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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

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| **x**                                                 | **Annual  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934.**     |
|-------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
|                                                  | ** **                                                                                                |
| **For the  fiscal year ended December 31, 2008** |
|                                                  | ** **                                                                                                |
| ** ****o**                                       | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934.** |
|                                                  | ** **                                                                                                |
| **Commission file number****000-50254**               |

** **
| **LAKE  AREA CORN PROCESSORS, LLC**                     |
|---------------------------------------------------------|
| (Exact name of registrant as specified in  its charter) |

 

| **South  Dakota**                                                   | ** ** | **46-0460790**                            |
|---------------------------------------------------------------------|------------|-------------------------------------------|
| **(State or other jurisdiction of  incorporation or organization)** | ** ** | **(I.R.S. Employer Identification  No.)** |

 

| **46269 SD  Highway 34****P.O. Box 100****Wentworth, South  Dakota** | **57075**  |
|---------------------------------------------------------------------------|------------|
| (Address of principal executive offices)                                  | (Zip Code) |

 
| **(605) 483-2676**                                                        |
|---------------------------------------------------------------------------|
| (Registrant’s telephone number, including  area code)                |
|                                                                      |
| Securities registered  under Section 12(b) of the Exchange Act: |
| ** **                                                                |
| **None**                                                                  |
|                                                                      |
| Securities registered  under Section 12(g) of the Exchange Act: |
|                                                                      |
| **Membership  Units**                                                     |

** **

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.

£  Yes   x  No

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

o  Yes   x  No

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.     S  Yes   £  No

 

Indicate by check markif disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 
| Large  accelerated filer o                                                   |   | Accelerated  filer o         |
|------------------------------------------------------------------------------|--------|------------------------------|
| Non-accelerated  filer x (Do not  check if a smaller reporting company) |   | Smaller  Reporting Company o |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).

o  Yes     x No

 

Theaggregate market value of the registrant’s membership units held bynon-affiliates of the registrant was $14,090,742.50 computed by reference tothe most recent public offering price on Form S-4.

 

Asof March 31, 2009, there are 29,620,000 membership units of the registrantoutstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The registrant has incorporated by reference into Part III of thisAnnual Report on Form 10-K portions of its definitive information statementto be filed with the Securities and Exchange Commission within 120 days afterthe close of the fiscal year covered by this Annual Report (December 31,2008).  This information statement isreferred to in this report as the 2009 Information Statement.

 

 

 

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**INDEX**

 
|                                                                                                                           | **Page**   |
|--------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                           | ** ** |
| **PART I**                                                                                                                | **4**      |
| **ITEM 1. BUSINESS**                                                                                                           | **4**      |
| **ITEM  1A. RISK FACTORS**                                                                                                     | **18**     |
| **ITEM  2. PROPERTIES**                                                                                                        | **24**     |
| **ITEM  3. LEGAL PROCEEDINGS**                                                                                                 | **24**     |
| **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS**                                                               | **24**     |
| **PART II**                                                                                                               | **25**     |
| **ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** | **25**     |
| **ITEM 6. SELECTED FINANCIAL DATA**                                                                                            | **27**     |
| **ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS**                        | **28**     |
| **ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK**                                                       | **43**     |
| **ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**                                                                       | **45**     |
| **ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURE**                              | **66**     |
| **ITEM 9A. CONTROLS AND PROCEDURES**                                                                                           | **66**     |
| **ITEM  9B. OTHER INFORMATION**                                                                                                | **67**     |
| **PART III**                                                                                                              | **67**     |
| **ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE  GOVERNANCE**                                                           | **67**     |
| **ITEM 11. EXECUTIVE COMPENSATION**                                                                                            | **67**     |
| **ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**                   | **67**     |
| **ITEM 13. CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS, AND DIRECTOR INDEPENDENCE**                                        | **67**     |
| **ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                                            | **67**     |
| **PART IV**                                                                                                               | **68**     |
| **ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**                                                                           | **68**     |
| **SIGNATURES**                                                                                                                 | **70**     |

 

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**CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING STATEMENTS**

 

Thisannual report contains historical information, as well as forward-lookingstatements that involve known and unknown risks and relate to future events,our future financial performance, or our expected future operations andactions.  In some cases, you can identifyforward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,”“anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,”“target,” “potential,” or “continue” or the negative of these terms or othersimilar expressions.  Theseforward-looking statements are only our predictions based upon currentinformation and involve numerous assumptions, risks and uncertainties.  Our actual results or actions may differmaterially from these forward-looking statements for many reasons, includingthe reasons described in this report. While it is impossible to identify all such factors, factors that couldcause actual results to differ materially from those estimated by us include:

 
| · |   | Availability  and costs of products and raw materials, particularly corn and natural gas;                                                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                           |
| · |   | Changes  in the price and market for ethanol and distiller’s grains;                                                                      |
|   |   |                                                                                                                                           |
| · |   | Decreases  in the price of gasoline or decreased gasoline demand;                                                                              |
|   |   |                                                                                                                                           |
| · |   | Our  ability to secure the financing we require to maintain liquidity and operate  our business and changes in interest rates;                 |
|   |   |                                                                                                                                           |
| · |   | Changes  and advances in ethanol production technology;                                                                                        |
|   |   |                                                                                                                                           |
| · |   | The  effectiveness of our hedging strategy to offset increases in the price of our  raw materials and decreases in the prices of our products; |
|   |   |                                                                                                                                           |
| · |   | Projected  growth or overcapacity within the ethanol industry causing supply to exceed  demand;                                                |
|   |   |                                                                                                                                           |
| · |   | Our  ability to market and our reliance on third parties to market our products;                                                               |
|   |   |                                                                                                                                           |
| · |   | The  decrease or elimination of governmental incentives which support the ethanol  industry;                                                   |
|   |   |                                                                                                                                           |
| · |   | Changes  in the weather or general economic conditions impacting the availability and  price of corn;                                          |
|   |   |                                                                                                                                           |
| · |   | Our  ability to generate free cash flow to invest in our business and service our  debt;                                                       |
|   |   |                                                                                                                                           |
| · |   | Changes  in plant production capacity or technical difficulties in operating the  plant;                                                       |
|   |   |                                                                                                                                           |
| · |   | Changes  in our business strategy, capital improvements or development plans;                                                                  |
|   |   |                                                                                                                                           |
| · |   | Our  ability to retain key employees and maintain labor relations;                                                                             |
|   |   |                                                                                                                                           |
| · |   | Our  liability resulting from litigation;                                                                                                      |
|   |   |                                                                                                                                           |
| · |   | Competition  from alternative fuels and alternative fuel additives; and                                                                        |
|   |   |                                                                                                                                           |
| · |   | Other  factors described elsewhere in this report.                                                                                             |

 

The cautionary statements referred to in this section also should beconsidered in connection with any subsequent written or oral forward-lookingstatements that may be issued by us or persons acting on our behalf.  We undertake no duty to update theseforward-looking statements, even though our situation may change in the future.Furthermore, we cannot guarantee future results, events, levels of activity,performance, or achievements.  We cautionyou not to put undue reliance on any forward-looking statements, which speakonly as of the date of this report.  You should read this report and thedocuments that we reference in this report and have filed as exhibits 

 

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completelyand with the understanding that our actual future results may be materiallydifferent from what we currently expect.  We qualify all of ourforward-looking statements by these cautionary statements.

 

**PART I.**

 

**ITEM 1.  BUSINESS.**

 

**Overview**

 

Lake Area Corn Processors, LLC is a South Dakota limited liabilitycompany that currently owns and manages its wholly-owned subsidiary DakotaEthanol, LLC.  Prior to June 2006,the Broin family owned a minority interest of approximately 12% of DakotaEthanol, LLC.  On June 30, 2006, weentered into an assignment agreement with the Broin family to purchase itsminority interest in Dakota Ethanol, LLC. Following execution of the assignment agreement, we own 100% of DakotaEthanol, LLC and operate it as a wholly-owned subsidiary.  Dakota Ethanol, LLC owns and operates anethanol plant located near Wentworth, South Dakota that has a nameplateproduction capacity of 40 million gallons of ethanol per year.  Lake Area Corn Processors, LLC is referred toin this report as “LACP,” the “company,” “we,” or “us.”  Dakota Ethanol, LLC is referred to in thisreport as “Dakota Ethanol” or the “ethanol plant.”

 

SinceSeptember 4, 2001, we have been engaged in the production of ethanol anddistiller’s grains.  Fuel grade ethanolis our primary product accounting for the majority of our revenue.  Wealso sell distiller’s grains, a principal co-product of the ethanol productionprocess.  We recently completed theinstallation of equipment which allows us to extract corn oil from thedistiller’s grains we produce which represents another co-product of theethanol production process.  During our2008 fiscal year, we processed approximately 16.5 million bushels of corn intoapproximately 46.8 million gallons of ethanol.  We also producedapproximately 132,000 tons of distiller’s grains in 2008.  In 2009, weanticipate that our ethanol and distiller’s grains production levels will besubstantially the same as in fiscal year 2008. There is, however, no assurance that we will be able to operate at theseproduction levels.

 

**General Development of Business**

 

LACPwas formed as a South Dakota cooperative on May 25, 1999.  On August 20, 2002, our membersapproved a plan to reorganize into a South Dakota limited liabilitycompany.  The reorganization becameeffective on August 31, 2002, and the assets and liabilities of thecooperative were transferred to the newly formed limited liabilitycompany.  Following the reorganization,our legal name was changed to Lake Area Corn Processors, LLC.

 

Our ownership of Dakota Ethanol represents substantially all of ourassets and our only source of revenue.  Since weoperate Dakota Ethanol as a wholly-owned subsidiary, we receive all revenuesgenerated by Dakota Ethanol.  Wedistribute the revenues received from Dakota Ethanol to our unit holders inproportion to the number of units held by each member.

 

We underwent a significant change in our mode of operations on June 6,2005, when we elected not to renew our management agreement and other marketingagreements with Broin Management, LLC and other various Broin-relatedentities.  Between June 6, 2005 and December 31,2005, we negotiated termination of the contracts with the Broin-relatedentities and entered into agreements with new risk management and marketingservice providers.

 

We recently completed installation of corn oil extraction equipmentwhich allows us to remove some of the corn oil contained in our distiller’sgrains.  This allows us to sell the cornoil separately from the distiller’s grains that we produce.  We are currently marketing the corn oil thatwe produce through RPMG which is the same entity that markets our ethanol anddistiller’s grains.  During our 2008fiscal year, we made an investment in Corn Oil Bio-Solutions, LLC (COBS) whichis a company formed for the purpose of developing a biodiesel plant thatutilizes corn oil as the feedstock to produce biodiesel.  Our intent was to sell all of our corn oil toCOBS to use as the feedstock to produce biodiesel.  Due to current conditions in both thebiodiesel industry and the credit markets, COBS has not completed thecapitalization necessary to construct the biodiesel plant.  Should COBS complete 

 

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constructionof the proposed biodiesel plant, we anticipate selling the corn oil we produceto COBS in order to operate the biodiesel plant.

 

**FinancialInformation**

 

Please refer to “**Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations**” for information about our revenues, profit and loss measurementsand total assets and “**Item 8 - FinancialStatements and Supplementary Data**” for our audited consolidatedfinancial statements.

 

**Principal Products**

 

The principal products produced at the ethanol plant are fuel gradeethanol and distiller’s grains. Subsequent to the end of our 2008 fiscal year, we commenced selling cornoil that we extract from our distiller’s grains.

 

***Ethanol***

 

Ethanol is ethyl alcohol, a fuel componentmade primarily from corn and various other grains.  More than 99% of all ethanol produced in theUnited States is used in its primary form for blending with unleaded gasolineand other fuel products.  The vastmajority of the ethanol that is produced in the United States uses corn as thefeedstock in the ethanol production process. Corn produces large quantities of carbohydrates, whichconvert into glucose more easily than most other kinds of biomass. As of March 5,2009, the Renewable Fuels Association estimates United States ethanolproduction capacity at more than 12.3 billion gallons.  However, due to current conditions in theethanol market, the Renewable Fuels Assocation estimates that as much as 15% ofthe ethanol production capacity in the United States has been idled.

 

An ethanol plant is essentially afermentation plant.  Ground corn andwater are mixed with enzymes and yeast to produce a substance called “beer,”which contains about 10% alcohol and 90% water. The “beer” is boiled to separate the water, resulting in ethyl alcohol,which is then dehydrated to increase the alcohol content.  This product is then mixed with a certifieddenaturant such as gasoline to make the product unfit for human consumption andcommercially saleable.

 

Ethanol can be used as: (i) an octaneenhancer in fuels; (ii) an oxygenated fuel additive for the purpose ofreducing ozone and carbon monoxide vehicle emissions; and (iii) anon-petroleum-based gasoline substitute. Used as a fuel oxygenate, ethanol provides a means to control carbonmonoxide emissions in large metropolitan areas where oxygenated fuels arerequired during certain times of the year.

 

Dakota Ethanol began producing ethanol in September 2001.  For our fiscal year ended December 31,2008, revenues from sales of ethanol were approximately 86% of our totalrevenues.  We attribute this decrease comparedto previous years with increased revenue we received from our distiller’sgrains sales.  The following table showsthe percentage of our total revenues that were from sales of ethanol for eachof the last three fiscal years:

 
| **Fiscal Year**          | ** ** | **Percentage of Revenues  from Sales of Ethanol** | ** ** |
|-------------------------------|------------|----------------------------------------------------------------------------|------------|
| Ended December 31,  2008 |       | 86                                                                         | %          |
| Ended December 31,  2007 |       | 89                                                                         | %          |
| Ended December 31,  2006 |       | 91                                                                         | %          |

 

***Distiller’s Grains***

 

A principal co-product of the ethanolproduction process is distiller’s grains, a high protein, high-energy animalfeed supplement primarily marketed to the dairy and beef industry.  Distiller’s grains contain by-pass proteinthat is superior to other protein supplements such as cottonseed meal andsoybean meal.  By-pass proteins are moredigestible to the animal, thus generating greater lactation in milk cows andgreater weight gain in beef cattle.  Drymill ethanol processing creates four forms of distiller grains: Distiller’s WetGrains (“DWS”), Distiller’s Modified Wet Grains with Solubles (“DMWS”),Condensed Distiller’s with Solubles (“CDS”) and Distiller’s Dried Grains 

 

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with Solubles (“DDGS”).  DWS is processed corn mash that containsapproximately 70% moisture.  DWS has ashelf life of approximately seven days and can be sold only to consumers withinthe immediate vicinity of an ethanol plant. DMWS is DWS that has been dried to approximately 50% moisture.  DMWS has a slightly longer shelf life ofapproximately ten days and is often sold to nearby markets.  CDS contains approximately 75% moisture andis marketed locally.  It has a shelf lifeof approximately thirty days.  DDGS isDWS that has been dried to between 10% and 12% moisture.  DDGS has an almost indefinite shelf life andmay be sold and shipped to any market regardless of its vicinity to an ethanolplant.  At our plant, the composition ofthe distiller’s grains we produce is approximately 2% DWS, 61% DMWS, 4% CDS and33% DDGS.

 

For our fiscal year ended December 31,2008, revenues from sales of distiller’s grains were approximately 14% of ourtotal revenues.  The following tableshows the percentage of our total revenues that were from sales of distiller’sgrains for each of the last three fiscal years:

 
| **Fiscal Year**          | ** ** | **Percentage of Revenues  from Sales of Distiller’s  Grains** | ** ** |
|-------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| Ended December 31,  2008 |       | 14                                                                                          | %          |
| Ended December 31,  2007 |       | 11                                                                                          | %          |
| Ended December 31,  2006 |       | 8                                                                                           | %          |

 

**Principal Product Markets**

 

***Ethanol***

 

The primary market for our ethanol is thedomestic fuel blending market.  TheUnited States is a net importer of ethanol so our ethanol marketer does notmarket our ethanol outside of domestic markets. We do not anticipate marketing our ethanol in export markets in the nearfuture.  Ethanol is generally blendedwith gasoline before it is sold to the end consumer.  Therefore, the primary purchasers of ethanolare fuel blending companies who mix the ethanol we produce with gasoline.  As discussed below in the section entitled “Distributionof Principal Products”, we have a third party marketer that sells all of ourethanol.  Our ethanol marketer makes alldecisions regarding where our ethanol is sold.

 

Below is a chart showing the price forethanol at the Sioux Falls, South Dakota Rack during our last three fiscalyears.

 

 

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We attribute the recent significantdecrease in ethanol prices with decreases in commodity prices generally alongwith increased ethanol supply that we believe may be in excess of ethanoldemand.  Please see our “Item 7 -Management’s Discussion and Analysis of Financial Condition and Results ofOperations” for further discussion of anticipated ethanol prices.

 

***Distiller’s Grains***

 

Distiller’s grains are typically used asan animal feed substitute.  Distiller’sgrains are typically fed to animals instead of other traditional animal feedssuch as corn and soybean meal.  Weprimarily market our distiller’s grains through a third-party marketer.  However, we market a portion of our distiller’sgrains directly into our local market without the assistance of a third partymarketer.  A majority of our distiller’sgrains are sold to consumers in the United States.  However, distiller’s grains exports haveincreased recently as distiller’s grains have become a more accepted animalfeed substitute.  We anticipate thatdistiller’s grains exports will continue to increase to countries that haveanimal feeding industries.

 

Below is a chart showing the market pricefor distiller’s grains compared to corn and soybean meal prices during our lastthree fiscal years.

 

 

**Distribution of Principal Products**

 

***Ethanol Distribution***

 

OnNovember 30, 2005, we entered into an Ethanol Fuel Marketing Agreementwith Renewable Products Marketing Group (“RPMG”) of Shakopee, Minnesota, forthe purposes of marketing and distributing our ethanol. On April 1, 2007,we became an owner of RPMG by making a capital contribution to RPMG.  Our capital contribution was $605,000, ofwhich $105,000 was paid at the time we became an owner of RPMG and the balancewill be paid over time with a portion of our ethanol sales revenue.  We became a party to RPMG’s operatingagreement, executed a contribution agreement that governs the funding of ourcapital contribution to RPMG, and entered into a new member ethanol fuel marketingagreement for members of RPMG.  Becomingan owner of RPMG allows us to share any profits made by RPMG and reduces thefees that we pay RPMG to market our ethanol. Pursuant to our member ethanol fuel marketing agreement, we use a pooledmarketing arrangement, which 

 

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meansthat the ethanol we produce is pooled with other ethanol producers and marketedby RPMG.  RPMG pays us a netback priceper gallon that is based on the difference between the pooled average deliveredethanol selling price and the pooled average distribution expense.  These averages are calculated based on eachpool participant’s selling price and expense averaged in direct proportion tothe volume of ethanol supplied by each participant to the pool.

 

***Distiller’s Grains Distribution***

 

Otherthan the distiller’s grains that we market locally, our distiller’s grains aremarketed by RPMG, the same entity that markets our ethanol.  On July 15, 2008 we entered into adistiller’s grains marketing agreement with RPMG.  Our previous distiller’s grains marketer wasCHS, Inc.  We made our finaldeliveries of distiller’s grains for contracts with CHS in October 2008.  The initial term of our distiller’s grainsmarketing agreement with RPMG is two years. Our distiller’s grains marketing agreement with RPMG automaticallyrenews for additional one-year terms unless notice is given as provided by thedistiller’s grains marketing agreement. We pay RPMG a commission based on each ton of distiller’s grains sold byRPMG.

 

Beginningon December 1, 2005, we began marketing some of our distiller’s grains toour local market without the use of an external marketer.  Shipments of these products are made to localmarkets by truck.  This has allowed us tosell less distiller’s grains in the form of DDGS which has decreased ournatural gas usage and increased our revenues from the sale of distiller’sgrains.

 

**New Products and Services**

 

Wedid not introduce any new products or services during our fiscal year ended December 31,2008.  We recently completed installationof equipment which allows us to extract corn oil from the distiller’s grains weproduce.  We are currently marketing thecorn oil we produce through RPMG which is the same marketer that markets ourethanol and distiller’s grains.  If COBSis successful in building a biodiesel plant, we anticipate selling the corn oilwe produce to COBS as the feedstock to produce biodiesel.

 

**Sources and Availability of Raw Materials**

 

***Corn Feedstock Supply***

 

The major raw material required for our ethanol plant to produceethanol and distiller’s grains is corn.  To operate at a nameplatecapacity of 40 milliongallons, the plant requires a supply of approximately 14 million bushels of corn annually.  The plant currently operates in excess of itsnameplate capacity, producing approximately 46.8 million gallons of ethanolannually from approximately 16.5 million bushels of corn.  The areasurrounding the plant near Wentworth in Lake County, South Dakota, currently provides an amplesupply of corn to meet and exceed our raw material requirements for thenameplate and actual production capacity of the plant.

 

Recently, we have experienced record corn crops, including the largestcorn crop which was harvested in the fall of 2007 and the second largest corncrop which was harvested in the fall of 2008. Despite these record corn crops, corn prices have recently beenextremely volatile.  We experienced aspike in corn prices during the middle of our 2008 fiscal year.  The Midwest experienced significant floodingand poor weather during the early part of the 2008 growing season. This causedcorn prices to increase significantly on fears that the corn harvest in thefall of 2008 would not be sufficient to meet current demand.  As a result, corn prices peaked in late June andearly July 2008, with prices reaching as high as $8.00 per bushel.  Following the unfavorable weather in theearly part of the 2008 growing season was nearly ideal weather conditions.  This, along with the collapse of thefinancial markets and a general downturn in the global commodities market,resulted in a significant decrease in corn prices during the second half of our2008 fiscal year.

 

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Below is a chart showing the spot price of corn during our last threefiscal years.

 

 

Should we endure an entire growing season with either widespread orlocalized poor weather that significantly reduces the corn crop, such as awidespread drought, corn prices could increase significantly.  These high corn prices could persist for asignificant period of time and may result in our inability to operate theethanol plant profitably.

 

Werecently switched risk management consultants from FCStone, LLC of West DesMoines, Iowa to John Stewart & Associates, Minnesota Branch ofRoseville, Minnesota (“JS&A”).  Weagreed to pay JS&A a fee of $2,500 per month to assist us in making riskmanagement decisions regarding our commodity purchases.  The initial term of the agreement is one yearand thereafter it renews on a month-to-month basis.  We anticipate engaging in less riskmanagement activities as a result of changes we have made to our riskmanagement strategy. Recently, we have been required to use a significantamount of cash to make margin calls required by our commodities broker as aresult of significant decreases in corn and natural gas prices and theresulting unrealized and realized losses we experienced on our hedgingactivities since July 2008. Utilizing cash for margin calls has an impact on the cash we haveavailable for our operations which could result in liquidity problems duringtimes when corn or natural gas prices fall significantly.  Going forward, we have decided to use minimalhedging of our corn and natural gas purchases to avoid potential losses on ourhedge positions and the resulting impact on our cash position.  This may leave us vulnerable to corn andnatural gas price increases, however, we believe this is necessary to moreclosely match the price we pay for corn and natural to the market price ofethanol and distiller’s grains which we believe change in relation to cornprices and commodity prices generally.

 

Corn is supplied to us primarily from ourmembers who are local agricultural producers and from purchases of corn on theopen market.  Certain of our members havecorn delivery contracts that require them to supply us with corn as a conditionof being a member of the company.  On August 1,2007, our board of directors approved a resolution making it voluntary forthese members to deliver corn to us under their respective corn deliveryagreements.  We anticipate that many ofour members will continue to supply us with corn on a voluntary basis.  We anticipate purchasing corn from thirdparties should our members fail to supply us with enough corn to operate theethanol plant at capacity.

 

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***Natural Gas***

 

Naturalgas is an important input to our manufacturing process.  We use naturalgas to dry our distiller’s grains products to moisture contents at which theycan be stored for long periods of time. This allows the distiller’s grains we produce to be transported greaterdistances which allows them to serve broader livestock markets, includingpoultry and swine markets in the continental United States.  We contract with NorthWestern Energy for ournatural gas.  Under our agreement, theprice for our natural gas is based on market rates.  The agreement is in effect until 2011 renewablefor an additional ten year term, unless the agreement is terminated.  Since operations commenced in 2001, therehave been no interruptions in the supply of natural gas from NorthWesternEnergy, and all of our natural gas requirements have been met.  Recently we have experienced significantdecreases in natural gas prices which have followed energy and commodity pricesgenerally.  We anticipate that naturalgas prices will continue to remain low so long as the global economic slowdownpersists.  However, should we experiencesupply interruptions during our 2009 fiscal year, such as from hurricaneactivity in the Gulf Coast region of the United States, we may experiencehigher natural gas prices.

 

Belowis a chart showing the spot market price of natural gas during our last threefiscal years.

 

 

***Electricity***

 

Electricityis necessary for lighting and powering much of the machinery and equipment usedin the production process.  We contractwith Sioux Valley Energy, Inc. to provide all of the electric power andenergy requirements for the ethanol plant.   The agreement is in effect until 2011 andautomatically renews for five-year terms, unless at least 18 months notice isgiven by either party to terminate the agreement prior to the expiration of thecurrent term.  We have had no interruption or shortages in the supply of electricityto the plant since operations commenced in 2001.

 

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***Water***

 

Wateris a necessary part of the ethanol production process.  It is used in the fermentation process and toproduce steam for the cooking, evaporation, and distillation processes.  We contract with Big Sioux Community Water System, Inc.to supply and meet our water requirements for the ethanol and distiller’sgrains production process.  Our agreementwith Big Sioux is for automatically renewing five-year terms.  Since our operations commenced in September 2001,we have had no interruption in the supply of water and all our requirementshave been met.  We are in the process ofnegotiating a renewal of our water supply agreement.  Pursuant to an addendum to our water supplyagreement, the current renewal term of the agreement is for three monthsstarting on December 17, 2008.  Weanticipate entering into another long term agreement with Big Sioux CommunityWater System, Inc.  Currently, theBig Sioux Community Water System will not guarantee any of the parameters ofthe original agreement due to our water usage levels.  The agreement also allows us to use waterfrom the Skunk River Aquifer to meet the plant’s water needs.

 

**SeasonalFactors in Business**

 

We anticipate someseasonality of demand for ethanol during the summer months that coincides withincreases in gasoline demand.  Weanticipate that this increased demand during summer months may be lesspronounced this year as a result of the global economic slowdown that webelieve is negatively impacting gasoline demand.  Since ethanol is typically blended withgasoline, when gasoline demand falls, ethanol demand is negativelyimpacted.  In an effort to improve airquality in regions where carbon monoxide and ozone are a problem, theFederal Clean Air Act requires the sale of oxygenated motor fuels during thewinter months in certain major metropolitan areas.  Gasoline that is blended with ethanol has a higheroxygen content than gasoline that does not contain ethanol.  As a result,we expect fairly light seasonality with respect to our revenue from ethanolsales allowing us to, potentially, be able to sell our ethanol at a slightpremium during the mandated oxygenate period. As more ethanol is used year round in many markets in the United States,we anticipate this effect to be dampened.

 

**WorkingCapital**

 

Inorder to protect the price of our inputs, namely corn and natural gas, we enterinto hedging transactions that are designed to limit our exposure to increasesin the price of corn and natural gas.  Asa result of the volatility of corn prices during our 2008 fiscal year,decreasing corn prices had a significant impact on the cash we had availablefor working capital at the end of our 2008 fiscal year. We experienced historichigh prices for corn during the early part of July 2008 and these pricesdecreased significantly during the remaining months of our 2008 fiscalyear.  The result of this volatility isthat we were forced to dedicate significant amounts of cash to meet margincalls associated with our derivative instruments and we experienced significantlosses on our risk management activities. On October 7, 2008, we liquidated all of our futures and optionspositions in order to preserve our liquidity. This resulted in an approximately $7.5 million realized loss on ourderivative instruments which we recorded during our fourth fiscal quarter of2008.  We anticipate adjusting ourhedging strategy in the future so we will not be as exposed to significanthedging losses during times when corn prices are volatile which can affect theamount of working capital we have available.

 

**Dependence on One or a Few Major Customers**

 

As discussed above, we have entered intomarketing agreements with RPMG to market both our ethanol and distiller’sgrains.  Further, we anticipate marketingour corn oil with RPMG.  Therefore, weanticipate relying on RPMG to market almost all of our products, except forthose distiller’s grains that we market locally.  Our financial success will be highlydependent on RPMG’s ability to market our products.  Any loss of RPMG as our marketing agent orany lack of performance under these agreements or inability to securecompetitive prices could have a significant negative impact on our revenues.

