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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

** **

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** **

**x****      Annual report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934.**

** **

**For the fiscal year endedDecember 31, 2009**

** **

**o****         Transition reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934.**

** **

**Commissionfile number****000-50254**

** **

**LAKE AREACORN PROCESSORS, LLC**

(Exact name of registrant as specified in its charter)

 

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

 

| **46269  SD Highway 34**

**P.O. Box  100**

**Wentworth,  South Dakota** | ** ** | **57075**  |
|--------------------------------------------------------------------------------|------------|------------|
| (Address of principal executive offices)                                       |       | (Zip Code) |

 

**(605) 483-2676**

(Registrant’s telephonenumber, including area code)

 

Securities registered pursuant toSection 12(b) of the Act:

**None**

 

Securities registered pursuant toSection 12(g) of the Act:

**Membership Units**

** **

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.  £ Yes x No

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.   £ Yes x No

 

Indicateby check mark whether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   x Yes £  No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).   £ Yes £ No

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, and will notbe contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  S

 

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

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).   £ Yes x No

 

As of June 30,2009, the last business day of the registrant’s most recently completed secondfiscal quarter, the aggregate market value of the registrant’s membership unitsheld by non-affiliates of the registrant was $14,090,742.50 computed byreference to the most recent public offering price on Form S-4.

 

As of March 31,2010, there are 29,620,000 membership units of the registrant outstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Theregistrant has incorporated by reference into Part III of this AnnualReport on Form 10-K portions of its definitive information statement to be filed with the Securitiesand Exchange Commission within 120 days after the close of the fiscal yearcovered by this Annual Report (December 31, 2009).  This information statement is referred to inthis report as the 2010 Information Statement.

 

 

 

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** **

**INDEX**

 
| ** **        | **Page**                                                                                                                       |
|-------------------|--------------------------------------------------------------------------------------------------------------------------------|
| **PART I**   | **4**                                                                                                                          |
| ** **        | ** **                                                                                                                     |
| ** **        | **ITEM 1. BUSINESS**                                                                                                           | **4** |
| ** **        | **ITEM  1A. RISK FACTORS**                                                                                                     | **18** |
| ** **        | **ITEM  2. PROPERTIES**                                                                                                        | **23** |
| ** **        | **ITEM  3. LEGAL PROCEEDINGS**                                                                                                 | **23** |
| ** **        | **ITEM 4. (REMOVED AND RESERVED)**                                                                                             | **23** |
| ** **        | ** **                                                                                                                     |
| **PART II**  | **24**                                                                                                                         |
| ** **        | ** **                                                                                                                     |
| ** **        | **ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** | **24** |
| ** **        | **ITEM 6. SELECTED FINANCIAL DATA**                                                                                            | **26** |
| ** **        | **ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS**                        | **27** |
| ** **        | **ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK**                                                       | **40** |
| ** **        | **ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**                                                                        | **42** |
| ** **        | **ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURE**                              | **62** |
| ** **        | **ITEM 9A(T). CONTROLS AND PROCEDURES**                                                                                        | **62** |
| ** **        | **ITEM 9B. OTHER INFORMATION**                                                                                                 | **63** |
| ** **        | ** **                                                                                                                     |
| **PART III** | **63**                                                                                                                         |
| ** **        | ** **                                                                                                                     |
| ** **        | **ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE  GOVERNANCE**                                                           | **63** |
| ** **        | **ITEM 11. EXECUTIVE COMPENSATION**                                                                                            | **63** |
| ** **        | **ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**                   | **63** |
| ** **        | **ITEM 13. CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS, AND DIRECTOR INDEPENDENCE**                                        | **63** |
| ** **        | **ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                                            | **63** |
| ** **        | ** **                                                                                                                     |
| **PART IV**  | **63**                                                                                                                         |
| ** **        | ** **                                                                                                                     |
| ** **        | **ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**                                                                           | **63** |
| ** **        | ** **                                                                                                                     |
| **SIGNATURES**    | **67**                                                                                                                         |

 

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**CAUTIONARY STATEMENTS REGARDINGFORWARD-LOOKING STATEMENTS**

 

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

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

 

The cautionarystatements referred to in this section also should be considered in connectionwith any subsequent written or oral forward-looking statements that may beissued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, eventhough our situation may change in the future. Furthermore, we cannot guaranteefuture results, events, levels of activity, performance, or achievements.  We caution you not to put undue reliance onany forward-looking statements, which speak only as of the date of thisreport.  You should read this report and the documents that we referencein this report and have filed as exhibits completely and with the understandingthat our actual future results may be materially different from what wecurrently expect.  We qualify all of our forward-looking statements bythese cautionary statements.

 

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**PART I.**

 

**ITEM1.  BUSINESS.**

 

**Overview**

 

Lake Area Corn Processors, LLC is a South Dakota limited liabilitycompany that currently owns and manages its wholly-owned subsidiary DakotaEthanol, L.L.C.  Dakota Ethanol, L.L.C.owns and operates an ethanol plant located near Wentworth, South Dakotathat has a nameplate production capacity of 40 million gallons of ethanol peryear.  Lake Area Corn Processors, LLC isreferred to in this report as “LACP,” the “company,” “we,” or “us.”  Dakota Ethanol, L.L.C. is referred to in thisreport as “Dakota Ethanol” or the “ethanol plant.”

 

Since September 4,2001, we have been engaged in the production of ethanol and distiller’sgrains.  Fuel grade ethanol is ourprimary product accounting for the majority of our revenue.  We also selldistiller’s grains, a principal co-product of the ethanol productionprocess.  During our 2009 fiscal year, wecompleted the installation of equipment which allows us to extract corn oilfrom the distiller’s grains we produce which represents another co-product ofthe ethanol production process.  Duringour 2009 fiscal year, we processed approximately 17.1 million bushels of corninto approximately 47.6 million gallons of ethanol.  We also producedapproximately 135,000 tons of distiller’s grains and 3.7 million pounds of cornoil in 2009.  In 2010, we anticipate that our ethanol and distiller’sgrains production levels will be substantially the same as in fiscal year2009.  However, we anticipate that ourcorn oil production will increase during our 2010 fiscal year since theequipment was only operational for a portion of our 2009 fiscal year.  We completed the installation of our corn oilequipment during the second quarter of our 2009 fiscal year.

 

**General Development of Business**

 

LACP was formed as aSouth Dakota cooperative on May 25, 1999. On August 20, 2002, our members approved a plan to reorganize intoa South Dakota limited liability company. The reorganization became effective on August 31, 2002, and theassets and liabilities of the cooperative were transferred to the newly formedlimited liability company.  Following thereorganization, our legal name was changed to Lake Area Corn Processors, LLC.

 

Ourownership of Dakota Ethanol represents substantially our only asset and ouronly source of revenue.  Sincewe operate Dakota Ethanol as a wholly-owned subsidiary, we receive all revenuesgenerated by Dakota Ethanol.  Wedistribute the revenues received from Dakota Ethanol to our unit holders inproportion to the number of units held by each member.

 

**Financial Information**

 

Please refer to “**Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations**”for information regarding our results of operations and “**Item 8 - Financial Statements and Supplementary Data**”for our audited consolidated financial statements.

 

**Principal Products**

 

The principalproducts produced at the ethanol plant are fuel grade ethanol, distiller’sgrains and corn oil.

 

***Ethanol***

 

Ethanol is ethyl alcohol, a fuel componentmade primarily from corn and various other grains.  More than 99% of all ethanol produced in theUnited States is used in its primary form for blending with unleaded gasolineand other fuel products.  The vastmajority of the ethanol that is produced in the United States uses corn as thefeedstock in the ethanol production process. Corn produces large quantities of carbohydrates, whichconvert into glucose more easily than most other kinds of biomass. As of March 10,2010, the Renewable Fuels Association estimates United States ethanolproduction capacity at more than 13.5 billion gallons.  However, due to current conditions in theethanol market, the Renewable Fuels Association estimates that as much as 8% ofthe ethanol production 

 

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capacityin the United States has been idled. This is a reduction from the beginning of 2009 when as much as 20% ofthe ethanol production capacity in the United States may have been idled.

 

An ethanol plant is essentially afermentation plant.  Ground corn andwater are mixed with enzymes and yeast to produce a substance called “beer,”which contains approximately 15% alcohol, 11% solids and 74% water.  The “beer” is boiled to separate the water,resulting in ethyl alcohol, which is then dehydrated to increase the alcoholcontent.  This product is then mixed witha certified denaturant such as gasoline to make the product unfit for humanconsumption and commercially saleable.

 

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

 

We began producing ethanol in September 2001.  For our fiscal year ended December 31,2009, revenue from the sale of ethanol accounted for approximately 83% of ourtotal revenue.  The following table showsthe percentage of our total revenue that was derived from sales of ethanol foreach of our last three fiscal years:

 

| **Fiscal Year**               | ** ** | **Percentage of Revenue********from Sales of Ethanol** | ** ** |
|-------------------------------|------------|--------------------------------------------------------|------------|
| Ended  December 31, 2009 |       | 83%                                                    |       |
| Ended  December 31, 2008 |       | 86%                                                    |       |
| Ended  December 31, 2007 |       | 89%                                                    |       |

 

***Distiller’s Grains***

 

A principal co-product of the ethanolproduction process is distiller’s grains, a high protein, high-energy animalfeed supplement primarily marketed to the dairy and beef industry.  Distiller’s grains contain by-pass proteinthat is superior to other protein supplements such as cottonseed meal andsoybean meal.  By-pass proteins are moredigestible to the animal, thus generating greater lactation in milk cows andgreater weight gain in beef cattle.  Drymill ethanol processing creates four forms of distiller grains: Distiller’s WetGrains (“DWS”), Distiller’s Modified Wet Grains with Solubles (“DMWS”),Condensed Distiller’s with Solubles (“CDS”) and Distiller’s Dried Grains withSolubles (“DDGS”).  DWS is processed cornmash that contains approximately 70% moisture. DWS has a shelf life of approximately seven days and can be sold only toconsumers within the immediate vicinity of an ethanol plant.  DMWS is DWS that has been dried toapproximately 50% moisture.  DMWS has aslightly longer shelf life of approximately ten days and is often sold tonearby markets.  CDS containsapproximately 75% moisture and is marketed locally.  It has a shelf life of approximately thirtydays.  DDGS is DWS that has been dried tobetween 10% and 12% moisture.  DDGS hasan almost indefinite shelf life and may be sold and shipped to any marketregardless of its vicinity to an ethanol plant. At our plant, the composition of the distiller’s grains we produce isapproximately 1% DWS, 55% DMWS, 5% CDS and 39% DDGS.

 

For our fiscal year ended December 31,2009, revenue from sales of distiller’s grains accounted for approximately 16%of our total revenue.  The followingtable shows the percentage of our total revenue that was derived from sales ofdistiller’s grains for each of our last three fiscal years:

 

| **Fiscal Year**              | ** ** | **Percentage of Revenue********from Sales of Distiller’s  Grains** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------------|------------|
| Ended December 31, 2009 |       | 16%                                                                     |       |
| Ended December 31, 2008 |       | 14%                                                                     |       |
| Ended December 31, 2007 |       | 11%                                                                     |       |

 

***Corn Oil***

 

During our 2009 fiscal year, we commencedoperating our corn oil extraction equipment which allows us to separate some ofthe corn oil contained in our distiller’s grains.  This is a new revenue source for ouroperations.  

 

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The corn oil that we produce is not foodgrade corn oil and therefore cannot be used for human consumption withoutfurther refining.  However, corn oil canbe used as the feedstock to produce biodiesel and has other industrial and feeduses.

 

For our fiscal year ended December 31,2009, revenue from sales of corn oil accounted for approximately 1% of ourtotal revenue.  We did not have any salesof corn oil prior to our 2009 fiscal year.

 

***Incentive Revenue***

 

We receive incentive revenue from theState of South Dakota associated with our production of ethanol.  During our 2009 fiscal year, this incentiverevenue accounted for less than 1% of our total revenue.

 

**Principal Product Markets**

 

***Ethanol***

 

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

 

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

 

 

Ethanol prices were lower during 2009compared to 2008 as a result of decreased commodity prices generally.  However, ethanol prices increased towards theend of 2009 with a peak occurring in the middle of November 2009.  Management attributes this peak in ethanolprices with corn price increases that were experienced due to unfavorableweather conditions during the harvest of 2009. Please see our “**Item 7 - Management’s**

 

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**Discussion and Analysis of FinancialCondition and Results of Operations**” for further discussion of anticipated ethanol prices.

 

***Distiller’s Grains***

 

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

 

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

 

 

**Distributionof Principal Products**

 

***Ethanol Distribution***

 

OnNovember 30, 2005, we entered into an Ethanol Fuel Marketing Agreementwith Renewable Products Marketing Group (“RPMG”) of Shakopee, Minnesota, forthe purposes of marketing and distributing our ethanol. On April 1, 2007,we became an owner of RPMG by making a capital contribution to RPMG.  Our capital contribution was $605,000, ofwhich $105,000 was paid at the time we became an owner of RPMG and the balancewas paid over time with a portion of our ethanol sales revenue.  We have fully paid our capital contributionto RPMG.  We became a party to RPMG’soperating agreement, executed a contribution agreement that governs the 

 

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fundingof our capital contribution to RPMG, and entered into a new member ethanol fuelmarketing agreement for members of RPMG. Becoming an owner of RPMG allows us to share any profits made by RPMGand reduces the fees that we pay RPMG to market our ethanol.  Pursuant to our member ethanol fuel marketingagreement, we use a pooled marketing arrangement, which means that the ethanolwe produce is pooled with other ethanol producers and marketed by RPMG.  RPMG pays us a netback price per gallon thatis based on the difference between the pooled average delivered ethanol sellingprice and the pooled average distribution expense.  These averages are calculated based on eachpool participant’s selling price and expense averaged in direct proportion tothe volume of ethanol supplied by each participant to the pool.

 

***Distiller’sGrains Distribution***

 

Otherthan the distiller’s grains that we market locally without a third partymarketer, our distiller’s grains are marketed by RPMG, the same entity thatmarkets our ethanol and corn oil.  On July 15,2008 we entered into a distiller’s grains marketing agreement with RPMG.  The initial term of our distiller’s grainsmarketing agreement with RPMG is two years. Our distiller’s grains marketing agreement with RPMG automaticallyrenews for additional one-year terms unless notice is given as provided by thedistiller’s grains marketing agreement. We pay RPMG a commission based on each ton of distiller’s grains sold byRPMG.

 

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

 

***CornOil Distribution***

 

Wemarket all of our corn oil through RPMG, which is the same entity that marketsour ethanol and distiller’s grains.  On August 11,2009, we executed a corn oil marketing agreement with RPMG.  Pursuant to the corn oil marketing agreement,RPMG agreed to market all of the corn oil we produce.  The initial term of the agreement is for oneyear.  The agreement automatically renewsfor additional one year terms unless either party gives 180 days notice thatthe agreement will not be renewed.  Weagreed to pay RPMG a commission based on each pound of  our corn oil that is sold by RPMG.

 

**New Productsand Services**

 

During our fiscal yearended December 31, 2009, we began extracting corn oil from our distiller’sgrains which represents a new product for us.

 

**Patents,Trademarks, Licenses, Franchises and Concessions**

 

We do not currently holdany patents, trademarks, franchises or concessions.  We were granted a license by Broin andAssociates, Inc., the company that designed and built the ethanol plant,to use certain ethanol production technology necessary to operate our ethanolplant.  The cost of the license grantedby Broin was included in the amount we paid to Broin to design and build ourethanol plant.

 

**Sources and Availability of Raw Materials**

 

***Corn Feedstock Supply***

 

The major rawmaterial required for our ethanol plant to produce ethanol and distiller’sgrains is corn.  To operate at a nameplate capacity of 40 million gallons, the plant requires asupply of approximately 14 million bushels of corn annually.  The plant currently operates in excess of itsnameplate capacity, producing approximately 47.5 million gallons of ethanolannually from approximately 17.1 million bushels of corn.  The areasurrounding the ethanol plant currently provides an ample supply of corn tomeet and exceed our raw material requirements for the nameplate and actual productioncapacity of the plant.

 

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Recently, theUnited States has experienced record corn crops, including the largest corncrop which was harvested in the fall of 2007, the third largest corn crop whichwas harvested in the fall of 2008 and the second largest corn crop harvested inthe fall of 2009.  Despite these recordcorn crops, corn prices have recently been extremely volatile, including arecord spike in corn prices during the middle of our 2008 fiscal year.  The Midwest experienced significant floodingand poor weather during the early part of the 2008 growing season. This causedcorn prices to increase significantly on fears that the corn harvest in thefall of 2008 would not be sufficient to meet demand.  As a result, corn prices peaked in late June andearly July 2008, with prices reaching as high as $8.00 per bushel.  Following the unfavorable weather conditionsin the early part of the 2008 growing season was nearly ideal weatherconditions.  This, along with thecollapse of the world financial markets and a general downturn in the globalcommodities market, resulted in a significant decrease in corn prices duringthe second half of our 2008 fiscal year. Corn prices remained lower for much of our 2009 fiscal year.  However, extremely wet weather during thefall of 2009 significantly delayed the 2009 harvest.  Management believes that this, along withearly improvements in the world economy, led to an increase in corn pricesduring the fall of 2009.

 

Recently cornprices have decreased due to the significant amount of corn harvested in thefall of 2009 and a potential increase in the number of acres of corn that isanticipated to be planted in the spring of 2010.  There is some concern regarding the qualityof the corn that was harvested in the fall of 2009 due to the wet weatherconditions.  Corn that is of poor qualitycould result in decreased ethanol yields per bushel of corn which couldnegatively impact our operations.  Poorquality corn could also negatively impact distiller’s grains prices.

 

Below is a chartshowing the spot price of corn during our last three fiscal years.

 

 

Should we endurean entire growing season with either widespread or localized poor weather thatsignificantly reduces the corn crop, such as a widespread drought, corn pricescould increase significantly.  These highcorn prices could persist for a significant period of time and may result inour inability to operate the ethanol plant profitably.

 

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InFebruary 2009, we entered into an agreement with John Stewart &Associates (“JS&A”) to provide us with consulting services related to ourrisk management strategy.  We agreed topay JS&A a fee of $2,500 per month to assist us in making risk managementdecisions regarding our commodity purchases. The initial term of the agreement is one year and thereafter it renewson a month-to-month basis.

 

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

 

***Natural Gas***

 

Naturalgas is an important input to our manufacturing process.  We use naturalgas to dry our distiller’s grains products to moisture contents at which theycan be stored for long periods of time. This allows the distiller’s grains we produce to be transported greaterdistances which allows them to serve broader livestock markets, includingpoultry and swine markets in the continental United States.  We contract with NorthWestern Energy for ournatural gas.  Under our agreement, theprice for our natural gas is based on market rates.  The agreement is in effect until 2011 and is renewablefor an additional ten-year term, unless the agreement is terminated.  Since operations commenced in 2001, therehave been no interruptions in the supply of natural gas from NorthWesternEnergy, and all of our natural gas requirements have been met.  Recently we have experienced significantdecreases in natural gas prices which have followed energy and commodity pricesgenerally.  We anticipate that naturalgas prices will continue to remain low so long as the global economic recessionpersists with the typical premium natural gas prices during the wintermonths.  However, should we experiencesupply interruptions during our 2010 fiscal year, such as from hurricaneactivity in the Gulf Coast region of the United States, we may experiencehigher natural gas prices.

 

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

 

 

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***Electricity***

 

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

 

***Water***

 

Wateris a necessary part of the ethanol production process.  It is used in the fermentation process and toproduce steam for the cooking, evaporation, and distillation processes.  We contract with Big Sioux Community WaterSystem, Inc. to supply and meet our water requirements for the ethanol anddistiller’s grains production process. Our agreement with Big Sioux is for a five-year term commencing in August 2009and is renewable for five year terms. Since our operations commenced in September 2001, we have had nointerruption in the supply of water and all of our requirements have been met.

 

**SeasonalFactors in Business**

 

We anticipate someseasonality of demand for ethanol during the summer months that coincides withincreases in gasoline demand.  Sinceethanol is typically blended with gasoline, when gasoline demand changes,ethanol demand typically correspondingly changes.  In addition, we experience some seasonalityin the price we pay for natural gas with premium pricing during the wintermonths.  This increase in natural gasprices coincides with increased natural gas demand for heating needs in thewinter months.

 

**WorkingCapital**

 

Inorder to protect the price of our inputs, namely corn and natural gas, we enterinto hedging transactions that are designed to limit our exposure to increasesin the price of corn and natural gas.  Asa result of the volatility of corn prices during our 2008 fiscal year,decreasing corn prices had a significant impact on the cash we had availablefor working capital at the end of our 2008 fiscal year. We experienced historichigh prices for corn during the early part of July 2008 and these pricesdecreased significantly during the remaining months of our 2008 fiscalyear.  The result of this volatility isthat we were forced to dedicate significant amounts of cash to meet margincalls associated with our derivative instruments and we experienced significantlosses on our risk management activities. On October 7, 2008, we liquidated all of our futures and optionspositions in order to preserve our liquidity. This resulted in an approximately $7.5 million realized loss on ourderivative instruments which we recorded during our fourth fiscal quarter of2008.  Following October 7, 2008, weadjusted our risk management strategy to limit its impact on the cash we haveavailable to continue our operations.  Weanticipate that the changes we made will decrease our exposure to significanthedging losses during times when corn prices are volatile which can affect theamount of working capital we have available.

 

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

 

As discussed above, we have entered intomarketing agreements with RPMG to market our ethanol, distiller’s grains andcorn oil.  Therefore, we anticipaterelying on RPMG to market almost all of our products, except for thosedistiller’s grains that we market locally. Our financial success will be highly dependent on RPMG’s ability tomarket our products at competitive prices. Any loss of RPMG as our marketing agent or any lack of performance underthese agreements or inability to secure competitive prices could have asignificant negative impact on our revenues.

 

**Our Competition**

 

Weare in direct competition with numerous ethanol producers, many of whom havegreater resources than we do.  We believethat due to our currently low debt load and our ready access to raw materialsto produce ethanol, 

 

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wecompete favorably in the ethanol industry. During 2008 and 2009, there was relatively slower growth in the numberof new ethanol producers entering the market due to high corn prices andrelatively lower ethanol prices as compared to 2006 and 2007.  We anticipate that ethanol production willcontinue to increase in order to meet the ethanol use mandates included in theFederal Renewable Fuels Standard. However, we also expect increased competition from other forms ofrenewable energy, specifically cellulosic ethanol.

 

Cellulose is the maincomponent of plant cell walls and is the most common organic compound onearth.  Cellulose is found in wood chips,corn stalks, rice straw, amongst other common plants. Cellulosic ethanol isethanol produced from cellulose.  Many ofthe government incentives that have been passed, including the expandedRenewable Fuels Standard and the 2008 Farm Bill, have included significantincentives to assist in the development of commercially viable cellulosicethanol.  Currently, the technology isnot sufficiently advanced to produce cellulosic ethanol on a commercial scale,however, due to these government incentives, we anticipate that commerciallyviable cellulosic ethanol technology will be developed in the near future.  Several companies and researchers havecommenced pilot projects to study the feasibility of commercially producingcellulosic ethanol.  If this technologycan be profitably employed on a commercial scale, it could potentially lead toethanol that is less expensive to produce than corn based ethanol, especiallyif corn prices remain high.  Cellulosicethanol may also capture more government subsidies and assistance than cornbased ethanol.  This could decreasedemand for our product or result in competitive disadvantages for our ethanolproduction process.  We do not believe itwould be feasible to convert our ethanol plant to utilize cellulosic ethanol productiontechnology.

