**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**FORM 10-K/A**

**Amendment No. 1**

 

**ý****         ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thefiscal year ended December 31, 2004**

 

**COMMISSIONFILE NO. 000-50253**

 

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

(Exact Name of Registrant asSpecified in its Charter)

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

 

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

(Address of PrincipalExecutive Offices)

 

**(605) 627-9240**

(Registrant’s TelephoneNumber)

 

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

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

 

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

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405of this chapter) is not contained herein, and will not be contained, to thebest of registrant’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.  o

 

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

 

State the aggregate marketvalue of the voting and non-voting common equity held by non affiliatescomputed by reference to the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last businessday of the registrant’s most recently completed second fiscal quarter: Theaggregate market value of the common equity of the registrant and itspredecessor held by non-affiliates as of June 30, 2005 was approximately$73,884,375 based on the latest sales price of its capital units in itsoffering ending June 30, 2005, which were the only public sales of itssecurities prior to June 30, 2005.

 

Indicate the number of sharesoutstanding of each of the registrant’s classes of common stock, as of thelatest practicable date:  As of the date of this filing, there were30,445,500 Class A capital units of the registrant outstanding.

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  o Yes  ý No

 

 

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**EXPLANATORYNOTE**

 

This Amendment No. 1 tothe Annual Report on Form 10-K of South Dakota Soybean Processors, LLC(the “Company”) for the year ended December 31, 2004, filed on April 15,2005, is being filed solely for the purposes of replacing the independentauditor’s report and accompanying financial statements for the year ended December 31,2003 for the reasons described in Item 9 below.  The Company has made noother changes to the previously filed Form 10-K.  Other than as setforth below, the items of the Form 10-K, as previously filed, continue tospeak as of the date of the original filings thereof, and the disclosurerelating to such items is not being updated.

 

**PART II**

 

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

 

Reference is made to the “Indexto Financial Statements” of South Dakota Soybean Processors, LLC located at page F-1of this report on Form 10-K/A, and financial statements and schedules forthe year ended December 31, 2004 referenced therein, which are herebyincorporated by reference.  Such financial statements were not changed inany respect from the Company’s previously filed financial statements as aresult of the re-audit discussed in Item 9 below, other than revising theperiods covered by the reports of independent auditors contained therein. Such changes do not constitute a restatement of the Company’s previously filedfinancial statements.

 

**Item 9.****                                  ****Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure**

 

The independent auditcovering the Company’s financial statements for the year ended December 31,2003 was originally conducted by Eide Bailly, LLP, which later resigned fromits engagement as the Company’s auditor in January 2005 due to anindependence issue, as disclosed in the Company’s prior filings. Subsequently, in connection with its review of the Company’s Form 10-K forthe year ended December 31, 2004, the Securities and Exchange Commissionquestioned whether the independence of Eide Bailly, LLP may have also beencompromised with respect to its review of the financial statements for thequarter ended September 30, 2003, and its audit of the financialstatements for the year ended December 31, 2003.  Followingcommunication with the Commission regarding the application of the independencerules in effect at the time, the Company agreed to comply with theCommission’s request to amend its SEC filings, including this annual report, toinclude re-audited financial statements for the period in question.

 

The Company’s new auditor,Gordon, Hughes & Banks, LLP, has completed its audit of the Company’s 2003financial statements, and delivered to the Company its signed audit report, datedas of September 30, 2005, which was filed with the Company’s recentamendment of its 2003 annual report, filed on Form 10-K/A, and is being filedherewith.  No restatement of the Company’s previously filed financialstatements for such periods was required as a result of such subsequent audit.

 

**PART IV**

 

**Item 15.****                           ****Exhibits, FinancialStatement Schedules, and Reports on Form 8-K**

 

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

 

(a)                                  Financial Statements and Schedules — Reference is made to the “Index toFinancial Statements” of South Dakota Soybean Processors, LLC located at page F-1of this report for a list of the financial statements and schedules for theyears ended December 31, 2004, 2003 and 2002 included herein.

 

(b)                                 Reports on Form 8-K – We did not file any reports on Form 8-Kduring the quarter ended December 31, 2004.

 

(c)                                  Exhibits - See Exhibit Index following the Signature Page to thisreport.

