**UNITED STATES********SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**FORM 10-K/A**

** **

**AmendmentNo. 2**

 

**ý****                                ****ANNUAL REPORT PURSUANTTO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thefiscal year ended December 31, 2005**

 

**o****                                ****TRANSITION REPORTPURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**COMMISSIONFILE NO.  000-50253**

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

(Exact Name of Registrant as Specified in itsCharter)

 
| **South  Dakota**                                                 | ** ** | **46-0462968**                        |
|-------------------------------------------------------------------|------------|---------------------------------------|
| (State of Other  Jurisdiction of   Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**100 CaspianAvenue, Post Office Box 500, Volga, South Dakota 57071**

(Address of Principal Executive Offices)

 

**(605)627-9240**

(Registrant’s Telephone Number)

 

----

 

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

SECURITIES REGISTERED PURSUANT TOSECTION 12 (g) OF THE ACT:

**CLASS ACAPITAL UNITS**

 

----

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.o Yes    ý  No

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.o Yes    ý  No

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    ý Yes    o No

 

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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).o Yes    ý  No

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).o Yes    ý  No

 

Theaggregate market value of the registrant’s common equity held by non-affiliatesof the registrant was $37,452,617 computed by reference to the price at whichcapital units were last sold.

 

Asof the day of this filing, there were 30,419,000 Class A capital units ofthe registrant outstanding

 

 

----

 

**EXPLANATORYNOTE**

 

This Amendment No. 2 to the Annual Report onForm 10-K of South Dakota Soybean Processors, LLC (“we,” “us” or “our” orthe “Company”) for the year ended December 31, 2005, originally filed onMarch 31, 2006 and as an amendment on May 15, 2006 (“Amendment No. 1”), isbeing filed for the purposes of restating the Company’s financial statementsfor the year ended December 31, 2005 and making the corresponding changesdescribed below.

 

Subsequent to our initial filing of our Form 10-Kand Amendment No. 1, we determined that the financial statements for the yearended December 31, 2005 should be restated with respect to our Balance Sheetand Statement of Members’ Equity. A portion of Members’ Equity is required tobe restated as Temporary Equity because our offering conducted in 2005 under aForm S-1 registration statement did not conform to federal securities laws. Inthe offering, the Form S-1 Registration Statement included a report of ourformer auditor whose independence we later determined was compromised. Thepresentation of the proceeds from this offering as Temporary Equity reflectsthe potential that such equity may be reduced or eliminated entirely ifsuccessful claims are made against us by investors who purchased capital unitsin the offering. We did not correctly characterize Amendment No. 1 as arestatement, instead characterizing the amendment as merely a reclassificationof Members’ Equity.

 

As a result, this Amendment No. 2 restates theBalance Sheet and Statement of Members’ Equity included in the financialstatements for the year ended December 31, 2005 and makes correspondingrevisions to related disclosures in our 10-K. Revisions have been made to Item8, Financial Statements and Supplementary Data, and Note 1 of our financialstatements to reflect the circumstances leading to and effects of thisrestatement.

 

For the convenience of the reader, thisForm 10-K/A sets forth the original Form 10-K and changes made onAmendment No. 1 in its entirety. However, this Form 10-K/A only amends theitems specifically described above under Item 8. No other information in theoriginal Form 10-K is amended. In addition, pursuant to the rules ofthe SEC, the original Form 10-K has been amended to contain currentlydated certifications from the our Chief Executive Officer and Chief FinancialOfficer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

 

This Amendment does not reflect events that haveoccurred after March 31, 2006, the date the Annual Report onForm 10-K was originally filed. Information with respect to those eventsis set forth, as appropriate, in our subsequent periodic filings, including ourQuarterly Reports on Form 10-Q and Current Reports on Form 8-K.

 

**Part I**

 

**CAUTIONARY STATEMENT REGARDING**

**FORWARD-LOOKING INFORMATION**

 

This information in this annual report onForm 10-K/A for the year ended December 31, 2005, contains “forward-lookingstatements” within the meaning of the Private Securities LitigationReform Act of 1995 with respect to the business and operations of SouthDakota Soybean Processors and our affiliates. In addition, we and ourrepresentatives and agents may from time to time make other written ororal forward-looking statements, including statements contained in our filingswith the Securities and Exchange Commission and our reports to members andsecurity 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 expressionsidentify forward-looking statements. We wish to caution readers not to placeundue reliance on any forward-looking statements, which speak only as of thedate made.

 

Our forward-looking statements are subject to risksand uncertainties that could cause actual results to differ materially fromthose discussed in the forward-looking statements. These risks anduncertainties include, but are not limited to:

 

•                                          Changes in the weather or general economicconditions impacting the availability and price of soybean and natural gas;

 

•                                          The availability and cost of raw materialsfor the production process, particularly soybeans.

 

•                                          Changes in business strategy, capitalimprovements or development plans;

 

•                                          Damage to or loss of our facilities due tocasualty, weather, mechanical failure or any extended or extraordinarymaintenance or inspection that may be required;

 

2

----

 

•                                          The availability of additional capital tosupport capital improvements, development and projects;

 

•                                          Changes in perception of food quality andsafety;

 

•                                          Changes in the taxation of limited liabilitycompanies;

 

•                                          Other factors discussed under the item belowentitled “Risk Factors.”

 

We are not under any duty to update theforward-looking statements contained in this report. We cannot guarantee futureresults or performance or what future business conditions will be like. Wecaution you not to put undue reliance on any forward-looking statements, whichspeak only as of the date of this report.

 

**PART I**

 

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

 

**Overview**

 

South Dakota Soybean Processors, LLC (“we,” “us,” “our”or the “Company”) owns and operates a soybean processing plant, a SoyolTMproduction facility, and a soybean oil refinery in Volga, South Dakota. Webegan producing crude soybean oil, soybean meal and soybean hulls in late 1996,and since then we have expanded our business to include the development of new,vertically integrated product lines and management services. In 2000, we beganproviding management services to Minnesota Soybean Processors (MnSP), a soybeanprocessing facility located in Brewster, Minnesota, and obtained a minorityinterest in MnSP in 2004. In 2002, we began refining crude soybean oil into aproduct known as refined and bleached oil, and in early 2003, we became themajority owner and assumed management control of Urethane Soy Systems Company(USSC), which produces SoyolTM, a bio-based polyurethane product madefrom soybean oil.

 

Our core business consists of processing locallygrown soybeans into soybean meal and soybean oil. Soybean meal is primarilysold to resellers, feed mills, and to livestock producers as livestock feed.Since the completion of our refining facility in 2002, we have processed mostof our crude soybean oil into refined and bleached oil. We sell our refined andbleached oil to a manufacturer of various retail and bulk food products whereit is further processed for human consumption. We continue to explore thefeasibility of installing facilities that would enable us to further processthe refined and bleached oil we produce into biodiesel, consistent with ourstrategy to increase our vertical integration by adding value to our coreproducts.

 

We plan to maintain a competitive position in themarketplace by producing high quality products, operating a highly efficientoperation at the lowest possible cost, and adding value to our core products tocapture larger margins. We plan to increase our cost efficiency by increasingdaily production capacity and to add value to our products by investing infurther processing of our products and developing and reviewing newapplications for our products in the plastics and energy fields.

 

Our primary business objective is to maximize cashdistributions to our members from the profits generated through our operationsand investments. At the same time, we recognize the need to maintain ourfinancial strength, and to consider and implement growth strategies that willallow us to continue meeting these objectives over time.

 

**Reorganization History**

 

We were originally organized as a South Dakotacooperative in 1993 and our members are primarily farmers in South Dakota andneighboring states. As a South Dakota cooperative, we were entitled tosingle-level, pass-through tax treatment on income generated through ourmembers’ patronage. This allowed us to pass our income onto our members in theform of distributions without first paying taxes at the company level,similar to a partnership. However, as we grew, the continuing availability ofthis advantageous tax treatment became less secure. Accordingly, in 2001 thecooperative’s Board of Directors approved a plan to reorganize into a SouthDakota limited liability company.

 

The plan of reorganization was duly approved by ourmembers at a meeting held on June 20, 2002, and the reorganization becameeffective July 1, 2002. The transaction was an exchange of interestswhereby the assets and liabilities of the cooperative were transferred forcapital units of the newly formed limited liability company, SoybeanProcessors, LLC. The capital units were distributed to our members upon dissolutionof the cooperative at a rate of one capital unit of the limited liabilitycompany for each share of equity stock owned in the cooperative. Thedistribution of capital units to our members was registered under theSecurities Act of 1933, as amended. For financial statement purposes, no gainor loss was recorded as a result of the exchange transaction. Upon completionof the reorganization, the name of the limited liability company was changed toSouth Dakota Soybean Processors, LLC. As a limited liability company, whichmay elect to be

 

3

----

 

taxedas either a partnership or a corporation, we elected to be taxed as apartnership in order to retain our historic single-level income tax treatmentat the member level.

 

**Industry Information**

 

The soybean processing industry converts soybeansinto soybean meal, soybean hulls and soybean oil. Food ingredients are theprimary end use for the oil, while the meal and hulls are mostly consumed byanimals. Crude soybean oil is refined by our customers for use as salad andcooking oil, baking and frying fat, and to a more limited extent, forindustrial uses.

 

Soybean production is concentrated in the centralUnited States, Brazil, China and Argentina. In the 2005 harvest season, theUnited States produced approximately 3.09 billion bushels of soybeans orapproximately 37% of estimated world production. The industry’s tradeassociations and the USDA estimate that approximately 55% of United Statesproduced soybeans are processed domestically, 15% are exported as wholesoybeans, and 30% are retained for seed and residual use. Historically, therehas been adequate soybean production in the upper Midwest to supply the localsoybean processing industry.

 

Soybean processing facilities are generally locatedclose to adequate sources of soybeans and a strong demand for meal to decreasetransportation costs. Poultry and swine dominate soybean meal consumption inthe United States. On average, exports of soybean meal account for 15% to 20%of total production. A bushel of soybeans typically yields approximately 44pounds of meal and 11 pounds of crude oil when processed.

 

Soybean oil refineries are generally located closeto processing plants. Oil is shipped throughout the United States and forexport. Approximately 96% of domestic oil production is used in foodapplications and 4% in industrial applications.

 

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

 

The soybean industry has worked diligently tointroduce soy products as bio-based substitutes for various petroleum-basedproducts. Such products include biodiesel, soy ink, lubricants, candles andplastics. Demand for biodiesel, in particular, is expected to expand, inpart due to new federal incentives and supports. Biodiesel is a substitutefor standard, petroleum-based diesel fuel that is made from approximately 90%vegetable oil (such as soybean oil) or animal fat and 10% alcohol (methanol).The chemical reaction resulting from the combination of these componentsproduces biodiesel and glycerin. Although the long-term average pricedifferential of biodiesel is currently about $1 per gallon higher than standarddiesel fuel, the 2004 Jobs Creation Act, which took effect on January 1,2005, establishes a blender’s tax credit that equates to about $1 per gallon ofbiodiesel. This new tax credit, along with some earlier, less significantproduction incentives, have essentially closed the price gap between standarddiesel fuel and biodiesel, considerably increasing the feasibility oflarge-scale biodiesel production.

 

**Products & Services**

 

*Soybean Processing*

 

We crush and process soybeans to extract the soybeanoil from the protein and fiber portions of the soybean. Approximately 80% ofthe weight of the soybeans that we process annually is sold as soybean meal orhulls. The meal and hulls are shipped out by truck and rail car. Primarymarkets include the local truck market, the Pacific Northwest, and exports toCanada. Currently, our significant meal customers include Land O’ Lakes of St.Paul, Minnesota, and Commodity Specialists of Minneapolis, Minnesota andShawnee Mission, Kansas. We currently extract crude soybean oil at a levelequal to approximately 20% of the weight of the soybeans that we processannually. We process most of the crude soybean oil we produce into refined andbleached oil or SoyolTM. Depending upon market conditions, excesscrude soybean oil is sold to other soybean oil refiners, stored for future use,or delivered against Chicago Board of Trade (CBOT) futures contracts since ourVolga plant site is a registered delivery point for the CBOT soybean oilfutures contract. We receive a storage payment through CBOT for all oil that isdelivered into this program.

 

*Refining*

 

We began refining operations in August 2002with the start-up of our on-site refining facility adjacent to our crushingplant in Volga, South Dakota. Refining consists of processing the crude soybeanoil we produce through a series of processes and filters to create a productknown in the industry as refined and bleached oil. In 2005, we refined morecrude soybean oil than we produced because we also refined 17 million gallonsof crude oil produced in 2004, plus we purchased crude soybean oil fromMinnesota Soybean Processors (MnSP) of Brewster, Minnesota.

 

4

----

 

We have an exclusive supply agreement with ACH FoodsCompanies, Inc. of Memphis, Tennessee, to provide its facilities with aconsistent supply of refined and bleached oil on a general requirements basis.Pricing is fixed until January 15, 2007, with the option to renegotiatethe price thereafter. The oil is transported by rail from our plant to one ofACH Foods’ facilities, where it is further processed for the edible oil market.

 

*Polyurethane*

 

We also process crude soybean oil to produce SoyolTM,a bio-based polyurethane product made from specially processed crude soybeanoil that has been developed for use as a replacement for certain petrochemicalproducts. SoyolTM is relatively new in the market and has beenundergoing research and development in recent years. We do the initial crudeoil processingat our Volga, South Dakota facility and ship itdirectly to USSC’s customers.

 

USSC developed SoyolTM and is responsiblefor its marketing. SoyolTM is a kind of polyol, which is a keychemical in foam formulation. It reacts with other ingredients toform different types of polyurethane foam, which can be used in a varietyof products such as insulation, packaging, furniture padding, carpet backingand footwear.

 

USSC holds the patents for SoyolTM and a numberof related production processes and industrial uses. We have the exclusiverights to supply soybean oil for USSC’s sales of SoyolTM until 2014and have agreed not to sell soybean oil to any other company in the plasticsindustry. We have also been assigned the rights to a patent and have developeda second patent relating to the modification of crude soybean oil for use inindustrial applications such as manufacturing SoyolTM which providescost advantages over other process techniques. USSC’s research and developmentlab is based at the Volga, South Dakota site.

 

We originally purchased a 4% ownership in USSC inMay 2000 for $1 million. In January 2003, we agreed to invest anadditional $8.55 million to acquire a 58% majority ownership interest in USSC bypurchasing shares from existing shareholders and newly issued shares from USSC.We also agreed to take over the management of USSC. We currently hold six ofthe nine seats on USSC’s board of directors, and our CEO is also the presidentof USSC. We purchased the newly issued shares of USSC for $4.50 million whichwas paid during 2003 and 2004. We purchased the shares from the existingshareholders of USSC for $4.05 million on an installment basis and have oneremaining installment of $891,000 payable in October of 2006.

 

5

----

 

More recently, we acquired another 7.71% ownershipin USSC and now own a 65.71% ownership in USSC. The 7.71% interest was acquiredin May 2005 in connection with a recent settlement with a former employeeof USSC. The employee sued USSC, USSC’s board of directors, us, and our CEO,claiming breach of contract and wrongful termination. The defendantscounterclaimed for breach of fiduciary duty against one of USSC’s directors. Aspart of a settlement in May 2005, the director against whom thedefendants counterclaimed agreed to transfer to us his shares in USSC, whichrepresented the 7.71% increase in ownership. We may acquire additionalequity in USSC in the future, particularly in the event that USSC needsadditional working capital. In addition, to provide working capital to USSC, wepurchased from USSC convertible subordinated notes in October 2005 for asum of $657,100. We subsequently decided to convert a portion of these notesinto equity in USSC which will increase our ownership in USSC to 70%. Wemay convert to equity additional portions of these convertible notes inthe near future, as well as purchase additional subordinated notes to provideworking capital for USSC.

 

**Other Business**

 

We also generate income from various other projects,including management fees for overseeing the general operations of a 110,000bushel per day soybean processing facility built by Minnesota SoybeanProcessors (MnSP) in Brewster, Minnesota. In addition, at times we earnmiscellaneous income for consulting fees, feasibility studies, or otherprojects.

 

In August 2000, we entered into an agreementwith MnSP to provide construction management for its new soybean processingplant. Under the contract, we were paid 10% of the total equity raised, and weagreed to reinvest 80% of the construction management fees in equity of MnSP.MnSP completed its equity fundraising in April 2002, raising a total ofapproximately $29 million. Construction began approximately six months laterand was completed in November 2003.

 

We made our required reinvestment in MnSP in 2004 bytransferring a 63 million-pound oil storage tank and loading facilities that weconstructed on land adjacent to the MnSP site. In exchange for such transfer,we received 1,400,400 (post split) shares of Class A Stock of MnSP,representing approximately 7% of MnSP’s outstanding shares. Also in 2004, wepurchased 287,500 shares of Class B Stock in MnSP. The shares are 8%,Non-Cumulative Convertible Class B Preferred Stock sold at $2.00 pershare. We also made to our members approximately $500,000 in interest-freeloans to invest in MnSP. These loans will be repaid to us by these membersthrough a reduction of future member distributions.

 

Currently, we are providing management and marketingservices to MnSP, including the day-to-day management control of MnSP’s plantunder a Services and Management Agreement pursuant to which we are paidprimarily on a cost-sharing basis. Costs for various employees, such as commercial,accounting, and engineering employees, and other administrative expenses areallocated between us and MnSP based on the volume of soybeans processed at eachplant. Our CEO has general management and oversight responsibilities of MnSPunder this Agreement.

 

**Raw Materials and Suppliers**

 

We procure soybeans from local soybean producers andelevators. In 2005, soybean production in South Dakota was approximately 138.6million bushels, compared to 140 million bushels in 2004 and 113 millionbushels in 2003. We control the flow of soybeans into the plant with acombination of pricing and contracting options. Threats to the soybean supplyinclude weather, changes in government programs, and competition from otherprocessors and export markets. Our refining plant and polyurethane productionreceive their entire supply of crude soybean oil from our crushing plant.

 

##### **Utilities**

 

We use natural gas and electricity to operate thecrushing and refining plants. Natural gas is used in the boilers for processheat and for drying soybeans. NorthWestern Corporation of Sioux Falls, SouthDakota, provides natural gas service to the plant on an interruptible basis. Weare at risk to adverse price fluctuations in the natural gas market, but wehave the capability to use fuel oil as a back up for natural gas if delivery isinterrupted or market conditions dictate. We also employ forward contracting tooffset some of this risk. Our electricity is supplied by the City of Volga. Along term contract on electricity offsets some of our price exposure onelectrical rates.

 

**Employees**

 

We currently employ approximately 106 individuals.All but 21 of our employees are full-time. We have no unions or othercollective bargaining agreements.

 

**Sales, Marketing and Customers**

 

Our primary meal markets are the local truck market(typically within 200 miles of our Volga plant), the Western

 

6

----

 

UnitedStates, (Washington, Oregon and California), and exports (to Canada). Ourprimary soybean oil market is Illinois which is served by rail. Our railservice is provided by the Dakota, Minnesota and Eastern (DM&E) rail line,with connections to the Burlington-Northern Santa Fe (BNSF) and the UnionPacific (UP). The table presented below lists the percentage of sales byquantity of product sold within various markets for 2005.

 
| ** **                 | ** ** | **Soybean Meal** | ** ** | **Crude Soybean  Oil** | ** ** | **Refined Oil** | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------------|------------|----------------------|------------|
| ** **                 | ** ** | ** **            | ** ** | ** **                  | ** ** | ** **           | ** ** |
| Local                      |       | 29                    | %          | 1                           | %          | 1                    | %          |
| Other U.S.  States         |       | 48                    | %          | 98                          | %          | 99                   | %          |
| Export  (including Canada) |       | 23                    | %          | 1                           | %          | —               |       |

 

**Dependence upon a Single Customer**

 

We currently sell all of the refined and bleachedsoybean oil that we produce to ACH Foods Companies, Inc. under an eightyear supply agreement that expires in 2007. If ACH Foods breaches itsobligations under this contract and we are unable to locate other customers forour refined and bleached oil, or if we are unable to locate other customers forour excess crude oil, we may have to sell our oil at discounted prices andour business could be materially harmed.

 

**Competition**

 

We are in direct competition with several othersoybean processing companies in the United States, many of which havesignificantly greater resources than we. The United States soybean processingindustry is comprised primarily of 15 different companies operating 68 plants in22 states. It is a mature, consolidated and vertically-integrated industry withfour companies controlling nearly 85% of the processing. Those four companiesare Archer Daniels Midland (ADM), Bunge, Cargill and Ag Processing, Inc.(AGP). The United States’ vegetable oil (including soybean oil) refiningindustry is divided between oilseed processors and independent vegetable oilrefiners. The oilseed processors operate approximately 83% of the vegetable oilrefining capacity in the United States, and ADM, Bunge, Cargill and AGP operateapproximately 70% of the oil refining capacity. The three largest independentvegetable oil refiners are ACH Foods, Smuckers (Proctor & Gamble), andConAgra (Hunt-Wesson).

 

We are the only significant hexane extraction andprocessing plant in South Dakota, and we believe that we have approximately 7%of the soybean processing capacity in the Upper Midwest and about 1% in theUnited States. We are aware, though, of a producer group from Webster,South Dakota, that is currently studying the feasibility of building a facilityapproximately 100 miles from our plant. Nevertheless, we plan to maintain ourcompetitive position in the market by producing high quality products andoperating a highly efficient operation at the lowest possible cost, and addingvalue to our products. We plan to increase our cost efficiency by increasingdaily production capacity, adding value to our products by investing in furtherprocessing of our products and developing and reviewing new applications for ourproducts in the plastics and energy fields.

 

**Government Regulation and Environmental Matters**

 

The recovery of hexane, a special-use solvent usedto extract oil from soybeans, is closely monitored by the United StatesEnvironmental Protection Agency. The Environmental Protection Agency requiresthat the amount of hexane lost in the extraction process not exceed 0.2 gallonsper ton of soybean oil produced on a rolling 12-month average. Our productionprocess currently meets this requirement.

 

As part of a Compliance Plan with the SouthDakota Departments of Environment and Natural Resources, we have a zero processdischarge system and are currently in compliance with our surface waterdischarge permits. We are also obligated to provide ongoing compliance reportsto the Department of Environment and Natural Resources.We maintain a spillprevention plan that contains the necessary procedures to minimize spill eventsand provide emergency notification, if necessary. It also contains the requiredinformation pertaining to spill containment procedures in the event a spilldoes occur, and the proper spill clean-up procedures. The plan places us incompliance with the provision of 40 CFR, Part 112, of the FederalRegulations on oil pollution prevention, and the provisions of SARA, *Superfund Amendments and Reauthorization Act, 1986*.It also addresses all known potentially polluting materials at our plant. Atthis time, we do not generate any known hazardous wastes at our plant.

 

We also maintain an EPA Facility Response Plan. Thisplan is also prepared according to the guidelines of 40 CFR, Part 112, andpursuant to the Oil Pollution Act of 1990. This plan is designed to emphasizeoil spill prevention and oil spill response preparedness.

 

7

----

 

**Item 1A.****               ****Risk Factors.**

 

**Operating Risks**

 

***Higher thananticipated operating costs, including but not limited to increased prices forsoybeans that are not accompanied by increased prices for soybean meal orsoybean oil, could reduce profitability.*** In addition to general market fluctuationsand economic conditions, we could experience significant cost increasesassociated with the ongoing operation of the soybean processing and refiningplant or our interest in USSC caused by a variety of factors, many of which arebeyond our control. These cost increases could arise from an inadequate localsupply and resulting increased price for soybeans that is not accompanied by anincrease in the price for soybean oil and meal. Labor costs can increase overtime, particularly if there is any shortage of labor, or shortage of personswith the skills necessary to operate the plant. Adequacy and cost of electricand natural gas utilities could also affect our operating costs. Changes inprice, operation and availability of truck and rail transportationmay affect our profitability with respect to the transportation of soybeanmeal, oil and other products to our customers.

