**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 

| **ý**                                            |   | **ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE**     |
|-------------------------------------------------------|--------|-------------------------------------------------------------------------|
|                                                  |   | **SECURITIES EXCHANGE ACT OF 1934**                                     |
|                                                  |   |                                                                    |
| **For the  fiscal year ended December 31, 2005** |
|                                                  |   |                                                                    |
| **o**                                                 |   | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(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 REGISTERED PURSUANTTO 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 A capital units of the registrantoutstanding.

 

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**Part I**

 

# **CAUTIONARYSTATEMENT REGARDING**

# **FORWARD-LOOKINGINFORMATION**

# ** **

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;

 

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•                                          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), whichproduces SoyolTM, a bio-based polyurethane product made from soybeanoil.

 

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 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

 

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need to maintain our financial strength, and toconsider and implement growth strategies that will allow us to continue meetingthese objectives 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 and hullsare mostly consumed by animals. Crude soybean oil is refined by our customersfor use as salad and cooking oil, baking and frying fat, and to a more limitedextent, 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 soybeans typicallyyields approximately 44 pounds of meal and 11 pounds of crude oil whenprocessed.

 

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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. Biodieselis a substitute for standard, petroleum-based diesel fuel that is made fromapproximately 90% vegetable oil (such as soybean oil) or animal fat and 10%alcohol (methanol). The chemical reaction resulting from the combination ofthese components produces biodiesel and glycerin. Although the long-termaverage price differential of biodiesel is currently about $1 per gallon higherthan standard diesel fuel, the 2004 Jobs Creation Act, which took effect on January 1,2005, establishes a blender’s tax credit that equates to about $1 per gallon ofbiodiesel. This new tax credit, along with some earlier, less significantproduction incentives, have essentially closed the price gap between standarddiesel fuel and biodiesel, considerably increasing the feasibility oflarge-scale biodiesel production.

 

**Products & Services**

 

*Soybean Processing*

 

We crush and 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 meal customersinclude Land O’ Lakes of St. Paul, Minnesota, and Commodity Specialists ofMinneapolis, Minnesota and Shawnee Mission, Kansas. We currently extract crudesoybean oil at a level equal to approximately 20% of the weight of the soybeansthat we process annually. We process most of the crude soybean oil we produceinto refined and bleached oil or SoyolTM. Depending upon marketconditions, excess crude soybean oil is sold to other soybean oil refiners,stored for future use, or delivered against Chicago Board of Trade (CBOT)futures contracts since our Volga plant site is a registered delivery point forthe CBOT soybean oil futures contract. We receive a storage payment throughCBOT 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.

 

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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.

 

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. Wesubsequently decided to convert a portion of these notes into equity in USSCwhich will increase our ownership in USSC to 70%. We may convert to equityadditional portions of these convertible notes in the near future, as well aspurchase additional subordinated notes to provide working capital for USSC.

 

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**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 managementfees in equity of MnSP. MnSP completed its equity fundraising in April 2002,raising a total of approximately $29 million. Construction began approximatelysix 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, wereceived 1,400,400 (post split) shares of Class A Stock of MnSP,representing approximately 7% of MnSP’s outstanding shares. Also in 2004, wepurchased 287,500 shares of Class B Stock in MnSP. The shares are 8%,Non-Cumulative Convertible Class B Preferred Stock sold at $2.00 pershare. We also made to our members approximately $500,000 in interest-freeloans to invest in MnSP. These loans will be repaid to us by these membersthrough a reduction of future member distributions.

 

Currently, we are 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. Ourrail service is provided by the Dakota, Minnesota and Eastern (DM&E) railline, with connections to the Burlington-Northern Santa Fe (BNSF) and the UnionPacific (UP). The table presented below lists the percentage of sales byquantity of product sold within various markets for 2005.

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

 

**Dependence upon a Single Customer**

 

We currently sell all of 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 ofbuilding a facility approximately 100 miles from our plant. Nevertheless, weplan to maintain our competitive position in the market by producing highquality products and operating a highly efficient operation at the lowest possiblecost, and adding value to our products. We plan to increase our cost efficiencyby increasing daily production capacity, adding value to our products byinvesting

 

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in further processing of our products and developingand reviewing new applications for our products in the plastics and energyfields.

 

**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 soybeans that is not accompanied by anincrease in the price for soybean oil and meal. Labor costs can increase overtime, particularly if there is any shortage of labor, or shortage of personswith the skills necessary to operate the plant. Adequacy and cost of electricand natural gas utilities could also affect our operating costs. Changes inprice, operation and availability of truck and rail transportation may affectour profitability with respect to the transportation of soybean meal, oil andother products 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, other regulationsmay arise in future years

 

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regarding the operation of the plant, including thepossibility of required additional permits and licenses. We might havedifficulty obtaining any such additional permits or licenses, and they couldinvolve significant unanticipated costs. We will be subject to all of theseregulations without regard to whether the operation of the plant is profitable.

 

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

 

***We may 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.

 

***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 not achieveor sustain profitable operations and we may be required to abandon ourinvestment 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

 

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in having manufacturers that use polyols substituteSoyolTM for petroleum-based polyols. Common acceptance of USSC’stechnology will be dependent, among other things, upon its ease of use,reliability, price and increased consumer demand for bio-based products. Evenif the advantages of SoyolTM are established, we are unable topredict how quickly, if ever, SoyolTM will be generally accepted bymanufacturers as a substitute 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.***USSC competeswith producers of petroleum-based polyols, such as Dow BASF and Huntsman. Thesecompanies have significantly greater resources than either we or USSC have tomarket SoyolTM.

 

***USSC is reliant on its patents and other proprietary rights related toSoyol*****TM*****.***USSC has three United States patents relatedto SoyolTM; however, USSC’s right to manufacture and market SoyolTMmay be limited if it infringes on valid patents held by others. USSC hasnot undertaken or conducted any comprehensive patent infringement searches orstudies. If any such third parties hold any such conflicting rights, 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 continuing technologicalinnovations to develop and maintain a competitive advantage, USSC could beforced to abandon its production 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. In addition,at any one time, our inventory and purchase contracts for delivery to the plantmay be substantial, which could limit our ability to adjust our hedgedpositions. If our risk management policies and procedures that guide our netposition limits are inadequate, we could suffer adverse financial consequences.

 

***We are reliant 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

 

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excess crude oil, we may have to sell our oilat 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 operations in Brewster, Minnesota as well as our soybeanprocessing and refining plant in Volga, South Dakota. Our future growth andprofitability will depend on, among other things, our ability to successfullyattract, train, motivate, manage and retain new and existing employees and tocontinue to improve our operational, financial and management informationsystems. Our management may be presented with unforeseen challenges ineffectively managing the diversification and expansion of our business.Management’s inability to manage our growth effectively could have a materialadverse effect on our business, financial condition and results of operations.

 

***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 islocated in a rural area. Such individuals are in high demand and are oftensubject to competing employment offers. In particular, our success is dependenton our ability to retain the services of Mr. Christianson, our ChiefExecutive Officer, 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

 

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weather conditions. A significant reduction in thequantity of soybeans harvested due to adverse weather conditions, disease orother factors could result in increased soybean costs with adverse financialconsequences to our operations. Significant variations in actual growingconditions from normal growing conditions may adversely affect our abilityto procure soybeans for the plant. We have no definitive agreements with anysoybean producers to provide 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, several countries have exterminated large quantities ofpoultry, including chicken, ducks and other kinds of fowl. Moreover, because ofthis virus, the demand for poultry in these areas in terms of human consumptionhas declined. While the virus has yet to be detected in the United States, manyexperts predict the virus will be detected inevitably. If this were to occur,the supply and demand for poultry may decline in the United States.Because soybean meal is a feed product for poultry, especially chickens, anysignificant decline in the supply and demand for poultry in the United Statescould adversely affect the demand for soybean meal   Accordingly,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 highmoisture content require more energy to dry them before they can be processed.While we may recover some of these extra energy costs by paying producersless for high moisture soybeans, these savings may not be sufficient tooffset our additional operating 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.

 

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***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 intransportation costs than other producers because our location in Volga is moreremote than that of most of our competitors. Today most of our products are soldFOB Volga, South Dakota, and those that are not have the full transportationcost added to the contract. Transportation costs do not currently affect ourmargin directly; however the added costs could eventually affect demand for ourproducts.

