**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K/A**

**Amendment No. 1**

 

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

 

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

 

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

 

**COMMISSIONFILE NO.  000-50253**

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

(Exact Name of Registrant asSpecified in its Charter)

 

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

 

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

(Address of PrincipalExecutive Offices)

 

**(605)627-9240**

(Registrant’s TelephoneNumber)

 

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

SECURITIES REGISTEREDPURSUANT TO SECTION 12 (g) OF THE ACT:

**CLASS ACAPITAL UNITS**

 

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Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.o Yes    ý  No

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.o Yes    ý  No

 

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

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  ý

 

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

 

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

 

The aggregate market value of the registrant’scommon equity held by non-affiliates of the registrant was $37,452,617 computedby reference to the price at which capital units were last sold.

 

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

 

 

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**EXPLANATORYNOTE**

 

This Amendment No. 1 tothe Annual Report on Form 10-K of South Dakota Soybean Processors, LLC (“we,”“us” or “our” or the “Company”) for the year ended December 31, 2005,originally filed on March 31, 2006, is being filed for the purposes ofamending the Company’s financial statements for the year ended December 31,2005 and making the corresponding changes described below.

 

Subsequent to our initialfiling of our 10-K, we determined that the proceeds of our offering conductedin 2005 under an S-1 registration statement should be reclassified as temporaryequity. As a result, we are required to amend the Balance Sheet and Statementof Members’ Equity included in the financial statements for the year ended December 31,2005 and make corresponding revisions to related disclosures in our 10-K. Thisreclassification to temporary equity reflects the potential that this equity may bereduced or eliminated entirely if successful claims are made against us byinvestors who purchased capital units in the offering that closed May 31,2005 as a result of the fact that the S-1 Registration Statement included thereport of our former auditor whose independence we later determined wascompromised. Therefore, the registration statement did not meet therequirements of federal securities laws. We are also amending Notes 1, 16 and17 of Item 8 of our financial statements to reflect the circumstances leadingto and effects of this reclassification.

 

Changes also have been madeto the following items in this amendment as a result of the reclassification.

 

Part I

 

•Item 1A, Risk Factors, “Legal, Regulatory,Tax, and Debt Risks”.

 

Part II

 

•Item 6, Selected Financial Data.

 

•Item 7, Management’s Discussion and Analysisof Financial Condition and Results of Operations.

 

•Item 8, Financial Statements andSupplementary Data.

 

For the convenience of thereader, this Form 10-K/A sets forth the original Form 10-K in itsentirety. However, this Form 10-K/A only amends the items specificallydescribed above under Items 1A, 6, 7 and 8. No other information in theoriginal Form 10-K is amended. In addition, pursuant to the rules ofthe SEC, the original Form 10-K has been amended to contain currentlydated certifications from the our Chief Executive Officer and Chief FinancialOfficer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

 

This Amendment does notreflect events that have occurred after March 31, 2006, the date theAnnual Report on Form 10-K was originally filed. Information with respectto those events will be set forth, as appropriate, in our subsequent periodicfilings, including our Quarterly Reports on Form 10-Q and Current Reportson Form 8-K.

 

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**Part I**

 

# **CAUTIONARY STATEMENT REGARDING**

# **FORWARD-LOOKING INFORMATION**

# ** **

This information in thisannual report on Form 10-K for the year ended December 31, 2005,contains “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995 with respect to the business andoperations of South Dakota Soybean Processors and our affiliates. In addition,we and our representatives and agents may from time to time make otherwritten or oral forward-looking statements, including statements contained inour filings with the Securities and Exchange Commission and our reports tomembers and security holders. Words and phrases such as “believe,” “expect,” “anticipate,”“intend,” “plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,”“future,” “potential,” or the negatives of these words, and all similarexpressions identify forward-looking statements. We wish to caution readers notto place undue reliance on any forward-looking statements, which speak only asof the date made.

 

Our forward-lookingstatements are subject to risks and uncertainties that could cause actualresults to differ materially from those discussed in the forward-lookingstatements. These risks and uncertainties include, but are not limited to:

 

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

 

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

 

•                                          Changes in business strategy, capitalimprovements or development plans;

 

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

 

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

 

•                                          Changes in perception of food quality andsafety;

 

•                                          Changes in the taxation of limited liabilitycompanies;

 

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

 

We are not under any duty toupdate the forward-looking statements contained in this report. We cannotguarantee future results or performance or what future business conditions willbe like. We caution you not to put undue reliance on any forward-lookingstatements, which speak only as of the date of this report.

 

### **PART I**

### ** **

**Item 1.        Business.**

 

**Overview**

 

South Dakota SoybeanProcessors, LLC (“we,” “us,” “our” or the “Company”) owns and operates asoybean processing plant, a SoyolTM production facility, and asoybean oil refinery in Volga, South Dakota. We began producing crude soybeanoil, soybean meal and soybean hulls in late 1996, and since then we haveexpanded our business to include the development of new, vertically integratedproduct lines and management services. In 2000, we began providing managementservices to Minnesota Soybean Processors (MnSP), a soybean processing facilitylocated in Brewster, Minnesota, and obtained a minority interest in MnSP in2004. In 2002, we began refining crude soybean oil into a product known asrefined and bleached oil, and in early 2003, we became the majority owner andassumed management control of Urethane Soy Systems Company (USSC), which producesSoyolTM, a bio-based polyurethane product made from soybean oil.

 

Our core business consistsof processing locally grown soybeans into soybean meal and soybean oil. Soybeanmeal is primarily sold to resellers, feed mills, and to livestock producers aslivestock feed. Since the completion of our refining facility in 2002, we haveprocessed most of our crude soybean oil into refined and bleached oil. We sellour refined and bleached oil to a manufacturer of various retail and bulk foodproducts where it is further processed for human consumption. We continue toexplore the feasibility of installing facilities that would enable us tofurther process the refined 

 

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and bleached oil we produce into biodiesel,consistent with our strategy to increase our vertical integration by addingvalue to our core products.

 

We plan to maintain acompetitive position in the marketplace by producing high quality products,operating a highly efficient operation at the lowest possible cost, and addingvalue to our core products to capture larger margins. We plan to increase ourcost efficiency by increasing daily production capacity and to add value to ourproducts by investing in further processing of our products and developing andreviewing new applications for our products in the plastics and energy fields.

 

Our primary businessobjective is to maximize cash distributions to our members from the profitsgenerated through our operations and investments. At the same time, werecognize the need to maintain our financial strength, and to consider andimplement growth strategies that will allow us to continue meeting theseobjectives over time.

 

**Reorganization History**

 

 We were originallyorganized as a South Dakota cooperative in 1993 and our members are primarilyfarmers in South Dakota and neighboring states. As a South Dakota cooperative,we were entitled to single-level, pass-through tax treatment on incomegenerated through our members’ patronage. This allowed us to pass our incomeonto our members in the form of distributions without first paying taxesat the company level, similar to a partnership. However, as we grew, thecontinuing availability of this advantageous tax treatment became less secure.Accordingly, in 2001 the cooperative’s Board of Directors approved a plan toreorganize into a South Dakota limited liability company.

 

The plan of reorganizationwas duly approved by our members at a meeting held on June 20, 2002, andthe reorganization became effective July 1, 2002. The transaction was anexchange of interests whereby the assets and liabilities of the cooperativewere transferred for capital units of the newly formed limited liabilitycompany, Soybean Processors, LLC. The capital units were distributed to ourmembers upon dissolution of the cooperative at a rate of one capital unit ofthe limited liability company for each share of equity stock owned in thecooperative. The distribution of capital units to our members was registeredunder the Securities Act of 1933, as amended. For financial statement purposes,no gain or loss was recorded as a result of the exchange transaction. Uponcompletion of the reorganization, the name of the limited liability company waschanged to South Dakota Soybean Processors, LLC. As a limited liabilitycompany, which may elect to be taxed as either a partnership or acorporation, we elected to be taxed as a partnership in order to retain ourhistoric single-level income tax treatment at the member level.

 

**Industry Information**

 

The soybean processingindustry converts soybeans into soybean meal, soybean hulls and soybean oil.Food ingredients are the primary end use for the oil, while the meal 

 

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and hulls are mostly consumed by animals. Crudesoybean oil is refined by our customers for use as salad and cooking oil,baking and frying fat, and to a more limited extent, for industrial uses.

 

Soybean production isconcentrated in the central United States, Brazil, China and Argentina. In the2005 harvest season, the United States produced approximately 3.09 billionbushels of soybeans or approximately 37% of estimated world production. Theindustry’s trade associations and the USDA estimate that approximately 55% ofUnited States produced soybeans are processed domestically, 15% are exported aswhole soybeans, and 30% are retained for seed and residual use. Historically,there has been adequate soybean production in the upper Midwest to supply thelocal soybean processing industry.

 

Soybean processingfacilities are generally located close to adequate sources of soybeans and astrong demand for meal to decrease transportation costs. Poultry and swinedominate soybean meal consumption in the United States. On average, exports ofsoybean meal account for 15% to 20% of total production. A bushel of soybeanstypically yields approximately 44 pounds of meal and 11 pounds of crude oilwhen processed.

 

Soybean oil refineries aregenerally located close to processing plants. Oil is shipped throughout theUnited States and for export. Approximately 96% of domestic oil production isused in food applications and 4% in industrial applications.

 

Soybean crushing andrefining margins are cyclical, characteristic of a mature, competitiveindustry. In addition, while the price of soybeans may fluctuatesubstantially from year to year, the prices of meal and oil generally trackwith the soybeans, although not necessarily on a one-for-one basis, andtherefore, margins can be variable.

 

The soybean industry hasworked diligently to introduce soy products as bio-based substitutes forvarious petroleum-based products. Such products include biodiesel, soy ink,lubricants, candles and plastics. Demand for biodiesel, in particular, isexpected to expand, in part due to new federal incentives and supports.Biodiesel is a substitute for standard, petroleum-based diesel fuel that ismade from approximately 90% vegetable oil (such as soybean oil) or animal fatand 10% alcohol (methanol). The chemical reaction resulting from thecombination of these components produces biodiesel and glycerin. Although thelong-term average price differential of biodiesel is currently about $1 pergallon higher than standard diesel fuel, the 2004 Jobs Creation Act, which tookeffect on January 1, 2005, establishes a blender’s tax credit that equatesto about $1 per gallon of biodiesel. This new tax credit, along with someearlier, less significant production incentives, have essentially closed theprice gap between standard diesel fuel and biodiesel, considerably increasingthe feasibility of large-scale biodiesel production.

 

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**Products & Services**

 

*Soybean Processing*

 

We crush and processsoybeans to extract the soybean oil from the protein and fiber portions of thesoybean. Approximately 80% of the weight of the soybeans that we processannually is sold as soybean meal or hulls. The meal and hulls are shipped outby truck and rail car. Primary markets include the local truck market, thePacific Northwest, and exports to Canada. Currently, our significant mealcustomers include Land O’ Lakes of St. Paul, Minnesota, and CommoditySpecialists of Minneapolis, Minnesota and Shawnee Mission, Kansas. We currentlyextract crude soybean oil at a level equal to approximately 20% of the weightof the soybeans that we process annually. We process most of the crude soybeanoil we produce into refined and bleached oil or SoyolTM. Dependingupon market conditions, excess crude soybean oil is sold to other soybean oilrefiners, stored for future use, or delivered against Chicago Board of Trade(CBOT) futures contracts since our Volga plant site is a registered deliverypoint for the CBOT soybean oil futures contract. We receive a storage paymentthrough CBOT for all oil that is delivered into this program.

 

*Refining*

 

We began refining operationsin August 2002 with the start-up of our on-site refining facility adjacentto our crushing plant in Volga, South Dakota. Refining consists of processingthe crude soybean oil we produce through a series of processes and filtersto create a product known in the industry as refined and bleached oil. In 2005,we refined more crude soybean oil than we produced because we also refined 17million gallons of crude oil produced in 2004, plus we purchased crude soybeanoil from Minnesota Soybean Processors (MnSP) of Brewster, Minnesota.

 

We have an exclusive supplyagreement with ACH Foods Companies, Inc. of Memphis, Tennessee, to provideits facilities with a consistent supply of refined and bleached oil on ageneral requirements basis. Pricing is fixed until January 15, 2007, withthe option to renegotiate the price thereafter. The oil is transported by railfrom our plant to one of ACH Foods’ facilities, where it is further processedfor the edible oil market.

 

*Polyurethane*

 

We also process crudesoybean oil to produce SoyolTM, a bio-based polyurethane product madefrom specially processed crude soybean oil that has been developed for use as areplacement for certain petrochemical products. SoyolTM is relativelynew in the market and has been undergoing research and development in recentyears. We do the initial crude oil processingat our Volga, SouthDakota facility and ship it directly to USSC’s customers.

 

USSC developed SoyolTMand is responsible for its marketing. SoyolTM is a kind of polyol,which is a key chemical in foam formulation. It reacts with other ingredientsto form different types of polyurethane foam, which can be used in avariety of products such as insulation, packaging, furniture padding, carpetbacking and footwear.

 

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USSC holds the patents forSoyolTM and a number of related production processes and industrialuses. We have the exclusive rights to supply soybean oil for USSC’s sales ofSoyolTM until 2014 and have agreed not to sell soybean oil to anyother company in the plastics industry. We have also been assigned the rightsto a patent and have developed a second patent relating to the modification ofcrude soybean oil for use in industrial applications such as manufacturingSoyolTM which provides cost advantages over other process techniques.USSC’s research and development lab is based at the Volga, South Dakota site.

 

We originally purchased a 4%ownership in USSC in May 2000 for $1 million. In January 2003, weagreed to invest an additional $8.55 million to acquire a 58% majorityownership interest in USSC by purchasing shares from existing shareholders andnewly issued shares from USSC. We also agreed to take over the management ofUSSC. We currently hold six of the nine seats on USSC’s board of directors, andour CEO is also the president of USSC. We purchased the newly issued shares ofUSSC for $4.50 million which was paid during 2003 and 2004. We purchased theshares from the existing shareholders of USSC for $4.05 million on aninstallment basis and have one remaining installment of $891,000 payable in October of2006.

