**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-K**

 

**ý****                                ****ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31,2004**

 

**COMMISSION FILE NO. 333-75804**

 

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

(Exact Name of Registrant as Specified in its Charter)

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

 

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

(Address of Principal Executive Offices)

 

**(605) 627-9240**

(Registrant’s Telephone Number)

 

----

 

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

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

 

----

 

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

 

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

 

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

 

State the aggregate market value of the voting and non-voting commonequity held by non affiliates computed by reference to the price at which thecommon equity was last sold, or the average bid and asked price of such commonequity, as of the last business day of the registrant’s most recently completedsecond fiscal quarter: The aggregate market value of the common equity of theregistrant and its predecessor held by non-affiliates as of June 30, 2004was approximately $43,400,000 based on the average sales price of itspredecessor’s equity shares on June 18, 2002, which was the latest date oftrading prior to June 30, 2004.

 

Indicate the number ofshares outstanding of each of the registrant’s classes of common stock, as ofthe latest practicable date:  As of thedate of this filing, there were 28,334,750 Class A capital units of theregistrant outstanding.

 

 

----

 

**Part I**

 

# **CAUTIONARYSTATEMENT REGARDING**

# **FORWARD-LOOKINGINFORMATION**

# ** **

This information in this annual report on Form 10-K for the yearended December 31, 2004, contains “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995 with respect tothe business and operations of South Dakota Soybean Processors and ouraffiliates.  In addition, we and ourrepresentatives and agents may from time to time make other written or oralforward-looking statements, including statements contained in our filings withthe Securities and Exchange Commission and our reports to members and securityholders. Words and phrases such as “believe,” “expect,” “anticipate,” “intend,”“plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,” “future,”“potential,” or the negatives of these words, and all 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 risks and uncertaintiesthat could cause actual results to differ materially from those discussed inthe forward-looking statements. These risks and uncertainties include, but arenot limited to, risks related to the level of commodity prices, loss of memberbusiness, competition, changes in the taxation of limited liability companies,compliance with laws and regulations, perceptions of food quality and safety,business interruptions and casualty losses, access to equity capital,consolidation of producers and customers, and alternative energy sources. Otherrisks or uncertainties may be described from time to time in our future filingswith the Securities and Exchange Commission.

 

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

 

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

 

**Overview**

 

SouthDakota Soybean Processors, LLC (SDSP) owns andoperates a soybean processing plant, a SoyolTM production facility anda soybean oil refinery in Volga, South Dakota. We began producing crude soybean oil, soybean meal and soybean hulls inlate 1996, and since then we have expanded our business to include thedevelopment of new, vertically integrated product lines and managementservices.  In 2000, we began providingmanagement services to Minnesota Soybean Processors (MnSP)and obtained a minority interest in MnSP in2004.  In 2002, we began refining crudesoybean oil into a product known as refined and bleached oil, and in early2003, we became the majority owner and assumed management control of UrethaneSoy Systems Company (USSC), which produces Soyol, a bio-based polyurethane product made from soybeanoil.

 

Our core business consistsof processing locally grown soybeans into soybean meal and soybean oil.  Soybean meal is primarily sold to resellers,feed mills, and to livestock producers as livestock feed.  Since the completion of our refining facilityin 2002, we have processed most of our crude soybean oil into refined and bleached oil.  We sell our refined and bleached oil to amanufacturer of various retail and bulk food products where it is furtherprocessed for human consumption.  We areexploring the feasibility of installing facilities that would enable us tofurther process the refined and bleached oil we produce into biodiesel, consistent with our strategy to increase ourvertical integration by adding value to our core products.

 

We plan to maintain a competitive position in the marketplace byproducing high quality products, operating a highly efficient operation at thelowest possible cost, and adding value to our core products to capture largermargins.  We plan to increase our costefficiency by increasing daily production

 

2

----

 

capacity and to add value to our products by investing in furtherprocessing of our products and developing and reviewing new applications forour products in the plastics and energy fields.

 

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

 

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

 

**Industry Information**

 

The soybean processing industry converts soybeans into soybean meal,soybean hulls and soybean oil. Food ingredients are the primary end use for theoil, while the meal and hulls are mostly consumed by animals. Crude soybean oilis refined by our customers for use as salad and cooking oil, baking and fryingfat, and to a more limited extent, for industrial uses.  According to Oil World 2020, a compilationreport published in 1999, the U.S. soybean processing industry is projected togrow at an annual rate of approximately 1 to 11⁄2%.

 

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

 

Soybean processing facilities are generally located close to adequatesources of soybeans and a strong demand for meal to decrease transportationcosts. Poultry and swine dominate soybean meal consumption in the U.S. Onaverage, exports of soybean meal account for 15 to 20% of total production. Abushel of soybeans typically yields approximately 48 pounds of meal and 11pounds of crude oil when processed.

 

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

 

The U.S. soybean processing industry is comprised primarily of 15different companies operating 65 plants in 22 states.  It is a mature, consolidated andvertically-integrated industry with four companies controlling nearly 85% ofthe processing. Those four companies are Archer Daniels Midland (ADM), Bunge, Cargill and AgProcessing, Inc. (AGP).  The U.S. vegetable oil (including soybeanoil) refining industry is divided between oilseed processors and independentvegetable oil refiners.  The oilseedprocessors operate approximately 80% of the vegetable oil refining capacity inthe U.S., and ADM, Bunge,Cargill and AGP operate approximately 65% of the oilrefining capacity.  The three largestindependent vegetable oil refiners are ACH Foods, Smuckers(P&G), and ConAgra (Hunt-Wesson).

 

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

 

The soybean industry hasworked diligently to introduce soy products as bio-based substitutes forvarious petroleum-based products.  Suchproducts include biodiesel, soy ink, lubricants,candles and plastics.  Demand for biodiesel, in particular, is expected to expand, in partdue to recently introduced federal incentives. Biodiesel is a substitute for standard,petroleum-based diesel fuel that is made from

 

3

----

 

approximately 90% vegetableoil (such as soybean oil) or animal fat and 10% alcohol (methanol).  The chemical reaction resulting from thecombination of these components produces biodieseland glycerin.  Although the long-termaverage price differential of biodiesel is currentlyabout $1 per gallon higher than standard diesel fuel, the 2004 Jobs CreationAct establishes a blender’s tax credit that will equate to about $1 per gallonof biodiesel. This new tax credit, along with some earlier, less significantproduction incentives, have essentially closed the price gap between standarddiesel fuel and biodiesel, considerably increasingthe feasibility of large-scale biodiesel production.

 

**Reorganization**

 

South DakotaSoybean Processors was originally organized on December 6, 1993, as aSouth Dakota cooperative, which was entitled to single-level, pass-through tax treatmenton income generated through the members’ patronage. This allowed us to pass ourincome on to our members in the form of distributions without first payingtaxes at the company level, similar to a partnership. However, as we grew, thecontinuing availability of this advantageous tax treatment was becoming lessand less secure. Accordingly, in 2001 the cooperative’s Board of Directors approveda plan to reorganize into a South Dakota limited liability company (LLC), whichmay elect to be taxed as either a partnership or a corporation.  As an LLC, we plan to retain our historicsingle-level income tax treatment by electing to be taxed as a partnership.

 

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

 

**Products & Services**

 

*Soybean Processing*

 

We crush and process soybeans to extract the soybean oil from theprotein and fiber portions of the soybean. Approximately 80% of the weight of the soybeans that we process annuallyis sold as soybean meal or hulls.  Themeal and hulls are shipped out by truck and rail car.  Primary markets include the local truckmarket, the Pacific Northwest, and exports to Canada.  Currently our significant meal customersinclude Land O’ Lakes and Commodity Specialists.  We currently extract crude soybean oil at alevel equalto approximately 20% of the weight of the soybeans that we process annually.  We process most of the crude soybean oil weproduce into refined and bleached oil or Soyol.  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 our Volga plant site is a registered delivery point forthe CBOT soybean oil futures contract.  We receive a storage payment through CBOT for all oil that is delivered into this program.

 

*Refining*

 

We began refining operations in August 2002 with the start-up ofour on-site refining facility adjacent to our crushing plant in Volga, SouthDakota. Refining consists of processing the crude soybean oil we producethrough a series of processes and filters to create a product known in theindustry as refined and bleached oil.  Werefined approximately 92% of the crude soybean oil we produced in 2004.

 

We have an exclusive supply agreement with ACH Foods to provide itsfacilities with a consistent supply of refined and bleached oil on a generalrequirements basis. Pricing is fixed for the first

 

4

----

 

five years (until January 15, 2007), with the option torenegotiate the price thereafter. The oil is transported by rail from our plantto one of ACH Foods’ facilities, where it is further processed for the edibleoil market.

 

*Polyurethane*

 

We also process crude soybeanoil to produce Soyol, a bio-based polyurethaneproduct made from specially processed crude soybean oil that has been developedfor use as a replacement for certain petrochemical products.  Soyol is relatively new in the market and has been undergoingresearch and development in recent years.  SDSPdoes the initial crude oil processingat theVolga, South Dakota facility and ships it directly to USSC’scustomer.

 

USSC developed Soyol and is now responsible for its marketing.  Soyol is a kind of polyol, which is a key chemical in foam formulation. Itreacts with other ingredients to form different types of polyurethane foam,which can be used in a variety of products such as insulation, packaging,furniture padding, carpet backing and footwear.

 

USSC holds thepatents for Soyol and a number of related productionprocesses and industrial uses.  We havethe exclusive rights to supply soybeanoil for USSC’s sales of Soyoluntil 2014 and have agreed not to sellsoybean oil to any other company in the plastics industry. We have also beenassigned the rights to a patent and have developed a second patent relating tothe modification of crude soybean oil for use in industrial applications suchas manufacturing Soyolthat provides costadvantages over other process techniques.

 

USSC’s sales personnel are located throughout theupper Midwest, and USSC is completing new researchand development laboratories at our Volga site. Dow Chemical is a primary customer of USSCutilizing Soyol in its BiobalanceÒproduct, a polyurethane carpet backing. John Deere also uses Soyol in its Harvest FormÒproduct, a rigid polyurethane combine shield.

 

We originally purchased a 4% ownership in USSC in May 2000 for $1 million. Effective January 2003,we agreed to invest an additional $8.55 million to acquire a 58% majorityownership interest in USSC by purchasing shares fromexisting shareholders and newly issued shares from USSC.  We also agreed to take over the management ofUSSC.  Wecurrently hold six of the nine seats on USSC’s boardof directors, and our CEO is also the president of USSC.  We purchased the newly issued shares of USSC for $4.50 million which was paid during 2003 and2004.  We purchased theshares from the existing shareholders of USSC for$4.05 million on an installment basis and have two remaining equal annualinstallments of $891,000 payable in October of 2005 and 2006.

 

**Other**

 

Wealso generate income from various other projects, including constructionmanagement fees for overseeing the general construction of a 100,000 bushel perday soybean processing facility built by Minnesota Soybean Processors (MnSP) in Brewster, Minnesota.  In addition, at timeswe earn miscellaneous income for consulting fees or the completion offeasibility studies or other projects.

 

In August 2000, we entered into anagreement with MnSP to provide constructionmanagement for its new soybean processing plant. Under the contract, we werepaid 10% of the total equity raised, and we agreed to reinvest 80% of theconstruction management fees in equity of MnSP.  MnSP completed itsequity fundraising in April 2002, raising a total of approximately $29million. Construction began approximately six months later and was completed inNovember 2003.

 

We made our required reinvestment in MnSP in the third quarter of 2004 by transferring a 63million-pound oil storage tank and loading facilities that we constructed onland adjacent to the MnSP site.   In exchange for such transfer, we received1,400,400 (post split) shares of Class A Stock of MnSP,representing approximately 7% of MnSP’s outstandingshares.  In the third quarter of 2004, we

 

5

----

 

subscribed for 287,500 shares of Class BStock in MnSP. The shares are 8%, Non-Cumulative Convertible Class B PreferredStock sold at $2.00 per share.  We madeour deposit of $287,500 and will pay the remaining commitment of $287,500 if MnSP completes the offering.  We also made approximately $500,000 ininterest-free loans backed by members’ equity to our members to invest in MnSP.  These loanswill be repaid through member distributions.

 

We are providing management and marketingservices to MnSP, including the day-to-day managementcontrol of MnSP’s plant under a Services andManagement Agreement with MnSP pursuant to which weare paid primarily on a cost-sharing basis. Costs for various employees, such as commercial, accounting, andengineering employees, and other administrative expenses will be allocatedbetween SDSP and MnSP basedon the volume of soybeans processed at each plant.  Rodney Christianson, our Chief ExecutiveOfficer has general management and oversight responsibilities of MnSP under this Agreement.

 

**Raw Materials and Suppliers**

 

We procure soybeans from local soybean producers and country elevators.In 2004 soybean production in South Dakota was approximately 140 millionbushels up significantly from 2003’s crop of 113 million bushels, which was lowprimarily due to dry weather conditions. We control the flow of soybeans intothe plant with a combination of pricing and contracting options. Threats to thesoybean supply include weather, changes in government programs, and competitionfrom other processors and export markets. Our refining plant and polyurethaneproduction procure their entire supply of crude soybean oil from our crushingplant.

 

##### **Utilities**

##### ** **

We use natural gas and electricity to operate the crushing and refiningplants. Natural gas is used in the boilers for process heat and for dryingsoybeans. NorthWestern Energy provides natural gas serviceto the plant on an interruptible basis. We are at risk to adverse pricefluctuations in the natural gas market, but we have the capability to use fueloil as a back up for natural gas if delivery is interrupted or marketconditions dictate. We employ forward contracting to offset some of this risk.Our electricity is supplied by the City of Volga. A long term contract onelectricity offsets some of our price exposure on electrical rates.

 

**Employees**

 

We currently employ approximately 109 individuals. All but 23 of ouremployees are full-time. We have no unions or other collective bargainingagreements.

 

**Sales, Marketing and Customers**

 

Our primary meal markets are the local truck market (typically within200 miles of our Volga plant), the Western U.S. (Washington, Oregon andCalifornia), and exports (to Canada). Our primary soybean oil market is Illinois and is served by rail.  Our rail service is provided by the Dakota,Minnesota and Eastern (DM&E) rail line, withconnections to the Burlington-Northern Santa Fe (BNSF)and the Union Pacific (UP).  The tablepresented below lists the percentage of sales by quantity of product soldwithin various markets for 2004.

 
| ** **                | ** ** | **Soybean Meal** | ** ** | **Crude Soybean Oil** | ** ** | **Refined Oil** | ** ** |
|---------------------------|------------|------------------|------------|-----------------------|------------|-----------------|------------|
|                      |       |             |       |                  |       |            |       |
| Local                     |       | 38               | %          | 6                     | %          | —          |       |
| Other U.S. States         |       | 53               | %          | 67                    | %          | 100             | %          |
| Export (including Canada) |       | 9                | %          | 27                    | %          | —          |       |

 

6

----

 

**Competition**

 

We are the only significant hexane extraction plant in South Dakota andwe believe that we have approximately 7% of the soybean processing capacity inthe Upper Midwest and about 1% in the United States.  We plan to maintain our competitive positionin the market by producing high quality product and operating a highlyefficient operation at the lowest possible cost, and adding value to ourproducts.  We plan to increase our costefficiency by increasing daily production capacity, adding value to ourproducts by investing in further processing of our products and developing andreviewing new applications for our products in the plastics and energy fields.

 

**Government Regulation and Environmental Matters**

 

Hexane recovery is closely monitored by the Environmental ProtectionAgency. New regulations effective in April 2004require that the amount of hexane lost in the extraction process not exceed 0.2gallons per ton of soybean oil produced on a rolling 12-month average.  Our production process currently meets thisrequirement.

 

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

 

We maintain a spill prevention plan that contains the necessaryprocedures to minimize spill events and provide emergency notification, ifnecessary. It also contains the required information pertaining to spillcontainment procedures in the event a spill does occur, and the proper spillclean-up procedures. The plan places us in compliance with the provision of 40 CFR, Part 112, of the Federal Regulations on oilpollution prevention, and the provisions of SARA, *SuperfundAmendments and Reauthorization Act, 1986*. It also addresses allknown potentially polluting materials at our plant. At this time, we do notgenerate any known hazardous wastes at our plant.

 

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

 

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

 

We conduct our operations principally from our facilities in Volga,South Dakota.  We own our facilities atVolga, and they serve as collateral for our credit facilities.  In addition, USSCleases office space for a portion of it sales staff in Princeton, Illinois.

 

**Item 3.****                         LegalProceedings**

 

From time to time in the ordinary course of our business, we may benamed as a defendant in legal proceedings related to various issues, includingwithout limitation, workers’ compensation claims, tort claims, or contractualdisputes. We carry insurance that provides protection against generalcommercial liability claims, claims against our directors, officers andemployees, business interruption, automobile liability, and workers’compensation claims. Except as described below, we are not currently involved inany material legal proceedings and are not aware of any potential claims.

 

OnJanuary 28, 2003, we were served with notice that we had been named as adefendant in a breach of contract suit in the circuit court of Cook County,Illinois, along with a number of other individual defendants, including ourChief Executive Officer, Rodney Christianson. The plaintiff, James Jackson, wasan employee of USSC whose services were terminatedshortly after we became the majority owner in early January 2003. Mr. Jacksonclaims that he was wrongfully terminated and that the defendants unjustlyinterfered with his employment contract and committed fraud in connection withour

 

7

----

 

acquisitionof a controlling interest in USSC. He is claimingnearly $1 million in compensatory damages and $5 million in punitivedamages. Based upon our investigation of the facts surrounding the case, webelieve that Mr. Jackson’s employment contract was not properly authorizedand that his claims are substantially without merit. We are vigorouslydefending the action; however, we cannot provide any assurance that we will besuccessful in disposing of the case or that any costs of settlement or damageswould not be material if we are unable to get the case dismissed.  We have entered into mediation negotiationswith Mr. Jackson, but have not yet reached a settlement agreement.  Under the terms of our stock purchaseagreement with USSC, we believe that we would beentitled to indemnification from USSC for our coststo settle or defend the suit, although since we now own 58% of USSC we will not receive dollar-for-dollar indemnificationfrom USSC.