 

**OurCompetition**

 

We are in direct competition withnumerous ethanol producers, many of whom have greater resources than wedo.  During our 2008 fiscal year, therewas relatively slower growth in the number of new ethanol producers enteringthe market due to high corn prices and relatively lower ethanol prices ascompared to 2007 and 2006.  We 

 

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anticipatethat ethanol production will continue to increase in order to meet the ethanoluse mandates included in the Federal Renewable Fuels Standard.  However, we also expect increased competitionfrom other forms of renewable energy, specifically cellulosic ethanol.

 

Cellulose is the maincomponent of plant cell walls and is the most common organic compound onearth.  Cellulose is found in wood chips,corn stalks, rice straw, amongst other common plants. Cellulosic ethanol isethanol produced from cellulose.  Many ofthe government incentives that have recently been passed, including theexpanded Renewable Fuels Standard and the 2008 Farm Bill, have includedsignificant incentives to assist in the development of commercially viablecellulosic ethanol.  Currently, thetechnology is not sufficiently advanced to produce cellulosic ethanol on acommercial scale, however, due to these new government incentives, weanticipate that commercially viable cellulosic ethanol technology will bedeveloped in the near future.  Severalcompanies and researchers have commenced pilot projects to study thefeasibility of commercially producing cellulosic ethanol.  If this technology can be profitably employedon a commercial scale, it could potentially lead to ethanol that is lessexpensive to produce than corn based ethanol, especially if corn prices remainhigh.  We do not believe it would befeasible to convert our ethanol plant to utilize cellulosic ethanol productiontechnology.  Cellulosic ethanol may alsocapture more government subsidies and assistance than corn based ethanol.  This could decrease demand for our product orresult in competitive disadvantages for our ethanol production process.

 

Ethanolis a commodity product, like corn, which means our ethanol plant competes with other ethanol producers on thebasis of price and, to a lesser extent, delivery service.  We believe we compete favorably with otherethanol producers due to our proximity to ample grain supplies and multiplemodes of transportation.  However, duringour 2008 fiscal year, some consolidation of the ethanol industry occurred,especially with the merger between Verasun Energy and U.S. BioEnergy.  Management believes that conditions are rightfor a contraction in the ethanol industry as a result of the significantfinancial hardship that has been occurring in the ethanol industry recently.

 

Accordingto the Renewable Fuels Association, as of March 5, 2009, the ethanolindustry has grown to 193 production facilities in the United States. There areapproximately 23 plants currently under construction or expansion.  The Renewable Fuels Association estimatesthat the United States ethanol industry has capacity to produce approximately12.3 billion gallons of ethanol per year, however the Renewable FuelsAssociation estimates that as much as 15% of this production capacity may beidled due to current conditions in the ethanol industry.  The new ethanol plants under constructionalong with the plant expansions under construction could push United Statesproduction of fuel ethanol in the near future to nearly 14.5 billion gallonsper year.  Further, should financialconditions in the ethanol industry improve, some or all of the idled productioncapacity may resume production of ethanol and distiller’s grains which couldincrease the supply of ethanol and distiller’s grains significantly.

 

Thelargest ethanol producers include POET, Archer Daniels Midland, ValeroRenewable Fuels and Hawkeye Renewables each of which are capable of producingmore ethanol than we produce.  ValeroRenewable Fuels recently purchased 8 ethanol plants with capacity to produce780 million gallons of ethanol per year from VeraSun Energy through a Chapter11 Bankruptcy auction.  Valero paid $477million for the VeraSun facilities, excluding working capital and inventorywhich is currently estimated at $75 million. Valero is a large gasoline refiner and it owns retail level gasolinedistribution.  Valero’s involvement inboth the ethanol and gasoline blending industries may allow Valero to realizeeconomies of scale and favorable operating conditions that may negativelyimpact other ethanol producers, including us. Further, many in the ethanol industry believe that the ethanol industryis ripe for consolidation.  Several otherethanol production companies have recently filed for bankruptcy which mayresult in consolidation of the ethanol industry depending on whether theethanol plants of these companies are purchased by other large ethanolproduction companies.  This may result ina few large companies controlling a significant amount of the ethanolproduction industry.  These large ethanolproducers may influence the ethanol industry in a manner that is not beneficialto us.

 

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Thefollowing table identifies the largest ethanol producers in the United Statesalong with their production capacities.

 

**U.S. FUELETHANOL PRODUCTION CAPACITY**

**BY TOP PRODUCERS**

**Producers of Approximately 200million gallons per year (mmgy) or more**

 
| **Company**                           | ** ** | **Location**                                                                                                                                                                                                                                                                                                                               | ** ** | **Current  Capacity  (mmgy)** | ** ** | **Under Construction/  Expansions  (mmgy)** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------------------------|------------|
| Aventine Renewable Energy, Inc.* | ** ** | **TOTAL**  Pekin, IL   Aurora, NE                                                                                                                                                                                                                                                                                                          | ** ** | **207**                       |       |                                             |       |
| Archer Daniels Midland*               | ** ** | **TOTAL**  Decatur, IL   Cedar Rapids, IA   Clinton, IA   Columbus, NE   Marshall, MN   Peoria, IL   Wallhalla, ND                                                                                                                                                                                                                         | ** ** | **1,070**                     | ** ** | **550**                                          | ** ** |
| POET*                                 | ** ** | **TOTAL******Albert Lea, MNAlexandria, INAshton, IABig Stone, SDBingham Lake, MNCaro, MIChancellor, SDCoon Rapids, IACorning, IAEmmetsburg, IAFostoria, OHGowrie, IAGroton, SDHanlontown, IAHudson, SDJewell, IALaddonia, MOLake Crystal, MNLeipsic, OHMacon, MOMarion, OHMitchell, SDN. Manchester, INPortland. INPreston, MNScotland, SD | ** ** | **1469**                      | ** ** | **65**                                           | ** ** |
| Hawkeye Renewables, LLC               | ** ** | **TOTAL**Iowa Falls, IA   Fairbank, IA   Menlo, IA   Shell Rock, IA                                                                                                                                                                                                                                                                        | ** ** | **445**105   120   110   110  |       |                                             |       |
| Valero Renewable Fuels                | ** ** | **TOTAL**  Albion, NE   Albert City, IA                                                                                                                                                                                                                                                                                                    | ** ** | **780**110   110              | ** ** | **110**                                          | ** ** |

 

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|                                                                                                                 | ** ** | Aurora, SD   Charles City, IA   Ft. Dodge, IA   Hartley, IA   Welcome, MN                              | ** ** | 120    110   110   110   110           | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------|------------|
|                                                                                                                 | ** ** | Reynolds, IN                                                                                           | ** ** | ** **                             | ** ** | 110        | ** ** |
| AgStar Financial Services (to be sold to numerous interested parties  within 60 days of closing VeraSun transaction) | ** ** | **TOTAL**  Central City, NE   Ord, NE   Dyersville, IA   Hankinson, ND   Janesville, MN   Woodbury, MI | ** ** | **530**100   50   110   110   110   50 |       |       |       |
| WestLB Ag                                                                                                            | ** ** | **TOTAL**  Linden, IN   Bloomingburg, OH                                                               | ** ** | **220**110   110                       |       |       |       |

----

*Individualstate production capacity not reported

 

Source:Renewable Fuels Association (“RFA”)

Updated:March 5, 2009

 

***Competitionwith Ethanol Imported from Other Countries***

 

Ethanolproduction is also expanding internationally. Ethanol produced or processed in certain countries in Central Americaand the Caribbean region is eligible for tariff reduction or elimination onimportation to the United States under a program known as the Caribbean BasinInitiative.  Some ethanol producers,including Cargill, have started taking advantage of this situation by buildingdehydration plants in participating Caribbean Basin countries, which convertethanol into fuel-grade ethanol for shipment to the United States.  Ethanol imported from Caribbean Basincountries may be a less expensive alternative to domestically produced ethanoland may affect our ability to sell our ethanol profitably.  Further, despite the fact that there is asignificant amount of ethanol produced in the United States, ethanol producedabroad and shipped by sea may be a more favorable alternative to supply coastalcities that are located on international shipping ports.

 

***Competitionfrom Alternative Fuels***

 

Our ethanol plant also competes withproducers of other gasoline additives having similar octane and oxygenatevalues as ethanol.  Alternative fuels,gasoline oxygenates and alternative ethanol production methods are also continuallyunder development.  The major oilcompanies have significantly greater resources than we have to market otheradditives, to develop alternative products, and to influence legislation andpublic perception of ethanol.  Thesecompanies also have sufficient resources to begin production of ethanol shouldthey choose to do so.  Recently, ValeroRenewable Fuels, purchased 8 ethanol plants from the VeraSun Energy bankruptcyauction with capacity to produce 780 million gallons of ethanol per year.  Valero paid $477 million for the VeraSunfacilities, excluding working capital and inventory which is currentlyestimated at $75 million.  Valero is acompany that owns gasoline blending and retail businesses.  Thismay be a signal of further involvement by major oil companies in the renewablefuels industry.  We may not be able tocompete with the resources of these large oil companies.

 

Further, recent governmental incentivesincluded in both the 2008 Farm Bill and President Obama’s stimulus plans havetargeted government incentives at certain advanced renewable fuels such ascellulosic ethanol.  The purpose of theseincentives is to develop other alternative energy sources from feedstocks otherthan corn.  These incentives may benefitproducers of other alternative fuels in a manner that makes the ethanol weproduce not competitive and could negatively impact our operations.

 

A number of automotive, industrial and powergeneration manufacturers are developing alternative clean power systems usingfuel cells or clean burning gaseous fuels. Like ethanol, the emerging fuel cell industry offers a technologicaloption to address increasing worldwide energy costs, the long-term availabilityof petroleum reserves and environmental concerns.  Fuel cells have emerged as a potentialalternative to certain existing power sources 

 

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because of their higher efficiency, reduced noise andlower emissions. Fuel cell industry participants are currently targeting thetransportation, stationary power and portable power markets in order todecrease fuel costs, lessen dependence on crude oil and reduce harmfulemissions.  If the fuel cell and hydrogenindustries continue to expand and gain broad acceptance and hydrogen becomesreadily available to consumers for motor vehicle use, we may not be able tocompete effectively.  This additionalcompetition could reduce the demand for ethanol, which could negatively impactour profitability.

 

**Distiller’s Grains Competition**

 

Ourethanol plant primarily competes with other ethanol producers in the productionand sales of distiller’s grains. Distiller’s grains are primarily used as an animal feed supplement whichreplaces corn and soybean meal. As a result, we believe that distiller’s grainsprices are positively impacted by increases in corn and soybean prices.  The amount of distiller’s grains produced bythe ethanol industry is expected to continue to increase as the number ofoperating ethanol plants increases.  Thiscould negatively impact the price at which we sell our distiller’s grainsunless demand expands in relation to the expanding supply.  However, as a result of decreased ethanolproduction due to the current conditions in the ethanol industry, we believethat distiller’s grains production has also decreased.  We anticipate that this may have a positiveimpact on distiller’s grains prices.  Weexpect the market price of distiller’s grains to continue to be volatile as aresult of changes in distiller’s grains production and the price of corn andsoybeans.

 

**GeneralEthanol Demand and Supply**

 

According to theRenewable Fuels Association, demand for fuel ethanol in the United Statescontinued to increase in 2008.  Domesticethanol demand was approximately 9.5 billion gallons in 2008 according toRenewable Fuels Association statistics. Further, domestic ethanol production is estimated by the RFA to be 9billion gallons.  However, we believethat current ethanol production capacity is significantly higher than ethanoldemand which we believe negatively impacts ethanol prices.  If the supply of ethanol continues toincrease at a more rapid rate than demand, the price at which we can sell ourethanol may continue to decrease.  Theethanol industry must grow demand for ethanol in order to support currentethanol prices and allow the ethanol industry to remain profitable.

 

Currently, ethanol isblended with conventional gasoline for use in standard (non-flex fuel) vehiclesto create a blend which is 10% ethanol and 90% conventional gasoline.  Estimates indicate that approximately 135billion gallons of gasoline are sold in the United States each year.  However, gasoline demand may be shrinking inthe United States as a result of the global economic slowdown.  Assuming that all gasoline in the UnitedStates is blended at a rate of 10% ethanol and 90% gasoline, the maximum demandfor ethanol is 13.5 billion gallons. This is commonly referred to as the “blending wall”, which represents alimit where more ethanol cannot be blended into the national gasolinepool.  This is a theoretical limit sinceit is believed it would not be possible to blend ethanol into every gallon ofgasoline that is used in the United States and it discounts higher percentageblends of ethanol such as E85 used in flex fuel vehicles.  Many in the ethanol industry believe that theethanol industry will reach this blending wall in 2009 or 2010.  The RFS requires that 36 billion gallons ofrenewable fuels be used each year by 2022. In order to meet the RFS in future years and expand demand for ethanol,higher blends of ethanol must be utilized in conventional automobiles.  Such higher blends of ethanol have recentlybecome a contentious issue.  Automobilemanufacturers and environmental groups have fought against higher ethanolblends.  Currently, state and federalregulations prohibit the use of higher ethanol blends in conventionalautomobiles and vehicle manufacturers have indicated that using higher blendsof ethanol in conventional automobiles would void the manufacturer’swarranty.  Without increases in theallowable percentage blends of ethanol, demand for ethanol may not continue toincrease.  Our financial condition may benegatively affected by decreases in the selling price of ethanol resulting fromlower ethanol demand compared to ethanol supply.

 

We anticipate that thecurrent low price for gasoline may not increase demand for ethanol as quicklyas gasoline prices have in the past. When gasoline prices were very high, ethanol prices were comparativelymuch lower and represented a significant cost savings to fuel blenders whoblended ethanol with conventional gasoline. Therefore, fuel blenders used a significant amount of ethanol in orderto reduce gasoline costs in an effort to compete more favorable in the gasolinemarket.  During periods of time whengasoline prices are high, fuel blenders are expected to voluntarily blendethanol with gasoline due to the favorable spread in price between gasoline andethanol.  However, in times when gasolineprices are low, blending ethanol does not present the same economies to

 

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fuel blenders who we anticipate will only blend asmuch ethanol as is required.

 

Demand for ethanol mayincrease as a result of increased consumption of E85 fuel. E85 is a blend of85% ethanol and 15% gasoline.  TheNational Ethanol Vehicle Coalition reports as of February 4, 2009, thatthere are approximately 1,900 retail gasoline stations supplying E85.  While the number of retail E85 suppliersincreases significantly each year, this remains a relatively small percentageof the total number of U.S. retail gasoline stations, which is approximately170,000.  According to the RFA, as of February 2009,there are more than 9 million flex fuel vehicles on the road in the UnitedStates.  As public awareness of ethanoland E85 increases along with E85’s increased availability, managementanticipates some growth in demand for ethanol as a result of E85consumption.  However, we anticipate thatthe number of flex fuel vehicles will not increase at a fast enough rate tosignificantly increase ethanol demand to meet the RFS in future years as wellas projected ethanol supply capacity.  Webelieve this is especially true as a result of the current global economicclimate and the difficulties being experienced by the automobile industry.  As automobile sales fall, the number of flexfuel vehicles that enter the market each year will also fall.  Further, the automobile industry may not bein a position to continue to develop technology that utilizes more ethanol whenthe automobile industry is struggling financially.

 

**Research andDevelopment**

 

Wedo not conduct any research and development activities associated with thedevelopment of new technologies for use in producing ethanol, distiller’sgrains and corn oil.

 

**Governmental Regulation**

 

Costs and Effects of Federal Ethanol Supports

 

The effect of therenewable fuel standard (“RFS”) program in the Energy Independence and SecurityAct signed into law on December 19, 2007 (the “2007 Act”) is uncertain.The mandated minimum level of use of renewable fuels in the RFS under the 2007Act increased to 11.1 billion gallons per year in 2009, and is scheduled toincrease to 36 billion gallons per year in 2022. However, only 10.5 billiongallons of the RFS in 2009 and 15 billion gallons by 2015 can be met with cornbased ethanol such as the ethanol we produce. The 2007 Act also requires the increased use of “advanced” biofuels,which are alternative biofuels produced without using corn starch, such ascellulosic ethanol and biomass-based diesel, with 21 billion gallons of themandated 36 billion gallons of renewable fuel required to come from advancedbiofuels by 2022. Required RFS volumes for both general and advanced renewablefuels in years to follow 2022 will be determined by a governmental administrator,in coordination with the U.S. Department of Energy and U.S. Department ofAgriculture.

 

Waivers of the RFSminimum levels of renewable fuels included in gasoline could negatively impactour results of operations. Under the RFS, as originally passed as part of theEnergy Policy Act of 2005, the U.S. Environmental Protection Agency, or EPA, inconsultation with the Secretary of Agriculture and the Secretary of Energy, maywaive the renewable fuels mandate with respect to one or more states if theAdministrator of the EPA determines that implementing the requirements wouldseverely harm the economy or the environment of a state, a region or thenation, or that there is inadequate supply to meet the requirement.

 

Further, theblending wall has established somewhat of a cap on ethanol demand due to thefact that current EPA regulations prohibit using higher blends of ethanol inconventional automobiles.  The ethanolindustry and several politicians have been working to increase the allowablepercentage of ethanol that can be used in conventional automobiles.  The EPA may not choose to change theregulations necessary for higher blends of ethanol to be used in conventionalautomobiles.  This may limit demand forethanol.

 

The use ofethanol as an alternative fuel source has been aided by federal taxpolicy.  On October 22, 2004, President Bushsigned H.R. 4520, which contained the Volumetric Ethanol Excise Tax Credit (“VEETC”)and amended the federal excise tax structure effective as of January 1,2005.  Prior to VEETC, ethanol-blendedfuel was taxed at a lower rate than regular gasoline (13.2 cents on a 10%blend).  Under VEETC, the ethanol excisetax exemption has been eliminated, thereby allowing the full federal excise taxof 18.4 cents per gallon of gasoline to be collected on all gasoline andallocated to the highway trust fund.  Inplace of the exemption, the bill created a new 

 

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volumetric ethanol excise tax credit of 5.1 centsper gallon of ethanol blended at 10%. The VEETC is scheduled to expire on December 31, 2010.

 

On June 18, 2008,the United States Congress overrode a presidential veto to approve the Food,Conservation and Energy Act of 2008 (the “2008 Farm Bill”) and to ensure thatall parts of the 2008 Farm Bill are enacted into law. Passage of the 2008 FarmBill reauthorizes the 2002 farm bill and adds new provisions regarding energy,conservation, rural development, crop insurance as well as other subjects. Theenergy title continues the energy programs contained in the 2002 farm bill butrefocuses certain provisions on the development of cellulosic ethanoltechnology. The new legislation provides assistance for the production, storageand transport of cellulosic feedstocks and provides support for ethanolproduction from such feedstocks in the form of grants, loans and loanguarantees. The 2008 Farm Bill also modifies the ethanol fuels tax credit from51 cents per gallon to 45 cents per gallon beginning in 2009. The bill alsoextends the 54 cent per gallon tariff on imported ethanol for two years, to January 2011.The 2008 Farm Bill is distinct from the Energy Independence and Security Act of2007, which contains the increased renewable fuels standard describedabove.  There is currently some debate inthe U.S. Senate about whether to repeal the 54 cent per gallon tariff onimported ethanol. If the 54 cent per gallon tariff is repealed, demand fordomestically produced ethanol may be offset by the supply of ethanol importedfrom Brazil or other foreign countries.

 

Costs and Effects of Compliance withEnvironmental Laws

 

We are subject to extensive air, water andother environmental regulations, and we have been required to obtain a numberof environmental permits to construct and operate the plant.  We have obtained all of the necessary permitsto operate the plant.  Although we have beensuccessful in obtaining all of the permits currently required, any retroactivechange in environmental regulations, either at the federal or state level,could require us to obtain additional permits or spend considerable resourceson complying with such regulations.

 

In addition, we may be required to purchase and install equipment forcontrolling and improving emissions.  In each of ourlast two fiscal years, 2008 and 2007, our costs of environmental compliancewere approximately $252,000.

 

We are subject to environmental oversightby the EPA.  There is always a risk thatthe EPA may enforce certain rules and regulations differently than SouthDakota’s environmental administrators. South Dakota or EPA rules are subject to change, and any suchchanges could result in greater regulatory burdens on plant operations.  We could also be subject to environmental ornuisance claims from adjacent property owners or residents in the area arisingfrom possible foul smells or other air or water discharges from the plant.  Such claims may result in an adverse resultin court if we are deemed to engage in a nuisance that substantially impairsthe fair use and enjoyment of real estate.

 

The government’s regulation of the environment changes constantly.  It is possible that federal or stateenvironmental rules or regulations could be adopted that could have anadverse effect on the use of ethanol. For example, changes in the environmental regulations regarding therequired oxygen content of automobile emissions could have an adverse effect onthe ethanol industry.  Furthermore, plantoperations are governed by the Occupational Safety and Health Administration (“OSHA”).  OSHA regulations may change such that thecosts of operating the plant may increase. Any of these regulatory factors may result in higher costs or othermaterially adverse conditions effecting our operations, cash flows andfinancial performance.

 

**Employees**

 

As of March 15, 2009, we had atotal of 38 full-time employees.  We do not expect to hire a significantnumber of employees in the next 12 months.

 

**Financial Information about Geographic Areas**

 

All of our operations are domiciled in the United States.  All of the products sold to our customers forfiscal years 2008, 2007 and 2006 were produced in the United States and all ofour long-lived assets are domiciled in the United States.  We have engaged a third-party professionalmarketer which decides where our products are marketed 

 

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andwe have no control over the marketing decisions made by our third-partyprofessional marketer.  Therefore, someof our products may be sold outside of the United States.

 

**ITEM 1A.               RISKFACTORS.**

 

*Youshould carefully read and consider the risks and uncertainties below and theother information contained in this report. The risks and uncertainties described below are not the only ones we mayface.  The following risks, together withadditional risks and uncertainties not currently known to us or that we currentlydeem immaterial could impair our financial condition and results of operation.*

 

**RisksRelating to Our Business**

 

***We may violate the terms of our credit agreements and financialcovenants which could result in our lender demanding immediate repayment of ourloans which may result in our failure.***  We have beeninvolved in discussions with our primary lender, First National Bank of Omaha(FNBO), regarding our non-compliance with certain of our loan covenants at theend of our 2008 fiscal year and our anticipated non-compliance during our firstfiscal quarter of 2009.  Specifically, wewere out of compliance with our debt service coverage ratio and our workingcapital covenants as of December 31, 2009, and we anticipate being out ofcompliance with these two covenants as of March 31, 2009.  Further, we do not anticipate that we will beable to raise an additional $2,000,000 of subordinated debt by March 31,2009 as required by a loan amendment we executed in January 2009.  FNBO agreed to grant us a waiver of ournon-compliance with these loan covenants and agreed to extend the date by whichwe must raise the additional $2,000,000 in subordinated debt to May 18,2009.  Further, FNBO has agreed to changethe way our debt service coverage ratio is measured until December 31,2009.  We are in the process of trying toraise the additional subordinated debt financing and securing the financing forour corn oil extraction equipment as required by FNBO.  However, we may violate the terms of ouramended credit agreements with FNBO even after the waivers issued by FNBO.  Further, there may be costs involved insecuring this waiver from FNBO, including attorney fees and other costs of FNBOrelated to issuing the waiver.  If weviolate the terms of our loan, our primary lender could deem us in default ofour loans and require us to immediately repay the entire outstanding balance ofour loans. If we do not have the funds available to repay the loans or wecannot find another source of financing, we may have to liquidate or reorganizeunder Chapter 11 bankruptcy protection which could decrease or eliminate thevalue of our units.

 

***Wemay not be able to raise sufficient capital in our subordinated debt offeringwhich could result in our failure. ***We are currently conducting a privateoffering of subordinated debt securities to certain qualifying investors.  Our lender has required that we raise anadditional $2,000,000 in subordinated debt financing by May 18, 2009.  We may not be able to raise this amount ofadditional subordinated debt through our debt offering.  If we are unable to raise the debt requiredby our credit agreement with our lender, we may be in violation of our creditagreement.  This could result in ourlender requiring immediate repayment of the entire outstanding amount of ourloans.  If we do not have the fundsavailable to repay the loans or we cannot find another source of financing, wemay have to liquidate or reorganize under Chapter 11 bankruptcy protectionwhich could decrease or eliminate the value of our units.

 

***Our financial performance is significantly dependent on cornand natural gas prices.**** *Ourresults of operations and financial condition are significantly affected by thecost and supply of corn and natural gas. Generally, we cannot pass on increases in input prices to ourcustomers.  Changes in the price andsupply of corn and natural gas are subject to and determined by market forcesover which we have no control.

 

Corn, as with most othercrops, is affected by weather, disease and other environmental conditions.  The price of corn is also influenced bygeneral economic, market and government factors.  These factors include weather conditions,farmer planting decisions, domestic and foreign government farm programs andpolicies, global demand, supply and quality. Changes in the price of corn can significantly affect our business.Generally, higher corn prices will produce lower profit margins and, therefore,represent unfavorable market conditions. If we endure high corn prices for a sustained period of time withoutcorresponding increases in the selling price of ethanol and distiller’s grains,such pricing may reduce our ability to operate our ethanol plantprofitably.  If our region becomessaturated by ethanol plants, corn used for ethanol could consume a significantportion of the total corn production in our 

 

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region, which wouldlikely increase local corn prices.  Wemay not be able to offset an increase in the price of corn by increasing theprice of our products.

 

The prices for andavailability of natural gas are subject to volatile market conditions,including supply shortages and infrastructure incapacities.  Significant disruptions in the supply ofnatural gas could impair our ability to manufacture ethanol and distiller’sgrains for our customers.  During the endof 2005 and early 2006, natural gas supply disruptions as a result ofhurricanes in the Gulf Coast led to historic high natural gas prices.  At any time, similar supply disruptions mayincrease the price we pay for natural gas. Furthermore, increases in natural gas prices or changes in our naturalgas costs relative to natural gas costs paid by competitors may adverselyaffect our results of operations and financial condition.

 

Increases in the price wepay for corn and natural gas, without corresponding increases in the price wereceive for our ethanol and distiller’s grains, may make our ethanol plantoperate unprofitably which could reduce or eliminate the value of our units.

 

***The spreadbetween ethanol and corn prices can vary significantly which could prevent usfrom operating the ethanol plant profitably. ***Corncosts significantly impact our cost of goods sold.  The spread between theprice of ethanol and the price we pay per bushel of corn has fluctuatedsignificantly in the past and may fluctuate significantly in the future.  We have recently experienced losses due toour raw material costs being higher than our revenues related to relativelyhigher natural gas and corn costs compared to the price we receive for ourethanol.  The spread between the price ofethanol and price of corn may continue to be volatile and may lead to volatilityin our net income and could lead to negative operating margins in thefuture.  Any reduction in the spreadbetween ethanol and corn prices, whether as a result of an increase in cornprices or a reduction in ethanol prices, could prevent us from operating theethanol plant profitably.  Our inabilityto operate the ethanol plant profitably for an extended period of time mayreduce or eliminate the value of our units.

 

***Our revenueswill be greatly affected by the price at which we can sell our ethanol anddistiller’s grains which could result in our inability to operate the ethanolplant profitably.*** The prices of ethanol and distiller’s grains can be volatile as aresult of a number of factors. These factors include overall supply and demand,commodity prices generally, including the price of gasoline and corn,government mandates for ethanol use such as the Renewable Fuels Standard,levels of government support, the blending wall and the availability and priceof competing products.

 

The selling price of ethanol peaked in the middle of2008 and was significantly lower by the end of 2008 and into the beginning of2009.  We anticipate the price of ethanolto be volatile as a result of the current economic uncertainty along withchanges in the relationship between ethanol supply and demand.  The interaction of the new ethanol supply anddemand will likely create swings in the price of ethanol into the foreseeablefuture.  Should ethanol demand continueto expand at a slower pace than increases in ethanol supply, we anticipate theselling price of ethanol to continue to decrease.  Further, we anticipate that increases inethanol supply will also lead to increases in distiller’s grains supply.  If the increased supply of distiller’s grainsis not also met with corresponding increases in distiller’s grains demand, itmay reduce the selling price of distiller’s grains.  As the ethanol industry continues to grow, weanticipate volatility in the price of both ethanol and distiller’s grains whichmakes future price projections unreliable. Any downward changes in the price of ethanol and/or distiller’s grainsmay result in less revenue and may impact our ability to operate profitably.