 

In December 2009,the California Office of Administrative Law approved the Low Carbon FuelStandard (“LCFS”) for implementation. The LCFS is an attempt to achieve a 10% reduction in motor vehicle’semissions of greenhouse gases by 2020 through the use of low-carbon fuels likehydrogen or cellulosic ethanol.  The LCFSattempts to consider the life cycle carbon content of all fuels used inCalifornia by taking into account indirect land use change theories whendetermining a fuel’s potential for reducing emissions of greenhouse gases.  Currently, most corn based ethanol would notmeet the criteria of the LCFS which may in turn limit the demand for corn basedethanol and increase the demand for ethanol derived from sugarcane or cellulosebased feedstocks.  Renewable fuels thatdo not use corn as the primary feedstock may be an important competitive factorfacing our company given the LCFS adopted in California.  There have been announcements of severalother states looking at similar legislation.

 

Ethanolis a commodity product, like corn, which means our ethanol plant competes with other ethanol producers on thebasis of price and, to a lesser extent, delivery service.  We believe we compete favorably with otherethanol producers due to our proximity to ample grain supplies and multiplemodes of transportation.  According tothe Renewable Fuels Association, as of March 10, 2010, the ethanolindustry has grown to 201 production facilities in the United States. There areapproximately 15 plants currently under construction or expansion.  The Renewable Fuels Association estimatesthat the United States ethanol industry has capacity to produce approximately13.5 billion gallons of ethanol per year, however the Renewable FuelsAssociation estimates that as much as 8% of this production capacity may beidled due to current conditions in the ethanol industry.  However, this is a decrease from thebeginning of 2009 when as much as 20% of the ethanol production capacity in theUnited States was idled.  The new ethanolplants under construction along with the plant expansions under constructioncould push United States production of fuel ethanol in the near future tonearly 14.6 billion gallons per year. Further, should financial conditions in the ethanol industry improve,some or all of the idled production capacity may resume production of ethanoland distiller’s grains within a short period of time which could increase thesupply of ethanol and distiller’s grains significantly.

 

Thelargest ethanol producers include POET, Archer Daniels Midland, Green PlainsRenewable Energy, Valero Renewable Fuels and Hawkeye Renewables each of whichare capable of producing significantly more ethanol than we produce.  Valero Renewable Fuels purchased 8 ethanolplants in early 2009 with capacity to produce 780 million gallons of ethanolper year from VeraSun Energy through its Chapter 11 Bankruptcy auction.  Valero is a large gasoline refiner and itowns retail level gasoline distribution. Valero’s involvement in both the ethanol and gasoline blendingindustries may allow Valero to realize economies of scale and favorableoperating conditions that may negatively impact other ethanol producers,including us.  In addition to the VersaSunbankruptcy, Hawkeye Renewables LLC filed for Chapter 11 bankruptcy on December 21,2009.  Hawkeye Renewables owns twoethanol plants and is a subsidiary of Hawkeye Energy Holdings.  While Hawkeye Renewables planned to exitChapter 11 bankruptcy in 60 to 90 days and does not anticipate ceasing itsoperations, 

 

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thisplan may not be realized.  If the ethanolplants owned by Hawkeye Renewables are sold, it may lead to furtherconsolidation of the ethanol industry.

 

Manyin the ethanol industry believe that the ethanol industry is ripe forconsolidation.  Several ethanolproduction companies have recently filed for bankruptcy which may result inconsolidation of the ethanol industry depending on whether the ethanol plantsof these companies are purchased by other large ethanol productioncompanies.  This may result in a fewlarge companies controlling a significant amount of the ethanol production in theUnited States.  These large ethanolproducers may influence the ethanol industry in a manner that is not beneficialto us.

 

Thefollowing table identifies the largest ethanol producers in the United Statesalong with their production capacities according to the Renewable FuelsAssociation.

 

**U.S. FUEL ETHANOL PRODUCTION CAPACITY**

**BY TOP PRODUCERS**

**Producers of Approximately 400**

**million gallons per year (mmgy) or more**

** **

| **Company**                       | ** ** | **Current  Capacity  (mmgy)** | ** ** | **Under  Construction/  Expansions  (mmgy)** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|----------------------------------------------|------------|
| ** **                        | ** ** | ** **                    | ** ** | ** **                                   | ** ** |
| **POET Biorefining**              | ** ** | **1,537.0**                   | ** ** | **5.0**                                      | ** ** |
| ** **                        | ** ** | ** **                    | ** ** | ** **                                   | ** ** |
| **Archer Daniels Midland**        | ** ** | **1,450.0**                   | ** ** | **275**                                      | ** ** |
| ** **                        | ** ** | ** **                    | ** ** | ** **                                   | ** ** |
| **Valero Renewable Fuels**        | ** ** | **1,130.0**                   |       |                                         |       |
| ** **                        | ** ** | ** **                    |       |                                         |       |
| **Green Plains Renewable Energy** | ** ** | **480.0**                     |       |                                         |       |
| ** **                        | ** ** | ** **                    |       |                                         |       |
| **Hawkeye Energy Holdings, LLC**  | ** ** | **420.0**                     |       |                                         |       |

 

Updated: March 10, 2010

 

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

 

Ethanolproduction is also expanding internationally. Ethanol produced or processed in certain countries in Central Americaand the Caribbean region is eligible for tariff reduction or elimination onimportation to the United States under a program known as the Caribbean BasinInitiative (CBI).  Some ethanolproducers, including Cargill, have started taking advantage of this situationby building dehydration plants in participating Caribbean Basin countries,which convert ethanol into fuel-grade ethanol for shipment to the UnitedStates.  The CBI import quota for ethanolin 2009 was approximately 622 million gallons of ethanol.  Therefore, up to 622 million gallons ofethanol were eligible to enter the United States duty free in 2009 fromparticipating countries in Central America and the Caribbean region.  This import quota is equal to 7% of the totalUnited States consumption of ethanol at the end of September eachyear.  The 2010 CBI import quota wasrecently announced as approximately 740 million gallons. Ethanol imported fromCaribbean Basin countries may be a less expensive alternative to domesticallyproduced ethanol and may affect our ability to sell our ethanolprofitably.  Further, despite the factthat there is a significant amount of ethanol produced in the United States,ethanol produced abroad and shipped by sea may be a more favorable alternativeto supply coastal cities that are located on international shipping ports.

 

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***Competitionfrom Alternative Fuels***

 

Our ethanol plant also competes withproducers of other gasoline additives having similar octane and oxygenate valuesas ethanol.  Alternative fuels, gasolineoxygenates and alternative ethanol production methods are also continuallyunder development.  The major oilcompanies have significantly greater resources than we have to market otheradditives, to develop alternative products, and to influence legislation andpublic perception of ethanol.  Thesecompanies also have sufficient resources to begin production of ethanol shouldthey choose to do so.  In 2009, ValeroRenewable Fuels, purchased 8 ethanol plants from the VeraSun Energy bankruptcyauction with capacity to produce 780 million gallons of ethanol per year.  Thismay be a signal of further involvement by major oil companies in the renewablefuels industry.  We may not be able tocompete with the resources of these large oil companies.

 

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

 

A number of automotive, industrial and powergeneration manufacturers are developing alternative clean power systems usingfuel cells or clean burning gaseous fuels. Like ethanol, the emerging fuel cell industry offers a technologicaloption to address increasing worldwide energy costs, the long-term availabilityof petroleum reserves and environmental concerns.  Fuel cells have emerged as a potentialalternative to certain existing power sources because of their higherefficiency, reduced noise and lower emissions. Fuel cell industry participantsare currently targeting the transportation, stationary power and portable powermarkets in order to decrease fuel costs, lessen dependence on crude oil andreduce harmful emissions.  If the fuelcell and hydrogen industries continue to expand and gain broad acceptance andhydrogen becomes readily available to consumers for motor vehicle use, we maynot be able to compete effectively.  Thisadditional competition could reduce the demand for ethanol, which couldnegatively impact our profitability.

 

**Distiller’s Grains Competition**

 

Ourethanol plant primarily competes with other ethanol producers in the productionand sales of distiller’s grains. Distiller’s grains are primarily used as an animal feed supplement whichreplaces corn and soybean meal. As a result, we believe that distiller’s grainsprices are positively impacted by increases in corn and soybean prices.  The amount of distiller’s grains produced bythe ethanol industry is expected to continue to increase as the number ofoperating ethanol plants increases.  Thiscould negatively impact the price at which we sell our distiller’s grainsunless demand expands in relation to the expanding supply.  We expect the market price of distiller’sgrains to continue to be volatile as a result of changes in distiller’s grainsproduction and the price of corn and soybeans.

 

**GeneralEthanol Demand and Supply**

 

According to theRenewable Fuels Association, demand for fuel ethanol in the United Statescontinued to increase in 2009.  Domesticethanol demand was approximately 10.94 billion gallons in 2009 according toRenewable Fuels Association statistics. Further, domestic ethanol production is estimated by the RFA to be 10.75billion gallons.  However, we believe thatcurrent ethanol production capacity in the United States is significantlyhigher than ethanol demand which we believe negatively impacts ethanolprices.  If the supply of ethanolcontinues to increase at a more rapid rate than demand, the price at which wecan sell our ethanol may decrease.  Theethanol industry must continue to grow demand for ethanol in order to supportcurrent ethanol prices and allow the ethanol industry to remain profitable.

 

Ethanol is typicallyblended with conventional gasoline for use in standard (non-flex fuel) vehiclesto create a blend which is 10% ethanol and 90% conventional gasoline.  Estimates indicate that approximately 135billion gallons of gasoline are sold in the United States each year.  Assuming that all gasoline in the UnitedStates is blended at a rate of 10% ethanol and 90% gasoline, the maximum demandfor ethanol is 13.5 billion gallons. This is commonly referred to as the “blending wall,” which represents atheoretical limit where more ethanol cannot be blended into the nationalgasoline pool.  This is a theoreticallimit since it is believed it would not be possible to 

 

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blend ethanol into everygallon of gasoline that is used in the United States and it discounts higherpercentage blends of ethanol such as E85 used in flex fuel vehicles.  Many in the ethanol industry believe that theethanol industry will reach this blending wall in 2010 or 2011.  The RFS requires that 36 billion gallons ofrenewable fuels be used each year by 2022. Many believe that it will not be possible to meet the RFS withoutallowing the use of higher ethanol blends in standard vehicles.

 

Recently, the UnitedStates Environmental Protection Agency has been researching increasing theamount of ethanol that can be blended with gasoline for use in standardvehicles from 10% to 15%.  However, theEPA has delayed a decision until sometime in 2010 with respect to a 15%blend.  Management believes thatincreasing ethanol blends to 15% for use in standard vehicles will increasedemand for ethanol and would likely positively impact ethanol prices.  Management believes that this could increaseethanol demand by as much as 7 billion gallons per year.  However, a 15% blend will also likely resultin companies building new ethanol plants or expanding their current ethanolplants, which could lead to further overcapacity in the ethanol industry ifsupply capacity continues to eclipse demand. In addition, based on comments made by the EPA, some in the ethanolindustry believe the EPA is considering allowing the use of a 15% ethanol blendonly for vehicles produced in the model year 2001 and later.  Such a restriction could lead to gasolineretailers deciding not to carry a 15% ethanol blend because many of theircustomers would not be permitted to use the 15% blend.  If this were to occur, it would significantlyreduce any ethanol demand increases that could result from such a 15%blend.  Management anticipates thatwithout an increase in the amount of ethanol that can be blended into gasolinefor use in standard vehicles, ethanol demand may not significantly increasepast current levels which may result in ethanol supply capacity continuing toexceed ethanol demand for the foreseeable future.

 

The institution of higherblends of ethanol, such as a 15% blend, is a contentious issue.  Automobile manufacturers and environmentalgroups have fought against higher ethanol blends.  Currently, state and federal regulationsprohibit the use of higher ethanol blends in standard vehicles and vehiclemanufacturers have indicated that using higher blends of ethanol inconventional automobiles would void the manufacturer’s warranty.  Due to this opposition to higher percentageethanol blends, it is difficult to predict whether such blends will be approvedand the effect such approval will have in the ethanol market.

 

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

 

Demand for ethanol in thefuture may increase as a result of increased consumption of E85 fuel. E85 is ablend of 85% ethanol and 15% gasoline. The National Ethanol Vehicle Coalition reports as of February 1,2010, that there are approximately 2,100 retail gasoline stations supplyingE85.  While the number of retail E85suppliers increases significantly each year, this remains a relatively smallpercentage of the total number of U.S. retail gasoline stations, which is approximately170,000.  According to the RFA, as of February 2009,there are more than 7 million flex fuel vehicles on the road in the UnitedStates.  As public awareness of ethanoland E85 increases along with E85’s increased availability, management anticipatessome growth in demand for ethanol as a result of E85 consumption.  However, we anticipate that the number offlex fuel vehicles will not increase at a fast enough rate to significantlyincrease ethanol demand to meet the RFS in future years as well as projectedethanol supply capacity.  We believe thisis especially true as a result of the current global economic climate and thedifficulties being experienced by the automobile industry.  As automobile sales fall, the number of flexfuel vehicles that enter the market each year will also fall.  Further, the automobile industry may not bein a position to continue to develop technology that utilizes more ethanol whenthe automobile industry is struggling financially.

 

**Research and Development**

 

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

 

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**Governmental Regulation**

 

Costs and Effects of Federal Ethanol Supports

 

The ethanol industry is dependent on severaleconomic incentives to produce ethanol, including federal ethanolsupports.  One significant federalethanol support is the Renewable Fuels Standard (the “RFS”).  The RFS requires that in each year, a certainamount of renewable fuels be utilized in the United States.  The RFS required the use of approximately 11billion gallons of renewable fuels in 2009. The RFS increases to approximately 13 billion gallons of renewable fuelsfor 2010, increasing to 36 billion gallons in 2022.  The new RFS also has a provision thatrequires the use of “advanced” renewable fuels. These advanced renewable fuels include ethanol that is not made fromcorn, such as cellulosic ethanol.  TheRFS is a national program that does not require that any renewable fuels beused in any particular area or state, allowing refiners to use renewable fuelblends in those areas where it is most cost-effective.

 

Recently the RFS has come under scrutiny.  As discussed above, many in the ethanolindustry believe that it is not possible to reach the RFS requirement in comingyears without allowing higher percentage blends of ethanol to be used instandard (non-flex fuel) vehicles due to the blending wall.  The RFS mandate requires that 36 billiongallons of renewable fuels be used each year by 2022 which equates toapproximately 27% renewable fuels used per gallon of gasoline sold.

 

In February 2010, the EPA issued regulationsgoverning the RFS starting in 2010 and going into the future.  This is commonly referred to as RFS2.  The most controversial part of RFS2 revolvesaround what is commonly referred to as the lifecycle analysis of greenhouse gasemissions.  Specifically, the EPA adoptedrules to determine which renewable fuels provided sufficient reductions ingreenhouse gases, compared to conventional gasoline, to qualify under the RFSprogram.  RFS2 establishes a tieredapproach, with regular renewable fuels required to accomplish a 20% greenhousegas reduction, advanced biofuels and biomass-based biodiesel must accomplish a50% reduction in greenhouse gases, and cellulosic biofuels must accomplish a60% reduction in greenhouse gases.  Anyfuels that fail to meet this standard cannot be used by fuel blenders tosatisfy their obligations under the RFS program.  The scientific method of calculating these greenhousegas reductions has been a contentious issue. Many in the ethanol industry were concerned that corn based ethanolwould not meet the 20% greenhouse gas reduction requirement.  RFS2 provides that corn-based ethanol doesmeet the definition of a renewable fuel under the RFS program if it is producedusing modern production technology.  Ourethanol plant is grandfathered into the RFS so we are not required to provethat we meet the lifecycle greenhouse gas reduction requirements.  Certain provisions of RFS2 maydisproportionately benefit ethanol produced from sugarcane.  This could make ethanol produced fromsugarcane more competitive in the United States ethanol market which couldreduce demand for the ethanol that we produce. Further, the California LCFS may result in Brazilian sugarcane basedethanol being more competitive in the California market.

 

The use of ethanol as an alternative fuel source hasbeen aided by federal tax policy.  On October 22,2004, President Bush signed H.R. 4520, which contained the Volumetric EthanolExcise Tax Credit (“VEETC”) and amended the federal excise tax structureeffective as of January 1, 2005. Prior to VEETC, ethanol-blended fuel was taxed at a lower rate thanregular gasoline (13.2 cents on a 10% blend). Under VEETC, the ethanol excise tax exemption has been eliminated,thereby allowing the full federal excise tax of 18.4 cents per gallon ofgasoline to be collected on all gasoline and allocated to the highway trustfund.  In place of the exemption, thebill created a new volumetric ethanol excise tax credit of 4.5 cents per gallonof ethanol blended at 10%.  The VEETC isscheduled to expire on December 31, 2010. If this tax credit is not renewed, it likely would have a negativeimpact on the price of ethanol.

 

On June 18, 2008, the United States Congressoverrode a presidential veto to approve the Food, Conservation and Energy Actof 2008 (the “2008 Farm Bill”) and to ensure that all parts of the 2008 FarmBill were enacted into law.  Passage ofthe 2008 Farm Bill reauthorizes the 2002 farm bill and adds new provisionsregarding energy, conservation, rural development, crop insurance as well asother subjects.   The energy titlecontinues the energy programs contained in the 2002 farm bill but refocusescertain provisions on the development of cellulosic ethanol technology.  The new legislation provides assistance forthe production, storage and transport of cellulosic feedstocks and providessupport for ethanol production from such feedstocks in the form of grants,loans and loan

 

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guarantees. The 2008 Farm Bill also modifies the ethanol fuels credit from 51 centsper gallon to 45 cents per gallon beginning in 2009.  Further, the bill extends the 54 cent pergallon ethanol tariff on imported ethanol for two years, to January 2011.

 

Costs and Effects of Compliance withEnvironmental Laws

 

We are subject to extensive air, water andother environmental regulations, and we have been required to obtain a numberof environmental permits to construct and operate the plant.  We have obtained all of the necessary permitsto operate the plant.  Although we havebeen successful in obtaining all of the permits currently required, anyretroactive change in environmental regulations, either at the federal or statelevel, could require us to obtain additional permits or spend considerableresources on complying with such regulations. In addition, we may be required to purchase and installequipment for controlling and improving emissions.  During our 2009 fiscal year, our costs of environmental compliance wereapproximately $30,000.  We anticipatethat our environmental compliance costs will be approximately $200,000 duringour 2010 fiscal year.

 

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

 

The government’s regulation of the environment changes constantly.  It is possible that federal or stateenvironmental rules or regulations could be adopted that could have anadverse effect on the use of ethanol. For example, changes in the environmental regulations regarding therequired oxygen content of automobile emissions could have an adverse effect onthe ethanol industry.  In addition, inthe future our industry may be negatively impacted by the effects of climatechange legislation, specifically legislation aimed at reducing greenhouse gasemissions.  In 2007, the Supreme Courtdecided a case in which it ruled that carbon dioxide is an air pollutant underthe Clean Air Act for the purposes of motor vehicle emissions.  The Supreme Court directed the EPA toregulate carbon dioxide from vehicle emissions as a pollutant under the CleanAir Act.  Additionally, legislation ispending in Congress on a comprehensive carbon dioxide regulatory scheme, suchas a carbon tax or cap-and-trade system which could affect how our plant isregulated.  Further, the California LCFShas signaled greater interest by the states in regulating greenhouse gasemissions.  If the EPA or the State ofSouth Dakota were to regulate carbon dioxide emissions by plants such as ours,we may have to apply for additional permits or we may be required to installcarbon dioxide mitigation equipment. Compliance with any future regulation of carbon dioxide or othergreenhouse gas emissions, could require us to use our capital resources tocomply with these environmental regulations.

 

Furthermore, plant operations are governed by the Occupational Safetyand Health Administration (“OSHA”).  OSHAregulations may change such that the costs of operating the plant mayincrease.  Any of these regulatoryfactors may result in higher costs or other materially adverse conditionseffecting our operations, cash flows and financial performance.

 

**Employees**

 

As of March 31, 2010, we had atotal of 38 full-time employees.  We do not expect to hire a significantnumber of employees in the next 12 months.

 

**Financial Information about Geographic Areas**

 

All of our operations are domiciled in the United States.  All of the products sold to our customers forfiscal years 2009, 2008 and 2007 were produced in the United States and all ofour long-lived assets are domiciled in the United States.  We have engaged a third-party professionalmarketer which decides where our products are marketed and we have no controlover the marketing decisions made by our third-party professionalmarketer.  Therefore, some of our productsmay be sold outside of the United States.

 

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**ITEM 1A.               RISKFACTORS.**

 

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

 

**RisksRelating to Our Business**

 

***We may violate the terms of our credit agreements and financialcovenants which could result in our lender demanding immediate repayment of ourloans. ***At the end of our 2008 fiscal year andthe beginning of our 2009 fiscal year, we were not in compliance with all ofour financial loan covenants due to tight operating margins and unfavorableconditions in the ethanol industry.  Wehave addressed all of these prior loan non-compliances and we are currently incompliance with all of our financial loan covenants.  Current management projections indicate thatwe will be in compliance with our loan covenants for at least the next 12months.  However, unforeseen circumstancesmay develop which could result in us violating our loan covenants.  If we violate the terms of our creditagreement, our primary lender could deem us in default of our loans and requireus to immediately repay the entire outstanding balance of our loans. If we donot have the funds available to repay the loans or we cannot find anothersource of financing, we may fail which could decrease or eliminate the value ofour units.

 

***Our financial performance is significantly dependent on cornand natural gas prices.**** *Ourresults of operations and financial condition are significantly affected by thecost and supply of corn and natural gas. Generally, we cannot pass on increases in input prices to our customers.  Changes in the price and supply of corn andnatural gas are subject to and determined by market forces over which we haveno control.

 

Corn, as with most othercrops, is affected by weather, disease and other environmental conditions.  The price of corn is also influenced bygeneral economic, market and government factors.  These factors include weather conditions,farmer planting decisions, domestic and foreign government farm programs andpolicies, global demand, supply and quality. Changes in the price of corn can significantly affect our business.Generally, higher corn prices will produce lower profit margins and, therefore,represent unfavorable market conditions. If we endure high corn prices for a sustained period of time withoutcorresponding increases in the selling price of ethanol and distiller’s grains,such pricing may reduce our ability to operate our ethanol plantprofitably.  If our region becomessaturated by ethanol plants, corn used for ethanol could consume a significantportion of the total corn production in our region, which would likely increaselocal corn prices.  We may not be able tooffset an increase in the price of corn by increasing the price of ourproducts.

