**UNITED STATES SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 
| **ý** |   | **Annual report pursuant to Section 13  or 15(d) of the Securities Exchange Act of 1934.**     |
|------------|--------|----------------------------------------------------------------------------------------------------------|
|       |   | ** **                                                                                               |
|       |   | **For the  fiscal year ended December 31, 2005**                                                    |
|       |   | ** **                                                                                               |
|       |   | **or**                                                                                                   |
|       |   | ** **                                                                                               |
| **o**      |   | **Transition report pursuant to Section 13  or 15(d) of the Securities Exchange Act of 1934.** |

 

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**LAKE AREA CORN PROCESSORS, LLC**

(Exact name of small businessissuer as specified in its charter)

 
| **South Dakota**                                                 |   | **0-50254**               |   | **46-0460790**                        |
|------------------------------------------------------------------|--------|---------------------------|--------|---------------------------------------|
| (State or  other jurisdiction of  incorporation or organization) |   | (Commission  File Number) |   | (I.R.S.  Employer Identification No.) |
|                                                             |   |                      |   |                                  |
| **46269 SD  Highway 34**                                         |
| **P.O. Box  100**                                           |
| **Wentworth,  South Dakota 57075**                               |
| (Address of principal  executive offices)                        |
|                                                             |   |                      |   |                                  |
| **(605) 483-2676**                                               |
| (Issuer’s  telephone number)                                |

 

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Securities registeredpursuant to Section 12(b) of the Exchange Act:  **None**

 

Securities registeredpursuant to Section 12(g) of the Exchange Act:  **Membership Units**

 

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Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405of the Securities Act.  o  Yes   ý  No

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes  ý No

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   ý  Yes  o  No

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.   ý

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer (asdefined in Rule 12b-2 of the Act).

Large Accelerated Filer  o   AcceleratedFiler  o   Non-acceleratedFiler  ý

 

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

o Yes     ý  No

 

The aggregate market value of the registrant’smembership units held by non-affiliates of the registrant was $63,386,800computed by reference to the price at which membership units were last sold.

 

As of the date of this filing, there are 29,620,000membership 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 proxy statement to be filedwith the Securities and Exchange Commission within 120 days after the close ofthe fiscal year covered by this Annual Report.

 

 

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**INDEX**

 
| **PART I**  | ** **                                                                                                   |
|------------------|--------------------------------------------------------------------------------------------------------------|
| ** **       | **ITEM 1. BUSINESS**                                                                                         | ** ** |
| ** **       | **ITEM 1A. RISK FACTORS**                                                                                    | ** ** |
| ** **       | **ITEM 2. PROPERTIES**                                                                                       | ** ** |
| ** **       | **ITEM 3. LEGAL PROCEEDINGS**                                                                                | ** ** |
| ** **       | **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                              | ** ** |
| **PART II** | ** **                                                                                                   |
| ** **       | **ITEM 5. MARKET FOR MEMBERSHIP UNITS AND RELATED MEMBER MATTERS**                                           | ** ** |
| ** **       | **ITEM 6. SELECTED FINANCIAL DATA**                                                                          | ** ** |
| ** **       | **ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATION**      | ** ** |
|             | **ITEM 7A. QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK**                                     | ** ** |
| ** **       | **ITEM 8.  FINANCIAL STATEMENTS**                                                                            | ** ** |
| ** **       | **ITEM  9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL  DISCLOSURES**          | ** ** |
| ** **       | **ITEM  9A. CONTROLS AND PROCEDURES**                                                                        | ** ** |
| ** **       | **ITEM  9B. OTHER INFORMATION**                                                                              | ** ** |
| **PART III**     | ** **                                                                                                   |
| ** **       | **ITEM  10. MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT**                                              | ** ** |
| ** **       | **ITEM  11. EXECUTIVE COMPENSATION**                                                                         | ** ** |
| ** **       | **ITEM 12. SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** | ** ** |
| ** **       | **ITEM  13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**                                                 | ** ** |
| ** **       | **ITEM  14. PRINCIPAL ACCOUNTING FEES AND SERVICES**                                                         | ** ** |
| **PART IV**      | ** **                                                                                                   |
| ** **       | **ITEM  15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**                                                        | ** ** |
| **SIGNATURES**   |                                                                                                         |

 

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**CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING STATEMENTS**

 

This annual report contains historical information,as well as forward-looking statements that involve known and unknown risks andrelate to future events, our future financial performance, or our expectedfuture operations and actions.  In somecases, you can identify forward-looking statements by terminology 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 current information and involve numerousassumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-lookingstatements for many reasons, including the reasons described in this report.  Whileit is impossible to identify all such factors, factors that could cause actualresults to differ materially from those estimated by us include:

 

•                      Overcapacity within the ethanol industrycausing supply to exceed demand;

 

•                      Actual ethanol and distillers grainsproduction varying from expectations;

 

•                      Availability and costs of products and rawmaterials, particularly corn and natural gas;

 

•                      Changes in the price and market for ethanoland distillers grains;

 

•                      Our ability to market and our reliance onthird parties to market our products;

 

•                      Changes in or elimination of governmentallaws, tariffs, trade or other controls or enforcement practices such as:

 

•                  national, state or local energy policy;

•                  federal ethanol tax incentives;

•                  legislation establishing a renewable fuelstandard or other legislation mandating the use of ethanol or other oxygenateadditives;

•                  state and federal regulation restricting orbanning the use of MTBE; or

•                  environmental laws and regulations that applyto our plant operations and their enforcement;

 

•                      Changes in the weather or general economicconditions impacting the availability and price of corn and natural gas;

 

•                      Total U.S. consumption of gasoline;

 

•                      Fluctuations in petroleum prices;

 

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

 

•                      Costs of construction and equipment;

 

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

 

•                      Results of our hedging strategies;

 

•                      Changes in interest rates or the availabilityof credit;

 

•                      Our ability to generate free cash flow toinvest in our business and service our debt;

 

•                      Our liability resulting from litigation;

 

•                      Our ability to retain key employees andmaintain labor relations;

 

•                      Changes and advances in ethanol productiontechnology;

 

•                      Competition from alternative fuels andalternative fuel additives; and

 

•                      Other factors described elsewhere in thisreport.