 

2

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                         | SOUTH DAKOTA SOYBEAN PROCESSORS,  LLC |
|------------------------------|---------------------------------------|
|                         |                                  |   |
| Dated: December 5, 2005 |                                  |   |
|                         |                                  |   |
|                         | By                                    | /s/ Rodney G. Christianson |
|                         |                                  | Rodney G. Christianson |
|                         |                                  | Chief Executive Officer |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons in the capacities indicated on December 5, 2005.

 
| **SIGNATURE**              | ** ** | **TITLE**                                    |
|----------------------------|------------|----------------------------------------------|
|                       |       |                                         |
| /s/ Rodney G. Christianson |       | Chief Executive Officer                      |
| Rodney G. Christianson     |       | (Principal Executive Officer)                |
|                       |       |                                         |
| /s/ James A. Seurer        |       | Chief Financial Officer                      |
| James A. Seurer            |       | (Principal Financial and Accounting Officer) |
|                       |       |                                         |
| /s/ Paul Barthel*          |       | Manager                                      |
| Paul Barthel               |       |                                         |
|                       |       |                                         |
|                       |       | Manager                                      |
| Robert E. Nelsen           |       |                                         |
|                       |       |                                         |
| /s/ Ryan J. Hill*          |       | Manager                                      |
| Ryan J. Hill               |       |                                         |
|                       |       |                                         |
| /s/ Peter Kontz*           |       | Manager                                      |
| Peter Kontz                |       |                                         |
|                       |       |                                         |
| /s/ Bryce Loomis*          |       | Manager                                      |
| Bryce Loomis               |       |                                         |
|                       |       |                                         |
| /s/ Dale F. Murphy*        |       | Manager                                      |
| Dale F. Murphy             |       |                                         |
|                       |       |                                         |
| /s/ Daniel Potter*         |       | Manager                                      |
| Daniel Potter              |       |                                         |
|                       |       |                                         |
|                       |       | Manager                                      |
| Corey Schnabel             |       |                                         |
|                       |       |                                         |
| /s/ Rodney Skalbeck*       |       | Manager                                      |
| Rodney Skalbeck            |       |                                         |
|                       |       |                                         |
| /s/ Delbert Tschakert*     |       | Manager                                      |
| Delbert Tschakert          |       |                                         |

 

3

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| /s/ Anthony VanUden*     |                                     | Manager |
|--------------------------|------------------------------------------|---------|
| Anthony VanUden          |                                     |    |
|                     |                                     |    |
| /s/ Ardon Wek*           |                                     | Manager |
| Ardon Wek                |                                     |    |
|                     |                                     |    |
|                     |                                     | Manager |
| Kent Howell              |                                     |    |
|                     |                                     |    |
| /s/ Laron Krause*        |                                     | Manager |
| Laron Krause             |                                     |    |
|                     |                                     |    |
|                     |                                     | Manager |
| Ronald Gorder            |                                     |    |
|                     |                                     |    |
| /s/ Steven Preszler*     |                                     | Manager |
| Steven Preszler          |                                     |    |
|                     |                                     |    |
|                     |                                     | Manager |
| Greg Schmieding          |                                     |    |
|                     |                                     |    |
| /s/ Dean Christopherson* |                                     | Manager |
| Dean Christopherson      |                                     |    |
|                     |                                     |    |
|                     |                                     | Manager |
| Jerome Jerzak            |                                     |    |
|                     |                                     |    |
| /s/ Wayne Enger*         |                                     | Manager |
| Wayne Enger              |                                     |    |
|                     |                                     |    |
|                     |                                     | Manager |
| David Driessen           |                                     |    |
|                     |                                     |    |
|                     |                                     |    |
| * By                     | /s/ Rodney G. Christianson               |    |   |
|                     | Rodney G. Christianson, Attorney-in-Fact |    |   |
|                          |                                          |         |  |  |

 

4

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                   | ** ** | **Filed  Herewith** | ** ** | **Incorporated Herein by Reference to**                                                    |
|---------------------|------------|---------------------------------------------------|------------|---------------------|------------|--------------------------------------------------------------------------------------------|
|                |       |                                              |       |                |       |                                                                                       |
| 24.1                |       | Power of Attorney                                 |       | o                   |       | See Signature Page to this Annual Report on Form 10-K  filed April 15, 2005 |
|                |       |                                              |       |                |       |                                                                                       |
| 31.1                |       | Rule 13a-14(a)/15d-14(a) Certifications |       | ý              |       |                                                                                       |
|                |       |                                              |       |                |       |                                                                                       |
| 32.1                |       | Section 1350 Certifications                  |       | ý              |       |                                                                                       |

 

5

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**SOUTHDAKOTA SOYBEAN PROCESSORS,LLC**

 

***CONSOLIDATED FINANCIALSTATEMENTS***

 

***DECEMBER 31, 2004, 2003AND 2002***

 

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

 

Table of Contents

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

 

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

## ** **

The Board of Managers

South Dakota Soybean Processors, LLC

Volga, South Dakota

 

We have audited the accompanying consolidated balance sheets of SouthDakota Soybean Processors, LLC as of December 31, 2004 and December 31,2003 and the related consolidated statements of operations, changes in members’equity and cash flows for the years then ended.  These consolidatedfinancial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.  