 

More recently, we acquiredanother 7.71% ownership in USSC and now own a 65.71% ownership in USSC. The7.71% interest was acquired in May 2005 in connection with a recentsettlement with a former employee of USSC. The employee sued USSC, USSC’s boardof directors, us, and our CEO, claiming breach of contract and wrongfultermination. The defendants counterclaimed for breach of fiduciary duty againstone of USSC’s directors. As part of a settlement in May 2005, thedirector against whom the defendants counterclaimed agreed to transfer to ushis shares in USSC, which represented the 7.71% increase in ownership. We may acquireadditional equity in USSC in the future, particularly in the event that USSCneeds additional working capital. In addition, to provide working capital toUSSC, we purchased from USSC convertible subordinated notes in October 2005for a sum of $657,100. We subsequently decided to convert a portion of thesenotes into equity in USSC which will increase our ownership in USSC to 70%. We may convertto equity additional portions of these convertible notes in the near future, aswell as purchase additional subordinated notes to provide working capital forUSSC.

 

**Other Business**

 

We also generate income fromvarious other projects, including management fees for overseeing the generaloperations of a 110,000 bushel per day soybean processing facility built byMinnesota Soybean Processors (MnSP) in Brewster, Minnesota. In addition, attimes we earn miscellaneous income for consulting fees, feasibility studies, orother projects.

 

In August 2000, weentered into an agreement with MnSP to provide construction management for itsnew soybean processing plant. Under the contract, we were paid 10% of the totalequity raised, and we agreed to reinvest 80% of the construction management 

 

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fees in equity of MnSP. MnSP completed its equityfundraising in April 2002, raising a total of approximately $29 million.Construction began approximately six months later and was completed in November 2003.

 

We made our requiredreinvestment in MnSP in 2004 by transferring a 63 million-pound oil storagetank and loading facilities that we constructed on land adjacent to the MnSPsite. In exchange for such transfer, we received 1,400,400 (post split) sharesof Class A Stock of MnSP, representing approximately 7% of MnSP’soutstanding shares. Also in 2004, we purchased 287,500 shares of Class BStock in MnSP. The shares are 8%, Non-Cumulative Convertible Class BPreferred Stock sold at $2.00 per share. We also made to our membersapproximately $500,000 in interest-free loans to invest in MnSP. These loanswill be repaid to us by these members through a reduction of future memberdistributions.

 

Currently, we are providingmanagement and marketing services to MnSP, including the day-to-day managementcontrol of MnSP’s plant under a Services and Management Agreement pursuant towhich we are paid primarily on a cost-sharing basis. Costs for variousemployees, such as commercial, accounting, and engineering employees, and otheradministrative expenses are allocated between us and MnSP based on the volumeof soybeans processed at each plant. Our CEO has general management andoversight responsibilities of MnSP under this Agreement.

 

**Raw Materials and Suppliers**

 

We procure soybeans fromlocal soybean producers and elevators. In 2005, soybean production in SouthDakota was approximately 138.6 million bushels, compared to 140 million bushelsin 2004 and 113 million bushels in 2003. We control the flow of soybeans intothe plant with a combination of pricing and contracting options. Threats to thesoybean supply include weather, changes in government programs, and competitionfrom other processors and export markets. Our refining plant and polyurethaneproduction receive their entire supply of crude soybean oil from our crushingplant.

 

##### **Utilities**

##### ** **

We use natural gas andelectricity to operate the crushing and refining plants. Natural gas is used inthe boilers for process heat and for drying soybeans. NorthWestern Corporationof Sioux Falls, South Dakota, provides natural gas service to the plant on aninterruptible basis. We are at risk to adverse price fluctuations in thenatural gas market, but we have the capability to use fuel oil as a back up fornatural gas if delivery is interrupted or market conditions dictate. We alsoemploy forward contracting to offset some of this risk. Our electricity issupplied by the City of Volga. A long term contract on electricity offsets someof our price exposure on electrical rates.

 

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**Employees**

 

We currently employapproximately 106 individuals. All but 21 of our employees are full-time. Wehave no unions or other collective bargaining agreements.

 

**Sales, Marketing and Customers**

 

Our primary meal markets arethe local truck market (typically within 200 miles of our Volga plant), theWestern United States, (Washington, Oregon and California), and exports (toCanada). Our primary soybean oil market is Illinois which is served by rail.Our rail service is provided by the Dakota, Minnesota and Eastern (DM&E)rail line, with connections to the Burlington-Northern Santa Fe (BNSF) and theUnion Pacific (UP). The table presented below lists the percentage of sales byquantity of product sold within various markets for 2005.

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

 

**Dependence upon a Single Customer**

 

We currently sell all of therefined and bleached soybean oil that we produce to ACH Foods Companies, Inc.under an eight year supply agreement that expires in 2007. If ACH Foodsbreaches its obligations under this contract and we are unable to locate othercustomers for our refined and bleached oil, or if we are unable to locate othercustomers for our excess crude oil, we may have to sell our oil atdiscounted prices and our business could be materially harmed.

 

**Competition**

 

We are in direct competitionwith several other soybean processing companies in the United States, many ofwhich have significantly greater resources than we. The United States soybeanprocessing industry is comprised primarily of 15 different companies operating68 plants in 22 states. It is a mature, consolidated and vertically-integratedindustry with four companies controlling nearly 85% of the processing. Thosefour companies are Archer Daniels Midland (ADM), Bunge, Cargill and AgProcessing, Inc. (AGP). The United States’ vegetable oil (includingsoybean oil) refining industry is divided between oilseed processors andindependent vegetable oil refiners. The oilseed processors operateapproximately 83% of the vegetable oil refining capacity in the United States,and ADM, Bunge, Cargill and AGP operate approximately 70% of the oil refiningcapacity. The three largest independent vegetable oil refiners are ACH Foods,Smuckers (Proctor & Gamble), and ConAgra (Hunt-Wesson).

 

We are the only significanthexane extraction and processing plant in South Dakota, and we believe that wehave approximately 7% of the soybean processing capacity in the Upper Midwestand about 1% in the United States. We are aware, though, of a producergroup from Webster, South Dakota, that is currently studying the feasibility 

 

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of building a facility approximately 100 miles fromour plant. Nevertheless, we plan to maintain our competitive position in themarket by producing high quality products and operating a highly efficientoperation at the lowest possible cost, and adding value to our products. Weplan to increase our cost efficiency by increasing daily production capacity,adding value to our products by investing in further processing of our productsand developing and reviewing new applications for our products in the plasticsand energy fields.

 

**Government Regulation andEnvironmental Matters**

 

The recovery of hexane, aspecial-use solvent used to extract oil from soybeans, is closely monitored bythe United States Environmental Protection Agency. The Environmental ProtectionAgency requires that the amount of hexane lost in the extraction process notexceed 0.2 gallons per ton of soybean oil produced on a rolling 12-monthaverage. Our production process currently meets this requirement.

 

As part of a CompliancePlan with the South Dakota Departments of Environment and Natural Resources, wehave a zero process discharge system and are currently in compliance with oursurface water discharge permits. We are also obligated to provide ongoingcompliance reports to the Department of Environment and Natural Resources.

 

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

 

We also maintain an EPAFacility Response Plan. This plan is also prepared according to the guidelinesof 40 CFR, Part 112, and pursuant to the Oil Pollution Act of 1990. Thisplan is designed to emphasize oil spill prevention and oil spill responsepreparedness.

 

**Item 1A.                        Risk Factors.**

 

**Operating Risks**

 

***Higher than anticipated operating costs, including but not limited toincreased prices for soybeans that are not accompanied by increased prices forsoybean meal or soybean oil, could reduce profitability.***In addition to general market fluctuationsand economic conditions, we could experience significant cost increasesassociated with the ongoing operation of the soybean processing and refiningplant or our interest in USSC caused by a variety of factors, many of which arebeyond our control. These cost increases could arise from an inadequate localsupply and resulting increased price for 

 

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soybeans that is not accompanied by an increase inthe price for soybean oil and meal. Labor costs can increase over time,particularly if there is any shortage of labor, or shortage of persons with theskills necessary to operate the plant. Adequacy and cost of electric andnatural gas utilities could also affect our operating costs. Changes in price,operation and availability of truck and rail transportation may affect ourprofitability with respect to the transportation of soybean meal, oil and otherproducts to our customers.

 

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

 

Our costs could alsoincrease as a result of various factors, including significant internationalcrises, acts of terrorism, or war, which could adversely impact our business,financial condition and results of operations. We could be adversely affectedby the threat of terrorist attacks and military actions conducted by the UnitedStates and others that increase energy costs.

 

***We may not be able to continue making cash distributions to ourmembers at the levels that we have paid in the past or even make cashdistributions at all.***Given the recent price fluctuations in the soy market and the workingcapital requirements to fund our investment in USSC, we may not havesufficient net income to make cash distributions to our members at the levelspaid in the past or even make cash distributions at all. If our minimum netincome is below $500,000 or a cash distribution to our members would violate orcause a default under the terms of our debt financing, we will not make anydistributions to our members, but rather will retain all of the net incomegenerated for future operating purposes, including general working capital. Inaddition, cash distributions in excess of 30% of our net income are entirely atthe discretion of our Board of Managers, and there is no guarantee as to whenor if we will generate sufficient profits to make distributions at anyparticular level or that we will make any distributions at all.

 

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

 

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

 

USSC’s ability tocommercialize SoyolTM will depend, among other things, on theperformance of the product as compared to alternative polyols, successfulcompletion of its ongoing development activities, its ability to market theproduct, and the relative cost to the customer of SoyolTM as comparedto alternative polyols. If SoyolTM is not successfully commercializedor marketed and fails to achieve market acceptance, USSC will likely notachieve or sustain profitable operations and we may be required to abandonour investment in USSC.

 

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

 

***The producers of petroleum-based polyols have economic resourcessuperior to USSC, which may make it difficult for USSC to compete withthem.***USSCcompetes with producers of petroleum-based polyols, such as Dow BASF andHuntsman. These companies have significantly greater resources than either weor USSC have to market SoyolTM.

 

***USSC is reliant on its patents and other proprietary rights related toSoyol*****TM*****.***USSC has three United States patents related to SoyolTM;however, USSC’s right to manufacture and market SoyolTM may belimited if it infringes on valid patents held by others. USSC has notundertaken or conducted any comprehensive patent infringement searches orstudies. If any such third parties hold any such conflicting rights, USSC may berequired to resort to litigation to defend such rights, resulting insubstantial costs and diversion of management’s attention. In the future, ifUSSC lost such litigation, USSC may be required to stop making, using orselling SoyolTM or to obtain licenses from and pay royalties toothers, which could have a significant and material adverse effect on itsoperations. In addition, other companies may develop substantiallyequivalent proprietary information which is not covered by USSC’s patentrights. If USSC is not able to adequately protect its registered trademarkSoyolTM, trade secrets, know-how and 

 

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continuing technological innovations to develop andmaintain a competitive advantage, USSC could be forced to abandon itsproduction and marketing of SoyolTM.

 

USSC also relies onunpatented trade secrets to protect its proprietary technology. USSC attemptsto protect its proprietary technology through confidentiality, non-compete andother similar agreements with its employees, but the confidentiality provisionsin these agreements may not be enforceable under the applicable laws ofcertain states. Other entities may independently develop or otherwiseacquire equivalent technology or gain access to USSC’s proprietary technology,which could decrease its value to USSC.

 

***Hedging transactions involve risks that could harm our profitability.***To reduce our price change risks associatedwith holding fixed price commodity positions, we generally take opposite andoffsetting positions by entering into commodity futures contracts (either astraight futures contract or an options futures contract) for soybeans andsoybean meal and crude soybean oil on the Chicago Board of Trade. While hedgingactivities reduce our risk of loss from increasing market values of soybeans,such activities also limit the gain potential which otherwise could result fromsignificant decreases in market prices of soybeans. Our policy is to maintainhedged positions within limits, but we can be long or short at any time. Inaddition, at any one time, our inventory and purchase contracts for delivery tothe plant may be substantial, which could limit our ability to adjust ourhedged positions. If our risk management policies and procedures that guide ournet position limits are inadequate, we could suffer adverse financialconsequences.

 

***We are reliant on one customer to purchase the refined and bleached oilthat we produce.***Wecurrently sell all of the refined and bleached soybean oil that we produce toACH Foods Company, Inc. under an eight year supply agreement which expiresin 2007. If ACH Foods breaches its obligations under this contract and we areunable to locate other customers for our refined and bleached oil, or if we areunable to locate other customers for our excess crude oil, we may have tosell our oil at discounted prices and our business could be materially harmed.

 

***There is a limited market for the refined and bleached oil that weproduce.***Therefined and bleached soybean oil that we produce must be deodorized before itcan be used in food products. There are a limited number of customers whopurchase refined and bleached soybean oil that has not been deodorized. If ACHFoods breaches its obligations under its supply agreement with us or does notrenew its supply agreement, we may have difficulty locating othercustomers for our refined and bleached oil and may be required to acquireadditional equipment to deodorize our refined and bleached oil so that we cansell it directly to food manufacturers.

 

***We may not be able to manage the expansion of the scope of ouroperations into soybean oil refining, polyol production and management of asecond soybean processing plant.***The recent beginning of soybean oil refining and the expansion of ourmanagement role in USSC may place increasing demands on our existingmanagement and operations. In addition, our existing management is nowoverseeing MnSP’s 

 

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operations in Brewster, Minnesota as well as oursoybean processing and refining plant in Volga, South Dakota. Our future growthand profitability will depend on, among other things, our ability tosuccessfully attract, train, motivate, manage and retain new and existing employeesand to continue to improve our operational, financial and managementinformation systems. Our management may be presented with unforeseenchallenges in effectively managing the diversification and expansion of ourbusiness. Management’s inability to manage our growth effectively could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

***We are dependent on our management and other key personnel, and loss oftheir services may adversely affect our business.***Our success and business strategy isdependent in large part on our ability to attract and retain keymanagement and operating personnel. This can present particular challenges forus because we operate in a specialized industry and because our business is locatedin a rural area. Such individuals are in high demand and are often subject tocompeting employment offers. In particular, our success is dependent on ourability to retain the services of Mr. Christianson, our Chief ExecutiveOfficer, Mr. Seurer, our Chief Financial Officer and Mr. Kersting,our Commercial Manager. The loss of the services of Messrs. Christianson,Kersting, or Seurer, or the failure of such individuals to perform theirjob functions in a satisfactory manner, would have a material adverse effect onour business operations and prospects.

