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South Dakota Soybean Processors LLC – ‘S-4’ on 12/21/01

On:  Friday, 12/21/01   ·   Accession #:  912057-1-544422   ·   File #:  333-75804

Previous ‘S-4’:  None   ·   Next:  ‘S-4/A’ on 2/14/02   ·   Latest:  ‘S-4/A’ on 5/10/02   ·   16 References:   By:  South Dakota Soybean Processors LLC – ‘10-K’ on 3/22/24 for 12/31/23 By:  South Dakota Soybean Processors LLC – ‘10-Q’ on 11/14/23 for 9/30/23 By:  South Dakota Soybean Processors LLC – ‘10-Q’ on 8/11/23 for 6/30/23 By:  South Dakota Soybean Processors LLC – ‘10-Q’ on 5/11/23 for 3/31/23 By:  South Dakota Soybean Processors LLC – ‘10-K’ on 3/30/23 for 12/31/22 By:  South Dakota Soybean Processors LLC – ‘10-Q’ on 11/10/22 for 9/30/22 By:  South Dakota Soybean Processors LLC – ‘10-Q’ on 8/15/22 for 6/30/22 By:  South Dakota Soybean Processors LLC – ‘10-Q’ on 5/12/22 for 3/31/22 By:  South Dakota Soybean Processors LLC – ‘10-K/A’ on 4/27/22 for 12/31/21 By:  South Dakota Soybean Processors LLC – ‘10-K’ on 3/18/22 for 12/31/21 By:  South Dakota Soybean Processors LLC – ‘10-Q’ on 11/12/21 for 9/30/21 By:  South Dakota Soybean Processors LLC – ‘10-Q’ on 8/16/21 for 6/30/21 By:  South Dakota Soybean Processors LLC – ‘10-Q’ on 5/14/21 for 3/31/21 By:  South Dakota Soybean Processors LLC – ‘10-K’ on 3/31/21 for 12/31/20 By:  South Dakota Soybean Processors LLC – ‘10-Q’ on 11/10/20 for 9/30/20 By:  South Dakota Soybean Processors LLC – ‘10-Q’ on 8/7/20 for 6/30/20 

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

12/21/01  South Dakota Soybean Process… LLC S-4                   23:1.4M                                   Merrill Corp/FA

Document/Exhibit                   Description                      Pages   Size 

 1: S-4         Registration of Securities Issued in a              HTML   1.05M 
                          Business-Combination Transaction                       
 2: EX-4.1      Instrument Defining the Rights of Security Holders     2     10K 
 3: EX-5.1      Opinion re: Legality                                   2     15K 
 4: EX-8.1      Opinion re: Tax Matters                                2     12K 
 5: EX-10.1     Material Contract                                     17     60K 
13: EX-10.10    Material Contract                                      4     15K 
14: EX-10.11    Material Contract                                      5     21K 
15: EX-10.12    Material Contract                                     16     61K 
16: EX-10.13    Material Contract                                     16     41K 
17: EX-10.14    Material Contract                                      2     12K 
 6: EX-10.2     Material Contract                                     13     65K 
 7: EX-10.3     Material Contract                                      3     20K 
 8: EX-10.4     Material Contract                                      3     19K 
 9: EX-10.5     Material Contract                                      8     45K 
10: EX-10.6     Material Contract                                      9     33K 
11: EX-10.7     Material Contract                                     11     42K 
12: EX-10.9     Material Contract                                     33     99K 
18: EX-23.3     Consent of Experts or Counsel                          1      9K 
19: EX-23.4     Consent of Experts or Counsel                          1      9K 
20: EX-24.1     Power of Attorney                                      2     15K 
21: EX-99.1     Miscellaneous Exhibit                                111    204K 
22: EX-99.2     Miscellaneous Exhibit                                  1      9K 
23: EX-99.3     Miscellaneous Exhibit                                  1     10K 

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 21, 2001

REGISTRATION N0. 333-      

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

Soybean Processors, LLC
(Exact name of Registrant as specified in its charter)

100 Caspian Avenue, Post Office Box 500, Volga, South Dakota 57071, (605) 627-9240
(Address and telephone number of principal executive offices)

100 Caspian Avenue, Post Office Box 500, Volga, South Dakota 57071, (605) 627-9240
(Address of principal place of business or intended principal place of business)

Rodney G. Christianson, 100 Caspian Avenue, Post Office Box 500, Volga, South Dakota 57071, (605) 627-9240
(Name, address and telephone number of agent for service)

COPIES TO:

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective and all other conditions to the reorganization described herein have been satisfied or waived.

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

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

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

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

CALCULATION OF REGISTRATION FEE

(1)

Estimated solely for the purposes of calculating this registration fee pursuant to Rule 457(o).

   THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT WILL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT WILL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT WILL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

Preliminary Prospectus/Information Statement
Subject to Completion, dated December 21, 2001

The information in this prospectus/information statement is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor is it soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

South Dakota Soybean Processors

100 Caspian Avenue
Post Office Box 500
Volga, South Dakota 57071
(605) 627-9240

Information Statement/Prospectus

Proposed Reorganization—Your Vote Is Very Important!

Dear South Dakota Soybean Processors Member:

We cordially invite you to attend a special meeting of members of South Dakota Soybean Processors on [meeting date], at [meeting time], local time, at [meeting location]. At this special meeting we are asking you to vote on the adoption of a Plan of Reorganization that has been approved by the Board. If the Plan of Reorganization is adopted, all our members will become holders of capital units of Soybean Processors, LLC, a new limited liability company formed for the purpose of completing the reorganization described in this document. We encourage you to vote by submitting the enclosed ballot as directed. Your vote is very important.

The primary reason for the reorganization is to avoid double taxation of non-patronage income from our operations and investments so that we can maximize potential dividend payments to our members. If we complete the reorganization, your percentage equity interest in the new LLC will be the same as it is now in the Cooperative, and your voting rights and rights to cash distributions will be very similar. You will no longer have a soybean delivery requirement and members will no longer have to be agricultural producers. The reorganization will be a taxable transaction, and members may recognize a gain or loss as a result. We expect that most members will incur a small capital loss; however, the amount of gain or loss that you will incur as a member will depend upon a number of factors and some members may incur a capital gain. You should read this document carefully to determine how to calculate the tax effect on you.

The new LLC's capital units will not be listed on any national securities exchange, The Nasdaq Stock Market or any over-the-counter market. The transferability of the new LLC's capital units will be strictly restricted by the new LLC's Operating Agreement to preserve the new LLC's partnership taxation status. Specifically, the new LLC's Board of Managers will only approve "private transfers," such as sales or gifts to qualified family members and transfers upon death; certain other qualified redemptions and repurchases; and limited sales made using the qualified matching service that we will operate.

We cannot complete the reorganization unless we receive the approval of at least 75% of the common stock that is voted at the special meeting either in person or by written ballot. As of November 30, 2001, there were 2,097 common shares of common stock and 14,129,250 shares of non-voting equity stock issued and outstanding. Each member has one share of voting common stock. We will issue a total of 14,129,250 LLC capital units in the reorganization.

Please see "Risk Factors" beginning on page 8 to read about important factors you should consider before voting.

The attached Notice of Special Meeting and Information Statement/Prospectus provide detailed information about the special meeting, the proposed reorganization and the new LLC. You should carefully review this entire document in considering how to vote. Information on our Web site is not part of this document, and we have not authorized anyone to provide you with any different information.

The Board of Directors of South Dakota Soybean Processors unanimously recommends that you vote "FOR" the adoption of the proposed Plan of Reorganization on the enclosed ballot.

Paul Casper
President, South Dakota Soybean Processors
President, Soybean Processors, LLC

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the Soybean Processors, LLC capital units to be issued in the reorganization or determined if this document is truthful or complete. Any representation to the contrary is a criminal offense.

This document is dated [document date], and was first mailed to members on [mailing date].

South Dakota Soybean Processors

100 Caspian Ave., P.O. Box 500
Volga, South Dakota 57071
(605) 627-9240

Notice Of Special Meeting Of Members
To Be Held On [meeting date]

To South Dakota Soybean Processors Members:

    This is a notice of a special meeting of South Dakota Soybean Processors, a South Dakota cooperative corporation, to be held on [meeting date], at [meeting time], CST, at [meeting location], for the following purpose:

•

To consider and vote upon a proposal to approve a Plan of Reorganization in the form set forth as Appendix A to this Information Statement/Prospectus between the Cooperative and Soybean Processors, LLC, a recently formed South Dakota limited liability company.

    If this proposal is adopted, the Cooperative will be dissolved and all our members will become holders of capital units in the new LLC. This proposal is described in the Information Statement/Prospectus included with this notice. You should carefully review this document in considering how to vote.

•

The close of business on [record date] has been fixed as the record date for determining those members entitled to vote at the special meeting and any adjournments or postponements of the meeting. Only members of record on that date will be entitled to vote.



•

You may vote only by using the enclosed ballot. No additional ballots will be distributed at the special meeting.



•

You may either send your ballot to us by mail before the special meeting or submit it in person at the special meeting.



•

You may revoke your ballot or change your vote at any time until we have tallied the votes at the special meeting.

    On [record date], there were 2,097 members entitled to vote. Each member has one share of voting common stock. If at least 110 members are present or represented by mail ballot at the special meeting, a quorum will exist.

    The Board of Directors of South Dakota Soybean Processors unanimously recommends that you vote "FOR" the approval of the proposed Plan of Reorganization on the enclosed ballot.

    You are cordially invited to attend the special meeting. If you are unable to attend, please complete and return the enclosed mail ballot to the Cooperative in the envelope provided as soon as possible to assure that we receive it prior to the special meeting so that your vote is counted.

By Order of the Board of Directors

Paul Casper
President, South Dakota Soybean Processors

[document date]
Volga, South Dakota

TABLE OF CONTENTS

SUMMARY

    This summary highlights selected information from this document and may not contain all of the information that is important to you. To understand the transaction fully and for a complete description of the legal terms of the reorganization, please read this entire document and the appendices.

General

    South Dakota Soybean Processors is a South Dakota cooperative corporation formed in 1993 to build and operate a soybean processing plant in Volga, South Dakota. The soybean processing plant began production in late 1996. Originally designed to crush 50,000 bushels of soybeans per day, our capacity has been expanded to crush more than 80,000 bushels of soybeans per day.

    Our primary business is processing locally grown soybeans into soybean meal, crude soybean oil and soybean hulls. Our soybean meal is primarily sold to resellers, feed mills, and local livestock producers as high protein livestock feed, our crude soybean oil is mostly sold to refineries for further processing into food products and for some industrial uses, and our soybean hulls are either blended back into the soybean meal or sold separately, either pelleted or loose, as a fiber source in livestock diets.

    Soybean processing is a mature and highly competitive industry. We plan to maintain our competitive position in the market place by producing a high quality product and operating a highly efficient operation at the lowest possible cost. Our primary business objective is to maximize cash dividends to our members from the profits generated through our soybean processing operations. At the same time, our management recognizes the need to maintain our financial strength and to consider and implement growth strategies that will allow us to continue meeting these objectives over time. Upon careful consideration of the various factors involved, the Board of Directors has determined that implementing the reorganization described in this prospectus is critical to our future ability to achieve these objectives.

    The executive offices of South Dakota Soybean Processors and Soybean Processors, LLC are located at 100 Caspian Avenue, Post Office Box 500, Volga, South Dakota 57071, and our telephone number is (605) 627-9240.

The Reorganization

    The purpose of this special meeting is to consider the adoption of the Plan of Reorganization that is being recommended by the Cooperative's Board of Directors. If adopted, the Cooperative will be reorganized as a limited liability company.

    Summary.  Due to potentially costly long-term tax consequences to our members of continuing to operate as a cooperative corporation, the Board of Directors is recommending that we reorganize our business as a limited liability company, or LLC. The primary reason for this is to avoid double taxation of non-patronage income from our operations and investments.

    If the reorganization is approved and implemented, it will have the following effects on you:

•

You will receive one capital unit of the new LLC for every equity unit of the Cooperative that you own now, so your percentage equity interest in the new LLC will be the same as it is currently in the Cooperative.



•

Your voting rights and rights to cash distributions as an owner of capital units of the new LLC will be similar to your rights as a member of the Cooperative. Each member of the new LLC will be entitled to one vote on each matter brought to a vote of the members, regardless of the number of capital units owned.

1

•

You will no longer have a soybean delivery requirement. Membership in the new LLC will not be restricted to agricultural producers, and we do not expect that you will have to pay self-employment tax on distributions of the new LLC.



•

The reorganization will be a taxable event, and members may recognize a gain or loss as a result. We expect that most members will incur a small capital loss as a result of the reorganization; however, the actual tax effect on you will depend upon your adjusted tax basis in your shares of equity stock and the final determination of the fair market value of the liquidating distribution. Although the basis of equity stock will vary among the members, the value per unit of the distribution will be the same for all members. Based upon a June 30, 2001 appraisal of our plant, property and equipment and certain investment assets and our most recent balance sheet, the per share value of the distribution upon liquidation would have been $1.87 per share if the reorganization had occurred on November 30, 2001. If you purchased your shares in our initial equity offering at a price of $2.00 per share, your adjusted tax basis would have been $2.02 as of November 30, 2001; accordingly if the reorganization had occurred on November 30, 2001, you would have incurred a capital loss of $0.15 per share. If you did not purchase all your shares in the initial offering, the tax effect will be different for you. You should carefully read the information provided under the heading "The Reorganization—Tax Treatment" to determine how to calculate your adjusted tax basis.

    We cannot implement the reorganization unless it is approved by 75% of the members of the Cooperative who vote at the special meeting. As of November 30, 2001, directors and officers of South Dakota Soybean Processors and their affiliates beneficially owned approximately 3% of the non-voting shares of equity stock, but only approximately 1% of the common shares voting on the proposed reorganization. You will only be entitled to vote and receive the new LLC capital units if you are a member of the Cooperative. We will not raise any additional cash proceeds in the reorganization and you will not be required or permitted to make any additional investment.

    If the reorganization is approved, each member of the Cooperative will receive a certificate for that number of capital units in the new LLC equal to the number of equity shares currently owned in the Cooperative and all issued and outstanding common shares and non-voting equity shares of the Cooperative will be cancelled. Cancellation of the common shares will be credited in satisfaction of a non-refundable $200 fee for new members of the LLC, which is similar to how the Cooperative handled common shares.

    If the Cooperative's members approve the Plan of Reorganization at the special meeting on [meeting date], on [completion date], and without further action by the Cooperative's members:

•

All the assets and liabilities of the Cooperative will be transferred to the new LLC in exchange for all of the new LLC's capital units;



•

The Cooperative will be dissolved and the capital units of the new LLC will be distributed pro rata to the Cooperative's members upon liquidation;



•

Members of the Cooperative will receive one capital unit of the new LLC for every equity shares of the Cooperative they own, and may become members of the new LLC by signing its Operating Agreement; and



•

The new LLC will change its name to "South Dakota Soybean Processors, LLC."

    We have attached the Plan of Reorganization, which describes the legal terms of the reorganization, as Appendix A to this document. We encourage you to read it carefully.

2

The New LLC; Rights of Members

    Articles of Organization; Operating Agreement of the LLC.  Your rights as a member of the new LLC will be governed by the LLC's Articles of Organization, Operating Agreement and South Dakota law. We have attached the Articles of Organization and the form of Operating Agreement as Appendix B to this Information Statement/Prospectus and encourage you to read them carefully. These are the legal documents that govern the purpose, powers and internal affairs of the new LLC.