 

In addition, the operation of the soybean processingand refining plant is subject to ongoing compliance with all applicablegovernmental regulations, such as those governing pollution control, and othermatters. If any of these regulations were to change, it could cost ussignificantly more to comply with them. Further, other regulationsmay arise in future years regarding the operation of the plant, includingthe possibility of required additional permits and licenses. We might havedifficulty obtaining any such additional permits or licenses, and they couldinvolve significant unanticipated costs. We will be subject to all of theseregulations without regard to whether the operation of the plant is profitable.

 

Our costs could also increase as a result of variousfactors, including significant international crises, acts of terrorism, or war,which could adversely impact our business, financial condition and results ofoperations. We could be adversely affected by the threat of terrorist attacksand military actions conducted by the United States and others that increaseenergy costs.

 

***We may notbe able to continue making cash distributions to our members at the levels thatwe have paid in the past or even make cash distributions at all.***Given the recent price fluctuations in thesoy market and the working capital requirements to fund our investment in USSC,we may not have sufficient net income to make cash distributions to ourmembers at the levels paid in the past or even make cash distributions at all.If our minimum net income is below $500,000 or a cash distribution to our memberswould violate or cause a default under the terms of our debt financing, we willnot make any distributions to our members, but rather will retain all of thenet income generated for future operating purposes, including general workingcapital. In addition, cash distributions in excess of 30% of our net income areentirely at the discretion of our Board of Managers, and there is no guaranteeas to when or if we will generate sufficient profits to make distributions atany particular level or that we will make any distributions at all.

 

***We have recentlyencountered some cash flow constraints and may not be able to make cashdistributions to our members at the levels that we have paid in the past oreven make cash distributions at all.***As a result of adverse changes in the soybeanmarket and our continued capital investment in USSC, we have recentlyencountered some cash flow constraints. If we are unable to manage our cashflow in the future, we may not be able to make cash distributions to ourmembers or may be required to make such distributions at lower levels thanin the past.

 

***We have made asignificant investment in Urethane Soy Systems Company, which is a developmentstage company with historical operating losses.***In January 2003, we became the majorityowner of USSC, a development stage company that has limited operating history.To date, USSC has been engaged primarily in research, development andpreliminary sales of SoyolTM, a polyol made from soybean oil used tomake polyurethane foam products. USSC has experienced significant losses todate, and has generated limited revenues. If USSC does not achieve profitableoperations, the profitability of our operations will be adversely affected andthe value of our investment in USSC will diminish.

 

USSC’s ability to commercialize SoyolTMwill depend, among other things, on the performance of the product as comparedto alternative polyols, successful completion of its ongoing developmentactivities, its ability to market the product, and the relative cost to thecustomer of SoyolTM as compared to alternative polyols. If SoyolTMis not successfully commercialized or marketed and fails to achieve marketacceptance, USSC will likely not achieve or sustain profitable operations andwe may be required to abandon our investment in USSC.

 

***The success ofour ownership in USSC is dependent upon market acceptance of Soyol*****TM*****.***USSC’s future success, if any, issignificantly dependent on acceptance of SoyolTM in the marketstargeted by USSC. USSC developed SoyolTM in 1998 and has experiencedlimited success in having manufacturers that use polyols substitute SoyolTMfor petroleum-based polyols. Common acceptance of USSC’s technology will bedependent, among other things, upon its ease of use, reliability, price andincreased consumer demand for bio-based products. Even if the advantages ofSoyolTM are established, we are unable to predict how quickly, ifever, SoyolTM will be generally accepted by manufacturers as asubstitute for petroleum-based polyols.

 

***The producers ofpetroleum-based polyols have economic resources superior to USSC, whichmay make it***

 

8

----

* *

***difficult for USSC to compete withthem.***USSC competeswith producers of petroleum-based polyols, such as Dow BASF and Huntsman. Thesecompanies have significantly greater resources than either we or USSC have tomarket SoyolTM.

 

***USSC is relianton its patents and other proprietary rights related to Soyol*****TM*****.***USSC has three United States patents relatedto SoyolTM; however, USSC’s right to manufacture and market SoyolTMmay be limited if it infringes on valid patents held by others. USSC hasnot undertaken or conducted any comprehensive patent infringement searches orstudies. If any such third parties hold any such conflicting rights, USSCmay be required to resort to litigation to defend such rights, resultingin substantial costs and diversion of management’s attention. In the future, ifUSSC lost such litigation, USSC may be required to stop making, using orselling SoyolTM or to obtain licenses from and pay royalties toothers, which could have a significant and material adverse effect on itsoperations. In addition, other companies may develop substantiallyequivalent proprietary information which is not covered by USSC’s patentrights. If USSC is not able to adequately protect its registered trademarkSoyolTM, trade secrets, know-how and continuing technologicalinnovations to develop and maintain a competitive advantage, USSC could beforced to abandon its production and marketing of SoyolTM.

 

USSC also relies on unpatented trade secrets toprotect its proprietary technology. USSC attempts to protect its proprietarytechnology through confidentiality, non-compete and other similar agreementswith its employees, but the confidentiality provisions in these agreementsmay not be enforceable under the applicable laws of certain states. Otherentities may independently develop or otherwise acquire equivalenttechnology or gain access to USSC’s proprietary technology, which could decreaseits value to USSC.

 

***Hedgingtransactions involve risks that could harm our profitability.***To reduce our price change risks associatedwith holding fixed price commodity positions, we generally take opposite andoffsetting positions by entering into commodity futures contracts (either astraight futures contract or an options futures contract) for soybeans andsoybean meal and crude soybean oil on the Chicago Board of Trade. While hedgingactivities reduce our risk of loss from increasing market values of soybeans,such activities also limit the gain potential which otherwise could result fromsignificant decreases in market prices of soybeans. Our policy is to maintainhedged 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 plantmay be substantial, which could limit our ability to adjust our hedgedpositions. If our risk management policies and procedures that guide our netposition limits are inadequate, we could suffer adverse financial consequences.

 

***We are reliant onone customer to purchase the refined and bleached oil that we produce.***We currently sell all of the refined andbleached soybean oil that we produce to ACH Foods Company, Inc. under aneight year supply agreement which expires in 2007. If ACH Foods breaches itsobligations under this contract and we are unable to locate other customers forour refined and bleached oil, or if we are unable to locate other customers forour excess crude oil, we may have to sell our oil at discounted prices andour business could be materially harmed.

 

***There is alimited market for the refined and bleached oil that we produce.***The refined and bleached soybean oil that weproduce must be deodorized before it can be used in food products. There are alimited number of customers who purchase refined and bleached soybean oil thathas not been deodorized. If ACH Foods breaches its obligations under its supplyagreement with us or does not renew its supply agreement, we may havedifficulty locating other customers for our refined and bleached oil andmay be required to acquire additional equipment to deodorize our refinedand bleached oil so that we can sell it directly to food manufacturers.

 

***We may notbe able to manage the expansion of the scope of our operations into soybean oilrefining, polyol production and management of a second soybean processingplant.*** The recentbeginning of soybean oil refining and the expansion of our management role inUSSC may place increasing demands on our existing management andoperations. In addition, our existing management is now overseeing MnSP’soperations in Brewster, Minnesota as well as our soybean processing andrefining plant in Volga, South Dakota. Our future growth and profitability willdepend on, among other things, our ability to successfully attract, train,motivate, manage and retain new and existing employees and to continue toimprove our operational, financial and management information systems. Ourmanagement may be presented with unforeseen challenges in effectivelymanaging the diversification and expansion of our business. Management’sinability to manage our growth effectively could have a material adverse effecton our business, financial condition and results of operations.

 

***We are dependenton our management and other key personnel, and loss of their servicesmay adversely affect our business.***Our success and business strategy isdependent in large part on our ability to attract and retain key managementand operating personnel. This can present particular challenges for us becausewe operate in a specialized industry and because our business is located in arural area. Such individuals are in high demand and are often subject tocompeting employment offers. In particular, our success is dependent on ourability to retain the services of Mr. Christianson, our Chief ExecutiveOfficer, Mr. Seurer, our Chief Financial Officer and Mr. Kersting,our Commercial Manager. The loss of the services of Messrs. Christianson,Kersting, or Seurer, or the failure of such individuals to perform theirjob functions in a

 

9

----

 

satisfactorymanner, would have a material adverse effect on our business operations andprospects.

 

**Industry Risks**

 

***We operate in anintensely competitive industry and we may not be able to continue tocompete effectively.***We may not be able to continue to penetrate successfully themarkets for our products. 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 othersoybean processors such as Archer-Daniels Midland, Cargill, Bunge, and AgProcessing (AGP), among others, all of which are capable of producingsignificantly greater quantities of soybean products than we do, andmay achieve higher operating efficiencies and lower costs due to theirscale.

 

***To producesoybean oil and meal, we must purchase significant amounts of soybeans, whichare subject to disease and other agricultural risks.***Production of soybean oil and meal at theplant requires significant amounts of soybeans. Soybeans, like other crops, areaffected by weather conditions. A significant reduction in the quantity ofsoybeans harvested due to adverse weather conditions, disease or other factorscould result in increased soybean costs with adverse financial consequences toour operations. Significant variations in actual growing conditions from normalgrowing conditions may adversely affect our ability to procure soybeansfor the plant. We have no definitive agreements with any soybean producers toprovide soybeans to our plant.

 

***The detection andspread of the Avian Flu virus into the United States could adversely affect oursales of soybean meal.***The spread of the Avian Flu virus, otherwise known as the “bird fluvirus,” has adversely affected the poultry industries globally, particularly inparts of Asia, the Middle East and Europe. In effort to combat the virus,several countries have exterminated large quantities of poultry, includingchicken, ducks and other kinds of fowl. Moreover, because of this virus, thedemand for poultry in these areas in terms of human consumption has declined.While the virus has yet to be detected in the United States, many expertspredict the virus will be detected inevitably. If this were to occur, thesupply and demand for poultry may decline in the United States. Becausesoybean meal is a feed product for poultry, especially chickens, anysignificant decline in the supply and demand for poultry in the United Statescould adversely affect the demand for soybean meal.  Accordingly, oursales of soybean meal and financial operations could be adversely affected bythe detection and spread of this virus in the United States.

 

***Our profitabilityis also influenced by the protein and moisture content of the soybeans in thelocal growing area.***Thenorthern portion of the western soybean belt, where our plant is located, typicallyproduces 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 beable to operate as profitably as soybean processing plants in other parts ofthe country. If adverse weather conditions further reduce the protein contentof the soybeans grown in our area, our business may be materially harmedbecause we will be required to sell our soybean meal at discounted prices toour customers.

 

In addition, the moisture content of the soybeansthat are delivered to our plant also influences our profitability and theefficiency of our plant operations. Soybeans with high moisture content requiremore energy to dry them before they can be processed. While we may recoversome of these extra energy costs by paying producers less for high moisturesoybeans, these savings may not be sufficient to offset our additionaloperating expenses.

 

***Interruptions inenergy supplies could have a material adverse impact on our business.***Soybean processing requires a constant andconsistent supply of energy. If there is any interruption in our supply ofenergy for whatever reason, such as supply, delivery or mechanical problems, wemay be required to halt production. If production is halted for any extendedperiod of time, it will have a material adverse effect on our business. If wewere to suffer interruptions in our energy supply, our production would likelyfall and the profitability of our business would be harmed.

 

***Because soybeanprocessing and refining is energy intensive, our business will be materiallyharmed if natural gas and electricity prices increase substantially.***Natural gas and electricity prices havehistorically fluctuated significantly. We have the ability to convert ournatural gas burning boiler to diesel fuel on a day’s notice; however, increasesin the price of natural gas or electricity would harm our business byincreasing our energy costs.

 

***Transportationcosts are a factor in the price of soybean oil and meal and increased transportationcosts could adversely affect our profitability.*** Soybean oil may be shipped by trucks,rail cars, and barges. Added transportation costs are a significant factor inthe price of soybean oil, and we may be more vulnerable to increases intransportation costs than other producers because our location in Volga is moreremote than that of most of our competitors. Today most of our products aresold FOB Volga, South Dakota, and those that are not have the fulltransportation cost added to the contract. Transportation costs do notcurrently affect our margin directly; however the added costs could eventuallyaffect demand for our products.

 

***Increases in theproduction of soybean meal or refined and bleached soybean oil could result inlower prices for soybean meal or refined and bleached soybean oil and haveother adverse effects.***We expect that existing soybean

 

10

----

 

processingand refining plants will construct additions to increase their production and thatnew soybean processing and refining plants will be constructed as well. Ifthere is not a corresponding increase in the demand for soybean meal andrefined and bleached soybean oil or if the increased demand is not significant,the increased production of soybean meal and refined and bleached soybean oilmay lead to lower prices for soybean meal and refined and bleached soybeanoil. The increased production of soybean meal and refined and bleached soybeanoil could have other adverse effects as well. For example, the increasedproduction of soybean meal and refined and bleached soybean oil could result inincreased demand for soybeans which could in turn lead to higher prices forsoybeans, resulting in higher costs of production and lower profits if we arenot able to lock in satisfactory margins on future soybean purchases andsoybean meal and refined and bleached soybean oil sales.

 

**Legal, Regulatory, Tax, and Debt Risks**

 

We could be subject to potential claims frominvestors in the future as a result of our public offering in 2005 and based onthe requirements of federal securities laws. On May 31, 2005, we closed apublic offering, raising approximately $4.5 million in proceeds from existingand new investors. On June 7, 2005, we received notification from the SECthat our filings were under review. During the course of the review, the SECraised questions about the lack of independence of the audit firm, Eide BaillyLLP, with respect to the audit of our financial statements for the year endedDecember 31, 2003. Management subsequently determined that theindependence of Eide Bailly LLP for that period had been compromised. We hadthe 2003 financial statements reaudited and received an unqualified opinion;however, the original Eide Bailly LLP audit report was included in ourprospectus for the 2005 public offering. As a result, our prospectus did notmeet the requirements of federal securities laws. While the financialstatements for these filings, as amended, now comply with the law, we stillcould be subject to certain claims from investors who purchased capital unitsin the 2005 public offering. If claims are made against us based on this matterand the number and amount of such claims reaches a significant percentage ofthe proceeds raised in the offering, but we are not successful in settling orlitigating such claims, the cost of settlement or damages may have anadverse effect on our profitability and cash flow.

 

**Legislative, legal or regulatorydevelopments could adversely affect our profitability. The regulation of theenvironment is a constantly changing area of the law and we are regulated bynumerous federal and state environmental rules or regulations.** For example, the Environmental ProtectionAgency currently requires monitoring of unrecovered levels of chemical hexane,which is used in our oil extraction process. If the standard is revised torequire lower loss levels or for some reason we are unable to meet the standardin the future, we could face fines or other consequences that could increaseour operating costs and reduce profits. It is possible that changes to otherfederal or state environmental rules or regulations could be adopted thatwould increase our operating costs and expenses or require additional capitalinvestment.

 

Although our production of refined and bleachedsoybean oil and soybean meal is not directly regulated by the Food &Drug Administration, we must comply with the FDA’s content and labelingrequirements, which are monitored at our customers’ facilities. Failure to complywith these requirements could result in fines, liability to our customers orother consequences that could increase our operating costs and reduce profits.In addition, changes to the FDA’s rules or regulations could be adoptedthat would increase our operating costs and expenses, or require capitalinvestment.

 

***We could faceincreased operating costs if we were required to segregate genetically modifiedsoybeans and the products generated from these soybeans.***In the last several years, some soybean producersin our area have been planting genetically modified soybeans, commonly known asRound-up Ready beans. Neither the United States Department of Agriculture northe FDA currently requires that genetically modified soybeans be segregatedfrom other soybeans. If these agencies or our customers were to require that weprocess these genetically modified soybeans separately, we would face increasedstorage and processing costs and our profitability could be harmed.

 

***We are subject toongoing state and federal environmental regulations and could be subject tofines and penalties and increased operating costs.***We are subject to continuing compliance andreview by the South Dakota Department of Environment and Natural Resources inregard to a settlement agreement and stipulation that was entered into inApril 2001 in regard to claims brought by the Department of Environmentand Natural Resources alleging that we had committed certain violations of theconditions of our wastewater permits for the operation of our soybeanprocessing facility. If we were ever found to be in violation of thissettlement agreement and stipulation or other environmental permits orregulations in the future, we could be subject to severe penalties, such aspotential closing of the plant, and face increased operating costs to achievecompliance.

 

***If we are treatedas a corporation for federal income tax purposes, our members’ capital unitscould decline in value.***We have elected to be treated as a partnership for federal income taxpurposes. This means that we do not pay income tax at the company level andthat members pay tax on their proportionate share of our net income. In theevent there are changes in the law or IRS interpretations, or trading incapital units that could result in classification of us as a publicly

 

11

----

 

tradedpartnership, for example, if our capital units trading system is not operatedwithin the parameters of our IRS private letter ruling, we may be treatedas a corporation rather than a partnership for federal income tax purposes. Inthat case, we would pay tax on our 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 corporatedividends. Because a tax would be imposed upon us at the entity level, the cashavailable for distribution to members would be reduced by the amount of the taxpaid. Reduced distributions could reduce the value of our members’ capitalunits.

 

***There aresignificant restrictions on transferring the capital units.***To maintain preferential partnership taxstatus, our capital units may not be traded on an established securitiesmarket or readily tradable on a secondary market. To help ensure that a marketdoes not develop, our Operating Agreement prohibits transfers other thanthrough the procedures specified in our Capital Units Transfer System. Underthis system, all transactions must be approved by the Board of Managers. TheBoard approves transfers that fall within “safe harbors” contained in thepublicly traded partnership rules under the federal tax code. Permittedtransfers include transfers by gift or sale to qualified family members,transfers upon death, or transfers through an alternative trading service.Transfers through the alternative trading service are limited annually to nomore than 2% of our total capital units outstanding. If a member transfersunits in violation of the publicly traded partnership rules or without theprior written consent of the Board, the transfer will be considered null andvoid and the Board will have the option to redeem the member’s capital units ata substantial discount. These restrictions on transfer could reduce the valueof a member’s capital units.

 

***Our third partydebt financing may reduce profitability and increase the risk of the lossto our members.***Asof December 31, 2005, we had approximately $15.8 million ofoutstanding long term and short term indebtedness, and an additional$17.8 million available under our lines of credit. The use of debtfinancing increases the risk that we will not be able to continue operatingprofitably because we will need to make principal and interest payments on thisindebtedness. Debt financing also exposes our members to the risk that theirentire investment could be lost in the event of a default on the indebtednessand a foreclosure and sale of our assets for an amount that is less than theoutstanding debt.

 

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

 

We conduct our operations principally from ourfacilities in Volga, South Dakota. We own these facilities which serve ascollateral for our debt instruments. These facilities, which are located on 46acres of land, are served by multiple state highways and is near InterstateHighway 29 and has rail service provided by the Dakota, Minnesota and Eastern(DM&E) rail line, with connections to the Burlington-Northern Santa Fe(BNSF) and the Union Pacific (UP).

 

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

 

From time to time in the ordinary course of ourbusiness, we may be named as a defendant in legal proceedings related tovarious issues, including without limitation, workers’ compensation claims,tort claims, or contractual dispute. Currently, we are not involved in anymaterial legal proceedings. In that we become involved, or in the case ofproceeding not deemed material, we carry insurance that provides protectionagainst general commercial liability claims, claims against our directors,officers and employees, business interruption, automobile liability, andworkers’ compensation claims.

 

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

 

There were no matters submitted to a vote ofsecurity holders in the fourth quarter ending December 31, 2005.

 

**Part II**

 

**Item 5.****                        ****Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities.**

 

As of March 1, 2006, the total number ofcapital units outstanding was 30,419,000, owned and held by 2,236 members.

 

*Trading Activity*

 

Our capital units are not traded on an establishedpublic market such as a stock exchange or The Nasdaq Stock Market. Our capitalunits must be transferred in accordance with our Operating Agreement and CapitalUnits Transfer System, which provides for transfers to family members, upondeath, by gift, and through a limited trading service, subject to Board ofManagers’ final approval. Between July 1, 2002 and July 1, 2005, wedid not operate or use a trading service, but on July 1, 2005, weinitiated a limited trading service through Variable InvestmentAdvisors, Inc., a Sioux Falls, South Dakota based broker-dealer that isregistered with the Securities and Exchange Commission as an alternativetrading system. The following table contains historical information regardingthe trading of capital units on our trading service:

 

12

----

 
| **Quarter**          | ** ** | **Low Price** | ** ** | **High Price** | ** ** | **Average Price** | ** ** | **# of Capital  Units Traded** | ** ** |
|----------------------|------------|--------------------|------------|---------------------|------------|------------------------|------------|-----------------------------------------------|------------|
| First Quarter 2004   | ** ** | NA                 |       | NA                  |       | NA                     |       | NA                                            |       |
| Second  Quarter 2004 |       | NA                 |       | NA                  |       | NA                     |       | NA                                            |       |
| Third Quarter 2004   |       | NA                 |       | NA                  |       | NA                     |       | NA                                            |       |
| Fourth  Quarter 2004 |       | NA                 |       | NA                  |       | NA                     |       | NA                                            |       |
| First Quarter 2005   |       | NA                 |       | NA                  |       | NA                     |       | NA                                            |       |
| Second  Quarter 2005 |       | NA                 |       | NA                  |       | NA                     |       | NA                                            |       |
| Third Quarter 2005   |       | 1.54               |       | 1.75                |       | 1.57                   |       | 37,000                                        |       |
| Fourth  Quarter 2005 |       | 1.50               |       | 1.54                |       | 1.51                   |       | 23,500                                        |       |

 

There were no issuer purchases of equity securitiesduring the fourth quarter ending December 31, 2005.

 

*Trading Restrictions*

 

As a limited liability company, we must strictlyrestrict transfers of our capital units in order to preserve our preferentialsingle-level tax status. Our capital units may not be traded on anynational securities exchange or in any over-the-counter market. All transfersmust be in accordance with our Capital Unit Transfer System, as it may beamended by the Board of Managers from time to time. Our Capital Unit TransferSystem prohibits any transfer that would result in the loss of our partnershiptax status.

 

Pursuant to our Operating Agreement, a minimum of2,500 capital units is required for membership, and no member may own morethan 1.5% of the total outstanding capital units. In addition to the transferrestrictions described above, under certain limited circumstances the Boardretains the right to redeem the capital units at the greater of $0.20 percapital unit or the original purchase price paid upon issuance of such capitalunits less cumulative distributions paid with respect to such capital units.The Board’s right to redeem is available in the event a member breaches theOperating Agreement or other contract with us or upon a failure to fulfill themembership requirements, including the foregoing minimum and maximum ownershiprequirements, but only if the member fails to cure the default within thetwenty-four months after we send written notice. Under the trading service, wedo not permit the number of capital units traded through the service each yearto exceed 2% of our total issued and outstanding capital units. This isnecessary in order to ensure that the trading service falls within certain “safeharbors” contained in the publicly traded partnership rules under thefederal tax code.

 

Our Operating Agreement prohibits transfers otherthan through the procedures specified in our Capital Units Transfer System.Under this system, all transactions must be approved by the Board. The Boardgenerally approves transfers that fall within “safe harbors” contained in thepublicly traded partnership rules under the federal tax code. Permittedtransfers include transfers by gift or death, sales to qualified familymembers, and trades through the limited trading service subject to the 2%restriction

 

*Distributions*

 

In 2002, we paid total cash distributions to ourmembers in the amount of $5.5 million (19.53¢ per capital unit on a post-splitadjusted basis). In 2003, we paid total cash distributions to our members inthe amount of $2.5 million (9.0¢ per capital unit). In 2004, we made onecash distribution to our members in the amount of approximately $3.3 million(11.64¢ per capital unit). In 2005, we made no cash distributions to ourmembers.

 

Under our Operating Agreement, the Board is requiredto distribute 30% of available net income (i.e. gross cash proceeds fromoperations after deducting amounts used to pay expenses or establish reservesat the Board’s discretion) to members each year, unless available net incomedoes not exceed $500,000 or such a distribution would violate or cause adefault under the terms of our debt financing or other credit facilities or isotherwise prohibited by law. Any other distributions are entirely at thediscretion of the Board of Managers and there is no guarantee as to when or ifwe will make distributions in any particular amount or at all and actualdistributions will depend upon profitability, expenses and other factors.Earnings, losses and cash distributions are allocated to members based on theirpercentage of capital unit ownership.