 

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

 

There were no matterssubmitted to a vote of security holders in the quarter ending December 31,2004.

 

**Part II**

 

**Item 5.****                         Marketfor Registrant’s Common Equity and Related Stockholder Matters**

 

Neither SDSP, nor our predecessorcooperative, sold any equity securities during the past three years ended December 31,2004; however, we implemented a two-for-one capital unit split effective June 17,2003.  Subsequent to December 31,2004, we commenced an offering of capital units further described below underthe section, “Capital Raising”.

 

*Trading Activity*

 

As of March 15, 2005, we had 28,334,750 Class A capital unitsoutstanding, held by 2,114 members. There is currently no active trading market for our capital units, andthere has not been any trading activity in our capital units for the past twoyears.

 

Although we are not currently permitting trading in our capital units,other than for the limited permitted private transfers discussed above that aresubject to the approval of our Board of Managers, we are in the process ofestablishing a limited alternative trading service for our capital units, whichwe expect to begin operating in the third quarter of 2005.  The trading service is expected to beoperated by Variable Investment Advisors, Inc., a registered broker/dealerthat will also be registered with the Securities and Exchange Commission as analternative trading system.  Under ourtrading service, our Board of Managers will not permit the number of capitalunits traded through the service each year to exceed 2% of our total issued andoutstanding 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.  We have obtained aprivate letter ruling from the IRS regarding the contemplated structure of ourcapital units trading service confirming that such structure will comply withthe IRS’s safe-harbor provisions for the publicly-traded partnershiprules.  As part of implementing thetrading service, our Board has approved some clarifying changes to theOperating Agreement to reflect the treatment of our member’s capital accountsand the allocations to the capital accounts. These changes to the Operating Agreement will be presented to themembers for approval at our annual meeting in June 2005.

 

*Distributions*

 

In 2002, we paid total cash distributions to our members in the amountof $5.5 million (19.53¢ per capital unit on a post-split adjusted basis).  In 2003, we paid total cash distributions toour members in the amount of $2.5 million (9.0¢ per capital unit).  In March 2004, we made a cashdistribution to our

 

8

----

 

members in the amount of approximately $3.3 million (11.64¢ per capitalunit).  This was the only distribution in2004.

 

Under our Operating Agreement, the Board is required to distribute 30%of available net income (i.e. gross cash proceeds from operations afterdeducting amounts used to pay expenses or establish reserves at the Board’sdiscretion) to members each year, unless available net income does not exceed$500,000 or such a distribution would violate or cause a default under theterms of our debt financing or other credit facilities or is otherwiseprohibited by law.  Any otherdistributions are entirely at the discretion of the Board of Managers and thereis no guarantee as to when or if the Company will make distributions in anyparticular amount or at all and actual distributions will depend uponprofitability, expenses and other factors. Earnings, losses and cash distributions are allocated to members basedon their percentage of capital unit ownership.

 

*Trading Restrictions*

 

As a limited liability company, we must strictly restrict transfers ofour capital units in order to preserve our preferential single-level taxstatus.  Our capital units may not betraded on any national securities exchange or in any over-the-countermarket.  All transfers must be inaccordance with our Capital Unit Transfer System, as it maybe amended by theBoard of Managers from time to time. Our Capital Unit Transfer System prohibitsany transfer that would result in the loss of our partnership tax status.

 

Pursuant to our Operating Agreement, a minimum of 2,500 capital unitsis required for membership, and no member may own more than 1.5% of the totaloutstanding capital units. In addition to the transfer restrictions describedabove, under certain limited circumstances the Board also retains the right toredeem the capital units at the greater of $.20 per capital unit or the originalpurchase price paid upon issuance of such capital units less cumulativedistributions paid with respect to such capital units.  The Board’s right to redeem is available inthe event a member breaches the Operating Agreement or other contract with SDSP or upon a failure to fulfill the membershiprequirements, 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.

 

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

 

9

----

 

**Item 6. Selected Financial Data**

 

The following table sets forth selected financial data of South DakotaSoybean Processors, LLC and our predecessor cooperative for the periodsindicated. The historical financial information in the table below includesaudited financial data of our predecessor cooperative prior to theeffectiveness of the reorganization on July 1, 2002. The financialstatements for the year ended December 31, 2004 included in Item 8 of thisreport were audited by Gordon, Hughes & Banks, LLP.  The financial statements for the years ended December 31,2003 and 2002 included in Item 8 of this report were audited by Eide  Bailly  LLP.

 
| ** **                                    | ** ** | **Years Ended December 31,** | ** **  |
|-----------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                    | ** ** | **2004**                          | ** **  | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                          |       |                              |        |   |   |   |   |   |   |   |   |
| Bushels Processed                             |       | 26,823,093                        |        | 28,384,272 |   | 27,963,507 |   | 26,924,542 |   | 26,832,064 |   |
|                                          |       |                              |        |   |   |   |   |   |   |   |   |
| Statement of Operations Data:                 |       |                              |        |   |   |   |   |   |   |   |   |
| Revenues:                                     |       |                              |        |   |   |   |   |   |   |   |   |
| Net Sales                                     |       | $                                 | 238,211,056 |   | $ | 207,256,575 |   | $ | 159,488,645 |   | $ | 148,258,146 |   | $ | 145,273,300 |   |
| Patronage Income                              |       | 153,961                           |        | 97,975 |   | 36,801 |   | 1,460,386 |   | 1,779,755 |   |
| CBOT Storage  Income                          |       | 58,769                            |        | 1,416,333 |   | 1,867,769 |   | 1,629,420 |   | 1,436,184 |   |
| Agent Fee Income                              |       | —                            |        | — |   | 258,988 |   | 463,896 |   | 450,674 |   |
| Grant Income                                  |       | 33,022                            |        | — |   | — |   | — |   | — |   |
| Management Fees & Misc.              |       | 162,270                           |        | 1,245,205 |   | 1,286,340 |   | — |   | — |   |
|                                          |       | 238,619,078                       |        | 210,269,710 |   | 162,938,543 |   | 151,811,848 |   | 148,939,913 |   |
| Costs & Expenses:                    |       |                              |        |   |   |   |   |   |   |   |   |
| Cost of goods sold                            |       | 232,703,866                       |        | 203,022,360 |   | 152,583,964 |   | 141,359,124 |   | 140,293,625 |   |
| Marketing & Admin Expense            |       | 4,476,511                         |        | 3,639,442 |   | 2,679,633 |   | 2,234,248 |   | 1,768,207 |   |
| Interest Expense                              |       | 1,425,849                         |        | 802,178 |   | 542,220 |   | 483,223 |   | 1,050,880 |   |
| Income Tax Expense (Benefit)                  |       | 1,032                             |        | (131,474 | ) | 520,000 |   | — |   | — |   |
| Minority Interest in Loss of Subsidiary       |       | (676,792                          | )           | (457,620 | ) | — |   | — |   | — |   |
| Net Income                                    |       | $                                 | 688,612     |   | $ | 3,394,824 |   | $ | 6,612,726 |   | $ | 7,735,253 |   | $ | 5,827,201 |   |
|                                          |       |                              |        |   |   |   |   |   |   |   |   |
| Weighted Average Capital Units Outstanding(1) |       | 28,250,139                        |        | 28,258,500 |   | 28,258,500 |   | 28,258,500 |   | 28,258,500 |   |
| Net Income per Capital Unit                   |       | $                                 | 0.02        |   | $ | 0.120 |   | $ | 0.235 |   | $ | 0.275 |   | $ | 0.205 |   |
|                                          |       |                              |        |   |   |   |   |   |   |   |   |
| Balance Sheet Data:                           |       |                              |        |   |   |   |   |   |   |   |   |
| Working Capital                               |       | $                                 | (2,865,135  | ) | $ | 9,499,231 |   | $ | 5,363,332 |   | $ | 4,212,055 |   | $ | 3,173,651 |   |
| Net Property, Plant & Equipment      |       | 30,130,219                        |        | 31,825,619 |   | 33,761,185 |   | 31,892,837 |   | 31,872,946 |   |
| Total Assets                                  |       | 72,499,888                        |        | 81,617,064 |   | 70,284,896 |   | 58,680,968 |   | 55,030,320 |   |
| Long-Term Obligations                         |       | 9,115,496                         |        | 17,664,442 |   | 10,234,523 |   | 8,346,078 |   | 8,649,420 |   |
| Members’ Equity                          |       | 32,122,573                        |        | 34,730,590 |   | 33,875,593 |   | 32,779,725 |   | 30,771,474 |   |
|                                          |       |                              |        |   |   |   |   |   |   |   |   |
| Other Data                                    |       |                              |        |   |   |   |   |   |   |   |   |
| Capital Expenditures                          |       | $                                 | 1,209,602   |   | $ | 1,016,849 |   | $ | 4,645,020 |   | $ | 2,718,740 |   | $ | 720,956 |   |

 

----

(1) Adjusted for two-for-one capitalunit split effective June 17, 2003.

 

10

----

 

**Item 7.****                         Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*You should read the following discussion along with our financialstatements and the notes to our financial statements included elsewhere in thisreport. The following discussion contains forward-looking statements that aresubject to risks, uncertainties and assumptions. Our actual results,performance and achievements may differ materially from those expressed in, orimplied by, such forward-looking statements. See “Cautionary StatementRegarding Forward-Looking Information” at the beginning of this report.*

 

**Executive Overview**

 

We generated gross profit of$5.5 million in 2004, an increase of 30% versus 2003. Margins in the soybeancomplex improved in the second and third quarters of 2004 due to the oilseedcomplex rationing of the short U.S. soybean crop reducing the supply, andincreasing the price, of soybean meal and soybean oil.  Margins in the fourth quarter weakened due togeneral reluctance by farmers to sell soybeans following a sharp drop insoybean prices.  Net income generated for2004 was $689,000.  Net income decreased 80%for 2004 versus 2003.  The decrease innet income was primarily due to non-operating income, consisting ofconstruction management and soybean oil storage, decreasing by an aggregate of$2.6 million in 2004 versus 2003, a $0.6 million increase in interest expensedue to higher commodity prices and a $0.8 million increase in administrativeexpenses resulting from additional expenses incurred in connection with themanagement and operation of ussc.  Despite arecord 2004 crop harvested and good demand for soy products, management expectsmargins in the near term to be under pressure as farmers adjust to soybeanprices dropping from over $9 per bushel to the low $5 range.

 

Sinceour construction management services for Minnesota Soybean Processors (MnSP) have been completed, we are now performing managementand marketing services for MnSP on a cost-sharingbasis. This cost-sharing arrangement has helped to offset the increasedexpenses that we have incurred in our efforts to improve soybean oil marginsand expand soybean oil markets to the polyurethane industry.

 

Weexpect to continue to make progress towards our long-term objectives of delivering high quality productsand services at the lowest possible costs and adding value to our products byinvesting in further processing of our products and developing and reviewingnew applications for our products in the plastics and energy fields.  During 2004, we continued to expend capitalto fund the operations of Urethane Soy Systems Company, Inc. (“USSC”), our majority-owned subsidiary which produces SoyolÒ, a bio-based polyurethane product made fromsoybean oil.  USSChas used these funds to raise the level of industry experience of its staff,target its marketing and sales, increase its product lines, improve qualitycontrol and relocate its research facilities to our Volga, South Dakota plantsite. As of June 2004, USSC had a fullyoperating and staffed chemical and applications lab. In addition, during thethird and fourth quarter of 2004, USSC’s marketingefforts were highlighted by the following achievements:

 

•                  In the carpet industry, the largest supplierof carpet backing polyurethane systems agreed to market USSC’sproducts;

•                  In the automotive industry, USSC successfully produced seat cushions for Ford Motor andVolvo, successfully completed a headrest trial at Lear, and receivedindications of interest from Toyota, GM, and Intier;

•                  In the polyurethane bed-liner market, USSC completed product testing and began marketing of its *Bio TuffTM* bed-linersystem, a USSC trademark; and

•                  In the pulltrussionindustry, USSC conducted successful production testsin a customer’s plant.  We expect thecustomer will make products with USSC’s systemcommercially available by mid 2005.

 

11

----

 

In addition, USSC has developed three new product uses for Soyol and major progress has been made to reduce the odorof Soyol in polyurethane products.  Webelieve that during 2005 we will see growth in demand for Soyolas customers in the carpet, rigid foam, flex foam, pulltrusionand automotive industries complete their testing of Soyol.  We, however, do not anticipate that USSC will generate net income until at least 2006.

 

Asa result of adverse changes in the soybean market and our continued capitalinvestment in USSC, we encountered some cash flowconstraints in 2004.  In order to provideadditional working capital and finance our capital investment in USSC, our Board authorized a capital units offering to raise up to $11.25 million,which was launched in February 2005.

 

**Company Profile**

 

We own and operate a soybean processing plant, a SoyolÒproduction facility and a soybean oil refinery in Volga, South Dakota.  We were originally organized as a SouthDakota cooperative, and reorganized into a South Dakota limited liabilitycompany effective July 1, 2002.  Webegan producing crude soybean oil and soybean meal in late 1996, and since thenwe have expanded our business to include the development of new product linesand management services.  In 2000, webegan providing management services to Minnesota Soybean Processors andobtained a minority 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.

 

When we began refining operations in 2002, we started reporting ourresults by operational segments because we anticipated that those components ofour business would be managed and evaluated independently; however, since thenwe have been processing most of the crude oil we produce into refined andbleached oil or Soyol® instead of sellingit, and the production, sales and marketing of our products have beensubstantially integrated. Accordingly, in late 2003, we began the process ofreevaluating whether segment reporting is necessary and along with our auditorshave since concluded that segment reporting is not necessary under theapplicable accounting rules.  Wetherefore discontinued segment reporting of our business operations in 2004.

 

**Results of Operations**

 

***Comparisonof Years Ended December 31, 2004 and 2003***

 

*Revenue*– Revenue increased from $207.3 million for the year ended December 31,2003 to $238.2 million for the year ended December 31, 2004, an increaseof approximately $30.9 million, or 14.9%. The improvement was a result of several factors.  Principally, the increase in revenues is aresult of higher soybean meal and soybean oil prices along with higher salesvolume of refined and bleached oil.  Theaverage sales prices for soybean meal, crude soybean oil, and refined andbleached soybean oil increased by 23.9%, 12.0%, and 30.4%, respectively.  In addition, sales volume of refined andbleached soybean oil increased by 7.3% in 2004 versus 2003.  The increases attributable to these factorswere offset by a decrease of 85.1% in sales volume of crude soybean oil during2004, which resulted from the fact that we sold crude soybean oil we held instorage during 2003.

 

*GrossProfit/Loss* – During theyear ended December 31, 2004, the Company generated a gross profit of $5.5million, compared to a gross profit of $4.2 million for the year ended December 31,2003.  While revenues increased by $30.9 million,cost of revenues increased only $29.7 million over 2003. Revenuesincreased due to higher soybean meal and soybean oil prices offset by a decreasein crude soybean oil volume.  The increased costof revenue was caused by a $26.1 million (15.0%) increase in cost of productsold and a $3.1 million (21.4%) increase in freight expense for the year ended December 31,2004 compared to 2003.  The increasedcost of product sold was due to higher soybean prices, which

 

12

----

 

increasedapproximately 25.0% from the year ended December 31, 2003.  The increased freight cost resulted fromhigher product volumes delivered to customers and higher freight rates.

 

*AdministrativeExpense* – Administrative expense, including allselling, general and administrative expenses, increased by $837,000, or 23%,for the year ended December 31, 2004 compared to the same period in 2003.  This increase resulted from additionalexpenses incurred in connection with the management and operation of USSC.  USSC remains in the developmental stage, and we continue toincur marketing and research and development expenses to develop a market for Soyol®.  Administrative expenses for 2004 also includeamortization of certain patents previously classified as goodwill. Some of theincrease in administrative expenses associated with USSC has been offset bylower general and administrative expenses that we are incurring on our crushingand refining operations as a result of our cost-sharing arrangement with MnSP.

 

*InterestExpense* – During 2004, interest expenseincreased by $620,000, or 77.7%, compared to 2003.  The increase was due to higher debt levelsresulting from the increase in soybean prices and higher interest rates. On December 31, 2004, we had outstandingdebt of $10.2 million, most of which consists of the Company’s senior debtwhich bore interest at an annual rate of 4.85% interest as of December 31,2004.  At December 31, 2003, we hadoutstanding debt of $18.5 million, the majority of which bore interest at anannual rate of 3.47%.  The average debtlevel throughout 2004 was approximately $23.6 million compared to an averagedebt level during 2003 of approximately $21.8 million.

 

*NetIncome/Loss* – We recordednet income of $689,000 for the year ended December 31, 2004, compared tonet income of $3.4 million in 2003.  Thedecrease of $2.7 million in net income is primarily attributable to a decreasein 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.