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standardsrequire that we plan and perform the audits to obtain reasonable assuranceabout whether the consolidated financial statements are free of materialmisstatement.  The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting.  Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financialreporting.  Accordingly, we express no such opinion.  An auditincludes examining, on a test basis, evidence supporting the amounts and disclosuresin the consolidated financial statements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our audits provide a reasonable basis forour opinion.  

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of SouthDakota Soybean Processors, LLC as of December 31, 2004 and December 31,2003, and the results of its operations and its cash flows for each of the twoyears then ended, in conformity with accounting principles generally acceptedin the United States of America.  

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

 

Greenwood Village, Colorado

September 30, 2005  

 

F-1

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**INDEPENDENT AUDITOR’S REPORT**

 

The Board of Managers

**South Dakota Soybean Processors, LLC**

Volga, South Dakota

 

We have audited the statements of operations, changes in members’equity, and cash flows of **South DakotaSoybean Processors, LLC**for the year ended December 31, 2002. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audit.  

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audit provides a reasonable basis for our opinion.  

 

In our opinion, the 2002 financial statements referred to above presentfairly, in all material respects, the results of its operations, changes in members’ equityand  cashflows of **South DakotaSoybean Processors, LLC**  for the year ended December 31,2002, in conformity with accounting principles generally accepted in the UnitedStates of America.  

 
| /s/ Eide Bailly LLP       |   |
|---------------------------|--------|
|                      |
| Sioux Falls, South Dakota |
| January 23, 2003     |

 

F-2

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2004 AND 2003**

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

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

F-3

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED BALANCE SHEETS (continued)**

**DECEMBER 31, 2004 AND 2003**

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

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

F-4

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED DECEMBER 31, 2004,2003 AND 2002**

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

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

F-5

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

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

**FOR THE YEARS ENDED DECEMBER 31, 2004,2003 AND 2002**

 
| ** **                           | ** ** | **Capital Units** | ** ** |
|--------------------------------------|------------|-------------------|------------|
| ** **                           | ** ** | **Shares**        | ** ** | **Amount** | ** ** |
|                                 |       |              |       |   |   |
| **BALANCE,  JANUARY 1, 2002**   |       | 28,258,500        |       | 32,779,725 |   |
|                                 |       |              |       |   |   |
| Net income                           |       | —            |       | 6,612,726 |   |
|                                 |       |              |       |   |   |
| Proceeds  from members’ equity  |       | —            |       | 2,200 |   |
|                                 |       |              |       |   |   |
| Distributions  to members            |       | —            |       | (5,519,058 | ) |
|                                 |       |              |       |   |   |
| **BALANCE,  DECEMBER 31, 2002** |       | 28,258,500        |       | 33,875,593 |   |
|                                 |       |              |       |   |   |
| Net income                           |       | —            |       | 3,394,824 |   |
|                                 |       |              |       |   |   |
| Distributions  to members            |       | —            |       | (2,539,827 | ) |
|                                 |       |              |       |   |   |
| **BALANCE,  DECEMBER 31, 2003** |       | 28,258,500        |       | 34,730,590 |   |
|                                 |       |              |       |   |   |
| Net income                           |       | —            |       | 688,612 |   |
|                                 |       |              |       |   |   |
| Liquidation  of members’ equity |       | (30,000           | )          | (6,000 | ) |
|                                 |       |              |       |   |   |
| Distributions  to members            |       | —            |       | (3,290,629 | ) |
|                                 |       |              |       |   |   |
| **BALANCE,  DECEMBER 31, 2004** |       | 28,228,500        |       | $ | 32,122,573 |   |
|                                      |            |                   |            |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

 

F-6

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31, 2004,2003 AND 2002**

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

 

(continued on next page)

 

F-7

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

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

**FOR THE YEARS ENDED DECEMBER 31, 2004,2003 AND 2002**

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

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

F-8

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE1 -**                     PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTINGPOLICIES

 

*Organization*

 

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

 

As a result of the exchange, the Cooperative was dissolved on July 1,2002, and the LLC’s capital units were distributed to the members of theCooperative at a rate of one capital unit of the LLC for each share of equitystock of the Cooperative.  In connectionwith the reorganization, the LLC changed its name to South Dakota SoybeanProcessors, LLC.