 

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The cautionary statementsreferred to in this section also should be considered in connection withany subsequent written or oral forward-looking statements that may be issued byus or persons acting on our behalf.  Weundertake no duty to update these forward-looking statements, even though oursituation may change in the future. Furthermore, we cannot guarantee futureresults, 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.

 

**PART I.**

 

**ITEM 1.****                                                     BUSINESS.**

 

**Overview**

 

Lake Area Corn Processors, LLC (the “Company”)is a South Dakota limited liability company that owns and manages an 88%interest in Dakota Ethanol, LLC.  Severalmembers of the Broin family own the remaining minority interest.  Dakota Ethanol, LLC owns and operates an ethanol plant located near Wentworth, SouthDakota that has a nameplate production capacity of 40 million gallons ofethanol per year.  Lake Area CornProcessors, LLC is referred to in this report as “LACP,” the “company,” “we,”or “us.”  Dakota Ethanol, LLC is referredto in this report as “Dakota Ethanol” or the “ethanol plant.”

 

Since September 4, 2001, Dakota Ethanol hasbeen engaged in the production of ethanol and distillers grains.  Fuel grade ethanol is Dakota Ethanol’sprimary product accounting for the majority of its revenue.  DakotaEthanol also sells distillers grains, a principal co-product of the ethanolproduction process.  In 2005, Dakota Ethanol processed approximately17.2 million bushels of corn into approximately 47.5 million gallons ofethanol.  Dakota Ethanol also processed approximately 149,000 tons ofdistillers grains in 2005.  In 2006, we anticipate that Dakota Ethanolwill produce approximately 48 million gallons of ethanol and 150,000 tons ofdistillers grains from approximately 17.2 million bushels of corn.  There is no assurance that Dakota Ethanolwill be able to operate at these production levels.

 

**General Development of Business since January 1,2005**

 

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

 

Our 88%ownership interest in Dakota Ethanol represents substantially all of ourassets.  Dakota Ethanol owns and operatesan ethanolplant near Wentworth, South Dakota that has a nameplate production capacity of40 million gallons of ethanol per year, but generally operates above itsnameplate capacity, producing approximately 48 million gallons of ethanol peryear.  The plant commenced operations on September 4, 2001.  As owner of an 88% interest in Dakota Ethanol,we manage and control the affairs of Dakota Ethanol.  The Broin family owns a 12% minority interestin Dakota Ethanol and elects two of seven members of the Board of Managers ofDakota Ethanol.  Under the operatingagreement of Dakota Ethanol, revenues generated from plant operations aredistributed to us in proportion to our equity ownership in Dakota Ethanol.  We distribute the revenues received fromDakota Ethanol to our unit holders in proportion to the number of units held byeach unit holder.

 

Dakota Ethanol underwent asignificant change in its mode of operations on June 6, 2005, when itelected not to renew its management agreement and other marketing agreementswith Broin Management, LLC and other various Broin-related entities.  Between June 6, 2005 and December 31,2005, Dakota Ethanol and the Broin-related entities negotiated termination ofthe contracts, and Dakota Ethanol entered into agreements with new riskmanagement and marketing service providers. In addition, on December 16, 2005, Dakota Ethanol entered into anemployment agreement with Scott Mundt to serve in the position of TransitionCoordinator.  Mr. Mundt’s employmentbegan on October 17, 2005, the effective date of the employmentagreement.  Effective January 1, 

 

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2006, Mr. Mundt’s position changed to GeneralManager.  Mr. Mundt’s duties includeday-to-day management of the operations of Dakota Ethanol.

 

**Available Information**

 

Thepublic may read and copy materials we file with the Securities and ExchangeCommission at the SEC’s Public Reference Room at 100 F Street NE,Washington, D.C., 20549.  Information onthe operation of the Public Reference Room may be obtained by calling theSEC at 1-800-SEC-0330.  In addition, theSEC maintains an Internet site that contains reports, proxy and informationstatements and other information regarding issuers that file electronicallywith the SEC.  Reports we fileelectronically with the SEC may be obtained at http://www.sec.gov.  In addition, information about us is also available at ourwebsite at*http://www.dakotaethanol.com/lacp.html*, which includes links toreports we have filed with the Securities and Exchange Commission.  The contents of our website are notincorporated by reference in this Annual Report on Form 10-K.

 

**FinancialInformation**

 

Pleaserefer to “**Item 7 – Management’s Discussion and Analysis of FinancialCondition and Results of Operations**” forinformation about our revenues, profit and loss measurements and total assets and“**Item 8 - Financial Statements andSupplementary Data**” for our consolidated financial statements.

 

**Principal Productsand Their Markets**

 

The principal productsproduced at the Dakota Ethanol plant are fuel grade ethanol and distillersgrains.