 

Our ability to issue distributions in the future issubstantially dependent upon our profitability, the discretion of our Board ofManagers subject to the provisions of our Operating Agreement, and the approvalof our lenders.

 

**Item 6.        Selected Financial Data.**

 

The following table sets forth selected financialdata of South Dakota Soybean Processors, LLC and our predecessor cooperativefor the periods indicated. The historical financial information in the tablebelow includes audited financial data of our predecessor cooperative prior tothe effectiveness of the reorganization on July 1, 2002. The financialstatements for the years ended December 31, 2005, 2004 and 2003 includedin Item 8 of this report were audited by Gordon, Hughes & Banks, LLP.The financial statements for the years ended December 31, 2002 and2001included in Item 8 of this report were audited by Eide Bailly LLP.

 

13

----

 
| ** **                                     | ** ** | **2005**    | ** **  | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** **  | **2001**    | ** ** |
|------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|-------------|-------------|-------------|------------|
|                                           |       |        |        |        |       |        |       |        |        |        |       |
| Bushels  Processed                             |       | 28,003,640  |        | 26,823,093  |       | 28,384,272  |       | 27,963,507  |        | 26,924,542  |       |
|                                           |       |        |        |        |       |        |       |        |        |        |       |
| **Statement  of Operations Data:**             |       |        |        |        |       |        |       |        |        |        |       |
| Revenues:                                      |       |        |        |        |       |        |       |        |        |        |       |
| Net Sales                                      |       | $           | 210,370,966 |        | $          | 238,211,056 |       | $           | 207,256,575 |        | $          | 159,488,645 |   | $ | 148,258,146 |   |
| Patronage Income                               |       | 193,413     |        | 153,961     |       | 97,975      |       | 36,801      |        | 1,460,386   |       |
| CBOT Storage Income                            |       | —      |        | 58,769      |       | 1,416,333   |       | 1,867,769   |        | 1,629,420   |       |
| Agent Fee Income                               |       | —      |        | —      |       | —      |       | 258,988     |        | 463,896     |       |
| Grant Income                                   |       | 201,195     |        | 33,022      |       | —      |       | —      |        | —      |       |
| Management Fees & Misc.               |       | 445,881     |        | 162,270     |       | 1,245,205   |       | 1,286,340   |        | —      |       |
| Total Revenues                                 |       | 211,211,455 |        | 238,619,078 |       | 210,269,710 |       | 162,938,543 |        | 151,811,848 |       |
| Costs &  Expenses:                    |       |        |        |        |       |        |       |        |        |        |       |
| Cost of goods sold                             |       | 209,992,802 |        | 232,703,866 |       | 203,022,360 |       | 152,583,964 |        | 141,359,124 |       |
| Marketing & Admin Expense             |       | 3,826,823   |        | 4,476,511   |       | 3,639,442   |       | 2,679,633   |        | 2,234,248   |       |
| Interest Expense                               |       | 1,400,403   |        | 1,425,849   |       | 802,178     |       | 542,220     |        | 483,223     |       |
| Income Tax Expense (Benefit)                   |       | —      |        | 1,032       |       | (131,474    | )          | 520,000     |        | —      |       |
| Minority  Interest in Loss of Subsidiary       |       | (368,403    | )           | (676,792    | )          | (457,620    | )          | —      |        | —      |       |
| Net Income                                     |       | $           | (3,640,170  | )           | $          | 688,612     |       | $           | 3,394,824   |        | $          | 6,612,726 |   | $ | 7,735,253 |   |
|                                           |       |        |        |        |       |        |       |        |        |        |       |
| Weighted Average Capital Units  Outstanding(1) |       | 29,758,885  |        | 28,250,139  |       | 28,258,500  |       | 28,258,500  |        | 28,258,500  |       |
| Net Income  per Capital Unit                   |       | $           | (0.122      | )           | $          | 0.024       |       | $           | 0.120       |        | $          | 0.235 |   | $ | 0.275 |   |
| **Balance  Sheet Data:**                       |       |        |        |        |       |        |       |        |        |        |       |
| Working Capital                                |       | $           | 5,599,709   |        | $          | (2,865,135  | )          | $           | 9,499,231   |        | $          | 5,363,332 |   | $ | 4,212,055 |   |
| Net Property, Plant & Equipment       |       | 27,756,941  |        | 30,130,219  |       | 31,825,619  |       | 33,761,185  |        | 31,892,837  |       |
| Total Assets                                   |       | 73,630,296  |        | 72,499,888  |       | 81,617,064  |       | 70,284,896  |        | 58,680,968  |       |
| Long-Term Obligations                          |       | 14,712,635  |        | 9,115,496   |       | 17,664,442  |       | 10,234,523  |        | 8,346,078   |       |
| Temporary Equity                               |       | 4,286,094   |        | —      |       | —      |       | —      |        | —      |       |
| Members’ Equity                           |       | 28,482,403  |        | 32,122,573  |       | 34,730,590  |       | 33,875,593  |        | 32,779,725  |       |
| **Other  Data:**                               |       |        |        |        |       |        |       |        |        |        |       |
| Capital Expenditures                           |       | $           | 600,739     |        | $          | 1,209,852   |       | $           | 1,016,849   |        | $          | 4,645,020 |   | $ | 2,718,740 |   |

 

----

(1)  Adjustedfor two-for-one capital unit split effective June 17, 2003.

 

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

 

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

 

**Executive Overview and Summary**

 

We recorded a net loss of $3.6 million in 2005verses net income of $0.7 million in 2004. The primary factors were the weakcrushing margins for January through May 2005 and an increase of $2.1million in production expenses from 2004. Early weakness in the crushing marginwas attributed to the local basis price relationship between soybeans andsoybean meal, primarily because farmers were reluctant sellers after seeingsoybean prices drop from above $8.00 per bushel to under $6.00 per bushel.However, the crushing margin improved from $0.327 per bushel throughMay 2005 to $0.796 per bushel through the remainder of 2005. Increasedenergy costs, particularly natural gas, accounted for all of the increasedproduction expenses in 2005. On a positive note, administrative expensesdecreased by $0.6 million or 14.5% and other non-operating income improved by$0.4 million.

 

In 2006, we expect crushing margins to be profitablebut below the historical average. A large 2005 soybean crop was produced in theUnited States with high oil content. While we expect the local basis pricerelationship between soybeans and soybean meal to return to a more historicallevel, we expect the basis level for soybean oil to weaken for the first halfof 2006. We also expect this to be followed by an improvement in the basislevel for soybean oil in the second half of 2006 as new biodiesel refineriesincrease soybean oil demand. Energy prices and the potential impact of theAvian bird flu, however, may adversely impact the demand for soybean mealand offset any improvements in the crushing margins.

 

Furthermore, we expect to continue to make progresstowards achieving our long-term objectives which is to deliver high qualityproducts and services at the lowest possible costs and to add value byinvesting in the development of new applications for our products in theplastics and energy fields. During 2005, we continued to expend capital to fundthe operations of Urethane Soy Systems Company, Inc. (“USSC”), ourmajority-owned subsidiary which produces SoyolTM, a bio-basedpolyurethane product made from soybean oil. Higher crude oil prices and increasingdemand for polyurethane

 

14

----

 

plasticshas increased the interest in polyols and polyurethane systems. In July 2005,USSC restructured its staff and narrowed its market focus to enhanceprofitability. USSC’s focus in 2006 is the following:

 

•                  *The carpet industry’spolyurethane backing and rebound carpet padding* – In the carpet industry, the largestsupplier of carpet backing polyurethane systems agreed to market USSC’sproducts;

 

•                  *SoyThermTM forpolyurethane foam insulation market* – In 2005 USSC finalized its half pound insulation system and begancommercially marketing the system. We expect growth in this market segment aswe move into the spring and summer seasons in 2006. USSC will increase itsproduct line to include a one pound system by June and a one and one-halfpound system by the end of 2006.

 

•                  *SoyMatrixTM , aresin for composite material in the pultrution and filament winding industry* – USSC entered into a mutual exclusivitysupplier arrangement with a major fiberglass window manufacture in late 2005.We expect sales to start in the second quarter of 2006.

 

•                  *Automotive industry* – In the automotive industry, USSC continuesits work and development with Ford Motor Co. Our target is to have USSC’sproduct in a 2008 model. USSC also continues to work with Lear, Toyota, andIntier.

 

•                  *Research for new orimproved based polyol continues* – USSC expects to roll out a new three functional, multiple hydroxylsSoyolTM in the second quarter of 2006 and a fourth in the latter halfof 2006.

 

Sales of USSC’s products are expected to increase in2006 due to increased price advantages. USSC is also currently reviewing itsstrategy of patience, slow growth, and potential strategic alliances to meetits objectives.

 

**Company Profile**

 

We own and operate a soybean processing plant, asoybean oil refinery, and a SoyolTM production facility in Volga,South Dakota. We were originally organized as a South Dakota cooperative andreorganized into a South Dakota limited-liability company effectiveJuly 1, 2002. We began producing crude soybean oil and soybean meal inlate 1996, and since then we have expanded our business to include thedevelopment of new product lines and management services. In 2000, we beganproviding management services to Minnesota Soybean Processors and obtained aminority interest in MnSP in 2004. In 2002, we began refining crude soybean oilinto a product known as refined and bleached oil, and in early 2003, we becamethe majority owner and assumed management control of USSC.

 

**Results of Operations**

 

***Comparison of Years EndedDecember 31, 2005 and 2004***

 
| ** **              | ** ** | **Year Ended December 31, 2005** | ** **  | **Year Ended December 31, 2004** | ** ** |
|-------------------------|------------|------------------------------------------------------|-------------|------------------------------------------------------|------------|
| ** **              | ** ** | **$**                                                | ** **  | **% of  Revenue**                               | ** ** | **$** | ** ** | **% of  Revenue** | ** ** |
|                    |       |                                                 |        |                                                 |       |   |   |   |   |
| Revenue                 |       | $                                                    | 210,370,966 |                                                 | 100.0      |   | $ | 238,211,056 |   | 100.0 |   |
| Cost of  revenues       |       | (209,992,802                                         | )           | (99.8                                                | )          | (232,703,866 | ) | (97.7 | ) |
| Operating  expenses     |       | (3,826,823                                           | )           | (1.8                                                 | )          | (4,476,511 | ) | (1.9 | ) |
| Other income  (expense) |       | (559,914                                             | )           | (0.3                                                 | )          | (1,017,827 | ) | (0.4 | ) |
| Minority interest       |       | 368,403                                              |        | 0.2                                                  |       | 676,792 |   | 0.3 |   |
| Income tax  expense     |       | —                                               |        | —                                               |       | (1,032 | ) | (0.0 | ) |
|                    |       |                                                 |        |                                                 |       |   |   |   |   |
| Net income (loss)       |       | $                                                    | (3,640,170  | )                                                    | (1.7       | ) | $ | 688,612 |   | 0.3 |   |

 

*Revenue* – Revenue decreased $27.8 million, or 11.7%,from the year ended December 31, 2004 to the year ended December 31,2005. The decrease was a result of lower market prices of soybean meal, crudesoybean oil, and refined and bleached soybean oil. The average sales prices forsoybean meal, crude soybean oil, and refined and bleached soybean oil decreasedby 20.9%, 13.1%, and 20.0%, respectively. The decrease in market prices wasattributable to an improved U.S. soybean crop, which resulted in an increasedsupply of soybeans in 2005. The price decreases was offset by an increase insales volume of all products: soybean meal volume increased by 4.6%; crudesoybean oil volume increased by 271.1%; and refined and bleached soybean oilvolume increased by 10.3%. The increase in the sales volume of crude soybeanoil in 2005 resulted from the delivery and issuance of warehouse receipts ofcrude soybean oil to the Chicago Board of Trade.

 

*Gross Profit/Loss* – For the year ended December 31, 2005,we generated a gross profit of $378,000, compared to a

 

15

----

 

grossprofit of $5.5 million for the year ended December 31, 2004. Whilerevenues decreased by $27.8 million (11.7%), cost of revenues decreased by only$22.7 million (9.8%) over 2004. The decrease in gross profit was due to anumber of factors, including a tight local soybean market and higher productionexpenses. Farmers were reluctant to sell their soybeans after they saw soybeanprices drop from over $8.00 per bushel to under $6.00; thus, the local basisadjustment on soybeans increased. Our soybean meal and oil customers, however,were unwilling to absorb this increase due to the abundant supply of soybeansand national soybean processing capacity. In addition, natural gas pricessoared during 2005, resulting in approximately $2.0 million of additional productionexpenses versus 2004. The difference in the cost of natural gas was primarilythe result of increased demand for natural gas, reduced production andinventories in the natural gas industry, as well as strong pricing in petroleumcommodities, such as unleaded gas and heating oil. Increased freight costsresulted from higher product volumes delivered to customers, as well as higherfreight rates. During 2005, we shipped approximately 8% more soybean meal andhulls than the prior year.

 

*Administrative Expense* – Administrative expense, including allselling, general and administrative expenses, decreased by $650,000, or 14.5%,for the year ended December 31, 2005 compared to the same period in 2004.This decrease resulted from lower general and administrative expenses in USSCresulting from USSC’s restructuring of staff and narrowing of market focus inJuly 2005.

 

*Interest Expense* – In 2005, interest expense decreased by$25,000, or 1.8%, compared to 2004. The decrease was due to lower debt levelsresulting from the decrease in soybean prices. The average debt level in 2005was approximately $17.2 million, compared to an average debt level in 2004 ofapproximately $23.6 million. The decrease in interest due to the lower debtlevels was partially offset by higher interest rates on our senior debt. OnDecember 31, 2005, we had outstanding debt of $15.8 million, the majorityof which bore interest at an annual rate of 7.05%. On December 31, 2004,we had outstanding debt of $10.2 million, the majority of which bore interestat an annual rate of 4.85%.

 

*Net Income/Loss* – We recorded a net loss of $3.6 million forthe year ended December 31, 2005, compared to net income of $689,000 in2004. The decrease of $4.3 million in net income was primarily attributable toa decrease in gross profit.

 

***Comparison of Years EndedDecember 31, 2004 and 2003***

 
| ** **              | ** ** | **Year Ended December 31, 2004** | ** **  | **Year Ended December 31, 2003** | ** ** |
|-------------------------|------------|------------------------------------------------------|-------------|------------------------------------------------------|------------|
| ** **              | ** ** | **$**                                                | ** **  | **% of  Revenue**                               | ** ** | **$** | ** ** | **% of  Revenue** | ** ** |
|                    |       |                                                 |        |                                                 |       |   |   |   |   |
| Revenue                 |       | $                                                    | 238,211,056 |                                                 | 100.0      |   | $ | 207,256,575 |   | 100.0 |   |
| Cost of  revenues       |       | (232,703,866                                         | )           | (97.7                                                | )          | (203,022,360 | ) | (98.0 | ) |
| Operating  expenses     |       | (4,476,511                                           | )           | (1.9                                                 | )          | (3,639,442 | ) | (1.8 | ) |
| Other income  (expense) |       | (1,017,827                                           | )           | (0.4                                                 | )          | 2,210,957 |   | 1.1 |   |
| Minority  interest      |       | 676,792                                              |        | 0.3                                                  |       | 457,620 |   | 0.2 |   |
| Income tax  expense     |       | (1,032                                               | )           | (0.0                                                 | )          | 131,474 |   | 0.1 |   |
|                    |       |                                                 |        |                                                 |       |   |   |   |   |
| Net income (loss)       |       | $                                                    | 688,612     |                                                 | (0.3       | ) | $ | 3,394,824 |   | 1.6 |   |

 

*Revenue* – Revenue increased from $207.3 million forthe year ended December 31, 2003 to $238.2 million for the year endedDecember 31, 2004, an increase of approximately $30.9 million, or 14.9%.The improvement was a result of several factors. Principally, the increase inrevenues was a result of higher soybean meal and soybean oil prices along withhigher sales volume of refined and bleached oil. The average sales prices forsoybean meal, crude soybean oil, and refined and bleached soybean oil increasedby 23.9%, 12.0%, and 30.4%, respectively. In addition, sales volume of refinedand bleached soybean oil increased by 7.3% in 2004 versus 2003. The increasesattributable to these factors were offset by a decrease of 85.1% in salesvolume of crude soybean oil during 2004, which was due to selling less crudesoybean oil than we held in storage during 2003.

 

*Gross Profit/Loss* – During the year ended December 31,2004, we generated a gross profit of $5.5 million, compared to a gross profitof $4.2 million for the year ended December 31, 2003. While revenuesincreased by $30.9 million, cost of revenues increased only $29.7 million over2003. Revenues increased due to higher soybean meal and soybean oil pricesoffset by a decrease in crude soybean oil volume. The increased cost of revenuewas caused by a $26.1 million (15.0%) increase in cost of product sold and a$3.1 million (21.4%) increase in freight expense for the year endedDecember 31, 2004 compared to 2003. The increased cost of product sold wasdue to higher soybean prices, which increased approximately 25.0% from the yearended December 31, 2003. The increased freight cost resulted from higherproduct volumes delivered to customers and higher freight rates.

 

16

----

 

*Administrative Expense* – Administrative expense, including allselling, general and administrative expenses, increased by $837,000, or 23%, forthe year ended December 31, 2004, compared to the same period in 2003.This increase resulted from additional expenses incurred in connection with themanagement and operation of USSC, which remained in the developmental stage andwhere we continued to incur marketing and research and development expenses todevelop a market for SoyolTM. Some of the increase in administrativeexpenses associated with USSC was offset by lower general and administrativeexpenses that we incurred on our crushing and refining operations as a resultof our cost-sharing arrangement with MnSP.

 

*Interest Expense* – In 2004, interest expense increased by$620,000, or 77.7%, compared to 2003. The increase was due to higher debtlevels resulting from the increase in soybean prices and higher interest rates.On December 31, 2004, we had outstanding debt of $10.2 million, most ofwhich consists of our senior debt which bore interest at an annual rate of4.85% as of December 31, 2004. At December 31, 2003, we had outstandingdebt of $18.5 million, the majority of which bore interest at an annual rate of3.47%. The average debt level throughout 2004 was approximately $23.6 millioncompared to an average debt level during 2003 of approximately $21.8 million.

 

*Net Income/Loss* – We recorded net income of $689,000 for theyear ended December 31, 2004, compared to net income of $3.4 million in2003. The decrease of $2.7 million in net income was primarily attributable toa decrease in other non-operating income and an increase in administrative expensesincurred in connection with the management and operation of USSC, offset by anincrease in revenue as a result of higher soybean meal and soybean oil prices.Other non-operating income decreased by $2.7 million (91.3%) for the yearending December 31, 2004, compared to the same period in 2003. Thisdecrease was primarily due to a decrease of $1.1 million in constructionmanagement income and a decrease of $1.5 million in soybean oil storage income

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

***Comparison of the years endedDecember 31, 2005 and 2004***

 
| ** **                                     | ** ** | **2005**  | ** ** | **2004**    | ** ** |
|------------------------------------------------|------------|-----------|------------|-------------|------------|
|                                           |       |      |       |        |       |
| Net cash  from (used for) operating activities |       | $         | (6,298,040 | )           | $          | 11,963,776 |   |
| Net cash  from (used for) investing activities |       | (776,192  | )          | (1,891,791  | )          |
| Net cash  from (used for) financing activities |       | 7,138,365 |       | (10,590,259 | )          |
|                                                |            |           |            |             |            |  |  |

 

*Cash Flows from Operating Activities*

 

The decrease in net cash flow from operatingactivities between 2005 and 2004 was primarily attributed to a decrease in netincome and an increase in working capital requirements. The increase in workingcapital requirements was related to increases in accounts receivable andinventory, along with decreases in accrued commodity purchases and accountspayable. Accounts receivable increased primarily due to placing crude oil instorage with the Chicago Board of Trade in late December 2005. Theincrease in inventory was mostly due to holding an increased quantity ofsoybeans compared to 2004. The decrease in accrued commodity purchases wasattributed to possessing fewer soybeans on our deferred payment program atDecember 31, 2005 than 2004. These increases to the working capitalrequirements were offset by a decrease in our margin deposit accounts from 2004to 2005.

 

*Cash Flows from Investing Activities*

 

The decrease in cash used for investing activitiesbetween 2005 and 2004 was attributed to a decrease in the purchase of capitalimprovements and investments, which were delayed due to lower margins in 2005.In 2005, we spent approximately $609,000 less cash on purchases of property andequipment than in 2004. In 2004, we spent approximately $1.2 million onequipment to increase the energy efficiency of the boiler, for improvements inour crushing operations, and increased storage for SoyolTM. Alsoduring the year ended December 31, 2004, we purchased additional shares inMnSP for approximately $601,000.

 

*Cash Flows from Financing Activities*

 

The increase in net cash provided by financingactivities was due to increasing our long-term debt, the issuance of capitalunits and not paying out a distribution to our members in 2005. In order tofinance the increasing working capital requirements in 2005, we increased ourlong-term debt by approximately $5.6 million compared to decreasing our debt by$8.3 million in 2004. In addition, we acquired proceeds of $4.3 million fromthe issuance of 2,190,500 capital units during our 2005 public offering. Whileno distributions were made in 2005, we made $3.3 million in distributions toour members in 2004.

 

17

----

 

We anticipate in the next 12 months havingsufficient cash flows from operating activities and our revolving debt to fundworking capital and to cover operating and administrative expenses, capitalexpenditures, and debt service obligations, although any significant legalclaims resulting from our 2005 public offering (see below) could reduce ourability to fund our growth including planned capital expenditures in 2006.

 

***Comparison of the years endedDecember 31, 2004 and 2003***

 
| ** **                                     | ** ** | **2004**    | ** ** | **2003**   | ** ** |
|------------------------------------------------|------------|-------------|------------|------------|------------|
|                                           |       |        |       |       |       |
| Net cash  from (used for) operating activities |       | $           | 11,963,776 |       | $          | 1,960,946 |   |
| Net cash  from (used for) investing activities |       | (1,891,791  | )          | (5,504,904 | )          |
| Net cash  from (used for) financing activities |       | (10,590,259 | )          | 4,062,485  |       |
|                                                |            |             |            |            |            |  |  |

 

*Cash Flows from Operating Activities*

 

Operating activities generated $12 million for theyear ended December 31, 2004, compared to $2.0 million for the year endedDecember 31, 2003. The funds generated in the year ended December 31,2004 consisted primarily of $689,000 of cash from net income plus depreciationand amortization of $3.7 million, a $8.3 million change in current assets andliabilities, less $677,000 of minority interest in the net loss of USSC andnon-cash patronage dividends of $108,000. The primary changes from 2003included a $12.4 million decrease in working capital needs, offset by adecrease of $2.1 million in net income in 2004, a $219,000 reduction inminority interest in net loss of subsidiary, and a $98,000 reduction indepreciation expense.

 

*Cash Flows from Investing Activities*

 

Investing activities used $1.9 million during theyear ending December 31, 2004 compared to $5.5 million for the yearended December 31, 2003. The purchase of shares in MnSP accounted for$601,000 of such expenditures in 2004. In 2003, we purchased shares in USSCamounting to $4.1 million. In addition, we purchased $1.2 million of propertyand equipment during the year ending December 31, 2004, compared to $1.0million purchased in the period ending December 31, 2003. The $1.2 millionspent on property and equipment during the year ended December 31, 2004consisted of equipment to increase the energy efficiency of the boiler,improvements in our crushing operations, and increased storage for SoyolTM.During 2003, the $1.0 million spent on property and equipment consisted ofconsolidation software to upgrade our technological capabilities and severalother projects to improve our soybean processing and refining operations.

 

*Cash Flows from Financing Activities*

 

Net cash used by financing activities for the yearsending December 31, 2004 was $10.6 million, compared to providing $4.1million of cash in 2003. During the year ended December 31, 2004, we madepayments of $8.3 million on long-term debt commitments by carrying smallervalues in accounts receivable and distributed $3.3 million to our members,offset by a $1.0 million increase in outstanding checks in excess of bankbalances. During the year ended December 31, 2003, we increased our borrowingsby $9.5 million, as a result of carrying larger values in accounts receivableand inventory, less operating income and expenditures for capital investments,including our investment in USSC. These additional borrowings in 2003 wereoffset by a distribution to our members of $2.5 million and payments of $1.6million on long-term debt commitments.

