**UNITED STATES********SECURITIES ANDEXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM l0-KSB**

 

**Annual Report Pursuant to Section 13 or15(d) of the Securities Exchange Act of 1934**

 

**For thefiscal year ended December 31, 2003**

 

**Commissionfile number 333-66552**

 

**LakeArea Corn Processors, LLC**

(Name of Small BusinessIssuer in its Charter)

 

| **South  Dakota**                                                                |   | **46-0460790**                        |
|----------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)                 |   | (I.R.S. Employer  Identification No.) |
|                                                                             |
| **46269  South Dakota Highway 34  P.O. Box 100  Wentworth, South Dakota  57075** |
| (Address of Principal  Executive Offices) (Zip Code)                             |
|                                                                             |
| **(605)  483-2676**                                                              |
| (Issuer’s Telephone  Number, Including Area Code)                           |

 

Securities registeredunder Section 12(b) of the Exchange Act:

 

**None**

 

Securities registeredunder Section 12(g) of the Exchange Act:

 

**Class ACapital Units**

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act of 1934 during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

ý Yes             o No

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10–KSB.  ý

 

State issuer’s revenuesfor its most recent fiscal year.                                                     **$69,391,182**

 

The aggregate market valueof the registrant’s Class A capital units held by non-affiliates of theregistrant was approximately $24,532,695, based on the average sales price of$.87 for the trading period ended on March 1, 2004.

 

As of the date of thisfiling, there were 29,620,000 Class A capital units of the registrantoutstanding.

 

Transitional SmallBusiness Disclosure Format:                                      o Yes             ý No

 

 

----

 

### **PARTI**

**Item 1.****          ****Description ofBusiness.**

 

**OVERVIEW**

 

On August 20, 2002, our members approved our reorganization from acooperative to a limited liability company. The reorganization became effective on August 31, 2002.  As a result of the reorganization, eachshareholder received one of our capital units in exchange for each equity sharethe shareholder owned in the cooperative. Asof the date of this filing, we had 958 members.

 

We own an 88% interest in Dakota Ethanol, LLC, a company that owns andoperates a 40 million gallon ethanol plant in Wentworth, South Dakota, whichproduces ethanol and distiller’s dried grains with solubles, or DDGS.  Five individual members of the Broin familyown the other 12% interest in Dakota Ethanol. Entities affiliated with these Broin family members designed and builtthe plant, manage the plant, and market the ethanol and DDGS produced at theplant.  The plant began production onSeptember 4, 2001.  Prior to thereorganization, Lake Area Corn Processors, LLC had no operations.  Accordingly, this report discusses the consolidated financialperformance, results of operations, and capital resources of Dakota Ethanol,Lake Area Corn Processors, and the cooperative, as if the cooperative had beena limited liability company since its inception.

 

2

----

 

**THE ETHANOL PLANT AND PRODUCTIONPROCESS**

 

An ethanol plant isessentially a fermentation plant. The ground corn, which contains starch, ismixed with water to form a mash. The mash is heated and enzymes are addedto convert the starch into fermentable sugars. Fermentation occurs when yeastis added to convert the sugars into alcohol and carbon dioxide. The carbondioxide may either be captured and sold, if nearby markets exist, or releasedinto the atmosphere. Fermentation produces a mixture called “beer,” whichcontains about 10% alcohol and 90% water. The “beer” is then boiled in adistillation column to separate the water, resulting in ethyl alcohol that is90 to 95% pure. The mixture then goes through a dehydration process, whichincreases the alcohol content to 99% or greater. This product is then mixedwith a certified denaturant to make the product impotable and commerciallysaleable.

 

The solids removed duringthe distillation process are centrifuged and then conveyed to the DDGS’ dryersystem. A syrup is added to the mixture as it enters the dryer, where moistureis removed. This process produces DDGS. DDGS is produced from the protein,fiber, vitamins, and minerals that are not used in producing ethanol. Ethanolproduction from corn uses only the starch contained in the corn.

 

Dakota Ethanol’s plantwas designed and built by Broin and Associates, Inc. of Sioux Falls, SouthDakota to produce 40 million gallons of ethanol annually. Broin licenses toDakota Ethanol, for a fee, the technology for the operation of the ethanol plantfor as long as the plant exists. The licensed technology consists of Broin’sproprietary rights including its patents, copyrights, trade secrets, formulas,research data, processes, know-how, and specifications related to Broin’sdesign and construction of the ethanol plant. If either Dakota Ethanol or Broinbreaches the terms of the agreement, the non-breaching party may exercise anyremedies available to it, including specific performance and requestinginjunctive relief.

 

**THEETHANOL INDUSTRY**

 

Although ethanol can beproduced from a number of different types of grains, approximately 90% ofethanol in the United States today is produced from corn. Current annualdomestic production capacity is approximately 3.1 billion gallons.

 

Ethanol contains 35% oxygenby weight.  When combined with gasoline,ethanol acts as an oxygenate, which is to say it increases the percentage ofoxygen in gasoline.  As a result, thegasoline burns more cleanly, and releases less carbon monoxide and otherexhaust emissions into the atmosphere. Oxygenated gasoline is commonly referred to as 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.

 

Because of federal andstate policies promoting cleaner air, state and federal tax programs andproduction incentives, the ethanol industry has grown substantially in recentyears.  Currently, U.S. ethanol plantshave the capacity to produce approximately 3.1 billion gallons of ethanolannually, compared to only 175 million gallons in 1980.  There are more than 74 ethanol productionfacilities located in the United States, with the great majority of themlocated in the

 

3

----

 

Midwestern corn-producingstates of Illinois, Wisconsin, Minnesota, Iowa, North Dakota, South Dakota,Nebraska, and Kansas.  Including DakotaEthanol, South Dakota currently has 10 plants producing approximately 377million gallons of ethanol annually and one additional plant under constructionthat will have the capacity to produce an additional 45 million gallons peryear.

 

**ETHANOLMARKETING**

 

The target market area for the ethanol produced at Dakota Ethanolincludes local, regional, and national markets.  Shipping is done by truck and rail.  The plant site is served by multiple South Dakota state highwaysand Interstate Highways 29 and 90 provide transportation links in all directions.

 

The plant has rail facilities and connections to the BurlingtonNorthern Santa Fe railroad system, which facilitate transporting the ethanol tonational target markets.  Approximately90% the ethanol produced at Dakota Ethanol is marketed by rail.  The national target rail markets for thefacility include Chicago, the Pacific Northwest, the Southern and Southwestmarkets, as well as potential new markets on the East coast and California dueto anticipated MTBE phase outs.

 

Dakota Ethanol contracts withEthanol Products, LLC, a Broin affiliate, to sell and market the ethanolproduced at the plant.  DakotaEthanol’s marketing contract with Ethanol Products is in effect until 2006 andautomatically renews for five-year terms unless terminated by either party withthree months advance notice prior to the end of the term.  Under the contract, Ethanol Products chargesDakota Ethanol marketing administrative fees based on the number of gallons ofethanol sold.  Ethanol Products isresponsible for invoicing all shipments, receiving payments from customers andpaying freight when necessary. All accounts receivable losses arising from themarketing of ethanol are Dakota Ethanol’s sole responsibility.

 

EthanolProducts currently markets ethanol for 15 producers located in Minnesota, SouthDakota, North Dakota, Iowa, Michigan, Kansas, Kentucky, Nebraska andMissouri.  Although Dakota Ethanol reliesentirely on Ethanol Products to market the ethanol it produces, EthanolProducts is not dependent on one or a limited number of major customers.

 

The sale and marketing of ethanol could beadversely affected by decisions pending before the U.S. EnvironmentalProtection Agency.  On July 17,2003, the United States Court of Appeals for the Ninth Circuit vacated theEPA’s decision of June 2001 which denied the state of California’s requestfor waiver from the oxygenated fuel requirement of the 1990 Clean Air ActAmendments.  The court subsequentlyremanded the matter to the EPA to reconsider California’s request for waiver fromthe oxygenated requirement.  Theoxygenated requirement resulted from the 1990 Clean Air Act Amendments whenCongress required the use of a reformulated gasoline in certain high smog-ozoneareas in the United States.  Congressrequired that the reformulated gasoline contain at least 2% oxygen by weight,the two primary choices of oxygenates being ethanol and methyl tertiary butylether (“MTBE”).  In April 1999,California requested that the EPA waive the oxygen requirement for California,asserting that it could comply with air emission requirements of the Clean AirAct without a mandatory oxygen content through the use of a non-ethanol based,reformulated gasoline called CaRFG3.  InJune 2001, however, the EPA denied California’s request for waiver from theoxygenated requirement.  In addition,after determining that MTBE was a public health threat, California decided toban MTBE entirely by January 1,

 

4

----

 

2004.  This resulted in ethanol being the primary meansto 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 a significantlylarge number of refineries switched to or commenced using CaRFG3 or otherreformulated gasoline, it could harm Dakota Ethanol’s and the ethanolindustry’s efforts to expand the marketing and sale of ethanol in California.

 

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 New Hampshire is officially granted awaiver by the EPA, and more states subsequently request and are granted awaiver, this could materially and adversely affect Dakota Ethanol’s and theethanol industry’s efforts to market and sell ethanol in the future.

 

**THE DDGSINDUSTRY**

 

DDGS is a co-product ofthe ethanol production process.  DDGS isa high protein, high energy feed supplement marketed primarily to the dairy,beef, sheep, swine, and poultry industries. DDGS is a popular animal feed supplement, with approximately 6.4 milliontons produced in North America annually. Most DDGS is sold for use in animal feeds within the United States andCanada, and a small percentage is exported, primarily to Europe.  The vast majority of DDGS is fed to ruminantanimals in the dairy and beef sector. However, new technologies, which have allowed for the production of amore consistent, quality product, have helped create a market for DDGS in theswine and poultry industries as well.

 

When operated at its annual name-plate capacity of 40 million gallons,the Dakota Ethanol plant has the ability to dry all distiller’s grains producedat the plant.  The plant yieldsapproximately 17 pounds of DDGS per bushel of corn.

 

**DDGSMARKETING**

 

Dakota Ethanol contracts 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 2006.  It automatically renews for five-year periods, unlessdiscontinued by either party upon at least three months prior writtennotice.  Dakota Ethanol pays Dakota GoldMarketing a marketing 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 accounts receivablelosses arising from the sales of DDGS are Dakota Ethanol’s sole responsibility.

 

Dakota Gold Marketingmarkets the DDGS to local, regional and national markets.  Dakota Ethanol ships approximately 70% ofthe DDGS to national markets, primarily in the southwestern

 

5

----

 

United States, and therest to local and regional markets. Shipments to the national markets are primarily by rail.  Dakota Ethanol ships DDGS to local orregional markets primarily by truck. Dakota Ethanol also contracts with Dakota Gold Marketing in the use ofrailcars, paying Dakota Gold Marketing a flat fee per railcar in connectionwith a DDGS shipment.  Although DakotaEthanol relies entirely on Dakota Gold Marketing to market its DDGS, DakotaGold Marketing is not dependent on one or a limited number of major customers.

 

**COMPETITION**

 

Dakota Ethanol is indirect competition with numerous other ethanol and DDGS producers, many ofwhich have significantly greater resources than Dakota Ethanol.  The ethanol industry has grown to over 74production facilities in the United States. Industry authorities estimate thatthese facilities are capable of producing approximately 3.1 billion gallons ofethanol per year.  The largest ethanolproducers include: Archer Daniels Midland Company, Aventine Renewable Energy,Inc., Cargill, Inc., Verasun Energy Corporation and New Energy Corporation, allof which are capable of producing more ethanol than Dakota Ethanolproduces.  In addition, there arenumerous regional farmer-owned or other ownership-type entities of a similarsize to Dakota Ethanol. Most ethanol producers also produce DDGS or competinganimal feed products such as distiller’s wet grains.  In South Dakota, there are currently five ethanol plants within a100-mile radius of Dakota Ethanol with a total annual production capacity ofapproximately 250 million gallons of ethanol.

 

Further, at least 17 newethanol plants with a combined production capacity of over 598 million gallonsare under construction and additional plans to expand existing plants have alsobeen announced which would increase the ethanol production capacity of DakotaEthanol’s competitors.  We are unable todetermine the number and production capacity of plants that ultimately may beconstructed, the timing of such construction, or the effect of resultingproduction upon the demand or price for Dakota Ethanol’s products.

 

We also expect thatadditional ethanol and DDGS producers will enter the market if the demand forethanol continues to increase.  DakotaEthanol competes, in part, with other ethanol and DDGS producers on the basisof price and, to a lesser extent, delivery service.  In South Dakota, Dakota Ethanol competes with other ethanolproducers in proximity to Dakota Ethanol’s plant on the basis of procuringcorn.  We believe, however, that DakotaEthanol can continue to compete favorably with other ethanol and DDGSproducers, primarily because it continues to procure corn at favorable pricesand from an ample corn supply.

 

As the demand for ethanolincreases, Dakota Ethanol may also have to compete with international ethanolproducers from countries such as Brazil, which may have lower production costsand comparable transportation costs to those of the United States’ coastalmarkets.

 

Dakota Ethanol alsocompetes with producers of MTBE. MTBE is the other oxygenate commonly used infuels for compliance with the Federal Clean Air Act mandates and is ethanol’smajor competitor in the oxygenate market. MTBE, however, has been the subject of serious environmentalconcerns.  Accordingly, seventeenstates, including California and New York, two of the largest state consumersof ethanol, have enacted laws prohibiting the use of MTBE as an oxygenate infuels.  Nevertheless, many major oilcompanies produce MTBE and, because it is petroleum-based, its use is stronglysupported by them.  These companies havesignificant

 

6

----

 

resources with which to market MTBE, to influencelegislation, and influence public perception of MTBE.  These companies also have sufficient resources to beginproduction of ethanol should they choose 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 could providethem with competitive advantages over us and harm our business.

 

**PROCUREMENTS**

 

**Corn**

 

The major raw materialrequired for Dakota Ethanol to produce ethanol and DDGS is corn.  To operate at name-plate capacity of 40million gallons, the plant requires approximately 14 million bushels of corn annually.  Unless a corn deliveryexemption has been granted, our members are required to deliver corn to theplant on a trimester basis and receive payment for their corn based on anaverage of market prices at predetermined elevators plus a freight allowance.  The members currently supply approximately 30% of Dakota Ethanol’s corn supplyunder a corn delivery obligation, and the balance is purchased from other localcorn producers on the open market based upon a schedule of prices forcurrent and future delivery prepared by management.

 

Since September 1, 2002, our members may apply on an annual basisto be released from the corn delivery requirement if the member historicallyhas not produced enough grain to meet the requirement; if the member does notproduce enough grain to meet the requirement because the member’s grain is fedto livestock; or if the member produces and stores the majority of the member’sgrain more than 50 miles from the Dakota Ethanol plant site.  The Grain Committee appointed by the DakotaEthanol Board of Managers has sole discretion to determine whether to grant ourmembers exemptions from the corn delivery requirement.  Since September 1, 2002, approximately40% of our members have been granted annual exemptions from the corn deliveryrequirement.