 

**Industry Risks**

 

***We operate in an intensely competitive industry and we may not beable to continue to compete effectively.***We may not be able to continue topenetrate successfully the markets for our products. The soybean processingbusiness is highly competitive, and other companies presently in the market, orthat could enter the market, could adversely affect prices for the products wesell. We compete with other soybean processors such as Archer-Daniels Midland,Cargill, Bunge, and Ag Processing (AGP), among others, all of which are capableof producing significantly greater quantities of soybean products than we do,and may achieve higher operating efficiencies and lower costs due to theirscale.

 

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

 

***The detection and spread of the Avian Flu virus into the United Statescould adversely affect our sales of soybean meal.***The spread of the Avian Flu virus, otherwiseknown as the “bird flu virus,” has adversely affected the poultry industriesglobally, particularly in parts of Asia, the Middle East and Europe. In effortto combat the virus, 

 

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several countries have exterminated large quantitiesof poultry, including chicken, ducks and other kinds of fowl. Moreover, becauseof this virus, the demand for poultry in these areas in terms of humanconsumption has declined. While the virus has yet to be detected in the UnitedStates, many experts predict the virus will be detected inevitably. If thiswere to occur, the supply and demand for poultry may decline in the UnitedStates. Because soybean meal is a feed product for poultry, especiallychickens, any significant decline in the supply and demand for poultry in theUnited States could adversely affect the demand for soybean meal.  Accordingly,our sales of soybean meal and financial operations could be adversely affectedby the detection and spread of this virus in the United States.

 

***Our profitability is also influenced by the protein and moisturecontent 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 moisturecontent of the soybeans that are delivered to our plant also influences ourprofitability and the efficiency of our plant operations. Soybeans with high moisturecontent require more energy to dry them before they can be processed. While we may recoversome of these extra energy costs by paying producers less for high moisturesoybeans, these savings may not be sufficient to offset our additionaloperating expenses.

 

***Interruptions in energy supplies could have a material adverse impacton our business.***Soybeanprocessing requires a constant and consistent supply of energy. If there is anyinterruption in our supply of energy for whatever reason, such as supply,delivery or mechanical problems, we may be required to halt production. Ifproduction is halted for any extended period of time, it will have a materialadverse effect on our business. If we were to suffer interruptions in ourenergy supply, our production would likely fall and the profitability of ourbusiness would be harmed.

 

***Because soybean processing and refining is energy intensive, ourbusiness will be materially harmed if natural gas and electricity pricesincrease substantially.***Natural gas and electricity prices have historically fluctuatedsignificantly. We have the ability to convert our natural gas burning boiler todiesel fuel on a day’s notice; however, increases in the price of natural gasor electricity would harm our business by increasing our energy costs.

 

***Transportation costs are a factor in the price of soybean oil and mealand increased transportation costs could adversely affect our profitability.***Soybean oil may be shipped by trucks,rail cars, and barges. Added transportation costs are a significant factor inthe price of soybean oil, and we may be more vulnerable to increases 

 

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in transportation costs than other producers becauseour location in Volga is more remote than that of most of our competitors.Today most of our products are sold FOB Volga, South Dakota, and those that arenot have the full transportation cost added to the contract. Transportationcosts do not currently affect our margin directly; however the added costscould eventually affect demand for our products.

 

***Increases in the production of soybean meal or refined and bleachedsoybean oil could result in lower prices for soybean meal or refined andbleached soybean oil and have other adverse effects.***We expect that existing soybean processingand refining plants will construct additions to increase their production andthat new soybean processing and refining plants will be constructed as well. Ifthere is not a corresponding increase in the demand for soybean meal andrefined and bleached soybean oil or if the increased demand is not significant,the increased production of soybean meal and refined and bleached soybean oil may leadto lower prices for soybean meal and refined and bleached soybean oil. Theincreased production of soybean meal and refined and bleached soybean oil couldhave other adverse effects as well. For example, the increased production ofsoybean meal and refined and bleached soybean oil could result in increaseddemand for soybeans which could in turn lead to higher prices for soybeans,resulting in higher costs of production and lower profits if we are not able tolock in satisfactory margins on future soybean purchases and soybean meal andrefined and bleached soybean oil sales.

 

**Legal, Regulatory, Tax, and DebtRisks**

 

***We could be subject to potential claims from investors in the future asa result of our public offering in 2005 and based on the requirements offederal securities laws.*** On May 31, 2005, we closed a public offering, raising approximately$4.5 million in proceeds from existing and new investors. On June 7, 2005,we received notification from the SEC that our filings were under review.  During the course of the review, the SECraised questions about the lack of independence of the audit firm, Eide BaillyLLP, with respect to the audit of our financial statements for the year ended December 31,2003. Management subsequently determined that the independence of Eide BaillyLLP for that period had been compromised. We had the 2003 financial statementsreaudited and received an unqualified opinion; however, the original EideBailly LLP audit report was included in our prospectus for the 2005 publicoffering. As a result, our prospectus did not meet the requirements of federalsecurities laws. While the financial statements for these filings, as amended,now comply with the law, we still could be subject to certain claims frominvestors who purchased capital units in the 2005 public offering. If claimsare made against us based on this matter and the number and amount of suchclaims reaches a significant percentage of the proceeds raised in the offering,but we are not successful in settling or litigating such claims, the cost ofsettlement or damages may have an adverse effect on our profitability andcash flow.

 

***Legislative, legal or regulatory developments could adversely affectour profitability.***Theregulation of the environment is a constantly changing area of the law and weare regulated by numerous federal and state environmental rules orregulations. 

 

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For example, the Environmental Protection Agencycurrently requires monitoring of unrecovered levels of chemical hexane, whichis used in our oil extraction process. If the standard is revised to requirelower loss levels or for some reason we are unable to meet the standard in thefuture, we could face fines or other consequences that could increase ouroperating costs and reduce profits. It is possible that changes to other federalor state environmental rules or regulations could be adopted that wouldincrease our operating costs and expenses or require additional capitalinvestment.

 

Although our production ofrefined and bleached soybean oil and soybean meal is not directly regulated bythe Food & Drug Administration, we must comply with the FDA’s contentand labeling requirements, which are monitored at our customers’ facilities.Failure to comply with these requirements could result in fines, liability toour customers or other consequences that could increase our operating costs andreduce profits. In addition, changes to the FDA’s rules or regulationscould be adopted that would increase our operating costs and expenses, orrequire capital investment.

 

***We could face increased operating costs if we were required tosegregate genetically modified soybeans and the products generated from thesesoybeans.***In thelast several years, some soybean producers in our area have been plantinggenetically modified soybeans, commonly known as Round-up Ready beans. Neitherthe United States Department of Agriculture nor the FDA currently requires thatgenetically modified soybeans be segregated from other soybeans. If theseagencies or our customers were to require that we process these geneticallymodified soybeans separately, we would face increased storage and processingcosts and our profitability could be harmed.

 

***We are subject to ongoing state and federal environmental regulationsand could be subject to fines and penalties and increased operating costs.***We are subject to continuing compliance andreview by the South Dakota Department of Environment and Natural Resources inregard to a settlement agreement and stipulation that was entered into in April 2001in regard to claims brought by the Department of Environment and NaturalResources alleging that we had committed certain violations of the conditionsof our wastewater permits for the operation of our soybean processing facility.If we were ever found to be in violation of this settlement agreement andstipulation or other environmental permits or regulations in the future, wecould be subject to severe penalties, such as potential closing of the plant,and face increased operating costs to achieve compliance.

 

***If we are treated as a corporation for federal income tax purposes, ourmembers’ capital units could decline in value.***We have elected to be treated as apartnership for federal income tax purposes. This means that we do not payincome tax at the company level and that members pay tax on their proportionateshare of our net income. In the event there are changes in the law or IRSinterpretations, or trading in capital units that could result inclassification of us as a publicly traded partnership, for example, if ourcapital units trading system is not operated within the parameters of our IRSprivate letter ruling, we may be treated as a corporation rather than apartnership for federal income tax purposes. In that case, we would pay tax onour income at corporate 

 

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rates and no income, gains, losses, deductions orcredits would flow through to our members. Currently, the maximum effectivefederal corporate rate is 35%. In addition, distributions would generally betaxed to members upon receipt as corporate dividends. Because a tax would beimposed upon us at the entity level, the cash available for distribution tomembers would be reduced by the amount of the tax paid. Reduced distributionscould reduce the value of our members’ capital units.

 

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

 

***Our third party debt financing may reduce profitability andincrease the risk of the loss to our members.***As of December 31, 2005, we hadapproximately $15.8 million of outstanding long term and short termindebtedness, and an additional $17.8 million available under our lines ofcredit. The use of debt financing increases the risk that we will not be ableto continue operating profitably because we will need to make principal andinterest payments on this indebtedness. Debt financing also exposes our membersto the risk that their entire investment could be lost in the event of adefault on the indebtedness and a foreclosure and sale of our assets for anamount that is less than the outstanding debt.

 

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

 

We conduct our operations principallyfrom our facilities in Volga, South Dakota. We own these facilities which serveas collateral for our debt instruments. These facilities, which are located on46 acres of land, are served by multiple state highways and is near InterstateHighway 29 and has rail service provided by the Dakota, Minnesota and Eastern(DM&E) rail line, with connections to the Burlington-Northern Santa Fe(BNSF) and the Union Pacific (UP).

 

**Item 3.    Legal Proceedings.**

 

From time to time in theordinary course of our business, we may be named as a defendant in legalproceedings related to various issues, including without limitation, 

 

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workers’ compensation claims, tort claims, orcontractual dispute. Currently, we are not involved in any material legalproceedings. In that we become involved, or in the case of proceeding notdeemed material, we carry insurance that provides protection against generalcommercial liability claims, claims against our directors, officers andemployees, business interruption, automobile liability, and workers’compensation claims.

 

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

 

There were no matterssubmitted to a vote of security holders in the fourth quarter ending December 31,2005.

 

**Part II**

 

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

 

As of March 1, 2006,the total number of capital units outstanding was 30,419,000, owned and held by2,236 members.

 

*Trading Activity*

 

Our capital units are nottraded on an established public market such as a stock exchange or The NasdaqStock Market. Our capital units must be transferred in accordance with ourOperating Agreement and Capital Units Transfer System, which provides fortransfers to family members, upon death, by gift, and through a limited tradingservice, subject to Board of Managers’ final approval. Between July 1,2002 and July 1, 2005, we did not operate or use a trading service, but onJuly 1, 2005, we initiated a limited trading service through VariableInvestment Advisors, Inc., a Sioux Falls, South Dakota based broker-dealerthat is registered with the Securities and Exchange Commission as analternative trading system. The following table contains historical informationregarding the trading of capital units on our trading service:

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

 

There were no issuerpurchases of equity securities during the fourth quarter ending December 31,2005.

 

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*Trading Restrictions*

 

As a limited liabilitycompany, we must strictly restrict transfers of our capital units in order topreserve our preferential single-level tax status. Our capital units may notbe traded on any national securities exchange or in any over-the-countermarket. All transfers must be in accordance with our Capital Unit TransferSystem, as it may be amended by the Board of Managers from time to time.Our Capital Unit Transfer System prohibits any transfer that would result inthe loss of our partnership tax status.

 

Pursuant to our OperatingAgreement, a minimum of 2,500 capital units is required for membership, and nomember may own more than 1.5% of the total outstanding capital units. Inaddition to the transfer restrictions described above, under certain limitedcircumstances the Board retains the right to redeem the capital units at thegreater of $0.20 per capital unit or the original purchase price paid uponissuance of such capital units less cumulative distributions paid with respectto such capital units. The Board’s right to redeem is available in the event amember breaches the Operating Agreement or other contract with us or upon afailure to fulfill the membership requirements, including the foregoing minimumand maximum ownership requirements, but only if the member fails to cure thedefault within the twenty-four months after we send written notice. Under thetrading service, we do not permit the number of capital units traded throughthe service each year to exceed 2% of our total issued and outstanding capitalunits. This is necessary in order to ensure that the trading service fallswithin certain “safe harbors” contained in the publicly traded partnership rules underthe federal tax code

 

Our Operating Agreementprohibits transfers other than through the procedures specified in our CapitalUnits Transfer System. Under this system, all transactions must be approved bythe Board. The Board generally approves transfers that fall within “safeharbors” contained in the publicly traded partnership rules under thefederal tax code. Permitted transfers include transfers by gift or death, salesto qualified family members, and trades through the limited trading servicesubject to the 2% restriction

 

*Distributions*

 

In 2002, we paid total cashdistributions to our members in the amount of $5.5 million (19.53¢ per capitalunit on a post-split adjusted basis). In 2003, we paid total cash distributionsto our members in the amount of $2.5 million (9.0¢ per capital unit).In 2004, we made one cash distribution to our members in the amount ofapproximately $3.3 million (11.64¢ per capital unit). In 2005, we made no cashdistributions to our members.

 

Under our OperatingAgreement, the Board is required to distribute 30% of available net income(i.e. gross cash proceeds from operations after deducting amounts used to payexpenses or establish reserves at the Board’s discretion) to members each year,unless available net income does not exceed $500,000 or such a distributionwould violate or cause a default under the terms of our debt financing or othercredit facilities or is otherwise prohibited by law. Any other distributionsare entirely at the discretion of the 

 

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Board of Managers and there is no guarantee as towhen or if we will make distributions in any particular amount or at all andactual distributions will depend upon profitability, expenses and otherfactors. Earnings, losses and cash distributions are allocated to members basedon their percentage of capital unit ownership.

 

Our ability to issuedistributions in the future is substantially dependent upon our profitability,the discretion of our Board of Managers subject to the provisions of ourOperating Agreement, and the approval of our lenders.

 

**Item 6. Selected Financial Data.**

 

The following table setsforth selected financial data of South Dakota Soybean Processors, LLC and ourpredecessor cooperative for the periods indicated. The historical financialinformation in the table below includes audited financial data of ourpredecessor cooperative prior to the effectiveness of the reorganization on July 1,2002. The financial statements for the years ended December 31, 2005, 2004and 2003 included in Item 8 of this report were audited by Gordon, Hughes &Banks, LLP. The financial statements for the years ended December 31, 2002and 2001included in Item 8 of this report were audited by Eide Bailly LLP.