    The Operating Agreement will go into effect automatically upon the completion of the reorganization. To become a member of the new LLC, you will be required to submit an executed counterpart signature page to the Operating Agreement and consent to the termination of your member agreement with the Cooperative regarding soybean delivery. If you do not become a member, you will be a unit holder of capital units of the new LLC and will still be entitled to distributions and liable for taxes; however, you will not be able to vote and, if you do not sign the Operating Agreement within 12 months, the LLC will have the option to redeem your capital units at a significant discount.

    In most respects, your rights as a member of the new LLC will be similar to your current rights as a member of the Cooperative. From your perspective, the primary differences are that you will no longer have a soybean delivery requirement, membership will not be restricted to agricultural producers, and we do not expect that you will have to pay self-employment tax on LLC distributions. The primary difference from an accounting perspective is that distributions by the new LLC will be based on investment (equity), whereas in a cooperative, distributions must be based on patronage (doing business with your cooperative).

    Cash Distributions.  You will be entitled to receive a proportionate share of any cash or other distributions declared by the new LLC's Board of Managers based upon the number of capital units you own, regardless of whether or not you agree to become a member. Under the terms of the Operating Agreement, the new LLC will be required to distribute 30% of our net income, unless net income does not exceed $500,000 or such a distribution would violate or cause a default under the terms of our debt financing or other credit facilities or is otherwise prohibited by law. Any other distributions are entirely at the discretion of the Board of Managers, and there is no guarantee as to when or if we will generate sufficient profits to make distributions at any particular level or that the new LLC will make any distributions at all. If the new LLC makes distributions, it will make them proportionately to all unit holders on a per unit basis.

    Voting Rights.  Each member of the new LLC will be entitled to one vote on all matters submitted to a vote of the members, regardless of the actual number of capital units owned, similar to the voting structure of a traditional producers' cooperative. Cooperative members who receive LLC units in the reorganization but have not agreed to become members of the new LLC by signing the Operating Agreement will not be entitled to vote.

    Members of the new LLC will be entitled to vote on the following matters:

•

any merger, sale of all or substantially all of our assets or voluntary dissolution;



•

election and removal of individuals serving on the Board of Managers;



•

an increase or decrease in the number of individuals serving on the Board of Managers;



•

changes in the geographical boundaries of the districts from which Managers are elected;



•

an amendment to the LLC's Articles of Organization or Operating Agreement; and



•

any other matters referred to a vote of the members by the Board of Managers.

3

    All matters that are subject to a vote of the LLC's members will be decided by the vote of a majority of members, other than the following:

•

director elections will be decided by the members within a particular district; and



•

any merger, sale of all or substantially all of our assets or voluntary dissolution must be approved by two-thirds of the members.

    The LLC's Board of Managers will decide all other matters in its discretion.

    Board of Managers.  The initial members of the Board of Managers of the new LLC are the 21 individuals serving as directors of the Cooperative, consisting of three directors from each of the Cooperative's seven geographic districts. Each of these initial managers will serve until the expiration of his original term on the Cooperative's Board of Directors. The managers will subsequently be elected to office by the members of the LLC on a district by district basis as in the Cooperative.

    The Board of Managers and the officers appointed by the Board will be responsible for the general management and affairs of the new LLC, including managing the soybean processing plant, approving and administering transfers of capital units, and supervising our bookkeeping and other administrative matters. Most actions of the Board of Managers must be approved by a majority of managers present at any meeting at which a quorum is present, although certain actions require a super majority of two-thirds of the managers.

    No Public Market; Restrictions on Trading.  The new LLC must strictly restrict transfers of its capital units in order to preserve its preferential single-level tax status. You will not be able to trade your capital units on any national securities exchange or in any over-the-counter market. All transfers must be approved by the Board of Managers, and it will not recognize any transfer that would result in the new LLC losing its partnership tax status. However, the new LLC will generally approve sales or gifts of capital units to qualified family members and transfers upon death.

Questions And Answers About The Reorganization

    The following section summarizes the answers to some commonly asked questions regarding the reorganization, but it is not a complete listing of all the information about the reorganization that may be important to you. You should read this entire document carefully.

4

5

6

7

RISK FACTORS

    You should carefully consider the risks described below before making a decision to vote for the reorganization. For the reasons explained below, owning capital units of Soybean Processors, LLC involves a high degree of risk. Most of these risks are similar to the risks involved in owning shares of the Cooperative; however, some differ in that they are related to the reorganization and operating as an LLC, so you should consider them carefully.

Reorganization-Related Risks

    The reorganization from a cooperative into a limited liability company will be a taxable transaction to the Cooperative and its members and you may realize a taxable gain as a result.  The reorganization from a cooperative into a limited liability company will be a taxable transaction. The amount of taxable gain or loss that the Cooperative will recognize depends on the aggregate fair market value of the assets of the Cooperative and its tax basis in those assets. For this purpose, among others, the Cooperative has obtained an appraisal of the fair market value of its assets. Based upon an appraisal of our plant, property and equipment and certain investment assets as of June 30, 2001 and the book value of certain other assets on our most recent balance sheet, we expect that the aggregate value of these assets will exceed their tax basis and that the Cooperative will incur a taxable gain. The amount of such gain is based upon our belief in the appraisal report, which must be updated as of the date of the reorganization. We cannot assure you that the appraisal report is accurate or that subsequent events will not significantly affect the appraised value or the fair market value of the other assets on our balance sheet. This could result in additional taxable gain to the Cooperative, reducing distributions to members, or result in less loss or more capital gain to members.

    The IRS might determine that the Cooperative or its members must recognize additional taxable gain.  In deciding to proceed with the reorganization, the Board has relied on the accuracy of an independent appraiser's report dated June 30, 2001. The report is not binding on the IRS. There is a risk that the IRS might determine that the Cooperative or its members must recognize less loss or more taxable gain for federal income tax purposes if the IRS can prove the appraiser's report incorrect. Furthermore, the report is subject to adjustment for changes occurring between June 30, 2001, and the reorganization date. The appraisal report will be updated if the reorganization is approved, and if the updated appraisal report does not confirm the appraised value in the June 30, 2001, appraisal report, members may have to recognize taxable gain.

Debt-Related Risks

    Our third party debt financing may reduce profitability and increase the risk of the loss of your entire investment.  As of November 30, 2001, we had approximately $12.7 million of outstanding indebtedness, and an additional $4.7 million available under our lines of credit. The use of debt financing increases the risk that the plant will not be able to operate profitably because we will need to make principal and interest payments on this indebtedness. Debt financing also exposes you to the risk that your entire investment could be lost in the event of a default on the indebtedness and a foreclosure and sale of the plant and its assets for an amount that is less than the outstanding debt.

    Debt service and restrictive loan covenants limit our ability to make cash distributions to our members and could have other important consequences.  Our debt service requirements may make us more vulnerable to economic or market downturns. If we are unable to service our debt, we may be forced to reduce or delay planned capital expenditures, sell assets, restructure our indebtedness or seek additional equity capital. We cannot assure you that we can accomplish any of these strategies on satisfactory terms, if at all. In addition, our debt financing agreements contain numerous financial and other restrictive covenants. These covenants and obligations limit our ability to make cash distributions to our members.

8

Operating Risks

    Higher than anticipated operating costs could reduce profitability.  In addition to general market fluctuations and economic conditions, we could experience significant cost increases associated with the ongoing operation of the soybean processing plant caused by a variety of factors, many of which are beyond our control. These cost increases could arise from an inadequate local supply and resulting increased price for soybeans that is not accompanied by an increase in the price for soybean oil and meal. Labor costs can increase over time, particularly if there is any shortage of labor, or shortage of persons with the skills necessary to operate the plant. Adequacy and cost of electric and natural gas utilities could also affect our operating costs. Changes in price, operation and availability of truck and rail transportation may affect our profitability with respect to the transportation of oil and other products to our customers.

    In addition, the operation of the soybean processing plant is subject to ongoing compliance with all applicable governmental regulations, such as those governing pollution control, and other matters. If any of these regulations were to change, it could cost us significantly more to comply with them. Further, other regulations may arise in future years regarding the operation of the plant, including the possibility of required additional permits and licenses. We might have difficulty obtaining any such additional permits or licenses, and they could involve significant unanticipated costs. We will be subject to all of these regulations without regard to whether the operation of the plant is profitable.

    Increases in the production of crude soybean oil or meal could result in lower prices for crude soybean oil or meal and have other adverse effects.  We expect that existing soybean processing plants will construct additions to increase their production and that new soybean processing plants will be constructed as well. We cannot provide any assurance or guarantee that there will be material or significant increases in the demand for crude soybean oil and meal so the increased production of crude soybean oil and meal may lead to lower prices for crude soybean oil and meal. The increased production of crude soybean oil and meal could have other adverse effects as well. For example, the increased production of crude soybean oil or meal could result in increased demand for soybeans which could in turn lead to higher prices for soybeans, resulting in higher costs of production and lower profits if we are not able to lock in satisfactory crush margins.

    Hedging transactions involve risks that could harm our profitability.  To reduce our price change risks associated with holding fixed price commodity positions, we generally take opposite and offsetting positions by entering into commodity futures contracts (either a straight futures contract or an options futures contract) for soybeans and soybean meal and crude oil on the Chicago Board of Trade. While hedging activities reduce our risk of loss from increasing market values of soybeans, such activities also limit the gain potential which otherwise could result from significant decreases in market prices of soybeans. Our policy is to generally maintain hedged positions within limits, but we can be long or short at any time. In addition, at any one time, our inventory and purchase contracts for delivery to the plant may be substantial. If our risk management policies and procedures that guide our net position limits are in adequate, we could suffer adverse financial consequences.

    We operate in an intensely competitive industry and we cannot assure you that we will be able to compete effectively.  Although we have adequate markets for our products, there is no guarantee that we will be able to continue to successfully penetrate those markets. The soybean processing business is highly competitive, and other companies presently in the market, or that could enter the market, could adversely affect prices for the products we sell. We compete with other soybean processors such as Archer-Daniels Midland, Cargill, Bunge, Ag Processing (AGP), and Central Soya, among others, all of which are capable of producing significantly greater quantities of soybean products than we do and may achieve higher operating efficiencies and lower costs due to their scale. With regard to crude soybean oil, we also compete with processors of other oilseeds, such as sunflower, flaxseed, canola, peanut and cotton processors, because refineries can process multiple oil varieties in one facility.

9

    To produce soybean oil and meal, we must purchase significant amounts of soybeans, which are subject to disease and other agricultural risks.  Production of crude soybean oil and meal at the plant requires significant amounts of soybeans. Soybeans, like other crops, are affected by weather conditions. A significant reduction in the quantity of soybeans harvested due to adverse weather conditions, disease or other factors could result in increased soybean costs with adverse financial consequences to our operations. Significant variations in actual growing conditions from normal growing conditions may adversely affect our ability to procure soybeans for the plant. After the reorganization, we will have no definitive agreements with any soybean producers to provide soybeans to the soybean plant.

    Our profitability is also influenced by the protein and moisture content of the soybeans in the local growing area.  The northern portion of the western soybean belt, where our plant is located, typically produces a lower protein soybean resulting in a lower protein soybean meal. Because lower protein soybean meal is sold at a lower price, we may not be able to operate as profitably as soybean processing plants in other parts of the country. If adverse weather conditions further reduce the protein content of the soybeans grown in our area, our business may be materially harmed because we will be required to sell our soybean meal at discounted prices to our customers.

    In addition the moisture content of the soybeans that are delivered to our plant also influences our profitability and the efficiency of our plant operations. Soybeans with high moisture content require more energy to dry them before they can be processed. While we may recover some of these extra energy costs by paying producers less for high moisture soybeans, these savings may not be sufficient to offset our additional operating expenses.

    Interruptions in energy supplies could have a material adverse impact on our business.  Soybean processing requires a constant and consistent supply of energy. If there is any interruption in our supply of energy for whatever reason, such as supply, delivery or mechanical problems, we may be required to halt production. If production is halted for any extended period of time, it will have a material adverse effect on our business. We have entered into agreements to provide our needed energy, but we cannot assure you that these companies will be able to reliably supply the gas and electricity that we need. If we were to suffer interruptions in our energy supply, our business would be harmed.

    Because soybean processing is energy intensive, our business will be materially harmed if natural gas and electricity prices increase substantially.  Natural gas and electricity prices have historically fluctuated significantly. We have the ability to convert our natural gas burning boiler to diesel fuel on a day's notice; however, increases in the price of natural gas or electricity would harm our business by increasing our energy costs.

    Our business is not diversified because it is limited to the soybean processing industry, which may limit our ability to adapt to changing business and market conditions.  Today, our sole business is the production and sale of soybean meal, crude soybean oil and soybean hulls. We currently do not have the capability to produce food grade oil, which is used in such products as margarine and salad or cooking oil, or other products. The lack of diversification of our business may limit its ability to adapt to changing business and market conditions.

    We are reliant on one customer to purchase the majority of the soybean oil that we produce.  We currently sell the majority of the oil that we produce to Cenex Harvest States in Mankato, Minnesota, however, we do not have a long-term contract that will insure that we can keep making these sales. Further, Cenex Harvest States has announced plans to build additional soybean crushing capacity in Fairmont, Minnesota that would begin operation in 2003, and we anticipate that this plant will reduce the amount of oil that Cenex Harvest States purchases from us. We therefore are considering refining oil ourselves or finding other refinery customers. If we are unable to locate other customers or construct refinery facilities before Cenex Harvest States begins operations at its new plant, we may have to sell our oil to other refiners at discounted prices and our business could be materially harmed.

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    Transportation costs are a factor in the price of soybean oil and meal and increased transportation costs could adversely affect our profitability.  Soybean oil may be shipped by trucks, rail cars, and barges. The added transportation costs are a significant factor in the price of soybean oil. Today most of our products are sold FOB Volga, South Dakota and those that are not have the full transportation cost added to the contract. Transportation costs do not currently affect our margin directly; however the added costs could eventually affect demand for our products.

Government and Regulatory Risks

    Legislative, legal or regulatory developments could adversely affect our profitability.  The regulation of the environment is a constantly changing area of the law. Soybean oil and meal are not currently regulated in any way; however, it is possible that federal or state environmental rules or regulations regarding the processing of soybean meal and oil could be adopted and could increase our operating costs and expenses, or require capital investment. The Environmental Protection Agency currently requires monitoring of unrecovered levels of chemical hexane, which is used in the extraction process. New regulations which take effect in 2002 require that the amount of hexane lost in the extraction process not exceed 0.2 gallons per ton of soybean oil produced on a rolling 12-month average. Our production process currently meets this requirement, but if we are ever unable to meet this requirement or any new requirements, we could face fines or other consequences that could increase our operating costs and reduce profits.

    We could face increased operating costs if we were required to segregate genetically modified soybeans and the products generated from these soybeans.  In the last several years, some soybean producers in our area have been planting genetically modified soybeans, commonly known as Round-up Ready beans. Neither the United States Department of Agriculture nor the Food and Drug Administration currently requires that genetically modified soybeans be segregated from other soybeans. If these agencies or our customers were to require that we process these genetically modified soybeans separately, we would face increased storage and processing costs and our profitability could be harmed.

    We are subject to ongoing state and federal environmental regulations and could be subject to fines and penalties and increased operating costs.  We are subject to continuing compliance and review by the South Dakota Department of Environment and Natural Resources in regard to a consent decree that was entered into in April 2001. We believe that we are currently in compliance with the requirements of the consent decree, but if we were ever found to be in violation of this consent decree or other environmental permits or regulations in the future, we could be subject to severe penalties, such as potential closing of the plant, and face increased operating costs to achieve compliance.

    We are also in the process of working with an engineering firm to complete an emergency action plan for spills of hazardous chemicals. The Environmental Protection Agency placed us on notice of this deficiency in our regulatory compliance in September 2001, but we were not fined or cited for the violation. We could, however, face severe penalties and liability if a spill of hazardous chemicals were to occur at our plant site before we completed and received approval from the Environmental Protection Agency of our emergency action plan.