 

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

 

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

 

***The spreadbetween ethanol and corn prices can vary significantly which could prevent usfrom operating the ethanol plant profitably. ***Corncosts significantly impact our cost of goods sold.  The spread between theprice of ethanol and the price we pay per bushel of corn has fluctuatedsignificantly in the past and may fluctuate significantly in the future.  At the beginning of our 2009 fiscal year, weexperienced losses due to our raw material costs being higher than our revenuesrelated to relatively higher natural gas and corn costs compared to the pricewe received for our ethanol.  The spreadbetween the price of ethanol and price of corn may continue to be volatile andmay lead to volatility in our net income which could lead to negative operatingmargins in the future.  Any reduction 

 

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in the spread between ethanol and corn prices, whetheras a result of an increase in corn prices or a reduction in ethanol prices,could prevent us from operating the ethanol plant profitably.  Our inability to operate the ethanol plantprofitably for an extended period of time may reduce or eliminate the value ofour units.

 

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

 

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

 

***Our business is not diversified.***  Our successdepends on our ability to profitably operate our ethanol plant. We do not haveany other lines of business or other sources of revenue if we are unable tooperate our ethanol plant and manufacture ethanol, distiller’s grains and cornoil.  If economic or political factorsadversely affect the market for ethanol, distiller’s grains and corn oil, wemay not be able to continue our operations. Our business would also besignificantly harmed if our ethanol plant could not operate at full capacityfor any extended period of time.  Thiscould reduce or eliminate the value of our units.

 

***Our inability to secure credit facilities we may require in the futuremay negatively impact our liquidity. ***Due to current conditions in the creditmarkets, it has been difficult for businesses to secure financing.  While we do not currently require morefinancing than we have, in the future we may need additional financing.  If we require financing in the future and weare unable to secure such financing, or we are unable to secure the financingwe require on reasonable terms, it may have a negative impact on ourliquidity.  This could negatively impactthe value of our units.

 

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

 

***Ourproduct marketer may fail to market our products at competitive prices whichmay cause us to operate unprofitably.***** **RPMG is the sole marketer of all of our ethanol, cornoil and distiller’s grains, and we rely heavily on its marketing efforts tosuccessfully sell our products.  BecauseRPMG sells ethanol, corn oil and distiller’s grains for a number of otherproducers, we have limited control over its sales efforts.  Our financial performance is dependent uponthe financial health of RPMG as substantially all of our revenues areattributable to RPMG’s sales.  If RPMGbreaches our marketing agreements or it cannot market all of the ethanol, cornoil and

 

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distiller’s grains weproduce, we may not have any readily available means to sell our ethanol, cornoil and distiller’s grains and our financial performance could be negativelyaffected.  While we market a portion ofour distiller’s grains internally to local consumers, we do not anticipate wewould have the ability to sell all of the distiller’s grains, corn oil andethanol we produce ourselves.  If ouragreements with RPMG terminate, we may seek other arrangements to sell ourethanol, corn oil and distiller’s grains, including selling our own product,but we may not be able to achieve results comparable to those achieved by RPMGwhich could harm our financial performance.

 

***We engage in hedging transactions which involve risks that could harmour business.***  We are exposed to market risk from changes incommodity prices.  Exposure to commodityprice risk results from our dependence on corn and natural gas in the ethanolproduction process.  We seek to minimizethe risks from fluctuations in the prices of corn, natural gas and ethanolthrough the use of hedging instruments. The effectiveness of our hedging strategies is dependent on the price ofcorn, natural gas and ethanol and our ability to sell sufficient products touse all of the corn and natural gas for which we have futures contracts.  Our hedging activities may not successfullyreduce the risk caused by price fluctuation which may leave us vulnerable tocorn and natural gas price volatility. We may choose not to engage in hedgingtransactions in the future and our operations and financial conditions may beadversely affected during periods in which corn and/or natural gas pricesincrease.  Significant losses on ourhedging activities may cause us to operate unprofitably and could decrease thevalue of our units.

 

**RisksRelated to Ethanol Industry**

 

***Valero, a large gasoline blending company, purchased 8 ethanol plantsfrom the VeraSun bankruptcy which may signal further involvement in the ethanolindustry by large oil companies which may influence the ethanol industry inways that harms our business.***  ValeroRenewable Fuels purchased 8 ethanol plants from the VeraSun Energy bankruptcyauction.  These ethanol plants have atotal nameplate production capacity of 780 million gallons of ethanol.  Valero is involved in the gasoline blendingand retail gasoline sales industries. Now, Valero owns ethanol production capacity that would allow Valero toproduce a portion of the ethanol that it is required to blend withgasoline.  This may allow Valero torealize economies in the production and sale of ethanol that we are not able torealize.  Further, this may signalincreased involvement by large oil companies in the ethanol industry.  Many of these oil companies havesignificantly greater resources than we have. We may not be able to competeeffectively with Valero or other large oil companies which may result in ourinability to operate our ethanol plant profitably.

 

***New plants underconstruction or decreases in the demand for ethanol may result in excessproduction capacity in our industry which could decrease the selling prices ofour products and cause us to operate unprofitably. ***The supply of domestically produced ethanol is at anall-time high.  As of March 10,2010, there were 201 ethanol plants nationwide with the capacity to producemore than 13.5 billion gallons of ethanol annually.  An additional approximately 15 plants arecurrently under construction or expansion, which will add an additionalestimated 1.0 billion gallons of annual production capacity.  Excess capacity in the ethanol industry wouldhave an adverse impact on our results of operations, cash flows and general financialcondition.  If the demand for ethanoldoes not grow at the same pace as increases in supply, we would expect theselling price of ethanol to decline.  Themarket price of ethanol may decline to a level that is inadequate to generatesufficient cash flow to cover our costs. This could negatively affect our future profitability.

 

***We operate in an intenselycompetitive industry and compete with larger, better financed entities whichcould impact our ability to operate profitably.***  There is significant competition among ethanol producers.  There are numerous producer-owned andprivately-owned ethanol plants planned and operating throughout the Midwest andelsewhere in the United States.  We also face competition from outside ofthe United States.  The passage of theEnergy Policy Act of 2005 included a renewable fuels mandate.  The Energy Independence and Security Act of2007 increased the RFS to 36 billiongallons by 2022.  Further, some stateshave passed renewable fuel mandates. These increases in ethanol demand have encouraged companies to enter theethanol industry.  The largest ethanol producers include POET,Archer Daniels Midland, Green Plains Renewable Energy, Valero Renewable Fuelsand Hawkeye Renewables, LLC, all ofwhich are each capable of producing more ethanol than we produce.  We may not be able to compete effectivelywith these larger ethanol producers. Further, many believe that there will be consolidation occurring in theethanol industry in the near future which will likely lead to a few companieswho control a significant portion of the ethanol production market.  These larger ethanol producers may be able toaffect the ethanol market in ways that are not beneficial to us which couldaffect our financial performance.

 

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***Competition from the advancement of alternative fuels maylessen the demand for******ethanolwhich could negatively impact our ability to operate profitably.*** Alternative fuels, gasoline oxygenates and ethanol production methodsare continually under development. A number of automotive, industrial and powergeneration manufacturers are developing alternative clean power systems usingfuel cells or clean burning gaseous fuels. Like ethanol, the emerging fuel cellindustry offers a technological option to address increasing worldwide energycosts, the long-term availability of petroleum reserves and environmentalconcerns. Fuel cells have emerged as a potential alternative to certainexisting power sources because of their higher efficiency, reduced noise andlower emissions. Fuel cell industry participants are currently targeting thetransportation, stationary power and portable power markets in order todecrease fuel costs, lessen dependence on crude oil and reduce harmfulemissions.  If the fuel cell and hydrogenindustries continue to expand and gain broad acceptance, and hydrogen becomesreadily available to consumers for motor vehicle use, we may not be able tocompete effectively. This additional competition could reduce demand forethanol, resulting in lower ethanol prices that might adversely affect ourresults of operations and financial condition.

 

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

 

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

 

***E******thanol imported from Caribbean basincountries may be a less******expensivealternative to our ethanol and negatively impact our ability to sell ourproduct at a profit.***  Ethanolproduced or processed in certain countries in Central America and the Caribbeanregion is eligible for tariff reduction or elimination upon importation to theUnited States under a program known as the Caribbean Basin Initiative. Largeethanol producers, such as Cargill, have built dehydration plants inparticipating Caribbean Basin countries, such as El Salvador, which convertethanol into fuel-grade ethanol for shipment to the United States. Ethanolimported from Caribbean Basin countries may be a less expensive alternative todomestically produced ethanol. Competition from ethanol imported from CaribbeanBasin countries may affect our ability to sell our ethanol profitably,adversely affect our results of operations and financial condition.

 

***Ethanol imported from Brazil may be a less expensive******alternative to our ethanol.*** Brazil is currently the world’s largest exporter of ethanol.  Until recently, Brazil was also the world’slargest producer of ethanol.  In Brazil,ethanol is produced primarily from sugarcane, which is also used to producefood-grade sugar.  Ethanol imported fromBrazil may be a less expensive alternative to domestically produced ethanol,which is primarily made from corn. Tariffs presently protecting U.S. ethanolproducers may be reduced or eliminated. Further, the new 

 

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California LCFS may increase demand for sugarcanebased ethanol which could significantly benefit ethanol imported fromBrazil.  Competition from ethanolimported from Brazil may affect our ability to sell our ethanol profitably andadversely affect our financial condition.

 

***Consumer beliefs may affect the demand for ethanol.*** We believe that certain consumers perceive the use of ethanol to have anegative impact on gasoline prices at the pump. Some consumers also believethat ethanol adds to air pollution and harms car and truck engines. Still otherconsumers believe that the process of producing ethanol actually uses morefossil fuel energy, such as oil and natural gas, than the energy in the ethanolthat is produced. These consumer beliefs could potentially be widespread. Ifconsumers choose not to buy ethanol, it will affect the demand for the ethanolwe produce which could lower the selling price of ethanol and negatively affectour profitability and financial condition.

 

**Risks Related to Regulation and GovernmentalAction**

 

***Demand for ethanol may not continue to grow unless ethanol can beblended into gasoline in higher percentage blends for conventionalautomobiles. ***Currently, ethanol is blended withconventional gasoline for use in standard (non-flex fuel) vehicles to create ablend which is 10% ethanol and 90% conventional gasoline.  Estimates indicate that approximately 135billion gallons of gasoline are sold in the United States each year.  Assuming that all gasoline in the UnitedStates is blended at a rate of 10% ethanol and 90% gasoline, the maximum demandfor ethanol is 13.5 billion gallons. This is commonly referred to as the “blending wall,” which represents atheoretical limit where more ethanol cannot be blended into the nationalgasoline pool.  Many in the ethanolindustry believe that the ethanol industry will reach this blending wall in2010 or 2011.  In order to expand demandfor ethanol, higher percentage blends of ethanol must be utilized in standardvehicles.  Such higher percentage blendsof ethanol have recently become a contentious issue.  Automobile manufacturers and environmentalgroups have fought against higher percentage ethanol blends.  Currently, state and federal regulations prohibitthe use of higher percentage ethanol blends in standard vehicles and vehiclemanufacturers have stated that using higher percentage ethanol blends instandard vehicles would void the manufacturer’s warranty.  Recently, the EPA was expected to make aruling on using higher percentage blends of ethanol such as E15, however, the EPAdeferred making a decision on this issue until 2010.  Further, some believe the EPA is consideringonly approving a 15% ethanol blend for vehicles produced in model year 2001 andlater.  This may lead to gasolineretailers refusing to carry a 15% ethanol blend even if it is approved.  Without an increase in the allowablepercentage blends of ethanol, demand for ethanol may not continue to increasewhich could decrease the selling price of ethanol and could result in ourinability to operate the ethanol plant profitably which could reduce oreliminate the value of our units.

 

***Governmentincentives for ethanol production, including federal tax incentives,******may be eliminated in the future, which could hinderour ability to operate at a**profit****.** *Theethanol industry is assisted by various federal ethanol production and taxincentives, including the RFS set forth in the Energy Policy Act of 2005 andincreased by the Energy Independence and Security Act of 2007.  The RFS helps support a market for ethanolthat might disappear without this incentive; as such, waiver of the RFS minimumlevels of renewable fuels included in gasoline could negatively impact ourresults of operations.

 

In addition, the elimination or reduction of taxincentives to the ethanol industry, such as the Volumetric Ethanol Excise TaxCredit (“VEETC”) available to gasoline refiners and blenders, could also reducethe market demand for ethanol, which could reduce prices and our revenues bymaking it more costly or difficult for us to produce and sell ethanol. If thefederal tax incentives are eliminated or sharply curtailed, we believe thatdecreased demand for ethanol will result, which could negatively impact ourability to operate profitably.

 

Also, elimination of thetariffs that protect the United States ethanol industry could lead to theimportation of ethanol produced in other countries, especially in areas of theUnited States that are easily accessible by international shipping ports.  While the 2008 Farm Bill extended the tariffon imported ethanol through 2011, this tariff could be repealed earlier whichcould lead to increased ethanol supplies and decreased ethanol prices.

 

***Changes in environmental regulations or violations of theregulations could reduce our profitability.***  We are subjectto extensive air, water and other environmental laws and regulations.  In addition, some of these laws require ourplant to operate under a number of environmental permits. These laws,regulations and permits can often require expensive pollution control equipmentor operational changes to limit actual or potential impacts to the 

 

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environment.  Aviolation of these laws and regulations or permit conditions can result insubstantial fines, damages, criminal sanctions, permit revocations and/or plantshutdowns.  In the future, permitrequirements may change or we may exceed certain limits in our permits that maylead to regulatory actions by the State of South Dakota or the EPA.  Further, we may be required to secureadditional permits in the future which may be costly and may affect our abilityto operate the ethanol plant.  We mayalso be subject to litigation by environmental advocacy groups and otherparties based on actual or alleged violations of environmental laws.  Additionally, any changes in environmentallaws and regulations, both at the federal and state level, could require us tospend considerable resources in order to comply with future environmentalregulations. The expense of compliance with environmental laws as well aslitigation concerning environmental laws could be significant and reduce ourprofitability and negatively affect our financial condition.

 

***Regulation of carbon dioxide and other greenhouse gases could adverselyaffect our financial performance*****. **In 2007,the Supreme Court decided a case in which it ruled that carbon dioxide is anair pollutant under the Clean Air Act for the purposes of motor vehicleemissions.  The Supreme Court directedthe EPA to regulate carbon dioxide from vehicle emissions as a pollutant underthe Clean Air Act.  Similar lawsuits havebeen filed seeking to require the EPA to regulate carbon dioxide emissions fromstationary sources such as our ethanol plant under the Clean Air Act.  Additionally, legislation is pending inCongress on a comprehensive carbon dioxide regulatory scheme, such as a carbontax or cap-and-trade system and California recently instituted a Low CarbonFuel Standard requiring a 10% reduction in GHG emissions from transportationfuels by 2020.  While this standard iscurrently being challenged by various lawsuits, implementation of such astandard may have an adverse impact on the market for corn-based ethanol.

 

Our plant produces asignificant amount of carbon dioxide that we currently vent into theatmosphere.  While there are currently noregulations applicable to us concerning carbon dioxide, if the EPA or the Stateof South Dakota were to regulate carbon dioxide emissions by plants such asours, we may have to apply for additional permits or we may be required toinstall carbon dioxide mitigation equipment or take other as yet unknown stepsto comply with these potential regulations. Further, compliance with the California Low Carbon Fuel Standard mayreduce demand significantly for our ethanol. Compliance with any future regulation of carbon dioxide and othergreenhouse gases, if it occurs, could be costly and may prevent us fromoperating the ethanol plant profitably which could decrease or eliminate thevalue of our units.

 

**ITEM 2.  PROPERTIES.**

 

We ownDakota Ethanol as a wholly-owned subsidiary. The ethanol plant is located on Dakota Ethanol’s 212-acre rural sitenear Wentworth, South Dakota. During our 2008 fiscal year, we purchased 135acres of additional land that is adjacent to our current property.  The total cost of this additional land was$550,000.  All of our operations occur atour plant in Wentworth, South Dakota.

 

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

 

**ITEM 3.  LEGAL PROCEEDINGS.**

 

From time to timein the ordinary course of business, Dakota Ethanol or Lake Area Corn Processorsmay be named as a defendant in legal proceedings related to various issues,including, worker’s compensation claims, tort claims, or contractualdisputes.  We are not currently involvedin any material legal proceedings, directly or indirectly, and we are not awareof any claims pending or threatened against us or any of the managers thatcould result in the commencement of material legal proceedings.

 

**ITEM 4.  (REMOVEDAND RESERVED).**

 

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**PART II**

 

**ITEM 5.  MARKET FOR REGISTRANT’SCOMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES.**

 

**RecentSales of Unregistered Equity Securities**

 

None.

 

**Market Information**

 

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

 

**Unit Holders**

 

As of March 31, 2010, the company had29,620,000 membership units issued and outstanding and a total of approximately1,026 unit holders.  There is no otherclass of membership unit issued or outstanding.

 

**Bid and Asked Prices**

 

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

 

| **Period**             | ** ** | **Low Price** | ** ** | **High Price** | ** ** | **Average Price** | ** ** | **# of  Units Matched** | ** ** |
|------------------------|------------|---------------|------------|----------------|------------|-------------------|------------|-------------------------|------------|
| 2008  1st Quarter |       | $             | 2.77       |           | $          | 2.90              |       | $                       | 2.84       |   | 112,000 |   |
| 2008  2nd Quarter |       | $             | 2.36       |           | $          | 2.80              |       | $                       | 2.65       |   | 136,500 |   |
| 2008  3rd Quarter |       | $             | 2.35       |           | $          | 2.35              |       | $                       | 2.35       |   | 10,000 |   |
| 2008  4th Quarter |       | $             | —     |           | $          | —            |       | $                       | —     |   | — |   |
| 2009  1st Quarter |       | $             | 1.90       |           | $          | 1.90              |       | $                       | 1.90       |   | 5,000 |   |
| 2009  2nd Quarter |       | $             | 1.04       |           | $          | 1.04              |       | $                       | 1.04       |   | 5,000 |   |
| 2009  3rd Quarter |       | $             | 1.25       |           | $          | 1.70              |       | $                       | 1.39       |   | 15,000 |   |
| 2009  4th Quarter |       | $             | 0.99       |           | $          | 1.11              |       | $                       | 1.06       |   | 31,235 |   |

 

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“—“ Indicates no unittransactions were completed.

 

**Distributions**

 

Under the terms of our Amended andRestated Operating Agreement, we are required to make distributions to ourmembers and may not retain more than $200,000 of net cash from operations,unless: (1) a 75% supermajority of our board decides otherwise; (2) itwould violate or cause a default under the terms of any debt financing or othercredit facilities; or (3) it is otherwise prohibited by law.  We recently amended our credit agreement withour primary lender, First National Bank of Omaha, to provide that FirstNational will approve all distributions by us 

 

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prior to making any suchdistributions.  Our ability to makedistributions to our members is dependent upon the distributions made to us byDakota Ethanol.  All net income generatedfrom plant operations is distributed by Dakota Ethanol to us since DakotaEthanol is our wholly-owned subsidiary. We distribute the net income received from Dakota Ethanol to our unitholders in proportion to the number of units held by each unit holder.  A unit holder’s distribution percentage isdetermined by dividing the number of units owned by such unit holder by thetotal number of units outstanding.  Ourexpectations with respect to our ability to make future distributions arediscussed in greater detail in “**Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations**.”

 

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

 

***2009 Distributions***

 

We did not make any distributions to ourmembers during our 2009 fiscal year.

 

***2008 Distributions***

 

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

 

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

 

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**Performance Graph**

 

The followinggraph compares the cumulative total return on our units with the cumulativetotal return of the NASDAQ Index and the SIC Code Index (SIC Code2869—Industrial Organic Chemicals, Not Elsewhere Classified).  The unit price performance shown on thefollowing graph is not intended to forecast and is not indicative of futureunit price performance.  The data forthis performance graph was compiled for us by Morningstar, Inc.

 

**COMPARISONOF 5-YEAR CUMULATIVE TOTAL RETURN AMONG LAKE AREA CORN**

**PROCESSORS,LLC, NASDAQ MARKET INDEX AND SIC CODE INDEX**

 

 

ASSUMES $100 INVESTED ON JAN. 01, 2005

ASSUMES DIVIDEND REINVESTED

FISCAL YEAR ENDING DEC. 31, 2009

 

**ITEM 6.  SELECTED FINANCIAL DATA.**

 

The followingtable sets forth selected consolidated financial data, which is derived fromour audited financial statements for the periods indicated.  The selected consolidated balance sheetfinancial data as of December 31, 2007, 2006 and 2005 and the selectedconsolidated income statement data and other financial data for the years endedDecember 31, 2006 and 2005 have been derived from our audited consolidatedfinancial statements that are not included in this Form 10-K. The selectedconsolidated balance sheet financial data as of December 31, 2009 and 2008and the selected consolidated income statement data and other financial datafor each of the years in the three year period ended December 31, 2009 havebeen derived from the audited Consolidated Financial Statements includedelsewhere in this Form 10-K. You should read the following table inconjunction with (i) the consolidated financial statements andaccompanying notes included elsewhere in this Form 10-K; (ii) “**Item 7 Management’s Discussion and Analysis of Financial Condition andResults of Operations**”; and (iii) “**Item 1A RiskFactors**”****foundelsewhere in this Form 10-K.  Amongother things, those financial statements include more detailed informationregarding the basis of presentation for the following consolidated financialdata.