 

***Indebtedness***

 

CoBank is our primary lender. On October 6,2005, we modified the two lines of credit with CoBank to meet the needs of ouroperations. The first is a revolving long-term loan agreement. Under the termsof this loan, we began with a $17.1 million credit line. It reduces by $1.3million every six months. The final payment will be equal to the remainingunpaid principal balance of the loan on March 20, 2012. The revolving loanis set up so that we may borrow funds as needed up to the credit linemaximum, and then pay down the principal whenever excess cash is available.Repaid amounts may be reborrowed up to the available credit line. We pay a0.50% annual commitment fee on any funds not borrowed.

 

The second credit line is a revolving workingcapital loan that expires on September 1, 2006. The primary purpose ofthis loan is to finance inventory and receivables. The maximum availabilityunder this credit line is $16 million. Borrowing base reports and financialstatements are required monthly to justify the balance borrowed on this line.We pay a 0.25% annual commitment fee on any funds not borrowed; however, wehave the option to reduce these credit lines during any given commitment periodlisted in the agreement to avoid the commitment fee.

 

Both CoBank loans are set up with a variable rateoption. The variable rate is set by CoBank and changes weekly on the firstbusiness day of each week. We also have a fixed rate option on both loansallowing us to fix rates for any period

 

18

----

 

betweenone day and the entire commitment period. We can get a fixed rate quote fromCoBank at any time and lock-in the interest rate on all or a part of ourborrowings that are available for fixing. Both CoBank loans are secured bysubstantially all of our assets. In addition, both loans are subject tocompliance with standard financial covenants and the maintenance of certainfinancial ratios, including but not limited to, a fixed debt service coverageratio of not less than 1.2:1.00 and a minimum working capital of not less than$6 million including the amount available and outstanding balance on therevolving long-term loan. During the fourth quarter ended December 31,2005, we were not in compliance with the working capital covenant but CoBankagreed to waive this requirement. Currently, we are in compliance with allcovenants under the loan agreement.. The balance borrowed on the revolving termloan was $14.5 million and $7.9 million as of December 31, 2005and 2004, respectively. There were no advances outstanding on the workingcapital loan at December 31, 2005 and 2004. The annual interest rate onboth the working capital and revolving term loans as of December 31, 2005was 7.05%.

 

We also have other long-term contracts and notestotaling approximately $1.3 million, with a weighted average annual interestrate of 3.5% as of December 31, 2005. These arrangements include a nointerest $891,000 long-term payable to the other USSC shareholders relating toour purchase of their tendered USSC shares. The obligation is secured by thepurchased shares, with the final annual payment due on October 31, 2006.Our highest interest payable during 2005 was a $250,000 loan held by USSC at15% per annum, which became due February 13, 2005. We made principalpayments of $965,000 and $976,000 on these additional long-term obligationsduring the years ended December 31, 2005 and 2004, respectively.

 

***Capital Raising***

 

Duringthe year ended December 31, 2005, we conducted a registered publicoffering to sell up to 5,625,000 new capital units. The offering was madeavailable initially only to our existing members at a price of $2.00 per unituntil April 11, 2005, and then was made available to the general public ata price of $2.50 per unit. When the offering expired on May 31, 2005, wehad sold 2,190,500 capital units for a total of $4,495,750.

 

***Capital Expenditures***

 

We only invested approximately $600,000 in capitalexpenditures for property and equipment during the year ended December 31,2005 compared to approximately $1.2 million in capital expenditures during theyear ended December 31, 2004. Depending on our profitability in 2006, weanticipate spending between $1.0 and $2.0 million on capital expendituresduring the year ended December 31, 2006. Our principal sources of fundsare anticipated to be cash flows from operating activities and borrowings underour revolving and working capital loans with CoBank.

 

***Potential Legal Claims due to OurPublic Offering in 2005***

 

We could be subject to claims from investors in thefuture as a result of our public offering in 2005 and based on the requirementsof federal securities laws. On May 31, 2005, we closed a public offeringof capital units, raising approximately $4.5 million in proceeds from existingand new investors. On June 7, 2005, we received notification from the SECthat our filings were under review. During the course of the review, the SECrequested additional information about our change in auditors for the audit ofour financial statements for the year ended December 31, 2004 as disclosedin the our Form 8-K filing dated January 18, 2005. After considering suchinformation, we determined that the independence of the audit firm, Eide BaillyLLP, with respect to its audit of our financial statements for the year endedDecember 31, 2003 was compromised and decided to have the financialstatements for that period reaudited. As a result, in the latter part of2005 our Board of Managers engaged Gordon, Hughes, & Banks LLP toreaudit the financial statements for the year ended December 31, 2003. There-audit produced an unqualified opinion and there was no effect on previouslyreported net income or member’s equity. During early 2005, prior to receivingnotice of the SEC review, we solicited investors through a Form S-1registration statement which included the 2003 audit opinion letter from EideBailly LLP and the audited financial statements for the year endedDecember 31, 2003. Because the independence of Eide Bailly was compromisedfor that period, the registration statement did not meet the requirements offederal securities law. The financial statements included in our periodicreports for such periods, as amended, are now compliant with the independentauditor requirements of applicable securities law, but there remains apossibility that claims could be made against us relating to the inclusion inthe offering materials of the original audit opinion letter. We therefore haveclassified the proceeds from this offering as temporary member’s equity. Ifclaims are indeed made against us and the aggregate amount of such claimsreaches a significant percentage of the total proceeds raised in the offering,but we are unable to dismiss or settle the claims in our favor, itmay have an adverse effect on our business. Our ability to invest in ouroperations, for instance, including our planned capital expenditures in 2006,could be reduced significantly as we anticipate financing any claims from cashflow from operations.

 

**OFF BALANCE SHEET FINANCING ARRANGEMENTS**

 

We do not utilize variable interest entities orother off-balance sheet financial arrangements.

 

19

----

 

**Lease Commitments**

 

We have commitments undervarious operating leases for rail cars, various types of vehicles, and lab andoffice equipment. Our most significant lease commitments are the rail carleases we use to distribute our products. We have a number of long-term leaseswith GE Capital and Trinity Capital for hopper rail cars and oil tank cars.Total lease expense under these arrangements was approximately $2.1 million forboth years ended December 31, 2005 and 2004. The hopper rail cars earn mileagecredit from the railroad through a sublease program, which totaled $2.2 millionand $1.8 million for the years ended December 31, 2005 and 2004,respectively.

 

In addition to rail carleases, we have several operating leases for various equipment and storagefacilities. Total lease expense under these arrangements was $283,000 and$198,000 for the years ended December 31, 2005 and 2004, respectively.Some of these leases include purchase options; however, none are for a valueless than fair market value at the end of the lease.

 

The following table shows our contractual obligations for the periodspresented.

 

**CONTRACTUAL OBLIGATIONS**

 
| ** **                  | ** ** | **Payment due by period** | ** ** |
|-----------------------------|------------|------------------------------------------|------------|
| ** **                  | ** ** | **Total**                                | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
|                        |       |                                     |       |   |   |   |   |   |   |   |   |
| Long-Term Debt Obligations  |       | $                                        | 15,796,331 |   | $ | 1,212,768 |   | $ | 5,282,375 |   | $ | 5,201,188 |   | $ | 4,100,000 |   |
|                        |       |                                     |       |   |   |   |   |   |   |   |   |
| Operating Lease Obligations |       | 19,529,897                               |       | 2,514,808 |   | 4,287,803 |   | 3,333,284 |   | 9,394,002 |   |
|                        |       |                                     |       |   |   |   |   |   |   |   |   |
| Other Long-Term Liabilities |       | 129,072                                  |       | 11,000 |   | 11,000 |   | — |   | 107,072 |   |
|                        |       |                                     |       |   |   |   |   |   |   |   |   |
| Total                       |       | $                                        | 35,455,300 |   | $ | 3,738,576 |   | $ | 9,581,178 |   | $ | 8,534,472 |   | $ | 13,601,074 |   |

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

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

 

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

 

Of the significantaccounting policies described in the notes to the financial statements, webelieve that the following may involve a higher degree of estimates,judgments, and complexity:

 

*Commitments and Contingencies*

 

Contingencies, by theirnature relate to uncertainties that require management to exercise judgmentboth in assessing the likelihood that a liability has been incurred, as well asin estimating the amount of the potential expense. In conformity withaccounting principles generally accepted in the United States, we accrue anexpense when it is probable that a liability has been incurred and the amountcan be reasonably estimated.

 

*Inventory Valuation*

 

We account for ourinventories at estimated net realizable market value. These inventories areagricultural commodities that are freely traded, have quoted market prices,may be sold without significant further processing, and have predictableand insignificant costs of disposal. We derive our estimates from local marketprices determined by grain terminals in our area. Processed product priceestimates are determined by the ending sales contract price as of the close ofthe final day of the period. This price is determined by the closing price onthe Chicago Board of Trade, net of the local basis. Changes in the marketvalues of these inventories are recognized as a component of cost of goodssold.

 

*Long-Lived Assets*

 

Depreciation andamortization of our property, plant and equipment is provided on thestraight-lined method by

 

20

----

 

charges to operations atrates based upon the expected useful lives of individual or groups of assets.Economic circumstances or other factors may cause management’s estimatesof expected useful lives to differ from actual.

 

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

 

The Company evaluates therecoverability of identifiable intangible assets whenever events or changes incircumstances indicate that an intangible asset’s carrying value may notbe recoverable. Such circumstances could include, but are not limited to:(1) a significant decrease in the market value of an asset, (2) asignificant adverse change in the extent or manner in which an asset is used,or (3) an accumulation of costs significantly in excess of the amountoriginally expected for the acquisition of an asset. The Company measures thecarrying amount of the asset against the estimated undiscounted future cashflows associated with it. Should the sum of the expected future net cash flowsbe less than the carrying value of the asset being evaluated, an impairmentloss would be recognized. The impairment loss would be calculated as the amountby which the carrying value of the asset exceeded its fair value. The fairvalue is measured based on quoted market prices, if available. If quoted marketprices are not available, the estimate of fair value is based on variousvaluation techniques, including the discounted value of estimated future cashflows. The evaluation of asset impairment requires the Company to makeassumptions about future cash flows over the life of the asset being evaluated.These assumptions require significant judgment and actual resultsmay differ from assumed and estimated amounts.

 

*Accounting for DerivativeInstruments and Hedging Activities*

 

We minimize theeffects of changes in the price of agricultural commodities by usingexchange-traded futures and options contracts to minimize our net positions in theseinventories and contracts. We account for changes in market value onexchange-traded futures and option contracts at exchange prices and account forthe changes in value of forward purchase and sales contracts at local marketprices determined by grain terminals in the area. Changes in the market valueof all these contracts are recognized in earnings as a component of cost ofgoods sold.

 

**Item 7A.     Quantitative and Qualitative Disclosure about Market Risk**

 

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

 

At any one time, ourinventory and purchase contracts for delivery to the plant may besubstantial. We have risk management policies and procedures that include netposition limits. They are defined by commodity, and include both trader andmanagement limits. This policy and procedure triggers a review by managementwhen any trader is outside of position limits. The position limits are reviewedat least annually with the Board of Managers. We monitor current marketconditions and may expand or reduce the limits in response to changes inthose conditions.

 

***Foreign Currency Risk.***We conduct essentially all of our business in U.S. dollars and have nodirect risk regarding foreign currency fluctuations. Foreign currencyfluctuations 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 loanagreements with fixed rate options. Long-term loan agreements can utilize thefixed option through maturity; however, the revolving ability to pay down andborrow back would be eliminated once the funds were fixed.

 

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

 

Reference is made to the “Indexto Financial Statements” of South Dakota Soybean Processors, LLC located atpage F-1 of this report, and financial statements and schedules for theyears ended December 31, 2005, 2004 and 2003.

 

21

----

 

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

 

On January 18, 2005, weaccepted Eide Bailly’s resignation from its engagement to perform the audit ofour financial statements for the year ended December 31, 2004.  Suchresignation was presented in person by representatives of Eide Bailly andapproved by our Audit and Finance Committee and our Board of Managers atmeetings held on January 18, 2005.  Eide Bailly stated that thereason for its resignation was its concern that the assistance rendered to usby certain of Eide Bailly’s personnel in connection with the preparation of ourfinancial statements in 2004, though believed to be de minimus, could be viewedas prohibited bookkeeping services and that its independence to perform ouraudit for 2004 could therefore be compromised.  We did not dispute EideBailly’s determination.

 

Eide Bailly performed theaudits for our financial statements for the years ended December 31, 2003and 2002, and neither of the reports on the financial statements for either ofthose years contained an adverse opinion or a disclaimer of opinion, or wasqualified or modified as to uncertainty, audit scope, or accountingprinciples.  We had no disagreements with Eide Bailly during either of ourtwo fiscal years (2002-2003) or during any subsequent interim period precedingits resignation on any matter of accounting principles or practices, financialstatement disclosure, or auditing scope or procedure, which disagreement(s), ifnot resolved to the satisfaction of Eide Bailly, would have caused it to makereference to the subject matter of the disagreement(s) in connection with itsreport. ** **Eide Bailly has notadvised us: (a) that the internal controls necessary for us to developreliable financial statements do not exist, (b) that information has cometo its attention that has led it to no longer be able to rely on management’srepresentations, or that has made it unwilling to be associated with thefinancial statements prepared by management, or (c) of the need to expandsignificantly the scope of its audit or that information has come to itsattention that if further investigated may (i) materially impact thefairness or reliability of a previously issued audit report or the underlyingfinancial statements with respect to the periods covered by such reports, orfor any subsequent period or (ii) cause it to be unwilling to rely onmanagement’s representations or be associated with our financial statements.

 

Also on January 18,2005, our Audit and Finance Committee and Board of Managers approved theengagement of Gordon, Hughes & Banks, LLP, to perform the audit of ourfinancial statements for the fiscal year ended December 31, 2004, and tore-review our interim financial statements for the first three quarters of2004.  Prior to this time, Gordon, Hughes & Banks had neverperformed any audit services or any other accounting or advisory services forus. Gordon, Hughes & Banks completed its audit of our 2004 financialstatements.  Subsequently, in connection with its review of ourForm 10-K for the year ended December 31, 2004, the SEC alsoquestioned whether the independence of Eide Bailly may have been compromisedwith respect to its review of the financial statements for the quarter endedSeptember 30, 2003, and its audit of the financial statements for the yearended December 31, 2003.  Following communication with the SECregarding the application of the independence rules in effect at the time,we agreed to comply with the SEC’s request to amend our SEC filings. Gordon,Hughes & Banks subsequently completed its audit of the 2003 financialstatements, and delivered to us its signed audit report, dated as ofSeptember 30, 2005, which was filed as Form 10-K/A for the yearsended December 31, 2003. No restatement of our previously filedfinancial statements for such periods was required as a result of such subsequentaudit.

 

**Item 9A.     Controls and Procedures.**

** **

***Evaluation of Disclosure Controls and Procedures****.* Based on their evaluation as of the end ofthe period covered by this Annual Report on Form 10-K, our principalexecutive officer and principal financial officer have concluded that theCompany’s disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of1934) are effective to ensure that information required to be disclosed by theCompany in reports that it files or submits under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms.

 

***Changes in Internal Control Over Financial Reporting****.* There were no changes in our internalcontrol over financial reporting identified in connection with the evaluationof disclosure controls and procedures that occurred during the year that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**Item 9B.****    ****Other Information.**

 

None.

 

22

----

 

**Part III**

 

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

 

**Board of Managers**

 

Our Board of Managers consistsof three members from each of seven geographic districts, for a total of 21Board members. Board members are elected to staggered three-year terms by themembers in their geographic district and currently may not serve more thanthree consecutive three-year terms. Generally, one Board seat in each of theseven geographical districts is elected at our annual meeting each year asrequired by our Operating Agreement.

 

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

 
| **Name, Address and  Board Position, if any** | ** ** | **Age**    | ** ** | **Board  Member  Since** | ** ** | **Current  Term  Expiring** | ** ** | **Occupation  and  Background**                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|------------------------------------------------------------------------|------------|------------|------------|--------------------------|------------|-----------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Paul Barthel**22308 486th  Ave.  Elkton, SD 57026                    |       | 37         |       | 1996                     |       | 2006                        |       | Paul has been a farmer for the past 18 years. He  is a member of the South Dakota Soybean Association, and the South Dakota  Corn Growers. Paul graduated from South Dakota State University in Brookings,  South Dakota in 1992 with a major in Ag Business and minor in Agronomy.                                                                                                                                                                                       |
|                                                                   |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Dean Christopherson**32732 Quine Ave.  Worthington, MN  56187        |       | 58         |       | 2004                     |       | 2007                        |       | Dean has been a farmer for the past 34 years. He  is president of Nobles County Farm Bureau and a 4-H leader. He is a past  director of SouthWest Farm Management and AMPI. Dean is a trustee and  committee member of First Covenant Church in Worthington, MN. He attended  Worthington Community College for two years and the University of Minnesota  for one year.                                                                                                  |
| ** **                                                             | ** ** | ** ** | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **David Driessen**105 4th  St. West  Canby, MN 56220                   |       | 51         |       | 2005                     |       | 2008                        |       | David has been a farmer for the past 28 years. He  is past director of the Canby Farmers Grain Coop. He received his B.A. degree  in 1977 from Southwest State University in Marshall, Minnesota.                                                                                                                                                                                                                                                                         |
|                                                                   |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Wayne Enger**2090 180th Street  Madison, MN 56256                    |       | 52         |       | 2004                     |       | 2007                        |       | Wayne has been a farmer for the past 30 years. He  is secretary of the State Line Farmers Cooperative Elevator and was a board  member of the Lac Qui Parle County Soybean Producers. Wayne has served as  president and treasurer of the Midwest Cattlemen’s Association and is a  former member of the Garfield Lutheran Church Board. Wayne received his B.A.  degree in Mathematics and German literature from University of  Minnesota-Morris in** **1975. |
|                                                                   |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Ronald J. Gorder**19196 471st  Ave.  Estelline, SD 57234             |       | 42         |       | 2005                     |       | 2008                        |       | Ronald has been a farmer for the past 22 years. He  is president of Trinity Church in Estelline and vice president of the  Estelline School Board. He is also president of the South Dakota Soybean  Association. Ronald attended Concordia College in Moorhead, Minnesota in 1982                                                                                                                                                                                        |
|                                                                   |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Ryan J. Hill**36327 210th  St.  Brewster, MN  56119                  |       | 57         |       | 1995                     |       | 2006                        |       | Ryan has been a farmer for the past 30 years. He  is a member of the National and Minnesota Corn and Soybean Growers  Associations. Ryan attended Worthington Junior College, and participated in  the U.S. Navy Engineering metallurgy program in 1969.                                                                                                                                                                                                                  |
|                                                                   |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Kent Howell**212981 464th Ave.  Volga, SD 57071                      |       | 49         |       | 2005                     |       | 2008                        |       | Kent has been a farmer for the past 28 years. Kent  previously served as secretary of Volga Coop Oil Co. and Meadow Creek Golf Course  and the secretary/treasurer of the Volga Fire Department. Kent received his  B.S. from South Dakota State University in Brookings, South Dakota in 1977.                                                                                                                                                                           |
|                                                                   |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Jerome L. Jerzak**2974 County Hwy 5  Ivanhoe, MN 56142               |       | 58         |       | 2005                     |       | 2008                        |       | Jerome has been a farmer for the past 41 years. He  is a member of the Minnesota Crop Improvement Association, the South Dakota  Soybean Association and the South Dakota Corn Growers, and is a former board  member of the Ivanhoe Elevator Cooperative and the Ivanhoe School Board.                                                                                                                                                                                   |

 

23

----

 
| **Peter Kontz**47068 223rd  St.  Colman, SD 57017                 |       | 63         |       | 1998       |       | 2007       |       | Peter has been a farmer for the past 39 years. He  is a member of the South Dakota Cattlemen’s Association (Treasurer for four  years), South Dakota Corn Growers Association, and the South Dakota Soybean  Association. He attended the School of Agriculture in Brookings, South  Dakota.                                                                                                                                                                                                               |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                              |       |       |       |       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Laron  Krause**47244 181st St.  Clear Lake, SD 57226            | ** ** | 45         | ** ** | 2004       | ** ** | 2007       | ** ** | Laron has  been a farmer for the past 29 years. He is a member of the South Dakota  Soybean Association, South Dakota Pork Producers, and South Dakota Corn  Growers Association, and is a former president of the South Dakota Soybean  Association. Laron graduated from Canby Vocational Tech in Canby, Minnesota  in 1980 with a degree in Production Agriculture.                                                                                                                                          |
|                                                              |       |       |       |       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Bryce Loomis***President*19989 464th  Ave.  Bruce, SD 57220     |       | 63         |       | 1998       |       | 2007       |       | Bryce has been a farmer and seed sales  representative for the past 40 years. He is a member of the National Corn  Growers Association, the South Dakota Soybean Producers Association and the  Farm Bureau.                                                                                                                                                                                                                                                                                                    |
|                                                              |       |       |       |       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Dale Murphy**102 E. 2nd  Ave.  PO Box 686  White, SD 57276      |       | 75         |       | 1994       |       | 2006       |       | Dale is a retired farmer, and was an active farmer  for the previous 38 years. He was a director of the First National Bank in  White, SD between 1987-1999. Dale attended Nettleton Commercial College in  Sioux Falls, South Dakota and earned a certificate in auditing and accounting  in 1957.                                                                                                                                                                                                             |
|                                                              |       |       |       |       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Robert Nelsen**1173 280th  Ave.  Westbrook, MN 56183            |       | 65         |       | 2005       |       | 2008       |       | Robert has been a farmer for the past 44 years. He  is a state director of the Minnesota Soybean Growers Association and a board  member of the Murray County Corn and Soybean Growers. He is also on the  executive board of the Lions Club of Westbrook, Minnesota.                                                                                                                                                                                                                                           |
|                                                              |       |       |       |       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Daniel Potter**31012 County  Highway 6  Redwood Falls, MN 56283 |       | 74         |       | 1995       |       | 2006       |       | Daniel has been a farmer for the past 54 years and  is a 50% owner of Potterosa Farms, Inc. He belongs to the Redwood County  Cattlemen’s Association, and the National Cattlemen’s Association. He is also  a supervisor of the Redwood Soil and Water Conservation District and chairs  the Administrative Council of the New Avon United Methodist Church.                                                                                                                                    |
|                                                              |       |       |       |       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **Steven C. Preszler**28708 433rd Ave.  Menno, SD 57045           |       | 47         |       | 2005       |       | 2007       |       | Steven has been a farmer for the past 27 years. He  is director and vice president of Lumber Yard Board. Steven is also the past  president of Jaycees of Menno and treasurer of the Salem Reformed Church.  Steven is a brother-in-law of Corey Schnabel who is also a board member.                                                                                                                                                                                                                           |
| ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Greg Schmieding**6213 S. Doral Tr.  Sioux Falls, SD 57108       |       | 50         |       | 2005       |       | 2008       |       | Greg has been a senior vice president of Metavante  since July 1994 and global account director for Manpower, Inc. since  July 2005. Prior to this, Greg was a senior vice president of First Data  Corp. for two years and employed by IBM for over eleven years. Greg also  currently manages his family farm operations in South Dakota and Iowa. He  received his B.S. degree from South Dakota State University in 1977 and his  M.B.A. degree from the University of South Dakota in 1981. |

 

24

----

 
| **Corey Schnabel**43555 273rd  St.  Freeman, SD 57029                      |   | 47     |   | 2005   |   | 2008   |   | Corey has been a farmer for the past 25 years. He  is also a Grandview Township Supervisor. He belongs to the South Dakota and  National Corn Growers Association, the South Dakota and American Simmental  Association. He is also a former director of the South Dakota Corn Growers  Association and National Corn Growers Association. Corey is a graduate of  Lake Area Technical Institute in Watertown, South Dakota, where he earned an  Associate degree in Ag Business in 1980. Corey is a brother-in-law of Steven  Preszler who is a board member also representing District 3. |
|----------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                       |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Rodney Skalbeck**80903 160th  St.  Sacred Heart, MN 56285                |   | 72     |   | 1995   |   | 2006   |   | Rodney has been a farmer for the past 52 years. He  belongs to the Farmers Union, Land Stewardship Project and is a former  director of the Farm Credit association where he has had positions as  chairman and vice chairman. He is also a former school board member and  church board member and treasurer.                                                                                                                                                                                                                                                                                   |
|                                                                       |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Delbert Tschakert***Vice-President*16150 442nd  Ave.  Florence, SD 57235 |   | 50     |   | 1994   |   | 2006   |   | Delbert has been a farmer for the past 26 years,  producing corn, soybeans, and hay commodities. He is a member of the South  Dakota Soybean Association, the South Dakota Corn Growers Association, and  former President of the South Dakota Soybean Association. Delbert received  his B.S. in Ag Communications with a minor in Economics from South Dakota  State University in 1977.                                                                                                                                                                                                       |
|                                                                       |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Anthony Van Uden**3461 300th  Ave.  Cottonwood, MN 56229                 |   | 67     |   | 1996   |   | 2007   |   | Anthony has been a farmer for the past 45 years.  He is a member of Minnesota Soybean Association, and the American Legion. He  is a past director of the Farmers Elevator Company, Cottonwood, MN, Lucas  Town board, as Chairman, and the Lyon County Planning and Zoning Committee.                                                                                                                                                                                                                                                                                                           |
|                                                                       |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Ardon Wek***Secretary*43958 288th St.  Freeman, SD 57029                 |   | 47     |   | 1996   |   | 2006   |   | Ardon has been a farmer for the past 27 years. He  is a member of the South Dakota Corn Growers, and the South Dakota Soybean  Association. Ardon graduated from Mitchell Technical College in Mitchell,  South Dakota. His major was Architectural Drafting, and Building  Construction.                                                                                                                                                                                                                                                                                                        |

 

**Compensation of Board of Managers**

 

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

 

**Committees of Board of Managers**

 

The Board of Managers hasformed the following committees: finance and audit committee, nominationcommittee, governance committee, public relations committee, and planningcommittee.  The current members of the Finance and Audit Committee areDaniel Potter, who serves as the chairperson of the committee, Wayne Enger,Jerome Jerzak, Robert Nelsen, Steven Preszler, Greg Schmieding, Anthony VanUden and Ardon Wek.  Because our Board members are generally farmers, asis common for producer-based agricultural entities, we do not have an auditcommittee financial expert serving on our finance and audit committee. The Board, however, has selected members for the finance and audit committeebased on the Board’s determination that they are fully qualified to monitormanagement, our internal accounting operations and the independent auditors andare fully qualified to monitor our disclosures to assure that they fairlypresent our financial condition and results of operations. In addition, thefinance and audit committee has the authority to engage advisers as it deemsnecessary to assist it in carrying out its duties.