 

***Our business is not diversified.***  Our successdepends largely upon our ability to profitably operate our ethanol plant. We donot have any other lines of business or other sources of revenue if we areunable to operate our ethanol plant and manufacture ethanol and distiller’sgrains.  If economic or political factorsadversely affect the market for ethanol, we have no other line of business tofall back on. Our business would also be significantly harmed if our ethanolplant could not operate at full capacity for any extended period of time.

 

***We may require additional debt financing to continue to operate ourethanol plant which may not be available or may not be available on favorableterms which may result in our inability to operate the ethanol plantprofitably.***  The ethanol industry is experiencingdifficult economic conditions which have affected us.  As a result of these economic conditions, wemay require additional financing in the future in order to continue to operatethe ethanol plant.  However, due to currentconditions in the credit markets, we may not be able to secure such 

 

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additional financing orwe may not be able to secure such financing on favorable terms.  If we are unable to secure the additionalfinancing we may need in the future on favorable terms, we may be forced toshut down the ethanol plant or reduce ethanol production at the plant, eitheron a short term basis or permanently. This may force us to liquidate or reorganize under Chapter 11 bankruptcyprotection which could decrease or eliminate the value of our units.

 

***Advances inethanol production technology could require us to incur costs to update ourplant or could otherwise hinder our ability to compete or operate profitably.*** Advances and changes in the technology of ethanol production areexpected to occur.  Such advances andchanges may make the ethanol production technology installed in our plant lessdesirable or obsolete.  These advancescould also allow our competitors to produce ethanol at a lower cost thanus.  If we are unable to adopt orincorporate technological advances, our ethanol production methods andprocesses could be less efficient than our competitors, which could cause ourplant to become uncompetitive or completely obsolete.  If our competitors develop, obtain or licensetechnology that is superior to ours or that makes our technology obsolete, wemay be required to incur significant costs to enhance or acquire new technologyso that our ethanol production remains competitive.  Alternatively, we may be required to seekthird-party licenses, which could also result in significant expenditures.  These third-party licenses may not beavailable or, once obtained, may not continue to be available on commerciallyreasonable terms.  These costs couldnegatively impact our financial performance by increasing our operating costsand reducing our net income.

 

***Ourproduct marketer may fail to market our products at competitive prices whichmay cause us to operate unprofitably.***** **RPMG is the sole marketer of all of our ethanol, cornoil and distiller’s grains, and we rely heavily on its marketing efforts tosuccessfully sell our products.  BecauseRPMG sells ethanol, corn oil and distiller’s grains for a number of otherproducers, we have limited control over its sales efforts.  Our financial performance is dependent uponthe financial health of RPMG as substantially all of our revenues areattributable to RPMG’s sales.  If RPMGbreaches our marketing agreements or it cannot market all of the ethanol, cornoil and distiller’s grains we produce, we may not have any readily availablemeans to sell our ethanol, corn oil and distiller’s grains and our financialperformance will be adversely and materially affected.  While we market a portion of our distiller’sgrains internally to local consumers, we do not anticipate we would have theability to sell all of the distiller’s grains, corn oil and ethanol we produceourselves.  If our agreements with RPMGterminate, we may seek other arrangements to sell our ethanol, corn oil anddistiller’s grains, including selling our own product, but we may not be ableto achieve results comparable to those achieved by RPMG.

 

***We engage in hedging transactions which involve risks that could harmour business.***  We are exposed to market risk from changes incommodity prices.  Exposure to commodityprice risk results from our dependence on corn and natural gas in the ethanolproduction process.  We seek to minimizethe risks from fluctuations in the prices of corn, natural gas and ethanolthrough the use of hedging instruments. The effectiveness of our hedging strategies is dependent on the price ofcorn, natural gas and ethanol and our ability to sell sufficient products touse all of the corn and natural gas for which we have futures contracts.  Our hedging activities may not successfullyreduce the risk caused by price fluctuation which may leave us vulnerable tocorn and natural gas price volatility. We may choose not to engage in hedgingtransactions in the future and our operations and financial conditions may beadversely affected during periods in which corn and/or natural gas pricesincrease.  Recently, we have beenrequired to use a significant amount of cash to make margin calls required byour commodities broker as a result of significant decreases in corn and naturalgas prices and the resulting unrealized and realized losses we experienced onour hedging activities since July 2008. Utilizing cash for margin calls has an impact on the cash we haveavailable for our operations which could result in liquidity problems duringtimes when corn or natural gas prices decrease significantly.  This is especially true during times whencredit is difficult to secure such as it currently is.  As a result of this situation, in October 2008,we liquidated all of our hedging positions which resulted in a realized loss ofapproximately $7.5 million which we recorded in our fourth fiscal quarter of2008.  Going forward, we have decided touse minimal hedging of our corn and natural gas purchases to avoid potentiallosses on our hedge positions and the resulting impact on our cashposition.  This may leave us vulnerableto corn and natural gas price increases. We believe this is necessary to more closely match the price we pay forcorn and natural gas to the market price of ethanol and distiller’s grainswhich we believe change in relation to corn prices and commodity pricesgenerally.  Significant losses on ourhedging activities may cause us to operate unprofitably and could decrease thevalue of our units.

 

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**Risks Related to Ethanol Industry**

 

***Valero, a large gasoline blending company, recently purchased 8 ethanolplants from the VeraSun bankruptcy which may signal further involvement in theethanol industry by large oil companies which may influence the ethanolindustry in ways that harms our business.*** Valero Renewable Fuels recently purchased 8 ethanol plants from theVeraSun Energy bankruptcy auction.  Theseethanol plants have a total nameplate production capacity of 780 milliongallons of ethanol.  Valero paid $477million for the VeraSun facilities, excluding working capital and inventorywhich is currently estimated at $75 million. Valero is involved in the gasoline blending and retail gasoline salesindustries.  Now, Valero owns ethanolproduction capacity that would allow Valero to produce a portion of the ethanolthat it is required to blend with gasoline. This may allow Valero to realize economies in the production and sale ofethanol that we are not able to realize. Further, this may signal increased involvement by large oil companies inthe ethanol industry.  Many of these oilcompanies have significantly greater resources than we have. We may not be ableto compete effectively with Valero or other large oil companies which mayresult in our inability to operate our ethanol plant profitably.

 

***New plants under construction or decreases in the demand for ethanolmay result in excess production capacity in our industry which could decreasethe selling prices of our products and cause us to operate unprofitably. ***The supply of domestically produced ethanol is at an all-timehigh.  As of March 5, 2009, therewere 193 ethanol plants nationwide with the capacity to produce more than 12.3billion gallons of ethanol annually.  Anadditional approximately 23 plants are currently under construction orexpansion, which will add an additional estimated 2 billion gallons of annualproduction capacity.  Excess capacity inthe ethanol industry would have an adverse impact on our results of operations,cash flows and general financial condition. If the demand for ethanol does not grow at the same pace as increases insupply, we would expect the selling price of ethanol to continue todecline.  The market price of ethanol maydecline to a level that is inadequate to generate sufficient cash flow to coverour costs.  This could negatively affectour future profitability.

 

***We operate in an intenselycompetitive industry and compete with larger, better financed entities whichcould impact our ability to operate profitably.***  There is significant competition among ethanol producers.  There are numerous producer-owned andprivately-owned ethanol plants planned and operating throughout the Midwest andelsewhere in the United States.  We also face competition from outside ofthe United States.  The passage of theEnergy Policy Act of 2005 included a renewable fuels mandate.  The Energy Independence and Security Act of2007 increased the RFS to 36 billiongallons by 2022.  Further, some stateshave passed renewable fuel mandates. These increases in ethanol demand have encouraged companies to enter theethanol industry.  The largest ethanol producers include POET,Archer Daniels Midland, Valero Renewable Fuels and Hawkeye Renewables, LLC, all of which are each capable of producingmore ethanol than we produce.  We may notbe able to compete effectively with these larger ethanol producers.  Further, many believe that there will beconsolidation occurring in the ethanol industry in the near future which willlikely lead to a few companies who control a significant portion of the ethanolproduction market.  These larger ethanolproducers may be able to affect the ethanol market in ways that are notbeneficial to us which could affect our financial performance.

 

***Competition from the advancement ofalternative fuels may lessen the demand for******ethanol which could negatively impact our ability to operateprofitably.***  Alternative fuels, gasoline oxygenates andethanol production methods are continually under development. A number ofautomotive, industrial and power generation manufacturers are developingalternative clean power systems using fuel cells or clean burning gaseousfuels. Like ethanol, the emerging fuel cell industry offers a technologicaloption to address increasing worldwide energy costs, the long-term availabilityof petroleum reserves and environmental concerns. Fuel cells have emerged as apotential alternative to certain existing power sources because of their higherefficiency, reduced noise and lower emissions. Fuel cell industry participantsare currently targeting the transportation, stationary power and portable powermarkets in order to decrease fuel costs, lessen dependence on crude oil andreduce harmful emissions. If the fuel cell and hydrogen industries continue toexpand and gain broad acceptance, and hydrogen becomes readily available toconsumers for motor vehicle use, we may not be able to compete effectively.This additional competition could reduce demand for ethanol, resulting in lowerethanol prices that might adversely affect our results of operations andfinancial condition.

 

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***Technology advances in the commercialization of cellulosic ethanol maydecrease demand for corn based ethanol which may negatively affect ourprofitability.***  The current trend in ethanol production researchis to develop an efficient method of producing ethanol from cellulose-basedbiomass, such as agricultural waste, forest residue, municipal solid waste, andenergy crops. This trend is driven by the fact that cellulose-based biomass isgenerally cheaper than corn, and producing ethanol from cellulose-based biomasswould create opportunities to produce ethanol in areas which are unable to growcorn.  The Energy Independence andSecurity Act of 2007 and the 2008 Farm Bill offer a very strong incentive todevelop commercial scale cellulosic ethanol. The RFS requires that 16 billion gallons per year of advanced bio-fuelsbe consumed in the United States by 2022. Additionally, state and federal grants have been awarded to severalcompanies who are seeking to develop commercial-scale cellulosic ethanolplants.  We expect this will encourageinnovation that may lead to commercially viable cellulosic ethanol plants inthe near future.  If an efficient methodof producing ethanol from cellulose-based biomass is developed, we may not beable to compete effectively. We do not believe it will be cost-effective toconvert our ethanol plant into a plant which will use cellulose-based biomassto produce ethanol. If we are unable to produce ethanol as cost-effectively ascellulose-based producers, our ability to generate revenue and our financialcondition will be negatively impacted.

 

***Growth in the ethanol industry is dependenton growth in the fuel blending infrastructure to accommodate ethanol, which maybe slow and could result in decreased demand for ethanol.***  Theethanol industry depends on the fuel blending industry to blend the ethanolthat is produced with gasoline so it may be sold to the end consumer.  In many parts of the country, the blendinginfrastructure cannot accommodate ethanol so no ethanol is used in thosemarkets.  Substantial investments arerequired to expand this blending infrastructure and the fuel blending industrymay choose not to expand the blending infrastructure to accommodateethanol.  Should the ability to blendethanol not expand at the same rate as increases in ethanol supply, it maydecrease the demand for ethanol which may lead to a decrease in the sellingprice of ethanol which could impact our ability to operate profitably.

 

***E******thanolimported from Caribbean basin countries may be a less******expensive alternative to our ethanol and negatively impact our abilityto sell our product at a profit.***  Ethanol produced or processedin certain countries in Central America and the Caribbean region is eligiblefor tariff reduction or elimination upon importation to the United States undera program known as the Caribbean Basin Initiative. Large ethanol producers,such as Cargill, have built dehydration plants in participating Caribbean Basincountries, such as El Salvador, which convert ethanol into fuel-grade ethanolfor shipment to the United States. Ethanol imported from Caribbean Basincountries may be a less expensive alternative to domestically produced ethanol.Competition from ethanol imported from Caribbean Basin countries may affect ourability to sell our ethanol profitably, adversely affect our results ofoperations and financial condition.

 

***Ethanol imported from Brazil may be a lessexpensive******alternative to ourethanol.***  Brazil is currently the world’s largestexporter of ethanol.  Until recently,Brazil was also the world’s largest producer of ethanol.  In Brazil, ethanol is produced primarily fromsugarcane, which is also used to produce food-grade sugar.  Ethanol imported from Brazil may be a lessexpensive alternative to domestically produced ethanol, which is primarily madefrom corn. Tariffs presently protecting U.S. ethanol producers may be reducedor eliminated. Competition from ethanol imported from Brazil may affect ourability to sell our ethanol profitably and adversely affect our financialcondition.

 

***Consumer beliefs may affect the demand forethanol.***  We believe that certain consumers perceivethe use of ethanol to have a negative impact on gasoline prices at the pump.Some consumers also believe that ethanol adds to air pollution and harms carand truck engines. Still other consumers believe that the process of producingethanol actually uses more fossil fuel energy, such as oil and natural gas,than the energy in the ethanol that is produced. These consumer beliefs couldpotentially be widespread. If consumers choose not to buy ethanol, it willaffect the demand for the ethanol we produce which could lower the sellingprice of ethanol and negatively affect our profitability and financialcondition.

 

**Risks Related to Regulation andGovernmental Action**

 

***Demand for ethanol may not continue to growunless ethanol can be blended into gasoline in higher percentage blends forconventional automobiles which could impact our ability to operateprofitably. ***Currently,

 

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ethanol is blended withconventional gasoline for use in standard (non-flex fuel) vehicles to create ablend which is 10% ethanol and 90% conventional gasoline.  Estimates indicate that approximately 135billion gallons of gasoline are sold in the United States each year.  Assuming that all gasoline in the UnitedStates is blended at a rate of 10% ethanol and 90% gasoline, the maximum demandfor ethanol is 13.5 billion gallons. This is commonly referred to as the “blending wall”, which represents atheoretical limit where more ethanol cannot be blended into the nationalgasoline pool.  However, the RenewableFuels Standard provides for 36 billion gallons of renewable fuels being blendedby 2022.  Many in the ethanol industrybelieve that the ethanol industry will reach this blending wall in 2009 or2010.  In order to meet the RFS and expanddemand for ethanol, higher blends of ethanol must be utilized in conventionalautomobiles.  Such higher blends ofethanol have recently become a contentious issue.  Automobile manufacturers and environmentalgroups have fought against higher ethanol blends.  Currently, state and federal regulationsprohibit the use of higher ethanol blends in conventional automobiles andautomobile manufacturers have stated that using higher percentage blends ofethanol in conventional automobiles would void the manufacturer’swarranty.  Without increases in theallowable percentage blends of ethanol, demand for ethanol may not continue toincrease which could decrease the selling price of ethanol and could result inour inability to operate the ethanol plant profitably.

 

***A change in government policies favorableto ethanol may cause demand for******ethanol todecline.***  Growth and demand for ethanol may be drivenprimarily by federal and state government policies, national tax incentives andthe renewable fuels standard. The continuation of these policies is uncertain,which means that demand for ethanol may decline if these policies change or arediscontinued. A decline in the demand for ethanol is likely to cause lowerethanol prices which in turn will negatively affect our results of operations,financial condition and cash flows.

 

***Government incentives for ethanol production, including federal taxincentives,******may be eliminated in thefuture, which could hinder our ability to operate at a**profit****.** *The ethanol industryis assisted by various federal ethanol production and tax incentives, includingthe RFS set forth in the Energy Policy Act of 2005 and increased by the EnergyIndependence and Security Act of 2007. The RFS helps support a market for ethanol that might disappear withoutthis incentive; as such, waiver of the RFS minimum levels of renewable fuelsincluded in gasoline could negatively impact our results of operations.

 

In addition, the eliminationor reduction of tax incentives to the ethanol industry, such as the VolumetricEthanol Excise Tax Credit (“VEETC”) available to gasoline refiners andblenders, could also reduce the market demand for ethanol, which could reduceprices and our revenues by making it more costly or difficult for us to produceand sell ethanol. If the federal tax incentives are eliminated or sharplycurtailed, we believe that decreased demand for ethanol will result, whichcould negatively impact our ability to operate profitably.

 

Also,elimination of the tariffs that protect the United States ethanol industrycould lead to the importation of ethanol produced in other countries,especially in areas of the United States that are easily accessible byinternational shipping ports.  While the2008 Farm Bill extended the tariff on imported ethanol through 2011, thistariff could be repealed earlier which could lead to increased ethanol suppliesand decreased ethanol prices.

 

***Changes in environmental regulations or violations of the regulationscould reduce our profitability.***  We are subject to extensiveair, water and other environmental laws and regulations.  In addition, some of these laws require ourplant to operate under a number of environmental permits. These laws,regulations and permits can often require expensive pollution control equipmentor operation changes to limit actual or potential impacts to theenvironment.  A violation of these lawsand regulations or permit conditions can result in substantial fines, damages,criminal sanctions, permit revocations and/or plant shutdowns.  In the future, permit requirements may changeor we may exceed certain limits in our permits that may lead to regulatoryactions by the State of South Dakota or the EPA.  Further, we may be required to secureadditional permits in the future which may be costly and may affect our abilityto operate the ethanol plant.  We mayalso be subject to litigation by environmental advocacy groups and otherparties based on actual or alleged violations of environmental laws.  Additionally, any changes in environmentallaws and regulations, both at the federal and state level, could require us tospend considerable resources in order to comply with future environmentalregulations. The expense of compliance with environmental laws as wellas litigation concerning environmental laws could be significant and reduce ourprofitability and negatively affect our financial condition.

 

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***Carbon dioxide may be regulated in thefuture by the EPA as an air pollutant requiring us to obtain additional permitsand install additional environmental mitigation equipment, which couldadversely affect our financial performance*****. **In 2007, the Supreme Court decided a case in which it ruled that carbondioxide is an air pollutant under the Clean Air Act for the purposes of motorvehicle emissions.  The Supreme Courtdirected the EPA to regulate carbon dioxide from vehicle emissions as apollutant under the Clean Air Act. Similar lawsuits have been filed seeking to require the EPA to regulatecarbon dioxide emissions from stationary sources such as our ethanol plantunder the Clean Air Act. Our plant produces a significant amount of carbondioxide that we currently vent into the atmosphere.  While there are currently no regulationsapplicable to us concerning carbon dioxide, if the EPA or the State of SouthDakota were to regulate carbon dioxide emissions by plants such as ours, we mayhave to apply for additional permits or we may be required to install carbondioxide mitigation equipment or take other as yet unknown steps to comply withthese potential regulations.  Compliancewith any future regulation of carbon dioxide, if it occurs, could be costly andmay prevent us from operating the ethanol plant profitably which could decreaseor eliminate the value of our units.

 

**ITEM 2.****         PROPERTIES.**

 

Weown Dakota Ethanol as a wholly-owned subsidiary.  The ethanol plant is located on DakotaEthanol’s 212-acre rural site near Wentworth, South Dakota. During our 2008fiscal year we purchased 135 acres of additional land that is adjacent to ourcurrent property.  The total cost of thisadditional land was $550,000.  All of ouroperations occur at our plant in Wentworth, South Dakota.  Theoriginal construction of the plant was completed in 2001 and consists of the following buildings:

 

·      Aprocessing building, which contains processing equipment, laboratories, controlroom and offices;

·      A grainreceiving and shipping building;

·      Amechanical building, which contains maintenance offices, storage and a weldingshop; and

·      Anadministrative building, along with furniture and fixtures, office equipmentand computer and telephone systems.

 

The plant includes a fermenter walkway,gas dryer, evaporator and storage facilities for ethanol and distiller’sgrains.  The site also containsimprovements such as rail tracks and a rail spur, landscaping, drainage systemsand access roads.

 

Allof Dakota Ethanol’s tangible and intangible property, real and personal, servesas the collateral for debt financing with First National Bank of Omahadescribed below under “**Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Indebtedness**.”

 

**ITEM 3.****         LEGALPROCEEDINGS.**

 

From time to time in the ordinary course of business, Dakota Ethanol orLake Area Corn Processors may be named as a defendant in legal proceedingsrelated to various issues, including without limitation, worker’s compensationclaims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings,directly or indirectly, and we are not aware of any claims pending orthreatened against us or any of the managers that could result in the commencementof legal proceedings.

 

**ITEM4.****         ****SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

We did not submit any matter to a vote of our unit holders through thesolicitation of proxies or otherwise during the fourth quarter of 2008.

 

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**PART II**

 

**ITEM 5.****         MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES.**

 

**Recent Sales of Unregistered Equity Securities**

 

None.

 

**Market Information**

 

There is no public trading market for ourunits.  Our units may only be transferredin accordance with our Capital Units Transfer System, which provides fortransfers by gift to family members, upon death, and through a qualifiedmatching service, subject to approval by our board of managers.  Our qualified matching service is operatedthrough Variable Investment Advisors, Inc., a registered broker-dealerbased in Sioux Falls, South Dakota. Variable Investment Advisor’s Alternative Trading System may be accessedat www.agstocktrade.com. The matching service consists of an electronicbulletin board that provides information to prospective sellers and buyers ofour units.  We do not receive anycompensation relating to the matching service. We have no role in effecting the transactions beyond approval, asrequired under our operating agreement and the issuance of new certificates.  So long as we remain a Section 12registrant and a publicly reporting company, information about us will bepublicly available through the SEC’s filing system.  However, if at any time we cease to be a Section 12registrant or publicly reporting company, we anticipate continuing to makeinformation about us publicly available on our website in order to continue tooperate our qualified matching service.

 

**Unit Holders**

 

As of March 31, 2009, the company had29,620,000 membership units issued and outstanding and a total of approximately1,015 unit holders.  There is no otherclass of membership unit issued or outstanding.

 

**Bid and Asked Prices**

 

The following table contains informationconcerning completed unit transactions that occurred during the last two fiscalyears.  Our bulletin board trading systemdoes not track bid and asked prices and therefore we only have informationconcerning completed unit transactions.

 
| **Period**            | ** ** | **Low Price** | ** ** | **High Price** | ** ** | **Average Price** | ** ** | **# of  Units Listed** | ** ** |
|-----------------------|------------|--------------------|------------|---------------------|------------|------------------------|------------|----------------------------------|------------|
| 2007 1st Quarter |       | $                  | —     |                | $          | —                 |       | $                                | —     |   | — |   |
| 2007 2nd Quarter |       | $                  | 3.75       |                | $          | 4.11                   |       | $                                | 3.99       |   | 164,050 |   |
| 2007 3rd Quarter |       | $                  | 3.61       |                | $          | 3.98                   |       | $                                | 3.87       |   | 50,000 |   |
| 2007 4th Quarter |       | $                  | 2.99       |                | $          | 3.44                   |       | $                                | 3.60       |   | 8,500 |   |
| 2008 1st Quarter |       | $                  | 2.77       |                | $          | 2.90                   |       | $                                | 2.84       |   | 112,000 |   |
| 2008 2nd Quarter |       | $                  | 2.36       |                | $          | 2.80                   |       | $                                | 2.65       |   | 136,500 |   |
| 2008 3rd Quarter |       | $                  | 2.35       |                | $          | 2.35                   |       | $                                | 2.35       |   | 10,000 |   |
| 2008 4th Quarter |       | $                  | 0          |                | $          | 0                      |       | $                                | 0          |   | 0 |   |

 

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“—” Indicates period during which unit tradingwas suspended by the Company.

 

**Distributions**

 

Under the terms of our Amended andRestated Operating Agreement, we are required to make distributions to ourmembers and may not retain more than $200,000 of net cash from operations,unless: (1) a 75% supermajority of our board decides otherwise; (2) itwould violate or cause a default under the terms of any debt financing or othercredit facilities; or (3) it is otherwise prohibited by law.  We recently amended our credit agreement withour primary lender, First National Bank of Omaha, to provide that FirstNational will approve all distributions by us prior to making any such distributions.  Our ability to make distributions to ourmembers is dependent upon the distributions made to us by Dakota Ethanol.  All net income generated from plantoperations is distributed by Dakota Ethanol to us since Dakota Ethanol is ourwholly-owned subsidiary.  We distributethe net income received from Dakota Ethanol to our unit holders in proportionto the number of units held by each unit holder.  A unit holder’s distribution percentage isdetermined by dividing the number of units owned by such unit holder by thetotal number of units outstanding.  Ourexpectations with respect to our ability to make future distributions are

 

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discussed in greater detail in “**Item 7 — Management’s Discussion and Analysis of Financial Conditionand Results of Operations**.”

 

Distributions to our unit holders are alsosubject to certain loan covenants and restrictions that require us to makeadditional loan payments based on excess cash flow.  These loan covenants and restrictions aredescribed in greater detail under “**Item 7 — Management’s Discussionand Analysis of Financial Condition and Results of Operations****— Indebtedness.**”

 

***2008 Distributions***

 

Infiscal year 2008, Dakota Ethanol madetotal cash distributions to LACP of approximately $1,700,000.  As a result, our board of managersapproved cash distributions to our members totaling $1,481,000.  The followingchart lists the cash distributions made to our members in fiscal year 2008:

 
| **Date of Board Approval** | ** ** | **Total Distribution** | ** **    | **Distribution  Per Unit** | ** ** | **Distributed to Members of Record as of:** | ** ** |
|-------------------------------------------|------------|-----------------------------|---------------|---------------------------------|------------|---------------------------------------------------------------------------|------------|
| May 29, 2008                         |       | $                           | 1,481,000     |                            | $          | 0.05                                                                      |       | April 1,  2008 |   |
| **Totals**                                | ** ** | **$**                       | **1,481,000** | ** **                      | **$**      | **0.05**                                                                  |       |   |   |

 

***2007 Distributions***

 

Infiscal year 2007, Dakota Ethanol madetotal cash distributions to LACP of approximately $18,748,000.  As a result, our board of managersapproved cash distributions to our members totaling $17,772,000.  The followingchart lists the cash distributions made to our members in fiscal year 2007:

 
| **Date of Board Approval** | ** ** | **Total Distribution** | ** **     | **Distribution  Per Unit** | ** ** | **Distributed to Members of Record as of:** | ** ** |
|-------------------------------------------|------------|-----------------------------|----------------|---------------------------------|------------|---------------------------------------------------------------------------|------------|
| February 7, 2007                     |       | $                           | 5,924,000      |                            | $          | 0.20                                                                      |       | January 1,  2007 |   |
| April 25, 2007                       |       | $                           | 2,962,000      |                            | $          | 0.10                                                                      |       | April 1,  2007 |   |
| May 30, 2007                         |       | $                           | 2,962,000      |                            | $          | 0.10                                                                      |       | April 1,  2007 |   |
| August 1, 2007                       |       | $                           | 2,962,000      |                            | $          | 0.10                                                                      |       | July 1,  2007 |   |
| November 20, 2007                    |       | $                           | 2,962,000      |                            | $          | 0.10                                                                      |       | October 1,  2007 |   |
| **Totals**                                | ** ** | **$**                       | **17,772,000** | ** **                      | **$**      | **0.60**                                                                  |       |   |   |

 

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**Performance Graph**

 

The following graph compares the cumulative totalreturn on our units with the cumulative total return of the NASDAQ Index andthe SIC Code Index (SIC Code 2869—Industrial Organic Chemicals, Not ElsewhereClassified).  The unit price performanceshown on the following graph is not intended to forecast and is not indicativeof future unit price performance.  Thedata for this performance graph was compiled for us by Morningstar, Inc.

 

**COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURNAMONG LAKE AREA CORN PROCESSOR, LLC,NASDAQ MARKET INDEX AND SIC CODE INDEX**

 

 

ASSUMES $100 INVESTED ONDEC 31, 2003ASSUMES DIVIDEND REINVESTEDFISCAL YEAR ENDING DEC 31, 2008

 

**ITEM 6.****         SELECTEDFINANCIAL DATA.**

 

The following table sets forth selected consolidated financial data,which is derived from our audited financial statements for the periodsindicated.  The selected consolidatedbalance sheet financial data as of December 31, 2006, 2005 and 2004 andthe selected consolidated income statement data and other financial data forthe years ended December 31, 2005 and 2004 have been derived from ouraudited consolidated financial statements that are not included in this Form 10-K.The selected consolidated balance sheet financial data as of December 31,2008 and 2007 and the selected consolidated income statement data and otherfinancial data for each of the years in the three year period ended December 31,2008 have been derived from the audited Consolidated Financial Statementsincluded elsewhere in this Form 10-K. You should read the following tablein conjunction with (i) the consolidated financial statements andaccompanying notes included elsewhere in this Form 10-K; (ii) “**Item 7 Management’s Discussion and Analysis of Financial Condition andResults of Operations**”; and (iii) “**Item 1A RiskFactors**”****foundelsewhere in this Form 10-K.  Amongother things, those financial statements include more detailed informationregarding the basis of presentation for the following consolidated financialdata.