 

***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, raisingapproximately $4.5 million in proceeds from existing and new investors. On June 7,2005, we received notification from the SEC that our annual and quarterlyreport 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. This audit was included in our prospectus for the 2005 public offering.As a result, our prospectus did not meet the requirements of federal securitieslaws. While the financial statements for these filings, as amended, now complywith the law, we still could be subject to certain claims from investors whopurchased capital units in the 2005 public offering. If claims are made againstus based on this matter and the number and amount of such claims reaches asignificant percentage of the proceeds raised in the offering, but we are notsuccessful in settling or litigating such claims, the cost of settlement ordamages may have an adverse effect on our profitability and cash 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. For example, the Environmental Protection Agency currentlyrequires monitoring of unrecovered levels of chemical hexane, which is used inour oil extraction process. If the standard is revised to require lower losslevels or for some reason we are unable to meet the standard in the future, wecould face fines or other consequences that could increase our operating costsand reduce profits. It is possible that changes to other federal or stateenvironmental rules or regulations could be adopted that would increaseour operating costs and expenses or require additional capital investment.

 

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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 and stipulationor other environmental permits or regulations in the future, we could besubject to severe penalties, such as potential closing of the plant, and faceincreased 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 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

 

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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.**

 

Weconduct our operations principally from our facilities in Volga, South Dakota. Weown these facilities which serve as collateral for our debt instruments. Thesefacilities, which are located on 46 acres of land, are served by multiple statehighways and is near Interstate Highway 29 and has rail service provided by theDakota, Minnesota and Eastern (DM&E) rail line, with connections to theBurlington-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, workers’compensation claims, tort claims, or contractual dispute. Currently, we are notinvolved in any material legal proceedings. In that we become involved, or inthe case of proceeding not deemed material, we carry insurance that providesprotection against general commercial liability claims, claims against ourdirectors, officers and employees, business interruption, automobile liability,and workers’ compensation claims.

 

**Item 4.****                                  ****Submission of Matters to aVote 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’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities.**

 

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

 

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*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.

 

*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-counter market.All transfers must be in accordance with our Capital Unit Transfer System, asit may be amended by the Board of Managers from time to time. Our CapitalUnit Transfer System prohibits any transfer that would result in the loss ofour 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

 

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by gift or death, sales to qualified family members,and trades through the limited trading service subject 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 of approximately$3.3 million (11.64¢ per capital unit). In 2005, we made no cash distributionsto 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 Board of Managers and there is noguarantee as to when or if we will make distributions in any particular amountor at all and actual distributions will depend upon profitability, expenses andother factors. Earnings, losses and cash distributions are allocated to membersbased on their percentage of capital unit ownership.

 

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

 

**Item 6.****                                  ****Selected Financial Data**

 

The following table sets forth selectedfinancial data of South Dakota Soybean Processors, LLC and our predecessorcooperative for the periods indicated. The historical financial information inthe table below includes audited financial data of our predecessor cooperativeprior to the effectiveness of the reorganization on July 1, 2002. Thefinancial statements for the years ended December 31, 2005, 2004 and 2003included in Item 8 of this report were audited by Gordon, Hughes &Banks, LLP. The financial statements for the years ended December 31, 2002 and 2001includedin 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   |       |
| Members’  Equity                          |       | 32,768,497  |        | 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 capitalunit split effective June 17, 2003.

 

**Item 7.****                                  ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

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

 

**ExecutiveOverview and Summary**

 

We recorded a net loss of $3.6 million in2005 verses net income of $0.7 million in 2004. The primary factors were theweak crushing margins for January through May 2005 and an increase of$2.1 million in production expenses from 2004. Early weakness in the crushingmargin was attributed to the local basis price relationship between soybeansand soybean meal, primarily because farmers were reluctant sellers after seeingsoybean prices drop from above $8.00 per bushel to under $6.00 per bushel. However,the crushing margin improved from $0.327 per bushel through May 2005 to$0.796 per bushel through the remainder of 2005. Increased energy costs,particularly natural gas, accounted for all of the increased productionexpenses in 2005. On a positive note, administrative expenses decreased by $0.6million or 14.5% and other non-operating income improved by $0.4 million.

 

In 2006, weexpect crushing margins to be profitable but below the historical average. Alarge 2005 soybean crop was produced in the United States with high oil content.While we expect the local basis price relationship between soybeans and soybeanmeal to return to a more historical level, we expect the basis level forsoybean oil to weaken for the first half of 2006. We also expect this to befollowed by an improvement in the basis level for soybean oil in the secondhalf of 2006 as new biodiesel refineries increase soybean oil demand. Energyprices and the potential impact of the Avian bird flu, however, may adverselyimpact the demand for soybean meal and offset any improvements in the crushingmargins.

 

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Furthermore, we expect to continue to make progresstowards achieving ourlong-term objectives which is to deliver high quality products and services atthe lowest possible costs and to add value by investing in the development ofnew applications for our products in the plastics and energy fields. During2005, we continued to expend capital to fund the operations of Urethane SoySystems Company, Inc. (“USSC”), our majority-owned subsidiary whichproduces SoyolTM, a bio-based polyurethane product made from soybeanoil. Higher crude oil prices and increasing demand for polyurethane plasticshas increased the interest in polyols and polyurethane systems. In July 2005,USSC restructured its staff and narrowed its market focus to enhanceprofitability. USSC’s focus in 2006 is the following:

 

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

 

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

 

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

 

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

 

•                  *Research for new or improvedbased polyol continues* –USSC expects to roll out a new three functional, multiple hydroxyls SoyolTMin the second quarter of 2006 and a fourth in 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 soybean processingplant, a soybean oil refinery, and a SoyolTM productionfacility in Volga, South Dakota. We were originally organized as a South Dakotacooperative and reorganized into a South Dakota limited-liability companyeffective July 1, 2002. We began producing crude soybean oil and soybeanmeal in late 1996, and since then we have expanded our business to include thedevelopment of new product lines and management services. In 2000, we beganproviding management services to Minnesota Soybean Processors and obtained aminority interest in MnSP in 2004. In 2002, we began refining crude soybean oilinto a product known as refined and bleached oil, and in early 2003, we becamethe majority owner and assumed management control of USSC.

 

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**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 was attributableto an improved U.S. soybean crop, which resulted in an increased supply ofsoybeans in 2005. The price decreases was offset by an increase in sales volumeof all products: soybean meal volume increased by 4.6%; crude soybean oilvolume increased by 271.1%; and refined and bleached soybean oil volumeincreased by 10.3%. The increase in the sales volume of crude soybean oil in2005 resulted from the delivery and issuance of warehouse receipts of crudesoybean 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 processing capacity. In addition,natural gas prices soared during 2005, resulting in approximately $2.0 millionof additional production expenses versus 2004. The difference in the cost ofnatural gas was primarily the result of increased demand for natural gas,reduced production and inventories in the natural gas industry, as well asstrong pricing in petroleum commodities, such as unleaded gas and heating oil. Increasedfreight costs resulted from higher product volumes delivered to customers, aswell as higher freight rates. During 2005, we shipped approximately 8% moresoybean meal 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.

 

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*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%. OnDecember 31, 2004, we had outstanding debt of $10.2 million, the majorityof 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 of approximately $30.9 million, or 14.9%. The improvement wasa result of several factors. Principally, the increase in revenues was a resultof higher soybean meal and soybean oil prices along with higher sales volume ofrefined and bleached oil. The average sales prices for soybean meal, crudesoybean oil, and refined and bleached soybean oil increased by 23.9%, 12.0%,and 30.4%, respectively. In addition, sales volume of refined and bleachedsoybean oil increased by 7.3% in 2004 versus 2003. The increases attributableto these factors were offset by a decrease of 85.1% in sales volume of crudesoybean oil during 2004, which was due to selling less crude soybean oil thanwe 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.

 

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*AdministrativeExpense* –Administrative expense, including all selling, general and administrativeexpenses, increased by $837,000, or 23%, for the year ended December 31,2004, compared to the same period in 2003. This increase resulted fromadditional expenses incurred in connection with the management and operation ofUSSC, which remained in the developmental stage and where we continued to incurmarketing and research and development expenses to develop a market for SoyolTM. Some of the increase in administrative expenses associated with USSCwas offset by lower general and administrative expenses that we incurred on ourcrushing and refining operations as a result of our cost-sharing arrangementwith 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 bore interestat 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 soybean meal and soybean oil prices. Other non-operatingincome 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 inaccounts receivable and inventory, along with decreases in accrued commoditypurchases and accounts payable. Accounts receivable increased primarily due toplacing crude 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.

 

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*Cash Flows from Investing Activities*

 

The decrease in cash used for investing activitiesbetween 2005 and 2004 was attributed to a decrease in the purchase of capitalimprovements and investments, which were delayed due to lower margins in 2005.In 2005, we spent approximately $609,000 less cash on purchases of property andequipment than in 2004. In 2004, we spent approximately $1.2 million on equipment to increase theenergy efficiency of the boiler, for improvements in our crushing operations,and increased storage for SoyolTM. Also during theyear ended December 31, 2004, wepurchased additional shares in MnSP for approximately $601,000.