 

***Comparisonof Years Ended December 31, 2003 and 2002***

 

*Revenue*– Revenue increased from $159.5 million for 2002 to $207 million for 2003, anincrease of 30%.  The improvement was a result of several factors. Principally, commodity prices increased for all of our commodities, and salesof our refined and bleached oil were up 363% for the year as a result of a fullyear of operations of our refinery versus four months of operations in2002.  Total soybean oil sales were up38% due to sales in 2003 of soybean oil held in storage from 2002, a highersoybean oil yield per bushel, and an increase in the volume of soybeansprocessed.  We placed significantquantities of oil in storage in 2002 because prices were relatively low and wehoped to realize greater basis improvement in later sales.  Basisobjectives were achieved in 2003 and most of the stored oil was sold andshipped during 2003.  As a result, we sold 95 million more pounds of crudeand refined and bleached oil during 2003 than in 2002.  We do not expectthese higher sales levels of crude and refined and bleached oil to be sustainedin the short-run due to the exhaustion of our stored oil inventory.

 

*GrossProfit* – During 2003, the Company achieved agross profit of $4.2 million compared to a gross profit of $6.9 million in2002, a 39% decrease.  Total cost ofrevenue increased by $50.4 million, a 33% increase in 2003 versus 2002. Theincreased cost of revenue was caused by increased cost of product sold,production and freight costs of $45.7 million (36%), $2.3 million (20%), and$2.4 million (20%), respectively.  Factors impacting the increased cost ofproduct sold in 2003 included a 1.5% increase in the volume of soybeansprocessed, 95 million pounds of additional soybean oil sales, and highercommodity prices of soybeans.  Theincreased freight cost resulted from higher product volumes delivered tocustomers and higher freight rates.  The increased production expense wasattributable to higher natural gas prices, increased depreciation expense forthe refinery assets, and increased labor and personnel expenses for therefinery operations.

 

13

----

 

*AdministrativeExpense* – Administrative expense, includingselling, general and administrative expenses, increased $960,000, or 36%, for2003 compared to 2002. Much of this increase represents the consolidation of USSC in SDSP’s financialstatements for 2003, and corresponding expenses of $896,000 related toadditional employees, marketing and professional fees. The remaining increasewas due largely to travel expenses related to the USSCacquisition, and travel and relocation expense and search fees for procuringnew personnel for our refinery and construction management projects.

 

*InterestExpense* – Interest expense increased $260,000,or 48%, for the year ended December 31, 2003 compared to 2002. Theincrease was due to higher debt levels caused by carrying larger values inaccounts receivable and inventory, less operating income and capital investments,including our investment in USSC, partially offset bylower interest rates.  Refined and bleached oil was in production for allof 2003 versus only the last four months of 2002.  Financing longerpayment terms for refined and bleached oil receivables accounted for a portionof the additional interest cost.  As of December 31, 2003, we hadoutstanding debt of $17.5 million, most of which consisted of our senior debtand bore interest at an annual rate of 3.47% as of December 31,2003.  At December 31, 2002, we had outstanding debt of $10.1million, the majority of which bore interest at an annual rate of 3.57%.

 

*NetIncome* – Net income for the year ended December 31,2003 was $3.4 million compared to $6.6 million for the same period in 2002, adecrease of $3.2 million, or 48%.  Thedecrease in net income was primarily a result of the 33% increase in total costof revenues while revenues increased only 30%, the consolidation of USSC’s operations, and the additional interest expenseresulting from higher debt balances.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

***Comparisonof the years ended December 31, 2004 and 2003***

 

*Cash Flows fromOperating Activities*

 

Operating activitiesgenerated $12 million for the year ended December 31, 2004, compared to$2.0 million for the year ended December 31, 2003. The funds generated inthe year ended December 31, 2004 consisted primarily of $689,000 of cashfrom net income plus depreciation and amortization of $3.7 million, a $8.3million change in current assets and liabilities, less $677,000 of minorityinterest in the net loss of USSC and non-cashpatronage dividends of $108,000.  The primary changes from 2003 included a$12.4 million decrease in working capital needs, offset by $2.1 million lessnet income in 2004, a $219,000 reduction in minority interest in net loss ofsubsidiary, and a $98,000 reduction in depreciation expense.

 

*Cash Flows fromInvesting Activity*

 

Investing activitiesused $1.9 million during the year ending December 31, 2004 compared to$5.5 million for the year ended December 31, 2003.  The purchaseof shares in MnSP accounted for $601,000 of suchexpenditures in 2004.  In 2003, wepurchased shares in USSC amounting to $4.1million.  In addition, we purchased $1.2million of property and equipment during the year ending December 31, 2004compared to $1.0 million purchased in the period ending December 31,2003.  The$1.2 million spent on property and equipment during the year ended December 31,2004 consisted of equipment to increase the energy efficiency of the boiler,improvements in our crushing operations, and increased storage for Soyol. During 2003, the $1.0 million spent on property andequipment consisted of consolidation software to upgrade our technologicalcapabilities and several other projects to improve our soybean processing andrefining operations.

 

14

----

 

*Cash Flows fromFinancing Activity*

 

Net cash used byfinancing activities for the years ending December 31, 2004 was $10.6million, compared to a generation of $4.1 million of cash flows in 2003.  During the year ended December 31, 2004,we made payments of $8.3 million on long-term debt commitments by carryingsmaller values in accounts receivable and distributed $3.3 million to ourmembers, offset by a $1.0 million increase in outstanding checks in excess ofbank balances.  During the year ended December 31,2003, we increased our borrowings by $9.5 million, as a result of carryinglarger values in accounts receivable and inventory, less operating income andexpenditures for capital investments, including our investment in USSC.  Theseadditional borrowings in 2003 were offset by a distribution to our members of$2.5 million and payments of $1.6 million on long-term debt commitments.

 

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

 

*Cash Flows fromOperating Activities*

 

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

 

*Cash Flows fromInvesting Activity*

 

Investing activitiescost $5.5 million during the year ending December 31, 2003 compared to$6.9 million for the year ended December 31, 2002.  The purchaseof shares in USSC accounted for $4.1 million ofsuch expenditures in 2003.  We alsoadvanced loans to our members of $480,000 on future distribution payoutstowards the purchase of MnSP stock.  In addition, we purchased $1.0 million ofproperty and equipment during the year ending December 31, 2003 comparedto $4.6 million purchased in the period ending December 31, 2002.  The primary variance in property andequipment is due to the construction of the oil refinery at our Volga locationduring 2002. The $1.0 million spent on property and equipment during the yearended December 31, 2003 consisted mostly of small items. The largestsingle investment during that period was consolidation software to upgrade ourtechnological capabilities and several projects to improve our soybeanprocessing and refining operations.  In2002, we also spent approximately $2.3 million for the construction of a newoil storage tank in Brewster, MN, which we transferred to MnSPfor approximately 7% of MnSP’s outstanding shares.

 

*Cash Flows fromFinancing Activity*

 

Net cash generated byfinancing activities for the years ending December 31, 2003 and 2002 was$5.4 million and $6.0 million, respectively. During the year ended December 31,2003, we increased our borrowings by $9.5 million, as a result of carryinglarger values in accounts receivable and inventory, less operating income andexpenditures for capital investments, including our investment in USSC.  Theseadditional borrowings were offset by a distribution to our members of $2.5million and payments of $1.6 million on long-term debt commitments.  During the year ended December 31, 2002,we paid $5.5 million to our members in a cash distribution and principalpayments of $455,000 on our long-term debt.

 

***Indebtedness***

 

CoBankis our primary lender. Effective June 17, 2004, we modified the two linesof credit with CoBank to meet the needs of ouroperations. The first is a revolving long-term loan agreement. Under the

 

15

----

 

terms of this loan, we began with a $18.4million credit line. It now reduces by $1.3 million approximately every sixmonths. The final payment will be equal to the remaining unpaid principalbalance of the loan on March 20, 2011. The revolving loan is set up sothat we may borrow funds as needed up to the credit line maximum, and then paydown the principal whenever excess cash is available. Repaid amounts may be reborrowed up to the available credit line. We pay a 0.50%annual commitment fee on any funds not borrowed.

 

The second credit lineis a revolving working capital loan.  InFebruary 2005, CoBank unilaterally extended thisagreement from March 31, 2005 to July 1, 2005. The primary purpose of this loan is to finance inventory andreceivables. The maximum availability under this credit line is $16 million.  Borrowing base reports and financialstatements are required monthly to justify the balance borrowed on thisline.  We pay a 0.25% annual commitmentfee on any funds not borrowed; however, we have the option to reduce thesecredit lines during any given commitment period listed in the agreement toavoid the commitment fee.

 

Both CoBank loans are set up with a variable rate option. Thevariable rate is set by CoBank and changes weekly onthe first business day of each week. We also have a fixed rate option on bothloans allowing us to fix rates for any period between one day and the entirecommitment period. We can get a fixed rate quote from CoBankat any time and lock-in the interest rate on all or a part of our borrowingsthat are available for fixing. Both CoBank loans aresecured by substantially all of our assets and are subject to compliance withstandard financial covenants and the maintenance of certain financial ratios.The balance borrowed on the revolving term loan was $7.9 million and$15.3 million as of December 31, 2004 and 2003, respectively. Therewere no advances outstanding on the working capital loan at December 31,2004 and 2003.  The annual interest rateon both the working capital and revolving term loans as of December 31,2004 was 4.85%.  CoBankhas agreed to defer our next two scheduled principal payments of an aggregateof $2.6 million.

 

We also have otherlong-term contracts and notes totaling approximately $2.3 million, with aweighted average annual interest rate of 2.2% as of December 31, 2004.These arrangements include a no interest $1.8 million long-term payable to theother USSC shareholders relating to our purchase oftheir tendered USSC shares. The obligation is securedby the purchased shares, with final payment due on October 31, 2006. Ourhighest interest payable during 2004 was a $250,000 loan held by USSC at 15% per annum which became due February 13,2005 and has been paid in full.  We made principal payments of $976,000and $1,452,000 on these additional long-term obligations during the years endedDecember 31, 2004 and 2003, respectively.

 

***Capital Raising***

 

We are currentlyconducting a registered offering to sell up to 5,625,000 new capital units. Theoffering was made available exclusively to our existing members of SDSP at a price of $2.00 per capital unit until April 11,2005, and is now available to the general public at a price of $2.50 percapital unit.  Anyone interest in learning more about suchoffering may request a copy of the prospectus that describes the offering termsfrom South Dakota Soybean Processors, LLC, 100 Caspian Avenue, P.O. Box500, Volga, South Dakota 57071 or by contacting Lucas Ueckerat (605) 627-6138.  All investments mustbe made in accordance with the terms described in the prospectus.  Nothing in thisparagraph or report shall constitute an offer to sell capital units or othersecurities of SDSP.

 

***Capital Expenditures***

 

We investedapproximately $1.2 million in capital expenditures during the year ended December 31,2004 compared to approximately $1.0 million in capital expenditures during theyear ended December 31, 2003. Depending on the success of the current offering described above, weanticipate spending between $1.0 and $2.0 million on capital expendituresduring the year ended December 31, 2005. Our

 

16

----

 

principal source of funds, in addition to theoffering described above, is anticipated to be cash flows from operatingactivities and borrowings under our revolving and working capital loans with CoBank.

 

**OFF BALANCE SHEETFINANCING ARRANGEMENTS**

 

We do notutilize special purpose entities or off-balance sheet financial arrangements.

 

**Lease Commitments**

 

We have commitmentsunder various operating leases for rail cars, various types of vehicles, andlab and office equipment.  Our most significant lease commitments are therail car leases we use to distribute our products.  We have a number oflong-term leases with GE Capital and Trinity Capital for hopper rail cars andoil tank cars. Total lease expense under these arrangements was approximately$2.1 million and $1.9 million for the years ending December 31, 2004 and2003, respectively. The hopper rail cars earn mileage credit from the railroadthrough a sublease program which totaled $1.8 million and $1.6 million for theyears ending December 31, 2004 and 2003, respectively.

 

Inaddition to rail car leases, we have several operating leases for variousequipment and storage facilities. Total lease expense under these arrangementswas $198,000 and $328,000 for the years ending December 31, 2004 and 2003,respectively. Some of these leases include purchase options; however, none arefor a value less than fair market value at the end of the lease.  The reason for the decrease in otherlease expense for 2004 is the expiration of leases for off-site oil storagefacilities during 2003.

 

The following table shows our contractual obligations for the periodspresented.  

 
| ** **                   | ** ** | **Payment due by period** | ** ** |
|------------------------------|------------|---------------------------|------------|
| **CONTRACTUAL  OBLIGATIONS** | ** ** | **Total**                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|                         |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-Term Debt Obligations   |       | $                         | 10,202,589 |   | $ | 1,216,438 |   | $ | 1,039,011 |   | $ | 1,247,140 |   | $ | 6,700,000 |   |
|                         |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Lease Obligations    |       | —                    |       | — |   | — |   | — |   | — |   |
|                         |       |                      |       |   |   |   |   |   |   |   |   |
| Operating Lease Obligations  |       | 20,447,504                |       | 2,148,707 |   | 4,055,919 |   | 3,232,584 |   | 11,010,294 |   |
|                         |       |                      |       |   |   |   |   |   |   |   |   |
| Purchase Obligations         |       | —                    |       | — |   | — |   | — |   | — |   |
|                         |       |                      |       |   |   |   |   |   |   |   |   |
| Other Long-Term Liabilities  |       | 129,345                   |       | 11,000 |   | 22,000 |   | — |   | 96,345 |   |
|                         |       |                      |       |   |   |   |   |   |   |   |   |
| Total                        |       | $                         | 30,779,438 |   | $ | 3,376,145 |   | $ | 5,116,930 |   | $ | 4,479,724 |   | $ | 17,806,639 |   |

 

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

 

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

 

The difficulty inapplying these policies arises from the assumptions, estimates, and judgmentsthat have to be made currently about matters that are inherently uncertain,such as future 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.

 

17

----

 

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 andContingencies*

 

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

 

*Inventory Valuation*

 

We account for ourinventories at estimated net realizable market value. These inventories areagricultural commodities that are freely traded, have quoted market prices, maybe sold without significant further processing and have predictable andinsignificant costs of disposal. We derive our estimates from local market pricesdetermined by grain terminals in our area. Processed product price estimatesare determined by the ending sales contract price as of the close of the finalday of the period. This price is determined by the closing price on the ChicagoBoard of Trade, net of the local basis. Changes in the market values of theseinventories are recognized as a component of cost of goods sold.

 

*Long-Lived Assets*

 

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

 

Long-lived assets,including property, plant and equipment and investments are evaluated forimpairment on the basis of undiscounted cash flows whenever events or changesin circumstances 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 differ fromactual.

 

*Accounting forDerivative Instruments 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 inthese inventories and contracts. We account for changes in market value onexchange-traded futures and option contracts at exchange prices and account forchanges in value of forward purchase and sales contracts at local market pricesdetermined by grain terminals in the area. Changes in the market value of allthese contracts are recognized in earnings as a component of cost of goodssold.

 

18

----

 

**Item 7A.****                          Quantitativeand Qualitative Disclosure about Market Risk**

 

***Commodities Risk & Risk Management.***Toreduce the price change risks associated with holding fixed price commoditypositions, we generally take opposite and offsetting positions by entering intocommodity futures contracts (either a straight or options futures contract) ona regulated commodity futures exchange, the Chicago Board of Trade. Whilehedging activities reduce the risk of loss from increasing market prices ofsoybeans, such activities also limit the gain potential which otherwise couldresult from significant decreases in market prices of soybeans. Our policy isgenerally to maintain a hedged position within limits, but we can be long orshort at any time. Our profitability is primarily derived from margins onsoybeans processed, not from hedging transactions. Management does notanticipate that its hedging activity will have a significant impact on futureoperating results or liquidity. Hedging arrangements do not protect againstnonperformance of a cash contract.

 

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

 

***Foreign Currency Risk. ***Weconduct essentially all of our business in U.S. dollars and have no direct riskregarding foreign currency fluctuations. Foreign currency fluctuations do,however, impact the ability of foreign buyers to purchase U.S. agriculturalproducts and the competitiveness of and demand for U.S. agricultural productscompared 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.****                                   FinancialStatements and Supplementary Data**

 

Reference is made to the “Index to Financial Statements” of South DakotaSoybean Processors, LLC located at page F-1 of this report, and financialstatements and schedules for the year ended December 31, 2004 referencedtherein, which are hereby incorporated by reference.

 

**Item 9.****                                   Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

 

The independent auditscovering our financial statements for the years ended December 31, 2003 and2002, were conducted by EideBailly, LLP.  On January 18, 2005, we accepted Eide  Bailly’s resignation fromits engagement to perform the audit of our financial statements for the yearended December 31, 2004.  Suchresignation was presented in person by representatives of EideBailly and approved by our Audit and FinanceCommittee and our Board of Managers at meetings held on January 18,2005.  Eide  Bailly stated that the reason for its resignation was itsconcern that the assistance rendered to us by certain of EideBailly’s personnel in connection with the preparationof our financial statements in 2004, though believed to be de minimus, could be viewed as prohibited bookkeeping

 

19

----

 

services and that its independence to performour audit for 2004 could therefore be compromised.  We did not dispute EideBailly’s determination.

 

Eide Bailly performed our audit for each of the two mostrecent fiscal years (2002-2003) and neither of the reports on the financialstatements for either of those years contained an adverse opinion or adisclaimer of opinion, or was qualified or modified as to uncertainty, auditscope, or accounting principles.  We havenot had any disagreements with Eide  Bailly during either of our two most recent fiscal years(2002-2003) or during any subsequent interim period preceding its resignationon any matter of accounting principles or practices, financial statementdisclosure, or auditing scope or procedure, which disagreement(s), if notresolved to the satisfaction of Eide  Bailly, would have caused it to make reference to thesubject matter of the disagreement(s) in connection with its report. ** **Eide  Bailly has not advised us: (a) thatthe internal controls necessary for us to develop reliable financial statementsdo not exist, (b) that information has come to its attention that has ledit to no longer be able to rely on management’s representations, or that hasmade it unwilling to be associated with the financial statements prepared bymanagement, or (c) of the need to expand significantly the scope of itsaudit or that information has come to its attention that if furtherinvestigated 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.