 

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| **Statement of Operations  Data:** | ** ** | **2008**   | ** **  | **2007**   | ** ** | **2006**    | ** ** | **2005**   | ** **  | **2004**   | ** ** |
|----------------------------------------------|------------|------------|-------------|------------|------------|-------------|------------|------------|-------------|------------|------------|
| Revenues                                     |       | $          | 111,778,588 |       | $          | 103,739,699 |       | $          | 103,889,412 |       | $          | 80,020,970 |   | $ | 84,432,486 |   |
| ** **                                   | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** |
| Cost of Revenues                             |       | $          | 125,413,056 |       | $          | 80,977,667  |       | $          | 50,792,418  |       | $          | 63,201,108 |   | $ | 71,736,360 |   |
| ** **                                   | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** |
| Gross Profit (Loss)                          |       | $          | (13,634,468 | )          | $          | 22,762,032  |       | $          | 53,096,994  |       | $          | 16,819,862 |   | $ | 12,696,126 |   |
| ** **                                   | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** |
| Operating Expense                            |       | $          | (3,534,274  | )          | $          | (3,721,813  | )          | $          | (3,938,845  | )          | $          | (3,610,590 | ) | $ | (3,058,024 | ) |
| ** **                                   | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** |
| Income (Loss) From Operations                |       | $          | (17,168,742 | )          | $          | 19,040,219  |       | $          | 49,158,149  |       | $          | 13,209,272 |   | $ | 9,638,102 |   |
| ** **                                   | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** |
| Interest Expense                             |       | $          | (656,303    | )          | $          | (695,043    | )          | $          | (1,008,300  | )          | $          | (1,089,364 | ) | $ | (1,300,647 | ) |
| ** **                                   | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** |
| Other Income (Expense)                       |       | $          | 1,211,596   |       | $          | (339,971    | )          | $          | 121,719     |       | $          | 238,705 |   | $ | 223,548 |   |
| ** **                                   | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** |
| Minority Interest in Subsidiary Income       |       | $          | —      |       | $          | —      |       | $          | (2,235,776  | )          | $          | (1,494,029 | ) | $ | (1,037,458 | ) |
| ** **                                   | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** |
| Net Income (Loss)                            |       | $          | (16,613,449 | )          | $          | 18,005,205  |       | $          | 46,035,792  |       | $          | 10,864,584 |   | $ | 7,523,545 |   |
| ** **                                   | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** | ** ** |
| Capital Units Outstanding                    |       | 29,620,000 |        | 29,620,000 |       | 29,620,000  |       | 29,620,000 |        | 29,620,000 |       |
| Net Income Per Capital Unit                  |       | $          | (0.56       | )          | $          | 0.61        |       | $          | 1.55        |       | $          | 0.37 |   | $ | 0.25 |   |
| Cash Distributions per Capital Unit          |       | $          | .05         |       | $          | 0.60        |       | $          | 0.45        |       | $          | 0.32 |   | $ | 0.21 |   |

 
| **Balance  Sheet Data:**                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|------------|------------|----------|------------|----------|------------|
| Working Capital                          |       | $        | (3,068,598 | )        | $          | 16,054,455 |       | $        | 17,220,709 |     | $          | 1,940,335 |   | $ | (145,791 | ) |
| Net Property, Plant & Equipment |       | $        | 34,531,667 |     | $          | 35,345,093 |       | $        | 35,695,754 |     | $          | 33,468,374 |   | $ | 34,862,856 |   |
| Total Assets                             |       | $        | 58,206,448 |     | $          | 73,554,744 |       | $        | 72,381,310 |     | $          | 42,946,122 |   | $ | 46,065,440 |   |
| Long-Term Obligations                    |       | $        | 5,664,276  |     | $          | 5,077,137  |       | $        | 6,921,695  |     | $          | 8,601,196 |   | $ | 9,882,779 |   |
| Minority Interest                        |       | $        | —     |     | $          | —     |       | $        | —     |     | $          | 3,234,649 |   | $ | 3,055,597 |   |
| Member’s Equity                     |       | $        | 38,859,138 |     | $          | 56,953,587 |       | $        | 56,720,382 |     | $          | 24,013,590 |   | $ | 22,627,406 |   |
| Book Value Per Capital Unit              |       | $        | 1.31       |     | $          | 1.92       |       | $        | 1.91       |     | $          | 0.81 |   | $ | 0.76 |   |

 
| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS.** |
|-------------|--------------------------------------------------------------------------------------------------|

 

Exceptfor the historical information, the following discussion containsforward-looking statements that are subject to risks and uncertainties. We caution you not to put undue reliance on any forward-looking statements,which speak only as of the date of this report.  Our actual resultsor actions may differ materially from these forward-looking statements for manyreasons, including the risksdescribed in “**Item 1A - Risk Factors**”and elsewhere in this annual report.  Our discussion and analysis of ourfinancial condition and results of operations should be read in conjunctionwith the financial statements and related notes and with the understanding thatour actual future results may be materially different from what we currentlyexpect.

 

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#### **Results ofOperations**

#### ** **

***Comparison of Year Ended******December 31,2008 and 2007*****.**

 

The following table shows the results of our operations and thepercentage of revenues, cost of revenues, operating expenses and other items tototal revenues in our consolidated statements of operations for the fiscalyears ended December 31, 2008 and 2007:

 
| ** **                           | ** ** | **2008**    | ** **  | **2007**   | ** ** |
|--------------------------------------|------------|-------------|-------------|------------|------------|
| **Income Statement Data:** | ** ** | **Amount**  | ** **  | **%**      | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                             |       | $           | 111,778,588 |       | 100.0      |   | $ | 103,739,699 |   | 100.0 |   |
| ** **                           | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of Revenues                     |       | 125,413,056 |        | 112.2      |       | 80,977,667 |   | 78.1 |   |
| ** **                           | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross Profit (Loss)                  |       | (13,634,468 | )           | (12.2      | )          | 22,762,032 |   | 21.9 |   |
| ** **                           | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating Expense                    |       | (3,354,274  | )           | (3.2       | )          | (3,721,813 | ) | (3.6 | ) |
| ** **                           | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income (Loss) From Operations        |       | (17,168,742 | )           | (15.4      | )          | 19,040,219 |   | 18.4 |   |
| ** **                           | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other Income (Expense)               |       | 555,293     |        | 0.5        |       | (1,035,014 | ) | (1.0 | ) |
| ** **                           | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income (Loss)                    |       | (16,613,449 | )           | (14.9      | )          | 18,005,205 |   | 17.4 |   |
|                                      |            |             |             |            |            |  |  |  |  |  |  |

 

*Revenues*

 

Duringour fiscal year ended December 31, 2008, we experienced a slight increasein our total revenue compared to our 2007 fiscal year.  This increase in our revenue was a result ofthe net effect of increased ethanol and modified/wet distiller’s grains revenueand decreased dried distiller’s grains revenue. Additionally, we experienced an approximately $126,000 decrease inincentive revenue in fiscal year 2008 as compared to fiscal year 2007.

 

Ourrevenue from sales of ethanol increased by approximately 5% during our 2008fiscal year as compared to our 2007 fiscal year.  This equated to an increase in revenue ofapproximately $4,741,000.  The reason forthis increase in ethanol revenue was the net effect of decreased ethanolproduction offset by a greater increase in the average price we received forour ethanol.  The average price wereceived for our ethanol increased by approximately 10% during our 2008 fiscalyear compared to our 2007 fiscal year. In real terms, this equaled an average increase of $0.18 per gallon from$1.87 per gallon in 2007 to $2.05 per gallon in 2008.  However, recent ethanol prices have decreasedsignificantly from highs we experienced in the first half of our 2008 fiscalyear.  We attribute this decrease inethanol prices with decreases in commodity prices generally.  We believe that the worldwide economicslowdown has negatively impacted all commodity prices, including ethanolprices.  Further, we experienced asignificant increase in ethanol production generally in the ethanol industryduring 2008 which we believe has affected the selling price of ethanol.  Total ethanol production in 2007 wasapproximately 6.5 billion gallons.  Totalethanol production in 2008 was approximately 9 billion gallons.  As new ethanol supply enters the market, ifit is not met by comparable demand increases, the price of ethanol will benegatively impacted.  We expect thatthere will be significant volatility in ethanol prices in the near term assupply and demand changes occur in the ethanol industry.  We believe that demand for gasoline maydecrease as a result of the current economic difficulties which we anticipatewill decrease demand for ethanol. Further, we anticipate that the supply of ethanol may decrease as webelieve some ethanol production facilities may cease production or decreaseproduction due to the current difficulties in the ethanol industry.

 

Theethanol industry’s ability to increase demand for ethanol in the coming yearsto offset increases in supply will be critical to our success.  The Energy Information Administrationrecently reported ethanol demand in the United States for 2008 wasapproximately 9.5 billion gallons.  However,current ethanol production capacity in the United States is estimated to beapproximately 12.3 billion gallons with an additional approximately 2 billiongallons of ethanol production capacity under construction.  If demand does not increase in proportion tosupply increases, the price of ethanol may decrease and we may not be able tooperate profitably.

 

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Currently,ethanol is blended with conventional gasoline for use in standard (non-flexfuel) vehicles to create a blend which is 10% ethanol and 90% conventionalgasoline.  Estimates indicate thatapproximately 135 billion gallons of gasoline are sold in the United Stateseach year.  However, gasoline demand maybe less than this 135 billion gallons per year in the near future in the UnitedStates as a result of the global economic slowdown and the effect this may haveon gasoline demand.  Assuming that gasolinedemand remains at 135 billion gallons per year and that all gasoline in theUnited States is blended at a rate of 10% ethanol and 90% gasoline, the maximumdemand for ethanol is 13.5 billion gallons. This is commonly referred to as the “blending wall”, which represents atheoretical limit for ethanol demand where more ethanol cannot be blended intothe national gasoline pool.  This is atheoretical limit since it is believed it would not be possible to blend ethanolinto every gallon of gasoline that is used in the United States and itdiscounts increased ethanol demand due to higher percentage blends of ethanolsuch as E85 used in flex fuel vehicles. Many in the ethanol industry believe that the ethanol industry willreach this blending wall in 2009 or 2010. In order to continue to expand demand for ethanol, higher blends ofethanol must be utilized in conventional automobiles.  Such higher blends of ethanol have recently becomea contentious issue.  Automobilemanufacturers and environmental groups have fought against higher ethanolblends.  Currently, state and federalregulations prohibit the use of higher ethanol blends in conventionalautomobiles and vehicle manufacturers have indicated that using higher blendsof ethanol in conventional automobiles would void the manufacturer’swarranty.  Without increases in theallowable percentage blends of ethanol, demand for ethanol may not continue toincrease.  The ethanol industry mustcontinue to expand demand for ethanol in order to support the market price ofethanol, especially if additional ethanol supply continues to enter themarket.  Our financial condition may benegatively affected by decreases in the selling price of ethanol resulting fromdecreased ethanol demand compared to ethanol supply.

 

Thisblending wall may also have an effect on the national Renewable FuelsStandard.  The RFS requires that 36billion gallons of renewable fuels must be used in the United States by 2022.  We anticipate that ethanol will be used tosatisfy the greatest percentage of the RFS. However, due to the blending wall, demand for ethanol may not exceed the13.5 billion gallons discussed above. Further, flex fuel vehicles may not be purchased by consumers in greatenough quantities to meet the RFS requirement in coming years through the saleof E85.  Management believes it will notbe possible to meet the RFS without the use of higher percentage blends ofethanol in conventional vehicles.

 

Increased consumption of E85 fuel may increaseethanol demand.  The United States Department of EnergyAlternative Fuels Data Center has reported that the availability and use of E85is growing nationally, and the availability of E85 and flex fuel vehicles isexpected to increase significantly in the next few years.  However,demand for ethanol as a result of increased E85 use will only occur if E85becomes more readily available for consumers to purchase it and if the numberof flex fuel vehicles increases.  TheRenewable Fuels Association recently reported that there are currently approximately1,900 retail gasoline stations in the United States supplying E85.  While the number of retail E85 suppliersincreases significantly each year, this remains a relatively small percentageof the total number of U.S. retail gasoline stations, which is approximately170,000.  As public awareness of ethanoland E85 increases along with E85’s increased availability, managementanticipates some growth in demand for ethanol as a result of E85consumption.  However, managementbelieves that higher percentage blends of ethanol used in conventional vehicleswill increase ethanol demand more significantly than E85.

 

We believe that increasedgovernment mandates for renewable fuels use will continue to positively impactdemand for ethanol.  The national RenewableFuels Standard (RFS) increased to 11.1 billion gallons of renewable fuels in2009.  However, only 10.5 billion gallonsof the RFS can be met by corn based ethanol such as the ethanol we produce.  The RFS requires the use of 36 billiongallons of renewable fuels by 2022. However, the RFS requires that a significant portion of these 36 billiongallons come from “advanced” renewable fuels. Grain based ethanol, such as the ethanol we produce, that may be used tosatisfy the RFS is capped at 15 billion gallons per year starting in 2015.  Therefore, demand for corn based ethanol maynot expand significantly past 15 billion gallons due to the cap in theRFS.  The advanced renewable fuels thatcan be used to satisfy the remaining gallons of the RFS include cellulosicethanol.  Cellulosic ethanol is ethanolthat is produced from cellulose, which is the main component of plant cellwalls and is the most common organic compound on earth.  Cellulose is found in wood chips, cornstalks, rice straw, amongst other common plants.  Current technology makes it difficult orimpossible to produce ethanol cost-effectively from cellulose.  However, the RFS and state and federal grantprograms are encouraging the 

 

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development of commercial-scalecellulosic ethanol production.  Severalgrants were recently made for pilot projects that are attempting to producecellulosic ethanol on a commercial scale.

 

Duringour 2008 fiscal year, we decreased the number of gallons of ethanol we sold byapproximately 4% compared to the same period of 2007.  In real terms, this equated to a decrease ofapproximately 2,055,000 gallons of ethanol sold.  Management attributes this decrease inethanol sales to production decreases related to equipment problems weexperienced in 2008.  By the end of our2008 fiscal year, we have addressed these equipment related issues and arecurrently operating at full capacity. However, this decrease in ethanol production has reduced our revenue forour 2008 fiscal year.

 

Inour 2008 fiscal year, we increased our distiller’s grains revenue byapproximately 29% compared to the same period of 2007.  This increase in distiller’s grains revenuewas a result of the net effect of a significant increase in the sales price wereceived for our distiller’s grains offset by a decrease in our distiller’sgrains production.  We attribute thesignificant increase in the selling price of our distiller’s grains with highercorn prices that we experienced during our 2008 fiscal year compared to our2007 fiscal year.  We believe that highercorn and soybean meal prices positively impact the selling price of distiller’sgrains.  The average price we receivedfor our dried distiller’s grains increased by approximately $31 per ton toapproximately $112 per ton.  This was anapproximately 38% increase.  In addition,the average price we received for our modified/wet distiller’s grains increasedby approximately 60% from approximately $68 per ton to approximately $109 perton.

 

Duringour 2008 fiscal year, we marketed more of our distiller’s grains in themodified/wet form.  We experienced anincrease in our modified/wet distiller’s grains sales of approximately 18%,which equaled an approximately 13,508 dry-equivalent ton increase, in the tonsof distiller’s grains we sold in the modified/wet form during our 2008 fiscalyear compared to the same period of 2007. In addition, the total tons of dried distiller’s grains that we producedwas approximately 32,000 tons less that we produced during our 2007 fiscalyear.  This equated to an approximately42% decrease.  We use a formula to createa dry-equivalent value for our modified/wet distiller’s grains in order tocompare the modified/wet distiller’s grains we produce compared to our drieddistiller’s grains.  This conversionformula has the effect of reducing the total tons of distiller’s grains weproduce measured according to this dry-equivalent value when we produce moremodified/wet distiller’s grains.  This,along with decreased ethanol production, decreased our total distiller’s grainsproduction by approximately 12% or approximately 18,000 tons during our 2008fiscal year compared to our 2007 fiscal year.

 

Managementexpects to continue to make decisions as to whether our distiller’s grains willbe marketed as dried distiller’s grains as opposed to modified/wet distiller’sgrains based on market conditions.  Thesemarket conditions include supply and demand factors as well as the pricedifference between dried distiller’s grains and wet/modified distiller’s grainscompared to the higher natural gas costs associated with drying our distiller’sgrains.

 

Webelieve that distiller’s grains prices will continue to change in reaction tothe market prices of corn and soybean meal since distiller’s grains aretypically used as a feed substitute for corn and soybean meal.  Since distiller’s grains prices tend toincrease in response to increases in corn prices, management expects thatincreased revenue from distiller’s grains sales may somewhat offset increasesin our cost of revenues associated with increases in corn prices.  However, as additional ethanol supply entersthe market, management expects the supply of distiller’s grains will alsoincrease, which may negatively impact the price we receive for our distiller’sgrains.  Due to current conditions in theethanol industry, we believe that as much as 15% of the ethanol productioncapacity in the United States has been idled. Since distiller’s grains are produced as a co-product of the ethanolproduction process, we anticipate that distiller’s grains supplies may decreaseduring times when the economics in the ethanol industry prevent ethanolmanufacturers from operating profitably and when ethanol productiondecreases.  This may positively impactthe market price of distiller’s grains by reducing the supply of distiller’sgrains in the market.

 

Duringour 2008 fiscal year, we experienced a decrease in incentive income ofapproximately $126,000.  We annuallyreceive an ethanol producer’s incentive from the State of South Dakota.  In our 2008 fiscal year, we did not receivethe annual maximum allocation under this program as a result of budgetconstraints on the South Dakota program. Management does not expect that we will receive the maximum allocationin fiscal year 2009 for the same reason. We did not receive any federal incentive income during either our 2008or 2007 fiscal years.

 

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*Cost of Revenues*

 

Our cost of revenues as a percentage of revenues was approximately 112%and approximately 78% for the fiscal years ended December 31,2008 and 2007 respectively.  Our totalcost of revenues increased by approximately 55% during our 2008 fiscal yearcompared to the same period of 2007. This significant increase in cost of revenues resulted from asignificant increase in our corn costs and increased rail car expenses duringour 2008 fiscal year compared to our 2007 fiscal year.

 

Our average cost per bushel of corn, including the costs associatedwith losses on our derivative instruments, increased by approximately 78%during our 2008 fiscal year compared to our 2007 fiscal year.  In real terms, this was an increase ofapproximately $2.52 per bushel.  Thisincrease in corn costs includes losses we realized on our hedging activitiesduring our 2008 fiscal year compared to our 2007 fiscal year.  Along with the increase in our corn costs, weexperienced a decrease in our corn consumption of approximately 4% orapproximately 697,000 bushels.  Thisdecrease in corn consumption was related to our decreased production of ethanoland distiller’s grains during our 2008 fiscal year compared to our 2007 fiscalyear due to equipment problems we experienced during our 2008 fiscal year.    We experienced significant volatility incorn prices during our 2008 fiscal year. Due to poor weather conditions in the first part of the 2008 growingseason and increases in commodity prices generally, including energy costs, theprice of corn reached approximately $8.00 per bushel at the end of June andearly July 2008 before decreasing significantly to below $4.00 perbushel.  This significant volatility incorn prices led to significant losses on our risk management positions whichwere designed to guard against corn price increases.  As a result of the significant decrease incorn prices, we were required to use a significant amount of cash to makemargin calls on our derivative instruments. Due to the significant amount of cash that we were using to make margincalls and the significant losses we experienced on our derivative instruments,in October 2008 we decided to liquidate all of our hedge positions.  We did this in order to protect our cashposition and to avoid making further payments into our margin account with ourcommodities broker.  This resulted in anapproximately $7.5 million realized loss on our derivative instruments thatoccurred during our fourth fiscal quarter of 2008.  We also experienced a $9.0 million increaseto our corn costs related to the mark to market valuation of forward cornpurchase contracts.   At December 31,2007, our forward corn purchase contracts represented an asset on our balancesheet of approximately $9.0 million.  Asthose contracts were fulfilled and the market changed, the assets were expensedduring 2008.  In addition, as of December 31,2008, we recorded an impairment of approximately $2,736,000 related to ourfuture corn purchase contracts and our corn inventory.  This was a lower of cost or market adjustmentthat we made based on estimates of the value of future corn contracts and corninventory related to the projected selling price of ethanol.

 

We have recently changed our hedging strategy, along with othercompanies in the ethanol industry, in order to attempt to match the costs ofproducing ethanol more closely with the market price of ethanol.  We believe that the price of ethanol changesin relation to commodity prices generally, including corn.  Therefore, we anticipate relying more on thespot market or futures contracts tied to the spot corn market instead ofentering into long term contracts at fixed prices.  We anticipate this may make us morevulnerable to subsequent commodity price increases but we anticipate that itwill make us less vulnerable to short term commodity price volatility.  Further, we anticipate that this will allowus to more closely match our raw material costs to the market price of ethanol.  However, should ethanol prices cease changingin relation to corn prices, we may experience a situation where corn pricesincrease when ethanol prices stay flat or decrease.  Since our profitability is based on a favorablespread between our corn costs and the price we receive for our ethanol, anydecoupling of the ethanol and corn prices may prevent us from operatingprofitably.

 

Management anticipates that corn prices will remain at their currentlevels for the foreseeable future.  Webelieve that the current economic conditions will keep commodity prices lowuntil global economic conditions improve. Further, we anticipate that corn yields in the future will continue toincrease which will increase the supply of corn and may have a positive impacton corn prices.  However, should weexperience either widespread or localized poor weather that decreases cornyields in any year, we may experience significant increases in corn priceswhich may prevent us from operating the ethanol plant profitably.

 

We experienced an increase in our railcar costs during our 2008 fiscalyear compared to our 2007 fiscal year, primarily as a result of projected costsassociated with damage to our leased railcars that we are recognizing on

 

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our financial statements.  Weanticipate that when our railcar leases end in 2010, we may incur costs associatedwith repairing damaged railcars that we are currently leasing.  We have included some of this projected costin our 2008 financial statements.

 

We use significant amounts of natural gas to drythe distiller’s grains produced at the ethanol plant.  Our total cost of revenues attributed tonatural gas increased during our 2008 fiscal year by approximately 29% comparedto the same period of 2007.  Our averagenatural gas price per MMBTU increased by approximately $3.12 which equaled anincrease of approximately 41% compared to our 2007 fiscal year.  This increase in natural gas costs includedlosses we experienced on our natural gas derivative instruments.  In addition to the increase in natural gascosts, we experienced an approximately 9% decrease in our natural gasconsumption from approximately 1,476,000 MMBTU during our 2007 fiscal year toapproximately 1,348,000 MMBTU during our 2008 fiscal year.  We attribute this decrease in natural gasconsumption with less production by the ethanol plant during our 2008 fiscalyear as a result of equipment problems we experienced as well as increasedproduction of wet/modified distiller’s grains which require less natural gas toproduce than dried distiller’s grains. Current natural gas prices are very low compared to highs we experiencedduring our 2008 fiscal year.  Weanticipate that natural gas prices will stay low into the near future as aresult of decreased energy prices generally. However, should we experience any significant supply disruptions as aresult of hurricane activity during the summer of 2009, we could experience aspike in natural gas prices similar to the spike that occurred during thesummer of 2006.

 

*Operating Expense*

 

Ouroperating expenses decreased slightly in our 2008 fiscal year compared to thesame period of 2007.  This decrease inoperating expenses resulted from decreased public relations, legal andenvironmental compliance costs for fiscal year 2008 as compared to fiscal year2007.  Our operating expenses as apercentage of revenue were approximately 3.2% and 3.6% for fiscal years 2008 and 2007respectively.

 

*Other Income and Expense*

 

We experienced a total other income for our 2008 fiscal year ofapproximately $555,000 compared to a total other expense for our 2007 fiscalyear of approximately $1,035,000.  Weexperienced less interest income during our 2008 fiscal year compared to our2007 fiscal year as a result of having less cash on hand during our 2008 fiscalyear as well as lower interest rates.  Weexperienced a significant gain related to our equity in the net income of ourinvestments mainly related to our investment in RPMG.  We experienced a loss related to our equityin the net income of our investments during our 2007 fiscal year.  Further, our interest expenses were lower duringour 2008 fiscal year compared to our 2007 fiscal year, primarily as a result ofthe decreasing principal balance of our term note.

 

**Changesin Financial Condition for the Fiscal year ended December 31, 2008Compared to the Fiscal Year Ended December 31, 2007.**

 

Our total current assets were significantly lessat December 31, 2008 compared to December 31, 2007 primarily as aresult of having more cash on hand, less ethanol receivables, having a lesserasset value related to our raw material and finished goods inventories, and asignificant decrease in our due from broker line item related to cash beingheld in our margin account with our commodities broker and asset value of ourderivative instruments.

 

We had more cash on hand at December 31, 2008compared to December 31, 2007 as a result of current conditions in theethanol market that has resulted in tight operating margins.  This has resulted in less cash beingdistributed to our members and more retained in the Company.

 

We experienced a decrease in our ethanolreceivable of more than $3 million at December 31, 2008 compared to December 31,2007 as a result of decreasing ethanol prices which affects the asset value ofour ethanol receivable from our ethanol marketer.  We experienced an increase in our distiller’sgrains receivable as a result of increases in distiller’s grains prices weexperienced at the end of our 2008 fiscal year, compared to the end of our2007fiscal year.  In addition, we changeddistiller’s grains marketers at the end of our 2007 fiscal year.  However, we continued to have distiller’sgrains sales through our old marketer. The different methods our distiller’s grains

 

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marketers used to pay us forour distiller’s grains sales also increased the amount of distiller’s grainsreceivables we had outstanding at December 31, 2008 compared to December 31,2007.

 

The inventory value of our raw materials wasapproximately $1.5 million less at December 31, 2008 compared to December 31,2007 as a result of corn prices being lower at December 31, 2008 comparedto December 31, 2007, as well as the fact that we had less bushels of cornon hand on December 31, 2008 compared to December 31, 2007.  Additionally, the asset value of our finishedgoods inventory was smaller at December 31, 2008 compared to December 31,2007 as a result of lower ethanol prices we experienced at the end of our 2008fiscal year compared to the end of our 2007 fiscal year.

 

We experienced a significant decrease in the assetvalue of our margin account with our commodities broker as of December 31,2008 compared to December 31, 2007 which is represented on our balancesheet by the due from broker line item. The reason for this significant decrease in our margin account isbecause in October 2008, we liquidated all of our risk managementpositions in order to avoid utilizing more cash to meet margin calls on ourderivative instruments as the market price of corn continued to decline.  The significant decrease in the asset valueof our derivative financial instruments is related to our liquidation of ourrisk management positions.  We changedour risk management strategy to avoid having a significant amount of our rawmaterials subject to fixed price contracts. Therefore, the asset value of these contracts is significantly lower at December 31,2008 compared to December 31, 2007 as a result of having significantlyless risk management positions in 2008 compared to 2007.

 

Our net property and equipment was lower at December 31,2008 compared to December 31, 2007. The amount of accumulated depreciation we experienced during our 2008fiscal year was larger than the value of our land purchase which occurred in December 2008and our construction in progress related to installation of corn oil extractionequipment which was not complete as of December 31, 2008.

 

Our total other assets were higher at December 31,2008 compared to December 31, 2007 partially as a result of twoinvestments that we made during our 2008 fiscal year and also due to increasesin the value of previous investments.  Wemade an investment of $1,050,000 in Prairie Gold Venture Partnership, LLC whichis a company making investments in cellulosic ethanol plant projects.  We made an investment of $300,000 in Corn OilBioSolutions, LLC (COBS) which we have valued at $0 on our balance sheet. COBSis an entity that was formed for the purpose of constructing a biodiesel plantthat utilizes corn oil as the feedstock to produce biodiesel.  We also recorded an increase in other assetsof approximately $1,513,000 related to an increase in the value of our equityposition in RPMG as their profitability and equity increased during the year.