 

The plant’s location in Lake County, South Dakota, providesaccessibility to corn at necessary levels. In 2003, approximately 13 million bushels of corn for grain wereproduced in Lake County and 96 million bushels of corn for grain were producedin the nearby counties of Brookings, Kingsbury, Moody, Miner, Hanson, McCookand Minnehaha.

 

**Hedging**

 

Dakota Ethanol contracts with Broin Management under a corn price riskmanagement agreement to develop and implement hedging strategies to manage therisk associated with the fluctuation in the price of corn.  Hedging means protecting the price at whichDakota Ethanol buys corn and the price at which it will sell its products inthe future.  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 governmentfactors.  Hedging practices are alsoutilized to balance Dakota Ethanol daily cash corn ownership relative to itsforward contracted ethanol sales.  Allcash corn contracts purchased by the plant are either hedged or owned at thepredetermined cash price based

 

7

----

 

on the current futures price of corn, as well as on Broin Management’sview on future price direction.

 

The corn price risk management agreement with Broin Management becameeffective in 1999 and is automatically renewed for one-year terms following theexpiration of the prior term, unless 30 days notice is provided by either partyto terminate the agreement prior to the expiration of the term.

 

#### **Natural Gas**

#### ** **

Theproduction of ethanol requires a significant amount of natural gas.  The plant requires approximately 4,600decatherms daily to operate the plant at its production capacity.  A decatherm is a unit used to measure aspecific quantity of heat.  DakotaEthanol contracts with NorthWestern Public Service pursuant to whichNorthWestern distributes natural gas from NorthernWestern’s pipeline to theethanol plant.  This agreement is in effectuntil 2011 and automatically renews for one-year terms.  Since operations were commenced in 2001,Dakota Ethanol has had no interruption in the supply of natural gas fromNorthWestern as all its requirements have been met.  Broin Management also provides risk management services to managethe risk associated with price fluctuation.

 

**Electricity**

 

Dakota Ethanol contractswith Sioux Valley Southwestern Electric Cooperative, Inc. to provide allof the electric power and energy requirements for the ethanol plant.  The agreement is in effect until 2011 andautomatically renews for five-year terms, unless 18 months notice is given byeither party to terminate the agreement prior to the expiration of the currentterm.  Since operations were commencedDakota Ethanol has had no interruption or shortages in the supply ofelectricity to the plant.

 

**Water**

 

Theproduction of ethanol also requires a significant amount of water. DakotaEthanol contracts with Big Sioux Community Water System, Inc. to supply andmeet its water requirements for the ethanol and DDGS production process.  Since Dakota Ethanol’s operations werecommenced in September 2001, Dakota Ethanol has had no interruption in thesupply of water as all its requirements have been met.  Dakota Ethanol’s agreement with Big Sioux isfor automatically renewing five-year terms.

 

**GOVERNMENTREGULATION**

 

Variousfederal and state laws, regulations and programs have led to the increasing useof ethanol in fuel, including subsidies, tax credits, and other forms of financialincentives.  Some of these laws provideeconomic incentives to produce ethanol and others mandate the use ofethanol.  Congress currently providescertain federal tax incentives for oxygenated fuel producers and marketers,including those who purchase ethanol to blend with gasoline in order to meetfederally mandated oxygenated fuel requirements.  Generally, these tax incentives include an excise tax

 

8

----

 

exemption from the federalexcise tax on gasoline blended with at least 10%, 7.7%, or 5.7% ethanol, andincome tax credits for blenders of ethanol mixtures and small ethanolproducers.  The federal tax incentivesare scheduled to expire on September 30, 2007.

 

Additionally,Congress provides an ethanol production incentive to ethanol producers throughthe United States Department of Agriculture Commodity Credit Corporation’sBioenergy Program.  Under this program,incentive payments are allocated partially based on an increase in gallons ofethanol produced compared to the prior year’s production.  Because a plant usually experiences thehighest increase in production during the first year of operations compared tothe prior year’s, a plant of Dakota Ethanol’s size is usually allocated themaximum payment during the first year of operations.  The maximum allocation per program year to an ethanol producer is$7.5 million, which Dakota Ethanol received during the 2002 program year(October 1, 2001 through September 30, 2002).  The maximum annual funding authorized under the program is$150 million.

 

SouthDakota also provides an incentive production payment to ethanol producers.  The production incentive consists of adirect payment to South Dakota ethanol producers of up to $.20 per gallon,which is divided among producers of fuel ethanol within South Dakota up to amaximum of $1 million per year per plant (or a maximum of $83,333 per month)and a maximum of $10 million over the life of a plant.  However, no more than $5 million in paymentsmay be distributed to all ethanol plants in South Dakota during the 2004program year (which ends on June 30, 2004) and no more than $6 million inpayments 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 moreplants commence production, or existing plants increase production, each plantreceives a lower proportionate share of the maximum payment during the programyear.

 

Therevocation, amendment, or non-renewal of any one or more of these laws,regulations or programs, or a lack of funding under these programs, couldadversely affect the future use of ethanol and our business and operations in amaterial way.  Any material reduction ofthe use of ethanol would have an adverse affect on our profitability andviability.

 

**ENVIRONMENTALMATTERS**

 

Dakota Ethanol’soperations are subject to various federal, state, and local laws andregulations with respect to environmental matters, including air and waterquality and underground fuel storage tanks. Compliance with these laws and regulations may require Dakota Ethanol toincur expenditures for such things as new or upgraded equipment or processes,some of which could be material to its business.  If Dakota Ethanol were found to have violated federal, state orlocal environmental laws or regulations, it could incur liability for cleanupcosts, damage claims from third parties, and civil or criminal penalties thatcould materially and adversely affect its business.

 

Shortly after DakotaEthanol’s plant was operational, Dakota Ethanol determined through a series ofinternal tests from February through May of 2002, that certain emissionsmay have exceeded air quality limits under state and federal law.  Dakota Ethanol began taking steps to correctpotential excessive emissions, including certain operational changes andinstalling a thermal

 

9

----

 

oxidizer, which is a pollution control device designedto reduce emissions.  In addition, theSouth Dakota Department of Environment and Natural Resources (DENR) informedDakota Ethanol that certain emissions from the plant exceeded the limitsallowed under state law and the plant’s Title V Air Quality Operating Permit.Based on subsequent internal tests, however, management believes that the plantnow complies with federal and state air quality laws and its Title V AirQuality Operating Permit.  To date,neither the DENR nor the U.S. Environmental Protection Agency (EPA) have takenany regulatory action against Dakota Ethanol for alleged excessive emissions in2002.  Based on recent informaldiscussions with the DENR, however, it is anticipated that to resolve thealleged excessive emissions in 2002 short of a formalproceeding, civilpenalties and other sanctions may be assessed against Dakota Ethanol, theextent of which is uncertain.

 

Dakota Ethanol could alsobe adversely affected by agency regulatory actions that occurred in 2002 and2003. In late 2002, a number of ethanol plants in Minnesota entered intoconsent decree settlements with the State of Minnesota and the EPA arising fromalleged emissions violations.  Civilpenalties were assessed against each ethanol plant, additional emissionsdevices were required, new testing protocols established and air qualitypermits were modified. The EPA has since stated that it intends to “level theplaying field,” inferring actions against other ethanol producers.  In April 2003, the EPA entered into aconsent decree with Archer Daniels arising from alleged emissions violations inseveral of its plants. In addition to civil penalties being assessed againstArcher Daniels, additional emissions devices, monitoring programs and a newtesting protocol for emissions were imposed.

 

On January 6, 2003,the EPA issued formal informational requests to ethanol plants designed,constructed, and/or managed by Broin and Associates and Broin Management.  The EPA also issued similar information requestsduring this time to other ethanol and non-ethanol related plants andcompanies.  The requests to Broinrequired that the subject ethanol plants, including Dakota Ethanol, provide theEPA with certain emissions data, presumably to determine if the plants were incompliance with the Clean Air Act. If the EPA determines that Dakota Ethanolhas not complied with the Clean Air Act or its Title V Air Quality OperatingPermit, the EPA could require pollution control mechanisms and internal controlprocesses that are not currently planned for this plant.  To date, no action has been initiated by theEPA, nor is management able to predict the form or magnitude of any regulatoryaction, if any, that could be initiated by the EPA as a result of these requests,or the effect it would have on operations.

 

In late 2002, the DENRbegan requiring applicants for new plants in South Dakota include a new methodfor quantifying emissions from these plants. The new testing method is commonly referred to as the Midwest ScalingMethod or the “multiplier.”  When themultiplier is used, the emission test results are higher than when traditionaltest measures are employed.  While theuse of the multiplier is not required in Dakota Ethanol’s Title V Air QualityOperating Permit, any future imposition of the multiplier could make it moredifficult for Dakota Ethanol to comply with its Title V Air Quality OperatingPermit and the air quality standards under the Clean Air Act.  Any future imposition of the multiplier may alsorequire pollution control mechanisms and internal processes that are notcurrently planned for the plant, or result in certain sanctions if DakotaEthanol is unable to comply with state or federal air quality standards.

 

10

----

 

OnDecember 29, 2003, Dakota Ethanol, along with five other ethanol plantsmanagement by Broin Management, filed an administrative petition before theSouth Dakota Board of Minerals and Environment.  The petition requests that the Board of Minerals and Environmentbar the DENR from using and applying the multiplier with respect to emissionstesting in order to determine compliance under the Title V Air Quality Permitand Clean Air Act.  A hearing on thepetition was schedule for March 18, 2004, but the hearing has beencontinued to a later, undetermined date. For additional information on this proceeding, please see “Item 3—LegalProceedings” below.

 

**MANAGEMENTAND EMPLOYEES**

 

Broin Management, LLC, aBroin affiliate, manages the day-to-day operations of the ethanol plant.  Dakota Ethanol pays Broin Management a fixedannual fee and an incentive bonus based on annual net income.  Dakota Ethanol also pays certain expensesincurred with respect to the operation of the plant while other expenses,including, but not limited to, the provision of a full-time plant manager andtechnical manager, are included as part of Broin Management’s fees.  The agreement is in effect untilJanuary 1, 2006, and automatically renews for additional five-year termsunless either party provides a 90-day advance written notice of terminationprior to the end of the term.  DakotaEthanol may only terminate Broin Management “for cause,” which is defined inthe agreement as illegal or unethical conduct.

 

Broin Management hired Mr. Dean Frederickson as Dakota Ethanol’s plantgeneral manager.  Mr. Fredericksonoversees and is responsible for operations and production at Dakota Ethanol ona day-to-day basis.  The general manageris a full-time, on-site position, but Mr. Frederickson is an employee of BroinManagement, LLC.  For Mr. Frederickson’sbiographical information, see “Item 9 – Directors, Executive officers,Promoters and Control Persons; in Compliance with Section 16(a) of theExchange Act.”

 

As of March 1, 2004,Dakota Ethanol employed 38 employees, including a commoditiesmanager, an operations manager, a maintenance manager, a microbiologist, achief mechanical operator, a controller, plant operators, plant maintenancepersonnel, a membership coordinator, a receptionist and a secretary.  This does not include contract employees orMr. Frederickson and the technical manager who are employees of BroinManagement.

 

**Item2.  Description of Property.**

 

The Dakota Ethanol plantis located on 77 acres of land it owns near the town of Wentworth in LakeCounty, South Dakota.  This site isserved by multiple state highways and is near Interstate Highways 29 and 90 andhas rail facilities and connections to the Burlington Northern Santa Ferailroad system to facilitate transporting the ethanol and DDGS produced at theplant to national target markets.  Allof Dakota Ethanol’s tangible and intangible property, real and personal, servesas the collateral for the debt financing with First National Bank of Omaha,which is described below under “Item 6 – Liquidity and Capital Resources.”

 

11

----

 

**Item3.  Legal Proceedings.**

 

# **From timeto time, we may be subject to litigation incidental to our business.  Dakota Ethanol is currently a party in apending matter before the South Dakota Board of Minerals and Environment inPierre, South Dakota.  OnDecember 29, 2003, Dakota Ethanol, five other ethanol plants in SouthDakota, and Broin Management, LLC, filed a petition for an order to show causeand declaratory judgment with the South Dakota Board of Minerals andEnvironment.  The South DakotaDepartment of Environment and Natural Resources (DENR) is the respondent in theproceeding.  The petition requests thatthe Board of Minerals and Environment bar the DENR from using and applying anew method for quantifying emissions from ethanol plants known as the MidwestScaling Method or “multiplier.”  TheBoard of Minerals and Environment is a nine person citizen board that serves aquasi-judicial and legislative role in matters involving the South Dakota airquality laws.  The Board of Minerals andEnvironment has authority to hear petitions regarding the application of DENR’srules governing air quality matters.**

# ** **

The petition alleges that the DENR’s use of the multiplier forquantifying emissions is inappropriate and unlawful.  Dakota Ethanol and the other petitioners contend that SouthDakota 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, however,changes the way emission quantities are reported, typically increasing thereported quantity of emissions and making it potentially more difficult tocomply with the Title V Air Quality Operating Permit and the standards underthe Clean Air Act.  A hearing on thematter was scheduled in Pierre on March 18, 2004, but that hearing hasbeen continued to a later, undetermined date.

 

In addition, as described under above under “Item 1—Description of Business,Environmental Matters,” while it is uncertain if the DENR will take any actionwith respect to the alleged excessive emissions prior to Dakota Ethanol’scorrective action in 2002, management anticipates that to resolve this mattershort of a formal proceeding, Dakota Ethanol may be assessed civil penaltiesand other sanctions.  Further, BroinManagement, acting on behalf of Dakota Ethanol and other ethanol plants managedby Broin Management, has recently held informal discussions with the EPAregarding whether the multiplier can be applied and used for quantifyingemissions.  These discussions arecurrently ongoing and generally relate to all ethanol plants that are managedby Broin.  It is uncertain whether theissues surrounding use of the multiplier can be resolved with the EPA short ofa formal proceeding, or what the effect will be on Dakota Ethanol if resolutionof the matter is or is not attained.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders.**

 

We did not submit anymatter to a vote of our security holders through the solicitation of proxies orotherwise during the fourth quarter.