Federal Income Tax Risks

    If the new LLC is treated as a corporation for federal income tax purposes, the capital units could decline in value.  The new LLC expects that it will be treated as a partnership for federal income tax purposes. This means that the new LLC will pay no income tax at the company level and members will pay tax on their proportionate share of the new LLC's net income. We cannot assure you, however, that the new LLC will always be treated as a partnership in the event there are changes in the law or IRS interpretations, or trading in capital units that could result in classification of the new LLC's as a publicly traded partnership.

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    If the new LLC were treated as a corporation rather than a partnership for federal income tax purposes, it would pay tax on its income at corporate rates and no income, gains, losses, deductions or credits would flow through to our members. Currently, the maximum effective federal corporate rate is 35%. In addition, distributions would generally be taxed to members upon receipt as corporate dividends. Because a tax would be imposed upon the new LLC at the entity level, the cash available for distribution to members would be reduced by the amount of the tax paid. Reduced distributions could reduce the value of your capital units.

    As a member or unit holder of the new LLC, your tax liabilities may exceed cash distributions.  The taxable income of the new LLC allocated to you could exceed any cash distributions you may receive. This may occur if the Board of Managers determines that the cash generated by the business is needed to fund our activities or other obligations, rather than being available for distribution to our members, or if we are prohibited from making distributions pursuant to our Operating Agreement. It is possible that you may not receive distributions sufficient to pay the tax liability attributed to you, and therefore you may be forced to pay tax liabilities out of your personal funds.

    You may not be able to fully deduct your share of the new LLC's losses or your interest expense.  Owning capital units of the new LLC will likely be treated by the IRS as a "passive activity." This means that your share of any loss incurred by the new LLC will be deductible only against your income or gains from other passive activities. Passive activity losses that are disallowed in any taxable year are suspended and may be carried forward and used as an offset against passive activity income in future years. Upon disposition of your entire interest in a passive activity to an unrelated person in a taxable transaction, you may then deduct suspended losses with respect to that activity.

    The IRS may challenge our allocations of income, gains, losses, deductions and credits.  The new LLC's Operating Agreement provides for the allocation of income, gains, losses, deductions and credits among members. The rules regarding partnership allocations are complex. It is possible that the IRS could successfully challenge the allocations provided for in the Operating Agreement and reallocate items of income, gains, losses, deductions or credits in a manner which reduces deductions or increases income allocable to you, which could result in additional tax liabilities. See "Federal Income Tax Consequences—Flow-Through of Partnership Taxable Income or Loss to Members."

    Because the new LLC will be treated as a partnership for federal income tax purposes, the IRS may audit your tax returns if an audit of the LLC's returns results in adjustments.  The IRS may audit the new LLC's tax returns and may disagree with the tax positions taken on its returns. If challenged by the IRS, the courts may not sustain the position taken on the new LLC's tax returns. An audit of the new LLC's tax returns could lead to separate audits of your tax returns, especially if adjustments are required, which could result in adjustments on your tax returns. This could result in tax liabilities, penalties and interest to you.

    The tax laws may change to the new LLC's detriment.  It is possible that the current federal and state tax treatment of the new LLC, or of its capital units, will be modified by subsequent legislative, administrative or judicial action. Any such changes could significantly alter the tax consequences of and decrease the after tax return on your investment in our capital units.

Other Investor Risks

    There is no public market for the capital units.  We do not intend to apply for listing of the new LLC capital units on any stock exchange or on The Nasdaq Stock Market. The new LLC's Operating Agreement contains extensive restrictions on transfer of the capital units. In addition, transferability of the capital units is restricted by federal and state law. It may be difficult or impossible for you to sell your capital units when you desire to do so. Therefore, you may be required to bear the economic risks of owning the new LLC's capital units for an indefinite period of time.

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    There are significant restrictions on transferring the capital units.  To maintain preferential partnership tax status, the capital units may not be traded on an established securities market or readily tradable on a secondary market. To help ensure that a market does not develop, the new LLC's Operating Agreement prohibits transfers other than through the procedures specified in our Capital Units Transfer System. Under this system, the Board will generally approve transfers that fall within "safe harbors" contained in the publicly traded partnership rules under the federal tax code. Permitted transfers include transfers by gift or sale to qualified family members, and transfers upon death of a member. The new LLC will also operate a matching service, which you may use to attempt to sell your capital units. If you transfer units in violation of the publicly traded partnership rules or without the prior written consent of the Board, the new LLC will consider the transfer to be null and void and will have the option to redeem your capital units at a substantial discount. These restrictions on transfer could reduce the value of your capital units.

    There may be conflicts of interest in our business structure.  Although we do not believe any material conflicts of interest exist which in practice will be detrimental to our business, conflicts of interest do exist in the structure and operation of our business and we cannot assure you that these conflicts will not harm our business. The decisions of any of our board members or officers regarding the reorganization should not be relied upon as an indication of the merits of this offering. Because our board members and officers are in a position to substantially influence our business, conflicts of interest may arise. The interests of our board members and officers may not be the same as yours.

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CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION

    This information statement/prospectus contains forward-looking statements involving future events, future business and other conditions, our future performance, and our expected operations. These statements are based on management's beliefs and expectations and on information currently available to management. Some of the sections of this information statement/prospectus that use forward-looking statements include, without limitation, "Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business." Forward-looking statements may include statements which use words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "predict," "hope," "will," "should," "could," "may," "future," "potential," or the negatives of these words, and all similar expressions.

    Forward-looking statements involve numerous assumptions, risks and uncertainties. Important factors that could significantly affect our current plans, anticipated actions, and future financial condition and results include, among others, those set forth under the heading "Risk Factors." Our actual results or actual business or other conditions may differ materially from those contemplated by any forward-looking statements and we are not under any duty to update the forward-looking statements contained in this information statement/prospectus. We cannot guarantee future results or performance, or what future business conditions will be like. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this document.

THE REORGANIZATION

Reasons for the Reorganization

    The structure and terms of the reorganization from a Cooperative into a limited liability company were determined by the Cooperative's Board of Directors after extensive investigation of the anticipated tax and other impacts of the reorganization on the Cooperative and its members. In determining whether to reorganize into a limited liability company, the Cooperative's Board considered numerous factors. The following is a brief discussion of those factors.

•

Our strategic objectives include expanding the processing of crude soybean oil into SoyOyl®, a product used in the polyurethane market, and we have entered into an agreement with Urethane Soy Systems Company, Inc. the SoyOyl® patent holder, to be its exclusive supplier of this processed oil until 2014. We believe that Urethane Soy Systems' demand for oil will eventually exceed our current production capacity by a significant margin. We do not believe it will be feasible to increase our oil production and member soybean delivery requirements; accordingly, we expect to purchase crude soybean oil on the open market to satisfy our obligation as the exclusive supplier. As a cooperative, all revenue derived from oil purchased from outside vendors, and subsequently processed and resold by the Cooperative, would be classified as non-patronage income and accordingly subject to federal tax at the Cooperative level. Additional non-patronage income would include administrative and consulting fees received from other companies such as the Construction and Management arrangement with Minnesota Soybean Processors, and the income received for these services. Further, the IRS is taking an increasingly aggressive stance on taxation of non-patronage income. "Non-patronage income" means incidental income derived from sources not directly related to the marketing, purchasing, or service activities of a cooperative.



•

As a limited liability company, we expect that you will not have to pay self-employment taxes on earnings; whereas cooperative members must pay self-employment taxes on patronage income. However, the IRS has not published authoritative rules determining whether a member of a limited liability company is exempt from self-employment tax with respect to his share of company income. Although our tax counsel believes that the new LLC members will generally

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not be subject to self-employment taxes, we cannot assure you that self-employment taxes would never be applied to a member's distributive share of the new LLC's income. Self-employment taxes are imposed on income from self employment in order to provide those who work for themselves, such as independent contractors, sole proprietors, and general partners, with social security and disability benefits that employees have through the withholding of FICA taxes from their wages (and salaries).

•

The limited liability company form of ownership permits an expanded universe of potential members. A cooperative is generally required to limit its equity owners to producers, and to distribute its earnings to members based on the amount of business each member does with the cooperative, rather than the value of each member's investment. Limited liability company membership is not similarly restricted. The Board believes that, while no assurances can be given, the liquidity of members' equity interests may be enhanced if membership in the new LLC is opened up to a broader range of investors.

    The Board also considered alternative courses of action that would be available to the Cooperative, including converting the Cooperative to a taxable corporation. The Board determined it was impractical, limiting and burdensome for the Cooperative and its members to convert to a taxable corporation because of the additional tax expense the Cooperative would incur. The Board also considered:

•

continuing to operate as a cooperative and, if necessary, challenging any legal ruling related to non-patronage income;



•

continuing to operate as a cooperative and treating any non-patronage source income as such and incurring the entity-level tax; and



•

not expanding into new business ventures.

    The Board ultimately decided to reject these alternative courses of action and pursue the LLC conversion because in their view it provides the best solution for maximizing return to our members.

    This discussion of factors the Board considered is not intended to be exhaustive, but is believed to include all material factors. In reaching its determination to approve and recommend the reorganization, the Board did not quantify or assign a relative weight to the above factors.

Recommendation of the Board

    The Cooperative's Board has unanimously approved the Plan of Reorganization. The Board believes that it is in the best interests of the Cooperative and its members to convert from a cooperative into a limited liability company. Accordingly, the Board has unanimously approved the Plan of Reorganization and recommends that members of the Cooperative vote "FOR" adoption of the Plan of Reorganization. If the reorganization is not consummated for any reason, the Board presently intends to continue to operate the Cooperative in its current cooperative form.

Tax Treatment

    The potential tax consequences of the reorganization to the Cooperative and its members are relatively complicated and will depend upon a number of factors. The following discussion summarizes the material aspects of these potential tax consequences; however, if the reorganization is completed, this analysis will have to be updated as of the date of the reorganization. Although we do not expect that the updated analysis will vary significantly from the information presented below, we cannot assure you that the results will be the same as provided in the examples below and it is possible that some or all members will incur a taxable gain.

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    Tax Impact on the Cooperative.  The tax effect on the Cooperative is determined by calculating the difference between the fair market value of the Cooperative's assets at the time the reorganization occurs and the Cooperative's adjusted tax basis in those assets. We expect the Cooperative to incur some capital gain, although the exact amount of capital gain will not be determinable until the date of the reorganization. To provide you with an understanding of how the cooperative level tax is calculated, we have calculated the estimated tax impact on the Cooperative as if the reorganization had occurred on November 30, 2001, as an example.

    To determine the fair market value of the Cooperative's plant, property and equipment and certain investment assets, the Board of Directors engaged Mid-States Appraisal Services, Inc., who delivered an appraisal report to the Board determining the fair market value of those assets as of June 30, 2001. The appraisal report must be updated as of the reorganization date and is described in more detail under the section entitled "The Appraisal." Other assets of the Cooperative (consisting of cash, cash equivalents, accounts receivables, inventories, margin deposits, prepaid expenses and other miscellaneous assets) were valued at their book value as of November 30, 2001. Based upon these valuations, the taxable gain to the Cooperative if the reorganization had occurred on November 30, 2001 would have been calculated as follows:

    The amount of the actual taxable gain to the Cooperative will depend upon the results of the updated appraisal report and the book value of the other assets as of the reorganization date.

    Tax Impact on Members.  The tax effect on individual members is determined by calculating the difference between the fair market value of the distribution of LLC capital units to each member and the member's individual adjusted tax basis in his or her shares of equity stock. We expect that most members will incur a small capital loss, although the exact amount of capital loss will not be determinable until the date of the reorganization and it is possible that some or all members will incur a capital gain.

    For tax purposes, the aggregate fair market value of the distribution of LLC capital units is simply the value of the total assets minus the accrued cooperative level taxes and the Cooperative's liabilities. This aggregate value is then divided proportionately among the members on a per equity share basis, and then adjusted for any appropriate discounts for minority interests and lack of marketability.

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Accordingly, to continue with the example set forth above, if the reorganization had occurred as of November 30, 2001, the value of the distribution to members would have been calculated as follows:

*

Based upon the opinion of Mid-States Appraisal Services, Inc. See "The Appraisal—Discounts for Lack of Marketability and Minority Interests" for further discussion.

    Although the value per share of the liquidating distribution will be the same for all members, the calculation of the actual tax gain or loss to individual members will vary depending upon each member's actual adjusted tax basis in his or her shares. Generally, your adjusted tax basis is equal to your original purchase price (as adjusted for our 1998 three for two stock split, if applicable) plus your retained distributions and retained allocations in the Cooperative. To provide you with an understanding of how the member level tax is calculated, we have calculated the adjusted tax basis and estimated tax impact on a per share basis for three sample members, who purchased shares at different prices and at different times, as if the reorganization had occurred on November 30, 2001, as examples.

*

Totals may not compute exactly due to rounding adjustments.

**

Assumes value of distribution at $1.87 per share as calculated above. The actual value of the distribution as of the reorganization date may vary

    In the examples shown above, Member A incurs a slight tax loss, Member B incurs a slightly higher tax loss, and Member C incurs a relatively significant tax loss. However, these are only examples

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and they do not show all the possible combinations of purchase price and tax effects. In considering the tax effects on you, please keep the following in mind:

•

If you purchased all your shares in our original equity offering in 1995 and the actual value of the distribution determined as of the reorganization date does not vary by more than $0.15 per share from this example, you will not incur a capital gain.



•

If you purchased shares after the original offering you will have to determine your adjusted tax basis to calculate the gain or loss on your shares.



•

If you purchased your shares at different times and/or different prices, the adjusted tax basis for each lot of shares you acquired must be calculated separately.



•

If you acquired shares through a gift or inheritance, your adjusted tax basis will be determined under the tax code. Under current law, the basis of property acquired by gift, for purposes of determining gain, is equal to the donor's basis, but for purposes of determining loss, is equal to its fair market value of the time of the gift, if less. Property acquired by will or inheritance generally has a basis equal to its fair market value as of the date of the donor's death.



•

If the value of the appraised assets rises significantly in the updated appraisal report, if the IRS successfully challenges the appraisal report or if the book value of our other assets increases significantly, some or all members could incur a taxable gain.

    Finally, you will be required to apply all your adjusted tax basis to the calculation of your taxable gain or loss and none can be carried forward in your new LLC capital units. Your basis in the LLC units you receive will be the fair market value of those units at the time of distribution, which would have been $1.87 as of November 30, 2001, in the example discussed above. If you incur a significant loss, you will realize it all at the time of the reorganization in 2002, but you may not be able to use these losses to offset gains if you do not have sufficient capital gains from passive activities.

Accounting Treatment

    For financial statement purposes, the transfer of interests between the Cooperative and the new LLC would have resulted in a gain of $1,011,691 based on the appraised value of the Cooperative's plant, property and equipment and certain investment assets as of June 30, 2001, and the book value of certain other assets as of November 30, 2001. The Cooperative will have to pay income tax at a corporate rate of 34% on any taxable gain, and accordingly, would have incurred a tax liability of approximately $343,975 if the transaction had taken place as of November 30, 2001. The actual amount of taxable gain will be determined based upon an updated appraisal and balance sheet as of the reorganization date. This amount will then be netted with other liabilities as a deduction from the fair market value of the assets to arise at the value of the distribution in liquidation of the cooperative organization. For financial statement purposes, the transfer of interests between the Cooperative and the new LLC will be accounted for as an exchange between related parties. As a result of the exchange, the Cooperative will be dissolved and the LLC's capital units distributed to the members of the Cooperative at a rate of one LLC capital unit for each share of equity stock of the Cooperative.

Regulatory Approval

    Other than the Securities and Exchange Commission declaring effective the registration statement on Form S-4 of which this information statement/prospectus forms a part, and the approval of any necessary state securities authorities, no federal or state regulatory requirements must be complied with or approval must be obtained in connection with the proposed reorganization.