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

 

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(1) Adjusted for two-for-one capital unit spliteffective June 17, 2003.

 

**Item 7.       Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

*You shouldread the following discussion along with our financial statements and the notesto our financial statements included elsewhere in this report. The followingdiscussion contains forward-looking statements that are subject to risks,uncertainties and assumptions. Our actual results, performance and achievementsmay differ materially from those expressed in, or implied by, suchforward-looking statements. See “Cautionary Statement Regarding Forward-LookingInformation” at the beginning of this report.*

 

**Executive Overview and Summary**

 

We recorded a net loss of$3.6 million in 2005 verses net income of $0.7 million in 2004. The primaryfactors were the weak crushing margins for January through May 2005and an increase of $2.1 million in production expenses from 2004. Earlyweakness in the crushing margin was attributed to the local basis pricerelationship between soybeans and soybean meal, primarily because farmers werereluctant sellers after seeing soybean prices drop from above $8.00 per bushelto under $6.00 per bushel. However, the crushing margin improved from $0.327per bushel through May 2005 to $0.796 per bushel through the remainder of2005. Increased energy costs, particularly natural gas, accounted for all ofthe increased production expenses in 2005. On a positive note, administrativeexpenses decreased by $0.6 million or 14.5% and other non-operating incomeimproved by $0.4 million.

 

In 2006, we expect crushingmargins to be profitable but below the historical average. A large 2005 soybeancrop was produced in the United States with high oil content. While we expectthe local basis price relationship between soybeans and soybean meal to returnto a more historical level, we expect the basis level for soybean oil to weakenfor the first half of 2006. We also expect this to be followed by animprovement in the basis level for soybean oil in the second half of 2006 asnew biodiesel refineries increase soybean oil demand. Energy prices and thepotential impact 

 

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of the Avian bird flu, however, may adverselyimpact the demand for soybean meal and offset any improvements in the crushingmargins.

 

Furthermore, we expect tocontinue to make progress towards achieving our long-term objectives which isto deliver high quality products and services at the lowest possible costs andto add value by investing in the development of new applications for ourproducts in the plastics and energy fields. During 2005, we continued to expendcapital to fund the operations of Urethane Soy Systems Company, Inc. (“USSC”),our majority-owned subsidiary which produces SoyolTM, a bio-basedpolyurethane product made from soybean oil. Higher crude oil prices andincreasing demand for polyurethane plastics has increased the interest inpolyols and polyurethane systems. In July 2005, USSC restructured itsstaff and narrowed its market focus to enhance profitability. USSC’s focus in2006 is the following:

 

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

 

•     *SoyThermTM for polyurethane foaminsulation market* – In 2005 USSC finalized its half poundinsulation system and began commercially marketing the system. We expect growthin this market segment as we move into the spring and summer seasons in 2006.USSC will increase its product line to include a one pound system by June anda one and one-half pound system by the end of 2006.

 

•     *SoyMatrixTM , a resin for compositematerial in the pultrution and filament winding industry* – USSCentered into a mutual exclusivity supplier arrangement with a major fiberglasswindow manufacture in late 2005. We expect sales to start in the second quarterof 2006.

 

•    *Automotive industry* – Inthe automotive industry, USSC continues its work and development with FordMotor Co. Our target is to have USSC’s product in a 2008 model. USSC alsocontinues to work with Lear, Toyota, and Intier.

 

•    *Research for new or improved based polyolcontinues* – USSC expects to roll out a new three functional,multiple hydroxyls SoyolTM in the second quarter of 2006 and a fourthin the latter half of 2006.

 

Sales of USSC’s products areexpected to increase in 2006 due to increased price advantages. USSC is alsocurrently reviewing its strategy of patience, slow growth, and potential strategicalliances to meet its objectives.

 

**Company Profile**

 

We own and operate a soybeanprocessing plant, a soybean oil refinery, and a SoyolTM productionfacility in Volga, South Dakota. We were originally organized as a 

 

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South Dakota cooperative and reorganized into aSouth Dakota limited-liability company effective July 1, 2002. We beganproducing crude soybean oil and soybean meal in late 1996, and since then wehave expanded our business to include the development of new product lines andmanagement services. In 2000, we began providing management services toMinnesota Soybean Processors and obtained a minority interest in MnSP in 2004.In 2002, we began refining crude soybean oil into a product known as refinedand bleached oil, and in early 2003, we became the majority owner and assumedmanagement control of USSC.

 

**Results of Operations**

 

***Comparison ofYears Ended December 31, 2005 and 2004***

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

 

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

 

*GrossProfit/Loss* – For theyear ended December 31, 2005, we generated a gross profit of $378,000,compared to a gross profit of $5.5 million for the year ended December 31,2004. While revenues decreased by $27.8 million (11.7%), cost of revenuesdecreased by only $22.7 million (9.8%) over 2004. The decrease in gross profitwas due to a number of factors, including a tight local soybean market andhigher production expenses. Farmers were reluctant to sell their soybeans afterthey saw soybean prices drop from over $8.00 per bushel to under $6.00; thus,the local basis adjustment on soybeans increased. Our soybean meal and oilcustomers, however, were unwilling to absorb this increase due to the abundantsupply of soybeans and national soybean 

 

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processing capacity. In addition, natural gas pricessoared during 2005, resulting in approximately $2.0 million of additionalproduction expenses versus 2004. The difference in the cost of natural gas wasprimarily the result of increased demand for natural gas, reduced productionand inventories in the natural gas industry, as well as strong pricing inpetroleum commodities, such as unleaded gas and heating oil. Increased freightcosts resulted from higher product volumes delivered to customers, as well ashigher freight rates. During 2005, we shipped approximately 8% more soybeanmeal and hulls than the prior year.

 

*AdministrativeExpense* –Administrative expense, including all selling, general and administrativeexpenses, decreased by $650,000, or 14.5%, for the year ended December 31,2005 compared to the same period in 2004. This decrease resulted from lowergeneral and administrative expenses in USSC resulting from USSC’s restructuringof staff and narrowing of market focus in July 2005.

 

*InterestExpense* – In 2005,interest expense decreased by $25,000, or 1.8%, compared to 2004. The decreasewas due to lower debt levels resulting from the decrease in soybean prices. Theaverage debt level in 2005 was approximately $17.2 million, compared to anaverage debt level in 2004 of approximately $23.6 million. The decrease ininterest due to the lower debt levels was partially offset by higher interestrates on our senior debt. On December 31, 2005, we had outstanding debt of$15.8 million, the majority of which bore interest at an annual rate of 7.05%.On December 31, 2004, we had outstanding debt of $10.2 million, themajority of which bore interest at an annual rate of 4.85%.

 

*NetIncome/Loss* – Werecorded a net loss of $3.6 million for the year ended December 31, 2005,compared to net income of $689,000 in 2004. The decrease of $4.3 million in netincome was primarily attributable to a decrease in gross profit.

 

***Comparison ofYears Ended December 31, 2004 and 2003***

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

 

*Revenue* – Revenue increased from $207.3 million forthe year ended December 31, 2003 to $238.2 million for the year ended December 31,2004, an increase 

 

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of approximately $30.9 million, or 14.9%. Theimprovement was a result of several factors. Principally, the increase inrevenues was a result of higher soybean meal and soybean oil prices along withhigher sales volume of refined and bleached oil. The average sales prices forsoybean meal, crude soybean oil, and refined and bleached soybean oil increasedby 23.9%, 12.0%, and 30.4%, respectively. In addition, sales volume of refinedand bleached soybean oil increased by 7.3% in 2004 versus 2003. The increasesattributable to these factors were offset by a decrease of 85.1% in sales volumeof crude soybean oil during 2004, which was due to selling less crude soybeanoil than we held in storage during 2003.

 

*GrossProfit/Loss* – Duringthe year ended December 31, 2004, we generated a gross profit of $5.5million, compared to a gross profit of $4.2 million for the year ended December 31,2003. While revenues increased by $30.9 million, cost of revenues increasedonly $29.7 million over 2003. Revenues increased due to higher soybean meal andsoybean oil prices offset by a decrease in crude soybean oil volume. Theincreased cost of revenue was caused by a $26.1 million (15.0%) increase incost of product sold and a $3.1 million (21.4%) increase in freight expense forthe year ended December 31, 2004 compared to 2003. The increased cost ofproduct sold was due to higher soybean prices, which increased approximately25.0% from the year ended December 31, 2003. The increased freight costresulted from higher product volumes delivered to customers and higher freightrates.

 

*AdministrativeExpense* – Administrativeexpense, including all selling, general and administrative expenses, increasedby $837,000, or 23%, for the year ended December 31, 2004, compared to thesame period in 2003. This increase resulted from additional expenses incurredin connection with the management and operation of USSC, which remained in thedevelopmental stage and where we continued to incur marketing and research anddevelopment expenses to develop a market for SoyolTM. Some of theincrease in administrative expenses associated with USSC was offset by lowergeneral and administrative expenses that we incurred on our crushing andrefining operations as a result of our cost-sharing arrangement with MnSP.

 

*InterestExpense* – In 2004,interest expense increased by $620,000, or 77.7%, compared to 2003. Theincrease was due to higher debt levels resulting from the increase in soybeanprices and higher interest rates. On December 31, 2004, we had outstandingdebt of $10.2 million, most of which consists of our senior debt which boreinterest at an annual rate of 4.85% as of December 31, 2004. At December 31,2003, we had outstanding debt of $18.5 million, the majority of which boreinterest at an annual rate of 3.47%. The average debt level throughout 2004 wasapproximately $23.6 million compared to an average debt level during 2003 ofapproximately $21.8 million.

 

*NetIncome/Loss* – Werecorded net income of $689,000 for the year ended December 31, 2004,compared to net income of $3.4 million in 2003. The decrease of $2.7 million innet income was primarily attributable to a decrease in other non-operatingincome and an increase in administrative expenses incurred in connection withthe management and operation of USSC, offset by an increase in revenue as aresult of higher 

 

26

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soybean meal and soybean oil prices. Othernon-operating income decreased by $2.7 million (91.3%) for the year ending December 31,2004, compared to the same period in 2003. This decrease was primarily due to adecrease of $1.1 million in construction management income and a decrease of$1.5 million in soybean oil storage income.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

***Comparison of theyears ended December 31, 2005 and 2004***

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

 

*Cash Flows from OperatingActivities*

 

The decrease in net cashflow from operating activities between 2005 and 2004 was primarily attributedto a decrease in net income and an increase in working capital requirements.The increase in working capital requirements was related to increases in accountsreceivable and inventory, along with decreases in accrued commodity purchasesand accounts payable. Accounts receivable increased primarily due to placingcrude oil in storage with the Chicago Board of Trade in late December 2005.The increase in inventory was mostly due to holding an increased quantity ofsoybeans compared to 2004. The decrease in accrued commodity purchases wasattributed to possessing fewer soybeans on our deferred payment program at December 31,2005 than 2004. These increases to the working capital requirements were offsetby a decrease in our margin deposit accounts from 2004 to 2005.

 

*Cash Flows from InvestingActivities*

 

The decrease in cash usedfor investing activities between 2005 and 2004 was attributed to a decrease inthe purchase of capital improvements and investments, which were delayed due tolower margins in 2005. In 2005, we spent approximately $609,000 less cash onpurchases of property and equipment than in 2004. In 2004, we spentapproximately $1.2 million on equipment to increase the energy efficiency ofthe boiler, for improvements in our crushing operations, and increased storagefor SoyolTM. Also during the year ended December 31, 2004, wepurchased additional shares in MnSP for approximately $601,000.

 

*Cash Flows from FinancingActivities*

 

The increase in net cashprovided by financing activities was due to increasing our long-term debt, theissuance of capital units and not paying out a distribution to our members in2005. In order to finance the increasing working capital requirements in 

 

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2005, we increased our long-term debt by approximately$5.6 million compared to decreasing our debt by $8.3 million in 2004. Inaddition, we acquired proceeds of $4.3 million from the issuance of 2,190,500capital units during our 2005 public offering. While no distributions were madein 2005, we made $3.3 million in distributions to our members in 2004.

 

We anticipate in the next 12months having sufficient cash flows from operating activities and our revolvingdebt to fund working capital and to cover operating and administrativeexpenses, capital expenditures, and debt service obligations, although anysignificant legal claims resulting from our 2005 public offering (see below)could reduce our ability to fund our growth including planned capitalexpenditures in 2006.

 

***Comparison of theyears ended December 31, 2004 and 2003***

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

 

*Cash Flows from OperatingActivities*

 

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

 

*Cash Flows from InvestingActivities*

 

Investing activities used$1.9 million during the year ending December 31, 2004 compared to$5.5 million for the year ended December 31, 2003. The purchase ofshares in MnSP accounted for $601,000 of such expenditures in 2004. In 2003, wepurchased shares in USSC amounting to $4.1 million. In addition, we purchased$1.2 million of property and equipment during the year ending December 31,2004, compared to $1.0 million purchased in the period ending December 31,2003. The $1.2 million spent on property and equipment during the year ended December 31,2004 consisted of equipment to increase the energy efficiency of the boiler,improvements in our crushing operations, and increased storage for SoyolTM.During 2003, the $1.0 million spent on property and equipment consisted ofconsolidation software to upgrade our technological 

 

28

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capabilities and several other projects to improveour soybean processing and refining operations.

 

*Cash Flows from FinancingActivities*

 

Net cash used by financingactivities for the years ending December 31, 2004 was $10.6 million,compared to providing $4.1 million of cash in 2003. During the year ended December 31,2004, we made payments of $8.3 million on long-term debt commitments bycarrying smaller values in accounts receivable and distributed $3.3 million toour members, offset by a $1.0 million increase in outstanding checks in excessof bank balances. During the year ended December 31, 2003, we increasedour borrowings by $9.5 million, as a result of carrying larger values inaccounts receivable and inventory, less operating income and expenditures forcapital investments, including our investment in USSC. These additionalborrowings in 2003 were offset by a distribution to our members of $2.5 millionand payments of $1.6 million on long-term debt commitments.

