**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

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

 

**For the fiscal year ended December 31,2007**

 

**o****        TRANSITIONREPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**COMMISSION FILE NO.  000-50253**

 

**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 Box500, Volga, South Dakota 57071**(Address of Principal Executive Offices)

 

**(605) 627-9240**(Registrant’s Telephone Number)

 

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

 

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

 

**CLASS A CAPITAL UNITS**

 

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.o  Yes      x  No

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.o  Yes      x  No

 

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

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained in this form, and no disclosurewill be contained, to the best of registrant’s knowledge, in definitive proxyor information statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of accelerated filer, large accelerated filer and smallerreporting company in Rule 12b-2 of the Exchange Act.

 

| o  Large Accelerated Filer |   | o  Accelerated Filer |   | o  Non-Accelerated Filer            |   | x  Smaller Reporting Company |
|--------------------------------------|--------|--------------------------------|--------|-----------------------------------------------|--------|----------------------------------------|
|                                 |   |                           |   | (do not check if a smaller reporting company) |   |                                   |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).  o  Yes      x  No

 

The aggregate marketvalue of the registrant’s common stock held by non-affiliates at June 30,2007 was approximately $41,152,650. The aggregate market value was computed byreference to the last sales price during the registrant’s most recentlycompleted second fiscal quarter.

 

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

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Part III of Form 10-K- Portions of the Information Statement for 2008 Annual Meeting of Members.

 

 

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**CAUTIONARY STATEMENT REGARDING****FORWARD-LOOKING INFORMATION**

 

This Annual Reporton Form 10-K and other reports issued by South Dakota Soybean Processors,LLC (including reports filed with the Securities and Exchange Commission (the “SEC”or “Commission”), contain “forward-looking statements” that deal with futureresults, expectations, plans and performance.  Forward-looking statementsmay include statements which use words such as “believe,” “expect,” “anticipate,”“intend,” “plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,”“future,” “potential,” or the negatives of these words, and all similarexpressions. These forward-looking statements are made based on ourexpectations and beliefs concerning future events affecting us and are subjectto uncertainties and factors relating to our operations and businessenvironment, all of which are difficult to predict and many of which are beyondour control, that could cause our actual results to differ materially fromthose matters expressed in or implied by these forward-looking statements. Wedo not undertake any responsibility to release publicly any revisions to theseforward-looking statements to take into account events or circumstances thatoccur after the date of this report. Additionally, we do not undertake anyresponsibility to update you on the occurrence of any unanticipated eventswhich may cause actual results to differ from those expressed or implied by theforward-looking statements contained in this report.  Important factors that could cause actualresults to differ materially from our expectations are disclosed under “RiskFactors” and elsewhere in this report. As stated elsewhere in this report suchfactors include, among others:

 

·              Changesin the weather or general economic conditions impacting the availability andprice of soybeans and natural gas;

 

·              Changesin business strategy, capital improvements or development plans;

 

·              Damage to or loss ofour facilities due to casualty, weather, mechanical failure or any extended orextraordinary maintenance or inspection that may be required;

 

·              The availability ofadditional capital to support capital improvements, development and projects;

 

·              Changesin perception of food quality and safety; and

 

·              Other factorsdiscussed under the item below entitled “Risk Factors.”

 

We are not under any duty to update the forward-looking statementscontained in this report. We cannot guarantee future results or performance orwhat future business conditions will be like. We caution you not to put unduereliance on any forward-looking statements, which speak only as of the date ofthis report.

 

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**PART I**

 

**Item 1.   Business.**

 

**Overview**

 

SouthDakota Soybean Processors, LLC (“we,” “us,” “our” or the “Company”) owns andoperates a soybean processing plant, a soybean oil refinery, and a bio-basedpolyurethane production facility in Volga, South Dakota. We are owned by 2,208members who principally reside in South Dakota and neighboring states.

 

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Our core business consists of processinglocally grown soybeans into soybean meal and soybean oil. Approximately 80% ofa bushel of soybeans (60 pounds) is processed into soybean meal or hulls, andthe remaining 20% is extracted as crude oil. We sell the soybean meal primarilyto resellers, feed mills, and livestock producers as livestock feed. We marketand sell multiple grades of soybean oil – crude, degummed, refined, refined andbleached, and a soy-based polyol.  Crudeoil is marketed to the food and biodiesel industries.  Under certain market conditions, we mayregister and deliver warehouse receipts for crude oil according to the termsand conditions of a CBOT soybean oil futures contract. Refined and refined andbleached oil are marketed to the food and biodiesel industries.  Our soy-based polyol, Soyol®, andits resin systems, are sold to the polyurethane industry.

 

We strive 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 continue to search for ways of improving on our efficiencies byanalyzing new methods of vertical integration, adding value to our products byinvesting in further processing of our products, and reviewing new applicationsfor our products in the plastics and energy fields. While it is our objectiveto maximize the issuance of cash distributions to our members from profitsgenerated through operations, we recognize the need to maintain our financialstrength by reinvesting for our future.

 

**General Development of Business**

 

We were originally organized as a South Dakota cooperative in 1993. Asa South Dakota cooperative, we were entitled to single-level, pass-through taxtreatment on income generated through our members’ patronage. This allowed usto pass our income onto our members in the form of distributions without firstpaying taxes at the company level, similar to a partnership. However, as wegrew, the continuing availability of this advantageous tax treatment becameless secure. Accordingly, in 2001 the cooperative’s board of directors approveda plan to reorganize into a South Dakota limited liability company, whichbecame effective on July 1, 2002. The transaction was an exchange ofinterests whereby the assets and liabilities of the cooperative weretransferred for capital units of the newly formed limited liability company,Soybean Processors, LLC. The capital units were distributed to our members upondissolution of the cooperative at a rate of one capital unit of the limitedliability company for each share of equity stock owned in the cooperative. Thedistribution of capital units to our members was registered under theSecurities Act of 1933, as amended. For financial statement purposes, no gainor loss was recorded as a result of the exchange transaction. Upon completionof the reorganization, the name of the limited liability company was changed toSouth Dakota Soybean Processors, LLC.

 

We began producing crude soybean oil, soybean meal and soybean hulls inlate 1996. Since then we have made significant capital improvements andexpanded our business to include the development of new, vertically integratedproduct lines and services. In 2002, we completed the construction of arefining facility and began refining crude soybean oil. In 2003, we became themajority owner and assumed management control of Urethane Soy Systems Company(USSC), a company to which we sell refined oil, Soyol® and Soyol®based polyurethane products, which, in turn, sells such products to itscustomers.  We hold a 66.74% equityinterest in USSC with the right to obtain additional interests upon theconversion of convertible subordinates notes issued to us since 2005. Inexchange for the notes, we have provided to USSC additional working capital. Ifwe elect to convert all of the convertible notes to equity, which we may do atany time,  we will hold up to a 90.13%equity interest in USSC.

 

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**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 generally refined for use as salad and cooking oil, baking and frying fat,and to a more limited extent, for industrial uses. Increasingly, the sale ofsoybean oil for human consumption is impacted by the regulation of trans-fat,an ingredient in soybean oil. In 2006, for example, the U.S. Food and DrugAdministration introduced labeling rules which require food processors todisclose levels of trans-fatty acids contained in their products. In addition,various local governments in the U.S. have enacted, or are consideringenacting, restrictions on the use of trans-fats in restaurants. Because ofthis, many food manufacturers have either switched or indicated an intention toswitch to edible oil products with lower levels of trans-fatty acids.

 

Soybean production is concentrated in the central U.S., Brazil, Chinaand Argentina. In the 2007 harvest season, the U.S. produced approximately 2.6billion bushels of soybeans or approximately 31.8% of estimated worldproduction. The USDA estimates that approximately 60% of soybeans produced inthe U.S. are processed domestically, 38% are exported as whole soybeans, and 2%are retained for seed and residual use. Historically, there has been adequatesoybean production in the upper Midwest to supply the local soybean processingindustry. In 2007, for example, farm producers in South Dakota produced 134million bushels of soybeans, compared to the top five states which produced thefollowing:

 

| **State** | ** ** | **Production (bushels)** |
|-----------|------------|-------------------------------|
| Iowa      |       | 439 million                   |
| Illinois  |       | 350 million                   |
| Minnesota |       | 252 million                   |
| Indiana   |       | 211 million                   |
| Nebraska  |       | 194 million                   |

 

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 44 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 90% ofdomestic oil production is used in food applications and 10% in industrialapplications.

 

Soybean crushing and refining margins are cyclical, characteristic of amature, competitive industry. While the price of soybeans may fluctuatesubstantially from year to year, the prices of meal and oil generally track thatof soybeans, although not necessarily on a one-for-one basis; therefore,margins can be variable.

 

The soybean industry continues diligently to introduce soy products asbio-based substitutes for various petroleum-based products. Such productsinclude biodiesel, soy ink, lubricants, candles and plastics. Biodiesel usagehas increased as a substitute for standard, petroleum-based diesel fuel, beingmade from approximately 90% vegetable oil (such as soybean oil) or animal fatand 10% alcohol (methanol). Today, the U.S. biodiesel industry is in a state offlux; therefore, annual output is difficult to 

 

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predictor rely upon in the short-term.  The U.S.biodiesel industry is also overbuilt in terms of production capacity relativeto the potential supply of vegetable oil and animal fats.

 

**Products & Services**

 

*Soybean Processing*

 

We process soybeans at our crushing plant to extract the soybean oilfrom the protein and fiber portions of the soybean. Approximately 80% of asoybean bushel is processed and sold as soybean meal or hulls. Our meal andhulls are shipped out by truck and rail car. Primary markets for meal and hullsinclude the local markets within 200 miles of our facility, the Western U.S,and Canada. The remaining percentage of the soybean is extracted as crudeoil.  Crude oil is marketed to the foodand biodiesel industries.  Under certainmarket conditions, we may register and deliver warehouse receipts for crude oilaccording to the terms and conditions of a CBOT soybean oil futures contract.

 

We have the capability to process a degummed oil, a refined oil,refined and bleached oil, and a soy-based polyol at our facility in Volga,South Dakota.  In 2007, we produced 240million pounds of refined oil, the majority of which was sold to ACH FoodsCompanies, Inc. of Memphis, Tennessee, under the terms of a supplyagreement. The remainder was sold to various biodiesel production companies inthe Midwest. In August 2008, our agreement with ACH Foods will terminateat which time we will need to locate new customers for the sale of our refinedoil.

 

Forfiscal years ended December 31, 2007, 2006 and 2005, revenues from thesale of soybean meal, hulls, crude oil, refined oil and refined and bleachedoil were approximately 99.2%, 99.8% and 99.8% of total revenues, respectively.

 

*Polyurethane*

 

We produce a bio-based polyol, Soyol®, which is used inindustrial applications for the polyurethane industry.  Soyol® is made from speciallyrefined crude soybean oil, and is a key chemical compound that, upon reactionwith other ingredients, forms polyurethane plastics. Soyol® isa renewable replacement for petrochemical based polyols. Polyurethanes are usedin a variety of products such as insulation in buildings and appliances;seating; carpet backing and padding; shoe soles; roof coatings; mattresses andpillows; rigid panels; and bumpers and interiors in cars, tractors and trucks.We sell Soyol® to USSC which, in turn, markets and sells to itscustomers Soyol® and polyurethane resin systems incorporating Soyol®.  Our resin systems include a spray-oninsulation product called SoyThermTM and a spray-based coating product forvarious applications (such as bedliners) called BioTuffTM.

 

Soyol® and Soyol®-based resin systems arerelatively new in the market, having undergone significant research anddevelopment in recent years. In 2007, we made significant progress in this areawhen Ford Motor Company announced in partnership with Lear Corporation that itwould begin incorporating Soyol® into the seat cushions of the 2008Ford Mustang.  For fiscal years ended December 31,2007, 2006 and 2005, however, our revenues from the sale of Soyol®and Soyol® based resin systems were approximately 0.4%, 0.2% and0.2% of total revenues, respectively.

 

We have exclusive rights to supply Soyol® to USSC until 2014and have agreed not to sell it to any other company in the plastics industry.

 

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**Raw Materials and Suppliers**

 

We procure soybeans from local soybean producers and elevators. In2007, soybean production in South Dakota was approximately 133.5 millionbushels, compared to 130.9 in 2006 and 134.7 million bushels in 2005. Of thisamount, we processed 26.6 million bushels of soybeans in 2007, compared to 27.8million in 2006 and 28.0 million in 2005. We control the flow of soybeans intoour facilities with a combination of pricing and contracting options. Threatsto the soybean supply include weather, changes in government programs, andcompetition from other processors and export markets. Our refining plant andpolyurethane production receive the substantial majority of crude soybean oilsupply from our crushing plant.

 

##### **Utilities**

 

We use natural gas and electricity to operate the crushing and refiningplants. Natural gas is used in the boilers for processing heat and for dryingsoybeans. NorthWestern Corporation of Sioux Falls, South Dakota, provides forthe delivery of natural gas to us on an interruptible basis. We are at risk toadverse price fluctuations in the natural gas market, but we have thecapability to use fuel oil and biofuel as a back up for natural gas if deliveryis interrupted or market conditions dictate. We also employ forward contractingto offset some of this risk. Our electricity is supplied by the City of Volga,South Dakota.

 

**Employees**

 

We currently employ approximately 101 individuals, all but 13 of whomare full-time. We have no unions or other collective bargaining agreements.

 

**Sales, Marketing and Customers**

 

Our soybean meal is primarily sold to resellers, feed mills, andlivestock producers as livestock feed. Our meal market is local (typicallywithin 200 miles of our Volga facility), Western U.S., and Canada. Twosignificant meal customers are Commodity Specialists of Minneapolis, Minnesota,and Shawnee Mission, Kansas, and Archer Daniels Midland Company of Mankato,Minnesota, Lincoln, Nebraska, and several other locations.  Our primary refined oil market is an ACHFoods’ facility in Illinois and biodiesel companies located in neighboringstates. Most of our products are shipped by rail, the service of which is providedby the Dakota, Minnesota and Eastern (DM&E) rail line, with connections tothe Burlington-Northern Santa Fe (BNSF) and the Union Pacific (UP) rail lines.The table presented below represents the percentage of sales by quantity ofproduct sold within various markets for 2007.

 
| ** **         | ** ** | **Soybean Meal** | ** ** | **Crude  Soybean  Oil** | ** ** | **Refined Oil** | ** ** |
|--------------------|------------|-----------------------|------------|-------------------------|------------|----------------------|------------|
|               |       |                  |       |                    |       |                 |       |
| Local              |       | 29                    | %          | 40                      | %          | 22                   | %          |
| Other U.S.  States |       | 53                    | %          | 59                      | %          | 78                   | %          |
| Export             |       | 18                    | %          | 1                       | %          | 0                    | %          |

 

Allof our operations are domiciled in the U.S.  All of the products sold toour customers for fiscal years 2007, 2006 and 2005 were produced in the U.S.,and all of our long-lived assets are domiciled in the U.S. In addition, 90% oftotal revenues in 2007 were derived from sales to customers in the U.S., and10% was derived from sales to customers in Canada.

 

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**Dependence upon a Single Customer**

 

We currently sell a majority of our refined soybean oil to ACH FoodsCompanies, Inc., under the terms of a supply agreement.  Pricing is fixed until August 31, 2008,when our agreement with ACH will terminate. While sales to ACH may still occur in a bid-offer situation after thetermination of the agreement, we may need to locate new customers for oursoybean oil. If we are unable to locate new customers for our soybean oil, oron terms as favorable with ACH Foods, our business could be materially harmed.

 

**Competition**

 

We are in direct competition with several other soybean processingcompanies in the U.S., many of which have significantly greater resources thanwe do. The U.S. soybean processing industry is comprised primarily of 16different companies operating 64 plants in the U.S. It is a mature,consolidated and vertically-integrated industry with four companies controllingnearly 84% of the processing industry. Those four companies are Archer DanielsMidland (ADM), Bunge, Cargill and Ag Processing (AGP). The U.S. vegetable oil(including soybean oil) refining industry is divided between oilseed processorsand independent vegetable oil refiners. The oilseed processors operateapproximately 83% of the vegetable oil refining capacity in the U.S., and ADM,Bunge, Cargill and AGP operate approximately 68% of the oil refining capacity.The three largest independent vegetable oil refiners are ACH Foods, Smuckers(Proctor & Gamble), and ConAgra (Hunt-Wesson).

 

We are the only significant hexane extraction and processing plant inSouth Dakota, and we believe that we have approximately 7% of the soybeanprocessing capacity in the upper Midwest and about 1.5% in the U.S.  Weplan to maintain our competitive position in the market by producing highquality products and operating a highly efficient operation at the lowestpossible cost, and adding value to our products. We plan to increase our costefficiency by adding value to our products by investing in further processingof our products, and developing and reviewing new applications for our productsin the plastics and energy fields.

 

According to the American Chemistry Council’s “2006 End Use MarketSurvey on the Polyurethanes Industry,” the primary competitors in soy-basedpolyols are USSC, Biobased Technology, Dow Chemical Co., and Cargill Inc.  While companies such as Arkema, Bioplasticsand Pelron also produce soy-based polyols, they are not viewed as significantcompetitors in this market at this time. We believe that USSC has positioned its soy-based polyols to serve asthe highest replacement for petroleum-based polyols, and at the lowest price.  In addition, USSC faces strong competitionfrom suppliers in the eight billion pound polyurethane NAFTA market, namelyBASF, Bayer, Dow Chemical and Huntsman, each of which has significantly greaterresources than we or USSC.

 

**Government Regulation and Environmental Matters**

 

The recovery of hexane, a special-use solvent used to extract oil fromsoybeans, is closely monitored by the U.S. Environmental Protection Agency. TheEnvironmental Protection Agency requires that the amount of hexane lost in theextraction process not exceed 0.2 gallons per ton of soybean oil produced on arolling 12-month average. Our production process meets this requirement as ofthis date.

 

As part of a Compliance Plan with the South Dakota Departments ofEnvironment and Natural Resources, we have a zero process discharge system andare currently in compliance with our surface 

 

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

 

**Available Information**

 

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K, and amendments to reports filed pursuant tothe Securities Exchange Act of 1934, as amended, are filed with the SEC.  Such reports and other information filed byus with the SEC are available on the SEC website (www.sec.gov). The public mayread and copy any materials filed by us with the SEC at the SEC’s PublicReference Room at 100 F Street, NE, Room 1580, Washington, DC 20549.The public may obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site thatcontains reports, proxy, and information statements and other informationregarding issuers that file electronically with the SEC at www.sec.gov. Thecontents of these websites are not incorporated into this filing. Our websiteis found at www.sdsbp.com.