 

A minimum of 2,500 capital units is required for an ownership interestin the LLC.  Such units are subject tocertain transfer restrictions.  The LLCretains the right to redeem the units at the greater of $.20 per unit or theoriginal purchase price less cumulative distributions through the date ofredemption in the event a member attempts to dispose of the units in a mannernot in conformity with the Operating Agreement, if a member becomes a holder ofless than 2,500 units, or if a member becomes an owner (directly or indirectly)of more than 1.5% of the issued and outstanding capital units.  The Operating Agreement of the LLC alsoincludes provisions whereby cash equal to a minimum of 30% of available netincome will be distributed to unit holders subject to certain limitations.  These limitations include a minimum netincome of $500,000, restrictions imposed by debt and credit instruments or asrestricted by law in the event of insolvency.

 

In connection with the reorganization, the delivery of soybeans underthe previous member delivery agreements was no longer required as an obligationof membership.  Earnings, losses and cashdistributions are allocated to members based on their percentage of ownershipin the LLC.

 

The Company owns approximately 58% of Urethane Soy Systems Company (“USSC”).  USSC is the manufacturer and patent holder ofSoyol®, a polyol made from soybean oil. A minority interest is presented in the consolidated balance sheet thatrepresents the approximate 42% ownership of other investors in the 96,025outstanding common shares of USSC.

 

South Dakota Soybean Processors is operated for the purpose ofmanufacturing products from soybeans, such as soybean oil, meal, and hulls.

 

*Basis of presentation and principles ofconsolidation*

 

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

 

(continued on next page)

 

F-9

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

*Cash and cash equivalents*

 

The Company considers all highly liquid debt instruments with maturityof three months or less at the time of acquisition to be cash equivalents.

 

*Accounts receivable*

 

Accounts receivable are considered past due when payments are notreceived within thirty days. Generally, these accounts receivable representamounts due for sale of soybean meal, oil, hulls and refined oil.

 

The carrying amount of trade receivables is reduced by a valuationallowance that reflects management’s best estimate of the amounts that will notbe collected.  Management reviews allreceivable balances that exceed 90 days from the invoice date and, based on anassessment of current creditworthiness, estimates the portion, if any, of thebalance that will not be collected.

 

*Inventories*

 

Finished goods (soybean meal, oil, refined oil, and hulls) and rawmaterials (soybeans) are valued at estimated market value, which approximatesnet realizable value.  This accountingpolicy is in accordance with the guidelines described in AICPA Statement ofPosition 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.

 

*Assets held for sale*

 

Assets held for sale are carried at net book value.

 

*Investments*

 

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

 

The investments inCenex Harvest States (CHS) and CoBank include actual patronage allocationsbased upon written qualified notices of allocation received from CHS andCoBank.  Patronage allocations representthe Company’s proportionate share of the patronage earnings of CHS and CoBank.Since the Company is no longer a cooperative as of July 1, 2002, it willno longer receive patronage allocations from CHS.

 

The Company accounts for its 7% investment in Minnesota Soybean Processorsusing the equity method due to the related nature of operations and the Company’sability to influence management decisions of MnSP.  Under the equity method, the initialinvestment is recorded at cost and adjusted annually to recognize the Company’sshare of earnings and losses of the entity.

 

*Property and equipment*

 

Property and equipment is stated at cost. Expenditures for renewals andimprovements that significantly add to the productive capacity or extend theuseful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense whenincurred. When depreciable properties are sold or retired, the cost andaccumulated depreciation are eliminated from the accounts and the resultantgain or loss is reflected in income.

 

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

 

(continued onnext page)

 

F-10

----

 

**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

Depreciation is provided for over the estimated useful lives of theindividual assets using the straight-line method.  The range of the estimated useful lives usedin the computation of depreciation is as follows:

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

 

*Patents*

 

The Company’s patents are intangible assets that are not considered tohave an indefinite life and, under the rules of SFAS No. 142, are tobe amortized over their estimated useful life. The patents are being amortized using the straight-line method over aperiod of 16 to 20 years, which is the shorter of the remaining estimatedeconomic life of the patents acquired or 20 years from the original file date.

 

*Other assets*

 

Other assets are carried at cost. Loan fees are being amortized on an interest method of accounting overthe term of the related loans.

 

*Use of estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

*Revenue Recognition*

 

Revenue is recognized when the related products are shipped, which iswhen title is transferred to 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.  Costsincurred for freight are reported as a component of cost of revenue.

 

*Advertising costs*

 

Advertising and promotion costs are expensed as incurred. The Companyincurred $17,614, $7,885, and $10,275 of advertising costs in the years ended December 31,2004, 2003, and 2002, respectively.

 

*Environmental remediation*

 

It is management’s opinion that the amount of any potentialenvironmental remediation costs will not be material to the Company’s financialcondition, results of operations, or cash flows; therefore, no accrual has beenrecorded.

