**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM l0-KSB**

 

**Annual Report Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934**

 

**For the fiscal year ended December 31, 2003**

 

**Commission file number 333-56368**

 

**Great Plains Ethanol, LLC**

(Name of Small Business Issuer in its Charter)

 
| **South Dakota**                                                |   | **46-0459188**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |

 

**27716 462ndAvenueChancellor, South Dakota57015**

(Address of Principal Executive Offices) (ZipCode)

 

**(605)647-0040**

(Issuer’s Telephone Number, Including AreaCode)

 

Securities registered underSection 12(b) of the Exchange Act:

**None**

 

Securities registered underSection 12(g) of the Exchange Act:

**Class ACapital Units**

 

Checkwhether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act of 1934 during the past 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

 
| ý   Yes |   | o  No |
|-------------------|--------|------------|

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B is not contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10 – KSB.   ý

 

 

----

 

Stateissuer’s revenues for its most recent fiscal year.  $52,354,635.00

 

Theaggregate market value of the registrant’s Class A and Class C capital unitsheld by non-affiliates of the registrant was approximately $22,881,000, basedon the average sales price of $7,500 per Class A unit and $8,000 per Class Cunit for the trading period ended March 1, 2004.

 

Asof March 1, 2004, there were 1,513 Class A, 200 Class B and 2,029 Class Ccapital units of the registrant outstanding.

 

TransitionalSmall Business Disclosure Format:                 o  Yes                   ý  NO

 

**PART I**

 

**Item 1.****                                                          ****Description of Business.**

 

**OVERVIEW**

 

Wewere formed on December 20, 2000 to construct and operate an ethanol plantin Chancellor, South Dakota.  Wecommenced an initial public offering of Class A and Class C capital units in2001, raising approximately $17,265,000 in net proceeds toward the constructionof the plant and related infrastructure. Construction of the plant began in April 2002 and was completed inearly March 2003.  The plantcommenced producing ethanol and an ethanol co-product, distiller’s dried grainswith solubles (DDGS), on March 20, 2003 and began operating at productioncapacity in early April 2003.  Asof March 1, 2004, we had 530 members.

 

**ETHANOL PLANT AND PRODUCTION PROCESS**

 

Anethanol plant is essentially a fermentation plant.  The ground corn, which contains starch, is mixed with water toform a mash.  The mash is heated andenzymes are added to convert the starch into fermentable sugars.  Fermentation occurs when yeast is added toconvert the sugars into alcohol and carbon dioxide.  The carbon dioxide may either be captured or sold, if nearbymarkets exist, or released into the atmosphere.  Fermentation produces a mixture called “beer,” which contains about10% alcohol and 90% water.  The “beer”is then boiled in a distillation column to separate the water, resulting inethyl alcohol that is 90 to 95% pure. The mixture then goes through a dehydration process, which increases thealcohol content to 99% or greater.  Thisproduct is then mixed with a certified denaturant to make the product impotableand commercially saleable.

 

Thesolids removed during the distillation process are centrifuged and thenconveyed to the DDGS’ dryer system. Syrup is added to the mixture as it enters the dryer, where moisture isremoved.  This process producesDDGS.  DDGS is produced from theprotein, fiber, vitamins, and minerals that are not used in producingethanol.  Ethanol production from cornuses only the starch contained in the corn.

 

2

----

 

Ourplant was designed and built by Broin and Associates, Inc. of Sioux Falls,South Dakota to produce 40 million gallons of ethanol annually.  Under a licensing agreement, Broin licensesto us, for a fee, the technology for the operation of the ethanol plant for aslong as the plant exists.  The licensedtechnology consists of Broin’s proprietary rights including its patents,copyrights, trade secrets, formulas, research data, processes, know-how, andspecifications related to Broin’s design and construction of the ethanolplant.  If we or Broin breaches theterms of the license agreement, the non-breaching party may exercise anyremedies available to it, including specific performance and requestinginjunctive relief.

 

**THE ETHANOL INDUSTRY**

 

Althoughethanol can be produced from a number of different types of grains,approximately 90% of ethanol in the United States today is produced fromcorn.  Current annual domestic ethanolproduction capacity is approximately 3.1 billion gallons.

 

Ethanolcontains 35% oxygen by weight.  Whencombined with gasoline, ethanol acts as an oxygenate, which is to say itincreases the percentage of oxygen in gasoline.  As a result, the gasoline burns more cleanly, and releases lesscarbon monoxide and other exhaust emissions into the atmosphere.  Oxygenated gasoline is commonly referred toas reformulated gasoline or “RFG.” Although not all scientists agree about the existence or extent ofenvironmental benefits associated with the use of ethanol, the use of ethanolis commonly viewed as a way to improve the quality of automobile emissions.

 

Becauseof federal and state policies promoting cleaner air, state and federal taxprograms and production incentives, the ethanol industry has grownsubstantially in recent years. Currently, U.S. ethanol plants have the capacity to produceapproximately 3.1 billion gallons of ethanol annually, compared to only 175million gallons in 1980.  There are morethan 74 ethanol production facilities located in the United States, with thegreat majority of them located in the Midwestern corn-producing states ofIllinois, Wisconsin, Minnesota, Iowa, North Dakota, South Dakota, Nebraska andKansas.  South Dakota currently has 10ethanol plants producing approximately 377 million gallons and one additionalplant under construction that will have the capacity to produce 45 milliongallons per year.

 

**ETHANOL MARKETING**

 

Thetarget market area for the ethanol produced by us includes local, regional andnational markets.  Shipping is done bytruck and rail.  The plant site isserved by multiple South Dakota state highways and Interstate Highways 29 and90 provide transportation links in all directions.

 

Theplant has rail facilities and connections to the Burlington Northern Santa Ferailroad system, which facilitate transporting the ethanol to national targetmarkets.  Approximately 90% of theethanol produced at our plant is marketed by rail.  The national target rail markets for the facility includeChicago, the Pacific Northwest, the

 

3

----

 

Southernand Southwest markets, as well as potential new markets on the East coast andCalifornia due to MTBE phase outs.

 

Wecontract with Ethanol Products, LLC, a Broin affiliate, to market all theethanol produced at our plant.  Ourmarketing contract with Ethanol Products is in effect until October 2013and automatically renews for three-year terms unless terminated by either partywith three months advance notice prior to the end of the term.  Under the contract, Ethanol Products chargesus marketing and administrative fees based on the number of gallons of ethanolsold.  Ethanol Products is responsiblefor invoicing all shipments, receiving payments from customers and payingfreight when necessary.  All accountsreceivable losses arising from the marketing of ethanol are our soleresponsibility.

 

EthanolProducts currently markets ethanol for 15 producers located in Minnesota, SouthDakota, North Dakota, Iowa, Michigan, Kansas, Kentucky, Nebraska andMissouri.  Although we rely entirely onEthanol Products to market the ethanol we produce, Ethanol Products is notdependent on one or a limited number of major customers.

 

Thesale and marketing of ethanol in California could be adversely affected bydecisions pending before the U.S. Environmental Protection Agency (EPA).  On July 17, 2003, the United StatesCourt of Appeals for the Ninth Circuit vacated the EPA’s decision ofJune 2001 which denied the state of California’s request for waiver fromthe oxygenated fuel requirement of the 1990 Clean Air Act Amendments.  The court remanded the matter to the EPA toreconsider California’s request for waiver from the oxygenatedrequirement.  The oxygenated requirementresulted from the 1990 Clean Air Act Amendments when Congress required the useof a reformulated gasoline in certain high smog-ozone areas in the UnitedStates.  Congress required that thereformulated gasoline contain at least 2% oxygen by weight, the two primarychoices of oxygenates being ethanol and methyl tertiary butyl ether (“MTBE”).  In April 1999, California requestedthat the EPA waive the oxygen requirement for California, asserting that itcould comply with air emission requirements of the Clean Air Act without amandatory oxygen content through the use of a non-ethanol based, reformulatedgasoline called CaRFG3.  InJune 2001, however, the EPA denied California’s request for waiver fromthe oxygenated requirement.  Inaddition, after determining that MTBE was a public health threat, Californiadecided to ban MTBE entirely by January 1, 2004, resulting in ethanolbeing the primary means to meet the two percent oxygenated fuel requirement.

 

Inanticipation of the MTBE ban in California and as a result of the EPA’s denialof California’s waiver request, many refineries in California have incorporatedethanol into the blending process to comply with the oxygenated fuelrequirement.  If the EPA reverses itsJune 2001 decision, it is uncertain whether refineries would switch to orcommence using CaRFG3 or other reformulated gasoline in California.  If the EPA reverses its decision and asignificantly large number of refineries switched, and with California beingone of the largest consumers of ethanol, it could harm our and the ethanol industry’sefforts to market and sell ethanol.

 

4

----

 

Inlate January 2004, the EPA announced a proposal to grant the State of NewHampshire a waiver from the oxygenate fuel requirement.  The waiver would allow New Hampshire to usea reformulated gasoline without adding an oxygenate, such as ethanol. If NewHampshire is officially granted a waiver by the EPA, and more statessubsequently request and are granted waivers, this could materially andadversely affect our and the ethanol industry’s efforts to market and sellethanol in the future.

 

**THE DDGS INDUSTRY**

 

DDGSis a co-product of the ethanol production process.  DDGS is a high protein, high energy feed supplement marketedprimarily to the dairy, beef, sheep, swine and poultry industries.  DDGS is a popular animal feed supplement,with approximately 6.4 million tons produced in North America annually.  Most DDGS is sold for use in animal feedswithin the United States and Canada and a small percentage is exported,primarily to Europe.  The vast majorityof the DDGS is fed to ruminant animals in the dairy and beef sector.  However, new technologies, which haveallowed for the production of a more consistent, quality product, have helpedcreate a market for DDGS in the swine and poultry industries as well.

 

Ourplant, as designed, has the capacity to dry all DDGS produced.  The plant yields approximately 17 pounds ofDDGS per bushel of corn.

 

**DDGS MARKETING**

 

Wehave a DDGS marketing contract with Dakota Gold Marketing, (formerly known asDakota Commodities), a division of Broin Enterprises, Inc., to market all ofthe DDGS produced at the plant.  TheDDGS marketing contract is in effect until October 2013 and automaticallyrenews for three-year periods, unless discontinued by either party upon atleast three months written notice prior to the end of the then currentterm.  We pay Dakota Gold Marketing amarketing fee based on the gross monthly sales of DDGS.  Dakota Gold Marketing is responsible forinvoicing all loads, receiving payments from customers and paying freight whennecessary.  All account receivablelosses arising from the sale of DDGS are our sole responsibility.

 

Wemarket DDGS to local, regional and national markets.  We ship approximately 33% of the DDGS to national markets,primarily in the southwestern United States and the rest to local and regionalmarkets.  Shipments to the nationalmarkets are primarily by rail, whereas shipments to local and regional marketsare primarily by truck.  Although werely entirely on Dakota Gold Marketing to market the DDGS we produce, DakotaGold Marketing is not dependent on one or a limited number of major customers.

 

**COMPETITION**

 

Weare in direct competition with numerous other ethanol and DDGS producers, manyof which have significant greater resources than we do.  The ethanol industry has

 

5

----

 

grownto over 74 production facilities in the United States.  Industry authorities estimate that thesefacilities are capable of producing 3.1 billion gallons of ethanol peryear.  The largest ethanol producersinclude Archer Daniel Midland, Cargill, Aventine Renewable Energy, VerasunEnergy and New Energy Corporation, all of which are capable of producing moreethanol than we produce.  In addition,there are numerous regional farmer-owned entities or other ownership-typeentities, which have recently formed or in the process of forming, of a similarsize to ours.  Most ethanol producersalso produce DDGS, or competing animal feed products such as distiller’s wetgrains.

 

Inaddition, at least 17 new ethanol plants with a combined production capacity ofover 598 million gallons are under construction and additional plans to expandexisting plants have been announced which would increase the ethanol productioncapacity of our competitors.  We areunable to determine the number and production capacity of plants thatultimately may be constructed, the timing of such construction, or the effectof resulting production upon the demand or price for our products.

 

Wealso expect that additional ethanol and DDGS producers will enter the market ifthe demand for ethanol continues to increase. Our ethanol plant competes with other ethanol and DDGS producers on thebasis of price and, to a lesser extent, delivery service.  We believe we can continue to competefavorably with other ethanol and DDGS producers, primarily due to our proximityto ample corn supplies at favorable prices.

 

Wemay also have to compete with international ethanol producers from countriessuch as Brazil, which may have lower production costs and comparabletransportation costs to those of the United States’ coastal markets.

 

Wealso compete with producers of MTBE. MTBE is the other oxygenate commonly used in fuels for compliance withthe Federal Clean Air Act mandates, and is ethanol’s major competitor in theoxygenate market.  MTBE, however, hasbeen the subject of serious environmental concerns.  Accordingly, seventeen states, including California and New York,two of the largest state consumers of ethanol, have enacted laws prohibitingthe use of MTBE as an oxygenate in fuels. Nevertheless, many major oil companies produce MTBE and, because it ispetroleum-based, its use is strongly supported by them.  These companies have significant resourceswith which to market MTBE, to influence legislation, and to influence publicperception of MTBE.  These companiesalso have sufficient resources to begin production of ethanol, should theychoose to do so.

 

Alternativefuels, gasoline oxygenates and ethanol production methods are continually underdevelopment by ethanol and oil companies with far greater resources than wehave.  New products or methods ofethanol production developed by larger, better financed competitors couldprovide them with competitive advantages over us and harm our business.