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Federal Securities Law Consequences

    Under the federal securities laws, capital units of the new LLC received in the reorganization by persons who are not "affiliates" of the new LLC as defined under the Securities Act of 1933, may be resold immediately, as long as they are sold in accordance with the Operating Agreement of the new LLC. Capital units of the new LLC received in the reorganization by affiliates of the new LLC may be resold only pursuant to further registration under the Securities Act, in compliance with Rule 145 under the Securities Act, or in transactions that are exempt from registration under the Securities Act. These restrictions are expected to apply to the managers and executive officers of the new LLC.

    This document cannot be used in connection with the resale of capital units received in the reorganization by persons who are affiliates of the Cooperative or the new LLC.

Conditions of the Reorganization

    The completion of the reorganization depends on the satisfaction of a number of conditions, including:

•

receiving the approval of the reorganization by 75% of the Cooperative's members who vote at the special meeting, either in person or by mail-in ballot;



•

not receiving any legal orders prohibiting the reorganization; and



•

not receiving any orders from the Securities and Exchange Commission revoking the effectiveness of the registration statement related to this offering.

APPRAISAL

    Because of the importance of establishing a reasonable estimate of the Cooperative's fair market value in evaluating the tax consequences of the proposed reorganization, we have retained Mid-States Appraisal Services, Inc. of Salina, Kansas to appraise and determine the fair market value of the Cooperative's soybean crushing facility and certain investment assets, and to establish appropriate discounts to the Cooperative's stock. The Cooperative's management used the valuations and conclusions reached by the appraiser to calculate the per share value of the liquidating distribution to members, as set forth under "The Reorganization—Tax Treatment."

    Since 1983, Mid-States Appraisal Services, Inc., has engaged in the valuation of over 820 agribusiness, commercial and industrial properties, facilities, and/or businesses for clients in various states. These appraisals have included grain elevators, feed mills, flour mills, edible bean plants, popcorn plants, soybean/canola processors, wholesale and retail fertilizer plants. The appraiser is certified in six states on a full-time basis.

    Mid-States Appraisal Services, Inc. has issued a Complete Appraisal in a Summary Report Format as of June 30, 2001, which will be updated when the reorganization is consummated. The appraiser's analysis and conclusions are discussed below. Although we do not anticipate any events or circumstances that would cause the valuation contained in the updated report to change significantly, there may be changes in our business or industry that will affect the final valuation in the updated appraisal report. The appraisal report does not constitute a recommendation as to how any member of the Cooperative should vote on the reorganization.

    The Cooperative's Board engaged the appraiser to perform the appraisal in connection with its consideration of the reorganization into a limited liability company; however, the Cooperative did not provide any valuation figures to the appraisal firm. As described below, the Cooperative did provide the appraiser with information about the appraised property, financial forecasts, and plans and specifications for the expansion of the soybean processing plant and processes.

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Summary of the Appraisal Report

    Based upon its investigation and analysis of the information gathered, Mid-States Appraisal Services, Inc. formed the opinion that the market value of the Cooperative's soybean processing plant as a going concern, including the business enterprise, real estate, buildings and equipment, as June 30, 2001, was $33.9 million, and that the aggregate fair market value of certain other investment assets was $522,133, as outlined in the appraisal report. In addition, the appraiser gave his opinion that applying 5% discounts for lack of marketability and minority interest would not be inappropriate. The value conclusion reached is subject to the assumptions and limiting conditions as set forth in the appraisal report. The appraisal conforms to the Uniform Standards of Professional Appraisal Practice and to guidelines issued under Title XI of the Federal Financial Institution Reform, Recovery and Enforcement Act of 1990, in accordance with Part 34, 12 CFR.

    Subject Property of the Appraisal.  The subject property of the appraisal report is the going concern (business enterprise) and the fee simple estate of the soybean crushing operations and related assets of the Cooperative located near Volga, South Dakota.

    Purpose of the Appraisal.  The purpose of this appraisal was to develop an opinion of the market value of the Cooperative's soybean crushing facility and certain investment assets for the evaluation of converting the Cooperative into a limited liability company or other entity.

    Definitions.  The appraisal uses the following definitions of "market value" and "business enterprise" from the Uniform Standards of Professional Appraisal Practice:

    Market Value.  The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of good title from seller to buyer under conditions whereby:

•

buyer and seller are motivated;



•

both parties are well informed or well advised, and acting in what they consider their own best interests;



•

a reasonable period of time is allowed for exposure in the open market;



•

payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and



•

the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted to anyone associated with the sale.

    Business Enterprise.  A business enterprise is a commercial, industrial or service organization pursuing an economic activity. This also includes the "going concern value", which is the value of the enterprise or an interest therein as a going concern, or the difference between tax depreciated book value of the assets or business and the market value estimate of the assets or business.

    Highest and Best Use.  The appraisal concludes that if the Volga site were vacant, its highest and best use would be for an industrial usage, such as the current use if specific demand exists, and that the highest and best use of the property as improved is to continue its specialized use in the grain services area, specifically, soybean crushing. The criteria considered in determining the highest and best use include legal permissibility, physical possibility, financial feasibility and maximum profitability.

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Scope of the Appraisal

    The appraisal report provides conclusions regarding the following:

•

the going concern (business enterprise) value of the soybean crushing plant, including the underlying ownership rights of fee simple estate on owned land, with merchantable title to all rolling and portable equipment;



•

the value of certain investment assets; and



•

appropriate discounts and discount rates.

    The appraisal report has been prepared in compliance with the Uniform Standards of Professional Appraisal Practice. In connection with the preparation of the appraisal report, Mid-States Appraisal Services, Inc., among other things,

•

made a physical inspection of the site;



•

interviewed certain officers and line operating personnel;



•

reviewed financial reports for the fiscal years ended August 31, 2000 through August 31, 1996 along with current year-to-date information ended June 30, 2001;



•

gathered information regarding the subject property from courthouse records and the personal inspection of the subject property;



•

collected and verified data from reliable local and state governmental offices, buyers/sellers, brokers, and financial institutions; and



•

conducted sales research in the immediate area of the subject property.

    Identification and evaluation of environmental hazards and Americans with Disabilities Act compliance issues were not considered in the scope of the appraisal.

Valuation of Plant, Property and Equipment

    The appraisal considered the cost, income capitalization, and sales comparison approaches to valuation in determining the fair market value of the Cooperative's plant, property and equipment. The following is a summary of the results of the appraiser's analysis, which is described in further detail in the subsequent sections:

    The Cost Approach.  The cost approach basically estimates value by determining how much it would cost to build a new or replace an existing facility. Specifically, the value of the property is estimated by determining the dollar amount to construct an exact duplicate of the property at current prices (or the dollar amount to construct a facility having the same utility), less depreciation, plus the

21

value of the landsite. The appraiser developed an approximately $33.9 million indication of value for the soybean processing plant based upon the cost approach, calculated as follows:

*

Includes land, buildings and fixed equipment, and going concern value of business enterprise.

    Site Valuation.  In estimating site value, the subject property's sites are compared with other sites in order to estimate the value of the site as if vacant and ready for development. Based upon four sales in the immediate area of the Volga plant between 1993 through 2000, including two sales involving portions of the subject property, and the appraiser's experience with similar sites adjacent to railroad and highway in other communities, the appraiser estimated the market value of the site at $5,000 per acre if it were vacant and ready for development. Accordingly, the appraiser calculated the estimated market value of the approximately 46.84 acre plant site at $234,200. In this case, the cost of land is included in the calculation of the reproduction cost of the plant described below.

    Reproduction and/or Replacement Costs.  The appraiser estimated reproduction or replacement costs through the use of the Marshall Valuation Service, consultation with suppliers and contractors in the industry, and actual construction costs times current multipliers. The appraiser consulted with seven outside suppliers that the appraiser has contacted on an ongoing basis since 1983 for cost information on new construction of agribusiness properties and used the following six new cost comparables on the construction of soybean processing plants, as adjusted for inflation.

*

Tons of soybeans processed per day.

    Excluding the facilities with an oil refinery and related grain assets, the new cost comparables indicate mill processing equipment can be added at a cost in the range of $14,461 per ton to $15,750 per ton of productive capacity. One of the most recently completed plants in the United States is the Cooperative's property in Volga, South Dakota, which was completed in the late summer of 1996. The proposed cost of this facility from the ground up, including land cost and all infrastructure including grain assets and related crushing mill assets, was $21,333 per ton of productive capacity based on its original size of 1,500 tons per day, and was subsequently upgraded to a 2,400 tons per day plant. The reported total cost of the facility, as expanded, was $42.0 million, or $17,500 per ton of capacity. Based on the foregoing analysis, the appraiser has estimated the reproduction cost of a new 2,400 tons per day facility in 2001 at $43,399,200 million, or $18,083 per ton of capacity, including all the fixed assets, such as land, buildings and fixtures.

22

    The appraiser estimated the new reproduction cost of the plant's rolling and portable equipment, such as office furniture, computers, software, information systems, vehicles and miscellaneous shop equipment, at $780,000.

    Depreciation.  Depreciation refers to physical depreciation, functional obsolescence and external or economic obsolescence. Physical depreciation is a loss in value due to physical deterioration. Functional obsolescence is the loss in value due to lack of utility or desirability of part or all of the property. Thus, a new structure or piece of equipment may suffer depreciation when built. Physical and functional depreciation is calculated based upon the age life method, whereby the effective age of the plant, either actual or based on condition, is divided by the economic life of the plant. External or economic obsolescence is the loss in value due to causes outside the property and independent of it, such as lack of volume, gross margins, expense control, competition or a combination of these. Economic obsolescence lowers net operating income on the income statement.

    The appraiser calculated total estimated physical and functional depreciation of the fixed assets to be approximately 13% based upon 5 years of operations out of an economic life of 40 years, which is considered typical for a plant with a high percentage of machinery and equipment. Economic obsolescence of the fixed assets was estimated to be 10% based upon the historical analysis of the plant summarized under the discussion of the income capitalization approach below. The appraiser calculated the total depreciated value of the fixed assets to be $33,478,750.

    The appraiser applied depreciation factors ranging from 40% to 75% to the reproduction cost of the plant's rolling and portable equipment, resulting in total depreciated value of such equipment of $412,000.

    The Income Capitalization Approach.  The income capitalization approach is a technique in which the anticipated net operating income of a business is projected at a rate commensurate with the current market which would attract a prudent owner/operator to this type of investment, thereby reflecting the value of the income-producing investment. The appraiser developed an approximately $32.3 million indication of value using the income capitalization approach based on our historical performance selling crude soybean oil and our other products, calculated as follows:

    The income analysis, and/or income projection and results thereof calculated by the appraiser are based upon assumptions believed to be reasonable by the appraiser. However, there is no warranty, representation or guarantee of the reasonableness, accuracy or completeness of any such assumptions, projections or such analysis or the results thereof. The accuracy and completeness of the analysis depends upon, and will be affected by, future events and conditions, including but not limited to general economic conditions, none of which can be accurately predicted at this time with any degree of certainty.

    Calculation of Estimated Net Operating Income.  The appraiser reviewed the Cooperative's historical income and expense information for the fiscal years ended August 31, 1996 through 2000, as well as year-to-date income and expenses for the period ended June 30, 2001, to calculate anticipated net operating income. The appraiser then prepared a projected income and expense statement based on the "typical operator" (no unique capabilities) concept for this industry. This projected income statement relies on the following assumptions:

•

volume will be sustained at or above 24.6 million bushels of soybeans annually;

23

•

annual margins will be sustained at or above the four-year average from 1997 through 2000; and



•

expenses will be those typical for the industry and the subject.

    The appraiser analyzed the Cooperative's financial information from inception through the date of the appraisal report. Adjustments were made to the operating statement to account for all interest expense and all depreciation expense, resulting in an addition to net income. Subtractions were made in the areas of reserve for wasting assets, since our facility is a processing plant with more than half of its value made up in machinery and equipment which sustains a substantial amount of obsolescence, wear and tear over the years. Therefore, reserves must be maintained in order to keep the plant at essentially the same operating level through its economic life. Also, an estimate for working capital expense was made based on the business having no "free" working capital on its balance sheet and borrowing all of its working capital needs. This has been estimated at 5% of gross margins based on the appraiser's experience of plants in the agribusiness industry. Patronage accrued has been adjusted downward (70%) to account for its cash equivalency. Only 30% of the patronage is paid in cash, and the balance has a long redemption time.

    These total adjustments were then added to or subtracted from the stated net income to calculate an adjusted net operating income before depreciation, debt service, and income taxes, resulting in a historical annual average of approximately $6,165,000 in net income. Our industry does have significant changes in its net income over time because of the volatility in the pricing of its commodities, which are all involved in a world marketplace. Thus, the appraiser concluded that the historical annual average is considered to be the best indicator of its near term future and the value.

    Calculation of Capitalization Rate.  The capitalization rate is the rate of return used in calculating the present value of future periodic payments or earnings. Since properties or businesses are generally purchased with a combination of debt and equity capital, one technique to determine the capitalization rate is through long-term interest rates, which measure return to debt holders, and equity dividend rates, which measure return to equity owners.

    A lender usually anticipates receiving a competitive interest rate based on the perceived risk of the investment and a requirement that the loan principal be repaid through periodic amortization, usually a period of years. Owners/operators (equity investors) anticipate receiving a competitive equity cash return based on the perceived risk of the business or they will invest their funds elsewhere. The overall capitalization rate must satisfy the market return requirements for both lenders and equity owners. This requires establishing appropriate estimates of the interest rates and other loan terms, the equity dividend rate and the debt to equity ratio.

•

Interest Rates and Terms. The appraisal report states that the appraiser has surveyed numerous lenders over the years in regard to their willingness to provide "typical" financing to the marketplace on special purpose agricultural properties such as a grain elevator. Typically, these lenders, which would include many national lenders, are in the range of prime rate to prime plus one. The interest rate is somewhat sensitive in regard to the credit worthiness of the borrower; however, the market as a whole may not all be prime or subprime borrowers. Therefore, the appraisal report assumes that "typical" is prime plus one percent. Amortization schedules also are a variable. Again, in surveying many lenders many of which are national in scope, the appraiser reported that this could range from a low of seven years to a high of 15 years with most typically being in the range of 10 years. The loan constant used in the calculation of the capitalization rate is a function of the interest rate, the frequency of the amortization, and the amortization term of the loan.



•

Equity Dividend Rate. With regard to equity dividend rates, the appraisal report notes that the extraction of equity dividend or overall rates out of comparable sales is very difficult due to lack of information. The appraiser reports that numerous large clients in their publications and in

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conversations with him have indicated what they consider to be the equity dividend for these types of properties which have significant risk. This has ranged from a low in some cases of 15% to 20% to a high of 30% because of significant risks. Therefore, the appraisal report considers an equity dividend rate of 25% to be normal. Again, special circumstances, newness of the property, uniqueness of the territory, market considerations and concentrations could all affect the prospective of an owner in regard to their equity dividend requirements.

    Based on the foregoing considerations, in determining an appropriate capitalization rate for the Cooperative, the appraiser assumed:

•

a loan for 70% of the required capital is available at a 7.75% fixed interest rate (prime rate was 6.75% on June 30, 2001, plus 1.0%), with a 10 year amortization schedule;



•

the remaining economic life of the business is equal to or in excess of 10 years; and



•

the owners in this type of property would typically require a 30% equity dividend rate before taxes because of risks.

    The appraiser then calculated the estimated overall capitalization rate to be 19.08%, as follows:

    This result is consistent with the appraiser's discussions over the years with large national owners such as ADM, ConAgra, Cargill, Inc., Farmland Industries, and Koch Industries, in which they have agreed that an overall capitalization rate on an adjusted net operating income before depreciation, debt service, and income taxes of 18% to 22% is within their realm of requirements.