 

*Accounting for derivativeinstruments and hedging activities*

 

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

 

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

 

(continued on next page)

 

F-11

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**SOUTH DAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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, which approximatesnet realizable value, so that gains and losses on the derivative contracts areoffset by gains and losses on inventories and reflected in current earnings.

 

*Earningsper capital unit*

 

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

 

For purposes ofcalculating basic earnings per capital unit, capital units issued by theCompany are considered outstanding on the effective date of issuance.

 

The Company has no othercapital units or other member equity instruments that are dilutive for purposesof calculating earnings per capital unit.

 

*Reclassifications*

 

Reclassifications have been made to the December 31, 2003 and December 31,2002 financial information to conform to the current period presentation.  These reclassifications have no effect onpreviously reported net income or members’ equity.

 

*Recentaccounting pronouncements*

 

InNovember 2004, the FASB issued FASB Statement No. 151, which revisedARB No.43, relating to inventory costs. This revision is to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts and wasted material (spoilage). This Statement requires that these items be recognized as a currentperiod charge regardless of whether they meet the criterion specified in ARB43.  In addition, this Statement requiresthe allocation of fixed production overheads to the costs of conversion bebased on normal capacity of the production facilities. This Statement iseffective for financial statements for fiscal years beginning after June 15,2005.  Earlier application is permittedfor inventory costs incurred during fiscal years beginning after the date ofthis Statement is issued.  Managementbelieves this Statement will have no impact on the financial statements of theCompany once adopted.

 

InDecember 2004, the FASB issued FASB Statement No. 152, which amendsFASB Statement No. 66, Accounting for Sales of Real Estate, to referencethe financial accounting and reporting guidance for real estate time-sharingtransactions that is provided in AICPA Statement of Position (SOP) 04-2, *Accounting for Real Estate Time-Sharing Transactions*.  This Statement also amends FASB Statement No. 67,*Accounting for Costs and Initial RentalOperations of Real Estate Projects*, to state that the guidance for (a) incidentaloperations and (b) costs incurred to sell real estate projects does notapply to real-estate time-sharing transactions. The accounting for those operations and costs is subject to the guidancein SOP 04-2.  This Statement is effectivefor financial statements for fiscal years beginning after June 15,2005.  Management believes this Statementwill have no impact on the financial statements of the Company once adopted.

 

(continued on next page)

 

F-12

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

InDecember 2004, the FASB issued FASB Statement No. 153.  This Statement addresses the measurement ofexchanges 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 inthat Opinion, however, included certain exceptions to that principle.  This Statement amends Opinion 29 to eliminatethe exception for nonmonetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of nonmonetary assets thatdo not have commercial substance.  Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange.  This Statement is effective for financialstatements 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 believes this Statement will haveno impact on the financial statements of the Company once adopted.

 

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

 

Anonpublic entity will measure the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof those instruments, except in certain circumstances.

 

Apublic entity will initially measure the cost of employee services received inexchange for an award of liability instruments based on its current fair value;the fair value of that award will be re-measured subsequently at each reportingdate through the settlement date. Changes in fair value during the requisite service period will berecognized as compensation cost over that period.  A nonpublic entity may elect to measure itsliability awards at their intrinsic value through the date of settlement.

 

Thegrant-date fair value of employee share options and similar instruments will beestimated using the option-pricing models adjusted for the uniquecharacteristics of those instruments (unless observable market prices for thesame or similar instruments are available).

 

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

 

Thenotes to the financial statements of both public and nonpublic entities willdisclose information to assist users of financial information to understand thenature of share-based payment transactions and the effects of thosetransactions on the financial statements.

 

(continued on next page)

 

F-13

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

Theeffective date for public entities that do not file as small business issuerswill be as of the beginning of the first interim or annual reporting periodthat begins after June 15, 2005. For public entities that file as small business issuers and nonpublicentities the effective date will be as of the beginning of the first interim orannual reporting period that begins after December 15, 2005.  Management intends to comply with thisStatement at the scheduled effective date for the relevant financial statementsof the Company.

 

**NOTE2 -**                     INVENTORIES

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

 

Finished goods and raw materials are valued at estimated market value,which approximates net realizable value. In addition, futures and option contracts are marked to market throughcost of revenues, with unrealized gains and losses recorded in the aboveinventory amounts.  This marketadjustment caused the soy processing finished goods to have a credit balance asof December 31, 2003. 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 maintains deposits with a brokerage firm.  The deposits are used for risk management.