 

6

----

 

**PROCUREMENT**

 

**Corn**

 

Themajor raw material required for us to produce ethanol and DDGS is corn.  To operate at name-plate capacity of 40million gallons of ethanol annually, our plant requires approximately 14million bushels of corn annually.  ClassA members are required to deliver 2,500 bushels of corn to us on a set deliveryschedule for each Class A capital unit owned, which supplies us withapproximately 25% of our corn requirements. The balance of our corn requirements is satisfied by the purchase ofcorn from local corn producers and elevators.

 

Theplant’s location in Turner County, South Dakota provides accessibility to cornat necessary levels.  In 2002, over 14million bushels of corn for grain were produced in Turner County and over 73million bushels of corn for grain were produced in the nearby counties ofLincoln, Hutchinson, McCook, Hanson, Minnehaha, Yankton, and Union.  Corn is primarily delivered to our plant by truck.

 

**Hedging**

 

Wecontract with Broin Management to develop and implement hedging strategies tomanage the risk associated with the fluctuation in the price of corn.  Hedging means protecting the price at whichwe buy corn and the price at which we will sell ethanol and DDGS in thefuture.  It is a way to attempt toreduce the risk caused by the price fluctuation of corn which has fluctuatedhistorically as a result of general economic, market and government factors.  Hedging practices are also utilized tobalance our daily cash corn ownership relative to its forward contractedethanol sales.  All cash corn contractspurchased by the plant are either hedged or owned at the predetermined cashprice based on the current futures price of corn, as well as on BroinManagement’s view of future price direction.

 

Theagreement with Broin Management commenced in November 2002 andautomatically renews for one-year terms following the expiration of the priorterm, unless at least 30 days notice is given by either party to terminate theagreement prior to the expiration of the current term.

 

#### **Natural Gas**

#### ** **

The production of ethanol requires asignificant amount of natural gas.  Theplant requires approximately 5,000 decatherms daily to operate the plant at itsproduction capacity. A decatherm is a unit used to measure a specific quantityof heat.  We contract with NorthWesternPublic Service pursuant to which NorthWestern supplies and distributes naturalgas from NorthWestern Natural Gas Company’s pipeline to the ethanol plant.  Our agreement with NorthWestern is in effectuntil 2018.  Our agreement also requiresthat we use a minimum amount of natural gas on an annual basis to cover

 

7

----

 

NorthWestern’s costs of constructing apipeline to our plant in 2002.  In theevent that we do not use a minimum amount of natural gas, NorthWestern isentitled to draw on an irrevocable standby letter of credit that we provided inMay 2003.  Since operations werecommenced, we have used the minimum amount of natural gas required byNorthWestern.  We also have notexperienced any interruption in the supply of natural gas as all ourrequirements have been met.  BroinManagement also provides risk management services to us to manage the risk associatedwith the price fluctuation of natural gas.

 

**Electricity**

 

We contract with Southeastern ElectricCooperative to provide all of the electric power and energy requirements forthe ethanol plant.  The agreement is ineffect indefinitely unless we breach the agreement at which time Southeasternmay terminate the agreement.  Sinceoperations were commenced, we have not experienced any shortages in the supplyof electricity and all our requirements have been met.

 

**Water**

 

The production of ethanol requires asignificant amount of water.  Watersupply and water quality are important requirements to produce ethanol.  All of our water requirements are currentlysupplied through three existing wells located near our plant site.  We anticipate adding a fourth ground well inthe next twelve months to provide additional assurances of an adequate supplyof water in the event of possible drought or plant expansion in thefuture.  Since operations werecommenced, we have not experienced any interruption or shortages in the supplyof water and all our requirements have been met.

 

**GOVERNMENT REGULATION**

 

Various federal and state laws,regulations and programs have led to the increasing use of ethanol in fuel,including subsidies, tax credits and other forms of financial incentives.  Some of these laws provide economicincentives to produce ethanol and others mandate the use of ethanol.  Congress currently provides certain federaltax incentives for oxygenated fuel producers and marketers, including those whopurchase ethanol to blend with gasoline in order to meet federally mandatedoxygenated fuel requirements.  These taxincentives include, generally, an exemption from the federal excise tax ongasoline blended with at least 10%, 7.7%, or 5.7% ethanol, and income tax creditsfor blenders of ethanol mixtures and small ethanol producers.  The federal tax incentives are scheduled toexpire on September 30, 2007.

 

Additionally, Congress provides an ethanolproduction incentive to ethanol producers through the United States Departmentof Agriculture Commodity Credit Corporation’s Bioenergy Program.  Under this program, incentive payments areallocated partially based on an increase in gallons of ethanol producedcompared to the prior year’s production, as opposed to the total number ofgallons produced in the current year.

 

8

----

 

Because a plant usually experiences thehighest increase in production during the first year of operations compared tothe prior year’s production, a plant of this size is typically allocated themaximum payment during the first year of operations.  The maximum allocation per program year to an ethanol producer is$7.5 million.  The maximum annualfunding authorized under the program during the 2003 program year was $150million.  In addition, the BioenergyProgram is currently scheduled to expire on September 30, 2007.

 

South Dakota also provides an incentiveproduction payment to ethanol producers. The production incentive consists of a direct payment to South Dakotaproducers of up to $.20 per gallon, which is divided among producers of fuelethanol within South Dakota up to a maximum of $1 million per year per plantand a maximum of $10 million over the life of a plant. However, no more than $5million in payments may be distributed to ethanol plants in South Dakota duringthe 2004 program year (which ends on June 30, 2004) and no more than $6million in payments may be distributed during the 2005 program year.  The payments are distributed to each plantin proportion to the total number of gallons of ethanol produced annually byall plants in South Dakota. As more plants come on line, or existing plantsincrease production, each plant receives a lower proportionate share of themaximum payment under the program.

 

The revocation, amendment or non-renewalof any one or more of these laws, regulations or programs, or a lack offunding, could adversely affect the future use of ethanol and our business andoperations in a material way.  Anymaterial reduction of the use of ethanol would have an adverse affect on ourprofitability and viability.

 

**ENVIRONMENTAL MATTERS**

 

Our operations are subject to variousfederal, state and local laws and regulations with respect to environmentalmatters, including air and water quality and underground fuel storagetanks.  We believe we currently complywith the applicable environmental laws and regulations.  However, environmental compliance with theselaws and regulations will require us to incur expenditures for such things asnew or upgraded equipment or processes, some of which could be material to ourbusiness.  If we were found to haveviolated federal, state or local environmental laws or regulations, we couldincur liability for cleanup costs, damage claims from third parties and civilor criminal penalties that could materially adversely affect our business.

 

We could be adversely affected by agencyregulatory actions that occurred in 2002 and 2003.  In late 2002, a number of ethanol plants in Minnesota enteredinto consent decree settlements with the State of Minnesota and the U.SEnvironmental Protection Agency arising from alleged emissions violations.  Civil penalties were assessed against eachethanol plant, additional emissions devices were required, new testing protocolsestablished and air quality permits were modified by the settlementagreements.  The EPA has since statedthat it intends to “level the playing field,” inferring actions against otherethanol producers.  In April 2003,the EPA entered into a consent decree with Archer Daniels Midland Companyarising from alleged emission

 

9

----

 

violations in several of its ethanol andnon-ethanol related plants.  In additionto civil penalties being assessed against Archer Daniels, additional emissionsdevices and monitoring programs were imposed on it.

 

On January 6, 2003, the EPA issuedformal requests to certain ethanol plants designed, constructed, and/or managedby Broin and Associates and Broin Management, to provide information pursuantto the Clean Air Act.  The requestsrequired that the subject ethanol plants managed by Broin Management providethe EPA with certain emissions data. The purpose of this request was presumably to determine whether theplants were in compliance with the Clean Air Act.  If the EPA determines that the plants managed by Broin have notcomplied with the Clean Air Act or its Title V Air Quality Operating Permit,the EPA could require pollution control mechanisms and internal controlprocesses that are not currently planned for these plants.  To date, no action has been taken by theEPA, nor are we able to predict the form or magnitude of any regulatory action,that may be brought by the EPA, if any, as a result of these requests, or theextent of which these requests would affect our plant.

 

In late 2002, the South Dakota Departmentof Environment and Natural Resources (DENR) began requiring that new plants inSouth Dakota, including our plant, include in their Title V Air QualityOperating Permit a new method for quantifying emissions.  The new testing method is commonly referredto as the Midwest Scaling Method or the “multiplier.”  The application of this method increases the quantity ofemissions being reported from a plant. The use of the multiplier could make it more difficult for us to complywith our Title V Air Quality Operating Permit and the standards under the CleanAir Act.  Even though we are currentlyin compliance, if we are unable to comply with the air emissions standardsusing this new method, we may have to incur additional expenditures and costsin order to bring us into compliance.

 

On December 29, 2003, we, along withfive other ethanol plants management by Broin Management, LLC, filed anadministrative petition before the South Dakota Board of Minerals andEnvironment.  The petition requests thatthe Board of Minerals and Environment bar the DENR from applying and using themultiplier to our and the other petitioner’s emission testing results in orderto determine compliance with the Title V Air Quality Permit and Clean AirAct.  A hearing on the petition wasscheduled for March 18, 2004, but it has since been continued to a later,undetermined date.

 

**MANAGEMENT AND EMPLOYEES**

 

Broin Management, LLC, a Broin affiliate,manages the day-to-day operations of the ethanol plant.  We pay Broin Management a fixed annual feeand an incentive bonus based on annual net income.  We also pay certain expenses incurred with respect to operationof the plant while other expenses, including but not limited to, the provisionsof a full time plant manager and technical manager are included as part ofBroin Management’s fees.  BroinManagement hired Mr. Rick Serie as our plant’s general manager.  Mr. Serie oversees and is responsible forthe operation and production on a day-to-day basis.  Mr. Serie also serves as our Chief Executive Officer and ChiefFinancial

 

10

----

 

Officer. For Mr. Serie’s biographical information see “Item 9—Directors,Executive Officers, Promoters and Control Persons; in Compliance WithSection 16(a) of the Exchange Act.”

 

As of March 1, 2004 we employed 41employees, all but one of whom were full time. Our employees include a commodities manager, an operations manager, amaintenance manager, a microbiologist, a chief mechanical operator, acontroller, plant operators, plant maintenance personnel, a membershipcoordinator, accounting assistants and an administrative assistant.  This list does not include contractemployees, or Mr. Serie or the technical manager who are Broin Managementemployees.

 

**Item 2.    Description of Property.**

 

Our ethanol plant is located on 119 acresof land we own near the town of Chancellor in Turner County, South Dakota.  This site is served by multiple statehighways and is near Interstate Highways 29 and 90 and has rail facilities andconnections to the Burlington-Northern Santa Fe railroad system to facilitatetransporting the ethanol and DDGS produced at our plant to certain markets.  All of our tangible and intangible property,real and personal, serves as collateral for our debt financing with AgCountryFarm Credit Services which is described below under “Item 6—ManagementDiscussion and Analysis or Plan of Operations—Liquidity and Capital Resources.”

 

**Item 3.    Legal Proceedings.**

 

From time to time in the ordinary courseof our business, we may be subject to litigation incidental to ourbusiness.  We are currently a party in apending matter before the South Dakota Board of Minerals and Environment inPierre, South Dakota.  OnDecember 29, 2003, Great Plains Ethanol, five other ethanol plants inSouth Dakota, and Broin Management, LLC, filed a petition with the South DakotaBoard of Minerals and Environment against the South Dakota Department of Environmentand Natural Resources (DENR).  Thepetition requests that the Board of Minerals and Environment bar the DENR fromusing and applying a new method for quantifying emissions from ethanol plantsknown as the Midwest Scaling Method or “multiplier.”  The Board of Minerals and Environment is a nine person citizenboard that serves a quasi-judicial and legislative role in matters involvingthe South Dakota air quality laws.  TheBoard of Minerals and Environment has authority to hear petitions regarding theapplication of DENR’s rules governing air quality matters.

 

The petition alleges that the DENR’s useof the multiplier for quantifying emissions is inappropriate and unlawful.  We and the other petitioners contend thatSouth Dakota and federal regulations do not require or permit the use of themultiplier.  Historically, ethanolplants have measured their emissions using EPA promulgated referencedmethods.  Using the multiplier changesthe way emission quantities are reported, typically increasing the reportedquantity of emission and making it potentially more difficult to comply withTitle V Air Quality Operating Permit and the standards

 

11

----

 

under the Clean Air Act.  A hearing on the matter was scheduled forMarch 18, 2004, but it has since been continued to a later, undetermineddate.

 

In addition, as described above under“Item 1—Description of Business, Environmental Matters,” we do not know if theEPA will take action with respect to its January 6, 2003 formal requestfor information or in connection with any other matter.  However, Broin Management, acting on behalfof us and other ethanol plants managed by Broin Management, has recently heldinformal discussions with the EPA regarding whether the multiplier can beapplied and used for quantifying emissions. These discussions are ongoing and generally relate to all ethanol plantsmanaged by Broin. It is uncertain whether the issues surrounding the use of themultiplier can be resolved with the EPA or what the effect will be on us iffinal resolution short of a formal proceeding is or is not attained.

 

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

 

We did not submit any matter to a vote ofour security holders through the solicitation of proxies or otherwise duringthe fourth quarter of 2003.

 

**PART II**

 

**Item 5.    Market for Common Equity and RelatedStockholder Matters.**

 

There is no public trading market as suchfor our capital units.  Capital unitsmay only be transferred in accordance with our Capital Units TransferSystem.  Our Capital Units TransferSystem is designed to preserve the single-level tax status as a limitedliability company.  Internal Revenue regulationsimpose significant trading restrictions on our capital units if we want tomaintain this status.