 

*Cash Flows from Financing Activities*

 

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

 

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

 

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

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

 

*Cash Flows from Operating Activities*

 

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

 

*Cash Flows from Investing Activities*

 

Investing activities used$1.9 million during the year ending December 31, 2004 compared to$5.5 million for the year ended December 31, 2003.  The purchase ofshares in

 

24

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MnSPaccounted for $601,000 of such expenditures in 2004. In 2003, we purchasedshares in USSC amounting to $4.1 million. In addition, we purchased $1.2million 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 andequipment during the year ended December 31, 2004 consisted of equipment toincrease the energy efficiency of the boiler, improvements in our crushingoperations, and increased storage for SoyolTM. During 2003,the $1.0 million spent on property and equipment consisted of consolidationsoftware to upgrade our technological capabilities and several other projectsto improve our soybean processing and refining operations.

 

*Cash Flows from Financing Activities*

 

Net cash used by financing activities for the yearsending December 31, 2004 was $10.6 million, compared to providing $4.1 millionof cash in 2003. During the year ended December 31, 2004, we made payments of$8.3 million on long-term debt commitments by carrying smaller values inaccounts receivable and distributed $3.3 million to our members, offset by a$1.0 million increase in outstanding checks in excess of bank balances. Duringthe year ended December 31, 2003, we increased our borrowings by $9.5 million,as a result of carrying larger values in accounts receivable and inventory,less operating income and expenditures for capital investments, including ourinvestment in USSC. These additional borrowings in 2003 were offset by adistribution to our members of $2.5 million and payments of $1.6 million onlong-term debt commitments.

 

***Indebtedness***

 

CoBank is our primary lender. On October 6, 2005, wemodified the two lines of credit with CoBank to meet the needs of ouroperations. The first is a revolving long-term loan agreement. Under the termsof this loan, we began with a $17.1 million credit line. It reduces by $1.3million every six months. The final payment will be equal to the remainingunpaid principal balance of the loan on March 20, 2012. The revolving loan isset up so that we may borrow funds as needed up to the credit line maximum, andthen pay down the principal whenever excess cash is available. Repaid amountsmay be reborrowed up to the available credit line. We pay a 0.50% annualcommitment fee on any funds not borrowed.

 

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

 

Both CoBank loans are set up with a variable rateoption. The variable rate is set by CoBank and changes weekly on the firstbusiness day of each week. We also have a fixed rate option on both loansallowing us to fix rates for any period between one day and the entirecommitment period. We can get a fixed rate quote from CoBank at any time andlock-in the interest rate on all or a part of our borrowings that are availablefor fixing. Both CoBank loans are secured by substantially all of our assets. Inaddition, both loans are subject to compliance with standard financialcovenants and the maintenance of certain financial ratios, including but not limited to, a fixed debtservice coverage ratio of not less than 1.2:1.00 and a minimum working capitalof not less than $6 million including the amount available and outstandingbalance on the revolving long-term loan. During the fourth quarter endedDecember 31, 2005, we were not in

 

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compliancewith the working capital covenant but CoBank agreed to waive this requirement.Currently, we are in compliance with all covenants under the loan agreement.. The balance borrowed on the revolving termloan was $14.5 million and $7.9 million as of December 31, 2005 and2004, respectively. There were no advances outstanding on the working capitalloan at December 31, 2005 and 2004. The annual interest rate on both theworking capital and revolving term loans as of December 31, 2005 was 7.05%.

 

We also have other long-term contracts and notestotaling approximately $1.3 million, with a weighted average annual interestrate of 3.5% as of December 31, 2005. These arrangements include a no interest$891,000 long-term payable to the other USSC shareholders relating to ourpurchase of their tendered USSC shares. The obligation is secured by thepurchased shares, with the final annual payment due on October 31, 2006. Ourhighest 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 paymentsof $965,000 and $976,000 on these additional long-term obligations during theyears ended December 31, 2005 and 2004, respectively.

 

***Capital Raising***

 

During the year ended December 31, 2005, weconducted a registered public offering to sell up to 5,625,000 new capitalunits. The offering was made available initially only to our existing membersat a price of $2.00 per unit until April 11, 2005, and then was made availableto the general public at a price of $2.50 per unit. When the offeringexpired on May 31, 2005, we had sold 2,190,500 capital units for a total of $4,495,750.

 

***Capital Expenditures***

 

We only invested approximately $600,000 in capitalexpenditures for property and equipment during the year ended December 31, 2005compared to approximately $1.2 million in capital expenditures during the yearended December 31, 2004. Depending on our profitability in 2006, we anticipate spendingbetween $1.0 and $2.0 million on capital expenditures during the year endedDecember 31, 2006. Our principal sources of funds are anticipated to be cashflows from operating activities and borrowings under our revolving and workingcapital loans with CoBank.

 

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

 

Wecould be subject to claims from investors in the future as a result of ourpublic offering in 2005 and based on the requirements of federal securitieslaws. On May 31, 2005, we closed a public offering of capital units, raisingapproximately $4.5 million in proceeds from existing and new investors. On June7, 2005, we received notification from the SEC that our quarterly and annualreport filings were under review. During the course of the review, the SECraised questions about the lack of independence of the audit firm, Eide BaillyLLP, with respect to the audit of our financial statements for the year endedDecember 31, 2003. This audit was included in our prospectus for the 2005 publicoffering. While our financial statements for the applicable filings, asamended, now comply with the law, we could be subject to certain claims frominvestors who purchased capital units in our 2005 public offering because ofthe lack of independence issue, although it is uncertain whether any claimswill be made or the nature and amount of such claims. If claims are indeed madeagainst us and the aggregate amount of such claims reaches a significantpercentage of the total proceeds raised in the offering, but we are unable to dismiss or settle theclaims in our favor, it may have an adverse effect on our business. Our abilityto invest in our operations, for instance, including our planned capitalexpenditures in 2006, could be reduced as we anticipate financing any claimsfrom cash flow from operations.

 

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**OFF BALANCE SHEET FINANCING ARRANGEMENTS**

 

We do notutilize variable interest entities or other off-balance sheet financialarrangements.

 

**Lease Commitments**

 

We have commitments under various operating leasesfor rail cars, various types of vehicles, and lab and office equipment. Our most significant lease commitments are the rail car leases we use todistribute our products.  We have a number of long-term leases with GECapital and Trinity Capital for hopper rail cars and oil tank cars. Total leaseexpense under these arrangements was approximately $2.1 million for both yearsended December 31, 2005 and 2004. The hopper rail cars earn mileage credit fromthe railroad through a sublease program, which totaled $2.2 million and $1.8million for the years ended December 31, 2005 and 2004, respectively.

 

In addition to rail car leases, we haveseveral operating leases for various equipment and storage facilities. Totallease expense under these arrangements was $283,000 and $198,000 for the yearsended December 31, 2005 and 2004, respectively. Some of these leases includepurchase options; however, none are for a value less than fair market value atthe end of the lease.

 

The following table shows our contractual obligations for the periodspresented.

 

**CONTRACTUAL OBLIGATIONS**

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

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Preparation of our financial statements requiresestimates and judgments to be made that affect the amounts of assets,liabilities, revenues and expenses reported. Such decisions include theselection 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 applying these policies arisesfrom the assumptions, estimates, and judgments that have to be made currentlyabout matters that are inherently uncertain, such as future economicconditions, operating results and valuations as well as management intentions.As the difficulty increases, the level of precision decreases, meaning thatactual results can and probably will be different from those currentlyestimated.

 

27

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Of the significant accounting policies described inthe notes to the financial statements, we believe that the following mayinvolve a higher degree of estimates, judgments, and complexity:

 

*Commitments and Contingencies*

 

Contingencies, by their nature relate touncertainties that require management to exercise judgment both in assessingthe likelihood that a liability has been incurred, as well as in estimating theamount of the potential expense.  In conformity with accounting principlesgenerally accepted in the United States, we accrue an expense when it isprobable that a liability has been incurred and the amount can be reasonablyestimated.

 

*Inventory Valuation*

 

We account for our inventories at estimated netrealizable market value. These inventories are agricultural commodities thatare freely traded, have quoted market prices, may be sold without significantfurther processing, and have predictable and insignificant costs of disposal.We derive our estimates from local market prices determined by grain terminalsin our area. Processed product price estimates are determined by the endingsales contract price as of the close of the final day of the period. This priceis determined by the closing price on the Chicago Board of Trade, net of thelocal basis. Changes in the market values of these inventories are recognizedas a component of cost of goods sold.

