the lower moisture and soybeanoil content of the 2001 crop, which generated more soybean meal on a per bushelbasis.  We sold lower volumes of crudesoybean oil in the year ended December 31, 2002 because we began refiningoperations in late August 2002 and stored additional crude soybean oil inorder to obtain basis objectives.  We also experienced higher averagesales prices for soybean meal (1%) and crude soybean oil (5%) during thatperiod.   The Soybean Processing segment reported net income forthe year ended December 31, 2002 of $6.2 million as compared to $7.3million for the year ended December 31, 2001.

 

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Prior to the change in organization to a LLC, we received patronageincome from all of the pounds of crude oil sold to Cenex Harvest States. Thepatronage income was based on net income in their refinery segment, and wasallocated to us in January of each year. We accrued the patronage based onthe quarterly filings with the Securities and Exchange Commission of CenexHarvest States. For the years ending December 31, 2002, and 2001, thatincome was $37,000 and $1.5 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 we sell toCenex Harvest States is no longer significant.

 

*Refining –* Revenue in the Refining segment for the year ended December 31,2002 was $17.4 million, but included only a few months of refining operations,which began in late August 2002. Accordingly, there were no revenues in2001 for this segment.   The Refiningsegment reported a $382,000 net loss for the year ended December 31,2002.  This was due to high overhead caused by the start-up of thesegment. Extra labor was used to get the equipment operational to meet thedeadline imposed by the supply agreement, and extensive training of personnelwas needed for the start-up activities. We received $112,000 in 2002 from the USDA based on a Value-AddedDevelopment Grant that offset some of the additional costs.

 

*Polyurethane* – Revenue for the Polyurethane segment for the years endedDecember 31, 2002 and 2001 was $39,670 and $12,666, respectively. SoyOylÒ remained in the development stage duringthese periods and revenues from its sales were not material, and no expenseswere allocated to our SoyOyl operations for the years ended December 31,2002 and 2001.

 

*Other*– We recognize construction management income as it is earned at SDSP based onthe percentage of completion of the project. The MnSP project was divided intofour stages, and a period was established for each stage. We adjust the periodeach month if a particular stage appears that it will take longer to completethan anticipated.  For the year ended December 31,2002, we recognized management income of $1.2 million compared to $302,000 forthe same period in 2001 based on the percentage of completion of theproject.  Allocated expenses against themanagement income were $248,000 and $0 for the years ended December 31,2002 and 2001 respectively, consisting primarily of management and personneltime.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

***Comparison of the years ended December 31, 2003 and 2002***

 

*Cash Flowsfrom Operating Activities*

 

Operatingactivities generated $775,000 for the year ended December 31, 2003,compared to $10.9 million for the year ended December 31, 2002. The fundsgenerated in the year ended December 31, 2003 consisted primarily of $3.4million of cash from net income plus depreciation of $3.0 million, less a $5.1million change in current net assets and liabilities, $457,000 of minorityinterest in the net loss of USSC and non-cash patronage dividends of $68,000.  The primary changes from 2002 included $3.3million less net income in 2003 and a $1.5 million increase in working capitalneeds, offset by $68,000 reduction in non-cash patronage allocations, andadditional depreciation expense of $248,000.

 

*Cash Flowsfrom Investing Activity*

 

Investingactivities cost $5.5 million during the year ending December 31, 2003compared to $6.9 million for the year ended December 31, 2002. The purchase of shares in USSC accounted for $4.1 million of suchexpenditures in 2003.  We also advancedloans to our members of $480,000 on future distribution payouts towards thepurchase of MnSP stock.  In addition, wepurchased $1.0 million

 

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of property and equipment during the year ending December 31, 2003compared to $4.6 million purchased in the period ending December 31,2002.  The primary variance in propertyand equipment is due to the construction of the oil refinery at our Volga, SDlocation during 2002. The $1.0 million spent on property and equipment duringthe year ended December 31, 2003 consisted mostly of small items. Thelargest single investment during that period was consolidation software toupgrade our technological capabilities and several projects to improve oursoybean processing and refining operations. In 2002, we also spent approximately $2.3 million for the constructionof a new oil storage tank in Brewster, MN, which we held for sale to MnSP.

 

*Cash Flowsfrom Financing Activity*

 

Netcash generated by financing activities for the years ending December 31,2003 and 2002 was $5.4 million and $6.0 million, respectively. During the yearended December 31, 2003, we increased our borrowings by $9.5 million, as aresult of carrying larger values in accounts receivable and inventory, lessoperating income and expenditures for capital investments, including ourinvestment in USSC.  These additionalborrowings were offset by a distribution to our members of $2.5 million andpayments of $1.6 million on long-term debt commitments.  During the year ended December 31,2002, we paid $5.5 million to our members in a cash distribution and principal paymentsof $455,000 on our long-term debt.

 

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

 

* Cash Flows from Operating Activities*

 

Operating activities generated $10.9 million for the year endedDecember 31, 2002, compared to $9.5 million for the year endedDecember 31, 2001. The primary changes from 2001 included $1.1 millionless net income in 2002, offset by a significant $1.5 million reduction innon-cash patronage allocations from Cenex Harvest States, a reduction in workingcapital needs of $603,000, and additional depreciation expense of $289,000.

 

*Cash Flows fromInvesting Activity*

 

Investing activities cost $7.0 million during the year endedDecember 31, 2002. This $7.0 million of expenditures consisted of $4.6million for equipment purchases for the plant and $2.3 million towards theconstruction of an oil storage tank at Brewster, Minnesota. Included in the$4.6 million of plant equipment expenditures were $4.1 million in costsassociated with the addition of the oil refinery in 2002. The other $500,000was spent on miscellaneous projects to meet maintenance or environmentalrequirements or improve efficiencies within the plant.

 

*Cash Flows fromFinancing Activity*

 

Cash flows from financing activities cost $6.0 million during the yearended December 31, 2002 as compared to $5.7 million during the year endedDecember 31, 2001.  The $6.0million in expenditures during 2002 consisted of $5.5 million paid to ourmembers in a cash distribution, and $455,000 in principal payments on long-termdebt as compared to $5.7 distributed to our members and $992,000 in principalpayments on long-term debt offset by proceeds of $1.1 million from otherlong-term debt in 2001.

 

***Indebtedness***

 

CoBankis our primary lender. Effective February 26, 2002, we established twolines of credit with CoBank to meet our borrowing needs. The first is arevolving long-term loan agreement. Under the terms of this loan, we began witha $16.0 million credit line, which was increased incrementally to $21.0 millionon May 1, 2003, and then began decreasing by $1.3 million approximatelyevery nine months

 

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thereafter. The final payment will be equal to the remaining unpaidprincipal balance of the loan on March 20, 2011. The revolving loan is setup so that we may borrow funds as needed up to the credit line maximum, andthen pay down the principal whenever excess cash is available. Repaid amountsmay be reborrowed up to the available credit line. We pay a 0.375% annualcommitment fee on any funds not borrowed.

 

Thesecond credit line is a revolving working capital loan under an agreement thatexpires on March 31, 2005, unless extended by CoBank. The primary purposeof this loan is to finance inventory and receivables. The maximum availabilityunder this credit line ranges from $6.0 million to $10.0 million for particularcommitment periods during the term of the loan to match our anticipated needswith respect to carrying inventory.  For example, we have higher linesestablished during the months of October through May to cover the carryingcosts of higher soybean inventories that are piled outside during the harvestseason. Borrowing base reports and financial statements are required monthly tojustify the balance borrowed on this line. We pay a 0.25% annual commitment feeon any funds not borrowed; however, we have the option to reduce these creditlines during any given commitment period listed in the agreement to avoidincurring the commitment fee on funds not borrowed.

 

BothCoBank loans are set up with a variable rate option. The variable rate is setby CoBank and changes weekly on the first business day of each week. We alsohave a fixed rate option on both loans allowing us to fix rates for any periodbetween one day and the entire commitment period. We can request a fixed ratequote from CoBank at any time and lock-in the interest rate on all or a part ofour then outstanding borrowings . Both CoBank loans are secured bysubstantially all of our assets and are subject to compliance with standardfinancial covenants and the maintenance of certain financial ratios.

 

Thebalance borrowed on the revolving term loan was $15.3 million and$9.9 million as of December 31, 2003 and 2002, respectively. Therewere no advances outstanding on the working capital credit line atDecember 31, 2003 or 2002. The interest rate on the revolving term loansas of December 31, 2003 and 2002 was 3.47% and 3.57%, respectively peryear.

 

In August 2000, we entered into an agreement with MnSP for certainconstruction management services for its new soybean processing plant inBrewster, Minnesota. We agreed to reinvest a minimum of 80% of the fees we earnunder the agreement in MnSP equity securities. To date, we have earnedapproximately $2.9 million under the agreement, and expect to make our requiredinvestment of $2.3 million in MnSP in the second quarter of 2004 bytransferring the 63 million pound oil storage tank and loading facilities webuilt next to the plant in Brewster, Minnesota, along with the land we acquiredfor the tank site.

 

Wealso have other long-term contracts and notes totaling approximately $3.2million, with a weighted average annual interest rate of 1.6% as ofDecember 31, 2003. These arrangements include a no interest long-termpayable to the other USSC shareholders relating to SDSP’s purchase of theirtendered USSC shares with a current outstanding principal balance of $2.6million. The obligation is secured by the purchased shares, with final paymentdue on October 31, 2006. Our highest interest payable is on a $250,000loan held by USSC at 15% per annum which becomes due February 13, 2005 andcannot be prepaid.  We made principal payments of $1,452,107 and $454,991on these additional long-term obligations during the years endedDecember 31, 2003 and 2002, respectively.

 

InSeptember 2003, our board of managers authorized the sale and issuance ofup to 4,500,000 new SDSP capital units. If the offering is completed, we intendto use the proceeds primarily to finance our acquisition of USSC.  We plan to offer the capital units first tocurrent members of SDSP for $2.00 per capital unit, and then, if after 45 dayswe have not raised at least $8.5 million, the remaining capital units would beoffered to the general public for $2.50 per unit. Nothing in this paragraph orreport shall constitute an offer to sell capital units or other securities ofSDSP. To conduct the offering, we must first file a registration statement onForm S-1 with the Securities and Exchange Commission and may only

 

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proceed with the offer and sale of capital units after the registrationstatement is declared effective by the SEC.

 

Weinvested $5.5 million in capital expenditures during the year endedDecember 31, 2003.  We anticipatespending approximate $3 million in capital expenditures during the year endedDecember 31, 2004.  Our principalsource of funds, in addition to the potential offering describe above, areanticipated to be cash flows from operating activities and borrowings under ourrevolving and working capital loans with CoBank.

 

**OFF BALANCESHEET FINANCING ARRANGEMENTS**

 

The Company does not utilize special purposeentities or off-balance sheet financial arrangements.

 

**LeaseCommitments**

 

Wehave commitments under various operating leases for rail cars, various types ofvehicles, and lab and office equipment.  Our most significant leasecommitments are the rail car leases we use to distribute our products.  Wehave a number of long-term leases with GE Capital and Trinity Capital forhopper rail cars and oil tank cars. Total lease expense under thesearrangements was approximately $1.9 million and $1.7 million for the yearsending December 31, 2003 and 2002, respectively. The hopper rail cars earnmileage credit from the railroad through a sublease program which totaled $1.6million and $1.4 million for the years ending December 31, 2003 and 2002,respectively.

 

In addition to rail car leases, we have several operating leases forvarious equipment and storage facilities. Total lease expense under thesearrangements was $321,000 and $628,000 for the years ending December 31,2003 and 2002, respectively. Some of these leases include purchase options;however, none are for a value less than fair market value at the end of thelease.  The lease expense for 2002 wassubstantially higher due to the crude soybean oil storage tanks leased due tomarket conditions.

 

The following table shows our contractual obligations for the periodspresented.

 
| **CONTRACTUAL  OBLIGATIONS** |   | **Payment  due by period** |       |
|------------------------------|--------|----------------------------|------------|
| **(Dollars in thousands)**   |   | **Total**                  |       | **Less than  1 year** |   | **1-3 years** |   | **3-5 years** |   | **More than  5  years** |   |
|                         |   |                       |       |   |   |   |   |   |   |   |   |
| Long-Term Debt Obligations   |   | $                          | 18,519,258 |   | $ | 976,117 |   | $ | 4,530,089 |   | $ | 4,538,751 |   | $ | 8,474,301 |   |
|                         |   |                       |       |   |   |   |   |   |   |   |   |
| Capital Lease Obligations    |   | —                     |       | — |   | — |   | — |   | — |   |
|                         |   |                       |       |   |   |   |   |   |   |   |   |
| Operating Lease Obligations  |   | 19,931,794                 |       | 2,000,411 |   | 3,942,873 |   | 3,145,736 |   | 10,842,774 |   |
|                         |   |                       |       |   |   |   |   |   |   |   |   |
| Purchase Obligations         |   | —                     |       | — |   | — |   | — |   | — |   |
|                         |   |                       |       |   |   |   |   |   |   |   |   |
| Other Long-Term Liabilities  |   | 121,301                    |       | 11,000 |   | 22,000 |   | 22,000 |   | 66,301 |   |
|                         |   |                       |       |   |   |   |   |   |   |   |   |
| Total                        |   | $                          | 38,572,353 |   | $ | 2,987,528 |   | $ | 8,494,962 |   | $ | 7,706,487 |   | $ | 19,383,376 |   |

 

20

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**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Preparationof our financial statements require estimates and judgments to be made thataffect the amounts of assets, liabilities, revenues and expenses reported. Suchdecisions include the selection of the appropriate accounting principles to beapplied and the assumptions on which to base accounting estimates. Managementcontinually evaluates these estimates based on historical experience and otherassumptions we believe to be reasonable under the circumstances.

