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

 

**Washington,D.C. 20549**

 

**FORM l0-K**

 

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

 

**For the fiscal yearended December 31, 2004**

 

**Commissionfile****number 333-66552**

 

**LakeArea Corn Processors, LLC**

(Exact name of registrant as specified in itscharter)

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

 

Securities registered under Section 12(b) ofthe Exchange Act:

 

**None**

 

Securities registered under Section 12(g) ofthe Exchange Act:

 

**Class A Capital Units**

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

ý  Yes     o  No

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K.   ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined underthe Exchange Act of Rule 12b-2).    o Yes     ý  No

 

As of June 30,2004, the aggregate market value of the registrant’s Class A capital unitsheld by non-affiliates of the registrant was $25,345,336 computed using thelast sales price of $0.90 per capital units of the registrant’s capital unitson June 30, 2004, the last business day of the registrant’s most recentlycompleted second fiscal quarter.

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date. As of the dateof this filing, there were 29,620,000 Class A capital units of theregistrant outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Part IIIof Form 10-K - Portions of the Proxy Statement for 2005 Annual Meeting ofMembers.

 

 

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### **PART I**

 

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

 

**Overview**

 

LakeArea Corn Processors, LLC (also referred to as “we,” “our,” or “us”) is a SouthDakota limited liability company that owns and manages an 88% interest inDakota Ethanol, LLC (also referred to as “Dakota Ethanol”), with severalmembers of the Broin family owning the remaining minority interest. DakotaEthanol owns and operates an ethanol plant near Wentworth, South Dakota whichproduces ethanol and distiller’s grains.  The plant commenced productionof ethanol and distiller’s grains on September 4, 2001.

 

Dakota Ethanol’s business is theproduction and sale of ethanol and distiller’s grains from the processing ofcorn. Corn is supplied to Dakota Ethanol from our members whoare primarily local agricultural producers and from purchases of corn on theopen market. Ethanol is sold to a company that markets and sells the ethanol toan array of customers located throughout the continental United States.Distiller’s grains are exclusively marketed and sold through a company tolivestock producers as livestock feed.

 

DakotaEthanol plans to maintain a competitive position in the marketplace by producinghigh quality ethanol and distiller’s grains and operating an efficientoperation at the lowest possible costs. To accomplish this end, Dakota Ethanolplans to continue to work with Broin Management, LLC and other Broin-relatedentities, in searching for new production methods and technologies andimproving plant operations.

 

**Reorganization**

 

We wereoriginally formed as a South Dakota cooperative on May 25, 1999. As acooperative, we were entitled to single-level, pass-through tax treatment onincome generated through the members’ patronage. This allowed us to pass ourincome onto our members in the form of distributions without first paying taxesat the company level, similar to a partnership. As we became more aware of thedisadvantages in remaining a cooperative, the cooperative’s board of directorsapproved a plan to reorganize into a South Dakota limited liability company,which may elect to be taxed as either a partnership or a corporation.  Asa limited liability company, we elected to be taxed as a partnership whichallowed us to retain our historic single-level income tax treatment at themember level.

 

Theplan of reorganization was duly approved by our members at a meeting held on August 20,2002, and the reorganization became effective August 31, 2002. Thetransaction was an exchange of interests whereby the assets and liabilities ofthe cooperative were transferred for capital units of the newly formed limitedliability company, Lake Area Ethanol, LLC. The capital units were distributedto our members upon dissolution of the cooperative at a rate of one capitalunit of the limited liability company for each share of equity stock owned inthe cooperative. The distribution of capital units to our members wasregistered under the Securities Act of 1933. Upon completion of thereorganization, the name of the limited liability company was changed to LakeArea Corn Processors, LLC.

 

1

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**Ethanol**

 

Theprincipal product produced at the ethanol plant is ethanol. Ethanol is ethylalcohol, a fuel component made primarily from corn and various other typegrains. Ethanol is used for three primary purposes: 1) an oxygenated fueladditive; ii) an octane enhancer in fuels; and iii) a non-petroleum based gassubstitute. Approximately 95% of all ethanol is used for blending with unleadedgasoline and other fuel products. Although not all scientists agree about theexistence or extent of environmental benefits associated with the use ofethanol, the use of ethanol is commonly viewed as a way to improve the qualityof automobile emissions. When blended with gasoline, ethanol acts as an oxygenate by increasing the percentage of oxygen ingasoline.  As a result, the gasoline burns more cleanly, and releases lesscarbon monoxide and other exhaust emissions into the atmosphere.

 

Anethanol plant is essentially a fermentation plant.  The ground corn,which contains starch, is mixed with water to form a mash.  The mashis heated and enzymes added to convert the starch into fermentablesugars.  Fermentation occurs when yeast is added to convert the sugarsinto alcohol and carbon dioxide.  The carbon dioxide may either be captured and sold, if nearby markets exist, orreleased into the atmosphere.  Fermentation produces a mixture called “beer,”which contains about 10% alcohol and 90% water.  The “beer” is then boiledin a distillation column to separate the water, resulting in ethyl alcohol thatis 90 to 95% pure.  The mixture then goes through a dehydration process,which increases the alcohol content to 99% or greater.  This product isthen mixed with a certified denaturant to make the product unfit for humanconsumption and commercially saleable.

 

**Ethanol Marketing and Distribution**

 

 Dakota Ethanol markets theethanol produced at the plant through Ethanol Products, LLC, aBroin affiliate.  Ethanol Products, LLC,through an exclusive marketing agreement with Dakota Ethanol, purchases andmarkets all of the ethanol produced at the plant. Ethanol Products isresponsible for determining the price and terms at which the ethanol acquiredfrom the plant is sold and to whom it is sold. The price received by Dakota Ethanol from the sale of ethanol is basedupon the price that Ethanol Products receives from the sale of ethanol to itscustomers, minus a fee. Ethanol Products’ principal customersare major, multi-national oil companies with blending and refinery facilitieslocated throughout the continental United States. Ethanol Products sellsethanol to these customers through short-term supply contracts, after which theethanol is shipped by Ethanol Products from the plant to these customers’terminals located in the Midwest, Pacific Northwest, South, Southwest, andEast. The ethanol is shipped using rail cars operated by Ethanol Products ortrucks supplied by companies with which Ethanol Products contracts. The plantis served by rail facilities and connections to the Burlington Northern SantaFe railroad system, which facilitate the transportation of approximately 90% of the ethanol produced at the plant.It is also served by multiple South Dakota state highways and InterstateHighways 29 and 90, which provide transportation links in all directions.

 

The marketing agreement between EthanolProducts and Dakota Ethanol is in effect until 2006 and is renewedautomatically for five-year terms, unless either party provides ninety dayswritten notice of termination prior to the end of the current term. In theevent that Dakota Ethanol’s relationship with Ethanol Products is interruptedfor any reason, we believe that another entity to market the ethanol could belocated.  Any interruption, however,could temporarily disrupt the sale of ethanol and adversely affect DakotaEthanol’s business and operations.

 

2

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**Distiller’s Grains**

 

Aprincipal co-product of the ethanol production process is distiller’sgrains.  Distiller’s grains are a high protein, high energy feedsupplement marketed primarily to the dairy, beef, sheep,swine, and poultry industries. It is a popular animal feed supplement,with millions of tons produced in North America annually.  Most distiller’s grains are sold for use in animal feeds withinthe United States, and a small percentage is exported primarily to Canada,Europe and Mexico.  The vast majority of it is fed to ruminant animals inthe dairy and beef sector.  New technologies, which have allowed for theproduction of a more consistent, quality product, have helped create a marketfor it in the swine and poultry industries as well.

 

Drymill ethanol processing generally produces three forms of distiller’s grains,all of which differ on moisture content and shelf life: distiller’s driedgrains with solubles or DDGS; distiller’s wet grains or “wet cake”; andmodified distiller’s grains.  Distiller’swet grains are processed corn mash that does not go through a drying processand contains approximately 70% moisture content. Distiller’s wet grainshave a short shelf life of approximately three days and can be sold  to livestockproducers within the immediate vicinity of the plant.  Modified distiller’sgrains consist of DDGS with the addition of a syrupand contains a 50% moisture content.  Modified distiller’s grains have aslightly longer shelf life of approximately ten days and are often sold tonearby livestock producers. DDGS is wet cake dried to an 8-10%moisture content. DDGS have an almost indefinite shelf life and may be sold andshipped to any market regardless of its vicinity to the plant.

 

**Distiller’s Grains Marketing and Distribution**

 

DakotaEthanol contracts with Broin Enterprises, Inc. d/b/a Dakota GoldMarketing, a Broin affiliate, to market all of the distiller’s grains producedat the plant. There are four types of distiller’s grains produced byDakota Ethanol and marketed by Dakota Gold Marketing: DDGS, Dakota GoldTM,distiller’s wet grains and modified distiller’s grains. Dakota GoldTM is DDGSwith an added certification from Dakota Gold Marketing that the DDGS meetscertain processing and production standards. The sale of Dakota GoldTM makes upthe overwhelming majority of Dakota Ethanol’s sales of distiller’s grains. Theproduction and sale of distiller’s wet grains and modified distiller’s grainsusually varies depending upon actual market conditions for each product and thegeneral operation of the plant.

 

DakotaGold Marketing markets Dakota Gold TM, DDGS, distiller’s wet grains and modifieddistiller’s grains to local, regional and national markets. Approximately 70% ofdistiller’s grains are shipped to national markets, primarily in thesouthwestern United States, and the rest to local and regional markets. Shipments of Dakota Gold and DDGS are primarily done by rail, whereas shipmentsof distiller’s wet grains and modified distiller’s grains are done bytruck.  Dakota Ethanol also contracts with Dakota Gold Marketing for theuse of railcars in the shipping of Dakota Gold and DDGS, paying Dakota GoldMarketing a flat fee per railcar in connection with each shipment. Although Dakota Ethanol relies on Dakota Gold Marketing to market its distiller’sgrains, Dakota Gold Marketing is not dependent upon one or a limited number ofmajor customers.

 

Dakota Ethanol’s marketing contract with Dakota Gold Marketing is ineffect until 2006.  It automaticallyrenews for five-year periods, unless discontinued by either party upon at leastthree months prior written notice. Dakota Ethanol pays Dakota Gold Marketing a marketing fee based on grossmonthly sales of distiller’s grains. Dakota Gold Marketing is responsible for invoicing all loads, receivingpayments from customers and paying freight when necessary.  All accounts receivable losses arising fromthe sales of distiller’s grains are Dakota Ethanol’s sole responsibility.

 

3

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**Dependence Upon a Single or FewCustomers**

 

Dakota Ethanol, as discussed above, issubstantially dependent upon Ethanol Products for the purchase, marketing anddistribution of ethanol. Ethanol Products purchases 100% of the ethanolproduced at the plant, all of which is marketed and distributed to itscustomers. Likewise, except for the purchasing aspect, Dakota Ethanol issubstantially dependent upon Dakota Gold Marketing for the marketing anddistribution of distiller’s grains.

 

**Competition**

 

DakotaEthanol is in direct competition with numerous other ethanol and distiller’sgrains producers, many of which have significantly greater resources.  Westrongly expect that additional ethanol and distiller’s grains producers willenter the market if the demand for ethanol continues to increase. DakotaEthanol competes with other ethanol and distiller’s grains producers on thebasis of price and, to a lesser extent, delivery service.  We believe thatDakota Ethanol will continue to compete favorably with other ethanol and distiller’sgrains producers because it operates consistently and efficiently and hasadvantageous marketing arrangements that capture the best value for itsproducts.

 

Theethanol industry has grown to over 85 production facilities in the UnitedStates. The largest ethanol producers include Abengoa Bioenergy Corp, ArcherDaniels Midland, Cargill, New Energy Corporation and VeraSun EnergyCorporation, and Aventine Renewable Energy, all of which are capable ofproducing more ethanol than Dakota Ethanol.  In addition, there arenumerous ethanol plants of a similar size to Dakota Ethanol’s plant located inthe Midwest region. Further, at least 16 new ethanol plants with a combinedproduction capacity of over 700 million gallons are currently underconstruction and additional plans to expand existing plants have also beenannounced, which would increase the ethanol production capacity ofcompetitors.  In SouthDakota, excluding Dakota Ethanol, there are currently ten plants in fullproduction. These ten plants, of which six are located withina 100-mile radius of Dakota Ethanol’s plant, havea total annual production capacity of approximately 377 million gallons ofethanol.

 

Thefollowing table identifies most of the producers in the United States alongwith their production capacities.

 

**U.S. Ethanol Production Capacity**

(million gallons per year (mmgy)
| **COMPANY**                       | ** ** | **LOCATION**   | ** ** | **FEEDSTOCK** | ** ** | **Current  Capacity  (mmgy)** | ** ** | **Under  Construction/  Expansions  (mmgy)** |
|-----------------------------------|------------|----------------|------------|---------------|------------|-------------------------------|------------|----------------------------------------------|
| Abengoa Bioenergy Corp.           |       | York, NE       |       | Corn/milo     |       | 55                            |       |                                         |
|                              |       | Colwich, KS    |       |          |       | 25                            |       |                                         |
|                              |       | Portales, NM   |       |          |       | 15                            |       | 15                                           |
| ACE Ethanol, LLC                  |       | Stanley, WI    |       | Corn          |       | 30                            |       |                                         |
| Adkins Energy, LLC*               |       | Lena, IL       |       | Corn          |       | 40                            |       |                                         |
| AGP*                              |       | Hastings, NE   |       | Corn          |       | 52                            |       |                                         |
| Agra Resources Coop. d.b.a. EXOL* |       | Albert Lea, MN |       | Corn          |       | 40                            |       |                                         |
| Agri-Energy, LLC*                 |       | Luverne, MN    |       | Corn          |       | 21                            |       |                                         |
| Alchem Ltd. LLLP                  |       | Grafton, ND    |       | Corn          |       | 10.5                          |       |                                         |
| Al-Corn Clean Fuel*               |       | Claremont, MN  |       | Corn          |       | 30                            |       |                                         |

 

4

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| Amaizing Energy, LLC*^               |   | Denison, IA         |   | Corn        |   |   |   | 40     |
|--------------------------------------|--------|---------------------|--------|-------------|--------|--------|--------|--------|
| Archer Daniels Midland               |   | Decatur, IL         |   | Corn        |   | 1070   |   |   |
|                                 |   | Cedar Rapids, IA    |   | Corn        |   |   |   |   |
|                                 |   | Clinton, IA         |   | Corn        |   |   |   |   |
|                                 |   | Columbus, NE        |   | Corn        |   |   |   |   |
|                                 |   | Marshall, MN        |   | Corn        |   |   |   |   |
|                                 |   | Peoria, IL          |   | Corn        |   |   |   |   |
|                                 |   | Wallhalla, ND       |   | Corn/barley |   |   |   |   |
| Aventine Renewable Energy, Inc. |   | Pekin, IL           |   | Corn        |   | 100    |   |   |
|                                 |   | Aurora, NE          |   | Corn        |   | 40     |   |   |
| Badger State Ethanol, LLC*           |   | Monroe, WI          |   | Corn        |   | 48     |   |   |
| Big River Resources, LLC*            |   | West Burlington, IA |   | Corn        |   | 40     |   |   |
| Broin Enterprises, Inc.         |   | Scotland, SD        |   | Corn        |   | 9      |   |   |
| Bushmills Ethanol, Inc.*^       |   | Atwater, MN         |   | Corn        |   |   |   | 40     |
| Cargill, Inc.                   |   | Blair, NE           |   | Corn        |   | 85     |   |   |
|                                 |   | Eddyville, IA       |   | Corn        |   | 35     |   |   |
| Central Iowa Renewable Energy, LLC*^ |   | Goldfield, IA       |   | Corn        |   |   |   | 50     |
| Central MN Ethanol Coop*             |   | Little Falls, MN    |   | Corn        |   | 20.5   |   |   |
| Central Wisconsin Alcohol            |   | Plover, WI          |   | Seed corn   |   | 4      |   |   |
| Chief Ethanol                        |   | Hastings, NE        |   | Corn        |   | 62     |   |   |
| Chippewa Valley Ethanol Co.*         |   | Benson, MN          |   | Corn        |   | 45     |   |   |
| Commonwealth Agri-Energy, LLC*       |   | Hopkinsville, KY    |   | Corn        |   | 23     |   |   |
| Corn Plus, LLP*                      |   | Winnebago, MN       |   | Corn        |   | 44     |   |   |
| Dakota Ethanol, LLC*                 |   | Wentworth, SD       |   | Corn        |   | 50     |   |   |
| DENCO, LLC*                          |   | Morris, MN          |   | Corn        |   | 21.5   |   |   |
| East Kansas Agri-Energy, LLC*^       |   | Garnett, KS         |   | Corn        |   |   |   | 35     |
| ESE Alcohol Inc.                     |   | Leoti, KS           |   | Seed corn   |   | 1.5    |   |   |
| Ethanol2000, LLP*                    |   | Bingham Lake, MN    |   | Corn        |   | 30     |   |   |
| Glacial Lakes Energy, LLC*           |   | Watertown, SD       |   | Corn        |   | 50     |   |   |
| Golden Cheese Company of California* |   | Corona, CA          |   | Cheese whey |   | 5      |   |   |
| Golden Grain Energy, LLC*            |   | Mason City, IA      |   | Corn        |   | 40     |   |   |
| Golden Triangle Energy, LLC*         |   | Craig, MO           |   | Corn        |   | 20     |   |   |
| Grain Processing Corp.               |   | Muscatine, IA       |   | Corn        |   | 20     |   |   |
| Granite Falls Energy, LLC^           |   | Granite Falls, MN   |   | Corn        |   |   |   | 45     |
| Great Plains Ethanol, LLC*           |   | Chancellor, SD      |   | Corn        |   | 50     |   |   |
| Hawkeye Renewables, LLC              |   | Iowa Falls, IA      |   | Corn        |   | 45     |   |   |
| Heartland Corn Products*             |   | Winthrop, MN        |   | Corn        |   | 36     |   |   |
| Heartland Grain Fuels, LP*           |   | Aberdeen, SD        |   | Corn        |   | 8      |   |   |
|                                 |   | Huron, SD           |   | Corn        |   | 14     |   |   |
| Husker Ag, LLC*                      |   | Plainview, NE       |   | Corn        |   | 24     |   |   |

 