 

The Company uses futures and option contracts to manage the risk ofcommodity price volatility of soybeans, crude soybean oil and soybeanmeal.  Consistent with its inventoryaccounting policy, these contracts are recorded at market value.

 

At December 31, 2004, the Company had contracts maturing through December 2005.

 

(continued on next page)

 

F-14

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE4 -**                     INVESTMENTS

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

 

**NOTE5 -**                     EQUITY INVESTMENT IN MINNESOTA SOYBEAN PROCESSORS

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

 

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

 

The Company also subscribed for 287,500 Class B shares inMnSP.  The shares are 8%, Non-CumulativeConvertible Class B Preferred Stock sold at $2.00 per share for a totalpurchase price of $575,000.

 

Summarized financial information of MnSP as of December 31, 2004 andfor the year then ended is as follows:

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

 

(continued on next page)

 

F-15

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 6 -**                     PROPERTY AND EQUIPMENT

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

 

**NOTE7 -**                     OTHER INTANGIBLE ASSETS

 

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

 

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

 

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

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

 

The Company has a contractual obligation to pay former USSCshareholders $4,050,000.  Two remaininginstallments of $891,000 are due on October 31, 2005 and 2006 (see Note9).

 

(continued on next page)

 

F-16

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

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

 

**NOTE8 -**                     NOTES PAYABLE – SEASONAL LOAN

 

The Company has enteredinto a revolving credit agreement with CoBank, which expires April 1, 2005.The purpose of the credit agreement is to finance the inventory and accountsreceivable of the Company. The Company may borrow up to $15,200,000. Interestaccrues at a variable rate (4.85% at December 31, 2004).  There were no advances outstanding at December 31,2004 and 2003.

 

Advances on the revolvingcredit agreement are limited based upon inventory and accounts receivable, netof soybean accounts payable.

 

(continued on next page)

 

F-17

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE9 -**                     LONG-TERM DEBT

 
| ** **                                                                                                                                                                                                                                                                                       | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                                                                                                                                                                                             |       |       |       |       |       |
| Revolving  term loan from CoBank, interest at variable rates (4.85% and 3.47% at December 31,  2004 and 2003, respectively), secured by substantially all property and  equipment. Loan matures March 20, 2011.                                                                        |       | 7,940,777  |       | 15,281,832 |       |
|                                                                                                                                                                                                                                                                                             |       |       |       |       |       |
| Note payable  to former USSC shareholders, due in annual principal payments of $891,000,  interest at 0%, secured by USSC stock. Note matures on October 31, 2006.                                                                                                                          |       | 1,782,000  |       | 2,673,000  |       |
|                                                                                                                                                                                                                                                                                             |       |       |       |       |       |
| Note payable  to Brookings County Railroad Authority, due in semi-annual principal and  interest installments of $36,885 at 5%, secured by railroad track assets.  Note matures September 1, 2007.                                                                                          |       | 203,158    |       | 264,462    |       |
|                                                                                                                                                                                                                                                                                             |       |       |       |       |       |
| Note payable  to Richard Kipphart, issued February 13, 2002, with quarterly interest  payments at 15% which began on June 30, 2002, and are paid in quarterly  installments thereafter. No prepayment of principal is allowed prior to  maturity. Note matures February 13, 2005. |       | 250,000    |       | 250,000    |       |
|                                                                                                                                                                                                                                                                                             |       |       |       |       |       |
| Note payable  to various companies at rates ranging from 0% to 7.5%. Notes mature on or  before March 16, 2009.                                                                                                                                                                             |       | 26,654     |       | 49,964     |       |
|                                                                                                                                                                                                                                                                                             |       | 10,202,589 |       | 18,519,258 |       |
| Less current  maturities                                                                                                                                                                                                                                                                         |       | (1,216,438 | )          | (976,117   | )          |
|                                                                                                                                                                                                                                                                                             |       |       |       |       |       |
| Totals                                                                                                                                                                                                                                                                                           |       | $          | 8,986,151  |       | $          | 17,543,141 |   |
|                                                                                                                                                                                                                                                                                                  |            |            |            |            |            |  |  |

 

The Company entered intoan agreement as of June 17, 2004 with CoBank to amend and restate itsMaster Loan Agreement (MLA), which includes both the revolving term loan andthe seasonal loan discussed in Note 8.  Under the terms and conditions of the MLA,CoBank agreed to make loans to the Company for up to $18,400,000. The availablecommitment decreases in scheduled periodic increments of $1,300,000.  The available commitment as of December 31,2004, was $17,100,000.

 

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

 

(continued on next page)

 

F-18

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

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

 

**NOTE10 -**              INCOME TAXES

 

The Company is taxed as a limited liability company underthe Internal Revenue Code.  The income ofthe Company flows through to the members to be taxed at the individual levelrather than the corporate level. Accordingly, the Company will have no income tax liability.

