UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2002

 

COMMISSION FILE NO. 333-75804

 

 

SOUTH DAKOTA SOYBEAN PROCESSORS, LLC

(Exact Name of Registrant as Specified in its Charter)

 

 

 

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

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

 

 

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

 

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

 

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

 

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

 

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

 

 

Part I

 

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION

 

This information in this annual report on Form 10-K for the year ended December 31, 2002, contains “forward-looking statements” within the meaning of the private securities litigation reform act of 1995 with respect to the business and operations of South Dakota Soybean Processors and our affiliates. In addition, we and our representatives and agents may from time to time make other written or oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and our reports to members and security holders. Words and phrases such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,” “future,” “potential,” or the negatives of these words, and all similar expressions identify forward-looking statements. We wish to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.

 

Our forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. These risks and uncertainties include, but are not limited to, risks related to the level of commodity prices, loss of member business, competition, changes in the taxation of limited liability companies, compliance with laws and regulations, perceptions of food quality and safety, business interruptions and casualty losses, access to equity capital, consolidation of producers and customers, alternative energy sources, and the performance of our Soy Processing, Oil Refining, and Other business segments. Other risks or uncertainties may be described from time to time in the company’s future filings with the Securities and Exchange Commission.

 

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

 

Item 1.                         Business

 

Industry Information

 

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, industrial uses. The U.S. soybean processing industry is currently projected to grow at an annual rate of approximately 1½%.

 

Soybean production is concentrated in the central United States, Brazil, China, and Argentina. In the 2002/2003 harvest season, the United States produced approximately 2.7 billion bushels of soybeans. It is estimated that 60% of those soybeans will be processed domestically, 35% will be exported as whole soybeans, and 5% will be retained for seed and residual use. Historically, there has been adequate soybean production in the upper Midwest to supply the local soybean processing industry, even in years when a substantial amount of soybeans has been exported.

 

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

 

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typically yields approximately 44 pounds of protein-rich meal, and 11 pounds of crude oil when crushed.

 

Refineries are generally located close to the crushing plants. Oil is shipped throughout the U. S. and for export. Approximately 90% of the soybean oil produced in the U.S. is consumed domestically and the remaining 10% exported. Approximately 96% of the domestic consumption is used in food applications and 4% is used in industrial applications.

 

The U.S. soybean processing industry is comprised primarily of 15 different companies operating 64 plants in 22 states. It is a mature, consolidated, and vertically-integrated industry with four companies controlling nearly 85% of the processing. The four companies include Archer Daniels Midland (ADM), Bunge, Cargill, and Ag Processing, Inc. (AGP).

 

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

 

Overview of South Dakota Soybean Processors, LLC

 

In 1993, a group of soybean producers in eastern South Dakota formed South Dakota Soybean Processors, referred by many as SDSP, to build the first soybean crushing facility in the United States since 1978. The organizers raised funds for the plant from over 2,000 area soybean producers. Ground-breaking ceremonies were held in September of 1995 at the plant site on the east side of Volga, South Dakota. 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. This represents a capacity of 1.6% of the total soybean crushing industry.

 

Our primary business is processing locally grown soybeans into soybean meal, crude soybean oil, and soybean hulls. In addition to these products, we added an oil refinery to the Volga site to process crude soybean oil into R&B (Refined and Bleached) oil. Our soybean meal is primarily sold to livestock feed companies and independent livestock producers as a high protein livestock feed additive. Our R&B oil is sold to an independent oil refiner through a supply agreement for further processing into food grade oil. Our crude soybean oil is sold to refineries for further processing into food products, as a feed ingredient, 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.

 

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 such as ADM, Cargill, AGP, Bunge, and Cenex Harvest States.

 

We are also taking initiatives to move our products up the value-added product chain. As part of this effort, we are reviewing industrial applications in plastics and energy. 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.

 

Our primary business objective is to maximize cash distributions to our members from the profits generated through our operations and investments. 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.

 

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Reorganization

 

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

 

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

 

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

 

Products & Services

 

Currently, we divide our operations, products and services, and the related revenues and net income into three segments; Soy Processing, Oil Refining, and Other. The Soy Processing segment processes whole soybeans into soybean meal, crude soybean oil, and soybean hulls. The Oil Refining segment purchases crude oil from the Soy Processing segment to refine and bleach for sale into the food grade market. The Other segment contains our investments, SoyOyl^® revenues and expenses, as well as management fees for various projects.