 

Thedifficulty in applying these policies arises from the assumptions, estimates,and judgments that have to be made currently about matters that are inherentlyuncertain, such as future economic conditions, operating results and valuationsas well as management intentions. As the difficulty increases, the level of precisiondecreases, meaning that actual results can and probably will be different fromthose currently estimated.

 

Ofthe significant accounting policies described in the notes to the financialstatements, we believe that the following may involve a higher degree ofestimates, judgments, and complexity:

 

*Commitmentsand Contingencies*

 

Contingencies,by their nature relate to uncertainties that require management to exercisejudgment both in assessing the likelihood that a liability has been incurred,as well as in estimating the amount of the potential expense.  Inconformity with accounting principles generally accepted in the United States,we accrue an expense when it is probable that a liability has been incurred andthe amount can be reasonably estimated.

 

*InventoryValuation*

 

Weaccount for our inventories at estimated net realizable market value. Theseinventories are agricultural commodities that are freely traded, have quotedmarket prices, may be sold without significant further processing and havepredictable and insignificant costs of disposal. We derive our estimates fromlocal market prices determined by grain terminals in our area. Processedproduct price estimates are determined by the ending sales contract price as ofthe close of the final day of the period. This price is determined by theclosing price on the Chicago Board of Trade, net of the local basis. Changes inthe market values of these inventories are recognized as a component of cost ofgoods sold.

 

*Long-LivedAssets*

 

Depreciationand amortization of our property, plant and equipment is provided on thestraight-lined method by charges to operations at rates based upon the expecteduseful lives of individual or groups of assets. Economic circumstances or otherfactors may cause management’s estimates of expected useful lives to differfrom actual.

 

21

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Long-livedassets, including property, plant and equipment and investments are evaluatedfor impairment on the basis of undiscounted cash flows whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. An impaired asset is written down to its estimated fair marketvalue based on the best information available. Considerable management judgmentis necessary to estimate discounted future cash flows and may differ fromactual.

 

*Accountingfor Derivative Instruments and Hedging Activities*

 

Weminimize the effects of changes in the price of agricultural commodities byusing exchange-traded futures and options contracts to minimize our netpositions in these inventories and contracts. We account for changes in marketvalue on exchange-traded futures and option contracts at exchange prices andaccount for changes in value of forward purchase and sales contracts at localmarket prices determined by grain terminals in the area. Changes in the marketvalue of all these contracts are recognized in earnings as a component of costof goods sold.

 

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

 

***Commodities Risk & Risk Management.***To reduce the price change risks associatedwith holding fixed price commodity positions, we generally take opposite andoffsetting positions by entering into commodity futures contracts (either astraight or options futures contract) on a regulated commodity futuresexchange, the Chicago Board of Trade. While hedging activities reduce the riskof loss from increasing market prices of soybeans, such activities also limitthe gain potential which otherwise could result from significant decreases inmarket prices of soybeans. Our policy is generally to maintain a hedgedposition within limits, but we can be long or short at any time. Ourprofitability is primarily derived from margins on soybeans processed, not fromhedging transactions. Management does not anticipate that its hedging activitywill have a significant impact on future operating results or liquidity.Hedging arrangements do not protect against nonperformance of a cash contract.

 

Atany one time, our inventory and purchase contracts for delivery to the plantmay be substantial. We have risk management policies and procedures thatinclude net position limits. They are defined by commodity, and include bothtrader and management limits. This policy and procedure triggers a review bymanagement when any trader is outside of position limits. The position limitsare reviewed at least annually with the Board of Managers. We monitor currentmarket conditions and may expand or reduce the limits in response to changes inthose conditions.

 

***Foreign Currency Risk. ***We conduct essentially all of our business inU.S. dollars and have no direct risk regarding foreign currency fluctuations.Foreign currency fluctuations do, however, impact the ability of foreign buyersto purchase U.S. agricultural products and the competitiveness of and demandfor U.S. agricultural products compared to the same products offered by foreignsuppliers.

 

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

 

**Item8.****                                   FinancialStatements and Supplementary Data**

 

Reference is made to the “Index to Financial Statements” of SouthDakota Soybean Processors, LLC located at page F-1 of this report, andfinancial statements and schedules for the year ended December 31, 2003referenced therein, which are hereby incorporated by reference.

 

22

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**Item9.****                                   Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item9A.****                          Controls and Procedures**

 

***Evaluation ofDisclosure Controls and Procedures****.* Based on their evaluation as of the endof the period covered by this Annual Report on Form 10-K, our principalexecutive officer and principal financial and accounting officer have concludedthat the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) areeffective to ensure that information required to be disclosed by the Company inreports that it files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

***Changes in Internal Control Over FinancialReporting****.*There were no changes in our internal control over financial reportingidentified in connection with the evaluation of disclosure controls andprocedures that occurred during our fourth fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**Part III**

 

**Item10.****                            Directorsand Executive Officers of the Registrant**

 

**Board of Managers**

 

OurBoard of Managers consists of three members of SDSP from each of sevengeographic districts, for a total of 21 Board members. Board members areelected to staggered three-year terms by the members in their geographicdistrict and currently may not serve more than three consecutive three-yearterms. Generally, one Board seat in each of the seven geographical districts iselected at our annual meeting each year as required by our Operating Agreement.

 

The table below describes important information about the members ofthe Board of Managers.

 
| **Name, Address, and  Board Position, if any**       |   | **Age** |   | **Board****Member  Since** |   | **Current  Term****Expiring** |   | **Occupation****andBackground**                                                                                                                                                                                                                                                                                                                                      |
|------------------------------------------------------|--------|---------|--------|----------------------------|--------|-------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |   |    |   |                       |   |                          |   |                                                                                                                                                                                                                                                                                                                                                                 |
| **Paul Barthel**  22308 486th Ave.  Elkton, SD 57026 |   | 35      |   | 1996                       |   | 2006                          |   | Paul has been a farmer for the  past 18 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 167Madison, MN 56256-9102    |   | 49      |   | 1995                       |   | 2004                          |   | James  has been a farmer for the past 31 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. |

 

23

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| **Name, Address, and  Board Position, if any**                               |   | **Age** |   | **Board****Member  Since** |   | **Current  Term****Expiring** |   | **Occupation****andBackground**                                                                                                                                                                                                                                                                                                                                                                                                   |
|------------------------------------------------------------------------------|--------|---------|--------|----------------------------|--------|-------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Paul W. Casper***President*  44095 212th St.  Lake Preston, SD  57249-9640 |   | 45      |   | 1994                       |   | 2004                          |   | Paul has been a farmer for the  past 26 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                      |   | 49      |   | 1996                       |   | 2005                          |   | Dan  has been a farmer for the past 22 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. |
|                                                                         |   |    |   |                       |   |                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Marvin Goplen**  1671 270th Ave.

Canby, MN 56220  (507) 223-7391          |   | 69      |   | 1995                       |   | 2005                          |   | Marvin has been a farmer for the past 46 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, MN56187-9402                  |   | 55      |   | 1995                       |   | 2006                          |   | Ryan has been a farmer for the past 30 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, SD57071-9355       |   | 67      |   | 1994                       |   | 2005                          |   | Marvin has been a farmer for the past 46 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. Marvin  attended the Lutheran Bible Institute in Minneapolis, MN in 1956 and 1957.                                                                                                                       |
|                                                                         |   |    |   |                       |   |                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **James H. Jepsen**48480 231st St.Flandreau, SD 57028-6631                   |   | 47      |   | 1996                       |   | 2005                          |   | James has been a farmer for the past 28 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                               |   | 61      |   | 1998                       |   | 2004                          |   | Peter has been a farmer for the past 37 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                        |   | 61      |   | 1998                       |   | 2004                          |   | Bryce has been a farmer and seed sales representative for the past 36  years. He belongs to the National Corn Growers Association, the South Dakota  Soybean Producers Association, and the Farm Bureau.                                                                                                                                                                                                                          |

 

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| **Name, Address, and  Board Position, if any**                                |   | **Age** |   | **Board****Member  Since** |   | **Current  Term****Expiring** |   | **Occupation****andBackground**                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-------------------------------------------------------------------------------|--------|---------|--------|----------------------------|--------|-------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Gerald Moe**  21469 452nd Ave.  Arlington, SD 57212  (605) 983-5949         |   | 67      |   | 1994                       |   | 2005                          |   | Gerald is a retired farmer, and was an active farmer for the previous  45 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 director of the Citizens State Bank in Arlington, SD. Gerald  attended Augustana College for one year in Sioux Falls, SD.                                                                                                                            |
|                                                                          |   |    |   |                       |   |                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Dale Murphy**  102 E. 2nd Ave.  PO Box 686  White, SD 57276  (605) 629-6181 |   | 73      |   | 1994                       |   | 2006                          |   | Dale is a retired farmer, and was an active farmer for the previous  38 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 |   | 63      |   | 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 director  of the Westbrook Lions Club and a V.F.W. member. He is also a member of the  American Highland Cattle Association, the Minnesota and National Corn Growers  Associations, 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         |   | 58      |   | 1995                       |   | 2005                          |   | Maurice has been a farmer for the past 39 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 6Redwood Falls, MN  56283              |   | 72      |   | 1995                       |   | 2006                          |   | Daniel has been a farmer for the past 52 years and is a 50% owner of  Potterosa Farms, Inc. 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  church Admin Council.                                                                                                                                                                       |
|                                                                          |   |    |   |                       |   |                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Corey Schnabel*****Secretary***  43555 273rd St.  Freeman, SD 57029-9760    |   | 45      |   | 1994                       |   | 2004                          |   | Corey has been a farmer for the past 24 years. He is also a Grandview  Township supervisor. He belongs to the South Dakota and National Corn Growers  Association, the South Dakota and American Simmental Association. He is also  a former director of the South Dakota Corn Growers Association and National  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       |   | 70      |   | 1995                       |   | 2006                          |   | Rodney has been a farmer for the past 51 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.  He is also a former school board member and church board member and  treasurer.                                                                                                                                                                                      |

 

25

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| **Name, Address, and  Board Position, if any**                    |   | **Age** |   | **Board****Member  Since** |   | **Current  Term****Expiring** |   | **Occupation****andBackground**                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------------------------------------------------------------|--------|---------|--------|----------------------------|--------|-------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Lyle R. Trautman**409 Lakeview St. Box 83Lake Benton, MN  56149 |   | 50      |   | 1996                       |   | 2005                          |   | Lyle has been a farm operator and manager for the past 31 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.                                        |
|                                                              |   |    |   |                       |   |                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **Delbert Tschakert**16150 442nd Ave.Florence, SD 57235           |   | 48      |   | 1994                       |   | 2006                          |   | Delbert has been a farmer for the past 26 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        |   | 66      |   | 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                     |   | 46      |   | 1996                       |   | 2006                          |   | Ardon has been a farmer for the past 26 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.                                                                                                                                             |

 

**Compensation of Boardof Managers**

 

Members of the Board of Managers are currently provided a per diempayment for services performed in the amount of $150 for each functionrequiring more than four hours, and $75 for each function requiring less thanfour hours. In addition to the per diem fee, mileage reimbursement is providedat current IRS rates.

 

**Committees of Boardof Managers**

 

The Board of Managers has formed the following committees: finance andaudit committee, nomination committee, governance committee, public relationscommittee, and planning committee.  Thecurrent members of the Audit Committee are Daniel Potter, who serves asthe chairperson of the committee, Maurice Odenbrett, Anthony Van Uden, PaulCasper, Paul Barthel, and Ardon Wek. Because our Board members are generally farmers, as is common for formeragricultural cooperatives, we do not have an audit committee financial expertserving on our finance and audit committee. The Board, however, has selected members for the finance andaudit committee based on the Board’s determination that they are fullyqualified to monitor management, our internal accounting operations and theindependent auditors and are fully qualified to monitor our disclosures toassure that they fairly present our financial condition and results ofoperations In addition, the finance and audit committee has the authority toengage advisers as it deems necessary to assist it in carrying out its duties.