 

The currentmembers of the Nomination Committee are Robert Nelsen, who serves as thechairperson of the committee, Paul Barthel, Dale Murphy, Daniel Potter, RodneySkalbeck, Delbert Tschakert and Ardon Wek. Our Nomination Committee Charter isavailable for review on our website at http://www.sdsbp.com.   Inorder to submit a nominee for the Board to the Nomination Committee for the2006 Annual Meeting, members were required to return a nomination petition formto the Nomination Committee no later than March 31, 2006. Nominations will not be accepted from the floor at the

 

25

----

 

2006 Annual Meeting. Themembers of the Nomination Committee will review each of the submitted formsduring their selection process and may also search for and contact additionalpotential nominees at their discretion.

 

**Executive Officers**

 

The following individualsserve as our executive officers in the capacities listed. These officers serveat the discretion of the Board of Managers and can be terminated withoutnotice.

 
| **Name**               | ** ** | **Age** | ** ** | **Position**            |
|------------------------|------------|---------|------------|-------------------------|
|                   |       |    |       |                    |
| Rodney G. Christianson |       | 52      |       | Chief Executive Officer |
| Thomas J. Kersting     |       | 43      |       | Commercial Manager      |
| James A. Seurer        |       | 42      |       | Chief Financial Officer |

 

**Rodney G.Christianson, *Chief Executive Officer*.** Rodney joined us as the Chief ExecutiveOfficer when operations began in 1996. With 20 years of service withCargill, Inc. in its Food, Industrial, and Oilseed Sectors, Rodney came tous with significant operational and managerial experience in the United Statesand Brazil. A member of the management team for the Greenfield construction andstart up of Cargill’s sunflower plant in West Fargo, North Dakota, Rodney’sexperience helped direct our difficult startup toward a financially successfulfirst year of operations.

 

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

 

Rodney has completeresponsibility for our operations.

 

**Thomas J.Kersting, *Commercial Manager.*** Tom joined us as the Procurement Managerwhen operations began in 1996, and since 1998 has served as the CommercialManager. Tom was affiliated with Harvest States Cooperative from July 1988until May 1996. Tom held such positions as Market Analyst/Advisor and HeadProcurement Merchandiser for Harvest States Cooperative throughout NorthDakota, South Dakota, and Minnesota. As a market analyst, Tom assisted grainelevator profitability by using advanced management and marketing techniqueswhile incorporating specific risk management procedures.

 

Tom graduated from theUniversity of Minnesota’s College of Agriculture with a B.S. in AgriculturalBusiness Administration with an emphasis in operations management. Tom is alicensed commodity broker, a director of the National Oilseed ProcessorsAssociation, a voting member of the National Biodiesel Board and our contactfor the Chicago Board of Trade.

 

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

 

**James A.Seurer, *Chief Financial Officer.* **After spending nearly18 years in the financial institution industry, Jim joined us as ChiefFinancial Officer in March 2005.  Most recently, Jim served for fouryears as Vice President/Chief Financial Officer of Red Rocks Federal CreditUnion in Highlands Ranch, Colorado (Denver).  Prior to that Jim served for14 years as a Federal Examiner and Problem Case Officer with the National CreditUnion Administration and he spent a short time in a similar capacity with theState of Colorado.

 

Jim received a B.S. inBusiness Administration with emphasis in Accounting and Business Management in1986 from Northern State University in Aberdeen, SD.  Jim is a licensedCertified Public Accountant (CPA) in the State of Colorado and a member of theColorado Society of CPAs*.*

 

**Code of Ethics**

 

We have adopted a writtencode of ethics, which applies to our principal executive officer, principalfinancial and accounting officer, controller or persons performing similarfunctions.  A copy of the code of ethics is filed as Exhibit 14.1 tothis Report.

 

**Compliance with ReportingRequirements of Section 16 of the Exchange Act**

 

UnderSection 16(a) of the Exchange Act, our directors, executive officersand any persons holding 10% or more of the common stock are required to reporttheir ownership of our capitalunits and any changes in that ownership to the Securities and ExchangeCommission (the “SEC”) and to furnish us with copies of such reports. Specificdue dates for these reports have been established and we are required todisclose in this report any failure to file on a timely basis by such persons.To our knowledge, based solely upon a review of copies of such reports receivedby us which were filed with the SEC from January 1, 2005 throughMarch 15, 2006, and upon written representations from such persons that noother reports

 

26

----

 

were required, we believethat all reports required to be filed under Section 16(a) for 2005have been timely filed with the SEC, other than a Form 4 filed byMr. Wayne Enger on October 12, 2005.

 

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

 

**SummaryCompensation Table.****The following table sets forth all thecompensation we paid during the years ended December 31, 2005, 2004, and2003 to our principal executive officer and each officer paid over $100,000 inour last fiscal year (the “named executive officers”).  No other officersreceived total compensation exceeding $100,000 during the year endedDecember 31, 2005.

 
| ** **                                 | ** ** | ** **      | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **                      | ** ** | **Long-Term Compensation** | ** ** | ** **                                          | ** ** |
|--------------------------------------------|------------|-----------------|------------|------------------------------|------------|------------|------------|---------------------------------|------------|---------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | ** **      | ** ** | **Annual Compensation** | ** ** | **Awards** | ** ** | **Payouts**                     | ** ** | ** **                      | ** ** |
| **Name and  Principal Position** | ** ** | **Year  Ended** | ** ** | **Salary**                   | ** ** | **Bonus**  | ** ** | **Other  Annual  Compensation** | ** ** | **Restricted  Stock  Award(s)** | ** ** | **Securities  Underlying  Options/  SARs (#)** | ** ** | **LTIP  Payouts** | ** ** | **All  Other  Compensation** | ** ** |
| ** **                                 | ** ** | ** **      | ** ** | **($)**                      | ** ** | **($)**    | ** ** | **($)**                         | ** ** | **($)**                         | ** ** | ** **                                          | ** ** | **($)** | ** ** | **($)** | ** ** |
|                                       |       |            |       |                         |       |       |       |                            |       |                            |       |                                                |       |   |   |   |   |
| Rodney G.  Christianson                    |       | 2005            |       | 266,667                      |       | 3,536      |       | 4,590                           |       | —                          |       | —                                              |       | — |   | 4,531 |   |
| *Chief  Executive Officer*                 |       | 2004            |       | 245,833                      |       | 20,894     |       | 4,590                           |       | —                          |       | —                                              |       | — |   | 4,196 |   |
|                                       |       | 2003            |       | 200,000                      |       | 36,190     |       | 3,855                           |       | —                          |       | —                                              |       | — |   | 3,855 |   |
|                                       |       |            |       |                         |       |       |       |                            |       |                            |       |                                                |       |   |   |   |   |
| Thomas J.  Kersting                        |       | 2005            |       | 130,000                      |       | 350        |       | —                          |       | —                          |       | —                                              |       | — |   | 3,002 |   |
| *Commercial  Manager*                      |       | 2004            |       | 110,750                      |       | 14,200     |       | —                          |       | —                          |       | —                                              |       | — |   | 2,780 |   |
|                                       |       | 2003            |       | 103,792                      |       | 12,500     |       | —                          |       | —                          |       | —                                              |       | — |   | 13,299 |   |

 

On February 1, 2004, weentered into a four-year employment agreement with Mr. Christianson thatexpires on January 31, 2008.  Under the employment agreement,Mr. Christianson received an annual salary of $250,000 throughAugust 31, 2005 and will receive an annual salary of $300,000 for theremaining term of the agreement.  Mr. Christianson is also entitledto receive an incentive bonus equal to one-half of one percent of net incomebefore taxes and member distributions, excluding certain extraordinary items ofincome and expense, on up to $5.0 million net income, or 1% of net incomebefore taxes and member distributions if net income exceeds $5.0 million.Mr. Christianson may elect to have his incentive bonus paid directly ordeferred.  Mr. Christianson is also entitled to participate in401(k), healthcare and other retirement and welfare benefit programs that aregenerally available to employees and a vehicle to be used for businesspurposes. Mr. Christianson is entitled to eighteen months of severance payin the event that we terminate his employment during the term of the agreement,other than for cause. Mr. Christianson’s employment contract is terminableat will by the Board of Managers without cause, and may be terminated byMr. Christianson with 60 days’ notice.  The employment agreement alsoincludes a two-year non-competition provision.

 

Mr. Kersting has anemployment agreement with us that is terminable at will. Mr. Kerstingreceives a base salary and is entitled to participate in 401(k), healthcare andother retirement and welfare benefit programs that are generally available toemployees, including the employee profit sharing program which allocates 4% ofnet profits over $2 million to all employees other than Mr. Christianson.Individual amounts are allocated and distributed to employees based on aformula that takes into account current salary level, level of responsibilityand the impact of the employee’s position on profits.

 

Messrs. Christiansonand Kersting also have a deferred compensation plan that provides “phantom”capital units.  Messrs. Christiansonand Kersting’s initial grants under these plans are fully vested.  OnFebruary 1, 2004, Mr. Christianson received an additional grant underan amended and restated deferred compensation plan.  Under both theoriginal and amended plan, we pay an amount equal to the fair market value ofthe participant’s vested phantom capital units in five annualsubstantially equal installments beginning upon the earlier of termination ofemployment with us or his 65th birthday.

 

Our Chief Financial Officer,Jim Seurer, was hired in March 2005 and received no compensation from usduring the years ended December 31, 2004, 2003, and 2002. Mr. Seurer’s employment with us is terminable at will. Mr. Seurer receives a base salary and is entitled to participate in401(k), healthcare and other retirement and welfare benefit programs that aregenerally available to employees, including the employee profit sharingprogram.

 

**Item 12.****     ****Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters.**

 

We do not have anycompensation plans under which our capital units are authorized for issuance.

 

The following table setsforth the beneficial ownership of our outstanding capital units by our Boardmembers and

 

27

----

 

named executive officers asof March 15, 2006.  As of that date, no person beneficially ownedmore than 5% of our capital units.

 
| **Name and Address  of Beneficial Owner (1)** | ** ** | **Number of  Votes  Beneficially  Owned** | ** ** | **Voting  Percentage** | ** ** | **Number of  Capital  Units  Beneficially  Owned** | ** ** | **Ownership  Percentage** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------|------------|---------------------------------------------------------|------------|---------------------------|------------|
|                                                                   |       |                                           |       |                   |       |                                                    |       |                      |       |
| Paul Barthel, Manager                                                  |       | 1                                              |       |                   | *          | 20,500                                                  |       |                      | *          |
| Rodney Christianson, CEO (2)                                           |       | 1                                              |       |                   | *          | 25,500                                                  |       |                      | *          |
| Dean Christopherson, Manager                                           |       | 1                                              |       |                   | *          | 30,000                                                  |       |                      | *          |
| David Driessen, Manager                                                |       | 1                                              |       |                   | *          | 45,000                                                  |       |                      | *          |
| Wayne Enger, Manager                                                   |       | 1                                              |       |                   | *          | 16,000                                                  |       |                      | *          |
| Ronald Gorder, Manager (3)                                             |       | 1                                              |       |                   | *          | 50,000                                                  |       |                      | *          |
| Ryan Hill, Manager                                                     |       | 2                                              |       |                   | *          | 24,500                                                  |       |                      | *          |
| Kent Howell, Manager (4)                                               |       | 2                                              |       |                   | *          | 80,000                                                  |       |                      | *          |
| Jerome Jerzak, Manager                                                 |       | 1                                              |       |                   | *          | 22,500                                                  |       |                      | *          |
| Tom Kersting, Commercial Manager                                       |       | —                                         |       |                   | *          | —                                                  |       |                      | *          |
| Peter Kontz, Manager (5)                                               |       | 2                                              |       |                   | *          | 119,000                                                 |       |                      | *          |
| Laron Krause, Manager                                                  |       | 1                                              |       |                   | *          | 20,000                                                  |       |                      | *          |
| Bryce Loomis, Manager (6)                                              |       | 1                                              |       |                   | *          | 40,000                                                  |       |                      | *          |
| Dale Murphy, Manager (7)                                               |       | 1                                              |       |                   | *          | 96,000                                                  |       |                      | *          |
| Robert Nelsen, Manager                                                 |       | 1                                              |       |                   | *          | 24,000                                                  |       |                      | *          |
| Daniel Potter, Manager (8)                                             |       | 2                                              |       |                   | *          | 16,500                                                  |       |                      | *          |
| Steven C. Preszler, Manager                                            |       | 1                                              |       |                   | *          | 17,000                                                  |       |                      | *          |
| Corey Schnabel, Manager                                                |       | 1                                              |       |                   | *          | 15,000                                                  |       |                      | *          |
| Greg Schmieding, Manager                                               |       | 1                                              |       |                   | *          | 8,750                                                   |       |                      | *          |
| James Seurer, CFO                                                      |       | —                                         |       |                   | *          | —                                                  |       |                      | *          |
| Rodney Skalbeck, Manager                                               |       | 1                                              |       |                   | *          | 113,500                                                 |       |                      | *          |
| Delbert Tschakert, Manager (9)                                         |       | 2                                              |       |                   | *          | 50,000                                                  |       |                      | *          |
| Tony Van Uden, Manager                                                 |       | 1                                              |       |                   | *          | 60,000                                                  |       |                      | *          |
| Ardon Wek, Secretary, Manager (10)                                     |       | 1                                              |       |                   | *          | 35,000                                                  |       |                      | *          |
| **Manager and Executive Officers, as a group**                         | ** ** | **27**                                         | ** ** | **1.22**               | **%**      | **928,750**                                             | ** ** | **3.05**                  | **%**      |

 

----

| *    |   | Percentage of shares beneficially owned does not  exceed 1% of the class.                                              |
|------|--------|------------------------------------------------------------------------------------------------------------------------|
| (1)  |   | The addresses for each of the individual managers  listed are set forth above under Board of Managers.                 |
| (2)  |   | Represents capital units owned of record by  Mr. Christianson’s wife.                                        |
| (3)  |   | Represents capital units owned of record by Gorder  Dairy Farm of which Mr. Gorder is an owner.                   |
| (4)  |   | Includes capital units owned of record by Howell  Farms of which Mr. Howell is an owner.                          |
| (5)  |   | Includes 73,000 capital units owned of record by  Mr. Kontz’s wife.                                          |
| (6)  |   | Represents capital units owned jointly with  Mr. Loomis’s wife.                                              |
| (7)  |   | Represents capital units owned of record by the  Dale F. Murphy Revocable Trust of which Mr. Murphy is a trustee. |
| (8)  |   | Includes 7,500 capital units owned of record by  Potterosa Farms, Inc. of which Mr. Potter is a co-owner.    |
| (9)  |   | Includes 21,500 capital units owned of record by  Mr. Tschakert’s wife.                                      |
| (10) |   | Represents capital units owned of record jointly  with Mr. Wek’s wife.                                       |

 

**Item 13.****     ****C****ertainRelationships and Related Transactions.**

 

Our individual Board membersand executive officers have not entered into, and do not anticipate enteringinto, any contractual or other transactions between themselves and us, exceptfor continuing employment agreements, as described above under “Compensation ofManagement and Executive Officers,” our Operating Agreement, and soybeanpurchases that are on the same terms available to the public. Board Membersreceive a per diem fee and other reimbursement and compensation for their Boardservices, as described above. The executive officers receive compensation asexecutive officers as described above.

 

28

----

 

**Item 14.****     ****Principal Accountant Fees and Services.**

 

**Fees for Fiscal Year EndedDecember 31, 2005:**

 

**AuditFees.  **Gordon,Hughes, & Banks, LLP billed a total amount of $55,000 for professionalservices rendered for the audit of the Company’s various annual financialstatements for the fiscal year ended December 31, 2005, and the reviews ofthe financial statements included in the Company’s Forms 10-Q for the fiscalyear ended December 31, 2005.

 

**AuditRelated Fees.  **Gordon, Hughes, & Banks, LLP billed a total amount of $4,350for professional services rendered for audit related services primarily as itrelates to consultation with the Company regarding an SEC review of the Company’sfinancial statements during the fiscal year ended December 31, 2005.

 

**Tax Fees.**   Gordon, Hughes, &Banks, LLP performed no professional tax services for the fiscal year endedDecember 31, 2005.

 

Eide Bailly billed a totalamount of $12,173 for professional tax services rendered for the Company duringthe fiscal year ended December 31, 2005.

 

**All OtherFees.  **Gordon,Hughes, & Banks, LLP did not render any other services for which feeswere paid for services rendered in connection with other matters requested bythe Company during the fiscal year ended December 31 2005.

 

**Fees for Fiscal Year EndedDecember 31, 2004:**

 

**AuditFees.  **Gordon,Hughes, & Banks, LLP billed a total amount of $56,000 for professionalservices rendered for the audit of the Company’s various financial statementsfor the fiscal year ended December 31, 2004 and the re-reviews of thefinancial statements included in the Company’s Forms 10-Q for the 2004 fiscalyear.

 

Prior to the resignation ofEide Bailly LLP in January 2005 and the subsequent retention of Gordon,Hughes, & Banks, LLP, Eide Bailly LLP billed a total amount of $40,641for professional services rendered for the reviews of the financial statementsincluded in the Company’s Forms 10-Q for the 2004 fiscal year.

 

**AuditRelated Fees.  **Gordon Hughes & Banks billed a total amount of $0 forprofessional services rendered for audit related services.

 

Eide Bailly billed a totalamount of $916 for professional services rendered for audit related****services. Audit related fees” wereprimarily assurance and related services related to the audit.

 

**Tax Fees.**   Gordon, Hughes, &Banks, LLP performed no professional tax services for the fiscal year endedDecember 31, 2004.

 

Eide Bailly billed a totalamount of $20,754 for professional tax services rendered for the Company duringthe fiscal year ended December 31, 2004.

 

**All OtherFees.  **Gordon,Hughes, & Banks, LLP did not render any other services for which feeswere paid in connection with other matters requested by the Company during thefiscal year ended December 31 2004.

 

Eide Bailly billed a totalamount of $4,739 for professional services rendered in connection with othermatters requested by the Company during the fiscal year ended December 31,2004. The fees were associated with the acquisition of USSC.

 

The Audit Committee Charterprovides that the Audit Committee shall approve in advance any fees related tonon-audit services.  Accordingly, our auditor submits to the AuditCommittee a notice of services proposed to be provided and the associated feesprior to the provision of any non-audit services.  During 2005 all suchnon-audit fees were pre-approved by the Audit Committee.

 

**Part IV**

 

**Item 15.****     ****E****xhibits,Financial Statement Schedules.**

 

The following exhibits andfinancial statements are filed as part of, or are incorporated by referenceinto, this report:

 

(a)(1)       Financial Statements and Schedules — Reference is made to the “Index toFinancial Statements” of South Dakota Soybean Processors, LLC located atpage F-1 of this report for a list of the financial statements andschedules for the year ended December 31, 2005 included herein.

 

(2)           N.A.

 

(3)           Exhibits - See Exhibit Index following the Signature Page to thisreport. The following exhibits constitute

 

29

----

 

management agreements, compensatory plans, orarrangements: Exhibits 10.14, 10.15, 10.16, and 10.17.