 

The Capital Units Transfer System providesfor transfers by gift to family members, upon death, and through a qualifiedmatching service, subject to our Board of Managers’ approval.  The qualified matching service is operated usinga registered Alternative Trading System (ATS). The ATS is operated and owned by Variable Investment Advisors, Inc., aregistered broker-dealer located in Sioux Falls, South Dakota, which may beaccessed at www.agstocktrade.com.  Wecommenced using the ATS operated by Variable Investment Advisors onOctober 1, 2002.  As ofMarch 1, 2004, there were 495 Class A members, 1 Class B member, and 148Class C members, representing a total of 530 members.

 

The following table contains historicalinformation by trimester for sales of our Class A capital units under an ATSsince October, 2002.

 

12

----

 
| **Trimester**                             |   | **Low Bid** |    | **High Bid** |   | **Average Bid** |   | **# of Capital  Units Traded** |    |
|-------------------------------------------|--------|-------------|---------|--------------|--------|-----------------|--------|--------------------------------|---------|
| No  Capital Units traded before Oct. 2002 |   | N/A         |    | N/A          |   | N/A             |   | N/A                            |    |
| Oct.-Dec.  2002                           |   | $           | No bids |         | $      | No bids         |   | $                              | No bids |   | 0 |   |
| Jan.-April 2003                      |   | $           | 10,000  |         | $      | 10,000          |   | $                              | 10,000  |   | 2 |   |
| May-Aug.  2003                            |   | $           | 8,500   |         | $      | 8,500           |   | $                              | 8,500   |   | 6 |   |
| Sept.-Dec.  2003                          |   | $           | 7,000   |         | $      | 7,250           |   | $                              | 7,125   |   | 4 |   |

 

Under the terms of our Third Amended andRestated Operating Agreement, we are required to make a distribution to ourmembers of at least 20% of the net cash we earn from operations, as long as netcash from operations is in excess of $500,000 for that year, or the Board determinesotherwise.  However, we are prohibitedfrom making any distributions that would violate or cause us to default underany of the terms of any of our credit facilities or debt instruments.

 

On January 14, 2004, we declared ourfirst cash distribution to our members of $3,742,000, or $1,000 per capitalunit.  The cash distribution was made toall members of record as of December 31, 2003.  We declared the cash distribution to be issued in twoinstallments, the first installment being made on January 14, 2004 and thesecond installment being made on March 4, 2004.  Because the January 2004 distribution was approved by ourBoard of Managers in December 2003, the distribution is reflected as acurrent liability in our December 31, 2003 financial statements.

 

**Item 6.    Management’s Discussion and Analysis orPlan of Operation.**

 

**CAUTIONARYSTATEMENT REGARDING**

**FORWARD-LOOKINGINFORMATION**

 

You should read the following discussionalong with the audited financial statements and notes to the audited financialstatements included elsewhere in this report. This report contains forward-looking statements, including, but notlimited to, those under “Plan of Operation” and “Liquidity and CapitalResources,” involving future events, future business and other conditions, ourfuture performance, and our expected operations.  Forward-looking statements may include statements which use wordssuch as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,”“predict,” “hope,” “will,” “should,” “could,” “may,” “future,” “potential,” orthe negatives of these words, and all similar expressions.

 

Forward-looking statements involvenumerous assumptions, risks and uncertainties, which include, but are notlimited to, legislative acts, regulatory acts, changes in the

 

13

----

 

prices of corn and other commodities,including gasoline, and general economic conditions.  The actual results, performance and achievements or actualbusiness or other conditions may differ materially from those contemplated,expressed in, or implied by, any forward-looking statements and we are notunder any duty to update the forward-looking statements contained in thisreport.  We cannot guarantee futureresults or performance, or what future business conditions will be like.  We caution you not to put undue reliance onany forward-looking statements. In particular:

 

•                  We may besubject to additional regulation, such as environmental restrictions, orregulatory action, which could include fines, penalties, or injunctive reliefas a result of any potential excessive emissions, which could increase ourcosts.

 

•                  While weanticipate that the emissions control equipment and processes in our plant willeliminate any potentially dangerous emissions from the ethanol productionprocess, and that it will bring compliance with environmental regulations, wecannot guarantee that it will.

 

•                  Wecurrently depend on government subsidies and incentive payments.  Our operating income may be adverselyimpacted by a decrease in or termination of available government subsidies andincentive payments.

 

•                  Althoughmanagement expects the demand for ethanol to increase, demand is largely drivenby federal and state environmental regulations, which are subject to change.

 

•                  Anylowering of gasoline prices will likely also lead to lower prices for ethanoland adversely affect our operating results.

 

•                  Theethanol industry and our business are sensitive to corn and natural gasprices.  When corn and natural gasprices increase our operating results may suffer.

 

•                  We areentirely dependent upon Broin Management, LLC to manage the day-to-dayactivities of the plant and upon Broin-related entities to market the ethanoland DDGS produced at the plant.  If anyof these entities ceased providing services to us, the plant’s operations maybe adversely affected.

 

We are not under any duty to update theforward-looking statements contained in this report.  We cannot guarantee future results or performance, or what futurebusiness conditions will be like.  Wecaution you not to put undue reliance on any forward-looking statements, whichspeak only as the date of this report.

 

**OVERVIEW**

 

Our business consists of the production ofethanol and an ethanol co-product, DDGS. In addition to federal and state government incentive programs, theprimary factors that influence our operating and financial performance are theprices at which we

 

14

----

 

sell ethanol and DDGS and the costsrelated to production, along with federal and state producer incentivesavailable to us. Although there are various costs related to the productionprocess, the most significant are the price at which we purchase corn and thecost of natural gas. You should review these and other factors when evaluatingour financial statements and results of operations.

 

**PLAN OF OPERATIONS**

 

We plan on operating the plant at or abovename-plate capacity of 40 million gallons of ethanol for the next twelve monthsof operations, despite sustaining a fire to the dryer system on March 14,2004.  The dryer system consists ofequipment and machinery necessary to produce DDGS.  Although the fire did not damage or affect the production andmarketing of ethanol, it temporarily suspended the production and marketing ofDDGS.  Nevertheless, we are able toproduce and market distiller’s wet grains. Unlike DDGS, distiller’s wet grains can only be marketed to local andregional markets instead of national markets because of problems with spoilingover time.  We anticipate that the dryersystem will be replaced and full production of DDGS will resume within the next30-45 days.  The total costs to replacethe dryer have not been determined nor do we know what our necessary expenditureswill be to replace it.  We do not expect,however, that the damage to the dryer system will have a material adverseeffect on our operations or financial condition.

 

In addition, over the next twelve months,we do not anticipate any change in the current number of 41 employees.  There is also no plan at this time for anymajor expansion of our plant that would require a material investment inproperty, plant and equipment.  Weanticipate that cash generated from operations will be sufficient to cover operatingand administrative costs, minor capital expenditures and fund working capitalrequirements.  However, while wecurrently comply with the state and federal air quality laws, in the event thatwe cannot comply with these laws in the future, we may have to fund certaincapital expenditures through additional debt or equity financing in order topay for additional emission control equipment or processes.

 

**RESULTS OF OPERATIONS**

 

Since we started production operations onMarch 20, 2003 and began operating at full capacity in April 2003,the income, production and sales data for the year ended December 31, 2003do not reflect a full year of operations.

 

Net income for the year endedDecember 31, 2003 was $6,173,246 consisting of $7,326,438 of operatingincome, $13,107 of interest income, and $11,172 of other income, offset by$1,177,471 of interest expense.

 

Sales for the year ended December 31,2003 were $44,588,101 million, consisting of $35,683,989 million in ethanolsales (80%) and $8,904,112 million in DDGS sales (20%).  We are currently selling 100% of ourproduction output and expect this to

 

15

----

 

continue throughout 2004.  We also do not anticipate a reduction inproduction output over the next twelve month’s operating cycle.

 

Our ethanol and DDGS sales could beaffected by various factors.  The priceof ethanol and sales tends to bear some direct relationship to the price ofgasoline.  As the price of gasolinedecreases, the price of ethanol tends to decrease.  Any lowering of gasoline prices will likely also lead to lowerprices for ethanol and reduce our sales and profitability.  The price of ethanol and sales could alsochange based upon the principles of supply and demand.  Increased production of ethanol could resultin lower prices for ethanol and sales if the demand for ethanol does not keepup with the expected increase in supply. We expect that existing ethanol plants will construct additions toincrease their production and that new fuel grade ethanol plants will beconstructed in addition to the 17 currently under construction.  Increased production of ethanol will alsolead to increased supplies of DDGS. Those increased supplies could lead to lower prices and sales forDDGS.  Further, if the EPA begins togrant states like New Hampshire and California waivers from the oxygenated fuelrequirement under the 1990 Clean Air Act Amendments, our sales could beadversely affected.

 

In addition to sales revenue, we recordedincentive revenue of $7.6  millionduring the year ended December 31, 2003. Incentive revenue consists of income earned from federal and stategovernments in connection with our ethanol production.  For the year ended December 31, 2003,we recorded incentive revenue of approximately $7.08 million from the UnitedStates Department of Agriculture’s Commodity Credit Corporation under itsBioenergy Program.  Of the $7.08 millionearned in the year ended December 31, 2003, $5.70 million is attributed tothe 2003 program year, which began on October 1, 2002 and endedSeptember 30, 2003, and $1.38 million is for the 2004 program year.  While we were eligible to receive a maximumof $6.9 million of the $7.5 million available under the Bioenergy Program in2003 based on our actual production rate, we did not receive this amount becauseof a production expansion in the industry. With new plants commencing production and existing plants increasingtheir operational efficiency, the number of applications for payment in 2003exceeded available funding under the program. This resulted in a lower payment to us than what we were eligible forunder the program.

 

In addition, we recorded incentive revenueof $583,333 from the state of South Dakota for the year ended December 31,2003.  Of this $583,333, $83,333 isattributed to the 2003 program year, which ended June 30, 2003, and$500,000 is for the 2004 program year. Our maximum allocation per program year and program month under theSouth Dakota program is $1.0 million and $83,333, respectively.

 

We anticipate that we will continue toreceive less payment under the Bioenergy Program in the 2004 program yearbecause we do not expect any significant increase in the production of ethanolduring the 2004 program year compared to 2003. In addition, we anticipate that we will not receive any further paymentsunder the South Dakota incentive program until the 2005 program year (beginningJuly 1, 2004) because the maximum payment of $5 million to all SouthDakota plants during the 2004 program year has already been allocated anddistributed.  While the maximum paymentto all

 

16

----

 

plants in South Dakota during the 2005program year will be increased to $6 million, we may receive less under thisprogram if more plants in South Dakota commence or increase production ofethanol.  Furthermore, the BioenergyProgram may not have sufficient funds to cover the requisite payments under theprogram, as recently experienced in the 2003 program year.  Unless Congress extends the BioenergyProgram, it is scheduled to expire in 2007.

 

Our cost of revenue, which includesproduction expense, for the year ended December 31, 2003 was$42,833,701.  Our cost of revenues couldbe materially affected by the price of corn and natural gas.  Production of ethanol and DDGS requires asubstantial amount of corn.  The priceof corn is affected by weather, governmental policy, disease and other factors.A significant reduction in the quantity of corn harvested due to adverseweather conditions such as drought, farmer planting, domestic and foreigngovernment farm policies and programs, carryout, demand and supply or otherfactors could result in increased corn prices which would increase the cost toproduce ethanol.  The significance andimpact of these factors on the price of corn is difficult to predict.  Significant variations in actual growingconditions from normal growing conditions also may adversely affect our abilityto procure corn.  Any events that tendto negatively affect the supply of corn will tend to increase prices andproduction costs and harm our business. Further, the price of corn has fluctuated significantly in the past,including in 2003, and may fluctuate significantly in the future.  If we cannot manage price fluctuationseffectively, our production costs could be materially and adversely affected.

 

Natural gas prices have historicallyfluctuated dramatically.  Natural gashas recently been available at prices exceeding historical averages.  These prices have exceeded historicalaverages primarily because of increased demand due to colder weather conditionsand reduced production and inventories in the natural gas industry.  We expect natural gas prices to remain abovethe historical averages in the near future, which could adversely affect ourcost of production.

 

We incurred startup and general andadministrative expenses of approximately $2,194,496 million and recordedinterest expense of $1,177,471 million on our short-term and long-term debt forthe year ended December 31, 2003.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

**Cash Flow FromOperations.**  Net cash provided byoperating activities was $2,898,607 for the twelve months endedDecember 31, 2003.  For the twelvemonths ended December 31, 2003, the net cash flow from operationsconsisted of net income of $6,173,246 and net non-cash expenses of $1,976,457,which were offset by increased working capital requirements of $5,251,096.  The change in working capital requirementsresulted primarily from an increase in receivables from the sales of ethanoland DDGS and an initial inventory build-up of raw materials and finished goodsduring startup of operations in March 2003, offset by an increase in tradeaccounts payable**.**

 

**Cash Flow From InvestingActivities.**  Net cash used forinvesting activities was $12,440,560 for the twelve months endedDecember 31, 2003.  We spent$12,908,826 on

 

17

----

 

the construction and development of theethanol plant and the purchase of property and various pieces of equipment.

 

**Cash Flow From FinancingActivities.**  Net cash provided byfinancing activities was $14,870,334 for the twelve months endedDecember 31, 2003, consisting of $17,440,626 of principal advances onlong-term debt and a $1,000,000 principal advance on a loan with a relatedparty, offset by our payment of $21,432 in financing costs, $2,548,850 inprincipal payments on long-term debt and a $1,000,000 principal payment on theloan with a related party.

 

We received net proceeds of $17,265,000 inour initial public offering in 2001.  Asof March 31, 2003 we had used all the net proceeds from our initial publicoffering.