 

**Item 1A.   RiskFactors.**

 

**Risks Relating to Operations**

 

***Higher than anticipated operatingcosts, including but not limited to increased prices for soybeans, could reduceour profitability.***In addition to general market fluctuations and economic conditions, we couldexperience significant cost increases associated with the ongoing operation ofour soybean processing and refining plant or our interest in USSC caused by avariety of factors, many of which are beyond our control. These cost increasescould arise from an inadequate local supply of soybeans and resulting increasedprice that is not accompanied by an increase in the price for soybean oil andmeal.  Labor costs can also increase overtime, particularly if there is any shortage of labor, or shortage of personswith the skills necessary to operate our facility. Adequacy and cost ofelectric and natural gas utilities could also affect our operating costs.Changes in price, operation and availability of truck and rail transportationmay affect our profitability with respect to the transportation of soybeanmeal, oil and other products to our customers.

 

***We may find it more difficult to obtain in thefuture an adequate supply of soybeans at reasonable prices if the renewablefuels industry continues to grow.***To accommodate the rapid growth in the ethanol industry, additionalacres of corn are expected to be planted in the U.S. in the future. As aresult, fewer acres of land may be available for the planting of soybeans. Iffewer acres are available, this will reduce the supply of soybeans and possiblyincrease the prices. An increase in the price of soybeans could increase ourcosts of production and have an adverse effect on our result of operations andfinancial condition.

 

***Our operating results could sufferif we are unable to find new customers for our oil.***Our supply agreementwith ACH Foods Company, Inc., a customer that purchases the majority of our refined oil, terminatesin August 2008. While sales to ACH Foods may still occur after terminationof the 

 

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agreement,we may need to find new customers for our soybean oil. There are no assurances,however, that we will be able to find new customers or, if we find newcustomers, on contractual terms favorable to us. It may be difficult to sellour oil, or it may be necessary to sell our oil at discounted prices whichcould materially affect our revenues and profits.

 

***It may become more difficult to sell our soybeanoil for human consumption. ***In 2006, new U.S. Food and DrugAdministration labeling rules took effect which require food processors todisclose levels of trans-fatty acids contained in their products. In addition,various local governments in the U.S. are considering, and some have enacted,restrictions on the use of trans-fats in restaurants. Several food processorshave either switched or indicated an intention to switch to edible oil productswith lower levels of trans-fatty acids.  Becauseprocessing soybean oil, particularly hydrogenation, creates transfat, it may bemore difficult to sell our oil to customers engaged in the food industry whichcould adversely affect our revenues and profits.

 

***We have made significant investmentsin USSC, which has a history of operating losses.***We are the majority owner of USSC, adevelopmental stage company engaged primarily in research and development ofSoyol® and Soyol® based resin systems. To date, USSC hasgenerated limited revenues and significant losses. If USSC is unable to achieveprofitable operations, our operations overall will be adversely affected,consequently diminishing the value of our investment in USSC.

 

The ability to commercialize Soyol® will depend upon, amongother things, the performance of the product as compared to alternativepolyols, successful completion of ongoing development activities, the abilityto market the product, and the relative cost to the customer of Soyol®as compared to alternative polyols.  IfSoyol® is not successfully commercialized and fails to achievemarket acceptance, USSC will likely not achieve or sustain profitableoperations and we may be required to abandon or reduce our investment inUSSC.

 

***The success of our ownership in USSCis dependent upon market acceptance of Soyol*****®*****.***USSC’s future success, if any, issignificantly dependent on the acceptance of Soyol® in the marketsto which Soyol® is targeted. Since Soyol® introduction in 1998, USSC has had limitedsuccess in marketing to manufacturers the use of Soyol® as areplacement for petroleum-based polyols. Common acceptance of USSC’s technologyis dependent upon among other things, the ease of use, reliability, price andincreased consumer demand for bio-based products. Even if the advantages ofSoyol® are established, we are unable to predict how quickly, ifever, Soyol® will be generally accepted by manufacturers as asubstitute for petroleum-based polyols.

 

***Hedging transactions involve risksthat could harm our profitability.***To reduce our price change risks associatedwith holding fixed price commodity positions, we generally take opposite andoffsetting positions by entering into commodity futures contracts (either astraight futures contract or an options futures contract) for soybeans, soybeanmeal and crude soybean oil on the Chicago Board of Trade. While hedgingactivities reduce our risk of loss from changing market values, such activitiesalso limit the gain potential which otherwise could result from those marketfluctuations. Our policy is to maintain hedged positions within limits, but wecan be long or short at any time. In addition, at any one time, our inventoryand purchase contracts for delivery to the plant may be substantial, whichcould limit our ability to adjust our hedged positions. If our risk managementpolicies and procedures that guide our net position limits are inadequate, wecould suffer adverse financial consequences.

 

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***We are dependent on our managementand other key personnel, and loss of their services may adversely affectour business.***Oursuccess and business strategy is dependent in large part on our ability toattract and retain key management and operating personnel. This can presentparticular challenges for us because we operate in a specialized industry andbecause our business is located in a rural area. Such individuals are in highdemand and are often subject to competing employment offers in the agriculturalvalue-added industries. In particular, our success is dependent on our abilityto retain the services of Mr. Christianson, our CEO, and Mr. Kersting,our Commercial Manager. The loss of the services of Messrs. Christiansonor Kersting or the failure of such individuals to perform their jobfunctions in a satisfactory manner, would have a material adverse effect on ourbusiness operations and prospects.

 

**Risks Relating to Industry**

 

***We operate in an intenselycompetitive industry and we may not be able to continue to competeeffectively.***Wemay not be able to continue to penetrate successfully the markets for ourproducts. The soybean processing business is highly competitive, and othercompanies presently in the market, or that could enter the market, couldadversely affect prices for the products we sell. We compete with other soybeanprocessors such as Archer-Daniels Midland (ADM), Cargill, Bunge, and AgProcessing (AGP), among others, all of which are capable of producingsignificantly greater quantities of soybean products than we do, andmay achieve higher operating efficiencies and lower costs due to theirscale.  In addition, we compete withcompanies who use petroleum based polyols in the polyurethane productmanufacturing process, including BASF, Bayer, Dow Chemical, and Huntsman. Wealso face competition with companies who are using soy-based polyoltechnologies in the polyurethane industry including Biobased Technology, DowChemical, and Cargill. The major companies have longer operating histories,greater name recognition, larger customer bases and greater financial,marketing and public relations resources, which may make it difficult for us toenter the market and become profitable in our sale of Soyol® andSoyol®-based resin systems.

 

***To produce soybean oil and meal, wemust purchase significant amounts of soybeans, which are subject to disease andother agricultural risks.***Production of soybean oil and meal at our facilities  requires significant amounts of soybeans.Soybeans, like other crops, are affected by weather conditions. A significantreduction in the quantity of soybeans harvested due to adverse weatherconditions, disease or other factors could result in increased soybean costswith adverse financial consequences to our operations. Significant variationsin actual growing conditions from normal growing conditions may adverselyaffect our ability to procure soybeans for the plant. We also have nodefinitive agreements with any soybean producers to provide soybeans to our facilities.

 

***The detection and spread of theAvian Flu virus into the U.S. could adversely affect our sales of soybean meal.***The spread of theAvian Flu virus, otherwise known as the “bird flu virus,” has adverselyaffected the poultry industries globally, particularly in Asia, the Middle Eastand Europe. In effort to combat the virus, several countries in the past haveexterminated large quantities of poultry, which consequently has reduced thedemand for poultry in these countries. While the virus has not been detected inthe U.S., many experts predict that the virus will eventually appear. If itdoes appear, the supply and demand for poultry is likely to decline in theU.S. Because soybean meal is a feed product for the poultry industry, anysignificant decline in the supply and demand for poultry in the U.S. couldadversely affect the demand for soybean meal.  As a result, our salesof soybean meal and financial operations could be adversely affected by thedetection and spread of this virus.

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***Our profitability is influenced bythe protein and moisture content of the soybeans in the local growing area.***The northern portion of the western soybeanbelt, where our plant is located, typically produces a lower protein soybeanresulting in a lower protein soybean meal. Because lower protein soybean mealis sold at a lower price, we may not be able to operate as profitably assoybean processing plants in other parts of the country. If adverse weatherconditions further reduce the protein content of the soybeans grown in ourarea, our business may be materially harmed because we will be required tosell our soybean meal at discounted prices to our customers.

 

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

 

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

 

***Because soybean processing andrefining is energy intensive, our business will be materially harmed if naturalgas and electricity prices increase substantially.***Historically**,****natural gas and electricity prices have fluctuated significantly. Anysignificant increase in the price of natural gas or electricity will increaseour energy costs and therefore harm our business.

 

***Transportation costs are a factor inthe price of soybean oil and meal and increased transportation costs couldadversely affect our profitability.*** Soybean oil may be shipped by trucks,rail cars, and barges. Added transportation costs are a significant factor inthe price of soybean oil, and we may be more vulnerable to increases intransportation costs than other producers because our location in Volga is moreremote than that of most of our competitors. Today, most of our products are soldFOB Volga, South Dakota, and those that are not have the full transportationcost added to the contract. Transportation costs do not currently affect ourmargin directly; however, the added costs could eventually affect demand forour products.

 

***Increases in the production ofsoybean meal or refined and bleached soybean oil could result in lower pricesfor soybean meal or refined and bleached soybean oil and have other adverseeffects.***Existingsoybean processing and refining plants could construct additions to increasetheir production and new soybean processing and refining plants could beconstructed as well. If there is not a corresponding increase in the demand forsoybean meal and oil or if the increased demand is not significant, theincreased production of soybean meal and oil may lead to lower prices forsoybean meal and oil. The increased production of soybean meal and oil couldhave other adverse effects as well. For example, the increased production ofsoybean meal and oil could result in increased demand for soybeans which couldin turn lead to higher prices for soybeans, resulting in higher costs ofproduction and lower profits if we are not able to lock in satisfactory marginson future soybean purchases and soybean meal and oil sales.

 

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**Risks Relating to Legal and Regulatory Risks**

 

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

 

Although our production of refined and bleached soybean oil and soybeanmeal is not directly regulated by the Food & Drug Administration, wemust comply with the FDA’s content and labeling requirements, which aremonitored at our customers’ facilities. Failure to comply with theserequirements could result in fines, liability to our customers or otherconsequences that could increase our operating costs and reduce profits. Inaddition, changes to the FDA’s rules or regulations could be adopted thatwould increase our operating costs and expenses, or require capital investment.

 

***We could face increased operatingcosts if we were required to segregate genetically modified soybeans and theproducts generated from these soybeans.***In the last several years, some soybeanproducers in our area have been planting genetically modified soybeans, commonlyknown as Round-up Ready beans. Neither the U.S. Department of Agriculture northe FDA currently requires that genetically modified soybeans be segregatedfrom other soybeans. If these agencies or our customers were to require that weprocess these genetically modified soybeans separately, we would face increasedstorage and processing costs and our profitability could be harmed

 

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

 

Weconduct our operations principally at our facility in Volga, South Dakota. Weown the land, consisting of 47 acres, on which all of the infrastructure andphysical properties rest. Our facilities consist of a soybean processing plant,a soybean oil refinery, a bio-based polyurethane production facility, a qualitycontrol laboratory, and administrative and operations buildings.

 

All of our tangible property, real and personal, serves as collateralfor our debt instruments with our primary lender, CoBank, ACB, of GreenwoodVillage, Colorado, which is described below under “Item 7—****Management’s Discussion and Analysis ofFinancial Condition and Results of Operation—Indebtedness.”

 

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

 

Fromtime to time in the ordinary course of our business, we may be named as adefendant in legal proceedings related to various issues, including withoutlimitation, workers’ compensation claims, tort claims, or contractual disputes.We carry insurance that provides protection against general commercialliability claims, claims against our directors, officers and employees,business interruption, automobile liability, and workers’ compensation claims.Except as described below, we are not currently involved in any material legalproceedings and are not aware of any potential claims.

 

OnJanuary 31, 2007, we were named as a defendant in a lawsuit filed in theU.S. District Court for the District of Minnesota, along with other individualdefendants, including our chief executive officer, Rodney Christianson,commercial manager, Tom Kersting, and Board member, Dan Feige, and 

 

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formerboard member, Rodney Skalbeck. The plaintiffs, Transocean Group Holdings PTYLtd. and Transocean Global Biofuels PTY Ltd., of Sydney, Australia (“Transocean”),allege that we breached a heads of agreement with Transocean dated April 28,2006.  The heads of agreement concernedthe potential development and operation of a biodiesel refinery through acompany called High Plains Biofuels, Inc., to be owned by us andTransocean as shareholders. Transocean alleges that the individual defendantsbreached fiduciary duties to High Plains Biofuels. Transocean is seeking reliefby way of specific performance on the heads of agreement, or, alternatively,its expectation damages which is unknown at this time.  Based upon our investigation of the factssurrounding the case, we believe that Transocean’s allegations are meritless,and we are vigorously defending the action. We filed an answer to Transocean’scomplaint on September 17, 2007. Transocean filed an amended complaint on January 18,2008 to which we filed an answer on February 7, 2008.  A tentative trial date has been set for February 2009.We cannot provide, however, any assurance that we will be successful indisposing of the case or that any costs of settlement or damages would not bematerial if we are unable to get the case dismissed.

 

OnDecember 31, 2007, an arbitration demand was filed against us with theAmerican Arbitration Association. The plaintiffs, John Wawak, Ed Kurth, JohnKurth, Rich Kurth, Ed Kurth (Executor for the Estate of Bruce Kurth), allegethat we breached a stock purchase agreement dated December 10, 2002. Thestock purchase agreements relates to our purchase of the plaintiffs’ interestsin USSC. We have withheld approximately $1.01 million under an indemnificationclause in the agreement, of which $621,191 is recorded as long-term debt as of December 31,2007. The plaintiffs claim that they are entitled to the original payments infull under the agreement. Based upon our investigation of the facts surroundingthe case, we believe that we did not breach the agreement or owe any money tothe plaintiffs. The arbitration hearing is expected to be held on May 28,2008.

 

**Item 4. ****                     ****Submission of Matters to aVote of Security Holders.**

 

There were no matters submitted to a vote of security holders in thefourth quarter ending December 31, 2007.

 

**Part II**

 

**Item 5. ****                     ****Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities.**

 

As of March 1, 2008, the total number of capital units outstandingis 30,419,000, all of which is owned and held by 2,208 members.

 

*Trading Activity*

 

Our capital units are not traded on an established trading market suchas a stock exchange or The NASDAQ Stock Market.  Rather, our capital unitsare traded on a “qualified matching service” as defined by the publicly-tradedpartnership rules of the federal tax code. Under the qualified matchingservice, interested buyers and sellers of our capital units are matched on thebasis of rules and conditions set forth by the federal tax code, and alltrades are subject to final approval by our board of managers. Our qualifiedmatching service is operated through Variable Investment Advisors, Inc.,of Sioux Falls, South Dakota, a registered broker-dealer operating an SECregistered Alternative Trading System.  The following table containshistorical information by quarter for the past two years regarding the tradingof capital units through the qualified matching service:

 

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| **Quarter**          | ** ** | **Low Price   (1)** | ** ** | **High Price   (1)** | ** ** | **Average   Price** | ** ** | **# of   Capital   Units Traded** | ** ** |
|----------------------|------------|-------------------------------|------------|--------------------------------|------------|--------------------------|------------|-------------------------------------------------------|------------|
| First Quarter  2006  |       | $                             | 1.22       |                           | $          | 1.27                     |       | $                                                     | 1.25       |   | 21,000 |   |
| Second Quarter  2006 |       | $                             | 1.29       |                           | $          | 1.32                     |       | $                                                     | 1.30       |   | 76,000 |   |
| Third Quarter  2006  |       | $                             | 1.32       |                           | $          | 1.60                     |       | $                                                     | 1.45       |   | 152,250 |   |
| Fourth Quarter  2006 |       | $                             | 1.43       |                           | $          | 1.49                     |       | $                                                     | 1.46       |   | 92,000 |   |
| First Quarter  2007  |       | $                             | 1.45       |                           | $          | 1.50                     |       | $                                                     | 1.47       |   | 120,000 |   |
| Second Quarter  2007 |       | $                             | 1.40       |                           | $          | 1.60                     |       | $                                                     | 1.52       |   | 70,500 |   |
| Third Quarter  2007  |       | $                             | 1.25       |                           | $          | 1.40                     |       | $                                                     | 1.33       |   | 39,000 |   |
| Fourth Quarter 2007  |       | $                             | 1.16       |                           | $          | 1.35                     |       | $                                                     | 1.25       |   | 51,500 |   |

 

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(1)          The rules under ourqualified matching service prohibit firm bids; therefore, the prices reflectactual sales**.**

 

There were no issuer purchases of equity securities during the fourthquarter ending December 31, 2007.

 

*Trading and Transfer Restrictions*

 

As a limited liability company, we must strictly restrict transfers ofour capital units in order to preserve our preferential single-level tax statusat the member level. To preserve this, our operating agreement prohibitstransfers other than through the procedures specified under our capital unitstransfer system, which may be amended from time to time by our board ofmanagers. Under this system, our capital units cannot be traded on any nationalsecurities exchange or in any over-the-counter market. Also, we do not permitthe number of capital units traded through the qualified matching service on anannual basis to exceed 10% of our total issued and outstanding capital units.All transactions also must be approved by the board, which are generallyapproved if they fall within “safe harbors” contained in the rules of thefederal tax code. Permitted transfers include transfers by gift or death, salesto qualified family members, and trades through the qualified matching servicesubject to the 10% restriction. Pursuant to our operating agreement, a minimumof 2,500 capital units is required to be owned by an individual for membership,and no member may own more than 1.5% of our total outstanding capital units.

 

*Distributions*

 

In 2006, we made no cash distributions to our members. In 2007, we paida cash distribution to our members of $6.4 million (approximately 21.0¢ percapital unit).