 

SIGNATURES

 

Pursuant to the requirementof Section 13 or 15(d) of the Securities Exchange Act, the registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                                                                                                                                                                                                     |         | SOUTH DAKOTA SOYBEAN  PROCESSORS, LLC           |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|-------------------------------------------------|
|                                                                                                                                                                                                     |         |                                            |
| Date:                                                                                                                                                                                                    | May 30, 2006 |                                            | /s/ Rodney Christianson |   |
|                                                                                                                                                                                                     |         | Rodney G. Christianson  Chief Executive Officer |
|                                                                                                                                                                                                     |         |                                            |
| Date:                                                                                                                                                                                                    | May 30, 2006 |                                            | /s/ James Seurer |   |
|                                                                                                                                                                                                     |         | James A. Seurer  Chief Financial Officer        |
|                                                                                                                                                                                                     |
| Pursuant  to the requirements of the Securities Exchange Act, this report has been  signed below by the following persons on behalf of the registrant and in the  capacities and on the dates indicated. |
|                                                                                                                                                                                                     |
|                                                                                                                                                                                                     |         | SOUTH DAKOTA SOYBEAN  PROCESSORS, LLC           |
|                                                                                                                                                                                                     |         |                                            |
|                                                                                                                                                                                                     |         |                                            |
| Date:                                                                                                                                                                                                    | May 30, 2006 |                                            | /s/ Rodney Christianson |   |
|                                                                                                                                                                                                     |         | Rodney G. Christianson                          |
|                                                                                                                                                                                                     |         | Chief Executive Officer                         |
|                                                                                                                                                                                                     |         | (Principal Executive Officer)                   |
|                                                                                                                                                                                                     |         |                                            |
|                                                                                                                                                                                                     |         |                                            |
| Date:                                                                                                                                                                                                    | May 30, 2006 |                                            | /s/ James Seurer |   |
|                                                                                                                                                                                                     |         | James A. Seurer                                 |
|                                                                                                                                                                                                     |         | Chief Financial Officer                         |
|                                                                                                                                                                                                     |         | (Principal Financial and Accounting  Officer)   |
|                                                                                                                                                                                                     |         |                                            |
|                                                                                                                                                                                                     |         |                                            |
| Date:                                                                                                                                                                                                    | May 30, 2006 |                                            | /s/ Paul Barthel |   |
|                                                                                                                                                                                                     |         | Paul Barthel, Manager                           |
|                                                                                                                                                                                                     |         |                                            |
|                                                                                                                                                                                                     |         |                                            |
| Date:                                                                                                                                                                                                    | May 30, 2006 |                                            | /s/ Dean Christopherson |   |
|                                                                                                                                                                                                     |         | Dean Christopherson,                            |
|                                                                                                                                                                                                     |         | Manager                                         |
|                                                                                                                                                                                                     |         |                                            |
|                                                                                                                                                                                                     |         |                                            |
| Date:                                                                                                                                                                                                    | May 30, 2006 |                                            | /s/ David Driessen |   |
|                                                                                                                                                                                                     |         |                                            | David Driessen,  Manager |
|                                                                                                                                                                                                     |         |                                            |   |
|                                                                                                                                                                                                     |         |                                            |   |
| Date:                                                                                                                                                                                                    | May 30, 2006 |                                            | /s/ Wayne Enger |   |
|                                                                                                                                                                                                     |         |                                            | Wayne Enger, Manager |
|                                                                                                                                                                                                     |         |                                            |   |
|                                                                                                                                                                                                     |         |                                            |   |
| Date:                                                                                                                                                                                                    | May 30, 2006 |                                            | /s/ Ronald Gorder |   |
|                                                                                                                                                                                                     |         |                                            | Ronald J. Gorder, Manager |
|                                                                                                                                                                                                     |         |                                            |   |
|                                                                                                                                                                                                     |         |                                            |   |
| Date:                                                                                                                                                                                                    | May 30, 2006 |                                            | /s/ Ryan Hill |   |
|                                                                                                                                                                                                     |         |                                            | Ryan J. Hill, Manager |
|                                                                                                                                                                                                          |              |                                                 |  |  |  |

 

30

----

 
| Date:  | May 30, 2006 |   | /s/ Kent Howell             |   |
|--------|--------------|--------|-----------------------------|--------|
|   |         |   | Kent Howell, Manager        |
|   |         |   |                        |
|   |         |   |                        |
| Date:  | May 30, 2006 |   | /s/ Jerome Jerzak           |   |
|   |         |   | Jerome L. Jerzak, Manager   |
|   |         |   |                        |
|   |         |   |                        |
| Date:  | May 30, 2006 |   | /s/ Peter Kontz             |   |
|   |         |   | Peter Kontz, Manager        |
|   |         |   |                        |
| Date:  | May 30, 2006 |   | /s/ Laron Krause            |   |
|   |         |   | Laron Krause, Manager       |
|   |         |   |                        |
| Date:  | May 30, 2006 |   | /s/ Bryce Loomis            |   |
|   |         |   | Bryce Loomis, Manager       |
|   |         |   |                        |
| Date:  | May 30, 2006 |   | /s/ Dale Murphy             |   |
|   |         |   | Dale F. Murphy, Manager     |
|   |         |   |                        |
| Date:  | May 30, 2006 |   | /s/ Robert Nelsen           |   |
|   |         |   | Robert Nelsen, Manager      |
|   |         |   |                        |
| Date:  | May 30, 2006 |   | /s/ Daniel Potter           |   |
|   |         |   | Daniel Potter, Manager      |
|   |         |   |                        |
| Date:  | May 30, 2006 |   | /s/ Steven Preszler         |   |
|   |         |   | Steven C. Preszler, Manager |
|   |         |   |                        |
| Date:  | May 30, 2006 |   | /s/ Greg Schmieding         |   |
|   |         |   | Greg Schmieding, Manager    |
|   |         |   |                        |
| Date:  | May 30, 2006 |   | /s/ Corey Schnabel          |   |
|   |         |   | Corey Schnabel, Manager     |
|   |         |   |                        |
| Date:  | May 30, 2006 |   | /s/ Rodney Skalbeck         |   |
|   |         |   | Rodney Skalbeck, Manager    |
|   |         |   |                        |
| Date:  | May 30, 2006 |   | /s/ Delbert Tschakert       |   |
|   |         |   | Delbert Tschakert, Manager  |   |
|   |         |   |
| Date:  | May 30, 2006 |   | /s/ Anthony VanUden         |   |
|   |         |   | Anthony VanUden, Manager    |   |
|   |         |   |                        |   |
| Date:  | May 30, 2006 |   | /s/ Ardon Wek               |   |
|   |         |   | Ardon Wek, Manager          |   |
|        |              |        |                             |        |  |  |  |  |  |

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**          | ** ** | **Filed  Herewith** | ** ** | **Incorporated Herein by Reference to**                                                                                                     |
|---------------------|------------|--------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                     |       |                |       |                                                                                                                                                            |
| 3.1(i)              |       | Articles of Organization |       |                |       | Appendix A to the Registrant’s Prospectus filed  with the Commission pursuant to Rule 424(b)(3) on May 24, 2002  (File No. 333-75804). |

 

31

----

 
| 3.1(ii)  |   | Operating Agreement, as amended and restated                                                                                      |   |   |   | Exhibit 3.1(ii) to the Registrant’s  Form 10-K filed on April 15, 2005.                                          |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 3.1(iii) |   | Articles of Amendment to Articles of Organization                                                                                 |   |   |   | Exhibit 3.1(iii) to the Registrant’s  Form  10-QSB filed with the Commission on August 14, 2002                       |
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 4.1      |   | Form of Class A Unit Certificate                                                                                        |   |   |   | Exhibit 4.1 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001 (File No. 333-75804)    |
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 10.1     |   | Form of Mortgage and Security Agreement with  CoBank dated October 2, 1995                                              |   |   |   | Exhibit 10.1 to the Registrant’s  Form S-4 filed with the Commission on December 21, 2001 (File  No. 333-75804)  |
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 10.2     |   | Master Loan Agreement with CoBank dated  June 17, 2004.                                                                      |   |   |   | Exhibit 10.2 to the Registrant’s  Form 10-Q filed with the Commission on August 16, 2004                              |
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 10.3     |   | Revolving Term Loan Supplement with CoBank dated  June 17, 2004                                                              |   |   |   | Exhibit 10.3 to the Registrant’s  Form 10-Q filed with the Commission on August 16, 2004                              |
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 10.4     |   | Statused Revolving Credit Supplement with CoBank  dated June 17, 2004                                                        |   |   |   | Exhibit 10.4 to the Registrant’s  Form 10-Q filed with the Commission on August 16, 2004                              |
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 10.5     |   | Urethane Soy Systems Company, Inc. Stock  Purchase Agreement dated May 30, 2000                                    |   |   |   | Exhibit 10.5 to the Registrant’s  Form S-4 filed with the Commission on December 21, 2001 (File  No. 333-75804)  |
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 10.6     |   | Vegetable Oil Supply Agreement with Urethane Soy  Systems Company, Inc. dated August 2, 1999 and January 10,  2001 |   |   |   | Exhibit 10.6 to the Registrant’s  Form S-4 filed with the Commission on December 21, 2001 (File  No. 333-75804)  |
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 10.7     |   | MnSP Services and Management Agreement dated  August 25, 2000                                                                |   |   |   | Exhibit 10.7 to the Registrant’s  Form S-4 filed with the Commission on December 21, 2001 (File  No. 333-75804)  |
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 10.8     |   | Soybean Oil Supply Agreement and Equipment  Purchase Agreement with ACH Food Company, Inc. dated January 15,  2002*     |   |   |   | Exhibit 10.8 to the Registrant’s  Form S-4 filed with the Commission on May 10, 2002 (File  No. 333-75804)       |
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 10.9     |   | Railcar Leasing Agreement with General Electric  dated May 14, 1996                                                          |   |   |   | Exhibit 10.9 to the Registrant’s  Form S-4 filed with the Commission on December 21, 2001 (File  No. 333-75804)  |
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 10.10    |   | Track Lease Agreement with DM&E Railroad dated  October 15, 1996                                                         |   |   |   | Exhibit 10.10 to the Registrant’s  Form S-4 filed with the Commission on December 21, 2001 (File  No. 333-75804) |
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 10.11    |   | Land Option Agreement with Howell Farms dated  September 8, 1994 and September 13, 2001                                 |   |   |   | Exhibit 10.11 to the Registrant’s  Form S-4 filed with the Commission on December 21, 2001 (File  No. 333-75804) |
|     |   |                                                                                                                              |   |   |   |                                                                                                                                      |
| 10.12    |   | Railroad Car Lease Agreement with Trinity  Industries dated February 12, 2002                                                |   |   |   | Exhibit 10.15 to the Registrant’s  Form S-4 filed with the Commission on March 14, 2002 (File  No. 333-75804)    |

 

32

----

 
| 10.13  |   | Stock Purchase Agreement with Urethane Soy  Systems, Co. and certain shareholders                                                        |   |   |   | Exhibit 10.16 to the Registrant’s  Form 8-K filed with the Commission on January 14, 2003 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.14  |   | Rodney Christianson Employment Agreement dated  February 1, 2004                                                                    |   |   |   | Exhibit 10.14 to the Registrant’s Form 10-K  filed with the Commission on March 30, 2004  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.15  |   | First Amended and Restated Deferred Compensation  Plan for the benefit of Rodney Christianson, dated February 1, 2004               |   |   |   | Exhibit 10.15 to the Registrant’s  Form 10-K filed with the Commission on March 30, 2004  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.16  |   | Thomas Kersting Employment Agreement dated  May 20, 1996                                                                            |   |   |   | Exhibit 10.18 to the Registrant’s  Form 10-K filed with the Commission on March 27, 2003  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.17  |   | Deferred Compensation Plan for the benefit of  Thomas Kersting, dated February 13, 2001                                             |   |   |   | Exhibit 10.20 to the Registrant’s  Form 10-K filed with the Commission on March 27, 2003  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.18  |   | Polyoil Consulting Services Agreement with Larry  Mahlum dated January 1, 2000                                                      |   |   |   | Exhibit 10.21 to the Registrant’s Form 10-K  filed with the Commission on March 27, 2003  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.19  |   | Railcar Leasing Agreements with General Electric  Railcar Services Corporation, dated November 10, 2003 and  November 25, 2003 |   |   |   | Exhibit 10.19 to the Registrant’s  Form 10-K filed with the Commission on March 30, 2004  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.20  |   | Security Agreement with CoBank dated June 17,  2004                                                                                 |   |   |   | Exhibit 10.1 to the Registrant’s  Form 10-Q filed with the Commission on August 16, 2004  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.21  |   | Master Loan Agreement with CoBank, dated  October 6, 2005                                                                           |   |   |   | Exhibit 10.21 to the Registrant’s  Form 10-K filed with the Commission on March 31, 2006. |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.22  |   | Revolving Term Loan Supplement with CoBank dated  October 6, 2005                                                                   |   |   |   | Exhibit 10.22 to the Registrant’s  Form 10-K filed with the Commission on March 31, 2006. |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.23  |   | Statused Revolving Credit Supplement with CoBank  dated October 6, 2005                                                             |   |   |   | Exhibit 10.23 to the Registrant’s  Form 10-K filed with the Commission on March 31, 2006. |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 14.1   |   | Code of Ethics                                                                                                                           |   |   |   | Exhibit 14.1 to the Registrant’s Form 10-K  filed with the Commission on March 31, 2006.  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 16.1   |   | Letter re: change in certifying accountant                                                                                               |   |   |   | Exhibit 16.1 to the Registrant’s  Form 10-K filed with the Commission on March 31, 2006.  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 21.1   |   | Subsidiaries of the Company                                                                                                              |   |   |   | Exhibit 21.1 to the Registrant’s  Form 10-K filed with the Commission on March 31, 2006.  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certifications                                                                                        |   | X      |   |                                                                                                          |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 32.1   |   | Section 1350 Certifications                                                                                                         |   | X      |   |                                                                                                          |

 

33

----

 

----

* The redacted portions of Exhibit B(2 pages) and Exhibit C (6 pages) to Exhibit 10.8 werefiled separately with the SEC subject to a request for confidential treatmentdated April 25, 2002.

 

34

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

 

***CONSOLIDATEDFINANCIAL STATEMENTS***

*** ***

***DECEMBER31, 2005, 2004 AND 2003***

 

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

 

Index to Financial Statements

 
| **REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM** |   |
|--------------------------------------------------------------|--------|
|                                                         |   |
| **FINANCIAL STATEMENTS**                                     |   |
| Consolidated  Balance Sheets                                 |   |
| Consolidated  Statements of Operations                       |   |
| Consolidated  Statements of Changes in Members’ Equity  |   |
| Consolidated  Statements of Cash Flows                       |   |
| Notes  to Consolidated Financial Statements                  |   |

 

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

** **

The Board of Managers

South Dakota Soybean Processors, LLC

Volga, South Dakota

 

We have audited the accompanying consolidated balance sheets of SouthDakota Soybean Processors, LLC (the “Company”) as of December 31, 2005 and 2004 and the related consolidated statementsof operations, changes in members’ equity and cash flows for each of the threeyears in the period ended December 31, 2005. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement. The Company has determined that it is not required to have, norwere we engaged to perform, an audit of its internal control over financialreporting. Our audit included consideration of internal  control  over financial  reporting  as a basis for  designing  audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the  effectiveness of the Company’s  internal  control over financial  reporting. Accordingly,we express no such opinion. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of South Dakota SoybeanProcessors, LLC as of December 31, 2005and 2004, and the consolidated results of its operations and its cash flows foreach of the three years in the period ended December 31, 2005, in conformitywith accounting principles generally accepted in the United States of America.

 

As described inNote 1 to the consolidated financial statements, theconsolidated Balance Sheet and the consolidated Statement of Members’Equity as of and for the year ended December 31, 2005, have beenrestated.

 

 

***Gordon, Hughes & Banks, LLP***

 

Greenwood Village, Colorado

February 3, 2006, except as to Notes 1, 16 and 17 which date is May 30,2006

 

F-1

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

#### **CONSOLIDATEDBALANCE SHEETS**

**DECEMBER 31, 2005 AND 2004**

 
| ** **                                                                                             | ** ** | **2005**       | ** ** | **2004**    | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------|------------|-------------|------------|
| ** **                                                                                             | ** ** | **(Restated)** | ** ** | ** **  | ** ** |
| **ASSETS**                                                                                             |       |           |       |        |       |
|                                                                                                   |       |           |       |        |       |
| CURRENT ASSETS                                                                                         |       |           |       |        |       |
| Cash and cash equivalents                                                                              |       | $              | 75,556     |        | $          | 11,423 |   |
| Trade accounts receivable, less allowance  for uncollectible accounts (2005 - $43,000; 2004 - $28,000) |       | 21,618,746     |       | 17,452,118  |       |
| Inventories                                                                                            |       | 8,939,662      |       | 8,601,502   |       |
| Margin deposits                                                                                        |       | 546,054        |       | 1,424,422   |       |
| Prepaid expenses                                                                                       |       | 568,855        |       | 538,816     |       |
| Total current assets                                                                                   |       | 31,748,873     |       | 28,028,281  |       |
|                                                                                                   |       |           |       |        |       |
| PROPERTY AND EQUIPMENT                                                                                 |       | 51,965,792     |       | 51,398,225  |       |
| Less accumulated depreciation                                                                          |       | (24,208,851    | )          | (21,268,006 | )          |
| Total property and equipment                                                                           |       | 27,756,941     |       | 30,130,219  |       |
|                                                                                                   |       |           |       |        |       |
| OTHER ASSETS                                                                                           |       |           |       |        |       |
| Investments in cooperatives                                                                            |       | 4,193,673      |       | 4,077,625   |       |
| Equity investment in unconsolidated  affiliate                                                         |       | 2,799,536      |       | 2,869,366   |       |
| Notes receivable - members                                                                             |       | 481,710        |       | 481,710     |       |
| Patents, net                                                                                           |       | 6,634,908      |       | 6,900,047   |       |
| Other, net                                                                                             |       | 14,655         |       | 12,640      |       |
| Total other assets                                                                                     |       | 14,124,482     |       | 14,341,388  |       |
|                                                                                                   |       |           |       |        |       |
| Total assets                                                                                           |       | $              | 73,630,296 |        | $          | 72,499,888 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-2

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

#### **CONSOLIDATEDBALANCE SHEETS (continued)**

**DECEMBER 31, 2005 AND 2004**

 
| ** **                                                                                                                                                        | ** ** | **2005**       | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|------------|------------|
| ** **                                                                                                                                                        | ** ** | **(Restated)** |       |       |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                                                                                                                          |       | ** **     |       |       |       |
|                                                                                                                                                              |       |           |       |       |       |
| CURRENT LIABILITIES                                                                                                                                               |       |           |       |       |       |
| Excess of outstanding checks over bank  balance                                                                                                                   |       | $              | 670,504    |       | $          | 3,411,975 |   |
| Current maturities of long-term debt                                                                                                                              |       | 1,212,768      |       | 1,216,438  |       |
| Accounts payable                                                                                                                                                  |       | 687,224        |       | 928,858    |       |
| Accrued commodity purchases                                                                                                                                       |       | 21,535,434     |       | 23,640,446 |       |
| Accrued expenses                                                                                                                                                  |       | 1,943,483      |       | 1,646,228  |       |
| Accrued interest                                                                                                                                                  |       | 99,751         |       | 49,471     |       |
| Total current liabilities                                                                                                                                         |       | 26,149,164     |       | 30,893,416 |       |
|                                                                                                                                                              |       |           |       |       |       |
| LONG-TERM LIABILITIES                                                                                                                                             |       |           |       |       |       |
| Long-term debt, less current maturities                                                                                                                           |       | 14,583,563     |       | 8,986,151  |       |
| Deferred compensation                                                                                                                                             |       | 129,072        |       | 129,345    |       |
| Total long-term liabilities                                                                                                                                       |       | 14,712,635     |       | 9,115,496  |       |
|                                                                                                                                                              |       |           |       |       |       |
| MINORITY INTEREST IN CONSOLIDATED  SUBSIDIARY                                                                                                                     |       | —         |       | 368,403    |       |
|                                                                                                                                                              |       |           |       |       |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                     |       |           |       |       |       |
|                                                                                                                                                              |       |           |       |       |       |
| TEMPORARY EQUITY, net of subscriptions  receivable of $209,656 and $0 at December 31, 2005 and 2004, respectively, consisting  of 2,190,500 Class A capital units |       | 4,286,094      |       | —     |       |
|                                                                                                                                                              |       |           |       |       |       |
| MEMBERS’ EQUITY                                                                                                                                              |       |           |       |       |       |
| Class A Units, no par value  30,419,000 and 28,228,500 units issued and outstanding at December 31, 2005  and 2004, respectively                                  |       | 28,482,403     |       | 32,122,573 |       |
|                                                                                                                                                              |       |           |       |       |       |
| Total liabilities, temporary equity and  members’ equity                                                                                                     |       | $              | 73,630,296 |       | $          | 72,499,888 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-3

----

** **

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

#### **CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED****DECEMBER 31, 2005, 2004 AND 2003**

 
| ** **                                                                                                          | ** ** | **2005**    | ** **  | **2004**    | ** ** | **2003**    | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
|                                                                                                                |       |        |        |        |       |        |       |
| NET REVENUES                                                                                                        |       | $           | 210,370,966 |        | $          | 238,211,056 |       | $ | 207,256,575 |   |
|                                                                                                                |       |        |        |        |       |        |       |
| COST OF REVENUES                                                                                                    |       |        |        |        |       |        |       |
| Cost of product sold                                                                                                |       | 172,995,316 |        | 200,374,848 |       | 174,234,599 |       |
| Production                                                                                                          |       | 16,496,432  |        | 14,435,824  |       | 14,046,771  |       |
| Freight and rail                                                                                                    |       | 20,247,481  |        | 17,606,723  |       | 14,506,644  |       |
| Brokerage fees                                                                                                      |       | 253,573     |        | 286,471     |       | 234,346     |       |
| Total cost of revenues                                                                                              |       | 209,992,802 |        | 232,703,866 |       | 203,022,360 |       |
|                                                                                                                |       |        |        |        |       |        |       |
| GROSS PROFIT                                                                                                        |       | 378,164     |        | 5,507,190   |       | 4,234,215   |       |
|                                                                                                                |       |        |        |        |       |        |       |
| OPERATING EXPENSES                                                                                                  |       |        |        |        |       |        |       |
| Administration                                                                                                      |       | 3,826,823   |        | 4,476,511   |       | 3,639,442   |       |
| OPERATING PROFIT (LOSS)                                                                                             |       | (3,448,659  | )           | 1,030,679   |       | 594,773     |       |
|                                                                                                                |       |        |        |        |       |        |       |
| OTHER INCOME (EXPENSE)                                                                                              |       |        |        |        |       |        |       |
| Interest expense                                                                                                    |       | (1,400,403  | )           | (1,425,849  | )          | (802,178    | )          |
| Other non-operating income                                                                                          |       | 647,076     |        | 254,061     |       | 2,915,160   |       |
| Patronage dividend income                                                                                           |       | 193,413     |        | 153,961     |       | 97,975      |       |
| Total other income (expense)                                                                                        |       | (559,914    | )           | (1,017,827  | )          | 2,210,957   |       |
|                                                                                                                |       |        |        |        |       |        |       |
| INCOME (LOSS) BEFORE INCOME TAXES AND  MINORITY INTEREST OF SUBSIDIARY                                              |       | (4,008,573  | )           | 12,852      |       | 2,805,730   |       |
|                                                                                                                |       |        |        |        |       |        |       |
| MINORITY INTEREST IN NET LOSS OF SUBSIDIARY                                                                         |       | 368,403     |        | 676,792     |       | 457,620     |       |
|                                                                                                                |       |        |        |        |       |        |       |
| INCOME (LOSS) BEFORE INCOME TAXES                                                                                   |       | (3,640,170  | )           | 689,644     |       | 3,263,350   |       |
|                                                                                                                |       |        |        |        |       |        |       |
| INCOME TAX EXPENSE (BENEFIT)                                                                                        |       | —      |        | 1,032       |       | (131,474    | )          |
|                                                                                                                |       |        |        |        |       |        |       |
| NET INCOME (LOSS)                                                                                                   |       | $           | (3,640,170  | )           | $          | 688,612     |       | $ | 3,394,824 |   |
|                                                                                                                |       |        |        |        |       |        |       |
| BASIC AND DILUTED EARNINGS (LOSS) PER  CAPITAL UNIT                                                                 |       | $           | (0.12       | )           | $          | 0.02        |       | $ | 0.12 |   |
|                                                                                                                |       |        |        |        |       |        |       |
| WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING  FOR CALCULATION OF BASIC AND DILUTED EARNINGS (LOSS) PER CAPITAL UNIT |       | 29,758,885  |        | 28,250,139  |       | 28,258,500  |       |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-4

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’EQUITY**

**FOR THE YEARS ENDED****DECEMBER 31, 2005, 2004 AND 2003**

** **
| ** **                                              | ** ** | **Class A Units** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **Units**                   | ** ** | **Amount** | ** ** |
|                                                    |       |                        |       |   |   |
| **BALANCE, JANUARY 1, 2003**                            |       | 28,258,500                  |       | $ | 33,875,593 |   |
|                                                    |       |                        |       |   |   |
| Net income                                              |       | —                      |       | 3,394,824 |   |
|                                                    |       |                        |       |   |   |
| Distributions to members                                |       | —                      |       | (2,539,827 | ) |
|                                                    |       |                        |       |   |   |
| **BALANCE, DECEMBER 31, 2003**                          |       | 28,258,500                  |       | 34,730,590 |   |
|                                                    |       |                        |       |   |   |
| Net income                                              |       | —                      |       | 688,612 |   |
|                                                    |       |                        |       |   |   |
| Liquidation of members’ equity                     |       | (30,000                     | )          | (6,000 | ) |
|                                                    |       |                        |       |   |   |
| Distributions to members                                |       | —                      |       | (3,290,629 | ) |
|                                                    |       |                        |       |   |   |
| **BALANCE, DECEMBER 31, 2004**                          |       | 28,228,500                  |       | 32,122,573 |   |
|                                                    |       |                        |       |   |   |
| Net income (loss)                                       |       | —                      |       | (3,640,170 | ) |
|                                                    |       |                        |       |   |   |
| Proceeds from issuance of new capital units  (restated) |       | 2,190,500                   |       | — |   |
|                                                    |       |                        |       |   |   |
| **BALANCE, DECEMBER 31, 2005 (RESTATED)**               |       | 30,419,000                  |       | $ | 28,482,403 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-5