5

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| Iowa Ethanol, LLC*                          |   | Hanlontown, IA     |   | Corn                       |   | 55     |   |   |
|---------------------------------------------|--------|--------------------|--------|----------------------------|--------|--------|--------|--------|
| Illinois River Energy, LLC^                 |   | Rochelle, IL       |   | Corn                       |   |   |   | 50     |
| James Valley Ethanol, LLC                   |   | Groton, SD         |   | Corn                       |   | 50     |   |   |
| KAAPA Ethanol, LLC*                         |   | Minden, NE         |   | Corn                       |   | 40     |   |   |
| Land O’ Lakes*                         |   | Melrose, MN        |   | Cheese whey                |   | 2.6    |   |   |
| Lincolnland Agri-Energy, LLC*               |   | Palestine, IL      |   | Corn                       |   | 40     |   |   |
| Lincolnway Energy, LLC*^                    |   | Nevada, IA         |   | Corn                       |   |   |   | 50     |
| Liquid Resources of Ohio^                   |   | Medina, OH         |   | Waste Beverage             |   |   |   | 4      |
| Little Sioux Corn Processors, LP*           |   | Marcus, IA         |   | Corn                       |   | 49     |   |   |
| Merrick/Coors                               |   | Golden, CO         |   | Waste beer                 |   | 1.5    |   |   |
| Michigan Ethanol, LLC                       |   | Caro, MI           |   | Corn                       |   | 50     |   |   |
| MGP Ingredients, Inc.                  |   | Pekin, IL          |   | Corn/wheat starch          |   | 78     |   |   |
|                                        |   | Atchison, KS       |   |                       |   |   |   |   |
| Mid-Missouri Energy, Inc.*             |   | Malta Bend, MO     |   | Corn                       |   | 45     |   |   |
| Midwest Grain Processors*                   |   | Lakota, IA         |   | Corn                       |   | 50     |   | 45     |
| Midwest Renewable Energy, LLC               |   | Sutherland, NE     |   | Corn                       |   | 15     |   |   |
| Miller Brewing Co.                          |   | Olympia, WA        |   | Brewery waste              |   | 0.7    |   |   |
| Minnesota Energy*                           |   | Buffalo Lake, MN   |   | Corn                       |   | 18     |   |   |
| New Energy Corp.                            |   | South Bend, IN     |   | Corn                       |   | 102    |   |   |
| Northeast Missouri Grain, LLC*              |   | Macon, MO          |   | Corn                       |   | 40     |   |   |
| Northern Lights Ethanol, LLC*               |   | Big Stone City, SD |   | Corn                       |   | 50     |   |   |
| Northstar Ethanol, LLC^                     |   | Lake Crystal, MN   |   | Corn                       |   |   |   | 50     |
| Otter Creek Ethanol, LLC*                   |   | Ashton, IA         |   | Corn                       |   | 55     |   |   |
| Panhandle Energies of Dumas, LP^            |   | Dumas, TX          |   | Corn/Grain Sorghum         |   |   |   | 30     |
| Parallel Products                           |   | Louisville, KY     |   | Beverage waste             |   | 5.4    |   |   |
|                                        |   | R. Cucamonga, CA   |   |                       |   |   |   |   |
| Permeate Refining                           |   | Hopkinton, IA      |   | Sugars & starches |   | 1.5    |   |   |
| Phoenix Biofuels^                           |   | Goshen, CA         |   | Corn                       |   |   |   | 25     |
| Pine Lake Corn Processors, LLC*^            |   | Steamboat Rock, IA |   | Corn                       |   |   |   | 20     |
| Platte Valley Fuel Ethanol, LLC             |   | Central City, NE   |   | Corn                       |   | 40     |   |   |
| Pro-Corn, LLC*                              |   | Preston, MN        |   | Corn                       |   | 40     |   |   |
| Quad-County Corn Processors*                |   | Galva, IA          |   | Corn                       |   | 23     |   |   |
| Reeve Agri-Energy                           |   | Garden City, KS    |   | Corn/milo                  |   | 12     |   |   |
| Siouxland Energy & Livestock Coop* |   | Sioux Center, IA   |   | Corn                       |   | 22     |   |   |

 

6

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| Sioux River Ethanol, LLC                  |       | Hudson, SD      |       | Corn              |       | 55         |       |       |
|-------------------------------------------|------------|-----------------|------------|-------------------|------------|------------|------------|------------|
| Tall Corn Ethanol, LLC*                   |       | Coon Rapids, IA |       | Corn              |       | 49         |       |       |
| Tate & Lyle                      |       | Loudon, TN      |       | Corn              |       | 67         |       |       |
| Trenton Agri Products, LLC                |       | Trenton, NE     |       | Corn              |       | 30         |       |       |
| Tri-State Ethanol Co., LLC*               |       | Rosholt, SD     |       | Corn              |       | 18         |       |       |
| United WI Grain Producers, LLC*^          |       | Friesland, WI   |       | Corn              |       |       |       | 40         |
| U.S. Energy Partners, LLC                 |       | Russell, KS     |       | Milo/wheat starch |       | 40         |       |       |
| Utica Energy, LLC                         |       | Oshkosh, WI     |       | Corn              |       | 48         |       |       |
| VeraSun Energy Corporation                |       | Aurora, SD      |       | Corn              |       | 102        |       |       |
| VeraSun Fort Dodge, LLC^                  |       | Ft. Dodge, IA   |       | Corn              |       |       |       | 110        |
| Voyager Ethanol, LLC*                     |       | Emmetsburg, IA  |       | Corn              |       | 50         |       |       |
| Western Plains Energy, LLC*               |       | Campus, KS      |       | Corn              |       | 30         |       |       |
| Western Wisconsin Renewable Energy, LLC*^ |       | Boyceville, WI  |       | Corn              |       |       |       | 40         |
| Wyoming Ethanol                           |       | Torrington, WY  |       | Corn              |       | 5          |       |       |
| **Total Existing Capacity**               | ** ** | ** **      | ** ** | ** **        | ** ** | **3738.7** | ** ** | ** ** |
| **Total Under  Construction/Expansions**  | ** ** | ** **      | ** ** | ** **        | ** ** | ** ** | ** ** | **689.0**  |
| **Total Capacity**                        | ** ** | ** **      | ** ** | ** **        | ** ** | **4427.7** | ** ** | ** ** |

 

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* farmer-owned

^ under construction

Renewable Fuels Association

Last Updated: February 2005

 

Asthe demand for ethanol increases, Dakota Ethanol may also have to compete withinternational ethanol producers, which may be able to produce and sell ethanolmore inexpensively. Currently, the Caribbean Basin Initiative allows forethanol produced in participating Caribbean Basin countries to be imported intothe United States duty free. Large ethanol producers, such as Cargill, haverecently expressed an interest in building plants in these countries. While theCaribbean Basin Initiative caps the amount of duty free ethanol imported intothe United States at 7% of the total United States’ production from theprevious year, as total production in the United States grows, the amount ofethanol produced from the Caribbean area and sold in the United States willalso grow, which could impact the ability to sell ethanol and the price atwhich it is sold.

 

Likemany ethanol producers, Dakota Ethanol also competes with producers ofMTBE.  MTBE is the other oxygenate commonly used in fuels for compliancewith the Federal Clean Air Act mandates and is ethanol’s major competitor inthe oxygenate market. Many major oil companies produce MTBE and, because it ispetroleum-based, its use is strongly supported by these companies. Thesecompanies have significantly greater resources than Dakota Ethanol with whichto market MTBE, influence legislation, and influence public perception ofMTBE.  These companies also have sufficient resources to begin productionof ethanol should they choose to do so. While MTBE still remains a competitor,it has been increasingly the subject of serious environmental concerns, whichhas resulted in several states enacting laws prohibiting the use of MTBE as an oxygenatein fuels.  As more states continue to ban the use of MTBE, MTBE may becomeless competitive with ethanol.

 

7

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Alternativefuels, gasoline oxygenates, and ethanol production methods are continuallyunder development by ethanol and oil companies with far greater resources thanDakota Ethanol.  New products or methods of ethanol production developedby larger, better-financed competitors could provide them with competitiveadvantages over Dakota Ethanol and harm its business.

 

**Sources and Availability of Raw Materials**

 

**Corn**. The major raw material required forDakota Ethanol to produce ethanol and distiller’s grain is corn.  To operate at a name-plate capacity of 40million gallons, the plant requires a supply of approximately 14 millionbushels of corn annually.  Unlessa corn delivery exemption has been granted, our members are required to delivercorn to the plant on a trimester basis and receive payment for their corn basedon an average of market prices at predetermined elevators plus a freightallowance.  The members currently supplyapproximately 30% of DakotaEthanol’s corn supply under a corn delivery obligation, the balance of which ispurchased from other local corn producers on the open market based upon a schedule ofprices for current and future delivery prepared by management.

 

Since September 1, 2002, ourmembers may apply on an annual basis to be released from the corn deliveryrequirement if the member historically has not produced enough grain to meetthe requirement; if the member does not produce enough grain to meet therequirement because the member’s grain is fed to livestock; or if the memberproduces and stores the majority of the member’s grain more than 50 miles fromthe Dakota Ethanol plant site.  A graincommittee appointed by the Dakota Ethanol’s board of managers has solediscretion to determine whether to grant our members exemptions from the corndelivery requirement.  As of December 31,2004, approximately 45% of our members have been granted annual exemptions fromthe corn delivery requirement. Any member’scorn exempted from delivery is substituted with corn purchased on the openmarket.

 

The plant’s location in Lake County, South Dakota, provides anample supply of corn to meet and exceed the name-plate production capacity ofthe plant.  In 2003, approximately13.4 million bushels of corn for grain were produced in Lake County and 96million bushels of corn for grain were produced in the nearby counties ofBrookings, Kingsbury, Moody, Miner, Hanson, McCook and Minnehaha.  In2004, we expect that the bushels of corn produced in these counties will exceedthe 2003 production rates due to a record corn crop.

 

**Natural Gas**.The production of ethanol at DakotaEthanol requires a significant amount of natural gas. Natural gas is necessaryto generate steam from three on-site boilers for the cooking, evaporation, anddistillation processes, as well as for the drying of distiller’s wet grainsinto DDGS.  Dakota Ethanol contracts withNorthWestern Public Service pursuant to which NorthWestern distributes naturalgas from NorthWestern’s pipeline to the ethanol plant.  This agreement is in effect until 2011 andautomatically renews for one-year terms. Since operations were commenced in 2001, there have been nointerruptions in the supply of natural gas from NorthWestern, as all of DakotaEthanol’s requirements have been met.

 

**Electricity.******The production process at DakotaEthanol requires electricity. Electricity is necessary for lighting andpowering much of the machinery and equipment. Dakota Ethanol contracts withSioux Valley Energy, Inc. to provide all of the electric power and energyrequirements for the ethanol plant.  Theagreement is in effect until 2011 and automatically renews for five-year terms,unless at least 18 months notice is given by either party to terminate theagreement prior to the expiration of the current term.  Since operations were commenced, DakotaEthanol has had no interruption or shortages in the supply of electricity tothe plant.

 

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**Water**. The production process at Dakota Ethanol requires water.Water is necessary in the fermentation process and to produce steam for thecooking, evaporation, and distillation processes. Dakota Ethanol contracts withBig Sioux Community Water System, Inc. to supply and meet its waterrequirements for the ethanol and distiller’s grains production process. DakotaEthanol’s agreement with Big Sioux is for automatically renewing five-yearterms. Since Dakota Ethanol’s operations were commenced in September 2001,Dakota Ethanol has had no interruption in the supply of water as all itsrequirements have been met.

 

**Research and Development**

 

DakotaEthanol does not conduct any research and development activities associatedwith the development of new technologies for use in producing ethanol anddistiller’s grains. Instead, Dakota Ethanol relies significantly on BroinManagement, LLC and Broin and Associates, Inc. for its research anddevelopment activities, as these Broin entities devote resources and efforts toimproving the technology associated with ethanol and distiller’s grains and theproduction process. Broin may offer to Dakota Ethanol new technology throughlicense or similar agreements, all of which must be negotiated. Currently,Dakota Ethanol and Broin operate under a license agreement entered in 1999,which relates to the original technology installed at the plant. Under thisagreement, Broin licenses to Dakota Ethanol, for a flat fee, the technology forthe operation of the ethanol plant for so long as the plant exists. Broin’stechnology consists of all of Broin’s proprietary rights, patents, copyrights,trade secrets, formulas, research data, processes, know-how, and specificationsrelated to Broin’s design, construction and operation of the plant. If eitherDakota Ethanol or Broin breaches the terms of the agreement, the non-breachingparty may exercise any remedies available to it, including specific performanceand requesting injunctive relief.

 

**Government Regulation**

 

Variousfederal and state laws, regulations, and programs have led to an increasing useof ethanol in fuel, including subsidies, tax credits and other forms offinancial incentives.  Some of these laws provide economic incentives toproduce ethanol and others mandate the use of ethanol.  Congress currentlyprovides certain federal tax incentives for oxygenated fuel producers andmarketers, including those who purchase ethanol to blend with gasoline in orderto meet federally mandated oxygenated fuel requirements.

 

Ethanol sales have been favorably affected by the Clean Air Act Amendments of 1990, particularly the Federal Oxygen Program, which became effective November 1, 1992.  The Federal Oxygen Program requires the sale of oxygenated motor fuels during the fall and winter months in certain major metropolitan areas to reduce carbon monoxide pollution. Ethanol use also has increased due to a second Clean Air Act program, the Reformulated Gasoline Program. This program became effective January 1, 1995, and requires the sale of reformulated gasoline in certain major urban areas to reduce pollutants, including those that contribute to ground level ozone, better known as smog.

 

The use of ethanol as an oxygenate to blend with fuel to comply with federal mandates also has been aided by federal tax policy.  Prior to the enactment of the American Jobs Creation Act of 2004, the Energy Tax Act of 1978 exempted ethanol blended gasoline from the federal gas tax as a means of stimulating the development of a domestic ethanol industry and mitigating the United States’ dependence on foreign oil. The exemption allowed ethanol to be sold by blenders at prices that were competitive with other less expensive additives and gasoline. Equivalent to providing a per gallon

 

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“equalization” payment, the exemption allowed blenders to pay more for ethanol than the wholesale price of gasoline and still retain the same profit margins. Blenders could claim an exemption of $0.052 per gallon from the excise tax of $0.184 per gallon for a 10% ethanol blend, with lower exemption amounts available for a 7.7% and 5.7% ethanol blend.

 

The American Jobs Creation Act of 2004amended the federal excise tax structure effective January 1, 2005 byimplementing the Volumetric Ethanol Excise Tax Credit (“VEETC”).  VEETC eliminates the existing ethanol taxexemption and replaces it with a new excise tax credit of $0.051per gallon of ethanol. Ratherthan basing the credit on an ethanol blend percentage, the credit is allowedfor any percentage blend of ethanol, which effectively gives the blendergreater flexibility to blend as much or as little ethanol to meet its octane orvolume needs. VEETC remains in effect until 2010.

 

Additionally,Congress provides an ethanol production incentive to ethanol producers throughthe United States Department of Agriculture Commodity Credit Corporation’sBioenergy Program.  Under the program, which is scheduled to expire on September 30,2007, incentive payments are allocated to ethanol producers based primarily onan increase in gallons of ethanol produced compared to the prior year’sproduction.  Because a plant typically experiences the highest increase inproduction during the first year of operations compared to the prior year’s, a plant of Dakota Ethanol’s size is usuallyallocated the maximum payment during the first year of production. DuringDakota Ethanol’s first year of production in the 2002 program year (October 1,2001 through September 30, 2002), Dakota Ethanol received the maximumpayment of $7.5 million. Since this time, Dakota Ethanol has received only anominal amount under the program. Management expects to receive even less inrevenue under the program in the future because a significant increase inproduction at the plant from 2004 is not expected, and Congress has recentlyreduced funding under the program from $150 million to $100 million per year.

 

Thestate of South Dakota provides an incentive production payment to ethanolproducers operating in South Dakota.  The production incentive consists ofa direct payment to South Dakota ethanol producers of up to $.20 per gallon,which is divided among producers of fuel ethanol within South Dakota up to amaximum of $1 million per year per plant (a maximum of $83,333 per month in2004) and a maximum of $10 million over the life of a plant.  The program,however, caps the payments that can be distributed to South Dakota plants in aprogram year to no more than $6 million in payments in 2005 (ending June 30,2005) and no more than $7 million in payments in the 2006 program year. Thepayments are distributed to each plant in proportion to the total number ofgallons ofethanolproduced and marketed annually by all the plants in South Dakota.  Thus,as more plants commence production, or existing plants increase production,each plant may receive a lower proportionate share of the maximum payment underthe program. Due to an increase in claims made for payment from new andexisting plants during the 2004 program year, the funds allocated to thisprogram were depleted in full midway through the program year, resulting inDakota Ethanol receiving less under the program than in the 2003 program year.It is uncertain whether the funds under the program will be depleted before theend of the 2005 and 2006 program years, much of which is dependent uponexisting plant production in South Dakota during these periods.

 

We expect that the 109th Congress will reintroduce legislation in 2005 calling for a Renewable Fuels Standard. In 2004, both the United States Senate and House of Representatives considered passing legislation that would determine the specific volume of ethanol to be used in gasoline on a nationwide basis. The bills debated in Congress, which failed to pass, anticipated that the volume requirement in the nation would begin at 2.3 billion gallons and grow at a rate of approximately 300 million gallons per year to a volume of 5 billion gallons by 2012. If similar legislation is reintroduced in 2005 and signed

 

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into law, the long-term market for ethanol is expected to grow at a rate at least equal to this schedule.

 

OnMarch 11, 2005, legislation (SB610) was introduced in the United StatesSenate to amend the small producer tax credit. This bill, if enacted into law, would make available the existingfederal small producer tax credit to any ethanol plant capable of producing upto 60 million gallons of ethanol on an annual basis, including Dakota Ethanol’s.  Currently, the small producer tax credit isonly available for plants with 30 million gallons or less of annual capacity,which precludes Dakota Ethanol’s plant from eligibility.  The federal small producer tax credit allowseligible ethanol plants to deduct from their federal income tax $0.10 pergallon on the first 15 million gallons produced annually at the plant. Thesmall producer tax credit is scheduled to expire on December 31, 2010.

 

Therevocation, amendment, or non-renewal of any one or more of these laws,regulations or programs, or a lack of funding under the programs, couldadversely affect the future use of ethanol and operations in a materialway.  Any material reduction of the use of ethanol would have an adverseeffect on the plant’s profitability and viability.

 

**Environmental Regulation**

 

DakotaEthanol is subject toextensive environmental regulation at the federal and state levels. Thefederal environmental regulations with which Dakota Ethanol must comply werepromulgated by the United States Environmental Protection Agency pursuant tothe federal Clean Air Act. The state environmental regulations with whichDakota Ethanol must comply were promulgated by the South Dakota Department ofEnvironment and Natural Resources. The Environmental Protection Agency and theDepartment of Environment and Natural Resources regulate the air quality at theplant, in particular the emissions from the plant into the air. TheDepartment of Environment and Natural Resources also regulates water collectionand discharge. In addition to its own enforcement authority under this law, theEnvironmental Protection Agency has delegated permitting and enforcementauthority to the Department of Environment and Natural Resources. The plantrequires the following permits to operate:

 

•Dakota Ethanol has a Title Five Operating Permit from the Department ofEnvironment and Natural Resources. In South Dakota, the Title Five OperatingPermit serves as the air quality and operation permit for the ethanol plant.Dakota Ethanol must conduct ongoing emissions testing to verify compliance withthe Title Five Operating Permit. The permit is scheduled for renewal on July 19,2005.

 

• DakotaEthanol has a Bureau of Alcohol,Tobacco and Firearms’ Fuel Permit from the Department of Treasury.Dakota Ethanol is required to obtain this permit because of the alcohol contentof ethanol. The permit must be renewed annually.

 

• DakotaEthanol has a Surface Water DischargePermit from the South Dakota Department of Environment and Natural Resources.The Surface Water Discharge Permit regulates the terms of any storm waterdischarges associated with industrial activity. The permit requires DakotaEthanol to provide ongoing compliance reports to the South Dakota Department ofEnvironment and Natural Resources. This permit is scheduled for renewal in 2006.

 

• Dakota Ethanol has a Storm Water Discharge Permit from the SouthDakota Department of Environment and Natural Resources. The Storm WaterDischarge Permit regulates the terms of any surface water from rain or otherprecipitation. The water is collected and stored in a storm water pond adjacentto the plant. The permit is scheduled for renewal in 2008.

 

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WhileDakota Ethanol is currently in compliance with applicable environmental laws,regulations and permits, Dakota Ethanol will need to continue to comply withall permits and regulatory requirements. To accomplish this end, Dakota Ethanolmaintains an on-going program to ensure compliance with such requirements.Maintaining compliance may require Dakota Ethanol to incur expenditures forsuch things as new or upgraded equipment or processes, some of which could bematerial and costly.  In 2005, managementanticipates making approximately $500,000 in capital expenditures toward new orupgraded pollution control equipment and dryer systems.  If the Environmental Protection Agency andBroin and Associates, Inc., however, cannot amicably resolve the application ofthe appropriate emissions testing method, as discussed below under “LegalProceedings,” or Dakota Ethanol cannot maintain compliance with applicable lawsand permits without new or upgraded equipment, additional material expendituresmay be required.