 

AgCountry Farm Credit Service is ourprimary lender.  On June 19, 2002we entered into a definitive Credit Agreement with AgCountry.  On June 20, 2002 we also executed apromissory note in favor of AgCountry in the principal amount of $2,000,000 forthe installation of a thermal oxidizer, an emissions control device.  Under our Credit Agreement, AgCountry loanedus up to the lesser of 65% of the costs of constructing our ethanol plant or$32,500,000.  Until the constructionloan was converted to a term loan on October 1, 2003, we made monthlyinterest payments only to AgCountry based on the average daily balance of theconstruction loan during the related monthly period at an annual floatinginterest rate equal to LIBOR plus 3.14%. The $2 million promissory note, which was retired on December 12,2003, bore interest equal to LIBOR plus 3.14% per annum.  The $2 million promissory note was due insemi-annual installments of $500,000 plus interest.  In addition to these semi-annual payments, we were required underthe promissory note to pay 35% of any incentive payments under the BioenergyProgram.  As of December 31, 2003,no principal or interest remained outstanding on the promissory note as aresult of a $1,100,508 principal and interest payment on December 12, 2003to retire the note.  On October 1,2003, we refinanced the outstanding balance of the construction loan with AgCountryinto a $6 million revolving-credit note and a $26.5 million variable-rate note.

 

The $26.5 million variable-rate note bearsinterest equal to LIBOR plus 2.64% per annum. This note requires quarterly payments of interest and principal on thebasis of a 10-year term.  In addition,we are required to prepay AgCountry each quarter 25% of the Free Cash Flow forsuch quarter, not to exceed $1.5 million in each fiscal year.  The credit agreement defines Free Cash Flowas net income before deductions for interest expense, income taxes,depreciation and amortization, excluding any Bioenergy Program paymentreceived, less expenditures for interest expense, taxes paid during therelevant period, required interest and principal payments, and fixed andcapital assets not financed by debt. There is no prepayment penalty if we prepay any amount outstanding underthe note, provided the payments exceed $100,000.  As of December 31, 2003 the variable rate was 3.76% andprincipal payments of $548,850 were made on the variable-rate note during theyear ended December 31, 2003, leaving an outstanding balance of$25,946,877 as of year ended December 31, 2003.

 

18

----

 

The $6 million variable-rate,revolving-credit note bears interest equal to LIBOR plus 3.14% per annum, subjectto 0.50% annual commitment fee assessed quarterly on any funds notborrowed.  The revolving feature permitsus to borrow in multiples of $100,000 on a revolving basis, the differencebetween the outstanding principal balance and $6 million.  This note requires monthly payments ofinterest based on the average daily balance of the revolving loan during arelated monthly period.  In addition, wemust pay at least 10% of the principal amount converted to a revolving loan byOctober 1 of each year until October 1, 2013, when all remainingprincipal and interest will be due.  Theannual pay down will permanently reduce the amount we may borrow under therevolving loan.  As of December 31,2003, the rate on the revolving loan was 4.26% and the outstanding balance was$6,000,000.

 

On June 16, 2003, we entered into anOperating Loan Agreement with Broin and Associates, Inc. for $1 million.  This loan was obtained primarily to covercertain administrative and operational costs and expenses until we achievedsufficient cash flow following the start-up of operations. This loan wasunsecured and financed at a rate of 8% calculated on the unpaid principalbalance on an annual 365 day basis, with a maturity date of December 15,2003. As of December 31, 2003, no principal or interest is outstanding onthis loan due to a payment of $1,039,097 in principal and interest onDecember 8, 2003 to retire the loan.

 

Under a Natural Gas Distribution DeliveryAgreement with NorthWestern Energy Corporation, NorthWestern required that weuse a minimum amount of natural gas annually to cover NorthWestern’s $1.6million cost in constructing the pipeline to our plant.  To protect against a minimum amount ofnatural gas not being used, NorthWestern required that we provide anirrevocable letter of credit.  A letterof credit was obtained on May 28, 2003 from Home Federal Bank of Sioux Falls,South Dakota and subsequently provided to NorthWestern.  To satisfy the letter of credit requirement,we also entered into a line of credit agreement with Home Federal Bank for upto $1.6 million.  Under the terms of theline of credit, in the event that there is a draw on the letter of credit byNorthWestern, an equal amount is drawn on the line of credit at which time itwill be recognized as a liability.  Theline of credit is evidenced by a promissory note with a variable interest rateequal to the prime rate as published by the Wall Street Journal plus 2.0%.  The maturity date is March 1,2004.  As of year endedDecember 31, 2003, Northwestern had not drawn on the letter of credit;therefore, there was no outstanding balance on the line of credit with HomeFederal Bank.

 

 Inaddition, nine individuals, including some of our board of managers, signedpersonal guarantees to satisfy the letter of credit and line of creditrequirements.  In consideration of suchguarantees, we agreed to pay each individual guarantor an annual fee of 2% ofthe amount of his guarantee until the expiration of the letter of credit on March 1,2004 unless renewed.  For the year endedDecember 31, 2003, we paid the guarantors a total amount of $32,000.

 

On February 25, 2004, we renewed theletter of credit with NorthWestern, the line of credit with Home Federal andthe agreements with all but two of the guarantors,

 

19

----

 

all under the same terms as the originalagreements except for a new maturity date and reduced amount.  The new maturity or expiration date for allthe agreements is March 1, 2005 and the new amount subject to each agreementis $1.25 million.

 

In addition to our debt obligations, wehave certain other contractual cash obligations and commitments.  The following tables provide informationregarding our contractual obligations and other commercial commitments as ofDecember 31, 2003:

 
|                                   |   | **Payment Due by Period** |   |
|----------------------------------------|--------|---------------------------|--------|
|                                   |   | **Total**                 |   | **Less than  One Year** |   | **One to  Three  Years** |   | **Four to  Five  Years** |   | **After Five  Years** |   |
| Long-Term  Debt                        |   | 31,946,877                |   | 2,847,313 |   | 5,954,988 |   | 6,324,552 |   | 16,820,024 |   |
| Electricity  Purchase Agreements       |   | 1,190,028                 |   | 357,000 |   | 714,000 |   | 119,028 |   |   |   |
| Natural  Gas Purchase Agreements       |   | 3,615,000                 |   | 395,000 |   | 790,000 |   | 790,000 |   | 1,640,000 |   |
| Related-Party  Agreements              |   | 4,174,397                 |   | 617,771 |   | 1,185,542 |   | 1,185,542 |   | 1,185,542 |   |
| **Total Contractual Cash Obligations** |   | 40,926,302                |   | 4,217,084 |   | 8,644,530 |   | 8,419,122 |   | 19,645,566 |   |

 
|                             |   | **Amount of Commitment Expiration Per Period** |   |
|----------------------------------|--------|------------------------------------------------|--------|
|                             |   | **Total**                                      |   | **Less than  One Year** |   | **One to  Three  Years** |   | **Four to  Five  Years** |   | **After Five  Years** |   |
| Line  of Credit (1)              |   | 1,250,000                                      |   | 1,250,000 |   | — |   | — |   | — |   |
| **Total Commercial Commitments** |   | 1,250,000                                      |   | 1,250,000 |   | — |   | — |   | — |   |

 

----

(1)          On February 25, 2003, GreatPlains entered into a line of credit agreement with Home Federal Bank.  Great Plains is required to draw on the lineof credit if its natural gas distributor draws on a separate letter of creditentered into between the natural gas distributor and Home Federal Bank.  The distributor may draw on the letter ofcredit if Great Plains does not comply with certain payment, purchase and deliveryobligations under a natural gas distribution agreement entered into with thedistributor.  The maturity date on therenewed line of credit is March 1, 2005. As of December 31, 2003, there was no outstanding balance on theline of credit.  Great Plains will alsonot incur any outstanding balance on the line of credit unless the natural gasdistributor makes a draw on the letter of credit.

 

**Off-Balance SheetArrangements**

 

We do not use or have any off-balancesheet financial arrangements.

 

**Recent AccountingPronouncements**

 

Management has reviewed the recentaccounting pronouncements and has not identified any that are relevant to ourfinancial statements.

 

**Critical AccountingPolicies and Estimates**

 

Preparation of our financial statementsnecessarily requires estimates and judgments to be made that affect the amountsof assets, liabilities, revenues and expenses reported.  Such decisions include the selection of theappropriate accounting principles to

 

20

----

 

be applied and the assumptions on which tobase accounting estimates.  Ourmanagement continually evaluates these estimates based on assumptions itbelieves to be reasonable under the circumstances.

 

The difficulty in applying these policiesarises from the assumptions, estimates and judgments that have to be madecurrently about matters that are inherently uncertain, such as future economicconditions, operating results and valuations, as well as management’sintentions.  As the difficultyincreases, the level of precision decreases, meaning that actual results can,and probably will be, different from those currently estimated.

 

 *Long-Lived Assets*

 

Depreciation and amortization of ourproperty, plant and equipment will be provided on the straight-line method bycharges to operations at rates based upon the expected useful lives ofindividual or groups of assets that are placed in service.  Economic circumstances or other factors maycause management’s estimates of expected useful lives to differ from the actualuseful lives.  Differences betweenestimated lives and actual lives may be significant, but management does notexpect events that occur during the normal operation of our plant related toestimated useful lives to have a significant effect on results of operations.

 

Long-lived assets, including property,plant and equipment and investments are evaluated for impairment on the basisof undiscounted cash flows whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  An impaired asset is written down to itsestimated fair market value based on the best information available.  Considerable management judgment isnecessary to estimate future cash flows and may differ from actual cash flows.  Management does not expect an impairment ofassets will exist based on their assessment of the risks and rewards related tothe ownership of these assets and the expected cash flows generated from theoperation of the plant.

 

*Inventory Valuation*

 

We account for our corn inventory atestimated net realizable market value. Corn is an agricultural commodity that is freely traded, has quotedmarket prices, may be sold without significant further processing and haspredictable and insignificant costs of disposal.  We derive our estimates from local market prices determined bygrain terminals in its area.  Change inthe market value of corn inventory is recognized as a component of cost ofrevenues.  Ethanol and DDGS inventories arestated at net realizable value. Work-in-process, supplies, parts and chemical inventory are stated atthe lower of cost or market on the first-in, first-out method.

 

21

----

 

###### *Revenue Recognition*

###### * *

Revenue from the production of ethanol andrelated products is recorded when title transfers to customers, net ofallowances for estimated returns. Generally, ethanol and related products are shipped FOB shippingpoint.  Interest income is recognizedwhen earned.

 

Revenue from federal and state incentiveprograms is recorded when we have produced or sold the ethanol and satisfiedthe reporting requirements under each applicable program.  When it is uncertain whether we will receivefull allocation and payment due under the federal incentive program, we derivean estimate of the incentive revenue**forthe**relevant period based onvarious factors including the most recently used payment factor applied to theprogram.  The estimate is subject tochange as management becomes aware of increases or decreases in the amount offunding available under the federal incentive program or other factors thataffect funding or allocation of funds under such program.

 

*Commitments andContingencies*

 

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

 

*Accounting forDerivative Instruments and Hedging Activities*

 

We minimize the effects of changes in theprice of agricultural commodities by engaging Broin Management, LLC to useexchange-traded futures and options contracts to minimize its net positions inthese inventories and contracts.  Weaccount for changes in market value on exchange-traded futures and optioncontracts at exchange values and account for changes in value of forwardpurchase and sales contracts at local market prices determined by grainterminals in the area.  Changes in themarket value of all these contracts are recognized in earnings as a componentof cost of goods sold.

 

**Item 7.    Financial Statements.**

 

Great Plains Ethanol, LLC’s financialstatements, described as follows, are appended to the signature page of thisreport beginning at page F-1.

 

•                  IndependentAuditor’s Report, dated January 23, 2004.

 

•                  BalanceSheet as of December 31, 2003.

 

•                  Statementsof Operations for the years ended December 31, 2003, and 2002.

 

22

----

 

•                  Statementsof Changes in Members’ Equity for the years ended December 31, 2003 and2002.

 

•                  Statementsof Cash Flows for the years ended December 31, 2003 and 2002.

 

•                  Notes toFinancial Statements.

 

**Item 8.    Changes in and Disagreements WithAccountants on Accounting and Financial Disclosure.**

 

None.

 

**Item 8A.    Controls and Procedures.**

 

**Evaluation of DisclosureControls and Procedures**

 

Our Chief Executive Officer and ChiefFinancial Officer, after evaluating the effectiveness of our disclosurecontrols and procedures (as defined in Rule 13a-14(c) under the SecuritiesExchange Act of 1934, as amended, as of the end of the period covered by thisreport, has concluded that our disclosure controls and procedures are effectivein ensuring that material information required to be disclosed is included inthe reports that we file with the Securities & Exchange Commission.

 

**Changes in InternalControls**

 

There were no significant changes in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the end of the period covered by this report.

 

**PART III**

 

**Item 9.    Directors, Executive Officers, Promotersand Control Persons; Compliance With Section 16(a) of the Exchange Act.**

 

Except for the Code of Ethics informationset forth below, information required by this item is incorporated in this Form10-KSB by reference from our definitive Proxy Statement for the Annual Meetingof Members to be held in 2004, a copy of which will be filed not later than 120days after December 31, 2003.

 

We adopted a Code of Ethics onJune 25, 2003, a copy of which will be provided to any person withoutcharge upon request in writing.  Please directyour request in writing to the following person and address:

 

Membership Coordinator

Great Plains Ethanol, LLC

 

23

----

 

27716 462nd Avenue

Chancellor, South Dakota  57015

 

**Item 10.    Executive Compensation.**

 

Information required by this item isincorporated in this Form 10-KSB by reference from our definitive ProxyStatement for the Annual Meeting of Members to be held in 2004, a copy of whichwill be filed with the Commission not later than 120 days afterDecember 31, 2003.