 

12

----

 

**PART II**

 

**Item5.  Market for Common Equity and RelatedStockholder Matters.**

 

There is no public tradingmarket for our capital units.  Capitalunits may only be transferred in accordance with our Capital Units TransferSystem.  The Capital Units TransferSystem provides for transfers by gift to family members, upon death, andthrough a qualified matching service, subject to our Board of Managers’approval.  The qualified matchingservice is operated through an Alternative Trading Service (ATS) owned andoperated by Variable Investment Advisors, Inc., a registered broker-dealerbased in Sioux Falls, South Dakota, which may be accessed atwww.agstocktrade.com.  As ofMarch 1, 2004, we had 958 members. The following table contains historical information bytrimester for the past two years for sales of our equity shares prior to theconversion and our capital units since the reorganization inAugust 2002.  All of theinformation has been adjusted to reflect the 4:1 capital unit split thatoccurred on November 1, 2002.

 
| **Trimester**              |   | **Low Bid** |   | **High Bid** |   | **Average  Bid** |   | **# of  Shares/Capital  Units Traded** |   |
|----------------------------|--------|-------------|--------|--------------|--------|------------------|--------|----------------------------------------|--------|
|                       |   |        |   |         |   |             |   |                                   |   |
| Jan – Apr 2002        |   | $           | 1.25   |         | $      | 1.45             |   | $                                      | 1.31   |   | 130,800 |   |
| May – Aug 2002        |   | $           | 1.19   |         | $      | 1.33             |   | $                                      | 1.28   |   | 108,000 |   |
| Sept – Dec 2002       |   | $           | 0.95   |         | $      | 1.00             |   | $                                      | 0.98   |   | 132,000 |   |
| Jan – April 2003 |   | $           | 1.00   |         | $      | 1.03             |   | $                                      | 1.01   |   | 100,000 |   |
| May – Aug 2003        |   | $           | 0.90   |         | $      | 1.10             |   | $                                      | 1.05   |   | 210,000 |   |
| Sept – Dec 2003       |   | $           | .070   |         | $      | 1.00             |   | $                                      | 0.87   |   | 125,000 |   |

 

 

Under the terms of ourOperating Agreement, we are required to make annual (or morefrequent) distributions to our members and may not retain more than $200,000 ofnet cash from operations, unless (i) a 75% supermajority of our Board decidesotherwise, (ii) it would violate or cause a default under the terms of any debtfinancing or other credit facilities, or (iii) it is otherwise prohibited bylaw.

 

In 2002, Dakota Ethanol made cash distributions to us of approximately$8.9 million and approximately $1.2 million to the minority members of DakotaEthanol.  We, in turn, distributed toour members approximately $8.2 million, or $0.275 per capital unit.

 

In 2003, Dakota Ethanol made cash distributions to us of approximately$3.7 million and approximately $500,000 to the minority members.  We, in turn, distributed to our membersapproximately $3.5 million, or $0.12 per capital unit.

 

**Item6.  Management’s Discussion and Analysisor Plan of Operation.**

 

**CAUTIONARYSTATEMENT REGARDINGFORWARD-LOOKING INFORMATION**

 

You should read thefollowing discussion along with the audited financial statements and notes tothe audited financial statements included elsewhere in this report.  This report contains forward-lookingstatements, including, but not limited to, those under “Management’sDiscussion

 

13

----

 

and Analysis-Results of Operations,” and “Liquidity and CapitalResources,” involving future events, future business and other conditions, ourfuture performance, and our expected operations.  These statements are based on management’s beliefs andexpectations and on information currently available to management.  Forward-lookingstatements may include statements which use words such as “believe,” “expect,”“anticipate,” “intend,” “plan,” “estimate,” “predict,” “hope,” “will,”“should,” “could,” “may,” “future,” “potential,” or the negatives of thesewords, and all similar expressions.

 

Forward-lookingstatements involve numerous assumptions, risks and uncertainties.  Dakota Ethanol’s and our actual results oractual business or other conditions may differ materially from thosecontemplated by any forward-looking statements.  While we believe that these statements are accurate, our businessis dependent upon general economic conditions and various conditions specificto our industry and future trends and these factors could cause actual resultsto differ materially from the forward looking statements that have been made.  In particular,

 

•                  Although management expects demand for ethanol to increase, demand islargely driven by federal and state environmental regulations, which are oftensubject to change.

 

•                  Any lowering of gasoline prices will likely alsolead to lower prices for ethanol and adversely affect Dakota Ethanol’s operating results.

 

•                  The ethanolindustry and Dakota Ethanol’s business are sensitive to corn prices.  When corn prices increase, Dakota Ethanoloperating results may suffer.

 

•                  The ethanol industry and Dakota Ethanol aresensitive to natural gas prices. When natural gas prices increase, DakotaEthanol’s operating results may suffer.

 

•                  The ethanolindustry and Dakota Ethanol are dependent upon government subsidies andincentive payments. Dakota Ethanol’s operating income may be adversely impactedby a decrease in or termination of available government subsidies and incentivepayments.

 

•                  The ethanol industry and Dakota Ethanol maybe subject 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 costs.

 

•                  Dakota Ethanol is dependent upon BroinManagement, LLC to manage the day-to-day activities of the plant and uponBroin-related entities to market the ethanol and DDGS produced at the plant. Ifany of these activities cease providing services to Dakota Ethanol, the plant’soperations may be adversely affected.

 

We are not under any duty to update the forward-looking statementscontained in this report.  We cannotguarantee future results or performance, or what future business conditionswill be like.  We caution you not to putundue reliance on any forward-looking statements, which speak only as of thedate of this report.

 

**Overview**

 

On August 20, 2002, our members approved a reorganization from acooperative to a limited liability company. The reorganization became effective on August 31, 2002.  Upon completion of the reorganization to alimited liability company, we became the owner of the

 

14

----

 

cooperative’s 88% interest in Dakota Ethanol, LLC, a company that ownsand operates a 40 million gallon ethanol plant in Wentworth, South Dakota whichproduces ethanol and DDGS.  The plantbegan production on September 4, 2001.

 

Dakota Ethanol’s business consists of the production of ethanol and anethanol co-product, DDGS.  Althoughfederal and state government incentive programs have been a significant sourceof income since Dakota Ethanol began production in 2001, they are becoming lesssignificant because of the means by which the programs structure, fund, andcondition the payments.  Thus, theprimary factors that influence Dakota Ethanol’s operating and financialperformance are the prices at which we sell ethanol and DDGS and the costsrelated to production.  Although thereare various costs related to the production process, the two most significantare the price at which Dakota Ethanol purchases corn and the cost of naturalgas.  You should review these and otherfactors when evaluating our financial statements and results of operations.

 

**Results of Operations**

 

The following table presents, for the periodsindicated, the relative composition of selected income and expense data for ouroperations:

 
|                                |   | **Year ended  December 31,** |       |
|-------------------------------------|--------|-----------------------------------|------------|
|                                |   | **2003**                          |       | **2002** |   |
| Total Revenue                       |   | $                                 | 69,391,182 |   | $ | 65,643,669 |   |
| Cost of revenues                    |   | 60,198,865                        |       | 51,857,757 |   |
| General and administrative expenses |   | 2,620,736                         |       | 3,225,991 |   |
| Interest and other income           |   | 147,629                           |       | 176,905 |   |
| Interest expense                    |   | 1,461,763                         |       | 1,983,869 |   |
|                                     |        |                                   |            |  |  |  |  |

#### ** **

#### **Year Ended December 31,2003 Compared to Year Ended December 31, 2002**

 

**Sales. **Sales for the year ended December 31, 2003 were approximately $67.9million, consisting of $56.5 million in sales of ethanol (83%) and $11.4million in sales of DDGS (17%).  Salesfor the year ended December 31, 2002 were approximately $59.3 million,consisting of $49.9 million in sales of ethanol (84%) and $9.4 million in salesof DDGS (16%).  The increase in saleswas due primarily to an increase in ethanol and DDGS values.  The average sales price of ethanol pergallon was approximately 10% higher for the year ended December 31, 2003than for the year ended December 31, 2002.  The average price per ton of DDGS increased by 7% for the yearended December 31, 2003, compared to the year ended December 31,2002.

 

The price of ethanol andDDGS could be impacted by various factors. The price of ethanol tends to bear some 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 profitability.  The price of ethanol could also change based upon basicprinciples of supply and demand. Increased production of ethanol could result in lower prices for ethanolif the demand for ethanol does not keep up with the expected increase insupply.  We expect that existing ethanolplants will construct additions to increase their production and that new

 

15

----

 

fuel grade ethanol plants will be constructed inaddition to the 17 currently under construction.  Increased production will also lead to increased supplies ofDDGS.  These increased supplies couldlead to lower prices for DDGS.  Further,if the EPA begins to grant states like New Hampshire and California waiversfrom the oxygenated fuel requirement, our sales of ethanol and resulting financialcondition could be materially and adversely affected.

 

Inaddition to sales revenue, Dakota Ethanol recorded incentive revenue ofapproximately $1.5 million during the year ended December 31, 2003 andapproximately $6.3 million during the year ended December 31, 2002.  Incentive revenue consists of incomereceived from federal and state governments in connection with Dakota Ethanol’sethanol production.  For the year endedDecember 31, 2003, Dakota Ethanol recorded $536,000 of incentive income fromthe United States Department of Agriculture’s Commodity Credit Corporationunder its Bioenergy Program compared to approximately $5.2 million for the sameperiod in 2002.  The decrease in incomefrom the Bioenergy Program is due primarily to how the program is structuredand payments are made under the program. Payments are based, in part, on the increase in gallons of ethanolproduced compared to the prior year’s production.  Dakota Ethanol received its highest payment in the 2002 programyear (October 1, 2001 through September 30, 2002) because this wasits first year of production and the largest increase in production compared toits prior year’s.  Accordingly, itreceived less in incentive revenue in 2003 compared to 2002.

 

DakotaEthanol recorded incentive income of approximately $980,000 from the State ofSouth Dakota (under the Ethanol Producer Incentive Program) for the year endedDecember 31, 2003 and approximately $1.1 million for the year endedDecember 31, 2002.  The decrease inincome from the State of South Dakota in 2003 is due to a funding anddistribution cap under the program.  Ofthe $980,000, $ 480,000 is attributed to the 2003 program year, which endedJune 30, 2003 and $500,000 is for the 2004 program year.  Dakota Ethanol’s maximum allocation perprogram year under the South Dakota program is $1.0 million and $10.0 millionover the life of the plant.

 

Managementanticipates that Dakota Ethanol will continue to receive less payment under theBioenergy Program in the 2004 program year because it does not expect anysignificant increase in the production of ethanol during the 2004 program yearcompared to 2003.  In addition, weanticipate that we will not receive any further payments under the South Dakotaincentive program until the 2005 program year (beginning July 1, 2004)because the maximum incentive payment of $5 million to all South Dakota plantsduring the 2004 program year has already been allocated and distributed.  While the maximum payment to all ethanolplants in South Dakota during the 2005 program year will be increased to $6million, we may receive less under this program if more plants in South Dakotacommence or increase production of ethanol. Furthermore, the Bioenergy Program may not have sufficient funds tocover the requisite payments under the program, as experienced in the programin 2003.  Unless Congress extends theBioenergy Program, it also scheduled to expire in 2007.

 

**Cost of Revenues.** Dakota Ethanol’s cost ofrevenues for the year ended December 31, 2003 was approximately $60.2million (89% of sales), compared to $51.9 million (87% of sales) for the sameperiod in 2002.  The increase in thecost of revenues as a percentage of sales resulted primarily from an increasein corn and natural gas costs.   Theaverage price per bushel of corn was

 

16

----

 

approximately 7% higher forthe year ended December 31, 2003 than for the year ended December 31,2002.  The increase in the cost of cornwas attributed to a reduced carryout level from 2002 to 2003, caused by a decreasein the supply of corn from the 2002 harvest due to drought conditions.  The average cost of natural gas was alsoapproximately 50% higher for the year ended December 2003 than for theyear ended December 31, 2002.  Thedifference in the cost of natural gas was primarily the result of increaseddemand for natural gas and reduced production and inventories in the naturalgas industry.

 

Our cost of revenues could be materially affected by the price of corn and natural gas. Production of ethanol and DDGS requires a substantial amount of corn.  The price of corn is affected by weather, governmental policy, disease and other factors.  A significant reduction in the quantity of corn harvested due to adverse weather conditions such as drought, planting, domestic and foreign government farm policies and programs, carryout, demand and supply or other factors could result in increased corn prices and costs which would increase the cost to produce ethanol.  The significance and impact of these factors on the price of corn is difficult to predict.  Significant variations in actual growing conditions from normal growing conditions may also adversely affect our ability to procure corn.  Any events that tend to negatively affect the supply of corn will tend to increase prices and harm our business.  Further, the price of corn has fluctuated significantly in the past and may fluctuate in the future.  If we cannot manage price fluctuations effectively, our costs may be materially and adversely affected.

 

Natural gas prices havehistorically fluctuated dramatically. Natural gas has recently been available at prices exceeding historicalaverages.  These prices have exceededhistorical averages primarily because of increased demand and consumption dueto colder weather conditions and reduced production and inventories in thenatural gas industry.  We expect naturalgas prices to remain above the historical averages in the near future, whichcould adversely affect our cost of production.

 

**General and Administrative Expenses.**  Dakota Ethanol incurred general andadministrative expense of approximately $2.6 million for the year endedDecember 31, 2003, compared to general and administrative expense ofapproximately $3.2 million for the year ended December 31, 2002.  The decrease was primarily the result ofpaying a decreased management incentive fee in 2003 caused by a correspondingdecrease in net income on which the management incentive fee is based and adecrease in professional fees in 2003.

 

**Interest Expense.**  Dakota Ethanol recorded an interest expense of  $1.5 million on its long-term debt, comparedto an interest expense of $2.0 million for the year ended December 31,2002.  The decrease in interest expensewas due in part to a decrease in the outstanding principal balance of long-termdebt and a reduction of interest rates. The average outstanding principal balance of long-term debt for the yearended December 31, 2003 was $16.6 million compared to $22.4 million forthe year ended December 31, 2002, which was due largely to reducing theoutstanding principal balance of the variable rate, revolving loan.  The average interest rate of long-term debtwas 8.8% in 2003 compared to 8.9% in 2002. The reduction in interest rates was attributed to refinancing certainlong-term loans in 2002, as discussed below under “Liquidity and CapitalResources—Cash Flow from Financing Activities.”

 

17

----

 

**Interest and Other Income.** Interest income consists ofincome earned on cash on hand and short-term investments generated fromoperations.  For the year endedDecember 31, 2003, Dakota Ethanol and Lake Area Corn Processors had $5,000of interest income compared to $87,000 of interest income in the same period of2002.  The reduction of interest incomeresulted from using cash to reduce the outstanding principal balance oflong-term debt.

 

Anadditional $114,000 of other income for the year ended December 31, 2003was recorded as a result of Dakota Ethanol’s allocation of earnings from itsinvestment in Ethanol Products, LLC, compared to $76,014 for the year endedDecember 31, 2002.  This incomeresults from Dakota Ethanol’s $250,000 investment in Ethanol Products in 2000in exchange for a 5% ownership interest.

 

**Net Income.** Lake Area Corn Processorsreported a net income of $4,615,000 for the year ended December 31, 2003,compared to a net income of $7,705,000 in the same period in December 31,2002.  As discussed above, the decreasewas primarily a result of the reduction in incentive revenue and an increase incorn and natural gas costs, which were offset by an increase in sales ofethanol and DDGS.