 

At the same meetings,our Audit and Finance Committee and Board of Managers approved the engagementof Gordon, Hughes & Banks, LLP, to performthe audit of our financial statements for the fiscal year ended December 31,2004, and to re-review our interim financial statements for the first threequarters of 2004.  Gordon, Hughes &Banks has never performed any audit services or any other accounting or advisoryservices for us.

 

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

 

***Evaluation ofDisclosure Controls and Procedures****.* Based on their evaluation as of the endof the period covered by this Annual Report on Form 10-K, our principalexecutive officer and principal financial and accounting officer have concludedthat the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934) are effective to ensurethat information required to be disclosed by the Company in reports that itfiles or submits under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.

 

***Changes in InternalControl 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 our fourth fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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

 

None.

 

**Part III**

 

**Item 10.****                            Directorsand Executive Officers of the Registrant**

 

**Board of Managers**

 

Our Board ofManagers consists of three members of SDSP from eachof seven geographic districts, for a total of 21 Board members. Board membersare elected to staggered three-year terms by the

 

20

----

 

membersin their geographic district and currently may not serve more than threeconsecutive three-year terms. Generally, one Board seat in each of the sevengeographical districts is elected at our annual meeting each year as requiredby our Operating Agreement.

 

The table belowdescribes important information about the members of the Board of Managers.

 
| **Name, Address,  Telephone and Board  Position, if any**                 | ** ** | **Age**    | ** ** | **Board  Member  Since** | ** ** | **Current  Term  Expiring** | ** ** | **Occupation  and  Background**                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|---------------------------------------------------------------------------|------------|------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                      |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **Paul Barthel**22308 486th Ave.  Elkton, SD 57026                        |       | 36         |       | 1996                     |       | 2006                        |       | Paul has been a farmer for the  past 18 years. He is a member of the South Dakota Soybean Association, and  the South Dakota Corn Growers. Paul graduated from South Dakota State  University in Brookings, SD in 1992 with a major in Ag Business and minor in  Agronomy.                                                                                                                                                                                                               |
|                                                                      |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **Dean Christopherson**  32732 Quine Ave.  Worthington, MN  56187         |       | 56         |       | 2004                     |       | 2007                        |       | Dean has been a farmer for the past 32 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.                                                                                                                  |
|                                                                      |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **Wayne Enger**  2090 180th Street  Madison, MN 56256                     |       | 51         |       | 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  graduated from University of Minnesota-Morris in** **1975 with a bachelor’s degree in  mathematics and German literature. |
| ** **                                                                | ** ** | ** ** | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **Dan Feige*Vice President***45974  232nd St.  Wentworth, SD 57075-  9644 |       | 49         |       | 1996                     |       | 2005                        |       | Dan  has been a farmer for the past 22 years. He is a member of the National Corn  Growers Association, the American Soybean Association, and a director on the  South Dakota Soybean Association. He is a past delegate for Associated Milk  Producers. Dan attended the University of South Dakota in Springfield, South  Dakota and received an Associate Degree in Diesel Technology with a minor in  Education and Business.                                                        |
|                                                                      |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **Marvin Goplen**1671 270th Ave.  Canby, MN 56220  (507) 223-7391         |       | 70         |       | 1995                     |       | 2005                        |       | Marvin has been a farmer for the past 46 years. He is a member of the  Farm Bureau, and the Minnesota Soybean Association. He is a Director of the  Minnesota State Plowing Organization, and a member of the National Plowing  Organization. Marvin attended the University of Minnesota, St. Paul, MN for 2  years concentrating in Agriculture                                                                                                                                        |
|                                                                      |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **Ryan J. Hill**36327 210th  St.  Brewster, MN  56119                     |       | 56         |       | 1995                     |       | 2006                        |       | Ryan has been a farmer for the past 30 years. He belongs to the  National and Minnesota Corn and Soybean Growers Associations. Ryan attended Worthington  Junior College, and participated in the U.S. Navy Engineering metallurgy  program in 1969.                                                                                                                                                                                                                                     |

 

21

----

 
| **Name, Address,  Telephone and Board  Position, if any**                   | ** ** | **Age**    | ** ** | **Board  Member  Since** | ** ** | **Current  Term  Expiring** | ** ** | **Occupation  and  Background**                                                                                                                                                                                                                                                                                                                                                                             |
|-----------------------------------------------------------------------------|------------|------------|------------|--------------------------|------------|-----------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                        |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Marvin Hope*President***45886 217th St.  Volga, SD  57071-9355            |       | 68         |       | 1994                     |       | 2005                        |       | Marvin has been a farmer for the past 46 years. He is a member of the  South Dakota Soybean Association, and the American Soybean Association. He  belongs to the National Corn Growers Association and the Farm Bureau. Marvin  attended the Lutheran Bible Institute in Minneapolis, MN in 1956 and 1957.                                                                                                 |
|                                                                        |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| **James H. Jepsen**48480 231st  St.  Flandreau, SD 57028-  6631             |       | 47         |       | 1996                     |       | 2005                        |       | James has been a farmer for the past 28 years. He is currently a  member and was the former President of the South Dakota Soybean Association.  Jim attended South Dakota State University in Brookings, SD and received an  Associate of Arts Degree in Agriculture and General Ag in 1977.                                                                                                                |
|                                                                        |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Peter Kontz**47068 223rd  St.  Colman, SD 57017                           |       | 62         |       | 1998                     |       | 2007                        |       | Peter has been a farmer for the past 37 years. He is a member of the  South Dakota Cattlemen’s Association (Treasurer for four years), South Dakota  Corn Growers Association, and the South Dakota Soybean Association. He  attended the School of Agriculture in Brookings, SD.                                                                                                                      |
|                                                                        |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Laron Krause**47244 181st St.  Clear Lake, SD 57226                       | ** ** | **44**     | ** ** | **2004**                 | ** ** | **2007**                    | ** ** | **Laron  has been a farmer for the past 26 years. He is a member of the South Dakota  Soybean Association and a former president of the South Dakota Soybean  Association, and a member of the Deuel County Memorial Hospital Board of  Directors. Laron graduated from Canby Vocational Tech in Canby, MN in 1980  with a degree in Production Agriculture.**                                              |
| ** **                                                                  | ** ** | ** ** | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                  |
| **Bryce Loomis**19989 464th  Ave.  Bruce, SD  57220-5113                    |       | 62         |       | 1998                     |       | 2007                        |       | Bryce has been a farmer and seed sales representative for the past 36  years. He belongs to the National Corn Growers Association, the South Dakota  Soybean Producers Association, and the Farm Bureau.                                                                                                                                                                                                    |
|                                                                        |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Gerald Moe**21469 452nd Ave.  Arlington, SD 57212  (605) 983-5949         |       | 67         |       | 1994                     |       | 2005                        |       | Gerald is a retired farmer, and was an active farmer for 45 years  prior to retirement. He also has been a District Sales Manager for a major  seed company for 10 years in the past. He is a member of the American Soybean  Association, as well as a member of the Board of Directors for the Citizens  State Bank in Arlington, SD. Gerald attended Augustana College for one year  in Sioux Falls, SD. |
|                                                                        |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Dale Murphy**102 E. 2nd Ave.  PO Box 686  White, SD 57276  (605) 629-6181 |       | 74         |       | 1994                     |       | 2006                        |       | Dale is a retired farmer, and was an active farmer for the previous  38 years. He was a director of the First National Bank in White, SD during  1987-1999. Dale attended Nettleton Commercial College in Sioux Falls, SD and  earned a certificate in auditing and accounting in 1957.                                                                                                                     |
|                                                                        |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Maurice Odenbrett**2778 41st St.  Fulda, MN 56131  (507) 425-2624         |       | 59         |       | 1995                     |       | 2005                        |       | Maurice has been a farmer for the past 39 years.  He is a supervisor for the Belfast Township  and serves as Vice Chairperson for the Murray County Township association.                                                                                                                                                                                                                              |

 

22

----

 
| **Name, Address,  Telephone and Board  Position, if any**                    | ** ** | **Age**    | ** ** | **Board  Member  Since** | ** ** | **Current  Term  Expiring** | ** ** | **Occupation  and  Background**                                                                                                                                                                                                                                                                                                                                                                                            |
|------------------------------------------------------------------------------|------------|------------|------------|--------------------------|------------|-----------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                         |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **Daniel Potter**31012 County  Highway 6  Redwood Falls, MN  56283           |       | 73         |       | 1995                     |       | 2006                        |       | Daniel has been a farmer for the past 52 years and is a 50% owner of  Potterosa Farms, Inc. He belongs to the Redwood County Cattlemen’s  Association, and the National Cattlemen’s Association. He is also a  supervisor of the Redwood Soil and Water Conservation District and chairs the  church Admin Council.                                                                                              |
| ** **                                                                   | ** ** | ** ** | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Steven C. Preszler**28708 433rd Ave.  Menno, SD 57045  (605) 387-5228      |       | 46         |       | 2004                     |       | 2005                        |       | 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.                                                                                                                                                                                                                |
| ** **                                                                   | ** ** | ** ** | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Rodney Skalbeck**80903 160th  St.  Sacred Heart, MN  56285  (320) 765-2542 |       | 70         |       | 1995                     |       | 2006                        |       | Rodney has been a farmer for the past 51 years. He belongs to the  Farmers Union, Land Stewardship Project and is a former Director of the Farm  Credit association where he has had positions as chairman and vice chairman.  He is also a former school board member and church board member and  treasurer.                                                                                                             |
|                                                                         |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **Lyle R. Trautman**409 Lakeview  St. Box  83  Lake Benton, MN  56149        |       | 51         |       | 1996                     |       | 2005                        |       | Lyle has been a farm operator and manager for the past 31 years. He  is a member of the Lincoln County Soybean Growers Association, the Minnesota  Soybean Growers Association, and the Minnesota Corn Growers Association. He  is also a member of the Lake Benton City Council. Lyle attended Mankato State  College for two years, and University of Minnesota for two quarters.                                        |
| ** **                                                                   | ** ** | ** ** | ** ** | ** **               | ** ** | ** **                  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Delbert Tschakert**16150 442nd  Ave.  Florence, SD 57235                   |       | 49         |       | 1994                     |       | 2006                        |       | Delbert has been a farmer for the past 26 years, producing corn,  soybeans, and hay commodities. He is a member of the South Dakota Soybean  Association, the South Dakota Corn Growers Association, and former President  of the South Dakota Soybean Association. Delbert is a graduate of South  Dakota State University in Brookings, SD. In 1977, he received his BS in Ag  Communications with a minor in Economics. |
|                                                                         |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **Anthony Van Uden**3461 300th  Ave.  Cottonwood, MN  56229                  |       | 66         |       | 1996                     |       | 2007                        |       | Anthony has been a farmer for the past 44 years. He is a member of  Minnesota Soybean Association, and the American Legion. He is a past Director  of the Farmers Elevator Company, Cottonwood, MN, Lucas Town board, as  Chairman, and the Lyon County Planning and Zoning Committee.                                                                                                                                     |
|                                                                         |       |       |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **Ardon Wek*Secretary***43958  288th St.  Freeman, SD 57029                  |       | 47         |       | 1996                     |       | 2006                        |       | Ardon has been a farmer for the past 26 years. He is a member of the  South Dakota Corn Growers, and the South Dakota Soybean Association. Ardon  graduated from Mitchell Technical College in Mitchell, SD. His major was  Architectural Drafting, and Building Construction.                                                                                                                                             |

 

23

----

 

**Compensation of Board of Managers**

 

Members of the Board of Managers are currently provided a per diem paymentfor services performed in the amount of $150 for each function requiring morethan four hours, and $75 for each function requiring less than four hours. Inaddition to the per diem fee, mileage reimbursement is provided at current IRSrates.

 

**Committees of Board of Managers**

 

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

 

In March 2004, we established a Nomination Committee and adopted aNomination Committee charter that is available for review on our website athttp://www.sdsbp.com.  The members of theNomination Committee are Paul Barthel, Ryan Hill, Dale Murphy, Rodney Skalbeck,Delbert Tschakert, Tony VanUden, and Ardon Wek. In order to submit a nominee for the Board to the Nomination Committeefor the 2005 Annual Meeting, members were required to return a nominationpetition form to the Nomination Committee no later than March 31, 2005.  Nominations will not be accepted from thefloor at the 2005 Annual Meeting. The members of the Nomination Committee willreview each of the submitted forms during their selection process and may alsosearch for and contact additional potential nominees at their discretion.

 

**Executive Officers**

 

The following individuals serve as our executive officers in thecapacities listed. These officers serve at the discretion of the Board ofManagers and can be terminated without notice.

 
| **Name**               | ** ** | **Age** | ** ** | **Position**            |
|------------------------|------------|---------|------------|-------------------------|
|                   |       |    |       |                    |
| Rodney G. Christianson |       | 51      |       | Chief Executive Officer |
| Thomas J. Kersting     |       | 42      |       | Commercial Manager      |
| James A. Seurer        |       | 41      |       | Chief Financial Officer |

 

**Rodney G. Christianson, *ChiefExecutive Officer*.** Rodney joined us as theChief Executive Officer when operations began in 1996. With 20 years of servicewith Cargill, Inc. in its Food, Industrial, and Oilseed Sectors, Rodney came tous with significant operational and managerial experience in the U.S. andBrazil. A member of the management team for the Greenfield construction andstart up of

 

24

----

 

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

 

Rodney has complete responsibility for our operations.

 

**Thomas J. Kersting, *CommercialManager.*** Tom joined us as the ProcurementManager when operations began in 1996, and since 1998 has served as theCommercial Manager. Tom was affiliated with Harvest States Cooperative fromJuly 1988 until May 1996. Tom held such positions as Market Analyst/Advisor andHead Procurement 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 the University of Minnesota’s College of Agriculturewith a B.S. in Agricultural Business Administration with an emphasis inoperations management. Tom is a licensed commodity broker, a director of theNational Oilseed Processors Association, a voting member of the NationalBiodiesel Board and our contact for the Chicago Board of Trade.

 

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

 

**James A. Seurer, *Chief Financial Officer.* **After spending nearly 18 years in the financialinstitution industry, Jim joined us as Chief Financial Officer on March 14,2005.  Most recently, Jim has four years of service with Red Rocks FederalCredit Union in Highlands Ranch, Colorado (Denver) as Vice President/ChiefFinancial Officer.  Prior to that Jim served for 14 years as a FederalExaminer and Problem Case Officer with the National Credit Union Administrationand he spent a short time in a similar capacity with the State of Colorado.

 

Jim received a B.S. in Business Administration withemphasis in Accounting and Business Management in 1986 from Northern StateUniversity in Aberdeen, SD.  Jim is a licensed Certified Public Accountant(CPA) in the State of Colorado and a member of the Colorado Society of CPAs*.*

 

**Code of Ethics**

 

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

 

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

 

Under Section 16(a) of the Exchange Act, our directors, executiveofficers and any persons holding 10% or more of the common stock are requiredto report their ownership of our capital units and any changes in thatownership to the Securities and Exchange Commission (the “SEC”) and to furnishus with copies of such reports. Specific due dates for these reports have beenestablished and we are required to disclose in this report any failure to fileon a timely basis by such persons. To our knowledge, based solely upon a reviewof copies of such reports received by us which were filed with the SEC fromJanuary 1, 2004 through March 15, 2005, and upon written representations fromsuch persons that no other reports were required, we believe that all reportsrequired to be filed under Section 16(a) for 2004 have been timely filed withthe SEC, other than the Form 3s filed by Messrs. Dean Christopherson, WayneEnger, and Laron Krause following their election to our Board.

 

25

----

 

**Item 11.****                            ExecutiveCompensation**

 

**Summary Compensation Table.****The following table sets forth allthe compensation we paid during the years ended December 31, 2004, 2003, and2002 to our principal executive officer and each officer paid over $100,000 inour last fiscal year (the “named executive officers”).  Jim Seurer was hired as our Chief FinancialOfficer as of March 14, 2005 and received no compensation from us during theyears ended December 31, 2004, 2003, and 2002. No other officers received total compensation exceeding $100,000 duringthe year ended December 31, 2004.

 
| ** **                       | ** ** | ** **      | ** ** | **Annual Compensation** | ** ** | **Long-Term Compensation** | ** ** | ** **                            | ** ** |
|----------------------------------|------------|-----------------|------------|-------------------------|------------|----------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | ** **      | ** ** | ** **              | ** ** | ** **                 | ** ** | ** **                            | ** ** | **Awards** | ** ** | **Payouts** | ** ** | ** ** | ** ** |
| **Name and  Principal Position** | ** ** | **Year  Ended** | ** ** | **Salary  ($)**         | ** ** | **Bonus  ($)**             | ** ** | **Other  Annual  Compens  ation ($)** | ** ** | **Restricte  d Stock  Award(s)  ($)** | ** ** | **Securities  Underlying  Options/  SARs (#)** | ** ** | **LTIP  Payouts** | ** ** | **All Other  Compens  ation ($)** | ** ** |
|                             |       |            |       |                    |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |
| Rodney G. Christianson           |       | 2004            |       | 245,833                 |       | 20,894                     |       | 4,590                                 |       | — |   | — |   | — |   | 4,196 |   |
| *Chief Executive Officer*        |       | 2003            |       | 200,000                 |       | 36,190                     |       | 3,855                                 |       | — |   | — |   | — |   | 3,855 |   |
|                             |       | 2002            |       | 200,000                 |       | 64,528                     |       | 3,625                                 |       | — |   | — |   | — |   | 3,597 |   |
|                             |       |            |       |                    |       |                       |       |                                  |       |   |   |   |   |   |   |   |   |
| Thomas J. Kersting               |       | 2004            |       | 110,750                 |       | 14,200                     |       | —                                |       | — |   | — |   | — |   | 2,780 |   |
| *Commercial Manager*             |       | 2003            |       | 103,792                 |       | 12,500                     |       | —                                |       | — |   | — |   | — |   | 13,299 |   |
|                             |       | 2002            |       | 99,167                  |       | 24,000                     |       | —                                |       | — |   | — |   | — |   | 11,520 |   |

 

On February 1, 2004, we entered into afour-year employment agreement with Mr. Christianson that expires on January31, 2008.  Under the employmentagreement, Mr. Christianson will receive an annual salary of $250,000 throughAugust 31, 2005 and an annual salary of $300,000 for the remaining term of theAgreement.  Mr. Christianson is alsoentitled to receive an incentive bonus equal to one-half of one percent of netincome before taxes and member distributions, excluding certain extraordinaryitems of income and expense, on up to $5.0 million net income, or 1% of netincome before taxes and member distributions if net income exceeds $5.0million. Mr. Christianson may elect to have his incentive bonus paid directlyor deferred.  Mr. Christianson is alsoentitled to participate in 401(k), healthcare and other retirement and welfarebenefit programs that are generally available to employees and a vehicle to beused for business purposes. Mr. Christianson is entitled to eighteenmonths of severance pay in the event that we terminate his employment duringthe term of the agreement, other than for cause. Mr. Christianson’s employmentcontract is terminable at will by the Board of Managers without cause, and maybe terminated by Mr. Christianson with 60 days’ notice.  The employment agreement also includes atwo-year non-competition provision.