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED****DECEMBER 31, 2005, 2004 AND 2003**

 
| ** **                                                    | ** ** | **2005**   | ** ** | **2004**    | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-------------|------------|------------|------------|
| OPERATING ACTIVITIES                                          |       |       |       |        |       |       |       |
| Net income (loss)                                             |       | $          | (3,640,170 | )           | $          | 688,612    |       | $ | 3,394,824 |   |
| Charges and credits to net income (loss) not  affecting cash: |       |       |       |        |       |       |       |
| Depreciation and amortization                                 |       | 3,404,815  |       | 3,733,449   |       | 3,012,415  |       |
| Minority interest in net loss of subsidiary                   |       | (368,403   | )          | (676,792    | )          | (457,620   | )          |
| Loss on sale of fixed assets                                  |       | 6,081      |       | 5,136       |       | 1,325      |       |
| Loss on equity method investment                              |       | 69,831     |       | 54,626      |       | —     |       |
| Non-cash patronage dividends                                  |       | (116,048   | )          | (107,773    | )          | (97,976    | )          |
| Change in current assets and liabilities                      |       | (5,654,146 | )          | 8,266,518   |       | (3,892,022 | )          |
| NET CASH FROM (USED FOR) OPERATING  ACTIVITIES                |       | (6,298,040 | )          | 11,963,776  |       | 1,960,946  |       |
|                                                          |       |       |       |        |       |       |       |
| INVESTING ACTIVITIES                                          |       |       |       |        |       |       |       |
| Purchase of property and equipment                            |       | (600,739   | )          | (1,209,852  | )          | (1,016,849 | )          |
| Patent costs                                                  |       | (175,453   | )          | (84,508     | )          | (53,000    | )          |
| Investments in MnSP                                           |       | —     |       | (600,931    | )          | (4,076,686 | )          |
| Proceeds from sales of property and  equipment                |       | —     |       | 3,500       |       | 41,960     |       |
| Increase in member loans                                      |       | —     |       | —      |       | (480,710   | )          |
| Cash assumed with Urethane Soy Systems Co.                    |       | —     |       | —      |       | 38,989     |       |
| Retirement of patronage dividends                             |       | —     |       | —      |       | 56,134     |       |
| Purchase of assets held for sale - building                   |       | —     |       | —      |       | (14,742    | )          |
| NET CASH (USED FOR) INVESTING ACTIVITIES                      |       | (776,192   | )          | (1,891,791  | )          | (5,504,904 | )          |
|                                                          |       |       |       |        |       |       |       |
| FINANCING ACTIVITIES                                          |       |       |       |        |       |       |       |
| Change in excess of outstanding checks over  bank balances    |       | (2,741,471 | )          | 1,023,039   |       | (1,214,902 | )          |
| Proceeds from long-term debt                                  |       | 6,559,223  |       | —      |       | 9,489,103  |       |
| Principal payments on long-term debt                          |       | (965,481   | )          | (8,316,669  | )          | (1,671,889 | )          |
| Proceeds from issuance of capital units                       |       | 4,286,094  |       | —      |       | —     |       |
| Distributions to members                                      |       | —     |       | (3,290,629  | )          | (2,539,827 | )          |
| Payments for liquidation of members’ equity              |       | —     |       | (6,000      | )          | —     |       |
| NET CASH FROM (USED FOR) FINANCING  ACTIVITIES                |       | 7,138,365  |       | (10,590,259 | )          | 4,062,485  |       |
|                                                          |       |       |       |        |       |       |       |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                       |       | 64,133     |       | (518,274    | )          | 518,527    |       |
|                                                          |       |       |       |        |       |       |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  YEAR                 |       | 11,423     |       | 529,697     |       | 11,170     |       |
|                                                          |       |       |       |        |       |       |       |
| CASH AND CASH EQUIVALENTS, END OF YEAR                        |       | $          | 75,556     |        | $          | 11,423     |       | $ | 529,697 |   |

 

(continued on next page)

 

F-6

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)**

**FOR THE YEARS ENDED****DECEMBER 31, 2005, 2004 AND 2003**

 
| ** **                                            | ** ** | **2005** | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|-------------------------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION    |       |     |       |      |       |      |       |
| Cash paid during the year for:                        |       |     |       |      |       |      |       |
|                                                  |       |     |       |      |       |      |       |
| Interest                                              |       | $        | 1,350,123  |      | $          | 1,426,694 |       | $ | 936,902 |   |
|                                                  |       |     |       |      |       |      |       |
| Income taxes                                          |       | —   |       | 2,032     |       | (131,474  | )          |
|                                                  |       |     |       |      |       |      |       |
| Non-cash investing and financing  activities:         |       |     |       |      |       |      |       |
| Equity investment acquired from exchange of  building |       | —   |       | 2,322,561 |       | —    |       |
|                                                  |       |     |       |      |       |      |       |
| Subscriptions receivable                              |       | 209,656  |       | —    |       | —    |       |
|                                                       |            |          |            |           |            |           |            |  |  |  |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-7

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 -   PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTINGPOLICIES**

 

*Organization*

 

South Dakota SoybeanProcessors, LLC (the “Company” or “LLC”) processes and sells soybean products,such as soybean oil, meal and hulls. The Company’s principal operations are inVolga, South Dakota.

 

The Company ownsapproximately 66% of Urethane Soy Systems Company (“USSC”). USSC is themanufacturer and patent holder of Soyol®, a polyol made from soybeanoil. A minority interest is presented in the consolidated balance sheet thatrepresents the approximate 34% ownership of other investors in USSC.

 

*Restatement of proceeds from equity offering*

 

Subsequent to theCompany’s initial filing of the Form 10-K, the accompanying financialstatements for the year ended December 31, 2005 were restated with respect tothe Consolidated Balance Sheet and Consolidated Statement of Members’ Equity. Aportion of Members’ Equity is required to be restated as Temporary Equitybecause an offering conducted in 2005 under a Form S-1 registration statementdid not conform to federal securities laws. In the offering, the Form S-1Registration Statement included a report of the Company’s former auditor whoseindependence was later determined to be compromised. The presentation of theproceeds from this offering as Temporary Equity reflects the potential thatsuch equity may be reduced or eliminated entirely if successful claims aremade against us by investors who purchased capital units from this offering.The circumstances surrounding this matter are further disclosed in Note 17 tothe accompanying financial statements.

 

*Principles of consolidation*

 

Investee companies in which the Company directly or indirectly ownsmore than 50% of the outstanding voting securities or those over which theCompany has effective control are generally accounted for under theconsolidation method of accounting. Under this method, an Investee company’sbalance sheet and results of operations are reflected within the Company’sConsolidated Financial Statements. All significant intercompany accounts andtransactions have been eliminated. Minority interest in the net assets and earningsand losses of a consolidated Investee are reflected in the caption “Minorityinterest of consolidated subsidiary” in the Company’s Consolidated BalanceSheet and Statement of Operations. Minority interest adjusts the Company’sresults of operations to reflect only the Company’s share of the earnings orlosses of the consolidated Investee company. Upon dilution of control below50%, the accounting method is adjusted to the equity or cost method ofaccounting, as appropriate, for subsequent periods.

 

*Cash and cash equivalents*

 

The Company considers allhighly liquid debt instruments with maturity of three months or less at thetime of acquisition to be cash equivalents.

 

*Accountsreceivable*

 

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

 

The carrying amount oftrade receivables is reduced by a valuation allowance that reflectsmanagement’s estimate of amounts that will not be collected. Management reviewsall receivable balances that exceed 90 days from the invoice date and, based onan assessment of current creditworthiness, estimates the portion, if any, ofthe balance

 

(continued on next page)

 

F-8

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

that may not becollected.

 

*Inventories*

 

Finished goods (soybeanmeal, oil, refined oil, and hulls) and raw materials (soybeans) are valued atestimated market value, which approximates net realizable value.  This accounting policy is in accordance withthe guidelines described in AICPA Statement of Position No. 85-3, *“Accounting by Agricultural Producers and Agricultural Cooperatives.”*Supplies and other inventories are stated at the lower of cost, determined bythe first-in, first-out method, or market.

 

*Investments*

 

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

 

The Company accounts forits 6.95% investment in Minnesota Soybean Processors using the equity methoddue to the related nature of operations and the Company’s ability to influencemanagement decisions of MnSP.  Under theequity method, the initial investment is recorded at cost and adjusted annuallyto recognize the Company’s share of earnings and losses of the entity.

 

*Property and equipment*

 

Property and equipment isstated at cost. Expenditures for renewals and improvements that significantlyadd to the productive capacity or extend the useful life of an asset arecapitalized.  Expenditures formaintenance and repairs are charged to expense when incurred. When depreciableproperties are sold or retired, the cost and accumulated depreciation areeliminated from the accounts and the resultant gain or loss is reflected inincome.

 

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

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

 

The Company reviews its long-lived assets forimpairment whenever events indicate that the carrying amount of the asset maynot be recoverable. If impairment indicators are present and the future cashflows is less than the carrying amount of the assets, values are reduced to theestimated fair value of those assets.

 

*Patents*

 

The Company’s patents are amortized over their estimated useful lives,using the straight-line method over a period of 16 to 20 years, which is theshorter of the remaining estimated economic life of the patents acquired or 20years from the original file date.

 

*Use of estimates*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the financial statements and reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

 

(continued on next page)

 

F-9

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

*RevenueRecognition*

 

Revenue is recognizedwhen the related products are shipped, which is when title is transferred tothe customer.  Revenues are presented netof discounts and sales allowances.

 

*Freight*

 

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

 

TheCompany’s “Shipping and Handling Costs” policy is in accordance with EITF Issue00-10, *Accounting for Shipping and HandlingFees and Costs*.

 

*Advertising costs*

 

Advertising and promotioncosts are expensed as incurred. The Company incurred $33,942, $17,614, and $7,885of advertising costs in the years ended December 31, 2005, 2004, and 2003,respectively.

 

*Environmentalremediation*

 

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

 

*Accountingfor derivative instruments and hedging activities*

 

All of the Company’s derivatives are designated asnon-hedge derivatives.  The futures andoptions contracts used by the Company are discussed below.  Although the contracts may be effectiveeconomic hedges of specified risks, they are not designated as, nor accountedfor, as hedging instruments.

 

The Company, as part ofits trading activity, uses futures and option contracts offered throughregulated commodity exchanges to reduce risk. The Company is exposed to risk of loss in the market value ofinventories.  To reduce that risk, theCompany generally takes opposite and offsetting positions using futurescontracts or options.

 

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

 

*Earnings per capital unit*

 

Earnings per capital unit are calculated based on the weightedaverage number of capital units outstanding. The Company has no other capital units or other member equityinstruments that are dilutive for purposes of calculating earnings per capitalunit.

 

*Income taxes*

 

On June 20, 2002, themembers approved a plan of reorganization to convert the Cooperative’sstructure from an

 

(continued on next page)

 

F-10

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

exempt organization to alimited liability company.  Accordingly, under the Internal Revenue Code, the income ofthe Company flows through to the members to be taxed at the individual leveland there is no corporate income tax provision.

 

*Reclassifications*

 

Reclassifications have been made to the December 31, 2004 and December31, 2003 financial information to conform to the current period presentation.These reclassifications have no effect on previously reported net income ormembers’ equity.

 

*Recent accounting pronouncements*

 

In November 2004,the Financial Accounting Standards Board (“FASB”) issued Statement No. 151, Inventory Costs anamendment of ARB No. 43, Chapter 4, which revised ARB No.43, relating toinventory costs.  This revision is toclarify the accounting for abnormal amounts of idle facility expense, freight,handling costs and wasted material (spoilage). This Statement requires that these items be recognized as a currentperiod charge regardless of whether they meet the criterion specified in ARB43.  In addition, this Statement requiresthe allocation of fixed production overheads to the costs of conversion bebased on normal capacity of the production facilities.  This Statement is effective for financialstatements for fiscal years beginning after June 15, 2005.  Management believes this Statement will haveno impact on the financial statements of the Company once adopted.

 

In December 2004, theFASB issued Statement of Financial Accounting Standards No. 123 (revised 2005),*Share-Based Payment*, (“SFAS No. 123(revised)”)which amends FASB Statement Nos. 123 and 95. SFAS No. 123(revised) requires all companies to measure compensationcost for all share-based payments, including employee stock options, at fairvalue and is effective for public companies that file as small business issuersfor interim or annual periods beginning after December 15, 2005.  Management believes this Statement will haveno impact on the financial statements of the Company once adopted.

 

In December 2004, theFASB issued Statement No. 153, *Exchanges of NonmonetaryAssets anamendment of APB Opinion No. 29*.  This Statement addresses the measurement ofexchanges of nonmonetary assets.  The guidance in APB Opinion No. 29, *Accounting for Nonmonetary Transactions*,is based on the principle that exchanges of nonmonetary assets should bemeasured based on the fair value of the assets exchanged.  The guidance inthat Opinion, however, included certain exceptions to that principle. This Statement amends Opinion No. 29 to eliminate the exception fornonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance.  A nonmonetary exchange has commercial substance ifthe future cash flows of the entity are expected to change significantly as aresult of the exchange.  This Statement is effective for financialstatements for fiscal years beginning after June 15, 2005.  Earlier application is permitted fornonmonetary asset exchanges incurred during fiscal years beginning after thedate of this Statement is issued.  Management believes this Statement willhave no impact on the financial statements of the Company once adopted.

 

In March 2005, the FASBissued Interpretation No. 47 (“FIN 47”), *Accounting for ConditionalAsset Retirement Obligations*, which clarifies that an entity isrequired to recognize a liability for the fair value of a conditional assetretirement obligation when incurred if the liability’s fair value can bereasonably estimated.  A conditionalasset retirement obligation is defined as a legal obligation to perform assetretirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity. FIN 47 is effective no later than the end of fiscal years ending afterDecember 15, 2005.  Adoption of FIN 47 bythe Company will not result in a change to current practice.

 

(continued on next page)

 

F-11

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

In May 2005, the FASBissued Statement of Financial Accounting Standards No. 154, *Accounting Changes and Error Corrections a replacement of APB OpinionNo. 20 and FASB Statement No. 3*, which changes the requirements forthe accounting for and reporting of a change in accounting principle. ThisStatement requires retrospective application to prior periods’ financialstatements of changes in accounting principle, unless it is impracticable todetermine the period-specific effects or the cumulative effect of change.  When it is impracticable to determine theperiod-specific effects of an accounting change on one or more individual priorperiods presented, this Statement requires that the new accounting principle beapplied to the balances of assets and liabilities as of the beginning of theearliest period for which retrospective application is practicable and that acorresponding adjustment be made to the opening balance of retained earningsfor that period rather than being reported in the income statement.  The Company adopted the provisions of thiseffective January 1, 2006.

 

**NOTE 2 -   INVENTORIES**

 
| ** **                   | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|------------------------------|------------|-----------|------------|-----------|------------|
|                         |       |      |       |      |       |
| Finished goods               |       | $         | 1,551,879  |      | $          | 6,562,894 |   |
| Raw materials                |       | 7,336,386 |       | 1,986,644 |       |
| Supplies & miscellaneous |       | 51,397    |       | 51,964    |       |
|                         |       |      |       |      |       |
| Totals                       |       | $         | 8,939,662  |      | $          | 8,601,502 |   |

 

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

 

**NOTE 3 -   MARGINDEPOSITS**

 

The Company has margindeposits with a commodity brokerage firm used to acquire futures and optioncontracts to manage the price volatility risk of soybeans, crude soybean oiland soybean meal.  Consistent with itsinventory accounting policy, these contracts are recorded at market value.  At December 31, 2005, the Company’s futures contractsall mature within twelve months.

 

**NOTE 4 -   INVESTMENTSIN COOPERATIVES**

 
| ** **                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Investments in associated cooperative companies: |       |     |       |     |       |
| Cenex Harvest  States                            |       | $        | 3,516,592  |     | $          | 3,516,592 |   |
| CoBank                                           |       | 677,081  |       | 561,033  |       |
|                                             |       |     |       |     |       |
| Totals                                           |       | $        | 4,193,673  |     | $          | 4,077,625 |   |

 

(continued on next page)

 

F-12

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 5 -   EQUITYINVESTMENT IN MINNESOTA SOYBEAN PROCESSORS**

 
| ** **                                                | ** ** | **2005**      | ** ** | **2004**          | ** ** |
|-----------------------------------------------------------|------------|---------------|------------|-------------------|------------|
| ** **                                                | ** ** | **Beginning** | ** ** | ** **        | ** ** | **Net Income** | ** ** | **Asset** | ** ** | **Asset** | ** ** |
| ** **                                                | ** ** | **Balance**   | ** ** | **Distributions** | ** ** | **(Loss)** | ** ** | **Balance** | ** ** | **Balance** | ** ** |
|                                                      |       |          |       |              |       |   |   |   |   |   |   |
| Minnesota  Soybean Processors, 6.95% ownership, at equity |       | $             | 2,869,366  |              | $          | — |   | $ | (69,830 | ) | $ | 2,799,536 |   | $ | 2,869,366 |   |
|                                                           |            |               |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |

 

In August 2004, theCompany exchanged a storage facility with a net book value of $2,322,561 for1,400,400 Class A shares in Minnesota Soybean Processors (MnSP), a Minnesotacooperative association.  The sharesapproximate 6.95% of MnSP’s outstanding equity. In 2004, the Company also acquired 287,500 8% Class B Non-CumulativeConvertible preferred shares in MnSP for $575,000.  The Company accounts for the investment usingthe equity method due to the related nature of operations and the Company’sability to exercise significant influence.  The Company recognized losses of $69,831 and $54,626in 2005 and 2004, respectively, which is included in other non-operating income(expense).

 

Summarizedfinancial information of MnSP as of December 31, 2005 and 2004 and for the yearsthen ended is as follows (unaudited):

 
| ** **             | ** ** | **2005**     | ** **  | **2004**    | ** ** |
|------------------------|------------|--------------|-------------|-------------|------------|
|                   |       |         |        |        |       |
| Revenues               |       | $            | 225,256,628 |        | $          | 264,129,424 |   |
| Expenses               |       | (228,717,400 | )           | 268,405,313 |       |
| Other income (expense) |       | 1,756,223    |        | (198,636    | )          |
| Net income (loss)      |       | $            | (1,704,549  | )           | $          | 532,336,101 |   |
|                   |       |         |        |        |       |
| Assets                 |       | $            | 108,995,280 |        | $          | 82,962,604 |   |
| Liabilities            |       | 70,898,179   |        | 47,064,524  |       |
| Equity                 |       | 38,097,101   |        | 35,898,080  |       |

 

(continued on next page)

 

F-13

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 6 -   PROPERTYAND EQUIPMENT**

 
| ** **                 | ** ** | **2005**   | ** ** | ** **       | ** ** |
|----------------------------|------------|------------|------------|------------------|------------|
| ** **                 | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **Cost**   | ** ** | **Depreciation** | ** ** | **Net** | ** ** | **Net** | ** ** |
|                       |       |       |       |             |       |   |   |   |   |
| Land                       |       | $          | 237,643    |             | $          | — |   | $ | 237,643 |   | $ | 237,643 |   |
| Land improvements          |       | 50,136     |       | 18,045           |       | 32,091 |   | 790 |   |
| Buildings and improvements |       | 14,410,625 |       | 3,363,524        |       | 11,047,101 |   | 11,331,821 |   |
| Machinery and equipment    |       | 35,837,038 |       | 19,940,468       |       | 15,896,570 |   | 17,206,218 |   |
| Company vehicles           |       | 183,040    |       | 113,632          |       | 69,408 |   | 75,212 |   |
| Furniture and fixtures     |       | 1,001,053  |       | 773,182          |       | 227,871 |   | 118,607 |   |
| Construction in progress   |       | 246,257    |       | —           |       | 246,257 |   | 1,159,928 |   |
|                       |       |       |       |             |       |   |   |   |   |
| Totals                     |       | $          | 51,965,792 |             | $          | 24,208,851 |   | $ | 27,756,941 |   | $ | 30,130,219 |   |

 

**NOTE 7 -   PATENTSAND OTHER INTANGIBLE ASSETS**

 

On January 1, 2003, theCompany acquired an additional 54% interest in the outstanding common stock ofUSSC to bring its total ownership interest to approximately 58%.  The results of USSC’s operations have been consolidatedin the Company’s financial statements since that date.  The Company believes that the acquisition ofa controlling interest in USSC will allow the Company to develop and market soy-basedpolyurethane products.

 

The aggregate purchase price for the 54% interest was $8,576,686.  The Company had previously acquired a 4%interest for $1,000,000.  In preparingconsolidated financial statements, the Company assigned the total considerationpaid for the USSC stock to USSC’s assets and liabilities.  This allocation resulted in an assignment of$7,401,245 to patents.  None of thesepatent costs recognized for financial reporting purposes is expected to bedeductible for tax purposes.  The patentsare being amortized using the straight-line method over a period of 16 to 20years, which is the shorter of the remaining estimated economic life of thepatents acquired or 20 years from the original file date.

 

The following tablesummaries the estimated fair values of the assets acquired and liabilitiesassumed at the date of acquisition, January 1, 2003:

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

 

(continued on next page)

 

F-14

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

The Company also has acontractual obligation to pay former USSC shareholders $4,050,000.  One remaining installment of $891,000 is dueon October 31, 2006 (see Note 9).

 

The following tableprovides information regarding the Company’s other intangible assets as ofDecember 31, 2005 and 2004:

 
| ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------|------------|------------------|------------|------------|------------|
| **Intangible Assets**    | ** ** | **Life**   | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                     |       |       |       |       |       |             |       |       |       |
| As of December 31, 2005: |       |       |       |       |       |             |       |       |       |
| Patents                  |       | 16-20 Yrs. |       | $          | 7,906,596  |             | $          | (1,271,688 | )          | $ | 6,634,908 |   |
| Loan Origination  Costs  |       | 10 Yrs.    |       | 20,502     |       | (14,343          | )          | 6,159      |       |
| Trademarks               |       |       |       | 8,496      |       | —           |       | 8,496      |       |
|                     |       |       |       |       |       |             |       |       |       |
|                     |       |       |       | $          | 7,935,594  |             | $          | (1,286,031 | )          | $ | 6,649,563 |   |
|                     |       |       |       |       |       |             |       |       |       |
| As of December 31, 2004: |       |       |       |       |       |             |       |       |       |
| Patents                  |       | 16-20 Yrs. |       | $          | 7,745,947  |             | $          | (845,900   | )          | $ | 6,900,047 |   |
| Loan Origination  Costs  |       | 10 Yrs.    |       | 20,502     |       | (7,862           | )          | 12,640     |       |
|                     |       |       |       |       |       |             |       |       |       |
|                     |       |       |       | $          | 7,766,449  |             | $          | (853,762   | )          | $ | 6,912,687 |   |

 

**NOTE 8 -   NOTESPAYABLE – SEASONAL LOAN**

 

The Company has enteredinto a revolving credit agreement with CoBank, which expires September 1, 2006.The purpose of the credit agreement is to finance the inventory and accountsreceivable of the Company. The Company may borrow up to $15,200,000. Interest accruesat a variable rate (7.05% at December 31, 2005).  Advances on the revolving credit agreementare secured and limited to qualifying inventory and accounts receivable, net ofaccrued commodity purchases.  There wereno advances outstanding at December 31, 2005 and 2004.