 

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In March 2004, we established a Nomination Committee and adopted aNomination Committee charter that is available for review on our website athttp://www.sdsbp.com.  The members ofthe Nomination Committee are James Call, Ryan Hill, and Robert Nelsen.  In order to submit a nominee for the Boardto the Nomination Committee for the 2004 Annual Meeting, a member must returnthe Nomination Petition Form that was mailed to members on March 19, 2004to the Nomination Committee no later than March 31, 2004.  Nominations will not be accepted from thefloor at the Annual Meeting. The members of the Nomination Committee willreview each of the submitted forms during their selection process and may alsosearch for and contact additional potential nominees in their discretion.

 

**Executive Officers**

 

The following individuals serve as our executive officers in thecapacities listed. These officers serve at the discretion of the Board ofManagers and can be terminated without notice. There is currently a vacancy in our chief financial officer position.  Our management and key personnel along withthe assistance of outside advisors are assuming the functions that our chieffinancial officer previously performed. We are evaluating our needs to determine whether we will hire a personto serve as our chief financial officer.

 
| **Name**               |   | **Age** |   | **Position**            |
|------------------------|--------|---------|--------|-------------------------|
|                   |   |    |   |                    |
| Rodney G. Christianson |   | 50      |   | Chief Executive Officer |
| Thomas J. Kersting     |   | 41      |   | Commercial Manager      |

 

**RodneyG. Christianson, *Chief Executive Officer*.** Rodneyjoined us as the Chief Executive Officer when operations began in 1996. With 20years of service with Cargill, Inc. in its Food, Industrial, and OilseedSectors, 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.

 

Rodney is a Minnesota farm native, and received his B.S. in Engineeringfrom North Dakota State University. He holds a Professional Engineer’s License.

 

Rodney has complete responsibility for our operations.

 

**ThomasJ. Kersting, *Commercial Manager.*** Tom joined usas the Procurement Manager when operations began in 1996, and since 1998 hasserved as the Commercial Manager. Tom was affiliated with Harvest StatesCooperative from July 1988 until May 1996. Tom held such positions asMarket Analyst/Advisor and Head Procurement Merchandiser for Harvest StatesCooperative throughout North Dakota, South Dakota, and Minnesota. As a marketanalyst, Tom assisted grain elevator profitability by using advanced managementand marketing techniques while incorporating specific risk managementprocedures.

 

Tom graduated from the University of Minnesota’s College of Agriculturewith a B.S. in Agricultural Business Administration with an emphasis inoperations management. Tom is a licensed commodity broker, a director of theNational Oilseed Processors Association, a voting member of the NationalBiodiesel Board and our contact for the Chicago Board of Trade.

 

Tom is responsible for all futures trading strategies, as well asmerchandising commodity products, and soybean and natural gas procurement.

 

27

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**Family Relationships**

 

Paul Casper is Gerald Moe’s son-in-law; otherwise, no familyrelationship exists between any of our Board members, officers, or keyemployees.

 

**Code of Ethics**

 

Wehave adopted a written code of ethics, which applies to our principal executiveofficer, principal financial and accounting officer, controller or personsperforming similar functions.  A copy ofthe code of ethics is filed as Exhibit 14.1 to this Report.

 

**Compliance withReporting Requirements of Section 16 of the Exchange Act**

 

Under Section 16(a) of the Exchange Act, our directors,executive officers and any persons holding 10% or more of the common stock arerequired to report their ownership of our capital units and any changes in thatownership to the Securities and Exchange Commission (the “SEC”) and to furnishus with copies of such reports. Specific due dates for these reports have beenestablished and we are required to disclose in this report any failure to fileon a timely basis by such persons. To our knowledge, based solely upon a reviewof copies of such reports received by us which were filed with the SEC fromJanuary 1, 2003 through March 30, 2004, and upon writtenrepresentations from such persons that no other reports were required, webelieve that all reports required to be filed under Section 16(a) havebeen timely filed with the SEC.

 

**Item11.****                            ExecutiveCompensation**

 

**SummaryCompensation Table.****The followingtable sets forth all the compensation we paid during the years endedDecember 31, 2003, 2002 and 2001 to our principal executive officer andeach officer paid over $100,000 in our last fiscal year (the “named executiveofficers”). No other officers received total compensation exceeding $100,000during the year ended December 31, 2003.

 
|                             |   |            |   | **Annual  Compensation** |   | **Long-Term  Compensation** |   |                                 |   |
|----------------------------------|--------|-----------------|--------|--------------------------|--------|-----------------------------|--------|--------------------------------------|--------|
|                             |   |            |   |                     |   |                        |   |                                 |   | **Awards** |   | **Payouts** |   |   |   |
| **Name and  Principal Position** |   | **Year  Ended** |   | **Salary   ($)**         |   | **Bonus  ($)**              |   | **Other  Annual  Compens  ation($)** |   | **Restricte  d Stock  Award(s)  ($)** |   | **Securities  Underlying  Options/  SARs (#)** |   | **LTIP  Payouts** |   | **All Other  Compens  ation ($)** |   |
|                             |   |            |   |                     |   |                        |   |                                 |   |   |   |   |   |   |   |   |   |
| Rodney G. Christianson           |   | 2003            |   | 200,000                  |   | 36,190                      |   | 3,855                                |   | — |   | — |   | — |   | 3,855 |   |
| *Chief Executive Officer*        |   | 2002            |   | 200,000                  |   | 64,528                      |   | 3,625                                |   | — |   | — |   | — |   | 3,597 |   |
|                             |   | 2001            |   | 186,666                  |   | 100,135                     |   | 3,625                                |   | — |   | — |   | — |   | 17,208 |   |
|                             |   |            |   |                     |   |                        |   |                                 |   |   |   |   |   |   |   |   |   |
| Thomas J. Kersting               |   | 2003            |   | 103,792                  |   | 12,500                      |   | —                               |   | — |   | — |   | — |   | 13,299 |   |
| *Commercial Manager*             |   | 2002            |   | 99,167                   |   | 24,000                      |   | —                               |   | — |   | — |   | — |   | 11,520 |   |
|                             |   | 2001            |   | 90,000                   |   | 40,000                      |   | —                               |   | — |   | — |   | — |   | 9,931 |   |
|                             |   |            |   |                     |   |                        |   |                                 |   |   |   |   |   |   |   |   |   |
| Larry E. Mahlum (1)              |   | 2003            |   | 96,228                   |   | 8,700                       |   | —                               |   | — |   | — |   | — |   | — |   |
| *Operations Manager*             |   | 2002            |   | 95,000                   |   | 16,000                      |   | —                               |   | — |   | — |   | — |   | — |   |
|                             |   | 2001            |   | 95,000                   |   | 33,000                      |   | —                               |   | — |   | — |   | — |   | — |   |

 

----

(1) Mr. Mahlum retired in January 2004.

 

On February 1, 2004, we entered into a four-year employment agreementwith Mr. Christianson that expires on January 31, 2008.  Under the employment agreement, Mr.Christianson will receive an annual salary of $250,000 through August 31,2005 and an annual salary of $300,000 for the remaining term of theAgreement.  Mr. Christianson is alsoentitled to receive an incentive bonus equal to one-half of one percent of netincome before taxes and member distributions, excluding certain extraordinaryitems of income and expense, on up to $5.0 million net income, or 1% of netincome before taxes and member

 

28

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distributions if net income exceeds $5.0 million. Mr. Christianson mayelect to have his incentive bonus paid directly or deferred.  Mr. Christianson is also entitled toparticipate in 401(k), healthcare and other retirement and welfare benefitprograms that are generally available to employees and a vehicle to be used forbusiness purposes. Mr. Christianson is entitled to eighteen months ofseverance pay in the event that we terminate his employment during the term ofthe agreement, other than for cause. 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.  The employment agreement also includes a two-year non-competitionprovision.

 

Mr. Kersting has an employment agreement with us that is terminable atwill. Mr. Kersting receives a base salary and is entitled to participate in401(k), healthcare and other retirement and welfare benefit programs that aregenerally available to employees, including the employee profit sharing programwhich allocates 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,level of responsibility and the impact of the employee’s position on profits.

 

Messrs. Christianson and Kersting also have a deferred compensationplan that provides “phantom” capital units. Messr. Christianson and Kersting’s initial grants under these plans arefully vested.  On February 1, 2004,Mr. Christianson received an additional grant under an amended and restateddeferred compensation plan.  Under boththe original and amended plan, we will pay an amount equal to the fair marketvalue of the participant’s vested phantom capital units in five annualsubstantially equal installments beginning upon the earlier of termination ofemployment with us or his 65th birthday. In lieu of participating inthe phantom capital unit plan, Mr. Mahlum receives an amount equal to 2% of thefirst $10 million, and 1% thereafter, of our net proceeds from the sale of allpolyol products for a period of 10 years. However, to date we have not had anysignificant sales of polyol products and no payments have been made under thisagreement.

 

**Item12.****                            SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.**

 

We do not have any compensation plans under which our capital units areauthorized for issuance.

 

The following table sets forth the beneficial ownership of ouroutstanding capital units by our Board members and named executive officers asof March 30, 2004. As of that date, no person beneficially owned more than5% of our capital units.

 
| **Name and Address  of Beneficial Owner**        |   | **Number of  Votes  Beneficially  Owned** |   | **Voting  Percentage** |   | **Number of  Capital Units  Beneficially  Owned** |   | **Ownership****Percentage** |   |
|--------------------------------------------------|--------|-------------------------------------------|--------|------------------------|--------|---------------------------------------------------|--------|-----------------------------|--------|
|                                             |   |                                      |   |                   |   |                                              |   |                        |   |
| Paul Barthel, Manager                            |   | 1                                         |   | *                      |   | 10,500                                            |   | *                           |   |
| James Call, Manager (2)                          |   | 2                                         |   | *                      |   | 22,000                                            |   | *                           |   |
| Paul Casper, President, Manager                  |   | 1                                         |   | *                      |   | 60,000                                            |   | *                           |   |
| Rodney Christianson, CEO (3)                     |   | 1                                         |   | *                      |   | 10,500                                            |   | *                           |   |
| Dan Feige, Manager                               |   | 1                                         |   | *                      |   | 30,000                                            |   | *                           |   |
| Marvin Goplen, Manager (4)                       |   | 1                                         |   | *                      |   | 18,000                                            |   | *                           |   |
| Ryan Hill, Manager (5)                           |   | 2                                         |   | *                      |   | 22,500                                            |   | *                           |   |
| Marvin Hope, Vice President, Manager (6)         |   | 1                                         |   | *                      |   | 56,000                                            |   | *                           |   |
| Jim Jepsen, Manager                              |   | 1                                         |   | *                      |   | 30,000                                            |   | *                           |   |
| Peter Kontz, Manager (7)                         |   | 2                                         |   | *                      |   | 99,000                                            |   | *                           |   |
| Bryce Loomis, Manager (8)                        |   | 1                                         |   | *                      |   | 30,000                                            |   | *                           |   |
| Gerald Moe, Manager (9)                          |   | 1                                         |   | *                      |   | 45,000                                            |   | *                           |   |
| Dale Murphy, Manager (10)                        |   | 1                                         |   | *                      |   | 80,000                                            |   | *                           |   |
| Robert Nelsen, Manager                           |   | 1                                         |   | *                      |   | 21,000                                            |   | *                           |   |
| Maurice Odenbrett, Manager                       |   | 1                                         |   | *                      |   | 36,000                                            |   | *                           |   |
| Daniel Potter, Manager (11)                      |   | 2                                         |   | *                      |   | 16,500                                            |   | *                           |   |
| Corey Schnabel, Secretary, Manager               |   | 1                                         |   | *                      |   | 15,000                                            |   | *                           |   |
| Rodney Skalbeck, Manager                         |   | 1                                         |   | *                      |   | 105,000                                           |   | *                           |   |
| Lyle Trautman, Manager (12)                      |   | 1                                         |   | *                      |   | 13,500                                            |   | *                           |   |
| Delbert Tschakert, Manager (13)                  |   | 2                                         |   | *                      |   | 42,000                                            |   | *                           |   |
| Tony Van Uden, Manager                           |   | 1                                         |   | *                      |   | 60,000                                            |   | *                           |   |
| Ardon Wek, Manager (14)                          |   | 1                                         |   | *                      |   | 30,000                                            |   | *                           |   |
|                                             |   |                                      |   |                   |   |                                              |   |                        |   |
| **Managers and  Executive Officers, as a group** |   | **27**                                    |   | **1.29%**              |   | **852,500**                                       |   | **3.02%**                   |   |

 

29

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| *    |   | 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 9,000 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 10,000 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 53,000 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.                    |
| (11) |   | Includes  7,500 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 17,500 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.                                              |

 

 

**Item13.****                            CertainRelationships and Related Transactions**

 

The individual Board members and executive officers of the LLC have notentered into, and do not anticipate entering into, any contractual or othertransactions between themselves and SDSP, except for continuing employmentagreements, as described above under “Compensation of Management and ExecutiveOfficers,” the Operating Agreement of SDSP, and soybean purchases that are onthe same terms available to the public. None of the individual Board members orexecutive officers received any compensation relative to the distribution ofcapital units of the new LLC upon the liquidation of the predecessorcooperative. However, the Board Members receive a per diem fee and otherreimbursement and compensation for their Board services, as described above.The executive officers receive compensation as executive officers as describedabove.