 

***Ethanol***

 

  Ethanol is ethyl alcohol, a fuel componentmade primarily from corn and various other grains.  According to the Renewable FuelsAssociation, approximately 85 percent of ethanol in the United Statestoday is produced from corn, and approximately 90 percent of ethanol isproduced from a corn and other input mix. Corn produces large quantities ofcarbohydrates, which convert into glucose more easily than most other kinds ofbiomass. As of February 2006, the Renewable Fuels Association estimateddomestic ethanol capacity at approximately 4.4 billion gallons.

 

An ethanolplant is essentially a fermentation plant. Ground corn and water are mixed with enzymes and yeast to produce asubstance called “beer,” which contains about 10% alcohol and 90% water.  The “beer” is boiled to separate the water,resulting in ethyl alcohol, which is then dehydrated to increase the alcoholcontent.  This product is then mixed witha certified denaturant to make the product unfit for human consumption andcommercially saleable.

 

Ethanol canbe used as: (i) an octane enhancer in fuels; (ii) an oxygenated fueladditive for the purpose of reducing ozone and carbon monoxide vehicleemissions; and (iii) a non-petroleum-based gasoline substitute.  Approximately 95% of all ethanol is used inits primary form for blending with unleaded gasoline and other fuelproducts.  Used as a fuel oxygenate,ethanol provides a means to control carbon monoxide emissions in largemetropolitan areas where oxygenated fuels are required during certain times ofthe year.  The principal purchasers ofethanol are generally wholesale gasoline marketers or blenders.  The principal markets for our ethanol arepetroleum terminals in the continental United States.

 

DakotaEthanol began producing ethanol in September 2001.  For our fiscal year ended December 31,2005, revenues from sales of ethanol were approximately 86% of our totalrevenues.  The following table shows thepercentage of our total revenues that were from sales of ethanol for each ofthe last three fiscal years:

 
| **Fiscal Year**               | ** ** | **Percentage of Revenues  from Sales of Ethanol** | ** ** |
|-------------------------------|------------|---------------------------------------------------|------------|
| Ended December 31,  2005 |       | 86                                                | %          |
| Ended December 31,  2004 |       | 85                                                | %          |
| Ended December 31,  2003 |       | 82                                                | %          |

 

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***DistillersGrains***

 

A principalco-product of the ethanol production process is distillers grains, a highprotein, high-energy animal feed supplement primarily marketed to the dairy andbeef industry.  Distillers grains containby-pass protein that is superior to other protein supplements such ascottonseed meal and soybean meal. By-pass proteins are more digestible to the animal, thus generatinggreater lactation in milk cows and greater weight gain in beef cattle.  Dry mill ethanol processing creates fourforms of distillers grains: Distillers Wet Grains (“DWS”), Distillers ModifiedWet Grains (“DMWS”), Condensed Distillers Solubles (CDS) and Distillers DriedGrains with Solubles (“DDGS”).  DWS isprocessed corn mash that contains approximately 70% moisture.  DWS has a shelf life of approximately sevendays and can be sold only to farms within the immediate vicinity of an ethanolplant.  DMWS is DWS that has been driedto approximately 50% moisture.  DMWS havea slightly longer shelf life of approximately ten days and are 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 to10% to 12% moisture.  DDGS has an almostindefinite shelf life and may be sold and shipped to any market regardless ofits vicinity to an ethanol plant.  At ourplant, the composition of the distillers grains we produce is approximately 3%DWS, 4% DMWS, 3% CDS and 90% DDGS.

 

For ourfiscal year ended December 31, 2005, revenues from sales of distillersgrains were approximately 13% of our total revenues.  The following table shows the percentage ofour total revenues that were from sales of distillers grains for each of thelast three fiscal years:

 
| **Fiscal Year**               | ** ** | **Percentage of Revenues  from Sales of Distillers Grains** | ** ** |
|-------------------------------|------------|-------------------------------------------------------------|------------|
| Ended December 31,  2005 |       | 13                                                          | %          |
| Ended December 31,  2004 |       | 14                                                          | %          |
| Ended December 31,  2003 |       | 16                                                          | %          |

 

**Distribution of Principal Products**

 

The ethanolplant is located near Wentworth, South Dakota in Lake County, in eastern SouthDakota.  We selected the Wentworth sitebecause of its location to existing grain production, accessibility to road andrail transportation and its proximity to major population centers.  It is also served by the Burlington NorthernSanta Fe railroad system.  It is in closeproximity to multiple state highways and is near Interstate Highways 29 and 90.

 

***EthanolDistribution***

 

From the date Dakota Ethanolbegan operations through the fiscal year ended December 31, 2005, DakotaEthanol has marketed the ethanol produced at the plant through an exclusivemarketing agreement with Ethanol Products, LLC (“Ethanol Products”), a Broinaffiliate.  Under the agreement, EthanolProducts purchased and marketed all of the ethanol produced at the plant.Pursuant to the marketing agreement, Ethanol Products was responsible fordetermining the price and terms at which the ethanol acquired from the plantwas sold and to whom it was sold.  The price received by Dakota Ethanolfrom the sale of ethanol was based upon the price that Ethanol Productsreceives from the sale of ethanol to its customers, minus a fee. EthanolProducts’ principal customers are major, multi-national oil companies withblending and refinery facilities located throughout the continental UnitedStates.  Ethanol Products sells ethanolto these customers through short-term supply contracts, after which the ethanolis shipped by Ethanol Products from the plant to these customers’ terminalslocated in the Midwest, Pacific Northwest, South, Southwest, and East.  The ethanol is shipped using rail carsoperated by Ethanol Products or trucks supplied by companies with which EthanolProducts contracts.  On June 6,2005, Dakota Ethanol elected not to renew its agreement with Ethanol Productsand agreed that termination would become effective as of January 1, 2006.