 

##### **Management and Employees**

 

Broin Management, LLC, aBroin affiliate, manages the day-to-day operations of the ethanol plant.  Dakota Ethanol pays Broin Management a fixedannual fee and an incentive bonus based on annual net income.  Dakota Ethanol also pays certain expenses incurredwith respect to the operation of the plant while other expenses, including, butnot limited to, the provision of a full-time plant manager and technicalmanager, are included as part of Broin Management’s fees.  The agreement is in effect until January 1,2006, and automatically renews for additional five-year terms unless eitherparty provides a 90-day advance written notice of termination prior to the endof the term.  Dakota Ethanol may onlyterminate Broin Management “for cause,” which is defined in the agreement asillegal or unethical conduct.

 

Broin Management hired Mr. DeanFrederickson as Dakota Ethanol’s plant general manager.  Mr. Frederickson oversees and isresponsible for operations and production at Dakota Ethanol on a day-to-daybasis.  The general manager is afull-time, on-site position, but Mr. Frederickson is an employee of BroinManagement, LLC.  For Mr. Frederickson’sbiographical information, see “Item 10–Directorsand Executive Officers of the Registrant.”

 

As of March 1, 2005,Dakota Ethanol employs 38 employees, including a commoditiesmanager, an operations manager, a maintenance manager, a microbiologist, achief mechanical operator, a controller, plant operators, plant maintenancepersonnel, commodities personnel and administrative personnel.  This does not include Mr. Fredericksonand the technical manager, both of whom are employees of Broin Management.

 

**Item 2.****  Description of Property.**

 

The Dakota Ethanol plant is located on77 acres of land it owns near the town of Wentworth in Lake County, SouthDakota.  This site is served by multiplestate highways and is near Interstate Highways 29 and 90 and has railfacilities and connections to the Burlington Northern Santa Fe railroad systemto facilitate transporting the ethanol and distiller’s grains produced at theplant to national target markets.  All ofDakota Ethanol’s tangible and intangible property, real and personal, serves asthe collateral for the debt financing with First National Bank of Omaha, whichis described below under “Item 7 – Management’sDiscussion and Analysis of Financial Condition and Results ofOperations-Indebtness.”

 

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**Item 3.****  Legal Proceedings.**

 

From time to time in the ordinarycourse of business, Dakota Ethanol or we may be named as a defendant in legalproceedings related to various issues, including without limitation, workers’compensation claims, tort claims, or contractual disputes. Except as describedbelow, Dakota Ethanol or we are not currently involved in any material legalproceedings, directly or indirectly, and we are not aware of any potentialclaims.

 

Inthe last few years, both the United States Environmental Protection Agency andthe State of South Dakota Department of Environment and Natural Resources haveplaced increased scrutiny on ethanol plants for compliance with air qualitylaws and regulations. After Dakota Ethanol’s plant was operational in late2001, Dakota Ethanol determined through a series of internal tests between February andMay of 2002, that certain emissions may have exceeded air quality limitsunder state and federal law.  DakotaEthanol initiated steps to correct potential excessive emissions, includingcertain operational changes and installing a thermal oxidizer, which is apollution control device designed to reduce emissions.  In addition, the South Dakota Department ofEnvironment and Natural Resources informed Dakota Ethanol that certainemissions from the plant exceeded the limits allowed under state law and theplant’s Title V Air Quality Operating Permit. To date, the Department of Environmentand Natural Resources has not initiated any regulatory action against DakotaEthanol for these alleged excessive emissions in 2002, and it remains uncertainwhether any action will be taken or the type and magnitude of such action.  Fines and/or other penalties couldresult.  Currently, management believesthat the plant fully complies with federal and state air quality laws and its Title V Air Quality Operating Permit.

 

In2002, a number of ethanol plants in Minnesota entered into consent decree settlementswith the State of Minnesota and the Environmental Protection Agency arisingfrom alleged emission violations.  Civil penalties were assessed againsteach ethanol plant, additional emissions devices were required, new testingprotocols were established and air quality permits were modified by thesettlement agreements.  The Environmental Protection Agency subsequentlystated that it intends to “level the playing field,” inferring actions againstother ethanol plants.

 

OnJanuary 6, 2003, the Environmental Protection Agency issued formalinformation requests to many ethanol plants including those designed,constructed, and/or managed by Broin and Associates and BroinManagement. The requests required that the subject ethanol plants,including Dakota Ethanol, provide the Environmental Protection Agency withcertain emissions data, presumably to determine whether the plants were incompliance with the Clean Air Act. Since these requests were made, Broin andAssociates has been holding on-going discussions with the EnvironmentalProtection Agency regarding the application and use of testing methods forquantifying certain emissions at the plants managed by Broin. To date, noaction has been taken nor has any final resolution been made regarding this matter.It is also uncertain whether the Environmental Protection Agency will take anyaction with respect to its formal information requests, or what the result oreffect will be on Dakota Ethanol of the discussions between Broin andAssociates and the Environmental Protection Agency.  Fines and/or other penalties could result.

 

Inlate 2002, the Department of Environment and Natural Resources began requiringnew ethanol plants in South Dakota to include a new method for quantifyingemissions from the plants.  The new method is commonly referred to as theMidwest Scaling Method or the “multiplier.”  When the multiplier is used,emission test results are generally higherthan when traditional test measures are employed. Inresponse to the Department of Environment and Natural Resource’s multiplierrequirement, Dakota Ethanol, five other ethanol plants in South Dakota, andBroin Management filed a

 

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petitionand declaratory judgment on December 29, 2003 before the South DakotaBoard of Minerals and Environment.  The petition requested that the Boardof Minerals and Environment bar the Department of Environment and NaturalResources from using and applying the multiplier in quantifying emissionsbecause its use was inappropriate and unlawful.  Dakota Ethanol and theother plants contended that neither South Dakota nor federal regulationsrequired the use of the multiplier.

 

OnJune 16, 2004, following the administrative hearing, the Board of Mineralsand Environment ruled that the multiplier was not contained in state or federalemission test methods or regulations. The effect of this ruling, if final, isthat the Department of Environment and Natural Resources can no longer use orrequire the use of the multiplier to measure emissions from Dakota Ethanol’splant.

 

**Item 4.****  Submission of Matters to a Vote of SecurityHolders.**

 

Wedid not submit any matter to a vote of our security holders through thesolicitation of proxies or otherwise during the fourth quarter of 2004.

 

**PART II**

 

**Item 5.****  Market for Common Equityand Related Stockholder Matters.**

 

There is no public tradingmarket for our capital units. As of March 1, 2005, we had 970 members with29,620,000 Class A capital units outstanding.  Capital units may only be transferred inaccordance with our Capital Units Transfer System.  The Capital Units Transfer System providesfor transfers by gift to family members, upon death, and through a qualifiedmatching service, subject to our board of managers’ approval.  The qualified matching service is operatedthrough Variable Investment Advisors, Inc., aregistered broker-dealer based in Sioux Falls, South Dakota which owns andoperates a registered Alternative Trading Service with the S.E.C. VariableInvestment Advisor’s Alternative Trading System may be accessed atwww.agstocktrade.com. The following table contains historicalinformation by trimester for the past three years for sales of our equityshares prior to the conversion from a cooperative and our capital units sincethe reorganization in August 2002. All of the information has been adjusted to reflect the 4:1 capital unitsplit that occurred on November 1, 2002.

 

| **Trimester**              | ** ** | **Low Price** | ** ** | **High Price** | ** ** | **Average Price** | ** ** | **# of  Shares/Capital  Units Traded** | ** ** |
|----------------------------|------------|---------------|------------|----------------|------------|-------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | ** **    | ** ** | ** **     | ** ** | ** **        | ** ** | ** **                             | ** ** |
| Jan – April 2003 |       |          | $          | 1.00           |       | $                 | 1.03       |                                   | $          | 1.01 |   | 100,000 |   |
| May –  Aug 2003  |       |          | $          | 0.90           |       | $                 | 1.10       |                                   | $          | 1.05 |   | 210,000 |   |
| Sept – Dec  2003      |       |          | $          | 0.70           |       | $                 | 1.00       |                                   | $          | 0.87 |   | 125,000 |   |
| Jan-April 2004        |       |          | $          | 0.81           |       | $                 | 0.95       |                                   | $          | 0.87 |   | 192,500 |   |
| May-Aug 2004               |       |          | $          | 0.75           |       | $                 | 0.95       |                                   | $          | 0.83 |   | 161,250 |   |
| Sept – Dec  2004      |       |          | $          | 0.89           |       | $                 | 1.29       |                                   | $          | 0.96 |   | 171,750 |   |

 

Under the terms of ourAmended and Restated Operating Agreement dated February 17, 2005, weare required to make annual (or more frequent) distributions to our members andmay not retain more than $200,000 of net cash from operations, unless (i) a75% supermajority of our Board decides otherwise, (ii) it would violate orcause a default under the terms of any debt financing or other creditfacilities, or (iii) it is otherwise prohibited by law.  Our ability to make distributions to members,however, is dependent upon the distributions made by Dakota Ethanol. Under theLoan Agreement with First National Bank of Omaha, Nebraska, Dakota Ethanol is restrictedto making distributions to its

 

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members by a covenant that limits thedistributions in any given year not to exceed 80% of the excess cash flow. Forfurther details of the Loan Agreement, please see “Item 7, Management’s Discussion andAnalysis of Financial Conditions and Results of Operations—Indebtness.”

 

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

 

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

 

In 2004, Dakota Ethanol made cash distributions to us of approximately$4.1 million and approximately $600,000 to the minority members.  We, in turn, distributed to our membersapproximately $4.1 million, or $0.14 per capital unit.

 

If Dakota Ethanol continues to operate profitably as it did in 2004 and2003, we expect to make similar distributions to our members in 2005.

 

**Item 6.**** ****SelectedFinancial Data.**

 

Thefollowing table sets forth selected financial data of Lake Area CornProcessors, LLC and our predecessor cooperative for the periods indicated. Theaudited financial statements included in Item 8 of this report have beenaudited by our independent auditors, Eide Bailly LLP.

 
| ** **                                    | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001(1)** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------|------------|
| **Statement  of Operations Data:**            |       |       |       |       |       |       |       |        |       |
| Revenue                                       |       | $          | 84,432,486 |       | $          | 69,391,182 |       | $           | 65,643,669 |   | $ | 22,366,245 |   |
| Cost of Revenues                              |       | $          | 71,736,360 |       | $          | 60,198,865 |       | $           | 51,857,757 |   | $ | 12,992,026 |   |
| Gross Profit                                  |       | $          | 12,696,126 |       | $          | 9,192,317  |       | $           | 13,785,912 |   | $ | 9,374,219 |   |
| General and Administrative Expense            |       | $          | (3,058,024 | )          | $          | (2,620,736 | )          | $           | (3,225,991 | ) | $ | (2,016,375 | ) |
| Income from Operations                        |       | $          | 9,638,102  |       | $          | 6,571,581  |       | $           | 10,559,921 |   | $ | 7,357,844 |   |
| Interest Expense                              |       | $          | (1,300,647 | )          | $          | (1,461,763 | )          | $           | (1,983,869 | ) | $ | (749,927 | ) |
| Other Income                                  |       | $          | 223,548    |       | $          | 147,629    |       | $           | 176,905    |   | $ | 114,389 |   |
| Minority Interest in Subsidiary Income        |       | $          | (1,037,458 | )          | $          | (641,767   | )          | $           | (1,098,023 | ) | $ | (837,797 | ) |
| Net Income                                    |       | $          | 7,523,545  |       | $          | 4,615,680  |       | $           | 7,704,887  |   | $ | 5,909,518 |   |
| Capital Units Outstanding                     |       | 29,620,000 |       | 29,620,000 |       | 29,620,000 |       | 29,620,000  |       |
| Net Income per Capital Unit                   |       | 0.25       |       | 0.16       |       | 0.26       |       | $           | 0.20       |   |
| Cash Distributions declared per Capital  Unit |       | $          | 0.21       |       | $          | 0.12       |       | $           | 0.28       |   | — |   |
|                                          |       |       |       |       |       |       |       |        |       |
| **Balance  Sheet Data:**                      |       |       |       |       |       |       |       |        |       |
| Working Capital                               |       | $          | (145,791   | )          | $          | (115,841   | )          | $           | (172,074   | ) | $ | 9,717,623 |   |
| Net Property, Plant & Equipment      |       | $          | 34,862,856 |       | $          | 35,988,764 |       | $           | 37,795,312 |   | $ | 38,131,345 |   |
| Total Assets                                  |       | $          | 46,065,440 |       | $          | 45,998,055 |       | $           | 46,192,041 |   | $ | 54,985,185 |   |
| Long-Term Obligations                         |       | $          | 9,882,779  |       | $          | 12,682,279 |       | $           | 15,112,610 |   | $ | 24,787,611 |   |
| Minority Interest                             |       | $          | 3,055,597  |       | $          | 2,863,277  |       | $           | 2,727,163  |   | $ | 2,827,564 |   |
| Members Equity                                |       | $          | 22,627,406 |       | $          | 21,324,061 |       | $           | 20,262,781 |   | $ | 20,702,800 |   |
| Book Value per Capital Unit                   |       | $          | 0.76       |       | $          | 0.72       |       | $           | 0.68       |   | $ | 0.70 |   |

 

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(1)                                  The year 2001 represents only a partial year ofoperations, as the ethanol plant commenced production in September 2001.The financial information in the table also includes audited financial data ofour predecessor cooperative prior to the effectiveness of the reorganizationinto a limited liability company on August 31, 2002.

 

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

 

**CAUTIONARYSTATEMENT REGARDINGFORWARD-LOOKING INFORMATION**

 

You should read thefollowing discussion along with the audited financial statements and notes tothe audited financial statements included elsewhere in this report.  This report contains forward-lookingstatements, including, but not limited to, those under “Management’sDiscussion and Analysis-of Financial Condition and Results of Operations,” and “Liquidity and CapitalResources,” involving future events, future business and other conditions, ourfuture performance, and our expected operations.  These statements are based onmanagement’s beliefs and expectations and on information currently available tomanagement.  Forward-looking statements may include statements which use wordssuch as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,”“hope,” “will,” “should,” “could,” “may,” “future,” “potential,” or thenegatives of these words, and all similar expressions.

 

Forward-lookingstatements involve numerous assumptions, risks and uncertainties.  Dakota Ethanol’s actual results or actualbusiness or other conditions may differ materially from those contemplated byany forward-looking statements.  While webelieve that these statements are accurate, this business is dependent upongeneral economic conditions and various conditions specific to this industryand future trends and these factors could cause actual results to differmaterially from the forward looking statements that have been made.  In particular,

 

•                  Demand for ethanol is largely driven by federal and state regulations,which are often subject to change.

 

•                  Dakota Ethanol’sTitle Five Operating Permit from the Department of Environment and NaturalResources is due for renewal on July 19, 2005. While management expectsthe permit to be renewed without controversy, there are no assurances of thisresult. If the permit is unable to be renewed, and the plant is forced toshutdown temporarily, Dakota Ethanol’s operating results could be adverselyaffected.

 

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

 

•                  The ethanolindustry is increasingly competitive, with additional plants in operation,under construction and in the planning stages. With additional plants coming online, the supply of ethanol will increase which, if the demand does not growaccordingly or is unaided by government policies and programs, could adverselyimpact the price of ethanol and Dakota Ethanol’s operating results.

 

•                  The ethanol industry and Dakota Ethanol’s business aresensitive to corn and natural gas prices. When corn and natural gas prices increase, Dakota Ethanol’s operatingresults may suffer. When corn and natural gas prices fluctuatesignificantly, Dakota Ethanol’s cost of

 

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revenues and, thus, operating results may be adverselyaffected by the use of derivative instruments under the risk managementprogram.

 

•                  The ethanolindustry and Dakota Ethanol’s operatingincomemay be adversely impacted by a decrease in or termination of government subsidies and other forms of financialincentives;  a termination ofgovernment environmental and tax policies that encourage the production and useof ethanol; or, the preclusion of new government policies and programsthat encourage the use of ethanol.

 

•                  The ethanol industry and Dakota Ethanol maybe subject to additional regulation, such as environmental restrictions, orregulatory action, which could include fines, penalties, or injunctive reliefas a result of any potential excessive emissions, which could increase costs.

 

•                  Dakota Ethanol is dependent upon BroinManagement, LLC to manage the day-to-day activities of the plant and uponBroin-related entities to market the ethanol and distiller’s grains produced atthe plant. If any of these activities cease providing services to DakotaEthanol, the plant’s operations may be adversely affected.

 

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

 

**Overview**

 

Dakota Ethanol is engaged in the production of fuel-grade ethanol anddistiller’s grains. Corn is supplied to Dakota Ethanol from our members who areprimarily local agricultural producers and from purchases of corn on the openmarket. After processing the corn, ethanol is sold to Ethanol Products, LLC, aBroin affiliate, which subsequently markets and sells the ethanol to gasolineblenders and refineries located throughout the continental United States.  The price that Dakota Ethanol receives fromthe sale of ethanol to Ethanol Products is based upon the price that EthanolProducts receives from the sale to its customers, minus a fee. Distiller’sgrains are sold through Dakota Gold Marketing, another Broin affiliate, whichmarkets and sells the product to livestock feeders.

 

Dakota Ethanol’s operating income or loss is significantly tied to theprice at which ethanol and distiller’s grains are sold. Historically, the priceof ethanol tends to fluctuate in the same direction as the price of unleadedgasoline and other petroleum products. Surplus ethanol supplies also tend toput downward price pressure on ethanol. In contrast, the price of distiller’sgrains generally tends to fluctuate based on the price of substitute livestockfeed, such as corn and soybean meal. Surplus grain supplies also tend to putdownward price pressure on distiller’s grains.

 

Dakota Ethanol’s cost of revenues, which includes production expenses,is significantly affected by the cost of corn and natural gas. In 2004, for instance,the cost of corn was approximately 60% of total cost of revenues, whereas thecost of natural gas was approximately 15% of total cost of revenues.Comparatively, in 2003, the cost of corn was approximately 60% of total cost ofrevenues, whereas the cost of natural gas was approximately 17% of total costof revenues.  The cost of corn isaffected primarily by supply and demand factors such as crop production,carryout, exports, risk management and weather, much of which Dakota Ethanolhas no control. Natural gas prices fluctuate with the energy complex ingeneral. Over the last few years, natural gas prices have trended higher thanaverage and

 

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appear will continue to trend higher due tothe high price of alternative fuels such as fuel oil.

 

The 2004 fiscal year for Dakota Ethanolstarted with very strong earnings, only to see earnings fall in the middle ofthe year, followed by a strong earnings recovery at the end of the year. Theprincipal cause for these fluctuations was the price volatility of corn, whichproved to be significantly greater than in 2003. Earnings fell during thespring when corn prices increased to at or near record highs. Fears of a wetspring and a decrease in corn production were the principal causes for theincrease, although risk management mitigated some of the increase. As the year progressed through the summer and early fall, cornprices actually declined as a result of a forecasted record corn crop.Unfortunately, when prices declined during this period, risk management had anadverse impact on cost of revenues and, therefore, earnings.  During the fourth quarter, however, withextremely low and stable prices for corn and high prices for ethanol, earningsmade a full recovery.

 

While 2004 was marked by corn pricevolatility, there were several positives. Earnings increased by approximately$2.9 million from 2003. Earnings increased despite insignificant paymentsreceived from the Bioenergy Program, compared to prior years. Ethanolproduction at the plant also increased to a record 49 million gallons, comparedto 47 million gallons in 2003 and 44 million gallons in 2002. Productionincreased primarily from continued improvements made to the plant, whichresulted in greater plant efficiency and reliability.