 

**Liquidity and CapitalResources. **The following table shows our cash flows forthe last two years:

 
|                                   |   | **Year ended  December 31,** |      |
|----------------------------------------|--------|-----------------------------------|-----------|
|                                   |   | **2003**                          |      | **2002** |   |
| Net cash  from operating activities    |   | $                                 | 7,086,879 |   | $ | 13,197,253 |   |
| Net cash used for investing activities |   | (230,288                          | )         | (1,833,073 | ) |
| Net cash used for financing activities |   | (6,759,775                        | )         | (17,443,805 | ) |
|                                        |        |                                   |           |  |  |  |  |

 

**Cash Flow From Operations.**  The net cash flow from operating activitiesof Dakota Ethanol and Lake Area Corn Processors was approximately $7.1 millionfor the year ended December 31, 2003, compared to $13.2 million for theyear ended December 31, 2002.  Theprimary variances between the respective periods were the amount of change innet income ($3.1 million), change in current assets and liabilities balances($2.7 million) and the amount of change in the minority interest in thesubsidiary ($456,000).  For the yearended December 31, 2003, the cash flow from operations consisted of netincome of $4.6 million and net non-cash expenses of $2.8 million, which wereoffset by increased working capital requirements of $300,000.  The change in working capital requirementswas primarily a result of a $645,000 increase in inventory, and $292,000increase in investments in commodity contracts for natural gas and grain,offset by a $754,000 increase in accounts payable.  For the year ended December 31, 2002, the cash flow fromoperations consisted of net income of $7.7 million and net non-cash expenses of$3.1 million, which were offset by increased working capital requirements of$2.3 million.  The change in workingcapital requirements was primarily a result of a $2.6 million decrease inreceivables, offset by a $311,000 increase in investments in commoditycontracts for natural gas and grain.

 

18

----

 

**Cash Flow From Investing Activities.*** *The net cash flow used for investing activities was $230,000 for theyear ended December 31, 2003, compared to $1.8 million for the year endedDecember 31, 2002.  Dakota Ethanolspent $326,000 for investing activities during the year ended December 31,2003 to purchase various pieces of production equipment.** **Thisexpenditure was offset by an approximately $95,000 change in other assets.  During the year ended December 31,2002, Dakota Ethanol spent approximately $1.4 million for investing activitiesto install a thermal oxidizer for the ethanol plant.  A thermal oxidizer is a pollution controls device designed toreduce emissions.  Dakota Ethanol spentan additional $500,000 to purchase various pieces of production equipment.  These expenditures were also offset by anapproximately $100,000 change in other assets as the result of cashdistributions received from Ethanol Products.

 

**Cash Flow From Financing Activities.**  Net cash used for financing activities was$6.8 million for the year ended December 31, 2003, compared to $17.4million for the year ended December 31, 2002.  Net cash used for financing activities was $6.8 million for theyear ended December 31, 2003, consisting of $2.9 million for repayment ofprincipal of long-term debt, a $3.5 million cash distribution to Lake Area CornProcessors’ members, and a $500,000 cash distribution to the minority membersof Dakota Ethanol.  These payments wereoffset by Dakota Ethanol’s $236,000 increase in outstanding checks drawn inexcess of bank balances.  Net cash usedfor financing activities for the year ended December 31, 2002 was $17.4million, consisting of $8.5 million for repayment of principal on long-termdebt, an $8.1 million cash dividend distribution to Lake Area Corn Processors’members and a $1.2 million cash distribution to the minority members of DakotaEthanol.  These payments were offset byDakota Ethanol’s $575,000 increase in outstanding checks drawn in excess ofbank balances.

 

First National Bank of Omaha is Dakota Ethanol’s primary lender.  Dakota Ethanol entered into a ConstructionLoan Agreement and Construction Note with First National Bank of Omaha as ofSeptember 25, 2000, for up to $26.6 million in debt financing to fund thebalance of the construction costs for the ethanol plant.  Until construction of the ethanol plant wascompleted, Dakota Ethanol paid interest at First National’s national base rateplus 3% and made quarterly interest only payments to First National Bank ofOmaha.  After construction wascompleted, the outstanding principal and interest was amortized over a ten-yearperiod at 9% interest annually.  OnJuly 29, 2002, Dakota Ethanol refinanced its Construction Note with FirstNational Bank into an approximately $9.6 million variable rate note and anapproximately $14.5 million fixed rate note and, on November 1, 2002,Dakota Ethanol refinanced the approximately $9.4 million outstanding balance onits variable rate note into two variable notes with balances of approximately$4.4 million and $5 million, in order to facilitate use of First NationalBank’s cash management services.  The fixedrate note bears 9% interest annually and is due on September 1, 2011.Principal payments made on the fixed rate note were $1,565,000 for the yearended December 31, 2003, compared to payment of $3,060,000 for the yearended December 31, 2002.

 

The variable rate notes bear interest at .50% over the national baserate set by First National Bank of Omaha, which may be reduced if DakotaEthanol’s ratio of indebtedness to net worth improves, with a minimum interestrate of 5% annually.  The interest rateon the variable rate notes was 5.0% as of December 31, 2003, compared to arate of 5.0% as of December 31, 2002. Until July 29, 2005, Dakota Ethanol has the option to fix thevariable rate notes at 2.5% over the rate published by the Federal Home LoanBank of Topeka, Kansas at the time the note is fixed.  The $5

 

19

----

 

million variable rate note is set up as a revolving loan that allowsDakota Ethanol to reborrow up to $5 million of any repaid principal on arevolving basis, subject to a 0.375% annual commitment fee assessed quarterlyon any funds not borrowed.  There isalso a prepayment penalty on both variable rate notes if Dakota Ethanol prepaysin full before July 29, 2005. Principal payments made on the non-revolving variable rate note were$1,365,000 for the year ended December 31, 2003, compared to a payment of$5,516,000 for the year ended December 31, 2002.  In addition, $0 remained outstanding on the revolving loan as ofDecember 31, 2003, compared to $0 outstanding as of December 31,2002.

 

Dakota Ethanol incurredapproximately $1.5 million in interest expense for the year endedDecember 31, 2003, compared to $2.0 million for the year endedDecember 31, 2002.

 

The notes from FirstNational are secured by Dakota Ethanol’s real property, personal property(including general intangibles), an assignment of its interest in theDesign/Build Contract with Broin and an assignment of all rents and leases infavor of First National.  TheConstruction Loan Agreement contains debt service coverage ratio, workingcapital, net worth and other standard negative and affirmative covenants, allof which were complied with as of December 31, 2003.  On November 1, 2002, First Nationalagreed to amend the Construction Loan Agreement to revise the method forcalculating working capital and to include the unused amount of the revolvingnote in evaluating Dakota Ethanol’s compliance with the financialcovenants.  In addition to the regularpayments on the notes, the Construction Loan Agreement provides that 10% ofDakota Ethanol’s excess cash flow, as defined in the Construction LoanAgreement, must be paid annually on the unpaid principal amount.  If an event of default occurs, FirstNational may terminate the Construction Loan Agreement and declare the entireamount immediately due and owing. Events of default under the Agreement generally include failure to makepayments when due or violation of one or more of the Agreement’s covenants.

 

Dakota Ethanol also has anote payable to Sioux Valley Southwestern Energy for $85,000 related to theextension of utility lines to the plant. The loan is payable over ten years, beginning on October 1, 2001,with an effective interest rate of approximately 9%.  Principal payments of $5,667 were made for the year endedDecember 31, 2003, compared to payments of $4,243 for the year endedDecember 31, 2002.

 

On June 1, 2004,Dakota Ethanol will commence paying principal and interest on a portion of a$1.323 million tax increment revenue bond series issued by Lake County, SouthDakota on December 2, 2003.  DakotaEthanol is obligated to make payment to the sole purchaser of these bonds inconnection with a guarantee dated September 23, 2003 that Dakota Ethanolprovided to this purchaser.  Theinterest rate on the bonds is 7.75% per year.  The bonds require semi-annual payments of interest onDecember 1 and June 1, along with payment of principal onJune 1.  Dakota Ethanol’s paymentobligation will continue until maturity in 2018 unless Lake County realizes asufficient increase in property taxes from the real estate on which the ethanolplant is located to cover the principal and interest payments of the taxincrement revenue bond series.  DakotaEthanol expects to satisfy this obligation through cash flows from operations.

 

The obligation with respect to these bonds is attributed toa guarantee.  On September 23, 2003, Dakota Ethanolagreed to guarantee to First National Bank of Brookings, South Dakota, the

 

20

----

 

sole bondholder of certain revenue bonds issued in2001, the debt service obligation of a specific taxable series of tax incrementrevenue bonds to be issued by Lake County, South Dakota.  In April 2001, Dakota Ethanol receivedapproximately $1.9 million in proceeds from the issuance of tax incrementrevenue bonds issued by Lake County. The funds from these bonds were used to pay for infrastructureimprovements to the plant.  The fundswere to be repaid to First National by Lake County from an increase in propertytaxes expected to be realized from the real estate on which the plant islocated.  However, because the land andbuilding on which the plant is located were appraised at a lower than expectedvalue following the issuance of these bonds, Lake County determined that aninadequate amount in property taxes was expected in the future to cover thenecessary principal and interest payments on the bonds.  As a result, Lake County provided to FirstNational on December 2, 2003 a refund on the bonds issued in 2001 andsubsequently reissued to First National new tax increment revenue bonds in twodifferent series, a taxable series in the amount of $1.323 million and atax-exempt series in the amount of $824,599.

 

As a condition to FirstNational purchasing the newly reissued bonds, Dakota Ethanol agreed toguarantee to First National the principal and interest obligation of thetaxable bond series ($1.323 million). Under the guarantee, Dakota Ethanol is not obligated to make anyprincipal or interest payment on the taxable bond series unless Lake Countyrealizes an insufficient amount in property taxes from the real estate on whichthe plant is located to cover the principal and interest payments on thetaxable series of bonds.  However, it isexpected that Lake County will not realize a sufficient amount in propertytaxes from the plant beginning in 2004 to cover all of the necessary principaland interest payments on the taxable bond series.  Therefore, Dakota Ethanol will be obligated under the guaranteeto pay First National an amount in principal and interest equal to thedifference between the debt service obligation on the taxable bond series andthe amount in property taxes realized to cover the debt service on the taxablebond series, or a sum of $573,315.  Itis anticipated that Dakota Ethanol’s obligation under this guarantee will beginon June 1, 2004 and will continue until Lake County realizes a sufficientincrease in property taxes from the plant to cover the principal and interestpayments on the taxable bond series, which may never occur.

 

In addition to DakotaEthanol’s long-term debt obligations, Dakota Ethanol has certain othercontractual cash obligations.  Thefollowing table provides information regarding our consolidated contractualobligations as of December 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                          |   | $                          | 15,166,503 |   | 2,995,344 |   | 6,037,924 |   | 3,750,574 |   | 2,382,661 |   |
| Electricity Purchase  Commitments       |   | 2,318,800                  |       | 290,400 |   | 897,600 |   | 616,800 |   | 514,000 |   |
| Related Party Agreements                |   | 1,310,877                  |       | 615,855 |   | 695,022 |   | — |   | — |   |
| Guarantee Liability                     |   | 573,315                    |       | 62,195 |   | 187,845 |   | 122,998 |   | 200,277 |   |
| **Total Contractual Cash  Obligations** |   | $                          | 19,369,495 |   | 3,963,794 |   | 7,818,391 |   | 4,490,372 |   | 3,096,938 |   |

 

Dakota Ethanol expects tocontinue operating its plant at, or above, name-plate capacity for the nexttwelve months.  Dakota Ethanol expectsto have sufficient cash from operations to cover its operating and administrativecosts and intends to fund working capital, minor capital expenditures, and debtservice obligations, for the next twelve months primarily through cash flowsgenerated from its operating activities. However, in the event that we are required to apply the

 

21

----

 

Midwest Scaling Method or “multiplier” to quantifyemissions by the EPA or DENR, or other similar emissions quantification method,we may have to fund certain capital expenditures through additional debt orequity financing in order to pay for additional emission control equipment andprocesses.  Management is unable topredict at this time, however, the costs and effects the multiplier would haveon plant operations, or the extent of potential sanctions from the DENR foralleged excessive emissions prior to taking corrective action in 2002.

 

##### **Off-Balance Sheet Arrangements**

 

Wedo not use or have any off-balance sheet financial arrangements.

 

**Recent AccountingPronouncements**

 

Management has reviewedthe recent accounting pronouncements and has not identified any that arerelevant to our financial statements.

 

**Critical AccountingPolicies and Estimates**

 

Preparation of our financial statements require estimates and judgmentsto be made that affect the amounts of assets, liabilities, revenues, andexpenses reported.  Such decisionsinclude the selection of the appropriate accounting principles to be appliedand the assumptions on which to base accounting estimates.  Management continually evaluates theseestimates based on historical experience and other assumptions we believe to bereasonable under the circumstances.

 

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

 

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

 

## *Commitments and Contingencies*

 

Contingencies, by their nature, relate to uncertainties that requiremanagement to exercise judgment both in assessing the likelihood that aliability has been incurred, as well as in estimating the amount of thepotential expense.  In conformity withaccounting principles generally accepted in the United States, we accrue anexpense when it is probable that a liability has been incurred and the amountcan be reasonably estimated.

 

## *Inventory Valuation*

 

Dakota Ethanol accounts for its corn inventory at estimated netrealizable market value.  Corn is anagricultural commodity that is freely traded, has quoted market prices, may besold without significant further processing and has predictable andinsignificant costs of disposal.  DakotaEthanol derives its estimates from local market prices determined by grainterminals in its

 

22

----

 

area.  Changes in the marketvalues of corn inventory is recognized as a component of cost of revenues.  Ethanol and DDGS are states at netrealizable value.  Work-in-process,supplies, parts and chemical inventory are stated at the lower of cost ormarket on the first-in, first-out method.

 

*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.

 

## *Long-Lived Assets*

## * *

Depreciation and amortization of our property, plant and equipment isprovided on the straight-line method by charges to operations at rates based uponthe expected useful lives of individual or groups of assets.  Economic circumstances or other factors maycause management’s estimates of expected useful lives to differ from actual.

 

Long-lived assets, including property, plant and equipment and investmentsare evaluated for impairment on the basis of undiscounted cash flows wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable.  Animpaired asset is written down to its estimated fair market value based on thebest information available. Considerable management judgment is necessary to estimate discountedfuture cash flows and may differ from actual.