 

**Item14.****                            PrincipalAccountant Fees and Services**

 

The fees paid to Eide Bailly LLP in 2003, by category, were as follows:

 
| Audit fees                                                                             |   | $ | 53,234 |   |
|----------------------------------------------------------------------------------------|--------|---|--------|--------|
| Audit-related fees  (essentially, assurance and related services related to the audit) |   | $ | 2,985  |   |
| Tax fees                                                                               |   | $ | 23,447 |   |
| All other fees                                                                         |   | $ | 4,679  |   |

 

“Audit related fees” were for out-of-pocket expenses.  “All other fees” were for the feesassociated with the acquisition of the USSC.

 

30

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The fees paid to Eide Bailly LLP in 2002, by category, were as follows:

 
| Audit fees                                                                             |   | $ | 137,406 |   |
|----------------------------------------------------------------------------------------|--------|---|---------|--------|
| Audit-related fees  (essentially, assurance and related services related to the audit) |   | $ | 14,204  |   |
| Tax fees                                                                               |   | $ | 2,756   |   |
| All other fees                                                                         |   | $ | 14,112  |   |

 

“Audit fees” for 2002 including audit fees related to ourreorganization from a cooperative to an LLC and the conversion of our year-endfrom August 31st to December 31st. “All other fees” were for fees related to diligence conducted prior toour acquisition of a majority interest in USSC.

 

The Audit Committee Charter provides that the Audit Committee shallapprove in advance any fees related to non-audit services.  Accordingly, our auditor submits to theAudit Committee a notice of services proposed to be provided and the associatedfees prior to the provision of any non-audit services.  During 2003 all such non-audit fees werepre-approved by the Audit Committee.

 

**Part IV**

 

**Item15.****                            Exhibits,Financial Statement Schedules, and Reports on Form 8-K**

 

The following exhibits and financialstatements are filed as part of, or are incorporated by reference into, thisreport:

 

(a)                                  Financial Statements and Schedules – Reference is made to the “Index toFinancial Statements” of South Dakota Soybean Processors, LLC located at pageF-1 of this report for a list of the financial statements and schedules for theyear ended December 31, 2003 included herein.

 

(b)                                 Reports on Form 8-K – We did not file any reports on Form 8-Kduring the quarter ended December 31, 2003.

 

(c)                                  Exhibits - See Exhibit Index following the Signature Page to this report. Thefollowing exhibits constitute management agreements, compensatory plans, or arrangementsExhibits 10.14, 10.15, 10.16, and 10.17.

 

31

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|                             | SOUTH DAKOTA  SOYBEAN PROCESSORS, LLC |
|----------------------------------|---------------------------------------|
|                             |                                  |
|                             |                                  |
| Dated:  March 30, 2004 |                                  |
|                             |                                  |
|                             | By                                    |  /s/ Rodney G. Christianson |
|                             |                                  |  Rodney G. Christianson |
|                             |                                  |  Chief Executive Officer |

 

**POWER OF ATTORNEY**

 

Each of the undersigned officers and members of the Board of Managersof South Dakota Soybean Processors, LLC hereby appoints each of RodneyChristianson and Mark Hyde, jointly and severally, his attorneys-in-fact andagent for the undersigned, each with full power of substitution, for him and inthe name, place and stead of the undersigned, to sign and file with theSecurities and Exchange Commission under the Securities Exchange Act of 1934,as amended, any and all amendments and exhibits to this Annual Report on Form10-K, with full power and authority to do and perform any and all acts andthings whatsoever requisite and necessary or desirable.

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons in the capacitiesindicated on March 30, 2004.

 
| **SIGNATURE**              |   | **TITLE**                                    |
|----------------------------|--------|----------------------------------------------|
|                       |   |                                         |
| /s/ Rodney G. Christianson |   | Chief Executive Officer                      |
| Rodney G. Christianson     |   | (Principal Executive Officer)                |
|                       |   |                                         |
| /s/ Mark Hyde              |   | Controller                                   |
| Mark Hyde                  |   | (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                  |   |                                         |

 

32

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| /s/ Marvin Goplen     |   | Manager |
|-----------------------|--------|---------|
| Marvin Goplen         |   |    |
|                  |   |    |
| /s/ Ryan J. Hill      |   | Manager |
| Ryan J. Hill          |   |    |
|                  |   |    |
| /s/ Marvin Hope       |   | Manager |
| Marvin Hope           |   |    |
|                  |   |    |
| /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 Odenbret  |   | 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       |   |    |
|                  |   |    |
|                  |   | Manager |
| Ardon Wek             |   |    |

 

33

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**EXHIBITINDEX**

 
| **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-QSB 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-QSB 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)                  |

 

34

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| 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  |   | 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)    |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                   |
| 10.13  |   | 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                       |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                   |
| 10.14  |   | Rodney Christianson Employment Agreement dated February 1, 2004                                                                    |   | ý |   |                                                                                                                   |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                   |
| 10.15  |   | First Amended and Restated Deferred Compensation Plan for the benefit  of Rodney Christianson, dated February 1, 2004              |   | ý |   |                                                                                                                   |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                   |
| 10.16  |   | Thomas Kersting Employment Agreement dated May 20, 1996                                                                                 |   |   |   | Exhibit  10.18 to the Issuer’s Form 10-K filed with the Commission on March 27,  2003                        |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                   |
| 10.17  |   | Deferred Compensation Plan for the benefit of Thomas Kersting, dated  February 13, 2001                                            |   |   |   | Exhibit  10.20 to the Issuer’s Form 10-K filed with the Commission on March 27,  2003                        |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                   |
| 10.18  |   | Polyoil Consulting Services Agreement with Larry Mahlum dated  January 1, 2000                                                     |   |   |   | Exhibit  10.21 to the Issuer’s Form 10-K filed with the Commission on March 27,  2003                        |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                   |
| 10.19  |   | Railcar Leasing Agreements with General Electric Railcar Services Corporation,  dated November 10, 2003 and November 25, 2003 |   | ý |   |                                                                                                                   |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                   |
| 14.1   |   | Code of Ethics                                                                                                                          |   | ý |   |                                                                                                                   |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                   |
| 21.1   |   | Subsidiaries of the Company                                                                                                             |   | ý |   |                                                                                                                   |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                   |
| 24.1   |   | Power of Attorney                                                                                                                       |   | ý |   | See  Signature Page to this Annual Report on Form 10-K                                                                 |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                   |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                 |   | ý |   |                                                                                                                   |
|   |   |                                                                                                                                    |   |   |   |                                                                                                                   |
| 32.1   |   | Section 1350 Certifications                                                                                                        |   | ý |   |                                                                                                                   |

 

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* The redacted portions of Exhibit B (2 pages) andExhibit C (6 pages) to Exhibit 10.8 were filed separately withthe SEC subject to a request for confidential treatment dated April 25,2002.

 

35

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**SOUTHDAKOTA SOYBEAN PROCESSORS,LLC**

 

***CONSOLIDATED FINANCIAL STATEMENTS***

 

***DECEMBER 31, 2003AND 2002***

 

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

 

Table of Contents

 

 
| **INDEPENDENT AUDITOR’S  REPORT**                      |   |   |
|-------------------------------------------------------------|--------|--------|
|                                                        |   |   |
| **FINANCIAL STATEMENTS**                                    |   |   |
| Consolidated Balance Sheets                                 |   |   |
| Consolidated  Statements of Operations                      |   |   |
| Consolidated  Statements of Changes in Members’ Equity |   |   |
| Consolidated  Statements of Cash Flows                      |   |   |
| Consolidated  Notes to Financial Statements                 |   |   |

 

----

 

**INDEPENDENT AUDITOR’S REPORT**

 

The Board of Managers

**South Dakota Soybean Processors, LLC**

Volga, South Dakota

 

 

We have audited the accompanying consolidated balance sheets of **South Dakota Soybean Processors, LLC****and Subsidiary** as of December 31, 2003 andthe related consolidated statements of operations, changes in members’ equity,and cash flows for the year then ended. We have also audited the balance sheet of **South Dakota Soybean Processors, LLC** as of December 31, 2002and the related statements of operations, changes in members’ equity, and cashflows for the years ended December 31, 2002 and 2001.  These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant 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 2003 financial statements referred to above presentfairly, in all material respects, the consolidated financial position of **South DakotaSoybean Processors, LLC and Subsidiary**as of December 31, 2003, and the results of its operations and itscash flows for the year then ended in conformity with accounting principlesgenerally accepted in the United States of America.  Also, in our opinion, the 2002 and 2001 financial statementsreferred to above present fairly, in all material respects, the financialposition of **South Dakota Soybean Processors,LLC** as of December 31, 2002, and the results of its operations andits cash flows for the years ended December 31, 2002 and 2001, in conformitywith accounting principles generally accepted in the United States of America.

 
| /s/ Eide Bailly LLP       |   |   |
|---------------------------|--------|--------|
| Sioux Falls, South Dakota |   |
| January 23, 2004          |   |

 

F-1

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2003 AND 2002**

 
|                                                                                                      |   | **2003**        |           | **2002**    |   |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------|----------------|-------------|--------|
| **ASSETS**                                                                                                |   |            | ** **     |        |   |
|                                                                                                      |   |            | ** **     |        |   |
| CURRENT ASSETS                                                                                            |   |            | ** **     |        |   |
| Cash and cash  equivalents                                                                                |   | **$**           | **529,697**    | ** **  | $      | 11,170 |   |
| Trade accounts  receivable, less allowance for  uncollectible accounts (2003 - $273,878; 2002 - $273,331) |   | **23,530,989**  | ** **     | 14,695,709  |   |
| Inventories                                                                                               |   | **10,776,402**  | ** **     | 13,113,098  |   |
| Margin deposits                                                                                           |   | **—**      | ** **     | 927,339     |   |
| Prepaid expenses                                                                                          |   | **516,419**     | ** **     | 482,977     |   |
| Assets held for  sale - Building                                                                          |   | **2,322,561**   | ** **     | 2,307,819   |   |
| Total current  assets                                                                                     |   | **37,676,068**  | ** **     | 31,538,112  |   |
|                                                                                                      |   |            | ** **     |        |   |
| PROPERTY AND  EQUIPMENT                                                                                   |   | **50,250,024**  | ** **     | 49,172,714  |   |
| Less accumulated  depreciation                                                                            |   | **(18,424,405** | **)**          | (15,411,529 | )      |
|                                                                                                      |   | **31,825,619**  |           | 33,761,185  |   |
|                                                                                                      |   |            | ** **     |        |   |
| OTHER ASSETS                                                                                              |   |            | ** **     |        |   |
| Investments                                                                                               |   | **3,970,102**   | ** **     | 4,928,261   |   |
| Goodwill                                                                                                  |   | **7,401,245**   | ** **     | —      |   |
| Notes receivable  - members                                                                               |   | **481,710**     | ** **     | —      |   |
| Patents                                                                                                   |   | **246,599**     | ** **     | 36,836      |   |
| Other, net                                                                                                |   | **15,721**      | ** **     | 20,502      |   |
|                                                                                                      |   | **12,115,377**  |           | 4,985,599   |   |
|                                                                                                      |   |            | ** **     |        |   |
|                                                                                                      |   | **$**           | **81,617,064** |        | $      | 70,284,896 |   |

 

See Accompanying Notes to Consolidated Financial Statements

 

F-2

----

 
|                                                                  |   | **2003**       |           | **2002**   |   |
|-----------------------------------------------------------------------|--------|----------------|----------------|------------|--------|
| **LIABILITIES  AND MEMBERS’ EQUITY**                             |   |           |           |       |   |
|                                                                  |   |           |           |       |   |
| CURRENT  LIABILITIES                                                  |   |           |           |       |   |
| Excess of  outstanding checks over bank balance                       |   | **$**          | **2,388,936**  |       | $      | 3,603,838 |   |
| Current  maturities of long-term debt                                 |   | **976,117**    |           | 101,472    |   |
| Accounts payable                                                      |   | **1,883,200**  |           | 639,587    |   |
| Accrued  commodity purchases                                          |   | **21,492,404** |           | 20,150,385 |   |
| Accrued expenses                                                      |   | **1,385,864**  |           | 1,628,022  |   |
| Accrued interest                                                      |   | **50,316**     |           | 51,476     |   |
| Total current  liabilities                                            |   | **28,176,837** |           | 26,174,780 |   |
|                                                                  |   |           |           |       |   |
| LONG-TERM  LIABILITIES                                                |   |           |           |       |   |
| Long-term debt,  less current maturities                              |   | **17,543,141** |           | 10,143,459 |   |
| Deferred  compensation                                                |   | **121,301**    |           | 91,064     |   |
|                                                                  |   | **17,664,442** |           | 10,234,523 |   |
|                                                                  |   |           |           |       |   |
| MINORITY  INTEREST IN CONSOLIDATED SUBSIDIARY                         |   | **1,045,195**  |           | —     |   |
|                                                                  |   |           |           |       |   |
| COMMITMENTS                                                           |   | **—**     |           | —     |   |
|                                                                  |   |           |           |       |   |
| MEMBERS’ EQUITY                                                  |   |           |           |       |   |
| Class A Units,  no par value  28,258,500 units issued and outstanding |   | **34,730,590** |           | 33,875,593 |   |
|                                                                  |   |           |           |       |   |
|                                                                  |   | **$**          | **81,617,064** |       | $      | 70,284,896 |   |