 

On November 30, 2005, Dakota Ethanolentered into an Ethanol Fuel Marketing Agreement with Renewable ProductsMarketing Group (“RPMG”) of Belle Plaine, Minnesota for the purposes ofmarketing and distributing our ethanol. Under this agreement, we had the option of using a pooled ornon-pooled marketing

 

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arrangement.  We have elected to use a pooled marketingarrangement, which means that the ethanol we produce is pooled with otherethanol producers and marketed by RPMG. We pay RPMG a pooling fee for ethanol delivered to the pool, and RPMGpays us a netback price per gallon that is based upon the difference betweenthe pooled average delivered ethanol selling price and the pooled averagedistribution expense.  These averages arecalculated based upon each pool participant’s selling price and expenseaveraged in direct proportion to the volume of ethanol supplied by eachparticipant to the pool.  Beginning December 31,2006, Dakota Ethanol will be eligible to purchase an ownership interest in RMPGthrough certain forms of capital contributions. We expect to enter intoa membership agreement with the current members of RPMG pursuant to which weexpect to purchase an interest in RPMG.  The term ofthe ethanol marketing agreement with RMPG ends on March 31, 2007; theagreement renews automatically for additional one-year terms unless priorwritten notice of non-renewal is provided by either party.

 

***DistillersGrains Distribution***

 

From the date Dakota Ethanolbegan operations through the fiscal year ended December 31, 2005, DakotaEthanol marketed its distillers grains through a contract with BroinEnterprises, Inc. d/b/a Dakota Gold Marketing, a Broin affiliate, tomarket all of the distillers grains produced at the plant.  Five types ofdistillers grains were produced by Dakota Ethanol and marketed by Dakota GoldMarketing: DDGS, Dakota GoldTM, distillers wet grains, condensed distillerssolubles and modified distillers grains. Dakota GoldTM is DDGS with an added certification from Dakota GoldMarketing that the DDGS meets certain processing and production standards.

 

Under the marketingagreement, Dakota Gold Marketing marketed Dakota Gold TM, DDGS, distillers wetgrains and modified distillers grains to local, regional and nationalmarkets.  Approximately 60% of distillersgrains were shipped to national markets, primarily in the southwestern UnitedStates, and the rest to local and regional markets.  Shipments of DakotaGold and DDGS are primarily made by rail, whereas shipments of distillers wetgrains and modified distillers grains are made by truck.  Dakota Ethanolalso contracts with Dakota Gold Marketing for the use of railcars in theshipping of Dakota Gold and DDGS, paying Dakota Gold Marketing a flat fee perrailcar in connection with each shipment.  Although Dakota Ethanol reliedexclusively upon Dakota Gold Marketing to market its distillers grains, DakotaGold Marketing is not dependent upon one or a limited number of majorcustomers.  On June 6, 2005, DakotaEthanol elected not to renew its agreement with Dakota Gold Marketing andagreed to a termination date of December 1, 2005.

 

On November 28, 2005, Dakota Ethanolentered into a Distillers Grain Marketing Agreement with Commodity SpecialistsCompany (CSC) of Minneapolis, Minnesota for the purpose of marketing thedistillers dried grains we produce. Under the terms of the agreement, CSC markets our distillers dried grains, and we receive apercentage of the selling price actually received by CSC in marketing ourdistillers grains to its customers. The term of the agreement begins on December 1,2005 and renews automatically for an additional term of one year unless priorwritten notice of non-renewal is provided by either party.

 

Beginning on December 1, 2005, DakotaEthanol began marketing distillers wet grains, condensed distillers solublesand modified distillers grains without the use of an external marketer.  Shipments of these products are made to localmarkets by truck.

 

**Seasonal Factors in Business**

 

In an effort to improve airquality in regions where carbon monoxide and ozone are a problem, theFederal Oxygen Program of the Clean Air Act requires the sale of oxygenatedmotor fuels during the winter months in certain major metropolitan areas.  Gasolinethat is blended with ethanol has a higher oxygen content than gasoline thatdoes not contain ethanol.  As a result, we expect fairly light seasonalitywith respect to our gross profit margins on our ethanol allowing us to,potentially, be able to sell our ethanol at a slight premium during themandated oxygenate period.  Conversely, we expect our average sales pricefor fuel-grade ethanol to be a little lower during the summer, when fuel-gradeethanol is primarily used as an octane enhancer or a fuel supply extender.

 

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**Sources andAvailability of Raw Materials**

 

***CornFeedstock Supply***

 

The major raw materialrequired for our ethanol plant to produce ethanol and distillers grain iscorn.  To operate at a name-plate capacity of 40 million gallons, the plant requires a supplyof approximately 14 million bushelsof corn annually.  The plant currentlyoperates in excess of its nameplate capacity, producing approximately 48million gallons of ethanol annually from approximately 17 million bushels ofcorn.  The plant’s location near Wentworth in Lake County, South Dakota currently provides an amplesupply of corn to meet and exceed the name-plate production capacity of theplant.  The 2004 corn crop was the largest corn crop on record withnational production at approximately 11.8 billion bushels and South Dakota cornproduction at approximately 539 million bushels.  South Dakota cornproduction in 2005 was estimated at 470 million bushels.  National corn production in 2005 wasestimated to be approximately 11.1 billion bushels, which is the second largeston record exceeded only by the 2004 crop.

 

For thefiscal year ended December 31, 2005, Dakota Ethanol operated under anagreement with Broin Management, LLC for price risk management related to cornrequirements of the plant.  However,Dakota Ethanol terminated the agreement effective January 1, 2006.