 

Soy Processing Segment

 

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

 

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In this segment, our products include 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, 11 pounds of oil, and 4 pounds of hulls, accounting for approximately 68%, 20% and 12%, respectively, of revenues in this segment for 2002.

 

Soybean Meal.  We produce approximately 616,000 tons of soybean meal each year. The meal is shipped out by truck and rail car. Primary markets include the local truck market, the Pacific Northwest, and exports to Canada. Over the years, we have shipped meal into 22 states and 4 Canadian Provinces. Significant meal customers in 2002 included Land O’ Lakes, Commodity Specialists, and Eastman Feeds out of Winnipeg, Canada.

 

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

 

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

 

Soybean Hulls. In addition to soybean meal and crude soybean oil, we produce approximately 49,000 tons of soybean hulls annually. The hulls are either blended back into the soybean meal or sold in a loose or pelleted form as a fiber source for livestock. Soybean hulls are not traded in the futures market. Cash markets include local beef and dairy producers and feed mills throughout the United States.

 

Oil Refining Segment

 

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

 

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

 

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

 

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

 

Other Segment

 

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

 

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

 

Urethane Soy Systems Company, Inc.

 

USSC is a Princeton, Illinois based producer of SoyOyl®, a polyol made from soybean oil. Polyol is a key chemical in foam formulation that reacts with other ingredients to form different types of polyurethane foam, which can be used in a variety of products such as insulation, packaging, furniture padding, carpet backing and footwear. USSC holds the patent for SoyOyl® and a number of related production processes and industrial uses.

 

We have the exclusive rights to supply soybean oil to USSC to make SoyOyl^® until 2014. We have also been assigned the rights to a patent relating to the modification of crude soybean oil for use in industrial applications such as manufacturing SoyOyl^®. In February 2001, the developer of this process filed an application to patent the process with the United States Patent and Trademark Office and subsequently assigned the rights to the process and any future patent to us. A patent for the process was granted in 2002. Because this patent is only for the initial refining process to prepare crude soybean oil for industrial uses, and SoyOyl^® itself is already patented, we do not anticipate that our SoyOyl^®operations would be materially harmed if we did not have this patent.

 

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

 

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

 

The Stock Purchase Agreement requires us to pay $1,377,000 of the purchase price to the USSC shareholders by October 27, 2003. The remainder of the purchase price to the shareholders becomes due in three equal annual installments of $891,000 on the first, second, and third anniversary of the first payment date. We are required to pay the purchase price to USSC for the newly-issued shares in twelve equal quarterly payments of $375,000 beginning January 1, 2003. Our Board of Managers is considering an offering of additional capital units of SDSP, to finance the balance of the purchase price to USSC and the shareholders; however, no final decision has been reached and other financing alternatives may be considered.

 

Minnesota Soybean Processors.

 

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

 

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

 

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

 

New Projects.

 

In September of 2001, we received a $500,000 matching Value-Added Agricultural Product Market and Development Grant (VADG) from the United States Department of Agriculture. The grant is to help fund the cost of exploring the feasibility of further value added ventures. Under the terms of the grant, the United States Department of Agriculture will contribute 50% towards the budgeted expenses incurred for our projects, up to a total grant of $500,000. To date we

 

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

 

Raw Materials and Suppliers

 

We procure soybeans through a network of local soybean producers and country elevators. In 2002 soybean production in a 50-mile radius of the plant was approximately 35 million bushels or 1.25 times the plant needs. Production of soybeans in South Dakota has averaged approximately 140 million bushels over the last three years. We control the flow of soybeans into the plant with a combination of price and contracting options. Threats to the soybean supply include weather, changes in government programs, and competition from other processors and export markets. The refining plant receives its entire supply of crude soybean oil from our crushing plant.

 

Utilities

 

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

 

Sales, Marketing and Customers

 

Our principal 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 generally 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 (BNSF) and the Union Pacific (UP) for meal and crude oil shipments.  The BNSF is the primary carrier into the Pacific Northwest, and the UP is used for approximately 50% of the shipments in the California market.  Refined oil is shipped via the DM&E, Canada Pacific and Canada National lines.  The table presented below lists the percentage of sales by quantity of product sold within various markets for 2002.

 

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

 

We generally market and sell all of our products ourselves instead of using brokers. 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).

 

Competition

 

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

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competitive position in the market place 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, Bunge, Ag Processors, and Cenex Harvest States.

 

Government Regulation and Environmental Matters

 

Hexane recovery is critical in the crushing operation and is closely monitored by the Environmental Protection Agency. Current regulations require that the amount of hexane lost