 

Mr. Kersting has an employment agreement withus that is terminable at will. Mr. Kersting receives a base salary and isentitled to participate in 401(k), healthcare and other retirement and welfarebenefit programs that are generally available to employees, including theemployee profit sharing program which allocates 4% of net profits over $2million to all employees other than Mr. Christianson. Individual amountsare allocated and distributed to employees based on a formula that takes intoaccount current salary level, level of responsibility and the impact of theemployee’s position on profits.

 

Messrs. Christianson and Kersting also have adeferred compensation plan that provides “phantom” capital units.  Messrs. Christianson and Kersting’s initialgrants under these plans are fully vested. On February 1, 2004, Mr. Christianson received an additional grant underan amended and restated deferred compensation plan.  Under both the original and amended plan, wewill pay an amount equal to the fair market value of the participant’s vestedphantom capital units in five annual substantially equal installments beginningupon the earlier of termination of employment with us or his 65thbirthday.

 

Mr. Seurer’s employment with us is terminableat will.  Mr. Seurer receives a basesalary and is entitled to participate in 401(k), healthcare and other retirementand welfare benefit programs that are generally available to employees,including the employee profit sharing program.

 

26

----

 

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

 

We do not have any compensation plans underwhich our capital units are authorized for issuance.

 

The following table sets forth the beneficialownership of our outstanding capital units by our Board members and namedexecutive officers as of April 11, 2005. As of that date, no person beneficially owned more than 5% of ourcapital 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                                        |       |                   | *          | 10,500                                            |       |                      | *          |
| Rodney Christianson, CEO(2)                      |       | 1                                        |       |                   | *          | 10,500                                            |       |                      | *          |
| Dean Christopherson, Manager                     |       | 1                                        |       |                   | *          | 30,000                                            |       |                      | *          |
| Wayne Enger, Manager                             |       | 1                                        |       |                   | *          | 13,000                                            |       |                      | *          |
| Dan Feige, Vice President, Manager               |       | 1                                        |       |                   | *          | 30,000                                            |       |                      | *          |
| Marvin Goplen, Manager(3)                        |       | 1                                        |       |                   | *          | 18,000                                            |       |                      | *          |
| Ryan Hill, Manager(4)                            |       | 2                                        |       |                   | *          | 22,500                                            |       |                      | *          |
| Marvin Hope, President, Manager(5)               |       | 1                                        |       |                   | *          | 56,000                                            |       |                      | *          |
| Jim Jepsen, Manager                              |       | 1                                        |       |                   | *          | 30,000                                            |       |                      | *          |
| Tom Kersting, Commercial Manager                 |       | —                                   |       |                   | *          | —                                            |       |                      | *          |
| Peter Kontz, Manager(6)                          |       | 2                                        |       |                   | *          | 119,000                                           |       |                      | *          |
| Laron Krause, Manager                            |       | 1                                        |       |                   | *          | 12,000                                            |       |                      | *          |
| Bryce Loomis, Manager(7)                         |       | 1                                        |       |                   | *          | 35,000                                            |       |                      | *          |
| Gerald Moe, Manager(8)                           |       | 1                                        |       |                   | *          | 45,000                                            |       |                      | *          |
| Dale Murphy, Manager(9)                          |       | 1                                        |       |                   | *          | 80,000                                            |       |                      | *          |
| Maurice Odenbrett, Manager                       |       | 1                                        |       |                   | *          | 36,000                                            |       |                      | *          |
| Daniel Potter, Manager(10)                       |       | 2                                        |       |                   | *          | 16,500                                            |       |                      | *          |
| Steven C. Preszler, Manager                      |       | 1                                        |       |                   | *          | 15,000                                            |       |                      | *          |
| Jim Seurer, CFO                                  |       | —                                   |       |                   | *          | —                                            |       |                      | *          |
| Rodney Skalbeck, Manager                         |       | 1                                        |       |                   | *          | 105,000                                           |       |                      | *          |
| Lyle Trautman, Manager(11)                       |       | 1                                        |       |                   | *          | 13,500                                            |       |                      | *          |
| Delbert Tschakert, Manager(12)                   |       | 2                                        |       |                   | *          | 42,000                                            |       |                      | *          |
| Tony Van Uden, Manager                           |       | 1                                        |       |                   | *          | 60,000                                            |       |                      | *          |
| Ardon Wek, Secretary, Manager(13)                |       | 1                                        |       |                   | *          | 30,000                                            |       |                      | *          |
| ** **                                       | ** ** | ** **                               | ** ** | ** **             | ** ** | ** **                                        | ** ** | ** **                | *          |
| **Managers  and Executive Officers, as a group** | ** ** | **26**                                   | ** ** | **1.24**               | **%**      | **829,500**                                       | ** ** | **2.93**                  | **%**      |

 

----

*                 Percentage ofshares beneficially owned does not exceed 1% of the class.

(1)          The addresses for eachof the individual managers listed are set forth under Board of Managers above.

(2)          Represents capital unitsowned of record by Mr. Christianson’s wife, Heidi Christianson.

(3)          Represents capital unitsowned of record by the Marvin and Mary Ann Goplen Revocable Living Trust ofwhich Mr. Goplen is a trustee.

(4)          Includes 10,000 capitalunits owned of record by Mr. Hill’s wife, Naomi Hill.

(5)          Represents capital unitsowned of record by the Marvin H. Hope Trust of which Mr. Hope is a trustee.

(6)          Includes 73,000 capitalunits owned of record by Mr. Kontz’s wife, Alyce Kontz.

(7)          Represents capital unitsowned jointly with Mr. Loomis’s wife, Georgean Loomis.

(8)          Represents capital unitsowned jointly with Mr. Moe’s wife, Kaye Moe.

(9)          Represents capital unitsowned of record by the Dale F. Murphy Revocable Trust of which Mr. Murphy is atrustee.

 

27

----

 

(10)       Includes 7,500 capital unitsowned of record by Potterosa Farms, Inc. of which Mr. Potter is a co-owner.

(11)       Represents capital unitsowned jointly with Mr. Trautman’s wife, Pam Trautman.

(12)       Includes 17,500 capitalunits owned of record by Mr. Tschakert’s wife, Kay Tschakert.

(13)       Represents capital unitsowned of record jointly with Mr. Wek’s wife, Sheila Wek.

 

**Item 13.****                            CertainRelationships and Related Transactions**

 

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

 

**Item 14.****                            PrincipalAccountant Fees and Services**

 

The fees paidto Eide Bailly LLP in 2004, by category, were as follows:

 
| Audit fees         |   | $ | 76,555 |   |
|--------------------|--------|---|--------|--------|
| Audit-related fees |   | $ | 916    |   |

(essentially, assurance and related servicesrelated to the audit)
| Tax fees       |   | $ | 20,754 |   |
|----------------|--------|---|--------|--------|
| All other fees |   | $ | 4,739  |   |

 

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

 
| Audit fees         |   | $ | 53,234 |   |
|--------------------|--------|---|--------|--------|
| Audit-related fees |   | $ | 2,985  |   |

(essentially, assurance and related servicesrelated to the audit)
| Tax fees       |   | $ | 23,447 |   |
|----------------|--------|---|--------|--------|
| All other fees |   | $ | 4,679  |   |

 

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

 

We did not pay any fees in 2004 or 2003 to Gordon, Hughes, & Banks,LLP.

 

The AuditCommittee Charter provides that the Audit Committee shall approve in advanceany fees related to non-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 2004 all such non-audit fees werepre-approved by the Audit Committee.

 

**Part IV**

 

**Item 15.****                            Exhibitsand Financial Statement Schedules**

 

The following exhibits and financial statements are filed as part of,or are incorporated by reference into, this report:

 

28

----

 

(a)           Financial Statementsand Schedules – Reference is made to the “Index to Financial Statements” ofSouth Dakota Soybean Processors, LLC located at page F-1 of this report for alist of the financial statements and schedules for the year ended December 31,2004 included herein.

 

(b)           Exhibits -See Exhibit Index following the Signature Page to this report. The followingexhibits constitute management agreements, compensatory plans, or arrangements:Exhibits 10.14, 10.15, 10.16, and 10.17.

 

29

----

 

**SIGNATURES**

 

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

 
|                  | SOUTH DAKOTA            |
|-----------------------|-------------------------|
|                  | SOYBEAN PROCESSORS, LLC |
|                  |                    |   |
|                  |                    |   |
| Dated: April 15, 2005 |                    |   |
|                  | By                      | /s/ Rodney G. Christianson |   |
|                  |                    | Rodney G. Christianson |
|                  |                    | Chief Executive Officer |

 

**POWER OF ATTORNEY**

 

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

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons in the capacities indicated on April 15, 2005.

 
| **SIGNATURE**              | ** ** | **TITLE**                                    |
|----------------------------|------------|----------------------------------------------|
|                       |       |                                         |
| /s/ Rodney G. Christianson |       | Chief Executive Officer                      |
| Rodney G. Christianson     |       | (Principal Executive Officer)                |
|                       |       |                                         |
| /s/ James A. Seurer        |       | Chief Financial Officer                      |
| James A. Seurer            |       | (Principal Financial and Accounting Officer) |
|                       |       |                                         |
| /s/ Paul Barthel           |       | Manager                                      |
| Paul Barthel               |       |                                         |
|                       |       |                                         |
| /s/ Dean Christopherson    |       | Manager                                      |
| Dean Christopherson        |       |                                         |
|                       |       |                                         |
| /s/ Wayne Enger            |       | Manager                                      |
| Wayne Enger                |       |                                         |
|                       |       |                                         |
| /s/ Dan Feige              |       | Manager                                      |
| Dan Feige                  |       |                                         |
|                       |       |                                         |
| /s/ Marvin Goplen          |       | Manager                                      |
| Marvin Goplen              |       |                                         |

 

30

----

 
| /s/ Ryan J. Hill       |   | Manager |
|------------------------|--------|---------|
| Ryan J. Hill           |   |    |
|                   |   |    |
| /s/ Marvin Hope        |   | Manager |
| Marvin Hope            |   |    |
|                   |   |    |
| /s/ James H. Jepsen    |   | Manager |
| James H. Jepsen        |   |    |
|                   |   |    |
| /s/ Peter Kontz        |   | Manager |
| Peter Kontz            |   |    |
|                   |   |    |
| /s/ Laron Krause       |   | Manager |
| Laron Krause           |   |    |
|                   |   |    |
| /s/ Bryce Loomis       |   | Manager |
| Bryce Loomis           |   |    |
|                   |   |    |
| /s/ Gerald Moe         |   | Manager |
| Gerald Moe             |   |    |
|                   |   |    |
| /s/ Dale F. Murphy     |   | Manager |
| Dale F. Murphy         |   |    |
|                   |   |    |
| /s/ Maurice Odenbrett  |   | Manager |
| Maurice Odenbrett      |   |    |
|                   |   |    |
| /s/ Daniel Potter      |   | Manager |
| Daniel Potter          |   |    |
|                   |   |    |
| /s/ Steven C. Preszler |   | Manager |
| Steven C. Preszler     |   |    |
|                   |   |    |
| /s/ Rodney Skalbeck    |   | Manager |
| Rodney Skalbeck        |   |    |
|                   |   |    |
| /s/ Lyle R. Trautman   |   | Manager |
| Lyle R. Trautman       |   |    |
|                   |   |    |
| /s/ Delbert Tschakert  |   | Manager |
| Delbert Tschakert      |   |    |
|                   |   |    |
| /s/ Anthony VanUden    |   | Manager |
| Anthony VanUden        |   |    |
|                   |   |    |
| /s/ Ardon Wek          |   | Manager |
| Ardon Wek              |   |    |

 

31

----

 

**EXHIBIT INDEX**

 

** **
| **Exhibit  Number** | ** ** | **Description**                                                                                                      | ** ** | **Filed  Herewith** | ** ** | **Incorporated Herein by Reference to**                                                                                                |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                 |       |                |       |                                                                                                                                   |
| 3.1(i)              |       | Articles of Organization                                                                                             |       |                |       | Appendix  A to the Issuer’s Prospectus filed with the Commission pursuant to Rule  424(b)(3) on May 24, 2002 (File No. 333-75804) |
|                |       |                                                                                                                 |       |                |       |                                                                                                                                   |
| 3.1(ii)             |       | Operating Agreement, as amended and restated                                                                         |       |                |       |                                                                                                                                   |
|                |       |                                                                                                                 |       |                |       |                                                                                                                                   |
| 3.1(iii)            |       | Articles of Amendment to Articles of Organization                                                                    |       |                |       | Exhibit  3.1(iii) to the Issuer’s Form 10-QSB filed with the Commission on August 14,  2002                                       |
|                |       |                                                                                                                 |       |                |       |                                                                                                                                   |
| 4.1                 |       | Form of Class A Unit Certificate                                                                                     |       |                |       | Exhibit 4.1 to the Issuer’s Form S-4 filed  with the Commission on December 21, 2001 (File No. 333-75804)                         |
|                |       |                                                                                                                 |       |                |       |                                                                                                                                   |
| 10.1                |       | Form of Mortgage and Security Agreement with CoBank dated October 2,  1995                                           |       |                |       | Exhibit  10.1 to the Issuer’s Form S-4 filed with the Commission on December 21, 2001  (File No. 333-75804)                       |
|                |       |                                                                                                                 |       |                |       |                                                                                                                                   |
| 10.2                |       | Master Loan Agreement with CoBank dated June 17, 2004                                                                |       |                |       | Exhibit  10.2 to the Issuer’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 Issuer’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 Issuer’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 Issuer’s Form S-4 filed with the Commission on December 21, 2001  (File No. 333-75804)                       |
|                |       |                                                                                                                 |       |                |       |                                                                                                                                   |
| 10.6                |       | Vegetable Oil Supply Agreement with Urethane Soy Systems Company,  Inc. dated August 2, 1999 and January 10, 2001    |       |                |       | Exhibit  10.6 to the Issuer’s Form S-4 filed with the Commission on December 21, 2001  (File No. 333-75804)                       |
|                |       |                                                                                                                 |       |                |       |                                                                                                                                   |
| 10.7                |       | MnSP Services and Management Agreement dated August 25, 2000                                                         |       |                |       | Exhibit  10.7 to the Issuer’s Form S-4 filed with the Commission on December 21, 2001  (File No. 333-75804)                       |
|                |       |                                                                                                                 |       |                |       |                                                                                                                                   |
| 10.8                |       | Soybean Oil Supply Agreement and Equipment Purchase Agreement with  ACH Food Companies, Inc. dated January 15, 2002* |       |                |       | Exhibit  10.8 to the Issuer’s Form S-4 filed with the Commission on May 10, 2002 (File  No. 333-75804)                            |
|                |       |                                                                                                                 |       |                |       |                                                                                                                                   |
| 10.9                |       | Railcar Leasing Agreement with General Electric dated May 14, 1996                                                   |       |                |       | Exhibit  10.9 to the Issuer’s Form S-4 filed with the Commission on December 21, 2001  (File No. 333-75804)                       |

 