 

On November 28, 2005, Dakota Ethanolentered into a Risk Management Contract with FCStone, LLC (“FCStone”) of WestDes Moines, Iowa.  Under the contract,FCStone will provide all risk management services and programs relating toDakota Ethanol’s production and sale of ethanol and distillers grains.  In exchange for these services, DakotaEthanol will pay FCStone a fee of $3,333.33 per month, which is based on a rateof $0.001 per gallon of ethanol produced and an annual production capacity of40 million gallons.  In addition, DakotaEthanol will pay any commission, fee, service charge or mark-up arising fromany option, futures or other risk management or cash commodity transactionexecuted or brokered through FCStone, not to exceed $12.50 per round turn forexchange-traded futures and options contracts and equal to $10.00 per roundturn for over-the-counter transactions. The term of the contract began on November 10, 2005 and continuesuntil October 31, 2006, at which time the contract renews automaticallyfor additional one-year terms unless prior written notice of non-renewal isprovided by either party.

 

***NaturalGas***

 

Natural gas is also an important input to ourmanufacturing process.  Dakota Ethanol uses natural gas to dry itsdistillers grains products to moisture contents at which they can be stored forlong periods and transported greater distances, so that they can be marketed tobroader livestock markets, including poultry and swine markets in the continentalUnited States.  Dakota Ethanol contractswith NorthWestern Energy for its natural gas. Under our agreement, the price for our natural gas is based on marketrates.  The agreement is in effect until2011 and automatically renews for one-year terms.  Since operations were commenced in 2001,there have been no interruptions in the supply of natural gas from NorthWesternEnergy, and all of Dakota Ethanol’s natural gas requirements have been met.

 

***Electricity***

 

Electricity is necessaryfor lighting and powering much of the machinery and equipment used in theproduction process.  Dakota Ethanolcontracts with Sioux Valley Energy, Inc. to provide all of the electricpower and energy 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.  Dakota Ethanol has had no interruption or shortages in thesupply of electricity to the plant since operations were commenced in 2001.

 

***Water***

 

Water is a necessarypart of the production process.  It isused in the fermentation process and to produce steam for the cooking,evaporation, and distillation processes. Dakota Ethanol contracts with Big Sioux Community Water System, Inc.to supply and meet its water requirements for the ethanol and distillers grainsproduction process.  Dakota Ethanol’sagreement with Big Sioux is for automatically renewing five-year terms.  Since Dakota Ethanol’s operations werecommenced in September 2001, Dakota Ethanol has had no interruption in thesupply of water as all its requirements have been met.

 

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**Federal Ethanol Supports**

 

The ethanolindustry is heavily dependent on several economic incentives to produceethanol, including federal ethanol supports. The most recent ethanol supports are contained in the Energy Policy Actof 2005.  Most notably, the Act creates a7.5 billion gallon Renewable Fuels Standard (“RFS”).  The RFS requires refiners to use4 billion gallons of renewable fuels in 2006, increasing to7.5 billion gallons by 2012.  On December 28,2005, the EPA released interim rules governing the implementation of the2006 RFS requirement.  The EPA’s interim rule imposesa collective compliance approach, which means the requirement for 2006 fuel useis determined in the aggregate rather than on a refiner-by-refiner basis.  The EPA adopted this approach for 2006because current uncertainties regarding the RFS might result in unnecessarilyhigh costs of compliance if each party was required to independentlycomply.  Although there is not arequirement for individual parties to demonstrate compliance in 2006, the EPAfound that increases in ethanol production and projections for future demandindicate that the 2006 volume is likely to be met.  However, in the unlikely event that the RFSis not met in 2006, the EPA expects to adjust the volume requirement in 2007 tocover the deficit. There are no other consequences for failure to collectivelymeet the 2006 standard.  The EPA expectsto promulgate more comprehensive regulations by August 8, 2006, but theinterim rules and collective compliance approach are expected to apply forthe entire 2006 calendar year.  In 2007and subsequent years, the EPA expects to specifically identify liable parties,determine the applicable RFS, and develop a credit trading program.  Further, the standards for compliance,record-keeping and reporting are expected to be clarified.

 

Historically,ethanol sales have also been favorably affected by the Clean Air Act amendmentsof 1990, particularly the Federal Oxygen Program which became effective November 1,1992.  The Federal Oxygen Programrequires the sale of oxygenated motor fuels during the winter months in certainmajor metropolitan areas to reduce carbon monoxide pollution.  Ethanol use has increased due to a secondClean Air Act program, the Reformulated Gasoline Program.  This program became effective January 1,1995, and requires the sale of reformulated gasoline in nine major urban areasto reduce pollutants, including those that contribute to ground level ozone,better known as smog.  The two majoroxygenates added to reformulated gasoline pursuant to these programs are MTBEand ethanol, however MTBE has caused groundwater contamination and has beenbanned from use by many states.  AlthoughtheEnergy Policy Act of 2005 did not impose a national ban of MTBE, its failure toinclude liability protection for manufacturers of MTBE is expected to result inrefiners and blenders using ethanol as an oxygenate rather than MTBE to satisfythe reformulated gasoline oxygenate requirement.  While this may create increased demand in theshort-term, we do not expect this to have a long term impact on the demand forethanol as the Act repeals the Clean Air Act’s 2% oxygenate requirement forreformulated gasoline.  However, the Actdid not repeal the 2.7% oxygenate requirement for carbon monoxidenon-attainment areas which are required to use oxygenated fuels in the wintermonths.  While we expect ethanol to bethe oxygenate of choice in these areas, there is no assurance that ethanol willin fact be used.