 

## *Accounting for Derivative Instruments and HedgingActivities*

## * *

Dakota Ethanol minimizes the effects of changes in the price ofagricultural commodities by engaging Broin Management, LLC to useexchange-traded futures and options contracts to minimize its net positions inthese inventories and contracts.  DakotaEthanol accounts for changes in market value on exchange-traded futures andoption contracts at exchange values. Dakota Ethanol also accounts for changes in value of forward purchaseand sales contracts at local market prices determined by grain terminals in itsarea.  Changes in the market value ofall these contracts are recognized in earnings as a component of cost ofrevenues.

 

23

----

 

**Item7.  Financial Statements.**

 

LakeArea Corn Processors’ financial statements, described as follows, are appendedto the signature page of this report beginning at page F-1.

 

•                  IndependentAuditor’s Report, dated January 22, 2004.

 

•                  ConsolidatedBalance Sheet as of December 31, 2003.

 

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

 

•                  ConsolidatedStatements of Changes in Members’ Equity for the years ended December 31,2003 and 2002.

 

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

 

•                  Notes toFinancial Statements.

 

**Item8.  Changes in and Disagreements WithAccountants on Accounting and Financial Disclosure.**

 

None.

 

**Item8A.  Controls and Procedures**

 

EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES

 

Our chief executive officer and chief financial officer, afterevaluating the effectiveness of our “disclosure controls and procedures” (asdefined in Rule 13a-14(c) under the Securities Exchange Act of 1934, asamended) as of the end of the period covered by this report, have concludedthat our disclosure controls and procedures are effective in ensuring thatmaterial information required to be disclosed is included in the reports thatwe file with the Securities and Exchange Commission.

 

CHANGES IN INTERNAL CONTROLS

 

There were no significant changes in our or Dakota Ethanol’s internalcontrols or, to the knowledge of our management, in other factors that couldsignificantly affect these controls subsequent to the end of the period coveredby this report.

 

24

----

 

### **PARTIII**

### ** **

**Item9.  Directors, Executive Officers,Promoters and Control Persons; Compliance With Section 16(a) of theExchange Act.**

 

Except for the Code ofEthics information set forth below, information required by this item isincorporated by reference from our definitive Proxy Statement for the AnnualMeeting of Members, to be filed with the Commission not later than 120 daysafter December 31, 2003.

 

We adopted a Code ofEthics on June 25, 2003, a copy of which will be provided to any person,without charge, upon request in writing. Please direct your request in writingto the following person and address:

 

Membership Coordinator

Lake Area Corn Processors,LLC

46269 South Dakota Highway34

P.O. Box 100

Wentworth, South Dakota57075

 

**Item10.  Executive Compensation.**

 

The information requiredby this item is incorporated by reference from our definitive Proxy Statementfor the Annual Meeting of Members, to be filed with the Commission not laterthan 120 days after December 31, 2003.

 

**Item11.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

The information requiredby this item is incorporated by reference from our definitive Proxy Statementfor the Annual Meeting of Members, to be filed with the Commission not laterthan 120 days after December 31, 2003.

 

**Item12.  Certain Relationships and RelatedTransactions.**

 

The information requiredby this item is incorporated by reference from our definitive Proxy Statementfor the Annual Meeting of Members, to be filed with the Commission not later than120 days after December 31, 2003.

 

**Item13.  Exhibits and Reports on Form 8-K.**

 

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

 

(a)                                  Exhibits. See Exhibit Index

 

(b)                                 The following reports were filed onForm 8-K during the fourth quarter ended December 31, 2003:

 
| **Date of Report**     |   | **Item Reported**                             |
|------------------------|--------|-----------------------------------------------|
| November 26, 2003 |   | Item No. 5—Cash  Distribution to Members |

 

25

----

 

**Item14.  Principal Accountant Fees andServices.**

 

The information requiredby this item is incorporated by reference from our definitive Proxy Statementfor the Annual Meeting of Members, to be filed with the Commission not laterthan 120 days after December 31, 2003.

 

SIGNATURES

 

In accordance with Section 13or 15(d) of the Exchange Act, the registrant caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

 

 
|                      | LAKE AREA CORN PROCESSORS, LLC             |
|---------------------------|--------------------------------------------|
|                      |                                       |
| Date: March 30, 2004 | /s/ Douglas Van  Duyn                      |
|                      | Douglas Van Duyn, Chief Executive  Officer |
|                      |                                       |
| Date: March 30, 2004 | /s/ Brian Woldt                            |
|                      | Brian Woldt, Chief Financial Officer       |

 

In accordance with the Exchange Act, this report has been signed belowby the following persons on behalf of the registrant and in the capacities andon the dates indicated.

 

 
| Date: March 30, 2004 | /s/ Douglas Van Duyn                                                                        |   |
|---------------------------|---------------------------------------------------------------------------------------------|--------|
|                      | Douglas Van Duyn, Chief Executive  Officer, Manager (Principal Executive Officer)           |
|                      |                                                                                        |
|                      |                                                                                        |
| Date: March 30, 2004 | /s/ Brian Woldt                                                                             |   |
|                      | Brian Woldt, Chief Financial Officer,  Manager (Principal Financial and Accounting Officer) |
|                      |                                                                                        |
|                      |                                                                                        |
| Date: March 30, 2004 | /s/ Ronald C. Alverson                                                                      |   |
|                      | Ronald C. Alverson, Manager                                                                 |
|                      |                                                                                        |
|                      |                                                                                        |
| Date: March 30, 2004 | /s/ Todd M. Brown                                                                           |   |
|                      | Todd M. Brown, Manager                                                                      |
|                      |                                                                                        |
|                      |                                                                                        |
| Date: March 30, 2004 | /s/ Dale I. Schut                                                                           |   |
|                      | Dale I. Schut, Manager                                                                      |
|                      |                                                                                        |
|                      |                                                                                        |
| Date: March 30, 2004 | /s/ Dale L. Thompson                                                                        |   |
|                      | Dale L. Thompson, Manager                                                                   |
|                      |                                                                                        |
|                      |                                                                                        |
| Date: March 30, 2004 | /s/ Gregory Van Zanten                                                                      |   |
|                      | Gregory Van Zanten,  Manager                                                                |
|                           |                                                                                             |        |  |

 

26

----

 

**EXHIBITINDEX**

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                           |   | **Filed  Herewith** |   | **Incorporated  by Reference**                                                                                             |   |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------|--------|
| 2.1             |   | Plan of Reorganization                                                                                                                                                                    |   |                |   | Appendix A to the Issuer’s Prospectus filed with the Commission on  July 19, 2002 (File No. 333-66552)           |   |
|            |   |                                                                                                                                                                                      |   |                |   |                                                                                                                       |   |
| 3.1             |   | Articles of Organization                                                                                                                                                                  |   |                |   | Appendix B to the Issuer’s Prospectus filed with the Commission  pursuant to Rule 424(b)(3) on July 19, 2002     |   |
|            |   |                                                                                                                                                                                      |   |                |   |                                                                                                                       |   |
| 3.2             |   | Articles of Amendment to Articles of Organization                                                                                                                                         |   |                |   | Exhibit 3.1(ii) to the Issuer’s Form 10-QSB filed with the Commission  on November 14, 2003 (File No. 333-66552) |   |
|            |   |                                                                                                                                                                                      |   |                |   |                                                                                                                       |   |
| 3.3             |   | Operating Agreement, as adopted on September 1, 2002                                                                                                                                 |   |                |   | Exhibit 3.1(ii) to the Issuer’s Form 10-QSB filed with the Commission  on November 14, 2003                      |   |
|            |   |                                                                                                                                                                                      |   |                |   |                                                                                                                       |   |
| 3.4             |   | Amendment and Addendum to Operating Agreement, dated June 25,  2003                                                                                                                  |   |                |   | Exhibit 3.1(iii) to the Issuer’s Form 10-QSB filed with the  Commission on August 14, 2003 (File No. 333-66552)  |   |
|            |   |                                                                                                                                                                                      |   |                |   |                                                                                                                       |   |
| 3.5             |   | Third Amended and Restated Operating Agreement, dated August 27,  2003                                                                                                               |   |                |   | Exhibit 3.2 to the Issuer’s Form 10-QSB filed with the Commission on  November 14, 2003                          |   |
|            |   |                                                                                                                                                                                      |   |                |   |                                                                                                                       |   |
| 4.1             |   | Form of Class A Capital Unit Certificate                                                                                                                                                  |   |                |   | Exhibit 4.1 to the Issuer’s Form S-4 filed with the Commission on  August 2, 2001 (File No. 333-66552)           |   |
|            |   |                                                                                                                                                                                      |   |                |   |                                                                                                                       |   |
| 10.1            |   | DDGS Marketing Agreement with Dakota Commodities, dated June 7,  2001                                                                                                                |   |                |   | Exhibit 10.1 to the Issuer’s Form S-4 filed with the Commission on  August 2, 2001                               |   |
|            |   |                                                                                                                                                                                      |   |                |   |                                                                                                                       |   |
| 10.2            |   | Ethanol Marketing and Services Agreement with Ethanol Products, LLC,  dated October 7, 1999 and First Amendment to Ethanol and Marketing  Service Agreement, dated June 7, 2001 |   |                |   | Exhibit 10.2 to the Issuer’s Form S-4 filed with the Commission on  August 2, 2001                               |   |
|            |   |                                                                                                                                                                                      |   |                |   |                                                                                                                       |   |
| 10.4            |   | Management Agreement with Broin Management, LLC, dated  October 7, 1999                                                                                                              |   |                |   | Exhibit 10.4 to the Issuer’s Form S-4 filed with the Commission on  August 2, 2001                               |   |

 

27

----

 
| 10.5   |   | Corn Price Risk Management Agreement with Broin Management, LLC,  dated December 17, 1999                  |   |   |   | Exhibit 10.5 to the Issuer’s Form S-4 Filed with the Commission on  August 2, 2001                                 |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                            |   |   |   |                                                                                                                         |   |
| 10.6   |   | Licensing Agreement with Broin and Associates, Inc., dated  October 7, 1999                                |   |   |   | Exhibit 10.6 to the Issuer’s Form S-4 filed with the Commission on  August 2, 2001                                 |   |
|   |   |                                                                                                            |   |   |   |                                                                                                                         |   |
| 10.7   |   | Construction Loan Agreement with First National Bank of Omaha, dated  September 25, 2000                   |   |   |   | Exhibit 10.7 to the Issuer’s Form S-4 filed with the Commission on  August 2, 2001                                 |   |
|   |   |                                                                                                            |   |   |   |                                                                                                                         |   |
| 10.8   |   | Construction Note payable to First National Bank of Omaha, dated  September 25, 2000                       |   |   |   | Exhibit 10.8 to the Issuer’s Form S-4 filed with the Commission on  August 2, 2001                                 |   |
|   |   |                                                                                                            |   |   |   |                                                                                                                         |   |
| 10.9   |   | Water Purchase Agreement with Big Sioux Community Water Systems,  Inc., dated June 2, 2000                 |   |   |   | Exhibit 10.9 to the Issuer’s Form S-4 filed with the Commission on  August 2, 2001                                 |   |
|   |   |                                                                                                            |   |   |   |                                                                                                                         |   |
| 10.10  |   | U. S. Energy Service Agreements, dated April 1, 1999 and  March 9, 2001                               |   |   |   | Exhibit 10.11 to the Issuer’s Form S-4 filed with the Commission on  August 2, 2001                                |   |
|   |   |                                                                                                            |   |   |   |                                                                                                                         |   |
| 10.11  |   | Railcar Lease Agreement with Chicago Freight Car Leasing Co., dated  June 6, 2001                          |   |   |   | Exhibit 10.12 to the Issuer’s Form S-4 filed with the Commission on  August 2, 2001                                |   |
|   |   |                                                                                                            |   |   |   |                                                                                                                         |   |
| 10.12  |   | Gas Management Agreement with Northwestern Energy, dated  August 2000                                      |   |   |   | Exhibit 10.13 to the Issuer’s Form S-4 filed with the Commission on  August 2, 2001                                |   |
|   |   |                                                                                                            |   |   |   |                                                                                                                         |   |
| 10.13  |   | Service Request Form with Northwestern Energy, dated August 2000                                           |   |   |   | Exhibit 10.14 to the Issuer’s Form S-4 filed with the Commission on  August 2, 2001                                |   |
|   |   |                                                                                                            |   |   |   |                                                                                                                         |   |
| 10.14  |   | First Amendment to Construction Loan Agreement with First National  Bank of Omaha, dated July 29, 2002     |   |   |   | Exhibit 10.15 to the Issuer’s Form 10-QSB filed with the Commission  on August 22, 2002 (File No. 333-66552)       |   |
|   |   |                                                                                                            |   |   |   |                                                                                                                         |   |
| 10.15  |   | Railcar Lease Agreement with Trinity Industries Leasing Company,  dated July 5, 2002                       |   |   |   | Exhibit 10.16 to the Issuer’s Form 10-KSB filed with the Commission  on March 25, 2003  (File No.  333-66552) |   |
|   |   |                                                                                                            |   |   |   |                                                                                                                         |   |
| 10.17  |   | Second Amendment to Construction Loan Agreement with First National  Bank of Omaha, dated November 1, 2002 |   |   |   | Exhibit 10.17 to the Issuer’s Form 10-KSB filed with the Commission  on March 25, 2003                             |   |

 

28

----

 
|   |   |                                                                           |   |   |   |                                                                                                                    |   |
|--------|--------|--------------------------------------------------------------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|
| 10.18  |   | Memorandum of Understanding with Dakota Commodities, dated  April 1, 2003 |   |   |   | Exhibit 10.18 to the Issuer’s Form 10-QSB filed with the Commission  on May 15, 2003  (File No. 333-66552)    |   |
|   |   |                                                                           |   |   |   |                                                                                                                    |   |
| 10.19  |   | Debt Service Guarantee                                                         |   |   |   | Exhibit 10.1 to the Issuer’s Form 10-QSB filed with the Commission on  November 14, 2003 (File No. 333-66552) |   |
|   |   |                                                                           |   |   |   |                                                                                                                    |   |
| 10.20  |   | Natural Gas Supply and Transportation Agreements dated  October 23, 2003  |   | ý |   |                                                                                                                    |   |
|   |   |                                                                           |   |   |   |                                                                                                                    |   |
| 31.1   |   | Rule 13a-14/15d-14(a) Certifications                                           |   | ý |   |                                                                                                                    |   |
|   |   |                                                                           |   |   |   |                                                                                                                    |   |
| 31.2   |   | Rule 13a-14/15d-14(a) Certifications                                           |   | ý |   |                                                                                                                    |   |
|   |   |                                                                           |   |   |   |                                                                                                                    |   |
| 32.1   |   | Section 1350 Certification                                                |   | ý |   |                                                                                                                    |   |
|   |   |                                                                           |   |   |   |                                                                                                                    |   |
| 32.2   |   | Section 1350 Certification                                                |   | ý |   |                                                                                                                    |   |

 

29

----

 

# **LAKE AREA CORNPROCESSORS, LLC**

 

***CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2003 AND 2002***

 

----

 

**LAKE AREA CORN PROCESSORS, LLC**

 

Table of Contents

 

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

 

----

 

## **INDEPENDENTAUDITOR’S REPORT**

 

The Board of Directors**Lake Area Corn Processors, LLC**Wentworth, South Dakota

 

We have audited theaccompanying consolidated balance sheet of **Lake Area Corn Processors, LLC**as ofDecember 31, 2003, and the related consolidated statements of operations,changes in members’ equity and cash flows for the years ended December 31,2003 and 2002. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our auditsin accordance with the auditing standards generally accepted in the UnitedStates of America. Those standards require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of **Lake Area Corn Processors, LLC**as ofDecember 31, 2003, and the results of its operations and its cash flowsfor the years ended December 31, 2003 and 2002, in conformity withaccounting principles generally accepted in the United States of America.