 

**Item 11.    Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

 

Information required by this item isincorporated in this Form 10-KSB by reference from our definitive ProxyStatement for the Annual Meeting of Members to be held in 2004, a copy of whichwill be filed with the Commission not later than 120 days afterDecember 31, 2003.

 

**Item 12.    Certain Relationships and RelatedTransactions.**

 

Information required by this item isincorporated in this Form 10-KSB by reference from our definitive ProxyStatement for the Annual Meeting of Members to be held in 2004, a copy of whichwill be filed with the Commission not later than 120 days afterDecember 31, 2003.

 

**Item 13.    Exhibits and Reports on Form 8-K.**

 

The following exhibits are filed as partof, or are incorporated by reference into, this report:

 

(a)                                  Exhibits.See Exhibit Index

 

(b)                                 None.

 

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

 

Information required by this item isincorporated in this Form 10-KSB by reference from our definitive ProxyStatement for the Annual Meeting of Members to be held in 2004, a copy of whichwill be filed with the Commission not later than 120 days afterDecember 31, 2003.

 

24

----

 

**SIGNATURES**

 

In accordance with Section 13 or15(d) of the Exchange Act, the registrant caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

 

 
|   |                |                                | GREAT PLAINS ETHANOL, LLC      |
|--------|---------------------|-------------------------------------|--------------------------------|
|   |                |                                |                           |
| Date:  | March 30, 2004 |                                | /s/ Rick Serie                 |   |
|   |                |                                | Rick A. Serie, Chief Executive |
|   |                | Officer and Chief Financial Officer |

 

In accordance with the Exchange Act, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| Date:         | March 30 ,2004 |                                                 | /s/ Rick Serie          |   |
|---------------|---------------------|------------------------------------------------------|-------------------------|--------|
|          |                |                                                 | Rick A. Serie           |
|          |                | Chief Executive Officer and Chief  Financial Officer |
|          |                |                                                 |
| Date:         | March 30, 2004 | /s/ Jeff Broin                                       |                    |
|          |                |                                                 | Jeff Broin, Manager     |   |
|          |                |                                                 |                    |   |
| Date:         | March 30, 2004 | /s/ Dennis Hardy                                     |                    |
|          |                |                                                 | Dennis Hardy, Manager   |   |
|          |                |                                                 |                    |   |
| Date:         | March 30, 2004 | /s/ Darrin Ihnen                                     |                    |
|          |                |                                                 | Darrin Ihnen, Manager   |   |
|          |                |                                                 |                    |   |
| Date:         | March 30, 2004 | /s/ John Ludens                                      |                    |
|          |                |                                                 | John A. Ludens, Manager |   |
|          |                |                                                 |                    |   |
| Date:         | March 30, 2004 | /s/ Dennis Schrag                                    |                    |
|          |                |                                                 | Dennis Schrag, Manager  |   |
|          |                |                                                 |                    |   |
| Date:         | March 30, 2004 | /s/ Steve Sinning                                    |                    |
|          |                |                                                 | Steve Sinning, Manager  |   |
|          |                |                                                 |                    |   |
| Date:         | March 30, 2004 | /s/ Fred Thurman                                     |                    |
|          |                |                                                 | Fred Thurman, Manager   |   |
|          |                |                                                 |                    |   |
| Date:         | March 30, 2004 | /s/  Dan Viet                                        |                    |
|          |                |                                                 | Dan  Viet, Manager      |   |
|          |                |                                                 |                    |
|    Date: | March 30, 2004 | /s/  Larry Ward                                      |                    |
|          |                |                                                 | Larry  Ward, Manager    |

 

25

----

 

**EXHIBIT INDEX**

 
| **Exhibit #** |   | **Description**                                                            |   | **Filed  Herewith** |   | **Incorporated by Reference**                                                                                                            |
|---------------|--------|----------------------------------------------------------------------------|--------|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1           |   | Articles of Organization                                                   |   |                |   | Appendix A to Issuer’s Prospectus filed  with the Commission pursuant to Rule 424(b)(3) on June 11, 2001 (File  No. 333-56368) |
| 3.2           |   | First Amended and Restated Operating  Agreement                            |   |                |   | Appendix A to Issuer Prospectus filed  with the Commission pursuant to Rule 424(b)(3) on June 11, 2001                              |
| 3.3           |   | Amended and Addendum to Operating  Agreement                               |   |                |   | Exhibit 3.2 to the Issuer’s Form 10-KSB  filed with the Commission on March 3, 2003 (File No. 333-56368)                       |
| 3.4           |   | Third Amended and Restated Operating  Agreement adopted July 22, 2003 |   |                |   | Exhibit 3.1 to the Issuer’s Form 10-QSB  filed with the Commission on November 14, 2003 (File No. 333-56368)                   |
| 4.1           |   | Form of Class A Certificate                                                |   |                |   | Exhibit 4.1 to the Issuer’s Form SB-2  filed with the Commission on February 28, 2001 (File No. 333-56368)                     |
| 4.2           |   | Form of Class B Certificate                                                |   |                |   | Exhibit 4.2 to the Issuer’s Form SB-2  filed with the Commission February 28, 2001                                             |

 

26

----

 
| 4.3   |   | Form of Class C Certificate                                                                                                                          |   |   |   | Exhibit 4.3 to the Issuer’s Form SB-2  filed with the Commission February 28, 2001                             |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------|
| 10.1  |   | Ethanol Marketing and Services Agreement  with Ethanol Products, LLC, dated December 18, 2000                                                   |   |   |   | Exhibit 10.4 to the Issuer’s Form SB-2  filed with the Commission on February 28, 2001                         |
| 10.2  |   | Consulting Agreement with U.S. Energy  Services, Inc., dated February 26, 2001                                                                  |   |   |   | Exhibit 10.11 to the Issuer’s Form SB-2  filed with the Commission on February 28, 2001                        |
| 10.3  |   | Construction Contract with Broin and  Associates, Inc., dated November 20, 2001                                                                 |   |   |   | Exhibit 10.3 to the Issuer’s Form 10-KSB  filed with the Commission on April 1, 2002                           |
| 10.4  |   | First Amendment to Agreement between  Owner and Design Builder (construction contract) with Broin and Associates,  Inc. dated November 20, 2001 |   |   |   | Exhibit A 10.13 to the Issuer’s  Form 10-KSB/A filed with the Commission on May 15, 2002 (File No.  333-56368) |
| 10.5  |   | Licensing Agreement with Broin and  Associates, Inc. dated November 20, 2001                                                                    |   |   |   | Exhibit 10.10 to the Issuer’s Form  10-KSB filed with the Commission on April 1, 2002                          |
| 10.6  |   | Process Guarantee by Broin and  Associates, Inc., dated November 20, 2001                                                                       |   |   |   | Exhibit 10.11 to the Issuer’s Form  10-KSB/A filed with the Commission on April 1, 2002                        |
| 10.7  |   | Water Purchase Agreement with Lincoln  County Rural Water System, Inc., dated May 24, 2002                                                           |   |   |   | Exhibit 10.3 to the Issuer’s Form 10-QSB  filed with the Commission on August 14, 2002 (File No. 333-56368)    |
| 10.8  |   | Credit Agreement with Ag Country Farm  Services Credit, FLCA, dated June 19, 2002                                                               |   |   |   | Exhibit 10.1 to the Issuer’s Form 8-K  filed with the Commission on June 20, 2002 (File No. 333-56368)         |
| 10.9  |   | Promissory Note with Ag Country Farm  Service Credit, PLA, dated June 20, 2002                                                                  |   |   |   | Exhibit 10.2 to the Issuer’s Form 8-K  filed with the Commission on June 20, 2002 (File No. 333-56368)         |
| 10.10 |   | Natural Gas Distribution Agreement,  dated September 2, 2002                                                                                    |   |   |   | Exhibit 10.2 to the Issuer’s Form 10-QSB  filed with the Commission on November 14, 2002 (File No. 333-56368)  |
| 10.11 |   | Natural Gas Supply Agreement                                                                                                                         |   |   |   | Exhibit 10.3 to the Issuer’s Form 10-QSB  filed with the Commission on November 14, 2002                       |

 

27

----

 
|   |   |                                                                                                       |   |   |   |                                                                                                                          |
|--------|--------|------------------------------------------------------------------------------------------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|
| 10.12  |   | Natural Gas Interstate Pipeline  Transportation Agreement, dated September 2, 2002                    |   |   |   | Exhibit 10.4 to the Issuer’s From 10-QSB  filed with the Commission on November 14, 2002  (File No. 333-56368) |
| 10.13  |   | Electric Service Agreement, dated September 25,  2002                                                 |   |   |   | Exhibit 10.1 to the Issuer’s Form 10-QSB  filed with the Commission on November 14, 2002                            |
| 10.14  |   | Corn Price Risk Management Agreement  with Broin Management, LLC, dated November 27, 2002             |   |   |   | Exhibit 10.20 to the Issuer’s Form  10-KSB filed with the Commission on March 4, 2003 (File No. 333-56368)          |
| 10.15  |   | DDGS Marketing Contract with Broin  Enterprises, Inc. d/b/a Dakota Commodities, dated January 7, 2003 |   |   |   | Exhibit 10.21 to the Issuer’s Form  10-KSB filed with the Commission on March 4, 2003                               |
| 10.16  |   | Irrevocable Standby Letter of Credit                                                                       |   |   |   | Exhibit 10.1 to the Issuer’s Form 10-QSB  filed with the Commission May 15, 2003 (File No. 333-56368)                    |
| 10.17  |   | Loan Agreement with Broin and  Associates, Inc., dated June 16, 2003                                  |   |   |   | Exhibit 10.1 to the Issuer’s From 10-QSB  filed with the Commission on August 14, 2003 (File No. 333-56368)         |
| 10.18  |   | Amended and Restated Irrevocable Standby  Letter of Credit, dated May 28, 2003                             |   |   |   | Exhibit 10.2 to the Issuer’s From 10-QSB  filed with the Commission on August 14, 2003                              |
| 10.19  |   | Loan Agreement with Home Federal Bank,  dated February 28, 2003                                       |   |   |   | Exhibit 10.3 to the Issuer’s Form 10-QSB  filed with the Commission on August 14, 2003                              |
| 10.20  |   | Promissory Note with Home Federal Bank,  dated February 28, 2003                                      |   |   |   | Exhibit 10.4 to the Issuer’s Form 10-QSB  filed with the Commission on August 14, 2003                              |
| 31     |   | Rule 13a-14(a)/15d-14(a) Certifications                                                                    |   | X      |   |                                                                                                                          |
| 32     |   | Section 1350 Certification                                                                            |   | X      |   |                                                                                                                          |

 

28

----

 

**GREATPLAINS ETHANOL, LLC**

 

***FINANCIAL STATEMENTS***

***DECEMBER 31, 2003***

 

----

 

**GREAT PLAINS ETHANOL, LLC**

 

Table of Contents

 
| **INDEPENDENT AUDITOR’S  REPORT** |   |
|----------------------------------------|--------|
|                                   |   |
| **FINANCIAL STATEMENTS**               |   |
| Balance Sheet                          |   |
| Operations                             |   |
| Changes  in Members’ Equity       |   |
| Cash Flows                             |   |
| Notes to Financial  Statements         |   |

 

----

 

**INDEPENDENT AUDITOR’S REPORT**

 

Audit Committee

### **Great Plains Ethanol, LLC**

Chancellor, South Dakota

 

We have audited the accompanying balance sheet of **Great Plains Ethanol, LLC**, as of December31, 2003, and the related statements of operations, changes in members’ equityand cash flows for the years ended December 31, 2003 and 2002. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand 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 that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of **Great Plains Ethanol, LLC** as of December31, 2003, and the results of its operations and cash flows for the years endedDecember 31, 2003 and 2002, in conformity with accounting principles generallyaccepted in the United States of America.