 

The use of ethanol as analternative fuel source has been aided by federal tax policy.  On October 22, 2004, President Bush signed H.R. 4520, whichcontained the Volumetric Ethanol Excise Tax Credit (“VEETC”) and amended thefederal excise tax structure effective as of January 1, 2005.  Prior to VEETC, ethanol-blended fuel wastaxed at a lower rate than regular gasoline (13.2 cents on a 10% blend).  Under VEETC, the ethanol excise tax exemptionhas been eliminated, thereby allowing the full federal excise tax of 18.4 centsper gallon of gasoline to be collected on all gasoline and allocated to thehighway trust fund.  This is expected toadd approximately $1.4 billion to the highway trust fund revenue annually.  In place of the exemption, the bill creates anew volumetric ethanol excise tax credit of 5.1 cents per gallon of ethanol blendedat 10%.  Refiners and gasoline blendersapply for this credit on the same tax form as before only it is a credit fromgeneral revenue, not the highway trust fund. Based on volume, the VEETC is expected to allow much greater refineryflexibility in blending ethanol since it makes the tax credit available on allethanol blended with all gasoline, diesel and ethyl tertiary butyl ether (“ETBE”),including ethanol in E-85 and the E-20 in Minnesota.  The VEETC is scheduled to expire on December 31,2010.

 

The Energy Policy Act of 2005 expands who qualifies for the smallethanol producer tax credit. Historically, small ethanol producers were allowed a 10-cents-per-gallonproduction income tax credit on up to 15 million gallons of productionannually.  The size of the plant eligiblefor the tax credit was limited to 30 million gallons.  Under the Energy Policy Act of 2005 the sizelimitation on the production capacity for small ethanol producers increasesfrom 30 million to 60 million gallons. As a result, we expect that Dakota Ethanol will qualify

 

9

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under this definition under its currentnameplate production capacity of 40 million gallons of ethanol per year.  The credit can be taken on the first 15million gallons of production.  The taxcredit is capped at $1.5 million per year per producer.  The credit is effective for taxable yearsending after the date of enactment.

 

In addition,the Energy Policy Act of 2005 creates a new tax credit that permits taxpayersto claim a 30% credit (up to $30,000) for the cost of installing clean-fuelvehicle refueling equipment, such as an E85 fuel pump, to be used in a trade orbusiness of the taxpayer or installed at the principal residence of thetaxpayer. Under the provision, clean fuels are any fuel of at least 85% of thevolume of which consists of ethanol, natural gas, compressed natural gas,liquefied natural gas, liquefied petroleum gas, and hydrogen and any mixture ofdiesel fuel and biodiesel containing at least 20% biodiesel.  The provision is effective for equipmentplaced in service December 31, 2005 and before January 1, 2010. Whileit is unclear how this credit will affect the demand for ethanol in the shortterm, we expect it will help raise consumer awareness of alternative sources offuel and could positively impact future demand for ethanol.

 

Additionally, Congressprovides an ethanol production incentive to ethanol producers through theUnited States Department of Agriculture Commodity Credit Corporation’s BioenergyProgram.  Under the program, incentive payments are allocated to ethanolproducers based primarily on an increase in gallons of ethanol producedcompared to the prior year’s production.  These payments are based upon increases in ethanol production relative toprevious years.  The receipt of these additional program payments issubject to the continued availability of program funds, which may be reduced asa result of increased participation in the program by new and expanding plantsas well as decreased federal funding.  The Bioenergy Program is scheduledto expire at the end of the federal government’s 2006 fiscal year.

 

The ethanolindustry and our business depend upon continuation of the federal ethanolsupports discussed above.  Theseincentives have supported a market for ethanol that might disappear without theincentives.  Alternatively, theincentives may be continued at lower levels than at which they currentlyexist.  The elimination or reduction ofsuch federal ethanol supports would make it more costly for us to sell ourethanol and would likely reduce our net income.

 

**Our Competition**

 

We will be in direct competition with numerousother ethanol producers, many of whom have greater resources than we do. Wealso expect that additional ethanol producers will enter the market if thedemand for ethanol continues to increase. Ethanol is a commodity product, like corn, which means our ethanol plant competes with other ethanol producers on thebasis of price and production efficiency, to a lesser extent, deliveryservice.  We believe we compete favorablywith other ethanol producers due to our proximity to ample grain supplies andmultiple modes of transportation.

 

The ethanol industry has grown to over 95production facilities in the United States. There are also numerous other producer and privately owned ethanolplants planned and operating throughout the Midwest and elsewhere in the UnitedStates.  The largestethanol producers include Abengoa Bioenergy Corp., Archer Daniels Midland,Aventine Renewable Energy, Inc., Cargill, Inc., New Energy Corp. andVeraSun Energy Corporation, all of which are capable of producing more ethanolthan we expect to produce.  ArcherDaniels Midland recently announced its plan to add approximately 500 milliongallons per year of additional ethanol production capacity in the UnitedStates. ADM is currently the largest ethanol producer in the U.S. and controlsa significant portion of the ethanol market. ADM’s plan to produce anadditional 500 million gallons of ethanol per year will strengthen itsposition in the ethanol industry and cause a significant increase in domesticethanol supply.