    The Sales Comparison Approach.  The sales comparison approach uses sales of like or similar businesses to estimate value. The appraiser developed a $35.4 million indication of value for the business enterprise using a sales comparison approach based on an average of the four most recent sales of plants in the industry.

    In the appraisal of any income producing property, the analysis of known sales of comparable properties is generally one of the most reliable tools available to the appraiser in the formation of an opinion of value. Under the principle of substitution, the value of any item cannot reasonably be considered to be in excess of the amount of money for which an equal or equivalent property can be acquired.

    One means of comparing soybean processing plants is on a dollars per ton day of crushing capacity, with the differences reflected as upward or downward adjustments for dissimilar characteristics. Based on the information available from the sales of soybean crushing facilities, it was the opinion of the appraiser that the market value of the subject property which includes land, buildings, improvements, rolling and portable equipment as an operating unit, was approximately $35.4 million, calculated as follows:

    2,400 tons per day of crush capacity ($14,750 per ton) =  $35,400,000

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    Summary Of Comparable Sales Data.  The appraiser researched the market and found the following 11 sales of like or similar facilities that have occurred in a time period from 1984 through 2000.

(1)

Adjusted sale price after removal of refinery.

(2)

Leased fee estate sale.

    The sales that occurred in the industry in the mid-1980s were during a time period of low net operating incomes and severe financial pressures in the soybean crushing industry. This resulted in consolidation of the industry into larger, potentially more efficient, operations. The late 1980s through the mid-1990s was characterized by higher crushing margins in the industry. The sales that have occurred in the 1990s at Guntersville, Alabama, Goodland, Kansas, Chesapeake, Virginia, and Enderlin, North Dakota indicate a substantially higher price. The recent sales at these four locations have occurred in a price range from $12,125 per ton of productive capacity to $17,672 per ton of productive capacity. The plants at Goodland, Kansas and Enderlin, North Dakota, are sunflower crushing plants; however, they have all the physical internal and external capabilities of a soybean crushing plant, since sunflowers are also an oilseed crop.

    The overall average of the four most recent sales is $14,750 per ton of crush capacity per day. Considering the newness of the subject to the comparables and its location in a good production area, a slight positive adjustment is considered relevant. However, considering the recent economic downturns in the industry in the last year and the closure of other plants in the United States that were less economically viable, the appraiser noted a continued risk in this market. This would account for a slight negative adjustment. In the appraiser's opinion, these adjustments cancel each other out. Therefore, the appraiser considered the average of the four most recent sales as the most reasonable.

    Market Value Estimate.  The differences in the value estimates discussed above are due primarily to the area of emphasis in the approach:

•

the Cost Approach emphasizes reproduction or replacement cost new less estimated depreciation in all forms;



•

the Income Capitalization Approach emphasizes profitability and return on investment; and



•

the Sales Comparison Approach emphasizes comparable sales with allowances for dissimilar characteristics.

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    The Cooperative owns and operates a 2,400 tons per day soybean processing plant. It does not have an edible oil refinery included in its operation. This requires the plant to sell its oil to a refiner for further processing. This is typical of many soybean processing plants. The facility is in near new condition (built in 1996). All three approaches have been considered in this value conclusion. Based on indications from the Income Capitalization Approach, the appraiser concluded that there is external obsolescence, which is a factor outside the property that affects its value. It is usually a lack of volume, gross margins, expense control, competition, or the combination of all these factors. The appraiser indicated that he placed the greatest emphasis on the Cost and Income Capitalization Approaches.

    Accordingly, based on the appraiser's investigation and analysis of the data gathered, the appraiser formed the opinion that the market value of the subject property as of June 30, 2001, was Thirty-Three Million Nine Hundred Thousand Dollars ($33,900,000).

Valuation of Investment Assets

    The appraisal report also provided an estimate of market value for certain investment assets held by the Cooperative. These assets included allocated and accrued patronage from CoBank and Cenex Harvest States and the Cooperative's 4% investment in Urethane Soy Systems Company, Inc. Based on the appraiser's experience, the column labeled "Current Market Value" is the appraiser's estimation of the market value of these assets by category. In summary, the appraiser estimated a current market value of these assets and investments of approximately $520,000, calculated as follows:

(1)

CoBank patronage is discounted to a net present value based on a 15 year payout and a 12% rate of return. This soybean processing business has an overall rate requirement in the range of 19% to justify its values. However, the stock market has been capable of returning in the range of 11% to 12% over time. Thus, the appraiser applied a 12% discount rate.

(2)

The Cenex Harvest States patronage of approximately $3.25 million has an extremely long redemption window. On that basis, the appraiser noted that in his experience this type of stock, similar to Farmland Industries, has traded in the range of near nothing to upwards of 10% of its face value. Thus, the appraiser allocated 5% of its face value as its current market value.

(3)

The 4% investment in Urethane Soy Systems Company, Inc. stock is in a company that has not generated a profit and is still in the conception/startup stages. It is very similar to a "dot com" start-up company in an industry in which numerous failures have occurred. Thus, the appraiser allocated only a minimal value of $10,000 to this investment.

(4)

The accrued patronage on Cenex Harvest States for the current year is estimated at $972,250. Cenex Harvest States pays 30% of such amount in cash. Thus, the appraiser discounted the face value of this asset to its cash value equivalent of 30%.

Discounts for Lack of Marketability and Minority Interests

    Finally, the appraisal report addressed appropriate discounts to the value of the Cooperative's outstanding stock for lack of marketability and minority stock. The Cooperative is owned by individual

27

members with no one owning a sufficient portion of common stock to exercise control. The appraiser concluded that it would be considered a closely held corporation and its stock would suffer from discounts for lack of marketability and minority issues.

    Lack of Marketability Discount Discussion.  A discount for the lack of marketability has been recognized by courts, valuation experts, and the IRS as a cost inherent in stock companies in which there is no ready market for the shares. Usually, the discount for lack of marketability is tied to the expectation of how long it will take to convert the business interest into cash. The items that may affect the size of a marketability discount include:

•

size of the interest;



•

financial condition of the company;



•

limited market for the stock; and



•

dividends paid by the company.

    The Cooperative has paid dividends to its members, which have fluctuated over time. Also, current members must be agricultural producers and owning stock includes a delivery requirement for soybeans. Excluding the special nature of current ownership and considering the market as a whole, the appraiser concluded that the Cooperative's stock would suffer from a lack of marketability. The appraisal report indicates that there have been many studies on the lack of marketability discounts, and that collectively, these studies have shown over time a mean discount of up to 32.6% for lack of marketability. In a supplemental letter from the appraiser dated December 11, 2001, the appraiser gave his opinion that a 5% discount on members' interests in the Cooperative for lack of marketability would be conservative, based on all relevant market data and studies.

    Minority Discount Discussion.  A minority interest discount addresses situations in which an owner owns less than 51% of the stock and therefore has limited to no control of financial, operational or other aspects of the company. The discounts for minority purposes are above and beyond discounts for lack of marketability. The concept of non-controlling ownership interest deals with a relationship between the ownership interest being valued in a total business enterprise. The concept of marketability deals with the liquidity of the subject's ownership interest, i.e., how quickly it can be converted to cash. These discounts have an intertwining relationship. It was the appraiser's opinion that in a minority situation discounts by themselves ranging upwards to 30% would not be considered unusual, based in part upon information gathered by the appraiser independently from this appraisal on a closely held corporation involved in agribusiness that has repurchased minority stock over a period of years. In a supplemental letter from the appraiser dated December 11, 2001, the appraiser gave his opinion that a 5% discount on members' interests in the cooperative would be conservative, based on all relevant market data and studies.

    Application of Discounts.  Lack of marketability and minority discounts must be utilized in the final valuation of the stock. These discounts are taken sequentially, one after the other. Thus, the estimated market value of the shares to be valued are subject to the lack of marketability discount estimate. The remainder is then subject to a minority discount estimate, which leaves a remaining value which is the estimation of market value of the subject stock after all necessary steps in regard to valuation have been considered. With the marketability and minority discounts taken sequentially, the total discounts are then a lump sum estimate of the total discount from the starting value on the subject stock.

Conclusion

    The appraisal report described in the foregoing discussion will be updated as of the date of the reorganization. Other than Mid-States Appraisal Services, Inc.'s commitment to provide an updated Appraisal Report as of the reorganization date, the Cooperative has no plans, formal or informal to engage Mid-States Appraisal Services, Inc. for any other valuation assignment. The complete Appraisal Report is included as an exhibit to the registration statement of which this document forms a part. See "Where to Find More Information" to find out how to get a copy.

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SELECTED FINANCIAL DATA

    The following table sets forth selected financial data of South Dakota Soybean Processors. The audited financial statements included in Appendix C to this document have been audited by Eide Bailly LLP, independent auditors.

    Historically, the Cooperative's fiscal year end has been August 31; however, because the new LLC's fiscal year end will be December 31 of each year, the Cooperative has prepared historical financial statements as of December 31, 2000, 1999 and 1998. You should read the financial data presented below along with "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as the financial statements and related notes that we have included at the end of this document.

*

Adjusted for 1998 three for two stock split.

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    You should read the following discussion along with our financial statements and the notes to our financial statements included elsewhere in this prospectus. The following discussion contains forward-looking statements that are subject to risks, uncertainties and assumptions, including those discussed under "Risk Factors" and described in this prospectus generally. Our actual results, performance and achievements may differ materially from those expressed in, or implied by, these forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Information."

Overview

    Upon completion of the reorganization, the new LLC will own the assets and liabilities of the Cooperative, which owns and operates a 80,000 bushel per day soybean processing plant which produces crude soybean oil, soybean meal, soybean hulls and other products. The plant began production in late 1996. To date, the LLC has had no operations. Accordingly, this section discusses the financial performance, results of operations and capital resources of the Cooperative.

    Historically, the Cooperative's fiscal year end is on August 31; however, because a limited liability company must generally have a fiscal year end that coincides with the fiscal year end of most of its members, the new LLC's fiscal year end will be December 31 of each year, commencing December 31, 2001. Accordingly, the Cooperative has included audited historical financial statements as of December 31, 2000, 1999 and 1998, and its unaudited results for the nine-month periods ended September 30, 2001 and 2000.

Background and Objectives

    South Dakota Soybean Processors, which is referred to locally as SDSP, is a farmer-owned new generation cooperative with 2,097 members, who are primarily residents of the Dakotas, Minnesota and Iowa. Initial equity invested by our members totaled $21,001,519 as of October 31, 1996. We have completed our fifth year of operations, all which have recorded a profit. Since operations began, the Board of Directors has distributed a total of approximately $15.5 million in cash patronage to our members which constitutes approximately 63% of the total $24.6 million in declared patronage through the first five years of operations.

    Our business was built on the model of a commodity processor. We remained successful in 1999 and 2000 even though the oilseed industry suffered historically low margins. Two key factors contributed to this success:

•

Additional capital investments of $9.2 million allowed us to increase daily production from 50,000 bushels per day to 80,000 bushels per day. Without these additional investments, which enabled us to operate as a "low cost producer," we would have recorded significant losses in fiscal 1999 and 2000.



•

We started with a strong equity position ($21 million equity out of a $34 million total project cost).

    Our primary focus for the next five years is summarized as follows:

•

Maintain our competitive position in the traditional soybean crushing market. Soybean crushing is a mature and highly competitive industry. Producing a high quality product, while operating a highly efficient operation at the lowest possible cost, maintains our competitive position. We plan to increase production capability from 80,000 bushels per day to 100,000 bushels per day in the next five years.



•

Move our products up the value-added food chain. All of our products—soybean meal, soybean hulls and crude soybean oil—are considered commodities which are priced in the open market.

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Our objective is to generate 50% of our revenue stream from value-added products that are commodities which have been further processed and can generate higher margins. Currently, our primary focus is on products made with soybean oil. We are reviewing industrial applications in plastics and energy along with refining soybean oil for human consumption.

•

Develop additional strategic alliances, such as those with Urethane Soy Systems Company, Inc. and Minnesota Soybean Processors to help meet our overall goals and objectives. We are negotiating a potential alliance for refining soybean oil and investigating other opportunities.

Results of Operations

Comparison Of Nine Months Ended September 30, 2001 And 2000.

    Net sales increased $4.1 million, or 4%, for the nine months ended September 30, 2001, as compared to the nine months ended September 30, 2000. There were an additional 6,600 tons of meal sold (1.5%) in 2001 compared to the nine months ended September 30, 2000, and 11.0 million (5%) fewer pounds of oil sold in 2001 compared to 2000. Higher cash prices of meal accounted for $4.9 million of increased sales, additional hull sales volume contributed $200,000 and these were offset by the reflection of the lower cash price for oil, or $1.1 million. The average sales price per ton of meal for the nine months ended September 30, 2001 was $170.20 compared to the average of $160.82 for the same period in 2000. Among other factors, the higher sales price reflects additional freight expenses of $1.5 million for the nine-month period ended September 30, 2001 compared to the same period in 2000, because all freight expense that we incur is offset by adding it to the cost of the contract. Discount revenue was $100,000 higher in 2001 than 2000.

    An additional $854,000 of net income was attributed to increased patronage income from Cenex Harvest States, resulting from an adjustment to our original estimate for 2000, after actual values were allocated in 2001. Patronage income is estimated based on a combination of the prior year's allocation and information provided in Cenex Harvest State's latest published SEC Report on Form 10-Q. We use a very conservative approach when estimating this amount, and then adjust our estimate when actual amounts are allocated.

    Cost of goods sold, which includes production expense, increased $2.0 million in the nine months ended September 30, 2001, as compared to the same period in 2000. Freight expense increases, which are passed on to our customers as increases in the sales price as discussed above, accounted for $1.5 million in increased cost of goods sold for the nine-month period ended September 30, 2001, as compared to the same period in 2000. Utility costs were $725,000 higher in the nine months ended September 30, 2001, compared to the nine-month period ended September 30, 2000. The 28% increase was a result of increases in natural gas prices. Our normal rates for natural gas range in the $2 to $4 per million BTU's; whereas, the winter of 2000-2001 presented rates as high as $10 per million BTU's. Alternative fuel sources were used where economically feasible, such as burning diesel fuel and crude soybean oil in our boiler.

    Marketing and administrative expense was $1.5 million for the nine months ended September 30, 2001 compared to $1.2 million for the nine months ended September 30, 2000, an increase of $256,000 or 20%. This increase was primarily the result of the bonus arrangement that allocates up to 5% of net income back to our employees and increased salary expense.

    Interest expense for the nine-month period ended September 30, 2001 was $348,000 compared to $763,000 for the same period ended September 30, 2000. The average borrowed balance for the nine months ended September 30, 2001, was $10.1 million, compared to $13.2 million average borrowings for the nine months ended September 30, 2000, contributing to lower interest expense. In addition to the lower amount borrowed, the interest rate was reduced drastically during this period. Between January 1, 2000 and September 30, 2001 our interest rate dropped 2.73% or from 7.69% to 4.96% due to reductions in prime lending rates.

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    Net income for the nine months ended September 30, 2001 was $5.3 million compared to net income of $2.1 million for the same nine-month period ended September 30, 2000. The 141% increase of $3.1 million was primarily the result of higher gross commodity margins in the 2001 period. We locked in board crush margins averaging 42.4¢ per bushel in the nine months ended September 30, 2000. For the same period in 2001, board crush margins were locked in at 64.8¢ for a gain of 22.4¢, or 53%.

Comparison Of The Years Ended December 31, 2000, And 1999.