 

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| **Statement  of Operations Data:**        | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**    | ** ** | **2006**   | ** **  | **2005**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|-------------|------------|------------|-------------|------------|------------|
| Revenues                                  |       | $          | 90,340,642 |       | $          | 111,778,588 |       | $          | 103,739,699 |       | $          | 103,889,412 |   | $ | 80,020,970 |   |
|                                      |       |       |       |       |       |        |       |       |        |       |       |
| Cost  of Revenues                         |       | $          | 81,659,486 |       | $          | 125,413,056 |       | $          | 80,977,667  |       | $          | 50,792,418 |   | $ | 63,201,108 |   |
|                                      |       |       |       |       |       |        |       |       |        |       |       |
| Gross  Profit (Loss)                      |       | $          | 8,681,156  |       | $          | (13,634,468 | )          | $          | 22,762,032  |       | $          | 53,096,994 |   | $ | 16,819,862 |   |
|                                      |       |       |       |       |       |        |       |       |        |       |       |
| Operating  Expense                        |       | $          | (2,957,809 | )          | $          | (3,534,274  | )          | $          | (3,721,813  | )          | $          | (3,938,845 | ) | $ | (3,610,590 | ) |
|                                      |       |       |       |       |       |        |       |       |        |       |       |
| Income  (Loss) From Operations            |       | $          | 5,723,347  |       | $          | (17,168,742 | )          | $          | 19,040,219  |       | $          | 49,158,149 |   | $ | 13,209,272 |   |
|                                      |       |       |       |       |       |        |       |       |        |       |       |
| Other  Expense                            |       | $          | (793,658   | )          | $          | (656,303    | )          | $          | (695,043    | )          | $          | (1,008,300 | ) | $ | (1,089,364 | ) |
|                                      |       |       |       |       |       |        |       |       |        |       |       |
| Other  Income (Expense)                   |       | $          | (54,920    | )          | $          | 1,211,596   |       | $          | (339,971    | )          | $          | 121,719 |   | $ | 238,705 |   |
|                                      |       |       |       |       |       |        |       |       |        |       |       |
| Minority  Interest in Subsidiary Income   |       | $          | —     |       | $          | —      |       | $          | —      |       | $          | (2,235,776 | ) | $ | (1,494,029 | ) |
|                                      |       |       |       |       |       |        |       |       |        |       |       |
| Net  Income (Loss)                        |       | $          | 4,874,769  |       | $          | (16,613,449 | )          | $          | 18,005,205  |       | $          | 46,035,792 |   | $ | 10,864,584 |   |
|                                      |       |       |       |       |       |        |       |       |        |       |       |
| Capital  Units Outstanding                |       | 29,620,000 |       | 29,620,000 |       | 29,620,000  |       | 29,620,000 |        | 29,620,000 |       |
| Net  Income Per Capital Unit              |       | $          | 0.16       |       | $          | (0.56       | )          | $          | 0.61        |       | $          | 1.55 |   | $ | 0.37 |   |
| Cash  Distributions per Capital Unit      |       | $          | 0.00       |       | $          | 0.05        |       | $          | 0.60        |       | $          | 0.45 |   | $ | 0.32 |   |
|                                      |       |       |       |       |       |        |       |       |        |       |       |
| **Balance Sheet Data:**         | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**    | ** ** | **2006**   | ** **  | **2005**   | ** ** |
| Working  Capital                          |       | $          | 2,372,783  |       | $          | (3,068,598  | )          | $          | 16,054,455  |       | $          | 17,220,709 |   | $ | 1,940,335 |   |
| Net  Property, Plant & Equipment |       | $          | 32,445,979 |       | $          | 34,531,667  |       | $          | 35,345,093  |       | $          | 35,695,754 |   | $ | 33,468,374 |   |
| Total  Assets                             |       | $          | 58,625,220 |       | $          | 58,206,448  |       | $          | 73,554,744  |       | $          | 72,381,310 |   | $ | 42,946,122 |   |
| Long-Term  Obligations                    |       | $          | 3,923,596  |       | $          | 5,664,276   |       | $          | 5,077,137   |       | $          | 6,921,695 |   | $ | 8,601,196 |   |
| Minority  Interest                        |       | $          | —     |       | $          | —      |       | $          | —      |       | $          | — |   | $ | 3,234,649 |   |
| Member’s  Equity                     |       | $          | 43,733,907 |       | $          | 38,859,138  |       | $          | 56,953,587  |       | $          | 56,720,382 |   | $ | 24,013,590 |   |
| Book  Value Per Capital Unit              |       | $          | 1.48       |       | $          | 1.31        |       | $          | 1.92        |       | $          | 1.91 |   | $ | 0.81 |   |

 

**ITEM 7.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

Except for the historicalinformation, the following discussion contains forward-looking statements that aresubject to risks and uncertainties.  We caution you not to put unduereliance on any forward-looking statements, which speak only as of the date ofthis report.  Our actual results or actions may differ materiallyfrom these forward-looking statements for many reasons, including the risks described in “**Item 1A - Risk Factors**” and elsewhere inthis annual report.  Our discussion and analysis of our financialcondition and results of operations should be read in conjunction with thefinancial statements and related notes and with the understanding that ouractual future results may be materially different from what we currentlyexpect.

 

#### **Resultsof Operations**

 

***Comparison of Years Ended******December 31,2009 and 2008*****.**

 

The followingtable shows the results of our operations and the percentage of revenues, costof revenues, operating expenses and other items to total revenues in ourconsolidated statements of operations for the fiscal years ended December 31,2009 and 2008:

 

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| ** **                           | ** ** | **2009**   | ** ** | **2008** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|
| **Income Statement Data:** | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                             |       | $          | 90,340,642 |     | 100.0      |   | $ | 111,778,588 |   | 100.0 |   |
|                                 |       |       |       |     |       |   |   |   |   |
| Cost  of Revenues                    |       | 81,659,486 |       | 90.4     |       | 125,413,056 |   | 112.2 |   |
|                                 |       |       |       |     |       |   |   |   |   |
| Gross  Profit (Loss)                 |       | 8,681,156  |       | 9.6      |       | (13,634,468 | ) | (12.2 | ) |
|                                 |       |       |       |     |       |   |   |   |   |
| Operating  Expense                   |       | 2,957,809  |       | 3.3      |       | 3,354,274 |   | 3.2 |   |
|                                 |       |       |       |     |       |   |   |   |   |
| Income  (Loss) From Operations       |       | 5,723,347  |       | 6.3      |       | (17,168,742 | ) | (15.4 | ) |
|                                 |       |       |       |     |       |   |   |   |   |
| Other  Income (Expense)              |       | (848,578   | )          | (0.9     | )          | 555,293 |   | 0.5 |   |
|                                 |       |       |       |     |       |   |   |   |   |
| Net  Income (Loss)                   |       | 4,874,769  |       | 5.4      |       | (16,613,449 | ) | (14.9 | ) |
|                                      |            |            |            |          |            |  |  |  |  |  |  |

 

***Revenues***

 

We experienced asignificant decrease in revenues during our 2009 fiscal year compared to our2008 fiscal year.  We attribute thisdecrease in revenue during our 2009 fiscal year with significantly lower marketprices for our products.  This decreasein the market prices of our products was partially offset by increased sales ofethanol and distiller’s grains during our 2009 fiscal year compared to our 2008fiscal year.

 

*Ethanol*

 

Our revenue from the saleof ethanol decreased by approximately 21% during our 2009 fiscal year comparedto our 2008 fiscal year.  This decreasewas the result of an approximately 23% decrease in the average price wereceived for our ethanol during our 2009 fiscal year compared to our 2008fiscal year.  The average price wereceived for our ethanol during our 2009 fiscal year was approximately $1.57per gallon sold compared to approximately $2.05 per gallon sold during our 2008fiscal year.  Management attributes thisdecrease in the average price we received for our ethanol during our 2009fiscal year compared to our 2008 fiscal year with lower commodities prices generally,including lower energy prices.  Weexperienced historically high commodity prices leading up to the middle of our2008 fiscal year.  Following this peak,commodity prices decreased significantly. Management attributes this decrease in commodity prices with the globaleconomic recession that negatively impacted energy prices and demand in thesecond half of 2008.  Commodity priceswere less volatile during our 2009 fiscal year but were also significantlylower than we experienced during our 2008 fiscal year.  We experienced a general increasing trend inthe average price we received for our ethanol during our 2009 fiscal year, witha peak in ethanol prices during the fourth quarter of our 2009 fiscalyear.  Following this peak, ethanolprices have continued lower into the first quarter of 2010.  Management believes that ethanol prices havetended to follow corn prices during our 2009 fiscal year and after.  Management anticipates that ethanol priceswill stabilize early in our 2010 fiscal year and gradually increase throughoutour 2010 fiscal year.

 

We experienced increasedethanol sales during our 2009 fiscal year compared to our 2008 fiscal yearwhich partially offset the decrease we experienced in ethanol prices during our2009 fiscal year compared to our 2008 fiscal year.  We increased ethanol sales by approximately2% during our 2009 fiscal year compared to our 2008 fiscal year.  Management attributes this increase inethanol sales during our 2009 fiscal year with increased ethanol productionduring our 2009 fiscal year compared to our 2008 fiscal year.  We experienced equipment problems at theethanol plant during the first quarter of our 2008 fiscal year which resultedin decreased ethanol and distiller’s grains production during that timeperiod.  We have since remedied theseequipment problems and the ethanol plant is operating at full capacity.

 

Demandfor ethanol has been somewhat volatile during the current global economicrecession which has impacted ethanol prices. Management anticipates continued volatility in the market price ofethanol based on the interaction between increased ethanol supplies and ethanoldemand.  Management believes that theethanol industry’s ability to increase demand for ethanol in the coming yearsto offset anticipated increases in ethanol supply will be critical to oursuccess.  However, the ethanol industrymust contend with the effects of the blending wall on 

 

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ethanoldemand.  As discussed above in “**Item 1 — Business —****General Ethanol Demand and Supply**”, theblending wall represents an artificial cap on ethanol demand based on therequirement that only 10% ethanol blends can be used in conventional vehicles.  Based on the United States gasolineconsumption, this blending wall would create a cap on ethanol demand atapproximately 13.5 billion gallons.  Manyin the ethanol industry believe that the United States will reach the blendingwall in 2010 or 2011.  Managementbelieves that raising the allowable percentage of ethanol for use in standardvehicles could increase ethanol demand by approximately 7 billion gallons.  If a 15% blend were to be approved, moreethanol producers will likely expand their operations and new ethanol producerswill likely enter the market.  This maylead to further overcapacity in the ethanol industry which could have anegative impact on ethanol prices.

 

Managementbelieves that demand for ethanol may increase in the future as a result ofincreased use of E85.  However, E85’seffect on ethanol demand is expected to be lower in the near term due to therelatively small number of flexible fuel vehicles capable of operating on E85along with the fact that there are fewer retailers that carry E85.  Management anticipates that this will changein the future.

 

Management believes that ethanol demand may benegatively impacted if the VEETC blender’s credit for ethanol is allowed toexpire on December 31, 2010. Recently, the blender’s credit that benefits the biodiesel industry wasallowed to expire.  This resulted insubstantially all of the biodiesel producers in the United States ceasingoperations.  While Management believesthat expiration of VEETC may not result in the same level of shutdowns in theethanol industry, it could negatively impact demand for the ethanol that weproduce.

 

*Distiller’sGrains*

 

We experienced a decreasein our total revenue from sales of distiller’s grains during our 2009 fiscalyear compared to our 2008 fiscal year. We experienced decreased distiller’s grains prices during our 2009fiscal year compared to our 2008 fiscal year, which was somewhat offset by anincrease in the total tons of distiller’s grains we sold during our 2009 fiscalyear compared to our 2008 fiscal year. During our 2009 fiscal year, we experienced more favorable prices forour dried distiller’s grains compared to our modified/wet distiller’s grains sowe sold more of our distiller’s grains in the dried form.

 

The average price wereceived for our dried distiller’s grains was approximately 10% lower duringour 2009 fiscal year compared to our 2008 fiscal year.  In real terms, this was a decrease ofapproximately $11 per ton of dried distiller’s grains sold.  The average price we received for ourmodified/wet distiller’s grains was approximately 8% lower during our 2009fiscal year compared to our 2008 fiscal year. In real terms, this equaled a decrease of approximately $8 per ton ofmodified/wet distiller’s grains sold. Management attributes these decreases in the average prices we receivedfor our distiller’s grains with decreased market corn and soybean mealprices.  Management believes that sincedistiller’s grains are typically used as an animal feed substitute, changes inthe price of corn and soybean meal which are also used as animal feed impactsthe prices of distiller’s grains.

 

During our 2009 fiscalyear, we experienced an increase in the total tons of dried distiller’s grainswe sold of approximately 21% compared to our 2008 fiscal year.  In real terms, this was an increase ofapproximately 9,000 tons.  Managementattributes this increase in dried distiller’s grains sales during our 2009fiscal year with more favorable marketing opportunities for dried distiller’sgrains compared to modified/wet distiller’s grains during our 2009 fiscalyear.  Correspondingly, we experienced adecrease of approximately 6% in the total tons of modified/wet distiller’sgrains we sold during our 2009 fiscal year compared to our 2008 fiscalyear.  In real terms, this was a decreaseof approximately 6,000 tons, on a dry-equivalent basis.

 

Management expects tocontinue to make decisions as to whether our distiller’s grains will bemarketed as dried distiller’s grains as opposed to modified/wet distiller’s grainsbased on market conditions.  These marketconditions include supply and demand factors as well as the price differencebetween dried distiller’s grains and wet/modified distiller’s grains comparedto the higher natural gas costs associated with drying our distiller’s grains.

 

Management believes thatdistiller’s grains prices will continue to change in reaction to the marketprices of corn and soybean meal. Management expects that distiller’s grains prices will soften in theearly part of our 2010 fiscal year and then will gradually increase later inthe year.  Since distiller’s grainsprices tend to increase in response to increases in corn prices, managementexpects that increased revenue from distiller’s grains sales may 

 

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somewhat offset increasesin our cost of revenues associated with increases in corn prices.  However, as additional ethanol supply entersthe market, management expects the supply of distiller’s grains will alsoincrease, which may negatively impact the price we receive for our distiller’sgrains.

 

*Corn Oil*

 

During our 2009 fiscalyear, we commenced operation of our corn oil extraction equipment.  The sale of corn oil separately from ourdistiller’s grains represents a new revenue source for us.  Our corn oil extraction equipment becameoperational in the second quarter of our 2009 fiscal year, therefore, we didnot have any sales of corn oil during our 2008 fiscal year.  We experienced total revenue during our 2009fiscal year related to corn oil sales of approximately $808,000.  We experienced a general increasing trend incorn oil prices during our 2009 fiscal year which has continued following theend of our 2009 fiscal year.  Currentcorn oil price forecasts look strong but management believes corn oil pricesmay be negatively impacted by decreased biodiesel production.  Corn oil is used as a feedstock to producebiodiesel.  The biodiesel industry hasbeen struggling with the elimination of an important tax incentive that hasresulted in significantly reduced biodiesel production.  Management anticipates producing more cornoil during our 2010 fiscal year due to the fact that we anticipate theequipment will operate during the entire year as well as due to the fact thatwe are continuing to improve the efficiency of our corn oil extractionequipment.

 

*GovernmentIncentives*

 

During our 2009 fiscalyear, we experienced a slight increase in our incentive revenue of less than$20,000.  We annually receive an ethanolproducer’s incentive from the State of South Dakota.  Management attributes this slight increase inincentive revenue during our 2009 fiscal year compared to our 2008 fiscal yearwith more funds available pursuant to the South Dakota program.

 

***Cost of Revenues***

 

Weexperienced a significant decrease in our cost of revenues for our 2009 fiscalyear compared to our 2008 fiscal year. This decrease in our cost of revenues was larger than the decrease inrevenues we experienced in our 2009 fiscal year.  Management attributes this decrease in ourcost of revenues primarily with a significant decrease in our average cost perbushel of corn for our 2009 fiscal year compared to our 2008 fiscal year.

 

Ouraverage cost per bushel of corn, which includes gains and losses we experienceon our derivative instrument positions, decreased by approximately 38% for our2009 fiscal year compared to our 2008 fiscal year.  In real terms, our average cost per bushel ofcorn during our 2009 fiscal year was approximately $3.55 per bushel compared toapproximately $5.73 per bushel during our 2008 fiscal year.  Management attributes this decrease in corncosts with a decrease in market corn prices from highs that we experienced inthe middle of our 2008 fiscal year.  Cornprices spiked in the middle of our 2008 fiscal year and then fell significantlyas we entered the worldwide economic recession. This resulted in decreased commodity prices generally, including cornprices.  We experienced some increase incorn prices at the end of our 2009 fiscal year as a result of unfavorableweather conditions during the 2009 harvest. However, record corn production and the potential for increased cornacres in 2010 have kept corn prices down. Management anticipates that following the significant decrease in thecorn market in January and February 2010, the corn market willincrease to buy acres going into the planting season.  Management anticipates that corn prices willremain volatile during our 2010 fiscal year. Management expects that corn prices could increase significantly if weexperience unfavorable weather conditions during the rest of our 2010 fiscalyear.  Further, if demand for commoditiesincreases as a result of economic recovery in the global markets, it could leadto increases in corn prices.

 

Alongwith the decrease in corn costs, we experienced an increase in our cornconsumption during our 2009 fiscal year compared to our 2008 fiscal year.  We consumed approximately 3% more corn duringour 2009 fiscal year compared to our 2008 fiscal year, which in real termsequaled an approximately 522,000 bushel increase.  Management attributes this increase in cornconsumption with increased ethanol production during our 2009 fiscal year.  During our 2008 fiscal year, we experiencedsome equipment problems that decreased our ethanol production and consequently,we used less corn.

 

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Duringour 2009 fiscal year, we experienced an approximately 44% decrease in our totalnatural gas costs compared to our 2008 fiscal year.  In real terms, this equaled a decrease ofapproximately $6.4 million.  We attributethis decrease in our total natural gas costs to record high commodity pricesduring the first half of our 2008 fiscal year which increased our natural gascosts during that time period, along with losses on our natural gas derivativeinstruments during our 2008 fiscal year. Our average cost of natural gas per MMBtu during our 2009 fiscal yearwas approximately 43% lower compared to our 2008 fiscal year.  In real terms, this was a decrease ofapproximately $4.66 per MMBtu.  We alsoexperienced an approximately 2% decrease in our natural gas consumption duringour 2009 fiscal year compared to our 2008 fiscal year.  Management attributes this decrease innatural gas consumption during our 2009 fiscal year with improved efficienciesachieved from marketing more condensed distillers with solubles and cornoil.  Management anticipates that naturalgas prices will remain stable during our 2010 fiscal year.  Management believes that natural gas suppliesare adequate and that industrial demand for natural gas has been slow torecover from the economic recession. Management anticipates that natural gas prices will continue to followtheir seasonal trend of increasing during the winter months as a result of increasednatural gas demand for heating needs.  Asa result, we anticipate continuing to pay premium natural gas prices during thewinter months.

 

Weare currently leasing railcars that we use to transport our products.  We anticipate that when our railcar leasesend in December 2010, we may incur costs associated with repairing damagedrailcars.  We have been including theanticipated cost of repairing these railcars in our financial statements overthe last three years, however, we may be required to expense the costsassociated with repairing these railcars during our 2010 fiscal year.

 

***Operating Expense***

 

We experienced a decreasein operating expenses during our 2009 fiscal year compared to our 2008 fiscalyear.  Management attributes thisdecrease in operating expenses with a decrease in our environmental test fees,public relations costs, professional fees and decreased bonus expenses duringour 2009 fiscal year compared to our 2008 fiscal year.

 

***Other Income and Expense***

 

Weexperienced more interest income during our 2009 fiscal year compared to our2008 fiscal year as a result of having more cash on hand during our 2009 fiscalyear.  We experienced a net loss on ourinvestments during our 2009 fiscal year compared to a significant gain on ourinvestments during our 2008 fiscal year. Management attributes this change to the impact of derivativeinstruments utilized by our investments in their operations.  We had a larger interest expense during our2009 fiscal year compared to our 2008 fiscal year as a result of thesubordinated debt we issued at the beginning of our 2009 fiscal year to helpfund our operations and provide us with working capital.

 

**Changes in Financial Conditionfor the Fiscal Year Ended December 31, 2009 Compared to the Fiscal YearEnded December 31, 2008.**

 

***CurrentAssets***

 

Thevalue of our accounts receivable at December 31, 2009 was higher comparedto December 31, 2008 as a result of higher ethanol and distiller’s driedgrains prices.  In addition, the value ofour inventory as of December 31, 2009 was higher compared to December 31,2008 as a result of higher corn prices. We had a significantly higher amount due from our commodities broker at December 31,2009 compared to December 31, 2008. Management attributes this increase to the fact that we had liquidatedmost of our derivative instrument positions during our fourth quarter of 2008in order to preserve our cash position due to the volatile conditions in thecommodities markets at that time.  As of December 31,2009, we had more derivative instrument positions that required us to maintaincash in our margin account with our commodities broker.  Our derivative instruments represented anasset on our balance sheet as of December 31, 2008, compared to aliability at December 31, 2009.

 

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***Propertyand Equipment***

 

Thevalue of our equipment was higher at December 31, 2009 compared to December 31,2008, primarily as a result of the fact that we completed construction of ourcorn oil extraction equipment during our 2009 fiscal year.  Our net property and equipment was lower at December 31,2009 compared to December 31, 2008 as a result of our accumulateddepreciation.  The increase in our accumulateddepreciation was larger than the increase in the value of our property andequipment which resulted in the reduction.

 

***CurrentLiabilities***

 

Thevalue of our accounts payable at December 31, 2009 was less than at December 31,2008 as a result of lower corn and natural gas payables.  Further, the value of our accrued liabilitieswas significantly lower at December 31, 2009 compared to December 31,2008 as a result of decreased liabilities related to corn purchasecontracts.  The liability associated withour derivative instruments was larger at December 31, 2009 compared to December 31,2008 as a result of changes in the price of commodities relative to ourderivative instrument positions.  Weexperienced an increase in the current portion of our notes payable at December 31,2009 compared to December 31, 2008 as a result of the increased amount ofdebt that we issued during the beginning our 2009 fiscal year along withincreased principal payments on our term loan related to our continuingamortization of that loan.

 

***Long-TermLiabilities***

 

Thevalue of our notes payable, net of current maturities was lower as of December 31,2009 compared to December 31, 2008 as a result of our ongoing payments onour term loan and certain subordinated debt we entered into during the earlypart of our 2009 fiscal year.

 

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

 

The followingtable shows the results of our operations and the percentage of revenues, costof revenues, operating expenses and other items to total revenues in ourconsolidated statements of operations for the fiscal years ended December 31,2008 and 2007:

 

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

 

***Revenues***

 

During our fiscal yearended December 31, 2008, we experienced a slight increase in our totalrevenue compared to our 2007 fiscal year. This increase in our revenue was a result of the net effect of increasedethanol and modified/wet distiller’s grains revenue and decreased drieddistiller’s grains revenue. Additionally, we experienced an approximately $126,000 decrease inincentive revenue in fiscal year 2008 as compared to fiscal year 2007.

 

Our revenue from sales ofethanol increased by approximately 5% during our 2008 fiscal year as comparedto our 2007 fiscal year.  This equated toan increase in revenue of approximately $4,741,000.  The reason for this 

 

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increase in ethanolrevenue was the net effect of decreased ethanol production offset by a greaterincrease in the average price we received for our ethanol.  The average price we received for our ethanolincreased by approximately 10% during our 2008 fiscal year compared to our 2007fiscal year.  In real terms, this equaledan average increase of $0.18 per gallon from $1.87 per gallon in 2007 to $2.05per gallon in 2008.

 

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

 

In our 2008 fiscal year, weincreased our distiller’s grains revenue by approximately 29% compared to thesame period of 2007.  This increase indistiller’s grains revenue was a result of the net effect of a significantincrease in the sales price we received for our distiller’s grains offset by adecrease in our distiller’s grains production. We attribute the significant increase in the selling price of ourdistiller’s grains with higher corn prices that we experienced during our 2008fiscal year compared to our 2007 fiscal year. We believe that higher corn and soybean meal prices positively impactthe selling price of distiller’s grains. The average price we received for our dried distiller’s grains increasedby approximately $31 per ton to approximately $112 per ton.  This was an approximately 38% increase.  In addition, the average price we receivedfor our modified/wet distiller’s grains increased by approximately 60% fromapproximately $68 per ton to approximately $109 per ton.

 

During our 2008 fiscalyear, we marketed more of our distiller’s grains in the modified/wet form.  We experienced an increase in ourmodified/wet distiller’s grains sales of approximately 18%, which equaled anapproximately 13,508 dry-equivalent ton increase, in the tons of distiller’sgrains we sold in the modified/wet form during our 2008 fiscal year compared tothe same period of 2007.  In addition,the total tons of dried distiller’s grains that we produced was approximately32,000 tons less that we produced during our 2007 fiscal year.  This equated to an approximately 42%decrease.  We use a formula to create adry-equivalent value for our modified/wet distiller’s grains in order tocompare the modified/wet distiller’s grains we produce compared to our drieddistiller’s grains.  This conversion formulahas the effect of reducing the total tons of distiller’s grains we producemeasured according to this dry-equivalent value when we produce moremodified/wet distiller’s grains.  This,along with decreased ethanol production, decreased our total distiller’s grainsproduction by approximately 12% or approximately 18,000 tons during our 2008fiscal year compared to our 2007 fiscal year.