 

On February 20, 2008, our Board of Managers approved cashdistributions of approximately $3.8 million. In accordance with our operating agreement and distribution policy, thedistributions were or are to be issued to our members as well as to eligiblepersons of our predecessor cooperative who were subject to patronage retainagethrough written notices of allocation. Over $2.4 million (approximately 7.7¢ per capital unit) was distributedto our members on February 28, 2008, and the distribution to eligiblepersons of our predecessor cooperative is expected to be paid and issued on orabout April 30, 2008.

 

Our distributions are declared at the discretion of our board ofmanagers and are issued in accordance with the terms of our operatingagreement.  There is no assurance as toif, when, or how much we will make in distributions. Actual distributionsdepend upon our profitability, expenses and other factors discussed in thisreport.

 

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**  Item6.****                  ****Selected****Financial Data.**

 

Thefollowing table sets forth selected financial data of South Dakota SoybeanProcessors, LLC for the periods indicated. The financial statements included inItem 8 of this report were audited by Gordon, Hughes & Banks, LLP.

 
| ** **                                     | ** ** | **2007**     | ** **  | **2006**     | ** ** | **2005**     | ** ** | **2004**     | ** **  | **2003**     | ** ** |
|------------------------------------------------|------------|--------------|-------------|--------------|------------|--------------|------------|--------------|-------------|--------------|------------|
|                                           |       |         |        |         |       |         |       |         |        |         |       |
| Bushels  Processed                             |       | 26,649,061   |        | 27,775,724   |       | 28,003,640   |       | 26,823,093   |        | 28,384,272   |       |
|                                           |       |         |        |         |       |         |       |         |        |         |       |
| **Statement  of Operations Data:**             |       |         |        |         |       |         |       |         |        |         |       |
| Revenues                                       |       | $            | 247,741,767 |         | $          | 212,721,926  |       | $            | 210,370,966 |         | $          | 238,211,056 |   | $ | 207,256,575 |   |
| Costs &  Expenses:                    |       |         |        |         |       |         |       |         |        |         |       |
| Cost of goods  sold                            |       | (240,701,417 | )           | (203,525,766 | )          | (209,992,802 | )          | (232,703,866 | )           | (203,022,360 | )          |
| Marketing &  Admin Expense            |       | (3,938,405   | )           | (3,487,773   | )          | (3,826,823   | )          | (4,476,511   | )           | (3,639,442   | )          |
| Operating Profit  (Loss)                       |       | 3,101,945    |        | 5,708,387    |       | (3,448,659   | )          | 1,030,679    |        | 594,773      |       |
| Non-Operating  Income                          |       | 3,157,147    |        | 2,574,350    |       | 840,489      |       | 408,022      |        | 3,013,135    |       |
| Interest Expense                               |       | (2,105,676   | )           | (629,070     | )          | (1,400,403   | )          | (1,425,849   | )           | (802,178     | )          |
| Income Tax  Expense                            |       | 7,160        |        | (2,308       | )          | —       |       | (1,032       | )           | 131,474      |       |
| Minority  Interest in Loss of Subsidiary       |       | —       |        | —       |       | 368,403      |       | 676,792      |        | 457,620      |       |
| Net Income  (Loss)                             |       | $            | 4,160,576   |         | $          | 7,651,359    |       | $            | (3,640,170  | )            | $          | 688,612 |   | $ | 3,394,824 |   |
|                                           |       |         |        |         |       |         |       |         |        |         |       |
| Weighted Average  Capital Units Outstanding(1) |       | 30,419,000   |        | 30,419,000   |       | 29,758,885   |       | 28,250,139   |        | 28,258,500   |       |
| Net Income  (Loss) per Capital Unit            |       | $            | 0.137       |         | $          | 0.252        |       | $            | (0.122      | )            | $          | 0.024 |   | $ | 0.120 |   |
|                                           |       |         |        |         |       |         |       |         |        |         |       |
| **Balance  Sheet Data:**                       |       |         |        |         |       |         |       |         |        |         |       |
| Working Capital                                |       | $            | 11,624,347  |         | $          | 11,951,704   |       | $            | 5,599,709   |         | $          | (2,865,135 | ) | $ | 9,499,231 |   |
| Net Property,  Plant & Equipment      |       | 24,267,041   |        | 25,526,402   |       | 27,756,941   |       | 30,130,219   |        | 31,825,619   |       |
| Total Assets                                   |       | 102,362,137  |        | 82,070,372   |       | 73,630,296   |       | 72,499,888   |        | 81,617,064   |       |
| Long-Term  Obligations                         |       | 12,022,549   |        | 12,007,955   |       | 14,712,635   |       | 9,115,496    |        | 17,664,442   |       |
| Members’ Equity                           |       | 38,383,991   |        | 40,409,808   |       | 32,768,497   |       | 32,122,573   |        | 34,730,590   |       |
|                                           |       |         |        |         |       |         |       |         |        |         |       |
| **Other  Data:**                               |       |         |        |         |       |         |       |         |        |         |       |
| Capital  Expenditures                          |       | $            | 1,002,652   |         | $          | 660,397      |       | $            | 600,739     |         | $          | 1,209,852 |   | $ | 1,016,849 |   |

 

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

 

**Item 7.****                        ****Management’s Discussion andAnalysis 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.*

 

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**Overviewand Executive Summary**

 

Our core business and primary source of income generation is oursoybean processing plant located in Volga, South Dakota. We processapproximately 28 million bushels of soybeans annually to produce approximately680 tons of high protein soybean meal and 310 million pounds of crude soybeanoil. This represents approximately 1.5% of total U.S. soybean processingcapacity. In addition to our processing plant, we operate a soybean oilrefinery in Volga which produces a partially refinedsoybean oil. The partially refinedsoybean oil is sold to an independent soybean oil food refiner and as afeedstock to industrial applications, such as plastics and biodiesel. Therefining operations provide us with an alternative for the marketing of soybeanoil as we can produce degummed oil, refined oil, refined and bleached oil and asoybean oil based polyol. Under certain market conditions, we may register anddeliver warehouse receipts for crude oil according to the terms and conditionsof a CBOT soybean oil futures contract.

 

Other activities that generate income, albeit small in scale, are ourinvestment in a soybean processing facility called Minnesota Soybean Processors(MnSP) and management and consulting agreements.

 

Soybean processing is basically a commodity driven business and iscyclical in nature. Our industry is dependent on the annual soybean cropproduction (supply side) and world economic growth (demand side for food).Soybean processing is also a highly consolidated industry with four companiesin the U.S. controlling 84% of the soybean processing industry and 68% of thesoybean oil refining capacity for food applications. We compete in thisindustry by producing high quality products and operating a highly efficientoperation at the lowest possible cost.

 

In efforts to increase the value of the products we produce, wecontinue to invest in our subsidiary, USSC, for the research, marketing anddevelopment of soy-based polyol and soy-based polyurethane systems. USSC’stechnical staff and research lab facilities are located in Volga. In 2007, USSC’smarketing focus included the auto industry which resulted in Ford MotorCompany, in partnership with Lear Corporation, deciding to incorporate Soyol®into the seat cushions of the 2008 Ford Mustang. Other focuses included sprayapplications for insulation, carpet rebound and padding, and polyurethanesystem houses.

 

We generated a net profit of $4.2 million for 2007 compared to a profitof $7.7 million for the same period in 2006, a decrease of $3.5 million, or$0.13 per bushel processed.  We attribute the decrease to three primaryfactors: a decrease of 1.1 million bushels processed, higher interest andadministrative expenses, and slightly lower crush margins.

 

Biofuels and industrial utilization of food products such as corn,soybeans and other crops open up new opportunities and challenges for us andour industry. Over the last 30 years, the soybean industry has been driven bythe world’s population and the capability to buy the food products producedfrom soybeans, meat and oil. As a result, the U.S. soybean industry experiencedan average growth rate of 1.0% to 2.0% annually. But increased demand forindustrial soybean oil utilization, such as for biodiesel and plastics, coulddrive soybean growth in the U.S. to approximately six percent annually. The impactof increased demand from these industries is likely to create market distortionand volatility for us in the short-term as we search for a new balance betweencompeting demands. Potentially offsetting new industrial demand for soybean oilare the perceived health concerns regarding the consumption of soybean oilcontaining *trans-fats,* which may weaken demand foroil. Our success during this period will 

 

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dependupon our ability to manage the price volatility and price relationships ofsoybeans and soybean products, as well as our ability to adapt to technologicaladvances in corn and soybean germ plasma, changes in energy prices and publicpolicy and technological advances relating to the production of biofuels andindustrial products. These and other factors will present challenges for theforeseeable future.

 

**Resultsof Operations**

 

***Comparison of Years Ended December 31,2007 and 2006***

 
| ** **              | ** ** | **Year Ended December 31, 2007** | ** **  | **Year Ended December 31, 2006** | ** ** |
|-------------------------|------------|------------------------------------------------------|-------------|------------------------------------------------------|------------|
| ** **              | ** ** | **$**                                                | ** **  | ** % of  Revenue**                         | ** ** | **$** | ** ** | ** % of   Revenue** | ** ** |
|                    |       |                                                 |        |                                                 |       |   |   |   |   |
| Revenue                 |       | $                                                    | 247,741,767 |                                                 | 100.0      |   | $ | 212,721,926 |   | 100.0 |   |
| Cost of revenues        |       | (240,701,417                                         | )           | (97.1                                                | )          | (203,525,766 | ) | (95.7 | ) |
| Operating  expenses     |       | (3,938,405                                           | )           | (1.6                                                 | )          | (3,487,773 | ) | (1.6 | ) |
| Other income  (expense) |       | 1,051,471                                            |        | 0.4                                                  |       | 1,945,280 |   | 0.9 |   |
| Income tax  expense     |       | 7,160                                                |        | 0.0                                                  |       | (2,308 | ) | 0.0 |   |
|                    |       |                                                 |        |                                                 |       |   |   |   |   |
| Net income  (loss)      |       | $                                                    | 4,160,576   |                                                 | 1.7        |   | $ | 7,651,359 |   | 3.6 |   |

 

*Revenue*– Revenue increased $35.0 million, or 16.5%, for the year ended December 31,2007 compared to the same period in 2006. The increase in revenues is primarily due to increases in the averagesales price of soybean meal and oil.  Theaverage sales price of soybean meal and oil increased 25.2% and 37.8%,respectively, from 2006 to 2007. The principal cause for this increase is theincrease in the price of crude petroleum oil and its refined products.  The increase in revenues is partially offsetby a 4.1% reduction in the amount of soybeans crushed compared to 2006, whichresulted in a decrease in sales volume.

 

*GrossProfit/Loss* – For the year ended December 31, 2007, wegenerated a gross profit of $7.0 million compared to $9.2 million for the yearended December 31, 2006.  Thedecrease in gross profit is attributed to a reduction of approximately 1.1 million in bushels processed and slightlylower crush margins in 2007 compared to 2006.

 

*AdministrativeExpense* – Administrative expense, including all selling,general and administrative expenses, increased $451,000, or 12.9%, for the yearended December 31, 2007 compared to 2006. This increase is due to the termination of a cost-sharing managementagreement and relationship with MnSP on September 1, 2007.

 

*InterestExpense* – Interest expense increased by $1.5 million, or234.7%, during 2007 compared to the same period in 2006.  The increase is due to higher debt levelsresulting from elevated soybean prices, an increase in the quantity ofinventory and member distributions, and higher accounts receivable due to theelevated soy-based product prices.  Ouroutstanding debt on December 31, 2007 is $37.5 million, compared to $12.9million on December 31, 2006.  Thisincrease is partially offset by lower interest rates on our senior debt.

 

*OtherNon-Operating Income* – Other non-operating income increasedby $682,000, or 28.1%, for the year ended December 31, 2007 compared tothe same period in 2006.  The increase is

 

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primarily due to a$775,000 increase in oil storage income, offset partially by a $99,000 decreasein earnings on our investment in MnSP. Prior to the termination of the services and management agreement withMnSP on September 1, 2007, we accounted for our investment in MnSP usingthe equity method.  Under the equitymethod, our investment was adjusted annually to recognize our share of theearnings and losses of MnSP.  But uponthe termination of our services and management agreement with MnSP, we ceasedusing the equity method and therefore made no earnings adjustment for the lastfour months of 2007.

 

*NetIncome/Loss* – The $3.5 million decrease in net income duringthe year ended December 31, 2007 compared to 2006, is primarilyattributable to a decrease in gross profit and an increase in interest expense,offset by an increase in other non-operating income.

 

***Comparison of Years Ended December 31,2006 and 2005***

 
| ** **              | ** ** | **Year Ended December 31, 2006** | ** **  | **Year Ended December 31, 2005** | ** ** |
|-------------------------|------------|------------------------------------------------------|-------------|------------------------------------------------------|------------|
| ** **              | ** ** | **$**                                                | ** **  | ** % of   Revenue**                   | ** ** | **$** | ** ** | ** % of   Revenue** | ** ** |
|                    |       |                                                 |        |                                                 |       |   |   |   |   |
| Revenue                 |       | $                                                    | 212,721,926 |                                                 | 100.0      |   | $ | 210,370,966 |   | 100.0 |   |
| Cost of revenues        |       | (203,525,766                                         | )           | (95.7                                                | )          | (209,992,802 | ) | (99.8 | ) |
| Operating  expenses     |       | (3,487,773                                           | )           | (1.6                                                 | )          | (3,826,823 | ) | (1.8 | ) |
| Other income  (expense) |       | 1,945,280                                            |        | 0.9                                                  |       | (559,914 | ) | (0.3 | ) |
| Minority  interest      |       | —                                               |        | —                                               |       | 368,403 |   | 0.2 |   |
| Income tax  expense     |       | (2,308                                               | )           | 0.0                                                  |       | — |   | — |   |
|                    |       |                                                 |        |                                                 |       |   |   |   |   |
| Net income  (loss)      |       | $                                                    | 7,651,359   |                                                 | 3.6        |   | $ | (3,640,170 | ) | (1.7 | ) |

 

*Revenue*– Revenue increased $2.4 million, or 1.1%, from the year ended December 31,2005 to the year ended December 31, 2006. The increase in revenues is primarily driven by an increase in salesvolume of crude soybean oil.  During theyear ended December 31, 2006, we registered with the CBOT warehousereceipts for approximately 135.8 million pounds of crude soybean oil, or $33.1million in revenue, compared to 30.0 million pounds and $6.2 million in revenuein 2005.  This increase is slightlyoffset by a decrease in sales volume of refined and bleached soybean oil(27.8%) and soybean meal (2.6%), and a reduction in the average sales price ofsoybean meal (5.7%), all of which decreased sales by approximately $29.8million.

 

*GrossProfit/Loss* – For the year ended December 31, 2006, wegenerated a gross profit of $9.2 million compared to $0.4 million for the yearended December 31, 2005.  Theincrease in gross profit is attributed to improved crushing margins and adecrease in production expenses.  Naturalgas prices decreased in 2006 due to an increase in supply nationwide, whichconsequently reduced production expenses by approximately $0.7 million in 2006compared to 2005.

 

*AdministrativeExpense* – Administrative expense decreased $339,000, or 8.9%,for the year ended December 31, 2006 compared to the same period in2005.  This decrease is the result oflower labor costs in USSC and $243,000 in administrative expenses that wecharged to MnSP under our cost-sharing arrangement which had not beenpreviously charged prior to 2006.  Thelower labor costs in USSC are due to a restructuring of USSC’s staff andnarrowing of market focus in July 2005.

 

*InterestExpense* – In 2006, interest expense decreased by $771,000, or55.1%, compared to 2005.  The decrease isdue to lower debt levels resulting from a decrease in the price of soybeans and

 

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improved profitability.This decrease is partially offset by higher interest rates on our senior debt.On December 31, 2006, we had outstanding debt of $12.9 million, themajority of which bore interest at an annual rate of 7.75%.  On December 31, 2005, in contrast, wehad outstanding debt of $15.8 million, the majority of which bore interest atan annual rate of 7.05%.

 

*OtherNon-Operating Income* – Other non-operating income increasedfrom $0.6 million in 2005 to $2.4 million for the year ended December 31,2006.  The increase of $1.8 million isprimarily due to increases in oil storage income and the value of ourinvestment in MnSP.

 

*NetIncome/Loss* – We recorded net income of $7.7 million for theyear ended December 31, 2006, compared to net loss of $3.6 million for thesame period in 2005.  The increase of$11.3 million is primarily attributable to an increase in gross margin onproducts sold due to a decrease in cost of revenues, as well as an increase inother non-operating income.

 

**Liquidity and Capital Resources**

 

Our primary sourcesof liquidity are cash provided by operations and borrowings under our two linesof credit which are discussed below under “Indebtedness.” On December 31,2007, we had working capital, defined as current assets less currentliabilities, of $11.6 million and a current ratio, defined as current assetsdivided by current liabilities of 1.2 to 1, compared to working capital of$12.0 million and a current ratio of 1.4 to 1 on December 31, 2006.Working capital decreased by approximately $300,000 between periods due mainlyto a decrease in earnings.

 

***Comparison of the years ended December 31,2007 and 2006***

* *
| ** **                                     | ** ** | **2007**   | ** **  | **2006**   | ** ** |
|------------------------------------------------|------------|------------|-------------|------------|------------|
|                                           |       |       |        |       |       |
| Net cash from  (used for) operating activities |       | $          | (23,204,972 | )          | $          | 8,685,354 |   |
| Net cash from  (used for) investing activities |       | (1,067,681 | )           | (1,170,221 | )          |
| Net cash from  (used for) financing activities |       | 15,965,134 |        | 726,077    |       |
|                                                |            |            |             |            |            |  |  |

 

*CashFlows from Operating Activities*

 

The decrease innet cash flow from operating activities between 2007 and 2006 is primarilyattributed to an increases in inventories, accounts receivable and margindeposits and a decrease in net income. During 2007, higher commodity prices resulted in increases toinventories (116%), accounts receivable (51%), and margin deposits (364%).

 

*CashFlows from Investing Activity*

 

The decrease incash used for investing activities between 2007 and 2006 is primarilyattributed to a decrease in the purchase of investments.  In May 2006, unlike in 2007, we wererequired to make a unit retain investment in MnSP of approximately $420,000 afterMnSP’s members voted to require members to invest $0.30 per share of Class Apreferred stock.  The decrease ininvesting activities is slightly offset by an increase of $342,000 in purchasesof property and equipment for our facilities.