 

***Indebtedness***

 

CoBank is our primarylender. On October 6, 2005, we modified the two lines of credit with CoBankto meet the needs of our operations. The first is a revolving long-term loanagreement. Under the terms of this loan, we began with a $17.1 million creditline. It reduces by $1.3 million every six months. The final payment will beequal to the remaining unpaid principal balance of the loan on March 20,2012. The revolving loan is set up so that we may borrow funds as neededup to the credit line maximum, and then pay down the principal whenever excesscash is available. Repaid amounts may be reborrowed up to the availablecredit line. We pay a 0.50% annual commitment fee on any funds not borrowed.

 

The second credit line is arevolving working capital loan that expires on September 1, 2006. Theprimary purpose of this loan is to finance inventory and receivables. Themaximum availability under this credit line is $16 million. Borrowing basereports and financial statements are required monthly to justify the balanceborrowed on this line. We pay a 0.25% annual commitment fee on any funds notborrowed; however, we have the option to reduce these credit lines during anygiven commitment period listed in the agreement to avoid the commitment fee.

 

Both CoBank loans are set upwith a variable rate option. The variable rate is set by CoBank and changesweekly on the first business day of each week. We also have a fixed rate optionon both loans allowing us to fix rates for any period between one day and theentire commitment period. We can get a fixed rate quote from CoBank at any timeand lock-in the interest rate on all or a part of our borrowings that areavailable for fixing. Both CoBank loans are secured by substantially all of ourassets. In addition, both loans are subject to compliance with standardfinancial covenants and the maintenance of certain financial ratios, includingbut not limited to, a fixed debt service coverage ratio of not less than1.2:1.00 and a minimum working capital of not less than $6 million includingthe amount available and outstanding balance on the revolving long-term loan. 

 

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During the fourth quarter ended December 31,2005, we were not in compliance with the working capital covenant but CoBankagreed to waive this requirement. Currently, we are in compliance with allcovenants under the loan agreement.. The balance borrowed on the revolving termloan was $14.5 million and $7.9 million as of December 31, 2005and 2004, respectively. There were no advances outstanding on the workingcapital loan at December 31, 2005 and 2004. The annual interest rate onboth the working capital and revolving term loans as of December 31, 2005was 7.05%.

 

We also have other long-termcontracts and notes totaling approximately $1.3 million, with a weightedaverage annual interest rate of 3.5% as of December 31, 2005. Thesearrangements include a no interest $891,000 long-term payable to the other USSCshareholders relating to our purchase of their tendered USSC shares. Theobligation is secured by the purchased shares, with the final annual payment dueon October 31, 2006. Our highest interest payable during 2005 was a$250,000 loan held by USSC at 15% per annum, which became due February 13,2005. We made principal payments of $965,000 and $976,000 on these additionallong-term obligations during the years ended December 31, 2005 and 2004,respectively.

 

***Capital Raising***

 

During the year ended December 31,2005, we conducted a registered public offering to sell up to 5,625,000 newcapital units. The offering was made available initially only to our existingmembers at a price of $2.00 per unit until April 11, 2005, and then wasmade available to the general public at a price of $2.50 per unit. When theoffering expired on May 31, 2005, we had sold 2,190,500 capital units fora total of $4,495,750.

 

***CapitalExpenditures***

 

We only investedapproximately $600,000 in capital expenditures for property and equipmentduring the year ended December 31, 2005 compared to approximately $1.2million in capital expenditures during the year ended December 31, 2004.Depending on our profitability in 2006, we anticipate spending between $1.0 and$2.0 million on capital expenditures during the year ended December 31,2006. Our principal sources of funds are anticipated to be cash flows fromoperating activities and borrowings under our revolving and working capitalloans with CoBank.

 

***Potential LegalClaims due to Our Public Offering in 2005***

 

We could be subject toclaims from investors in the future as a result of our public offering in 2005and based on the requirements of federal securities laws. On May 31, 2005,we closed a public offering of capital units, raising approximately $4.5million in proceeds from existing and new investors. On June 7, 2005, wereceived notification from the SEC that our filings were under review. Duringthe course of the review, the SEC requested additional information about ourchange in auditors for the audit of our financial statements for the year endedDecember 31, 2004 as disclosed in the our Form 8-K filing dated 

 

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January 18, 2005. After considering suchinformation, we determined that the independence of the audit firm, Eide BaillyLLP, with respect to its audit of our financial statements for the year ended December 31,2003 was compromised and decided to have the financial statements for thatperiod reaudited. As a result, in the latter part of 2005 our Board ofManagers engaged Gordon, Hughes, & Banks LLP to reaudit the financialstatements for the year ended December 31, 2003. The re-audit produced anunqualified opinion and there was no effect on previously reported net incomeor member’s equity. During early 2005, prior to receiving notice of the SECreview, we solicited investors through a Form S-1 registration statement whichincluded the 2003 audit opinion letter from Eide Bailly LLP and the auditedfinancial statements for the year ended December 31, 2003. Because theindependence of Eide Bailly was compromised for that period, the registrationstatement did not meet the requirements of federal securities law. Thefinancial statements included in our periodic reports for such periods, asamended, are now compliant with the independent auditor requirements ofapplicable securities law, but there remains a possibility that claims could bemade against us relating to the inclusion in the offering materials of theoriginal audit opinion letter. We therefore have classified the proceeds fromthis offering as temporary member’s equity. If claims are indeed made againstus and the aggregate amount of such claims reaches a significant percentage ofthe total proceeds raised in the offering, but we are unable to dismiss orsettle the claims in our favor, it may have an adverse effect on ourbusiness. Our ability to invest in our operations, for instance, including ourplanned capital expenditures in 2006, could be reduced significantly as weanticipate financing any claims from cash flow from operations.

 

**OFF BALANCE SHEET FINANCINGARRANGEMENTS**

 

We do not utilize variableinterest entities or other off-balance sheet financial arrangements.

 

**Lease Commitments**

 

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

 

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

 

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The following table showsour contractual obligations for the periods presented.

 

**CONTRACTUAL OBLIGATIONS**

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

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

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

 

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

 

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

 

*Commitments and Contingencies*

 

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

 

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*Inventory Valuation*

 

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

 

*Long-Lived Assets*

 

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

 

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

 

The Company evaluates therecoverability of identifiable intangible assets whenever events or changes incircumstances indicate that an intangible asset’s carrying value may notbe recoverable. Such circumstances could include, but are not limited to: (1) 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. The Company measures the carrying amount ofthe asset against the estimated undiscounted future cash flows associated withit. Should the sum of the expected future net cash flows be less than thecarrying value of the asset being evaluated, an impairment loss would berecognized. The impairment loss would be calculated as the amount by which thecarrying value of the asset exceeded its fair value. The fair value is measuredbased on quoted market prices, if available. If quoted market prices are notavailable, the estimate of fair value is based on various valuation techniques,including the discounted value of estimated future cash flows. The evaluationof asset impairment requires the Company to make assumptions about future cashflows over the life of the asset being evaluated. These assumptions require significantjudgment and actual results may differ from assumed and estimated amounts.

 

*Accounting for DerivativeInstruments and Hedging Activities*

 

We minimize the effects ofchanges in the price of agricultural commodities by using exchange-tradedfutures and options contracts to minimize our net positions in 

 

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these inventories and contracts. We account forchanges in market value on exchange-traded futures and option contracts atexchange prices and account for the changes in value of forward purchase andsales contracts at local market prices determined by grain terminals in thearea. Changes in the market value of all these contracts are recognized inearnings as a component of cost of goods sold.

 

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

 

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

 

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

 

***Foreign Currency Risk.***We conduct essentially all of our business in U.S. dollars and have nodirect risk regarding foreign currency fluctuations. Foreign currencyfluctuations do, however, impact the ability of foreign buyers to purchase U.S.agricultural products and the competitiveness of and demand for U.S.agricultural products compared to the same products offered by foreign suppliers.

 

***Interest Rate Risk.***We manage exposure to interest rate changes by using variable rate loanagreements with fixed rate options. Long-term loan agreements can utilize thefixed option through maturity; however, the revolving ability to pay down and borrowback would be eliminated once the funds were fixed.

 

**Item 8.****                                  ****Financial Statements andSupplementary Data.**

 

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

 

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

 

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

 

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

 

Also on January 18,2005, our Audit and Finance Committee and Board of Managers approved theengagement of Gordon, Hughes & Banks, LLP, to perform the audit of ourfinancial statements for the fiscal year ended December 31, 2004, and tore-review our interim financial statements for the first three quarters of2004.  Prior to this time, Gordon, Hughes & Banks had neverperformed any audit services or any other accounting or advisory services forus. Gordon, Hughes & Banks completed its audit of our 2004 financialstatements.  Subsequently, in connection with its review of our Form 10-Kfor the year ended December 31, 2004, the SEC also questioned whether theindependence of Eide Bailly may have been compromised with respect to itsreview of the financial statements for the quarter ended September 30,2003, and its audit of the financial statements for the year ended December 31,2003.  Following communication with the SEC regarding the application ofthe independence rules in effect at the time, we

 

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agreed to comply with the SEC’s request to amend ourSEC filings. Gordon, Hughes & Banks subsequently completed its auditof the 2003 financial statements, and delivered to us its signed audit report,dated as of September 30, 2005, which was filed as Form 10-K/A forthe years ended December 31, 2003. No restatement of our previouslyfiled financial statements for such periods was required as a result of suchsubsequent audit.

 

## **Item9A.         Controls and Procedures.**

## ** **

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

 

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

 

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

 

None.

 

**Part III**

 

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

 

**Board of Managers**

 

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

 

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

 

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

 

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|                                                          |       |   |       |     |       |     |       | Department. Kent received his B.S. from South  Dakota State University in Brookings, South Dakota in 1977.                                                                                                                                                                                                                                                                 |
|---------------------------------------------------------------|------------|--------|------------|----------|------------|----------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                          |       |   |       |     |       |     |       |                                                                                                                                                                                                                                                                                                                                                                       |
| **Jerome L. Jerzak**2974 County Hwy 5  Ivanhoe, MN 56142      |       | 58     |       | 2005     |       | 2008     |       | Jerome has been a farmer for the past 41 years. He  is a member of the Minnesota Crop Improvement Association, the South Dakota  Soybean Association and the South Dakota Corn Growers, and is a former board  member of the Ivanhoe Elevator Cooperative and the Ivanhoe School Board.                                                                                    |
| ** **                                                    |       |   |       |     |       |     |       |                                                                                                                                                                                                                                                                                                                                                                       |
| **Peter Kontz**47068 223rd  St.  Colman, SD 57017             |       | 63     |       | 1998     |       | 2007     |       | Peter has been a farmer for the past 39 years. He  is a member of the South Dakota Cattlemen’s Association (Treasurer for four  years), South Dakota Corn Growers Association, and the South Dakota Soybean  Association. He attended the School of Agriculture in Brookings, South  Dakota.                                                                          |
|                                                          |       |   |       |     |       |     |       |                                                                                                                                                                                                                                                                                                                                                                       |
| **Laron Krause**47244 181st St.  Clear Lake, SD 57226         | ** ** | **45** | ** ** | **2004** | ** ** | **2007** | ** ** | **Laron has been a farmer for the past 29 years. He is  a member of the South Dakota Soybean Association, South Dakota Pork  Producers, and South Dakota Corn Growers Association, and is a former  president of the South Dakota Soybean Association. Laron graduated from Canby  Vocational Tech in Canby, Minnesota in 1980 with a degree in Production  Agriculture.** |
|                                                          |       |   |       |     |       |     |       |                                                                                                                                                                                                                                                                                                                                                                       |
| **Bryce Loomis***President*19989 464th  Ave.  Bruce, SD 57220 |       | 63     |       | 1998     |       | 2007     |       | Bryce has been a farmer and seed sales  representative for the past 40 years. He is a member of the National Corn  Growers Association, the South Dakota Soybean Producers Association and the  Farm Bureau.                                                                                                                                                               |
|                                                          |       |   |       |     |       |     |       |                                                                                                                                                                                                                                                                                                                                                                       |
| **Dale Murphy**102 E. 2nd  Ave.  PO Box 686  White, SD 57276  |       | 75     |       | 1994     |       | 2006     |       | Dale is a retired farmer, and was an active farmer  for the previous 38 years. He was a director of the First National Bank in  White, SD between 1987-1999. Dale attended Nettleton Commercial College in  Sioux Falls, South Dakota and earned a certificate in auditing and accounting  in 1957.                                                                        |
|                                                          |       |   |       |     |       |     |       |                                                                                                                                                                                                                                                                                                                                                                       |
| **Robert Nelsen**1173 280th  Ave.  Westbrook, MN 56183        |       | 65     |       | 2005     |       | 2008     |       | Robert has been a farmer for the past 44 years. He  is a state director of the Minnesota Soybean Growers Association and a board  member of the Murray County Corn and Soybean Growers. He is also on the  executive board of the Lions Club of Westbrook, Minnesota.                                                                                                      |
|                                                          |       |   |       |     |       |     |       |                                                                                                                                                                                                                                                                                                                                                                       |
| **Daniel Potter**31012 County  Highway 6  Redwood Falls, MN   |       | 74     |       | 1995     |       | 2006     |       | Daniel has been a farmer for the past 54 years and  is a 50% owner of Potterosa Farms, Inc. He belongs to the Redwood County  Cattlemen’s Association, and the National                                                                                                                                                                                          |

 