 

#### **Management’s outlook for 2005 is relativelypositive.  The first quarter began withrelatively high ethanol prices and stable and low corn costs, which we expect to continue going into the second quarter and positivelyimpact earnings during these two quarters. There is less certainty, however,about earnings potential during the last two quarters.  As spring approaches, we may see thevolatility of corn prices and costs return to the markets, particularly inanticipation of a new corn crop. Unless there is a plentiful corn crop in 2005,the price of corn may increase, thus leading to an increase in productioncosts. Further, unless demand for ethanol continues to increase and new marketsfor ethanol open up through the passage of a federal Renewable Fuels Standardbill or other means, the price of ethanol may be adversely impacted byadditional production and supply of ethanol. Approximately 700 million newgallons of ethanol is slated to enter the market by the end of 2005, some ofwhich may not be absorbed unless new markets are developed. If ethanol pricesdo decrease, Dakota Ethanol’s earnings may suffer as a result.**

#### ** **

#### **Results of Operations**

 

**Comparison of years ended December 31, 2004 and December 31,2003.**

 
| ** **              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **              | ** ** | **$**                            | ** ** | **%  of  Revenue** | ** ** | **$** | ** ** | **%  of  Revenue** | ** ** |
| Revenue:                |       |                             |       |   |   |   |   |   |   |
| Ethanol                 |       | 71,648,488                       |       | 85 |   | 56,450,057 |   | 82 |   |
| Distiller’s Grains |       | 11,769,124                       |       | 14 |   | 11,427,190 |   | 16 |   |
| Incentive               |       | 1,014,874                        |       | 1 |   | 1,513,935 |   | 2 |   |
| Total                   |       | 84,432,486                       |       | 100 |   | 69,391,182 |   | 100 |   |

 

*Revenues*-Revenueincreased $15.0 million or 22% from the year ended December 31, 2003 tothe year ended December 31, 2004.  The increase was due primarily toan increase in ethanol revenues.

 

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Revenuefrom the sale of ethanol increased $15.2 million, or 27%, from the year ended December 31,2003 to the year ended December 31, 2004.  The increase was dueprimarily to an increase in the price of ethanol.  The average sales price of ethanol increased22% from the year ended December 31, 2003 to the year ended December 31,2004.  Ethanol prices increased because of strong demand for ethanol and acontinuation of higher prices of unleaded gasoline.

 

Revenuefrom the sale of distiller’s grains increased $300,000, or 3%, from the yearended December 31, 2003 to the year ended December 31, 2004. Theincrease in distiller’s grain sales was due primarily to a 4% increase in salesvolume, offset by a 1% decrease in sales price.

 

Totalincentive revenues from federal and state government incentive programsdecreased by 33% from the year ended December 31, 2003 to the year ended December 31,2004. Incentive revenue consists of income received from federal and stategovernments in connection with Dakota Ethanol’s ethanol production. Theincentive revenue from the United States Department of Agriculture’s CommodityCredit Corporation Bioenergy Program decreased $188,000, or 35%, to $348,000for the year ended December 31, 2004 from $536,000 for the year ended2003.This decreasewas primarily because the payments under the Bioenergy Program are based inpart on a plant’s increase in production from the prior year.  Dakota Ethanol, however, had a nominalincrease in production in 2004 compared to 2003, resulting in less incentiverevenue earned under the program. Management anticipates receiving even lessunder this program in 2005 compared to 2004 because the plant is not expectedto have a significant increase in production from last year to justify an increasein payment, and Congress has reduced funding for this program in 2005 from $150million to $100 million per year.

 

Incentiverevenue from the state of South Dakota incentive program decreased $311,000, or32%, to $667,000 from the year ended December 31, 2003 to the year ended December 31,2004. The decrease was primarily due to an earlier than anticipated depletion of funds allocated to theprogram in the 2004 program year (July 1, 2003 to June 30, 2004).While funds allocated to this program have increased in the 2005 program yearand are expected to increase in the 2006 program year, itis uncertain whether the funds allocated to this program will be depletedbefore the end of these program years, much of which is dependent upon theproduction levels of all plants in South Dakota during these periods.

 

*Cost of Revenues*-Cost of revenues, which includes production expense,increased 19% to $71.7 million for the year ended December 31, 2004 from$60.2 million for the year ended December 31, 2003.  The increase in the cost of corn was causedby an approximately 7% increase in the market price of corn per bushel from theyear ended December 31, 2003 to the year ended December 31, 2004 andthe risk management program in2004.

 

In terms ofrisk management in 2004, the use of corn derivative instruments relative to theprice fluctuation of corn in 2004 was a primary factor for the increase in costof corn. Gains and losses that result from a change in value of corn andnatural gas derivative instruments are recognized in cost of revenues as thechanges occur.  For the year ended December 31,2004, cost of revenues include losses of $3.8 millionfrom the use of corn derivative instruments, up from $30,000 in 2003. Theselosses were caused by fluctuations in the price of corn in 2004. At the end of2003, Dakota Ethanol increased its use of corn derivative instruments andpositions to protect against the market price forecasts for corn. Thoseforecasts predicted higher prices for corn because of low world carryout priorto the growing season, decreased production, and drought. As the yearprogressed, however, and it became apparent that corn production would be muchhigher than expected, the original market forecasts proved incorrect and the

 

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marketprice of corn actually declined. When the market price declined, the value ofthe corn derivative instruments fell which led to an increase in cost ofrevenues.

 

At least forthe first half of 2005, management does not anticipate the same or similarimpact on cost of revenues from risk management. Because of the record corncrop in 2004 and higher than anticipated world corn carryout, the marketconditions for corn are expected to be positive, namely lower prices for cornand less price volatility. In the second half of 2005, however, whilemanagement believes the market will remain positive, conditions could alter thestability of the market and use of derivative instruments, thus increasing thepotential for losses under the risk management program.

 

While natural gas prices remainedrelatively constant between the year ended 2004 and 2003, the prices,historically, have fluctuated dramatically. Natural gas is currently at pricesexceeding historical averages.  Theseprices exceed historical averages primarily because of increased demand, higherprices in the energy markets, and inclement weather. It is expected thatnatural gas prices will continue to remain high in the future, all of whichwill affect production expenses and cost of revenues. Moreover, any significantfluctuation of natural gas prices in 2005 could affect the value of natural gasderivative instruments and, therefore, cost of revenues.

 

*General and Administrative Expenses*-Generaland administrative expenses increased 17%**to$3.1 million for the year ended December 31, 2004 from $2.6 million forthe year ended 2003. The increase in general and administrative expenses wasprimarily due to an increasein the management incentive fees paid to Broin Management, LLC.  As netincome rose, management incentive fees increased by 21% fromthe year ended December 31, 2003 to the year ended December 31, 2004.

 

*Interest Expense-*Interestexpense decreased 11% to $1.3 million for the year ended December 31, 2004from $1.4 million for the year ended of 2003. The decrease in interest expense was primarily dueto a reduction in the principal balanceoutstanding of all loans with First National Bank of Omaha.

 

*Minority Interest inSubsidiary-*Minorityinterest in subsidiary increased 62% to $1.0 millionfor the year ended December 31, 2004 from $642,000 for the year ended of2003.  The increase in minority interestin subsidiary was primarily due to the increased profitability of DakotaEthanol which increased by 62% for the year ended December 31, 2004 fromthe year ended December 31, 2003.

 

*Net Income-*Net income increased 63% to a net income of $7.5 million forthe year ended December 31, 2004 from a net income of $4.6 million for theyear ended December 31, 2003.  This change was caused primarily by,as discussed above, an increase in ethanol and distiller’sgrains revenues, offset by the increase in corn costs.

 

**Comparison of years ended December 31, 2003 and December 31,2002.**

 
| ** **              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **2003**                         | ** ** | **2002** | ** ** |
| ** **              | ** ** | **$**                            | ** ** | **%  of  Revenue** | ** ** | **$** | ** ** | **%  of  Revenue** | ** ** |
| Revenue:                |       |                             |       |   |   |   |   |   |   |
| Ethanol                 |       | 56,450,057                       |       | 82 |   | 49,872,450 |   | 76 |   |
| Distiller’s Grains |       | 11,427,190                       |       | 16 |   | 9,457,226 |   | 14 |   |
| Incentive               |       | 1,513,935                        |       | 2 |   | 6,313,993 |   | 10 |   |
| Total                   |       | 69,391,182                       |       | 100 |   | 65,643,669 |   | 100 |   |

 

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*Revenues*-Revenueincreased 6% from the year ended December 31, 2002 to the year ended December 31,2003.  The increase was due primarily to an increase in the sales pricesof ethanol and distiller’s grains.

 

Revenuefrom the sale of ethanol increased 13% from the year ended December 31,2002 to the year ended December 31, 2003.  The increase was dueprimarily to an increase in the price of ethanol. The average sales price ofethanol increased 10% from the year ended December 31, 2002 to the yearended December 31, 2003.  Ethanol prices increased because of strongdemand for ethanol and higher prices of unleaded gasoline.

 

Revenuefrom the sale of distiller’s grains increased approximately 21% from the yearended December 31, 2003 to the year ended December 31, 2004. Theincrease was due primarily to an increase in the price of distiller’sgrains.  The average sales price ofdistiller’s grains increased 7% from the year ended December 31, 2002 tothe year ended December 31, 2003.  The sales price of distiller’sgrains increased primarily because of higher prices of corn and soybean meal.

 

Totalincentive revenues from federal and state government incentive programsdecreased by 76% from the year ended December 31, 2002 to the year ended December 31,2003. The incentive revenue from the United States Department ofAgriculture’s Commodity Credit Corporation Bioenergy Program decreased $4.7million, or 90%, to $536,000 for the year ended December 31, 2003 from$5.2 million for the year ended 2002. The decrease was primarily becausethe payments under the Bioenergy Program are based in part on a plant’sincrease in production from the prior year. Dakota Ethanol, however, had a nominal increase in production in 2003compared to 2002, resulting in less incentive revenue earned under the program.

 

Incentiverevenue from the state of South Dakota incentive program decreased $89,000, or8%, to $978,000 from the year ended December 31, 2002 to the year ended December 31,2003. The decrease was primarily due to an earlier than anticipated depletion of funds allocated to theprogram in the 2003 program year (July 1, 2002 to June 30, 2003) anda modification to the payment methodology implemented for the 2004 program year(July 1, 2003 to June 30, 2004) which capped the monthly payment fromthe program to one-twelfth of the annual maximum of $1 million.

 

*Cost of Revenues*-Cost ofRevenues increased $8.3 million, or 16%, to $60.2 million for the year ended December 31,2003 from $51.9 million for the year ended December 31, 2002. The increase in the cost of revenues resulted primarily froman increase in corn and natural gas costs.  The average price per bushel of corn was approximately 7% higher for theyear ended December 31, 2003 than for the year ended December 31,2002.  The increase in the cost of cornwas attributed to a reduced carryout level from 2002 to 2003, caused by adecrease in the supply of corn from the 2002 harvest that was primarily due todrought conditions.  The average cost ofnatural gas was approximately 50% higher for the year ended December 2003than for the year ended December 31, 2002. The difference in the cost of natural gas was primarily the result ofincreased demand for natural gas and reduced production and inventories in thenatural gas industry.

 

*General and Administrative Expenses*-Generaland administrative expenses decreased $605,000, or 19%,**to $2.6 million for the year ended December 31,2003 from $3.2 million for the year ended 2002. The decrease in general andadministrative expenses was due toa decrease in the management incentive fees paid to Broin Management,LLC.  As net income decreased, management incentive fees decreased by 21% fromthe year ended December 31, 2002 to the year ended December 31, 2003.

 

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*Interest Expense-*Interestexpense decreased $522,000, or 26%, to $1.5 million for the year ended December 31,2003 from $2.0 million for the year ended of 2002.  The decrease in interest expense was due inpart to a reduction in the outstanding principal balance of the long-term debtand a reduction of interest rates.

 

*Minority Interest inSubsidiary-*Minorityinterest in subsidiary decreased $457,000, or 42%, for the yearended December 31, 2003 from $1.1 million for the year ended of 2002.  The decrease in minority interest insubsidiary was primarily due to the decreased profitability of Dakota Ethanolwhich decreased by 42% for the year ended December 31, 2003 from the yearended December 31, 2002.

 

*Net Income-*Net income decreased $3.1 million to a net income of $4.6million for the year ended December 31, 2003 from $7.7 million for theyear ended December 31, 2002.  This change was caused primarily by,as discussed above, an increase in sales revenues offset by an increase in cornand natural gas costs and reduction of incentive revenue.

 

**Liquidity and Capital Resources.**** **The following table shows cash flows for thelast two years:

 
| ** **                             | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| Net cash from operating activities     |       | $                                | 11,388,383 |   | $ | 7,086,879 |   |
| Net cash used for investing activities |       | (687,766                         | )          | (230,288 | ) |
| Net cash used for financing activities |       | (8,589,929                       | )          | (6,759,775 | ) |
|                                        |            |                                  |            |  |  |  |  |

 

*Cash Flow From Operations-*Theincrease in net cash flow provided from operating activities between 2004 and2003 was primarily attributed to an increase in net income and a decrease inworking capital requirements.  Thedecrease in working capital requirements was related to a decrease ininventory, accounts payable and investments in commodity contracts, withaccounts receivable increasing during the same period.  Inventory decreased primarily due to losseson deferred corn purchases as the market values on deferred corn purchases werelower in 2004 compared to 2003.  Accountspayable decreased due to a reduction in corn payables, as more producersdelivering corn to the plant in late 2003 elected to defer payment until 2004and were paid after the beginning of the year. The decrease in investments in commodity contracts in 2004 was relatedto a change in the composition of the contracts and a decrease in value offutures’ contracts in 2004.  Accountsreceivable increased based on the increase in the market price of ethanol in2004.

 

*Cash Flow From InvestingActivities-*The increase in cash used for investingactivities was mainly attributed to an increase in the purchase of property andequipment.  Approximately $564,000 more in cash was used in 2004 forcapital improvement projects, specifically improvements to buildings andequipment at the plant.  The increase incapital spending was offset by a $107,000 increase in cash provided by otherassets, as investments provided an improved rate of return in 2004.

 

Managementestimates that approximately $500,000 in capital expenditures will be made inthe next six months for general improvements to the plant, all of which areexpected to be financed from cash flows from operations and revolving debt.Improvements are expected to be made in the areas of air pollution controlequipment and dryer systems.

 

*Cash Flow From FinancingActivities-*The increase in cash used by financingactivities was attributed to a decrease in outstanding checks in excess of bankbalance and additional distributions

 

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beingmade to our members and the minority members. Outstanding checks in excess of bank balances decreased approximately$800,000 as there was more cash available at the end of 2004.  Approximately $600,000 more in distributionswas made to our members in 2004 compared to 2003.  Similarly, approximately $60,000 more indistributions was made to the minority members in 2004 compared to 2003.

 

Thefollowing table shows cash flows for 2003 and 2002:

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

 

*Cash Flow From Operations.* The decrease in net cash flow provided from operating activities between 2003and 2002 was primarily attributed to a decrease in net income and an increasein working capital requirements.  Theincrease in working capital requirements was related to an increase ininventory and accounts payable, with accounts receivable decreasing during thesame period.  Inventory increasedprimarily due to increases in corn and distiller’s grains values.  Accounts payable increased due to an increasein corn payables, as more producers delivering corn to the plant in late 2002elected to defer payment until 2003 and were paid after the beginning of theyear.  Accounts receivable decreasedprimarily because there was less incentive income earned in 2003.

 

*Cash Flow From InvestingActivities.*  The decrease in cash used forinvesting activities between 2003 and 2002 was mainly attributed to a decreasein the purchase of property and equipment.  Dakota Ethanol usedapproximately $1.6 million less cash in 2003 than in 2002 for capitalimprovement projects.  In 2002, DakotaEthanol spent approximately $1.4 million for the installation of a thermaloxidizer, which is a pollution control device designed to reduce emissions.

 

*Cash Flow From FinancingActivities.* The decrease in cash used byfinancing activities between 2003 and 2002 was attributed to a decrease inprincipal payments on notes payable, a decrease in distributions paid to ourmembers and the minority members and a decrease in outstanding checks in excessof bank balance.  The principal paymentson notes payable decreased in 2003 as a result of Dakota Ethanol refinancingits loans with First National Bank in 2002. The refinancing allowed DakotaEthanol to use $5 million in cash in 2002 to reduce the principal balance ofthe $5.0 million revolving note. In addition, approximately $4.6 million lessin distributions was made to our members in 2003 compared to 2002.  Similarly, approximately $700,000 less indistributions was made to the minority members in 2003 compared to 2002.Outstanding checks in excess of bank balances decreased approximately $300,000as there was more cash available at the end of 2003.

 

**Indebtness**

 

FirstNational Bank of Omaha is Dakota Ethanol’s primary lender. Dakota Ethanolhas four notes or loans outstanding with First National Bank pursuant to aConstruction Loan Agreement and Construction Note dated September 25, 2000and amendments dated July 29, 2002, November 1, 2002 and April 23,2004:  a $14.5 million fixed rate note, a$4.4 million variable rate note, a $5.0 million variable rate, revolving note,and a $3.0 million variable rate, revolving note.

 

Thefixed rate note bears 9% interest annually, requires quarterly installmentpayments, and is

 

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dueon September 1, 2011.  ThroughDecember 31, 2003, a portion of the principal was required to be prepaid eachyear in an amount equal to 10% of the excess cash flow payment. Excess cashflow was defined as net income plus interest expense, depreciation andamortization, less annual debt service. The excess cash flow payment was applied pro rata to the $4.4 millionnote, then the $5 million note, followed by the fixed note. In March 2005,First National Bank granted Dakota Ethanol a waiver of the excess cash flowpayment effective for 2004 and subsequent years.  Principal payments made on the fixed ratenote were $1,598,572 for the year ended December 31, 2004, compared topayments of $1,565,196 for the year ended December 31, 2003.  The principalbalance outstanding on this note was $10.8 million as of December 31, 2004.

 

The$5.0 million and $4.4 million variable rate notes bear interest at .50% overthe national base rate set by First National Bank of Omaha, which may bereduced if Dakota Ethanol’s ratio of indebtedness to net worth improves, with aminimum interest rate of 5% annually. The variable rates as of December 31,2004 and December 31, 2003 were 5.5% and 5.0%, respectively.  Until July 29,2005, Dakota Ethanol has the option to fix the variable rate notes at 2.5% overand above the rate published by the Federal Home Loan Bank of Topeka, Kansas atthe time the note is fixed.

 

The$5 million variable rate note is set up as a revolving loan that allows DakotaEthanol to reborrow up to $5 million of any repaid principal on a revolvingbasis, subject to a 0.375% annual commitment fee assessed quarterly on anyfunds not borrowed.  There is also a prepayment penalty on both variablerate notes if Dakota Ethanol prepays in full before July 29, 2005. Principal payments of $1,394,571 were made on the $4.4 million variable ratenote during the year ended December 31, 2004, compared to principalpayments of $1,365,205 during the year ended December 31, 2003.  The principal balance outstanding on the $4.4million variable rate note was $1.3 million as of December 31, 2004.  The unpaid principal balance on the $5million variable rate note was $0.00 as of December 31, 2004 and as of December 31,2003.

 

OnApril 23, 2004 Dakota Ethanol and First National Bank entered into anamendment of the Construction Loan Agreement to obtain a new revolving line ofcredit for Dakota Ethanol. The primary purpose of the line of credit is forworking capital. The maximum amount available under the line of credit is $3million, Dakota Ethanol being able to borrow up to the maximum amount availableand pay down without penalty whenever excess cash is available.  Once paid down, the amount available toborrow under the line of credit increases back to the maximum.  The line of credit is subject to a 0.375%annual commitment fee assessed quarterly on any funds not borrowed. Theinterest rate is set at .50% over the national base rate set by First National,which may be reduced if Dakota Ethanol’s ratio of indebtedness to net worthimproves, the minimum interest rate being 5% annually. The maturity on the lineof credit is April 22, 2005, which management expects to renew before thistime.  The balance borrowed on this loanwas $0 as of December 31, 2004, and the variable rate was 5.5%.