 

 

/s/ Eide Baily LLP

Minneapolis, MinnesotaJanuary 22, 2004

 

F-1

----

 

**LAKEAREA CORN PROCESSORS, LLCCONSOLIDATED BALANCE SHEETDECEMBER 31, 2003**

 
| **ASSETS**                         |   |       |       |
|------------------------------------|--------|------------|------------|
|                               |   |       |       |
| CURRENT  ASSETS                    |   |       |       |
| Cash                               |   | $          | 96,816     |   |
| Receivables                        |   |       |       |
| Ethanol  - related party           |   | 3,738,063  |       |
| Distillers  grains                 |   | 468,301    |       |
| Incentives                         |   | 166,667    |       |
| Other                              |   | 287,557    |       |
| Inventory                          |   |       |       |
| Raw  materials                     |   | 1,890,282  |       |
| Finished  goods                    |   | 568,527    |       |
| Parts  inventory                   |   | 461,816    |       |
| Work  in process                   |   | 508,742    |       |
| Investment  in commodity contracts |   | 728,550    |       |
| Prepaid  expenses                  |   | 97,276     |       |
| Total  current assets              |   | 9,012,597  |       |
|                               |   |       |       |
| PROPERTY  AND EQUIPMENT            |   |       |       |
| Land                               |   | 106,394    |       |
| Land  improvements                 |   | 2,238,975  |       |
| Buildings                          |   | 7,254,757  |       |
| Equipment                          |   | 31,276,838 |       |
|                               |   | 40,876,964 |       |
| Less  accumulated depreciation     |   | (4,888,200 | )          |
| Net  property and equipment        |   | 35,988,764 |       |
|                               |   |       |       |
| OTHER  ASSETS                      |   |       |       |
| Guarantee  premium                 |   | 564,197    |       |
| Other                              |   | 432,497    |       |
| Total  other assets                |   | 996,694    |       |
|                               |   |       |       |
|                               |   | $          | 45,998,055 |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-2

----

 
| **LIABILITIES AND MEMBERS’ EQUITY**                                    |   |       |       |
|-----------------------------------------------------------------------------|--------|------------|------------|
|                                                                        |   |       |       |
| CURRENT  LIABILITIES                                                        |   |       |       |
| Outstanding  checks in excess of bank balance                               |   | $          | 812,144    |   |
| Accounts  payable                                                           |   | 4,584,254  |       |
| Accounts  payable - related party                                           |   | 289,312    |       |
| Accounts  payable - construction - related party                            |   | 95,520     |       |
| Accrued  liabilities                                                        |   | 289,669    |       |
| Current  portion of guarantee payable                                       |   | 62,195     |       |
| Current  portion of notes payable                                           |   | 2,995,344  |       |
| Total  current liabilities                                                  |   | 9,128,438  |       |
|                                                                        |   |       |       |
| LONG-TERM  LIABILITIES                                                      |   |       |       |
| Guarantee  payable                                                          |   | 511,120    |       |
| Notes  payable                                                              |   | 12,171,159 |       |
| Total  long-term liabilities                                                |   | 12,682,279 |       |
|                                                                        |   |       |       |
| MINORITY  INTEREST                                                          |   | 2,863,277  |       |
|                                                                        |   |       |       |
| COMMITMENTS  AND CONTINGENCIES                                              |   |       |       |
|                                                                        |   |       |       |
| MEMBERS’  EQUITY                                                       |   |       |       |
| Capital  units, $0.50 stated value, 29,620,000 units issued and outstanding |   | 14,810,000 |       |
| Additional  paid-in capital                                                 |   | 96,400     |       |
| Retained  earnings                                                          |   | 6,417,661  |       |
| Total  members’ equity                                                 |   | 21,324,061 |       |
|                                                                        |   |       |       |
|                                                                        |   | $          | 45,998,055 |   |

 

F-3

----

 

**LAKEAREA CORN PROCESSORS, LLCCONSOLIDATED STATEMENTS OFOPERATIONSYEARS ENDED DECEMBER 31, 2003 AND 2002**

 
|                                                                                                            |   | **2003**       |           | **2002**   |   |
|-----------------------------------------------------------------------------------------------------------------|--------|----------------|----------------|------------|--------|
|                                                                                                            |   |           |           |       |   |
| REVENUES                                                                                                        |   |           |           |       |   |
| Sales                                                                                                           |   | **$**          | **67,877,247** | ** ** | $      | 59,329,676 |   |
| Incentive  income                                                                                               |   | **1,513,935**  | ** **     | 6,313,993  |   |
|                                                                                                            |   |           |           |       |   |
| Total  revenues                                                                                                 |   | **69,391,182** | ** **     | 65,643,669 |   |
|                                                                                                            |   |           | ** **     |       |   |
| COST  OF REVENUES                                                                                               |   | **60,198,865** | ** **     | 51,857,757 |   |
|                                                                                                            |   |           | ** **     |       |   |
| GROSS  PROFIT                                                                                                   |   | **9,192,317**  | ** **     | 13,785,912 |   |
|                                                                                                            |   |           | ** **     |       |   |
| EXPENSES                                                                                                        |   |           | ** **     |       |   |
| Organizational  costs                                                                                           |   | **—**     | ** **     | —     |   |
| Start-up  costs                                                                                                 |   | **—**     | ** **     | —     |   |
| General  and administrative expenses                                                                            |   | **2,620,736**  | ** **     | 3,225,991  |   |
|                                                                                                            |   |           | ** **     |       |   |
| INCOME  FROM OPERATIONS                                                                                         |   | **6,571,581**  | ** **     | 10,559,921 |   |
|                                                                                                            |   |           | ** **     |       |   |
| OTHER  INCOME (EXPENSE)                                                                                         |   |           | ** **     |       |   |
| Interest  and other income                                                                                      |   | **147,629**    | ** **     | 176,905    |   |
| Interest  expense                                                                                               |   | **(1,461,763** | **)**          | (1,983,869 | )      |
| Total  other income (expense)                                                                                   |   | **(1,314,134** | **)**          | (1,806,964 | )      |
|                                                                                                            |   |           | ** **     |       |   |
| NET  INCOME BEFORE INCOME TAXES                                                                                 |   | **5,257,447**  | ** **     | 8,752,957  |   |
|                                                                                                            |   |           | ** **     |       |   |
| BENEFIT  FROM INCOME TAXES                                                                                      |   | **—**     | ** **     | 49,953     |   |
|                                                                                                            |   |           | ** **     |       |   |
| NET  INCOME BEFORE MINORITY INTEREST                                                                            |   | **5,257,447**  | ** **     | 8,802,910  |   |
|                                                                                                            |   |           | ** **     |       |   |
| MINORITY  INTEREST IN SUBSIDIARY                                                                                |   | **(641,767**   | **)**          | (1,098,023 | )      |
|                                                                                                            |   |           | ** **     |       |   |
| NET  INCOME                                                                                                     |   | **$**          | **4,615,680**  | ** ** | $      | 7,704,887 |   |
|                                                                                                            |   |           | ** **     |       |   |
| BASIC  AND DILUTED EARNINGS PER UNIT                                                                            |   | **$**          | **0.16**       | ** ** | $      | 0.26 |   |
|                                                                                                            |   |           | ** **     |       |   |
| WEIGHTED  AVERAGE UNITS OF EQUITY STOCK OUTSTANDING FOR THE CALCULATION OF BASIC AND  DILUTED EARNINGS PER UNIT |   | **29,620,000** | ** **     | 29,620,000 |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-4

----

 

**LAKEAREA CORN PROCESSORS, LLCCONSOLIDATED STATEMENTS OF CHANGESIN MEMBERS’ EQUITYYEARS ENDED DECEMBER 31, 2003 AND 2002**

 
|                                        |   |               |       | **Additional  Paid-In  Capital** |                   |       |      |       |       |
|---------------------------------------------|--------|--------------------|------------|----------------------------------|------------------------|------------|-----------|------------|------------|
|                                        |   | **Capital  Units** |       |                             | **Retained  Earnings** |       | **Total** |       |
|                                        |   | **Shares**         |       | **Amount**                       |                   |       |      |       |
| BALANCE,  DECEMBER 31, 2001            |   | 29,620,000         |       | $                                | 14,810,000             |       | $         | 95,800     |       | $ | 5,797,000 |   | $ | 20,702,800 |   |
|                                        |   |               |       |                             |                   |       |      |       |       |   |   |
| Additional  paid-in capital received        |   |               |       |                             |                   | 600        |      |       |       | 600 |   |
| Net  income                                 |   |               |       |                             |                   |       |      | 7,704,887  |       | 7,704,887 |   |
| Distributions  paid ($.28 per capital unit) |   |               |       |                             |                   |       |      | (8,145,506 | )          | (8,145,506 | ) |
|                                        |   |               |       |                             |                   |       |      |       |       |   |   |
| BALANCE,  DECEMBER 31, 2002            |   | 29,620,000         |       | $                                | 14,810,000             |       | $         | 96,400     |       | $ | 5,356,381 |   | $ | 20,262,781 |   |
|                                        |   |               |       |                             |                   |       |      |       |       |   |   |
| Net  income                                 |   |               |       |                             |                   |       |      | 4,615,680  |       | 4,615,680 |   |
| Distributions  paid ($.12 per capital unit) |   |               |       |                             |                   |       |      | (3,554,400 | )          | (3,554,400 | ) |
|                                        |   |               |       |                             |                   |       |      |       |       |   |   |
| **BALANCE, DECEMBER 31, 2003**         |   | **29,620,000**     | ** ** | **$**                            | **14,810,000**         | ** ** | **$**     | **96,400** | ** ** | **$** | **6,417,661** | ** ** | **$** | **21,324,061** | ** ** |

 

See Notes to ConsolidatedFinancial Statements

 

F-5

----

 

**LAKEAREA CORN PROCESSORS, LLCCONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2003 AND 2002**

 
|                                                                 |   | **2003**       |          | **2002**    |   |
|----------------------------------------------------------------------|--------|----------------|---------------|-------------|--------|
| OPERATING  ACTIVITIES                                                |   |           |          |        |   |
| Net  income                                                          |   | **$**          | **4,615,680** | ** **  | $      | 7,704,887 |   |
| Changes  to income not affecting cash                                |   |           | ** **    |        |   |
| Depreciation                                                         |   | **2,164,551**  | ** **    | 2,064,007   |   |
| Amortization                                                         |   | **84,342**     | ** **    | 73,313      |   |
| Minority  interest in subsidiary                                     |   | **641,767**    | ** **    | 1,098,023   |   |
| Other                                                                |   | **(124,310**   | **)**         | (86,014     | )      |
| (Increase)  decrease in                                              |   |           | ** **    |        |   |
| Receivables                                                          |   | **(2,834**     | **)**         | 2,640,838   |   |
| Inventory                                                            |   | **(645,267**   | **)**         | (52,438     | )      |
| Prepaid  expenses                                                    |   | **(58,861**    | **)**         | 111,224     |   |
| Investment  in commodity contracts                                   |   | **(292,207**   | **)**         | (311,828    | )      |
| Increase  (decrease) in                                              |   |           | ** **    |        |   |
| Accounts  payable                                                    |   | **753,689**    | ** **    | 368,607     |   |
| Accrued  liabilities                                                 |   | **(49,671**    | **)**         | (413,366    | )      |
| NET  CASH FROM OPERATING ACTIVITIES                                  |   | **7,086,879**  | ** **    | 13,197,253  |   |
|                                                                 |   |           | ** **    |        |   |
| INVESTING  ACTIVITIES                                                |   |           | ** **    |        |   |
| Change  in other assets                                              |   | **95,906**     | ** **    | 98,628      |   |
| Purchase  of property and equipment                                  |   | **(326,194**   | **)**         | (1,931,701  | )      |
| NET  CASH USED FOR INVESTING ACTIVITIES                              |   | **(230,288**   | **)**         | (1,833,073  | )      |
|                                                                 |   |           | ** **    |        |   |
| FINANCING  ACTIVITIES                                                |   |           | ** **    |        |   |
| Outstanding  checks in excess of bank balance                        |   | **236,343**    | ** **    | 575,802     |   |
| Principal  payments on notes payable                                 |   | **(2,936,067** | **)**         | (8,580,040  | )      |
| Financing  costs paid                                                |   | **—**     | ** **    | (96,236     | )      |
| Additional  paid in capital received                                 |   | **—**     | ** **    | 600         |   |
| Distributions  paid to minority member                               |   | **(505,651**   | **)**         | (1,198,425  | )      |
| Distributions  paid to LACP members                                  |   | **(3,554,400** | **)**         | (8,145,506  | )      |
| NET  CASH USED FOR FINANCING ACTIVITIES                              |   | **(6,759,775** | **)**         | (17,443,805 | )      |
|                                                                 |   |           | ** **    |        |   |
| NET  INCREASE (DECREASE) IN CASH                                     |   | **96,816**     | ** **    | (6,079,625  | )      |
|                                                                 |   |           | ** **    |        |   |
| CASH  AT BEGINNING OF PERIOD                                         |   | **—**     | ** **    | 6,079,625   |   |
| CASH  AT END OF PERIOD                                               |   | **$**          | **96,816**    | ** **  | $      | — |   |
|                                                                 |   |           | ** **    |        |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                   |   |           | ** **    |        |   |
|                                                                 |   |           | ** **    |        |   |
| Cash  paid during the year for Interest, net of capitalized interest |   | **$**          | **1,461,763** | ** **  | $      | 2,625,192 |   |
|                                                                 |   |           | ** **    |        |   |
| Income  taxes refunded                                               |   | **$**          | **—**    | ** **  | $      | 49,953 |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-6

----

 

**LAKEAREA CORN PROCESSORS, LLCNOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 1 - NATURE OF OPERATIONS**

 

*Principal Business Activity*

 

Lake Area CornProcessors, LLC (formerly Lake Area Corn Processors Cooperative, or theCooperative) is a South Dakota limited liability company located in Wentworth,South Dakota. Lake Area Corn Processors, LLC (LACP or the Company) wasorganized by investors to provide a portion of the corn supply for a 40million-gallon (annual capacity) ethanol plant, owned by Dakota Ethanol, LLC(Dakota Ethanol). On September 4, 2001, the ethanol plant commenced itsprincipal operations. The Company sells ethanol and related products tocustomers located in North America.