 

*Long-Lived Assets*

 

Depreciation and amortization of our property, plantand equipment is provided on the straight-lined method by charges to operationsat rates based upon the expected useful lives of individual or groups ofassets. Economic circumstances or other factors may cause management’sestimates of expected useful lives to differ from actual.

 

Long-lived assets, including property, plant andequipment and investments are evaluated for impairment on the basis ofundiscounted cash flows whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. An impaired assetis written down to its estimated fair market value based on the bestinformation available. Considerable management judgment is necessary toestimate undiscounted future cash flows and may differ from actual.

 

The Company evaluates the recoverability ofidentifiable intangible assets whenever events or changes in circumstancesindicate that an intangible asset’s carrying value may not be recoverable. Suchcircumstances could include, but are not limited to: (1) a significant decreasein the market value of an asset, (2) a significant adverse change in the extentor manner in which an asset is used, or (3) an accumulation of costssignificantly in excess of the amount originally expected for the acquisitionof an asset. The Company measures the carrying amount of the asset against theestimated undiscounted future cash flows associated with it. Should the sum ofthe expected future net cash flows be less than the carrying value of the assetbeing evaluated, an impairment loss would be recognized. The impairment losswould be calculated as the amount by which the carrying value of the assetexceeded its fair value. The fair value is measured based on quoted marketprices, if available. If quoted market prices are not available, the estimateof fair value is based on various valuation techniques, including thediscounted value of estimated future cash flows. The evaluation of assetimpairment requires the Company to make assumptions

 

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aboutfuture cash flows over the life of the asset being evaluated. These assumptionsrequire significant judgment and actual results may differ from assumed andestimated amounts.

 

*Accounting for Derivative Instruments and HedgingActivities*

 

We minimize the effects of changes in the price ofagricultural commodities by using exchange-traded futures and options contractsto minimize our net positions in these inventories and contracts. We accountfor changes 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.****                          Quantitativeand Qualitative Disclosure about Market Risk**

 

***Commodities Risk& Risk Management.***To reduce the price change risks associated with holding fixed pricecommodity positions, we generally take opposite and offsetting positions byentering into commodity futures contracts (either a straight or options futurescontract) on a regulated commodity futures exchange, the Chicago Board ofTrade. While hedging activities reduce the risk of loss from increasing marketprices of soybeans, such activities also limit the gain potential whichotherwise could result from significant decreases in market prices of soybeans.Our policy is generally to maintain a hedged position within limits, but we canbe long or short at any time. Our profitability is primarily derived frommargins on soybeans processed, not from hedging transactions. Management doesnot anticipate that its hedging activity will have a significant impact onfuture operating results or liquidity. Hedging arrangements do not protectagainst nonperformance of a cash contract.

 

At any one time, our inventory and purchasecontracts for delivery to the plant may be substantial. We have risk managementpolicies and procedures that include net position limits. They are defined bycommodity, and include both trader and management limits. This policy andprocedure triggers a review by management when any trader is outside ofposition limits. The position limits are reviewed at least annually with theBoard of Managers. We monitor current market conditions and may expand orreduce the limits in response to changes in those conditions.

 

***Foreign CurrencyRisk. ***Weconduct essentially all of our business in U.S. dollars and have no direct riskregarding foreign currency fluctuations. Foreign currency fluctuations do,however, impact the ability of foreign buyers to purchase U.S. agriculturalproducts and the competitiveness of and demand for U.S. agricultural productscompared to the same products offered by foreign suppliers.

 

***Interest RateRisk.***  Wemanage exposure to interest rate changes by using variable rate loan agreementswith fixed rate options. Long-term loan agreements can utilize the fixed optionthrough maturity; however, the revolving ability to pay down and borrow backwould be eliminated once the funds were fixed.

 

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

 

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

 

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**Item 9.****                                  ****Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

On January 18, 2005, we accepted Eide Bailly’sresignation from its engagement to perform the audit of our financialstatements for the year ended December 31, 2004.  Such resignationwas presented in person by representatives of Eide Bailly and approved by ourAudit and Finance Committee and our Board of Managers at meetings held onJanuary 18, 2005.  Eide Bailly stated that the reason for itsresignation was its concern that the assistance rendered to us by certain ofEide Bailly’s personnel in connection with the preparation of our financialstatements in 2004, though believed to be de minimus, could be viewed asprohibited bookkeeping services and that its independence to perform our auditfor 2004 could therefore be compromised.  We did not dispute Eide Bailly’sdetermination.

 

Eide Bailly performed the audits for our financialstatements for the years ended December 31, 2003 and 2002, and neither ofthe reports on the financial statements for either of those years contained anadverse opinion or a disclaimer of opinion, or was qualified or modified as touncertainty, audit scope, or accounting principles.  We had nodisagreements with Eide Bailly during either of our two fiscal years(2002-2003) or during any subsequent interim period preceding its resignationon any matter of accounting principles or practices, financial statementdisclosure, or auditing scope or procedure, which disagreement(s), if notresolved to the satisfaction of Eide Bailly, would have caused it to 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, or forany 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 FinanceCommittee and Board of Managers approved the engagement of Gordon, Hughes &Banks, LLP, to perform the audit of our financial statements for the fiscalyear ended December 31, 2004, and to re-review our interim financialstatements for the first three quarters of 2004.  Prior to this time,Gordon, Hughes & Banks had never performed any audit services or anyother accounting or advisory services for us. Gordon, Hughes & Bankscompleted its audit of our 2004 financial statements.  Subsequently, inconnection with its review of our Form 10-K for the year endedDecember 31, 2004, the SEC also questioned whether the independence ofEide Bailly may have been compromised with respect to its review of thefinancial statements for the quarter ended September 30, 2003, and itsaudit 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 agreed to comply with the SEC’srequest to amend our SEC filings. Gordon, Hughes & Banks subsequentlycompleted its audit of the 2003 financial statements, and delivered to us itssigned audit report, dated as of September 30, 2005, which was filed asForm 10-K/A for the years ended December 31, 2003. No restatement of ourpreviously filed financial statements for such periods was required as a resultof such subsequent audit.

 

30

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## **Controlsand Procedures**

## ** **

***Evaluation ofDisclosure Controls and Procedures****.* Based on their evaluation as of the endof the period covered by this Annual Report on Form 10-K, our principalexecutive officer and principal financial officer have concluded that theCompany’s disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) areeffective to ensure that information required to be disclosed by the Company inreports that it files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

***Changes in InternalControl Over Financial Reporting****.* There were no changes in our internalcontrol over financial reporting identified in connection with the evaluationof disclosure controls and procedures that occurred during 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 ExecutiveOfficers of the Registrant.**

 

**Board of Managers**

 

Our Board of Managers consists of three members fromeach of seven geographic districts, for a total of 21 Board members. Boardmembers are elected to staggered three-year terms by the members in theirgeographic district and currently may not serve more than three consecutivethree-year terms. Generally, one Board seat in each of the seven geographicaldistricts is elected at our annual meeting each year as required by ourOperating Agreement.

 

The table below describes important informationabout the members of the Board of Managers.

 
| **Name,  Address and  Board Position, if any**                  | ** ** | **Age** | ** ** | **Board  Member  Since** | ** ** | **Current  Term  Expiring** | ** ** | **Occupation  and  Background**                                                                                                                                                                                                                                                                                                                                          |
|-----------------------------------------------------------------|------------|---------|------------|--------------------------|------------|-----------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                            |       |    |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| **Paul Barthel**22308 486th  Ave.  Elkton, SD 57026             |       | 37      |       | 1996                     |       | 2006                        |       | Paul  has been a farmer for the past 18 years. He is a member of the South Dakota  Soybean Association, and the South Dakota Corn Growers. Paul graduated from  South Dakota State University in Brookings, South Dakota in 1992 with a major  in Ag Business and minor in Agronomy.                                                                                     |
|                                                            |       |    |       |                     |       |                        |       |                                                                                                                                                                                                                                                                                                                                                                     |
| **Dean Christopherson**32732 Quine Ave.  Worthington, MN  56187 |       | 58      |       | 2004                     |       | 2007                        |       | Dean  has been a farmer for the past 34 years. He is president of Nobles County  Farm Bureau and a 4-H leader. He is a past director of SouthWest Farm  Management and AMPI. Dean is a trustee and committee member of First Covenant  Church in Worthington, MN. He attended Worthington Community College for two  years and the University of Minnesota for one year. |

 