 

Thenotes from First National are secured by Dakota Ethanol’s real property,personal property (including general intangibles), and an assignment of allrents and leases in favor of First National. The Construction Loan Agreement contains debt service coverage ratio,working capital, net worth and other standard negative and affirmativecovenants. Dakota Ethanol, for example, is limited to making no more than$500,000 in capital expenditures in given year without First National’s consentor waiver.  Dakota Ethanol is alsorestricted in making distributions to its members in any given year by not morethan  80% ofexcess cash flow.  If an event of defaultoccurs, First National may terminate the Construction Loan Agreement anddeclare all amounts under the four loans due and owing.  Events of default under the Agreementgenerally include failure to make payments when due or violation of one or moreof the Agreement’s covenants.  Managementbelieves that Dakota Ethanol is currently in compliance with all covenants andrestrictions contained by such notes and loans.

 

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OnOctober 1, 2001, Dakota Ethanol obtained a loan from Sioux Valley Energyfor $85,000, relating to the financing of an extension of utility lines to theplant.  The loan was payable over ten years, beginning on October 1,2001, with an effective interest rate of approximately 9%.  Principalpayments of $72,701 were made during the year ended December 31, 2004,compared to payments of $5,666 for the year ended December 31, 2003.  As of December 31, 2004, there is noprincipal balance outstanding, as the note was fully repaid during the fourthquarter of 2004.

 

Finally, Dakota Ethanol has a long-termdebt obligation on a portion of a $1.323 million tax increment revenue bondseries issued by Lake County, South Dakota on December 2, 2003.  The portion for which Dakota Ethanol isobligated is estimated at $511,120. The bond was issued in connection with therefunding of a tax increment financing bond issued by Lake County in 2001, ofwhich Dakota Ethanol was the recipient of the proceeds.  In 2003, Lake County became aware that thetaxes collected from the property on which the plant was located would beinsufficient to cover the debt service of the 2001 bond issue. Based on thisdeficiency and change in interest rates during December of 2003, LakeCounty refunded the 2001 bond issue and replaced it with two separate bonds: atax-exempt bond in the amount of $824,599 and a taxable bond in the amount of$1,323,024. As a part of this refund, Dakota Ethanol entered into an agreementwith the holder of these bonds to guarantee the entire debt service on thetaxable bond issue. The taxes levied on Dakota Ethanol’s property are usedfirst towards paying the debt service of the tax-exempt bonds and any remainingtaxes are used for paying the debt service of the taxable bonds. Since theproperty taxes on the property are currently sufficient to cover a portion ofthe debt service on the taxable bond series, Dakota Ethanol’s obligation underthe guarantee is to cover the shortfall in debt service, representing thedifference between the original taxable bond amount ($1,323,024) and theestimated amount expected to be collected in property taxes from the realproperty on which Dakota Ethanol’s plant is located.   The interest rateon the bonds is 7.75% annually.  The taxable bonds require semi-annualpayments of interest on December 1 and June 1, in addition to apayment of principal on December 1 of each year. While Dakota Ethanol’sobligation 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. Principal payments of $49,682 and $0 were madeon the bonds for year ended December 31, 2004 and December 31, 2003,respectively. The principal balance outstanding was $1,273,342 as of December 31,2004.

 

Managementanticipates that the plant will continue to operate at or above name-platecapacity for the next twelve months. Management also expects for the next twelve months to have sufficientcash flows from operating activities and its revolving debt to fund workingcapital and to cover operating and administrative costs, capital expenditures,and debt service obligations.

 

Inaddition to Dakota Ethanol’s long-term debt obligations, Dakota Ethanol hascertain other contractual cash obligations and commitments.  The following tablesprovides information regarding our consolidated contractual obligationsand commitments as of December 31, 2004:

 
| ** **                         | ** ** | **Payment Due By Period** | ** ** |
|------------------------------------|------------|---------------------------|------------|
| **Contractual  Cash Obligations**  | ** ** | **Total**                 | ** ** | **Less than  One Year** | ** ** | **One to  Three  Years** | ** ** | **Four to  Five  Years** | ** ** | **After Five  Years** | ** ** |
|                               |       |                      |       |   |   |   |   |   |   |   |   |
| Long-Term Debt Obligations         |       | $                         | 12,100,658 |   | $ | 2,666,308 |   | $ | 3,270,355 |   | $ | 3,822,843 |   | $ | 2,341,152 |   |
| Capital Lease Obligations          |       | 0                         |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Operating Lease Obligations        |       | 0                         |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Purchase Obligations               |       | 2,833,105                 |       | 882,217 |   | 820,088 |   | 616,800 |   | 514,000 |   |
| Other Long Term Liabilities        |       | 511,121                   |       | 62,692 |   | 125,153 |   | 122,998 |   | 200,278 |   |
| Total Contractual Cash Obligations |       | $                         | 15,444,884 |   | $ | 3,611,217 |   | $ | 4,215,596 |   | $ | 4,562,641 |   | $ | 3,055,430 |   |

 

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| ** **                        | ** ** | ** ** | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|-----------------------------------|------------|------------|------------|------------------------------------------------|------------|
| **Commercial  Commitments**       | ** ** | **Total**  | ** ** | **Less  than  One  Year**                      | ** ** | **One to  Three  Years** | ** ** | **Four to  Five  Years** | ** ** | **After  Five  Years** | ** ** |
| Guarantee (1)                     |       | $          | 2,131,036  |                                           | $          | 152,217 |   | $ | 304,434 |   | $ | 304,434 |   | $ | 1,552,168 |   |
| **Total  Commercial Commitments** |       | $          | 2,131,036  |                                           | $          | 152,217 |   | $ | 304,434 |   | $ | 304,434 |   | $ | 1,552,168 |   |

 

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(1) DakotaEthanol entered into a debt service guarantee in December 2003 as part ofa refunding on a taxable bond issue. Dakota Ethanol guarantees the payment ofall principal ($1,323,024) and interest on the taxable bonds, the totalcommitment until maturity being $2,136,036. Since local property taxes cover aportion of the debt service payment, Dakota Ethanol’s current obligation underthe guarantee is to cover a shortfall or difference between the amountestimated to be collected in property taxes on the real property on whichDakota Ethanol’s plant is located and the taxable bond amount. Currently, thereis an estimated shortfall of approximately $511,120 between the taxable bondamount and the amount expected to be collected in property taxes on the realproperty. This amount is recognized as a guarantee liability in the financialstatements.  If property taxes collectedon the property became insufficient to cover the debt service on the taxablebonds, in part or in whole, Dakota Ethanol’s obligation under the guaranteewould increase. For further information on thisguarantee, please “Item 7, Management’s Discussion andAnalysis of Financial Conditions and Results of Operations—Indebtness” above.

 

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

 

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

 

**Recent Accounting Pronouncements**

 

The Financial Accounting Standards Board (FASB) has issued Statement No. 151,Inventory Costs, an amendment of ARB No. 43, Chapter 4, “Inventory Pricing”(SFAS No. 151). The Statement amends and clarifies accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material(spoilage).  The statement requires suchcosts be recognized as current period charges. The statement also requires the allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacility.  Management has determined thatimplementation of this pronouncement will not have a material effect on thefinancial statements.

 

**Critical Accounting Policies and Estimates**

 

Preparation of our financial statementsrequire estimates and judgments to be made thataffect the amounts of assets, liabilities, revenues, and expensesreported.  Such decisions include theselection of the appropriate accounting principles to be applied and theassumptions on which to base accounting estimates.  Management continually evaluates theseestimates based on historical experience and other assumptions we believe to bereasonable under the circumstances.

 

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

 

26

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from those currently estimated.

 

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

 

## *Commitments and Contingencies*

 

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

 

## *Inventory Valuation*

 

Dakota Ethanol accounts for its corn inventory at estimated netrealizable market value.  Corn is anagricultural commodity that is freely traded, has quoted market prices, may besold without significant further processing and has predictable andinsignificant costs of disposal.  DakotaEthanol derives its estimates from local market prices determined by grainterminals in its area.  Changes in the market values of corn inventory is recognizedas a component of cost of revenues. Ethanol and DDGS are states at net realizable value.  Work-in-process, supplies, parts and chemicalinventory are stated at the lower of cost or market on the first-in, first-outmethod.

 

*Revenue Recognition*

 

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

 

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

 

## *Long-Lived Assets*

## * *

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

 

Long-lived assets, including property, plant and equipment andinvestments are evaluated for impairment on the basis of undiscounted cashflows whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. An impaired asset is written down to its estimated fair market valuebased on the best information available. Considerable management judgment is necessary to estimate discountedfuture cash flows and may differ from actual.

 

27

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## *Accounting for Derivative Instruments and HedgingActivities*

 

DakotaEthanol enters into derivative instruments to hedge its exposure to price riskrelated to forecasted corn and natural gas purchases, forward corn purchasecontracts and forecasted ethanol sales.  Dakota Ethanol does not typicallyenter into derivative instruments other than for hedging purposes.  Allderivative contracts are recognized on the December 31, 2004 and 2003balance sheets at their fair market value. Currently, none of the derivativeinstruments are classified as cash-flow hedges for accounting purposes.

 

Onthe date the derivative instrument is entered into, Dakota Ethanol willdesignate the derivative as either (1) a hedge of the fair value of arecognized asset or liability or of an unrecognized firm commitment (fair valuehedge), (2) a hedge of a forecasted transaction or of the variability ofcash flows to be received or paid related to a recognized asset or liability(cash flow hedge) or (3) will not designate the derivative as ahedge.  Changes in the fair value of a derivative that is designated asand meets all the required criteria for a fair value hedge, along with the gainor loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings.  Changesin the fair value of a derivative that is designated as and meets all therequired criteria for a cash flow hedge are recorded in accumulated othercomprehensive income and reclassified into earnings as the underlying hedgeditem affects earnings.  Changes in the fair value of a derivative that isnot designated as a hedge are recorded in current period earnings.

 

**Item 7A.****Quantitative and Qualitative Disclosure About Market Risk.**

 

DakotaEthanol is exposed to the impact of market fluctuations associated withcommodity prices and interest rates as discussed below. Dakota Ethanol has noexposure to foreign currency risk as all of its business is conducted in U.S. Dollars.Dakota Ethanol uses derivative financial instruments as part of an overallstrategy to manage market risk. It uses forward, futures and option contractsto hedge changes to the commodity prices of corn and natural gas. It does notenter into these derivative financial instruments for trading or speculativepurposes, nor does it designate these contracts as hedges for accountingpurposes pursuant to the requirements of SFAS 133, Accounting for DerivativeInstruments and Hedging Activities.

 

*CommodityPrice Risk*

 

DakotaEthanol produces ethanol and its co-product, distiller’s grain, from corn, andas such is sensitive to changes in the price of corn. The price of corn issubject to fluctuations due to unpredictable factors such as weather, totalcorn planted and harvested acreage, changes in national and global supply anddemand, and government programs and policies. Dakota Ethanol also uses naturalgas in the ethanol and distiller’s grains production process, and as such issensitive to changes in the price of natural gas.  The price of naturalgas is influenced by such weather factors as heat or cold in the summer andwinter, in addition to the threat of hurricanes in the spring, summer and fall.Other natural gas price factors include the domestic onshore and offshore rigcount, and the amount of natural gas in underground storage during both theinjection (April 1st – November 7th) and withdrawal (November 14th– March 31st) seasons.

 

DakotaEthanol attempts to reduce the market risk associated with fluctuations in theprice of corn and natural gas by employing a variety of risk managementstrategies.  Strategies include the use of derivative financialinstruments such as futures and options initiated on the Chicago Board of Trade

 

28

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and/or the NewYork Mercantile Exchange, as well as the daily cash management of DakotaEthanol’s total corn and natural gas ownership relative to its monthly demandfor each commodity, which may incorporate the use of forward cash contracts orbasis contracts.

 

Cornis hedged with derivative instruments including futures and options contractsoffered through the Chicago Board of Trade. Forward cash corn and basiscontracts are also utilized to minimize future price risk.  Similarly,natural gas is hedged with futures and options contracts offered through theNew York Mercantile Exchange.  Basis contracts are likewise utilized tominimize future price risk.

 

Gainsand losses on futures and options contracts used as economic hedges of corninventory, as well as on forward cash corn and basis contracts, are recognizedas a component of cost of revenues for financial reporting on a monthly basisusing month-end settlement prices for corn futures on the Chicago Board ofTrade.  Corn inventories are marked to fair value using market based pricesso that gains or losses on the derivative contracts, as well as forward cashcorn and basis contracts, are offset by gains orlosses on inventories during the same accounting period.

 

Gainsand losses on futures and options contracts used as economic hedges of naturalgas, as well as basis contracts, are recognized as a component of cost ofrevenues for financial reporting on a monthly basis using month-end settlementprices for natural gas futures on the New York Mercantile Exchange.  Thenatural gas inventories hedged with these derivatives or basis contracts arevalued at the spot price of natural gas, plus or minus the gain or loss on thefutures or options positions relative to the month-end settlement price on theNew York Mercantile Exchange.

 

A sensitivity analysis has beenprepared to estimate Dakota Ethanol’s exposure to commodity price risk. The table presents thefair value of corn inventory, forward purchase contract position and openfutures and option positions as of December 31, 2004 and December 31,2003 and the potential loss in fair value resulting from a hypothetical 10%adverse change in such prices. The fair value of the positions is a summationof the fair values calculated by valuing each net position at quoted marketprices as of the applicable date. The results of this analysis, which maydiffer from actual results, are as follows:

 
| **Year  Ended**        | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical Adverse  Change— Market Risk** | ** ** |
|------------------------|------------|----------------|------------|--------------------------------------------------------------|------------|
| December 31, 2004 |       | $              | 4,139,826  |                                                         | $          | 413,983 |   |
| December 31, 2003 |       | $              | 7,814,700  |                                                         | $          | 781,470 |   |

 

*Interest Rate Risk*

 

DakotaEthanol’s interest rate risk exposure pertains primarily to its long-term,variable rate debt. Specifically, Dakota Ethanol has $1.3 million outstandingin variable rate, long-term debt as of December 31, 2004.  Theinterest rate on the variable rate, long-term debt is .50% over the base rateset by First National Bank of Omaha, which was 5.5% as of  December 31, 2004.  Dakota Ethanol manages its interest rate riskby monitoring the effects of market changes on interest rates and using fixedrate debt.  Until July 29, 2005, Dakota Ethanol has the option to fixa substantial portion of the variable rate debt to 2.5% over the rate publishedby the Federal Home Loan Bank of Topeka, Kansas.

 

**Item 8.****  Financial Statements.**

 

Referenceis made to the “Index to Financial Statements” of Lake Area Corn Processors,LLC located at page F-1 of this report, and financial statements for theyear ended December 31, 2004, 2003

 

29

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and 2002 referenced therein, which are herebyincorporated by reference.

 

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

 

None.

 

**Item 9A.****  Controls and Procedures.**

 

*Evaluation Of Disclosure Controls And Procedures*

 

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

 

*ChangesIn Internal Controls*

 

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

 

### **PART III**

 

**Item 10.****  Directors andExecutive Officers of the Registrant.**

 

**Compliance with Section 16(a) of the Exchange Act**

 

Informationregarding untimely filings pursuant to Section 16 of the SecuritiesExchange Act of 1934, as amended, is incorporated in this Form 10-K byreference from our definitive Proxy Statement for the Annual Meeting of Membersto be held in 2005, a copy of which will be filed with the Commission not laterthan 120 days after December 31, 2004.

 

**Code of Ethics**

 

Informationregarding a code of ethics is incorporated in this Form 10-K by referenceto our definitive Proxy Statement for the Annual Meeting of Members to be heldin 2005, a copy of which will be filed with the Commission not later than 120days after December 31, 2004.

 

**Directors**

 

Informationregarding our board of managers is incorporated in this Form 10-K byreference from the definitive Proxy Statement for the Annual Meeting of Membersto be held in 2005, a copy of which will be filed with the Commission not laterthan 120 days after December 31, 2004.

 

**Executive officers**

 

Informationrequired by this item regarding the business experience of our executive isincorporated in this Form 10-K by reference from the definitive ProxyStatement for the Annual Meeting of Members to be held in 2005, a copy of whichwill be filed with the Commission not later

 

30

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than120 days after December 31, 2004.

 

**Item 11.****  ExecutiveCompensation.**

 

Information required bythis item is incorporated by reference in this Form 10-K from ourdefinitive Proxy Statement for the Annual Meeting of Members, to be filed withthe Commission not later than 120 days after December 31, 2004.

 

**Item 12.****  SecurityOwnership of Certain Beneficial Owners and Management.**

 

Information required bythis item is incorporated by reference in this Form 10-K from ourdefinitive Proxy Statement for the Annual Meeting of Members, to be filed withthe Commission not later than 120 days after December 31, 2004.

 

**Item 13.****  CertainRelationships and Related Transactions.**

 

Information required bythis item is incorporated by reference in this Form 10-K from ourdefinitive Proxy Statement for the Annual Meeting of Members, to be filed withthe Commission not later than 120 days after December 31, 2004.

 

**Item 14.****  PrincipalAccounting Fees and Services.**

 

Information required bythis item is incorporated by reference in this Form 10-K from our definitiveProxy Statement for the Annual Meeting of Members, to be filed with the Commissionnot later than 120 days after December 31, 2004.

 

**PART IV**

 

**Item 15.****  Exhibits, Financial Statement Schedules.**

 

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

 

(1)                                  FinancialStatements – Reference is made to the “Index toFinancial Statements” of Lake Area Corn Processors, LLC located at page F-1of this report for a list of the financial statements and schedules for theyear ended December 31, 2004 included herein.

 

(2)                                  Allsupplemental schedules are omitted because of the absence of conditions underwhich they are required or because the information is shown in the ConsolidatedFinancial Statements or notes thereto

 

(3)                                  Theexhibits we have filed herewith or incorporated by reference herein are setforth on the attached Exhibit Index.