32

----

 
| 10.10  |   | Track Lease Agreement with DM&E Railroad dated October 15, 1996                                                           |   |   |   | Exhibit  10.10 to the Issuer’s Form S-4 filed with the Commission on December 21, 2001  (File No. 333-75804) |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                          |   |   |   |                                                                                                              |
| 10.11  |   | Land Option Agreement with Howell Farms dated September 8, 1994 and  September 13, 2001                                       |   |   |   | Exhibit  10.11 to the Issuer’s Form S-4 filed with the Commission on December 21, 2001  (File No. 333-75804) |
|   |   |                                                                                                                          |   |   |   |                                                                                                              |
| 10.12  |   | Railroad Car Lease Agreement with Trinity Industries dated February  12, 2002                                                 |   |   |   | Exhibit  10.15 to the Issuer’s Form S-4 filed with the Commission on March 14, 2002  (File No. 333-75804)    |
|   |   |                                                                                                                          |   |   |   |                                                                                                              |
| 10.13  |   | Stock Purchase Agreement with Urethane Soy Systems, Co. and certain  shareholders                                             |   |   |   | Exhibit  10.16 to the Issuer’s Form 8-K filed with the Commission on January 14, 2003                        |
|   |   |                                                                                                                          |   |   |   |                                                                                                              |
| 10.14  |   | Rodney Christianson Employment Agreement dated February 1, 2004                                                               |   |   |   | Exhibit  10.14 to the Issuer’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 Issuer’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 Issuer’s Form 10-K filed with the Commission on March 27, 2003                         |
|   |   |                                                                                                                          |   |   |   |                                                                                                              |
| 10.17  |   | Deferred Compensation Plan for the benefit of Thomas Kersting, dated  February 13, 2001                                       |   |   |   | Exhibit  10.20 to the Issuer’s Form 10-K filed with the Commission on March 27, 2003                         |
|   |   |                                                                                                                          |   |   |   |                                                                                                              |
| 10.18  |   | Polyoil Consulting Services Agreement with Larry Mahlum dated January  1, 2000                                                |   |   |   | Exhibit  10.21 to the Issuer’s Form 10-K filed with the Commission on March 27, 2003                         |
|   |   |                                                                                                                          |   |   |   |                                                                                                              |
| 10.19  |   | Railcar Leasing Agreements with General Electric Railcar Services  Corporation, dated November 10, 2003 and November 25, 2003 |   |   |   | Exhibit  10.19 to the Issuer’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 Issuer’s Form 10-Q filed with the Commission on August 16, 2004                         |
|   |   |                                                                                                                          |   |   |   |                                                                                                              |
| 14.1   |   | Code of Ethics                                                                                                                |   | X      |   |                                                                                                              |
|   |   |                                                                                                                          |   |   |   |                                                                                                              |
| 21.1   |   | Subsidiaries of the Company                                                                                                   |   | X      |   |                                                                                                              |
|   |   |                                                                                                                          |   |   |   |                                                                                                              |
| 24.1   |   | Power of Attorney                                                                                                             |   | X      |   | See  Signature Page to this Annual Report on Form  10-K                                                           |
|   |   |                                                                                                                          |   |   |   |                                                                                                              |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certifications                                                                                       |   | X      |   |                                                                                                              |
|   |   |                                                                                                                          |   |   |   |                                                                                                              |
| 32.1   |   | Section 1350 Certifications                                                                                                   |   | X      |   |                                                                                                              |

 

----

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

 

33

----

 

# **SOUTHDAKOTA SOYBEAN PROCESSORS,**

# **LLC**

 

***CONSOLIDATEDFINANCIAL STATEMENTS***

 

***DECEMBER31, 2004, 2003 AND 2002***

 

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

 

Index to Financial Statements

 
| **REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS** |   |
|---------------------------------------------------------------|--------|
|                                                          |   |
| 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 PUBLIC ACCOUNTING FIRM**

 

The Board of Managers

South Dakota Soybean Processors, LLC

Volga, South Dakota

 

We have audited the accompanying consolidated balance sheet of SouthDakota Soybean Processors, LLC as of December31, 2004 and the related consolidated statements of operations, changesin members’ equity and cash flows for the year then ended.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting. Our audit included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of South Dakota Soybean Processors,LLC as of December 31, 2004, andthe results of their operations and their cash flows for the year then ended,in conformity with accounting principles generally accepted in the UnitedStates of America.

 

 

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

 
| /s/ Gordon, Hughes & Banks, LLP |   |
|-------------------------------------|--------|
| Greenwood Village, Colorado         |
| March 1, 2005                       |

 

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

## ** **

The Board of Managers

South Dakota Soybean Processors, LLC

Volga, South Dakota

 

We have audited the accompanying consolidated balance sheet of SouthDakota Soybean Processors, LLC and Subsidiary as of December 31, 2003 and the related consolidated statements ofoperations, changes in members’ equity and cash flows for the year thenended.  We have also audited thestatements of operations, changes in members’ equity, and cash flows for theyear ended December 31, 2002. These financial statements are the responsibilityof the Company’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the 2003financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of South Dakota SoybeanProcessors, LLC and Subsidiary as of December31, 2003, and the results of their operations and its cash flows for theyear then ended, in conformity with accounting principles generally accepted inthe United States of America. Also, in our opinion, the 2002 financialstatements referred to above present fairly, in all material respects, theresults of its operations and its cash flows for the year ended December 31,2002, in conformity with accounting principles generally accepted in the UnitedStates of America.

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

 

F-2

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER 31, 2004 AND 2003**

 
| ** **                                                                                              | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                              |       |        |       |        |       |
|                                                                                                    |       |        |       |        |       |
| CURRENT ASSETS                                                                                          |       |        |       |        |       |
| Cash and cash equivalents                                                                               |       | $           | 11,423     |        | $          | 529,697 |   |
| Trade accounts receivable, less allowance  for uncollectible accounts (2004 - $28,000; 2003 - $276,878) |       | 17,452,118  |       | 23,530,989  |       |
| Inventories (Note 2)                                                                                    |       | 8,601,502   |       | 10,776,402  |       |
| Margin deposits (Note 3)                                                                                |       | 1,424,422   |       | —      |       |
| Prepaid expenses                                                                                        |       | 538,816     |       | 516,419     |       |
| Building exchanged for interest in MnSP                                                                 |       | —      |       | 2,322,561   |       |
| Total current assets                                                                                    |       | 28,028,281  |       | 37,676,068  |       |
|                                                                                                    |       |        |       |        |       |
| PROPERTY AND EQUIPMENT (Note 6)                                                                         |       | 51,398,225  |       | 50,250,024  |       |
| Less accumulated depreciation                                                                           |       | (21,268,006 | )          | (18,424,405 | )          |
| Total property and equipment                                                                            |       | 30,130,219  |       | 31,825,619  |       |
|                                                                                                    |       |        |       |        |       |
| OTHER ASSETS                                                                                            |       |        |       |        |       |
| Investments (Note 4)                                                                                    |       | 4,077,625   |       | 3,970,102   |       |
| Equity investment in unconsolidated  affiliate (Note 5)                                                 |       | 2,869,366   |       | —      |       |
| Notes receivable - members                                                                              |       | 481,710     |       | 481,710     |       |
| Patents, net (Note 7)                                                                                   |       | 6,900,047   |       | 7,647,844   |       |
| Other, net                                                                                              |       | 12,640      |       | 15,721      |       |
| Total other assets                                                                                      |       | 14,341,388  |       | 12,115,377  |       |
|                                                                                                    |       |        |       |        |       |
| Total assets                                                                                            |       | $           | 72,499,888 |        | $          | 81,617,064 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

F-3

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATEDBALANCE SHEETS (continued)**

**DECEMBER31, 2004 AND 2003**

 
| ** **                                                                                                                       | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **LIABILITIES AND MEMBERS’ EQUITY**                                                                                         |       |       |       |       |       |
|                                                                                                                             |       |       |       |       |       |
| CURRENT LIABILITIES                                                                                                              |       |       |       |       |       |
| Excess of outstanding checks over bank  balance                                                                                  |       | $          | 3,411,975  |       | $          | 2,388,936 |   |
| Current maturities of long-term debt (Note  9)                                                                                   |       | 1,216,438  |       | 976,117    |       |
| Accounts payable                                                                                                                 |       | 928,858    |       | 1,883,200  |       |
| Accrued commodity purchases                                                                                                      |       | 23,640,446 |       | 21,492,404 |       |
| Accrued expenses                                                                                                                 |       | 1,646,228  |       | 1,385,864  |       |
| Accrued interest                                                                                                                 |       | 49,471     |       | 50,316     |       |
| Total current liabilities                                                                                                        |       | 30,893,416 |       | 28,176,837 |       |
|                                                                                                                             |       |       |       |       |       |
| LONG-TERM LIABILITIES                                                                                                            |       |       |       |       |       |
| Long-term debt, less current maturities  (Note 9)                                                                                |       | 8,986,151  |       | 17,543,141 |       |
| Deferred compensation (Note 11)                                                                                                  |       | 129,345    |       | 121,301    |       |
|                                                                                                                             |       | 9,115,496  |       | 17,664,442 |       |
|                                                                                                                             |       |       |       |       |       |
| MINORITY INTEREST IN CONSOLIDATED  SUBSIDIARY                                                                                    |       | 368,403    |       | 1,045,195  |       |
|                                                                                                                             |       |       |       |       |       |
| COMMITMENTS (Note 12)                                                                                                            |       | —     |       | —     |       |
|                                                                                                                             |       |       |       |       |       |
| MEMBERS’ EQUITY                                                                                                             |       |       |       |       |       |
| Class A Units, no par value 28,228,500 and  28,258,500 units issued and outstanding at December 31, 2004 and 2003,  respectively |       | 32,122,573 |       | 34,730,590 |       |
|                                                                                                                             |       |       |       |       |       |
| Total liabilities and members’ equity                                                                                       |       | $          | 72,499,888 |       | $          | 81,617,064 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

F-4

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THEYEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

 
| ** **                                                                                                   | ** ** | **2004**    | ** **  | **2003**    | ** ** | **2002**    | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
|                                                                                                         |       |        |        |        |       |        |       |
| NET REVENUES                                                                                                 |       | $           | 238,211,056 |        | $          | 207,256,575 |       | $ | 159,497,284 |   |
|                                                                                                         |       |        |        |        |       |        |       |
| COST OF REVENUES                                                                                             |       |        |        |        |       |        |       |
| Cost of product sold                                                                                         |       | 200,374,848 |        | 174,234,599 |       | 128,457,162 |       |
| Production                                                                                                   |       | 14,435,824  |        | 14,046,771  |       | 11,707,538  |       |
| Freight and rail                                                                                             |       | 17,606,723  |        | 14,506,644  |       | 12,095,338  |       |
| Brokerage fees                                                                                               |       | 286,471     |        | 234,346     |       | 323,926     |       |
| Total cost of revenues                                                                                       |       | 232,703,866 |        | 203,022,360 |       | 152,583,964 |       |
|                                                                                                         |       |        |        |        |       |        |       |
| GROSS PROFIT                                                                                                 |       | 5,507,190   |        | 4,234,215   |       | 6,913,320   |       |
|                                                                                                         |       |        |        |        |       |        |       |
| OPERATING EXPENSES                                                                                           |       |        |        |        |       |        |       |
| Administration                                                                                               |       | 4,476,511   |        | 3,639,442   |       | 2,679,633   |       |
| OPERATING PROFIT                                                                                             |       | 1,030,679   |        | 594,773     |       | 4,233,687   |       |
|                                                                                                         |       |        |        |        |       |        |       |
| OTHER INCOME (EXPENSE)                                                                                       |       |        |        |        |       |        |       |
| Interest expense                                                                                             |       | (1,425,849  | )           | (802,178    | )          | (542,220    | )          |
| Other non-operating income                                                                                   |       | 254,061     |        | 2,915,160   |       | 3,404,458   |       |
| Patronage dividend income                                                                                    |       | 153,961     |        | 97,975      |       | 36,801      |       |
| Total other income (expense)                                                                                 |       | (1,017,827  | )           | 2,210,957   |       | 2,899,039   |       |
|                                                                                                         |       |        |        |        |       |        |       |
| INCOME BEFORE INCOME TAXES AND MINORITY  INTEREST OF SUBSIDIARY                                              |       | 12,852      |        | 2,805,730   |       | 7,132,726   |       |
|                                                                                                         |       |        |        |        |       |        |       |
| MINORITY INTEREST IN NET LOSS OF SUBSIDIARY                                                                  |       | 676,792     |        | 457,620     |       | —      |       |
|                                                                                                         |       |        |        |        |       |        |       |
| INCOME BEFORE INCOME TAXES                                                                                   |       | 689,644     |        | 3,263,350   |       | 7,132,726   |       |
|                                                                                                         |       |        |        |        |       |        |       |
| INCOME TAX EXPENSE (BENEFIT)                                                                                 |       | 1,032       |        | (131,474    | )          | 520,000     |       |
|                                                                                                         |       |        |        |        |       |        |       |
| NET INCOME                                                                                                   |       | $           | 688,612     |        | $          | 3,394,824   |       | $ | 6,612,726 |   |
|                                                                                                         |       |        |        |        |       |        |       |
| BASIC AND DILUTED EARNINGS PER CAPITAL UNIT                                                                  |       | $           | 0.02        |        | $          | 0.12        |       | $ | 0.23 |   |
|                                                                                                         |       |        |        |        |       |        |       |
| WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING  FOR CALCULATION OF BASIC AND DILUTED EARNINGS PER CAPITAL UNIT |       | 28,250,139  |        | 28,258,500  |       | 28,258,500  |       |

 

The accompanying notes are anintegral part of these consolidated financial statements

 

F-5

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

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

**FOR THEYEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

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

 

The accompanying notes are anintegral part of these consolidated financial statements

 

 

F-6

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THEYEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

 
| ** **                                                 | ** ** | **2004**    | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| OPERATING ACTIVITIES                                       |       |        |       |       |       |       |       |
| Net income                                                 |       | $           | 688,612    |       | $          | 3,394,824  |       | $ | 6,612,726 |   |
| Charges and credits to net income not  affecting cash:     |       |        |       |       |       |       |       |
| Depreciation and amortization                              |       | 3,733,449   |       | 3,012,415  |       | 2,751,148  |       |
| Minority interest in net loss of subsidiary                |       | (676,792    | )          | (457,620   | )          | —     |       |
| Loss on sale of fixed assets                               |       | 5,136       |       | 1,325      |       | 30,288     |       |
| Loss on equity method investment                           |       | 54,626      |       | —     |       | —     |       |
| Non-cash patronage dividends                               |       | (107,773    | )          | (97,976    | )          | (28,964    | )          |
| Change in current assets and liabilities  (Note 13)        |       | 8,266,518   |       | (3,892,022 | )          | (530,981   | )          |
| NET CASH FROM OPERATING ACTIVITIES                         |       | 11,963,776  |       | 1,960,946  |       | 8,834,217  |       |
|                                                       |       |        |       |       |       |       |       |
| INVESTING ACTIVITIES                                       |       |        |       |       |       |       |       |
| Purchase of investments                                    |       | (600,931    | )          | (4,076,686 | )          | (250       | )          |
| Increase in member loans                                   |       | —      |       | (480,710   | )          | —     |       |
| Cash assumed with Urethane Soy Systems Co.                 |       | —      |       | 38,989     |       | —     |       |
| Retirement of patronage dividends                          |       | —      |       | 56,134     |       | 103,262    |       |
| Purchase of assets held for sale - building                |       | —      |       | (14,742    | )          | (2,307,819 | )          |
| Patent costs                                               |       | (84,508     | )          | (53,000    | )          | (36,998    | )          |
| Proceeds from sales of property and  equipment             |       | 3,500       |       | 41,960     |       | —     |       |
| Purchase of property and equipment                         |       | (1,209,852  | )          | (1,016,849 | )          | (4,645,020 | )          |
| NET CASH USED FOR INVESTING ACTIVITIES                     |       | (1,891,791  | )          | (5,504,904 | )          | (6,886,825 | )          |
|                                                       |       |        |       |       |       |       |       |
| FINANCING ACTIVITIES                                       |       |        |       |       |       |       |       |
| Change in excess of outstanding checks over  bank balances |       | 1,023,039   |       | (1,214,902 | )          | 2,026,870  |       |
| Payments for liquidation of members’ equity           |       | (6,000      | )          | **—** |       | 2,200      |       |
| Distributions to members                                   |       | (3,290,629  | )          | (2,539,827 | )          | (5,519,058 | )          |
| Payments for debt issue costs                              |       | —      | ** ** | **—** |       | (6,500     | )          |
| Proceeds from long-term debt                               |       | —      |       | 9,489,103  |       | —     |       |
| Principal payments on long-term debt                       |       | (8,316,669  | )          | (1,671,889 | )          | (454,991   | )          |
| NET CASH (USED FOR) FROM FINANCING  ACTIVITIES             |       | (10,590,259 | )          | 4,062,485  |       | (3,951,479 | )          |
|                                                       |       |        |       |       |       |       |       |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                    |       | (518,274    | )          | 518,527    |       | (2,004,087 | )          |
|                                                       |       |        |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  YEAR              |       | 529,697     |       | 11,170     |       | 2,015,257  |       |
|                                                       |       |        |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS, END OF YEAR                     |       | $           | 11,423     |       | $          | 529,697    |       | $ | 11,170 |   |

 

(continued on next page)

 

F-7

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (continued)**

**FOR THEYEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

 
| ** **                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION    |       |     |       |     |       |     |       |
| Cash paid during the year for:                        |       |     |       |     |       |     |       |
|                                                  |       |     |       |     |       |     |       |
| Interest                                              |       | $        | 1,426,694  |     | 936,902    |     | $          | 628,636 |   |
|                                                  |       |     |       |     |       |     |       |
| Income taxes                                          |       | $        | 2,032      |     | $          | (131,474 | )          | $ | 520,000 |   |
|                                                  |       |     |       |     |       |     |       |
| Equity investment acquired from exchange of  building |       | $        | 2,322,561  |     | $          | —   |       | $ | — |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

F-8

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

*Organization*

 

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

 

As a result of the exchange,the Cooperative was dissolved on July 1, 2002, and the LLC’s capital units weredistributed to the members of the Cooperative at a rate of one capital unit ofthe LLC for each share of equity stock of the Cooperative.  In connection with the reorganization, theLLC changed its name to South Dakota Soybean Processors, LLC.