 

20

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*CashFlows from Financing Activity*

 

The increase innet cash provided by financing activities is principally due to a $24.7 (net ofprincipal payments) increase in debt in 2007, offset by $6.4 million indistributions to members.  During theyear ended December 31, 2007, we used the $24.7 million in proceeds fromlong-term debt and seasonal borrowings (net of principal payments) to financean increase in inventory, accounts receivable, and margin deposits, anddistribute $6.4 million to our members.

 

We anticipate inthe next 12 months having sufficient cash flows from operating activities andour revolving debt to fund working capital, to cover operating, administrative,and capital expenditures, and to meet debt service obligations.

 

***Comparison of the years ended December 31,2006 and 2005***

* *
| ** **                                     | ** ** | **2006**   | ** ** | **2005**  | ** ** |
|------------------------------------------------|------------|------------|------------|-----------|------------|
|                                           |       |       |       |      |       |
| Net cash from  (used for) operating activities |       | $          | 8,685,354  |      | $          | (6,298,040 | ) |
| Net cash from  (used for) investing activities |       | (1,170,221 | )          | (776,192  | )          |
| Net cash from  (used for) financing activities |       | 726,077    |       | 7,138,365 |       |
|                                                |            |            |            |           |            |  |  |

 

*CashFlows from Operating Activities*

 

The increase innet cash flow from operating activities between 2006 and 2005 is primarilyattributed to an increase in net income and a decrease in accountsreceivable.  The increase in net incomeresulted primarily from an improved local soybean market which decreased ourcost of products sold.  The increase innet cash flows from operating activities is slightly offset by increases ininventory.

 

*CashFlows from Investing Activity*

 

The increase incash used for investing activities between 2006 and 2005 is attributed to theunit retain investment in MnSP of $420,000 in 2006, as expenditures made onproperty and equipment between periods is relatively constant between bothperiods.

 

*CashFlows from Financing Activity*

 

The decrease innet cash provided by financing activities is principally due to a $2.9 millionreduction in debt in 2006, compared to a $5.6 million (net of principalpayments) increase in debt during the same period in 2005. During the yearended December 31, 2005, we used $5.6 million in proceeds from long-termdebt to finance an increase in inventory, reduce accrued commodity purchases,and fund net loss.  In addition, thedecrease in net cash is caused by the absence of any cash raised from the saleof equity in 2006, in contrast to 2005 when we raised $4.3 million in proceedsin connection with a public offering.

 

***Indebtedness***

 

We have two linesof credit with CoBank, our primary lender, to meet the short and long-termneeds of our operations. The first credit line is a revolving long-term loan.Under the terms of this loan, we may borrow funds as needed up to the creditline maximum, or $13.2 million, and then pay down the principal whenever excesscash is available.  Repaid amounts may beborrowed up to the available credit line. The available credit line reduces by$1.3 million every six months until maturity on March 20, 2013, except thereduction was waived for September 2007 and March 2008.  Beginning in September 2008,

*** ***

***21***

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the reduction willcontinue and payments are required if our principal balance outstanding exceedsour then available credit line.  Thefinal payment at maturity will be equal to the remaining unpaid principalbalance of the loan. We pay a 0.50% annual commitment fee on any funds notborrowed.  The principal balanceoutstanding on the revolving term loan was $13.2 million and $11.9 million asof December 31, 2007 and 2006, respectively.

 

The second creditline is a revolving working capital loan that expires on October 1,2008.  The primary purpose of this loanis to finance inventory and receivables. The maximum available under thiscredit line is $50 million until July 2, 2008.  On July 2, 2008 the credit line revertsto $28 million until the loan’s maturity date. Borrowing base reports and financial statements are required monthly tojustify the balance borrowed on this line. We pay a 0.25% annual commitment fee on any funds not borrowed; however,we have the option to reduce the credit line during any given commitment periodlisted in the agreement to avoid the commitment fee.  The principal balance on the working capitalloan was approximately $23.4 million as of December 31, 2007, compared to$0 as of December 31, 2006.

 

Both CoBank loansare set up with a variable rate option. The variable rate is set by CoBank andchanges weekly on the first business day of each week. We also have a fixedrate option on both loans allowing us to fix rates for any period between oneday and the entire commitment period. The annual interest rate on both therevolving term and working capital loans is 6.75% and 7.75% as of December 31,2007 and December 31, 2006, respectively. Both CoBank loans are secured by substantially all of our assets and aresubject to compliance with standard financial covenants and the maintenance ofcertain financial ratios.  We were incompliance with all covenants and conditions with CoBank as of December 31,2007 and as of the date of this filing.

 

We also have otherlong-term contracts and notes totaling approximately $0.9 million, with aweighted average annual interest rate of 4.3% as of December 31, 2007.These arrangements include a no interest $621,000 long-term note payable to theother USSC shareholders relating to our purchase of their tendered USSC shares.The obligation is secured by the purchased shares. We made principal paymentsof $77,000 and $342,000 on these additional long-term obligations during theyears ended December 31, 2007 and 2006, respectively.

 

Out indebtednessis expected to increase in 2008 as a result of improvements to our facility’srailway infrastructure.  We are currentlyguaranteeing a $1.81 million loan between the State of South Dakota Departmentof Transportation and the Brookings County Regional Railway Authority.  This guaranty, however, will become a directobligation of ours beginning in October 2008 when we become responsiblefor making principal and interest payments on an annual basis.  For further details of this transaction,please see “Off-Balance Sheet Financing Arrangements - *Guaranty*”below.

*** ***

***Capital Expenditures***

 

We investedapproximately $1,003,000 in capital expenditures for property and equipmentduring the year ended December 31, 2007, compared to approximately$660,000 in capital expenditures during the year ended December 31,2006.  Depending on our profitability in2008, we anticipate spending between $2.0 million and $4.0 million on capitalexpenditures during the year ended December 31, 2008 to enhance thequality and efficiency of our soybean crushing facility. One known project willbe to improve our railway infrastructure at our facility. Our principal sourcesof funds are anticipated to be cash flows from operating activities, borrowingsunder our revolving and working capital loans with 

 

22

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CoBank, and a lowinterest loan from the South Dakota Railroad Fund administrated by South Dakota’sDepartment of Transportation.

** **

**Off Balance Sheet Financing Arrangements**

 

Except asdescribed below, we do not utilize variable interest entities or otheroff-balance sheet financial arrangements.

* *

*Guaranty*

 

On March 6,2007, we became a guarantor of a loan between State of South Dakota Departmentof Transportation and the Brookings County (South Dakota) Regional RailwayAuthority. On March 6, 2007, the State of South Dakota Department ofTransportation agreed to loan the Brookings County Regional Railroad Authoritya total sum of $1.81 million for purposes of making improvements to the railwayinfrastructure near our soybean processing facility in Volga, South Dakota. Theinterest rate on the loan is 4.857% per year. Principal and interest paymentsare due annually with the first payment due on October 1, 2008 and thefinal payment due at maturity in October 2017. In consideration of thisunsecured loan, we agreed to guarantee to the State of South Dakota Departmentof Transportation the full loan amount, plus interest.  This guaranty, however, will become a directobligation of ours in October 2008, when we will be responsible for payingthe above-described principal and interest payments on an annual basis.

* *

*Lease Commitments*

 

We havecommitments under various operating leases for rail cars, various types ofvehicles, and lab and office equipment.  Our most significant leasecommitments are the rail car leases we use to distribute our products.  Wehave a number of long-term leases with GE Capital, Trinity Capital, and AIGRail Services for hopper rail cars and oil tank cars. Total lease expenses underthese arrangements is approximately $2.0 million and $2.1 million for the yearsended December 31, 2007 and 2006, respectively. The hopper rail cars earnmileage credit from the railroad through a sublease program, which totaled $1.5million and $1.9 million for the years ended December 31, 2007 and 2006,respectively.

 

In addition torail car leases, we have several operating leases for various equipment andstorage facilities. Total lease expense under these arrangements is $117,000and $143,000 for the years ended December 31, 2007 and 2006, respectively.Some of our leases include purchase options, none of which however are for avalue less than fair market value at the end of the lease.

 

23

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**Contractual Obligations**

 

The followingtable shows our contractual obligations for the periods presented:

 
| ** **                       | ** ** | **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 (1)  |       | $                                        | 14,077,139 |   | $ | 2,175,951 |   | $ | 5,201,188 |   | $ | 5,200,000 |   | $ | 1,500,000 |   |
|                             |       |                                     |       |   |   |   |   |   |   |   |   |
| Operating Lease  Obligations     |       | 20,141,707                               |       | 2,157,318 |   | 4,243,614 |   | 4,228,645 |   | 9,512,130 |   |
|                             |       |                                     |       |   |   |   |   |   |   |   |   |
| Other Long-Term  Liabilities (2) |       | 121,361                                  |       | — |   | — |   | — |   | 121,361 |   |
|                             |       |                                     |       |   |   |   |   |   |   |   |   |
| Total                            |       | $                                        | 34,340,207 |   | $ | 4,333,269 |   | $ | 9,444,802 |   | $ | 9,428,645 |   | $ | 11,133,491 |   |

 

----

(1) Representsprincipal payments under our notes payable, which are included on ourConsolidated Balance Sheet.

(2) Representsobligations under our deferred compensation program and is included on ourConsolidated Balance Sheet.

 

**Recent Accounting Pronouncements**

 

In September 2006,the SEC released Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on the SEC’s views regarding theprocess of quantifying materiality of financial statement misstatements.  SAB 108 is effective for fiscal years endingafter November 15, 2006.  Theadoption of SAB 108 has not had a significant impact on our results ofoperations or financial position.

 

In September 2006,the FASB issued FAS 157, “Fair Value Measurements” (“SFAS 157”).  This standard defines fair value, establishesa framework for measuring fair value in generally accepted accountingprinciples, and expands disclosures about fair value measurements.  This statement is effective for financialstatements issued for fiscal years beginning after November 15, 2007,although earlier application is encouraged. We are currently evaluating the impact of adopting SFAS 157 on itsfinancial statements, but do not believe the adoption of this standard willhave a significant impact on our results of operations or financial position.

 

On February 15, 2007, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities – Including an Amendment of FASB Statement No. 115”(“SFAS 159”).  This standard permits anentity to measure financial instruments and certain other items at estimatedfair value.  Most of the provisions ofSFAS 159 are elective; however, the amendment to FASB 115, “Accounting forCertain Investments in Debt and Equity Securities,” applies to all entitiesthat own trading and available-for-sale securities.  The fair value option created by SFAS 159permits an entity to measure eligible items at fair value as of specifiedelection dates.  The fair value option (a) maygenerally be applied instrument by instrument, (b) is irrevocable unless anew election date occurs, and (c) must be applied to the entire instrumentand not to only a portion of the instrument. SFAS 159 is effective as of the beginning of the first fiscal year thatbegins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscalyear provided that the entity (i) makes the choice in the first 120 daysof that year, (ii) has not yet issued financial statements for any interimperiod of such year, and (iii) elects to apply the provisions of FASB157.  We are currently evaluating theimpact of SFAS 159, if any, on our financial statements.

 

24

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In December 2007,the FASB issued SFAS No.160, Non-controlling Interests in ConsolidatedFinancial Statements, including an amendment of ARB No. 51 (“SFAS No, 160)which established accounting and reporting standards for the non-controllinginterest in a subsidiary and for the deconsolidation of a subsidiary. Theeffective date of SFAS No. 160 is for fiscal years and interim periodswithin those fiscal years, beginning on or after December 15, 2008. We arestill evaluating the effects that SFAS No. 160 will have on ourconsolidated financial statements due to the recurring losses of USSC, 100% ofwhich has been absorbed by us since approximately 2005.

** **

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Preparation of our financial statements requires estimates and judgmentsto be made that affect the amounts of assets, liabilities, revenues andexpenses reported. Such decisions include the selection of the appropriateaccounting principles to be applied and the assumptions on which to baseaccounting estimates. Management continually evaluates these estimates based onhistorical experience and other assumptions we believe to be reasonable underthe circumstances.

 

The difficulty in applying these policies arises from the assumptions,estimates, and judgments that have to be made currently about matters that areinherently uncertain, such as future economic conditions, operating results andvaluations as well as management intentions. As the difficulty increases, thelevel of precision decreases, meaning that actual results can and probably willbe different from those currently estimated.

 

Of the significant accounting policies described in the notes to thefinancial statements, we believe that the following may involve a higher degreeof estimates, judgments, and complexity:

* *

*Commitments and Contingencies*

 

Contingencies, by their nature relate to uncertainties that requiremanagement to exercise judgment both in assessing the likelihood that aliability has been incurred, as well as in estimating the amount of thepotential expense.  In conformity with accounting principles generallyaccepted in the U.S., we accrue an expense when it is probable that a liabilityhas been incurred and the amount can be reasonably estimated.

* *

*Inventory Valuation*

 

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

* *

*Long-Lived Assets*

 

Depreciation and amortization of our property, plant and equipment isprovided on the straight-lined method by charges to operations at rates basedupon the expected useful lives of individual or groups of assets. Economiccircumstances or other factors may cause management’s estimates of expecteduseful lives to differ from actual.

 

25

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Long-lived assets, including property, plant and equipment andinvestments are evaluated for impairment on the basis of undiscounted cashflows whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. An impaired asset is written down toits estimated fair market value based on the best information available.Considerable management judgment is necessary to estimate undiscounted futurecash flows and may differ from actual.

 

We evaluate the recoverability of identifiable intangible assetswhenever events or changes in circumstances indicate that an intangible asset’scarrying value may not be recoverable. Such circumstances could include, but are not limited to: (1) asignificant decrease in the market value of an asset, (2) a significantadverse change in the extent or manner in which an asset is used, or (3) anaccumulation of costs significantly in excess of the amount originally expectedfor the acquisition of an asset. We measure the carrying amount of the assetagainst the estimated undiscounted future cash flows associated with it.  Should the sum of the expected future netcash flows be less than the carrying value of the asset being evaluated, an impairmentloss would be recognized.

 

The impairment loss would be calculated as the amount by which thecarrying value of the asset exceeded its fair value.  The fair value is measured based on quotedmarket prices, if available. If quoted market prices are not available, theestimate of fair value is based on various valuation techniques, including thediscounted value of estimated future cash flows.  The evaluation of asset impairment requiresus to make assumptions about future cash flows over the life of the asset beingevaluated. These assumptions require significant judgment and actual resultsmay differ from assumed and estimated amounts.

* *

*Accounting for Derivative Instruments and Hedging Activities*

 

We minimize the effects of changes in the price of agriculturalcommodities by using exchange-traded futures and options contracts to minimizeour net positions in these inventories and contracts. We account for changes inmarket value on exchange-traded futures and option contracts at exchange pricesand account for the changes in value of forward purchase and sales contracts atlocal market prices determined by grain terminals in the area. Changes in themarket value of all these contracts are recognized in earnings as a componentof cost of goods sold.

** **

**Item 7A.     Quantitative and QualitativeDisclosure about Market Risk.**

*** ***

***Commodities Risk & RiskManagement.***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 changing market prices, suchactivities also limit the gain potential which otherwise could result fromthese significant fluctuations in market prices. Our policy is generally tomaintain a hedged position within limits, but we can be long or short at anytime. Our profitability is primarily derived from margins on soybeansprocessed, not from hedging transactions. Management does not anticipate thatits hedging activity will have a significant impact on future operating resultsor liquidity. Hedging arrangements do not protect against nonperformance of acash contract.

 

At any one time, our inventory and purchase contracts for delivery toour facility may be substantial. We have risk management policies andprocedures that include net position limits. They are defined by commodity, andinclude both trader and management limits. This policy and procedure triggers areview by management when any trader is outside of position limits. Theposition limits are 

 

26

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reviewedat least annually with the board of managers. We monitor current marketconditions and may expand or reduce the limits in response to changes inthose conditions.

*** ***

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

*** ***

***Interest Rate Risk.***We manage exposure to interest rate changesby using variable rate loan agreements with fixed rate options. Long-term loanagreements can utilize the fixed option through maturity; however, therevolving ability to pay down and borrow back would be eliminated once thefunds were fixed.

** **

**Item 8.        FinancialStatements and Supplementary Data.**

** **

Reference is made to the “Index to FinancialStatements” of South Dakota Soybean Processors, LLC located on the pageimmediately preceding page F-1 of this report, and financial statements and schedules for the yearsended December 31, 2007, 2006 and 2005.

 

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

 

None.

** **

**Item 9A(T).     Controls and Procedures.**

*** ***

***Evaluation of Disclosure Controlsand Procedures****.*  Our management, with the participation of ourChief Executive Officer and Principal Accounting Officer, has evaluated theeffectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”) as of the end of the period covered by this report. Based on thisevaluation, our management hasconcluded that our disclosure controls and procedures are effective to ensurethat information required to be disclosed by us in reports that we file orsubmit under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms. Additionally, based on management’s evaluation, our disclosure controlsand procedures were effective in ensuring that information required to bedisclosed in our Exchange Act reports is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Principal AccountingOfficer, to allow timely decisions regarding required disclosures.

*** ***

***Management’s report on internal control overfinancial reporting.**** *Our management is responsible for establishing and maintaining adequateinternal control over financial reporting as defined in Rule 13a-15(f) ofthe Securities Exchange Act of 1934.  Ourinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. Our internal control over financial reporting includes those policiesand procedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of assets; (ii) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with U.S. generally accepted accounting principles,and that our receipts and expenditures are being made only in 

 

27

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accordancewith authorizations of our management and directors; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisitions, use, or disposition of our assets that could have a materialeffect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Asof December 31, 2007, management assessed our internal control overfinancial reporting in relation to criteria described in *InternalControl- Integrated Framework*, issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this assessment using thosecriteria, we concluded that, as of December 31, 2007, our internal controlover financial reporting is effective. Our management reviewed the results of theirassessment with the Audit Committee.

 

ThisAnnual Report does not include an attestation report of our registered publicaccounting firm regarding internal control over financial reporting.  Management’s report was not subject toattestation by our registered public accounting firm pursuant to temporary rules ofthe Commission that permit us to provide only management’s report in thisreport.

 

***Changes in Internal Control over FinancialReporting****.*  Therewas no change in our internal control over financial reporting that occurredduring the quarter ended December 31, 2007 that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

 
|   | /s/ Rodney Christianson               |
|--------|---------------------------------------|
|   | Rodney Christianson,  Chief Executive |
|   | Officer                               |
|   | (Principal Executive  Officer)        |

 

**Item 9B.     Other Information.**

 

None.