 

F-3

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED DECEMBER 31,2003, 2002 AND 2001**

 
|                                                                                                          |   | **2003**        |            | **2002**    |   | **2001**    |   |
|---------------------------------------------------------------------------------------------------------------|--------|-----------------|-----------------|-------------|--------|-------------|--------|
|                                                                                                          |   |            | ** **      |        |   |        |   |
| NET REVENUE                                                                                                   |   | **$**           | **207,256,575** | ** **  | $      | 159,497,284 |   | $ | 148,258,146 |   |
|                                                                                                          |   |            | ** **      |        |   |        |   |
| COST OF REVENUE                                                                                               |   |            | ** **      |        |   |        |   |
| Cost of product  sold                                                                                         |   | **174,234,599** | ** **      | 128,457,162 |   | 121,012,364 |   |
| Production                                                                                                    |   | **14,046,771**  | ** **      | 11,707,538  |   | 10,686,189  |   |
| Freight and rail                                                                                              |   | **14,506,644**  | ** **      | 12,095,338  |   | 9,366,185   |   |
| Brokerage fees                                                                                                |   | **234,346**     | ** **      | 323,926     |   | 294,386     |   |
| Total cost of  revenue                                                                                        |   | **203,022,360** | ** **      | 152,583,964 |   | 141,359,124 |   |
|                                                                                                          |   |            | ** **      |        |   |        |   |
| GROSS PROFIT                                                                                                  |   | **4,234,215**   | ** **      | 6,913,320   |   | 6,899,022   |   |
|                                                                                                          |   |            | ** **      |        |   |        |   |
| OPERATING  EXPENSES                                                                                           |   |            | ** **      |        |   |        |   |
| Administration                                                                                                |   | **3,639,442**   | ** **      | 2,679,633   |   | 2,234,248   |   |
| OPERATING PROFIT                                                                                              |   | **594,773**     | ** **      | 4,233,687   |   | 4,664,774   |   |
|                                                                                                          |   |            | ** **      |        |   |        |   |
| OTHER INCOME  (EXPENSE)                                                                                       |   |            | ** **      |        |   |        |   |
| Interest expense                                                                                              |   | **(802,178**    | **)**           | (542,220    | )      | (483,223    | )      |
| Other  non-operating income                                                                                   |   | **2,915,160**   | ** **      | 3,404,458   |   | 2,093,316   |   |
| Patronage  dividend income                                                                                    |   | **97,975**      | ** **      | 36,801      |   | 1,460,386   |   |
| Total other  income (expense)                                                                                 |   | **2,210,957**   | ** **      | 2,899,039   |   | 3,070,479   |   |
|                                                                                                          |   |            | ** **      |        |   |        |   |
| NET INCOME  BEFORE INCOME TAXES AND MINORITY INTEREST OF SUBSIDIARY                                           |   | **2,805,730**   | ** **      | 7,132,726   |   | 7,735,253   |   |
|                                                                                                          |   |            | ** **      |        |   |        |   |
| MINORITY  INTEREST IN NET LOSS OF SUBSIDIARY                                                                  |   | **457,620**     | ** **      | —      |   | —      |   |
|                                                                                                          |   |            | ** **      |        |   |        |   |
| NET INCOME  BEFORE INCOME TAXES                                                                               |   | **3,263,350**   | ** **      | 7,132,726   |   | 7,735,253   |   |
|                                                                                                          |   |            | ** **      |        |   |        |   |
| INCOME TAX  EXPENSE (BENEFIT)                                                                                 |   | **(131,474**    | **)**           | 520,000     |   | —      |   |
|                                                                                                          |   |            | ** **      |        |   |        |   |
| NET INCOME                                                                                                    |   | **$**           | **3,394,824**   | ** **  | $      | 6,612,726   |   | $ | 7,735,253 |   |
|                                                                                                          |   |            | ** **      |        |   |        |   |
| BASIC AND  DILUTED EARNINGS PER CAPITAL UNIT                                                                  |   | **$**           | **0.12**        | ** **  | $      | 0.23        |   | $ | 0.27 |   |
|                                                                                                          |   |            | ** **      |        |   |        |   |
| WEIGHTED AVERAGE  NUMBER OF UNITS OUTSTANDING FOR CALCULATION OF BASIC AND DILUTED EARNINGS PER  CAPITAL UNIT |   | **28,258,500**  | ** **      | 28,258,500  |   | 28,258,500  |   |

 

See Accompanying Notes to Consolidated Financial Statements

 

F-4

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF CHANGES INMEMBERS' EQUITY**

**FOR THE YEARS ENDED DECEMBER 31,2003, 2002 AND 2001**

 
|                                |   | **Capital  Units** |   |
|-------------------------------------|--------|--------------------|--------|
|                                |   | **Shares**         |   | **Amount** |   |
|                                |   |               |   |   |   |
| **BALANCE,  JANUARY 1, 2001**       |   | 28,258,500         |   | 30,771,474 |   |
|                                |   |               |   |   |   |
| Net income                          |   | —             |   | 7,735,253 |   |
|                                |   |               |   |   |   |
| Proceeds from  members’ equity |   | —             |   | 4,200 |   |
|                                |   |               |   |   |   |
| Distributions to  members           |   | —             |   | (5,731,202 | ) |
|                                |   |               |   |   |   |
| **BALANCE,  DECEMBER 31, 2001**     |   | 28,258,500         |   | 32,779,725 |   |
|                                |   |               |   |   |   |
| Net income                          |   | —             |   | 6,612,726 |   |
|                                |   |               |   |   |   |
| Proceeds from  members’ equity |   | —             |   | 2,200 |   |
|                                |   |               |   |   |   |
| Distributions to  members           |   | —             |   | (5,519,058 | ) |
|                                |   |               |   |   |   |
| **BALANCE,  DECEMBER 31, 2002**     |   | 28,258,500         |   | 33,875,593 |   |
|                                |   |               |   |   |   |
| Net income                          |   | —             |   | 3,394,824 |   |
|                                |   |               |   |   |   |
| Distributions to  members           |   | —             |   | (2,539,827 | ) |
|                                |   |               |   |   |   |
| **BALANCE,  DECEMBER 31, 2003**     |   | 28,258,500         |   | $ | 34,730,590 |   |
|                                     |        |                    |        |  |  |  |

 

See Accompanying Notes to Consolidated Financial Statements

 

F-5

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31,2003, 2002 AND 2001**

 
|                                                   |   | **2003**       |          | **2002**   |   | **2001**   |   |
|--------------------------------------------------------|--------|----------------|---------------|------------|--------|------------|--------|
| OPERATING  ACTIVITIES                                  |   |           |          |       |   |       |   |
| Net income                                             |   | **$**          | **3,394,824** | ** ** | $      | 6,612,726  |   | $ | 7,735,253 |   |
| Charges and  credits to net income not affecting cash: |   |           | ** **    |       |   |       |   |
| Depreciation                                           |   | **2,994,037**  | ** **    | 2,746,384  |   | 2,457,804  |   |
| Amortization                                           |   | **18,378**     | ** **    | 4,764      |   | 4,059      |   |
| Minority  interest in net loss of subsidiary           |   | **(457,620**   | **)**         | —     |   | —     |   |
| Loss on sale of  fixed assets                          |   | **1,325**      | ** **    | 30,288     |   | 118,920    |   |
| Non-cash  patronage dividends                          |   | **(97,976**    | **)**         | (28,964    | )      | (1,460,386 | )      |
| Change in assets  and liabilities                      |   | **(5,106,924** | **)**         | 1,495,889  |   | 603,351    |   |
| NET CASH FROM  OPERATING ACTIVITIES                    |   | **746,044**    | ** **    | 10,861,087 |   | 9,459,001  |   |
|                                                   |   |           | ** **    |       |   |       |   |
| INVESTING  ACTIVITIES                                  |   |           | ** **    |       |   |       |   |
| Purchase of  investments                               |   | **(4,076,686** | **)**         | (250       | )      | —     |   |
| Increase in  member loans                              |   | **(480,710**   | **)**         | —     |   | —     |   |
| Cash assumed  with Urethane Soy Systems Co.            |   | **38,989**     | ** **    | —     |   | —     |   |
| Retirement of  patronage dividends                     |   | **56,134**     | ** **    | 103,262    |   | 809,713    |   |
| Purchase of  assets held for sale - Building           |   | **(14,742**    | **)**         | (2,307,819 | )      | —     |   |
| Patent costs                                           |   | **(53,000**    | **)**         | (36,998    | )      | —     |   |
| Proceeds from  sales of property and equipment         |   | **41,960**     | ** **    | —     |   | 122,125    |   |
| Purchase of  property and equipment                    |   | **(1,016,849** | **)**         | (4,645,020 | )      | (2,718,740 | )      |
| NET CASH USED  FOR INVESTING ACTIVITIES                |   | **(5,504,904** | **)**         | (6,886,825 | )      | (1,786,902 | )      |
|                                                   |   |           | ** **    |       |   |       |   |
| FINANCING  ACTIVITIES                                  |   |           | ** **    |       |   |       |   |
| Proceeds from  members’ equity transactions       |   | **—**     | ** **    | 2,200      |   | 4,200      |   |
| Distributions to  members                              |   | **(2,539,827** | **)**         | (5,519,058 | )      | (5,731,202 | )      |
| Payments for  debt issue costs                         |   | **—**     | ** **    | (6,500     | )      | —     |   |
| Proceeds from  long-term debt                          |   | **9,489,103**  | ** **    | —     |   | 1,053,948  |   |
| Principal  payments on long-term debt                  |   | **(1,671,889** | **)**         | (454,991   | )      | (991,615   | )      |
| NET CASH FROM  (USED FOR) FINANCING ACTIVITIES         |   | **5,277,387**  | ** **    | (5,978,349 | )      | (5,664,669 | )      |
|                                                   |   |           | ** **    |       |   |       |   |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS               |   | **518,527**    | ** **    | (2,004,087 | )      | 2,007,430  |   |
|                                                   |   |           | ** **    |       |   |       |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF YEAR          |   | **11,170**     | ** **    | 2,015,257  |   | 7,827      |   |
|                                                   |   |           | ** **    |       |   |       |   |
| CASH AND CASH  EQUIVALENTS, END OF YEAR                |   | **$**          | **529,697**   | ** ** | $      | 11,170     |   | $ | 2,015,257 |   |
|                                                   |   |           |          |       |   |       |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION     |   |           |          |       |   |       |   |
| Cash paid during  the year for:                        |   |           |          |       |   |       |   |
|                                                   |   |           |          |       |   |       |   |
| Interest                                               |   | **$**          | **887,746**   |       | $      | 530,421    |   | $ | 628,636 |   |
|                                                   |   |           |          |       |   |       |   |
| Income taxes                                           |   | **$**          | **(131,474**  | **)**      | $      | 520,000    |   | $ | — |   |

 

See Accompanying Notes to Consolidated Financial Statements

 

F-6

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATEDNOTES TO FINANCIAL STATEMENTS**

 

**NOTE 1 -  PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES**

 

*Organization*

 

On October 12, 2001, Soybean Processors, LLC (the Company) wasformed.  The initial member of the LLCwas the South Dakota Soybean Processors Cooperative (the Cooperative).  The board of directors of the Cooperativeunanimously approved a plan of reorganization related to an exchange wherebythe LLC would acquire the assets and liabilities of the Cooperative.  The reorganization required the approval of75% of the members of the Cooperative who voted on the proposal.  On June 20, 2002, the members of the SouthDakota Soybean Processors Cooperative duly approved the reorganization of theCooperative into a limited liability company, which became effective on July 1,2002.  Effective July 1, 2002, the LLCacquired the assets and liabilities of the Cooperative. The transaction was anexchange of interests whereby the assets and liabilities of the Cooperativewere transferred for capital units of Soybean Processors, LLC.  For financial statement purposes, no gain orloss was recorded as a result of the exchange transaction. For income taxpurposes, the difference between the tax basis and the fair market value of theassets resulted in an income tax liability discussed in Note 10.