 

 
| /s/ Eide Bailly LLP |   |   |
|---------------------|--------|--------|

Minneapolis, Minnesota

January 23, 2004, except for Note 12, for which the date is March 25,2004

 

F - 1

----

 

**GREAT PLAINS ETHANOL, LLC**

**BALANCESHEET**

**DECEMBER 31, 2003**

 
| **ASSETS**                                                   |   |       |       |
|--------------------------------------------------------------|--------|------------|------------|
|                                                         |   |       |       |
| CURRENT ASSETS                                               |   |       |       |
| Cash and cash  equivalents                                   |   | $          | 5,479,992  |   |
| Receivables                                                  |   |       |       |
| Ethanol -  related party                                     |   | 3,419,580  |       |
| Distillers grain                                             |   | 352,186    |       |
| Incentives                                                   |   | 1,662,317  |       |
| Excise and sales  tax refund                                 |   | 174,353    |       |
| Other                                                        |   | 37,129     |       |
| Inventory                                                    |   |       |       |
| Raw materials                                                |   | 1,182,595  |       |
| Finished goods                                               |   | 913,665    |       |
| Work in process                                              |   | 377,118    |       |
| Parts inventory                                              |   | 346,213    |       |
| Investment in  commodities contracts                         |   | 893,899    |       |
| Prepaid expenses                                             |   | 57,119     |       |
| Total current  assets                                        |   | 14,896,166 |       |
|                                                         |   |       |       |
| PROPERTY AND  EQUIPMENT                                      |   |       |       |
| Land                                                         |   | 270,210    |       |
| Land  improvements                                           |   | 3,524,092  |       |
| Buildings                                                    |   | 8,889,160  |       |
| Equipment                                                    |   | 34,689,608 |       |
|                                                         |   | 47,373,070 |       |
| Less accumulated  depreciation                               |   | (1,947,536 | )          |
| Net property and  equipment                                  |   | 45,425,534 |       |
|                                                         |   |       |       |
| OTHER ASSETS                                                 |   |       |       |
| Financing costs,  net of accumulated amortization of $34,288 |   | 333,172    |       |
| Other                                                        |   | 1,000      |       |
|                                                         |   | 334,172    |       |
|                                                         |   |       |       |
|                                                         |   | $          | 60,655,872 |   |

 

See Notes To Financial Statements

 

F - 2

----

 
| **LIABILITIES  AND MEMBERS’ EQUITY**                      |   |       |       |
|----------------------------------------------------------------|--------|------------|------------|
|                                                           |   |       |       |
| CURRENT  LIABILITIES                                           |   |       |       |
|                                                           |   |       |       |
| Accounts payable  - trade                                      |   | $          | 3,642,561  |   |
| Accounts payable  to related party                             |   | 227,973    |       |
| Accounts payable  to related party - construction costs        |   | 641,455    |       |
| Accrued  distribution                                          |   | 3,742,000  |       |
| Other accrued  liabilities                                     |   | 125,470    |       |
| Current portion  of long-term debt                             |   | 2,847,313  |       |
|                                                           |   |       |       |
| Total current  liabilities                                     |   | 11,226,772 |       |
|                                                           |   |       |       |
| LONG-TERM DEBT                                                 |   | 29,099,564 |       |
|                                                           |   |       |       |
| COMMITMENTS AND  CONTINGENCIES                                 |   |       |       |
|                                                           |   |       |       |
| MEMBERS’ EQUITY                                           |   |       |       |
|                                                           |   |       |       |
| Total units  authorized - 4,700                                |   |       |       |
| Class A Units,  $5,000 par, 1,513 units issued and outstanding |   | 7,565,000  |       |
| Class B Units,  $5,000 par, 200 units issued and outstanding   |   | 1,000,000  |       |
| Class C Units,  $5,000 par, 2,029 units issued and outstanding |   | 10,145,000 |       |
| Class D Units,  $100 par, 0 units issued and outstanding       |   | —     |       |
| Additional  paid-in capital                                    |   | 7,000      |       |
| Retained earnings                                              |   | 1,612,536  |       |
|                                                           |   |       |       |
| Total members’  equity                                    |   | 20,329,536 |       |
|                                                           |   |       |       |
|                                                           |   | $          | 60,655,872 |   |

 

F - 3

----

 

**GREAT PLAINS ETHANOL, LLC**

**STATEMENTSOF OPERATIONS**

**YEARS ENDED DECEMBER 31, 2003 AND2002**

 
|                                              |   | **2003**       |           | **2002**   |   |
|---------------------------------------------------|--------|----------------|----------------|------------|--------|
|                                              |   |           | ** **     |       |   |
| REVENUES                                          |   |           | ** **     |       |   |
| Sales                                             |   | **$**          | **44,588,101** | ** ** | $      | — |   |
| Incentive  revenue                                |   | **7,663,419**  | ** **     | —     |   |
| Grant revenue                                     |   | **103,115**    | ** **     | 210,744    |   |
| Total revenues                                    |   | **52,354,635** | ** **     | 210,744    |   |
|                                              |   |           | ** **     |       |   |
| COST OF REVENUES                                  |   | **42,833,701** | ** **     | —     |   |
|                                              |   |           | ** **     |       |   |
| GROSS PROFIT                                      |   | **9,520,934**  | ** **     | 210,744    |   |
|                                              |   |           | ** **     |       |   |
| OPERATING  EXPENSES                               |   |           | ** **     |       |   |
| Startup costs                                     |   | **403,801**    | ** **     | 455,648    |   |
| General and  administrative                       |   | **1,790,695**  | ** **     |       |   |
| Total operating  expenses                         |   | **2,194,496**  | ** **     | 455,648    |   |
|                                              |   |           | ** **     |       |   |
| INCOME (LOSS)  FROM OPERATIONS                    |   | **7,326,438**  | ** **     | (244,904   | )      |
|                                              |   |           | ** **     |       |   |
| OTHER INCOME AND  (EXPENSES)                      |   |           | ** **     |       |   |
| Interest income                                   |   | **13,107**     | ** **     | 190,028    |   |
| Interest expense                                  |   | **(1,177,471** | **)**          | —     |   |
| Other                                             |   | **11,172**     | ** **     | 1,939      |   |
| Total other  income and expenses                  |   | **(1,153,192** | **)**          | 191,967    |   |
|                                              |   |           | ** **     |       |   |
| NET INCOME  (LOSS)                                |   | **$**          | **6,173,246**  | ** ** | $      | (52,937 | ) |
|                                              |   |           | ** **     |       |   |
| BASIC AND  DILUTED INCOME (LOSS) PER CAPITAL UNIT |   | **$**          | **1,650**      | ** ** | $      | (19 | ) |
|                                              |   |           | ** **     |       |   |
| WEIGHTED AVERAGE  CAPITAL UNITS OUTSTANDING:      |   |           | ** **     |       |   |
|                                              |   |           | ** **     |       |   |
| BASIC AND  DILUTED                                |   | **3,742**      | ** **     | 2,766      |   |

 

See Notes To Financial Statements

 

F - 4

----

 

**GREAT PLAINS ETHANOL, LLC**

**STATEMENTOF CHA****NGES IN MEMBERS’EQUITY**

**YEARS ENDED DECEMBER 31, 2003 AND2002**

** **
|                                   |   | **Capital  Units** | ** ** | **Additional  Paid In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Total  Amount**             | ** ** |
|----------------------------------------|--------|--------------------|------------|----------------------------------|------------|------------------------|------------|-------------------------------|------------|
| **Class A**                            |   | **Class B**        |       | **Class C**                      |       | **Class D**            |       | **Subscriptions  Receivable** |
| **Units**                              |   | **Amount**         |       | **Units**                        |       | **Amount**             |       | **Units**                     |       | **Amount** |   | **Units** |   | **Amount** |   |
|                                   |   |               |       |                             |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2001             |   | 1,529              |       | $                                | 7,645,000  |                   | 200        |                          | $          | 1,000,000 |   | 2,029 |   | $ | 10,145,000 |   | — |   | $ | — |   | $ | (16,515,000 | ) | $ | — |   | $ | (765,773 | ) | $ | 1,509,227 |   |
|                                   |   |               |       |                             |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Collection of unit subscriptions       |   | —             |       | —                           |       | —                 |       | —                        |       | — |   | — |   | — |   | — |   | 16,442,000 |   | — |   | — |   | 16,442,000 |   |
|                                   |   |               |       |                             |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forfeitures and other adjustments      |   | (16                | )          | (80,000                          | )          | —                 |       | —                        |       | — |   | — |   | — |   | — |   | 73,000 |   | 7,000 |   | — |   | — |   |
|                                   |   |               |       |                             |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Loss                               |   | —             |       | —                           |       | —                 |       | —                        |       | — |   | — |   | — |   | — |   | — |   | — |   | (52,937 | ) | (52,937 | ) |
|                                   |   |               |       |                             |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2002             |   | 1,513              |       | 7,565,000                        |       | 200                    |       | 1,000,000                     |       | 2,029 |   | 10,145,000 |   | — |   | — |   | — |   | 7,000 |   | (818,710 | ) | 17,898,290 |   |
|                                   |   |               |       |                             |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                             |   | —             |       | —                           |       | —                 |       | —                        |       | — |   | — |   | — |   | — |   | — |   | — |   | 6,173,246 |   | 6,173,246 |   |
|                                   |   |               |       |                             |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Distributions payable, $1,000 per unit |   | —             |       | —                           |       | —                 |       | —                        |       | — |   | — |   | — |   | — |   | — |   | — |   | (3,742,000 | ) | (3,742,000 | ) |
|                                   |   |               |       |                             |       |                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2003             |   | 1,513              |       | $                                | 7,565,000  |                   | 200        |                          | $          | 1,000,000 |   | 2,029 |   | $ | 10,145,000 |   | — |   | $ | — |   | $ | — |   | $ | 7,000 |   | $ | 1,612,536 |   | $ | 20,329,536 |   |

 

See Notes To Financial Statements

 

F - 5

----

 

**GREAT PLAINS ETHANOL, LLC**

**STATEMENTSOF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2003 AND2002**

 
|                                                             |   | **2003**        |          | **2002**    |   |
|------------------------------------------------------------------|--------|-----------------|---------------|-------------|--------|
|                                                             |   |            | ** **    |        |   |
| OPERATING  ACTIVITIES                                            |   |            | ** **    |        |   |
| Net income  (loss)                                               |   | **$**           | **6,173,246** | ** **  | $      | (52,937 | ) |
| Changes to net  income not affecting cash                        |   |            | ** **    |        |   |
| Depreciation                                                     |   | **1,946,955**   | ** **    | 406         |   |
| Amortization                                                     |   | **29,502**      | ** **    | —      |   |
| Increase in  current assets                                      |   |            | ** **    |        |   |
| Receivables                                                      |   | **(5,421,979**  | **)**         | (10,699     | )      |
| Inventory                                                        |   | **(2,819,591**  | **)**         | —      |   |
| Investments in  commodities contracts                            |   | **(893,899**    | **)**         | —      |   |
| Prepaid expenses                                                 |   | **(18,491**     | **)**         | (11,543     | )      |
| Increase  (decrease) in current liabilities                      |   |            | ** **    |        |   |
| Accounts payable  - trade                                        |   | **3,637,346**   | ** **    | (5,785      | )      |
| Accounts payable  to related party                               |   | **216,973**     | ** **    | 11,000      |   |
| Accrued interest                                                 |   | **(76,030**     | **)**         | —      |   |
| Accrued liabilities                                              |   | **124,575**     | ** **    | (1,860      | )      |
|                                                             |   |            | ** **    |        |   |
| NET CASH  PROVIDED BY (USED FOR) OPERATING ACTIVITIES            |   | **2,898,607**   | ** **    | (71,418     | )      |
|                                                             |   |            | ** **    |        |   |
| INVESTING  ACTIVITIES                                            |   |            | ** **    |        |   |
| Purchase of  property and equipment                              |   | **(12,908,826** | **)**         | (33,450,127 | )      |
| Increase in  other investments                                   |   | **—**      | ** **    | (1,000      | )      |
| Excise and sales  taxes refunded (paid) on construction contract |   | **468,266**     | ** **    | (642,619    | )      |
|                                                             |   |            | ** **    |        |   |
| NET CASH USED  FOR INVESTING ACTIVITIES                          |   | **(12,440,560** | **)**         | (34,093,746 | )      |
|                                                             |   |            | ** **    |        |   |
| FINANCING  ACTIVITIES                                            |   |            | ** **    |        |   |
| Advances on  notes payable                                       |   | **17,440,626**  | ** **    | 17,055,101  |   |
| Advances on  notes payable - related party                       |   | **1,000,000**   | ** **    | —      |   |
| Principal  payments on notes payable                             |   | **(2,548,850**  | **)**         | —      |   |
| Principal  payments on notes payable - related party             |   | **(1,000,000**  | **)**         |        |   |
| Financing costs  paid                                            |   | **(21,432**     | **)**         | (321,653    | )      |
| Proceeds from  issuance of capital units                         |   | **—**      | ** **    | 16,442,000  |   |
|                                                             |   |            | ** **    |        |   |
| NET CASH  PROVIDED BY FINANCING ACTIVITIES                       |   | **14,870,344**  | ** **    | 33,175,448  |   |
|                                                             |   |            | ** **    |        |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS            |   | **5,328,391**   | ** **    | (989,716    | )      |
|                                                             |   |            | ** **    |        |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                |   | **151,601**     | ** **    | 1,141,317   |   |
|                                                             |   |            | ** **    |        |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                      |   | **$**           | **5,479,992** | ** **  | $      | 151,601 |   |

 

(Continued on next page)

 

F - 6

----

 
|                                                                     |   | **2003**       |           | **2002**   |   |
|--------------------------------------------------------------------------|--------|----------------|----------------|------------|--------|
|                                                                     |   |           | ** **     |       |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION                        |   |           | ** **     |       |   |
|                                                                     |   |           | ** **     |       |   |
| Cash paid for  interest, net of interest capitalized                     |   | **$**          | **1,253,501**  | ** ** | $      | — |   |
|                                                                     |   |           | ** **     |       |   |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |   |           | ** **     |       |   |
|                                                                     |   |           | ** **     |       |   |
| Distributions  payable                                                   |   | **$**          | **3,742,000**  | ** ** | $      | — |   |
|                                                                     |   |           | ** **     |       |   |
| Accounts payable  incurred for construction costs                        |   | **$**          | **641,455**    | ** ** | $      | 4,696,876 |   |
|                                                                     |   |           | ** **     |       |   |
| Accrued interest  capitalized                                            |   | **$**          | **—**     | ** ** | $      | 76,030 |   |
|                                                                     |   |           | ** **     |       |   |
| Financing costs  amortized and reclassified to capitalized interest      |   | **$**          | **4,786**      | ** ** | $      | — |   |
|                                                                     |   |           | ** **     |       |   |
| Property and  equipment purchases                                        |   | **$**          | **14,065,697** | ** ** | $      | — |   |
| Tax increment  finance district proceeds and other support               |   | **(1,156,871** | **)**          | —     |   |
|                                                                     |   |           | ** **     |       |   |
| Property and  equipment purchases, net                                   |   | **$**          | **12,908,826** | ** ** | $      | — |   |

 

See Notes To Financial Statements

 

F - 7

----

 

**GREAT PLAINS ETHANOL, LLC**

**NOTES TO FINANCIAL STATEMENTS**

** **

**NOTE 1 -  NATURE OF OPERATIONS**

** **

*Principal Business Activity*

 

Great Plains Ethanol, LLC, a South Dakota limited liability companywith its principal place of business in Turner County, South Dakota, wasorganized to obtain equity ownership and debt financing to construct, own andoperate a 40 million gallon ethanol plant. Great Plains Ethanol, LLC (theCompany) began activities on December 20, 2000. On March 20, 2003, the ethanol plantcommenced its principal operations. Prior to March 20, 2003, the Company was inthe development stage with its efforts being principally devoted toconstruction of the ethanol plant.  TheCompany sells ethanol and related products to customers located in NorthAmerica.