 

During our 2008 fiscalyear, we experienced a decrease in incentive income of approximately$126,000.  We annually receive an ethanolproducer’s incentive from the State of South Dakota.  In our 2008 fiscal year, we did not receivethe annual maximum allocation under this program as a result of budgetconstraints on the South Dakota program. We did not receive any federal incentive income during either our 2008or 2007 fiscal years.

 

***Cost of Revenues***

 

Ourcost of revenues as a percentage of revenues was approximately 112% andapproximately 78% for the fiscal years endedDecember 31, 2008 and 2007 respectively. Our total cost of revenues increased by approximately 55% during our2008 fiscal year compared to the same period of 2007.  This significant increase in cost of revenuesresulted from a significant increase in our corn costs and increased rail carexpenses during our 2008 fiscal year compared to our 2007 fiscal year.

 

Ouraverage cost per bushel of corn, including the costs associated with losses onour derivative instruments, increased by approximately 78% during our 2008fiscal year compared to our 2007 fiscal year. In real terms, this was an increase of approximately $2.52 perbushel.  This increase in corn costsincludes losses we realized on our hedging activities during our 2008 fiscalyear compared to our 2007 fiscal year. Along with the increase in our corn costs, we experienced a decrease inour corn consumption of approximately 4% or approximately 697,000 bushels.  This decrease in corn consumption was relatedto our decreased production of ethanol and distiller’s grains during our 2008fiscal year compared to our 2007 fiscal year due to equipment problems weexperienced during our 2008 fiscal year.   We experienced significant volatility in corn prices during our 2008fiscal year.  Due to poor weatherconditions in the first part of the 2008 growing season and increases in 

 

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commodityprices generally, including energy costs, the price of corn reachedapproximately $8.00 per bushel at the end of June and early July 2008before decreasing significantly to below $4.00 per bushel.  This significant volatility in corn pricesled to significant losses on our risk management positions which were designedto guard against corn price increases. As a result of the significant decrease in corn prices, we were requiredto use a significant amount of cash to make margin calls on our derivativeinstruments.  Due to the significantamount of cash that we were using to make margin calls and the significantlosses we experienced on our derivative instruments, in October 2008 wedecided to liquidate all of our hedge positions.  We did this in order to protect our cashposition and to avoid making further payments into our margin account with ourcommodities broker.  This resulted in anapproximately $7.5 million realized loss on our derivative instruments thatoccurred during our fourth fiscal quarter of 2008.  We also experienced a $9.0 million increaseto our corn costs related to the mark to market valuation of forward cornpurchase contracts.  At December 31,2007, our forward corn purchase contracts represented an asset on our balancesheet of approximately $9.0 million.  Asthose contracts were fulfilled and the market changed, the assets were expensedduring 2008.  In addition, as of December 31,2008, we recorded an impairment of approximately $2,736,000 related to ourfuture corn purchase contracts and our corn inventory.  This was a lower of cost or market adjustmentthat we made based on estimates of the value of future corn contracts and corninventory related to the projected selling price of ethanol.

 

Weexperienced an increase in our railcar costs during our 2008 fiscal yearcompared to our 2007 fiscal year, primarily as a result of projected costsassociated with damage to our leased railcars that we are recognizing on ourfinancial statements.

 

Weuse significant amounts of natural gas to dry the distiller’s grains producedat the ethanol plant.  Our total cost ofrevenues attributed to natural gas increased during our 2008 fiscal year byapproximately 29% compared to the same period of 2007.  Our average natural gas price per MMBtuincreased by approximately $3.12 which equaled an increase of approximately 41%compared to our 2007 fiscal year.  Thisincrease in natural gas costs included losses we experienced on our natural gasderivative instruments.  In addition tothe increase in natural gas costs, we experienced an approximately 9% decreasein our natural gas consumption from approximately 1,476,000 MMBtu during our2007 fiscal year to approximately 1,348,000 MMBtu during our 2008 fiscalyear.  We attribute this decrease innatural gas consumption with less production by the ethanol plant during our2008 fiscal year as a result of equipment problems we experienced as well asincreased production of wet/modified distiller’s grains which require lessnatural gas to produce than dried distiller’s grains.

 

***Operating Expense***

 

Our operating expensesdecreased slightly in our 2008 fiscal year compared to the same period of2007.  This decrease in operatingexpenses resulted from decreased public relations, legal and environmentalcompliance costs for fiscal year 2008 as compared to fiscal year 2007.  Our operating expenses as a percentage ofrevenue were approximately 3.2% and 3.6% for fiscal years 2008 and 2007respectively.

 

***Other Income and Expense***

 

Weexperienced a total other income for our 2008 fiscal year of approximately$555,000 compared to a total other expense for our 2007 fiscal year ofapproximately $1,035,000.  We experiencedless interest income during our 2008 fiscal year compared to our 2007 fiscalyear as a result of having less cash on hand during our 2008 fiscal year as wellas lower interest rates.  We experienceda significant gain related to our equity in the net income of our investmentsmainly related to our investment in RPMG. We experienced a loss related to our equity in the net income of ourinvestments during our 2007 fiscal year. Further, our interest expenses were lower during our 2008 fiscal yearcompared to our 2007 fiscal year, primarily as a result of the decreasingprincipal balance of our term note.

 

**PlantOperations**

 

We plan tocontinue to operate the ethanol plant for the next 12 months.  Management anticipates that the plant willcontinue to operate at or above name-plate capacity of 40 million gallons peryear for the next twelve months.  We expect to have sufficient cash fromcash flow generated by continuing operations, our subordinated debt financingand cash reserves to cover the costs of operations over the next 12 months,which consist primarily of 

 

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corn supply, natural gassupply, staffing, office, audit, legal, compliance, working capital costs anddebt service obligations.

 

However, a varietyof market factors can affect both operating costs and revenues.  Thesefactors include:

 

·                  Changes in the availability of debt andequity financing;

·                  Changes in the price of ethanol anddistiller’s grains;

·                  Decreased demand for ethanol anddistiller’s grains;

·                  Changes in the availability and price ofcorn;

·                  Changes in the environmental regulationsthat apply to our plant operations;

·                  Increased competition in the ethanol andoil industries;

·                  Changes in interest rates or theavailability of credit;

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

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

·                  Changes in general economic conditions orthe occurrence of certain events causing an economic impact in the agriculture,oil or automobile industries;

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

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

 

**Application of Critical Accounting Policies**

 

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

 

***DerivativeInstruments***

 

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

 

As part of our trading activity, we use futures andoption contracts offered through regulated commodity exchanges to reduce ourrisk and we are exposed to risk of loss in the market value of inventories. Toreduce that risk, we generally take positions using cash and futures contractsand options.

 

Unrealizedgains and losses related to derivative contracts for corn and natural gaspurchases are included as a component of cost of revenues and derivativecontracts related to ethanol sales are included as a component of revenues inthe accompanying financial statements. The fair values of derivative contracts are presented on theaccompanying balance sheet as derivative financial instruments.

 

***Lower of cost or market accounting for inventory and forward purchasecontracts***

 

Withthe significant change in the prices of our main inputs and outputs, the lowerof cost or market analysis of inventories and purchase commitments can have asignificant impact on our financial performance.

 

Theimpact of market activity related to pricing of corn and ethanol will requireus to continuously evaluate the pricing of our inventory and purchasecommitments under a lower of cost or market analysis.

 

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Werecorded a lower of cost or market impairment adjustment related to our inventoryas of December 31, 2009 and December 31, 2008.  The lower of cost or market adjustmentrepresented a reduction to assets of approximately $212,000 and $1,139,000 at December 31,2009 and 2008 respectively.

 

Werecorded a lower of cost or market impairment adjustment related to our futurecorn purchase contracts as of December 31, 2008.  The lower of cost or market adjustmentrepresented a liability of approximately $2,736,000.

 

**Liquidity and Capital Resources**

 

Ourmain sources of liquidity are cash from our continuing operations and amountswe have available to draw on our revolving lines of credit.  Our liquidity as of December 31, 2009improved significantly compared to our liquidity at the end of our 2008 fiscalyear.  Management does not anticipatethat we will need to raise additional debt or equity financing in the nexttwelve months and management believes that our current sources of liquiditywill be sufficient to continue our operations during that time period.  We do not anticipate making any significantcapital expenditures in the next 12 months other than ordinary repair andreplacement of equipment in our ethanol plant.

 

Currently,we have two revolving loans which allow us to borrow funds for workingcapital.  These two revolving loans are describedin greater detail below in the section entitled “**Item 7 — Management’s Discussion and Analysis of Financial Condition andResults of Operations — Indebtedness**.”  As of December 31, 2009, we had $0outstanding and $9 million available to be drawn on these revolving loans.  Management anticipates that this issufficient to maintain our liquidity and continue our operations.

 

Currently,we are experiencing more favorable operating margins compared to the end of our2008 fiscal year and the beginning of our 2009 fiscal year.  This has allowed us to reduce our reliance onour revolving lines of credit and provides us more cash to fund ouroperations.  We experienced positive operatingmargins during our second, third and fourth quarters of 2009.

 

Thefollowing table shows cash flows for our last two fiscal years:

 

| ** **                             | ** ** | **Year  ended December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| Net cash from operating activities     |       | $                                 | 2,015,584  |   | $ | 6,495,595 |   |
| Net cash used for investing activities |       | (1,033,331                        | )          | (3,110,513 | ) |
| Net cash used for financing activities |       | (1,105,704                        | )          | (3,257,687 | ) |
|                                        |            |                                   |            |  |  |  |  |

 

*Cash Flow From Operations**. *We experienced less cash from our operating activities during our 2009fiscal year compared to our 2008 fiscal year, primarily as a result of asignificant change in the amount of cash our commodities broker was holding inour margin account.  During the fourthquarter of our 2008 fiscal year, we liquidated all of our derivative instrumentpositions.  We also had a lower of costor market adjustment to the value of our inventory that positively impacted ourcash position during our 2008 fiscal year compared to our 2009 fiscal year.

 

*Cash Flow From Investing Activities**. *We used less cash for investing activities during our 2009 fiscal yearcompared to our 2008 fiscal year.  Thischange was primarily the result of having less purchases of property andequipment during our 2009 fiscal year compared to our 2008 fiscal year as wellas the impact that distributions of revenues from our investments had on ourcash position during our 2009 fiscal year compared to our 2008 fiscalyear.  During our 2008 fiscal year, weused cash to purchase two investments. We used $300,000 in cash to purchase an interest in Corn OilBio-Solutions, LLC and we used $1,050,000 in cash to purchase an interest in Prairie GoldVenture Partnership, LLC.  During our 2007 fiscal year, we purchased aninvestment in RPMG, which is our ethanol, corn oil and distiller’s grainsmarketer.  In our 2008 fiscal year, weexperienced a decrease in our liability related to our RPMG capitalcontribution of approximately $246,000. The final payments for our RPMG capital contribution were made duringour 2008 fiscal year and no payments were made during our 2009 fiscal year forthis capital contribution.

 

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*Cash Flow From Financing Activities**.*We used less cash inour financing activities during our 2009 fiscal year compared to our 2008fiscal year.  We received more proceedsfrom certain subordinated loans during our 2009 fiscal year compared to theloan proceeds we received on our revolving lines of credit with our primarylender during our 2008 fiscal year.  Wehad less payments on short-term loans during our 2009 fiscal year compared toour 2008 fiscal year due to having less payments on our revolving line ofcredit with our primary lender.  We hadmore payments on our long-term loans during our 2009 fiscal year compared toour 2008 fiscal year as a result of having more payments on our long-termrevolving loan with our primary lender as well as having increased paymentspursuant to certain of the subordinated debt we issued during our 2009 fiscalyear.  We did not make any distributionsduring our 2009 fiscal year compared to a distribution of approximately $1.5million we made during our 2008 fiscal year.

 

Thefollowing table shows a comparison of cash flows for the fiscal years ended December 31,2008 and December 31, 2007:

 

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

 

*Cash Flow From Operations**. *We experienced a significant decrease in cash flow from our operatingactivities which was primarily the result of the significant decrease in netincome we experienced during our 2008 fiscal year compared to our 2007 fiscalyear.  However, our cash flows wereincreased by a significant decrease in our derivative financial instruments andour due from broker which represents cash being held by our commodities brokerin our margin account.  These decreasespositively impacted our cash flows. Further, decreases in our receivables and inventory positively impactedour cash flow for our 2008 fiscal year compared to our 2007 fiscal year.  Increases in our accounts payable and accruedliabilities at December 31, 2008 compared to December 31, 2007 alsopositively impacted our cash flows for our 2008 fiscal year compared to our2007 fiscal year.

 

*Cash Flow From Investing Activities**. *During our 2008 fiscal year, we used more cash for investing activitiesthan during our 2007 fiscal year.  Weused less cash during our 2008 fiscal year for investments in purchases ofproperty and equipment compared to our 2007 fiscal year.  During our 2008 fiscal year, we used cash toinstall corn oil extraction equipment and, during our 2007 fiscal year, we usedcash for the construction of an additional grain storage bin.  During our 2008 fiscal year, we used cash fortwo investments.  We used $300,000 incash to purchase an interest in Corn Oil Bio-Solutions, LLC and we used$1,050,000 in cash to purchase an interest in Prairie Gold VenturePartnership, LLC.  During our 2007 fiscal year, we purchased aninvestment in RPMG, which is our ethanol, corn oil and distiller’s grainsmarketer.  In our 2008 fiscal year, weexperienced a decrease in our liability related to our RPMG capital contributionof approximately $246,000.  This resultedfrom our ongoing payments to RPMG for our capital contribution.

 

*Cash Flow From Financing Activities**.*We used significantlyless cash during our 2008 fiscal year for financing activities compared to our2007 fiscal year.  We had a short-termnote payable of $2,333,000 as of December 31, 2007 related to borrowing onour revolving line of credit but we did not have any amount outstanding on ourrevolving line of credit on December 31, 2008.  Further, we had larger principal payments onour notes payable during our 2008 fiscal year compared to our 2007 fiscalyear.  We also experienced a significantdecrease in our distributions during our 2008 fiscal year compared to our 2007fiscal year.  We had smaller distributionsto our members as a result of generating less cash from our operations duringour 2008 fiscal year compared to our 2007 fiscal year.

 

**Indebtedness**

 

First National Bank ofOmaha (FNBO) is our primary lender. During our 2009 fiscal year, we executed a First Amended and RestatedConstruction Loan Agreement with FNBO. The purpose of this First Amended and Restated Construction LoanAgreement was not to change any of the terms of our loans with FNBO, butinstead to consolidate the terms of various amendments to our loan agreementswith FNBO that we have executed over the years.  We have three loans outstanding with FNBO, ashort-term revolving loan, a long-term revolving loan, and a

 

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term loan which was usedto finance the construction of our ethanol plant.  In addition, we entered into subordinatedunsecured debt financing with various individuals following the end of our 2008fiscal year for additional working capital. We also secured two loans to offset the cost of our corn oil extractionequipment which total $1.2 million.  FNBOrequired us to raise additional subordinated debt following the end of our 2008fiscal year in order to improve our liquidity. As of December 31, 2009, we have satisfied all of FNBO’srequirements that we raise additional subordinated debt.  Finally, we have a long-term loan related toa piece of property that we purchased adjacent to our ethanol plant.  The specifics of each credit facility we haveoutstanding are discussed below.

 

### ***Short-TermDebt Sources***

### ** **

We have a short-termrevolving promissory note with FNBO.  Wecan borrow up to $4,000,000 pursuant to this revolving promissory note.  The maturity date of the revolving promissorynote is May 17, 2010.  We agreed topay a variable interest rate on the revolving promissory note at an annual rate2% higher than FNBO’s base rate.  Theinterest rate for this loan as of December 31, 2009 was 5.25%.  The revolving promissory note is subject to aminimum interest rate of 5% per year. Interest on the revolving promissory note is paid quarterly.  We are required to pay a quarterly fee of 3/8of a percent on the unused portion of the revolving promissory note.  The revolving promissory note iscollateralized by the ethanol plant, its accounts receivable andinventories.  As of December 31,2009, we had $0 outstanding on our revolving promissory note and $4 millionavailable to be drawn.

 

#### ***Long-Term Debt Sources***

#### ** **

We have one long-termnote that was used for the permanent financing of the ethanol plant.  We are subject to certain restrictivecovenants establishing minimum reporting requirements, ratios, working capitaland net worth requirements pursuant to the loan agreement.  The term note is secured by the ethanolplant.  The note is subject to prepaymentpenalties based on the cost incurred by FNBO to break its fixed interest ratecommitment.

 

The balance of the termnote requires quarterly payments which commenced on October 1, 2002.  The balance is due September 1,2011.  Interest on the outstandingprincipal balance accrues at a fixed rate of 9% annually.  The principal balance due pursuant to thenote as of December 31, 2009 was approximately $2,864,000.

 

We have a long-termrevolving loan pursuant to which we may elect to borrow up to $5,000,000through September 1, 2011 known as Term Note 5.  The available amount of funds we can borrowpursuant to Term Note 5 reduces each year by 75% of certain excess cash flow wehave at the end of each of our fiscal years. Therefore, the funds available for us to draw on Term Note 5 maydecrease each year.  If in any year wehave a principal balance outstanding on Term Note 5 in excess of the new creditlimit, we must make a payment to FNBO such that the amount outstanding on TermNote 5 does not exceed the new credit limit.

 

Interest accrues on TermNote 5 at a variable interest rate of 0.5% above FNBO’s base rate.  This interest rate is subject to reductionsbased on ratios of our total indebtedness to our net worth.  Term Note 5 is subject to a minimum interestrate of 5% per year.  We are required topay a quarterly fee of thirty-seven basis points on the unused portion of TermNote 5.  On December 31, 2009, wehad $0 outstanding and $5 million available to be drawn on this loan.  The amount that will be available pursuant toTerm Note 5 for our 2010 fiscal year is $3,575,000.

 

We also have a long-termdebt obligation related to our purchase of an additional 135 acres of landpursuant to a land purchase contract. The total cost of this additional land was $550,000.   As of December 31, 2009, we hadapproximately $338,000 remaining to be paid pursuant to this land purchasecontract.

 

***SubordinatedDebt***

 

Werecently completed a private placement offering of subordinated unsecured debtsecurities.  The debt securities that weoffered were not registered with the Securities and Exchange Commission andwere offered pursuant to claimed exemptions from registration under state andfederal securities laws.  We raised atotal of $1,439,000 in subordinated debt through this offering.  Interest on the subordinated notes accrues ata fixed interest rate of 9% per year, which is the same rate we incur on ourterm loan with FNBO.  These subordinateddebt 

 

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securitieshave a two-year maturity from the date they were issued, with interest beingpaid on January 30th of each year and at maturity.  We paid interest on this subordinated debt onJanuary 30, 2010 of approximately $122,000.

 

Inaddition, on July 24, 2009, we entered into a $700,000 subordinated securedloan with Guardian Eagle Investments, LLC. The note accrues interest at a fixed rate of 9% and requires monthlyinstallments of principal and interest. This loan matures in April 2012. The principal balance of this loan as of December 31, 2009 was approximately$621,000.  This loan, together with the$1,439,000 in subordinated unsecured debt securities discussed above weresufficient to meet FNBO’s requirement that we raise an additional $2,000,000 insubordinated debt following the end of our 2008 fiscal year.

 

Wealso raised a total of $1.2 million in subordinated loans to help offset thecost of our corn oil extraction equipment from two different parties.  We secured $1 million in financing for thecorn oil extraction equipment from the Rural Electric Economic Development, Inc.(REED) and $200,000 from the First District Development Company (FDDC).  We closed on these loans on May 22,2009.  FNBO agreed that the $1.2 millionin additional financing we secured for our corn oil extraction equipment wassufficient to satisfy its requirements following the end of our 2008 fiscalyear.  We agreed to pay 4.70% interest onthe $1 million loan from REED and 5.5% interest on the $200,000 FDDC loan.  Both loans are amortized over a period offive years and both loans require monthly payments.  The principal balance of the REED loan wasapproximately $896,000 as of December 31, 2009.  The principal balance of the FDDC loan wasapproximately $179,000 as of December 31, 2009.

 

***Covenants***

 

As of December 31,2009, we were in compliance with all of our loan covenants.  However, we have recently had difficultysatisfying our loan covenants due to unfavorable operating conditions in theethanol industry as of the end of our 2008 fiscal year and the beginning of our2009 fiscal year.  If these unfavorableoperating conditions return, we may not be able to continue to meet our loancovenants or other terms and conditions of our credit agreements.  However, management’s current financialprojections indicate that we will be in compliance with our financial covenantsfor the next 12 months and we expect to remain in compliance thereafter.  If we fail to comply with the terms of ourcredit agreements with FNBO, and FNBO refuses to waive the non-compliance, FNBOmay require us to immediately repay all amounts outstanding on our loans.

 

***Lake County TaxIncrement Financing Bonds***

 

We have a long-term debtobligation on a portion of a $1.323 million tax increment revenue bond seriesissued by Lake County, South Dakota on December 2, 2003.  The portion for which we are obligated isestimated at approximately $200,000. The bond was issued in connection with therefunding of a tax increment financing bond issued by Lake County in 2001, ofwhich we were the recipient of the proceeds. In 2003, Lake County became aware that the taxes collected from theproperty on which the plant is located would be insufficient to cover the debtservice of the 2001 bond issue. Based on this deficiency and changes ininterest rates during December 2003, Lake County refunded the 2001 bondissue and replaced it with two separate bonds: a tax-exempt bond in the amountof $824,599 and a taxable bond in the amount of $1,323,024. As a part of thisrefund, we entered into an agreement with the holder of these bonds toguarantee the entire debt service on the taxable bond issue. The taxes leviedon our property are used first towards paying the debt service of thetax-exempt bonds and any remaining taxes are used for paying the debt serviceof the taxable bonds. Since the property taxes on the property are currentlysufficient to cover a portion of the debt service on the taxable bond series,our obligation under the guarantee is to cover the shortfall in debt service,representing the difference between the original taxable bond amount($1,323,024) and the estimated amount expected to be collected in propertytaxes from the real property on which our plant is located.  The interest rate on the bonds is 7.75%annually.  The taxable bonds requiresemi-annual payments of interest on December 1 and June 1, inaddition to a payment of principal on December 1 of each year. While ourobligation under the guarantee is expected to continue until maturity in 2018,such obligation may cease at some point in time if the property on which theplant is located appreciates in value to the extent that Lake County is able tocollect a sufficient amount in taxes to cover the principal and interestpayments on the taxable bonds. The principal balance outstanding wasapproximately $1,370,000 as of December 31, 2009.