 

(b)         See Item 15(a)(3)

 

(c)   —

 

31

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SIGNATURES

 

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

 

 
|                      | LAKE AREA CORN PROCESSORS, LLC             |
|---------------------------|--------------------------------------------|
|                      |                                       |
| Date: March 31, 2005 | /s/ Douglas Van Duyn                       |
|                      | Douglas Van Duyn, Chief Executive  Officer |
|                      |                                       |
| Date: March 31, 2005 | /s/ Brian Woldt                            |
|                      | Brian Woldt, Chief Financial Officer       |

 

In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 

 
| Date: March 31, 2005 | /s/ Douglas Van Duyn                                                                         |   |
|---------------------------|----------------------------------------------------------------------------------------------|--------|
|                      | Douglas Van Duyn, Chief Executive  Officer,  Manager (Principal Executive Officer)           |
|                      |                                                                                         |
|                      |                                                                                         |
| Date: March 31, 2005 | /s/ Brian Woldt                                                                              |   |
|                      | Brian Woldt, Chief Financial Officer,  Manager  (Principal Financial and Accounting Officer) |
|                      |                                                                                         |
|                      |                                                                                         |
| Date: March 31, 2005 | /s/ Ron Alverson                                                                             |   |
|                      | Ronald C. Alverson, Manager                                                                  |
|                      |                                                                                         |
|                      |                                                                                         |
| Date: March 31, 2005 | /s/ Todd Brown                                                                               |   |
|                      | Todd M. Brown, Manager                                                                       |
|                      |                                                                                         |
|                      |                                                                                         |
| Date: March 31, 2005 | /s/ Dale Schut                                                                               |   |
|                      | Dale I. Schut, Manager                                                                       |
|                      |                                                                                         |
|                      |                                                                                         |
| Date: March 31, 2005 | /s/ Dale Thompson                                                                            |   |
|                      | Dale L. Thompson, Manager                                                                    |
|                      |                                                                                         |
|                      |                                                                                         |
| Date: March 31, 2005 | /s/ Greg Van Zanten                                                                          |   |
|                      | Gregory Van Zanten,  Manager                                                                 |
|                           |                                                                                              |        |  |

 

32

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**EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                           | ** ** | **Filed  Herewith** | ** ** | **Incorporated by Reference**                                                                                                    | ** ** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| 2.1              |       | Plan of Reorganization                                                                                                                                                                    |       |                |       | Appendix A to the Issuer’s Prospectus filed with the Commission on July 19,  2002                                      |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 3.1              |       | Articles of Organization                                                                                                                                                                  |       |                |       | Appendix B to the Issuer’s Prospectus filed with the Commission  pursuant to Rule 424(b)(3) on July 19, 2002 |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 3.2              |       | Articles of Amendment to Articles of Organization                                                                                                                                         |       |                |       | Exhibit 3.1(ii) to the Issuer’s Form 10-QSB filed with  the Commission on November 14, 2003             |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 3.3              |       | Operating Agreement, as adopted on September 1, 2002                                                                                                                                 |       |                |       | Exhibit 3.1(ii) to the Issuer’s Form 10-QSB filed with  the Commission on November 14, 2003.            |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 3.4              |       | Amendment and Addendum to Operating Agreement, dated June 25,  2003                                                                                                                  |       |                |       | Exhibit 3.1(iii) to the Issuer’s Form 10-QSB filed  with the Commission on August 14, 2003.             |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 3.5              |       | Amended and Restated Operating Agreement, dated August 27, 2003                                                                                                                      |       |                |       | Exhibit 3.2 to the Issuer’s Form 10-QSB filed with the  Commission on November 14, 2003.                     |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 3.6              |       | Amended and Restated Operating Agreement, dated February 17,  2005                                                                                                                   |       | x                   |       |                                                                                                                             |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 4.1              |       | Form of Class A Capital Unit Certificate                                                                                                                                        |       |                |       | Exhibit 4.1 to the Issuer’s Form S-4 filed with the  Commission on August 2, 2001. .                         |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 10.1             |       | DDGS Marketing Agreement with Dakota Commodities (a/k/a Dakota Gold  Marketing), dated June 7, 2001                                                                                  |       |                |       | Exhibit 10.1 to the Issuer’s Form S-4 filed with the  Commission on August 2, 2001.                          |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 10.2             |       | Ethanol Marketing and Services Agreement with Ethanol Products, LLC,  dated October 7, 1999 and First Amendment to Ethanol and Marketing  Service Agreement, dated June 7, 2001 |       |                |       | Exhibit 10.2 to the Issuer’s Form S-4 filed with the  Commission on August 2, 2001.                          |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 10.4             |       | Management Agreement with Broin Management, LLC, dated October 7,  1999                                                                                                              |       |                |       | Exhibit 10.4 to the Issuer’s Form S-4 filed with the  Commission on August 2, 2001.                          |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 10.5             |       | Corn Price Risk Management Agreement with Broin Management, LLC,  dated December 17, 1999                                                                                            |       |                |       | Exhibit 10.5 to the Issuer’s Form S-4 Filed with the  Commission on August 2, 2001.                          |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 10.6             |       | Licensing Agreement with Broin and Associates, Inc., dated October 7,  1999                                                                                                     |       |                |       | Exhibit 10.6 to the Issuer’s Form S-4 filed with the  Commission on August 2, 2001.                          |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 10.7             |       | Construction Loan Agreement with First National Bank of Omaha, dated September 25,  2000                                                                                             |       |                |       | Exhibit 10.7 to the Issuer’s Form S-4 filed with the Commission  on August 2, 2001.                          |       |
|             |       |                                                                                                                                                                                      |       |                |       |                                                                                                                             |       |
| 10.8             |       | Construction Note payable to First National Bank of Omaha, dated September 25,  2000                                                                                                 |       |                |       | Exhibit 10.8 to the Issuer’s Form S-4 filed with the  Commission on August 2, 2001.                          |       |

 

33

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| 10.9   |   | Water Purchase Agreement with Big Sioux Community Water Systems, Inc.,  dated June 2, 2000            |   |   |   | Exhibit 10.9 to the Issuer’s Form S-4 filed with the  Commission on August 2, 2001.         |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 10.10  |   | U. S. Energy Service Agreements, dated April 1, 1999 and March 9,  2001                               |   |   |   | Exhibit 10.11 to the Issuer’s Form S-4 filed with the  Commission on August 2, 2001.        |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 10.11  |   | Railcar Lease Agreement with Chicago Freight Car Leasing Co., dated June 6,  2001                          |   |   |   | Exhibit 10.12 to the Issuer’s Form S-4 filed with the  Commission on August 2, 2001.        |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 10.12  |   | Gas Management Agreement with Northwestern Energy, dated August 2000                                       |   |   |   | Exhibit 10.13 to the Issuer’s Form S-4 filed with the  Commission on August 2, 2001.        |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 10.13  |   | Service Request Form with Northwestern Energy, dated August 2000                                      |   |   |   | Exhibit 10.14 to the Issuer’s Form S-4 filed with the  Commission on August 2, 2001.        |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 10.14  |   | First Amendment to Construction Loan Agreement with First National  Bank of Omaha, dated July 29, 2002     |   |   |   | Exhibit 10.15 to the Issuer’s Form 10-QSB filed with the  Commission on August 22, 2002.    |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 10.15  |   | Railcar Lease Agreement with Trinity Industries Leasing Company,  dated July 5, 2002                       |   |   |   | Exhibit 10.16 to the Issuer’s Form 10-KSB filed with the  Commission on March 25, 2003.     |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 10.17  |   | Second Amendment to Construction Loan Agreement with First National  Bank of Omaha, dated November 1, 2002 |   |   |   | Exhibit 10.17 to the Issuer’s Form 10-KSB filed with the  Commission on March 25, 2003.     |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 10.18  |   | Memorandum of Understanding with Dakota Commodities, dated April 1,  2003                                  |   |   |   | Exhibit 10.18 to the Issuer’s Form 10-QSB filed with the  Commission on May 15, 2003.  |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 10.19  |   | Debt Service Guarantee                                                                                          |   |   |   | Exhibit 10.1 to the Issuer’s Form 10-QSB filed with the  Commission on November 14, 2003.   |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 10.20  |   | Natural Gas Supply and Transportation Agreements dated October 23,  2003                                   |   |   |   | Exhibit 10.20 to the Issuer’s Form 10-KSB filed with the  Commission on March 30, 2004.     |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 10.21  |   | Third Amendment to Construction Loan Agreement and Promissory Note,  dated April 23, 2004                  |   |   |   | Exhibit 10.1 to the Issuer’s Form 10-Q filed with the  Commission on May 17, 2004.          |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 31.1   |   | Rule 13a-14/15d-14(a) Certifications                                                                  |   | ý |   |                                                                                                            |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 31.2   |   | Rule 13a-14/15d-14(a) Certifications                                                                  |   | ý |   |                                                                                                            |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 32.1   |   | Section 1350 Certification                                                                                 |   | ý |   |                                                                                                            |   |
|   |   |                                                                                                            |   |   |   |                                                                                                            |   |
| 32.2   |   | Section 1350 Certification                                                                                 |   | ý |   |                                                                                                            |   |

 

34

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**LAKE AREA CORN PROCESSORS, LLC**

 

Table of Contents

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

 

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

 

The Audit Committee

**Lake Area Corn Processors, LLC**

Wentworth, South Dakota

 

We have audited theaccompanying consolidated balance sheets of **Lake AreaCorn Processors, LLC** as of December 31, 2004 and 2003, and therelated consolidated statements of operations, members’ equity and cash flowsfor each of the three years in the period ended December 31, 2004. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based upon our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the consolidated financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates by management, as well as evaluatingthe overall financial statement presentation. We believe our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of **Lake Area Corn Processors,LLC** as of December 31, 2004 and 2003, and the results of itsoperations and its cash flows for each of the three years in the period endedDecember 31, 2004, in conformity with accounting principles generally acceptedin the United States of America.

 

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

Minneapolis, Minnesota

January 20, 2005, exceptfor Note 12, for which the date is March 7, 2005

 

 

F-1

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2004 AND 2003**

 
| ** **                         | ** ** | **2004**       | ** **     | **2003**   | ** ** | **2004**                                | ** ** |
|------------------------------------|------------|----------------|----------------|------------|------------|-----------------------------------------|------------|
| ** **                         | ** ** | ** **     | ** **     | ** ** | ** ** | **Pro forma  (Unaudited)  See Note 12** | ** ** |
| **ASSETS**                         |       |           | ** **     |       |       |                                    |       |
|                               |       |           | ** **     |       |       |                                    |       |
| CURRENT ASSETS                     |       |           | ** **     |       |       |                                    |       |
| Cash                               | ** ** | **$**          | **2,207,504**  | ** ** | $          | 96,816                                  |       | $ | 64,591 |   |
| Receivables                        |       |           | ** **     |       |       |                                    |       |
| Ethanol -  related party           | ** ** | **4,037,263**  | ** **     | 3,738,063  |       | 4,037,263                               |       |
| Distiller’s  grains           | ** ** | **501,501**    | ** **     | 468,301    |       | 501,501                                 |       |
| Incentives                         | ** ** | **244,867**    | ** **     | 166,667    |       | 244,867                                 |       |
| Other                              | ** ** | **—**     | ** **     | 287,557    |       | —                                  |       |
| Inventory                          |       |           | ** **     |       |       |                                    |       |
| Raw materials                      | ** ** | **613,521**    | ** **     | 1,890,282  |       | 613,521                                 |       |
| Finished goods                     | ** ** | **940,132**    | ** **     | 568,527    |       | 940,132                                 |       |
| Parts inventory                    | ** ** | **611,736**    | ** **     | 461,816    |       | 611,736                                 |       |
| Work in process                    | ** ** | **358,489**    | ** **     | 508,742    |       | 358,489                                 |       |
| Investment in  commodity contracts | ** ** | **749,832**    | ** **     | 728,550    |       | 749,832                                 |       |
| Prepaid expenses                   | ** ** | **89,022**     | ** **     | 97,276     |       | 89,022                                  |       |
|                               |       |           | ** **     |       |       |                                    |       |
| Total current  assets              | ** ** | **10,353,867** | ** **     | 9,012,597  |       | 8,210,954                               |       |
|                               |       |           | ** **     |       |       |                                    |       |
| PROPERTY AND  EQUIPMENT            |       |           | ** **     |       |       |                                    |       |
| Land                               | ** ** | **106,394**    | ** **     | 106,394    |       | 106,394                                 |       |
| Land  improvements                 | ** ** | **2,280,805**  | ** **     | 2,238,975  |       | 2,280,805                               |       |
| Buildings                          | ** ** | **7,439,179**  | ** **     | 7,254,757  |       | 7,439,179                               |       |
| Equipment                          | ** ** | **31,539,548** | ** **     | 31,276,838 |       | 31,539,548                              |       |
| Construction in  progress          | ** ** | **580,853**    | ** **     | —     |       | 580,853                                 |       |
| ** **                         |       | **41,946,779** | ** **     | 40,876,964 |       | 41,946,779                              |       |
| Less accumulated  depreciation     | ** ** | **(7,083,923** | **)**          | (4,888,200 | )          | (7,083,923                              | )          |
|                               |       |           | ** **     |       |       |                                    |       |
| Net property and  equipment        | ** ** | **34,862,856** | ** **     | 35,988,764 |       | 34,862,856                              |       |
|                               |       |           | ** **     |       |       |                                    |       |
| OTHER ASSETS                       |       |           | ** **     |       |       |                                    |       |
| Guarantee  premium                 | ** ** | **455,762**    | ** **     | 564,197    |       | 455,762                                 |       |
| Other                              | ** ** | **392,955**    | ** **     | 432,497    |       | 392,955                                 |       |
|                               |       |           | ** **     |       |       |                                    |       |
| Total other  assets                | ** ** | **848,717**    | ** **     | 996,694    |       | 848,717                                 |       |
|                               |       |           | ** **     |       |       |                                    |       |
| ** **                         |       | **$**          | **46,065,440** | ** ** | $          | 45,998,055                              |       | $ | 43,922,527 |   |

 

See Notes to ConsolidatedFinancial Statements

 

 

F-2

----

 
| ** **                                                                  | ** ** | **2004**       | ** **     | **2003**   | ** ** | **2004**        | ** ** |
|-----------------------------------------------------------------------------|------------|----------------|----------------|------------|------------|-----------------|------------|
| ** **                                                                  | ** ** | ** **     | ** **     | ** ** | ** ** | **Pro forma**   | ** ** |
| ** **                                                                  | ** ** | ** **     | ** **     | ** ** | ** ** | **(Unaudited)** | ** ** |
| ** **                                                                  | ** ** | ** **     | ** **     | ** ** | ** ** | **See Note 12** | ** ** |
| **LIABILITIES  AND MEMBERS’ EQUITY**                                   |       |           |           |       |       |            |       |
|                                                                        |       |           |           |       |       |            |       |
| CURRENT  LIABILITIES                                                        |       |           |           |       |       |            |       |
| Outstanding  checks in excess of bank balance                               | ** ** | **$**          | **—**     |       | $          | 812,144         |       | $ | — |   |
| Accounts payable                                                            | ** ** | **4,545,911**  |           | 4,584,254  |       | 4,545,911       |       |
| Accounts payable  - related party                                           | ** ** | **299,384**    |           | 289,312    |       | 299,384         |       |
| Accounts payable  - construction - related party                            | ** ** | **270,028**    |           | 95,520     |       | 270,028         |       |
| Distributions  payable                                                      | ** ** | **2,073,400**  |           | —     |       | —          |       |
| Distributions  payable - minority interest                                  | ** ** | **280,000**    |           | —     |       | —          |       |
| Accrued  liabilities                                                        | ** ** | **301,935**    |           | 289,669    |       | 301,935         |       |
| Current portion  of guarantee payable                                       | ** ** | **62,692**     |           | 62,195     |       | 62,692          |       |
| Current portion  of notes payable                                           | ** ** | **2,666,308**  |           | 2,995,344  |       | 2,666,308       |       |
|                                                                        |       |           |           |       |       |            |       |
| Total current  liabilities                                                  | ** ** | **10,499,658** |           | 9,128,438  |       | 8,146,258       |       |
|                                                                        |       |           |           |       |       |            |       |
| LONG-TERM  LIABILITIES                                                      |       |           |           |       |       |            |       |
| Guarantee  payable                                                          | ** ** | **448,429**    |           | 511,120    |       | 448,429         |       |
| Notes payable                                                               | ** ** | **9,434,350**  |           | 12,171,159 |       | 13,010,213      |       |
|                                                                        |       |           |           |       |       |            |       |
| Total long-term  liabilities                                                | ** ** | **9,882,779**  |           | 12,682,279 |       | 13,458,642      |       |
|                                                                        |       |           |           |       |       |            |       |
| MINORITY  INTEREST                                                          | ** ** | **3,055,597**  |           | 2,863,277  |       | 2,652,221       |       |
|                                                                        |       |           |           |       |       |            |       |
| COMMITMENTS AND  CONTINGENCIES                                              |       |           |           |       |       |            |       |
|                                                                        |       |           |           |       |       |            |       |
| MEMBERS’ EQUITY                                                        |       |           |           |       |       |            |       |
| Capital units,  $0.50 stated value, 29,620,000 units issued and outstanding | ** ** | **14,810,000** |           | 14,810,000 |       | 14,810,000      |       |
| Additional  paid-in capital                                                 | ** ** | **96,400**     |           | 96,400     |       | 96,400          |       |
| Retained  earnings                                                          | ** ** | **7,721,006**  |           | 6,417,661  |       | 4,759,006       |       |
|                                                                        |       |           |           |       |       |            |       |
| Total members’  equity                                                 | ** ** | **22,627,406** |           | 21,324,061 |       | 19,665,406      |       |
|                                                                        | ** ** | ** **     |           |       |       |            |       |
|                                                                        | ** ** | **$**          | **46,065,440** |       | $          | 45,998,055      |       | $ | 43,922,527 |   |

 

See Notes to ConsolidatedFinancial Statements

 

 

F-3

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

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

 
| ** **                                                                                     | ** ** | **2004**       | ** **     | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------|----------------|------------|------------|------------|------------|
| REVENUES                                                                                       |       |           | ** **     |       |       |       |       |
| Sales - related  party                                                                         | ** ** | **$**          | **71,648,488** | ** ** | $          | 56,450,057 |       | $ | 49,872,450 |   |
| Sales                                                                                          | ** ** | **11,769,124** | ** **     | 11,427,190 |       | 9,457,226  |       |
| Incentive income                                                                               | ** ** | **1,014,874**  | ** **     | 1,513,935  |       | 6,313,993  |       |
| Total revenues                                                                                 | ** ** | **84,432,486** | ** **     | 69,391,182 |       | 65,643,669 |       |
|                                                                                           |       |           | ** **     |       |       |       |       |
| COST OF REVENUES                                                                               | ** ** | **71,736,360** | ** **     | 60,198,865 |       | 51,857,757 |       |
|                                                                                           |       |           | ** **     |       |       |       |       |
| GROSS PROFIT                                                                                   | ** ** | **12,696,126** | ** **     | 9,192,317  |       | 13,785,912 |       |
|                                                                                           |       |           | ** **     |       |       |       |       |
| EXPENSES                                                                                       |       |           | ** **     |       |       |       |       |
| General and  administrative                                                                    | ** ** | **3,058,024**  | ** **     | 2,620,736  |       | 3,225,991  |       |
|                                                                                           |       |           | ** **     |       |       |       |       |
| INCOME FROM OPERATIONS                                                                         | ** ** | **9,638,102**  | ** **     | 6,571,581  |       | 10,559,921 |       |
|                                                                                           |       |           | ** **     |       |       |       |       |
| OTHER INCOME  (EXPENSE)                                                                        |       |           | ** **     |       |       |       |       |
| Interest and  other income                                                                     | ** ** | **223,548**    | ** **     | 147,629    |       | 176,905    |       |
| Interest expense                                                                               | ** ** | **(1,300,647** | **)**          | (1,461,763 | )          | (1,983,869 | )          |
| Total other  income (expense)                                                                  | ** ** | **(1,077,099** | **)**          | (1,314,134 | )          | (1,806,964 | )          |
|                                                                                           |       |           | ** **     |       |       |       |       |
| NET INCOME  BEFORE INCOME TAXES                                                                | ** ** | **8,561,003**  | ** **     | 5,257,447  |       | 8,752,957  |       |
|                                                                                           |       |           | ** **     |       |       |       |       |
| BENEFIT FROM  INCOME TAXES                                                                     | ** ** | **—**     | ** **     | —     |       | 49,953     |       |
|                                                                                           |       |           | ** **     |       |       |       |       |
| NET INCOME  BEFORE MINORITY INTEREST                                                           | ** ** | **8,561,003**  | ** **     | 5,257,447  |       | 8,802,910  |       |
|                                                                                           |       |           | ** **     |       |       |       |       |
| MINORITY  INTEREST IN SUBSIDIARY                                                               | ** ** | **(1,037,458** | **)**          | (641,767   | )          | (1,098,023 | )          |
|                                                                                           |       |           | ** **     |       |       |       |       |
| NET INCOME                                                                                     | ** ** | **$**          | **7,523,545**  | ** ** | $          | 4,615,680  |       | $ | 7,704,887 |   |
|                                                                                           |       |           | ** **     |       |       |       |       |
| BASIC AND  DILUTED EARNINGS PER UNIT                                                           | ** ** | **$**          | **0.25**       | ** ** | $          | 0.16       |       | $ | 0.26 |   |
|                                                                                           |       |           | ** **     |       |       |       |       |
| WEIGHTED AVERAGE  UNITS OUTSTANDING FOR THE CALCULATION OF BASIC AND DILUTED EARNINGS PER UNIT | ** ** | **29,620,000** | ** **     | 29,620,000 |       | 29,620,000 |       |

 

See Notes to ConsolidatedFinancial Statements

 

 

F-4

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OFCHANGES IN MEMBERS’ EQUITY**