**PART III**

 

Pursuant to General Instructions G(3), weomit Part III, Items 10, 11, 12, 13, and 14, and incorporate such items byreference to an amendment to this Annual Report on Form 10-K or to anInformation Statement to be filed with the Commission within 120 days after theclose of the fiscal year covered by this Report (December 31, 2007).

** **

**Part IV**

 

**Item 15.      Exhibits, FinancialStatement Schedules.**

 

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

 

28

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(a)(1)       Financial Statements — Reference is made to the “Index toFinancial Statements” of South Dakota Soybean Processors, LLC located on the page immediately preceding page F-1of this report for a list of the financial statements for the year ended December 31,2007.  The financial statements appear onpage F-2 of this Report.

 

(2)           All supplemental schedules are omittedbecause of the absence of conditions under which they are required or becausethe information is shown in the Consolidated Financial Statements or notesthereto.

 

(3)           Exhibits - See Exhibit Index following the Signature Page to thisreport. The following exhibits constitute management agreements, compensatoryplans, or arrangements: Exhibits 10.10, 10.11, 10.12, and 10.13.

 

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

 

SIGNATURES

 
|        |                | SOUTH DAKOTA SOYBEAN |                                      |
|--------|---------------------|----------------------|-------------------------------------------|
|   |                | PROCESSORS, LLC      |                                      |
|   |                |                 |                                      |
|   |                |                 |                                      |
| Date:  | March 31, 2008 |                 | /s/ Rodney Christianson                   |
|   |                |                 | Rodney G. Christianson                    |   |
|   |                |                 | Chief Executive Officer                   |   |
|   |                |                 |                                      |   |
|   |                |                 |                                      |   |
| Date:  | March 31, 2008 |                 | /s/ Mark Hyde                             |
|   |                |                 | Mark Hyde                                 |   |
|   |                |                 | Controller, Principal  Accounting Officer |   |

 

Pursuant to the requirements of the Securities Exchange Act, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
|        |                | SOUTH DAKOTA SOYBEAN |                           |
|--------|---------------------|----------------------|--------------------------------|
|   |                | PROCESSORS, LLC      |                           |
|   |                |                 |                           |
|   |                |                 |                           |
| Date:  | March 31, 2008 |                 | /s/ Rodney Christianson        |
|   |                |                 | Rodney G. Christianson         |   |
|   |                |                 | Chief Executive Officer        |   |
|   |                |                 | (Principal Executive  Officer) |   |

 

29

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|        |                |   | SOUTH DAKOTA SOYBEAN                      |
|--------|---------------------|--------|-------------------------------------------|
|   |                |   | PROCESSORS, LLC                           |
|   |                |   |                                      |
| Date:  | March 31, 2008 |   | /s/ Mark Hyde                             |
|   |                |   | Mark Hyde                                 |   |
|   |                |   | Controller, Principal  Accounting Officer |   |
|   |                |   |                                      |   |
| Date:  | March 31, 2008 |   | /s/ Paul Barthel                          |
|   |                |   | Paul Barthel, Manager                     |   |
|   |                |   |                                      |   |
| Date:  | March 31, 2008 |   | /s/ Alan Christensen                      |
|   |                |   | Alan Christensen, Manager                 |   |
|   |                |   |                                      |   |
| Date:  | March 31, 2008 |   | /s/ Dean Christopherson                   |
|   |                |   | Dean Christopherson,  Manager             |   |
|   |                |   |                                      |   |
| Date:  | March 31, 2008 |   | /s/ David Driessen                        |
|   |                |   | David Driessen, Manager                   |   |
|   |                |   |                                      |   |
| Date:  | March 31, 2008 |   | /s/ Wayne Enger                           |
|   |                |   | Wayne Enger, Manager                      |   |
|   |                |   |                                      |   |
| Date:  | March 31, 2008 |   | /s/ Dan Feige                             |
|   |                |   | Dan Feige, Manager                        |   |
|   |                |   |                                      |   |
| Date:  | March 31, 2008 |   | /s/ Ronald Gorder                         |
|   |                |   | Ronald J. Gorder, Manager                 |   |
|   |                |   |                                      |   |
| Date:  | March 31, 2008 |   | /s/ Martin Hope                           |
|   |                |   | Marvin Hope, Manager                      |   |
|   |                |   |                                      |   |
| Date:  | March 31, 2008 |   | /s/ Kent Howell                           |
|   |                |   | Kent Howell, Manager                      |   |
|   |                |   |                                      |   |
| Date:  | March 31, 2008 |   | /s/ James Jepsen                          |
|   |                |   | James Jepsen, Manager                     |   |

 

30

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|        |                |   | SOUTH DAKOTA SOYBEAN       |
|--------|---------------------|--------|----------------------------|
|   |                |   | PROCESSORS, LLC            |
|   |                |   |                       |
| Date:  | March 31, 2008 |   | /s/ Jerome Jerzak          |
|   |                |   | Jerome Jerzak, Manager     |   |
|   |                |   |                       |   |
| Date:  | March 31, 2008 |   | /s/ Robert Nelsen          |
|   |                |   | Robert Nelsen, Manager     |   |
|   |                |   |                       |   |
| Date:  | March 31, 2008 |   | /s/ Robert Nelson          |
|   |                |   | Robert Nelson, Manager     |   |
|   |                |   |                       |   |
| Date:  | March 31, 2008 |   | /s/ Maurice Odenbrett      |
|   |                |   | Maurice Odenbrett, Manager |   |
|   |                |   |                       |   |
| Date:  | March 31, 2008 |   | /s/ Greg Schmieding        |
|   |                |   | Greg Schmieding, Manager   |   |
|   |                |   |                       |
| Date:  | March 31, 2008 |   |                       |
|   |                |   | Corey Schnabel, Manager    |   |
|   |                |   |                       |   |
| Date:  | March 31, 2008 |   | /s/ Randy Tauer            |
|   |                |   | Randy Tauer, Manager       |   |
|   |                |   |                       |   |
| Date   | March 31, 2008 |   | /s/ Delbert Tschakert      |
|   |                |   | Delbert Tschakert, Manager |   |
|   |                |   |                       |   |
| Date:  | March 31, 2008 |   | /s Lyle Trautman           |
|   |                |   | Lyle Trautman, Manager     |   |
|   |                |   |                       |   |
| Date:  | March 31, 2008 |   | /s/ Ardon Wek              |
|   |                |   | Ardon Wek, Manager         |   |
|   |                |   |                       |   |
| Date:  | March 31, 2008 |   | /s/ Gary Wertish           |
|   |                |   | Gary Wertish, Manager      |   |

 

31

----

 

**EXHIBIT INDEX****

 
| Exhibit  Number | ** ** | **Description**                                                                                                                    | ** ** | **Filed  Herewith** | ** ** | **Incorporated Herein by Reference to**                                                                                                     |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 3.1(i)          |       | Articles of Organization.                                                                                                          |       |                |       | Appendix A to the Registrant’s Prospectus filed with  the Commission pursuant to Rule 424(b)(3) on May 24, 2002  (File No. 333-75804). |
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 3.1(ii)         |       | Operating Agreement, as amended and restated.                                                                                      |       |                |       | Exhibit 99.1 to the Registrant’s  Form 8-K filed on June 28, 2007.                                                                     |
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 3.1(iii)        |       | Articles of Amendment to Articles of Organization.                                                                                 |       |                |       | Exhibit 3.1(iii) to the Registrant’s  Form 10-QSB filed with the Commission on August 14, 2002.                                        |
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 4.1             |       | Form of Class A Unit Certificate.                                                                                        |       |                |       | Exhibit 4.1 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001. (File  No. 333-75804)                        |
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 10.1            |       | Form of Mortgage and Security Agreement with  CoBank dated October 2, 1995.                                              |       |                |       | Exhibit 10.1 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001. (File No. 333-75804)                        |
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 10.2            |       | Revolving Term Loan Supplement with CoBank dated  October 6, 2005.                                                            |       |                |       | Exhibit 10.22 to the Registrant’s  Form 10-K filed with the Commission on March 31, 2006.                                                   |
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 10.3            |       | Statused Revolving Credit Supplement with CoBank  dated October 6, 2005.                                                      |       |                |       | Exhibit 10.23 to the Registrant’s  Form 10-K filed with the Commission on March 31, 2006.                                                   |
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 10.4            |       | Urethane Soy Systems Company, Inc. Stock  Purchase Agreement dated May 30, 2000.                                    |       |                |       | Exhibit 10.5 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001. (File  No. 333-75804)                       |
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 10.5            |       | Vegetable Oil Supply Agreement with Urethane Soy  Systems Company, Inc. dated August 2, 1999 and January 10,  2001. |       |                |       | Exhibit 10.6 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001. (File  No. 333-75804)                       |
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 10.6            |       | Soybean Oil Supply Agreement and Equipment Purchase  Agreement with ACH Food Company, Inc. dated January 15, 2002.*      |       |                |       | Exhibit 10.8 to the Registrant’s Form S-4  filed with the Commission on May 10, 2002. (File No. 333-75804)                             |
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 10.7            |       | Railcar Leasing Agreement with General Electric  dated May 14, 1996.                                                          |       |                |       | Exhibit 10.9 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001. (File  No. 333-75804)                       |
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 10.8            |       | Track Lease Agreement with DM&E Railroad dated  October 15, 1996.                                                         |       |                |       | Exhibit 10.10 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001. (File  No. 333-75804)                      |
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 10.9            |       | Railroad Car Lease Agreement with Trinity Industries  dated February 12, 2002.                                                |       |                |       | Exhibit 10.15 to the Registrant’s Form S-4  filed with the Commission on March 14, 2002. (File No. 333-75804)                          |
|            |       |                                                                                                                               |       |                |       |                                                                                                                                                            |
| 10.10           |       | Stock Purchase Agreement with Urethane Soy Systems,  Co. and certain shareholders.                                                 |       |                |       | Exhibit 10.16 to the Registrant’s Form 8-K  filed with the Commission on January 14, 2003.                                                  |

 

32

----

 
| 10.11  |   | Rodney Christianson Employment Agreement dated  February 1, 2004.                                                                         |   |   |   | Exhibit 10.14 to the Registrant’s  Form 10-K filed with the Commission on March 30, 2004. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 10.12  |   | First Amended and Restated Deferred Compensation  Plan for the benefit of Rodney Christianson, dated February 1, 2004.                    |   |   |   | Exhibit 10.15 to the Registrant’s  Form 10-K filed with the Commission on March 30, 2004. |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 10.13  |   | Thomas Kersting Employment Agreement dated  May 20, 1996.                                                                                 |   |   |   | Exhibit 10.18 to the Registrant’s  Form 10-K filed with the Commission on March 27, 2003. |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 10.14  |   | Deferred Compensation Plan for the benefit of Thomas  Kersting, dated February 13, 2001.                                                  |   |   |   | Exhibit 10.20 to the Registrant’s  Form 10-K filed with the Commission on March 27, 2003. |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 10.15  |   | Railcar Leasing Agreements with General Electric  Railcar Services Corporation, dated November 10, 2003 and  November 25, 2003.      |   |   |   | Exhibit 10.19 to the Registrant’s  Form 10-K filed with the Commission on March 30, 2004. |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 10.16  |   | Security Agreement with CoBank dated June 17,  2004.                                                                                      |   |   |   | Exhibit 10.1 to the Registrant’s Form 10-Q  filed with the Commission on August 16, 2004. |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 10.17  |   | Master Loan Agreement with CoBank dated  October 6, 2005.                                                                                 |   |   |   | Exhibit 10.21 to the Registrant’s  Form 10-K filed with the Commission on March 31, 2006. |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 10.18  |   | Statused Revolving Loan Supplement dated  June 6, 2007.                                                                                   |   |   |   | Exhibit 10.1 to the Registrant’s Form 10-Q  filed with the Commission on August 14, 2007. |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 10.19  |   | Heads of Agreement with Transocean dated  April 28, 2006                                                                                  |   |   |   | Exhibit 10.1 to the Registrants Form 10-Q  filed with the Commission on May 15,2006.           |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 10.20  |   | Loan Agreement with State of South Dakota and  Brookings County Regional Railroad Authority dated March 6, 2007.                          |   |   |   | Exhibit 10.25 to the Registrants’  Form 10-K filed with the Commission on April 2, 2007.  |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 10.21  |   | Promissory Note and Guaranty Agreement with State of  South Dakota and Brookings County Regional Railroad Authority dated  March 6, 2007. |   |   |   | Exhibit 10.26 to the Registrants’  Form 10-K filed with the Commission on April 2, 2007.  |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 10.22  |   | Statused Revolving Credit Supplement dated  December 28, 2007.                                                                            |   | X      |   |                                                                                                          |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 10.23  |   | Statused Revolving Credit Supplement dated  February 29, 2008.                                                                            |   | X      |   |                                                                                                          |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 21.1   |   | Subsidiaries of the Company.                                                                                                                   |   | X      |   |                                                                                                          |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                              |   | X      |   |                                                                                                          |
|   |   |                                                                                                                                           |   |   |   |                                                                                                          |
| 32.1   |   | Section 1350 Certification.                                                                                                               |   | X      |   |                                                                                                          |

 

----

* The redacted portionsof Exhibit B (2 pages) and Exhibit C (6 pages) to Exhibit 10.8were filed separately with the SEC subject to a request for confidentialtreatment dated April 25, 2002.

 

** Documents can be foundat www.sec.gov.

#  

33

----

** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

 

Index to FinancialStatements

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

 

----

** **

**REPORT OFINDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

TheBoard of Managers

South Dakota SoybeanProcessors, LLC

Volga, South Dakota

 

We have audited theaccompanying consolidated balance sheets of South Dakota Soybean Processors,LLC as of December 31, 2007 and 2006 and the related consolidatedstatements of operations, changes in members’ equity and cash flows for each ofthe years in the three year period ended December 31, 2007.  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 audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audits to obtain reasonable assuranceabout whether the consolidated financial statements are free of materialmisstatement.  The Company has determinedthat it is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting. 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 a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of South Dakota SoybeanProcessors, LLC as of December 31, 2007 and 2006, and the consolidatedresults of its operations and its cash flows for each of the years in the threeyear period ended December 31, 2007, in conformity with accountingprinciples generally accepted in the United States of America.

 

 

***/s/ Gordon, Hughes &Banks, LLP***

 

Greenwood Village, Colorado

March 21, 2008

 

F-1

----

** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2007 AND 2006**

 
| ** **                                                                                               | ** ** | **2007**    | ** **  | **2006**    | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **ASSETS**                                                                                               |       |        |        |        |       |
|                                                                                                     |       |        |        |        |       |
| CURRENT ASSETS                                                                                           |       |        |        |        |       |
| Cash and cash  equivalents                                                                               |       | $           | 9,247       |        | $          | 8,316,766 |   |
| Trade accounts  receivable, less allowance for uncollectible accounts (2007 - $176,000; 2006  - $43,000) |       | 23,981,054  |        | 15,954,577  |       |
| Inventories                                                                                              |       | 34,103,546  |        | 15,813,795  |       |
| Margin deposits                                                                                          |       | 4,277,535   |        | 922,207     |       |
| Prepaid expenses                                                                                         |       | 564,378     |        | 596,968     |       |
| Investments in  cooperatives - current                                                                   |       | 644,184     |        | —      |       |
| Total current  assets                                                                                    |       | 63,579,944  |        | 41,604,313  |       |
|                                                                                                     |       |        |        |        |       |
| PROPERTY AND  EQUIPMENT                                                                                  |       | 53,237,984  |        | 52,623,024  |       |
| Less accumulated  depreciation                                                                           |       | (28,970,943 | )           | (27,096,622 | )          |
| Total property  and equipment                                                                            |       | 24,267,041  |        | 25,526,402  |       |
|                                                                                                     |       |        |        |        |       |
| OTHER ASSETS                                                                                             |       |        |        |        |       |
| Investments in  cooperatives                                                                             |       | 8,084,875   |        | 8,155,131   |       |
| Notes receivable  - members                                                                              |       | 460,042     |        | 479,130     |       |
| Patents, net                                                                                             |       | 5,950,490   |        | 6,289,475   |       |
| Other, net                                                                                               |       | 19,745      |        | 15,921      |       |
| Total other  assets                                                                                      |       | 14,515,152  |        | 14,939,657  |       |
|                                                                                                     |       |        |        |        |       |
| Total assets                                                                                             |       | $           | 102,362,137 |        | $          | 82,070,372 |   |

 

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

 

F-2

----

** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED BALANCE SHEETS (continued)**

**DECEMBER 31, 2007 AND 2006**

 
| ** **                                                                                                                                                                    | ** ** | **2007**   | ** **  | **2006**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| **LIABILITIES  AND MEMBERS’ EQUITY**                                                                                                                                     |       |       |        |       |       |
|                                                                                                                                                                          |       |       |        |       |       |
| CURRENT  LIABILITIES                                                                                                                                                          |       |       |        |       |       |
| Excess of  outstanding checks over bank balance                                                                                                                               |       | $          | 1,807,599   |       | $          | 4,346,087 |   |
| Current  maturities of long-term debt                                                                                                                                         |       | 2,175,951  |        | 947,931    |       |
| Note payable -  seasonal loan                                                                                                                                                 |       | 23,448,082 |        | —     |       |
| Accounts payable                                                                                                                                                              |       | 1,724,294  |        | 1,215,204  |       |
| Accrued  commodity purchases                                                                                                                                                  |       | 21,087,943 |        | 20,901,664 |       |
| Accrued expenses                                                                                                                                                              |       | 1,702,353  |        | 2,206,437  |       |
| Accrued interest                                                                                                                                                              |       | 9,375      |        | 35,286     |       |
| Total current  liabilities                                                                                                                                                    |       | 51,955,597 |        | 29,652,609 |       |
|                                                                                                                                                                          |       |       |        |       |       |
| LONG-TERM  LIABILITIES                                                                                                                                                        |       |       |        |       |       |
| Long-term debt,  less current maturities                                                                                                                                      |       | 11,901,188 |        | 11,906,363 |       |
| Deferred  compensation                                                                                                                                                        |       | 121,361    |        | 101,592    |       |
| Total long-term  liabilities                                                                                                                                                  |       | 12,022,549 |        | 12,007,955 |       |
|                                                                                                                                                                          |       |       |        |       |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                |       |       |        |       |       |
|                                                                                                                                                                          |       |       |        |       |       |
| TEMPORARY  EQUITY, net of subscriptions receivable of $6,098 and $219,705 at  December 31, 2007 and 2006, respectively consisting of 604,750  Class A capital units |       | 1,219,402  |        | 1,005,795  |       |
|                                                                                                                                                                          |       |       |        |       |       |
| MEMBERS’ EQUITY                                                                                                                                                          |       |       |        |       |       |
| Class A  Units, no par value 30,419,000 units issued and outstanding at December 31,  2007 and 2006                                                                 |       | 37,164,589 |        | 39,404,013 |       |
|                                                                                                                                                                          |       |       |        |       |       |
| Total  liabilities, temporary equity and members’ equity                                                                                                                 |       | $          | 102,362,137 |       | $          | 82,070,372 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-3