 

As a result of the exchange, the Cooperative was dissolved on July 1,2002, and the LLC’s capital units were distributed to the members of theCooperative at a rate of one capital unit of the LLC for each share of equitystock of the Cooperative.  In connectionwith the reorganization, the LLC changed its name to South Dakota SoybeanProcessors, LLC.

 

A minimum of 2,500 capital units is required for ownership of theLLC.  Such units will be subject tocertain transfer restrictions.  The LLCwill also 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 of soybeans underthe previous member delivery agreements is no longer required as an obligationof membership.  Earnings, losses andcash distributions are allocated to members based on their percentage ofownership in the LLC.

 

The company owns approximately 58% of Urethane Soy Systems Company(USSC).  USSC is the manufacturer andpatent holder of SoyOyl®, a polyol made from soybean oil.  A minority interest is presented in theconsolidated balance sheet that represents the approximate 42% ownership ofother investors in the 96,025 outstanding common shares of USSC.

 

South Dakota Soybean Processors is operated for the purpose ofmanufacturing products from soybeans, such as soybean oil, meal, and hulls.

 

*Basis of presentation*

 

As a result of the reorganization mentioned above, the financialstatements of the prior periods have been restated to reflect the comparativebasis of the Company versus the Cooperative. The consolidated financial statements include the accounts of theCompany and its majority-owned subsidiary. The effects of all significant intercompany accounts and transactionshave been eliminated.

 

(continued on next page)

F-7

----

 

*Cash and cash equivalents*

 

The Company considers all highly liquid debt instruments with maturityof three months or less to be cash equivalents.

 

*Accounts receivable*

 

Accounts receivable are carried at cost. Accounts receivable areconsidered past due when payments are not received within thirty days.Generally, these accounts receivable represent amounts due for sale of soybeanmeal, oil, hulls and refined oil.

 

The carrying amount of trade receivables is reduced by a valuationallowance that reflects management’s best estimate of the amounts that will notbe collected.  Management reviews allreceivable balances that exceed 90 days from the invoice date and based on anassessment of current creditworthiness, estimates the portion, if any, of thebalance that will not be collected.

 

*Inventories*

 

Finished goods (soybean meal, oil, refined oil, and hulls) and rawmaterials (soybeans) are valued at estimated market value, which approximatesnet realizable value.  Supplies andother are stated at the lower of cost determined by the first-in, first-outmethod, or market.

 

*Assets held for sale*

 

Assetsheld for sale are carried at cost.

 

*Investments*

 

Investments incooperatives are carried at cost plus the amount of patronage earningsallocated or estimates of interim allocations to the Company, less any cashdistributions received.

 

The investment in CenexHarvest States (CHS) is carried at an amount equal to the patronage allocationsreceived, and estimated to be received, from that cooperativeorganization.  The investment in CoBankis carried at an amount equal to the actual patronage allocationsreceived.  Patronage allocationsrepresent the Company’s proportionate share of the patronage earnings of CHSand CoBank.

 

The investments includeactual patronage allocations based upon written qualified notices of allocationreceived from CHS and CoBank and estimated patronage allocations expected to bereceived.  The Company recognizespatronage revenue when it is probable that an allocation will be made and whenthe amount can be reasonably estimated. The need to estimate patronage allocations arises because of differencesbetween the Company’s year-end and the receipt of the actual allocationnotification from CHS.

 

Since the company is nolonger a cooperative as of July 1, 2002, it will no longer receive patronageallocations.

 

(continued on next page)

F-8

----

 

*Property and equipment*

 

Property and equipment isstated at cost.  Expenditures forrenewals and improvements that significantly add to the productive capacity orextend the useful life of an asset are capitalized.  Expenditures for maintenance and repairs are charged to expensecurrently.  When depreciable propertiesare sold or retired, the cost and accumulated depreciation are eliminated fromthe accounts and the resultant gain or loss is reflected in income.

 

The Company reviews its property and equipment for impairment wheneverevents indicate that the carrying amount of the asset may not be recoverable.An impairment loss is recorded when the sum of the future cash flows is lessthan the carrying amount of the asset. The amount of the loss is determined by comparing the fair market valueof the asset to the carrying amount of the asset.

 

Depreciation is providedfor over the estimated useful lives of the individual assets using thestraight-line method.  The range of theestimated useful lives used in the computation of depreciation are as follows:

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

 

*Other assets*

 

Other assets are carriedat cost.  Loan fees are being amortizedon an interest method of accounting over the term of the related loans.

 

*Use of estimates*

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the financialstatements and reported amounts of revenues and expenses during the reportingperiod.  Actual results could differfrom those estimates.

 

*RevenueRecognition*

 

Revenue is recognizedafter the related products are shipped and title has transferred to thecustomer.  Revenues are presented net ofdiscounts and sales allowances.

 

*Freight*

 

TheCompany presents all amounts billed to the customer for freight as a componentof net revenue.  Costs incurred forfreight are reported as a component of cost of revenue.

 

*Advertising costs*

 

Advertising and promotioncosts are expensed as incurred.

 

*Environmentalremediation*

 

It is management’sopinion that the amount of any potential environmental remediation costs willnot be material to the Company’s financial condition, results of operations, orcash flow; therefore, no accrual has been recorded.

 

(continued on next page)

F-9

----

 

*Recently issued accountingpronouncements*

 

In May 2003 the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity”,which establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify afinancial instrument that is within its scope as a liability (or an asset incertain circumstances).  Many of thoseinstruments were previously classified as equity.  SFAS No. 150 is effective for financial instruments entered intoor modified after May 31, 2003, and otherwise is effective at the beginning ofthe first interim period beginning after June 15, 2003, except for mandatoryredeemable financial instruments of nonpublic entities that are subject to theprovisions for the first fiscal period beginning after December 15, 2003.  The Statement is to be implemented byreporting the cumulative effect of a change in an accounting principle forfinancial instruments created before the issuance date of the Statement andstill existing at the beginning of the interim period of adoption.  The Company believes that the adoption ofthis standard will not have a material effect on the consolidated financialstatements.

 

*Accounting for derivativeinstruments and hedging activities*

 

All of the Company’s derivatives are designated as non-hedgederivatives.  The futures and optionscontracts used by the Company are discussed below.  Although the contracts are effective economic hedges of specifiedrisks, they are not designated as and accounted for as hedging instruments.

 

The Company, as part of its trading activity, uses futures and optioncontracts offered through regulated commodity exchanges to reduce risk.  The Company is exposed to risk of loss inthe market value of inventories.  Toreduce that risk, the Company generally takes opposite and offsetting positionsusing future contracts or options.

 

Unrealized gains and losses on futures and options contracts used to hedgesoybean, oil and meal inventories are recognized as a component of net proceedsfor financial reporting. Inventories are recorded at estimated market value,which approximates net realizable value, so that gains and losses on thederivative contracts are offset by gains and losses on inventories andreflected in earnings currently.

 

*Earnings per share*

 

The ownership structure of the Company is made up of Class A capitalunits.  Earnings per capital unit arecalculated based on the number of Class A capital units held.  On June 17, 2003, the Board of Managersdeclared a 2-for-1 split of Class A capital units effective immediately.  Prior to this transaction, there were 14,129,250Class A capital units outstanding.  The2-for-1 stock split is reflected in the calculation of earnings per capitalunit.

 

For purposes of calculating basic earnings per capital unit, capitalunits issued by the Company are considered outstanding on the effective date ofissuance.

 

*Reclassifications*

 

Reclassifications have been made to December 31, 2002 and December 31,2001 financial information to make them conform to the current periodpresentation.  The reclassification hadno effect on previously reported net income or members’ equity.

 

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F-10

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**NOTE 2 -  INVENTORIES**

 
|                          |   | **2003**       |           | **2002**   |   |
|-------------------------------|--------|----------------|----------------|------------|--------|
| Finished goods                |   |           |           |       |   |
| Soy processing                |   | **$**          | **(447,404**   | **)**      | $      | 9,550,460 |   |
| Refined Oil                   |   | **313,815**    | ** **     | 496,198    |   |
| Other                         |   | **34,536**     | ** **     | 26,609     |   |
| Total                         |   | **(99,053**    | **)**          | 10,073,267 |   |
|                          |   |           | ** **     |       |   |
| Raw materials                 |   |           | ** **     |       |   |
| Soy Processing                |   | **10,696,391** | ** **     | 2,935,400  |   |
| Refined Oil                   |   | **46,663**     | ** **     | 45,262     |   |
| Other                         |   | **78,465**     | ** **     | 9,424      |   |
| Total                         |   | **10,821,519** | ** **     | 2,990,086  |   |
|                          |   |           | ** **     |       |   |
| Supplies &  Miscellaneous |   | **53,936**     | ** **     | 49,745     |   |
|                          |   |           | ** **     |       |   |
| Totals                        |   | **$**          | **10,776,402** | ** ** | $      | 13,113,098 |   |

 

Finished goods and raw materials are valued at estimated market value,which approximates net realizable value. In addition, futures and option contracts are marked to market throughcost of revenues, with unrealized gains and losses recorded in the aboveinventory amounts.  This marketadjustment caused the soy processing finished goods to have a credit balance asof December 31, 2003. Supplies and other inventories are stated at the lower ofcost determined by the first-in, first-out method, or market.

 

**NOTE 3 -  MARGIN DEPOSITS**

 

The Company maintains deposits with a brokerage firm.  The deposits are used for risk management.

 

The Company uses futures and option contracts to manage the risk ofcommodity price volatility of soybeans, crude soybean oil and soybean meal.  Consistent with its inventory accountingpolicy, these contracts are recorded at market value.

 

At December 31, 2003, the Company had contracts maturing throughDecember 2004.

 

**NOTE 4 -  ASSETS HELD FOR SALE**

 

The Company has entered into a letter of understanding with MinnesotaSoybean Processors (MnSP) regarding the terms and conditions of the Company’sinvestment in a soybean oil storage facility located in Brewster, MN.  The Company will own and operate thefacility until MnSP commences its planned principal operations.  Upon commencement of MnSP’s operations, theCompany will transfer the facility to MnSP for consideration equal to theoriginal cost of construction plus the cost of any improvements to the facility.

 

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F-11

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**NOTE 5 -  PROPERTY AND EQUIPMENT**

 
|                        |   | **2003**   |       |                          |   |
|-----------------------------|--------|------------|------------|-------------------------------|--------|
|                        |   | **Cost**   |       | **Accumulated  Depreciation** |   | **Net** |   | **2002  Net** |   |
|                        |   |       |       |                          |   |   |   |   |   |
| Land                        |   | $          | 237,643    |                          | $      | — |   | **$** | **237,643** | ** ** | $ | 237,643 |   |
| Land  improvements          |   | 18,572     |       | 17,711                        |   | **861** | ** ** | — |   |
| Buildings and  improvements |   | 14,290,569 |       | 2,556,169                     |   | **11,734,400** | ** ** | 12,136,431 |   |
| Machinery and  equipment    |   | 34,325,434 |       | 15,069,361                    |   | **19,256,073** | ** ** | 21,116,733 |   |
| Company vehicles            |   | 111,217    |       | 101,905                       |   | **9,312** | ** ** | 58,620 |   |
| Furniture and  fixtures     |   | 814,180    |       | 679,259                       |   | **134,921** | ** ** | 152,861 |   |
| Construction in  progress   |   | 452,409    |       | —                        |   | **452,409** | ** ** | 58,897 |   |
|                        |   |       |       |                          |   |   | ** ** |   |   |
| Totals                      |   | $          | 50,250,024 |                          | $      | 18,424,405 |   | **$** | **31,825,619** | ** ** | $ | 33,761,185 |   |

 

**NOTE 6 -  GOODWILL AND OTHER INTANGIBLE ASSETS**

 

On January 1, 2003, the Company acquired an additional 54% interest inthe outstanding common stock of USSC to bring its total ownership interest toapproximately 58%.  The results ofUSSC’s operations have been included in the financial statements since thatdate.  The Company believes that theacquisition of a controlling interest in USSC will allow them to moreeffectively market and expand applications for USSC’s products.

 

The aggregate purchase price for the 54% interest was $8,576,686.  The Company had previously acquired a 4%interest for $1,000,000.  In preparingconsolidated financial statements, the Company assigned the total considerationpaid for the USSC stock to USSC’s assets and liabilities.  This allocation resulted in an assignment of$7,401,245 to goodwill.  None of thegoodwill recognized for financial reporting purposes is expected to bedeductible for tax purposes.