 

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Inaddition to our debt obligations, we have certain other contractual cash obligationsand commitments.  The following table provides information regarding ourconsolidated contractual obligations and commitments as of December 31,2009:

 

| ** **                         | ** ** | **Payment  Due By Period** | ** ** |
|------------------------------------|------------|----------------------------|------------|
| **Contractual  Cash Obligations**  | ** ** | **Total**                  | ** ** | **Less  than  One Year** | ** ** | **One  to  Three  Years** | ** ** | **Three  to  Five  Years** | ** ** | **After  Five  Years** | ** ** |
|                               |       |                       |       |   |   |   |   |   |   |   |   |
| Long-Term Debt Obligations         |       | $                          | 7,065,352  |   | $ | 3,178,361 |   | $ | 3,502,910 |   | $ | 384,081 |   | $ | — |   |
| Capital Lease Obligations          |       | —                     |       | — |   | — |   | — |   | — |   |
| Operating Lease Obligations        |       | 2,580,175                  |       | 780,175 |   | 720,000 |   | 720,000 |   | 360,000 |   |
| Purchase Obligations               |       | 15,390,922                 |       | 15,034,722 |   | 356,200 |   | — |   | — |   |
| Other Long-Term Liabilities        |       | 200,278                    |       | 52,485 |   | 104,527 |   | 43,266 |   | — |   |
| Total Contractual Cash Obligations |       | $                          | 25,236,727 |   | $ | 19,045,743 |   | $ | 4,683,637 |   | $ | 1,147,347 |   | $ | 360,000 |   |

 

The long-term debt obligations in the table above include both principaland interest payments with a fixed annual interest rate of nine percent.

 

**Off-BalanceSheet Arrangements.**

 

We do not have anyoff-balance sheet arrangements.

 

**ITEM 7A.               QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.**

 

Weare exposed to the impact of market fluctuations associated with commodityprices as discussed below.  We have no exposure to foreign currency riskas all of our business is conducted in U.S. Dollars. We use derivative financialinstruments as part of an overall strategy to manage market risk. We use cash,futures and option contracts to hedge changes to the commodity prices of cornand natural gas. We do not enter into these derivative financial instrumentsfor trading or speculative purposes, nor do we designate these contracts ashedges for accounting purposes pursuant to the requirements of SFAS 133, *Accounting for Derivative Instruments and Hedging Activities*.

 

**CommodityPrice Risk**

 

We are exposed tomarket risk from changes in commodity prices.  Exposure to commodity pricerisk results from our dependence on corn and natural gas in the ethanolproduction process.  We seek to minimize the risks from fluctuations inthe prices of corn and natural gas through the use of hedginginstruments.  In practice, as markets move, we actively manage our riskand adjust hedging strategies as appropriate.  Although we believe ourhedge positions accomplish an economic hedge against our future purchases, theyare not designated as such for hedge accounting purposes, which would match thegain or loss on our hedge positions to the specific commodity purchase beinghedged.  We are marking to market our hedge positions, which means as thecurrent market price of our hedge positions changes, the gains and losses areimmediately recognized in our cost of revenues.

 

The immediaterecognition of hedging gains and losses can cause net income to be volatilefrom quarter to quarter due to the timing of the change in value of thederivative instruments relative to the cost and use of the commodity beinghedged.  We recorded a decrease to our cost of revenues of approximately$758,000 related to derivative instruments for the year ended December 31,2009.  We recorded an increase to cost ofrevenue of approximately $24,594,000 related to our derivative instruments forour fiscal year ended December 31, 2008 and a decrease to cost of revenuesof approximately $1,258,000 related to derivative instruments for our yearended December 31, 2007.  There areseveral variables that could affect the extent to which our derivativeinstruments are impacted by price fluctuations in the cost of corn or naturalgas.  However, it is likely that commodity cash prices will have thegreatest impact on the derivatives instruments with delivery dates nearest thecurrent cash price.

 

As of December 31,2009, we had price protection for approximately 21% of our expected corn usagefor fiscal year ended December 31, 2010 using CBOT futures and options andover-the-counter option contracts.  Ascorn prices move in reaction to market trends and information, our incomestatement will be affected depending on 

 

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the impact such marketmovements have on the value of our derivative instruments.  Depending on market movements, crop prospectsand weather, these price protection positions may cause immediate adverseeffects to our financial results, but are designed to produce long-termpositive growth for us.

 

As of December 31,2009, we are committed to purchasing approximately 160,000 MMBtu’s of naturalgas during our 2010 fiscal year, valued at approximately $846,000.  The natural gas purchases representapproximately 11% of the annual plant requirements.

 

A sensitivityanalysis has been prepared to estimate our exposure to corn and natural gasprice risk. The table presents the fair value of our derivative instruments asof December 31, 2009, December 31, 2008 and December 31, 2007and the potential loss in fair value resulting from a hypothetical 10% adversechange in such prices. The fair value of the positions is a summation of thefair values calculated by valuing each net position at quoted market prices asof the applicable date. The results of this analysis, which may differ fromactual results, are as follows:

 

| **Year  Ended**         | ** ** | **Fair  Value** | ** ** | **Effect  of Hypothetical  Adverse  Change— Market Risk** | ** ** |
|-------------------------|------------|-----------------|------------|----------------------------------------------------------------|------------|
| December 31,  2009 |       | $               | 3,562,370  |                                                           | $          | 356,237 |   |
| December 31,  2008 |       | $               | 21,607,078 |                                                           | $          | 2,160,708 |   |
| December 31,  2007 |       | $               | 39,641,473 |                                                           | $          | 3,964,147 |   |

 

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**ITEM 8.                   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

Table of Contents

 
| ** **                                                   | ** ** | **Page** |
|--------------------------------------------------------------|------------|----------|
|                                                         |       |     |
| **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRM** |       | 43       |
|                                                         |       |     |
| **CONSOLIDATED FINANCIAL STATEMENTS**                        |       |     |
| Consolidated Balance Sheets                                  |       | 44       |
| Consolidated Statements of Operations                        |       | 46       |
| Consolidated  Statements of Changes in Members’ Equity  |       | 47       |
| Consolidated Statements of Cash Flows                        |       | 48       |
| Notes to Consolidated Financial Statements                   |       | 49       |

 

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***REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM***

 

To the Board of Managersand Members

**LakeArea Corn Processors, LLC**

 

We have audited theaccompanying consolidated balance sheets of Lake Area Corn Processors, LLC and subsidiaryas of December 31, 2009 and 2008, and the related consolidated statementsof operations, changes in members’ equity and cash flows for each of the threeyears in the period ended December 31, 2009.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Lake Area Corn Processors, LLC andsubsidiary as of December 31, 2009 and 2008, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2009, in conformity with U.S. generally accepted accountingprinciples.

 

We were not engaged toexamine management’s assessment of the effectiveness of Lake Area CornProcessors, LLC and subsidiary’s internal control over financial reporting asof December 31, 2009, included in the accompanying Annual Report includedin Form 10-K and, accordingly, we do not express an opinion thereon.

 

/s/ McGladrey &Pullen, LLP

Des Moines, Iowa

March 31, 2010

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2009 AND 2008**

 
| ** **                       | ** ** | **2009**        | ** **     | **2008**    | ** ** |
|----------------------------------|------------|-----------------|----------------|-------------|------------|
|                             |       |            |           |        |       |
| **ASSETS**                       |       |            |           |        |       |
|                             |       |            |           |        |       |
| CURRENT ASSETS                   |       |            |           |        |       |
| Cash                             | ** ** | **$**           | **365,066**    |        | $          | 488,517 |   |
| Accounts receivable              | ** ** | **3,456,380**   |           | 2,769,458   |       |
| Other receivables                | ** ** | **276,273**     |           | 166,667     |       |
| Inventory                        | ** ** | **7,580,174**   |           | 6,526,977   |       |
| Due from broker                  | ** ** | **1,494,653**   |           | 60          |       |
| Derivative financial instruments | ** ** | **—**      |           | 373,313     |       |
| Prepaid expenses                 | ** ** | **167,954**     |           | 289,444     |       |
|                             |       |            |           |        |       |
| Total current assets             | ** ** | **13,340,500**  |           | 10,614,436  |       |
|                             |       |            |           |        |       |
| PROPERTY AND EQUIPMENT           |       |            |           |        |       |
| Land                             | ** ** | **676,097**     |           | 676,097     |       |
| Land improvements                | ** ** | **2,665,358**   |           | 2,665,358   |       |
| Buildings                        | ** ** | **8,088,853**   |           | 8,088,853   |       |
| Equipment                        | ** ** | **40,768,265**  |           | 38,882,582  |       |
| Construction in progress         | ** ** | **—**      |           | 1,256,194   |       |
| ** **                       | ** ** | **52,198,573**  |           | 51,569,084  |       |
| Less accumulated depreciation    | ** ** | **(19,752,594** | **)**          | (17,037,417 | )          |
|                             |       |            |           |        |       |
| Net property and equipment       | ** ** | **32,445,979**  |           | 34,531,667  |       |
|                             |       |            |           |        |       |
| OTHER ASSETS                     |       |            |           |        |       |
| Goodwill                         | ** ** | **10,395,766**  |           | 10,395,766  |       |
| Investments                      | ** ** | **2,345,300**   |           | 2,507,074   |       |
| Other                            | ** ** | **97,675**      |           | 157,505     |       |
|                             |       |            |           |        |       |
| Total other assets               | ** ** | **12,838,741**  |           | 13,060,345  |       |
|                             |       |            |           |        |       |
| ** **                       | ** ** | **$**           | **58,625,220** |        | $          | 58,206,448 |   |

 

See Notes to Consolidated Financial Statements

 

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| ** **                                                                  | ** ** | **2009**       | ** **     | **2008**   | ** ** |
|-----------------------------------------------------------------------------|------------|----------------|----------------|------------|------------|
|                                                                        |       |           |           |       |       |
| **LIABILITIES AND MEMBERS’ EQUITY**                                    |       |           |           |       |       |
|                                                                        |       |           |           |       |       |
| CURRENT LIABILITIES                                                         |       |           |           |       |       |
| Oustanding checks in excess of bank balance                                 | ** ** | **$**          | **285,804**    |       | $          | 400,918 |   |
| Accounts payable                                                            | ** ** | **6,245,418**  |           | 7,858,935  |       |
| Accrued liabilities                                                         | ** ** | **1,045,279**  |           | 3,199,234  |       |
| Derivative financial instruments                                            | ** ** | **610,991**    |           | 97,912     |       |
| Current portion of guarantee payable                                        | ** ** | **52,485**     |           | 60,678     |       |
| Current portion of notes payable                                            | ** ** | **2,727,740**  |           | 2,065,357  |       |
|                                                                        |       |           |           |       |       |
| Total current liabilities                                                   | ** ** | **10,967,717** |           | 13,683,034 |       |
|                                                                        |       |           |           |       |       |
| LONG-TERM LIABILITIES                                                       |       |           |           |       |       |
| Notes payable, net of current maturities                                    | ** ** | **3,609,203**  |           | 5,201,498  |       |
| Guarantee payable, net of current portion                                   | ** ** | **147,793**    |           | 200,278    |       |
| Other                                                                       | ** ** | **166,600**    |           | 262,500    |       |
|                                                                        |       |           |           |       |       |
| Total long-term liabilities                                                 | ** ** | **3,923,596**  |           | 5,664,276  |       |
|                                                                        |       |           |           |       |       |
| COMMITMENTS AND CONTINGENCIES                                               |       |           |           |       |       |
|                                                                        |       |           |           |       |       |
| MEMBERS’ EQUITY                                                        |       |           |           |       |       |
| Capital units, $0.50 stated value, 29,620,000  units issued and outstanding |       | **14,810,000** |           | 14,810,000 |       |
| Additional paid-in capital                                                  | ** ** | **96,400**     |           | 96,400     |       |
| Retained earnings                                                           | ** ** | **28,827,507** |           | 23,952,738 |       |
|                                                                        |       |           |           |       |       |
| Total members’ equity                                                  | ** ** | **43,733,907** |           | 38,859,138 |       |
|                                                                        |       |           |           |       |       |
| ** **                                                                  | ** ** | **$**          | **58,625,220** |       | $          | 58,206,448 |   |

 

See Notes to Consolidated Financial Statements

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007**

 
| ** **                                                                                            | ** ** | **2009**       | ** **     | **2008**    | ** ** | **2007**    | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------|----------------|-------------|------------|-------------|------------|
|                                                                                                  |       |           |           |        |       |        |       |
| REVENUES                                                                                              | ** ** | **$**          | **90,340,642** |        | $          | 111,778,588 |       | $ | 103,739,699 |   |
|                                                                                                  |       |           |           |        |       |        |       |
| COST OF REVENUES                                                                                      | ** ** | **81,659,486** |           | 125,413,056 |       | 80,977,667  |       |
|                                                                                                  |       |           |           |        |       |        |       |
| GROSS PROFIT (LOSS)                                                                                   | ** ** | **8,681,156**  |           | (13,634,468 | )          | 22,762,032  |       |
|                                                                                                  |       |           |           |        |       |        |       |
| OPERATING EXPENSES                                                                                    | ** ** | **2,957,809**  |           | 3,534,274   |       | 3,721,813   |       |
|                                                                                                  |       |           |           |        |       |        |       |
| INCOME (LOSS) FROM OPERATIONS                                                                         | ** ** | **5,723,347**  |           | (17,168,742 | )          | 19,040,219  |       |
|                                                                                                  |       |           |           |        |       |        |       |
| OTHER INCOME (EXPENSE)                                                                                |       |           |           |        |       |        |       |
| Interest and other income                                                                             | ** ** | **106,854**    |           | 54,522      |       | 265,029     |       |
| Equity in net income (loss) of investments                                                            | ** ** | **(161,774**   | **)**          | 1,157,074   |       | (605,000    | )          |
| Interest and other expense                                                                            | ** ** | **(793,658**   | **)**          | (656,303    | )          | (695,043    | )          |
| Total other income (expense)                                                                          | ** ** | **(848,578**   | **)**          | 555,293     |       | (1,035,014  | )          |
|                                                                                                  |       |           |           |        |       |        |       |
|                                                                                                  |       |           |           |        |       |        |       |
| NET INCOME (LOSS)                                                                                     | ** ** | **$**          | **4,874,769**  |        | $          | (16,613,449 | )          | $ | 18,005,205 |   |
|                                                                                                  |       |           |           |        |       |        |       |
|                                                                                                  |       |           |           |        |       |        |       |
|                                                                                                  |       |           |           |        |       |        |       |
| BASIC AND DILUTED EARNINGS (LOSS) PER UNIT                                                            |       | **$**          | **0.16**       |        | $          | (0.56       | )          | $ | 0.61 |   |
|                                                                                                  |       |           |           |        |       |        |       |
| WEIGHTED AVERAGE UNITS OUTSTANDING FOR THE  CALCULATION OF BASIC AND DILUTED EARNINGS (LOSS) PER UNIT |       | **29,620,000** |           | 29,620,000  |       | 29,620,000  |       |

 

See Notes to Consolidated Financial Statements

 

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# **LAKE AREA CORNPROCESSORS, LLC**

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

**YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007**

 
| ** **                                 | ** ** | ** **        | ** ** | ** **  | ** **     | **Additional** | ** ** | ** **   | ** ** | ** **  | ** **     |
|--------------------------------------------|------------|-------------------|------------|-------------|----------------|----------------|------------|--------------|------------|-------------|----------------|
| ** **                                 | ** ** | **Capital Units** | ** ** | **Paid-In** | ** **     | **Retained**   | ** ** | ** **   | ** ** |
| ** **                                 | ** ** | **Units**         | ** ** | **Amount**  | ** **     | **Capital**    | ** ** | **Earnings** | ** ** | **Total**   | ** **     |
| BALANCE, DECEMBER 31, 2006                 |       | 29,620,000        |       | $           | 14,810,000     |           | $          | 96,400       |       | $           | 41,813,982     |   | $ | 56,720,382 |   |
| Net income                                 |       | —            |       | —      |           | —         |       | 18,005,205   |       | 18,005,205  |           |
| Distributions paid ($.60 per capital unit) |       | —            |       | —      |           | —         |       | (17,772,000  | )          | (17,772,000 | )              |
|                                       |       |              |       |        |           |           |       |         |       |        |           |
| BALANCE, DECEMBER 31, 2007                 |       | 29,620,000        |       | 14,810,000  |           | 96,400         |       | 42,047,187   |       | 56,953,587  |           |
| Net loss                                   |       | —            |       | —      |           | —         |       | (16,613,449  | )          | (16,613,449 | )              |
| Distributions paid ($.05 per capital unit) |       | —            |       | —      |           | —         |       | (1,481,000   | )          | (1,481,000  | )              |
|                                       |       |              |       |        |           |           |       |         |       |        |           |
| BALANCE, DECEMBER 31, 2008                 |       | 29,620,000        |       | 14,810,000  |           | 96,400         |       | 23,952,738   |       | 38,859,138  |           |
| Net income                                 |       | —            |       | —      |           | —         |       | 4,874,769    |       | 4,874,769   |           |
|                                       |       |              |       |        |           |           |       |         |       |        |           |
| **BALANCE, DECEMBER 31, 2009**             | ** ** | **29,620,000**    | ** ** | **$**       | **14,810,000** | ** **     | **$**      | **96,400**   | ** ** | **$**       | **28,827,507** | ** ** | **$** | **43,733,907** | ** ** |

 

See Notes to Consolidated Financial Statements

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007**

 
| ** **                                                           | ** ** | **2009**       | ** **    | **2008**   | ** ** | **2007**    | ** ** |
|----------------------------------------------------------------------|------------|----------------|---------------|------------|------------|-------------|------------|
| OPERATING ACTIVITIES                                                 |       |           |          |       |       |        |       |
| Net income (loss)                                                    | ** ** | **$**          | **4,874,769** |       | $          | (16,613,449 | )          | $ | 18,005,205 |   |
| Changes to net income not affecting cash                             |       |           |          |       |       |        |       |
| Depreciation and amortization                                        | ** ** | **2,775,009**  |          | 2,759,580  |       | 2,725,098   |       |
| Equity in net (income) loss of investments                           | ** ** | **161,774**    |          | (1,157,074 | )          | 605,000     |       |
| Unrealized loss on purchase commitments                              | ** ** | **(2,735,966** | **)**         | 2,735,966  |       | —      |       |
| Lower of cost or market adjustment on inventory                      | ** ** | **211,935**    |          | 1,139,029  |       | —      |       |
| (Increase) decrease in                                               |       |           |          |       |       |        |       |
| Receivables                                                          | ** ** | **(796,528**   | **)**         | 2,220,370  |       | (1,050,505  | )          |
| Inventory                                                            | ** ** | **(1,265,132** | **)**         | 417,199    |       | (3,323,140  | )          |
| Prepaid expenses                                                     | ** ** | **121,490**    |          | 10,664     |       | 3,853       |       |
| Derivative financial instruments and due from  broker                | ** ** | **(608,201**   | **)**         | 13,402,114 |       | (4,719,706  | )          |
| Increase (decrease) in                                               |       |           |          |       |       |        |       |
| Accounts payable                                                     | ** ** | **(1,209,677** | **)**         | 1,451,801  |       | 771,419     |       |
| Accrued liabilities                                                  | ** ** | **486,111**    |          | 129,395    |       | (59,493     | )          |
|                                                                 |       |           |          |       |       |        |       |
| NET CASH FROM OPERATING ACTIVITIES                                   | ** ** | **2,015,584**  |          | 6,495,595  |       | 12,957,731  |       |
|                                                                 |       |           |          |       |       |        |       |
| INVESTING ACTIVITIES                                                 |       |           |          |       |       |        |       |
| Purchase of property and equipment                                   | ** ** | **(1,033,331** | **)**         | (1,514,941 | )          | (1,779,467  | )          |
| Purchase of investment                                               | ** ** | **—**     |          | (1,595,572 | )          | (359,428    | )          |
|                                                                 |       |           |          |       |       |        |       |
| NET CASH USED FOR INVESTING ACTIVITIES                               | ** ** | **(1,033,331** | **)**         | (3,110,513 | )          | (2,138,895  | )          |
|                                                                 |       |           |          |       |       |        |       |
| FINANCING ACTIVITIES                                                 |       |           |          |       |       |        |       |
| Increase in outstanding checks in excess of bank  balance            | ** ** | **(115,114**   | **)**         | 400,918    |       | —      |       |
| Short-term notes payable issued                                      | ** ** | **—**     |          | —     |       | 2,333,000   |       |
| Long-term notes payable issued                                       | ** ** | **3,339,000**  |          | 2,450,000  |       | —      |       |
| Principal payments on short-term notes payable                       | ** ** | **—**     |          | (2,333,000 | )          | —      |       |
| Principal payments on long-term notes payable                        | ** ** | **(4,268,912** | **)**         | (2,232,285 | )          | (1,629,953  | )          |
| Payment on guarantee payable                                         | ** ** | **(60,678**    | **)**         | (62,320    | )          | (62,536     | )          |
| Distributions paid to LACP members                                   | ** ** | **—**     |          | (1,481,000 | )          | (17,772,000 | )          |
|                                                                 |       |           |          |       |       |        |       |
| NET CASH USED FOR FINANCING ACTIVITIES                               | ** ** | **(1,105,704** | **)**         | (3,257,687 | )          | (17,131,489 | )          |
|                                                                 |       |           |          |       |       |        |       |
| NET INCREASE (DECREASE) IN CASH                                      | ** ** | **(123,451**   | **)**         | 127,395    |       | (6,312,653  | )          |
|                                                                 |       |           |          |       |       |        |       |
| CASH AT BEGINNING OF PERIOD                                          | ** ** | **488,517**    |          | 361,122    |       | 6,673,775   |       |
|                                                                 |       |           |          |       |       |        |       |
| CASH AT END OF PERIOD                                                | ** ** | **$**          | **365,066**   |       | $          | 488,517     |       | $ | 361,122 |   |
|                                                                 |       |           |          |       |       |        |       |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                    |       |           |          |       |       |        |       |
|                                                                 |       |           |          |       |       |        |       |
| Cash paid during the year for interest                               | ** ** | **$**          | **707,119**   |       | $          | 678,272     |       | $ | 695,750 |   |
|                                                                 |       |           |          |       |       |        |       |
| SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING AND  FINANCING ACTIVITIES |       |           |          |       |       |        |       |
|                                                                 |       |           |          |       |       |        |       |
| Capital expenditures in accounts payable                             | ** ** | **$**          | **—**    |       | $          | 403,840     |       | $ | 500,532 |   |
|                                                                 |       |           |          |       |       |        |       |
| Land acquired through issuance of note payable                       | ** ** | **—**     |          | 450,000    |       | —      |       |

 

See Notes to Consolidated Financial Statements

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2009 AND 2008**

** **

**NOTE 1 -       NATURE OF OPERATIONS**

 

*Principal Business Activity*

 

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

 

**NOTE 2 -       SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

*Principles of Consolidation*

 

The consolidatedfinancial statements of the Company include the accounts of its wholly ownedsubsidiary, Dakota Ethanol.  Allsignificant inter-company transactions and balances have been eliminated inconsolidation.

 

*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, basedon written contract terms between Dakota Ethanol and its customers.  Collectability of revenue is reasonablyassured based on historical evidence of collectability between Dakota Ethanoland its customers.  Interest income isrecognized as earned.

 

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

 

*Cost ofRevenues*

 

The primary components ofcost of revenues from the production of ethanol and related co-product are cornexpense, energy expense (natural gas and electricity), raw materials expense(chemicals and denaturant), and direct labor costs.