 

**NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

** **

*Basis of Accounting*

 

The Company uses the accrual basis of accounting in accordance withaccounting principles generally accepted in the United States of America.  This method recognizes revenues as earnedand expenses as incurred.

 

*Revenue Recognition*

 

Revenue from the production of ethanol and related products is recordedwhen title transfers to customers, net of allowances for estimated returns.Generally, ethanol and related products are shipped FOB shipping point.  Interest income is recognized as earned.

 

The Company receives payments for incentives to produce ethanol fromthe State of South Dakota and from the United States Department of Agriculture.In accordance with the terms of these arrangements, revenue is recorded basedon production or sale of ethanol.

 

Management reviews forward sales contracts of ethanol and relatedproducts and compares the current cost of production with the contract prices.For contracts with a sales value that is less than the current cost ofproduction, a loss is recorded as a component of cost of sales. For contractswith a sales value that exceeds the current cost of production, the applicablerevenue is recognized upon delivery (fulfillment of the contract).

 

*Shipping Costs*

 

Shipping costs incurred by the Company are recorded as a component ofcost of revenues. In accordance with the Company’s agreement for marketing andsale of ethanol and by-product, shipping costs arranged by the marketer are deductedfrom the gross sales price. Revenue is recorded based on the net selling pricereported to the Company by the marketer.

 

*Inventory Valuation*

 

Corn inventory is stated at market value, which approximates netrealizable value, based on local market prices determined by grain terminalslocated in the area of the Company. Ethanol and related products are stated atnet realizable value. Work-in-process, supplies, parts and chemical inventoryare stated at the lower of cost or market on the first-in, first-out method.

 

In addition, futures and option contracts are marked to market throughcost of revenues.

 

(Continued on next page)

 

F - 8

----

 

*Cash and Cash Equivalents*

 

Cash and cash equivalents consist of demand accounts and other accountsthat provide withdrawal privileges.

 

### ***Receivables and Credit Policies***

### ** **

Trade receivables are uncollateralized customer obligations due undernormal trade terms requiring payment within fifteen days from the invoice date.Unpaid trade receivables with invoice dates over thirty days old bear interestat 1.5% per month.

 

Trade receivables are stated at the amount billed to the customer.

 

Payments of trade receivables are allocated to the specific invoicesidentified on the customer’s remittance advice or, if unspecified, are appliedto the earliest unpaid invoices.

 

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 all trade receivable balances that exceedsixty days from the invoice date and based on an assessment of currentcreditworthiness, estimates the portion, if any, of the balance that will notbe collected.

 

*Investment in Commodities Contracts,Derivative Instruments and Hedging Activities*

 

SFAS No. 133 requires a company to evaluate its contracts to determinewhether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative maybe exempted from SFAS No. 133 as normal purchases or normal sales.  Normal purchases and normal sales arecontracts that provide for the purchase or sale of something other than afinancial instrument or derivative instrument that will be delivered inquantities expected to be used or sold over a reasonable period in the normalcourse of business.  Contracts that meetthe requirements of normal are documented as normal and exempted from theaccounting and reporting requirements of SFAS No. 133.

 

The Company enters into short-term cash, options and futures contractsas a means of securing corn and natural gas for the ethanol plant and managingexposure to changes in commodity prices. All of the Company’s derivatives aredesignated as non-hedge derivatives. Although the contracts are effectiveeconomic hedges of specified risks, they are not designated as and accountedfor as hedging instruments.

 

As part of its trading activity, the Company uses futures and optionscontracts offered through regulated commodity exchanges to reduce risk and isexposed to risk of loss in the market value of inventories. To reduce thatrisk, the Company generally takes positions using cash and futures contractsand options.

 

Unrealized gains and losses related to derivative contracts areincluded as a component of cost of revenues in the accompanying financialstatements. Inventories are recorded at net realizable value so that gains andlosses on derivative contracts are offset by gains and losses on inventoriesand reflected in current earnings. For the statement of cash flows, suchcontract transactions are classified as operating activities.

 

(Continued on next page)

 

F - 9

----

 

*Environmental Liabilities*

 

The Company’s operations are subject to environmental laws andregulations adopted by various governmental authorities in the jurisdiction inwhich it operates. These laws require the Company to investigate and remediatethe effects of the release or disposal of materials at its location.Accordingly, the Company has adopted policies, practices and procedures in theareas of pollution control, occupational health and the production, handling,storage and use of hazardous materials to prevent material environmental orother damage, and to limit the financial liability, which could result fromsuch events. Environmental liabilities are recorded when the Company’sliability is probable and the costs can be reasonably estimated.

 

*Start-Up Costs*

 

Start-up costs are expensed as incurred. Start-up costs consist ofamounts incurred during the development stage related to the operation andmanagement of the Company, which do not qualify as a capitalized cost.

 

*Financing Costs*

 

Financing costs are amortized over the term of the related debt usingthe interest method of amortization. Amortization of financing costs during construction is capitalized aspart of construction period interest.

 

*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 amount ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and revenues and expenses during the reportingperiod. Actual results could differ from those estimates.

 

*Concentrations of Credit Risk*

 

The Company’s cash balances are maintained in bank depositories andperiodically exceed federally insured limits.

 

*Property and Equipment*

 

Property and equipment is stated at cost. Significant additions andbetterments are capitalized, while expenditures for maintenance, repairs andminor renewals are charged to operations when incurred. Depreciation on assetsplaced in service is computed using the straight-line method over estimateduseful lives as follows:

 

| Site improvements |   | 40 years          |
|-------------------|--------|-------------------|
| Buildings         |   | 40 years          |
| Equipment         |   | 3 – 20 years |

 

The Company reviews its property and equipment for impairment wheneverevents indicate that the carrying amount of the asset may not be recoverable.An impairment loss is recorded when the sum of the future cash flows is lessthan the carrying amount of the asset. The amount of the loss is determined bycomparing the fair market values of the asset to the carrying amount of the asset.

 

(Continued on next page)

 

F - 10

----

 

*Additional Paid-In Capital*

 

During 2002, several investors defaulted on their capital unitsubscriptions and forfeited amounts previously paid to the Company. Amounts forfeitedare included in additional paid-in capital.

 

*Subscriptions Receivable*

 

Subscriptions receivable were recorded for amounts due from membersaccepted by the Company who had not paid the entire amount due to the Companyunder the promissory notes issued for their Capital Units.  Subscriptions receivable as of December 31,2001 were classified as a reduction in members’ equity.

 

*Earnings per Capital Unit*

 

For purposes of calculating basic earnings per capital unit, capitalunits issued by the Company are considered outstanding on the effective date ofissue.  Diluted earnings per unit arecalculated by including dilutive potential capital units in the denominator andadjusting net earnings (loss) as applicable. As of December 31, 2002, diluted earnings per unit are not presentedsince the effect of including potential units would be anti-dilutive.

 

*Income Taxes*

 

The Company is organized as a limited liability company under statelaw. Accordingly, the Company’s earnings pass through to the members and are taxedat the member level. No income tax provision has been included in thesefinancial statements. Differences between financial statement basis of assetsand tax basis of assets is related to capitalization and amortization oforganization and start-up costs for tax purposes, whereas these costs areexpensed for financial statement purposes. In addition, differences in lives and methods used in the depreciationof property and equipment result in differences between the financial statementand tax basis of property and equipment.

 

**NOTE 3 -  TAX INCREMENT FINANCING**

** **

During the year ended December 31, 2003, the Company received$1,106,871 from the proceeds of tax increment financing bonds issued by TurnerCounty, South Dakota. Under South Dakota law, proceeds from tax incrementfinancing are not a liability of the entity (Great Plains Ethanol, LLC), butare an obligation of the taxing district issuing the bonds. The grant wasprovided to fund infrastructure improvements to real property owned by theCompany and will be repaid by Turner County from the incremental increase inproperty taxes related to the improvement of the Company’s real property. Theproceeds of the financing have been recorded as a reduction of the cost basisof the applicable property and equipment.

 

(Continued on next page)

 

F - 11

----

 

**NOTE 4 -  LONG-TERM DEBT**

** **

On June 19, 2002, the Company entered into a credit agreement withAgCountry Farm Credit Services, FLCA outlining the terms of its construction,term and revolving financing arrangements. The construction loan was limited to65% of construction costs of the ethanol plant or $32,500,000. Interest duringconstruction was payable monthly at a variable rate of LIBOR plus 3.14%. OnOctober 1, 2003, the loan converted to a $26,500,000 term loan payable in 40equal quarterly installments of principal and interest at a variable rate ofLIBOR plus 2.64%.  The Company converted$6,000,000 of the construction loan to a revolving loan with monthly paymentsof interest at LIBOR plus 3.14%, plus a .50% unused commitment fee billed on aquarterly basis beginning with the calendar quarter ending January 1, 2004. OnOctober 1 of each year, the Company must reduce the original amount outstandingby 10% of the amount converted to the revolving loan.  The maximum revolving loan amount is reduced each year by thisamount. The term and revolving loans have a final maturity date of October 1,2013. In addition, the Company shall pay, on a quarterly basis, 25% of its freecash flow, not to exceed $1,500,000 in each fiscal year. The construction andterm loans are secured by a first and prior lien on the Company’s real andpersonal property and the collateral assignment of the Company’s materialcontracts.  The Company is subject tocertain restrictive covenants.  Thecovenants require minimum ratios, restrict distributions to no more than 75% ofnet income and limit capital expenditures without the consent of the lender.

 

On June 20, 2002, the Company entered into a promissory note withAgCountry Farm Credit Services, PCA to borrow an additional $2 million. Theinterest rate on the note was the 30-day LIBOR plus 3.14% per annum.  The note was due in semi-annual installmentsof $500,000, plus interest, beginning in June 2004, and had a final maturity ofDecember 2005.  During the year endedDecember 31, 2003, the note was paid in full.

 

The balance of the notes payable as of December 31, 2003 is as follows:

 
|                                             |   | **2003**   |       |
|--------------------------------------------------|--------|------------|------------|
|                                             |   |       |       |
| Notes payable to  AgCountry Farm Credit Services |   |       |       |
| Term Note                                        |   | $          | 25,946,877 |   |
| Revolving Term  Note                             |   | 6,000,000  |       |
|                                             |   | 31,946,877 |       |
|                                             |   |       |       |
| Less current  portion                            |   | (2,847,313 | )          |
|                                             |   |       |       |
|                                             |   | $          | 29,099,564 |   |

 

Minimum principal payments for the next five years are estimated asfollows:

 
| **Year Ending December 31,** |   | **Amount** |      |
|------------------------------|--------|------------|-----------|
|                         |   |       |      |
| 2004                         |   | $          | 2,847,313 |   |
| 2005                         |   | 2,933,011  |      |
| 2006                         |   | 3,021,977  |      |
| 2007                         |   | 3,114,336  |      |
| 2008                         |   | 3,210,216  |      |
|                              |        |            |           |  |

 

Interest capitalized totaled $142,742 and $226,178 for the years endedDecember 31, 2003 and 2002, respectively.

 

(Continued on next page)

 

F - 12

----

 

**NOTE 5 -  NOTES PAYABLE TO RELATED PARTY**

** **

On June 16, 2003, the Company entered into an operating loan agreementwith Broin and Associates, Inc. to borrow $1,000,000, expiring on December 15,2003.  The interest rate on the loan was8% per annum.  As of December 31, 2003,the Company had no outstanding balance on the loan agreement with Broin andAssociates, Inc.  Interest expense was$39,097 for the year ended December 31, 2003.

 

**NOTE 6 -  GRANT AGREEMENT**

** **

The Company has been awarded a United States Department of AgricultureValue-Added Agricultural Product Market Development Grant (the Grant) forapproximately $401,000.  The Grant wasused to pay for certain organizational, offering and start-up costs related tothe formation and capitalization of the Company.  The Company had received $401,704 under the agreement throughDecember 31, 2003.

 

During 2003, the Company received a $50,000 grant from SoutheastEnterprise Facilitation Project. The grant was used to pay for certain landcosts and has been recorded as a reduction in the cost of the land.

 

**NOTE 7 -  MEMBERS EQUITY**

** **

As specified in the Company’s Operating Agreement, the Company has fourclasses of membership capital units authorized: Class A, B, C and D.

 

During 2001, the Company completed its initial public offering of ClassA and Class C Capital Units.  TheCompany received subscriptions for 1,529 Class A Capital Units and 1,973 ClassC Capital Units, which would result in proceeds of $17,510,000 to the Companyif all subscriptions were paid in full. As part of the public offering, 10% ofthe offering price for each subscription was required to be deposited to anescrow account. The Company received payment in the form of promissory notesfor the balance of the subscription price from each subscriber. The funds inthe escrow account were not available to the Company until the Company secureda commitment letter for debt financing to cover certain construction costs forthe ethanol plant.  On November 7, 2001,the Company secured a commitment letter for debt financing and broke escrow andtook possession of the $1,751,000 held in the escrow account related to the1,529 Class A Units and 1,973 Class C Units subscribed in the offering.  In addition, the Company took possession of$120,000 held in escrow related to the Class B and Class C Units subscribed forin private sales.