 

A minimum of 2,500 capitalunits is required for an ownership interest in the LLC.  Such units are subject to certain transferrestrictions.  The LLC retains the rightto redeem the units at the greater of $.20 per unit or the original purchaseprice less cumulative distributions through the date of redemption in the eventa member attempts to dispose of the units in a manner not in conformity withthe Operating Agreement, if a member becomes a holder of less than 2,500 units,or if a member becomes an owner (directly or indirectly) of more than 1.5% ofthe issued and outstanding capital units. The Operating Agreement of the LLC also includes provisions whereby cashequal to a minimum of 30% of available net income will be distributed to unitholders subject to certain limitations. These limitations include a minimum net income of $500,000, restrictionsimposed by debt and credit instruments or as restricted by law in the event ofinsolvency.

 

In connection with thereorganization, the delivery of soybeans under the previous member deliveryagreements was no longer required as an obligation of membership.  Earnings, losses and cash distributions areallocated to members based on their percentage of ownership in the LLC.

 

The Company owns approximately58% of Urethane Soy Systems Company (“USSC”). USSC is the manufacturer and patent holder of Soyol®, a polyol made fromsoybean oil.  A minority interest ispresented in the consolidated balance sheet that represents the approximate 42%ownership of other investors in the 96,025 outstanding common shares of USSC.

 

South Dakota Soybean Processorsis operated for the purpose of manufacturing products from soybeans, such assoybean oil, meal, and hulls.

 

*Basis of presentation and principles ofconsolidation*

 

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

 

(continued on next page)

 

F-9

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

*Cash andcash 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 of tradereceivables is reduced by a valuation allowance that reflects management’s bestestimate of the amounts that will not be collected.  Management reviews all receivable balances thatexceed 90 days from the invoice date and, based on an assessment of currentcreditworthiness, estimates the portion, if any, of the balance that will notbe collected.

 

*Inventories*

 

Finished goods (soybean meal,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.

 

*Assets heldfor sale*

 

Assets held for sale arecarried at net book value.

 

*Investments*

 

Investments in cooperativesare carried at cost plus the amount of patronage earnings allocated orestimates of interim allocations to the Company, less any cash distributionsreceived.

 

The investments in CenexHarvest States (CHS) and CoBank include actual patronage allocations based uponwritten qualified notices of allocation received from CHS and CoBank.  Patronage allocations represent the Company’sproportionate share of the patronage earnings of CHS and CoBank. Since theCompany is no longer a cooperative as of July 1, 2002, it will no longerreceive patronage allocations from CHS.

 

The Company accounts for its 7%investment in Minnesota Soybean Processors using the equity method due to therelated nature of operations and the Company’s ability to influence managementdecisions of MnSP.  Under the equitymethod, the initial investment is recorded at cost and adjusted annually torecognize 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.

 

The Company reviews itsproperty and equipment for impairment whenever events indicate that thecarrying amount of the asset may not be recoverable. An impairment loss isrecorded when the sum of the future cash flows is less than the carrying amountof the asset.  The amount of the loss isdetermined by comparing the expected discounted cash flows from the asset tothe carrying amount of the asset.

 

(continued onnext page)

 

F-10

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

Depreciation is provided forover 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  |   |

 

*Patents*

 

The Company’s patents areintangible assets that are not considered to have an indefinite life and, underthe rules of SFAS No. 142, are to be amortized over their estimated usefullife.  The patents are being amortizedusing 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.

 

*Other assets*

 

Other assets are carried atcost.  Loan fees are being amortized onan interest method of accounting over the term of the related loans.

 

*Use of estimates*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities at the date of thefinancial statements and reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

*Revenue Recognition*

 

Revenue is recognized when therelated products are shipped, which is when title is transferred to thecustomer.  Revenues are presented net ofdiscounts and sales allowances.

 

*Freight*

 

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

 

*Advertising costs*

 

Advertising and promotion costsare expensed as incurred. The Company incurred $17,614, $7,885, and $10,275 ofadvertising costs in the years ended December 31, 2004, 2003, and 2002,respectively.

 

*Environmental remediation*

 

It is management’s opinion thatthe amount of any potential environmental remediation costs will not bematerial to the Company’s financial condition, results of operations, or cashflows; therefore, no accrual has been recorded.

 

*Accounting for derivative instruments and hedgingactivities*

 

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

 

(continued on next page)

 

F-11

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

*Earnings per capital unit*

 

The ownership structure of the Company is made up ofClass A capital units.  Earnings percapital unit are calculated based on the weighted average number of Class Acapital units outstanding.  On June 17,2003, the Board of Managers declared a 2-for-1 split of Class A capital unitseffective immediately.  Prior to thistransaction, there were 14,129,250 Class A capital units outstanding.  The 2-for-1 split is retroactively reflectedin the calculation of earnings per capital unit.

 

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

 

The Company has no other capital units or other memberequity instruments that are dilutive for purposes of calculating earnings percapital unit.

 

*Reclassifications*

 

Reclassifications have beenmade to the December 31, 2003 and December 31, 2002 financial information toconform to the current period presentation. These reclassifications have no effect on previously reported net incomeor members’ equity.

 

*Recent accounting pronouncements*

 

In November 2004, the FASBissued FASB Statement No. 151, which revised ARB No.43, relating to inventorycosts. This revision is to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs and wasted material (spoilage).  This Statement requires that these items berecognized as a current period charge regardless of whether they meet thecriterion specified in ARB 43.  Inaddition, this Statement requires the allocation of fixed production overheadsto the costs of conversion be based on normal capacity of the productionfacilities. This Statement is effective for financial statements for fiscalyears beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred duringfiscal years beginning after the date of this Statement is issued.  Management believes this Statement will haveno impact on the financial statements of the Company once adopted.

 

In December 2004, the FASBissued FASB Statement No. 152, which amends FASB Statement No. 66, Accountingfor Sales of Real Estate, to reference the financial accounting and reportingguidance for real estate time-sharing transactions that is provided in AICPAStatement of Position (SOP) 04-2, *Accountingfor Real Estate Time-Sharing Transactions*.  This Statement also amends FASB Statement No.67, *Accounting for Costs and Initial RentalOperations of Real Estate Projects*, to state that the guidance for(a) incidental operations and (b) costs incurred to sell real estate projectsdoes not apply to real-estate time-sharing transactions.  The accounting for those operations and costsis subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal yearsbeginning after June 15, 2005. Management believes this Statement will have no impact on the financialstatements of the Company once adopted.

 

(continued on next page)

 

F-12

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

In December 2004, the FASBissued FASB Statement No. 153.  ThisStatement addresses the measurement of exchanges 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 in that Opinion, however, includedcertain exceptions to that principle. This Statement amends Opinion 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 have commercialsubstance.  A nonmonetary exchange hascommercial substance if the future cash flows of the entity are expected tochange significantly as a result of the exchange.  This Statement is effective for financialstatements for fiscal years beginning after June 15, 2005. Earlier applicationis permitted for nonmonetary asset exchanges incurred during fiscal yearsbeginning after the date of this Statement is issued.  Management believes this Statement will have noimpact on the financial statements of the Company once adopted.

 

In December 2004, the FASBissued a revision to FASB Statement No. 123, *Accountingfor Stock Based Compensation.* This Statement supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and its related implementation guidance. This Statement establishes standards for the accounting for transactionsin which an entity exchanges its equity instruments for goods or services.  It also addresses transactions in which anentity incurs liabilities in exchange for goods or services that are based onthe fair value of the entity’s equity instruments or that may be settled by theissuance of those equity instruments. This Statement focuses primarily on accounting for transactions in whichan entity obtains employee services in share-based payment transactions.  This Statement does not change the accountingguidance for share-based payment transactions with parties other than employeesprovided in Statement 123 as originally issued and EITF Issue No. 96-18, *“Accounting for Equity Instruments That Are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices.”*  This Statementdoes not address the accounting for employee share ownership plans, which aresubject to AICPA Statement of Position 93-6, *Employers’Accounting for Employee Stock Ownership Plans.*

 

A nonpublic entity willmeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of those instruments,except in certain circumstances.

 

A public entity willinitially measure the cost of employee services received in exchange for anaward of liability instruments based on its current fair value; the fair valueof that award will be re-measured subsequently at each reporting date throughthe settlement date.  Changes in fairvalue during the requisite service period will be recognized as compensationcost over that period.  A nonpublicentity may elect to measure its liability awards at their intrinsic valuethrough the date of settlement.

 

The grant-date fair value ofemployee share options and similar instruments will be estimated using theoption-pricing models adjusted for the unique characteristics of thoseinstruments (unless observable market prices for the same or similarinstruments are available).

 

Excess tax benefits, asdefined by this Statement, will be recognized as an addition topaid-in-capital.  Cash retained as aresult of those excess tax benefits will be presented in the statement of cashflows as financing cash inflows.  Thewrite-off of deferred tax assets relating to unrealized tax benefits associatedwith recognized compensation cost will be recognized as income tax expenseunless there are excess tax benefits from previous awards remaining in paid-incapital to which it can be offset.

 

The notes to the financialstatements of both public and nonpublic entities will disclose information toassist users of financial information to understand the nature of share-basedpayment transactions and the effects of those transactions on the financialstatements.

 

(continued on next page)

 

F-13

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

The effective date forpublic entities that do not file as small business issuers will be as of thebeginning of the first interim or annual reporting period that begins afterJune 15, 2005.  For public entities thatfile as small business issuers and nonpublic entities the effective date willbe as of the beginning of the first interim or annual reporting period thatbegins after December 15, 2005. Management intends to comply with this Statement at the scheduledeffective date for the relevant financial statements of the Company.

 

**NOTE 2 -**       INVENTORIES

 
| ** **                   | ** ** | **2004**  | ** ** | **2003**   | ** ** |
|------------------------------|------------|-----------|------------|------------|------------|
| Finished goods               |       |      |       |       |       |
| Soy processing               |       | $         | 5,913,666  |       | $          | (447,404 | ) |
| Refined oil                  |       | 602,466   |       | 313,815    |       |
| Other                        |       | 46,762    |       | 34,536     |       |
| Total finished goods         |       | 6,562,894 |       | (99,053    | )          |
|                         |       |      |       |       |       |
| Raw materials                |       |      |       |       |       |
| Soy processing               |       | 1,950,568 |       | 10,696,391 |       |
| Refined oil                  |       | 18,909    |       | 46,663     |       |
| Other                        |       | 17,167    |       | 78,465     |       |
| Total raw materials          |       | 1,986,644 |       | 10,821,519 |       |
|                         |       |      |       |       |       |
| Supplies & miscellaneous |       | 51,964    |       | 53,936     |       |
|                         |       |      |       |       |       |
| Totals                       |       | $         | 8,601,502  |       | $          | 10,776,402 |   |

 

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

 

**NOTE 3 -       MARGIN DEPOSITS**

 

The Company maintains depositswith a brokerage firm.  The deposits areused for risk management.

 

The Company uses futures andoption contracts to manage the risk of commodity price volatility of soybeans,crude soybean oil and soybean meal. Consistent with its inventory accounting policy, these contracts arerecorded at market value.

 

At December 31, 2004, theCompany had contracts maturing through December 2005.

 

(continued on next page)

 

F-14

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 4 -       INVESTMENTS**

 
| ** **                           | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|--------------------------------------|------------|-----------|------------|-----------|------------|
| Investments in associated companies: |       |      |       |      |       |
| Cenex Harvest States                 | ** ** | **$**     | 3,516,592  |      | $          | 3,516,592 |   |
| CoBank                               | ** ** | 561,033   |       | 453,260   |       |
| ** **                           |       | 4,077,625 |       | 3,969,852 |       |
| Other                                | ** ** | —    |       | 250       |       |
|                                 |       |      |       |      |       |
| Totals                               | ** ** | **$**     | 4,077,625  |      | $          | 3,970,102 |   |

 

**NOTE 5 -       EQUITY INVESTMENT IN MINNESOTA SOYBEAN PROCESSORS**

 
| ** **                                                | ** ** | **2004**               | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **Acquired  Interest** | ** ** | **Distributions** | ** ** | **Net Income  (Loss)** | ** ** | **Asset  Balance** | ** ** |
|                                                      |       |                   |       |   |   |   |   |   |   |
| Minnesota Soybean Processors, 6.95% ownership,  at equity |       | $                      | 2,923,992  |   | $ | — |   | $ | (54,626 | ) | $ | 2,869,366 |   |
|                                                           |            |                        |            |  |  |  |  |  |  |  |  |  |  |

 

In August 2004, the Company exchanged a storage facility with a netbook value of $2,322,561 for 1,400,400 Class A shares in Minnesota SoybeanProcessors (MnSP), a Minnesota cooperative association.  The shares approximate 6.95% of MnSP’soutstanding equity.  The Company isaccounting for the investment on the equity method due to the related nature ofoperations and the fact that through the management services provided, theCompany exercises significant influence. In connection with the exchange and inrecording its respective share of the equity of MnSP, the Company recognized aloss of $54,626 which is included with other non-operating income (expense).

 

The Company also subscribed for287,500 Class B shares in MnSP.  Theshares are 8%, Non-Cumulative Convertible Class B Preferred Stock sold at $2.00per share for a total purchase price of $575,000.

 

Summarized financialinformation of MnSP as of December 31, 2004 and for the year then ended is asfollows:

 
| ** **             | ** ** | **(Unaudited)** | ** **  |
|------------------------|------------|-----------------|-------------|
| Revenues               |       | $               | 264,129,424 |   |
| Expenses               |       | 268,405,313     |        |
| Other income (expense) |       | (198,636        | )           |
| Net income (loss)      |       | $               | (4,474,525  | ) |
|                   |       |            |        |
| Assets                 |       | $               | 82,962,604  |   |
| Liabilities            |       | 47,064,524      |        |
| Equity                 |       | 35,898,080      |        |

 

(continued on next page)

 

F-15

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE6 -**                     PROPERTY AND EQUIPMENT

 
| ** **                 | ** ** | **2004**   | ** ** | ** **                    | ** ** |
|----------------------------|------------|------------|------------|-------------------------------|------------|
| ** **                 | ** ** | **Cost**   | ** ** | **Accumulated  Depreciation** | ** ** | **Net** | ** ** | **2003  Net** | ** ** |
|                       |       |       |       |                          |       |   |   |   |   |
| Land                       |       | $          | 237,643    |                          | $          | — |   | $ | 237,643 |   | $ | 237,643 |   |
| Land improvements          |       | 18,572     |       | 17,782                        |       | 790 |   | 861 |   |
| Buildings and improvements |       | 14,290,569 |       | 2,958,748                     |       | 11,331,821 |   | 11,734,400 |   |
| Machinery and equipment    |       | 34,684,574 |       | 17,478,356                    |       | 17,206,218 |   | 19,256,073 |   |
| Company vehicles           |       | 165,840    |       | 90,628                        |       | 75,212 |   | 9,312 |   |
| Furniture and fixtures     |       | 841,099    |       | 722,492                       |       | 118,607 |   | 134,921 |   |
| Construction in progress   |       | 1,159,928  |       | —                        |       | 1,159,928 |   | 452,409 |   |
|                       |       |       |       |                          |       |   |   |   |   |
| Totals                     |       | $          | 51,398,225 |                          | $          | 21,268,006 |   | $ | 30,130,219 |   | $ | 31,825,619 |   |

 

**NOTE 7 -       OTHER INTANGIBLE ASSETS**

 

On January 1, 2003, the Company acquired an additional54% interest in the outstanding common stock of USSC to bring its totalownership interest to approximately 58%. The results of USSC’s operations have been consolidated in the Company’sfinancial statements since that date. The Company believes that the acquisition of a controlling interest inUSSC will allow the Company to develop and market soy-based polyurethaneproducts.

 

The aggregate purchase pricefor the 54% interest was $8,576,686.  TheCompany had previously acquired a 4% interest for $1,000,000.  In preparing consolidated financialstatements, the Company assigned the total consideration paid for the USSCstock to USSC’s assets and liabilities. This allocation resulted in an assignment of $7,401,245 to patents.  None of these patent costs recognized forfinancial reporting purposes is expected to be deductible for tax purposes.  The patents are being amortized using thestraight-line method over a period of 16 to 20 years, which is the shorter ofthe remaining estimated economic life of the patents acquired or 20 years fromthe original file date.

 

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

 
| Current assets            |   | $         | 85,742    |   |
|---------------------------|--------|-----------|-----------|--------|
| Property and equipment    |   | 255,894   |      |
| 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 |   |

 

The Company has a contractual obligation to pay former USSCshareholders $4,050,000.  Two remaininginstallments of $891,000 are due on October 31, 2005 and 2006 (see Note 9).

 

(continued on next page)

 

F-16

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

The following table provides information regarding the Company’s otherintangible assets as of December 31, 2004 and 2003:

 
| **Intangible Assets**    | ** ** | **Life**     | ** ** | **Cost**   | ** ** | **Accumulated  Amortization** | ** ** | **Net**   | ** ** |
|--------------------------|------------|--------------|------------|------------|------------|-------------------------------|------------|-----------|------------|
|                     |       | ** **   |       | ** ** |       |                          |       |      |       |
| As of December 31, 2004: |       |         |       |       |       |                          |       |      |       |
| Loan Origination Costs   |       | 10 Yrs.      |       | $          | 20,502     |                          | $          | (7,862    | )          | $ | 12,640 |   |
| Patents                  |       | 16 - 20 Yrs. |       | 7,745,947  |       | (845,900                      | )          | 6,900,047 |       |
|                     |       |         |       | $          | 7,766,449  |                          | $          | (853,762  | )          | $ | 6,912,687 |   |
|                     |       |         |       |       |       |                          |       |      |       |
| As of December 31, 2003: |       |         |       |       |       |                          |       |      |       |
| Loan Origination Costs   |       | 10 Yrs.      |       | $          | 20,502     |                          | $          | (4,781    | )          | $ | 15,721 |   |
| Patents                  |       | 16 - 20 Yrs. |       | 7,661,394  |       | (13,550                       | )          | 7,647,844 |       |
|                     |       |         |       | $          | 7,681,896  |                          | $          | (18,331   | )          | $ | 7,663,565 |   |

 

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

 

The Company has entered into a revolving creditagreement with CoBank, which expires April 1, 2005. The purpose of the creditagreement is to finance the inventory and accounts receivable of the Company.The Company may borrow up to $15,200,000. Interest accrues at a variable rate(4.85% at December 31, 2004).  There wereno advances outstanding at December 31, 2004 and 2003.