 

Shippingcosts incurred in the sale of distiller’s grains are classified in netrevenues.  Shipping costs on distiller’s grains were approximately$795,000, $1,718,000, and $1,918,000, for the years ended December 31,2009, 2008 and 2007, respectively.

 

*OperatingExpenses*

 

The primary components ofoperating expenses are administrative wages and benefits, professional feeexpenses (legal and audit), and insurance expenses.

 

*InventoryValuation*

 

Ethanol and relatedproducts are stated at net realizable value. Raw materials, work-in-process,and parts inventory are valued using methods which approximate the lower ofcost (first-in, first-out) or market. In the valuation of inventories andpurchase and sale commitments, market is based on current replacement valuesexcept that it does not exceed net realizable values and is not less than netrealizable values reduced by allowances for approximate normal profit margin.

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2009 AND 2008**

 

*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.

 

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

 

The carrying amount 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.

 

*Investmentin commodities contracts, derivative instruments and hedging activities*

 

OnJanuary 1, 2009, the Company adopted new disclosure requirements, whichrequire entities to provide greater transparency in interim and annualfinancial statements about how and why the entity uses derivative instruments,how the instruments and related hedged items are accounted for, and how theinstruments and related hedged items affect the financial position, results ofoperations, and cash flows of the entity.

 

We are exposed to certainrisks related to our ongoing business operations.  The primary risks thatwe manage by using forward or derivative instruments are price risk onanticipated purchases of corn, natural gas and the sale of ethanol.

 

We are subject to marketrisk with respect to the price and availability of corn, the principal rawmaterial we use to produce ethanol and ethanol by-products.  In general,rising corn prices result in lower profit margins and, therefore, representunfavorable market conditions.  This is especially true when marketconditions do not allow us to pass along increased corn costs to ourcustomers.  The availability and price of corn is subject to wide fluctuationsdue to unpredictable factors such as weather conditions, farmer plantingdecisions, governmental policies with respect to agriculture and internationaltrade and global demand and supply.

 

Certaincontracts that literally meet the definition of a derivative may be exemptedfrom derivative accounting as normal purchases or normal sales.  Normalpurchases and normal sales are contracts that provide for the purchase or saleof something other than a financial instrument or derivative instrument thatwill be delivered in quantities expected to be used or sold over a reasonableperiod in the normal course of business.  Contracts that meet therequirements of normal purchases or sales are documented as normal and exemptedfrom the accounting and reporting requirements of derivative accounting.  Effective January 1, 2008, we appliedthe normal purchase and sales exemption under derivative accounting for forwardpurchases of corn and sales of distiller’s grains.  Transactions initiated prior to January 1,2008 are not exempted from the accounting and reporting requirements.  As of December 31, 2009, we arecommitted to purchasing 3.6 million bushels of corn on a forward contract basiswith an average price of $3.82 per bushel, of which 500,000 bushels are subjectto derivative accounting treatment and 3.1 million bushels are accounted for asnormal purchases, and accordingly, are not marked to market and are accountedfor using lower of cost or market accounting. Dakota Ethanol has a derivative financial instrument liability ofapproximately $59,000 related to the forward contracted purchases of corn.  The corn purchase contracts represent 21% ofthe annual plant corn usage.

 

We sometimes enter into firm-price purchase commitments with some ofour natural gas suppliers under which we agree to buy natural gas at a priceset in advance of the actual delivery of that natural gas to us.  Underthese arrangements, we assume the risk of a price decrease in the market priceof natural gas between the time this price is fixed and the time the naturalgas is delivered.  At December 31, 2009, we are committed topurchasing 160,000 

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2009 AND 2008**

 

MMBtus of natural gas with an average price of $5.29 per MMBtu. We account for these transactions as normal purchases, and accordingly, do notmark these transactions to market.  Thenatural gas purchases represent approximately 11% of the annual plantrequirements.

 

Weenter into short-term forward, option and futures contracts as a means ofsecuring corn and natural gas for the ethanol plant and managing exposure tochanges in commodity and energy prices. We enter into short-term forward,option and futures contracts for sales of ethanol to manage exposure to changesin energy prices.  All of our derivativesare designated as non-hedge derivatives, and accordingly are recorded at fairvalue with changes in fair value recognized in net income. Although thecontracts are considered economic hedges of specified risks, they are notdesignated as and accounted for as hedging instruments.

 

As part of our trading activity, we use futures andoption contracts offered through regulated commodity exchanges to reduce riskand we are exposed to risk of loss in the market value of inventories. Toreduce that risk, we generally take positions using forward and futurescontracts and options.

 

Derivatives notdesignated as hedging instruments at December 31, 2009 and December 31,2008 were as follows:

 
| ** **                    | ** ** | **Balance Sheet**      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **Classification**     | ** ** | **2009**              | ** ** | **2008**              | ** ** |
|                          |       |                   |       |                  |       |                  |       |
| Futures and options contracts |       | Current  Assets        |       | $                     | —     |                  | $          | 373,313 |   |
| Futures and options contracts |       | (Current  Liabilities) |       | $                     | (551,420   | )                     | $          | — |   |
| Forward contracts             |       | (Current  Liabilities) |       | $                     | (59,571    | )                     | $          | (97,912 | ) |

 

Realizedand unrealized gains and losses related to derivative contracts related to cornand natural gas purchases are included as a component of cost of revenues andderivative contracts related to ethanol sales are included as a component ofrevenues in the accompanying financial statements.

 
| ** **                                                           | ** ** | **Statement of Operations** | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|
| ** **                                                           | ** ** | **Classification**          | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net realized and unrealized (losses) related to  sales contracts:    |       |                        |       |                              |       |   |   |   |   |
|                                                                 |       |                        |       |                              |       |   |   |   |   |
| Futures and options contracts                                        |       | Revenues                    |       | $                                 | (1,487,368 | ) | $ | — |   | $ | — |   |
|                                                                 |       |                        |       |                              |       |   |   |   |   |
| Net realized and unrealized (losses) related to  purchase contracts: |       |                        |       |                              |       |   |   |   |   |
|                                                                 |       |                        |       |                              |       |   |   |   |   |
| Futures and options contracts                                        |       | Cost  of Revenues           |       | $                                 | 720,608    |   | $ | (15,542,120 | ) | $ | (1,119,528 | ) |
| Forward contracts                                                    |       | Cost  of Revenues           |       | $                                 | 38,341     |   | $ | (9,052,358 | ) | $ | 2,377,686 |   |

 

*Investments*

 

DakotaEthanol has investment interests in three unlisted companies in relatedindustries. These investments are flow-through entities and are being accountedfor by the equity method of accounting under which the Company’s share of netincome is recognized as income in the Company’s income statement and added tothe investment account.  Distributions ordividends received from the investments are treated as a reduction of theinvestment account.  The Companyconsistently follows the practice of recognizing the net income based on themost recent reliable data.

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2009 AND 2008**

 

DakotaEthanol has a nine percent investment interest in the company’s ethanolmarketer, Renewable Products Marketing Group, LLC (RPMG).  The net income which is reported in theCompany’s income statement for RPMG is based on RPMG’s September 30, 2009audited results.  The carrying amount ofthe Company’s investment was approximately $1,351,000 and $1,513,000 as of December 31,2009 and 2008, respectively.

 

DakotaEthanol has a twelve percent investment interest in Prairie Gold Venture Partnership,LLC (PGVP), a venture capital fund investing in cellulosic ethanolproduction.  The net income which isreported in the Company’s income statement for PGVP is based on PGVP’s June 30,2009 interim results.  The carryingamount of the Company’s investment was approximately $994,000 as of December 31,2009 and 2008.

 

DakotaEthanol has a twelve percent investment interest in Corn Oil Bio-Solutions, LLC(COBS), a developmental stage bio-diesel refinery.  The net income which is reported in the Company’sincome statement for COBS is based on COBS’ September 30, 2009 interimresults.  During the quarter ended December 31,2008, the project was idled due to credit conditions, as such, the companyreduced its investment to zero.

 

*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.  The Company has notexperienced any losses in connection with these balances.

 

*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. Depreciation on assets placed in service is computedusing the straight-line method over estimated useful lives as follows:

 

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

 

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

 

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

 

*Goodwill*

* *

Goodwill represents the excess of purchase price over the underlyingnet assets of business acquired. Goodwill is not amortized but is subject to annual impairmenttests.  The Company has performed therequired impairment tests, which have resulted in no impairment adjustments.

* *

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* *

# **LAKE AREA CORNPROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2009 AND 2008**

* *

*Earnings (loss) Per Unit*

 

For purposes ofcalculating basic earnings (loss) per unit, units issued are consideredoutstanding on the effective date of issuance. Diluted earnings per unit arecalculated by including dilutive potential equity units in thedenominator.  There were no dilutiveequity units for the years ending December 31, 2009, 2008, and 2007.

 

*Income Taxes*

 

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 member level ratherthan the corporate level. Accordingly, the Company has no tax liability.

 

Management has evaluatedthe Company’s tax positions under the Financial Accounting Standards Boardissued guidance on accounting for uncertainty in income taxes and concludedthat the Company had taken no uncertain tax positions that require adjustmentto the financial statements to comply with the provisions of thisguidance.  With few exceptions, theCompany is no longer subject to income tax examinations by the U.S. federal,state or local authorities for the years before 2007.

 

*Environmental Liabilities*

 

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

* *

*OperatingSegment*

* *

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

 

*Recently Issued AccountingPronouncements*

 

In January 2010, theFASB issued an update to “*Fair Value Measurementsand Disclosures (Topic 820), Improving Disclosures about Fair ValueMeasurements.”*  The updaterequires new disclosures about transfers in and out of Levels 1 and 2 andActivity in Level 3.  The update alsoprovides clarification of disclosures about the level of disaggregation and theinputs and valuation techniques used.

 

The Company is evaluatingthe effect, if any, that the adoption of this new accounting standard will haveon its results of operations, financial position, and the related disclosures.

 

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# **LAKE AREA CORN PROCESSORS,LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2009 AND 2008**

 

**NOTE 3 -       INVENTORY**

 

Inventory consisted ofthe following as of December 31, 2009 and 2008:

 

| ** **      | ** ** | **2009** | ** ** | **2008**  | ** ** |
|-----------------|------------|----------|------------|-----------|------------|
| Raw materials   |       | $        | 5,049,737  |      | $          | 3,937,873 |   |
| Finished goods  |       | 855,745  |       | 825,878   |       |
| Work in process |       | 679,817  |       | 591,870   |       |
| Parts inventory |       | 994,875  |       | 1,171,356 |       |
|            |       | $        | 7,580,174  |      | $          | 6,526,977 |   |

 

Included in inventory isa lower of cost or market adjustment of approximately $212,000 and $1,139,000at December 31, 2009 and 2008 respectively.

** **

**NOTE 4 -       INVESTMENTS**

 

Condensed financialinformation of the investments is as follows:

 
| ** **                     | ** ** | **RPMG**       | ** **  | **PGVP**       | ** ** |
|--------------------------------|------------|----------------|-------------|----------------|------------|
| ** **                     | ** ** | **12/31/2009** | ** **  | **12/31/2008** | ** ** | **12/31/2009** | ** ** | **12/31/2008** | ** ** |
| Current assets                 |       | $              | 104,251,285 |           | $          | 162,459,561 |   | $ | — |   | $ | 7,500 |   |
| Other assets                   |       | 527,470        |        | 396,126        |       | 8,500,000 |   | 8,500,000 |   |
| Current liabilities            |       | 88,638,769     |        | 150,602,186    |       | 5,509 |   | 13,112 |   |
| Long-term debt                 |       | —         |        | —         |       | — |   | — |   |
| Member’s equity (deficit) |       | 16,139,986     |        | 12,253,501     |       | 8,494,491 |   | 8,494,388 |   |
| Revenue                        |       | 1,668,159,966  |        | 2,501,097,434  |       | — |   | — |   |
| Net income (loss)              |       | 3,703,030      |        | 4,110,837      |       | (1,484 | ) | (241,207 | ) |
|                                |            |                |             |                |            |  |  |  |  |  |  |  |  |

 

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

 

On June 18, 2009,Dakota Ethanol renewed a revolving promissory note from First National Bank ofOmaha in the amount of $4,000,000.  Thenote expires on May 17, 2010 and the amount available is subject tocertain restrictive covenants establishing minimum reporting requirements,ratios, working capital, net worth and borrowing base requirements. Interest onthe outstanding principal balances will accrue at adjustable basis points abovethe lender’s base rate (5.25 percent at December 31, 2009).  The rate is subject to a floor of 5.0percent.    There is a commitment fee of3/8 percent on the unused portion of the $4,000,000 availability. In addition,the bank draws the checking account balance to a minimum balance on a dailybasis. The excess cash pays down or the shortfall is drawn upon the note asneeded.  The note is collateralized bythe ethanol plant, its accounts receivable and inventories.  On December 31, 2009, Dakota Ethanol hadapproximately $0 outstanding and $4,000,000 available to be drawn on therevolving promissory note.  On December 31,2008, Dakota Ethanol had $0 outstanding and $3,000,000 available to be drawn onthe revolving promissory note.

 

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

 

Dakota Ethanol has twonotes payable to First National Bank of Omaha, Nebraska (the Bank) (Term Notes2 and 5).

 

As part of the notepayable agreements, Dakota Ethanol is subject to certain restrictive covenantsestablishing minimum reporting requirements, ratios, working capital and networth requirements. The notes are collateralized by the ethanol plant andequipment, which had a net book value of approximately $32,446,000 on December 31,2009, its accounts receivable and inventories. Term note 2 is subject toprepayment penalties based on the cost incurred by the Bank to break its fixedinterest rate commitment.

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2009 AND 2008**

 

The balance of Term Note2 is due and payable in quarterly installments of $581,690 through September 1,2011. Interest on outstanding principal balances will accrue at a fixed rate of9 percent.

 

The balance of Term Note5 is due and payable on September 1, 2011. Interest on outstandingprincipal balances will accrue at adjustable basis points above the lender’srate (5.0 percent at December 31, 2009). This rate is subject to various adjustments based on various levels ofindebtedness to net worth, as defined by the agreement. The rate is subject toa floor of 5.0 percent.  Dakota Ethanolmay elect to borrow any principal amount repaid on Term Note 5 up to $5,000,000subject to the terms of the agreement. Should Dakota Ethanol elect not toutilize this feature, the lender will assess an unused commitment fee of 3/8percent on the unused portion of the $5,000,000.  On December 31, 2009, Dakota Ethanol had$0 outstanding and $5,000,000 available to be drawn on Term Note 5.  On December 31, 2008, Dakota Ethanol had$2,000,000 outstanding and $3,000,000 available to be drawn on Term Note 5.Term Note 5 has a reducing feature through which the available amount of thenote is reduced annually by 75 percent of the excess cash flow for theyear.  Subsequent to year end, themaximum amount available on the note was reduced to approximately $3,575,000.

 

During December 2008,Dakota Ethanol issued a note payable related to the purchase of land adjacentto the plant site.  The note was issuedfor $450,000.  The note matures on December 1,2012.  The note is payable in annualinstallments of $112,500 plus interest. Interest on outstanding principal balances will accrue at a fixed rateof 7.0 percent.

 

On January 16, 2009,we entered into an amendment to our credit agreements with FNBO.  The primary purposes of these amendments wereto increase our borrowing capacity and to make changes to the covenants applicableto our credit agreements.  We agreed toprovide FNBO more information regarding our hedging transactions and to makeadjustments to our hedging strategies. We also agreed to raise an additional $2,000,000 in subordinated debt byMarch 31, 2009 and to secure alternate financing for our corn oilextraction equipment by April 30, 2009. In addition, we agreed not to make any distributions to our memberswithout FNBO’s prior approval.

 

Inorder to comply with the conditions FNBO imposed regarding raising additionalsubordinated debt financing, we conducted a private placement offering ofsubordinated unsecured debt securities which closed on May 30, 2009.  The securities mature two years from the dateof issuance.  Interest on the outstandingbalances will accrue at a fixed rate of 9 percent.  Interest will be paid annually on January 30th of each year beginning on January 30,2010.  We have raised $1,439,000 insubordinated debt through this offering.

 

OnJuly 24, 2009 Dakota Ethanol issued an additional $700,000 in subordinatedsecured debt to Guardian Eagle Investments, LLC.  The note has a fixed interest rate of9.0%.  The note requires monthlyinstallments of principal and interest and matures in April 2012.

 

Asof December 31,2009, we have raised $2,139,000 in subordinated debt.  FNBO has agreed that the additional subordinatedfinancing we have secured is sufficient to satisfy the requirement in ouramended credit agreements.

 

On May 22, 2009,Dakota Ethanol entered into two loan agreements for alternative financingfor our corn oil extraction equipment as we had agreed with FNBO; one loan withRural Electric Economic Development, Inc (REED) and the other loan with FirstDistrict Development Company (FDDC).

 

Thenote to REED for $1 million has a fixed interest rate of 4.7%.  The note requires monthly installments ofprincipal and interest and matures on May 25, 2014.  The note is secured by the oil extractionequipment.

 

Thenote to FDDC for $200,000 has a fixed interest rate of 5.5%.  The note requires monthly installments ofprincipal and interest and matures on May 22, 2014.  The note is secured by the oil extractionequipment.

 

FNBO has agreed that the$1.2 million in additional financing we have secured for the corn oilextraction equipment is sufficient to satisfy the requirement in our amendedcredit agreements.

 

We are in compliance withour financial covenants as of December 31, 2009.

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2009 AND 2008**

 

The balance of the notespayable as of December 31, 2009 and 2008 is as follows:

 
| ** **                                 | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|
|                                       |       |       |       |       |       |
| Note payable to First National Bank, Omaha |       |       |       |       |       |
| Term Note 2                                |       | $          | 2,864,121  |       | $          | 4,816,855 |   |
| Term Note 5                                |       | —     |       | 2,000,000  |       |
| Note payable - Land                        |       | 337,500    |       | 450,000    |       |
| Note payable - Subordinated notes          |       | 1,439,000  |       | —     |       |
| Note payable - REED                        |       | 895,586    |       | —     |       |
| Note payable - FDDC                        |       | 179,394    |       | —     |       |
| Note payable -Guardian Eagle               |       | 621,342    |       | —     |       |
|                                       |       | 6,336,943  |       | 7,266,855  |       |
|                                       |       |       |       |       |       |
| Less current portion                       |       | (2,727,740 | )          | (2,065,357 | )          |
|                                       |       |       |       |       |       |
|                                       |       | $          | 3,609,203  |       | $          | 5,201,498 |   |

 

Minimum principalpayments for the next five years are as follows:

 

| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|------------------------------------|------------|------------|------------|
| 2010                               |       | $          | 2,727,723  |   |
| 2011                               |       | 2,791,284  |       |
| 2012                               |       | 447,452    |       |
| 2013                               |       | 258,417    |       |
| 2014                               |       | 112,067    |       |
|                                    |            |            |            |  |

 

**NOTE 7 -       EMPLOYEE BENEFIT PLANS**

 

Dakota Ethanol maintainsa 401(k) plan for the employees who meet the eligibility requirements setforth in the plan documents. Dakota Ethanol matches a percentage of theemployees’ contributed earnings. Employer contributions to the plan totaledapproximately $39,000, $39,000 and $45,000 for the years ended December 31,2009, 2008 and 2007, respectively.

 

**NOTE 8 -       FAIR VALUE MEASUREMENTS**

 

Effective January 1, 2009, the Company completely adopted the fairvalue measurements and disclosures standard which defines fair value,establishes a framework for measuring fair value, and expands disclosure forthose assets and liabilities carried on the balance sheet on a fair valuebasis.

 

The Company’s balance sheet contains derivative financial instrumentsthat are recorded at fair value on a recurring basis.  Fair value measurements and disclosuresrequire that assets and liabilities carried at fair value be classified anddisclosed according to the process for determining fair value.  There are three levels of determining fairvalue.

 

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

 

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

 

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

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2009 AND 2008**

 

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

 

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

 

The following table summarizes financial assets and financialliabilities measured at fair value on a recurring basis as of December 31,2009, segregated by the level of the valuation inputs within the fair valuehierarchy utilized to measure fair value:

 
| ** **                       | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|----------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|-------------|------------|
| December 31, 2009           |       |      |       |        |       |        |       |        |       |
|                             |       |      |       |        |       |        |       |        |       |
| Assets:                          |       |      |       |        |       |        |       |        |       |
| Derivative financial instruments |       | $         | —     |        | $          | —      |       | $           | —     |   | $ | — |   |
|                             |       |      |       |        |       |        |       |        |       |
| Liabilities:                     |       |      |       |        |       |        |       |        |       |
| Derivative financial instruments |       | $         | 610,991    |        | $          | 551,420     |       | $           | 59,571     |   | $ | — |   |
|                             |       |      |       |        |       |        |       |        |       |
|                             |       |      |       |        |       |        |       |        |       |
| December 31, 2008           |       |      |       |        |       |        |       |        |       |
|                             |       |      |       |        |       |        |       |        |       |
| Assets:                          |       |      |       |        |       |        |       |        |       |
| Derivative financial instruments |       | $         | 373,313    |        | $          | 373,313     |       | $           | —     |   | $ | — |   |
|                             |       |      |       |        |       |        |       |        |       |
| Liabilities:                     |       |      |       |        |       |        |       |        |       |
| Derivative financial instruments |       | $         | 97,912     |        | $          | —      |       | $           | 97,912     |   | $ | — |   |

 

Certain financial assets and financial liabilities are measured at fairvalue on a nonrecurring basis; that is, the instruments are not measured atfair value on an ongoing basis but are subject to fair value adjustments incertain circumstances (for example, when there is evidence of impairment).Financial assets and financial liabilities measured at fair value on anon-recurring basis were not significant at December 31, 2009.

 

Disclosure requirementsfor fair value of financial instruments require disclosure of the fair value offinancial assets and financial liabilities, including those financial assetsand financial liabilities that are not measured and reported at fair value on arecurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets andfinancial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above.  Themethodologies for other financial assets and financial liabilities arediscussed below.

 

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

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2009 AND 2008**

 

The carrying amount oflong-term obligations at December 31, 2009 of $6,537,221 had an estimatedfair value of approximately $6,602,314 based on estimated interest rates forcomparable debt. The carrying amount and fair value were $7,527,811 and$7,700,926 respectively at December 31, 2008.

 

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

 

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

 

Natural Gas — The agreement provides Dakota Ethanolwith a fixed transportation rate for natural gas for a ten-year term through September 2011,renewable for ten-year terms. The agreement does not require minimum purchasesof natural gas during their initial term.

 

Electricity — The agreement provides Dakota Ethanolwith electric service for a term of ten years through September 2011,renewable for five-year periods. The agreement sets rates for energy usagebased on market rates and requires a minimum purchase of electricity each monthduring the initial term of the agreement.

 

Expenses related to theagreement for the purchase of electricity and natural gas were approximately$9,585,000, $14,031,000, and $12,426,000, for the years ended December 31,2009, 2008 and 2007, respectively.