 

(continued on next page)

 

F-15

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 9 -   LONG-TERMDEBT**

 
| ** **                                                                                                                                                                                                                                                                              | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                                                                                                                                                                                    |       |       |       |       |       |
|  Revolving term loan from CoBank, interest at  variable rates (7.05% and 4.85% at December 31, 2005 and 2004, respectively),  secured by substantially all property and equipment. Loan matures March 20,  2012.                                                                   |       | $          | 14,500,000 |       | $          | 7,940,777 |   |
|                                                                                                                                                                                                                                                                                    |       |       |       |       |       |
|  Note payable to former USSC shareholders,  due in annual principal payments of $891,000, interest at 0%,  secured by USSC stock. Note matures on  October 31, 2006.                                                                                                          |       | 891,000    |       | 1,782,000  |       |
|                                                                                                                                                                                                                                                                                    |       |       |       |       |       |
|  Note payable to Brookings County Railroad  Authority, due in semi-annual principal and interest installments of $36,885  at 5%, secured by railroad track assets. Note matures September 1, 2007.                                                                                 |       | 140,064    |       | 203,158    |       |
|                                                                                                                                                                                                                                                                                    |       |       |       |       |       |
|  Note payable to Richard Kipphart, issued  February 13, 2002, with quarterly interest payments at 15% which began on  June 30, 2002, and are paid in quarterly installments thereafter. No  prepayment of principal is allowed prior to maturity. Note matures February  13, 2005. |       | 250,000    |       | 250,000    |       |
|                                                                                                                                                                                                                                                                                    |       |       |       |       |       |
|  Note payable to various companies at rates  ranging from 0% to 7.5%. Notes mature on or before March 16, 2009.                                                                                                                                                                    |       | 15,267     |       | 26,654     |       |
|                                                                                                                                                                                                                                                                                    |       | 15,796,331 |       | 10,202,589 |       |
|  Less current  maturities                                                                                                                                                                                                                                                          |       | (1,212,768 | )          | (1,216,438 | )          |
|                                                                                                                                                                                                                                                                                    |       |       |       |       |       |
| Totals                                                                                                                                                                                                                                                                                  |       | $          | 14,583,563 |       | $          | 8,986,151 |   |

 

The Company entered intoan agreement as of October 6, 2005 with CoBank to amend and restate its MasterLoan Agreement (MLA), which includes both the revolving term loan and theseasonal loan discussed in Note 8.  Underthe terms and conditions of the MLA, CoBank agreed to make advances to theCompany for up to $17,100,000 on the revolving term loan. The availablecommitment decreases in scheduled periodic increments of $1,300,000.  The remaining commitment available on therevolving term loan as of December 31, 2005, was $2,600,000.

 

The Company is inviolation of one of its loan covenants with CoBank as of December 31, 2005, butCoBank agreed to waive the requirement. The loan covenant requires the Companyto maintain a minimum working capital of $6.0 million. At December 31, 2005,working capital was approximately $5.7 million.

 

(continued on next page)

 

F-16

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

The minimum principalpayments on long-term debt obligations will be as follows:

 
| **For the years ending December 31:** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|
| 2006                                  |       | $          | 1,212,768  |   |
| 2007                                  |       | 2,677,199  |       |
| 2008                                  |       | 2,605,176  |       |
| 2009                                  |       | 2,601,188  |       |
| 2010                                  |       | 2,600,000  |       |
| Thereafter                            |       | 4,100,000  |       |
|                                  |       |       |       |
| Total                                 |       | $          | 15,796,331 |   |

 

**NOTE 10 -   EMPLOYEEBENEFIT PLANS**

 

The Company maintains a Section401(k) plan for employees who meet the eligibility requirements set forth inthe plan documents.  The Company matchesa percentage of employees’ contributed earnings.  The amounts charged to expense under thisplan were approximately $56,000, $58,000, and $63,000 for the years endedDecember 31, 2005, 2004, and 2003, respectively.

 

The Company has adeferred compensation plan for key employees. The agreements provide benefits, which vest over a three-yearperiod.  The Company shall pay theemployees in five equal annual installments upon retirement.  The future payments have been discounted at8%.  The amount recognized as expenseduring the years ended December 31, 2005, 2004, and 2003 was $10,348, $18,664, and$30,237, respectively.  The Company madepayments of approximately $10,600 during 2005 and 2004. Deferred compensationis recorded at $129,072 and $129,345 as of December 31, 2005 and 2004,respectively.

 

**NOTE 11 -   **COMMITMENTS

 

The Company has operating leases for 417 rail cars from GECapital.  The leases require monthlypayments of $168,716.  The leases beganin 1996 and have eighteen-year terms. The Company also leases 100 rail cars from Trinity Capital.  This lease requires monthly payments of$38,300.  Lease expense for all rail carswas $2,066,911, $2,068,015, and $1,903,367, for the years ended December 31,2005, 2004, and 2003, respectively.  TheCompany generates revenues from the use of 299 of these rail cars on otherrailroads.  Such revenues were$2,161,622, $1,794,012, and $1,648,666, for the years ended December 31, 2005,2004, and 2003, respectively.

 

The Company has enteredinto a sub-lease agreement with the Dakota, Minnesota & Eastern RailroadCorporation (“DME”) for the hopper rail cars that it leases from GECapital.  The Company recognizes revenuefrom this sub-lease as the hopper rail cars are used by the DME.  The sub-lease is for a twelve-month periodand is renewed annually.  The Company isresponsible for all maintenance of the rail cars.

 

The Company also has anumber of other operating leases for machinery and equipment. Rental expenseunder these other operating leases was $283,273, $197,864, and $328,079 for theyears ended December 31, 2005, 2004, and 2003, respectively.

 

(continued on next page)

 

F-17

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

The following is aschedule of future minimum rental payments required under these operatingleases.

 
| ** **              | ** ** | **Rail Cars** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-------------------------|------------|---------------|------------|-----------|------------|-----------|------------|
| Year ended December 31: |       |          |       |      |       |      |       |
| 2006                    |       | $             | 2,484,192  |      | $          | 30,616    |       | $ | 2,514,808 |   |
| 2007                    |       | 2,290,067     |       | 4,644     |       | 2,294,711 |       |
| 2008                    |       | 1,993,092     |       | —    |       | 1,993,092 |       |
| 2009                    |       | 1,679,892     |       | —    |       | 1,679,892 |       |
| 2010                    |       | 1,653,392     |       | —    |       | 1,653,392 |       |
| Thereafter              |       | 9,394,002     |       | —    |       | 9,394,002 |       |
|                    |       |          |       |      |       |      |       |
| Totals                  |       | $             | 19,494,637 |      | $          | 35,260    |       | $ | 19,529,897 |   |

 

We have an exclusivesupply agreement with ACH Foods to provide its facilities with a consistentsupply of refined and bleached oil on a general requirements basis. Pricing isfixed until January 15, 2007, with the option to renegotiate the pricethereafter. The oil is transported by rail from our plant to one of ACH Foods’facilities, where it is further processed for the edible oil.

 

**NOTE 12 -   CASHFLOW INFORMATION**

 

The following is aschedule of changes in assets and liabilities used to determine cash fromoperating activities:

 
| ** **                          | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| (Increase) decrease in assets:      |       |       |       |       |       |       |       |
| Trade accounts  receivable          |       | $          | (4,172,029 | )          | $          | 6,078,874  |       | $ | (8,786,716 | ) |
| Inventories                         |       | (338,160   | )          | 2,174,900  |       | 2,363,170  |       |
| Margin account  deposit             |       | 876,407    |       | (1,611,931 | )          | 1,114,848  |       |
| Prepaid expenses                    |       | (26,378    | )          | (24,097    | )          | (33,442    | )          |
|                                |       | (3,660,160 | )          | 6,617,746  |       | (5,342,140 | )          |
|                                |       |       |       |       |       |       |       |
| Increase (decrease) in liabilities: |       |       |       |       |       |       |       |
| Accounts payable                    |       | (236,236   | )          | (766,834   | )          | 275,240    |       |
| Accrued  commodity purchases        |       | (2,105,012 | )          | 2,148,041  |       | 1,342,767  |       |
| Accrued expenses  and interest      |       | 347,535    |       | 259,521    |       | (198,126   | )          |
| Deferred compensation               |       | (273       | )          | 8,044      |       | 30,237     |       |
|                                |       | (1,993,986 | )          | 1,648,772  |       | 1,450,118  |       |
|                                |       |       |       |       |       |       |       |
| Total                               |       | $          | (5,654,146 | )          | $          | 8,266,518  |       | $ | (3,892,022 | ) |

 

(continued on next page)

 

F-18

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 13 -   FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

Estimated fair values ofthe Company’s financial instruments (all of which are held for non-tradingpurposes) are as follows:

 
| ** **                | ** ** | **2005**     | ** ** | **2004**   | ** ** |
|---------------------------|------------|--------------|------------|------------|------------|
| ** **                | ** ** | **Carrying** | ** ** | **Fair**   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                | ** ** | **Amount**   | ** ** | **Value**  | ** ** | **Amount** | ** ** | **Value** | ** ** |
|                      |       |         |       |       |       |   |   |   |   |
| Cash and cash equivalents |       | $            | 75,556     |       | $          | 75,556 |   | $ | 11,423 |   | $ | 11,423 |   |
|                      |       |         |       |       |       |   |   |   |   |
| Margin deposits           |       | 546,054      |       | 546,054    |       | 1,424,422 |   | 1,424,422 |   |
|                      |       |         |       |       |       |   |   |   |   |
| Long-term debt            |       | 15,796,331   |       | 15,746,957 |       | 10,202,589 |   | 10,095,955 |   |
|                           |            |              |            |            |            |  |  |  |  |  |  |  |  |

 

The carrying amountapproximates fair value of cash and margin deposits.  The fair value of long-term debt is based oncurrent rates at which the Company could borrow funds with similar remainingmaturities. The carrying amount of accounts receivable, accounts payable,investments, and accrued commodity purchases approximates their fair value.

 

The Company has apatronage investment in other cooperatives and common stock in a privately heldentity.  There is no market for theirpatronage credits or the entity’s common shares, and it was impracticable toestimate fair value of the Company’s investment.  These investments are carried on the balancesheet at original cost.

 

**NOTE 14 -   RELATEDPARTY TRANSACTIONS**

 

During August 2000, theCompany entered into an agreement with Minnesota Soybean Processors Cooperative(MnSP) for certain services and management of a proposed soybean processingplant.  The agreement provided theCompany a fee of 10% of the equity raised by MnSP for the Company’s servicesrelated to business planning and construction management services. Fees earnedunder this arrangement were $0, $126,250, and $1,245,205 for the years endedDecember 31, 2005, 2004, and 2003, respectively.  The Company agreed to reinvest a minimum of80% of the fees earned from MnSP in equity units of MnSP.  During 2004, the Company exchanged a storagefacility with a net book value of $2,322,561 as its investment and paid cash of$600,931.

 

The Company has agreed toprovide management and marketing services to MnSP on a cost-sharing basis forautomatically renewing five-year periods beginning in late 2003. The Companyearned fees of $1,380,155, $1,047,193 and $226,985 under this arrangement forthe years ended December 31, 2005, 2004 and 2003. As of December 31, 2005 and 2004,MnSP owed the Company $251,482 and $74,338, respectively.

 

In addition, the Companyis providing up to $1 million in interest free loans to members of the Companywho choose to invest in MnSP.  The loansare secured by members’ equity in the Company. As of December 31, 2005 and 2004, the Company had outstanding notesreceivable pursuant to this arrangement of $481,710.  These will be repaid as the Board of Managersapproves distributions of prior earnings.

 

The Company and MnSP alsopurchase and sell processed products such as soybean meal, soybean oil,BioDiesel, etc. For the years ended December 31, 2005, 2004, and 2003, theCompany had sales to MnSP in the amount of $10,761,235, $0, and $0,respectively.  During the years endedDecember 31, 2005, 2004, and 2003, the Company also purchased $10,179,713, $0,and $0, respectively, from MnSP.

 

F-19

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

Occasionally the Companysubleases rail cars to MnSP.  The Companycharged MnSP $47,505 for these subleases during the year ended December 31,2005.

 

**NOTE 15 -   BUSINESSCREDIT RISK AND CONCENTRATIONS**

 

The Company maintains itscash balances with various financial institutions. At times during the year,the Company’s balances exceeded the $100,000 insurance limit of the FederalDeposit Insurance Corporation. Management believes the risk of loss to be low.

 

The Company also grantscredit to customers throughout the United States and Canada.  The Company evaluates each customer’s creditworthiness on a case-by-case basis. Accounts receivable are generally unsecured.  These receivables were $21,661,903 and $17,480,118at December 31, 2005 and 2004, respectively.

 

Soybean meal salesaccounted for approximately 56% of total revenues for the year ended December31, 2005, 60% of total revenues for the year ended December 31, 2004, and 58% oftotal revenues for the year ended December 31, 2003.  Approximately 31% and 37% of these sales weremade to one customer for the years ended December 31, 2004 and 2003,respectively.  At December 31, 2004, thiscustomer owed the Company approximately $1,024,000.  Refined oil sales represented approximately 37%of total revenues for the years ended December 31, 2005 and 2004, and 30% oftotal revenues for the year ended December 31, 2003.  These sales were primarily made to onecustomer. This customer owed the Company approximately $4,644,000 and $6,791,000at December 31, 2005 and 2004, respectively.

 

Net revenue by geographicarea for the years ended December 31, 2005, 2004 and 2003 are as follows:

 
| ** **    | ** ** | **2005**   | ** **  | **2004**   | ** ** | **2003**    | ** ** |
|---------------|------------|------------|-------------|------------|------------|-------------|------------|
|          |       |       |        |       |       |        |       |
| United States |       | $          | 198,933,966 |       | $          | 225,511,056 |       | $ | 189,556,575 |   |
| Canada        |       | 11,437,000 |        | 12,700,000 |       | 17,700,000  |       |
|          |       |       |        |       |       |        |       |
|          |       | $          | 210,370,966 |       | $          | 238,211,056 |       | $ | 207,256,575 |   |

 

**NOTE 16 -   MEMBERS’EQUITY**

 

A minimum of 2,500capital units is required for an ownership interest in the Company.  Such units are subject to certain transferrestrictions.  The Company retains theright to redeem the units at the greater of $.20 per unit or the originalpurchase price less cumulative distributions through the date of redemption inthe event a member attempts to dispose of the units in a manner not inconformity with the Operating Agreement, if a member becomes a holder of lessthan 2,500 units, or if a member becomes an owner (directly or indirectly) ofmore than 1.5% of the issued and outstanding capital units.  The Company’s Operating Agreement alsoincludes provisions whereby cash equal to a minimum of 30% of available netincome will be distributed to unit holders subject to certain limitations.  These limitations include a minimum netincome of $500,000, restrictions imposed by debt and credit instruments or asrestricted by law in the event of insolvency. Earnings, losses and cash distributions are allocated to members basedon their percentage of ownership in the LLC.

 

The Board of Directors approved a Form S-1 registration statement thatwas filed with the Securities and Exchange Commission on February 14, 2005 forthe sale of additional units in a public offering.  The maximum offering under the statement was$11,250,000.  During 2005, the Companysold 2,190,500 member units for a total of $4,495,750, which is accounted foras temporary equity as described in Note 1. The offering allowed the

 

F-20

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

investor to initially pay 50% and sign a note payable to the Companyfor the remaining portion. At December 31, 2005, the Company had subscriptionsreceivable of $209,656, which is accounted for as a deduction from temporaryequity until collected.

 

On June 17, 2003, the Board of Managers declared a 2-for-1 split ofClass A capital units effective immediately. All unit and unit per share amounts have been retroactively adjusted toreflect the effect of the split.

 

**NOTE 17 -   CONTINGENCIES**

 

From time to time in theordinary course of our business, we may be named as a defendant in legalproceedings related to various issues, including without limitation, workers’compensation claims, tort claims, or contractual disputes. We carry insurancethat provides protection against general commercial liability claims, claimsagainst our directors, officers and employees, business interruption,automobile liability, and workers’ compensation claims. Except as describedbelow, we are not currently involved in any material legal proceedings and arenot aware of any potential claims.

 

On June 9, 2003, USSC wasserved with notice that it had been named as a defendant in a breach ofcontract suit filed in circuit court of Cook County, Illinois. The plaintiff,William Blair & Co., LLC, claims that it is entitled to a commission on theCompany’s purchase of USSC’s stock in 2003 based on a broker agreement betweenUSSC and William Blair. In the broker agreement dated October 15, 2001, USSCretained William Blair to render investment banking services in connection witha potential private placement or sale by USSC. William Blair’s claim fordamages against USSC is for $684,000, but USSC strongly denies that WilliamBlain is entitled to such damages.  Thematter is scheduled for trial in circuit court of Cook County, Illinois on January8, 2007.

 

On June 7, 2005, theCompany received notification from the Securities and Exchange Commission (“SEC”)that the Company’s filings were under review. During the course of the review,the SEC requested additional information about the Company’s change in auditorsfor the audit of its financial statements for the year ended December 31,2004 as disclosed in the Company’s 8-K filing dated January 18, 2005.After considering such information, management determined that the independenceof the audit firm, Eide Bailly LLP, with respect to its audit of financialstatements for the year ended December 31, 2003 was compromised anddecided to have the financial statements for that period reaudited.  As a result, in the latter part of 2005 theCompany’s Board of Managers engaged Gordon, Hughes, & Banks LLP toreaudit the financial statements for the year ended December 31, 2003. There-audit produced an unqualified opinion and there was no effect on previouslyreported net income or member’s equity. During early 2005, prior to receivingnotice of the SEC review, the Company solicited investors through an S-1registration statement which included the 2003 audit opinion letter from EideBailly LLP and the audited financial statements for the year ended December 31,2003.  Because the independence of EideBailly was compromised for that period, the registration statement did not meetthe requirements of federal securities law. The financial statements includedin the Company’s periodic reports for such periods, as amended, are nowcompliant with the independent auditor requirements of applicable securitieslaw, but there remains a possibility that claims could be made against theCompany relating to the inclusion in the offering materials of the originalaudit opinion letter. As of December 31, 2005, the Company has notrecorded a provision for this matter, as management believes the likelihood ofclaims being asserted by investors in the offering is remote under FAS 5. Managementbelieves that any liability it may incur would not have a material adverseeffect on its financial condition or its results of operations.  Due to the circumstances described above, theCompany has recorded the net proceeds received to date as temporary equity inthe accompanying consolidated balance sheet.

 

F-21

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 18 -   QUARTERLYRESULTS OF OPERATIONS**

 

The following tablepresents certain unaudited quarterly financial data for each of the quarters inthe years ended December 31, 2005 and 2004. This information has been prepared on the same basis as the consolidatedfinancial statements and includes, in the opinion of the Company, alladjustments (consisting of only normal recurring adjustments) necessary topresent fairly the quarterly results when read in conjunction with consolidatedfinancial statements and related notes thereto. The operating results for any quarter are not necessarily indicative ofresults for any future period or the full year.

 

***UnauditedConsolidated Statements of Operations***

 
| ** **                                               | ** ** | **2005 Calendar Quarters (in thousands)** | ** ** | **2004 Calendar Quarters (in thousands)** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                               | ** ** | **First**                                 | ** ** | **Second**                                | ** ** | **Third** | ** ** | **Fourth** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|                                                     |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net revenues                                             |       | $                                         | 46,152     |                                      | $          | 49,665 |   | $ | 62,195 |   | $ | 52,359 |   | $ | 58,213 |   | $ | 71,178 |   | $ | 59,931 |   | $ | 48,889 |   |
| Cost of revenues                                         |       | (47,041                                   | )          | (50,984                                   | )          | (60,751 | ) | (51,218 | ) | (58,366 | ) | (68,157 | ) | (57,326 | ) | (48,855 | ) |
| Gross profit                                             |       | (889                                      | )          | (1,318                                    | )          | 1,444 |   | 1,141 |   | (153 | ) | 3,021 |   | 2,605 |   | 34 |   |
| Operating expenses                                       |       | (1,104                                    | )          | (1,184                                    | )          | (679 | ) | (860 | ) | (925 | ) | (1,040 | ) | (1,090 | ) | (1,422 | ) |
| Operating profit  (loss)                                 |       | (1,993                                    | )          | (2,502                                    | )          | 765 |   | 281 |   | (1,078 | ) | 1,981 |   | 1,515 |   | (1,388 | ) |
| Other income (expense)                                   |       | (240                                      | )          | 21                                        |       | (11 | ) | (330 | ) | 25 |   | (465 | ) | (271 | ) | (307 | ) |
| Income (loss)  before income taxes and minority interest |       | (2,232                                    | )          | (2,481                                    | )          | 754 |   | (49 | ) | (1,052 | ) | 1,516 |   | 1,244 |   | (1,695 | ) |
| Minority interest                                        |       | 133                                       |       | 134                                       |       | 101 |   | — |   | 190 |   | 168 |   | 181 |   | 138 |   |
| Income (loss)  before income taxes                       |       | (2,099                                    | )          | (2,347                                    | )          | 855 |   | (49 | ) | (862 | ) | 1,684 |   | 1,425 |   | (1,557 | ) |
| Income tax (expense) benefit                             |       | —                                    |       | —                                    |       | — |   | — |   | (1 | ) | — |   | — |   | — |   |
|                                                     |       |                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss)                                       |       | $                                         | (2,099     | )                                         | $          | (2,347 | ) | $ | 855 |   | $ | (49 | ) | $ | (864 | ) | $ | 1,684 |   | $ | 1,425 |   | $ | (1,557 | ) |

 

Certain reclassificationshave been made to the quarterly consolidated statements of operations toconform to the annual presentations.

 

F-22

----

 

## **REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULES**

 

The Board of Managers

South Dakota SoybeanProcessors, LLC

Volga, South Dakota

 

Under the date ofFebruary 3, 2006, we reported on the consolidated balance sheets of SouthDakota Soybean Processors, LLC as of December 31, 2005 and 2004, and therelated consolidated statements of operations, members’ equity, and cash flowsfor each of the three years in the period ended December 31, 2005.  Inconnection with our audits of the aforementioned consolidated financialstatements, we also have audited the related financial statement schedules aslisted in the accompanying index.  The financial statement schedules arethe responsibility of the Company’s management.  Our responsibility is toexpress an opinion on the financial statement schedules based on our audits.

 

In our opinion, suchfinancial statement schedules, when considered in relation to the basicconsolidated financial statements taken as a whole, present fairly, in allmaterial respects, the information set forth therein.

 

***Gordon,Hughes & Banks, LLP***

 

Greenwood Village,Colorado

February 3, 2006

 

F-23

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**FINANCIAL STATEMENT SCHEDULE**

 
| ** **                       | ** ** | ** **       | ** ** | **Charged**       | ** ** | ** **     | ** ** | ** **     | ** ** |
|----------------------------------|------------|------------------|------------|-------------------|------------|----------------|------------|----------------|------------|
| ** **                       | ** ** | ** **       | ** ** | **(Credited) to** | ** ** | ** **     | ** ** | ** **     | ** ** |
| ** **                       | ** ** | **Balance at**   | ** ** | **Costs and**     | ** ** | ** **     | ** ** | **Balance at** | ** ** |
| ** **                       | ** ** | **Beginning of** | ** ** | **Expenses**      | ** ** | ** **     | ** ** | **End of**     | ** ** |
| **Description**                  | ** ** | **Period**       | ** ** | **Additions**     | ** ** | **Deductions** | ** ** | **Period**     | ** ** |
|                             |       |             |       |              |       |           |       |           |       |
| Deducted from asset accounts:    |       |             |       |              |       |           |       |           |       |
| Year ended  December 31, 2003:   |       |             |       |              |       |           |       |           |       |
| Allowance for  doubtful accounts |       | $                | 273,331    |              | $          | —         |       | $              | (3,547     | ) | $ | 276,878 |   |
|                             |       |             |       |              |       |           |       |           |       |
| Deducted from asset accounts:    |       |             |       |              |       |           |       |           |       |
| Year ended  December 31, 2004:   |       |             |       |              |       |           |       |           |       |
| Allowance for  doubtful accounts |       | $                | 276,878    |              | $          | (248,987       | )          | $              | (109       | ) | $ | 28,000 |   |
|                             |       |             |       |              |       |           |       |           |       |
| Deducted from asset accounts:    |       |             |       |              |       |           |       |           |       |
| Year ended  December 31, 2005:   |       |             |       |              |       |           |       |           |       |
| Allowance for  doubtful accounts |       | $                | 28,000     |              | $          | 15,157         |       | $              | —     |   | $ | 43,157 |   |

 

F-24

----