----

** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED****DECEMBER 31, 2007, 2006 AND 2005**

 
| ** **                                                                                                           | ** ** | **2007**    | ** **  | **2006**    | ** ** | **2005**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
|                                                                                                                 |       |        |        |        |       |        |       |
| NET REVENUES                                                                                                         |       | $           | 247,741,767 |        | $          | 212,721,926 |       | $ | 210,370,966 |   |
|                                                                                                                 |       |        |        |        |       |        |       |
| COST OF REVENUES                                                                                                     |       |        |        |        |       |        |       |
| Cost of product  sold                                                                                                |       | 207,484,862 |        | 168,833,417 |       | 172,995,316 |       |
| Production                                                                                                           |       | 15,840,012  |        | 15,754,959  |       | 16,496,432  |       |
| Freight and rail                                                                                                     |       | 17,064,268  |        | 18,651,204  |       | 20,247,481  |       |
| Brokerage fees                                                                                                       |       | 312,275     |        | 286,186     |       | 253,573     |       |
| Total cost of  revenues                                                                                              |       | 240,701,417 |        | 203,525,766 |       | 209,992,802 |       |
|                                                                                                                 |       |        |        |        |       |        |       |
| GROSS PROFIT                                                                                                         |       | 7,040,350   |        | 9,196,160   |       | 378,164     |       |
|                                                                                                                 |       |        |        |        |       |        |       |
| OPERATING  EXPENSES                                                                                                  |       |        |        |        |       |        |       |
| Administration                                                                                                       |       | 3,938,405   |        | 3,487,773   |       | 3,826,823   |       |
| OPERATING PROFIT  (LOSS)                                                                                             |       | 3,101,945   |        | 5,708,387   |       | (3,448,659  | )          |
|                                                                                                                 |       |        |        |        |       |        |       |
| OTHER INCOME  (EXPENSE)                                                                                              |       |        |        |        |       |        |       |
| Interest expense                                                                                                     |       | (2,105,676  | )           | (629,070    | )          | (1,400,403  | )          |
| Other  non-operating income                                                                                          |       | 3,107,907   |        | 2,426,168   |       | 647,076     |       |
| Patronage  dividend income                                                                                           |       | 49,240      |        | 148,182     |       | 193,413     |       |
| Total other  income (expense)                                                                                        |       | 1,051,471   |        | 1,945,280   |       | (559,914    | )          |
|                                                                                                                 |       |        |        |        |       |        |       |
| INCOME (LOSS)  BEFORE INCOME TAXES AND MINORITY  INTEREST OF SUBSIDIARY                                              |       | 4,153,416   |        | 7,653,667   |       | (4,008,573  | )          |
|                                                                                                                 |       |        |        |        |       |        |       |
| MINORITY  INTEREST IN NET LOSS OF SUBSIDIARY                                                                         |       | —      |        | —      |       | 368,403     |       |
|                                                                                                                 |       |        |        |        |       |        |       |
| INCOME (LOSS)  BEFORE INCOME TAXES                                                                                   |       | 4,153,416   |        | 7,653,667   |       | (3,640,170  | )          |
|                                                                                                                 |       |        |        |        |       |        |       |
| INCOME TAX  EXPENSE (BENEFIT)                                                                                        |       | (7,160      | )           | 2,308       |       | —      |       |
|                                                                                                                 |       |        |        |        |       |        |       |
| NET INCOME  (LOSS)                                                                                                   |       | $           | 4,160,576   |        | $          | 7,651,359   |       | $ | (3,640,170 | ) |
|                                                                                                                 |       |        |        |        |       |        |       |
| BASIC AND  DILUTED EARNINGS (LOSS) PER CAPITAL UNIT                                                                  |       | $           | 0.14        |        | $          | 0.25        |       | $ | (0.12 | ) |
|                                                                                                                 |       |        |        |        |       |        |       |
| WEIGHTED AVERAGE  NUMBER OF UNITS OUTSTANDING FOR CALCULATION OF BASIC AND DILUTED EARNINGS (LOSS)  PER CAPITAL UNIT |       | 30,419,000  |        | 30,419,000  |       | 29,758,885  |       |

 

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

 

F-4

----

** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED STATEMENT OF CHANGESIN MEMBERS’ EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND2005**

 
| ** **                                                            | ** ** | **Class A Units** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                            | ** ** | **Units**                   | ** ** | **Amount** | ** ** |
|                                                                  |       |                        |       |   |   |
| **BALANCES,  JANUARY 1, 2005**                                        |       | 28,228,500                  |       | $ | 32,122,573 |   |
|                                                                  |       |                        |       |   |   |
| Net income  (loss)                                                    |       | —                      |       | (3,640,170 | ) |
|                                                                  |       |                        |       |   |   |
| Issuance of new  capital units                                        |       | 2,190,500                   |       | — |   |
|                                                                  |       |                        |       |   |   |
| **BALANCES,  DECEMBER 31, 2005**                                      |       | 30,419,000                  |       | 28,482,403 |   |
|                                                                  |       |                        |       |   |   |
| Net income  (loss)                                                    |       | —                      |       | 7,651,359 |   |
|                                                                  |       |                        |       |   |   |
| Recognition of  capital units previously recorded as temporary equity |       | —                      |       | 3,270,251 |   |
|                                                                  |       |                        |       |   |   |
| **BALANCES,  DECEMBER 31, 2006**                                      |       | 30,419,000                  |       | 39,404,013 |   |
|                                                                  |       |                        |       |   |   |
| Net income  (loss)                                                    |       | —                      |       | 4,160,576 |   |
|                                                                  |       |                        |       |   |   |
| Distributions to  members                                             |       | —                      |       | (6,400,000 | ) |
|                                                                  |       |                        |       |   |   |
| **BALANCES,  DECEMBER 31, 2007**                                      |       | 30,419,000                  |       | $ | 37,164,589 |   |

 

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

 

F-5

----

** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND2005**

 
| ** **                                                    | ** ** | **2007**    | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| OPERATING  ACTIVITIES                                         |       |        |       |       |       |       |       |
| Net income  (loss)                                            |       | $           | 4,160,576  |       | $          | 7,651,359  |       | $ | (3,640,170 | ) |
| Charges and  credits to net income (loss) not affecting cash: |       |        |       |       |       |       |       |
| Depreciation and  amortization                                |       | 2,689,574   |       | 3,324,808  |       | 3,404,815  |       |
| Minority  interest in net loss of subsidiary                  |       | —      |       | —     |       | (368,403   | )          |
| Loss on sale of  fixed assets                                 |       | 552         |       | —     |       | 6,081      |       |
| (Gain) loss on  equity method investment                      |       | (577,240    | )          | (667,726   | )          | 69,831     |       |
| Non-cash  patronage dividends                                 |       | (24,611     | )          | (74,076    | )          | (116,048   | )          |
| Change in  current assets and liabilities                     |       | (29,453,823 | )          | (1,549,011 | )          | (5,654,146 | )          |
| NET CASH FROM  (USED FOR) OPERATING ACTIVITIES                |       | (23,204,972 | )          | 8,685,354  |       | (6,298,040 | )          |
|                                                          |       |        |       |       |       |       |       |
| INVESTING  ACTIVITIES                                         |       |        |       |       |       |       |       |
| Purchase of  property and equipment                           |       | (1,002,652  | )          | (660,397   | )          | (600,739   | )          |
| Patent costs                                                  |       | (99,806     | )          | (89,704    | )          | (175,453   | )          |
| Investments in  MnSP                                          |       | —      |       | (420,120   | )          | —     |       |
| Retirement of  patronage dividends                            |       | 27,922      |       | —     |       | —     |       |
| Proceeds from  sales of property and equipment                |       | 6,855       |       | —     |       | —     |       |
| NET CASH (USED  FOR) INVESTING ACTIVITIES                     |       | (1,067,681  | )          | (1,170,221 | )          | (776,192   | )          |
|                                                          |       |        |       |       |       |       |       |
| FINANCING  ACTIVITIES                                         |       |        |       |       |       |       |       |
| Change in excess  of outstanding checks over bank balances    |       | (2,538,488  | )          | 3,675,583  |       | (2,741,471 | )          |
| Net proceeds  from seasonal borrowings                        |       | 23,448,082  |       | —     |       | —     |       |
| Proceeds from  long-term debt                                 |       | 1,300,000   |       | —     |       | 6,559,223  |       |
| Principal  payments on long-term debt                         |       | (77,155     | )          | (2,942,037 | )          | (965,481   | )          |
| Proceeds from issuance  of capital units                      |       | —      |       | (10,049    | )          | 4,286,094  |       |
| Decrease in  subscriptions receivable                         |       | 232,695     |       | 2,580      |       | —     |       |
| Distributions to  members                                     |       | (6,400,000  | )          | —     |       | —     |       |
| NET CASH FROM  FINANCING ACTIVITIES                           |       | 15,965,134  |       | 726,077    |       | 7,138,365  |       |
|                                                          |       |        |       |       |       |       |       |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                      |       | (8,307,519  | )          | 8,241,210  |       | 64,133     |       |
|                                                          |       |        |       |       |       |       |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF YEAR                 |       | 8,316,766   |       | 75,556     |       | 11,423     |       |
|                                                          |       |        |       |       |       |       |       |
| CASH AND CASH  EQUIVALENTS, END OF YEAR                       |       | $           | 9,247      |       | $          | 8,316,766  |       | $ | 75,556 |   |

 

(continued on next page)

 

F-6

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

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

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND2005**

 

**SUPPLEMENTAL DISCLOSURESOF CASH FLOW INFORMATION**

 
| ** **                                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005**  | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Cash paid during the year for: |       |     |       |     |       |      |       |
| Interest                                                |       | $        | 2,131,587  |     | $          | 1,350,123 |       | $ | 1,350,123 |   |
|                                                    |       |     |       |     |       |      |       |
| Income taxes                                            |       | $        | —     |     | $          | —    |       | $ | — |   |
|                                                    |       |     |       |     |       |      |       |
| Non-cash  investing and financing activities:           |       |     |       |     |       |      |       |
| Subscriptions  receivable                               |       | $        | —     |     | $          | 10,049    |       | $ | 209,656 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-7

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - PRINCIPAL ACTIVITY ANDSIGNIFICANT ACCOUNTING POLICIES**

** **

*Organization*

 

South DakotaSoybean Processors, LLC (the “Company” or “LLC”) processes and sells soybeanproducts, such as soybean oil, meal and hulls. The Company’s principal operations are in Volga, South Dakota.

 

The Company holdsa 66.74% equity interest in Urethane Soy Systems Company (“USSC”), which isresponsible for marketing, formulation and technical support of Soyol® (a polyol madefrom soybean oil) and related systems. The Company has the right to obtain additional interests if the Company electsto convert their convertible subordinate notes into equity.  The Company may convert those notes at anytime. If the Company elects to convert all of the notes to equity, the Companywould hold up to a 90.13% equity interest in USSC.  The Company consolidates the operations ofUSSC.

 

*Principlesof consolidation*

 

Investee companies inwhich the Company directly or indirectly owns more than 50% of the outstandingvoting securities or those over which the Company has effective control aregenerally accounted for under the consolidation method of accounting.  Under this method, an Investee company’sbalance sheet and results of operations are reflected within the Company’sConsolidated Financial Statements.  Allsignificant intercompany accounts and transactions have been eliminated.  Minority interest in the net assets andearnings and losses of a consolidated Investee are reflected in the caption “Minorityinterest of consolidated subsidiary” in the Company’s Consolidated BalanceSheet and Statement of Operations. Minority interest adjusts the Company’s results of operations to reflectonly the Company’s share of the earnings or losses of the consolidated Investeecompany.  Upon dilution of control below50%, the accounting method is adjusted to the equity or cost method ofaccounting, as appropriate, for subsequent periods.

 

*Cash andcash equivalents*

 

The Companyconsiders all highly liquid investment instruments with maturity of threemonths or less at the time of acquisition to be cash equivalents.

 

*Accountsreceivable*

 

Accountsreceivable are considered past due when payments are not received within thirtydays. Generally, these accounts receivable represent amounts due for sale ofsoybean meal, oil, hulls and refined oil.

 

The carryingamount of trade receivables is reduced by a valuation allowance that reflectsmanagement’s estimate of amounts that will not be collected.  Management reviews all receivable balancesthat exceed 90 days from the invoice date and, based on an assessment ofcurrent creditworthiness, estimates the portion, if any, of the balance thatmay not be collected.

 

*Inventories*

 

Finished goods(soybean meal, oil, refined oil, and hulls) and raw materials (soybeans) arevalued at estimated market value.  Thisaccounting policy is in accordance with the guidelines described in AICPAStatement of Position No. 85-3, *“Accounting byAgricultural Producers and Agricultural Cooperatives.”* Supplies andother inventories are stated at the lower of cost, determined by the first-in,first-out method, or market.

 

(continued on nextpage)

 

F-8

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

*Investments*

 

Investments incooperatives are carried at cost plus the amount of patronage earningsallocated to the Company, less any cash distributions received.

 

Prior to September 1,2007, the Company accounted for its 6.95% investment in Minnesota SoybeanProcessors (MnSP) using the equity method due to the related nature of operationsand the Company’s ability to influence management decisions of MnSP.  Under the equity method, the initialinvestment is recorded at cost and adjusted annually to recognize the Company’sshare of earnings and losses of the entity. On September 1, 2007, the services and management agreement betweenthe two companies was terminated. Commencing on that date, the Company ceased the accounting for itsinvestment in MnSP under the equity method, and began accounting for theinvestment at cost plus the amount of patronage earnings allocated to theCompany, less any cash distributions received. The financial statements as of December 31, 2006 have beenreclassified accordingly.

 

*Propertyand equipment*

 

Property andequipment is stated at cost. Expenditures for renewals and improvements thatsignificantly add to the productive capacity or extend the useful life of anasset are capitalized.  Expenditures formaintenance and repairs are charged to expense when incurred. When depreciableproperties are sold or retired, the cost and accumulated depreciation areeliminated from the accounts and the resultant gain or loss is reflected inincome.

 

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

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

 

The Company reviews itslong-lived assets for impairment whenever events indicate that the carryingamount of the asset may not be recoverable. If impairment indicators arepresent and the future cash flows is less than the carrying amount of theassets, values are reduced to the estimated fair value of those assets.

 

*Patents*

* *

The Company’spatents are amortized over their estimated useful lives, 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.

 

*Use ofestimates*

 

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

 

*RevenueRecognition*

 

Revenue isrecognized when the related products are shipped, which is when title istransferred to the customer.  Revenuesare presented net of discounts and sales allowances.

 

(continued on nextpage)

 

F-9

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

*Freight*

 

The Company presents all amounts billed to the customer for freight asa component of net revenue.  Costsincurred for freight are reported as a component of cost of revenue.

 

The Company’s “Shipping and Handling Costs” policy is in accordancewith EITF Issue 00-10, *Accounting forShipping and Handling Fees and Costs*.

 

*Advertisingcosts*

 

Advertising andpromotion costs are expensed as incurred. The Company incurred $121,643,$50,717, and $33,942 of advertising costs in the years ended December 31,2007, 2006, and 2005, respectively.

 

*Environmentalremediation*

 

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

 

*Accountingfor derivative instruments and hedging activities*

 

All of the Company’sderivatives are designated as non-hedge derivatives.  The futures and options contracts used by theCompany are discussed below.  Althoughthe contracts may be effective economic hedges of specified risks, they are notdesignated as, nor accounted for, as hedging instruments.

 

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

 

Unrealized gains andlosses on futures and options contracts used to hedge soybean, oil and mealinventories are recognized as a component of net proceeds for financialreporting. Inventories are recorded at estimated market value. Consequently,unrealized gains and losses on derivative contracts are offset by unrealizedgains and losses on inventories and reflected in current earnings.

 

*Earningsper capital unit*

 

Earnings per capital unitare calculated based on the weighted average number of capital units outstanding.  The Company has no other capital units orother member equity instruments that are dilutive for purposes of calculatingearnings per capital unit.

 

*Incometaxes*

 

On June 20,2002, the members approved a plan of reorganization to convert the Cooperative’sstructure from an exempt organization to a limited liability company.  Accordingly, under the Internal Revenue Code, the income ofthe Company flows through to the members to be taxed at the individual leveland there is no corporate income tax provision.

 

(continued on nextpage)

 

F-10

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

*Reclassifications*

 

Reclassifications have been made to the December 31, 2006 and December 31,2005 financial information to conform to the current periodpresentation. These reclassifications have no effect on previouslyreported net income or members’ equity.

 

*Recentaccounting pronouncements*

 

In September 2006,the SEC released Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on the SEC’s views regarding theprocess of quantifying materiality of financial statement misstatements.  SAB 108 is effective for fiscal years endingafter November 15, 2006.  Theadoption of SAB 108 has not had a significant impact on the Company’s resultsof operations or financial position.

 

In September 2006,the FASB issued FAS 157, “Fair Value Measurements” (“SFAS 157”).  This standard defines fair value, establishesa framework for measuring fair value in generally accepted accountingprinciples, and expands disclosures about fair value measurements.  This statement is effective for financialstatements issued for fiscal years beginning after November 15, 2007,although earlier application is encouraged. The Company is currently evaluating the impact of adopting SFAS 157 onits financial statements, but does not believe the adoption of this standardwill have a significant impact on the Company’s results of operations orfinancial position.