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| 56283                                                                      |   |   |   |   |   |   |   | Cattlemen’s Association. He is also a supervisor  of the Redwood Soil and Water Conservation District and chairs the  Administrative Council of the New Avon United Methodist Church.                                                                                                                                                                                                                                                                                                                                                                                                       |
|----------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                       |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Steven C. Preszler**28708 433rd Ave.  Menno, SD 57045                    |   | 47     |   | 2005   |   | 2007   |   | Steven has been a farmer for the past 27 years. He  is director and vice president of Lumber Yard Board. Steven is also the past  president of Jaycees of Menno and treasurer of the Salem Reformed Church.  Steven is a brother-in-law of Corey Schnabel who is also a board member.                                                                                                                                                                                                                                                                                                            |
| ** **                                                                 |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Greg Schmieding**6213 S. Doral Tr.  Sioux Falls, SD 57108                |   | 50     |   | 2005   |   | 2008   |   | Greg has been a senior vice president of Metavante  since July 1994 and global account director for Manpower, Inc. since  July 2005. Prior to this, Greg was a senior vice president of First Data  Corp. for two years and employed by IBM for over eleven years. Greg also  currently manages his family farm operations in South Dakota and Iowa. He  received his B.S. degree from South Dakota State University in 1977 and his  M.B.A. degree from the University of South Dakota in 1981.                                                                                  |
|                                                                       |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Corey Schnabel**43555 273rd  St.  Freeman, SD 57029                      |   | 47     |   | 2005   |   | 2008   |   | Corey has been a farmer for the past 25 years. He  is also a Grandview Township Supervisor. He belongs to the South Dakota and  National Corn Growers Association, the South Dakota and American Simmental  Association. He is also a former director of the South Dakota Corn Growers  Association and National Corn Growers Association. Corey is a graduate of  Lake Area Technical Institute in Watertown, South Dakota, where he earned an  Associate degree in Ag Business in 1980. Corey is a brother-in-law of Steven  Preszler who is a board member also representing District 3. |
|                                                                       |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Rodney Skalbeck**80903 160th  St.  Sacred Heart, MN  56285               |   | 72     |   | 1995   |   | 2006   |   | Rodney has been a farmer for the past 52 years. He  belongs to the Farmers Union, Land Stewardship Project and is a former  director of the Farm Credit association where he has had positions as chairman  and vice chairman. He is also a former school board member and church board  member and treasurer.                                                                                                                                                                                                                                                                                   |
|                                                                       |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Delbert Tschakert***Vice-President*16150 442nd  Ave.  Florence, SD 57235 |   | 50     |   | 1994   |   | 2006   |   | Delbert has been a farmer for the past 26 years,  producing corn, soybeans, and hay commodities. He is a member of the South  Dakota Soybean Association, the South Dakota Corn Growers Association, and  former President of the South Dakota Soybean Association. Delbert received  his                                                                                                                                                                                                                                                                                                        |

 

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|                                                        |   |   |   |   |   |   |   | B.S. in Ag Communications with a minor in  Economics from South Dakota State University in 1977.                                                                                                                                                                                         |
|-------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                        |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                     |
| **Anthony Van Uden**3461 300th  Ave.  Cottonwood, MN  56229 |   | 67     |   | 1996   |   | 2007   |   | Anthony has been a farmer for the past 45 years.  He is a member of Minnesota Soybean Association, and the American Legion. He  is a past director of the Farmers Elevator Company, Cottonwood, MN, Lucas  Town board, as Chairman, and the Lyon County Planning and Zoning Committee.   |
|                                                        |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                     |
| **Ardon Wek***Secretary*43958 288th St.  Freeman, SD 57029  |   | 47     |   | 1996   |   | 2006   |   | Ardon has been a farmer for the past 27 years. He  is a member of the South Dakota Corn Growers, and the South Dakota Soybean  Association. Ardon graduated from Mitchell Technical College in Mitchell, South  Dakota. His major was Architectural Drafting, and Building Construction. |

 

**Compensation of Board of Managers**

 

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

 

**Committees of Board of Managers**

 

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

 

The current members of theNomination Committee are Robert Nelsen, who serves as the chairperson of thecommittee, Paul Barthel, Dale Murphy, Daniel Potter, Rodney Skalbeck, DelbertTschakert and Ardon Wek. Our Nomination Committee Charter is available forreview on our website at http://www.sdsbp.com.   In order to submit anominee for the Board to the Nomination Committee for the 2006 Annual Meeting,members were required to return a nomination petition form to the Nomination

 

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Committee no later than March 31, 2006. Nominations will not be accepted from the floor at the 2006 Annual Meeting. Themembers of the Nomination Committee will review each of the submitted formsduring their selection process and may also search for and contact additionalpotential nominees at their discretion.

 

**Executive Officers**

 

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

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

 

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

 

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

 

Rodney has complete responsibilityfor our operations.

 

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

 

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

 

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

 

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

 

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

 

**Code of Ethics**

 

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

 

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

 

Under Section 16(a) ofthe Exchange Act, our directors, executive officers and any persons holding 10%or more of the common stock are required to report their ownership of ourcapitalunits and anychanges in that ownership to the Securities and Exchange Commission (the “SEC”)and to furnish us with copies of such reports. Specific due dates for thesereports have been established and we are required to disclose in this reportany failure to file on a timely basis by such persons. To our knowledge, basedsolely upon a review of copies of such reports received by us which were filedwith the SEC from January 1, 2005 through March 15, 2006, and uponwritten representations from such persons that no other reports were required,we believe that all reports required to be filed under Section 16(a) for2005 have been timely filed with the SEC, other than a Form 4 filed by Mr. WayneEnger on October 12, 2005.

 

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

 

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

 

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

 

On February 1, 2004, weentered into a four-year employment agreement with Mr. Christianson thatexpires on January 31, 2008.  Under the employment agreement, Mr. Christiansonreceived an annual salary of $250,000 through August 31, 2005 and willreceive an annual salary of $300,000 for the remaining term of theagreement.  Mr. Christianson is also entitled to receive an incentivebonus equal to one-half of one percent of net income before taxes and memberdistributions, excluding certain extraordinary items of income and expense, onup to $5.0 million net income, or 1% of net income before taxes and member distributionsif net income exceeds $5.0 million. Mr. Christianson may elect to have hisincentive bonus paid directly or deferred.  Mr. Christianson is alsoentitled to participate in 401(k), healthcare and other retirement and welfarebenefit programs that are generally available to employees and a vehicle to beused for business purposes. Mr. Christianson is entitled to eighteenmonths of severance pay in the event that we terminate his employment duringthe term of the agreement, other than for cause. Mr. Christianson’semployment contract is terminable at will by the Board of Managers withoutcause, and may be terminated by Mr. Christianson with 60 days’notice.  The employment agreement also includes a two-year non-competitionprovision.

 

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

 

Messrs. Christiansonand Kersting also have a deferred compensation plan that provides “phantom”capital units.  Messrs. Christianson and Kersting’s initial grantsunder these plans are fully vested.  On February 1, 2004, Mr. Christiansonreceived an additional grant under an amended and restated deferredcompensation plan.  Under both the original and amended plan, we pay anamount equal to the fair market value of the

 

43

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participant’s vested phantom capital units in fiveannual substantially equal installments beginning upon the earlier oftermination of employment with us or his 65th birthday.

 

Our Chief Financial Officer,Jim Seurer, was hired in March 2005 and received no compensation from usduring the years ended December 31, 2004, 2003, and 2002.  Mr. Seurer’semployment with us is terminable at will.  Mr. Seurer receives a basesalary and is entitled to participate in 401(k), healthcare and otherretirement and welfare benefit programs that are generally available toemployees, including the employee profit sharing program.

 

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

 

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

 

The following table setsforth the beneficial ownership of our outstanding capital units by our Boardmembers and named executive officers as of March 15, 2006.  As ofthat date, no person beneficially owned more than 5% of our capital units.

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

 

44

----

 

----

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

 

**Item 13.****        ****C****ertain Relationships and Related Transactions.**

 

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

 

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

 

**Fees for Fiscal Year Ended December 31,2005:**

 

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

 

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

 

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

 

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

 

45

----

 

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

 

**Fees for Fiscal Year Ended December 31,2004:**

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

46

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**Part IV**

 

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

 

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

 

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

 

(2)           N.A.

 

(3)           Exhibits - See Exhibit Index following the Signature Page to thisreport. The following exhibits constitute management agreements, compensatoryplans, or arrangements: Exhibits 10.14, 10.15, 10.16, and 10.17.

 

SIGNATURES

 

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

 

 
|   |              | SOUTH DAKOTA SOYBEAN  PROCESSORS, LLC           |
|--------|-------------------|-------------------------------------------------|
|   |              |                                            |
| Date:  | May 15, 2006 |                                            | /s/ Rodney Christianson |   |
|   |              | Rodney G. Christianson  Chief Executive Officer |
|   |              |                                            |
| Date:  | May 15, 2006 |                                            | /s/ James Seurer |   |
|   |              | James A. Seurer  Chief Financial Officer        |
|        |                   |                                                 |  |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
|   |              | SOUTH DAKOTA SOYBEAN  PROCESSORS, LLC |
|--------|-------------------|---------------------------------------|
|   |              |                                  |
|   |              |                                  |
| Date:  | May 15, 2006 |                                  | /s/ Rodney Christianson |   |
|   |              | Rodney G. Christianson                |
|   |              | Chief Executive Officer               |
|   |              | (Principal Executive Officer)         |
|        |                   |                                       |  |  |

 

47

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| Date:  | May 15, 2006 |                                          | /s/ James Seurer          |   |
|--------|-------------------|-----------------------------------------------|---------------------------|--------|
|   |              | James A. Seurer                               |
|   |              | Chief Financial Officer                       |
|   |              | (Principal Financial and Accounting  Officer) |
|   |              |                                          |
|   |              |                                          |
| Date:  | May 15, 2006 |                                          | /s/ Paul Barthel          |   |
|   |              | Paul Barthel, Manager                         |
|   |              |                                          |
|   |              |                                          |
| Date:  | May 15, 2006 |                                          | /s/ Dean Christopherson   |   |
|   |              | Dean Christopherson,                          |
|   |              | Manager                                       |
|   |              |                                          |
|   |              |                                          |
| Date:  | May 15, 2006 |                                          | /s/ David Driessen        |   |
|   |              |                                          | David Driessen,  Manager  |
|   |              |                                          |                      |
|   |              |                                          |                      |
| Date:  | May 15, 2006 |                                          | /s/ Wayne Enger           |   |
|   |              |                                          | Wayne Enger, Manager      |
|   |              |                                          |                      |
|   |              |                                          |                      |
| Date:  | May 15, 2006 |                                          | /s/ Ronald Gorder         |   |
|   |              |                                          | Ronald J. Gorder, Manager |
|   |              |                                          |                      |
|   |              |                                          |                      |
| Date:  | May 15, 2006 |                                          | /s/ Ryan Hill             |   |
|   |              |                                          | Ryan J. Hill, Manager     |
|   |              |                                          |                      |
|   |              |                                          |                      |
| Date:  | May 15, 2006 |                                          | /s/ Kent Howell           |   |
|   |              |                                          | Kent Howell, Manager      |
|   |              |                                          |                      |
|   |              |                                          |                      |
| Date:  | May 15, 2006 |                                          | /s/ Jerome Jerzak         |   |
|   |              |                                          | Jerome L. Jerzak, Manager |
|   |              |                                          |                      |
|   |              |                                          |                      |
| Date:  | May 15, 2006 |                                          | /s/ Peter Kontz           |   |
|   |              |                                          | Peter Kontz, Manager      |
|        |                   |                                               |                           |        |  |  |  |

 

48

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| Date:  | May 15, 2006 |                       | /s/ Laron Krause            |   |
|--------|-------------------|----------------------------|-----------------------------|--------|
|   |              |                       | Laron Krause, Manager       |
|   |              |                       |                        |
| Date:  | May 15, 2006 |                       | /s/ Bryce Loomis            |   |
|   |              |                       | Bryce Loomis, Manager       |
|   |              |                       |                        |
| Date:  | May 15, 2006 |                       | /s/ Dale Murphy             |   |
|   |              |                       | Dale F. Murphy, Manager     |
|   |              |                       |                        |
| Date:  | May 15, 2006 |                       | /s/ Robert Nelsen           |   |
|   |              |                       | Robert Nelsen, Manager      |
|   |              |                       |                        |
| Date:  | May 15, 2006 |                       | /s/ Daniel Potter           |   |
|   |              |                       | Daniel Potter, Manager      |
|   |              |                       |                        |
| Date:  | May 15, 2006 |                       | /s/ Steven Preszler         |   |
|   |              |                       | Steven C. Preszler, Manager |
|   |              |                       |                        |
| Date:  | May 15, 2006 |                       | /s/ Greg Schmieding         |   |
|   |              |                       | Greg Schmieding, Manager    |
|   |              |                       |                        |
| Date:  | May 15, 2006 |                       | /s/ Corey Schnabel          |   |
|   |              |                       | Corey Schnabel, Manager     |
|   |              |                       |                        |
| Date:  | May 15, 2006 |                       | /s/ Rodney Skalbeck         |   |
|   |              |                       | Rodney Skalbeck, Manager    |
|   |              |                       |                        |
| Date:  | May 15, 2006 |                       | /s/ Delbert Tschakert       |   |
|   |              | Delbert Tschakert, Manager |
|        |                   |                            |                             |        |  |  |

 

49

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| Date:  | May 15, 2006 |   | /s/ Anthony VanUden      |   |
|--------|-------------------|--------|--------------------------|--------|
|   |              |   | Anthony VanUden, Manager |
|   |              |   |                     |
| Date:  | May 15, 2006 |   | /s/ Ardon Wek            |   |
|   |              |   | Ardon Wek, Manager       |

 

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                | ** ** | **Filed  Herewith** | ** ** | **Incorporated Herein by Reference to**                                                                                                     |
|---------------------|------------|------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                           |       |                |       |                                                                                                                                                            |
| 3.1(i)              |       | Articles of Organization                                                                       |       |                |       | Appendix A to the Registrant’s Prospectus filed  with the Commission pursuant to Rule 424(b)(3) on May 24, 2002  (File No. 333-75804). |
|                |       |                                                                                           |       |                |       |                                                                                                                                                            |
| 3.1(ii)             |       | Operating Agreement, as amended and restated                                                   |       |                |       | Exhibit 3.1(ii) to the Registrant’s Form 10-K  filed on April 15, 2005.                                                                |
|                |       |                                                                                           |       |                |       |                                                                                                                                                            |
| 3.1(iii)            |       | Articles of Amendment to Articles of Organization                                              |       |                |       | Exhibit 3.1(iii) to the Registrant’s  Form  10-QSB filed with the Commission on August 14, 2002                                             |
|                |       |                                                                                           |       |                |       |                                                                                                                                                            |
| 4.1                 |       | Form of Class A Unit Certificate                                                     |       |                |       | Exhibit 4.1 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001 (File No. 333-75804)                          |
|                |       |                                                                                           |       |                |       |                                                                                                                                                            |
| 10.1                |       | Form of Mortgage and Security Agreement with  CoBank dated October 2, 1995           |       |                |       | Exhibit 10.1 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001 (File No. 333-75804)                         |
|                |       |                                                                                           |       |                |       |                                                                                                                                                            |
| 10.2                |       | Master Loan Agreement with CoBank dated June 17,  2004.                                   |       |                |       | Exhibit 10.2 to the Registrant’s Form 10-Q  filed with the Commission on August 16, 2004                                                    |
|                |       |                                                                                           |       |                |       |                                                                                                                                                            |
| 10.3                |       | Revolving Term Loan Supplement with CoBank dated June 17,  2004                           |       |                |       | Exhibit 10.3 to the Registrant’s Form 10-Q  filed with the Commission on August 16, 2004                                                    |
|                |       |                                                                                           |       |                |       |                                                                                                                                                            |
| 10.4                |       | Statused Revolving Credit Supplement with CoBank  dated June 17, 2004                     |       |                |       | Exhibit 10.4 to the Registrant’s Form 10-Q  filed with the Commission on August 16, 2004                                                    |
|                |       |                                                                                           |       |                |       |                                                                                                                                                            |
| 10.5                |       | Urethane Soy Systems Company, Inc. Stock  Purchase Agreement dated May 30, 2000 |       |                |       | Exhibit 10.5 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001 (File No. 333-75804)                         |