31

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| **David Driessen**105 4th  St. West  Canby, MN 56220       |       | 51         |       | 2005       |       | 2008       |       | David  has been a farmer for the past 28 years. He is past director of the Canby  Farmers Grain Coop. He received his B.A. degree in 1977 from Southwest State  University in Marshall, Minnesota.                                                                                                                                                                                                                                                                        |
|------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                       |       |       |       |       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Wayne Enger**2090 180th Street  Madison, MN 56256        |       | 52         |       | 2004       |       | 2007       |       | Wayne  has been a farmer for the past 30 years. He is secretary of the State Line  Farmers Cooperative Elevator and was a board member of the Lac Qui Parle  County Soybean Producers. Wayne has served as president and treasurer of the  Midwest Cattlemen’s Association and is a former member of the Garfield  Lutheran Church Board. Wayne received his B.A. degree in mathematics and  German literature from University of Minnesota-Morris in** **1975. |
| ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Ronald J. Gorder**19196 471st  Ave.  Estelline, SD 57234 |       | 42         |       | 2005       |       | 2008       |       | Ronald  has been a farmer for the past 22 years. He is president of Trinity Church in  Estelline and vice president of the Estelline School Board. He is also  president of the South Dakota Soybean Association. Ronald attended Concordia  College in Moorhead, Minnesota in 1982                                                                                                                                                                                       |
|                                                       |       |       |       |       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Ryan J. Hill**36327 210th  St.  Brewster, MN  56119      |       | 57         |       | 1995       |       | 2006       |       | Ryan  has been a farmer for the past 30 years. He is a member of the National and  Minnesota Corn and Soybean Growers Associations. Ryan attended Worthington  Junior College, and participated in the U.S. Navy Engineering metallurgy  program in 1969.                                                                                                                                                                                                                 |
| ** **                                                 |       |       |       |       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Kent Howell**212981 464th Ave.  Volga, SD 57071          |       | 49         |       | 2005       |       | 2008       |       | Kent  has been a farmer for the past 28 years. Kent previously served as secretary  of Volga Coop Oil Co. and Meadow Creek Golf Course and the  secretary/treasurer of the Volga Fire Department. Kent received his B.S. from  South Dakota State University in Brookings, South Dakota in 1977.                                                                                                                                                                          |
| ** **                                                 |       |       |       |       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Jerome L. Jerzak**2974 County Hwy 5  Ivanhoe, MN 56142   |       | 58         |       | 2005       |       | 2008       |       | Jerome  has been a farmer for the past 41 years. He is a member of the Minnesota Crop  Improvement Association, the South Dakota Soybean Association and the South  Dakota Corn Growers, and is a former board member of the Ivanhoe Elevator  Cooperative and the Ivanhoe School Board.                                                                                                                                                                                  |

 

32

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

 

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| **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 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.                                                                                                                                                                                                                                                                                                         |

 

34

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**Compensation of Board of Managers**

 

Members of the Board of Managers are currentlyprovided a per diem payment for services performed in the amount of $150 foreach function requiring more than four hours, and $75 for each functionrequiring less than four hours. In addition to the per diem fee, mileagereimbursement is provided at current IRS rates.

 

**Committees of Board of Managers**

 

The Board of Managers has formed the followingcommittees: finance and audit committee, nomination committee, governancecommittee, public relations committee, and planning committee.  The currentmembers of the Finance and Audit Committee are Daniel Potter, who serves as thechairperson of the committee, Wayne Enger, Jerome Jerzak, Robert Nelsen, StevenPreszler, Greg Schmieding, Anthony Van Uden and Ardon Wek.  Because ourBoard members are generally farmers, as is common for producer-basedagricultural entities, we do not have an audit committee financial expertserving on our finance and audit committee.  The Board, however, hasselected members for the finance and audit committee based on the Board’sdetermination that they are fully qualified to monitor management, our internalaccounting operations and the independent auditors and are fully qualified tomonitor our disclosures to assure that they fairly present our financialcondition and results of operations. In addition, the finance and auditcommittee has the authority to engage advisers as it deems necessary to assistit in carrying out its duties.

 

The current members of the Nomination Committee areRobert Nelsen, who serves as the chairperson of the committee, Paul Barthel,Dale Murphy, Daniel Potter, Rodney Skalbeck, Delbert Tschakert and Ardon Wek.Our Nomination Committee Charter is available for review on our website athttp://www.sdsbp.com.   In order to submit a nominee for the Board tothe Nomination Committee for the 2006 Annual Meeting, members were required toreturn a nomination petition form to the Nomination Committee no later thanMarch 31, 2006.  Nominations will not be accepted from the floor at the2006 Annual Meeting. The members of the Nomination Committee will review eachof the submitted forms during their selection process and may also search forand contact additional potential nominees at their discretion.

 

**Executive Officers**

 

The following individuals serve as our executiveofficers in the capacities listed. These officers serve at the discretion ofthe Board of Managers and can be terminated without notice.

 

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

 

35

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**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 and startup 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 farm native, and received hisB.S. in Engineering from North Dakota State University. He holds a ProfessionalEngineer’s License.

 

Rodney has complete responsibility for ouroperations.

 

**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 North Dakota,South Dakota, and Minnesota. As a market analyst, Tom assisted grain elevatorprofitability by using advanced management and marketing techniques whileincorporating specific risk management procedures.

 

Tom graduated from the University of Minnesota’sCollege of Agriculture with a B.S. in Agricultural Business Administration withan emphasis in operations management. Tom is a licensed commodity broker, adirector of the National Oilseed Processors Association, a voting member of theNational Biodiesel Board and our contact for the Chicago Board of Trade.

 

Tom is responsible for all futures tradingstrategies, as well as merchandising commodity products, and soybean andnatural gas procurement.

 

**James A. Seurer, *Chief Financial Officer.* **After spending nearly 18 years in thefinancial institution industry, Jim joined us as Chief Financial Officer inMarch 2005.  Most recently, Jim served for four years as VicePresident/Chief Financial Officer of Red Rocks Federal Credit Union inHighlands Ranch, Colorado (Denver).  Prior to that Jim served for 14 yearsas a Federal Examiner and Problem Case Officer with the National Credit UnionAdministration and he spent a short time in a similar capacity with the Stateof Colorado.

 

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

 

**Code of Ethics**

 

We have adopted a written code of ethics, whichapplies to our principal executive officer, principal financial and accountingofficer, controller or persons performing similar functions.  A copy ofthe code of ethics is filed as Exhibit 14.1 to this Report.

 

**Compliance with Reporting Requirements of Section 16of the Exchange Act**

 

Under Section 16(a) of the Exchange Act, ourdirectors, executive officers and any persons holding 10% or more of the commonstock are required to report their ownership of our capital

 

36

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unitsand any changes in that ownership to the Securities and Exchange Commission(the “SEC”) and to furnish us with copies of such reports. Specific due datesfor these reports have been established and we are required to disclose in thisreport any failure to file on a timely basis by such persons. To our knowledge,based solely upon a review of copies of such reports received by us which werefiled with 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) for 2005have been timely filed with the SEC, other than a Form 4 filed by Mr. WayneEnger on October 12, 2005.

 

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

 

**Summary Compensation Table.****The following table sets forth all the compensation we paid during theyears ended December 31, 2005, 2004, and 2003 to our principal executiveofficer and each officer paid over $100,000 in our last fiscal year (the “namedexecutive officers”).  No other officers received total compensationexceeding $100,000 during the year ended December 31, 2005.

 
| ** **                                 | ** ** | ** **      | ** ** | ** **                   | ** ** | **Long-Term Compensation** | ** ** | ** **                             | ** ** |
|--------------------------------------------|------------|-----------------|------------|------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | ** **      | ** ** | **Annual Compensation** | ** ** | **Awards**                      | ** ** | **Payouts**                            | ** ** | ** ** | ** ** |
| **Name and  Principal Position** | ** ** | **Year  Ended** | ** ** | **Salary  ($)**              | ** ** | **Bonus  ($)**                  | ** ** | **Other  Annual  Compens  ation  ($)** | ** ** | **Restricted  Stock  Award(s)  ($)** | ** ** | **Securities  Underlying  Options/  SARs (#)** | ** ** | **LTIP  Payouts  ($)** | ** ** | **All  Other  Compens  ation  ($)** | ** ** |
|                                       |       |            |       |                         |       |                            |       |                                   |       |   |   |   |   |   |   |   |   |
| 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, we entered into a four-yearemployment agreement with Mr. Christianson that expires on January 31,2008.  Under the employment agreement, Mr. Christianson received an annualsalary of $250,000 through August 31, 2005 and will receive an annual salary of$300,000 for the remaining term of the agreement.  Mr. Christianson isalso entitled to receive an incentive bonus equal to one-half of one percent ofnet income before taxes and member distributions, excluding certainextraordinary items of income and expense, on up to $5.0 million net income, or1% of net income before taxes and member distributions if net income exceeds$5.0 million. Mr. Christianson may elect to have his incentive bonus paiddirectly or deferred.  Mr. Christianson is also entitled to participate in401(k), healthcare and other retirement and welfare benefit programs that aregenerally available to employees and a vehicle to be used for businesspurposes. Mr. Christianson is entitled to eighteen months of severance payin the event that we terminate his employment during the term of the agreement,other than for cause. Mr. Christianson’s employment contract is terminable atwill by the Board of Managers without cause, and may be terminated by Mr.Christianson with 60 days’ notice.  The employment agreement also includesa two-year non-competition provision.