 

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.  To the extent that the fair market value ofthe Cooperative’s net assets exceeded their adjusted tax basis, the Cooperativeincurred a federal income tax liability. The excess of the fair market value of the Cooperative’s net assets overtheir adjusted tax basis was approximately $1,530,000. The Company’s effectivetax rate was 34% prior to the reorganization. The State of South Dakota doesnot have a corporate income tax.

 

The provision (benefit)for income taxes were as follows:

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

 

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

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

 

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

 

(continued on next page)

 

F-19

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE11 -**              EMPLOYEE BENEFIT PLANS

 

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

 

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

 

**NOTE12 -**              COMMITMENTS

 

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

 

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

 

The Company also has anumber of other operating leases for machinery and equipment. Rental expenseunder these other operating leases was $197,864, $328,079, and $628,306 for theyears ended December 31, 2004, 2003, and 2002, respectively.

 

The following is a schedule of future minimum rental paymentsrequired under these operating leases.

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

 

(continued on next page)

 

F-20

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

**NOTE13 -**              CASH FLOW INFORMATION

 

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

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

 

**NOTE14 -**              FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

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

 

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

 

(continued on next page)

 

F-21

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**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

**NOTE15 -**              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 providedthe Company a fee of 10% of the equity raised by MnSP for the Company’sservices related to business planning and construction management services.Fees earned under this arrangement were $126,250, $1,245,205, and $1,241,591for the years ended December 31, 2004, 2003 and 2002, respectively.  The Company agreed to reinvest a minimum of80% of the fees earned from MnSP in equity units of MnSP.  During 2004, the Company exchanged a storagefacility with a net book value of $2,322,561 as its reinvestment and paid cashof $600,931.

 

In addition, the Companyhas agreed to provide management and marketing services to MnSP on acost-sharing basis.  The agreement is forautomatically renewing five-year periods beginning sixty days before the plantis scheduled to begin operations. Operations of the MnSP plant began in late 2003. The Company earned feesof $1,047,193 and $226,985 under this arrangement for the years ended December 31,2004 and 2003. As of December 31, 2004 and 2003, MnSP owed the Company$74,338 and $3,635,318, respectively.

 

In addition, the Companyis providing up to $1 million in interest free loans, backed by members’ equity,available for members of the Company who choose to invest in MnSP.  As of December 31, 2004, the Company hadoutstanding notes receivable of $481,710. These will be repaid as the Board of Managers approves distributions ofprior earnings.

 

**NOTE16 -**              BUSINESS CREDIT RISK

 

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

 

The Company also grantscredit to customers throughout the United States and Canada.  The Company evaluates each customer’s creditworthiness on a case-by-case basis. Accounts receivable are generally unsecured.  These receivables were $17,480,118 and$23,804,867 at December 31, 2004 and 2003, respectively.

 

Soybean meal salesaccounted for approximately 60% of total revenues for the year ended December 31,2004, 58% of total revenues for the year ended December 31, 2003, and 66%of total revenues for the year ended December 31, 2002.  Approximately 32%, 37%, and 23% of thesesales were made to one customer for the years ended December 31, 2004,2003, and 2002, respectively.  At December 31,2004 and 2003, this customer owed the Company approximately $1,024,000 and$3,534,000, respectively.  Refined oilsales represented approximately 37% of total revenues for the year ended December 31,2004, 30% of total revenues for the year ended December 31, 2003, and 11%of total revenues for the year ended December 31, 2002.  These sales were primarily to one customer.This customer owed the Company approximately $6,791,000 and $6,516,000 at December 31,2004 and 2003, respectively.

 

(continued on next page)

 

F-22

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

Net revenue by geographicarea for the years ended December 31, 2004, 2003 and 2002 are as follows:

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

 

**NOTE17 -**              STOCK OFFERING

 

The Board of Directors approved a registration statement to be filedwith the Securities and Exchange Commission for the sale of additional units ina public offering.  The maximum offeringunder the statement will be $11,250,000. As of December 31, 2004 the Company was waiting to commence salesof the capital units until the Securities and Exchange Commission declares theregistration statement effective and the offering is authorized or exempted bythe regulatory authorities in the respective states where the offering isplanned to occur.

 

**NOTE18 -**              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 disputes. We carry insurancethat provides protection against general commercial liability claims, claimsagainst our directors, officers and employees, business interruption,automobile liability, and workers’ compensation claims. Except as describedbelow, we are not currently involved in any material legal proceedings and arenot aware of any potential claims.