 

50

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| 10.6   |   | Vegetable Oil Supply Agreement with Urethane Soy  Systems Company, Inc. dated August 2, 1999 and January 10,  2001 |   |   |   | Exhibit 10.6 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001 (File No. 333-75804)  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                              |   |   |   |                                                                                                                                     |
| 10.7   |   | MnSP Services and Management Agreement dated August 25,  2000                                                                |   |   |   | Exhibit 10.7 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001 (File No. 333-75804)  |
|   |   |                                                                                                                              |   |   |   |                                                                                                                                     |
| 10.8   |   | Soybean Oil Supply Agreement and Equipment  Purchase Agreement with ACH Food Company, Inc. dated January 15,  2002*     |   |   |   | Exhibit 10.8 to the Registrant’s Form S-4  filed with the Commission on May 10, 2002 (File No. 333-75804)       |
|   |   |                                                                                                                              |   |   |   |                                                                                                                                     |
| 10.9   |   | Railcar Leasing Agreement with General Electric  dated May 14, 1996                                                          |   |   |   | Exhibit 10.9 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001 (File No. 333-75804)  |
|   |   |                                                                                                                              |   |   |   |                                                                                                                                     |
| 10.10  |   | Track Lease Agreement with DM&E Railroad dated  October 15, 1996                                                         |   |   |   | Exhibit 10.10 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001 (File No. 333-75804) |
|   |   |                                                                                                                              |   |   |   |                                                                                                                                     |
| 10.11  |   | Land Option Agreement with Howell Farms dated September 8,  1994 and September 13, 2001                                 |   |   |   | Exhibit 10.11 to the Registrant’s Form S-4  filed with the Commission on December 21, 2001 (File No. 333-75804) |
|   |   |                                                                                                                              |   |   |   |                                                                                                                                     |
| 10.12  |   | Railroad Car Lease Agreement with Trinity  Industries dated February 12, 2002                                                |   |   |   | Exhibit 10.15 to the Registrant’s Form S-4  filed with the Commission on March 14, 2002 (File No. 333-75804)    |
|   |   |                                                                                                                              |   |   |   |                                                                                                                                     |
| 10.13  |   | Stock Purchase Agreement with Urethane Soy  Systems, Co. and certain shareholders                                                 |   |   |   | Exhibit 10.16 to the Registrant’s Form 8-K  filed with the Commission on January 14, 2003                            |
|   |   |                                                                                                                              |   |   |   |                                                                                                                                     |
| 10.14  |   | Rodney Christianson Employment Agreement dated February 1,  2004                                                             |   |   |   | Exhibit 10.14 to the Registrant’s Form 10-K  filed with the Commission on March 30, 2004                             |
|   |   |                                                                                                                              |   |   |   |                                                                                                                                     |
| 10.15  |   | First Amended and Restated Deferred Compensation  Plan for the benefit of Rodney Christianson, dated February 1, 2004        |   |   |   | Exhibit 10.15 to the Registrant’s Form 10-K  filed with the Commission on March 30, 2004                             |
|   |   |                                                                                                                              |   |   |   |                                                                                                                                     |
| 10.16  |   | Thomas Kersting Employment Agreement dated May 20,  1996                                                                     |   |   |   | Exhibit 10.18 to the Registrant’s Form 10-K  filed with the Commission on March 27, 2003                             |
|   |   |                                                                                                                              |   |   |   |                                                                                                                                     |
| 10.17  |   | Deferred Compensation Plan for the benefit of  Thomas Kersting, dated February 13, 2001                                      |   |   |   | Exhibit 10.20 to the Registrant’s Form 10-K  filed with the Commission on March 27, 2003                             |

 

51

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| 10.18  |   | Polyoil Consulting Services Agreement with Larry  Mahlum dated January 1, 2000                                                      |   |   |   | Exhibit 10.21 to the Registrant’s Form 10-K  filed with the Commission on March 27, 2003  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.19  |   | Railcar Leasing Agreements with General Electric  Railcar Services Corporation, dated November 10, 2003 and November 25,  2003 |   |   |   | Exhibit 10.19 to the Registrant’s Form 10-K  filed with the Commission on March 30, 2004  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.20  |   | Security Agreement with CoBank dated June 17,  2004                                                                                 |   |   |   | Exhibit 10.1 to the Registrant’s Form 10-Q  filed with the Commission on August 16, 2004  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.21  |   | Master Loan Agreement with CoBank, dated October 6,  2005                                                                           |   |   |   | Exhibit 10.21 to the Registrant’s Form 10-K  filed with the Commission on March 31, 2006. |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.22  |   | Revolving Term Loan Supplement with CoBank dated October 6,  2005                                                                   |   |   |   | Exhibit 10.22 to the Registrant’s Form 10-K  filed with the Commission on March 31, 2006. |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 10.23  |   | Statused Revolving Credit Supplement with CoBank  dated October 6, 2005                                                             |   |   |   | Exhibit 10.23 to the Registrant’s Form 10-K  filed with the Commission on March 31, 2006. |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 14.1   |   | Code of Ethics                                                                                                                           |   |   |   | Exhibit 14.1 to the Registrant’s Form 10-K  filed with the Commission on March 31, 2006.  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 16.1   |   | Letter re: change in certifying accountant                                                                                               |   |   |   | Exhibit 16.1 to the Registrant’s Form 10-K  filed with the Commission on March 31, 2006.  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 21.1   |   | Subsidiaries of the Company                                                                                                              |   |   |   | Exhibit 21.1 to the Registrant’s Form 10-K  filed with the Commission on March 31, 2006.  |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certifications                                                                                        |   | X      |   |                                                                                                          |
|   |   |                                                                                                                                     |   |   |   |                                                                                                          |
| 32.1   |   | Section 1350 Certifications                                                                                                         |   | X      |   |                                                                                                          |

 

----

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

 

52

----

# ** **

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

 

Index to Financial Statements

 
| ** **                                                   | **Page**   |
|--------------------------------------------------------------|------------|
|                                                         |       |
| **REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM** | F-1        |
|                                                         |       |
| **FINANCIAL  STATEMENTS**                                    | ** ** |
| Consolidated  Balance Sheets                                 | F-2        |
| Consolidated  Statements of Operations                       | F-4        |
| Consolidated  Statements of Changes in Members’ Equity  | F-5        |
| Consolidated  Statements of Cash Flows                       | F-6        |
| Notes  to Consolidated Financial Statements                  | F-8        |

 

----

 

## **REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Managers

South Dakota Soybean Processors, LLC

Volga, South Dakota

 

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

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement. The Company has determined that it is not required to have, norwere we engaged to perform, an audit of its internal control over financialreporting. Our audit included consideration of internal control over 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 includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluatingthe overall financial statement presentation. We believe that our auditsprovide 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 31,2005 and 2004, and the consolidated results of its operations and itscash flows for each of the three years in the period ended December 31,2005, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

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

 

Greenwood Village, Colorado

February 3, 2006, except as to Notes 1, 16 and 17 which date is May 12,2006

 

F-1

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2005 AND 2004**

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

 

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

 

F-2

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED BALANCE SHEETS (continued)**

**DECEMBER 31, 2005 AND 2004**

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

 

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

 

F-3

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

#### **CONSOLIDATED STATEMENTS OFOPERATIONS**

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

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

 

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

 

F-4

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

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

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

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

 

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, 2005,2004 AND 2003**

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

 

(continued on next page)

 

F-6

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

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

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

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

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

 

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

 

F-7

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

** **

*Organization*

 

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

 

The Company ownsapproximately 66% of Urethane Soy Systems Company (“USSC”). USSC is the manufacturerand patent holder of Soyol®, a polyol made from soybean oil. A minority interest ispresented in the consolidated balance sheet that represents the approximate 34%ownership of other investors in USSC.

 

*Principles of consolidation*

 

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

 

*Cash andcash equivalents*

 

The Companyconsiders all highly liquid debt instruments with maturity of three months orless 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 reviewsall receivable balances that exceed 90 days from the invoice date and, based onan assessment of current creditworthiness, estimates the portion, if any, ofthe balance that may not be collected.

 

*Inventories*

 

Finished goods(soybean meal, oil, refined oil, and hulls) and raw materials (soybeans) arevalued at estimated market value, which approximates net realizable value. Thisaccounting policy is in accordance with the guidelines described in AICPA Statementof 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 next page)

 

F-8

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

*Investments*

 

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

 

The Companyaccounts for its 6.95% investment in Minnesota Soybean Processors using theequity method due to the related nature of operations and the Company’s abilityto 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.

 

*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 for maintenance and repairs are charged toexpense when incurred. When depreciable properties are sold or retired, thecost and accumulated depreciation are eliminated from the accounts and theresultant gain or loss is reflected in income.

 

Depreciation isprovided for over the estimated useful lives of the individual assets using thestraight-line method. The range of the estimated useful lives used in thecomputation 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’s patents are amortized over their estimated useful lives,using the straight-line method over a period of 16 to 20 years, which is theshorter of the remaining estimated economic life of the patents acquired or 20years from the original file date.

 

*Use 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 thoseestimates.

 

*RevenueRecognition*

 

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

 

*Freight*

 

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

 

(continued on next page)

 

F-9

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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 $33,942,$17,614, and $7,885 of advertising costs in the years ended December 31,2005, 2004, and 2003, respectively.

 

*Environmentalremediation*

 

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

 

*Accountingfor derivative instruments and hedging activities*

 

All of the Company’sderivatives are designated as non-hedge derivatives. The futures and optionscontracts used by the Company are discussed below. Although the contractsmay 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 offeredthrough regulated commodity exchanges to reduce risk. The Company is exposed torisk of loss in the market value of inventories. 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, whichapproximates net realizable value. Consequently, unrealized gains and losses onderivative contracts are offset by unrealized gains and losses on inventoriesand reflected in current earnings.

 

*Earningsper capital unit*

 

Earnings per capital unitare calculated based on the weighted average number of capital unitsoutstanding. The Company has no other capital units or other member equityinstruments that are dilutive for purposes of calculating earnings per capitalunit.

 

*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 theInternal Revenue Code, the income of the Company flows through to the membersto be taxed at the individual level and there is no corporate income taxprovision.

 

*Reclassifications*

 

Reclassificationshave been made to the December 31, 2004 and December 31, 2003financial information to conform to the current period presentation. These reclassifications have no effect on previouslyreported net income or members’ equity.

 

(continued on next page)

 

F-10

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

Subsequent to theCompany’s initial filing of our Form 10-K, management determined that theproceeds of the offering conducted in 2005 under an S-1 registration statementshould be reclassified as temporary equity. As a result, the Company isrequired to amend the Balance Sheet and Statement of Members’ Equity includedin the financial statements for the year ended December 31, 2005 and makecorresponding revisions to related disclosures in our Form 10-K. Thisreclassification to temporary equity reflects the potential that this equitymay be reduced or eliminated entirely if successful claims are madeagainst the Company by investors who purchased capital units in the offeringthat closed May 31, 2005 as a result of the fact that the Form S-1Registration Statement included the report of the Company’s former auditorwhose independence management later determined was compromised. Therefore, theregistration statement did not meet the requirements of federal securitieslaws. The Company is also amending Note 17 of Item 8 of the Company’s financialstatements to reflect the circumstances leading to this reclassification. 

 

*Recentaccounting pronouncements*

 

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

 

In December 2004,the FASB issued Statement of Financial Accounting Standards No. 123(revised 2005), *Share-Based Payment*, (“SFAS No. 123(revised)”)which amends FASB Statement Nos. 123 and 95. SFAS No. 123(revised)requires all companies to measure compensation cost for all share-based payments,including employee stock options, at fair value and is effective for publiccompanies that file as small business issuers for interim or annual periodsbeginning after December 15, 2005. Management believes this Statement willhave no impact on the financial statements of the Company once adopted.

 

In December 2004,the FASB issued Statement No. 153, *Exchanges of NonmonetaryAssets anamendment of APB Opinion No. 29*. ThisStatement addresses the measurement of exchanges of nonmonetary assets. The guidancein APB Opinion No. 29, *Accounting forNonmonetary Transactions*, is based on the principle that exchangesof nonmonetary assets should be measured based on the fair value of the assetsexchanged. The guidance in that Opinion, however, included certain exceptionsto that principle. This Statement amends Opinion No. 29 to eliminate theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance. A nonmonetary exchange has commercial substance ifthe future cash flows of the entity are expected to change significantly as aresult of the exchange. This Statement is effective for financial statementsfor fiscal years beginning after June 15, 2005. Earlier application ispermitted for nonmonetary asset exchanges incurred during fiscal yearsbeginning after the date of this Statement is issued. Management believes thisStatement will have no impact on the financial statements of the Company onceadopted.

 

In March 2005,the FASB issued Interpretation No. 47 (“FIN 47”), *Accountingfor Conditional Asset Retirement Obligations*, which clarifies thatan entity is required to recognize a liability for the fair value of aconditional asset retirement obligation when incurred if the liability’s fairvalue can be reasonably estimated. A conditional asset retirement obligation isdefined as a legal obligation to perform asset retirement activity inwhich the timing and (or) method of settlement are conditional on a futureevent that may or may not be within the control of the entity. FIN 47is effective no later than the end of fiscal years ending after December 15,2005. Adoption of FIN

 

(continued on next page)

 

F-11

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47 by the Companywill not result in a change to current practice.