 

The Company offered to sell, and an entity related to the ManagingMember agreed to purchase, 200 Class B Capital Units at a price of $5,000 percapital unit, for a total of $1,000,000 in a private transaction.  The entity related to the Managing Memberhas paid the Company $1,000,000 in cash in connection with the sale of the 200Class B Capital Units as of December 31, 2002. Transfer of Class B CapitalUnits is prohibited unless the units are first offered for sale to the Companyat the fair market value of the units.

 

The Company also offered to sell, and the Managing Member agreed topurchase, 40 Class C Capital Units at a price of $5,000 per capital unit, for atotal of $200,000, in a private transaction in exchange for services related topreparation of a business plan and feasibility of the plant.  In connection with this agreement, the Companypaid the Managing Member $200,000 for the business plan and feasibility studyduring the year ended December 31, 2001. The Managing Member paid the Company$200,000 in cash for the 40 Class C Capital Units as of December 31, 2002.

 

(Continued on next page)

 

F - 13

----

 

An entity related to the Managing Member also subscribed for 400 ClassC Capital Units, for a total of $2,000,000, as part of the publicoffering.  The entity has paid theCompany $2,000,000 in connection with the sale of the 400 Class C Capital Unitsas of December 31, 2002.

 

For Class A, B and C Capital Units, 10% of the offering price was dueupon subscription, with the remaining amount paid in the form of a promissorynote due subject to call of the Board of Managers. Under the terms of itsinitial public offering, the Board of Managers was required to call amounts dueon promissory notes for Class A and Class C Capital Units subscribed beforecalling amounts due on promissory notes from Class B Capital Units subscribed.  At December 31, 2001, the Board of Managerscalled the remaining amounts due on promissory notes for Class A and Class CCapital Units, with 40% due on January 15, 2002, and the remaining 50% due onApril 1, 2002.

 

The Company offered Class C Capital units with a minimum purchase often (10) units per purchaser and Class A Capital Units to producers ofagricultural products, with a minimum purchase of two (2) Class A Capital Unitsper purchaser. For each Class A Capital Unit purchased, the member is obligatedto deliver 2,500 bushels of corn to the Company on an annual basis. For allClass A Members, this equates to 3,782,500 bushels of corn deliveredannually.  Corn is purchased from theClass A Members at a price based on the average market price from surrounding localmarkets.  For the year ended December31, 2003, the Company purchased 21% of its total bushels required forproduction under the obligation related to Class A Capital units.

 

Upon default on certain obligations of members related to Class A, Band C Capital Units, the Company had the right to redeem the member’s interestat 10% of the price at which the Capital Units were originally offered for saleby the Company.  If a member defaultedon the payment of the purchase price pursuant to the promissory note referencedabove, the Company had the option to redeem the member’s interest and retainall amounts paid by the member as liquidated damages. During the year endedDecember 31, 2002, forfeitures and other adjustments resulted in a reduction ofsubscribed units of 16 Class A units, cancellation of $73,000 of subscriptionsreceivables, and forfeitures of $7,000.

 

Voting rights are one vote per member for Class A Capital Units and onevote per unit for Class B, Class C and Class D Capital Units.

 

Income and losses are allocated to members based on their respectivepercentage of membership interest. Distributions to members shall be no lessthan 20% of net cash from operations, as defined in the Operating Agreement, ifnet cash from operations is in excess of $500,000 on an annual basis; providedthat any such distribution does not constitute or cause a default under any ofthe Company’s loan documents or credit facilities.

 

Transfer or disposition of Capital Units is subject to certainrestrictions, including approval by the Board of Managers.

 

(Continued on next page)

 

F - 14

----

 

**NOTE 8 -  INCOME TAXES**

** **

The differences between financial statement basis and tax basis ofassets as of December 31, 2003 are as follows:

 
|                                              |   | **2003**     |       |
|---------------------------------------------------|--------|--------------|------------|
|                                              |   |         |       |
| Financial  statement basis of assets              |   | $            | 60,655,872 |   |
|                                              |   |         |       |
| Plus  organization and start-up costs capitalized |   | 898,017      |       |
|                                              |   |         |       |
| Depreciation                                      |   | (12, 636,873 | )          |
|                                              |   |         |       |
| Tax basis of  assets                              |   | $            | 48,917,016 |   |

 

There were no material differences between the financial statementbasis and tax basis of the Company’s liabilities.

 

**NOTE 9 -  FAIR VALUE OF FINANCIAL INSTRUMENTS**

** **

The Company believes the carrying amount of cash and cash equivalentsapproximates fair value due to the short maturity of these instruments.

 

The carrying amount of long-term obligations approximates fair valuebased on estimated interest rates for comparable debt.

 

The Company believes the fair value of agreements for the purchase ofutilities approximates the carrying value based on the variable terms of theagreements that follow local market rates.

 

**NOTE 10 -  COMMITMENTS, CONTINGENCIES, AND AGREEMENTS**

** **

The Board of Managers has entered into various agreements regarding theformation, operation and management of the Company. Significant agreements areas follows:

 

Consulting and Services Agreements – The Company hasentered into a consulting agreement and a services agreement with Val-AddService Corporation (Val-Add).

 

The consulting agreement provides for a base fee of$1,500 per month for assistance in negotiating and financing the ethanol plant.This agreement also includes provisions whereby Val-Add is eligible for a bonusof $50,000 upon completion of a letter of commitment for debt financing.

 

The services agreement provides payment to Val-Add of$25 per hour for certain administrative and record-keeping services provided tothe Company. The services agreement was assigned to Val-Add Administrative andCommunications in December 2002.

 

Either of these agreements is terminable with 10 daysnotice by either party.

 

Start-up and organizational expenses related to theagreements with Val-Add totaled $4,680 and $27,227 for the years ended December31, 2003 and 2002, respectively.

 

(Continued on next page)

 

F - 15

----

 

Contract for Future Services – The Company enteredinto various agreements with Broin Management LLC (the Managing Member) andcertain of the Managing Member’s affiliates.

 

Agreements with the Managing Member and certain of itsaffiliates include:

 

Management Services – Pursuant to the terms set forthin the Company’s Operating Agreement, the Managing Member provides day-to-daymanagement of the ethanol plant. The Company pays a management fee of $250,000annually (the base fee), plus 4% of the net income of the Company as defined inthe Company’s Operating Agreement. The base fee is adjusted annually forinflation, and commences no sooner than nine months prior to the operation ofthe ethanol plant. This agreement continues unless terminated by a vote ofManagers as provided in the Operating Agreement.  For the years ended December 31, 2003 and 2002, expenses relatedto the bonus arrangement and management fee totaled $592,363 and $286,667,respectively.

 

Marketing Agreements – The Company entered intoagreements with companies affiliated with the Managing Member to market all ofits ethanol and DDGS. Fees of $.0065 per gallon are payable for administrationservices and ethanol marketing. Fees of 3% of gross sales, with a minimumannual fee of $200,000, are payable for marketing DDGS. The ethanol agreementcontinues for the length of the original primary debt financing for the plantconstruction, while the DDGS agreement has a term of 7 years or the length ofthe original primary debt for plant construction, whichever is longer. Bothagreements are renewable for 3-year periods after the initial term of theagreements.  Fees relating to themarketing agreements were $436,620 for the year ended December 31, 2003.

 

Construction Contract – On November 20, 2001, theCompany entered into a contract for the construction of the ethanol plant withBroin and Associates, Inc., a party related to the Managing Member.  The construction contract totals$48,712,749.  Construction costs as of December31, 2003, totaled $48,695,719, of which $624,425 had been incurred andunpaid.  The Company’s remainingcommitment on the construction of the ethanol plant, with a related party, isapproximately $17,030 as of December 31, 2003.

 

Corn Price Risk Management Agreement – The Company hasentered into an agreement with Broin Management, LLC for the hedge and pricerisk management related to corn and natural gas requirements of the plant. Thefee for this service is $50,000 annually. The agreement has a term of 1 year and commences upon the start ofoperations. The agreement is renewable for successive 1-year terms unlessterminated 30 days prior to expiration. Fees relating to this agreement were $47,667 for the year ended December31, 2003.

 

The Company has entered into agreements for the purchase of water,natural gas and electricity.

 

Water – The agreement provides the Company with waterat a fixed rate for 5 years, renewable for 5-year periods at rates negotiatedat the time of renewal. No minimum purchase quantities are required by theagreement.

 

(Continued on next page)

 

F - 16

----

 

Natural Gas – The agreements provide the Company withnatural gas at a fixed price for a 15-year term, beginning with the date theplant begins operations.  During theinitial 10 years of the agreement, the Company has a minimum obligation fordelivery of natural gas at a rate that covers the cost of construction of thepipeline.  The Company is required tohold an irrevocable letter of credit or similar instrument to guarantee paymentof the obligation.  The letter of creditwill be reduced each year by an amount equal to amortization of a $1,600,000loan at 8.5%.  Minimum payments,regardless of whether the plant takes delivery of the natural gas, are asfollows:

 
| **Year Ending December 31,**       |   | **Amount** |      |
|------------------------------------|--------|------------|-----------|
|                               |   |       |      |
| 2004                               |   | $          | 395,000   |   |
| 2005                               |   | 395,000    |      |
| 2006                               |   | 395,000    |      |
| 2007                               |   | 395,000    |      |
| 2008                               |   | 395,000    |      |
| 2009-2013                          |   | 1,640,000  |      |
| Total                              |   | 3,615,000  |      |
| Less amount  representing interest |   | 610,000    |      |
| Total at present  value            |   | $          | 3,005,000 |   |

 

Electricity – The agreements provide the Company withelectric service for a term of 5 years. The agreement sets rates for energy usage based on an agreed upon ratestructure and requires a minimum purchase of electricity each month during theinitial term of the agreement. Minimum annual payments during the initial termof the electricity agreement are as follows:

 
| **Year  Ending December 31,** |   | **Amount** |      |
|-------------------------------|--------|------------|-----------|
|                          |   |       |      |
| 2004                          |   | $          | 357,000   |   |
| 2005                          |   | 357,000    |      |
| 2006                          |   | 357,000    |      |
| 2007                          |   | 119,028    |      |
|                          |   |       |      |
|                          |   | $          | 1,190,028 |   |

 

(Continued on next page)

 

F - 17

----

 

Line of Credit - During the year, the Company enteredinto a $1,600,000 line of credit agreement with Home Federal Bank.  The line of credit agreement was required byHome Federal Bank in connection with a letter of credit agreement entered intobetween Home Federal Bank and the supplier of natural gas to the Company’splant.  The letter of credit is securityfor the Company’s natural gas distribution agreement as it relates toconstruction of the gas pipeline to the plant. Under the line of credit, the Company entered into a promissory notewith Home Federal Bank to borrow up to $1,600,000.  In the event of any amount drawn on the letter of credit by thesupplier of natural gas, an equal amount will be drawn on the line of credit byHome Federal which will be recorded as a liability of the Company.  The interest rate on the promissory note isthe prime rate as published by the Wall Street Journal plus 2%.  The maturity date on the line of credit isMarch 1, 2004.  The line of credit issecured by a lien on the Company’s real and personal property.  As of December 31, 2003, there was nooutstanding balance on the line of credit.

 

To obtain the letter of credit, Home Federal Bankrequired personal guarantees totaling $1,600,000 from certain members orrelated parties of the Company.  TheCompany has agreed to pay each party an annual guarantee fee of 2% of theamount guaranteed.  The Company paid$32,000 for the guarantee fee during the year ended December 31, 2003.

 

The Company receives incentives related to the production of ethanol asfollows:

 

Incentives – Great Plains Ethanol receives anincentive payment from the United States Department of Agriculture (USDA) forthe use of corn to produce ethanol. In accordance with the terms of thisarrangement, revenue is recorded based on incremental production of ethanolcompared to the prior year. The USDA has set the annual maximum not to exceed$7,500,000 for each eligible producer. The incentive is calculated on the USDAfiscal year of October 1 to September 30. Revenue of $1,708,190 and $5,371,895has been earned for the USDA program years ended September 30, 2004 and 2003,respectively. Incentive revenue of $7,080,085 was recorded for the year endedDecember 31, 2003.

 

Great Plains Ethanol also receives an incentivepayment from the State of South Dakota to produce ethanol. In accordance withthe terms of this arrangement, revenue is recorded based on ethanol sold. TheState of South Dakota has set a maximum of up to $1,000,000 per year for thisprogram per qualifying producer. Incentive revenue of $583,334 was recorded for the year ended December31, 2003.

 

**NOTE 11 -  RELATED PARTIES**

** **

Certain owners of Class A, Class B and Class C Capital Units areparties to agreements with the Company. Related party agreements with the Managing Member and its affiliates aredescribed in Note 7 and Note 10.  Inaddition, one of the owners of Val-Add (Note 10) is also a member of theCompany.

 

**NOTE 12 -  SUBSEQUENT EVENTS**

** **

On February 25, 2004, the Company renewed the line of credit with HomeFederal Bank referenced in Note 9.  Thenew maturity date on the line of credit is March 1, 2005, and the amount of theline of credit is $1,250,000.

 

On March 14, 2004, we experienced a fire in our DDGS dryingsystem.  Management is currently in theprocess of evaluating the total amount of loss to property and equipment, andlost revenues due to the fire.  Becauseof insurance policies in place, management does not expect this incident tohave a material effect on the Company’s financial position or results ofoperations for the fiscal year ending December 31, 2004.

 

F - 18

----