 

On January 28, 2003,we were served with notice that we had been named as a defendant in a breach ofcontract suit in the circuit court of Cook County, Illinois, along with anumber of other individual defendants, including our Chief Executive Officer,Rodney Christianson. The plaintiff, James Jackson, was an employee of USSCwhose services were terminated shortly after we became the majority owner inearly January 2003. Mr. Jackson claims that he was wrongfullyterminated and that the defendants unjustly interfered with his employmentcontract and committed fraud in connection with our acquisition of acontrolling interest in USSC. He is claiming nearly $1 million incompensatory damages and $5 million in punitive damages. Based upon ourinvestigation of the facts surrounding the case, we believe that Mr. Jackson’semployment contract was not properly authorized and that his claims aresubstantially without merit. We are vigorously defending the action; however,we cannot provide any assurance that we will be successful in disposing of thecase or that any costs of settlement or damages would not be material if we areunable to get the case dismissed.  Wehave entered into mediation negotiations with Mr. Jackson, but have notyet reached a settlement agreement. Under the terms of our stock purchase agreement with USSC, we believethat we would be entitled to indemnification from USSC for our costs to settleor defend the suit, although since we now own 58% of USSC we will not receivedollar-for-dollar indemnification from USSC.

 

F-23

----

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE**

 

The Board of Managers

South Dakota Soybean Processors, LLC

Volga, South Dakota

 

Under the date of September 30, 2005, we reported on theconsolidated balance sheets of South Dakota Soybean Processors, LLC as of December 31,2004 and December 31, 2003, and the related consolidated statements ofoperations, members’ equity and cash flows for thetwo years then ended.  In connection with our audits of the aforementionedconsolidated financial statements, we also have audited the related financialstatement schedule listed in the accompanying index.  The financialstatement schedule is the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on the financialstatement schedule based on our audit.  

 

In our opinion, such financial statement schedule, when considered inrelation to the basic consolidated financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

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

 

Greenwood Village, Colorado

September 30, 2005  

 

F-24

----

 

**INDEPENDENTAUDITOR’S REPORT**

 

The Board of Managers

South Dakota Soybean Processors, LLC

Volga, South Dakota

 

 

Under the date of January 23, 2003, we reported on the balancesheet of South Dakota Soybean Processors, LLC as of December 31, 2002, andthe related statements ofoperations, members’ equity and cash flows for theyear ended December 31, 2002, as contained herein.  In connectionwith our audit of theaforementioned financial statements, we also have audited the related financialstatement schedule listed in the accompanying index.  The financialstatement schedule is the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on the financialstatements schedule based on our audit.  

 

In our opinion, such financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.

 
| /s/ Eide Bailly LLP       |   |
|---------------------------|--------|
|                      |
| Sioux Falls, South Dakota |
| January 23, 2003     |

 

F-25

----

 

**SOUTHDAKOTA SOYBEAN PROCESSORS, LLC**

**FINANCIAL STATEMENT SCHEDULE**

 
| ** **                          | ** ** | **Balance at  Beginning of** | ** ** | **Charged  (Credited) to  Costs and  Expenses** | ** ** | ** **     | ** ** | **Balance at  End of** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-------------------------------------------------|------------|----------------|------------|------------------------|------------|
| **Description**                     | ** ** | **Period**                   | ** ** | **Additions**                                   | ** ** | **Deductions** | ** ** | **Period**             | ** ** |
|                                |       |                         |       |                                            |       |           |       |                   |       |
| Deducted  from asset accounts:      |       |                         |       |                                            |       |           |       |                   |       |
| Year ended December 31,  2002: |       |                         |       |                                            |       |           |       |                   |       |
| Allowance  for doubtful accounts    |       | $                            | 226,513    |                                            | $          | 60,000         |       | $                      | 13,182     |   | $ | 273,331 |   |
|                                |       |                         |       |                                            |       |           |       |                   |       |
| Deducted  from asset accounts:      |       |                         |       |                                            |       |           |       |                   |       |
| Year ended December 31,  2003: |       |                         |       |                                            |       |           |       |                   |       |
| Allowance  for doubtful accounts    |       | $                            | 273,331    |                                            | $          | —         |       | $                      | (3,547     | ) | $ | 276,878 |   |
|                                |       |                         |       |                                            |       |           |       |                   |       |
| Deducted  from asset accounts:      |       |                         |       |                                            |       |           |       |                   |       |
| Year ended December 31,  2004: |       |                         |       |                                            |       |           |       |                   |       |
| Allowance  for doubtful accounts    |       | $                            | 276,878    |                                            | $          | (248,987       | )          | $                      | (109       | ) | $ | 28,000 |   |

 

F-26

----