 

The following table summaries the estimated fair values of the assetsacquired and liabilities assumed at the date of acquisition.

 
| Current assets             |   | $         | 85,742    |   |
|----------------------------|--------|-----------|-----------|--------|
| Property and  equipment    |   | 255,894   |      |
| Goodwill                   |   | 7,401,245 |      |
| Total assets  acquired     |   | 7,742,881 |      |
|                       |   |      |      |
| Current  liabilities       |   | 1,054,906 |      |
| Long-term debt             |   | 155,928   |      |
| Total  liabilities assumed |   | 1,210,834 |      |
| Net assets  acquired       |   | $         | 6,532,047 |   |

 

The Company has a contractual obligation to pay former USSCshareholders $4,050,000.  The Companypaid an installment of $1,377,000 on October 31, 2003. Three additional annualinstallments of $891,000 will be payable on each October 31 thereafter.  The payments are made without interest.  It was not considered necessary to imputeinterest on the payments due to the immateriality of the imputed interestamounts.

 

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F-12

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The Company made payments of $1,125,000 in January 2003 and $375,000 inApril, July, and October 2003, to USSC in connection with the issuance of newcommon shares.  Future commitments aretwo additional quarterly installment of $375,000 and five quarterly payments of$300,000 beginning July 1, 2004.  Thisfuture commitment was taken into consideration in determining the totalpurchase price for the additional 54% interest in USSC.

 

The following table provides information regarding the Company’s otherintangible assets as of December 31, 2003 and 2002:

 
| **Intangible Assets**    |   | **Life** |   | **Gross  Carrying  Amount** |    | **Accumulated  Amortization** |   | **Net** |   |
|--------------------------|--------|----------|--------|-----------------------------|---------|-------------------------------|--------|---------|--------|
|                     |   |     |   |                        |    |                          |   |    |   |
| As of December  31, 2003 |   |     |   |                        |    |                          |   |    |   |
| Loan Origination  Costs  |   | 10 Yrs.  |   | $                           | 20,502  |                          | $      | (4,781  | )      | $ | 15,721 |   |
| Patents                  |   | 20 Yrs.  |   | 260,149                     |    | (13,550                       | )      | 246,599 |   |
|                     |   |     |   | $                           | 280,651 |                          | $      | (18,331 | )      | $ | 262,320 |   |
|                     |   |     |   |                        |    |                          |   |    |   |
| As of December  31, 2002 |   |     |   |                        |    |                          |   |    |   |
| Loan Origination  Costs  |   | 10 Yrs.  |   | $                           | 23,291  |                          | $      | (2,789  | )      | $ | 20,502 |   |

 

**NOTE 7 -  INVESTMENTS**

 
|                                  |   | **2003**      |          | **2002**  |   |
|---------------------------------------|--------|---------------|---------------|-----------|--------|
| Investments in  associated companies: |   |          |          |      |   |
| Cenex Harvest  States                 |   | **$**         | **3,516,592** |      | $      | 3,543,333 |   |
| CoBank                                |   | **453,260**   |          | 384,678   |   |
|                                  |   | **3,969,852** |          | 3,928,011 |   |
| Urethane Soy  Systems Company, Inc.   |   | **—**    |          | 1,000,000 |   |
| Minnesota  Soybean Processors         |   | **250**       |          | 250       |   |
|                                  |   |          |          |      |   |
| Totals                                |   | **$**         | **3,970,102** |      | $      | 4,928,261 |   |

 

**NOTE 8 -  NOTES PAYABLE – SEASONAL LOAN**

 

The Company has entered into a revolving credit agreement with CoBank,which expires April 1, 2005.  Thepurpose of the credit agreement is to finance the inventory and accountsreceivable of the Company.  The Companymay borrow up to $6,000,000 between June 1 and September 30 and up to$10,000,000 between October 1 and May 31. Interest is at a variable rate (3.47% at December 31, 2003).  There were no advances outstanding atDecember 31, 2003 and 2002.

 

Advances on the revolving credit agreement are limited based uponinventory, accounts receivable, net of soybean accounts payable.

 

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F-13

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**NOTE 9 -  LONG-TERM DEBT**

 
|                                                                                                                                                                                                                                                                      |   | **2003**       |           | **2002**   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|----------------|------------|--------|
|                                                                                                                                                                                                                                                                      |   |           |           |       |   |
| Revolving term loan  from CoBank, interest at variable rates (3.47% at December 31, 2003), secured  by substantially all property and equipment. Loan matures 3/20/2011.                                                                                                  |   | **15,281,832** |           | 9,874,620  |   |
|                                                                                                                                                                                                                                                                      |   |           |           |       |   |
| Note payable to  former USSC shareholders, due in annual principal payments of $891,000,  interest at 0%, secured by USSC stock. Note matures on 10/31/2006.                                                                                                              |   | **2,673,000**  |           | —     |   |
|                                                                                                                                                                                                                                                                      |   |           |           |       |   |
| 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.                                                                                  |   | **264,462**    |           | 322,812    |   |
|                                                                                                                                                                                                                                                                      |   |           |           |       |   |
| Note payable to  Richard Kipphart, issued February 13, 2002, with quarterly interest payments  at 15% which began on June 30, 2002, and are paid in quarterly installments  thereafter. No prepayment of principal is allowed prior to maturity. Note  matures 2/13/2005. |   | **250,000**    |           | —     |   |
|                                                                                                                                                                                                                                                                      |   |           |           |       |   |
| Note payable to  various companies at rates ranging from 0% to 7.5%. Notes mature on or before  4/15/2005.                                                                                                                                                                |   | **49,964**     |           | 8,754      |   |
|                                                                                                                                                                                                                                                                      |   |           |           |       |   |
| Contract payable  to City of Volga, due in monthly installments of $3,229 at 0%. Contract  matures 12/31/2003.                                                                                                                                                            |   | **—**     |           | 38,745     |   |
|                                                                                                                                                                                                                                                                      |   |           |           |       |   |
|                                                                                                                                                                                                                                                                      |   | **18,519,258** |           | 10,244,931 |   |
| Less current  maturities                                                                                                                                                                                                                                                  |   | **(976,117**   | **)**          | (101,472   | )      |
|                                                                                                                                                                                                                                                                      |   |           |           |       |   |
| Totals                                                                                                                                                                                                                                                                    |   | **$**          | **17,543,141** |       | $      | 10,143,459 |   |
|                                                                                                                                                                                                                                                                           |        |                |                |            |        |  |  |

 

The Company entered into an agreement as of February 26, 2002 withCoBank 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 from August 1,2002 until April 30, 2003 and up to $21,000,000 from May 1, 2003 to September19, 2003.  Beginning September 2003, theavailable commitment decreases in scheduled periodic increments of $1,300,000through March 2011.

 

The MLA contains financial covenants related to the maintenance ofworking capital and achieving debt service quotients among affirmative andnegative covenants.

 

(continued on next page)

F-14

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It is estimated that the minimum principal payments on long-term debtobligations will be as follows:

 
| For the years  ending December 31: |   |      |       |
|------------------------------------|--------|-----------|------------|
| 2004                               |   | $         | 976,117    |   |
| 2005                               |   | 2,265,682 |       |
| 2006                               |   | 2,264,407 |       |
| 2007                               |   | 2,267,668 |       |
| 2008                               |   | 2,271,083 |       |
| Thereafter                         |   | 8,474,301 |       |
|                               |   |      |       |
| Total                              |   | $         | 18,519,258 |   |

 

**NOTE 10 -  INCOME TAXES**

 

The Company is taxed as a limited liability company under the InternalRevenue Code.  The income of the companyflows through to the members to be taxed at the individual level rather thanthe corporate level.  Accordingly, theCompany will have no tax liability.

 

On June 20, 2002, the members approved a plan of reorganization toconvert the Cooperative’s structure from an exempt organization to a limitedliability company.  To the extent thatthe fair market value of the Cooperative’s net assets exceeded their adjustedtax basis, the Cooperative incurred a federal income tax liability.  The excess of the fair market value of theCooperative’s net assets over their adjusted tax basis was approximately$1,530,000. The Company’s effective tax rate is 34%. The State of South Dakotadoes not have a corporate income tax. This liability is estimated as follows:

 
|                                           |   | **2003** |         | **2002** |   | **2001** |   |
|------------------------------------------------|--------|----------|--------------|----------|--------|----------|--------|
|                                           |   |     |         |     |   |     |   |
| Federal income  tax expense at statutory rates |   | **$**    | **(131,474** | **)**    | $      | 520,000  |   | $ | — |   |
|                                                |        |          |              |          |        |          |        |  |  |  |

 

A reconciliation of income tax at the statutory rate to the Company’seffective rate is as follows:

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

 

The net book value of the Company’s assets exceeds the tax basis ofthose assets by approximately $7,450,000 at December 31, 2003.

 

(continued on next page)

F-15

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**NOTE 11 -  EMPLOYEE BENEFIT PLANS**

 

The Company maintains a 401(k) plan for employees who meet theeligibility requirements set forth in the plan documents.  The Company matches a percentage ofemployees’ contributed earnings.  The amountscharged to expense under this plan were approximately $63,000, $62,000, and$65,000 for the years ended December 31, 2003, 2002, and 2001, respectively.

 

The Company has a deferred compensation plan with key employees.  The agreements have benefits, which vestduring a three-year period.  The Companyshall make five equal annual installments upon retirement of theemployees.  The future payments havebeen discounted at 8%.  The amountrecognized as expense during the years ended December 31, 2003, 2002, and 2001was $30,237, $21,064, and $34,000, respectively.  The Company anticipates making payments of approximately $11,000in 2004.

 

**NOTE 12 -  OPERATING LEASES**

 

The Company leases 337 rail cars from GE Capital.  The lease requires monthly payments of$124,958.  The leases began in 1996 andhave eighteen-year terms.  The Companyalso leases 100 rail cars from Trinity Capital.  The lease requires monthly payments of $38,300.  Lease expense was $1,903,367, $1,703,279,and $1,472,435 for the years ended December 31, 2003, 2002, and 2001,respectively.  The Company generatesrevenues from the use of 299 of these rail cars on other railroads.  Such revenues were $1,648,666, $1,448,409,and $1,427,645 for the years ended December 31, 2003, 2002, and 2001,respectively.

 

The Company has entered into a sub-lease agreement with the Dakota,Minnesota & Eastern Railroad Corporation (DME) for the hopper rail carsthat it leases from GE Capital.  TheCompany recognizes revenue from this sub-lease as the hopper rail cars are usedby the DME.  The sub-lease is for atwelve-month period and is renewed annually. The Company is responsible for all maintenance of the rail cars.

 

The Company also has a number of other operating leases for machineryand equipment. Rental expense under these other operating leases was $321,490,$628,306, and $354,224 for the years ended December 31, 2003, 2002, and 2001,respectively.

 

The following is a schedule of future minimum rental payments requiredunder these operating leases.

 
|                     |   | **Rail Cars** |       | **Other** |   | **Total**  |   |
|--------------------------|--------|---------------|------------|-----------|--------|------------|--------|
| Year ended  December 31: |   |          |       |      |   |       |   |
| 2004                     |   | $             | 1,959,096  |      | $      | 41,315     |   | $ | 2,000,411 |   |
| 2005                     |   | 1,959,096     |       | 41,315    |   | 2,000,411  |   |
| 2006                     |   | 1,911,846     |       | 30,616    |   | 1,942,462  |   |
| 2007                     |   | 1,704,596     |       | 4,644     |   | 1,709,240  |   |
| 2008                     |   | 1,436,496     |       | —    |   | 1,436,496  |   |
| Thereafter               |   | 10,842,774    |       | —    |   | 10,842,774 |   |
|                     |   |          |       |      |   |       |   |
| Totals                   |   | $             | 19,813,904 |      | $      | 117,890    |   | $ | 19,931,794 |   |

 

(continued on next page)

F-16

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**NOTE 13 -  CASH FLOW INFORMATION**

 

The following is a schedule of changes in assets and liabilities usedto determine cash from operating activities:

 
|                                            |   | **2003**       |           | **2002**   |   | **2001**   |   |
|-------------------------------------------------|--------|----------------|----------------|------------|--------|------------|--------|
| (Increase)  decrease in assets:                 |   |           |           |       |   |       |   |
| Trade accounts                                  |   | **$**          | **(8,786,716** | **)**      | $      | (3,465,073 | )      | $ | (1,064,418 | ) |
| Inventories                                     |   | **2,363,170**  | ** **     | (5,965,921 | )      | 718,574    |   |
| Margin account  deposit                         |   | **1,114,848**  | ** **     | 187,654    |   | (573,983   | )      |
| Prepaids                                        |   | **(33,442**    | **)**          | (223,820   | )      | (56,886    | )      |
|                                            |   | **(5,342,140** | **)**          | (9,467,160 | )      | (976,713   | )      |
|                                            |   |           | ** **     |       |   |       |   |
| Increase  (decrease) in liabilities:            |   |           | ** **     |       |   |       |   |
| Excess of  outstanding checks over bank balance |   | **(1,214,902** | **)**          | 2,026,870  |   | 24,150     |   |
| Accounts payable                                |   | **275,240**    | ** **     | 171,112    |   | (212,572   | )      |
| Accrued  commodity purchases                    |   | **1,342,767**  | ** **     | 8,466,777  |   | 1,613,556  |   |
| Accrued expenses                                |   | **(198,126**   | **)**          | 277,226    |   | 120,930    |   |
| Deferred  compensation                          |   | **30,237**     | ** **     | 21,064     |   | 34,000     |   |
|                                            |   | **235,216**    |           | 10,963,049 |   | 1,580,064  |   |
|                                            |   |           | ** **     |       |   |       |   |
| Total                                           |   | **$**          | **(5,106,924** | **)**      | $      | 1,495,889  |   | $ | 603,351 |   |

 

**NOTE 14 -  FAIR VALUE OF FINANCIAL INSTRUMENTS**

** **

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

 
|                       |   | **2003**             |        | **2002**        |   |
|----------------------------|--------|----------------------|-------------|-----------------|--------|
|                       |   | **Carrying  Amount** |        | **Fair  Value** |   | **Carrying  Amount** |   | **Fair  Value** |   |
|                       |   |                 |        |            |   |   |   |   |   |
| Cash and cash  equivalents |   | **$**                | **529,697** | ** **      | **$**  | **529,697** |   | $ | 11,170 |   | $ | 11,170 |   |
|                       |   |                 | ** **  |            |   |   |   |   |   |
| Margin deposits            |   | **—**           | ** **  | **—**      |   | 927,339 |   | 927,339 |   |
|                       |   |                 | ** **  |            |   |   |   |   |   |
| Long-term debt             |   | **18,519,258**       | ** **  | **18,370,381**  |   | 10,244,931 |   | 10,258,941 |   |
|                            |        |                      |             |                 |        |  |  |  |  |  |  |  |  |

 

The carrying amount approximates fair value of cash and margindeposits.  The fair value of long-termdebt is based on current rates at which the Company could borrow funds withsimilar remaining maturities.