 

On April 2, 2001,Lake Area Ethanol, LLC was formed. The initial member of Lake Area Ethanol, LLCwas the Cooperative. Lake Area Ethanol, LLC was formed for the purpose ofacquiring the assets and liabilities of the Cooperative. The Board of Directorsof the Cooperative approved a plan of reorganization related to an exchangewhereby the LLC would acquire the assets and liabilities of theCooperative.  On August 20, 2002,the members of the Cooperative approved the plan of reorganization.  The effective date of the reorganization wasthe close of business on August 31, 2002. The transaction included anexchange of interests whereby the assets and liabilities of the Cooperativewere transferred for capital units of Lake Area Ethanol, LLC. For financialstatement purposes, no gain or loss was recorded as a result of the exchangetransaction.

 

As a result of theexchange, the Cooperative was dissolved, with Lake Area Ethanol, LLC’s capitalunits distributed to the stockholders of the Cooperative at a rate of one LakeArea Ethanol, LLC capital unit for each share of equity stock and all votingstock of the Cooperative surrendered and retired. In connection with thereorganization, the LLC changed its name to Lake Area Corn Processors, LLC. Aminimum of 5,000 capital units is required for ownership of the LLC. Such unitsare subject to certain transfer restrictions, including approval by the Boardof Managers of the LLC.  The LLC alsoretains the right to redeem the units at $.20 per unit in the event a memberattempts to dispose of the units in a manner not in conformity with theOperating Agreement, if a member becomes a holder of less than 5,000 units, ifa member breaches their corn delivery agreement or becomes a bankrupt member.The Operating Agreement of the LLC also includes provisions whereby cash flowin excess of $200,000 will be distributed to unit holders subject tolimitations imposed by a super majority vote of the Board of Managers orrestrictions imposed by loan covenants.

 

**NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

*Principles of Consolidation*

 

The consolidatedfinancial statements of the Company include the accounts of the LACP and its88% owned subsidiary, Dakota Ethanol. All significant inter-companytransactions and balances have been eliminated in consolidation.

 

As a result of thereorganization mentioned above, the financial statements have been restated toreflect the comparative basis of the Company as a limited liability companyversus the Cooperative.

 

(Continued on next page)

 

F-7

----

 

*Revenue Recognition*

 

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

 

Dakota Ethanol receivespayments for incentives to produce ethanol from the State of South Dakota andfrom the United States Department of Agriculture. In accordance with the termsof these arrangements, revenue is recorded based on production or sale ofethanol.

 

Management reviewsforward sales contracts of ethanol and related products and compares thecurrent cost of production with the contract prices. For contracts with a salesvalue less than the current cost of production, a loss is recorded as acomponent of cost of sales.  Forcontracts with sales value that exceeds the current cost of production, theapplicable revenue is recognized upon delivery (fulfillment of the contract).

 

*ShippingCosts*

 

Shipping costs incurredby Dakota Ethanol are recorded as a component of cost of revenues.  In accordance with Dakota Ethanol’sagreement for marketing and sale of ethanol and by product, shipping costsarranged by the marketer are deducted from the gross sales price.  Revenue is recorded based on the net sellingprice reported to Dakota Ethanol by the marketer.

 

*InventoryValuation*

 

Corn inventory is statedat market value, which approximates net realizable value, based on local marketprices determined by grain terminals in the area of Dakota Ethanol.  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 andoption contracts are marked to market through cost of revenues.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalentsconsist of demand accounts and other accounts that provide withdrawalprivileges.  Checks drawn in excess ofbank balance are recorded as a liability on the balance sheet and as a financingactivity on the statement of cash flows.

 

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

 

Trade receivables areuncollateralized customer obligations due under normal trade terms requiringpayment within fifteen days from the invoice date. Unpaid trade receivables withinvoice dates over thirty days old bear interest at 1.5% per month.

 

Trade receivables arestated at the amount billed to the customer.

 

Payments of tradereceivables are allocated to the specific invoices identified on the customer’sremittance advice or, if unspecified, are applied to the earliest unpaidinvoices.

 

(Continued on next page)

 

F-8

----

 

The carrying amount oftrade receivables is reduced by a valuation allowance that reflectsmanagement’s best estimate of the amounts that will not be collected.Management reviews all trade receivable balances that exceed sixty days fromthe invoice date and based on an assessment of current creditworthiness,estimates the portion, if any, of the balance that will not be collected.Additionally, management applies a two-year weighted-average of write-offs tothe aggregate remaining trade receivables to estimate a general allowancecovering those amounts. The weighted-average gives greater weight to the mostrecent year and is adjusted for management’s estimate of any changes in futureeconomic conditions that might give rise to results that differ from pastexperience.

 

*Investment in Commodities Contracts, Derivative Instrumentsand Hedging Activities*

 

SFAS No. 133 requires acompany to evaluate its contracts to determine whether the contracts arederivatives. Certain contracts that literally meet the definition of aderivative may be exempted from SFAS No. 133 as normal purchases or normalsales. Normal purchases and normal sales are contracts that provide for thepurchase or sale of something other than a financial instrument or derivativeinstrument that will be delivered in quantities expected to be used or soldover a reasonable period in the normal course of business. Contracts that meetthe requirements of normal are documented as normal and exempted from theaccounting and reporting requirements of SFAS No. 133.

 

Dakota Ethanol entersinto short-term cash grain, option and futures contracts as a means of securingcorn for the ethanol plant and managing exposure to changes in commodityprices. All of Dakota Ethanol’s derivatives are designated as non-hedgederivatives. Although the contracts are effective economic hedges of specifiedrisks, they are not designated as and accounted for as hedging instruments.

 

Aspart of its trading activity, the Company uses futures and option contractsoffered through regulated commodity exchanges to reduce risk and is exposed torisk of loss in the market value of inventories. To reduce that risk, theCompany generally takes positions using cash and futures contracts and options.

 

Unrealized gains andlosses related to derivative contracts are included as a component of cost ofrevenues in the accompanying consolidated financial statements. Inventories arerecorded at net realizable value so that gains and losses on derivativecontracts are offset by gains and losses on inventories and reflected inearnings currently. For the statement of cash flows, such contract transactionsare classified as operating activities.

 

*Guarantee Premium*

 

Guarantee premium isamortized over the term of the related guarantee using the interest method ofamortization.

 

*Minority Interest*

 

Amounts recorded asminority interest on the balance sheet relate to the investment by BroinEnterprises, Inc. or individuals related to Broin Enterprises, Inc.(hereinafter referred to as the minority member) in Dakota Ethanol, plus orminus any allocation of minority income or loss of Dakota Ethanol. Earnings andlosses of Dakota Ethanol are allocated to the members in proportion to themember’s capital accounts.

 

*Use of Estimates*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amount of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and revenues and expenses during the reporting period. Actualresults could differ from those estimates.

 

(Continued on next page)

 

F-9

----

 

*Concentrations of Credit Risk*

 

The Company’s cashbalances are maintained in bank depositories and periodically exceed federallyinsured limits.

 

*Property and Equipment*

 

Property and equipment isstated at cost. Significant additions and betterments are capitalized, whileexpenditures for maintenance, repairs and minor renewals are charged tooperations when incurred.  Construction inprogress includes the cost of assets under construction, including capitalizedinterest and related costs, which have not been placed in service as of thebalance sheet date. Depreciation on assets placed in service is computed usingthe straight-line method over estimated useful lives as follows:

 

| Site improvements |   | 40   |   | years |
|-------------------|--------|------|--------|-------|
| Equipment         |   | 5-20 |   | years |
| Buildings         |   | 40   |   | years |

 

The Company reviews itsproperty and equipment for impairment whenever events indicate that thecarrying amount of the asset may not be recoverable. An impairment loss isrecorded when the sum of the future cash flows is less than the carrying amountof the asset.  An impairment loss ismeasured as the amount by which the carrying amount of the asset exceeds itsfair value.

 

*Additional Paid-In Capital*

 

Upon conversion of theCooperative to an LLC, amounts previously recorded as voting stock weretransferred to additional paid-in capital, as the voting rights of LACP areincluded in the membership units.

 

*Earnings Per Unit*

 

For purposes ofcalculating basic earnings per unit, units issued are considered outstanding onthe effective date of issuance. Diluted earnings per unit are calculated byincluding dilutive potential equity units in the denominator.

 

On November 1, 2002,LACP effected a 4 for 1 capital unit split. To effect this split, 22,215,000 additional capital units wereauthorized and issued.

 

*Income Taxes*

 

On August 20, 2002,the members approved a plan of reorganization to convert the Cooperative’sstructure from an exempt cooperative organization to a limited liabilitycompany effective August 31, 2002. The Cooperative’s board approved allocating the tax gain related to thereorganization to the members.  Noincome taxes were paid by the Company as a result of the reorganization.

 

LACP is taxed as alimited liability company under the Internal Revenue Code.  The income of LACP flows through to themembers to be taxed at the individual level rather than the corporate level.  Accordingly, LACP has no tax liability.

 

The subsidiary company,Dakota Ethanol, is organized as a limited liability company under state law.Dakota Ethanol has elected to be taxed as a partnership, and income and expensepass through to LACP and the minority owner. 

 

(Continued on next page)

 

F-10

----

 

*EnvironmentalLiabilities*

 

Dakota Ethanol’soperations are subject to environmental laws and regulations adopted by variousgovernmental authorities in the jurisdiction in which it operates.  These laws require Dakota Ethanol toinvestigate and remediate the effects of the release or disposal of materialsat its locations.  Accordingly, DakotaEthanol has adopted policies, practices and procedures in the areas ofpollution control, occupational health, and the production, handling, storageand use of hazardous materials to prevent material environmental or otherdamage, and to limit the financial liability which could result from suchevents.  Environmental liabilities arerecorded when Dakota Ethanol’s liability is probable and the costs can bereasonably estimated.

 

*Reclassification*

 

Amounts in the 2002Statement of Operations have been reclassified to conform with the 2003presentation.  There is no change to the2002 net income as a result of the reclassification.

 

**NOTE 3 - LONG-TERM NOTES PAYABLE**

 

Dakota Ethanol originallyhad a $26,600,000 note payable to First National Bank, Omaha, Nebraska (Bank)for the construction and permanent financing of the plant (Term Note 1).  On July 29, 2002, Dakota Ethanolamended the construction loan agreement to create two term notes from itsoriginal Term Note 1, creating Term Notes 2 and 3, and converted Term Note 3into Term Notes 4 and 5 on November 1, 2002.

 

As part of the notepayable agreement, Dakota Ethanol is subject to certain restrictive covenantsestablishing minimum reporting requirements, ratios, working capital, and networth requirements. Dakota Ethanol is in compliance with the covenants as ofDecember 31, 2003. The note also includes terms whereby 10% of Dakota Ethanol’sexcess cash flow is payable annually to reduce the principal balance on thenote, with no more than 80% of excess cash flow available for distribution toDakota Ethanol’s members without prior approval of the bank.  The note is collateralized by the ethanolplant, which had a net book value of approximately $36,000,000 atDecember 31, 2003.  The note issubject to prepayment penalties based on the cost incurred by the Bank to breakits fixed interest rate commitment.

 

The balance of Term Note2 is due and payable in quarterly installments of $581,690 commencingOctober 1, 2002, through September 1, 2011. Interest on outstandingprincipal balances will accrue at a rate of 9 percent. The other terms andconditions of Term Note 1 remain in effect.

 

Except as set forthbelow, the original terms and conditions of Term Note 1 apply to Term Notes 4and 5.

 

The balance of Term Note4 is due and payable in quarterly installments of $329,777 commencingJanuary 1, 2003, through September 1, 2011. The installment willfirst be applied to the accrued interest on Term Note 5, and the remainder willbe applied to accrued interest and principal of Term Note 4.  Interest on outstanding principal balanceswill accrue at 50 basis points above the lender’s rate (5.0 percent atDecember 31, 2003). This rate is subject to various adjustments based onvarious levels of indebtedness to net worth, as defined by the agreement.

 

(Continued on next page)

 

F-11

----

 

The balance of Term Note5 is due and payable in quarterly installments of interest only commencingJanuary 1, 2003, through September 1, 2011. Interest on outstandingprincipal balances will accrue at 50 basis points above the lender’s rate (5.0percent at December 31, 2003). This rate is subject to various adjustmentsbased on various levels of indebtedness to net worth, as defined by theagreement. Dakota Ethanol may elect to borrow any principal amount repaid onTerm Note 5 up to $5,000,000 subject to the terms of the agreement. ShouldDakota Ethanol elect to utilize this feature, the lender will assess an unusedcommitment fee of 3/8 percent on the unused portion of the $5,000,000availability.  In addition, the bankdraws the checking account balance to a minimum balance on a daily basis.  The excess cash pays down or the shortfallis drawn upon Term Note 5 as needed.  AtDecember 31, 2003 and 2002, Dakota Ethanol had the ability to draw uponthe entire $5,000,000 available balance from Term Note 5.

 

Dakota Ethanol also incurreda note payable related to the extension of utility lines to the plant. The loanis payable over ten years, beginning on October 1, 2001, with an effectiveinterest rate of approximately 9 percent and a final maturity ofSeptember 1, 2011.

 

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

 
|                                        |   | **2003**       |           |
|---------------------------------------------|--------|----------------|----------------|
| Note  payable to First National Bank, Omaha |   |           |           |
| Term  Note 2                                |   | **$**          | **12,351,455** | ** ** |
| Term  Note 4                                |   | **2,742,347**  | ** **     |
| Term  Note 5                                |   | **—**     | ** **     |
| Utility  line extension note                |   | **72,701**     | ** **     |
|                                        |   | **15,166,503** | ** **     |
|                                        |   |           | ** **     |
| Less  current portion                       |   | **(2,995,344** | **)**          |
|                                        |   |           | ** **     |
|                                        |   | **$**          | **12,171,159** | ** ** |

 

Minimum principalpayments for the next five years are as follows:

 
| **Year Ended December 31,** |   | **Amount** |      |
|----------------------------------|--------|------------|-----------|
|                             |   |       |      |
| 2004                             |   | $          | 2,995,344 |   |
| 2005                             |   | 2,631,262  |      |
| 2006                             |   | 1,769,863  |      |
| 2007                             |   | 1,636,799  |      |
| 2008                             |   | 1,789,784  |      |
|                                  |        |            |           |  |

 

Minimum principalpayments for the year ending December 31, 2004 include approximately$544,000 related to the calculation of additional principal to the Bank basedon excess cash flow.

 

Interest capitalizedtotaled $0 and $43,059 for the years ended December 31, 2003 and 2002,respectively.