 

On February 15, 2007, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 159, “The FairValue Option for Financial Assets and Financial Liabilities – Including anAmendment of FASB Statement No. 115” (“SFAS 159”).  This standard permits an entity to measurefinancial instruments and certain other items at estimated fair value.  Most of the provisions of SFAS 159 areelective; however, the amendment to FASB 115, “Accounting for CertainInvestments in Debt and Equity Securities,” applies to all entities that owntrading and available-for-sale securities. The fair value option created by SFAS 159 permits an entity to measureeligible items at fair value as of specified election dates.  The fair value option (a) may generallybe applied instrument by instrument, (b) is irrevocable unless a newelection date occurs, and (c) must be applied to the entire instrument andnot to only a portion of the instrument. SFAS 159 is effective as of the beginning of the first fiscal year thatbegins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscalyear provided that the entity (i) makes the choice in the first 120 daysof that year, (ii) has not yet issued financial statements for any interimperiod of such year, and (iii) elects to apply the provisions of FASB157.  Management is currently evaluatingthe impact of SFAS 159, if any, on the Company’s financial statements.

 

In December 2007,the FASB issued SFAS No.160, *Non-controlling Interestsin Consolidated Financial Statements, including an amendment of ARB No. 51(“SFAS No, 160)*which established accounting and reporting standardsfor the non-controlling interest in a subsidiary and for the deconsolidation ofa subsidiary. The effective date of SFAS No. 160 is for fiscal years andinterim periods within those fiscal years, beginning on or after December 15,2008.**We are still evaluating the effectsthat SFAS No. 160 will have on our consolidated financial statements dueto the recurring losses of USSC that have been 100% absorbed by SDSP sinceapproximately 2005.

 

(continued on nextpage)

 

F-11

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 2 - INVENTORIES**

 
| ** **                         | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
|                               |       |       |       |       |       |
| Finished goods                     |       | $          | (1,564,589 | )          | $          | 4,288,113 |   |
| Raw materials                      |       | 35,620,472 |       | 11,478,020 |       |
| Supplies &  miscellaneous |       | 47,663     |       | 47,662     |       |
|                               |       |       |       |       |       |
| Totals                             |       | $          | 34,103,546 |       | $          | 15,813,795 |   |

 

Finished goods and rawmaterials are valued at estimated market value, which approximates netrealizable value.  In addition, futuresand option contracts are marked to market through cost of revenues, withunrealized gains and losses recorded in the above inventory amounts.  This market adjustment caused the finishedgoods to have a credit balance as of December 31, 2007.  Supplies and other inventories are stated atthe lower of cost, determined by the first-in, first-out method, or market.

 

**NOTE 3 - MARGIN DEPOSITS**

** **

The Company hasmargin deposits with a commodity brokerage firm used to acquire futures andoption contracts to manage the price volatility risk of soybeans, crude soybeanoil and soybean meal.  Consistent withits inventory accounting policy, these contracts are recorded at marketvalue.  At December 31, 2007, theCompany’s futures contracts all mature within twelve months.

 

**NOTE 4 - INVESTMENTS INCOOPERATIVES**

 
| ** **                                        | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|---------------------------------------------------|------------|-----------|------------|-----------|------------|
| Investments in  associated cooperative companies: |       |      |       |      |       |
| Minnesota  Soybean Processors                     |       | $         | 4,464,621  |      | $          | 3,887,382 |   |
| Cenex Harvest  States                             |       | 3,488,670 |       | 3,516,592 |       |
| CoBank                                            |       | 775,768   |       | 751,157   |       |
|                                              |       | 8,729,059 |       | 8,155,131 |       |
| Less current  maturities                          |       | (644,184  | )          | —    |       |
|                                              |       |      |       |      |       |
| Totals                                            |       | $         | 8,084,875  |      | $          | 8,155,131 |   |

 

In August 2004,the Company exchanged a storage facility with a net book value of $2,322,561for 1,400,400 Class A shares in Minnesota Soybean Processors (MnSP), a Minnesotacooperative association.  The sharesapproximate 6.95% of MnSP’s outstanding equity. In 2006, the Company also invested another $420,120 when MnSP declared aunit retain equal to $0.30 per share of Class A Preferred Stock.  In 2004, the Company also acquired 287,500 8%Class B Non-Cumulative Convertible preferred shares in MnSP for$575,000.  Prior to September 1,2007, the Company accounted for its 6.95% investment in MnSP using the equitymethod due to the related nature of operations and the Company’s ability toinfluence management decisions of MnSP. The Company recognized gains (losses) of $577,240, $667,726, and($69,831) in 2007, 2006, and 2005, respectively, which is included in othernon-operating income (expense).  On September 1,2007, the services and management agreement between the two companies wasterminated.  Commencing on that date, theCompany ceased the accounting for its investment in MnSP under the equitymethod, and began accounting for the investment at cost

 

(continued on nextpage)

 

F-12

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

plus the amount ofpatronage earnings allocated to the Company, less any cash distributionsreceived.  The financial statements as ofDecember 31, 2006 have been reclassified accordingly.

 

On December 21,2007, MnSP issued a press release announcing that they will pay back the $0.30per Class A share unit retain in January 2008.  MnSP also announced that they will pay a$0.16 per Class A share cash dividend in March 2008.  The Company’s portion of these twodistributions will be $644,184, which has been classified as a current asset onthe balance sheet.

 

**NOTE 5 - PROPERTY AND EQUIPMENT**

 
| ** **                  | ** ** | **2007**   | ** ** | ** **       | ** ** |
|-----------------------------|------------|------------|------------|------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **Cost**   | ** ** | **Depreciation** | ** ** | **Net** | ** ** | **Net** | ** ** |
|                        |       |       |       |             |       |   |   |   |   |
| Land                        |       | $          | 237,643    |             | $          | — |   | $ | 237,643 |   | $ | 237,643 |   |
| Land  improvements          |       | 82,895     |       | 25,014           |       | 57,881 |   | 62,867 |   |
| Buildings and  improvements |       | 14,489,749 |       | 4,182,311        |       | 10,307,438 |   | 10,716,612 |   |
| Machinery and equipment     |       | 36,716,748 |       | 24,055,227       |       | 12,661,521 |   | 13,929,243 |   |
| Company vehicles            |       | 274,404    |       | 156,834          |       | 117,570 |   | 46,202 |   |
| Furniture and  fixtures     |       | 1,019,529  |       | 551,557          |       | 467,972 |   | 272,524 |   |
| Construction in  progress   |       | 417,016    |       | —           |       | 417,016 |   | 261,311 |   |
|                        |       |       |       |             |       |   |   |   |   |
| Totals                      |       | $          | 53,237,984 |             | $          | 28,970,943 |   | $ | 24,267,041 |   | $ | 25,526,402 |   |

 

**NOTE 6 - PATENTS AND OTHERINTANGIBLE ASSETS**

** **

On January 1,2003, the Company acquired an additional 54% interest in the outstanding commonstock of USSC to bring its total ownership interest to approximately 58%.  The results of USSC’s operations have beenconsolidated in the Company’s financial statements since that date.  The acquisition of a controlling interest inUSSC allows the Company to develop and market soy-based polyurethaneproducts.  Subsequently, through theparticipation in additional equity offering, SDSP has increased its majorityownership in USSC to 66.74%.

 

The allocation of the purchase price of USSC resulted in an assignmentof $7,401,245 to patents.  None of thesepatent costs recognized for financial reporting purposes is expected to bedeductible for tax purposes.  The patentsare being amortized using the straight-line method over a period of 16 to 20years, which is the shorter of the remaining estimated economic life of thepatents acquired or 20 years from the original file date.  Amortization expense was $434,245, $433,872,and $436,879 for the years ended December 31, 2007, 2006, and 2005,respectively.

 

In conjunction with thepurchase of USSC, the Company had a contractual obligation to pay former USSCshareholders a total of $4,050,000.  Oneremaining installment of $621,191 remains due as of December 31, 2007since its original maturity date of October 31, 2006 (see Notes 9 and 16).

 

(continued on nextpage)

 

F-13

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

The following tableprovides information regarding the Company’s other intangible assets as of December 31,2007 and 2006:

 
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|------------------|------------|------------|------------|
| **Intangible Assets**     | ** ** | **Life**   | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
| As of  December 31, 2007: |       |       |       |       |       |             |       |       |       |
| Patents                        |       | 16-20 Yrs. |       | $          | 8,087,205  |             | $          | (2,136,715 | )          | $ | 5,950,490 |   |
| Loan Origination  Costs        |       | 10 Yrs.    |       | 46,625     |       | (44,278          | )          | 2,347      |       |
| Trademarks                     |       |       |       | 17,398     |       | —           |       | 17,398     |       |
|                           |       |       |       |       |       |             |       |       |       |
|                           |       |       |       | $          | 8,151,228  |             | $          | (2,180,993 | )          | $ | 5,970,235 |   |
|                           |       |       |       |       |       |             |       |       |       |
| As of  December 31, 2006: |       |       |       |       |       |             |       |       |       |
| Patents                        |       | 16-20 Yrs. |       | $          | 7,991,945  |             | $          | (1,702,470 | )          | $ | 6,289,475 |   |
| Loan Origination  Costs        |       | 10 Yrs.    |       | 46,625     |       | (43,556          | )          | 3,069      |       |
| Trademarks                     |       |       |       | 12,852     |       | —           |       | 12,852     |       |
|                           |       |       |       |       |       |             |       |       |       |
|                           |       |       |       | $          | 8,051,422  |             | $          | (1,746,026 | )          | $ | 6,305,396 |   |

 

**NOTE 7 - NOTES PAYABLE – SEASONALLOAN**

** **

The Company hasentered into a revolving credit agreement with CoBank, which expires October 1,2008. The purpose of the credit agreement is to finance the inventory andaccounts receivable of the Company. On February 20, 2008, the Companyamended its Master Loan Agreement.  Underthe amendment, the Company may borrow up to $50 million through July 1,2008, upon which time the amount reduces to $28 million. Interest accrues at avariable rate (6.75% at December 31, 2007).  Advances on the revolving credit agreementare secured and limited to qualifying inventory and accounts receivable, net ofaccrued commodity purchases.  There wereadvances outstanding of $23,448,082 and $0 at December 31, 2007 and 2006,respectively.

 

(continued on nextpage)

 

F-14

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 8 - LONG-TERM DEBT**

 
| ** **                                                                                                                                                                                                                                                                                          | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                                                                                                                                                                                                |       |       |       |       |       |
| Revolving term  loan from CoBank, interest at variable rates (6.75% and 7.75% at  December 31, 2007 and 2006, respectively), secured by substantially all  property and equipment. Loan matures March 20, 2012.                                                                           |       | $          | 13,200,000 |       | $          | 11,900,000 |   |
|                                                                                                                                                                                                                                                                                                |       |       |       |       |       |
| Note payable to  former USSC shareholders, due in annual principal payments of $891,000,  interest at 0%, secured by USSC stock. Note matured on October 31, 2006.                                                                                                                             |       | 621,191    |       | 621,191    |       |
|                                                                                                                                                                                                                                                                                                |       |       |       |       |       |
| 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 matured on February 13, 2005. |       | 250,000    |       | 250,000    |       |
|                                                                                                                                                                                                                                                                                                |       |       |       |       |       |
| Notes payable to  various creditors at rates ranging from 0% to 7.5%. Notes mature on or before  March 16, 2009.                                                                                                                                                                               |       | 5,948      |       | 10,781     |       |
|                                                                                                                                                                                                                                                                                                |       |       |       |       |       |
| 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 matured September 1, 2007.                                                                                                  |       | —     |       | 72,322     |       |
|                                                                                                                                                                                                                                                                                                |       | 14,077,139 |       | 12,854,294 |       |
| Less current  maturities                                                                                                                                                                                                                                                                            |       | (2,175,951 | )          | (947,931   | )          |
|                                                                                                                                                                                                                                                                                                |       |       |       |       |       |
| Totals                                                                                                                                                                                                                                                                                              |       | $          | 11,901,188 |       | $          | 11,906,363 |   |

 

The Companyentered into an agreement as of October 6, 2005 with CoBank to amend andrestate its Master Loan Agreement (MLA), which includes both the revolving termloan and the seasonal loan discussed in Note 8. Under the terms and conditions of the MLA, CoBank agreed to makeadvances to the Company for up to $17,100,000 on the revolving term loan. Theavailable commitment decreases in scheduled periodic increments of $1,300,000every six months.  These payments werewaived for the September 2007 and March 2008 periods.  The principal balance outstanding on therevolving term loan was $13.2 million and $11.9 million as of December 31,2007 and 2006, respectively.

 

(continued on nextpage)

 

F-15

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 
| ** **                                                 | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|------------|------------|
| For the years ending December 31: |       |       |       |   |
| 2008                                                       |       | $          | 2,175,951  |   |
| 2009                                                       |       | 2,601,188  |       |
| 2010                                                       |       | 2,600,000  |       |
| 2011                                                       |       | 2,600,000  |       |
| 2012                                                       |       | 2,600,000  |       |
| Thereafter                                                 |       | 1,500,000  |       |
|                                                       |       |       |       |
| Total                                                      |       | $          | 14,077,139 |   |

 

**NOTE 9 - EMPLOYEE BENEFIT PLANS**

** **

The Company maintains a Section 401(k) planfor employees who meet the eligibility requirements set forth in the plandocuments.  The Company matches apercentage of employees’ contributed earnings. The amounts charged to expense under this plan were approximately$66,000, $48,000, and $56,000 for the years ended December 31, 2007, 2006,and 2005, respectively.

 

The Company has adeferred compensation plan for key employees. The agreements provide benefits, which vest over a three-yearperiod.  The Company shall pay theemployees in five equal annual installments upon retirement.  The future payments have been discounted at8%.  The amount recognized as expense(benefit) during the years ended December 31, 2007, 2006, and 2005 was$30,389, $(16,861), and $10,348, respectively. The Company made payments of approximately $10,600 during each of 2007,2006, and 2005. Deferred compensation payable is recorded at $121,361 and$101,592 as of December 31, 2007 and 2006, respectively.

 

**NOTE 10 - COMMITMENTS**

** **

*Operating Leases*

 

The Company has operatingleases for 270 rail cars from GE Capital. The leases require monthly payments of $107,925.  The Company also leases 97 rail cars fromTrinity Capital.  This lease requiresmonthly payments of $37,151.  The Companyalso leases 67 rail cars from AIG Rail Services.  This lease requires monthly payments of$25,996.  The leases began between 1996and 2004 and have terms ranging from 10-18 years.  Lease expense for all rail cars was$1,998,223, $2,096,951, and $2,066,911, for the years ended December 31,2007, 2006, and 2005, respectively.  TheCompany generates revenues from the use of 322 of these rail cars on otherrailroads.  Such revenues were$1,528,301, $1,888,207, and $2,161,622 for the years ended December 31,2007, 2006, and 2005, respectively.

 

The Company hasentered into a sub-lease agreement with the Dakota, Minnesota &Eastern Railroad Corporation (“DME”) for the hopper rail cars that it leasesfrom GE Capital.  The Company recognizesrevenue from this sub-lease as the hopper rail cars are used by the DME.  The sub-lease is for a twelve-month periodand is renewed annually.  The Company isresponsible for all maintenance of the rail cars.

 

The Company also has a number of other operating leases for machineryand equipment. Rental expense under these other operating leases was $497,179,$147,298, and $283,273 for the years ended December 31, 2007, 2006, and2005, respectively.

 

(continued on next page)

 

F-16

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 
| ** **                    | ** ** | **Rail Cars** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------|------------|-----------|------------|
| Year ended  December 31: |       |               |       |      |       |      |       |
| 2008                          |       | $                  | 2,052,864  |      | $          | 104,454   |       | $ | 2,157,318 |   |
| 2009                          |       | 2,052,864          |       | 69,866    |       | 2,122,730 |       |
| 2010                          |       | 2,052,864          |       | 68,021    |       | 2,120,885 |       |
| 2011                          |       | 2,052,864          |       | 67,046    |       | 2,119,910 |       |
| 2012                          |       | 2,052,864          |       | 55,871    |       | 2,108,735 |       |
| Thereafter                    |       | 9,512,129          |       | —    |       | 9,512,129 |       |
|                          |       |               |       |      |       |      |       |
| Totals                        |       | $                  | 19,776,449 |      | $          | 365,258   |       | $ | 20,141,707 |   |

 

*Exclusive Supply Agreement*

 

Wehave an exclusive supply agreement with ACH Foods to provide its facilitieswith a consistent supply of refined and bleached oil on a general requirementsbasis.  The oil is transported by railfrom our plant to one of ACH Foods’ facilities, where it is further processedfor the edible oil.  Pricing is fixeduntil August 31, 2008, when the agreement will terminate. While sales toACH Foods may still occur after termination of the agreement in a bid-offersituation, the Company may need to locate new customers for the sale of theirsoybean oil. Most of their new customers are likely to be companies engaged inbiodiesel production which, unless the current biodiesel market improves, maymean selling at prices below the price currently received from ACH Foods.

 

*Note Guarantee*

 

On March 6, 2007, webecame a guarantor of a loan between State of South Dakota Department ofTransportation and the Brookings County (South Dakota) Regional RailwayAuthority. On March 6, 2007, the State of South Dakota Department ofTransportation agreed to loan the Brookings County Regional Railroad Authoritya total sum of $1.81 million for purposes of making improvements to the railwayinfrastructure near our soybean processing facility in Volga, South Dakota. Theinterest rate on the loan is 4.857% per year. Principal and interest paymentsare due annually, with the first payment due on October 1, 2008 and thefinal payment due at maturity in October 2017. In consideration of thisunsecured loan, we agreed to guarantee to the State of South Dakota Departmentof Transportation the full loan amount, plus interest.  This guaranty, however, will become a directobligation of ours in October 2008, when we will be responsible for payingthe above-described principal and interest payments on an annual basis.