    Net product sales quantities increased by 10%, or 70,000 tons, between the years ended December 31, 2000 and 1999. Net sales in dollars increased by 13%, reflecting an increase in sales prices of the commodities, together with increased quantities sold. This was primarily a result of meal prices. The average cash price of meal for the year ended December 31, 2000 was $158.67, compared to only $128.70 in 1999, a 23% increase.

    Patronage income for the year ended December 31, 2000, was $1.8 million compared to only $661,000 for the year ended December 31, 1999. The increase was due to an adjustment of our estimate to reflect the higher values presented in Cenex Harvest State's SEC filings (from 21 points, $.0021, per pound to 42 points, $.0042, per pound), and an additional 18.1 million pounds of oil shipped to Cenex Harvest States in the 2000 calendar year.

    Cost of goods sold reflected an 11% increase between the periods ended December 31, 2000 and 1999. This increase was a result of a 10% increase in quantity shipped, and an increase in board crush margins. Average board crush margins were locked in for the year ended December 31, 2000 at 47.17¢ per bushel crushed, and were only 28.16¢ per bushel crushed for the year ended December 31, 1999. Board crush margin effects are netted in the cost of goods sold amount presented in the Selected Financial Data.

    Marketing and administrative expenses were approximately the same for the year ended December 31, 2000 compared to the same period in 1999.

    Interest expense for the year ended December 31, 2000 was $1.1 million compared to the $723,000 for the same period in 1999. This increase resulted from the additional borrowings needed to operate the facility due to the low income during the first two quarters of 2000.

    Net income for the year ended December 31, 2000 was $5.8 million compared to $2.2 million for the year ended December 31, 1999. This represents an increase of 165%, or $3.6 million. Quarterly results during the year ended December 31, 2000 were extremely unbalanced. At the end of the second calendar quarter of 2000 we had a net loss of $545,000. During the third calendar quarter of 2000 we earned $2.7 million, and in the fourth calendar quarter we generated an additional $3.7 million of net income, as board crush margins began to increase back to normal levels.

Comparison Of The Years Ended December 31, 1999, And 1998.

    Net sales for the year ended December 31, 1999, were only $128 million compared to $161 million for the same period in 1998. This 26% decrease was primarily the result of the cash price of crude soybean oil declining significantly on the Chicago Board of Trade. In 1998, average crude soybean oil sold for $.2397 per pound, while in 1999 the price averaged only $.1609 per pound. This accounted for a difference of $21.6 million in revenue. This reduction in price contributed to the historically low board crush margins for that year. The quantity of meal sold actually increased in 1999 by 7,700 tons; however, crude soybean oil sales were 1.9 million pounds, or 0.67%, lower in 1999.

    Patronage income for the year ended December 31, 1999 was $661,000 compared to $1.1 million for the same twelve-month period ended December 31, 1998. The decrease was due to an adjustment of our estimate to reflect the actual values allocated by Cenex Harvest States for the 1998 year. Our estimate in 1998 was based on estimates from the 1997 allocation in 1998. The 1997 allocation was

32

based on a rate of $.00917 per pound sold. In 1998, the allocation was only $.00479 per pound. Accordingly, we recognized an adjustment of $278,000 in January 1999. The oil sold to Cenex Harvest States increased by 71%, or 114 million pounds in 1999. This was because more of our oil was sold to Cenex Harvest States, rather than delivered to the Chicago Board of Trade.

    Cost of goods sold reflects an 18% decrease between the periods ended December 31, 1999 and 1998. This decrease was the result of a 15% reduction in the price of soybeans and a decrease in board crush margins. Average board crush margins were locked in for the year ended December 31, 1998 at 47.17¢ per bushel crushed, and were only 28.16¢ per bushel crushed for the year ended December 31, 1999. Board crush margin effects are netted in the cost of goods sold amount in the Selected Financial Data.

    Marketing and administrative expenses were $307,000 less for the year ended December 31, 1999 compared to the same period in 1998. There were two primary causes for this. The first was that bonus expense was significantly reduced by $160,000 in 1999 due to the low net income, and secondly, legal expenses were significantly lower. In 1998 we were involved in settling construction disputes with two contractors and because of this incurred significant legal expenses of approximately $153,000.

    Interest expense for the year ended December 31, 1999 was $723,000 compared to the $1.0 million for the same period ended in 1998. This results from a reduction in borrowings needed to operate the facility, primarily caused by increased participation in the price later soybean program. As the price of soybeans fell, producers elected to participate in this program in hopes of recovery in the soybean price at a later time.

    Net income for the year ended December 31, 1999, was $2.2 million compared to $6.8 million for the same period in 1998. This represents a decrease of 70%, or $4.6 million. The second two calendar quarters of 1999 produced extremely low gross margins. During these months some of the lowest crush margins in the last several years were available for locking in on the Chicago Board of Trade. During those six months, our average crush margin was only 26.05¢ per bushel compared to the same time period in 1998 of 40.63¢ per bushel. Based on the 11.9 million bushels crushed for the period, this resulted in $1.7 million less margin in the second and third quarter of 1999. For the entire year, in 1998 we crushed 23.8 million bushels at average board margins of 44.51¢ per bushel, and in 1999 we crushed 24.6 million bushels at average board margins of 28.17¢ per bushel. In 1998, this generated $10.6 million of crush margin compared to only $6.9 million in 1999. In addition to the low crush margins presented in 1999, we had protein quality issues that contributed to the decreased income. In 1998 our average soybean meal protein was 47.25% compared to only 46.87% for the calendar 1999. This 0.38% difference can equate to a $1 to $3 per ton discount in meal sales price. Based on the 24.6 million bushels crushed in 1999, this reduced our margin by $1.1 million.

Liquidity and Capital Resources

    We intend to fund future working capital, capital expenditures and debt service obligations primarily through cash flows generated from our operating activities and from borrowings under our current revolving term loan agreement and our revolving working capital loan agreement, or similar replacement lines of credit. Management believes that cash generated from operating activities together with borrowing availability under our revolving loan agreements will be adequate to cover our working capital, debt service and capital expenditure requirements on a short term basis. However, if we pursue one or more of the expansion initiatives discussed below, we may need to consider other available options in connection with funding future working capital and capital expenditures needs, including the issuance of additional debt and/or equity.

    CoBank is currently our primary lender. CoBank is a financial institution that lends exclusively to cooperatives, so we will have to refinance our primary credit lines and any other outstanding debt to CoBank in connection with the reorganization as an LLC. However, CoBank has indicated that we would have at least a year following the reorganization to complete such refinancing and CoBank is

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working with us to find an alternative lender. We have already received proposals from several financial institutions and management does not believe that we will have difficulty securing alternative lines of credit on satisfactory terms.

    We have two lines established with CoBank to meet the needs of the company. The first is a revolving long-term loan agreement. The terms of this loan are as follows: as of May 17, 2001, we agreed to a $16.0 million credit line reducing $1.1 million every six months beginning March 20, 2002, and a final payment equal to the remaining unpaid principal balance of the loan on March 20, 2009. The revolving loan is set up so we can borrow funds as needed up to the credit line maximum, and pay down whenever excess cash is available. Once we pay it down, the credit line increases, and we have full access to borrow those funds again if needed. We pay a 0.5% annual commitment fee on any funds not borrowed.

    The second credit line is a revolving working capital loan agreement. The terms of this loan are as follows: a $6.0 million credit line is available during the months of October through January, and $2.0 million is available during February through September. The primary purpose of this loan is to finance inventory and receivables. During the months of October through January, it is not unusual to have a large supply of soybeans purchased and piled on the ground or stored. This is the reason that the loan balance is higher during those months, compared to the February through September period. Borrowing base reports and financial statements are required monthly to justify the balance borrowed on this line.

    Both CoBank loans are set up with a variable rate option. This rate changes weekly, on the first business day of each week. We have a fixed rate option on both loans allowing us to fix rates for any time period between one day and the entire commitment period. Every day rate quotes are presented to us, and are available for fixing. The balance borrowed on the revolving term loan was $9.1 million, and $13.4 million as of December 31, 2000 and 1999, respectively. The seasonal working capital loan had no outstanding balance on either December 31, 2000 or 1999.

    We have had two loans administered by the South Dakota Governor's Office of Economic Development. The first loan, from the Revolving Economic Development and Initiative Fund (REDI), was originally for $1.05 million, financed at 3% annually with a balloon payment after five years. The loan matured on December 1, 2001, and was fully paid. The second loan is an Agriculture Processing and Export fund loan (APEX). The principal was in the original amount $150,000 financed at 5% per annum. This loan has a balloon payment at the end of six years, December 1, 2002. Payments on the REDI loan were $42,589 for the year ended December 31, 2000, and $41,314 for the same period in 1999. Payments on the APEX loan were $5,208 for the year ended December 31, 2000, and $4,951 for the same period in 1999.

    We have a note payable to the Brookings County Railroad Authority. This note is a ten-year note for $575,000, financed at 5%, which matures on September 1, 2007. Semi-annual principal and interest payments are due in February and August. Railroad track sidings located at the plant secure the note. Principal payments of $50,315 and $47,890 were made in the years ended December 31, 2000 and 1999 respectively.

    We have a long-term payable contract with the City of Volga for an error in the billing of electricity due to a faulty city meter that occurred between 1996 and 1999. Payments are made at a rate of $3,229 per month without interest. The contract matures on December 31, 2003.

    Cash Flows From Operations.  Operating activities provided $6.6 million for the year ended December 31, 2000, and $3.9 million for the year ended December 31, 1999. For the year ended December 31, 2000, net proceeds of $5.8 million and net non-cash expenses of $2.8 million were offset by non-cash patronage dividend income of $1.4 million and increased working capital requirements of $615,000. For the year ended December 31, 1999, net proceeds of $2.2 million and net non-cash expenses of $2.7 million were offset by non-cash patronage dividend income of $597,000, and working

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capital requirements of $354,000. For the year ended December 31, 1998, net proceeds of $6.8 million, net non-cash expenses of $2.3 million, and negative working capital requirement of $4.0 million were offset by non-cash patronage dividend income of $847,000.

    Cash Flows From Investing Activities.  Investing activities used $1.7 million during the year ended December 31, 2000. This $1.7 million of expenditures consisted of equipment purchases for the plant of $721,000, and an investment in Urethane Soy Systems Company for $1.0 million. Investing activities used $2.6 million during the year ended December 31, 1999. We spent $1.6 million primarily on upgrades to the plant to reach an 80,000-bushel per day crush level, $500,000 to install a pelleting system for hulls, and $500,000 to install equipment and tanks for SoyOyl®.

    Investing activities used $2.9 million during the year ended December 31, 1998. The money was all spent on capital improvements. These improvements primarily consisted of upgrades to the process, product storage, and loadout efficiency.

    Cash Flows From Financing Activities.  Net cash used by financing activities for the year ended December 31, 2000 was $5.0 million, and $1.2 million for the same period in 1999. Net cash used by financing activities for the year ended December 31, 1998 was $9.5 million. Cash patronage paid out to members was $578,000, $3.4 million, and $5.8 million for the years 2000, 1999 and 1998 respectively. Patronage allocations are determined by the net income of the Cooperative, and are allocated 100% to members, which is authorized by the Board of Directors. The Board then in turn authorizes a percentage to be paid in cash and a percentage to be retained within the Cooperative for growth, debt reduction, and reinvesting purposes. In the year ended December 31, 2000, $578,000 was returned to the members based on local profits (net income not including patronage income received from other cooperatives) of $232,000 of which 80% was paid in cash, and $392,000 cash received from other cooperatives. In the year ended December 31, 1999, $3.4 million was returned to members based on local profits of $4.0 million of which 80% was paid in cash, and $256,000 cash received from other cooperatives. Net income for patronage allocations was based on our historical fiscal years ended August 31, 2000 and 1999, respectively.

    In October 2001, the Board of Directors authorized and paid a cash patronage allocation of $5.7 million. It was distributed to the members based on local profits of $6.9 million, of which 70% was paid in cash, and $896,000 cash received from other cooperatives our historical fiscal year ended August 31, 2001.

Expansion Initiatives and Other Projects

    The segment of our business that we are currently trying to expand through capital expenditures is crude soybean oil refining. We are currently negotiating a contract with a strategic partner to commit to a supply agreement in exchange for the fixed assets required to refine crude oil. In return we would commit to an eight-year supply agreement providing the partner's packaging locations with refined and bleached oil. We would be required to dismantle the equipment, transport it to Volga, SD, and build a refinery processing plant at our Volga site. If the agreement is finalized, we estimate that construction (removal of equipment process) will begin in January 2002. Physical construction of the new building, engineering, and related activities will be in process at Volga contemporaneously. The estimated completion date for the project is July 2002, and it is expected to be running at full capacity in August 2002.

    We also have plans to invest $2.3 million in 2001 and 2002 for a soybean oil storage tank in Brewster, MN. The estimated completion date for this project is April 2002. We will own the tank, until the Minnesota Soybean Processors (MnSP) plant is operational at that site at which time we plan to sell the tank to MnSP. We are currently negotiating the terms of the proposed sale and at this time do not have a definitive agreement to sell the tank to MnSP. The tank increases our opportunities to capture additional profits by delivering oil to the Chicago Board of Trade rather than selling it in a depressed crude oil market.

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    We offered a program to our members in which they could borrow from their retained patronage to finance up to 20% of their purchases in MnSP stock. To date approximately $400,000 has been committed to this program. The payment will be made directly to MnSP as part of the members' final payment, which is scheduled for the spring of 2003.

    CoBank has agreed to supply $5.2 million in long-term revolving debt towards the two capital projects, and we have retained $2.1 million from the last patronage allocation to members. The combined $7.3 million will provide enough capital for the two projects, and any additional maintenance projects that may become necessary during the year. In addition to the $2.1 million of local retained patronage allocation from 2001, a balance of $2.3 million remains in the retained equity section of the balance sheet.

    The United States Department of Agriculture has provided a $500,000 matching grant for us to study and implement the oil refining project discussed above and the following three other new projects:

•

We are evaluating producing a soy diesel product. This project would produce soy diesel to meet potential mandated demand due to regulatory changes. With the addition of the refining equipment, we would need to purchase another $6.0 million of additional equipment for this project. There are government subsidies available for the production of soy diesel that may make this project very favorable.



•

We are also evaluating opportunities in the edible protein market. In this project, we would produce edible protein products, such as meat extenders, and work with a broker to market the products.



•

We are working with Urethane Soy Systems Company, Inc. to develop a finished product made with SoyOyl® that we could market directly. If this market segment takes off, we may find the need to expand our SoyOyl® production facilities rapidly. Primary expenditures would be for tanks, mixers, and related equipment. We anticipate that the profits from sales of the product would be large enough to fund the tanks if sales increased at a reasonable pace. However, if large orders become necessary immediately, we may need to raise additional funds for the project.

    Finally, it is our goal to run the Volga facility at a 100,000 bushel per day crush rate within the next five years. The plant was originally designed for 50,000 bushels per day with the possibility of expansion to 70,000. In fact, the plant has already expanded its production to a crushing capacity of 80,000 bushels per day. The next jump to 100,000 bushels per day will be much more costly than the first two capacity increases. The Board believes it may be necessary to raise additional funds to finance this project.

Distribution Policy

    The Cooperative's goal has been to return 70% to 80% of local earnings to the members in cash; however, the new LLC reserves the right to distribute a lower percentage of local earnings to members in cash but not less than 30%. The new LLC has neither declared nor paid any distributions on its capital units. The new LLC will be required to distribute a minimum of 30% of our net income each year to our unit holders and members in proportion to the number of units held, provided that net income for that year exceeds $500,000 and the distribution would not be a violation of or cause a default under the terms of any of our credit facilities and is not otherwise prohibited by law. The LLC's "available cash for distribution" includes gross cash proceeds from our operations, sales, and other dispositions of assets, including but not limited to investment assets (but not including sales and other dispositions of all or substantially all of the assets of the LLC), less the portion thereof used to pay, or set aside for, all of our expenses, debt payments, obligations, capital improvements, replacements and contingencies, as determined by our Board of Managers. Any additional distributions

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will be solely in the discretion of the Board of Managers and we cannot assure you that we will ever be able to pay any distributions to our unit holders.