 

According tothe Renewable Fuels Association, excluding our plant, South Dakota currentlyhas 10 ethanol plants with a production capacity of approximately 420 milliongallons per year.  In addition,expansions of existing plants and at least 2 plants currently underconstruction are expected to add at least an additional 128 million gallons ofannual capacity.  The following map depictsthe South Dakota Ethanol plants currently in operation:

 

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Source:  Iowa StateUniversity, Iowa Beef Center

 

The following table identifies most ofthe ethanol producers in the United States along with their productioncapacities:

 

**U.S. FUELETHANOL PRODUCTION CAPACITY**million gallons per year (mmgy)

 
| **Company**                        | ** ** | **Location**     | ** ** | **Feedstock** | ** ** | **Current  Capacity  (mmgy)** | ** ** | **Under  Construction/  Expansions  (mmgy)** | ** ** |
|------------------------------------|------------|------------------|------------|---------------|------------|-------------------------------|------------|----------------------------------------------|------------|
| Abengoa Bioenergy Corp.            |       | York, NE         |       | Corn/milo     |       | 55                            |       |                                         |       |
|                               |       | Colwich, KS      |       |          |       | 25                            |       |                                         |       |
|                               |       | Portales, NM     |       |          |       | 30                            |       |                                         |       |
|                               |       | Ravenna, NE      |       |          |       |                          |       | 88                                           |       |
| ACE Ethanol, LLC                   |       | Stanley, WI      |       | Corn          |       | 39                            |       |                                         |       |
| Adkins Energy, LLC*                |       | Lena, IL         |       | Corn          |       | 40                            |       |                                         |       |
| Advanced Bioenergy                 |       | Fairmont, NE     |       | Corn          |       |                          |       | 100                                          |       |
| AGP*                               |       | Hastings, NE     |       | Corn          |       | 52                            |       |                                         |       |
| Agra Resources Coop. d.b.a.  EXOL* |       | Albert Lea, MN   |       | Corn          |       | 40                            |       | 8                                            |       |
| Agri-Energy, LLC*                  |       | Luverne, MN      |       | Corn          |       | 21                            |       |                                         |       |
| Alchem Ltd. LLLP                   |       | Grafton, ND      |       | Corn          |       | 10.5                          |       |                                         |       |
| Al-Corn Clean Fuel*                |       | Claremont, MN    |       | Corn          |       | 35                            |       |                                         |       |
| Amaizing Energy, LLC*              |       | Denison, IA      |       | Corn          |       | 40                            |       |                                         |       |
| Archer Daniels Midland             |       | Decatur, IL      |       | Corn          |       | 1,070                         |       |                                         |       |
|                               |       | Cedar Rapids, IA |       | Corn          |       |                          |       |                                         |       |
|                               |       | Clinton, IA      |       | Corn          |       |                          |       |                                         |       |
|                               |       | Columbus, NE     |       | Corn          |       |                          |       |                                         |       |
|                               |       | Marshall, MN     |       | Corn          |       |                          |       |                                         |       |
|                               |       | Peoria, IL       |       | Corn          |       |                          |       |                                         |       |
|                               |       | Wallhalla, ND    |       | Corn/barley   |       |                          |       |                                         |       |

 

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| ASAlliances Biofuels, LLC             |   | Albion, NE          |   | Corn        |   |   |   | 100    |   |
|---------------------------------------|--------|---------------------|--------|-------------|--------|--------|--------|--------|--------|
|                                  |   | Linden, IN          |   | Corn        |   |   |   | 100    |   |
| Aventine Renewable Energy,  LLC       |   | Pekin, IL           |   | Corn        |   | 100    |   | 57     |   |
|                                  |   | Aurora, NE          |   | Corn        |   | 50     |   |   |   |
| Badger State Ethanol, LLC*            |   | Monroe, WI          |   | Corn        |   | 48     |   |   |   |
| Big River Resources, LLC*             |   | West Burlington, IA |   | Corn        |   | 40     |   |   |   |
| Blue Flint Ethanol                    |   | Underwood, ND       |   | Corn        |   | 50     |   |   |   |
| Broin Enterprises, Inc.          |   | Scotland, SD        |   | Corn        |   | 9      |   |   |   |
| Bushmills Ethanol, Inc.*         |   | Atwater, MN         |   | Corn        |   | 40     |   |   |   |
| Cargill, Inc.                    |   | Blair, NE           |   | Corn        |   | 85     |   |   |   |
|                                  |   | Eddyville, IA       |   | Corn        |   | 35     |   |   |   |
| Central Indiana Ethanol, LLC          |   | Marion, IN          |   | Corn        |   |   |   | 40     |   |
| Central MN Ethanol Coop*              |   | Little Falls, MN    |   | Corn        |   | 21.5   |   |   |   |
| Central Wisconsin Alcohol             |   | Plover, WI          |   | Seed corn   |   | 4      |   |   |   |
| Chief Ethanol                         |   | Hastings, NE        |   | Corn        |   | 62     |   |   |   |
| Chippewa Valley Ethanol Co.*          |   | Benson, MN          |   | Corn        |   | 45     |   |   |   |
| Commonwealth Agri-Energy,  LLC*       |   | Hopkinsville, KY    |   | Corn        |   | 24     |   | 9      |   |
| Corn, LP*                             |   | Goldfield, IA       |   | Corn        |   | 50     |   |   |   |
| Cornhusker Energy Lexington,  LLC     |   | Lexington, NE       |   | Corn        |   |   |   | 40     |   |
| Corn Plus, LLP*                       |   | Winnebago, MN       |   | Corn        |   | 44     |   |   |   |
| Dakota Ethanol, LLC*                  |   | Wentworth, SD       |   | Corn        |   | 50     |   |   |   |
| DENCO, LLC*                           |   | Morris, MN          |   | Corn        |   | 21.5   |   |   |   |
| E3 Biofuels                           |   | Mead, NE            |   | Corn        |   |   |   | 24     |   |
| East Kansas Agri-Energy, LLC*         |   | Garnett, KS         |   | Corn        |   | 35     |   |   |   |
| ESE Alcohol Inc.                      |   | Leoti, KS           |   | Seed corn   |   | 1.5    |   |   |   |
| Ethanol2000, LLP*                     |   | Bingham Lake, MN    |   | Corn        |   | 32     |   |   |   |
| Frontier Ethanol, LLC                 |   | Gowrie, IA          |   | Corn        |   |   |   | 60     |   |
| Front Range Energy, LLC               |   | Windsor, CO         |   | Corn        |   |   |   | 40     |   |
| Glacial Lakes Energy, LLC*            |   | Watertown, SD       |   | Corn        |   | 50     |   |   |   |
| Golden Cheese Company of  California* |   | Corona, CA          |   | Cheese whey |   | 5      |   |   |   |
| Golden Grain Energy, LLC*             |   | Mason City, IA      |   | Corn        |   | 40     |   |   |   |
| Golden Triangle Energy, LLC*          |   | Craig, MO           |   | Corn        |   | 20     |   |   |   |
| Grain Processing Corp.                |   | Muscatine, IA       |   | Corn        |   | 20     |   |   |   |
| Granite Falls Energy, LLC             |   | Granite Falls, MN   |   | Corn        |   | 45     |   |   |   |
| Great Plains Ethanol, LLC*            |   | Chancellor, SD      |   | Corn        |   | 50     |   |   |   |
| Green Plains Renewable Energy         |   | Shenandoah, IA      |   | Corn        |   |   |   | 50     |   |
| Hawkeye Renewables, LLC               |   | Iowa Falls, IA      |   | Corn        |   | 50     |   | 50     |   |
|                                  |   | Fairbank, IA        |   | Corn        |   |   |   | 100    |   |
| Heartland Corn Products*              |   | Winthrop, MN        |   | Corn        |   | 36     |   |   |   |
| Heartland Grain Fuels, LP*            |   | Aberdeen, SD        |   | Corn        |   | 9      |   |   |   |
|                                  |   | Huron, SD           |   | Corn        |   | 12     |   | 18     |   |
| Heron Lake BioEnergy, LLC             |   | Heron Lake, MN      |   | Corn        |   |   |   | 50     |   |
| Horizon Ethanol, LLC                  |   | Jewell, IA          |   | Corn        |   | 60     |   |   |   |
| Husker Ag, LLC*                       |   | Plainview, NE       |   | Corn        |   | 26.5   |   |   |   |