 

The Company has a patronage investment in other cooperatives and commonstock in a privately held entity.  Thereis no market for their patronage credits or the entity’s common shares, and itwas impracticable to estimate fair value of the Company’s investment.  The investment is carried on the balancesheet at original cost.

 

(continued on next page)

F-17

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**NOTE 15 -  COMMITMENTS**

 

During August 2000, the Company entered into an agreement withMinnesota Soybean Processors Cooperative (MnSP) for certain services and management of a proposed soybeanprocessing plant.  The agreementprovides the Company a fee of 10% of the equity raised by MnSP for theCompany’s services related to business planning and construction managementservices.  The Company has agreed toreinvest a minimum of 80% of the fees earned from MnSP in equity units ofMnSP.  Fees earned under thisarrangement were $1,245,205, $1,241,591 and $301,754 the years ended December31, 2003, 2002 and 2001, respectively.

 

In addition, the Company has agreed to provide management and marketingservices to MnSP on a cost-sharing basis. The agreement is for automatically renewing five-year periods beginningsixty days before the plant is scheduled to begin operations.  Operations of the MnSP plant began during2003, and the Company earned fees of $226,985 under this arrangement for theyear ended December 31, 2003.

 

In addition, the Company is making up to $1 million in interest freeloans backed by retained local earnings available for members of the Companywho invest in MnSP.  As of December 31,2003, the Company had made loans of $481,710. These will be repaid as the Board of Managers approves distributions ofprior earnings.

 

**NOTE 16 -  BUSINESS CREDIT RISK**

 

The Company maintains its cash balances with various financialinstitutions. At times during the year, the Company’s balances exceeded the$100,000 insurance limit of the Federal Deposit Insurance Corporation.

 

The Company also grants credit to customers throughout the UnitedStates and Canada.  The Companyevaluates each customer’s credit worthiness on a case-by-case basis.  Accounts receivable are generallyunsecured.  These receivables were$23,804,867 and $14,969,040 at December 31, 2003 and 2002, respectively.

 

Soybean meal sales accounted for approximately sixty-six percent oftotal revenues for the year ended December 31, 2003, sixty-six percent of totalrevenues for the year ended December 31, 2002, and sixty-eight percent for theyear ended December 31, 2001.  Approximatelythirty-seven percent, twenty-three percent, and twenty-one percent of thesesales were made to one customer for the years ended December 31, 2003, 2002,and 2001, respectively.  At December 31,2003 and 2002, this customer owed the Company approximately $3,534,000 and$1,370,000, respectively.  Soybean oilsales represented approximately nine percent of total revenues for the yearended December 31, 2003, twenty percent of sales for the years ended December31, 2002, and twenty percent of sales for the years ended December 31, 2001.Approximately forty-six percent of these sales were made to one customer forthe years ended December 31, 2003. These sales were primarily to one customerin 2002 and prior. This customer owed the Company approximately $352,000 and$121,000 at December 31, 2003 and 2002, respectively.  Refined oil sales represented approximately thirty percent oftotal revenues for the year ended December 31, 2003, and eleven percent oftotal revenues for the year ended December 31, 2002.  These sales were primarily to one customer. This customer owedthe Company approximately $6,516,000 and $4,591,000 at December 31, 2003 and2002.

 

Sales by geographic area for these years ended December 31, 2003, 2002and 2001 are as follows:

 
|          |   | **2003**       |            | **2002**   |        | **2001**    |   |
|---------------|--------|----------------|-----------------|------------|-------------|-------------|--------|
|          |   |           |            |       |        |        |   |
| United States |   | **$**          | **189,556,575** |       | 140,597,284 |        | $      | 130,558,146 |   |
| Canada        |   | **17,700,000** |            | 18,900,000 |        | 17,700,000  |   |
|          |   |           |            |       |        |        |   |
|          |   | **$**          | **207,256,575** |       | $           | 159,497,284 |   | $ | 148,258,146 |   |
|               |        |                |                 |            |             |             |        |  |  |  |

 

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**NOTE 17 -  SEGMENT REPORTING**

 

The Company organizes its business units into three reportablesegments: soybean-processing, crude oil refining, and polyurethane.  Separate management of each segment isrequired because each segment is subject to different marketing, production,and technology strategies.  Thesoybean-processing segment purchases soybeans and further processes them intoprimarily three products: soybean meal, crude soybean oil, and soybeanhulls.  The oil-refining segment furtherrefines the crude soybean oil for sale in commercial applications.  The polyurethane segment processes oil intoa bio-based polyurethane product that is used in foam applications.  The segments’ accounting policies are thesame as those described in the summary of significant accounting polices.  Market prices are used to reportintersegment sales.  All items notrelated to one of the three segments are included in the column titled “Other.”

 

Segment information for the years ended December 31, 2003 and 2002 areas follows:

 
|                                    |   | **Soybean  Processing** |        | **Oil  Refining** |   | **Polyurethane** |   | **Other** |    | **Total**  |   |
|-----------------------------------------|--------|-------------------------|-------------|-------------------|--------|------------------|--------|-----------|---------|------------|--------|
| FOR THE YEAR  ENDED  DECEMBER 31, 2003: |   |                    |        |              |   |             |   |      |    |       |   |
|                                    |   |                    |        |              |   |             |   |      |    |       |   |
| Sales to  external customers            |   | $                       | 144,437,434 |              | $      | 62,500,006       |   | $         | 319,135 |       | $      | — |   | $ | 207,256,575 |   |
| Interest expense                        |   | 279,638                 |        | 317,853           |   | 204,687          |   | —    |    | 802,178    |   |
| Depreciation and  amortization          |   | 2,577,739               |        | 357,605           |   | 77,071           |   | —    |    | 3,012,415  |   |
| Income tax  benefit                     |   | 131,474                 |        | —            |   | —           |   | —    |    | 131,474    |   |
| Segment profit  (loss)                  |   | 3,597,665               |        | 183,411           |   | (1,088,940       | )      | 702,688   |    | 3,394,824  |   |
| Minority  interest                      |   | —                  |        | —            |   | 457,620          |   | —    |    | 457,620    |   |
|                                    |   |                    |        |              |   |             |   |      |    |       |   |
| Segment assets                          |   | 59,004,036              |        | 11,044,928        |   | 8,763,829        |   | 2,804,271 |    | 81,617,064 |   |
|                                    |   |                    |        |              |   |             |   |      |    |       |   |
| Expenditures for  segment assets        |   | 896,881                 |        | —            |   | 119,968          |   | —    |    | 1,016,849  |   |
|                                    |   |                    |        |              |   |             |   |      |    |       |   |
| FOR THE YEAR  ENDED  DECEMBER 31, 2002: |   |                    |        |              |   |             |   |      |    |       |   |
|                                    |   |                    |        |              |   |             |   |      |    |       |   |
| Sales to  external customers            |   | $                       | 141,942,209 |              | $      | 17,383,370       |   | $         | 163,066 |       | $      | — |   | $ | 159,488,645 |   |
| 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)                  |   | 6,237,559               |        | (381,815          | )      | (236,412         | )      | 993,394   |    | 6,612,726  |   |
| Minority  interest                      |   | —                  |        | —            |   | —           |   | —    |    | —     |   |
|                                    |   |                    |        |              |   |             |   |      |    |       |   |
| Segment assets                          |   | 58,604,024              |        | 7,847,047         |   | 1,471,945        |   | 2,361,881 |    | 70,284,897 |   |
|                                    |   |                    |        |              |   |             |   |      |    |       |   |
| Expenditures for  segment assets        |   | 1,135,688               |        | 3,509,332         |   | —           |   | —    |    | 4,645,020  |   |

 

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**NOTE 18 -  LEGAL PROCEEDINGS**

 

From time-to-time in the ordinary course of the Company’s business, theCompany may be named as a defendant in legal proceedings related to variousissues, including without limitation, workers’ compensation claims, tortclaims, or contractual disputes.  TheCompany carries insurance that provides protection against general commercialliability claims, claims against directors, officers and employees, businessinterruption, automobile liability, and workers’ compensation claims.

 

The Company has been named as a defendant in a breach of contract suitalleging various compensatory and punitive damages.

 

#    #   #    #    #    #

 

F-20

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# **INDEPENDENT AUDITOR’S REPORT ON SCHEDULE**

 

 

The Board of Managers

South Dakota Soybean Processors, LLC

Volga, South Dakota

 

 

Under the date of January 23, 2004, we reported on the consolidatedbalance sheets of South Dakota Soybean Processors, LLC and subsidiary as ofDecember 31, 2003 and 2002, and the related consolidated statements ofoperations, members’ equity, and cash flows for each of the years in thethree-year period ended December 31, 2003, as contained herein.  In connection with our audits of theaforementioned consolidated financial statements, we also have audited therelated financial statement schedule as listed in the accompanying index.  The financial statement schedule is theresponsibility of the Company’s management. Our responsibility is to express an opinion on the financial statementschedule based on our audits.

 

In our opinion, such financial statement schedule, when considered inrelation to the basic consolidated financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

 

 
| /s/ Eide Bailly LLP       |   |   |
|---------------------------|--------|--------|
|                      |   |
|                      |   |
| Sioux Falls, South Dakota |   |
| January 23, 2004          |   |

 

F-21

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Indexto Financial Statements

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

 
| **Description**                    |   | **Balance at  Beginning of  Period** | ** ** | **Charged  (Credited) to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|------------------------------------|--------|--------------------------------------|------------|-------------------------------------------------|------------|----------------|------------|--------------------------------|------------|
|                               |   |                                 | ** ** | **Additions**                                   | ** ** |           | ** ** |                           | ** ** |
| **COL. A**                         |   | **COL. B**                           | ** ** | **COL. C**                                      | ** ** | **COL. D**     | ** ** | **COL. E**                     | ** ** |
|                               |   |                                 |       |                                            |       |           |       |                           |       |
| Deducted from asset accounts:      |   |                                 |       |                                            |       |           |       |                           |       |
| Year ended December 31, 2001:      |   |                                 |       |                                            |       |           |       |                           |       |
| Allowance for doubtful receivables |   | $                                    | 168,871    |                                            | 60,000     |           | 2,358      |                           | $          | 226,513 |   |
|                               |   |                                 |       |                                            |       |           |       |                           |       |
| Deducted from asset accounts:      |   |                                 |       |                                            |       |           |       |                           |       |
| Year ended December 31, 2002:      |   |                                 |       |                                            |       |           |       |                           |       |
| Allowance for doubtful receivables |   | $                                    | 226,513    |                                            | 60,000     |           | 13,182     |                           | $          | 273,331 |   |
|                               |   |                                 |       |                                            |       |           |       |                           |       |
| Deducted from asset accounts:      |   |                                 |       |                                            |       |           |       |                           |       |
| Year ended December 31, 2003:      |   |                                 |       |                                            |       |           |       |                           |       |
| Allowance for doubtful receivables |   | $                                    | 273,331    |                                            | —     |           | (547       | )                              | $          | 273,878 |   |

 

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