Recent Accounting Pronouncements

    The Financial Accounting Standards Board has recently issued pronouncements regarding Business Combinations, Goodwill and Other Intangible Assets, and Accounting for Asset Retirement Obligations. Management is reviewing these pronouncements, but does not expect the implementation of these pronouncements to have a significant effect on the financial statements.

Quantitative and Qualitative Disclosures About Market Risk

    Commodities Risk & Risk Management.  To reduce the price change risks associated with holding fixed price commodity positions, we generally take opposite and offsetting positions by entering into commodity futures contracts (either a straight futures contract or options futures contract) on a regulated commodity futures exchange, the Chicago Board of Trade. While hedging activities reduce the risk of loss from increasing market values of soybeans, such activities also limit the gain potential which otherwise could result from significant decreases in market prices of soybeans. Our policy is to generally maintain hedged positions within limits, but we can be long or short at any time. Our profitability is primarily derived from margins on soybeans processed, not from hedging transactions. Management does not anticipate that its hedging activity will have a significant impact on future operating results or liquidity. Hedging arrangements do not protect against nonperformance of a cash contract.

    At any one time, our inventory and purchase contracts for delivery to the plant may be substantial. We have risk management policies and procedures that include net position limits. It is defined by commodity and includes both trader and management limits. This policy and procedure triggers a review by management when any trader is outside of position limits. The position limits are reviewed at least annually with the Board of Directors. We monitor current market conditions and may expand or reduce the limits in response to changes in those conditions.

    Foreign Currency Risk.  We conduct essentially all of our business in U.S. dollars and have no direct risk regarding foreign currency fluctuations. Foreign currency fluctuations do, however, impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of and demand for U.S. agricultural products compared to the same products offered by foreign suppliers.

    Interest Rate Risk.  We manage exposure to interest rate changes 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 eliminated once the funds were fixed.

Dilution

    The new LLC may seek additional equity financing in the future, which could cause additional dilution to you, and a reduction in your percentage equity interest. If you become a member of the new LLC in this offering, you will not have preemptive rights to purchase additional units in any subsequent offering to preserve your equity ownership percentage, although the Board may choose to offer existing members the opportunity to participate in its discretion.

Historical Financial Statements

    Soybean Processors, LLC was formed on October 12, 2001, in anticipation of the reorganization and has not been a separate operating entity. The new LLC has no substantial assets and has earned no income from operations.

    Audited financial statements of the Cooperative for the years ended December 31, 2000, 1999 and 1998, and unaudited financial statements for the nine months ended September 30, 2001 and 2000, are located under Appendix C, attached hereto and incorporated by reference.

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INDUSTRY INFORMATION

Overview of Soybean Processing Industry

    The soybean processing industry converts soybeans into soybean meal and crude soybean oil. Food ingredients are the primary end use for the oil, while the meal is consumed mostly by animals. Crude soybean oil is refined primarily for use in processed foods, such as margarine, salad dressings and baked goods and, to a more limited extent, for industrial uses. A bushel of soybeans typically contains approximately 11 pounds of oil and 44 pounds of protein-rich meal when crushed.

    Soybean production is concentrated in the central United States, Brazil, China and Argentina. Soybean processing plants, also known as crushing plants, are generally located close to adequate sources of soybeans and strong demand for meal, which decreases transportation costs. Refineries are generally located close to the processing plants. Oil is shipped throughout the United States and for export.

    Historically, there has been an adequate supply of soybeans in the upper Midwest, even in years when a substantial amount of soybeans has been exported. While the price of soybeans has fluctuated substantially, the prices of meal and oil will generally track with the soybeans, although not necessarily on a one for one basis, therefore margins can be variable.

The U.S. Soybean Crushing Industry

    Grown by farmers in 29 states, soybeans are the second largest cash crop in the United States. More than half of the United States' annual soybean production is generally crushed to make soybean oil and meal and other products. In 2001, American farmers harvested approximately 2.8 billion bushels of soybeans.

    Soybeans are processed in 22 states by 16 different companies. While the industry has continued its path toward consolidation and vertical integration, four new companies have entered the United States soybean processing industry over the last five years and the number of plants has increased to 64 plants. Industry sources estimate that demand in the United States will support an additional 1.7 million bushels of daily soybean crushing capacity by 2020.

    The soybean crushing industry is mature and well standardized, and does not depend upon proprietary secrets or rapidly evolving technology. Accordingly, even though market entry costs are high to build efficient plants and upgrade equipment, the industry is highly competitive. Major industry competitors include ADM, Cargill, Ag Processing, Inc. (AGP), Central Soya and Bunge, which have multiple crushing and refining facilities throughout the U.S. In addition, Cenex Harvest States and ADM have significant crushing and refining facilities in the upper Midwest and there are numerous smaller facilities. Competition is driven by price, transportation costs, service and product quality. These and other competitors are acquiring other processors, expanding capacity of existing plants or building new plants, domestically and internationally. Unless exports increase or existing facilities are closed, this extra capacity is likely to put additional pressure on prices and challenge margins. Several competitors operate over various market segments and may be suppliers to or customers of other competitors.

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    The following table is a summary of the United States soybean crushing industry. The top five processors control nearly 85% of all soybean crushing capacity.

*

Includes idle, but not closed, facilities.

Soybean Oil Refining

    Crude soybean oil must be refined before it can be used to manufacture other products, and therefore the soybean processing industry is closely connected to the soybean refining industry. Refineries can process multiple oil varieties through a single facility with little or no additional capital. Soybean oil processors therefore compete in the oilseed market with sunflower, flaxseed, canola, peanut and cotton processors. We do not currently have the capabilities to refine crude soybean oil for use in food products and therefore must sell the majority of our crude soybean oil to refineries. We are in the process of negotiating an agreement to expand our plant facilities to include crude oil refinery equipment.

    Soybean oil dominates the edible portion of the United States' consumption of fat and oil, accounting for 80% of the edible fats and oils used in food. Ninety-six percent of all soybean oil is used in a food application. Per capita domestic consumption of soybean oil has increased sizably in recent years (up 24% over 5 years). U.S. exports of soybean oil are variable, but generally constitute a minor portion of total production. In recent years, exports have varied widely, which dramatically influenced margins in both crushing and refining.

    In addition to consolidating over the last twenty years, the vegetable oil refinery industry, of which soybean oil refining is a component, has transferred from a business operating independently from the nation's soybean crushers, to one that is now owned by soybean processors. There are only seven independent vegetable oil refineries operating in the United States, plus Lou Anna Foods, in which Cenex Harvest States has approximately 50% ownership. Independent vegetable oil refiners operate 16% of the U.S. oilseed refining capacity.

    Even with operating their own refineries, the major soybean processors still sell some crude soybean oil to the marketplace, although ADM, AGP and Cargill are nearly balanced between crude soybean oil production and soybean oil refining capacity. Of the nine smaller soybean processors, four have refining capabilities. Three of the smaller operations have refining capabilities in excess of their

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oil production capabilities. Cenex Harvest States, which has a significant crushing and refining operation in southwestern Minnesota, currently purchases nearly 60% of its crude soybean oil needs.

    The following table summarizes the oilseed refining capacity for vegetable oil. Several of the facilities shown process more than one type of oil.

Soybean Meal

    Of the soybean meal used domestically, nearly all is used as a high protein ingredient in livestock feed, with poultry and swine dominating usage. Usage of meal is contingent on the amount of livestock being raised, which has increased in recent years. While per person domestic consumption of meat has been stable in recent years, demand for soybean meal has increased due to an increase in the domestic consumption of pork and poultry and an increase in meat exports.

    Soybean meal provides a ready source of protein with a 44% or higher protein content, compared to corn at 9%, wheat at 9.5% and barley at 11.5%. The industry standard for high protein soybean meal is 48%.

Risk Management

    One of the benefits of soybean processing as compared to other types of value-added processing is the well-established cash and futures markets that exist for soybeans and the soybean products. Hedging allows us to protect the price for the soybeans we purchase and the soybean meal and oil we sell. Soybeans, soybean meal and oil are all traded on the Chicago Board of Trade. Hedging involves selling soybean futures contracts when a cash purchase of soybeans is made and purchasing soybean meal futures contracts and oil when a cash sale is made. By hedging on the Chicago Board of Trade, we can significantly reduce the financial risk caused by daily fluctuations in soybeans, meal and oil prices. In addition to straight hedging, we have the ability to establish a "board margin" on the Chicago Board of Trade. To establish a board margin, soybean futures are purchased and meal and oil futures are sold at a set relationship to each other. The board margin is then liquidated as cash purchases and sales are made and the corresponding hedging activities are executed. The profit or loss on the cash transactions offsets the profit or loss realized during the liquidation of the futures contracts. Chicago Board of Trade futures contract and cash contracts are all valued at the market price at the end and the corresponding profit or loss is reported on a monthly basis.

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BUSINESS

Overview

    In 1993, a group of soybean producers in eastern South Dakota formed South Dakota Soybean Processors to build the first soybean crushing facility in the United States since 1978. The organizers raised funds for the plant from over 2,100 area soybean producers. Ground-breaking ceremonies were held in September of 1995 at the plant site on the east side of Volga, South Dakota, and we began operations in late 1996. Originally designed to crush 16 million bushels of soybeans per year, our plant capacity has since been increased to crush 28 million bushels per year, or more than 80,000 bushels of soybeans per day.

    Our primary business is processing locally grown soybeans into soybean meal, crude soybean oil and soybean hulls. Our soybean meal is primarily sold to livestock feed companies and independent livestock producers as a high protein livestock feed additive. Our crude soybean oil is sold to refineries for further processing into food products and some industrial uses. Our soybean hulls are either blended back into the soybean meal or sold separately, either pelleted or loose, as a fiber source in livestock diets.

    Soybean processing is a matured and highly competitive industry. We plan to maintain our competitive position in the marketplace by producing a high quality product and operating a highly efficient operation at the lowest possible cost. At the same time, we plan to gradually increase our production capability to compete more effectively against higher capacity competitors like ADM, Cargill, AGP, Bunge and Cenex Harvest States.

    We are also taking initiatives to move our products up the value-added product chain, and we are particularly interested in crude soybean oil refining opportunities. As part of this effort, we are reviewing industrial applications in plastics and energy as well as refining soybean oil for human consumption. In addition to the oil opportunities, we are exploring the potential of processing soy flour into edible protein products such as meat extenders. Finally, we are pursuing strategic alliances to help meet our overall goals, such as our relationship with Urethane Soy Systems Company, Inc. and Minnesota Soybean Processors, which are discussed in further detail below in "Strategic Alliances."

    Our primary business objective is to maximize cash dividends to our members from the profits generated through our soybean processing operations. At the same time, our management recognizes the need to maintain our financial strength and to consider and implement growth strategies that will allow us to continue meeting these objectives over time.

Products

    Currently, our only products are soybean meal, crude soybean oil and soybean hulls, which are all generated from the same basic crushing process. Each sixty-pound bushel of soybeans crushed at our Volga plant yields approximately 44 pounds of meal (75%), 11 pounds of oil (19%), and 4 pounds of hulls (6%).

    Soybean Meal.  We produce approximately 600,000 tons of soybean meal annually. Soybean meal is used primarily as a high protein livestock feed or as an ingredient or additive to livestock feed. The meal is processed to meet customer specifications. The industry standard for high protein soybean meal is 48% protein. The northern portion of the Western soybean belt, where our plant is located, typically produces a lower protein soybean resulting in lower protein soybean meal. The average protein content of soybean meal from our plant is 47%, which is sold at a discount compared to 48% protein meal. If a customer wants a lower percentage protein meal, the raw meal is blended with soybean hulls to lower the protein content to make 44% soybean meal. Current market trends favor the consumption of higher protein soybean meal, and we only expect lower protein soybean meal to account for 2 to 5% of our total meal production in upcoming years.

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    Soybean Oil.  We produce approximately 157,000 tons of crude soybean oil per year. This oil is either delivered to the Chicago Board of Trade, shipped out for further refining and packaging into food grade product or processed to be combined with other chemicals to make a polyurethane product called SoyOyl®, which is discussed below in "Strategic Alliances—Urethane Soy Systems Company, Inc."

    Refined oil is sold for the manufacture of products such as margarine, shortening, printing ink, paints, soaps, linoleum, plastic, rubber substitutes and biodiesel fuel. Although we do not currently have the equipment necessary for value-added refining of soybean oil, we are exploring developing this capability in the near future.

    Soybean Hulls.  We produce approximately 49,000 tons of soybean hulls annually. Soybean hulls can either be blended back into the high protein soybean meal to make 44% soybean meal or sold separately, in loose, ground or pelleted form, as a highly digestible source of fiber for livestock diets. The amount of soybean hulls used to create 44% soybean meal depends on the crude protein content of the current year's soybeans and the market demand for 44% soybean meal.

    We also have the equipment to pellet soybean hulls to be consumed by livestock. Pelleting soybean hulls increases the bulk density of the commodity, allowing for substantial freight savings. Soybean hull pellets also are attractive to direct on-farm users for their handling and storage characteristics and are sold at a premium compared to loose or ground hulls.

Plant and Description of Process

    Our plant is located on a 47-acre site one mile east of Volga, South Dakota. The location is on Highway 14, five miles west of Brookings, South Dakota and approximately 30 miles west of the Minnesota border. The site in its entirety consists of approximately 107 acres. We purchased approximately 47 acres at a cost of $3,500 per acre, and pay $1,000 per year to maintain an option on the remaining 60 acres.

    We currently have the capacity to process approximately 80,000 bushels, or 2,400 tons of soybeans, per day at our plant. This equates to 3,000 bushels per hour, 2.4 million bushels per month, and 28 million bushels per year. The plant has historically run at between 88% to 96% of capacity. The plant generally processes the highest number of soybeans in the December through May period. Scheduled ten day maintenance shutdowns are usually taken in May or June, and then production resumes to normal levels until harvest. The quality of the new crop dictates how well we are able to run in September through November.

    Soybean Receiving.  As a result of the abundant soybean supply in the area surrounding Volga, the plant receives soybeans primarily by truck, although the plant is equipped for rail receiving if it became cost effective or necessary due to reduced local supply or other reasons. Some of the soybeans that need to be processed come from other elevators, but the majority, about 75%, comes by truck delivery from individual farmers. Trucks are weighed on a 120-foot scale and then proceed to a receiving line. We currently operate two receiving lines at a rate of 15,000 bushels per hour. The soybeans are sampled using an inline sampler system as they are conveyed from the pit to the storage bins. The samples are then graded for moisture, foreign material, and other quality discounts.

    We use a high-tech automated weighing system that enables us to automate the ticket process. The weight is taken and then automatically printed and recorded. The entire process is computer generated to provide rapid, accurate, and dependable records. Once the scale operator records the information on the customer, it is available for the grading station to view and enter the grades from the samples. This information is then finalized and available for the accounting and commercial department to view and process.

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    Preparation and Extraction.  Preparation, as its name implies, prepares the soybean for the extraction process where soybean oil is removed from the meat of the soybean. The subsystems involved include:

•

Cleaning and cracking—The soybean meat is broken into 4 to 8 pieces. This releases the outside hull from the meat and also provides the appropriate size meat for further processing.



•

Dehulling—Soybean hulls must be removed in order to produce high protein soybean meal. We chose conventional dehulling for the plant design. This dehulling system provided the best use of capital and operating cost estimates at the time of installation. One 5,000 bushel per hour grain dryer and a cleaning system is included along with four 30,000-bushel soybean tempering tanks. These tanks enhance the process of removing the soybean hull from the soybean meat by ensuring moisture and temperature consistency of the soybeans.