 

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

 

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

 

Ethanol FuelMarketing Agreement— Dakota Ethanol has an agreement with RPMG (a related party, see note 2), ajoint venture of ethanol producers, for the sale, marketing, billing andreceipt of payment and other administrative services for all ethanol producedby the plant. The agreement expires on March 31, 2010, and isautomatically renewed for successive one-year terms unless terminated 90 daysprior to expiration.

 

Distiller’s GrainMarketing Agreement— Dakota Ethanol has an agreement with RPMG (a related party, see note 2), forthe marketing of all distiller’s dried grains produced by the plant. Theagreement expires on July 15, 2010, and is automatically renewed for successiveone-year terms unless terminated 180 days prior to expiration.

 

Rail Car LeaseAgreements —Dakota Ethanol has agreements with Chicago Freight Car Leasing Co. and TrinityIndustries Leasing Co. for rail car leases for the shipment of Dakota Ethanol’sdistiller’s dried grains.  The leasesexpire in October and December of 2010. Costs related to the leaseswere $851,100 $859,800, and $859,800 for the years ended December 31,2009, 2008 and 2007, respectively.

 

Minimum annual paymentsduring the term of the rail car lease agreement are as follows:

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2009 AND 2008**

 

| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|------------------------------------|------------|------------|------------|
| 2010                               |       | $          | 780,000    |   |
| 2011                               |       | 360,000    |       |
| 2012                               |       | 360,000    |       |
| 2013                               |       | 360,000    |       |
| 2014                               |       | 360,000    |       |
|                                    |            |            |            |  |

 

Rail Car SubleaseAgreements —Dakota Ethanol has agreements with third parties for the sublease of 50 railcars for the shipment of distiller’s dried grains that are not being utilizedby Dakota Ethanol. The agreements expire in December of 2010. Revenuesduring the remaining term of the lease will be $270,000.

 

Dakota Ethanol receives an incentive payment from the State of SouthDakota to produce ethanol. In accordance with the terms of this arrangement,revenue is recorded based on ethanol sold. Incentive revenue of $641,649,$623,515, and $750,000, was recorded for the years ended December 31, 2009,2008 and 2007, respectively. Dakota Ethanol did not receive the annual maximumfor the 2009 program year due to budget constraints on the State of SouthDakota program and will not likely receive the annual maximum under the 2010program year.

 

**NOTE 10 -     RELATED PARTY TRANSACTIONS**

 

On April, 1 2007, DakotaEthanol purchased a 9% interest in RPMG, in which Dakota Ethanol has enteredinto an ethanol marketing agreement for the exclusive rights to market, selland distribute the entire ethanol inventory produced by Dakota Ethanol. The marketing fees are included in net revenues.

 

On August 1, 2008,Dakota Ethanol entered into a dried distiller’s grains marketing agreement withRPMG for the exclusive rights to market, sell and distribute the entire drieddistiller’s grains inventory produced by Dakota Ethanol.

 

Sales and marketing feesrelated to the agreements are as follows:

 
| ** **                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                        |       |                              |       |   |   |   |   |
| Sales ethanol                               |       | $                                 | 76,313,982 |   | $ | 96,258,317 |   | $ | 67,181,000 |   |
| Sales distiller’s grains               |       | 6,183,806                         |       | 2,843,819 |   | — |   |
|                                        |       |                              |       |   |   |   |   |
| Marketing fees ethanol                      |       | 197,985                           |       | 193,360 |   | 137,000 |   |
| Marketing fees distillers grains            |       | 88,533                            |       | 33,748 |   | — |   |
|                                        |       |                              |       |   |   |   |   |
| Amounts due included in accounts receivable |       | 2,973,282                         |       | 2,049,739 |   | 4,424,712 |   |
|                                             |            |                                   |            |  |  |  |  |  |  |  |

 

Additional agreementswith related parties are included in Note 9.

 

**NOTE 11 -     TIF BOND GUARANTEE**

 

During December 2003,Dakota Ethanol entered into an agreement to guarantee a bond issued by LakeCounty, South Dakota. The bond issue was in conjunction with the refunding ofthe tax increment financing (TIF) bond issued by Lake County in 2001, of whichDakota Ethanol was the recipient of the proceeds. During 2003, Lake Countybecame aware 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 of2003, Lake County refunded the 2001 bond issue replacing it with two separatebonds. A tax-exempt bond in the amount of $824,599 and a taxable bond in theamount of $1,323,024 were issued. As a part of the refunding, Dakota Ethanolentered into the agreement to guarantee the taxable bond issue. The taxeslevied on

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2009 AND 2008**

 

Dakota Ethanol’s propertywill first go towards the semiannual debt service of the tax-exempt bonds andany remaining taxes will be used for the debt service of the taxable bonds.Dakota Ethanol guarantees any shortfall in debt service for the taxable bonds.The guarantee expires in December of 2018.

 

The maximum amount ofestimated future payments on the taxable bond debt service is $1,369,951 as of December 31,2009. The carrying amount of the guarantee liability on Dakota Ethanol’sbalance sheet is $200,278, which represents the estimated shortfall between thetaxable bond amount and the amount of taxes estimated to be collected on DakotaEthanol’s property.

 

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

 

| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|------------------------------------|------------|------------|------------|
| 2010                               |       | $          | 52,485     |   |
| 2011                               |       | 52,382     |       |
| 2012                               |       | 52,145     |       |
| 2013                               |       | 34,540     |       |
| 2014                               |       | 8,726      |       |
|                                    |            |            |            |  |

 

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

 

**NOTE 12 -     CAPTIVE INSURANCE**

 

The Company participatesin a captive insurance company (Captive).  The Captive insures lossesrelated to general liability, property and casualty, workman’s compensation andautomobiles.  Premiums are accrued by the Company through a charge toincome in the period to which the premium relates.  The Captive reinsurescatastrophic losses in excess of a predetermined amount.  The Company’spremiums are structured such that the Company is self-insured for the estimatedamount of losses related to the above coverage, and take into account theCompany’s liability for deductible per incident.  Amounts in excess of theCompany’s deductible, but less than the catastrophic loss limit, are insured bythe Captive.

 

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# **LAKE AREA CORNPROCESSORS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2009 AND 2008**

 

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

 

Summary quarterly resultsare as follows:

 
| ** **                                  | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|---------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                  | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Year  ended December 31, 2009          |       |        |       |        |       |        |       |        |       |
| Total  revenues                             |       | $           | 20,975,004 |        | $          | 22,487,000  |       | $           | 20,705,138 |   | $ | 26,173,500 |   |
| Gross  profit (loss)                        |       | 38,588      |       | 1,030,400   |       | 1,255,086   |       | 6,357,082   |       |
| Income  (loss) from operations              |       | (663,874    | )          | 283,257     |       | 568,372     |       | 5,535,592   |       |
| Net  income (loss)                          |       | (1,250,020  | )          | 182,653     |       | 375,551     |       | 5,566,585   |       |
| Basic  and diluted earnings (loss) per unit |       | (0.04       | )          | 0.01        |       | 0.01        |       | 0.19        |       |
|                                        |       |        |       |        |       |        |       |        |       |
| Year  ended December 31, 2008          |       |        |       |        |       |        |       |        |       |
| Total  revenues                             |       | $           | 26,478,012 |        | $          | 29,916,456  |       | $           | 31,200,349 |   | $ | 24,183,771 |   |
| Gross  profit (loss)                        |       | 12,049,847  |       | 11,643,197  |       | (20,416,898 | )          | (16,910,614 | )          |
| Income  (loss) from operations              |       | 10,948,791  |       | 10,654,549  |       | (21,252,764 | )          | (17,519,318 | )          |
| Net  income (loss)                          |       | 10,736,498  |       | 10,502,321  |       | (21,359,855 | )          | (16,492,413 | )          |
| Basic  and diluted earnings (loss) per unit |       | 0.36        |       | 0.35        |       | (0.72       | )          | (0.55       | )          |
|                                        |       |        |       |        |       |        |       |        |       |
| Year  ended December 31, 2007          |       |        |       |        |       |        |       |        |       |
| Total  revenues                             |       | $           | 27,769,149 |        | $          | 27,647,758  |       | $           | 24,466,924 |   | $ | 23,855,868 |   |
| Gross  profit                               |       | 3,371,737   |       | 7,872,608   |       | 5,419,955   |       | 6,097,732   |       |
| Income  from operations                     |       | 2,454,649   |       | 6,943,447   |       | 4,485,537   |       | 5,156,586   |       |
| Net  income                                 |       | 2,322,466   |       | 6,835,926   |       | 4,474,171   |       | 4,372,642   |       |
| Basic  and diluted earnings per unit        |       | 0.08        |       | 0.23        |       | 0.15        |       | 0.15        |       |

 

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.

 

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**ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

None

 

**ITEM 9A(T).           CONTROLS AND PROCEDURES.**

 

**DisclosureControls and Procedures**

 

Our management, including our President and ChiefExecutive Officer (the principal executive officer), Scott Mundt, along withour Chief Financial Officer (the principal financial officer), Robbi Buchholtz,have reviewed and evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) underthe Securities Exchange Act of 1934, as amended) as of December 31, 2009. Basedon this review and evaluation, these officers have concluded that ourdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods required by the forms and rules of the Securities and ExchangeCommission; and to ensure that the information required to be disclosed by anissuer in the reports that it files or submits under the Exchange Act isaccumulated and communicated to our management including our principalexecutive and principal financial officers, or persons performing similarfunctions, as appropriate to allow timely decisions regarding requireddisclosure.

 

**InternalControl Over Financial Reporting**

 

InherentLimitations Over Internal Controls

 

Our internal control over financial reporting isdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. Our internal controlover financial reporting includes those policies and procedures that:

 

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

 

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

 

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

 

Management, including our Chief Executive Officerand Chief Financial Officer, does not expect that our internal controls willprevent or detect all errors and all fraud. A control system, no matter howwell designed and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of internal controls can provide absolute assurance that all controlissues and instances of fraud, if any, have been detected. Also, any evaluationof the effectiveness of controls in future periods are subject to the risk thatthose internal controls may become inadequate because of changes in businessconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

 

Management’sAnnual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) underthe Securities Exchange Act of 1934, as amended). Management

 

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conductedan evaluation of the effectiveness of our internal control over financialreporting based on the criteria set forth in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (“COSO”). Based on this evaluation, management has concluded thatour internal control over financial reporting was effective as of December 31,2009.

 

This annual report does not include an attestationreport of our registered public accounting firm regarding internal control overfinancial reporting. Management’s report was not subject to attestation by ourregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit us to provide only management’sreport in this annual report.

 

Changesin Internal Control Over Financial Reporting

 

There were no changes in our internal control overfinancial reporting during the fourth quarter of our 2009 fiscal year, whichwere identified in connection with management’s evaluation required byparagraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**ITEM 9B.               OTHERINFORMATION.**

 

None.

 

**PART III****.**

 

Pursuant toGeneral Instruction G(3), we omit Part III, Items 10, 11, 12, 13 and 14and incorporate such items by reference to an amendment to this Annual Reporton Form 10-K or to a definitive information statement to be filed with theSecurities and Exchange Commission within 120 days after the close of thefiscal year covered by this Annual Report (December 31, 2009).

 

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

 

The informationrequired by this Item is incorporated by reference to the 2010 InformationStatement.

 

**ITEM 11.               EXECUTIVECOMPENSATION**

 

The informationrequired by this Item is incorporated by reference to the 2010 InformationStatement.

 

**ITEM 12.****                                          ****SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The informationrequired by this Item is incorporated by reference to the 2010 InformationStatement.

 

**ITEM 13.               CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

The informationrequired by this Item is incorporated by reference to the 2010 InformationStatement.

 

**ITEM 14.               PRINCIPALACCOUNTANT FEES AND SERVICES**

 

The informationrequired by this Item is incorporated by reference to the 2010 InformationStatement.

 

**PART IV.**

 

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

 

The followingexhibits and financial statements are filed as part of, or are incorporated byreference into, this report:

 

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(1)           FinancialStatements — Reference is made to the “Index to Financial Statements” of LakeArea Corn Processors, LLC located under Part II Item 8 of this report fora list of the financial statements and schedules for the fiscal year ended December 31,2009, 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 areidentified in the Exhibit Index set forth below.

 

Thefollowing exhibits are filed as part of this report. Exhibits previously filedare incorporated by reference, as noted.

** **
| **Exhibit  No.** | ** ** | **Exhibit**                                                                                                                                        | ** ** | **Filed  Herewith** | ** ** | **Incorporated by Reference**                                                                                                                                |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Plan  of Reorganization.                                                                                                                           |       |                |       | Filed  as Exhibit 2.1 on the registrant’s Form S-4 filed with the  Commission on August 2, 2001 and incorporated by reference herein.    |
|             |       |                                                                                                                                               |       |                |       |                                                                                                                                                         |
| 3.1              |       | Articles  of organization of the registrant.                                                                                                       |       |                |       | Filed  as Exhibit 3.1 on the registrant’s Form S-4 filed with the  Commission on August 2, 2001 and incorporated by reference herein.    |
|             |       |                                                                                                                                               |       |                |       |                                                                                                                                                         |
| 3.2              |       | Amended  and restated operating agreement of the registrant.                                                                                       |       |                |       | Filed  as Exhibit 3.6 on the registrant’s Form 10-K filed with the  Commission on March 31, 2005 and incorporated by reference herein.   |
|             |       |                                                                                                                                               |       |                |       |                                                                                                                                                         |
| 3.3              |       | First  amendment to the amended and restated operating agreement of the registrant.                                                                |       |                |       | Filed  as Exhibit 99.1 on the registrant’s Form 8-K filed with the  Commission on March 19, 2007 and incorporated by reference herein.   |
|             |       |                                                                                                                                               |       |                |       |                                                                                                                                                         |
| 10.1             |       | Twelfth  Amendment to the Construction Loan Agreement dated January 12, 2009  between First National Bank of Omaha and Dakota Ethanol, L.L.C. |       |                |       | Filed  as Exhibit 99.1 on the registrant’s Form 8-K filed with the  Commission on January 20, 2009 and incorporated by reference herein. |
|             |       |                                                                                                                                               |       |                |       |                                                                                                                                                         |
| 10.2             |       | Revolving  Promissory Note dated January 12, 2009 between First National Bank of  Omaha and Dakota Ethanol, L.L.C.                            |       |                |       | Filed  as Exhibit 99.2 on the registrant’s Form 8-K filed with the  Commission on January 20, 2009 and incorporated by reference herein. |
|             |       |                                                                                                                                               |       |                |       |                                                                                                                                                         |
| 10.3             |       | Promissory  Note (Term Note 5 Reducing Revolver) dated January 12, 2009 between  First National Bank of Omaha and Dakota Ethanol, L.L.C.      |       |                |       | Filed  as Exhibit 99.3 on the registrant’s Form 8-K filed with the  Commission on January 20, 2009 and incorporated by reference herein. |
|             |       |                                                                                                                                               |       |                |       |                                                                                                                                                         |
| 10.4             |       | Distillers  Grains Marketing Agreement dated July 15, 2008 between RPMG, Inc. and Dakota Ethanol, L.L.C. +                               |       |                |       | Filed  as Exhibit 10.1 on the registrant’s Form 10-Q filed with the  Commission on August 14, 2008 and incorporated by reference herein. |
|             |       |                                                                                                                                               |       |                |       |                                                                                                                                                         |
| 10.5             |       | Contribution Agreement  between Renewable Products Marketing Group, LLC and Dakota Ethanol, L.L.C.  dated April 1, 2007.                      |       |                |       | Filed  as Exhibit 10.1 on the registrant’s Form 10-Q filed with the  Commission on August 14, 2007 and incorporated by reference herein. |

 

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| 10.6   |   | Member Ethanol Fuel  Marketing Agreement between Renewable Products Marketing Group, LLC and  Dakota Ethanol, L.L.C. dated April 1, 2007.      |   |   |   | Filed  as Exhibit 10.2. on the registrant’s Form 10-Q filed with the  Commission on August 14, 2007 and incorporated by reference herein. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                |   |   |   |                                                                                                                                                          |
| 10.7   |   | Addendum to Water  Purchase Agreement dated February 28, 2007 between Big Sioux Community  Water Systems, Inc. and Dakota Ethanol, L.L.C. |   |   |   | Filed  as Exhibit 10.1 on the registrant’s Form 10-K filed with the  Commission on March 30, 2007.                                        |
|   |   |                                                                                                                                                |   |   |   |                                                                                                                                                          |
| 10.8   |   | Eighth Amendment to the  Construction Loan Agreement dated June 30, 2006 between First National  Bank of Omaha and Dakota Ethanol, L.L.C.      |   |   |   | Filed  as Exhibit 10.2 on the registrant’s Form 10-Q filed with the  Commission on August 14, 2006 and incorporated by reference herein.  |
|   |   |                                                                                                                                                |   |   |   |                                                                                                                                                          |
| 10.9   |   | Sixth Amendment to the  Construction Loan Agreement dated March 23, 2006 between First National  Bank of Omaha and Dakota Ethanol, L.L.C.      |   |   |   | Filed  as Exhibit 10.1 on the registrant’s Form 10-Q filed with the  Commission on May 15, 2006 and incorporated by reference herein.     |
|   |   |                                                                                                                                                |   |   |   |                                                                                                                                                          |
| 10.10  |   | Risk Management  Agreement dated November 28, 2005 between FCStone, LLC and Dakota  Ethanol, L.L.C.                                            |   |   |   | Filed  as Exhibit 10.1 on the registrant’s Form 8-K filed with the  Commission on December 2, 2005 and incorporated by reference herein.  |
|   |   |                                                                                                                                                |   |   |   |                                                                                                                                                          |
| 10.11  |   | Distiller’s Grain  Marketing Agreement dated November 28, 2005 between Commodity  Specialists Company and Dakota Ethanol, L.L.C.          |   |   |   | Filed as  Exhibit 10.2 on the registrant’s Form 8-K filed with the Commission on December 2, 2005 and incorporated by reference  herein.  |
|   |   |                                                                                                                                                |   |   |   |                                                                                                                                                          |
| 10.12  |   | Fourth Amendment to  Construction Loan Agreement dated April 22, 2005 between First National  Bank of Omaha and Dakota Ethanol, L.L.C.         |   |   |   | Filed as  Exhibit 10. 1 on the registrant’s Form 10-Q filed with the  Commission on May 16, 2005 and incorporated by reference herein.    |
|   |   |                                                                                                                                                |   |   |   |                                                                                                                                                          |
| 10.13  |   | Revolving Promissory  Note dated April 21, 2005 between First National Bank of Omaha and  Dakota Ethanol, L.L.C.                               |   |   |   | Filed as  Exhibit 10.2 on the registrant’s Form 10-Q filed with the  Commission on May 16, 2005 and incorporated by reference herein.     |
|   |   |                                                                                                                                                |   |   |   |                                                                                                                                                          |
| 10.14  |   | Employment Agreement  between Scott Mundt and Dakota Ethanol, L.L.C. dated October 17, 2005.                                                   |   |   |   | Filed as  Exhibit 10.9 on the registrant’s Form 10-K filed with the Commission on March 30,  2006 and  incorporated by reference herein.  |
|   |   |                                                                                                                                                |   |   |   |                                                                                                                                                          |
| 10.15  |   | Thirteenth  Amendment to the Construction Loan Agreement dated March 31, 2009  between First National Bank of Omaha and Dakota Ethanol, L.L.C. |   |   |   | Filed as  Exhibit 10.15 on the registrant’s Form 10-K filed with the Commission on March 31,  2009 and  incorporated by reference herein. |
|   |   |                                                                                                                                                |   |   |   |                                                                                                                                                          |
| 10.16  |   | Employment  Agreement between Scott Mundt and Dakota Ethanol, L.L.C. dated April 1,  2009                                                      |   |   |   | Filed as  Exhibit 10.1 on the registrant’s Form 10-Q filed with the Commission on  May 15, 2009 and incorporated by reference herein.     |
|   |   |                                                                                                                                                |   |   |   |                                                                                                                                                          |
| 10.17  |   | First  Amended and Restated Construction Loan Agreement dated June 18, 2009  between First National Bank of Omaha and Dakota Ethanol, L.L.C.   |   |   |   | Filed as  Exhibit 10.1 on the registrant’s Form 10-Q filed with the Commission on  August 12, 2009 and incorporated by reference herein.  |
|   |   |                                                                                                                                                |   |   |   |                                                                                                                                                          |
| 10.18  |   | Corn  Oil Marketing Agreement dated August 11, 2009 between RPMG, Inc.  and Dakota Ethanol, L.L.C. +                                      |   |   |   | Filed as  Exhibit 10.2 on the registrant’s Form 10-Q filed with the Commission on  August 12, 2009 and incorporated by reference herein.  |

 

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| 31.1   |   | Certificate  Pursuant to 17 CFR 240.13a-14(a)        |   | X      |   | Filed  herewith |
|--------|--------|------------------------------------------------------|--------|--------|--------|-----------------|
|   |   |                                                 |   |   |   |            |
| 31.2   |   | Certificate  Pursuant to 17 CFR 240.13a-14(a)        |   | X      |   | Filed  herewith |
|   |   |                                                 |   |   |   |            |
| 32.1   |   | Certificate  Pursuant to 18 U.S.C. Section 1350 |   | X      |   | Filed  herewith |
|   |   |                                                 |   |   |   |            |
| 32.2   |   | Certificate  Pursuant to 18 U.S.C. Section 1350 |   | X      |   | Filed  herewith |

 

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+ Confidential Treatment Requested

 

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**SIGNATURES**

 

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

 
|                      | LAKE  AREA CORN PROCESSORS, LLC               |
|---------------------------|-----------------------------------------------|
|                      |                                          |
|                      |                                          |
| Date: March 31, 2010 | /s/  Scott Mundt                              |
|                      | Scott  Mundt                                  |
|                      | President  and Chief Executive Officer        |
|                      | (Principal  Executive Officer)                |
|                      |                                          |
|                      |                                          |
| Date: March 31, 2010 | /s/  Robbi Buchholtz                          |
|                      | Robbi  Buchholtz                              |
|                      | Chief  Financial Officer                      |
|                      | (Principal  Financial and Accounting Officer) |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 

 

| Date:  March 31, 2010 |   | /s/  Douglas Van Duyn      |
|----------------------------|--------|----------------------------|
|                       |   | Douglas  Van Duyn, Manager |
|                       |   |                       |
|                       |   |                       |
| Date:  March 31, 2010 |   | /s/  Brian Woldt           |
|                       |   | Brian  Woldt, Manager      |
|                       |   |                       |
|                       |   |                       |
| Date:  March 31, 2010 |   | /s/  Randy Hansen          |
|                       |   | Randy  Hansen, Manager     |
|                       |   |                       |
|                       |   |                       |
| Date:  March 31, 2010 |   | /s/  Rick Kasperson        |
|                       |   | Rick  Kasperson, Manager   |
|                       |   |                       |
|                       |   |                       |
| Date:  March 31, 2010 |   | /s/  Ronald Alverson       |
|                       |   | Ronald  Alverson, Manager  |
|                       |   |                       |
|                       |   |                       |
| Date:  March 31, 2010 |   | /s/  Dale Thompson         |
|                       |   | Dale  Thompson, Manager    |
|                       |   |                       |
|                       |   |                       |
| Date:  March 31, 2010 |   | /s/  Todd Brown            |
|                       |   | Todd  Brown, Manager       |

 

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