 

(continued on next page)

 

F-17

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 11 - CASH FLOW INFORMATION**

** **

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

 
| ** **                           | ** ** | **2007**    | ** **  | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------|------------|-------------|-------------|------------|------------|------------|------------|
| (Increase)  decrease in assets:      |       |        |        |       |       |       |       |
| Trade accounts  receivable           |       | $           | (8,026,477  | )          | $          | 5,664,169  |       | $ | (4,172,029 | ) |
| Inventories                          |       | (18,289,751 | )           | (6,874,133 | )          | (338,160   | )          |
| Margin account  deposit              |       | (3,355,328  | )           | (376,153   | )          | 876,407    |       |
| Prepaid expenses                     |       | 32,590      |        | (28,113    | )          | (26,378    | )          |
|                                 |       | (29,638,966 | )           | (1,614,230 | )          | (3,660,160 | )          |
| Increase  (decrease) in liabilities: |       |        |        |       |       |       |       |
| Accounts payable                     |       | 509,090     |        | 527,980    |       | (236,236   | )          |
| Accrued  commodity purchases         |       | 186,279     |        | (633,770   | )          | (2,105,012 | )          |
| Accrued expenses  and interest       |       | (529,995    | )           | 198,489    |       | 347,535    |       |
| Deferred  compensation               |       | 19,769      |        | (27,480    | )          | (273       | )          |
|                                 |       | 185,143     |        | 65,219     |       | (1,993,986 | )          |
|                                 |       |        |        |       |       |       |       |
| Total                                |       | $           | (29,453,823 | )          | $          | (1,549,011 | )          | $ | (5,654,146 | ) |

 

**NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS**

** **

Estimated fairvalues of the Company’s financial instruments (all of which are held fornon-trading purposes) are as follows:

 
| ** **                 | ** ** | **2007**     | ** ** | **2006**   | ** ** |
|----------------------------|------------|--------------|------------|------------|------------|
| ** **                 | ** ** | **Carrying** | ** ** | **Fair**   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                 | ** ** | **Amount**   | ** ** | **Value**  | ** ** | **Amount** | ** ** | **Value** | ** ** |
|                       |       |         |       |       |       |   |   |   |   |
| Cash and cash  equivalents |       | $            | 9,247      |       | $          | 9,247 |   | $ | 8,316,766 |   | $ | 8,316,766 |   |
|                       |       |         |       |       |       |   |   |   |   |
| Margin deposits            |       | 4,277,535    |       | 4,277,535  |       | 922,207 |   | 922,207 |   |
|                       |       |         |       |       |       |   |   |   |   |
| Long-term debt             |       | 14,077,139   |       | 14,077,773 |       | 12,854,294 |   | 12,854,003 |   |
|                            |            |              |            |            |            |  |  |  |  |  |  |  |  |

 

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

 

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

 

F-18

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 13 - RELATED PARTYTRANSACTIONS**

** **

During August 2000,the Company entered into an agreement with Minnesota Soybean ProcessorsCooperative (MnSP) for certain services and management of a proposed soybeanprocessing plant.  The Company agreed toreinvest a minimum of 80% of the fees earned from MnSP in equity units of MnSP.  During 2004, the Company exchanged a storagefacility with a net book value of $2,322,561 as its investment and paid cash of$600,931.

 

The Company washired to provide management and marketing services to MnSP on a cost-sharingbasis for automatically renewing five-year periods beginning in late 2003. On August 28,2006, MnSP’s Board of Directors gave the Company a one-year notice oftermination of the services and management agreement effective September 1,2007.

 

The Company wasreimbursed by MnSP for shared personnel costs, including labor and benefits, of$1,049,150, $1,603,285, and $1,380,155 under this arrangement for the yearsended December 31, 2007, 2006, and 2005, respectively. As of December 31,2007 and 2006, MnSP owed the Company $62,000 and $359,046, respectively.

 

In addition, theCompany is providing up to $1 million in interest free loans to members of theCompany who chose to invest in MnSP.  Theloans are secured by members’ equity in the Company.  As of December 31, 2007 and 2006, theCompany had outstanding notes receivable pursuant to this arrangement of$459,042 and $478,131, respectively. These will be repaid as the Board of Managers approves distributions ofprior earnings.

 

The Company andMnSP also purchase and sell processed products such as soybean meal, soybeanoil, biodiesel, etc. For the years ended December 31, 2007, 2006, and2005, the Company had sales to MnSP in the amount of $124,429, $658,120, and$10,761,235, respectively.  During theyears ended December 31, 2007, 2006, and 2005, the Company also purchasedproducts totaling $3,924,624, $13,745,174, and $10,179,713, respectively, fromMnSP.

 

Occasionally theCompany subleases rail cars to MnSP.  TheCompany charged MnSP $125,013, $296,654, and $47,505 for these subleases duringthe years ended December 31, 2007, 2006, and 2005, respectively.

 

**NOTE 14 - BUSINESS CREDIT RISK ANDCONCENTRATIONS**

** **

The Companymaintains its cash balances with various financial institutions. At timesduring the year, the Company’s balances exceeded the $100,000 insurance limitof the Federal Deposit Insurance Corporation. Management believes the risk ofloss to be low.

 

The Company alsogrants credit to customers throughout the United States and Canada.  The Company evaluates each customer’s creditworthiness on a case-by-case basis. Accounts receivable are generally unsecured.  These receivables were $24,177,223 and$15,997,915 at December 31, 2007 and 2006, respectively.

 

Soybean meal salesaccounted for approximately 54% of total revenues for the year ended December 31,2007, 51% of total revenues for the year ended December 31, 2006, and 56%of total revenues for the year ended December 31, 2005.  Approximately 16% of these sales were made toone customer for the year ended December 31, 2007.  At December 31, 2007, this customer owedthe Company approximately $2,873,000. Refined oil sales represented approximately 35% of total revenues forthe year ended December 31, 2007, 27% of total revenues for the year endedDecember 31, 2006, and 37% of total revenues for the year ended December 31,2005.  These sales were primarily made totwo customers for the year ended December 31, 2007. These customers owedthe Company approximately $4,253,000 at December 31, 2007.

 

F-19

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

Net revenue bygeographic area for the years ended December 31, 2007, 2006, and 2005 areas follows:

 
| ** **    | ** ** | **2007**   | ** **  | **2006**   | ** ** | **2005**    | ** ** |
|---------------|------------|------------|-------------|------------|------------|-------------|------------|
|          |       |       |        |       |       |        |       |
| United States |       | $          | 224,015,899 |       | $          | 195,971,017 |       | $ | 198,933,966 |   |
| Canada        |       | 23,725,868 |        | 16,750,909 |       | 11,437,000  |       |
|          |       |       |        |       |       |        |       |
|          |       | $          | 247,741,767 |       | $          | 212,721,926 |       | $ | 210,370,966 |   |

 

**NOTE 15 - MEMBERS’ EQUITY**

** **

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

 

The Board ofManagers approved a Form S-1 registration statement that was filed withthe Securities and Exchange Commission on February 14, 2005 for the saleof additional units in a public offering. The maximum offering under the statement was $11,250,000.  During 2005, the Company sold 2,190,500 memberunits for a total of $4,495,750, which is accounted for as temporary equity asdescribed in Note 17. The offering allowed the investor to initially pay 50%and sign a note payable to the Company for the remaining portion. At December 31,2007 and 2006, the Company had subscriptions receivable of $6,098 and $219,705,respectively, which is accounted for as a deduction from temporary equity untilcollected.

 

On February 20, 2007, the Board of Managersapproved a cash distribution of $6.4 million (21.0¢ per capital unit) payable to holders of capital units during2006.  Cash distributions paid in 2007totaled $6.4 million and have been charged to members’ equity.

 

**NOTE 16 - CONTINGENCIES**

** **

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

 

On January 31, 2007, the Company, along with our chief executiveofficer, commercial manager, and two Board members were named as defendants ina lawsuit filed in the United States District Court for the District ofMinnesota. The plaintiffs, Transocean Group Holdings PTY Ltd. and TransoceanGlobal Biofuels PTY Ltd., of Sydney, Australia (“Transocean”), allege that theCompany breached a heads of agreement with Transocean dated April 28,2006.  The heads of agreement concernedthe potential development and operation of a biodiesel

 

F-20

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

refinery through a company called High Plains Biofuels, Inc., tobe owned by the Company and Transocean as shareholders. Transocean alleges thatthe individual defendants breached fiduciary duties to High Plains Biofuels.Transocean is seeking relief by way of specific performance on the heads ofagreement, or, alternatively, its expectation damages which is unknown at thistime.  Based upon their investigation ofthe facts surrounding the case, management believes that Transocean’sallegations are meritless and are vigorously defending the action; however,management can not provide any assurance that the Company will be successful indisposing of the case or that any costs of settlement or damages would not bematerial if they are unable to get the case dismissed.  The Company filed an answer to Transocean’scomplaint on September 17, 2007, but no trial date has been set.

 

On December 31,2007, an arbitration demand was filed against us with the American ArbitrationAssociation. The plaintiffs, John Wawak, Ed Kurth, John Kurth, Rich Kurth, EdKurth (Executor for the Estate of Bruce Kurth), allege that we breached a stockpurchase agreement dated December 10, 2002. The stock purchase agreementrelates to our purchase of the plaintiffs’ interests in USSC. SDSP has withheldapproximately $1.01 million under an indemnification clause in the agreement,of which $621,191 is recorded in long-term debt as of December 31, 2007.The plaintiffs claim that they are entitled to the original payments in fullunder the agreement. Based upon our investigation of the facts surrounding thecase, management believes that they did not breach the agreement or owe anymoney to the plaintiffs. The arbitration hearing is expected to occur on May 28,2008.

 

On June 7,2005, the Company received notification from the Securities and ExchangeCommission (“SEC”) that the Company’s filings were under review. During thecourse of the review, the SEC requested additional information about theCompany’s change in auditors for the audit of its financial statements for theyear ended December 31, 2004 as disclosed in the Company’s 8-K filingdated January 18, 2005. After considering such information, managementdetermined that the independence of the audit firm, Eide Bailly LLP, withrespect to its audit of financial statements for the year ended December 31,2003 was compromised and decided to have the financial statements for thatperiod reaudited.  As a result, in thelatter part of 2005 the Company’s Board of Managers engaged Gordon, Hughes, &Banks LLP to reaudit the financial statements for the year ended December 31,2003. The re-audit produced an unqualified opinion and there was no effect onpreviously reported net income or member’s equity. During early 2005, prior toreceiving notice of the SEC review, the Company solicited investors through anS-1 registration statement which included the 2003 audit opinion letter fromEide Bailly LLP and the audited financial statements for the year ended December 31,2003.  Because the independence of EideBailly was compromised for that period, the registration statement did not meetthe requirements of federal securities law. The financial statements includedin the Company’s periodic reports for such periods, as amended, are nowcompliant with the independent auditor requirements of applicable securitieslaw, but there remains a possibility that claims could be made against theCompany relating to the inclusion in the offering materials of the originalaudit opinion letter. Asof December 31, 2007 and December 31, 2006, the Company has notrecorded a provision for this matter, as management believes the likelihood ofclaims being asserted by investors in the offering is remote under FAS 5.Management believes that any liability the Company may incur would nothave a material adverse effect on its financial condition or its results of operations.  Due to the circumstances described above, theCompany has recorded the net proceeds received to date, reduced by an amountthat no longer qualifies as a possible claim under federal and state securitieslaws, as temporary equity in the accompanying consolidated balance sheets.  Amounts recorded as temporary equity totaled$1,219,402 and $1,005,795 as of December 31, 2007 and 2006, respectively,consisting of 604,750 Class A capital units.

 

**NOTE 17 - QUARTERLY RESULTS OFOPERATIONS (UNAUDITED)**

 

The followingtable presents certain unaudited quarterly financial data for each of thequarters in the years ended December 31, 2007, 2006 and 2005.  This information has been prepared on thesame basis as the consolidated financial statements and includes, in theopinion of the Company, all adjustments (consisting of only normal

 

F-21

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** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

recurringadjustments) necessary to present fairly the quarterly results when read inconjunction with consolidated financial statements and related notesthereto.  The operating results for anyquarter are not necessarily indicative of results for any future period or thefull year.

 

***Unaudited Consolidated Statements of Operations***

*** ***
| ** **                                  | ** ** | **First**  | ** ** | **Second** | ** ** | **Third**  | ** ** | **Fourth** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| For the Year  Ended December 31, 2007: |       |       |       |       |       |       |       |       |       |
| Net revenues                                |       | $          | 51,542,154 |       | $          | 59,976,616 |       | $          | 60,587,433 |   | $ | 75,635,564 |   |
| Gross profit                                |       | 370,550    |       | 1,482,288  |       | 3,216,480  |       | 1,971,032  |       |
| Operating profit  (loss)                    |       | (609,861   | )          | 590,820    |       | 2,360,090  |       | 760,896    |       |
| Income (loss)  before income taxes          |       | (117,698   | )          | 934,846    |       | 2,600,421  |       | 735,847    |       |
| Net income  (loss)                          |       | (110,538   | )          | 934,846    |       | 2,600,421  |       | 735,847    |       |
| Basic and  diluted earnings (loss) per unit |       | $          | (0.00      | )          | $          | 0.03       |       | $          | 0.09       |   | $ | 0.02 |   |
|                                        |       |       |       |       |       |       |       |       |       |
| For the Year  Ended December 31, 2006: |       |       |       |       |       |       |       |       |       |
| Net revenues                                |       | $          | 62,835,648 |       | $          | 53,289,632 |       | $          | 45,195,584 |   | $ | 51,401,062 |   |
| Gross profit                                |       | 1,119,831  |       | 2,978,100  |       | 2,102,232  |       | 2,995,997  |       |
| Operating profit  (loss)                    |       | 252,269    |       | 1,937,289  |       | 1,344,617  |       | 2,174,212  |       |
| Income (loss)  before income taxes          |       | 309,136    |       | 2,412,445  |       | 1,919,658  |       | 3,012,428  |       |
| Net income  (loss)                          |       | 309,136    |       | 2,410,137  |       | 1,919,658  |       | 3,012,428  |       |
| Basic and  diluted earnings (loss) per unit |       | $          | 0.01       |       | $          | 0.08       |       | $          | 0.06       |   | $ | 0.10 |   |
|                                        |       |       |       |       |       |       |       |       |       |
| For the Year  Ended December 31, 2005: |       |       |       |       |       |       |       |       |       |
| Net revenues                                |       | $          | 46,151,560 |       | $          | 49,665,296 |       | $          | 62,194,975 |   | $ | 52,359,135 |   |
| Gross profit                                |       | (889,104   | )          | (1,318,306 | )          | 1,444,419  |       | 1,141,155  |       |
| Operating profit  (loss)                    |       | (1,992,723 | )          | (2,502,150 | )          | 765,292    |       | 280,922    |       |
| Income (loss)  before income taxes          |       | (2,099,094 | )          | (2,347,475 | )          | 855,261    |       | (48,862    | )          |
| Net income  (loss)                          |       | (2,099,094 | )          | (2,347,475 | )          | 855,261    |       | (48,862    | )          |
| Basic and  diluted earnings (loss) per unit |       | $          | (0.07      | )          | $          | (0.08      | )          | $          | 0.03       |   | $ | (0.00 | ) |

 

Certainreclassifications have been made to the quarterly consolidated statements ofoperations to conform to the annual presentations.

 

**NOTE 18 - SUBSEQUENT EVENT**

** **

On February 20,2008, the Company’s Board of Managers approved a cash distribution ofapproximately $3.8 million.  Inaccordance with our operating agreement and distribution policy, thedistribution will be issued to our members as well as to eligible persons ofour predecessor cooperative who were subject to patronage retainage throughwritten notices of allocation.  Over $2.4million (approximately 7.7¢ per capital unit) was distributed to our members onFebruary 28, 2008, and the $1.4 million distribution to eligible personsof our predecessor cooperative is expected to be paid and issued on or about April 30,2008.

 

On February 20,2008, the Company amended its Master Loan Agreement with CoBank.  Under the amendment, the revolving creditagreement was increased from $38 million to $50 million through July 1,2008.  On July 2, 2008, however, thecredit line reverts to $28 million until the loan’s maturity date on October 1,2008.  In addition, the amendment changedthe working capital covenant from a requirement of not less than $6.5 millionto a requirement of not less than $9 million. All other terms and conditions under the Master Loan Agreement andsubsequent amendments remained the same.

 

F-22

----

## ** **

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

 

The Board ofManagers

South DakotaSoybean Processors, LLC

Volga, SouthDakota

 

Under the date of March 21,2008, we reported on the consolidated balance sheets of South Dakota SoybeanProcessors, LLC as of December 31, 2007 and 2006, and the related consolidatedstatements of operations, members’ equity, and cash flows for each of the yearsin the three year period ended December 31, 2007.  In connection withour audits of the aforementioned consolidated financial statements, we alsohave audited the related financial statement schedules as listed in theaccompanying index.  The financial statement schedules are theresponsibility of the Company’s management.  Our responsibility is toexpress an opinion on the financial statement schedules based on our audits.

 

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

 

 

***/s/ Gordon, Hughes &Banks, LLP***

 

Greenwood Village,Colorado

March 21, 2008

 

F-23

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**SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

**FINANCIAL STATEMENT SCHEDULE**

 
| ** **                          | ** ** | ** **            | ** ** | **Charged**            | ** ** | ** **     | ** ** | ** **          | ** ** |
|-------------------------------------|------------|-----------------------|------------|------------------------|------------|----------------|------------|---------------------|------------|
| ** **                          | ** ** | ** **            | ** ** | **(Credited) to** | ** ** | ** **     | ** ** | ** **          | ** ** |
| ** **                          | ** ** | **Balance at**   | ** ** | **Costs and**     | ** ** | ** **     | ** ** | **Balance at** | ** ** |
| ** **                          | ** ** | **Beginning of** | ** ** | **Expenses**           | ** ** | ** **     | ** ** | **End of**     | ** ** |
| **Description**                     | ** ** | **Period**            | ** ** | **Additions**          | ** ** | **Deductions** | ** ** | **Period**          | ** ** |
|                                |       |                  |       |                   |       |           |       |                |       |
| Deducted from  asset accounts:      |       |                  |       |                   |       |           |       |                |       |
| Year ended  December 31, 2005: |       |                  |       |                   |       |           |       |                |       |
| Allowance for  doubtful accounts    |       | $                     | 28,000     |                   | $          | 15,157         |       | $                   | —     |   | $ | 43,157 |   |
|                                |       |                  |       |                   |       |           |       |                |       |
| Deducted from  asset accounts:      |       |                  |       |                   |       |           |       |                |       |
| Year ended  December 31, 2006: |       |                  |       |                   |       |           |       |                |       |
| Allowance for  doubtful accounts    |       | $                     | 43,157     |                   | $          | 529            |       | $                   | (348       | ) | $ | 43,338 |   |
|                                |       |                  |       |                   |       |           |       |                |       |
| Deducted from  asset accounts:      |       |                  |       |                   |       |           |       |                |       |
| Year ended December 31,  2007: |       |                  |       |                   |       |           |       |                |       |
| Allowance for  doubtful accounts    |       | $                     | 43,338     |                   | $          | 152,000        |       | $                   | (19,554    | ) | $ | 175,784 |   |

 

F-24

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