 

37

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Mr. Kersting has an employment agreement with usthat is terminable at will. Mr. Kersting receives a base salary and is entitledto participate in 401(k), healthcare and other retirement and welfare benefitprograms that are generally available to employees, including the employeeprofit sharing program which allocates 4% of net profits over $2 million to allemployees other than Mr. Christianson. Individual amounts are allocatedand distributed to employees based on a formula that takes into account currentsalary level, level of responsibility and the impact of the employee’s positionon profits.

 

Messrs. Christianson and Kersting also have adeferred compensation plan that provides “phantom” capital units.  Messrs.Christianson and Kersting’s initial grants under these plans are fullyvested.  On February 1, 2004, Mr. Christianson received an additionalgrant under an amended and restated deferred compensation plan.  Underboth the original and amended plan, we pay an amount equal to the fair marketvalue of the participant’s vested phantom capital units in five annualsubstantially equal installments beginning upon the earlier of termination ofemployment with us or his 65th birthday.

 

Our Chief Financial Officer, Jim Seurer, was hiredin March 2005 and received no compensation from us during the years endedDecember 31, 2004, 2003, and 2002.  Mr. Seurer’s employment with us isterminable at will.  Mr. Seurer receives a base salary and is entitled toparticipate in 401(k), healthcare and other retirement and welfare benefitprograms that are generally available to employees, including the employeeprofit sharing program.

 

**Item 12.****                           ****Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.**

 

We do not have any compensation plans under whichour capital units are authorized for issuance.

 

The following table sets forth the beneficialownership of our outstanding capital units by our Board members and named executiveofficers as of March 15, 2006.  As of that date, no person beneficiallyowned 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**                  | **%**      |

 

38

----

 

 

----

| *    | 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.****                           ****Certain Relationships andRelated Transactions.**

 

Our individual Board members and executive officers  have not entered into, and do not anticipateentering into, any contractual or other transactions between themselves and us,except for continuing employment agreements, as described above under “Compensationof Management 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 Feesand Services.**

 

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

 

**Audit Fees.  **Gordon, Hughes, & Banks, LLP billed atotal amount of $55,000 for professional services rendered for the audit of theCompany’s various annual financial statements for the fiscal year endedDecember 31, 2005, and the reviews of the financial statements included inthe Company’s Forms 10-Q for the fiscal year ended December 31, 2005.

 

**Audit Related Fees.  **Gordon, Hughes, & Banks, LLP billed atotal amount of $4,350 for professional services rendered for audit relatedservices primarily as it relates to consultation with the Company regarding anSEC review of the Company’s financial statements during the fiscal year endedDecember 31, 2005.

 

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

 

39

----

 

Eide Bailly billed a total amount of $12,173 forprofessional tax services rendered for the Company during the fiscal year endedDecember 31, 2005.

 

**All Other Fees.  **Gordon, Hughes, & Banks, LLP did notrender any other services for which fees were paid for services rendered inconnection with other matters requested by the Company during the fiscal yearended December 31 2005.

 

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

 

**Audit Fees.  **Gordon, Hughes, & Banks, LLP billed atotal amount of $56,000 for professional services rendered for the audit of theCompany’s various financial statements for the fiscal year ended December 31,2004 and the re-reviews of the financial statements included in the Company’sForms 10-Q for the 2004 fiscal year.

 

Prior to the resignation of Eide Bailly LLP in January2005 and the subsequent retention of Gordon, Hughes, & Banks, LLP, EideBailly LLP billed a total amount of $40,641 for professional services renderedfor the reviews of the financial statements included in the Company’s Forms10-Q for the 2004 fiscal year.

 

**Audit Related Fees.  **Gordon Hughes & Banks billed a totalamount of $0 for professional services rendered for audit related services.

 

Eide Bailly billed a total amount of $916 forprofessional services rendered for audit related****services. Audit related fees” were primarily assurance andrelated services related to the audit.

 

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

 

Eide Bailly billed a total amount of $20,754 forprofessional tax services rendered for the Company during the fiscal year endedDecember 31, 2004.

 

**All Other Fees.  **Gordon, Hughes, & Banks, LLP did notrender any other services for which fees were paid in connection with othermatters requested by the Company during the fiscal year ended December 31 2004.

 

Eide Bailly billed a total amount of $4,739 forprofessional services rendered in connection with other matters requested bythe Company during the fiscal year ended December 31, 2004. The fees were associatedwith the acquisition of USSC.

 

The Audit Committee Charter provides that the AuditCommittee shall approve in advance any fees related to non-audit services. Accordingly, our auditor submits to the Audit Committee a notice ofservices proposed to be provided and the associated fees prior to the provisionof any non-audit services.  During 2005 all such non-audit fees werepre-approved by the Audit Committee.

 

40

----

 

**Part IV**

 

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

 

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

 

(a)(1)       Financial Statements and Schedules– Reference is made to the “Index to Financial Statements” of South DakotaSoybean Processors, LLC located at page F-1 of this report for a list of thefinancial statements and schedules for the year ended December 31, 2005included herein.

 

(2)           N.A.

 

(3)           Exhibits - See Exhibit Indexfollowing the Signature Page to this report. The following exhibits constitutemanagement agreements, compensatory plans, or arrangements:Exhibits 10.14, 10.15, 10.16, and 10.17.

 

41

----

 

SIGNATURES

 

Pursuant to the requirement of Section 13 or15(d) of the Securities Exchange Act, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|   |            | SOUTH  DAKOTA SOYBEAN  PROCESSORS, LLC           |
|--------|-----------------|--------------------------------------------------|
|   |            |                                             |   |
| Date:  | March  31, 2006 |                                             | /s/ Rodney Christianson |   |
|   |            | Rodney  G. Christianson  Chief Executive Officer |
|   |            |                                             |   |
|   |            |                                             |   |
| Date:  | March 31, 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:  | March  31, 2006 |                                                                                     | /s/ Rodney Christianson |   |
|   |            | Rodney  G. Christianson  Chief Executive Officer  (Principal Executive Officer)          |
|   |            |                                                                                     |
|   |            |                                                                                     |
| Date:  | March  31, 2006 |                                                                                     | /s/  James Seurer |   |
|   |            | James  A. Seurer  Chief Financial Officer  (Principal Financial and Accounting  Officer) |
|   |            |                                                                                     |
|   |            |                                                                                     |
| Date:  | March  31, 2006 |                                                                                     | /s/ Paul Barthel |   |
|   |            | Paul  Barthel, Manager                                                                   |
|   |            |                                                                                     |
|   |            |                                                                                     |
| Date:  | March  31, 2006 |                                                                                     | /s/ Dean Christopherson |   |
|   |            | Dean  Christopherson,  Manager                                                           |
|        |                 |                                                                                          |  |  |  |  |

 

42

----

 
| Date:  | March 31, 2006  |                         | /s/  David Driessen |   |
|--------|-----------------|------------------------------|---------------------|--------|
|   |            | David Driessen, Manager      |
|   |            |                         |
|   |            |                         |
| Date:  | March  31, 2006 |                         | /s/ Wayne Enger     |   |
|   |            | Wayne  Enger, Manager        |
|   |            |                         |
|   |            |                         |
| Date:  | March  31, 2006 |                         | /s/ Ronald Gorder   |   |
|   |            | Ronald  J. Gorder, Manager   |
|   |            |                         |
|   |            |                         |
| Date:  | March  31, 2006 |                         | /s/ Ryan Hill       |   |
|   |            | Ryan  J. Hill, Manager       |
|   |            |                         |
|   |            |                         |
| Date:  | March  31, 2006 |                         | /s/ Kent Howell     |   |
|   |            | Kent  Howell, Manager        |
|   |            |                         |
|   |            |                         |
| Date:  | March  31, 2006 |                         | /s/ Jerome Jerzak   |   |
|   |            | Jerome  L. Jerzak, Manager   |
|   |            |                         |
|   |            |                         |
| Date:  | March  31, 2006 |                         | /s/ Peter Kontz     |   |
|   |            | Peter  Kontz, Manager        |
|   |            |                         |
| Date:  | March  31, 2006 |                         | /s/ Laron Krause    |   |
|   |            | Laron  Krause, Manager       |
|   |            |                         |
|   |            |                         |
| Date:  | March  31, 2006 |                         | /s/ Bryce Loomis    |   |
|   |            | Bryce  Loomis, Manager       |
|   |            |                         |
|   |            |                         |
| Date:  | March  31, 2006 |                         |                |   |
|   |            | Dale  F. Murphy, Manager     |
|   |            |                         |
|   |            |                         |
| Date:  | March  31, 2006 |                         | /s/ Robert Nelsen   |   |
|   |            | Robert  Nelsen, Manager      |
|   |            |                         |
|   |            |                         |
| Date:  | March  31, 2006 |                         | /s/ Daniel Potter   |   |
|   |            | Daniel  Potter, Manager      |
|   |            |                         |
|   |            |                         |
| Date:  | March  31, 2006 |                         | /s/ Steven Preszler |   |
|   |            | Steven  C. Preszler, Manager |
|        |                 |                              |                     |        |  |  |  |  |  |  |