 

Our total current liabilities were higher at December 31,2008 compared to December 31, 2007. We experienced an increase in our accounts payable at December 31,2008 compared to December 31, 2007 as a result of higher corn prices whichincreased our liability related to corn accounts payable.  We also had a liability associated with ourderivative financial instruments as of December 31, 2008 which did notexist on December 31, 2007.  Thisliability represents approximately $98,000 in losses on our forward cornpurchase contracts.  We also had anincrease in accrued liabilities primarily related to an impairment liability ofapproximately $2,736,000 that we recognized as of December 31, 2008related to the value of our forward contracts for corn purchases and our corninventory.  We experienced an increase inthe amount of outstanding checks drawn in excess of bank balances as morecustomers were delaying their deposits until 2009.  As of December 31, 2008, we had no amountoutstanding on our short-term revolving line of credit compared to having$2,333,000 outstanding on December 31, 2007.  Further, our current liabilities were higherat December 31, 2008 compared to December 31, 2007 as a result of anincrease in the current portion of our notes payable.  This increase in the current portion of ournotes payable is as a result of larger principal payments on our long-term debtas we continue to amortize this debt, as well as payments we expect to makethis fiscal year related to our land purchase contract.  During our 2008 fiscal year, we made aninitial payment of $100,000 for the land we purchased adjacent to our currentfacility and we entered into a contract to pay the remaining portion of the$550,000 purchase price over a four year period.

 

Our long term liabilities were higher at December 31,2008 compared to December 31, 2007 primarily as a result of an increase inour long-term promissory notes as well as an increase in our other long-termliabilities.  The increase in ourlong-term notes payable is related to increased borrowing on our long-termrevolving note at December 31, 2008 compared to December 31, 2007 aswell as an increase related to our land purchase contract.  The increase in our other long-termliabilities relates to anticipated damage to our leased railcars that occurredduringour 2008 fiscal year.  We anticipate thatwe will have to make payments to have certain of our leased railcars

 

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repaired at the end of ourrailcar leases in 2010.  We are includingthese anticipated costs on our balance sheet as a long-term liability.

 

Our members’ equity was significantly lower at December 31,2008 compared to December 31, 2007 as a result of decreased retainedearnings caused by the significant net loss we experienced during our 2008fiscal year.

 

***Comparison of Year Ended******December 31,2007 and 2006*****.**

 

The following table shows the results of our operations and thepercentage of revenues, cost of revenues, operating expenses and other items tototal revenues in our consolidated statements of operations for the fiscalyears ended December 31, 2007 and 2006:

 
| ** **                             | ** ** | **2007**   | ** **  | **2006**   | ** ** |
|----------------------------------------|------------|------------|-------------|------------|------------|
| **Income Statement Data:**   | ** ** | **Amount** | ** **  | **%**      | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                               |       | $          | 103,739,699 |       | 100.0      |   | $ | 103,889,412 |   | 100.0 |   |
| ** **                             | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of Revenues                       |       | 80,977,667 |        | 78.1       |       | 50,792,418 |   | 48.9 |   |
| ** **                             | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross Profit                           |       | 22,762,032 |        | 21.9       |       | 53,096,994 |   | 51.1 |   |
| ** **                             | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating Expense                      |       | (3,721,813 | )           | (3.6       | )          | (3,938,845 | ) | (3.8 | ) |
| ** **                             | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income From Operations                 |       | 19,040,219 |        | 18.4       |       | 49,158,149 |   | 47.3 |   |
| ** **                             | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other Income (Expense)                 |       | (1,035,014 | )           | (1.0       | )          | (886,581 | ) | (0.9 | ) |
| ** **                             | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Minority Interest in Subsidiary Income |       | —     |        | —     |       | (2,235,776 | ) | (2.2 | ) |
| ** **                             | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income                             |       | 18,005,205 |        | 17.4       |       | 46,035,792 |   | 44.3 |   |
|                                        |            |            |             |            |            |  |  |  |  |  |  |

 

*Revenues*

 

Duringour fiscal year ended December 31, 2007, we experienced a slight decreasein our total revenue compared to our 2006 fiscal year.  This decrease in our revenue was a result ofthe net effect of decreased ethanol revenue offset by a smaller increase indistiller’s grains revenue during our 2007 fiscal year as compared to the sameperiod of 2006.  Additionally, weexperienced an approximately $26,000 decrease in incentive revenue in fiscalyear 2007 as compared to fiscal year 2006.

 

Ourrevenue from sales of ethanol decreased approximately 3% during our 2007 fiscalyear as compared to our 2006 fiscal year. The reason for this decrease was primarily due to a lower averageselling price for our ethanol during our 2007 fiscal year as compared to thesame period of 2006, which was partially offset by an increase in the volume ofethanol we sold.  The average price we receivedfor our ethanol during our 2007 fiscal year was approximately 5% lower than theaverage price we received in fiscal year 2006. However, ethanol prices reached historic highs during our 2006 fiscalyear as a result of the interaction of a number of factors, includingsignificantly increased ethanol demand as a result of the Renewable FuelsStandard and the replacement of MTBE with ethanol as the oxygenate of choicefor reformulated gasoline.  Managementattributes this decrease in the average sales price of ethanol during our 2007fiscal year with the significant increase in ethanol supply that came into themarket during our 2007 fiscal year. Management believes that this significant increase in supply may haveexceeded demand for ethanol at certain points during our 2007 fiscal year, whichnegatively affected the price we received for our ethanol.  However, the most significant decreases inethanol prices occurred during the middle of our 2007 fiscal year, and ethanolprices rebounded towards the end of our 2007 fiscal year.

 

Duringour 2007 fiscal year, we increased the number of gallons of ethanol we producedby approximately 2.3% compared to the same period of 2006.  Management attributes this increase inethanol production to a decrease

 

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in the amount of plantdown-time that we experienced during our 2007 fiscal year as compared to our2006 fiscal year.  This increase inethanol and distiller’s grains production increased our revenues in fiscal year2007.

 

Inour 2007 fiscal year, we increased our distiller’s grains revenue byapproximately 29% compared to the same period of 2006.  This increase in revenue was a result of acombination of an increase in the average price we received for our distiller’sgrains and an increase in the total distiller’s grains production by us duringour 2007 fiscal year as compared to the same period of 2006.  We experienced an increase of approximately10% in the average price we received for our dried distiller’s grains duringour 2007 fiscal year as compared to the same period 2006.  Additionally, we experienced an increase ofapproximately 29% in the average price we received for our modified/wetdistiller’s grains during our 2007 fiscal year as compared to the same periodof 2006.  Management believes that theseincreases in the average prices we received for our distiller’s grains duringthe 2007 fiscal year was a result of the significant increases in corn andsoybean meal prices during 2007.

 

Weincreased the total tons of distiller’s grains we produced during our 2007fiscal year by approximately 6% compared to the same period of 2007.  This increase in the total distiller’s grainsproduction was a result of increased ethanol production.  Since distiller’s grains are the primaryco-product of our ethanol production process, as ethanol production increases,distiller’s grains production will correspondingly increase.

 

Weincreased the amount of distiller’s grains we marketed as wet/modifieddistiller’s grains during our 2007 fiscal year as compared to our 2006 fiscalyear.  Wet/modified distiller’s grainsrequire less natural gas to produce than dried distiller’s grains, whichdecreases our cost of revenues.  Wemarket a portion of the wet/modified distiller’s grains we produce locally.

 

Duringour 2007 fiscal year, we experienced a decrease in incentive income ofapproximately $26,000.  In our 2007fiscal year, we did not receive the annual maximum allocation under thisprogram as a result of budget constraints on the South Dakota program.

 

*Cost of Revenues*

 

Our cost of revenues as a percentage of revenues was approximately 78% andapproximately 49% for the fiscal years ended December 31, 2007 and 2006respectively.  Our total cost of revenuesincreased by approximately 59% during our 2007 fiscal year compared to the sameperiod of 2006.  This significantincrease in cost of revenues resulted from a significant increase in theaverage price per bushel we paid for corn during our 2007 fiscal year andincreased corn consumption by the ethanol plant as a result of the increasedethanol and distiller’s grains production.

 

The average price we paid per bushel of corn increased by approximately89% during our 2007 fiscal year as compared to the same period of 2006.  This significant increase in the averageprice we paid for corn has significantly increased our cost of revenues.

 

Total cost of revenues attributed to natural gasdecreased during our 2007 fiscal year by approximately 13% compared to the sameperiod of 2006.  This decrease in cost ofrevenues attributed to natural gas costs was a result of decreased natural gasconsumption and a decreased average price we paid for natural gas during our2007 fiscal year.  Total natural gasconsumption at the ethanol plant decreased by approximately 3% during the 2007fiscal year as compared to same period of 2006. The reason for this decrease in natural gas consumption was the factthat we sold less dried distiller’s grains in fiscal year 2007 and morewet/modified distiller’s grains.  Thisdecreased the amount of distiller’s grains drying that was required in fiscalyear 2007 and therefore reduced our total natural gas consumption.  Further, we experienced a decrease of approximately10% in the average price we paid per MMBTU of natural gas in fiscal year 2007as compared to the same period of 2006. Natural gas prices increased sharply at the end of 2005 and thebeginning of 2006 as a result of supply interruptions from hurricane activityin the Gulf Coast.  These supplyinterruptions caused a spike in natural gas prices that subsequently decreasedin 2007.  Management anticipatesrelatively stable natural gas prices in fiscal year 2008 barring any supplyinterruptions like those experienced during our 2006 fiscal year.

 

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*Operating Expense*

 

Ouroperating expenses decreased slightly in our 2007 fiscal year compared to thesame period of 2006.  This decrease inoperating expenses resulted from the net effect of increased professional fees,including legal fees and Sarbanes-Oxley Section 404 Compliance consultingfees and increased environmental compliance fees, and decreased bonus expensesfor fiscal year 2007 as compared to fiscal year 2006.  Our operating expenses as a percentage ofrevenue were approximately 3.6%and 3.8% for fiscal years 2007 and 2006respectively.

 

*Other Income and Expense*

 

Our total other expense for our 2007 fiscal year was approximately 17%higher compared to our other expense for the 2006 fiscal year.  This increase in other expense for our 2007fiscal year was a result of increased loss of equity on investments compared tofiscal year 2006.  We offset thisincreased loss of equity in investments with a larger interest income anddecreased interest expense in fiscal year 2007 compared to fiscal year 2006.

 

*MinorityInterest in Subsidiary Income*

 

For our 2007 fiscal year,there was no minority interest in Dakota Ethanol as the Broin family minorityinterest was repurchased in June 2006. Dakota Ethanol made distributions to the Broin family of approximately$2,236,000 in fiscal year 2006 pursuant to its minority interest in DakotaEthanol.  This decreased thedistributions that were paid to Lake Area Corn Processors in fiscal year 2006.

 

**Changesin Financial Condition for the Fiscal Year Ended December 31, 2007Compared to the Fiscal Year Ended December 31, 2006.**

 

We had approximately $6,313,000 less cash on handon December 31, 2007 as compared to December 31, 2006.  This significant decrease in cash on hand wasa result of more cash being used for corn inventory.  The significant decrease in cash on hand wasoffset by increases in ethanol receivables, raw material inventory, andapproximately $4,677,000 that was due from our commodities broker on December 31,2007.  The significant increase in rawmaterial inventory was a result of our increased grain storage capacity as aresult of the new grain bin that was constructed during fiscal year 2007 alongwith an increase in corn price.

 

Property plant and equipment and other assets wererelatively unchanged between our fiscal year end on December 31, 2007compared to December 31, 2006.

 

Current liabilities were higher at our 2007 fiscalyear end compared to 2006.  This increasewas the result of increased accounts payable and the fact that we hadapproximately $2,333,000 outstanding on our revolving loan on December 31,2007.  The increase in our accountspayable was primarily a result of increased corn prices which increased thevalue of our accounts payable.  Long termliabilities continued to decrease as we made payments on our term loan and dueto decreases in our guarantee payable.

 

Members’ equity remained relatively unchanged atour fiscal year end on December 31, 2007 as compared to December 31,2006.  We also continued to makedistributions to our members approximately quarterly during our 2007 fiscalyear.

 

**Plant Operations**

 

We plan to continue to operate the ethanol plant for the next 12months.  Management anticipates that theplant will continue to operate at or above name-plate capacity of 40 milliongallons per year for the next twelve months.  We expect to have sufficientcash from cash flow generated by continuing operations, our subordinated debtfinancing and cash reserves to cover the costs of operations over the next 12months, which consist primarily of corn supply, natural gas supply, staffing,office, audit, legal, compliance, working capital costs and debt serviceobligations.

 

However, a variety of market factors can affect both operating costsand revenues.  These factors include:

 

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·      Changes in the availability of debt andequity financing;

·      Changes in the price of ethanol and distiller’sgrains;

·      Decreased demand for ethanol and distiller’sgrains;

·      Changes in the availability and price ofcorn;

·      Changes in the environmental regulations thatapply to our plant operations;

·      Increased competition in the ethanol and oilindustries;

·      Changes in interest rates or the availabilityof credit;

·      Changes in our business strategy, capitalimprovements or development plans;

·      Changes in plant production capacity ortechnical difficulties in operating the plant;

·      Changes in general economic conditions or theoccurrence of certain events causing an economic impact in the agriculture, oilor automobile industries;

·      Changes in the availability and price ofnatural gas and the market for distiller’s grains; and

·      Changes in federal and/or state laws(including the elimination of any federal and/or state ethanol tax incentives).

 

**Application of Critical Accounting Policies**

 

Management uses estimates andassumptions in preparing our consolidated financial statements in accordancewith generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assetsand liabilities, the disclosure of contingent assets and liabilities, and thereported revenues and expenses.  Of thesignificant accounting policies described in the notes to our consolidated financialstatements, we believe that the following is the most critical:

 

***Derivative Instruments***

 

We enter into short-term cash grain, option and futures contracts as ameans of securing corn and natural gas for the ethanol plant and managingexposure to changes in commodity and energy prices.  We enter into short-term forward, option andfutures contracts for sales of ethanol to manage exposure to changes in energyprices.  All of our derivatives aredesignated as non-hedge derivatives, and accordingly are recorded at fair valuewith changes in fair value recognized in net income. Although the contracts areconsidered economic hedges of specified risks, they are not designated as andaccounted for as hedging instruments.

 

As part of its tradingactivity, we use futures and option contracts offered through regulatedcommodity exchanges to reduce our risk and we are exposed to risk of loss inthe market value of inventories. To reduce that risk, we generally takepositions using cash and futures contracts and options.

 

Unrealized gains and losses related to derivativecontracts for corn and natural gas purchases are included as a component ofcost of revenues and derivative contracts related to ethanol sales are includedas a component of revenues in the accompanying financial statements.  The fair values of derivative contracts arepresented on the accompanying balance sheet as derivative financialinstruments.

 

***Lower of cost or market accounting for inventoryand forward purchase contracts***

 

With the significant change in the prices of our main inputs andoutputs, the lower of cost or market analysis of inventories and purchasecommitments can have a significant impact on our financial performance.

 

The impact of market activity related to pricing of corn and ethanolwill require us to continuously evaluate the pricing of our inventory andpurchase commitments under a lower of cost or market analysis.

 

We recorded a lower of cost or market impairmentadjustment related to our inventory as of December 31, 2008.  The lower of cost or market adjustment representeda reduction to assets of approximately $1,139,000.

 

We recorded a lower of cost or market impairmentadjustment related to our future corn purchase contracts as of December 31,2008.  The lower of cost or marketadjustment represented a liability of approximately $2,736,000.

 

**Liquidity and Capital Resources**

 

Our liquidity and capital resources havechanged since the end or our 2008 fiscal year on December 31, 2008.  As of March 27, 2009, we had $3,927,000available to borrow on our revolving lines of credit, including our long-termrevolving loan called Term Note 5 and our revolving line of credit.  The terms of our credit facilities arediscussed in more detail below in the section entitled “Indebtedness.”  In January 2009, we increased the amountof our revolving line of credit from $3,000,000 to $5,000,000.  We requested this additional borrowingcapacity in order to secure additional cash for our continuing operations.  In January 2009, the ethanol industryexperienced very tight operating margins with ethanol prices decreasing andcorn prices increasing.  Theseunfavorable conditions in the ethanol industry required us to use additionalcash from our lines of credit to continue our operations.  In exchange for this additional credit, ourprimary lender, First National Bank of Omaha, has required 

 

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us to secure subordinated debt financing inthe amount of $2,000,000 by March 31, 2009 and to secure equipmentfinancing for our corn oil extraction equipment by April 30, 2009.  Securing this additional debt financing isdesigned to provide more short term capital for our continuing operations andallow us to maintain more borrowing capacity on our lines of credit.  To date, we have secured $1,369,000 inadditional subordinated debt financing and we have made progress in securingthe equipment financing we need for our corn oil extraction equipment.  Since we did not raise the entire $2,000,000in subordinated debt by March 31, 2009, First National extended ourdeadline for raising the additional subordinated debt to May 18,2009.  We used the additionalsubordinated debt funds we have raised to date to pay down our lines of credit.

 

Based on current financial forecastsperformed by management, we anticipate that we will have sufficient cash fromour current credit facilities, our current subordinated debt and cash from ouroperations to continue to operate the ethanol plant for the next 12months.  In addition, we anticipatecontinuing to seek additional subordinated debt financing and equipmentfinancing to provide additional cash for our operations.  We may not be able to secure such additionalcapital due to conditions in the credit markets.

 

Part of the current unprofitableoperation of the ethanol plant is due to corn and natural gas costs that arehigher than market costs.  These highercosts are related to forward raw material purchases that we made above currentmarket rates.  Due to current ethanolprices, we have experienced negative operating margins.  However, we have adjusted our hedgingstrategy in order to more closely match our raw material costs with currentethanol prices.  We believe that ethanolprices follow commodity prices generally, including corn and naturalprices.  Therefore, we anticipate that ifwe price our raw materials, including corn and natural gas, closely in time toour ethanol sales, we will be able to maintain a positive operating margin andmaintain our liquidity.  However, shouldethanol prices cease moving in relation to corn and natural gas prices, wecould experience negative operating margins, especially if the price of cornincreases at a time when ethanol prices are falling.  This could cause us to operate unprofitablyand negatively impact our liquidity.

 

Our management believes it has taken thesteps necessary in order to maintain our liquidity for the next 12 months andto provide sufficient working capital to continue our operations.  We anticipate continuing to secure additionalshort term debt financing in order to provide more available cash for ouroperations and contingencies.

 

The following table shows cash flows for our lasttwo fiscal years:

 
| ** **                             | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| Net cash from operating activities     |       | $                                          | 6,495,595  |   | $ | 12,957,731 |   |
| Net cash used for investing activities |       | (3,110,513                                 | )          | (2,138,895 | ) |
| Net cash used for financing activities |       | (3,257,687                                 | )          | (17,131,489 | ) |
|                                        |            |                                            |            |  |  |  |  |

 

*Cash Flow From Operations**. *We experienced asignificant decrease in cash flow from our operating activities which wasprimarily the result of the significant decrease in net income we experiencedduring our 2008 fiscal year compared to our 2007 fiscal year.  However, our cash flows were increased by asignificant decrease in our derivative financial instruments and our due frombroker which represents cash being held by our commodities broker in our marginaccount.  These decreases positivelyimpacted our cash flows.  Further,decreases in our receivables and inventory positively impacted our cash flowfor our 2008 fiscal year compared to our 2007 fiscal year.  Increases in our accounts payable and accruedliabilities at December 31, 2008 compared to December 31, 2007 alsopositively impacted our cash flows for our 2008 fiscal year compared to our2007 fiscal year.

 

*Cash Flow From InvestingActivities**. *During our 2008fiscal year, we used more cash for investing activities than during our 2007fiscal year.  We used less cash duringour 2008 fiscal year for investments in purchases of property and equipmentcompared to our 2007 fiscal year.  Duringour 2008 fiscal year, we used cash to install corn oil extraction equipmentand, during our 2007 fiscal year, we used cash for the construction of anadditional grain storage bin.  During our2008 fiscal year, we used cash for two investments.  We used $300,000 in cash to purchase aninterest in Corn Oil Bio-Solutions, LLC and we used $1,050,000 in cash topurchase an interest in Prairie Gold Venture Partnership, LLC. During our 2007 fiscal year, we purchased an investment in RPMG, whichis our ethanol, corn oil and distiller’s grains marketer.  In our 2008 fiscal year, we experienced adecrease in 

 

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our liability relatedto our RPMG capital contribution of approximately $246,000.  This resulted from our ongoing payments toRPMG for our capital contribution.

 

*Cash Flow From FinancingActivities**.*We used significantly less cash during our 2008 related to fiscal yearfor financing activities compared to our 2007 fiscal year.  We had a short-term note payable of$2,333,000 as of December 31, 2007 related to borrowing on our revolvingline of credit but we did not have any amount outstanding on our revolving lineof credit on December 31, 2008. Further, we had larger principal payments on our notes payable duringour 2008 fiscal year compared to our 2007 fiscal year.  We also experienced a significant decrease inour distributions during our 2008 fiscal year compared to our 2007 fiscalyear.  We had smaller distributions toour members as a result of generating less cash from our operations during our2008 fiscal year compared to our 2007 fiscal year.

 

The following table shows a comparison of cashflows for the fiscal years ended December 31, 2007 and December 31,2006:

 
| ** **                             | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| Net cash from operating activities     |       | $                                          | 12,957,731 |   | $ | 41,808,080 |   |
| Net cash used for investing activities |       | (2,138,895                                 | )          | (19,743,726 | ) |
| Net cash used for financing activities |       | (17,131,489                                | )          | (16,094,861 | ) |
|                                        |            |                                            |            |  |  |  |  |

 

*Cash Flow From Operations**. *The significant decrease in net cash fromoperating activities primarily resulted from the significant decrease in netincome that resulted during Dakota Ethanol’s 2007 fiscal year compared to thesame period of 2006.  This decreaseresulted from a significant increase in cost of revenues as a result of asignificant increase in the average price per bushel that we paid for corn.

 

*Cash Flow From InvestingActivities**. *We experienced asignificant decrease in net cash used for investing activities in fiscal year2007 compared to fiscal year 2006.  Thisdecreased resulted from the fact that we repurchased the Broin minorityinterest in Dakota Ethanol in June 2006 for approximately$19,376,000.  Further, we used $350,000in cash to install a hammermill.  Infiscal year 2007, we had an increase in net cash used in investing activitiesas a result of the grain bin that was constructed during fiscal year 2007 ofapproximately $2.2 million and the investment in RPMG of $360,000.

 

*Cash Flow From FinancingActivities**.*During our 2007 fiscal year, we had an increase in net cash used for financingactivities of $4,443,000 as a result of the fact that we paid approximately$0.15 more per unit in distributions during our 2007 fiscal year as compared tothe same period of 2006.  In fiscal year2006, we issued a note in the amount of $19,100,000 to repurchase the minorityinterest in Dakota Ethanol held by the Broin family.  This note was repaid during our 2006 fiscalyear.  Our net cash used in financingactivities was also higher in fiscal year 2006 as a result of distributionsthat were made by Dakota Ethanol to the minority owner and payments made on aguarantee issued by us.

 

**Indebtedness**

 

FirstNational Bank of Omaha (FNBO) is our primary lender.  We have three notes or loans outstanding withFNBO pursuant to a Construction Loan Agreement and Construction Note dated September 25,2000 and amendments thereto.  Inaddition, we entered into subordinated unsecured debt with various individualsfollowing the end of our 2008 fiscal year for additional working capital.  Our subordinated debt offering is being usedto meet FNBO’s requirement that we raise an additional $2,000,000 insubordinated debt.  The details of eachtype of debt that we have outstanding are described below.

 

***January 2009 Credit Agreement Amendment Summary***

 

OnJanuary 16, 2009, we entered into an amendment to our credit agreementswith FNBO.  The primary purposes of theseamendments were to increase our revolving line of credit with FNBO from$3,000,000 to $5,000,000 and to make changes to the covenants applicable to ourcredit agreements as a result of certain non-compliances with our financialloan covenants as of December 31, 2008. Pursuant to the amendment, we agreed to provide FNBO more informationregarding our hedging transactions and to make adjustments to our hedging strategies.  We also agreed to raise an additional$2,000,000 in subordinated debt by March 31, 2009 and to 

 

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securealternate financing for our corn oil extraction equipment by April 30,2009.  In addition, we agreed not to makeany distributions to our members without FNBO’s prior approval.  As a result of additional non-compliance withour financial covenants as well as the terms of the January creditagreement amendments, we secured a waiver from FNBO of certain requirements ofour credit agreements.  This waiver isdiscussed in greater detail below in the section entitled “Covenants.”

 

***Short-Term Debt Sources***

 

Wehave a revolving promissory note with FNBO. On January 16, 2009, we increased the principal amount of thisrevolving promissory note from $3,000,000 to $5,000,000.  The maturity date of the revolving promissorynote is May 18, 2009.  We agreed topay a variable interest rate on the revolving promissory note at an annual rate2% higher than FNBO’s base rate.  FNBO’sbase rate on January 16, 2009 was 3.25%. The revolving promissory note is subject to a minimum interest rate of5% per year.  Interest on the revolvingpromissory note is paid quarterly.  Weare required to pay a quarterly fee of fifty basis points on the unused portionof the revolving promissory note.  Therevolving promissory note is collateralized by the ethanol plant, its accountsreceivable and inventories.  As of December 31,2008, we did not have an outstanding balance on the revolving promissory note.

 

***Long-Term Debt Sources***

 

Wehave one long-term note payable to FNBO that was used for the permanentfinancing of the plant.  We are subjectto certain restrictive covenants establishing minimum reporting requirements,ratios, working capital and net worth requirements pursuant to the loanagreement.  The term note is secured bythe ethanol plant.  The note is subjectto prepayment penalties based on the cost incurred by FNBO to break its fixedinterest rate commitment.

 

Thebalance of the term note requires quarterly payments which commenced on October 1,2002.  The balance is due September 1,2011.  Interest on the outstandingprincipal balances accrues at a fixed rate of 9% annually.  The principal balance due pursuant to thenote as of December 31, 2008 was $4,816,855.

 

Wehave a long term revolving loan pursuant to which we may elect to borrow up to$5,000,000 through September 1, 2011 known as Term Note 5.  The available amount of funds we can borrowpursuant to Term Note 5 reduces each year by 75% of certain excess cash flow wehave at the end of each of our fiscal years. Therefore, the funds available for us to draw on Term Note 5 may decreaseeach year.  If in any year we have aprincipal balance outstanding on Term Note 5 in excess of the new credit limit,we must make a payment to FNBO such that the amount outstanding on Term Note 5does not exceed the new credit limit. Interest accrues on Term Note 5 at a variable interest rate of 0.5%above FNBO’s base rate.  This interestrate is subject to reductions based on ratios of our total indebtedness to ournet worth.  Term Note 5 is subject to aminimum interest rate of 5% per year.  Weare required to pay a quarterly fee of thirty-seven basis points on the unusedportion of Term Note 5.  On December 31,2008, Dakota Ethanol had $2,000,000 outstanding and $3,000,000 available to bedrawn on this loan.

 

***Covenants***

 

Asof December 31, 2008, we were out of compliance with two of our financialloan covenants with FNBO.  The loancovenants that we were out of compliance with were our debt service coverageratio and our working capital covenants. In January 2009, we entered into amendments to our creditagreements with FNBO in exchange for a waiver of our non-compliance with thesetwo financial covenants as of December 31, 2008.  The amendments to our credit agreementsimposed additional restrictions on us, including that we provide certainadditional reports to FNBO, that we raise an additional $2,000,000 insubordinated debt by March 31, 2009 and that we secure subordinatedequipment financing for our corn oil extraction equipment by April 30,2009.