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

 
| ** **                                     | ** ** | ** **        | ** ** | ** **  | ** **     | **Additional** | ** ** | ** **   | ** ** | ** ** | ** **    |
|------------------------------------------------|------------|-------------------|------------|-------------|----------------|----------------|------------|--------------|------------|------------|---------------|
| ** **                                     | ** ** | **Capital Units** | ** ** | **Paid-In** | ** **     | **Retained**   | ** ** | ** **   | ** ** |
| ** **                                     | ** ** | **Units**         | ** ** | **Amount**  | ** **     | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  | ** **    |
| BALANCE,  DECEMBER 31, 2001                    |       | 29,620,000        |       | $           | 14,810,000     |           | $          | 95,800       |       | $          | 5,797,000     |   | $ | 20,702,800 |   |
| Additional  paid-in capital received           |       | —            |       | —      |           | 600            |       | —       |       | 600        |          |
| Net income                                     |       | —            |       | —      |           | —         |       | 7,704,887    |       | 7,704,887  |          |
| Distributions  paid ($.28 per capital unit)    |       | —            |       | —      |           | —         |       | (8,145,506   | )          | (8,145,506 | )             |
|                                           |       |              |       |        |           |           |       |         |       |       |          |
| BALANCE,  DECEMBER 31, 2002                    |       | 29,620,000        |       | 14,810,000  |           | 96,400         |       | 5,356,381    |       | 20,262,781 |          |
| Net income                                     |       | —            |       | —      |           | —         |       | 4,615,680    |       | 4,615,680  |          |
| Distributions  paid ($.12 per capital unit)    |       | —            |       | —      |           | —         |       | (3,554,400   | )          | (3,554,400 | )             |
|                                           |       |              |       |        |           |           |       |         |       |       |          |
| BALANCE,  DECEMBER 31, 2003                    |       | 29,620,000        |       | 14,810,000  |           | 96,400         |       | 6,417,661    |       | 21,324,061 |          |
| Net income                                     |       | —            |       | —      |           | —         |       | 7,523,545    |       | 7,523,545  |          |
| Distributions  paid ($.14 per capital unit)    |       | —            |       | —      |           | —         |       | (4,146,800   | )          | (4,146,800 | )             |
| Distributions  payable ($.07 per capital unit) |       | —            |       | —      |           | —         |       | (2,073,400   | )          | (2,073,400 | )             |
|                                           |       |              |       |        |           |           |       |         |       |       |          |
| **BALANCE,  DECEMBER 31, 2004**                | ** ** | **29,620,000**    | ** ** | **$**       | **14,810,000** | ** **     | **$**      | **96,400**   | ** ** | **$**      | **7,721,006** | ** ** | **$** | **22,627,406** | ** ** |
|                                                |            |                   |            |             |                |                |            |              |            |            |               |  |  |  |  |  |  |

 

See Notes to ConsolidatedFinancial Statements

 

 

F-5

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

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

 
| ** **                                                           | ** ** | **2004**       | ** **    | **2003**   | ** ** | **2002**    | ** ** |
|----------------------------------------------------------------------|------------|----------------|---------------|------------|------------|-------------|------------|
| OPERATING  ACTIVITIES                                                |       |           | ** **    |       |       |        |       |
| Net income                                                           | ** ** | **$**          | **7,523,545** | ** ** | $          | 4,615,680   |       | $ | 7,704,887 |   |
| Changes to  income not affecting cash                                |       |           | ** **    |       |       |        |       |
| Depreciation                                                         | ** ** | **2,195,723**  | ** **    | 2,164,551  |       | 2,064,007   |       |
| Amortization                                                         | ** ** | **159,715**    | ** **    | 84,342     |       | 73,313      |       |
| Minority  interest in subsidiary                                     | ** ** | **1,037,458**  | ** **    | 641,767    |       | 1,098,023   |       |
| Other                                                                | ** ** | **(214,428**   | **)**         | (124,310   | )          | (86,014     | )          |
| (Increase)  decrease in                                              |       |           | ** **    |       |       |        |       |
| Receivables                                                          | ** ** | **(123,044**   | **)**         | (2,834     | )          | 2,640,838   |       |
| Inventory                                                            | ** ** | **905,491**    | ** **    | (645,267   | )          | (52,438     | )          |
| Prepaid expenses                                                     | ** ** | **8,255**      | ** **    | (58,861    | )          | 111,224     |       |
| Investment in  commodity contracts                                   | ** ** | **(21,282**    | **)**         | (292,207   | )          | (311,828    | )          |
| Increase  (decrease) in                                              |       |           | ** **    |       |       |        |       |
| Accounts payable                                                     | ** ** | **(33,123**    | **)**         | 753,689    |       | 368,607     |       |
| Accrued  liabilities                                                 | ** ** | **(49,927**    | **)**         | (49,671    | )          | (413,366    | )          |
|                                                                 |       |           | ** **    |       |       |        |       |
| NET CASH FROM  OPERATING ACTIVITIES                                  | ** ** | **11,388,383** | ** **    | 7,086,879  |       | 13,197,253  |       |
|                                                                 |       |           | ** **    |       |       |        |       |
| INVESTING  ACTIVITIES                                                |       |           | ** **    |       |       |        |       |
| Change in other  assets                                              | ** ** | **202,690**    | ** **    | 95,906     |       | 98,628      |       |
| Purchase of  property and equipment                                  | ** ** | **(890,456**   | **)**         | (326,194   | )          | (1,931,701  | )          |
|                                                                 |       |           | ** **    |       |       |        |       |
| NET CASH USED  FOR INVESTING ACTIVITIES                              | ** ** | **(687,766**   | **)**         | (230,288   | )          | (1,833,073  | )          |
|                                                                 |       |           | ** **    |       |       |        |       |
| FINANCING  ACTIVITIES                                                |       |           | ** **    |       |       |        |       |
| Outstanding  checks in excess of bank balance                        | ** ** | **(812,144**   | **)**         | 236,343    |       | 575,802     |       |
| Principal  payments on notes payable                                 | ** ** | **(3,065,845** | **)**         | (2,936,067 | )          | (8,580,040  | )          |
| Financing costs  paid                                                | ** ** | **—**     | ** **    | —     |       | (96,236     | )          |
| Additional  paid-in capital received                                 | ** ** | **—**     | ** **    | —     |       | 600         |       |
| Distributions  paid to minority members                              | ** ** | **(565,140**   | **)**         | (505,651   | )          | (1,198,425  | )          |
| Distributions  paid to LACP members                                  | ** ** | **(4,146,800** | **)**         | (3,554,400 | )          | (8,145,506  | )          |
|                                                                 |       |           | ** **    |       |       |        |       |
| NET CASH USED  FOR FINANCING ACTIVITIES                              | ** ** | **(8,589,929** | **)**         | (6,759,775 | )          | (17,443,805 | )          |
|                                                                 |       |           | ** **    |       |       |        |       |
| NET INCREASE  (DECREASE) IN CASH                                     | ** ** | **2,110,688**  | ** **    | 96,816     |       | (6,079,625  | )          |
|                                                                 |       |           | ** **    |       |       |        |       |
| CASH AT  BEGINNING OF PERIOD                                         | ** ** | **96,816**     | ** **    | —     |       | 6,079,625   |       |
|                                                                 |       |           | ** **    |       |       |        |       |
| CASH AT END OF  PERIOD                                               | ** ** | **$**          | **2,207,504** | ** ** | $          | 96,816      |       | $ | — |   |
|                                                                 |       |           | ** **    |       |       |        |       |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                   |       |           | ** **    |       |       |        |       |
| Cash paid during  the year for Interest, net of capitalized interest | ** ** | **$**          | **1,300,647** | ** ** | $          | 1,461,763   |       | $ | 2,625,192 |   |
|                                                                 |       |           | ** **    |       |       |        |       |
| Income taxes  refunded                                               | ** ** | **$**          | **—**    | ** ** | $          | —      |       | $ | 49,953 |   |

 

See Notes to ConsolidatedFinancial Statements

 

F-6

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

**NOTE 1 -       NATURE OF OPERATIONS**

 

*Principal Business Activity*

 

Lake Area Corn Processors, LLC (formerly Lake Area Corn ProcessorsCooperative, or the “Cooperative”) is a South Dakota limitedliability company located in Wentworth, South Dakota. Lake Area CornProcessors, LLC (the Company) was organized by investors to provide a portionof the corn supply for a 40 million-gallon (annual capacity) ethanol plant,owned by Dakota Ethanol, LLC (Dakota Ethanol). On September 4, 2001, theethanol plant commenced its principal operations. The Company sells ethanol andrelated products to customers located in North America.

 

On April 2, 2001, Lake Area Ethanol, LLC was formed. The initial memberof Lake Area Ethanol, LLC was the Cooperative. Lake Area Ethanol, LLC wasformed for the purpose of acquiring the assets and liabilities of theCooperative. The Board of Directors of the Cooperative approved a plan ofreorganization related to an exchange whereby the LLC would acquire the assetsand liabilities of the Cooperative. On August 20, 2002, the members of theCooperative approved the plan of reorganization. The effective date of thereorganization was the close of business on August 31, 2002. The transactionincluded an exchange of interests whereby the assets and liabilities of theCooperative were transferred for capital units of Lake Area Ethanol, LLC. Forfinancial statement purposes, no gain or loss was recorded as a result of theexchange transaction.

 

As a result of the exchange, the Cooperative was dissolved, with LakeArea Ethanol, LLC’s capital units distributed to the stockholders of theCooperative at a rate of one Lake Area Ethanol, LLC capital unit for each shareof equity stock and all voting stock of the Cooperative surrendered andretired. In connection with the reorganization, the LLC changed its name toLake Area Corn Processors, LLC. A minimum of 5,000 capital units is requiredfor ownership of the LLC. Such units are subject to certain transferrestrictions, including approval by the Board of Managers of the LLC. The LLCalso retains the right to redeem the units at $.20 per unit in the event amember attempts to dispose of the units in a manner not in conformity with theOperating Agreement, if a member becomes a holder of less than 5,000 units, ifa member breaches their corn delivery agreement or becomes a bankrupt member.The Operating Agreement of the LLC also includes provisions whereby cash flowin excess of $200,000 will be distributed to unit holders, subject tolimitations imposed by a super majority vote of the Board of Managers orrestrictions imposed by loan covenants.

 

**NOTE 2 -       SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

** **

*Principles of Consolidation*

 

The consolidated financialstatements of the Company include the accounts of its 88 percent ownedsubsidiary, Dakota Ethanol. All significant inter-company transactions andbalances have been eliminated in consolidation.

 

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

 

*ProForma Information (Unaudited)*

 

Balance sheet informationlabeled as pro forma has been presented to reflect adjustments for subsequentlyapproved and paid distributions as if the distributions were paid as ofDecember 31, 2004.

 

F-7

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

*Revenue Recognition*

 

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

 

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

 

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

 

*ShippingCosts*

 

Shipping costs incurred by Dakota Ethanol are recorded as a componentof cost of revenues. In accordance with Dakota Ethanol’s agreement formarketing and sale of ethanol and by product, shipping costs arranged by themarketer are deducted from the gross sales price. Revenue is recorded based onthe net selling price reported to Dakota Ethanol by the marketer.

 

*InventoryValuation*

 

Corn inventory is statedat market value, which approximates net realizable value, based on local marketprices determined by grain terminals in the area of Dakota Ethanol. Ethanol andrelated products are stated at net realizable value. Work-in-process, supplies,parts and chemical inventory are stated at the lower of cost or market on thefirst-in, first-out method.

 

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

 

*Cash and Cash Equivalents*

 

Cash and cash equivalentsconsist of demand accounts and other accounts that provide withdrawalprivileges. Checks drawn in excess of bank balance are recorded as a liabilityon the balance sheet and as a financing activity on the statement of cashflows.

 

*Receivables and Credit Policies*

 

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

 

Trade receivables arestated at the amount billed to the customer.

 

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

 

F-8

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

The carrying amount oftrade receivables is reduced by a valuation allowance that reflects management’sbest estimate of the amounts that will not be collected. Management reviews alltrade receivable balances that exceed sixty days from the invoice date andbased on an assessment of current creditworthiness, estimates the portion, ifany, of the balance that will not be collected. Additionally, managementapplies a two-year weighted-average of write-offs to the aggregate remainingtrade receivables to estimate a general allowance covering those amounts. Theweighted-average gives greater weight to the most recent year and is adjustedfor management’s estimate of any changes in future economic conditions thatmight give rise to results that differ from past experience.

 

*Investment in CommoditiesContracts, Derivative Instruments and Hedging Activities*

 

SFAS No. 133 requires a company to evaluate its contracts to determinewhether the contracts are derivatives. Certain contracts that literally meetthe definition of a derivative may be exempted from SFAS No. 133 as normalpurchases or normal sales. Normal purchases and normal sales are contracts thatprovide for the purchase or sale of something other than a financial instrumentor derivative instrument that will be delivered in quantities expected to beused or sold over a reasonable period in the normal course of business.Contracts that meet the requirements of normal are documented as normal andexempted from the accounting and reporting requirements of SFAS No. 133.

 

Dakota Ethanol enters into short-term cashgrain, option and futures contracts as a means of securing corn for the ethanolplant and managing exposure to changes in commodity prices. All of DakotaEthanol’s derivatives are designated as non-hedge derivatives. Although thecontracts are effective economic hedges of specified risks, they are notdesignated as and accounted for as hedging instruments.

 

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

 

Unrealized gains and losses related to derivative contracts areincluded as a component of cost of revenues in the accompanying consolidatedfinancial statements. Inventories are recorded at net realizable value so thatgains and losses on derivative contracts are offset by gains and losses oninventories and reflected in earnings currently. For the statement of cashflows, such contract transactions are classified as operating activities.

 

We have recorded anincrease to cost of revenues of $4,069,718, $25,192 and $636,421 related to ourderivative contracts for the years ended December 31, 2004, 2003 and 2002.

 

*Guarantee Premium*

 

Guarantee premium is amortized over the term of the related guaranteeusing the interest method of amortization.

 

*Minority Interest*

 

Amounts recorded as minority interest on the balance sheet relate tothe investment by Broin family members (hereinafter referred to as the minoritymembers) in Dakota Ethanol, plus or minus any allocation of minority income orloss of Dakota Ethanol. Earnings and losses of Dakota Ethanol are allocated tothe members in proportion to the member’s capital accounts.

 

F-9

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

*Use of Estimates*

 

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

 

*Concentrations of Credit Risk*

 

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

 

*Property and Equipment*

 

Property and equipment isstated at cost. Significant additions and betterments are capitalized, whileexpenditures for maintenance, repairs and minor renewals are charged tooperations when incurred. Construction in progress includes the cost of assetsunder construction, including capitalized interest and related costs, whichhave not been placed in service as of the balance sheet date. Depreciation onassets placed in service is computed using the straight-line method overestimated useful lives as follows:

 

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

 

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

 

*Additional Paid-In Capital*

 

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

 

*Earnings PerUnit*

 

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

 

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

 

*Income Taxes*

 

On August 20, 2002, themembers approved a plan of reorganization to convert the Cooperative’sstructure from an exempt cooperative organization to a limited liabilitycompany effective August 31, 2002. The Cooperative’s board approved allocatingthe tax gain related to the reorganization to the members. No income taxes werepaid by the Company as a result of the reorganization.

 

F-10

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

The Company is taxed as alimited liability company under the Internal Revenue Code. The income of theCompany flows through to the members to be taxed at the individual level ratherthan the corporate level. Accordingly, the Company has no tax liability.

 

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

 

*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.

 

*Recently Issued AccountingPronouncements*

 

In November 2004, theFASB issued SFAS No. 151, “Inventory Costs-An Amendment of ARB No. 43,Chapter 4” (SFAS No. 151). This statement clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs and wastedmaterial (spoilage). The statement requires such costs to be recognized ascurrent-period charges. The statement also requires the allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities.

 

Management does notexpect the adoption of the above pronouncement will have a material impact onthe Company.

 

*Reclassification*

 

Amounts in the 2003 and 2002Statement of Operations have been reclassified to conform withthe 2004 presentation. There was no change to the 2003 and 2002 net income as aresult of the reclassification.

 

**NOTE 3 -       SHORT-TERM NOTE PAYABLE**

** **

On April 23, 2004, DakotaEthanol received a revolving promissory note from First National Bank of Omahain the amount of $3,000,000. The note expires on April 22, 2005 and the amountavailable is subject to certain financial ratios. Interest on the outstandingprincipal balances will accrue at 50 basis points above the bank’s base rate(5.50 percent at December 31, 2004). There is a commitment fee of 3/8 percenton the unused portion of the $3,000,000 availability. The note iscollateralized by the ethanol plant, its accounts receivable and inventories. OnDecember 31, 2004, Dakota Ethanol had the ability to draw upon the entire$3,000,000 available balance from the revolving promissory note.

 

**NOTE 4 -       LONG-TERM NOTES PAYABLE**

** **

Dakota Ethanol originallyhad a $26,600,000 note payable to First National Bank of Omaha, Nebraska (the Bank)for the construction and permanent financing of the plant (Term Note 1). OnJuly 29, 2002, Dakota Ethanol amended the construction loan agreement to createtwo term notes from its original Term Note 1, creating Term Notes 2 and 3, andconverted Term Note 3 into Term Notes 4 and 5 on November 1, 2002.

 

F-11

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

As part of the notepayable agreement, Dakota Ethanol is subject to certain restrictive covenantsestablishing minimum reporting requirements, ratios, working capital and networth requirements. Dakota Ethanol is in compliance with the covenants as ofDecember 31, 2004. The note also includes terms whereby 10 percent ofDakota Ethanol’s excess cash flow is payable annually to reduce the principalbalance on the note, with no more than 80 percent of excess cash flow availablefor distribution to Dakota Ethanol’s members without prior approval of the bank.The note is collateralized by the ethanol plant, which had a net book value ofapproximately $35,000,000 on December 31, 2004. The note is subject toprepayment penalties based on the cost incurred by the Bank to break its fixedinterest rate commitment.

 

The balance of Term Note2 is due and payable in quarterly installments of $581,690 commencing October1, 2002, through September 1, 2011. Interest on outstanding principal balanceswill accrue at a rate of 9 percent. The other terms and conditions of Term Note1 remain in effect.

 

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

 

The balance of Term Note4 is due and payable in quarterly installments of $329,777 commencing January1, 2003, through September 1, 2011. The installment will first be applied tothe accrued interest on Term Note 5, and the remainder will be applied toaccrued interest and principal of Term Note 4. Interest on outstandingprincipal balances will accrue at 50 basis points above the lender’s rate (5.50percent at December 31, 2004). This rate is subject to various adjustmentsbased on various levels of indebtedness to net worth, as defined by theagreement.

 

The balance of Term Note5 is due and payable in quarterly installments of interest only commencingJanuary 1, 2003, through September 1, 2011. Interest on outstanding principalbalances will accrue at 50 basis points above the lender’s rate (5.50 percentat December 31, 2004). This rate is subject to various adjustments based onvarious levels of indebtedness to net worth, as defined by the agreement.Dakota Ethanol may elect to borrow any principal amount repaid on Term Note 5up to $5,000,000 subject to the terms of the agreement. Should Dakota Ethanolelect to utilize this feature, the lender will assess an unused commitment feeof 3/8 percent on the unused portion of the $5,000,000. In addition, the bankdraws the checking account balance to a minimum balance on a daily basis. Theexcess cash pays down or the shortfall is drawn upon Term Note 5 as needed. On December 31, 2004, 2003 and 2002, DakotaEthanol had the ability to draw upon the entire $5,000,000 available balancefrom Term Note 5.

 

Dakota Ethanol alsoincurred a note payable related to the extension of utility lines to the plant.The loan is payable over ten years, beginning on October 1, 2001, with aneffective interest rate of approximately 9 percent and a final maturity ofSeptember 1, 2011. Dakota Ethanol paid off the note in full during December2004.