 

43

----

 
| Date:  | March  31, 2006 |                        | /s/ Greg Schmieding   |   |
|--------|-----------------|-----------------------------|-----------------------|--------|
|   |            | Greg  Schmieding, Manager   |
|   |            |                        |
|   |            |                        |
| Date:  | March  31, 2006 |                        | /s/ Corey Schnabel    |   |
|   |            | Corey  Schnabel, Manager    |
|   |            |                        |
|   |            |                        |
| Date:  | March  31, 2006 |                        | /s/ Rodney Skalbeck   |   |
|   |            | Rodney  Skalbeck, Manager   |
|   |            |                        |
|   |            |                        |
| Date:  | March  31, 2006 |                        | /s/ Delbert Tschakert |   |
|   |            | Delbert  Tschakert, Manager |
|   |            |                        |
|   |            |                        |
| Date:  | March  31, 2006 |                        | /s/ Anthony VanUden   |   |
|   |            | Anthony  VanUden, Manager   |
|   |            |                        |
|   |            |                        |
| Date:  | March  31, 2006 |                        | /s/ Ardon Wek         |   |
|   |            | Ardon  Wek, Manager         |

 

 

**EXHIBITINDEX**

 
| **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                                         |       |                |       | Exhibit  10.2 to the Registrant’s Form 10-Q                                                                                            |

 

44

----

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

 

45

----

 
| 10.15  |   | First  Amended and Restated Deferred Compensation Plan for the benefit of Rodney  Christianson, dated February 1, 2004         |   |   |   | Exhibit  10.15 to the Registrant’s Form 10-K filed with the Commission on March 30,  2004 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                           |   |   |   |                                                                                           |
| 10.16  |   | Thomas  Kersting Employment Agreement dated May 20, 1996                                                                       |   |   |   | Exhibit  10.18 to the Registrant’s Form 10-K filed with the Commission on March 27,  2003 |
|   |   |                                                                                                                           |   |   |   |                                                                                           |
| 10.17  |   | Deferred  Compensation Plan for the benefit of Thomas Kersting, dated February 13, 2001                                        |   |   |   | Exhibit  10.20 to the Registrant’s Form 10-K filed with the Commission on March 27,  2003 |
|   |   |                                                                                                                           |   |   |   |                                                                                           |
| 10.18  |   | Polyoil  Consulting Services Agreement with Larry Mahlum dated January 1, 2000                                                 |   |   |   | Exhibit  10.21 to the Registrant’s Form 10-K filed with the Commission on March 27,  2003 |
|   |   |                                                                                                                           |   |   |   |                                                                                           |
| 10.19  |   | Railcar  Leasing Agreements with General Electric Railcar Services Corporation, dated  November 10, 2003 and November 25, 2003 |   |   |   | Exhibit  10.19 to the Registrant’s Form 10-K filed with the Commission on March 30,  2004 |
|   |   |                                                                                                                           |   |   |   |                                                                                           |
| 10.20  |   | Security  Agreement with CoBank dated June 17, 2004                                                                            |   |   |   | Exhibit  10.1 to the Registrant’s Form 10-Q filed with the Commission on August 16,  2004 |
|   |   |                                                                                                                           |   |   |   |                                                                                           |
| 10.21  |   | Master  Loan Agreement with CoBank, dated October 6, 2005                                                                      |   | X      |   |                                                                                           |
|   |   |                                                                                                                           |   |   |   |                                                                                           |
| 10.22  |   | Revolving  Term Loan Supplement with CoBank dated October 6, 2005                                                              |   | X      |   |                                                                                           |
|   |   |                                                                                                                           |   |   |   |                                                                                           |
| 10.23  |   | Statused  Revolving Credit Supplement with CoBank dated October 6, 2005                                                        |   | X      |   |                                                                                           |
|   |   |                                                                                                                           |   |   |   |                                                                                           |
| 14.1   |   | Code  of Ethics                                                                                                                |   | X      |   |                                                                                           |
|   |   |                                                                                                                           |   |   |   |                                                                                           |
| 16.1   |   | Letter re: change in certifying accountant                                                                                     |   | X      |   |                                                                                           |
|   |   |                                                                                                                           |   |   |   |                                                                                           |
| 21.1   |   | Subsidiaries  of the Company                                                                                                   |   | X      |   |                                                                                           |
|   |   |                                                                                                                           |   |   |   |                                                                                           |
| 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 were filed separately with the SEC subjectto a request for confidential treatment dated April 25, 2002.

 

46

----

 

# **SOUTH DAKOTA SOYBEAN PROCESSORS,LLC**

# ** **

***CONSOLIDATEDFINANCIAL STATEMENTS***

*** ***

***DECEMBER 31, 2005, 2004 AND 2003***

 

----

 

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

** **

Indexto Financial Statements

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

 

----

 

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

## ** **

The Board of Managers

South Dakota SoybeanProcessors, LLC

Volga, South Dakota

 

We have audited theaccompanying consolidated balance sheets of South Dakota Soybean Processors,LLC (the “Company”) as of December 31,2005 and 2004 and the related consolidated statements of operations,changes in members’ equity and cash flows for each of the three years in theperiod ended December 31, 2005. These consolidated financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits. 

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the consolidated financialstatements are free of material misstatement. The Company has determined thatit is not required to have, nor were we engaged to perform, an audit of itsinternal control over financial reporting. Our audit included  consideration of internal  control over  financial  reporting as a basis  for  designing audit procedures that are appropriate in the circumstances, but not forthe purpose of expressing an opinion on the effectiveness  of the Company’s  internal control over  financial  reporting. Accordingly, we express no suchopinion. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the consolidated financial statements. An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

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 its cashflows 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.

 
| *** ***                 | ***Gordon, Hughes &  Banks, LLP*** |
|------------------------------|---------------------------------------------|
| *** ***                 | *** ***                                |
| Greenwood  Village, Colorado |                                        |
| February 3,  2006       |                                        |

 

F-1

----

 

**SOUTHDAKOTA 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 notesare an integral part of these consolidated financial statements.

 

F-2

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATEDBALANCE 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                                                                                                              |       |       |       |       |       |
|                                                                                                                                       |       |       |       |       |       |
| 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 |       | 32,978,153 |       | 32,122,573 |       |
| Subscriptions receivable                                                                                                                   |       | (209,656   | )          | —     |       |
| Total members’ equity                                                                                                                 |       | 32,768,497 |       | 32,122,573 |       |
|                                                                                                                                       |       |       |       |       |       |
| Total liabilities and members’ equity                                                                                                 |       | $          | 73,630,296 |       | $          | 72,499,888 |   |

 

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

 

F-3

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THEYEARS 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 notesare an integral part of these consolidated financial statements.

 

F-4

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATEDSTATEMENT OF CHANGES IN MEMBERS’ EQUITY**

**FOR THEYEARS 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                   |       | 4,495,750 |   |
|                                        |       |                        |       |   |   |
| **BALANCE, DECEMBER 31, 2005**         |       | 30,419,000                  |       | $ | 32,978,153 |   |

 

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

 

F-5

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THEYEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

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

 

(continued on next page)

 

F-6

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (continued)**

**FOR THEYEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

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

 

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

 

F-7

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE1 - PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES**

** **

*Organization*

 

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

 

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

 

*Principlesof consolidation*

 

Investee companies inwhich the Company directly or indirectly owns more than 50% of the outstandingvoting securities or those over which the Company has effective control aregenerally accounted for under the consolidation method of accounting. Underthis method, an Investee company’s balance sheet and results of operations arereflected within the Company’s Consolidated Financial Statements. Allsignificant intercompany accounts and transactions have been eliminated. Minorityinterest in the net assets and earnings and losses of a consolidated Investeeare reflected in the caption “Minority interest of consolidated subsidiary” inthe Company’s Consolidated Balance Sheet and Statement of Operations. Minorityinterest adjusts the Company’s results of operations to reflect only theCompany’s share of the earnings or losses of the consolidated Investee company.Upon dilution of control below 50%, the accounting method is adjusted to theequity or cost method of accounting, 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 carrying amountof 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 AICPAStatement of Position No. 85-3, *“Accounting byAgricultural Producers and Agricultural Cooperatives.”* Supplies andother inventories are stated at the lower of cost, determined by the first-in,first-out method, or market.