 

In May 2005,the FASB issued Statement of Financial Accounting Standards No. 154, *Accounting Changes and Error Corrections a replacement of APB Opinion No. 20and FASB Statement No. 3*, which changes the requirements forthe accounting for and reporting of a change in accounting principle. ThisStatement requires retrospective application to prior periods’ financialstatements of changes in accounting principle, unless it is impracticable todetermine the period-specific effects or the cumulative effect of change. Whenit is impracticable to determine the period-specific effects of an accountingchange on one or more individual prior periods presented, this Statementrequires that the new accounting principle be applied to the balances of assetsand liabilities as of the beginning of the earliest period for whichretrospective application is practicable and that a corresponding adjustment bemade to the opening balance of retained earnings for that period rather thanbeing reported in the income statement. The Company adopted the provisions ofthis effective January 1, 2006.

 

**NOTE 2 -       INVENTORIES**

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

 

Finished goods and raw materials are valued at estimated market value,which approximates net realizable value. In addition, futures and optioncontracts are marked to market through cost of revenues, with unrealized gainsand losses recorded in the above inventory amounts. Supplies and otherinventories are stated at the 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 with its inventory accounting policy, thesecontracts are recorded at market value. At December 31, 2005, the Company’sfutures contracts all mature within twelve months.

 

**NOTE 4 -       INVESTMENTS INCOOPERATIVES**

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

 

(continued on next page)

 

F-12

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

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

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

 

In August 2004,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), aMinnesota cooperative association. The shares approximate 6.95% of MnSP’soutstanding equity. In 2004, the Company also acquired 287,500 8% Class BNon-Cumulative Convertible preferred shares in MnSP for $575,000. The Companyaccounts for the investment using the equity method due to the related natureof operations and the Company’s ability to exercise significant influence. TheCompany recognized losses of $69,831 and $54,626 in 2005 and 2004,respectively, which is included in other non-operating income (expense).

 

Summarized financial information of MnSP as of December 31, 2005 and2004 and for the years then ended is as follows (unaudited):

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

 

(continued on next page)

 

F-13

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 6 -**           PROPERTY AND EQUIPMENT

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

 

**NOTE 7 -**           PATENTS AND OTHER INTANGIBLE 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%. Theresults of USSC’s operations have been consolidated in the Company’s financialstatements since that date. The Company believes that the acquisition of acontrolling interest in USSC will allow the Company to develop and market soy-basedpolyurethane products.

 

The aggregate purchase price for the 54% interest was $8,576,686. TheCompany had previously acquired a 4% interest for $1,000,000. In preparingconsolidated financial statements, the Company assigned the total considerationpaid for the USSC stock to USSC’s assets and liabilities. This allocationresulted in an assignment of $7,401,245 to patents. None of these patent costsrecognized for financial reporting purposes is expected to be deductible fortax purposes. The patents are being amortized using the straight-line methodover a period of 16 to 20 years, which is the shorter of the remaining estimatedeconomic life of the patents acquired or 20 years from the original file date.

 

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

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

 

(continued on next page)

 

F-14

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

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

 

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

 

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

 

The Company hasentered into a revolving credit agreement with CoBank, which expires September 1,2006. The purpose of the credit agreement is to finance the inventory andaccounts receivable of the Company. The Company may borrow up to $15,200,000.Interest accrues at a variable rate (7.05% at December 31, 2005). Advanceson the revolving credit agreement are secured and limited to qualifyinginventory and accounts receivable, net of accrued commodity purchases. Therewere no advances outstanding at December 31, 2005 and 2004.

 

(continued on next page)

 

F-15

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 9 -**           LONG-TERM DEBT

 

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

 

The 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 conditionsof the MLA, CoBank agreed to make advances to the Company for up to $17,100,000on the revolving term loan. The available commitment decreases in scheduledperiodic increments of $1,300,000. The remaining commitment available on therevolving term loan as of December 31, 2005, was $2,600,000.

 

TheCompany is in violation of one of its loan covenants with CoBank as of December 31,2005, but CoBank agreed to waive the requirement. The loan covenant requiresthe Company to maintain a minimum working capital of $6.0 million. At December 31,2005, working capital was approximately $5.7 million.

 

(continued on next page)

 

F-16

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

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

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

 

**NOTE 10 -**         EMPLOYEE BENEFIT PLANS

** **

The Company maintains a Section 401(k)plan for employees who meet the eligibility requirements set forth in the plandocuments. The Company matches a percentage of employees’ contributed earnings.The amounts charged to expense under this plan were approximately $56,000,$58,000, and $63,000 for the years ended December 31, 2005, 2004, and2003, respectively.

 

The Company has adeferred compensation plan for key employees. The agreements provide benefits,which vest over a three-year period. The Company shall pay the employees infive equal annual installments upon retirement. The future payments have beendiscounted at 8%. The amount recognized as expense during the years ended December 31,2005, 2004, and 2003 was $10,348, $18,664, and $30,237, respectively. TheCompany made payments of approximately $10,600 during 2005 and 2004. Deferredcompensation is recorded at $129,072 and $129,345 as of December 31, 2005and 2004, respectively.

 

**NOTE 11 -**         COMMITMENTS

 

The Company has operatingleases for 417 rail cars from GE Capital. The leases require monthly paymentsof $168,716. The leases began in 1996 and have eighteen-year terms. The Companyalso leases 100 rail cars from Trinity Capital. This lease requires monthlypayments of $38,300. Lease expense for all rail cars was $2,066,911,$2,068,015, and $1,903,367, for the years ended December 31, 2005, 2004,and 2003, respectively. The Company generates revenues from the use of 299 ofthese rail cars on other railroads. Such revenues were $2,161,622, $1,794,012,and $1,648,666, for the years ended December 31, 2005, 2004, and 2003,respectively.

 

The Company 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 recognizes revenue from this sub-lease as thehopper rail cars are used by the DME. The sub-lease is for a twelve-monthperiod and is renewed annually. The Company is responsible for all maintenanceof the rail cars.

 

The Company alsohas a number of other operating leases for machinery and equipment. Rentalexpense under these other operating leases was $283,273, $197,864, and $328,079for the years ended December 31, 2005, 2004, and 2003, respectively.

 

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F-17

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

The following is a schedule offuture minimum rental payments required under these operating leases.

 

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

 

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

 

**NOTE 12 -**         CASH FLOW INFORMATION

** **

The following is a schedule ofchanges in assets and liabilities used to determine cash from operatingactivities:

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

 

(continued on next page)

 

F-18

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 13 -**         FAIR VALUE OF FINANCIAL INSTRUMENTS

** **

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

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

 

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

 

The Company has apatronage investment in other cooperatives and common stock in a privately heldentity. There is no market for their patronage credits or the entity’s commonshares, and it was impracticable to estimate fair value of the Company’sinvestment. These investments are carried on the balance sheet at originalcost.

 

**NOTE 14 -**         RELATED PARTY TRANSACTIONS

** **

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 agreement provided the Company a fee of 10% of the equityraised by MnSP for the Company’s services related to business planning andconstruction management services. Fees earned under this arrangement were $0,$126,250, and $1,245,205 for the years ended December 31, 2005, 2004, and2003, respectively. The Company agreed to reinvest a minimum of 80% of the feesearned from MnSP in equity units of MnSP. During 2004, the Company exchanged astorage facility with a net book value of $2,322,561 as its investment and paidcash of $600,931.

 

The Company hasagreed to provide management and marketing services to MnSP on a cost-sharingbasis for automatically renewing five-year periods beginning in late 2003. TheCompany earned fees of $1,380,155, $1,047,193 and $226,985 under thisarrangement for the years ended December 31, 2005, 2004 and 2003. As of December 31,2005 and 2004, MnSP owed the Company $251,482 and $74,338, respectively.

 

In addition, theCompany is providing up to $1 million in interest free loans to members of theCompany who choose to invest in MnSP. The loans are secured by members’ equityin the Company. As of December 31, 2005 and 2004, the Company hadoutstanding notes receivable pursuant to this arrangement of $481,710. Thesewill be repaid as the Board of Managers approves distributions of priorearnings.

 

The Company andMnSP also purchase and sell processed products such as soybean meal, soybeanoil, BioDiesel, etc. For the years ended December 31, 2005, 2004, and2003, the Company had sales to MnSP in the amount of $10,761,235, $0, and $0,respectively. During the years ended December 31, 2005, 2004, and 2003,the Company also purchased $10,179,713, $0, and $0, respectively, from MnSP.

 

F-19

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

Occasionally theCompany subleases rail cars to MnSP. The Company charged MnSP $47,505 for thesesubleases during the year ended December 31, 2005.

 

**NOTE 15 -**         BUSINESS CREDIT RISK AND CONCENTRATIONS

** **

The Company maintainsits cash balances with various financial institutions. At times during theyear, the Company’s balances exceeded the $100,000 insurance limit of theFederal Deposit Insurance Corporation. Management believes the risk of loss tobe low.

 

The Company alsogrants credit to customers throughout the United States and Canada. The Companyevaluates each customer’s credit worthiness on a case-by-case basis. Accountsreceivable are generally unsecured. These receivables were $21,661,903 and$17,480,118 at December 31, 2005 and 2004, respectively.

 

Soybean meal salesaccounted for approximately 56% of total revenues for the year ended December 31,2005, 60% of total revenues for the year ended December 31, 2004, and 58%of total revenues for the year ended December 31, 2003. Approximately 31%and 37% of these sales were made to one customer for the years ended December 31,2004 and 2003, respectively. At December 31, 2004, this customer owed theCompany approximately $1,024,000. Refined oil sales represented approximately37% of total revenues for the years ended December 31, 2005 and 2004, and30% of total revenues for the year ended December 31, 2003. These saleswere primarily made to one customer. This customer owed the Companyapproximately $4,644,000 and $6,791,000 at December 31, 2005 and 2004,respectively.

 

Net revenue bygeographic area for the years ended December 31, 2005, 2004 and 2003 areas follows:

 

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

 

**NOTE 16 -**         MEMBERS’ EQUITY

** **

A minimum of 2,500capital units is required for an ownership interest in the Company. Such unitsare subject to certain transfer restrictions. The Company retains the right toredeem the units at the greater of $.20 per unit or the original purchase priceless cumulative distributions through the date of redemption in the event amember attempts to dispose of the units in a manner not in conformity with theOperating Agreement, if a member becomes a holder of less than 2,500 units, orif a member becomes an owner (directly or indirectly) of more than 1.5% of theissued 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 net income of $500,000, restrictionsimposed by debt and credit instruments or as restricted by law in the event ofinsolvency. Earnings, losses and cash distributions are allocated to membersbased on their percentage of ownership in the LLC.

 

The Board of Directorsapproved a Form S-1 registration statement that was filed with theSecurities and Exchange Commission on February 14, 2005 for the sale ofadditional units in a public offering. The maximum offering under the statementwas $11,250,000. During 2005, the Company sold 2,190,500 member units for atotal of $4,495,750, which is accounted for as temporary equity as described inNote 1. The offering allowed the 

 

F-20

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

investor to initially pay50% and sign a note payable to the Company for the remaining portion. At December 31,2005, the Company had subscriptions receivable of $209,656, which is accountedfor as a deduction from temporary equity until collected.

 

On June 17, 2003, theBoard of Managers declared a 2-for-1 split of Class A capital unitseffective immediately. All unit and unit per share amounts have beenretroactively adjusted to reflect the effect of the split.

 

**NOTE 17 -**         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 June 9,2003, USSC was served with notice that it had been named as a defendant in abreach of contract suit filed in circuit court of Cook County, Illinois. Theplaintiff, William Blair & Co., LLC, claims that it is entitled to acommission on the Company’s purchase of USSC’s stock in 2003 based on a brokeragreement between USSC and William Blair. In the broker agreement dated October 15,2001, USSC retained William Blair to render investment banking services inconnection with a potential private placement or sale by USSC. William Blair’sclaim for damages against USSC is for $684,000, but USSC strongly denies thatWilliam Blain is entitled to such damages. The matter is scheduled for trial incircuit court of Cook County, Illinois in January 2007.

 

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 Form 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 our 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 the latter part of 2005 the Company’s Boardof Managers engaged Gordon, Hughes, & Banks LLP to reaudit thefinancial statements for the year ended December 31, 2003. The re-auditproduced an unqualified opinion and there was no effect on previously reportednet income or members’ equity. During early 2005, prior to receiving notice ofthe SEC review, the Company solicited investors through a Form S-1 registrationstatement which included the 2003 audit opinion letter from Eide Bailly LLP andthe audited financial statements for the year ended December 31, 2003.Because the independence of Eide Bailly was compromised for that period, theregistration statement did not meet the requirements of federal securities law.The financial statements included in the Company’s periodic reports for suchperiods, as amended, are now compliant with the independent auditorrequirements of applicable securities law, but there remains a possibility thatclaims could be made against the Company relating to the inclusion in theoffering materials of the original audit opinion letter. As of December 31,2005, the Company has not recorded a provision for this matter, as managementbelieves the likelihood of claims being asserted by investors in the offeringis remote under FAS 5, “Accounting for Contingencies.” Management believes thatany liability it may incur would not have a material adverse effect on itsfinancial condition or its results of operations. Due to the circumstances described above, theCompany has recorded the net proceeds received to date as temporary equity inthe accompanying consolidated balance sheet.

 

F-21

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 18 -**         QUARTERLY RESULTS OF OPERATIONS

** **

The followingtable presents certain unaudited quarterly financial data for each of thequarters in the years ended December 31, 2005 and 2004. This informationhas been prepared on the same basis as the consolidated financial statementsand includes, in the opinion of the Company, all adjustments (consisting ofonly normal recurring adjustments) necessary to present fairly the quarterlyresults when read in conjunction with consolidated financial statements andrelated notes thereto. The operating results for any quarter are notnecessarily indicative of results for any future period or the full year.

 

***Unaudited Consolidated Statements of Operations***

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

 

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

 

F-22

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## **REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULES**

 

 

The Board ofManagers

South DakotaSoybean Processors, LLC

Volga, SouthDakota

 

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

 

In our opinion,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.

 

 

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

 

Greenwood Village,Colorado

February 3, 2006

 

F-23

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**FINANCIALSTATEMENT SCHEDULE**

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

 

F-24

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