 

Asof March 31, 2009, we anticipate being out of compliance with the same twofinancial covenants that we were out of compliance with as of December 31,2008.  In additional, we do notanticipate that we will be able to raise the entire $2,000,000 in subordinateddebt financing by March 31, 2009. As a result, we entered into another amendment to our credit agreementswith FNBO at the end of March 2009 in order to secure a waiver of these loancovenant compliance issues. Specifically, FNBO waived our non-compliance with our debt servicecoverage ratio and our working capital covenants as of December 31, 2008and March 31, 2009.  In addition,FNBO changed the manner in which we calculate our debt service coverage ratiountil December 31, 2009 to avoid projected future 

 

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non-compliance with our debtservice coverage ratio covenant.  FNBOalso extended our deadline for raising the additional $2,000,000 in subordinateddebt to May 18, 2009.

 

However,if we fail to satisfy these new conditions of our credit agreement, we may onceagain be in violation of the terms of our credit agreement with FNBO.  If we violate the terms of our creditagreement with FNBO, FNBO may require us to immediately repay all amountsoutstanding on our loans.  We do notanticipate having sufficient cash to immediate repay these loans.  This may result in FNBO seeking to forecloseon our ethanol plant.

 

***Lake County Tax Increment Financing Bonds***

 

Wehave a long-term debt obligation on a portion of a $1.323 million tax incrementrevenue bond series issued by Lake County, South Dakota on December 2,2003.  The portion for which we areobligated is estimated at $260,956. The bond was issued in connection with therefunding of a tax increment financing bond issued by Lake County in 2001, ofwhich we were the recipient of the proceeds. In 2003, Lake County became aware that the taxes collected from theproperty on which the plant is located would be insufficient to cover the debtservice of the 2001 bond issue. Based on this deficiency and changes ininterest rates during December 2003, Lake County refunded the 2001 bondissue and replaced it with two separate bonds: a tax-exempt bond in the amountof $824,599 and a taxable bond in the amount of $1,323,024. As a part of thisrefund, we entered into an agreement with the holder of these bonds toguarantee the entire debt service on the taxable bond issue. The taxes leviedon our property are used first towards paying the debt service of thetax-exempt bonds and any remaining taxes are used for paying the debt serviceof the taxable bonds. Since the property taxes on the property are currentlysufficient to cover a portion of the debt service on the taxable bond series,our obligation under the guarantee is to cover the shortfall in debt service,representing the difference between the original taxable bond amount($1,323,024) and the estimated amount expected to be collected in propertytaxes from the real property on which our plant is located.  The interest rate on the bonds is 7.75%annually.  The taxable bonds requiresemi-annual payments of interest on December 1 and June 1, inaddition to a payment of principal on December 1 of each year. While ourobligation under the guarantee is expected to continue until maturity in 2018,such obligation may cease at some point in time if the property on which theplant is located appreciates in value to the extent that Lake County is able tocollect a sufficient amount in taxes to cover the principal and interestpayments on the taxable bonds. The principal balance outstanding was $1,033,006as of December 31, 2008.

 

***Subordinated Debt***

 

In order to comply with the conditions FNBOimposed regarding raising additional subordinated debt financing, we are in theprocess of conducting a private placement offering of subordinated unsecureddebt securities.  The debt securitiesthat we are offering will not be registered with the Securities and ExchangeCommission.  Therefore, the debtsecurities may not be offered or sold without an exemption from theregistration requirements of applicable securities laws.  We are offering the debt securities only to alimited number of accredited investors in order to comply with applicable SECregulations.  As of March 24, 2009,we have raised $1,369,000 in subordinated debt through this offering.  Our deadline to raise this $2,000,000 insubordinated debt has been extended by FNBO to May 18, 2009.

 

In addition to our debt obligations, we havecertain other contractual cash obligations and commitments.  The followingtables provide information regarding our consolidated contractual obligationsand commitments as of December 31, 2008:

 
| ** **                                 | ** ** | **Payment Due By Period** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|
| **Contractual Cash Obligations** | ** ** | **Total**                                | ** ** | **Less than  One Year** | ** ** | **One to  Three  Years** | ** ** | **Three to  Five  Years** | ** ** | **After Five  Years** | ** ** |
|                                       |       |                                     |       |   |   |   |   |   |   |   |   |
| Long-Term Debt Obligations                 |       | $                                        | 8,215,012  |   | $ | 2,552,940 |   | $ | 5,541,566 |   | $ | 120,506 |   | $ | — |   |
| Capital Lease Obligations                  |       | —                                   |       | — |   | — |   | — |   | — |   |
| Operating Lease Obligations                |       | 1,631,275                                |       | 851,100 |   | 780,175 |   | — |   | — |   |
| Purchase Obligations                       |       | 31,103,147                               |       | 27,949,622 |   | 3,153,525 |   | — |   | — |   |
| Other Long-Term Liabilities                |       | 260,956                                  |       | 60,678 |   | 104,867 |   | 95,411 |   | — |   |
| Total Contractual Cash Obligations         |       | $                                        | 41,210,390 |   | $ | 31,414,340 |   | $ | 9,580,133 |   | $ | 215,917 |   | $ | — |   |

 

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The long-term debt obligations in the tableabove include both principal and interest payments with a fixed annual interestrate of nine percent.

 

**Off-Balance Sheet Arrangements.**

 

We do not have any off-balance sheet arrangements.

 

**ITEM 7A.****              ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

We are exposed to the impact of marketfluctuations associated with commodity prices as discussed below.  We haveno exposure to foreign currency risk as all of our business is conducted inU.S. Dollars. We use derivative financial instruments as part of an overallstrategy to manage market risk. We use cash, futures and option contracts tohedge changes to the commodity prices of corn and natural gas. We do not enterinto these derivative financial instruments for trading or speculativepurposes, nor do we designate these contracts as hedges for accounting purposespursuant to the requirements of SFAS 133, *Accounting for DerivativeInstruments and Hedging Activities*.

 

**InterestRate Risk**

 

We are exposed to market risk from changes ininterest rates. Exposure to interest rate risk results primarily from holding arevolving line of credit which bears variable interest rates.  As of December 31, 2008, we did not haveany amount outstanding on our revolving line of credit, however, we anticipatethat during our 2009 fiscal year we will at various times borrow funds on ourrevolving line of credit which will accrue interest at variable rates.  The specifics of this revolving note isdiscussed in greater detail in “**Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Indebtedness.**”

 

**Commodity Price Risk**

 

We are exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn andnatural gas in the ethanol production process.  We seek to minimize therisks from fluctuations in the prices of corn and natural gas through the useof hedging instruments.  In practice, as markets move, we actively manageour risk and adjust hedging strategies as appropriate.  Although webelieve our hedge positions accomplish an economic hedge against our futurepurchases, they are not designated as such for hedge accounting purposes, whichwould match the gain or loss on our hedge positions to the specific commoditypurchase being hedged.  We are marking to market our hedge positions,which means as the current market price of our hedge positions changes, thegains and losses are immediately recognized in our cost of revenues.

 

Due to recent volatility in the prices of corn and natural gas, on October 7,2008 we liquidated all of our futures and options positions.  This resulted in an approximately $7.5million realized loss we recorded during our fourth fiscal quarter of2008.  Going forward, we anticipateadjusting our hedging strategy in order to avoid significant long-term fixedprice contracts for our corn and natural gas. Further, our primary lender, has required us to provide periodic reportsregarding our hedging activities along with changes to our risk managementstrategy.

 

The immediate recognition of hedging gains and losses can cause netincome to be volatile from quarter to quarter due to the timing of the changein value of the derivative instruments relative to the cost and use of thecommodity being hedged.  We recorded an increase to our cost of revenuesof approximately $24,594,000 related to derivative instruments for the yearended December 31, 2008.  Werecorded a decrease to cost of revenue of approximately $1,258,000 and adecrease to cost of revenues of approximately $11,448,000 related to derivativeinstruments for the years ended December 31, 2007 and 2006,respectively.  There are severalvariables that could affect the extent to which our derivative instruments areimpacted by price fluctuations in the cost of corn or natural gas.  However,it is likely that commodity cash prices will have the greatest impact on thederivatives instruments with delivery dates nearest the current cash price.

 

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As of December 31, 2008, we had price protection for approximately13% of our expected corn usage for fiscal year ended December 31, 2009using CBOT futures and options and over-the-counter option contracts.  As corn prices move in reaction to markettrends and information, our income statement will be affected depending on theimpact such market movements have on the value of our derivative instruments.  Depending on market movements, crop prospectsand weather, these price protection positions may cause immediate adverseeffects to our financial results, but are designed to produce long-termpositive growth for us.

 

As of December 31, 2008, we are committed to purchasingapproximately 479,000 mmBtu’s of natural gas during our 2009 fiscal year,valued at approximately $3,678,720.  Thenatural gas purchases represent approximately 32% of the annual plantrequirements.

 

A sensitivity analysis has been prepared to estimate our exposure tocorn and natural gas price risk. The table presents the fair value of ourderivative instruments as of December 31, 2008, December 31, 2007 andDecember 31, 2006 and the potential loss in fair value resulting from ahypothetical 10% adverse change in such prices. The fair value of the positionsis a summation of the fair values calculated by valuing each net position atquoted market prices as of the applicable date. The results of this analysis,which may differ from actual results, are as follows:

 
| **Year Ended**    | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical  Adverse  Change— Market Risk** | ** ** |
|------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------|------------|
| December 31, 2008 |       | $                   | 21,607,078 |                                                                              | $          | 2,160,708 |   |
| December 31, 2007 |       | $                   | 39,641,473 |                                                                              | $          | 3,964,147 |   |
| December 31, 2006 |       | $                   | 8,957,869  |                                                                              | $          | 895,786 |   |

 

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**ITEM 8.                   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

Tableof Contents

 
|                                                         | **Page** |
|--------------------------------------------------------------|----------|
|                                                         |     |
| **REPORT  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** | 46       |
|                                                         |     |
| **CONSOLIDATED FINANCIAL STATEMENTS**                        |     |
| Consolidated Balance Sheets                                  | 47       |
| Consolidated Statements of Operations                        | 49       |
| Consolidated Statements of Changes in Members’ Equity   | 50       |
| Consolidated Statements of Cash Flows                        | 51       |
| Notes to Consolidated Financial Statements                   | 52       |

 

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***REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM***

 

Tothe Board of Managers and Members

**Lake Area Corn Processors, LLC**

 

Wehave audited the accompanying consolidated balance sheets of Lake Area CornProcessors, LLC and subsidiary as of December 31, 2008 and 2007, and therelated consolidated statements of operations, changes in members’ equity andcash flows for each of the three years in the period ended December 31,2008.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Lake Area CornProcessors, LLC and subsidiary as of December 31, 2008 and 2007, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2008, in conformity with U.S. generallyaccepted accounting principles.

 

Wewere not engaged to examine management’s assessment of the effectiveness ofLake Area Corn Processors, LLC and subsidiary’s internal control over financialreporting as of December 31, 2008, included in the accompanying AnnualReport included in Form 10-K and, accordingly, we do not express anopinion thereon.

 

McGladrey &Pullen, LLP

Des Moines, Iowa

March 31, 2009

 

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**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2008 AND 2007**

 
| ** **                       | ** ** | **2008**        | ** **     | **2007**    | ** ** |
|----------------------------------|------------|-----------------|----------------|-------------|------------|
|                             |       |            |           |        |       |
| **ASSETS**                       |       |            |           |        |       |
|                             |       |            |           |        |       |
| CURRENT ASSETS                   |       |            |           |        |       |
| Cash                             | ** ** | **$**           | **488,517**    |        | $          | 361,122 |   |
| Accounts receivable              | ** ** | **2,769,458**   |           | 4,984,561   |       |
| Other receivables                | ** ** | **166,667**     |           | 171,934     |       |
| Inventory                        | ** ** | **6,526,977**   |           | 8,083,205   |       |
| Due from broker                  | ** ** | **60**          |           | 4,677,332   |       |
| Derivative financial instruments | ** ** | **373,313**     |           | 9,000,243   |       |
| Prepaid expenses                 | ** ** | **289,444**     |           | 300,108     |       |
|                             |       |            |           |        |       |
| Total current assets             | ** ** | **10,614,436**  |           | 27,578,505  |       |
|                             |       |            |           |        |       |
| PROPERTY AND EQUIPMENT           |       |            |           |        |       |
| Land                             | ** ** | **676,097**     |           | 126,097     |       |
| Land improvements                | ** ** | **2,665,358**   |           | 2,665,358   |       |
| Buildings                        | ** ** | **8,088,853**   |           | 8,088,853   |       |
| Equipment                        | ** ** | **38,882,582**  |           | 38,820,526  |       |
| Construction in progress         | ** ** | **1,256,194**   |           | —      |       |
| ** **                       |       | **51,569,084**  |           | 49,700,834  |       |
| Less accumulated depreciation    | ** ** | **(17,037,417** | )              | (14,355,741 | )          |
|                             |       |            |           |        |       |
| Net property and equipment       | ** ** | **34,531,667**  |           | 35,345,093  |       |
|                             |       |            |           |        |       |
| OTHER ASSETS                     |       |            |           |        |       |
| Goodwill                         | ** ** | **10,395,766**  |           | 10,395,766  |       |
| Investments                      | ** ** | **2,507,074**   |           | —      |       |
| Guarantee premium                | ** ** | **141,263**     |           | 201,973     |       |
| Other                            | ** ** | **16,242**      |           | 33,437      |       |
|                             |       |            |           |        |       |
| Total other assets               | ** ** | **13,060,345**  |           | 10,631,176  |       |
|                             |       |            |           |        |       |
| ** **                       |       | **$**           | **58,206,448** |        | $          | 73,554,774 |   |

 

SeeNotes to Consolidated Financial Statements

 

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| ** **                                                                  | ** ** | **2008**       | ** **     | **2007**   | ** ** |
|-----------------------------------------------------------------------------|------------|----------------|----------------|------------|------------|
|                                                                        |       |           |           |       |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                                    |       |           |           |       |       |
|                                                                        |       |           |           |       |       |
| CURRENT LIABILITIES                                                         |       |           |           |       |       |
| Oustanding checks in excess of bank balance                                 | ** ** | **$**          | **400,918**    |       | $          | — |   |
| Accounts payable                                                            | ** ** | **7,858,935**  |           | 6,503,826  |       |
| Accrued liabilities                                                         | ** ** | **3,199,234**  |           | 841,945    |       |
| Derivative financial instruments                                            | ** ** | **97,912**     |           | —     |       |
| Short-term notes payable                                                    | ** ** | **—**     |           | 2,333,000  |       |
| Current portion of guarantee payable                                        | ** ** | **60,678**     |           | 62,319     |       |
| Current portion of notes payable                                            | ** ** | **2,065,357**  |           | 1,782,960  |       |
|                                                                        |       |           |           |       |       |
| Total current liabilities                                                   | ** ** | **13,683,034** |           | 11,524,050 |       |
|                                                                        |       |           |           |       |       |
| LONG-TERM LIABILITIES                                                       |       |           |           |       |       |
| Notes payable, net of current maturities                                    | ** ** | **5,201,498**  |           | 4,816,180  |       |
| Guarantee payable, net of current portion                                   | ** ** | **200,278**    |           | 260,957    |       |
| Other                                                                       | ** ** | **262,500**    |           | —     |       |
|                                                                        |       |           |           |       |       |
| Total long-term liabilities                                                 | ** ** | **5,664,276**  |           | 5,077,137  |       |
|                                                                        |       |           |           |       |       |
| COMMITMENTS AND CONTINGENCIES                                               |       |           |           |       |       |
|                                                                        |       |           |           |       |       |
| MEMBERS’ EQUITY                                                        |       |           |           |       |       |
| Capital units, $0.50 stated value, 29,620,000  units issued and outstanding |       | **14,810,000** |           | 14,810,000 |       |
| Additional paid-in capital                                                  | ** ** | **96,400**     |           | 96,400     |       |
| Retained earnings                                                           | ** ** | **23,952,738** |           | 42,047,187 |       |
|                                                                        |       |           |           |       |       |
| Total members’ equity                                                  | ** ** | **38,859,138** |           | 56,953,587 |       |
|                                                                        |       |           |           |       |       |
| ** **                                                                  |       | **$**          | **58,206,448** |       | $          | 73,554,774 |   |

 

SeeNotes to Consolidated Financial Statements

 

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**CONSOLIDATED STATEMENTS OF OPERATIONS**

**YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006**

 
| ** **                                                                                            | ** ** | **2008**        | ** **      | **2007**   | ** ** | **2006**    | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------|-----------------|------------|------------|-------------|------------|
|                                                                                                  |       |            |            |       |       |        |       |
| REVENUES                                                                                              | ** ** | **$**           | **111,778,588** |       | $          | 103,739,699 |       | $ | 103,889,412 |   |
|                                                                                                  |       |            |            |       |       |        |       |
| COST OF REVENUES                                                                                      | ** ** | **125,413,056** |            | 80,977,667 |       | 50,792,418  |       |
|                                                                                                  |       |            |            |       |       |        |       |
| GROSS PROFIT (LOSS)                                                                                   | ** ** | **(13,634,468** | **)**           | 22,762,032 |       | 53,096,994  |       |
|                                                                                                  |       |            |            |       |       |        |       |
| OPERATING EXPENSES                                                                                    | ** ** | **3,534,274**   |            | 3,721,813  |       | 3,938,845   |       |
|                                                                                                  |       |            |            |       |       |        |       |
| INCOME (LOSS) FROM OPERATIONS                                                                         | ** ** | **(17,168,742** | **)**           | 19,040,219 |       | 49,158,149  |       |
| ** **                                                                                            | ** ** | ** **      | ** **      | ** ** | ** ** | ** **  | ** ** |
| OTHER INCOME (EXPENSE)                                                                                | ** ** | ** **      | ** **      | ** ** | ** ** | ** **  | ** ** |
| Interest and other income                                                                             | ** ** | **54,522**      |            | 265,029    |       | 121,719     |       |
| Equity in net income (loss) of investments                                                            | ** ** | **1,157,074**   |            | (605,000   | )          | —      |       |
| Interest and other expense                                                                            | ** ** | **(656,303**    | )               | (695,043   | )          | (1,008,300  | )          |
| Total other income (expense)                                                                          | ** ** | **555,293**     |            | (1,035,014 | )          | (886,581    | )          |
|                                                                                                  |       |            |            |       |       |        |       |
| NET INCOME (LOSS) BEFORE MINORITY INTEREST                                                            |       | **(16,613,449** | **)**           | 18,005,205 |       | 48,271,568  |       |
|                                                                                                  |       |            |            |       |       |        |       |
| MINORITY INTEREST IN SUBSIDIARY                                                                       | ** ** | **—**      |            | —     |       | (2,235,776  | )          |
|                                                                                                  |       |            |            |       |       |        |       |
| NET INCOME (LOSS)                                                                                     | ** ** | **$**           | **(16,613,449** | **)**      | $          | 18,005,205  |       | $ | 46,035,792 |   |
|                                                                                                  |       |            |            |       |       |        |       |
| BASIC AND DILUTED EARNINGS (LOSS) PER UNIT                                                            |       | **$**           | **(0.56**       | **)**      | $          | 0.61        |       | $ | 1.55 |   |
|                                                                                                  |       |            |            |       |       |        |       |
| WEIGHTED AVERAGE UNITS OUTSTANDING FOR THE  CALCULATION OF BASIC AND DILUTED EARNINGS (LOSS) PER UNIT |       | **29,620,000**  |            | 29,620,000 |       | 29,620,000  |       |

 

SeeNotes to Consolidated Financial Statements

 

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

**YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006**

 
| ** **                                 | ** ** | ** **             | ** ** | ** **  | ** **     | **Additional** | ** ** | ** **   | ** ** | ** **  | ** **     |
|--------------------------------------------|------------|------------------------|------------|-------------|----------------|----------------|------------|--------------|------------|-------------|----------------|
| ** **                                 | ** ** | **Capital Units** | ** ** | **Paid-In** | ** **     | **Retained**   | ** ** | ** **   | ** ** |
| ** **                                 | ** ** | **Units**              | ** ** | **Amount**  | ** **     | **Capital**    | ** ** | **Earnings** | ** ** | **Total**   | ** **     |
| BALANCE, DECEMBER 31, 2005                 |       | 29,620,000             |       | $           | 14,810,000     |           | $          | 96,400       |       | $           | 9,107,190      |   | $ | 24,013,590 |   |
| Net income                                 |       | —                 |       | —      |           | —         |       | 46,035,792   |       | 46,035,792  |           |
| Distributions paid ($.45 per capital unit) |       | —                 |       | —      |           | —         |       | (13,329,000  | )          | (13,329,000 | )              |
|                                       |       |                   |       |        |           |           |       |         |       |        |           |
| BALANCE, DECEMBER 31, 2006                 |       | 29,620,000             |       | 14,810,000  |           | 96,400         |       | 41,813,982   |       | 56,720,382  |           |
| Net income                                 |       | —                 |       | —      |           | —         |       | 18,005,205   |       | 18,005,205  |           |
| Distributions paid ($.60 per capital unit) |       | —                 |       | —      |           | —         |       | (17,772,000  | )          | (17,772,000 | )              |
|                                       |       |                   |       |        |           |           |       |         |       |        |           |
| BALANCE, DECEMBER 31, 2007                 |       | 29,620,000             |       | 14,810,000  |           | 96,400         |       | 42,047,187   |       | 56,953,587  |           |
| Net (loss)                                 |       | —                 |       | —      |           | —         |       | (16,613,449  | )          | (16,613,449 | )              |
| Distributions paid ($.05 per capital unit) |       | —                 |       | —      |           | —         |       | (1,481,000   | )          | (1,481,000  | )              |
|                                       |       |                   |       |        |           |           |       |         |       |        |           |
| **BALANCE, DECEMBER 31, 2008**             | ** ** | **29,620,000**         | ** ** | **$**       | **14,810,000** | ** **     | **$**      | **96,400**   | ** ** | **$**       | **23,952,738** | ** ** | **$** | **38,859,138** | ** ** |

 

See Notes to Consolidated Financial Statements

 

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006**

 
| ** **                                                           | ** ** | **2008**       | ** **      | **2007**    | ** ** | **2006**    | ** ** |
|----------------------------------------------------------------------|------------|----------------|-----------------|-------------|------------|-------------|------------|
| OPERATING ACTIVITIES                                                 |       |           |            |        |       |        |       |
| Net income (loss)                                                    | ** ** | **$**          | **(16,613,449** | **)**       | $          | 18,005,205  |       | $ | 46,035,792 |   |
| Changes to net income not affecting cash                             |       |           | ** **      |        |       |        |       |
| Depreciation and amortization                                        | ** ** | **2,759,580**  | ** **      | 2,725,098   |       | 2,563,248   |       |
| Minority interest in subsidiary                                      | ** ** | **—**     | ** **      | —      |       | 2,235,776   |       |
| Other                                                                | ** ** | **—**     | ** **      | —      |       | 14,204      |       |
| Equity in net (income) loss of investments                           | ** ** | **(1,157,074** | **)**           | 605,000     |       | —      |       |
| Unrealized loss on purchase commitments                              | ** ** | **2,735,966**  | ** **      | —      |       | —      |       |
| Lower of cost or market adjustment on  inventory                     | ** ** | **1,139,029**  | ** **      | —      |       | —      |       |
| (Increase) decrease in                                               |       |           | ** **      |        |       |        |       |
| Receivables                                                          | ** ** | **2,220,370**  | ** **      | (1,050,505  | )          | 1,407,612   |       |
| Inventory                                                            | ** ** | **417,199**    | ** **      | (3,323,140  | )          | (2,464,507  | )          |
| Prepaid expenses                                                     | ** ** | **10,664**     | ** **      | 3,853       |       | 49,494      |       |
| Derivative financial instruments and due  from broker                | ** ** | **13,402,114** | ** **      | (4,719,706  | )          | (8,787,744  | )          |
| Increase (decrease) in                                               |       |           | ** **      |        |       |        |       |
| Accounts payable                                                     | ** ** | **1,451,801**  | ** **      | 771,419     |       | 623,773     |       |
| Accrued liabilities                                                  | ** ** | **129,395**    | ** **      | (59,493     | )          | 130,432     |       |
|                                                                 |       |           | ** **      |        |       |        |       |
| NET CASH FROM OPERATING ACTIVITIES                                   | ** ** | **6,495,595**  | ** **      | 12,957,731  |       | 41,808,080  |       |
|                                                                 |       |           | ** **      |        |       |        |       |
| INVESTING ACTIVITIES                                                 |       |           | ** **      |        |       |        |       |
| Purchase of property and equipment                                   | ** ** | **(1,514,941** | **)**           | (1,779,467  | )          | (367,357    | )          |
| Purchase of minority interest                                        | ** ** | **—**     | ** **      | —      |       | (19,376,369 | )          |
| Purchase of investment                                               | ** ** | **(1,595,572** | **)**           | (359,428    | )          | —      |       |
|                                                                 |       |           | ** **      |        |       |        |       |
| NET CASH USED FOR INVESTING ACTIVITIES                               | ** ** | **(3,110,513** | **)**           | (2,138,895  | )          | (19,743,726 | )          |
|                                                                 |       |           | ** **      |        |       |        |       |
| FINANCING ACTIVITIES                                                 |       |           | ** **      |        |       |        |       |
| Increase in outstanding checks in excess of  bank balance            | ** ** | **400,918**    | ** **      | —      |       | —      |       |
| Short-term notes payable issued                                      | ** ** | **—**     | ** **      | 2,333,000   |       | 19,100,000  |       |
| Long-term notes payable issued                                       | ** ** | **2,450,000**  | ** **      | —      |       | —      |       |
| Principal payments on long-term notes  payable                       | ** ** | **(2,232,285** | **)**           | (1,629,953  | )          | (20,999,687 | )          |
| Principal payments on short-term notes  payable                      | ** ** | **(2,333,000** | **)**           | —      |       | —      |       |
| Payment on guarantee payable                                         | ** ** | **(62,320**    | **)**           | (62,536     | )          | (49,755     | )          |
| Distributions paid to minority members                               | ** ** | **—**     | ** **      | —      |       | (816,419    | )          |
| Distributions paid to LACP members                                   | ** ** | **(1,481,000** | **)**           | (17,772,000 | )          | (13,329,000 | )          |
|                                                                 |       |           | ** **      |        |       |        |       |
| NET CASH USED FOR FINANCING ACTIVITIES                               | ** ** | **(3,257,687** | **)**           | (17,131,489 | )          | (16,094,861 | )          |
|                                                                 |       |           | ** **      |        |       |        |       |
| NET INCREASE (DECREASE) IN CASH                                      | ** ** | **127,395**    | ** **      | (6,312,653  | )          | 5,969,493   |       |
|                                                                 |       |           | ** **      |        |       |        |       |
| CASH AT BEGINNING OF PERIOD                                          | ** ** | **361,122**    | ** **      | 6,673,775   |       | 704,282     |       |
|                                                                 |       |           | ** **      |        |       |        |       |
| CASH AT END OF PERIOD                                                | ** ** | **$**          | **488,517**     | ** **  | $          | 361,122     |       | $ | 6,673,775 |   |
|                                                                 |       |           | ** **      |        |       |        |       |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION                   |       |           | ** **      |        |       |        |       |
|                                                                 |       |           | ** **      |        |       |        |       |
| Cash paid during the year for interest                               | ** ** | **$**          | **678,272**     | ** **  | $          | 695,750     |       | $ | 1,033,419 |   |
|                                                                 |       |           | ** **      |        |       |        |       |
| SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING  AND FINANCING ACTIVITIES |       |           | ** **      |        |       |        |       |
|                                                                 |       |           | ** **      |        |       |        |
| Capital expenditures in accounts payable                             | ** ** | **$**          | **403,840**     | ** **  | $          | 500,532     |       | $ | — |   |
|                                                                 |       |           | ** **      |        |       |        |       |
| Land acquired through issuance of note  payable                      | ** ** | **450,000**    | ** **      | —      |       | —      |       |

 

SeeNotes to Consolidated Financial Statements

 

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**LAKE AREA CORN PROCESSORS, LLC**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

**DECEMBER 31, 2008 AND 2007**

** **

**NOTE 1 -       NATURE OF OPERATIONS**

** **

*PrincipalBusiness Activity*

 

Lake Area Corn Processors, LLC and subsidiary (the Company) is a SouthDakota limited liability company located in Wentworth, South Dakota. TheCompany was organized by investors to provide a portion of the corn supply fora 40 million-gallon (annual capacity) ethanol plant, owned by Dakota Ethanol,LLC (Dakota Ethanol). On September 4, 2001, the ethanol plant commencedits principal operations. The Company sells ethanol and related products tocustomers located in North America.