 

*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.

 

(continued on nextpage)

 

F-8

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

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 its long-livedassets for impairment whenever events indicate that the carrying amount of theasset may not be recoverable. If impairment indicators are present and thefuture cash flows is less than the carrying amount of the assets, values arereduced to the estimated fair value of those assets.

 

*Patents*

 

The Company’s patents are amortized over their estimated useful lives, usingthe straight-line method over a period of 16 to 20 years, which is the shorterof the remaining estimated economic life of the patents acquired or 20 yearsfrom 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 is transferredto the customer. Revenues are presented net of discounts and sales allowances.

 

*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.

 

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.

 

(continued on nextpage)

 

F-9

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

*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 contracts may beeffective economic hedges of specified risks, they are not designated as, noraccounted for, as hedging instruments.

 

The Company, as part ofits trading activity, uses futures and option contracts offered throughregulated commodity exchanges to reduce risk. The Company is exposed to risk ofloss in the market value of inventories. To reduce that risk, the Companygenerally takes opposite and offsetting positions using futures contracts oroptions.

 

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 units outstanding.The Company has no other capital units or other member equity instruments thatare dilutive for purposes of calculating earnings per capital unit.

 

*Incometaxes*

 

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

 

*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.

 

*Recentaccounting pronouncements*

 

In November 2004,the Financial Accounting Standards Board (“FASB”) issued Statement No. 151,*I*nventory Costs an amendment of ARB No. 43,Chapter 4, which revised ARB No.43, relating to inventory costs. This revisionis to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs and wasted material (spoilage). This Statement requiresthat these items be recognized as a current period charge regardless of whetherthey meet the criterion specified in ARB 43. In addition, this Statementrequires the allocation of fixed production overheads to the costs ofconversion be based on normal capacity of the production facilities. ThisStatement is effective for financial statements for fiscal years beginningafter June 15, 2005. Management believes this Statement will have noimpact on the financial statements of the Company once adopted.

 

In December 2004,the FASB issued Statement of Financial Accounting Standards No. 123(revised 2005), *Share-*

 

(continued on nextpage)

 

F-10

----

 

*BasedPayment*, (“SFAS No. 123(revised)”) which amends FASBStatement Nos. 123 and 95. SFAS No. 123(revised) requires all companies tomeasure compensation cost for all share-based payments, including employeestock options, at fair value and is effective for public companies that file assmall business issuers for interim or annual periods beginning after December 15,2005. Management believes this Statement will have no impact on the financialstatements 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. Theguidance in APB Opinion No. 29, *Accountingfor Nonmonetary Transactions*, is based on the principle thatexchanges of nonmonetary assets should be measured based on the fair value ofthe assets exchanged. The guidance in that Opinion, however, included certainexceptions to that principle. This Statement amends Opinion No. 29 toeliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance. A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. This Statement is effective forfinancial statements for fiscal years beginning after June 15, 2005. Earlierapplication is permitted for nonmonetary asset exchanges incurred during fiscalyears beginning after the date of this Statement is issued. Management believesthis Statement will have no impact on the financial statements of the Companyonce adopted.

 

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 47 by the Company will not result in a change to currentpractice.

 

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.

 

**NOTE2 - 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 |   |

 

(continued on next page)

 

F-11

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

Finished goods and rawmaterials are valued at estimated market value, which approximates netrealizable value. In addition, futures and option contracts are marked tomarket through cost of revenues, with unrealized gains and losses recorded inthe above inventory amounts. Supplies and other inventories are stated at thelower of cost, determined by the first-in, first-out method, or market.

 

**NOTE3 - 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.

 

**NOTE4 - INVESTMENTS IN COOPERATIVES**

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

 

**NOTE5 - 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 are as follows (unaudited):

 

(continued on next page)

 

F-12

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **              | ** ** | **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  |       |

 

**NOTE6 - 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 |   |

 

**NOTE7 - 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 marketsoy-based polyurethane 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 remainingestimated economic life of the patents acquired or 20 years from the originalfile date.

 

(continued on next page)

 

F-13

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

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 |   |

 

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 |   |

 

**NOTE8 - 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). Advances on the revolving credit agreement are secured and limited toqualifying inventory and accounts receivable, net of accrued commoditypurchases. There were no advances outstanding at December 31, 2005 and2004.

 

(continued on next page)

 

F-14

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE9 - 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-15

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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 |   |

 

**NOTE10 - 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.

 

**NOTE11 - COMMITMENTS**

** **

The Company has operating leases for 417 rail cars from GE Capital. Theleases require monthly payments of $168,716. The leases began in 1996 and haveeighteen-year terms. The Company also leases 100 rail cars from TrinityCapital. This lease requires monthly payments of $38,300. Lease expense for allrail 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 useof 299 of these 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.

 

(continued on next page)

 

F-16

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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.

 

**NOTE12 - 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-17

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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 borrow fundswith similar remaining maturities. The carrying amount of accounts receivable,accounts payable, investments, and accrued commodity purchases approximatestheir 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’ equity in the Company. As of December 31,2005 and 2004, the Company had outstanding notes receivable pursuant to thisarrangement of $481,710. These will be repaid as the Board of Managers approvesdistributions of prior earnings.

 

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-18

----

 

**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.

 

**NOTE15 - BUSINESS CREDIT RISK AND CONCENTRATIONS**

** **

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

 

The Company alsogrants credit to customers throughout the United States and Canada. The 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 |   |

 

**NOTE16 - 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 Directors approved a Form S-1 registration statementthat was filed with the Securities and Exchange Commission on February 14,2005 for the sale of additional units in a public offering. The maximumoffering under the statement was $11,250,000. During 2005, the Company sold2,190,500 member units for a total of $4,495,750. The offering allowed theinvestor to initially pay 50% and sign a note payable to the

 

F-19

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

Company for the remaining portion. At December 31, 2005, the Companyhad subscriptions receivable of $209,656, which is accounted for as a deductionfrom members’ equity until collected.

 

On June 17, 2003,the Board 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.

 

**NOTE17 - CONTINGENCIES**

** **

From time to timein the ordinary course of our business, we may be named as a defendant inlegal proceedings related to various issues, including without limitation,workers’ compensation claims, tort claims, or contractual disputes. We carryinsurance that provides protection against general commercial liability claims,claims against 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 on April 10, 2006.

 

On June 7,2005, the Company received notification from the Securities and ExchangeCommission (“SEC”) that the Company’s filings were under review. During thecourse of the review, the SEC requested additional information about theCompany’s change in auditors for the audit of its financial statements for theyear ended December 31, 2004 as disclosed in the Company’s 8-K filingdated January 18, 2005. After the Company provided the information, theSEC raised additional questions about the independence of the audit firm, EideBailly LLP, with respect to its audit of financial statements for the yearended December 31, 2003. As a result, in the latter part of 2005 thefinancial statements for the year ended December 31, 2003 were re-auditedby Gordon, Hughes, & Banks LLP. The re-audit produced an unqualifiedopinion and there was no effect on previously reported net income or member’sequity. During early 2005, prior to receiving notice of the SEC review, theCompany solicited investors through an S-1 registration statement whichincluded the 2003 audit opinion letter from Eide Bailly LLP and therefore didnot meet the requirements of federal securities law. The financial statementsincluding in the Company’s periodic reports for such periods, as amended, arenow compliant with applicable securities law but there remains a remotepossibility that claims could be made against the Company relating to thetechnical inadequacy of the offering materials. As of December 31, 2005,the Company has not recorded a provision for this matter, as managementbelieves claims from those investors in the offering are not probable. TheCompany believes that any liability it may incur would not have a materialadverse effect on its financial condition or its results of operations.

 

**NOTE18 - 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.

 

F-20

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

***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-21

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

## ** **

The Board ofManagersSouth Dakota Soybean Processors, LLCVolga, South Dakota

 

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. In connectionwith our audits of the aforementioned consolidated financial statements, wealso have audited the related financial statement schedules as listed in theaccompanying index. The financial statement schedules are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thefinancial 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-22

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                         | ** ** | ** **       | ** ** | **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-23

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