 

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

 

(continued on next page)

 

F-17

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 9 -       LONG-TERM DEBT**

 
| ** **                                                                                                                                                                                                                                                                       | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                                                                                                                                                                             |       |       |       |       |       |
| Revolving term loan from CoBank, interest  at variable rates (4.85% and 3.47% at December 31, 2004 and 2003,  respectively), secured by substantially all property and equipment. Loan matures  March 20, 2011.                                                                  |       | 7,940,777  |       | 15,281,832 |       |
|                                                                                                                                                                                                                                                                             |       |       |       |       |       |
| 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.                                                                                                               |       | 1,782,000  |       | 2,673,000  |       |
|                                                                                                                                                                                                                                                                             |       |       |       |       |       |
| Note payable to Brookings County Railroad  Authority, due in semi-annual principal and interest installments of $36,885  at 5%, secured by railroad track assets. Note matures September 1, 2007.                                                                                |       | 203,158    |       | 264,462    |       |
|                                                                                                                                                                                                                                                                             |       |       |       |       |       |
| 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.                                                                                                                                                                   |       | 26,654     |       | 49,964     |       |
|                                                                                                                                                                                                                                                                             |       | 10,202,589 |       | 18,519,258 |       |
| Less current maturities                                                                                                                                                                                                                                                          |       | (1,216,438 | )          | (976,117   | )          |
|                                                                                                                                                                                                                                                                             |       |       |       |       |       |
| Totals                                                                                                                                                                                                                                                                           |       | $          | 8,986,151  |       | $          | 17,543,141 |   |
|                                                                                                                                                                                                                                                                                  |            |            |            |            |            |  |  |

 

The Company entered into an agreement as of June 17,2004 with CoBank to amend and restate its Master Loan Agreement (MLA), whichincludes both the revolving term loan and the seasonal loan discussed in Note8.  Under the terms and conditions of theMLA, CoBank agreed to make loans to the Company for up to $18,400,000. The availablecommitment decreases in scheduled periodic increments of $1,300,000.  The available commitment as of December 31,2004, was $17,100,000.

 

After the amendment to the loan agreement, the Company negotiated theminimum working capital level for future periods to be $6.0 million. Inaddition, its lender deferred the next two scheduled deductions to theavailable credit. The $1,300,000 reductions to the available credit will nowbegin in September 2005.  As of December31, 2004 the Company has working capital of greater than $6.0 million and is incompliance with its working capital covenant. Waivers for noncompliance were obtained at various interim periodsduring the year ended December 31, 2004.

 

(continued on next page)

 

F-18

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 
| **For the years ending December  31:** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| 2005                                   |       | $          | 1,216,438  |   |
| 2006                                   |       | 963,125    |       |
| 2007                                   |       | 75,886     |       |
| 2008                                   |       | 5,176      |       |
| 2009                                   |       | 1,241,964  |       |
| Thereafter                             |       | 6,700,000  |       |
|                                   |       |       |       |
| Total                                  |       | $          | 10,202,589 |   |

 

**NOTE 10 -     INCOME TAXES**

 

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

 

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

 

The provision (benefit) for income taxes were asfollows:

 
| ** **                                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                     |       |     |       |     |       |     |       |
| Federal income tax expense (benefit) at  statutory rates |       | $        | 1,032      |     | $          | (131,474 | )          | $ | 520,000 |   |
|                                                          |            |          |            |          |            |          |            |  |  |  |

 

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

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

 

The net book value of the Company’s assets exceeds the tax basis ofthose assets by approximately $12,330,000 at December 31, 2004.

 

(continued on next page)

 

F-19

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 11 -     EMPLOYEE BENEFIT PLANS**

 

The Company maintains a 401(k) plan for employees who meet theeligibility requirements set forth in the plan documents.  The Company matches a percentage of employees’contributed earnings.  The amountscharged to expense under this plan were approximately $58,000, $63,000, and$62,000 for the years ended December 31, 2004, 2003, and 2002, respectively.

 

The Company has a deferred compensation plan for key employees.  The agreements have benefits, which vest overa three-year period.  The Company shallmake five equal annual installments upon retirement of the employees.  The future payments have been discounted at8%.  The amount recognized as expenseduring the years ended December 31, 2004, 2003, and 2002 was $18,664, $30,237,and $21,064, respectively.  The Companymade payments of approximately $10,600 during 2004. Deferred compensation isrecorded at $129,345 and $121,301 as of December 31, 2004 and 2003,respectively.

 

**NOTE 12 -     COMMITMENTS**

 

The Company has operatingleases for 337 rail cars from GE Capital. The leases require monthly payments of $137,316.  The leases began in 1996 and haveeighteen-year terms.  The Company alsoleases 100 rail cars from Trinity Capital. This lease requires monthly payments of $38,300.  Lease expense for all rail cars was$2,068,015, $1,903,367, and $1,703,279 for the years ended December 31, 2004,2003, and 2002, respectively.  TheCompany generates revenues from the use of 299 of these rail cars on otherrailroads.  Such revenues were$1,794,012, $1,648,666, and $1,448,409 for the years ended December 31, 2004,2003, and 2002, respectively.

 

The Company has entered into a sub-lease agreementwith the Dakota, Minnesota & Eastern Railroad Corporation (“DME”) for thehopper rail cars that it leases from GE Capital.  The Company recognizes revenue from thissub-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 a number of other operatingleases for machinery and equipment. Rental expense under these other operatingleases was $197,864, $328,079, and $628,306 for the years ended December 31,2004, 2003, and 2002, respectively.

 

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

 
| ** **              | ** ** | **Rail Cars** | ** ** | **Other** | ** ** | **Total**  | ** ** |
|-------------------------|------------|---------------|------------|-----------|------------|------------|------------|
| Year ended December 31: |       |          |       |      |       |       |       |
| 2005                    |       | $             | 2,107,392  |      | $          | 41,315     |       | $ | 2,148,707 |   |
| 2006                    |       | 2,107,392     |       | 30,616    |       | 2,138,008  |       |
| 2007                    |       | 1,913,267     |       | 4,644     |       | 1,917,911  |       |
| 2008                    |       | 1,616,292     |       | —    |       | 1,616,292  |       |
| 2009                    |       | 1,616,292     |       | —    |       | 1,616,292  |       |
| Thereafter              |       | 11,010,294    |       | —    |       | 11,010,294 |       |
|                    |       |          |       |      |       |       |       |
| Totals                  |       | $             | 20,370,929 |      | $          | 76,575     |       | $ | 20,447,504 |   |

 

(continued on next page)

 

F-20

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

**NOTE 13 -     CASH FLOW INFORMATION**

 

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

 
| ** **                          | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| (Increase) decrease in assets:      |       |       |       |       |       |       |       |
| Trade accounts receivable           |       | $          | 6,078,874  |       | $          | (8,786,716 | )          | $ | (3,465,073 | ) |
| Inventories                         |       | 2,174,900  |       | 2,363,170  |       | (5,965,921 | )          |
| Margin account deposit              |       | (1,611,931 | )          | 1,114,848  |       | 187,654    |       |
| Prepaid expenses                    |       | (24,097    | )          | (33,442    | )          | (223,820   | )          |
|                                |       | 6,617,746  |       | (5,342,140 | )          | (9,467,160 | )          |
|                                |       |       |       |       |       |       |       |
| Increase (decrease) in liabilities: |       |       |       |       |       |       |       |
| Accounts payable                    |       | (766,834   | )          | 275,240    |       | 171,112    |       |
| Accrued commodity purchases         |       | 2,148,041  |       | 1,342,767  |       | 8,466,777  |       |
| Accrued expenses and interest       |       | 259,521    |       | (198,126   | )          | 277,226    |       |
| Deferred compensation               |       | 8,044      |       | 30,237     |       | 21,064     |       |
|                                |       | 1,648,772  |       | 1,450,118  |       | 8,936,179  |       |
|                                |       |       |       |       |       |       |       |
| Total                               |       | $          | 8,266,518  |       | $          | (3,892,022 | )          | $ | (530,981 | ) |

 

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

 

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

 
| ** **                | ** ** | **2004**             | ** ** | **2003**        | ** ** |
|---------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
|                      |       |                 |       |            |       |   |   |   |   |
| Cash and cash equivalents |       | $                    | 11,423     |            | $          | 11,423 |   | $ | 529,697 |   | $ | 529,697 |   |
|                      |       |                 |       |            |       |   |   |   |   |
| Margin deposits           |       | 1,424,422            |       | 1,424,422       |       | — |   | — |   |
|                      |       |                 |       |            |       |   |   |   |   |
| Long-term debt            |       | 10,202,589           |       | 10,095,955      |       | 18,519,258 |   | 18,370,381 |   |
|                           |            |                      |            |                 |            |  |  |  |  |  |  |  |  |

 

The carrying amount approximates fair value of cashand margin deposits.  The fair value oflong-term debt is based on current rates at which the Company could borrowfunds with similar remaining maturities. The carrying amount of accountsreceivable, accounts payable, investments, and accrued commodity purchasesapproximates their fair value.

 

(continued on next page)

 

F-21

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

**NOTE 15 -     RELATED PARTY TRANSACTIONS**

 

During August 2000, the Company entered into anagreement with Minnesota Soybean Processors Cooperative (MnSP) for certainservices and management of a proposed soybean processing plant.  The agreement provided the Company a fee of10% of the equity raised by MnSP for the Company’s services related to businessplanning and construction management services. Fees earned under thisarrangement were $126,250, $1,245,205, and $1,241,591 for the years endedDecember 31, 2004, 2003 and 2002, respectively. The Company agreed to reinvest a minimum of 80% of the fees earned fromMnSP in equity units of MnSP.  During2004, the Company exchanged a storage facility with a net book value of$2,322,561 as its reinvestment and paid cash of $600,931.

 

In addition, the Company has agreed to providemanagement and marketing services to MnSP on a cost-sharing basis.  The agreement is for automatically renewingfive-year periods beginning sixty days before the plant is scheduled to beginoperations.  Operations of the MnSP plantbegan in late 2003. The Company earned fees of $1,047,193 and $226,985 under thisarrangement for the years ended December 31, 2004 and 2003. As of December 31,2004 and 2003, MnSP owed the Company $74,338 and $3,635,318, respectively.

 

In addition, the Company is providing up to $1 millionin interest free loans, backed by members’ equity, available for members of theCompany who choose to invest in MnSP.  Asof December 31, 2004, the Company had outstanding notes receivable of$481,710.  These will be repaid as theBoard of Managers approves distributions of prior earnings.

 

**NOTE 16 -     BUSINESS CREDIT RISK**

 

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

 

The Company also grants credit to customers throughoutthe United States and Canada.  TheCompany evaluates each customer’s credit worthiness on a case-by-casebasis.  Accounts receivable are generallyunsecured.  These receivables were$17,480,118 and $23,804,867 at December 31, 2004 and 2003, respectively.

 

Soybean meal sales accounted for approximately 60% oftotal revenues for the year ended December 31, 2004, 58% of total revenues forthe year ended December 31, 2003, and 66% of total revenues for the year endedDecember 31, 2002.  Approximately 32%,37%, and 23% of these sales were made to one customer for the years endedDecember 31, 2004, 2003, and 2002, respectively.  At December 31, 2004 and 2003, this customerowed the Company approximately $1,024,000 and $3,534,000, respectively.  Refined oil sales represented approximately37% of total revenues for the year ended December 31, 2004, 30% of totalrevenues for the year ended December 31, 2003, and 11% of total revenues forthe year ended December 31, 2002.  Thesesales were primarily to one customer. This customer owed the Companyapproximately $6,791,000 and $6,516,000 at December 31, 2004 and 2003,respectively.

 

(continued on next page)

 

F-22

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

Net revenue by geographic area for the years endedDecember 31, 2004, 2003 and 2002 are as follows:

 
| ** **    | ** ** | **2004**   | ** **  | **2003**   | ** ** | **2002**    | ** ** |
|---------------|------------|------------|-------------|------------|------------|-------------|------------|
|          |       |       |        |       |       |        |       |
| United States | ** ** | $          | 225,511,056 |       | $          | 189,556,575 |       | $ | 140,597,284 |   |
| Canada        | ** ** | 12,700,000 |        | 17,700,000 |       | 18,900,000  |       |
|          |       |       |        |       |       |        |       |
| ** **    |       | $          | 238,211,056 |       | $          | 207,256,575 |       | $ | 159,497,284 |   |

 

**NOTE 17 -     STOCK OFFERING**

 

The Board of Directors approveda registration statement to be filed with the Securities and ExchangeCommission for the sale of additional units in a public offering.  The maximum offering under the statement willbe $11,250,000.  As of December 31, 2004the Company was waiting to commence sales of the capital units until the Securitiesand Exchange Commission declares the registration statement effective and theoffering is authorized or exempted by the regulatory authorities in therespective states where the offering is planned to occur.

 

**NOTE 18 -     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 disputes. We carry insurance that providesprotection against general commercial liability claims, claims against ourdirectors, officers and employees, business interruption, automobile liability,and workers’ compensation claims. Except as described below, we are notcurrently involved in any material legal proceedings and are not aware of anypotential claims.

 

On January 28, 2003, we were served with notice thatwe had been named as a defendant in a breach of contract suit in the circuitcourt of Cook County, Illinois, along with a number of other individualdefendants, including our Chief Executive Officer, Rodney Christianson. Theplaintiff, James Jackson, was an employee of USSC whose services wereterminated shortly after we became the majority owner in early January 2003.Mr. Jackson claims that he was wrongfully terminated and that the defendantsunjustly interfered with his employment contract and committed fraud inconnection with our acquisition of a controlling interest in USSC. He isclaiming nearly $1 million in compensatory damages and $5 million inpunitive damages. Based upon our investigation of the facts surrounding thecase, we believe that Mr. Jackson’s employment contract was not properlyauthorized and that his claims are substantially without merit. We arevigorously defending the action; however, we cannot provide any assurance thatwe will be successful in disposing of the case or that any costs of settlementor damages would not be material if we are unable to get the casedismissed.  We have entered intomediation negotiations with Mr. Jackson, but have not yet reached a settlementagreement.  Under the terms of our stockpurchase agreement with USSC, we believe that we would be entitled toindemnification from USSC for our costs to settle or defend the suit, althoughsince we now own 58% of USSC we will not receive dollar-for-dollarindemnification from USSC.

 

F-23

----

 

## **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM ON SCHEDULE**

 

The Board of Managers

South Dakota Soybean Processors, LLC

Volga, South Dakota

 

Under the date of March 1, 2005, we reported on theconsolidated balance sheet of South Dakota Soybean Processors, LLC as ofDecember 31, 2004, and the related consolidated statements of operations,members’ equity, and cash flows for the year then ended.  In connectionwith our audit of the aforementioned consolidated financial statements, we alsohave audited the related financial statement schedule as listed in theaccompanying index.  The financial statement schedule is theresponsibility of the Company’s management.  Our responsibility is toexpress an opinion on the financial statement schedule based on our audit.

 

In our opinion, such financial statement schedule,when considered in relation to the basic consolidated financial statementstaken as a whole, presents fairly, in all material respects, the informationset forth therein.

 

 

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

 
| /s/ Gordon,  Hughes & Banks, LLP |   |
|--------------------------------------|--------|
| Greenwood Village, Colorado          |
| March 1, 2005                        |

 

F-24

----

 

## **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM ON SCHEDULE**

 

The Board of Managers

South Dakota Soybean Processors, LLC

Volga, South Dakota

 

Under the date of January 23, 2004, we reported on theconsolidated balance sheets of South Dakota Soybean Processors, LLC as ofDecember 31, 2003, and the related consolidated statements of operations,members’ equity, and cash flows for each of the years in the two-year periodended December 31, 2003, as contained herein.  In connection with ouraudits of the aforementioned consolidated financial statements, we also haveaudited the related financial statement schedule as listed in the accompanyingindex.  The financial statement schedule is the responsibility of theCompany’s management.  Our responsibility is to express an opinion on thefinancial statement schedule based on our audits.

 

In our opinion, such financial statement schedule,when considered in relation to the basic consolidated financial statementstaken as a whole, presents fairly, in all material respects, the informationset forth therein.

 

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

 

F-25

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**FINANCIAL STATEMENT SCHEDULE**

 
| ** **                      | ** ** | **Balance at  Beginning of** | ** ** | **Charged  (Credited) to  Costs and  Expenses** | ** ** | ** **     | ** ** | **Balance at  End of** | ** ** |
|---------------------------------|------------|------------------------------|------------|-------------------------------------------------|------------|----------------|------------|------------------------|------------|
| **Description**                 | ** ** | **Period**                   | ** ** | **Additions**                                   | ** ** | **Deductions** | ** ** | **Period**             | ** ** |
|                            |       |                         |       |                                            |       |           |       |                   |       |
| Deducted from asset accounts:   |       |                         |       |                                            |       |           |       |                   |       |
| Year ended December 31, 2002:   |       |                         |       |                                            |       |           |       |                   |       |
| Allowance for doubtful accounts |       | $                            | 226,513    |                                            | $          | 60,000         |       | $                      | 13,182     |   | $ | 273,331 |   |
|                            |       |                         |       |                                            |       |           |       |                   |       |
| 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 |   |

 

F-26

----