 

The balance of the notespayable as of December 31, 2004 and 2003 is as follows:

 
| ** **                                  | ** ** | **2004**       | ** **     | **2003**   | ** ** |
|---------------------------------------------|------------|----------------|----------------|------------|------------|
|                                        |       |           | ** **     |       |       |
| Note payable to  First National Bank, Omaha |       |           | ** **     |       |       |
| Term Note 2                                 | ** ** | **$**          | **10,752,883** | ** ** | $          | 12,351,455 |   |
| Term Note 4                                 | ** ** | **1,347,775**  | ** **     | 2,742,347  |       |
| Term Note 5                                 | ** ** | **—**     | ** **     | —     |       |
| Utility line  extension note                | ** ** | **—**     | ** **     | 72,701     |       |
| ** **                                  |       | **12,100,658** | ** **     | 15,166,503 |       |
|                                        |       |           | ** **     |       |       |
| Less current  portion                       | ** ** | **(2,666,308** | **)**          | (2,995,344 | )          |
|                                        |       |           | ** **     |       |       |
| ** **                                  |       | **$**          | **9,434,350**  | ** ** | $          | 12,171,159 |   |
|                                             |            |                |                |            |            |  |  |  |  |

 

F-12

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

Minimum principalpayments for the next five years are as follows:

 

| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
| 2005                          |       | $          | 2,666,308  |   |
| 2006                          |       | 1,601,788  |       |
| 2007                          |       | 1,668,567  |       |
| 2008                          |       | 1,824,464  |       |
| 2009                          |       | 1,998,379  |       |
|                               |            |            |            |  |

 

Interest capitalizedtotaled $0, $0 and $43,059 for the years ended December 31, 2004, 2003 and2002, respectively.

 

**NOTE 5 -       TAX INCREMENT FINANCING**

 

During the year ended December 31, 2001, Dakota Ethanol received agrant of approximately $1,911,587 from the proceeds of tax increment financingbonds issued by Lake County, South Dakota. Under South Dakota law, proceedsfrom tax increment financing are not a liability of the entity (Dakota Ethanol),but are an obligation of the taxing district issuing the bonds. The grant wasprovided to fund infrastructure improvements to real property owned by DakotaEthanol and will be repaid by Lake County from the incremental increase inproperty taxes related to the improvement of Dakota Ethanol’s real property. Theproceeds of the financing were recorded as a reduction of the cost basis of theapplicable property and equipment.

 

**NOTE 6 -       EMPLOYEE BENEFIT PLANS**

** **

Dakota Ethanol maintainsa 401(k) plan for the employees who meet the eligibility requirements set forthin the plan documents. Dakota Ethanol matches a percentage of the employees’contributed earnings. Employer contributions to the plan totaled approximately$19,000, $9,000 and $0 for the years ended December 31, 2004, 2003 and 2002,respectively.

 

**NOTE 7 -       INCOME TAXES**

 

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

 

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

 

Deferred taxes aregenerally not recognized with regard to timing differences on patronage sourceincome and expense. Deferred taxes on non-patronage source income related totiming differences on the deduction of non-patronage source expenses arerecognized on the financial statements of cooperative organizations.

 

F-13

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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

 
| ** **                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                           |       |     |       |     |       |     |       |
| Income tax  benefit calculated based on non-patronage source net income (loss) | ** ** | **$**    | **—** |     | $          | —   |       | $ | (49,953 | ) |
|                                                                                |            |          |            |          |            |          |            |  |  |  |

 

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

 
| ** **                                                     | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                                                           |       |       |       |     |       |     |       |
| Income tax  expense (benefit) at statutory rates               | ** ** | **$**      | **—** |     | $          | —   |       | $ | (49,953 | ) |
| Tax effect of  non-deductible patronage  source  expenses | ** ** | **—** |       | —   |       | —   |       |
|                                                           |       |       |       |     |       |     |       |
| Income tax  expense (benefit)                                  | ** ** | **$**      | **—** |     | $          | —   |       | $ | (49,953 | ) |

 

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

 

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

 
| ** **                                         | ** ** | **2004**        | ** **     | **2003**   | ** ** |
|----------------------------------------------------|------------|-----------------|----------------|------------|------------|
| Financial  statement basis of assets               | ** ** | **$**           | **46,065,440** | ** ** | $          | 45,998,055 |   |
| Less tax over  book depreciation                   | ** ** | **(10,553,100** | **)**          | (7,763,929 | )          |
| Organization and  start-up costs capitalized - net | ** ** | **236,723**     | ** **     | 378,877    |       |
| TIF guarantee                                      | ** ** | **(455,762**    | **)**          | (564,197   | )          |
| Other book and  tax differences                    | ** ** | **(283,559**    | **)**          | 127,810    |       |
| Tax basis of  assets                               | ** ** | **$**           | **35,009,742** | ** ** | $          | 38,176,616 |   |
|                                                    |            |                 |                |            |            |  |  |  |

 
| ** **                                | ** ** | **2004**     | ** **     | **2003**   | ** ** |
|-------------------------------------------|------------|--------------|----------------|------------|------------|
| Financial  statement basis of liabilities | ** ** | **$**        | **46,065,440** | ** ** | $          | 45,998,055 |   |
| TIF guarantee  payable                    | ** ** | **(511,121** | **)**          | (573,316   | )          |
| Other book and  tax differences           | ** ** | **(47,908**  | **)**          | (38,496    | )          |
| Tax basis of  liabilities                 | ** ** | **$**        | **45,506,411** | ** ** | $          | 45,386,243 |   |
|                                           |            |              |                |            |            |  |  |  |

 

**NOTE 8 -       FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

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

 

The carrying amount of long-term obligations of $12,611,780 had a fairvalue of approximately $12,900,000 based on estimated interest rates forcomparable debt.

 

F-14

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

The Company believes thecarrying amount of the short-term note payable approximates fair value due tothe short maturity of the instrument.

 

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

 

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

 

The Company has entered into contracts and agreements regarding theoperation and management of the ethanol plant.

 

Dakota Ethanol has entered into agreements for the purchase ofelectricity and natural gas. The following agreements commenced on or aboutSeptember 4, 2001.

 

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

 

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

 

Expenses related to theagreement for the purchase of electricity and natural gas were$12,168,447, $11,303,754 and $7,682,224 for the years ended December 31, 2004, 2003and 2002, respectively.

 

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

 

| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
| 2005                          |       | $          | 290,400    |   |
| 2006                          |       | 303,600    |       |
| 2007                          |       | 303,600    |       |
| 2008                          |       | 308,400    |       |
| 2009                          |       | 308,400    |       |
| 2010 - 2011                   |       | 514,000    |       |
|                          |       | $          | 2,028,400  |   |
|                               |            |            |            |  |  |

 

Dakota Ethanol receivesan incentive payment from the United States Department of Agriculture (USDA)for the use of corn to produce ethanol. In accordance with the terms of thisarrangement, revenue is recorded based on incremental production of ethanolcompared to the prior year. The USDA has set the annual maximum not to exceed$7,500,000 for each eligible producer during program years 2004, 2003 and 2002.Due to funding constraints, the USDA has set the annual maximum not to exceed$5,000,000 for each eligible producer during the 2005 program year. Theincentive is calculated on the USDA fiscal year of October 1 to September 30. Revenueof $78,200, $270,007, $1,000,349 and $7,500,000 has been earned for the USDAprogram years ended September 30, 2005, 2004, 2003 and 2002, respectively. Incentiverevenue of $348,207, $535,879 and $5,247,269 was recorded for the years endedDecember 31, 2004, 2003 and 2002, respectively.

 

F-15

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

Dakota Ethanol also receives an incentive payment from the State ofSouth Dakota to produce ethanol. In accordance with the terms of thisarrangement, revenue is recorded based on ethanol sold. The State of SouthDakota has set a maximum of up to $1,000,000 per year for this program perqualifying producer. Dakota Ethanol earned $583,334, $666,667, $1,000,000 and$1,000,000 for the State of South Dakota program years ended June 30, 2005,2004, 2003 and 2002, respectively. Incentive revenue of $666,667, $978,057 and$1,066,724 was recorded for the years ended December 31, 2004, 2003 and 2002,respectively.

 

The following commitments, contingencies and agreements are withrelated parties.

 

Each capital unit holderhas entered into a corn delivery agreement with the Company. For each unitowned, one-fourth bushel of corn is required to be delivered annually. Theprice paid for the corn is the average corn price for the applicable four-monthperiod (trimester) based on several local grain elevators’ cash corn price. Thedelivery agreements commence at the discretion of the Company to coincide withthe completion and operation of the plant. Members can opt out of delivery ifthey meet certain criteria and are approved by the Board of Managers. Based onthe number of units outstanding, 4,070,000 bushels of corn will be deliveredannually by the unit holders. This represents approximately 27 percent of thecorn required for the operation of the plant at its 40,000,000 gallon capacity.Purchases of corn from corn delivery agreements and cash contracts from theCompany’s stockholders totaled approximately $10,620,000, $11,960,000 and$13,845,000 for the years ended December 31, 2004, 2003 and 2002, respectively,of which $442,000, $997,000 and $1,046,000 was recorded as a liability atDecember 31, 2004, 2003 and 2002, respectively.

 

The Company and theminority members of Dakota Ethanol, or parties related to the minority membersthrough common ownership, have entered into thefollowing agreements:

 

Ethanol MarketingContract – Dakota Ethanol has an agreement with EthanolProducts, LLC, a joint venture of ethanol producers, for the sale, marketing,billing and receipt of payment and other administrative services for allethanol produced by the plant. In the event Ethanol Products, LLC is unable tocollect from their customer, Dakota Ethanol is charged for the applicable baddebt. The initial agreement expires on September 4, 2006, and is automaticallyrenewed for successive five-year terms unless terminated three months prior toexpiration.

 

Distiller’s GrainsMarketing Contract – Dakota Ethanol has an agreement withDakota Gold Marketing (formerly known as Dakota Commodities) for the marketingof all distiller’s grains produced by the plant. The agreement provides for anagency relationship in that Dakota Gold Marketing does not take title to the distiller’sgrains, but acts as a broker on behalf of Dakota Ethanol. The agreement expireson September 4, 2006, and is automatically renewed for successive five-yearterms unless terminated three months prior to expiration.

 

ManagementAgreement – Dakota Ethanol has an agreement with BroinManagement, LLC for the management and operation of the ethanol plant. Inexchange for the services, Broin Management receives an annual fee plus anincentive bonus of 5 percent of net income. The annual fee is adjusted eachyear for changes in the consumer price index. The management agreement includesthe salary and benefits of the plant general manager and plant technicalmanager and certain other services related to operation of the ethanol plant.The agreement expires January 1, 2006, and is renewable for successivefive-year terms unless terminated ninety days prior to expiration of theagreement.

 

Corn Price RiskManagement Agreement – Dakota Ethanol has an agreement withBroin Management, LLC for the hedge and price risk management related to cornrequirements of the plant. The agreement expires on August 1, 2005, and isrenewable for successive one-year terms unless terminated thirty days prior toexpiration.

 

 

F-16

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

InformationTechnology Management – Dakota Ethanol has an agreement withBroin and Associates, Inc., for information technology and systems management. Theagreement expires on September 11, 2005, and is automatically renewed forsuccessive two-year terms unless terminated sixty days prior to expiration.

 

Dakota Ethanol has anagreement with Broin and Associates, Inc., for the purchase of certain softwareand data management services. The annual fee for the management service isadjusted each year for changes in the consumer price index. The agreementexpires on December 15, 2006, and is automatically renewed for successivetwo-year terms unless terminated sixty days prior to expiration.

 

ConstructionContract – Dakota Ethanol has an agreement with Broin andAssociates, Inc., for the design and construction of process equipment andenvironmental control equipment. The total value of the project isapproximately $740,000. The project began in November of 2004 and will becompleted in 2005.

 

Revenues and expensesrelated to the above agreements with related parties are as follows:

 
| ** **                             | ** ** | **Years Ended December 31,** | ** **     |
|----------------------------------------|------------|------------------------------|----------------|
| ** **                             | ** ** | **2004**                     | ** **     | **2003** | ** ** | **2002** | ** ** |
| Ethanol sales                          | ** ** | **$**                        | **71,648,488** |   | $ | 56,450,057 |   | $ | 49,872,450 |   |
| Management fees  expense               | ** ** | **903,884**                  |           | 751,686 |   | 922,296 |   |
| Marketing fees  expense - all products | ** ** | **691,076**                  |           | 651,485 |   | 605,607 |   |
|                                        |            |                              |                |  |  |  |  |  |  |  |

 

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

 

| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
|                          |       |       |       |
| 2005                          |       | $          | 591,817    |   |
| 2006                          |       | 212,888    |       |
|                          |       |       |       |
|                          |       | $          | 804,705    |   |
|                               |            |            |            |  |  |

 

Environmental– During the year ended December 31, 2002, management became aware that theethanol plant may have exceeded certain emission levels allowed by theiroperating permit. The Company has disclosed the situation to the appropriatestate regulatory agency and has taken steps to reduce the emissions toacceptable levels. Management has not accrued a liability for environmentalremediation costs since the costs, if any, cannot be estimated.

 

**NOTE 10 -     RELATED PARTY TRANSACTIONS**

 

The Company and theminority members are the members of Dakota Ethanol, LLC. The Company invested$14,810,000 and the minority members invested $2,000,000 in Dakota Ethanol fortheir respective ownership interests of approximately 88 percent and 12 percent.In accordance with the operating agreement of Dakota Ethanol, the minority members has the right to elect two of seven members of theBoard of Managers of Dakota Ethanol.

 

Purchases of supplies andchemicals from related parties totaled approximately $145,000, $92,000 and$120,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

 

F-17

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**LAKE AREA CORN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

The Company has anagreement with Dakota Gold Marketing for the use of rail cars to transport distiller’sgrains. The agreement provides a flat rate per car, per shipment. Fees underthe rail car agreement were approximately $218,000, $46,000 and $0 for the yearsended December 31, 2004, 2003 and 2002, respectively.

 

Amounts owed to Broin& Associates, Inc. related to the construction contracts as of December 31,2004, 2003 and 2002 were $270,028, $95,520 and $63,708, respectively.

 

Amounts owed to BroinManagement, LLC related to the management agreement as of December 31, 2004,2003 and 2002, were $228,703, $228,620 and $27,679, respectively.

 

Additional agreementswith related parties are included in Note 9.

 

**NOTE 11 -     TIF BOND GUARANTEE**

 

During December 2003, DakotaEthanol entered into an agreement to guarantee a bond issued by Lake County,South Dakota. The bond issue was in conjunction with the refunding of the taxincrement financing (TIF) bond issued by Lake County in 2001, of which DakotaEthanol was the recipient of the proceeds. During 2003, Lake County becameaware that the taxes collected based on the incremental tax would not besufficient to cover the debt service of the 2001 bond issue. Based on theaforementioned deficiency and changes in interest rate during December of 2003,Lake County refunded the 2001 bond issue replacing 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 part of the refunding, Dakota Ethanol entered intothe agreement to guarantee the taxable bond issue. The taxes levied on DakotaEthanol’s property will first go towards the semiannual debt service of thetax-exempt bonds and any remaining taxes will be used for the debt service ofthe taxable bonds. Dakota Ethanol guarantees any shortfall in debt service forthe taxable bonds. The guarantee expires in December of 2018.

 

The maximum amount ofestimated future payments on the taxable bond debt service is $2,131,036. Thecarrying amount of the guarantee liability on Dakota Ethanol’s balance sheet is$511,120, which represents the estimated shortfall between the taxable bondamount and the amount of taxes estimated to be collected on Dakota Ethanol’sproperty.

 

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

 

| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
|                          |       |       |       |
| 2005                          |       | $          | 62,692     |   |
| 2006                          |       | 62,617     |       |
| 2007                          |       | 62,536     |       |
| 2008                          |       | 62,319     |       |
| 2009                          |       | 60,678     |       |
|                               |            |            |            |  |

 

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

 

Management has applied the guidance from Financial Accounting StandardsBoard Interpretation No. 45, (FIN 45) related to accounting for guaranteeobligations. Management has determined the probability weighted present valueof the estimated cash flows related to the guarantee obligation and recorded aliability and related asset of $511,120.

 

 

F-18

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**LAKE AREA CORN PROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2004 AND 2003**

 

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

 

| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
|                          |       |       |       |
| 2005                          |       | $          | 96,556     |   |
| 2006                          |       | 84,592     |       |
| 2007                          |       | 72,641     |       |
| 2008                          |       | 60,710     |       |
| 2009                          |       | 53,623     |       |
|                               |            |            |            |  |

 

**NOTE 12 -     SUBSEQUENT EVENTS**

 

During February 2005,Dakota Ethanol distributed $3,390,377 of cash to its members. The Companyreceived approximately $2,987,000 and the minority members receivedapproximately $403,000. In conjunction with this distribution, the Companydeclared and paid a distribution to its members of $2,962,000, or $.10 percapital unit, with a distribution date of February 23, 2005. A pro formabalance sheet has been included in the accompanying financial statements toreflect the effects of the February 2005 distribution and the December 2004 distributionpayable as if they had been paid on December 31, 2004. Adjustments applied tothe historical December 31, 2004 financial statements include a reduction ofcash, distributions payable, minority interest and retained earnings, and anincrease in long-term notes payable.

 

During March 2005, FirstNational Bank granted Dakota Ethanol a waiver of the excess cash flow recapturecovenant effective for fiscal year 2004 and thereafter. The effects of thewaiver have been applied to the historical December 31, 2004 financialstatements.

 

**NOTE 13 -     QUARTERLY FINANCIAL REPORTING (UNAUDITED)**

 

Summary quarterly resultsare as follows:

 
| ** **                                  | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|---------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Year ended  December 31, 2004               |       |               |       |                |       |               |       |                |       |
| Total revenues                              |       | $                  | 18,915,005 |                | $          | 21,591,665         |       | $                   | 21,068,181 |   | $ | 22,857,635 |   |
| Gross profit  (loss)                        |       | 5,047,916          |       | (969,415            | )          | 1,322,758          |       | 7,294,867           |       |
| Income (loss)  from operations              |       | 4,138,269          |       | (1,528,232          | )          | 679,065            |       | 6,349,000           |       |
| Net income  (loss)                          |       | 3,404,201          |       | (1,605,629          | )          | 368,859            |       | 5,356,114           |       |
| Basic and  diluted earnings (loss) per unit |       | 0.11               |       | (0.05               | )          | 0.01               |       | 0.18                |       |
|                                        |       |               |       |                |       |               |       |                |       |
| Year ended  December 31, 2003               |       |               |       |                |       |               |       |                |       |
| Total revenues                              |       | $                  | 18,152,120 |                | $          | 15,542,147         |       | $                   | 16,842,638 |   | $ | 18,854,277 |   |
| Gross profit  (loss)                        |       | 2,916,261          |       | 614,167             |       | 1,765,187          |       | 3,896,702           |       |
| Income (loss)  from operations              |       | 2,198,372          |       | (34,537             | )          | 1,104,088          |       | 3,303,658           |       |
| Net income  (loss)                          |       | 1,614,686          |       | (334,342            | )          | 670,988            |       | 2,664,348           |       |
| Basic and  diluted earnings (loss) per unit |       | 0.05               |       | (0.01               | )          | 0.02               |       | 0.10                |       |
|                                        |       |               |       |                |       |               |       |                |       |
| Year ended  December 31, 2002               |       |               |       |                |       |               |       |                |       |
| Total revenues                              |       | $                  | 17,765,538 |                | $          | 16,335,268         |       | $                   | 14,852,421 |   | $ | 16,690,442 |   |
| Gross profit  (loss)                        |       | 6,190,640          |       | 4,547,088           |       | 1,695,163          |       | 1,353,021           |       |
| Income (loss)  from operations              |       | 5,299,534          |       | 3,583,531           |       | 1,029,807          |       | 647,049             |       |
| Net income  (loss)                          |       | 4,171,994          |       | 2,716,274           |       | 577,073            |       | 239,546             |       |
| Basic and  diluted earnings (loss) per unit |       | 0.14               |       | 0.09                |       | 0.02               |       | 0.01                |       |
|                                             |            |                    |            |                     |            |                    |            |                     |            |  |  |  |  |  |  |  |

 

The above quarterlyfinancial data is unaudited, but in the opinion of management, all adjustmentsnecessary for the fair presentation of the selected data for these interimperiods presented have been included.

 

F-19

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