 

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

** **

*Principlesof Consolidation*

 

Theconsolidated financial statements of the Company include the accounts of itssubsidiary, Dakota Ethanol. The Company owned 88% of Dakota Ethanol until June 30,2006 when it became wholly owned.  Allsignificant inter-company transactions and balances have been eliminated inconsolidation.

 

*RevenueRecognition*

 

Revenue from the production of ethanol and related products is recordedwhen title transfers to customers, net of allowances for estimated returns.Generally, ethanol and related products are shipped FOB shipping point, basedon written contract terms between Dakota Ethanol and its customers.  Collectability of revenue is reasonablyassured based on historical evidence of collectability between Dakota Ethanoland its customers.  Interest income isrecognized as earned.

 

Shipping costs incurred by the Company in the sale of ethanol are notspecifically identifiable and as a result, revenue from the sale of ethanol isrecorded based on the net selling price reported to the Company from themarketer.

 

*Cost of Revenues*

 

Theprimary components of cost of revenues from the production of ethanol andrelated co-product are corn expense, energy expense (natural gas andelectricity), raw materials expense (chemicals and denaturant), and directlabor costs.

 

Shippingcosts incurred in the sale of distiller’s grains are classified in netrevenues.  Shipping costs on distiller’s grains were approximately$1,718,000, $1,918,000, and $2,380,000, for the years ended December 31,2008, 2007 and 2006, respectively.

 

*Operating Expenses*

 

Theprimary components of operating expenses are administrative wages and benefits,professional fee expenses (legal and audit), and insurance expenses.

 

*Inventory Valuation*

 

Ethanoland related products are stated at net realizable value. Raw materials,work-in-process, and parts inventory are valued using methods which approximatethe lower of cost (first-in, first-out) or market. In the valuation ofinventories and purchase and sale commitments, market is based on currentreplacement values except that it does not exceed net realizable values and isnot less than net realizable values reduced by allowances for approximatenormal profit margin.

 

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**LAKE AREA CORN PROCESSORS, LLC**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

**DECEMBER 31, 2008 AND 2007**

* *

*Cashand Cash Equivalents*

 

Cashand cash equivalents consist of demand accounts and other accounts that providewithdrawal privileges. Checks drawn in excess of bank balance are recorded as aliability on the balance sheet and as a financing activity on the statement ofcash flows.

 

Tradereceivables are uncollateralized customer obligations due under normal tradeterms requiring payment within fifteen days from the invoice date. Unpaid tradereceivables with invoice dates over thirty days old bear interest at 1.5percent per month.  Trade receivables arestated at the amount billed to the customer. Payments of trade receivables are allocated to the specific invoicesidentified on the customer’s remittance advice or, if unspecified, are appliedto the earliest unpaid invoices.

 

Thecarrying amount of trade receivables is reduced by a valuation allowance thatreflects management’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.

 

*Investment in commodities contracts, derivative instrumentsand hedging activities*

 

SFASNo. 133 requires a company to evaluate its contracts to determine whetherthe contracts are derivatives.  Certain contracts that literally meet thedefinition of a derivative may be exempted from SFAS No. 133 as normalpurchases or normal sales.  Normal purchases and normal sales arecontracts that provide for the purchase or sale of something other than afinancial instrument or derivative instrument that will be delivered inquantities expected to be used or sold over a reasonable period in the normalcourse of business.  Contracts that meet the requirements of normalpurchases or sales are documented as normal and exempted from the accountingand reporting requirements of SFAS No. 133.  Effective January 1, 2008, DakotaEthanol applies the normal purchase and sales exemption under SFAS No. 133for forward purchases of corn and sales of distiller’s grains.  Transactions initiated prior to January 1,2008 are not exempted from the accounting and reporting requirements of SFAS No. 133.  As of December 31, 2008, Dakota Ethanolis committed to purchasing 5.4 million bushels of corn on a forward contractbasis, of which 2.3 million bushels are subject to SFAS No. 133 and 3.1million bushels are exempted under the normal purchase and sales exemption.

 

DakotaEthanol enters into short-term forward, option and futures contracts as a meansof securing corn and natural gas for the ethanol plant and managing exposure tochanges in commodity and energy prices. Dakota Ethanol enters into short-termforward, option and futures contracts for sales of ethanol to manage exposure tochanges in energy prices.  All of DakotaEthanol’s derivatives are designated as non-hedge derivatives, and accordinglyare recorded at fair value with changes in fair value recognized in net income.Although the contracts are considered economic hedges of specified risks, theyare not designated as and accounted for as hedging instruments.

 

As part of its tradingactivity, Dakota Ethanol uses futures and option contracts offered throughregulated commodity exchanges to reduce risk and is exposed to risk of loss inthe market value of inventories. To reduce that risk, Dakota Ethanol generallytakes positions using forward and futures contracts and options.

 

Realized and unrealized gains and losses related toderivative contracts related to corn and natural gas purchases are included asa component of cost of revenues and derivative contracts related to ethanolsales are included as a component of revenues in the accompanying financialstatements.  The fair values of derivativecontracts are presented on the accompanying balance sheet as derivativefinancial instruments.

 

*Investments*

 

DakotaEthanol has a less than 20% investment interest in three unlisted companies inrelated industries. These investments are being accounted for by the equitymethod of accounting under which the Company’s share of net income isrecognized as income in the Company’s income statement and added to theinvestment account.  Distributions or dividends received from theinvestments are treated as a reduction of the investment account.  The Company consistently follows the practiceof recognizing the net income based on the most recent reliable data.

 

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**LAKE AREA CORN PROCESSORS, LLC**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

**DECEMBER 31, 2008 AND 2007**

 

DakotaEthanol has a less than 20% investment interest in the company’s ethanolmarketer, Renewable Products Marketing Group, LLC (RPMG).  The net incomewhich is reported in the Company’s income statement for RPMG is based on RPMG’sSeptember 30, 2008 audited results. The carrying amount of the Company’s investment was approximately$1,513,000 and $0 as of December 31, 2008 and 2007, respectively.

 

DakotaEthanol has a less than 20% investment interest in Prairie Gold VenturePartnership, LLC (PGVP), a venture capital fund investing in cellulosic ethanolproduction.  The net income which is reported in the Company’s incomestatement for PGVP is based on PGVP’s September 30, 2008 interimresults.  The carrying amount of theCompany’s investment was approximately $994,000 as of December 31, 2008.

 

DakotaEthanol has a less than 20% investment interest in Corn Oil Bio-Solutions, LLC(COBS), a developmental stage bio-diesel refinery.  The net income whichis reported in the Company’s income statement for COBS is based on COBS’ September 30,2008 interim results.  During the quarterended December 31, 2008, the project was idled due to credit conditions, assuch, the company reduced its investment to zero.

 

*GuaranteePremium*

 

The guarantee premium is amortized over the term of the relatedguarantee using the interest method of amortization.

 

*Use ofEstimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and revenues and expenses during the reporting period.Actual results could differ from those estimates.

 

*Concentrationsof Credit Risk*

 

TheCompany’s cash balances are maintained in bank depositories and periodicallyexceed federally insured limits.  Thecompany has not experienced any losses in connection with these balances.

 

*Propertyand Equipment*

 

Propertyand equipment is stated at cost. Significant additions and betterments arecapitalized, while expenditures for maintenance, repairs and minor renewals arecharged to operations when incurred. Depreciation on assets placed in serviceis computed using the straight-line method over estimated useful lives asfollows:

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

 

Equipment relates to two general categories: mechanical equipment andadministrative and maintenance equipment. Mechanical equipment generally relates to equipment for handlinginventories and the production of ethanol and related products, with usefullives of 15 to 20 years, including boilers, cooling towers, grain bins,centrifuges, conveyors, fermentation tanks, pumps and drying equipment.  Administrative and maintenance equipment isequipment with useful lives of 5 to 15 years, including vehicles, computersystems, security equipment, testing devices and shop equipment.

 

The Company reviews its property and equipment for impairment wheneverevents indicate that the carrying amount of the asset may not be recoverable.An impairment loss is recorded when the sum of the future cash flows is lessthan the carrying amount of the asset. An impairment loss is measured as theamount by which the carrying amount of the asset exceeds its fair value.

 

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**LAKE AREA CORN PROCESSORS, LLC**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

**DECEMBER 31, 2008 AND 2007**

 

*Goodwill*

 

Goodwill represents the excess of purchase price over the underlyingnet assets of business acquired.  UnderStatement of Financial Accounting Standards No. 142, goodwill is notamortized but is subject to annual impairment tests.  The Company has performed the requiredimpairment tests, which have resulted in no impairment adjustments.

 

*Earnings(loss) Per Unit*

 

Forpurposes of calculating basic earnings (loss) per unit, units issued areconsidered outstanding on the effective date of issuance. Diluted earnings perunit are calculated by including dilutive potential equity units in thedenominator.  There were no dilutiveequity units for the years ending December 31, 2008, 2007, and 2006.

 

*IncomeTaxes*

 

TheCompany is taxed as a limited liability company under the Internal RevenueCode. The income of the Company flows through to the members to be taxed at themember level rather than the corporate level. Accordingly, the Company has notax liability.

 

*Environmental Liabilities*

 

Dakota Ethanol’s operations are subject to environmental laws andregulations adopted by various governmental authorities in the jurisdiction inwhich it operates. These laws require Dakota Ethanol to investigate andremediate the effects of the release or disposal of materials at its locations.Accordingly, Dakota Ethanol has adopted policies, practices and procedures inthe areas of pollution control, occupational health and the production,handling, storage and use of hazardous materials to prevent materialenvironmental or other damage, and to limit the financial liability which couldresult from such events. Environmental liabilities are recorded when DakotaEthanol’s liability is probable and the costs can be reasonably estimated.

 

*OperatingSegment*

* *

The Company uses the “management approach” for reporting informationabout segments in annual and interim financial statements.  The management approach is based on the waythe chief operating decision-maker organizes segments within a company formaking operating decisions and assessing performance.  Reportable segments are based on products andservices, geography, legal structure, management structure and any other mannerin which management disaggregates a company. Based on the “management approach” model, the Company has determinedthat its business is comprised of a single operating segment.

 

*Risksand Uncertainties*

* *

The current U.S. recession has reduced the nation’s demand forenergy.  The recent bankruptcy filing ofone of the industry’s major producers has resulted in great economicuncertainty about the viability of ethanol. The ethanol boom of recent years has spurred overcapacity in theindustry and production capacity is currently exceeding the RFS mandates.  The average national ethanol spot marketprice has plunged over 30% since May 2008. The drop in crude oil prices from a record $150 a barrel to its recentprice of less than $40 a barrel has resulted in the price of reformulatedgasoline blendstock for oxygen blending (RBOB) dropping below $1 per gallon in December 2008.  With ethanol spot prices exceeding RBOBprices the economic incentives for blender to continue using ethanol has becomeless advantageous.  This could result insignificant reduction in the demand for ethanol.  As such, the Company may need to evaluatewhether crush margins will be sufficient to operate the plant and generateenough debt service.  In the event crushmargins become negative for an extended period of time, the Company may berequired to reduce capacity or shut down the plant.  The Company will continue to evaluate crushmargins on a regular basis and may reduce capacity or shut down depending onthe economic conditions at the time.

 

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**LAKE AREA CORN PROCESSORS, LLC**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

**DECEMBER 31, 2008 AND 2007**

 

*RecentlyIssued Accounting Pronouncements*

 

InSeptember 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*. This Statementdefines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements. SFAS No. 157 alsoemphasizes that fair value is a market-based measurement, not anentity-specific measurement, and sets out a fair value hierarchy with thehighest priority being quoted prices in active markets.  Under SFAS No. 157,fair value measurements are disclosed by level within that hierarchy. Therequirements of SFAS No. 157 are first effective for our fiscal yearbeginning January 1, 2008.  However, in February 2008, the FASBdecided that an entity need not apply this standard to nonfinancial assets andliabilities that are recognized or disclosed at fair value in the financialstatements on a nonrecurring basis until the subsequent year.  Accordingly,our adoption of this standard on January 1, 2008 is limited to financialassets and liabilities and any nonfinancial assets and liabilities recognizedor disclosed at fair value on a recurring basis.

 

In December 2007, the FASB issued SFAS No. 141 (revised2007), “Business Combinations” (“FAS 141R”), which replaces FASB StatementNo. 141. FAS 141R establishes principles and requirements for how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, any non controlling interest in theacquiree and the goodwill acquired. The Statement also establishes disclosurerequirements which will enable users to evaluate the nature and financialeffects of the business combination. FAS 141R is effective as of thebeginning of an entity’s fiscal year that begins after December 15, 2008,which will be the Company’s year beginning January 1, 2009.

 

InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statement—amendments of ARB No. 51(FAS 160).” FAS 160 states that accounting and reporting for minority interestswill be recharacterized as noncontrolling interests and classified as acomponent of equity.  The Statement also establishes reporting requirementsthat provide sufficient disclosures that clearly identify and distinguishbetween the interests of the parent and the interests of the noncontrollingowners. FAS 160 applies to all entities that prepare consolidated financialstatements, except not-for-profit organizations, but will affect only thoseentities that have an outstanding noncontrolling interest in one or moresubsidiaries or that deconsolidate a subsidiary.  This statement iseffective as of the beginning of an entity’s first fiscal year beginning after December 15,2008, which corresponds to the Company’s year beginning January 1, 2009.

 

InMarch 2008, the FASB issued SFAS No. 161, Disclosures aboutDerivative Instruments and Hedging Activities. The new standard is intended toimprove financial reporting about derivative instruments and hedging activitiesby requiring enhanced disclosures to enable investors to better understandtheir effects on an entity’s financial position, financial performance, andcash flows. It is effective for financial statements issued for fiscal yearsand interim periods beginning after November 15, 2008, which correspondsto the Company’s year beginning January 1, 2009 but early application isencouraged.

 

InMay 2008, the FASB issued SFAS No. 162, The Hierarchy of GenerallyAccepted Accounting Principles. The new standard is intended to improvefinancial reporting by identifying a consistent framework, or hierarchy, forselecting accounting principles to be used in preparing financial statementsthat are presented in conformity with U.S. generally accepted accountingprinciples (GAAP) for nongovernmental entities. Statement 162 is effective60 days following the SEC’s approval of the Public Company AccountingOversight Board Auditing amendments to AU Section 411, The Meaning ofPresent Fairly in Conformity with Generally Accepted Accounting Principles.

 

TheCompany is evaluating the effect, if any, that the adoption of these newaccounting pronouncements will have on its results of operations, financialposition, and the related disclosures.

 

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**LAKE AREA CORN PROCESSORS, LLC**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

**DECEMBER 31, 2008 AND 2007**

 

**NOTE 3 -       INVENTORY**

** **

Inventoryconsisted of the following as of December 31, 2008 and 2007:

 
| ** **      | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|-----------------|------------|-----------|------------|-----------|------------|
| Raw materials   |       | $         | 3,937,873  |      | $          | 4,927,377 |   |
| Finished goods  |       | 825,878   |       | 1,342,893 |       |
| Work in process |       | 591,870   |       | 700,039   |       |
| Parts inventory |       | 1,171,356 |       | 1,112,896 |       |
|            |       | $         | 6,526,977  |      | $          | 8,083,205 |   |

 

Includedin inventory is a lower of cost or market adjustment of approximately$1,139,000 and $0 at December 31, 2008 and 2007 respectively.

 

**NOTE 4 -       INVESTMENTS**

** **

Condensedfinancial information of the investments is as follows:

 
| ** **                     | ** ** | **RPMG**       | ** **  | **PGVP**       | ** ** |
|--------------------------------|------------|----------------|-------------|----------------|------------|
| ** **                     | ** ** | **12/31/2008** | ** **  | **12/31/2007** | ** ** | **12/31/2008** | ** ** |
| Current assets                 |       | $              | 168,260,757 |           | $          | 98,493,182 |   | $ | 7,500 |   |
| Other assets                   |       | 396,126        |        | 403,477        |       | 8,500,000 |   |
| Current liabilities            |       | 150,497,382    |        | 101,399,187    |       | 13,112 |   |
| Long-term debt                 |       | —         |        | —         |       | — |   |
| Member’s equity (deficit) |       | 18,159,501     |        | (2,502,528     | )          | 8,494,388 |   |
| Revenue                        |       | 2,501,097,434  |        | 1,540,483,604  |       | — |   |
| Net income (loss)              |       | 10,016,837     |        | (8,438,273     | )          | (241,207 | ) |
|                                |            |                |             |                |            |  |  |  |  |  |

 

**NOTE 5 -       SHORT-TERM NOTE PAYABLE**

 

OnMay 19, 2008, Dakota Ethanol renewed a revolving promissory note fromFirst National Bank of Omaha in the amount of $3,000,000. The note expires on May 18,2009 and the amount available is subject to certain restrictive covenantsestablishing minimum reporting requirements, ratios, working capital, net worthand borrowing base requirements. Interest on the outstanding principal balanceswill accrue at adjustable basis points above the lender’s base rate (5.0percent at December 31, 2008). There is a commitment fee of 3/8 percent onthe unused portion of the $3,000,000 availability. The note is collateralizedby the ethanol plant, its accounts receivable and inventories.  On December 31, 2008, Dakota Ethanol had$0 outstanding and $3,000,000 available to be drawn on the revolving promissorynote. On December 31, 2007, Dakota Ethanol had $2,333,000 outstanding and$667,000 available to be drawn on the revolving promissory note.

 

**NOTE 6 -       LONG-TERM NOTES PAYABLE**

** **

DakotaEthanol has two notes payable to First National Bank of Omaha, Nebraska (theBank) (Term Notes 2 and 5).

 

Aspart of the note payable agreements for Term Notes 2 and 5, Dakota Ethanol issubject to certain restrictive covenants establishing minimum reportingrequirements, ratios, working capital and net worth requirements. The notes arecollateralized by the ethanol plant and equipment, which had a net book valueof approximately

 

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**LAKE AREA CORN PROCESSORS, LLC**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

**DECEMBER 31, 2008 AND 2007**

 

$34,532,000on December 31, 2008, its accounts receivable and inventories. Term Note 2is subject to prepayment penalties based on the cost incurred by the Bank tobreak its fixed interest rate commitment.

 

Thebalance of Term Note 2 is due and payable in quarterly installments of $581,690through September 1, 2011. Interest on outstanding principal balances willaccrue at a fixed rate of 9 percent.

 

Thebalance of Term Note 5 is due and payable in quarterly installments of interestonly through September 1, 2011. Interest on outstanding principal balanceswill accrue at adjustable basis points above the lender’s rate (5.0 percent at December 31,2008). This rate is subject to various adjustments based on various levels ofindebtedness to net worth, as defined by the agreement. Dakota Ethanol mayelect to borrow any principal amount repaid on Term Note 5 up to $5,000,000subject to the terms of the agreement. Should Dakota Ethanol elect not toutilize this feature, the lender will assess an unused commitment fee of 3/8percent on the unused portion of the $5,000,000. In addition, the bank drawsthe checking account balance to a minimum balance on a daily basis. The excesscash pays down or the shortfall is drawn upon Term Note 5 as needed.  On December 31, 2008, Dakota Ethanol had$2,000,000 outstanding and $3,000,000 available to be drawn on Term Note 5. On December 31,2007, Dakota Ethanol had $0 outstanding and $5,000,000 available to be drawn onTerm Note 5.

 

DuringDecember 2008, Dakota Ethanol issued a note payable in 2008 related to thepurchase of land adjacent to the plant site. The note was issued for $450,000. The note matures on December 1, 2012.  The note is payable in annual installments of$112,500 plus interest.  Interest onoutstanding principal balances will accrue at a fixed rate of 7.0 percent.

 

Asof December 31, 2008, Dakota Ethanol was out of compliance with certaincovenants related to the notes held by First National Bank.  The bank has granted a waiver of the debtservice coverage ratio and working capital amount as of December 31, 2008and has restructured and waived certain future covenant requirements.

 

Thebalance of the notes payable as of December 31, 2008 and 2007 is asfollows:

 
| ** **                                 | ** ** | **2008**       | ** **    | **2007**   | ** ** |
|--------------------------------------------|------------|----------------|---------------|------------|------------|
|                                       |       |           |          |       |       |
| Note payable to First National Bank, Omaha |       |           |          |       |       |
| Term Note 2                                | ** ** | **$**          | **4,816,855** |       | $          | 6,599,140 |   |
| Term Note 5                                | ** ** | **2,000,000**  |          | —     |       |
| Note payable - Land                        | ** ** | **450,000**    |          | —     |       |
| ** **                                 |       | **7,266,855**  |          | 6,599,140  |       |
|                                       |       |           |          |       |       |
| Less current portion                       | ** ** | **(2,065,357** | )             | (1,782,960 | )          |
|                                       |       |           |          |       |       |
| ** **                                 |       | **$**          | **5,201,498** |       | $          | 4,816,180 |   |

 

Minimumprincipal payments for the next five years are as follows:

 
| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2009                                         |       | $          | 2,065,357  |   |
| 2010                                         |       | 2,249,746  |       |
| 2011                                         |       | 2,839,252  |       |
| 2012                                         |       | 112,500    |       |
|                                              |            |            |            |  |

 

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**LAKE AREA CORN PROCESSORS, LLC**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

**DECEMBER 31, 2008 AND 2007**

 

**NOTE 7 -       EMPLOYEE BENEFIT PLANS**

** **

DakotaEthanol maintains a 401(k) plan for the employees who meet the eligibilityrequirements set forth in the plan documents. Dakota Ethanol matches apercentage of the employees’ contributed earnings. Employer contributions tothe plan totaled approximately $39,000, $45,000 and $26,000 for the years endedDecember 31, 2008, 2007 and 2006, respectively.

 

**NOTE 8 -       FAIR VALUE MEASUREMENTS**

** **

Effective January 1, 2008, the Company partially adopted SFAS No. 157,Fair Value Measurements, which defines fair value, establishes a framework formeasuring fair value, and expands disclosure for those assets and liabilitiescarried on the balance sheet on a fair value basis.  The FASB has deferred the effective date ofSFAS No. 157 until 2009 for nonfinancial assets and nonfinancialliabilities which are recognized at fair value on a nonrecurring basis.

 

The Company’s balance sheet contains derivative financial instrumentsthat are recorded at fair value on a recurring basis.  SFAS No. 157 requires that assets andliabilities carried at fair value be classified and disclosed according to theprocess for determining fair value. There are three levels of determining fair value.

 

Level 1 uses quoted market prices in active markets for identicalassets or liabilities.

 

Level 2 uses observable market based inputs or unobservable inputs thatare corroborated by market data.

 

Level 3 uses unobservable inputs that are not corroborated by marketdata.

 

A description of the valuation methodologies used for instrumentsmeasured at fair value, as well as the general classification of suchinstruments pursuant to the valuation hierarchy, is set forth below. Thesevaluation methodologies were applied to all of the Company’s financial assetsand financial liabilities carried at fair value effective January 1, 2008.

 

*Derivative financial instruments*. Commodity futures and options contracts arereported at fair value utilizing Level 1 inputs. For these contracts, theCompany obtains fair value measurements from an independent pricing service.The fair value measurements consider observable data that may include dealerquotes and live trading levels from the CBOT and NYMEX markets. Over-the-countercommodity options contracts are reported at fair value utilizing Level 2inputs.  For these contracts, the Companyobtains fair value measurements from an independent pricing service.  The fair value measurements considerobservable data that may include dealer quotes and live trading levels from theover-the-counter markets.  Forwardpurchase contracts are reported at fair value utilizing Level 2 inputs.  For these contracts, the Company obtains fairvalue measurements from local grain terminal bid values. The fair valuemeasurements consider observable data that may include live trading bids fromlocal elevators and processing plants which are based off the CBOT markets.

 

The following table summarizes financial assets and financialliabilities measured at fair value on a recurring basis as of December 31,2008, segregated by the level of the valuation inputs within the fair valuehierarchy utilized to measure fair value:

 
| ** **                       | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|----------------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Assets:                          |       |      |       |             |       |             |       |             |       |
|                             |       |      |       |             |       |             |       |             |       |
| Derivative financial instruments |       | $         | 373,313    |             | $          | 373,313          |       | $                | —     |   | $ | — |   |
|                             |       |      |       |             |       |             |       |             |       |
| Liabilities:                     |       |      |       |             |       |             |       |             |       |
|                             |       |      |       |             |       |             |       |             |       |
| Derivative financial instruments |       | $         | 97,912     |             | $          | —           |       | $                | 97,912     |   | $ | — |   |

 

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**LAKE AREA CORN PROCESSORS, LLC**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

**DECEMBER 31, 2008 AND 2007**

 

Certain financial assets and financial liabilities are measured at fairvalue on a nonrecurring basis; that is, the instruments are not measured atfair value on an ongoing basis but are subject to fair value adjustments incertain circumstances (for example, when there is evidence of impairment).Financial assets and financial liabilities measured at fair value on a non-recurringbasis were not significant at December 31, 2008.

 

SFASNo. 107, Disclosures about Fair Value of Financial Instruments, requiresdisclosure of the fair value of financial assets and financial liabilities,including those financial assets and financial liabilities that are notmeasured and reported at fair value on a recurring basis or nonrecurringbasis.  The methodologies for estimatingthe fair value of financial assets and financial liabilities that are measuredat fair value on a recurring or non recurring basis are discussed above.  The methodologies for other financial assetsand financial liabilities are discussed below.

 

The Company believes the carrying amount of cash, cash equivalents,accounts receivable, due from broker, derivative instruments, and accountspayable approximates fair value due to the short maturity of these instruments.

 

The carrying amount of long-term obligationsat December 31, 2008 of $7,527,811 had an estimated fair value ofapproximately $7,700,926 based on estimated interest rates for comparabledebt.  The carrying amount and fair valuewere $6,922,416 and $7,068,108 respectively at December 31, 2007.

 

TheCompany believes the carrying amount of the short-term note payable at December 31,2007 approximates fair value due to the short maturity of the instrument.

 

**NOTE 9 -       COMMITMENTS, CONTINGENCIES AND AGREEMENTS**

** **

Dakota Ethanol has entered into contracts and agreements regarding theoperation and management of the ethanol plant.

 

Natural Gas —The agreement provides Dakota Ethanol with a fixed transportation rate fornatural gas for a ten-year term through September 2011, renewable forten-year terms. The agreement does not require minimum purchases of natural gasduring their initial term.

 

Electricity —The agreement provides Dakota Ethanol with electric service for a term of tenyears through September 2011, renewable for five-year periods. Theagreement sets rates for energy usage based on market rates and requires aminimum purchase of electricity each month during the initial term of theagreement.

 

Expensesrelated to the agreement for the purchase of electricity and natural gas wereapproximately $14,031,000, $12,426,000, and $13,227,000, for the years ended December 31,2008, 2007 and 2006, respectively.

 

Minimumannual payments during the term of the electricity agreement are as follows:

 
| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2009                                         |       | $          | 308,000    |   |
| 2010                                         |       | 308,000    |       |
| 2011                                         |       | 206,000    |       |
|                                              |            |            |            |  |

 

EthanolFuel Marketing Agreement— Dakota Ethanol has an agreement with RPMG (a related party, see note 2), ajoint venture of ethanol producers, for the sale, marketing, billing andreceipt of payment and other administrative services for all ethanol producedby the plant. The agreement expires on March 31, 2009, and isautomatically renewed for successive one-year terms unless terminated 90 daysprior to expiration.  Our intent is torenew the agreement.

 

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**LAKE AREA CORN PROCESSORS, LLC**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

**DECEMBER 31, 2008 AND 2007**

 

Distiller’sGrain Marketing Agreement — Dakota Ethanol has an agreement with RPMG (a related party, see note2), for the marketing of all distiller’s dried grains produced by theplant.  The agreement expires on July 15,2010, and is automatically renewed for successive one-year terms unlessterminated 180 days prior to expiration.

 

RailCar Lease Agreements —Dakota Ethanol has agreements with Chicago Freight Car Leasing Co. and TrinityIndustries Leasing Co. for rail car leases for the shipment of Dakota Ethanol’sdistiller’s dried grains.    The leasesexpire in October and December of 2010. Costs related to the leasesfor the years ended December 31, 2008 and 2007 were $859,800 for bothyears.