 

(Continued on next page)

 

F-12

----

 

**NOTE 4 -TAX INCREMENT FINANCING**

 

During the year endedDecember 31, 2001, Dakota Ethanol received a grant of approximately $1,911,587from the proceeds of tax increment financing bonds issued by Lake County, SouthDakota. Under South Dakota law, proceeds from tax increment financing are not aliability of the entity (Dakota Ethanol) but are an obligation of the taxingdistrict issuing the bonds. The grant was provided to fund infrastructureimprovements to real property owned by Dakota Ethanol and will be repaid byLake County from the incremental increase in property taxes related to theimprovement of Dakota Ethanol’s real property. The proceeds of the financing were recorded as a reduction of the costbasis of the applicable property and equipment.

 

**NOTE 5 -INCOME TAXES**

 

Previously organized as acooperative, the Cooperative’s income and expenses were included or excludedfrom the computation of taxable income based on their classification aspatronage or non-patronage source income. Non-patronage source income, lessnon-patronage source expenses, was subject to income taxes. Patronage sourcenet income (patronage source income less patronage source expenses) allocatedto stockholders in the form of a written notice of allocation of qualifiedpatronage dividend was allowed as a deduction from patronage source taxableincome.

 

Interest earnings of theCooperative during the development stage were classified as non-patronagesource income. In addition, certain expenses were considered non-patronagesource expenses during the development stage, and were available for deductionagainst the non-patronage income.

 

Deferred taxes are generallynot recognized with regard to timing differences on patronage source income andexpense. Deferred taxes on non-patronage source income related to timingdifferences on the deduction of non-patronage source expenses are recognized onthe financial statements of cooperative organizations.

 

Income tax expense(benefit) related to activities of the cooperative before the reorganizationconsists of the following:

 
|                                                                           |   | **2003** |       | **2002** |   |
|--------------------------------------------------------------------------------|--------|----------|------------|----------|--------|
|                                                                           |   |     |       |     |   |
| Income  tax benefit calculated based on non-patronage source net income (loss) |   | **$**    | **—** |     | $      | (49,953 | ) |
|                                                                                |        |          |            |          |        |  |  |

 

The reconciliation ofincome tax expense at statutory tax rates on non-patronage income (loss) toincome taxes recognized above is as follows:

 
|                                                    |   | **2003**   |       | **2002** |   |
|---------------------------------------------------------|--------|------------|------------|----------|--------|
|                                                    |   |       |       |     |   |
| Income  tax expense (benefit) at statutory rates        |   | **$**      | **—** |     | $      | (49,953 | ) |
| Tax  effect of non-deductible patronage source expenses |   | **—** |       | —   |   |
|                                                    |   |       |       |     |   |
| Income  tax expense (benefit)                           |   | **$**      | **—** |     | $      | (49,953 | ) |

 

Upon reorganization froma cooperative to a limited liability company, the Board of Directors of theCooperative elected to pass through to its members the tax gain related to thereorganization.

 

(Continued on next page)

 

F-13

----

 

The difference betweenthe financial statement basis and tax basis of assets is as follows:

 
|                                               |   | **2003**       |           |
|----------------------------------------------------|--------|----------------|----------------|
| Financial  statement basis of assets               |   | **$**          | **45,998,055** | ** ** |
| Less  tax over book depreciation                   |   | **(7,763,929** | **)**          |
| Organization  and start-up costs capitalized - net |   | **378,877**    | ** **     |
| TIF  guarantee                                     |   | **(564,197**   | **)**          |
| Other  book and tax differences                    |   | **127,810**    | ** **     |
|                                               |   |           | ** **     |
| Tax  basis of assets                               |   | **$**          | **38,176,616** | ** ** |
|                                               |   |           | ** **     |
|                                               |   | **2003**       |           |
| Financial  statement basis of liabilities          |   | **$**          | **45,998,055** | ** ** |
| TIF  guarantee payable                             |   | **(573,316**   | **)**          |
| Other  book and tax differences                    |   | **(38,496**    | **)**          |
|                                               |   |           | ** **     |
| Tax  basis of liabilities                          |   | **$**          | **45,386,243** | ** ** |

 

**NOTE 6 -FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The Company believes thecarrying amount of cash and cash equivalents approximates fair value due to theshort maturity of these instruments.

 

The carrying amount oflong-term obligations of $15,739,818 had a fair value of approximately $17,300,000based on estimated interest rates for comparable debt.

 

The Company believes thefair value of agreements for the purchase of utilities approximates thecarrying value based on the variable terms of the agreements that follow localmarket rates.

 

**NOTE 7 -COMMITMENTS, CONTINGENCIES AND AGREEMENTS**

 

The Company has enteredinto contracts and agreements regarding the operation and management of theethanol plant.

 

Dakota Ethanol hasentered into agreements for the purchase of electricity and natural gas. Thefollowing agreements commenced on or about September 4, 2001.

 

Natural Gas– The agreements provide Dakota Ethanol with a fixed transportation rate fornatural gas for a ten-year term, renewable for ten-year terms. In addition, theagreement provides a pricing structure for natural gas for a two-year periodbased on market rates. These agreements do not require minimum purchases ofnatural gas during their initial term.

 

(Continued on next page)

 

F-14

----

 

Electricity– The agreements provide Dakota Ethanol with electric service for a term of tenyears, renewable for five-year periods. The agreement sets rates for energyusage based on market rates and requires a minimum purchase of electricity eachmonth during the initial term of the agreement.

 

Expenses related to theagreement for the purchase of electricity and natural gas were $11,303,754 and$7,682,224 for the years ended December 31, 2003 and 2002, respectively.

 

Minimum annual paymentsduring the term of the electricity agreement are as follows:

 
| **Year Ended December 31,** |   | **Amount** |      |
|----------------------------------|--------|------------|-----------|
|                             |   |       |      |
| 2004                             |   | $          | 290,400   |   |
| 2005                             |   | 290,400    |      |
| 2006                             |   | 303,600    |      |
| 2007                             |   | 303,600    |      |
| 2008                             |   | 308,400    |      |
| 2009 - 2011                      |   | 822,400    |      |
|                             |   |       |      |
|                             |   | $          | 2,318,800 |   |

 

Dakota Ethanol receivesan incentive payment from the United States Department of Agriculture (USDA)for the 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 $0, $1,000,349 and $7,500,000 has been earned for theUSDA program years ended September 30, 2004, 2003 and 2002,respectively.  Incentive revenue of$535,879 and $5,247,269 was recorded for the years ended December 31, 2003and 2002, respectively.

 

Dakota Ethanol alsoreceives an incentive payment from the State of South Dakota to produceethanol. In accordance with the terms of this arrangement, revenue is recordedbased on ethanol sold. The State of South Dakota has set a maximum of up to$1,000,000 per year for this program per qualifying producer. Dakota Ethanolearned $605,277 for the State of South Dakota program year ended June 30,2004, and has earned $1,000,000 for the program year ended June 30,2003.  Incentive revenue of $978,057 and$1,066,724 was recorded for the years ended December 31, 2003 and 2002,respectively.

 

The followingcommitments, contingencies and agreements are with related parties.

 

Each capital unit holderhas entered into a corn delivery agreement with the Company. For each unitowned, one-fourth bushel of corn is required to be delivered annually. Theprice paid for the corn is the average corn price for the applicable four-monthperiod (trimester) based on several local grain elevators’ cash corn price. Thedelivery agreements commence at the discretion of the Company to coincide withthe completion and operation of the plant. Members can opt out of delivery ifthey meet certain criteria and are approved by the Board of Managers.  Based on the number of units outstanding,4,450,000 bushels of corn will be delivered annually by the unit holders. Thisrepresents approximately 30% of the corn required for the operation of theplant at its 40,000,000 gallon capacity. Purchases of corn from corn delivery agreements and cash contracts fromthe Company’s stockholders totaled approximately $11,960,000 and $13,845,000for the years ended December 31, 2003 and 2002, respectively, of which$997,000 and $1,046,000 was recorded as a liability at December 31, 2003and 2002, respectively.

 

(Continued on next page)

 

F-15

----

 

The Company and theminority member of Dakota Ethanol, or parties related to the minority memberthrough common ownership, have entered into the following agreements:

 

Ethanol MarketingContract – Dakota Ethanol has an agreement with EthanolProducts, LLC, a joint venture of ethanol producers, for the sale, marketing,billing and receipt of payment and other administrative services for allethanol produced by the plant. In the event Ethanol Products, LLC is unable tocollect from their customer, Dakota Ethanol is charged for the applicable baddebt. Total sales to Ethanol Products, LLC were $56,450,057 and $49,872,449 forthe years ended December 31, 2003 and 2002, respectively.  The fee for these services totaled $319,570and $308,679 for the years ended December 31, 2003 and 2002, respectively.The initial agreement expires on September 4, 2006, and is automaticallyrenewed for successive five-year terms unless terminated three months prior toexpiration.

 

DDGS MarketingContract – Dakota Ethanol has entered into an agreement withDakota Gold Marketing (formerly known as Dakota Commodities) for the marketingof all Distiller’s Dried Grain with Solubles (DDGS) produced by the plant. Themarketing fee for this service is 3% of DDGS sales, with a minimum marketing feeof $200,000 per year. The agreement expires on September 4, 2006, and isautomatically renewed for successive five-year terms unless terminated threemonths prior to expiration. Fees related to the marketing agreement were$331,915 and $296,928 for the years ended December 31, 2003 and 2002,respectively.

 

ManagementAgreement – Dakota Ethanol has entered into an agreement withBroin Management, LLC for the management and operation of the ethanol plant.The fee for this service is approximately $348,000 annually plus an incentivebonus of 5% of net income. The annual fee is adjusted each year for changes inthe consumer price index. The management agreement includes the salary andbenefits of the plant general manager and plant technical manager and certainother services related to operation of the ethanol plant. The agreement expiresJanuary 1, 2006, and is renewable for successive five-year terms unlessterminated 90 days prior to expiration of the agreement.  Management fees expense were $661,686 and $850,629for the years ended December 31, 2003 and 2002, respectively.  Of these amounts, the Company had aliability of $228,620 and $27,679 owed to Broin Management, LLC for the yearsended December 31, 2003 and 2002, respectively.

 

Corn Price RiskManagement Agreement – Dakota Ethanol has entered into anagreement with Broin Management, LLC for the hedge and price risk managementrelated to corn requirements of the plant. The fee for this service is $50,000annually. The agreement is renewable for successive one-year terms unlessterminated 30 days prior to expiration. The agreement expires on August 1,2004.  Fees relating to this agreementwere $50,000 and $50,000 for the years ended December 31, 2003 and 2002,respectively.

 

Purchases of supplies andchemicals from related parties totaled approximately $92,000 and $120,000 forthe years ended December 31, 2003 and 2002, respectively.

 

Minimum payments on theabove agreements with related parties for the initial term of the agreementsare as follows:  

 
| **Year Ended December 31,** |   | **Amount** |      |
|----------------------------------|--------|------------|-----------|
|                             |   |       |      |
| 2004                             |   | $          | 615,855   |   |
| 2005                             |   | 561,689    |      |
| 2006                             |   | 133,333    |      |
|                             |   |       |      |
|                             |   | $          | 1,310,877 |   |

 

(Continued on next page)

 

F-16

----

 

Environmental – Duringthe year ended December 31, 2002, management became aware that the ethanolplant may have exceeded certain emission levels allowed by their operatingpermit. The Company has disclosed the situation to the appropriate stateregulatory agency and has taken steps to reduce the emissions to acceptablelevels. Management has not accrued a liability for environmental remediationcosts since the costs, if any, cannot be estimated.

 

**NOTE 8 -RELATED PARTY TRANSACTIONS**

 

The Company and theminority member are the members of Dakota Ethanol, LLC. The Company invested$14,810,000 and the minority member invested $2,000,000 in Dakota Ethanol fortheir respective ownership interests of approximately 88% and 12%. Inaccordance with the operating agreement of Dakota Ethanol, the minority memberhas the right to elect two of seven members of the Board of Managers of DakotaEthanol.

 

Amounts due to Broin& Associates, Inc. related to the construction contract as ofDecember 31, 2003 and 2002 were $95,520 and $63,708, respectively.

 

Additional agreementswith related parties are included in Note 7.

 

**NOTE 9 -TIF BOND GUARANTEE**

 

DuringDecember 2003, Dakota Ethanol entered into an agreement to guarantee abond issued by Lake County, South Dakota. The bond issue was in conjunction with the refunding of the tax incrementfinancing (TIF) bond issued by Lake County in 2001, of which Dakota Ethanol wasthe recipient of the proceeds.  During2003, Lake County became aware that the taxes collected based on theincremental tax would not be sufficient to cover the debt service of the 2001bond issue. Based on the aforementioned deficiency and changes in interest rateduring December of 2003, Lake County refunded the 2001 bond issuereplacing it with two separate bonds. A tax-exempt bond in the amount of$824,599 and a taxable bond in the amount of $1,323,024 were issued. As a partof the refunding, Dakota Ethanol entered into the agreement to guarantee thetaxable bond issue. The taxes levied on Dakota Ethanol’s property will first gotowards the semiannual debt service of the tax-exempt bonds and any remainingtaxes will be used for the debt service of the taxable bonds. Dakota Ethanolguarantees any shortfall in debt service for the taxable bonds.  The guarantee expires in December of2018.

 

The maximum amount ofestimated future payments is $2,282,967. The carrying amount of the guaranteeliability on Dakota Ethanol’s balance sheet is $573,315.

 

Estimated maturities ofthe guarantee for the next five years are as follows:  

 
| **Year Ended December 31,** |   | **Amount** |    |
|----------------------------------|--------|------------|---------|
|                             |   |       |    |
| 2004                             |   | $          | 62,195  |   |
| 2005                             |   | 62,692     |    |
| 2006                             |   | 62,617     |    |
| 2007                             |   | 62,536     |    |
| 2008                             |   | 62,319     |    |
| 2009 - 2016                      |   | 260,956    |    |
|                             |   |       |    |
|                             |   | $          | 573,315 |   |

 

(Continued on next page)

 

F-17

----

 

Dakota Ethanol has norecourse from third parties or collateral held by third parties related to theguarantee.

 

Management has appliedthe guidance from Financial Accounting Standards Board Interpretation No. 46(FIN 46) related to accounting for guarantee obligations. Management hasdetermined the probability weighted present value of the estimated cash flowsrelated to the guarantee obligation and recorded a liability and related assetof $573,315.

 

Estimated amortization ofthe guarantee premium for the next five years is as follows:

 
| **Year Ended December 31,** |   | **Amount** |    |
|----------------------------------|--------|------------|---------|
|                             |   |       |    |
| 2004                             |   | $          | 108,435 |   |
| 2005                             |   | 96,556     |    |
| 2006                             |   | 84,592     |    |
| 2007                             |   | 72,641     |    |
| 2008                             |   | 68,677     |    |
| 2009 - 2016                      |   | 133,296    |    |
|                             |   |       |    |
|                             |   | $          | 564,197 |   |

 

F-18

----