•

Conditioning/Flaking—The clean soybean meat will be heated to 165° to 175°. Roller mills are then used to produce flakes thereby rupturing the oil cells, the final step before extraction.



•

Oil Extraction. Soybean flakes are sent to the extraction building where they are washed with hexane several times in a concurrent flow to remove the soybean oil from the flake. We have a DeSmet deep-bed extractor. The washed flakes leaving the extractor enter a vessel that performs multiple tasks, including desolventizing, toasting, drying and cooling, before the soybean flakes return to the preparation building for grinding. The soybean oil/hexane mixture, commonly referred to as miscella, is then processed through an evaporation system to recover all but a trace amount of hexane. The oil is then dried and cooled prior to storage.



•

Meal Grinding/Storage—After the extraction process, the flakes are returned to the preparation building where they are ground to specified particle size or mixed with hulls to reduce protein content to meet customer needs. The resulting soybean meal is then transferred to the storage facility.

Product Storage

    We have the capacity to store 1.5 million bushels of soybeans in storage bins, or the equivalent of nineteen days operating supply. Storage bins are equipped with both temperature monitoring and aeration to assure soybean quality during storage. During the soybean harvest, we also pile soybeans in an open field. For the 2000 harvest, this pile was up to 1.3 million bushels. Although there can be substantial risk in storing the soybeans in the open air for extended periods, we have the capacity to process the entire pile in a period of 16 days, minimizing the risk of loss.

    Our soybean meal storage is designed to hold 5,000 tons or three days of production. Two concrete silos holding 2,500 tons of meal each provide the storage. Two soybean hull storage tanks are used to store ground or pelleted hulls. They too are concrete structures each holding 700 tons of loose hulls, or 1,200 tons of pelleted hulls.

    Soybean oil is initially held in one of four temporary storage tanks, and samples from these tanks are quality tested to insure that hexane removal has met specifications. The oil is then transferred to one of three ten million-pound tanks for either delivery to the Chicago Board of Trade or loading to meet customers' contract requirements. We also have two long-term oil storage tanks. The first, a 54,000-ton oil tank, designed as a multi-use facility and convertible into a two million bushel soybean storage tank, contains 108 million pounds of oil which has been delivered to the Chicago Board of Trade. This oil is owned by the warehouse receipt holders of the Chicago Board of Trade, and in return they pay us storage fees at a rate of $.00003 per pound per day. The second tank is solely an oil storage tank, which will hold up to 31,500 tons (63 million pounds) of oil that has been delivered to the Chicago Board of Trade. We also are in the process of constructing a duplicate 63 million-pound oil storage tank in Brewster, Minnesota as part of our strategic alliance with Minnesota Soybean

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Processors. We anticipate that when completed this tank will also store oil delivered to the Chicago Board of Trade. See "Strategic Alliances—Minnesota Soybean Processors" for more details.

    In addition to the tanks that we own, we also have lease agreements for storage tanks in St. Paul, Minnesota and Chicago, Illinois. We lease an 11.4 million-pound storage tank in St. Paul, Minnesota from Westway Terminal Company for $16,800 per month with additional fees for throughput in excess of six million gallons per contract year. The term of this lease is scheduled to end on January 31, 2002, but will automatically renew for three-month terms unless terminated in writing by either party with 45 days'notice. We also lease a 9.6 million-pound storage tank in Chicago, Illinois from Kinder Morgan Liquids Terminals LLC for a flat fee of $5,000 per month plus a throughput charge of $4 per metric ton received or shipped. The term of this lease is scheduled to end on April 15, 2002 but will automatically renew for an additional one-year term unless terminated in writing by either party with 60 days' notice. We plan to keep the leases on the tanks in St. Paul and Chicago until the oil is physically removed, and the sales price of crude oil or alternative processing no longer dictates the need for such storage.

Loading, Transportation and Delivery

    The final phase of the operation is the loading of the oil and meal on trucks and rail cars for shipment to customers for consumption or to manufacturers for further processing into final products. Currently, we ship approximately 45% of our products by rail and 55% by truck. Our plant site is adjacent to a Dakota, Minnesota & Eastern (DM&E) Railroad track with connections to the Burlington Northern rail line in Huron, SD, and is directly accessible from U.S. Highway 14, which provides access to U.S. Interstate 29 eight miles to the east.

    Soybean meal loading capacity is 200 tons per hour. Meal loadout speed allows for daily production to be loaded out within a 12-hour period. This rate takes into account delays between customer loads. The soybean meal loading area is staffed seven days a week to provide needed customer service. Soybean hulls are blended with meal to make 44% protein meal through the same system. Soybean hulls by themselves can also be loaded out through this system, but at a slower rate. Pelleted hulls are loaded at a rate similar to that of meal. Separate platform scales for the truck and rail loadout areas are provided.

    Soybean oil loading capacity is 3,345 tons per day by either truck or rail. Approximately 70% of our crude soybean oil is shipped by rail. The other 30% is shipped by truck. Soybean oil is weighed by a liquid flow meter, which adjusts for temperature and is approved by the National Oilseed Processors Association (NOPA) trading rules and state certified. The Chicago Board of Trade requires us to have the capacity to load out all of their oil stored at our location within 30 working days, and our current loading capacity satisfies this criterion.

    Our rail shipments are coordinated with the DM&E Railroad. We currently lease 299 hopper cars for an 18-year term from GE Capital for the purpose of transporting soybean meal and hulls. The lease rates on the cars range from $375 to $388 per car per month. These cars are large enough that we can take advantage of maximum weight limits and gain freight advantages on the base car rate. We in turn sublease these cars to the DM&E Railroad. The cars are eligible for mileage credit and demurrage charges collected from other customers. The mileage credits offset the lease cost of the cars and provide us with a small profit. These charges also create an incentive for the customer to get the car unloaded and returned to us quickly because they are incurred on a per hour basis. The railroad shipping rates for soybean meal are fixed amounts per car, subject to change at the DM&E Railroad's discretion. We do, however, have the option to negotiate contracts with the DM&E Railroad and fix the prices for a specified period of time, but we do not currently do so. We are responsible for the repairs and maintenance of all of the leased hopper cars, including repainting them at the end of the lease period.

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    We also lease ten tanker cars for soybean oil from GE Capital, at a rate of $525 per month for a five-year term that began in April 2001. We are responsible for managing this fleet, and ensuring that the return times are profitable. The tanker cars are under a full service lease, which covers routine maintenance and painting, but we are responsible for all repairs.

    Local meal is delivered by truck, primarily by standard commercial carriers. The standard semi-truck will hold 26 tons of meal. South Dakota also permits the use of "pup" trailers on its highways, which can carry an additional 10 tons of meal.

Utilities

    Processing soybeans is an energy intensive process, using significant amounts of electricity and natural gas. Our plant uses natural gas to heat water to generate steam and to dry soybeans. Our plant requires a natural gas supply of on average 500,000 therms per month to operate the plant at its current production capacity. A therm is a unit used to measure a specific quantity of heat. We purchase our natural gas from NorthWestern Energy with some portion purchased at fixed prices months in advance depending upon the quoted price and the remainder purchased at market prices. We have the ability to convert our boiler to use diesel fuel if the price of natural gas makes it more cost effective to do so. When we operate our boiler on diesel fuel, we purchase the diesel fuel on the open market. We purchase our electrical energy and water supply from the City of Volga at prices set by the City of Volga. We are currently exploring the possibility of using coal and biomass to fuel a high-pressure boiler and electric generating station with the resulting low pressure steam used in our processing facility.

Raw Materials and Suppliers

    Our primary raw material is soybeans. In 2000, South Dakota farmers produced approximately 153 million bushels of soybeans. In addition, farmers in western Minnesota produced approximately 97.7 million bushels of soybeans. Production within a 50-mile radius of Volga was approximately 49.3 million bushels in 2000, representing 1.8 times the needs of our 28 million-bushel per year processing facility. Our plant location in Volga therefore gives us accessibility to soybeans at necessary levels, and although the availability and price of soybeans fluctuate with forces of supply and demand, we have never experienced an inability to source soybeans.

    All of the soybeans that we purchase are quality tested and graded against the United States Department of Agriculture's grade requirements. From time to time, we accept soybeans that are substandard, but we discount the price or make other allowances to account for the lesser grade quality or condition at delivery. In the past, we have offered programs to entice members to plant a particular variety of soybeans. These soybeans were proven to have a higher protein content than many of the other varieties that are grown around Volga, and could be grown successfully in our colder climate. We were offering incentives based on the purchase of this variety of seed to members. We do not currently offer such incentives, but may consider doing so in the future if market prices for oil make such a program attractive again.

    In recent years, some soybean producers in our area have been planting genetically modified soybeans, commonly known as Round-up Ready beans. Although some processors segregate genetically modified soybeans from those that are not we currently do not do so and our customers have not requested that we do so. Without the addition of several smaller soybean storage bins and renovation of our soybean receiving system, our current plant facilities would not allow us to efficiently segregate genetically modified soybeans.

    To Arrive Soybean Contracts.  We purchase the majority of our soybeans under "to arrive" contracts. These contracts establish an agreed upon price and delivery period for the soybeans. Modifications to the "to arrive" contract are also offered where either the futures price (futures fixed)

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or basis (basis fixed) is established upon creation of the contract and the other term of the contract is completed at an agreed upon date. The futures price is the trade price at the Chicago Board of Trade for soybeans to be delivered during a month in the future. We receive instantaneous futures quotes, and we agree with the producer on the board month and price presented at the time of the arrangement. The basis is the second part of the contract pricing equation. The basis is the adjustment to the Chicago Board of Trade futures price to arrive at a locally delivered price at our plant. The basis is influenced primarily by local supply and demand ratios which are driven by local competition and available local storage space, and freight. Generally in our area the basis is traded at a reduction to the Chicago Board of Trade futures price. Most of our contracts with producers requires them to pay the transportation costs of delivering the soybeans to our plant in Volga. If a producer wishes for us to arrange and pay freight, the basis will be wider (greater) by the amount of the freight. Basis in our area ranges from a monthly average of—20¢ to—53¢ depending upon the time of year. The basis is generally the widest during harvest and the narrowest just prior to harvest.

    Price Later Soybean Procurement Program.  In this program a producer, or elevator, is allowed to deliver soybeans to the plant without fixing a price on the product. The producer relinquishes ownership rights in the soybeans, and we are then free to process these beans. The producer later notifies us that they wish to price the soybeans, and we pay the producer for the soybeans at that time. The soybeans are recorded as a current payable on our books until the price is fixed; however, we do not incur any interest expense. If producers deliver the soybeans between harvest and January under this program, they pay us storage fees. After January we generally waive the storage fees to attract producers to deliver into this program. Our risk with this program is that the producers will all price their beans when the soybean basis is quite narrow. However, our experience is that producers will only price their soybeans when the Chicago Board of Trade price increases, at which point our basis usually widens and reduces the sales price because local supply increases as producers are more willing to sell their stored soybeans.

Sales, Marketing and Customers

    Our target markets can be broken into two segments: local (South Dakota, Minnesota, and the Canadian providence of Saskatchewan), and the Pacific Northwest (considered a regional market consisting of the states of Oregon, Washington, and the Northwest Canadian Providences of Alberta and British Columbia). Favorable freight rates are the primary motivator in determining demand for commodity products. We deliver to local markets by truck and to the regional markets by rail. Our rail service is provided by the DM&E rail line, with connections to the Burlington-Northern Santa Fe at Huron, SD, and by the Union Pacific for oil to Cenex Harvest States. The Burlington Northern offers us freight advantages into the Pacific Northwest market as compared to the California market, which is serviced by the Union Pacific. The table presented below lists the percentage of sales by quantity of product sold within various markets.

    Our Merchandising Manager is responsible for marketing and sales of all of our products. We sell the majority of our products using "shipment" or "to ship" contracts which are either priced (meaning the entire price of the commodity has been established including futures price, basis, and freight) or basis only (which means only the basis and freight have been fixed). Occasionally we will use a broker for some meal shipments. These brokers receive a commission (usually 50¢ per ton for rail, and $1.00 per ton for truck) and then sell the meal to the end customer. We are responsible for paying the

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commission, and for collecting receivables. We also sell meal to resellers. We pay no commission for these sales, nor do we accept responsibility for the collection of receivables. However, these fees are usually built into the price the resellers will pay us for the commodity, or into the price their customers will have to pay them.

    To Ship Soybean Meal and Crude Soybean Oil Contracts.  We sell the majority of our products using "to ship" contracts. These contracts establish an agreed upon price and delivery period for the products. Modifications to the "to arrive" contract are also offered where either the futures price (futures fixed) or basis (basis fixed) is established upon creation of the contract and the other term of the contract is completed at an agreed upon date. Most of our contracts are traded FOB (or picked-up) at our plant in Volga so that the purchaser pays the freight costs. If a purchaser wishes for us to arrange and pay freight, the basis will be narrower (less negative) by the amount of the freight. For the last four years, basis in our area for soybean meal and soybean oil has ranged from a monthly average of -$3.00 to - $17.00 per ton of meal, and -100 to -350 points (-$.01 to -$.035) per pound of oil, depending upon the current global and local supply.

    Some of our crude soybean oil is delivered to the Chicago Board of Trade for storage. We have been declared "regular" or qualified by the Chicago Board of Trade to store approximately 200 million pounds of crude soybean oil at our Volga plant site and an additional 21 million pounds of oil at our leased terminal sites in St. Paul and Chicago. This oil is delivered to the Chicago Board of Trade based on us having a "short" oil position, the equivalent of having a short futures contract. For every short futures contract that is held, another company has a long futures contract. Beginning on the first notice day in a period (certain commodities are only sold in certain months, and each period has a first notice day which is determined and published by the Chicago Board of Trade at least one year prior to the period), the companies holding the long futures contracts are notified by the Chicago Board of Trade that the oil under contract will be delivered on the following day, and a warehouse receipt for the oil is issued. Once a warehouse receipt is issued, the oil belongs to the customer, and the oil that we hold in storage is the oil that has been delivered to these customers. We receive storage charges on this oil at a rate of $.00003 per pound per day. The Chicago Board of Trade still maintains all of the responsibility for accounting for warehouse receipts, collecting storage, and processing the necessary functions to account for the transaction. The customer can either arrange to have the oil shipped from this location to their facility, or they can purchase short futures contracts and bring their position back to zero. If the customer returns their position to zero, then the Chicago Board of Trade cancels the warehouse receipt and issues a new one to whomever holds the long futures contract that offsets the short futures contract. Eventually the price will be such that a company will want to take physical delivery of the oil to process it. At that time, they arrange to have it removed from our storage tanks and we receive a load-out fee at a rate of $.00004 per pound. We are then able to replace the oil with current production and start the process again.

    We currently sell a majority of the oil we produce to Cenex Harvest States. Cenex Harvest States has excess refining capacity at its Mankato, Minnesota crushing and refining facility, so it purchases crude soybean oil from outside vendors, such as Ag Processors and us. In 2001, we have sold 85% of our oil to Cenex Harvest States, and they have contracts with us to purchase 111 million pounds of oil over the next six months, which is 84% of our anticipated oil production during that period. The significant freight cost savings provided by the relatively short 159 mile distance between the two plants is the primary reason that this arrangement works so well for both Cenex Harvest States and us. Cenex Harvest States, however, has announced plans to build a soybean crushing and refining plant at Fairmont, Minnesota, which would reduce the amount of crude oil it purchases from us. Cenex Harvest States has announced that construction on the Fairmont plant is scheduled to begin in the Spring of 2002, with completion in 2003. We therefore are examining the possibility of refining oil ourselves or finding other refinery customers for crude soybean oil.