 

Minimumannual payments during the term of the rail car lease agreement are as follows:

 
| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2009                                         |       | $          | 851,000    |   |
| 2010                                         |       | 780,000    |       |
|                                              |            |            |            |  |

 

RiskManagement Agreement —Dakota Ethanol has an agreement with John Stewart and Associates, MinnesotaBranch for the risk management consulting related to corn and energyrequirements of the plant. The agreement expires on December 1, 2009, andis renewable for successive one-month terms thereafter.

 

Dakota Ethanol receives an incentive payment from the State of SouthDakota to produce ethanol. In accordance with the terms of this arrangement,revenue is recorded based on ethanol sold. Incentive revenue of $623,515, $750,000, and $775,910, was recorded forthe years ended December 31, 2008, 2007 and 2006, respectively.  Dakota Ethanol did not receive the annualmaximum for the 2008 program year due to budget constraints on the State ofSouth Dakota program and will not likely receive the annual maximum under the2009 program year.

 

As of December 31, 2008, Dakota Ethanol is committed to purchasing5.4 million bushels of corn on a forward contract basis through December 31,2009, valued at approximately $26.6 million. Dakota Ethanol has a derivative financialinstrument liability of approximately $97,000 related to the forward contractedpurchases of corn.  Dakota Ethanol alsohas a lower of cost or market impairment liability of approximately $2.7million related to the forward corn purchase contracts and corn inventory.  This was a lower of cost or market adjustmentbased on estimates of the value of future corn contracts and corn inventoryrelated to the price of producing ethanol. The corn purchase contracts represent 31% of the annual plant corn usage.  Further, Dakota Ethanol is committed topurchasing 479,000 mmBtu’s of natural gas for 2009, valued at approximately$3,679,000.  The natural gas purchasesrepresent approximately 32% of the annual plant requirements.

 

The following commitments, contingencies and agreements are withrelated parties.

 

Eachcapital unit holder has entered into a corn delivery agreement with theCompany. For each unit owned, one-fourth bushel of corn is required to bedelivered annually. The price paid for the corn is the average corn price forthe applicable four-month period (trimester) based on several local grainelevators’ cash corn price. Members can opt out of delivery agreement and theaverage price if they choose to do so. Based on the number of units outstanding,1,850,000 bushels of corn will be delivered annually by the unit holders. Thisrepresents approximately 13 percent of the corn required for the operation ofthe plant at its 40,000,000 gallon capacity. Purchases of corn from corndelivery agreements and cash contracts from the Company’s members totaledapproximately $8,424,000, $10,660,000, and $8,034,000 for the years ended December 31,2008, 2007, and 2006, respectively, of which $352,000, $726,000, and $1,156,000was recorded as a liability at December 31, 2008, 2007, and 2006,respectively.

 

Environmental — During the year ended December 31,2002, management became aware that the ethanol plant may have exceeded certainemission levels allowed by their operating permit. The Company has disclosedthe situation to the appropriate state regulatory agency and has taken steps toreduce the emissions to acceptable levels.

 

Construction Project — Dakota Ethanol hasentered into an agreement for the design and installation of corn oilextraction equipment. The total value of the project is $1,846,000. As ofDecember 31, 2008, Dakota Ethanol has paid $846,160 with $403,840 in accountspayable and $596,000 yet to be completed. The project is expected to becompleted during the first quarter of 2009. Dakota Ethanol plans to pay for theproject through long-term financing and cash flows from operations.

 

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**LAKE AREA CORN PROCESSORS, LLC**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

**DECEMBER 31, 2008 AND 2007**

 

Managementhas not accrued a liability for environmental remediation costs since thecosts, if any, cannot be estimated.

 

**NOTE 10 -     RELATED PARTY TRANSACTIONS**

** **

OnApril, 1 2007, Dakota Ethanol purchased a 9% interest in RPMG, in which DakotaEthanol has entered into an ethanol marketing agreement for the exclusiverights to market, sell and distribute the entire ethanol inventory produced byDakota Ethanol.  The marketing fees are included in net revenues.

 

OnAugust 1, 2008, Dakota Ethanol entered into a dried distiller’s grainsmarketing agreement with RPMG for the exclusive rights to market, sell anddistribute the entire dried distiller’s grains inventory produced by Dakota Ethanol.

 

Salesand marketing fees related to the agreements are as follows:

 
| ** **                                  | ** ** | **Years Ended December 31,** | ** **     |
|---------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                  | ** ** | **2008**                                    | ** **     | **2007** | ** ** | **2006** | ** ** |
|                                        |       |                                        |           |   |   |   |   |
| Sales ethanol                               | ** ** | **$**                                       | **96,258,317** |   | $ | 67,181,000 |   | $ | — |   |
| Sales distiller’s grains               |       | 2,843,819                                   |           | — |   | — |   |
|                                        |       |                                        |           |   |   |   |   |
| Marketing fees ethanol                      |       | 193,360                                     |           | 137,000 |   |   |   |
| Marketing fees distillers grains            |       | 33,748                                      |           | — |   | — |   |
|                                        |       |                                        |           |   |   |   |   |
| Amounts due included in accounts receivable |       | 2,049,739                                   |           | 4,424,712 |   | — |   |
|                                             |            |                                             |                |  |  |  |  |  |  |  |

 

Additionalagreements with related parties are included in Note 9.

 

**NOTE 11 -     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 conjunctionwith the refunding of the tax increment financing (TIF) bond issued by Lake Countyin 2001, of which Dakota Ethanol was the 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 guaranteeexpires in December of 2018.

 

Themaximum amount of estimated future payments on the taxable bond debt service is$1,522,168 as of December 31, 2008. The carrying amount of the guaranteeliability on Dakota Ethanol’s balance sheet is $260,956, which represents theestimated shortfall between the taxable bond amount and the amount of taxesestimated to be collected on Dakota Ethanol’s property.

 

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** **

**LAKE AREACORN PROCESSORS, LLC**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

 

Estimatedmaturities of the guarantee for the next five years are as follows:

 
| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2009                                         |       | $          | 60,678     |   |
| 2010                                         |       | 52,485     |       |
| 2011                                         |       | 52,382     |       |
| 2012                                         |       | 52,145     |       |
| 2013                                         |       | 34,540     |       |
|                                              |            |            |            |  |

 

DakotaEthanol has no recourse from third parties or collateral held by third partiesrelated to the guarantee.

 

Management has applied the guidance from Financial Accounting StandardsBoard Interpretation No. 45, (FIN 45) related to accounting forguarantee obligations. Management has determined the probability weightedpresent value of the estimated cash flows related to the guarantee obligationand recorded a liability and related asset of $141,263 as of December 31,2008.

 

Estimated amortization of the guarantee premium for the next five yearsis as follows:

 
| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2009                                         |       | $          | 48,841     |   |
| 2010                                         |       | 37,390     |       |
| 2011                                         |       | 27,375     |       |
| 2012                                         |       | 17,381     |       |
| 2013                                         |       | 7,709      |       |
|                                              |            |            |            |  |

 

**NOTE 12 -**              RISK MANAGEMENT

** **

TheCompany’s activities expose it to a variety of market risks, including theeffects of changes in commodity prices.  These financial exposures aremonitored and managed by the Company as an integral part of its overallrisk-management program.  The Company’s risk management program focuses onthe unpredictability of financial and commodities markets and seeks to reducethe potentially adverse effects that the volatility of these markets may haveon its operating results.

 

Toreduce price risk caused by market fluctuations, the Company generally followsa policy of using exchange traded futures and options contracts to reduce itsnet position of merchandisable agricultural commodity inventories and forwardcash purchase and sales contracts and uses exchange traded futures and optionscontracts to reduce price risk.  Exchange-traded futures and optionscontracts are valued at market price.  Changes in market price of contractsrelated to corn and natural gas are recorded in cost of goods sold and changesin market prices of contracts related to sale of ethanol are recorded inrevenues.

 

Thecompany has deemed all forward contracts entered into subsequent to January 1,2008 as “normal purchases”, as such, unrealized gains and losses on forwardcontracts are deemed “normal purchases” under FASB Statement No. 133, asamended and, therefore, are not marked to market in the Company’s financialstatements.  Prior to January 1,2008 the Company treated these forward contracts as derivatives.

 

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** **

**LAKE AREACORN PROCESSORS, LLC**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

 

AtDecember 31, 2008, 2007 and 2006 the realized and unrealized gains(losses) and fair value of derivative instruments is as follows:

 
| ** **                                                                 | ** ** | **Financial**               | ** ** | **Years Ended December 31,** | ** **      |
|----------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------------------|-----------------|
| ** **                                                                 | ** ** | **Statement Location** | ** ** | **2008**                                    | ** **      | **2007** | ** ** | **2006** | ** ** |
|                                                                       |       |                        |       |                                        |            |   |   |   |   |
| Futures and options contracts                                              |       | Current  Assets or          | ** ** | **$**                                       | **373,313**     |   | $ | 1,228,960 |   | $ | 4,705,900 |   |
| Forward contracts                                                          |       | (Current  Liabilities)      |       | **$**                                       | **(97,912**     | ) | $ | 7,771,283 |   | $ | 5,410,251 |   |
|                                                                       |       |                        |       |                                        |            |   |   |   |   |
| Net realized and unrealized gains (losses)  related to purchase contracts: |       |                        |       |                                        |            |   |   |   |   |
| Futures and options contracts                                              |       | Cost of  Revenues           | ** ** | **$**                                       | **(15,542,120** | ) | $ | (1,119,528 | ) | $ | 4,110,827 |   |
| Forward contracts                                                          |       | Cost of  Revenues           | ** ** | **$**                                       | **(9,052,358**  | ) | $ | 2,377,686 |   | $ | 7,337,027 |   |
|                                                                       |       |                        |       |                                        |            |   |   |   |   |
| Net realized and unrealized gains (losses)  related to sales contracts     |       | Revenues                    | ** ** | **$**                                       | **—**      |   | $ | — |   | $ | 99,966 |   |

 

**NOTE 13 -**              SUBSEQUENT EVENTS

** **

OnJanuary 16, 2009, we entered into an amendment to our credit agreementswith FNBO.  The primary purposes of theseamendments were to increase our revolving line of credit with FNBO from$3,000,000 to $5,000,000 and to make changes to the covenants applicable to ourcredit agreements.  We agreed to provideFNBO more information regarding our hedging transactions and to makeadjustments to our hedging strategies. We also agreed to raise an additional $2,000,000 in subordinated debt byMarch 31, 2009 and to secure alternate financing for our corn oilextraction equipment by April 30, 2009. In addition, we agreed not to make any distributions to our memberswithout FNBO’s prior approval.

 

In order to comply with the conditions FNBOimposed regarding raising additional subordinated debt financing, we are in theprocess of conducting a private placement offering of subordinated unsecureddebt securities.  The debt securitiesthat we are offering will not be registered with the Securities and ExchangeCommission.  Therefore, the debtsecurities may not be offered or sold without an exemption from theregistration requirements of applicable securities laws.  We are offering the debt securities only to alimited number of accredited investors in order to comply with applicable SECregulations.  As of March 24, 2009,we have raised $1,369,000 in subordinated debt through this offering.

 

Asof March 31, 2009, we anticipate being out of compliance with the same twofinancial covenants that we were out of compliance with as of December 31,2008. In additional, we do not anticipate that we will be able to raise theentire $2,000,000 in subordinated debt financing by March 31, 2009. As aresult, we entered into another amendment to our credit agreements with FNBO atthe end of March 2009 in order to secure a waiver of these loan covenantcompliance issues. Specifically, FNBO waived our non-compliance with our debtservice coverage ratio and our working capital covenants as of December 31,2008 and March 31, 2009. In addition, FNBO changed the manner in which wecalculate our debt service coverage ratio until December 31, 2009 to avoidprojected future non-compliance with our debt service coverage ratio covenant.FNBO also extended our deadline for raising the additional $2,000,000 insubordinated debt to May 18, 2009.

 

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**LAKE AREACORN PROCESSORS, LLC**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

 

**NOTE 14 -**              QUARTERLY FINANCIALREPORTING (UNAUDITED)

** **

Summaryquarterly results are as follows:

 
| ** **                                 | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|--------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                 | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Year ended December 31, 2008          |       |        |       |        |       |        |       |        |       |
| Total revenues                             |       | $           | 26,478,012 |        | $          | 29,916,456  |       | $           | 31,200,349 |   | $ | 24,183,771 |   |
| Gross profit (loss)                        |       | 12,049,847  |       | 11,643,197  |       | (20,416,898 | )          | (16,910,614 | )          |
| Income (loss) from operations              |       | 10,948,791  |       | 10,654,549  |       | (21,252,764 | )          | (17,519,318 | )          |
| Net income (loss)                          |       | 10,736,498  |       | 10,502,321  |       | (21,359,855 | )          | (16,492,413 | )          |
| Basic and diluted earnings (loss) per unit |       | 0.36        |       | 0.35        |       | (0.72       | )          | (0.55       | )          |
|                                       |       |        |       |        |       |        |       |        |       |
| Year ended December 31, 2007          |       |        |       |        |       |        |       |        |       |
| Total revenues                             |       | $           | 27,769,149 |        | $          | 27,647,758  |       | $           | 24,466,924 |   | $ | 23,855,868 |   |
| Gross profit                               |       | 3,371,737   |       | 7,872,608   |       | 5,419,955   |       | 6,097,732   |       |
| Income from operations                     |       | 2,454,649   |       | 6,943,447   |       | 4,485,537   |       | 5,156,586   |       |
| Net income                                 |       | 2,322,466   |       | 6,835,926   |       | 4,474,171   |       | 4,372,642   |       |
| Basic and diluted earnings per unit        |       | 0.08        |       | 0.23        |       | 0.15        |       | 0.15        |       |
|                                       |       |        |       |        |       |        |       |        |       |
| Year ended December 31, 2006          |       |        |       |        |       |        |       |        |       |
| Total revenues                             |       | $           | 22,684,333 |        | $          | 29,579,774  |       | $           | 27,531,613 |   | $ | 24,093,692 |   |
| Gross profit                               |       | 6,620,601   |       | 14,006,367  |       | 13,713,311  |       | 18,756,715  |       |
| Income from operations                     |       | 5,897,503   |       | 13,157,052  |       | 12,502,276  |       | 17,601,318  |       |
| Net income                                 |       | 4,990,770   |       | 11,431,056  |       | 12,313,474  |       | 17,300,492  |       |
| Basic and diluted earnings per unit        |       | 0.17        |       | 0.39        |       | 0.42        |       | 0.57        |       |

 

Theabove quarterly financial data is unaudited, but in the opinion of management,all adjustments necessary for the fair presentation of the selected data forthese interim periods presented have been included.

 

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| **ITEM 9.** | ** ** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.** |
|-------------|------------|--------------------------------------------------------------------------------------------|

 

None

 
| **ITEM 9A.** | ** ** | **CONTROLS  AND PROCEDURES.** |
|--------------|------------|-------------------------------|

 

**DisclosureControls and Procedures**

 

Ourmanagement, including our President and Chief Executive Officer (the principalexecutive officer), Scott Mundt, along with our Chief Financial Officer (theprincipal financial officer), Robbi Buchholtz, have reviewed and evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) andRule 15d-15(e) under the Securities Exchange Act of 1934, as amended)as of December 31, 2008.  Based onthis review and evaluation, these officers have concluded that our disclosurecontrols and procedures are effective to ensure that information required to bedisclosed in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods requiredby the forms and rules of the Securities and Exchange Commission; and toensure that the information required to be disclosed by an issuer in thereports that it files or submits under the Exchange Act is accumulated andcommunicated to our management including our principal executive and principalfinancial officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.

 

**InternalControl Over Financial Reporting**

 

InherentLimitations Over Internal Controls

 

Ourinternal control over financial reporting is designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. Our internal control over financial reportingincludes those policies and procedures that:

 

(i)                                       pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of our assets;

 

(ii)                                    provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that our receipts and expenditures are being made only inaccordance with authorizations of our management and directors; and

 

(iii)                                 provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use, or disposition of our assets that could have a material effect on thefinancial statements.

 

Management,including our Chief Executive Officer and Chief Financial Officer, does notexpect that our internal controls will prevent or detect all errors and allfraud. A control system, no matter how well designed and operated, can provideonly reasonable, not absolute, assurance that the objectives of the controlsystem are met. Further, the design of a control system must reflect the factthat there are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all controlsystems, no evaluation of internal controls can provide absolute assurance thatall control issues and instances of fraud, if any, have been detected. Also,any evaluation of the effectiveness of controls in future periods are subjectto the risk that those internal controls may become inadequate because ofchanges in business conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

Management’sAnnual Report on Internal Control Over Financial Reporting

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting (as defined in Rule 13a-15(f) underthe Securities Exchange Act of 1934, as amended). Management

 

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conductedan evaluation of the effectiveness of our internal control over financial reportingbased on the criteria set forth in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).Based on this evaluation, management has concluded that our internal controlover financial reporting was effective as of December 31, 2008.

 

Thisannual report does not include an attestation report of our registered publicaccounting firm regarding internal control over financial reporting.  Management’s report was not subject toattestation by our registered public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit us to provide onlymanagement’s report in this annual report.

 

Changesin Internal Control Over Financial Reporting

 

Therewere no changes in our internal control over financial reporting during thefourth quarter of our 2008 fiscal year, which were identified in connectionwith management’s evaluation required by paragraph (d) of rules 13a-15and 15d-15 under the Exchange Act, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**ITEM 9B.         OTHERINFORMATION.**

 

None.

 

**PART III****.**

 

Pursuantto General Instruction G(3), we omit Part III, Items 10, 11, 12, 13 and 14and incorporate such items by reference to an amendment to this Annual Reporton Form 10-K or to a definitive information statement to be filed with theSecurities and Exchange Commission within 120 days after the close of thefiscal year covered by this Annual Report (December 31, 2008).

 

**ITEM****10.****         ********DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.**

 

The Information required by this Item is incorporated by reference tothe 2009 Information Statement.

 

**ITEM 11.****         ****EXECUTIVE COMPENSATION**

 

The Information required by this Item is incorporated by reference tothe 2009 Information Statement.

 
| **ITEM 12.** | **SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|-----------------------------------------------------------------------------------------------------|

 

The Information required by this Item is incorporated by reference tothe 2009 Information Statement.

 

**ITEM 13.****         ****CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

The information required by this Item isincorporated by reference to the 2009 Information Statement.

 

**ITEM 14.****         ****PRINCIPAL ACCOUNTANT FEESAND SERVICES**

 

The Information required by this Item is incorporated by reference tothe 2009 Information Statement.

 

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**PART IV.**

 

**ITEM 15.****                                                 ****EXHIBITS****, FINANCIAL STATEMENT SCHEDULES****.**

 

Thefollowing exhibits and financial statements are filed as part of, or areincorporated by reference into, this report:

 

(1)         Financial Statements – Reference is made tothe “Index to Financial Statements” of Lake Area Corn Processors, LLC locatedunder Part II Item 8 of this report for a list of the financial statementsand schedules for the fiscal year ended December 31, 2008, included herein.

 

(2)         All supplemental schedules are omittedbecause of the absence of conditions under which they are required or becausethe information is shown in the Consolidated Financial Statements or notesthereto.

 

(3)         The exhibits we have filed herewith orincorporated by reference herein are identified in the Exhibit Index setforth below.

 

The following exhibits arefiled as part of this report.  Exhibitspreviously filed are incorporated by reference, as noted.

** **
| **Exhibit  No.** | ** ** | **Exhibit**                                                                                                                                      | ** ** | **Filed  Herewith** | ** ** | **Incorporated by Reference**                                                                                                                                |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Plan of Reorganization.                                                                                                                          |       |                |       | Filed as Exhibit 2.1 on the  registrant’s Form S-4 filed with the Commission on August 2, 2001  and incorporated by reference herein.    |
|             |       |                                                                                                                                             |       |                |       |                                                                                                                                                         |
| 3.1              |       | Articles of organization of the registrant.                                                                                                      |       |                |       | Filed as Exhibit 3.1 on the  registrant’s Form S-4 filed with the Commission on August 2, 2001  and incorporated by reference herein.    |
|             |       |                                                                                                                                             |       |                |       |                                                                                                                                                         |
| 3.2              |       | Amended and restated operating agreement of  the registrant.                                                                                     |       |                |       | Filed as Exhibit 3.6 on the  registrant’s Form 10-K filed with the Commission on March 31, 2005  and incorporated by reference herein.   |
|             |       |                                                                                                                                             |       |                |       |                                                                                                                                                         |
| 3.3              |       | First amendment to the amended and restated  operating agreement of the registrant.                                                              |       |                |       | Filed as Exhibit 99.1 on the  registrant’s Form 8-K filed with the Commission on March 19, 2007  and incorporated by reference herein.   |
|             |       |                                                                                                                                             |       |                |       |                                                                                                                                                         |
| 10.1             |       | Twelfth Amendment to the Construction Loan  Agreement dated January 12, 2009 between First National Bank of Omaha  and Dakota Ethanol, LLC. |       |                |       | Filed as Exhibit 99.1 on the registrant’s  Form 8-K filed with the Commission on January 20, 2009 and  incorporated by reference herein. |
|             |       |                                                                                                                                             |       |                |       |                                                                                                                                                         |
| 10.2             |       | Revolving Promissory Note dated  January 12, 2009 between First National Bank of Omaha and Dakota  Ethanol, LLC.                            |       |                |       | Filed as Exhibit 99.2 on the  registrant’s Form 8-K filed with the Commission on January 20, 2009  and incorporated by reference herein. |
|             |       |                                                                                                                                             |       |                |       |                                                                                                                                                         |
| 10.3             |       | Promissory Note (Term Note 5 Reducing  Revolver) dated January 12, 2009 between First National Bank of Omaha  and Dakota Ethanol, LLC.      |       |                |       | Filed as Exhibit 99.3 on the  registrant’s Form 8-K filed with the Commission on January 20, 2009  and incorporated by reference herein. |
|             |       |                                                                                                                                             |       |                |       |                                                                                                                                                         |
| 10.4             |       | Distillers Grains Marketing Agreement dated  July 15, 2008 between RPMG, Inc. and Dakota Ethanaol, LLC. +                              |       |                |       | Filed as Exhibit 10.1 on the  registrant’s Form 10-Q filed with the Commission on August 14, 2008  and incorporated by reference herein. |

 

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| 10.5   |   | Contribution Agreement between Renewable Products Marketing Group,  LLC and Dakota Ethanol, LLC dated April 1, 2007.                        |   |   |   | Filed as Exhibit 10.1 on the  registrant’s Form 10-Q filed with the Commission on August 14, 2007  and incorporated by reference herein.  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 10.6   |   | Member Ethanol Fuel Marketing Agreement between Renewable Products  Marketing Group, LLC and Dakota Ethanol, LLC dated April 1, 2007.       |   |   |   | Filed as Exhibit 10.2. on the  registrant’s Form 10-Q filed with the Commission on August 14, 2007  and incorporated by reference herein. |
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 10.7   |   | Addendum to Water Purchase Agreement dated February 28, 2007  between Big Sioux Community Water Systems, Inc. and Dakota Ethanol, LLC. |   |   |   | Filed as Exhibit 10.1 on the registrant’s  Form 10-K filed with the Commission on March 30, 2007.                                         |
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 10.8   |   | Eighth Amendment to the Construction Loan Agreement dated  June 30, 2006 between First National Bank of Omaha and Dakota Ethanol,  LLC.     |   |   |   | Filed as Exhibit 10.2 on the  registrant’s Form 10-Q filed with the Commission on August 14, 2006  and incorporated by reference herein.  |
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 10.9   |   | Sixth Amendment to the Construction Loan Agreement dated  March 23, 2006 between First National Bank of Omaha and Dakota Ethanol,  LLC.     |   |   |   | Filed as Exhibit 10.1 on the  registrant’s Form 10-Q filed with the Commission on May 15, 2006  and incorporated by reference herein.     |
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 10.10  |   | Risk Management Agreement dated November 28, 2005 between  FCStone, LLC and Dakota Ethanol, LLC.                                            |   |   |   | Filed as Exhibit 10.1 on the  registrant’s Form 8-K filed with the Commission on December 2, 2005  and incorporated by reference herein.  |
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 10.11  |   | Distiller’s Grain Marketing Agreement dated November 28, 2005  between Commodity Specialists Company and Dakota Ethanol, LLC.          |   |   |   | Filed as Exhibit 10.2 on the registrant’s Form 8-K filed with the Commission on December 2, 2005 and incorporated by reference  herein.   |
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 10.12  |   | Fourth Amendment to Construction Loan Agreement dated April 22,  2005 between First National Bank of Omaha and Dakota Ethanol, LLC.         |   |   |   | Filed as Exhibit 10. 1 on the registrant’s Form 10-Q filed  with the Commission on May 16, 2005 and incorporated by reference  herein.    |
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 10.13  |   | Revolving Promissory Note dated April 21, 2005 between First  National Bank of Omaha and Dakota Ethanol, LLC.                               |   |   |   | Filed as Exhibit 10.2 on the registrant’s Form 10-Q filed  with the Commission on May 16, 2005 and incorporated by reference  herein.     |
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 10.14  |   | Employment Agreement between Scott Mundt and Dakota Ethanol, LLC  dated October 17, 2005.                                                   |   |   |   | Filed as Exhibit 10.9 on the registrant’s Form 10-K filed with the Commission on March 30, 2006 and incorporated by reference herein.     |
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 10.15  |   | Thirteenth Amendment to the Construction Loan Agreement dated March  31, 2009 between First National Bank of Omaha and Dakota Ethanol, LLC.      |   | X      |   | Filed herewith                                                                                                                                                |
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 31.1   |   | Certificate Pursuant to 17 CFR  240.13a-14(a)                                                                                                    |   | X      |   | Filed herewith                                                                                                                                                |
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 31.2   |   | Certificate Pursuant to 17 CFR  240.13a-14(a)                                                                                                    |   | X      |   | Filed herewith                                                                                                                                                |
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 32.1   |   | Certificate Pursuant to 18 U.S.C.  Section 1350                                                                                             |   | X      |   | Filed herewith                                                                                                                                                |
|   |   |                                                                                                                                             |   |   |   |                                                                                                                                                          |
| 32.2   |   | Certificate Pursuant to 18 U.S.C.  Section 1350                                                                                             |   | X      |   | Filed herewith                                                                                                                                                |

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   |                |   | LAKE AREA CORN PROCESSORS, LLC                                        |
|--------|---------------------|--------|-----------------------------------------------------------------------|
|   |                |   |                                                                  |
|   |                |   |                                                                  |
| Date:  | March 31, 2009 |   | /s/ Scott Mundt                                                       |
|   |                |   | Scott Mundt                                                           |
|   |                |   | President and Chief Executive Officer  (Principal Executive Officer)  |
|   |                |   |                                                                  |
|   |                |   |                                                                  |
| Date:  | March 31, 2009 |   | /s/ Robbi Buchholtz                                                   |
|   |                |   | Robbi Buchholtz                                                       |
|   |                |   | Chief Financial Officer  (Principal Financial and Accounting Officer) |

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, this reporthas been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated.

 

 
| Date: March 31, 2009 |   | /s/ Douglas Van Duyn      |
|---------------------------|--------|---------------------------|
|                      |   | Douglas Van Duyn, Manager |
|                      |   |                      |
|                      |   |                      |
| Date: March 31, 2009 |   | /s/ Brian Woldt           |
|                      |   | Brian Woldt, Manager      |
|                      |   |                      |
|                      |   |                      |
| Date: March 31, 2009 |   | /s/ Randy Hansen          |
|                      |   | Randy Hansen, Manager     |
|                      |   |                      |
|                      |   |                      |
| Date: March 31, 2009 |   | /s/ Rick Kasperson        |
|                      |   | Rick Kasperson, Manager   |
|                      |   |                      |
|                      |   |                      |
| Date: March 31, 2009 |   | /s/ Ronald Alverson       |
|                      |   | Ronald Alverson, Manager  |
|                      |   |                      |
|                      |   |                      |
| Date: March 31, 2009 |   | /s/ Dale Thompson         |
|                      |   | Dale Thompson, Manager    |
|                      |   |                      |
|                      |   |                      |
| Date: March 31, 2009 |   | /s/ Todd Brown            |
|                      |   | Todd Brown, Manager       |

 

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