 

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| Illinois River Energy, LLC           |   | Rochelle, IL       |   | Corn                       |   |   |   | 50     |   |
|--------------------------------------|--------|--------------------|--------|----------------------------|--------|--------|--------|--------|--------|
| Iowa Ethanol, LLC*                   |   | Hanlontown, IA     |   | Corn                       |   | 50     |   |   |   |
| Iroquois Bio-Energy Company,  LLC    |   | Rensselaer, IN     |   | Corn                       |   |   |   | 40     |   |
| James Valley Ethanol, LLC            |   | Groton, SD         |   | Corn                       |   | 50     |   |   |   |
| KAAPA Ethanol, LLC*                  |   | Minden, NE         |   | Corn                       |   | 40     |   |   |   |
| Land O’ Lakes*                  |   | Melrose, MN        |   | Cheese whey                |   | 2.6    |   |   |   |
| Lincolnland Agri-Energy, LLC*        |   | Palestine, IL      |   | Corn                       |   | 48     |   |   |   |
| Lincolnway Energy, LLC*              |   | Nevada, IA         |   | Corn                       |   |   |   | 50     |   |
| Liquid Resources of Ohio             |   | Medina, OH         |   | Waste Beverage             |   | 3      |   |   |   |
| Little Sioux Corn Processors,  LP*   |   | Marcus, IA         |   | Corn                       |   | 52     |   |   |   |
| Merrick/Coors                        |   | Golden, CO         |   | Waste beer                 |   | 1.5    |   | 1.5    |   |
| MGP Ingredients, Inc.           |   | Pekin, IL          |   | Corn/wheat starch          |   | 78     |   |   |   |
|                                 |   | Atchison, KS       |   |                       |   |   |   |   |   |
| Michigan Ethanol, LLC                |   | Caro, MI           |   | Corn                       |   | 50     |   |   |   |
| Mid America Agri  Products/Wheatland |   | Madrid, NE         |   | Corn                       |   |   |   | 44     |   |
| Mid-Missouri Energy, Inc.*      |   | Malta Bend, MO     |   | Corn                       |   | 45     |   |   |   |
| Midwest Grain Processors*            |   | Lakota, IA         |   | Corn                       |   | 95     |   |   |   |
|                                 |   | Riga, MI           |   | Corn                       |   |   |   | 57     |   |
| Midwest Renewable Energy, LLC        |   | Sutherland, NE     |   | Corn                       |   | 17.5   |   | 4.5    |   |
| Minnesota Energy*                    |   | Buffalo Lake, MN   |   | Corn                       |   | 18     |   |   |   |
| Missouri Ethanol                     |   | Laddonia, MO       |   | Corn                       |   |   |   | 45     |   |
| New Energy Corp.                     |   | South Bend, IN     |   | Corn                       |   | 102    |   |   |   |
| North Country Ethanol, LLC*          |   | Rosholt, SD        |   | Corn                       |   | 20     |   |   |   |
| Northeast Missouri Grain,  LLC*      |   | Macon, MO          |   | Corn                       |   | 45     |   |   |   |
| Northern Lights Ethanol, LLC*        |   | Big Stone City, SD |   | Corn                       |   | 50     |   |   |   |
| Northstar Ethanol, LLC               |   | Lake Crystal, MN   |   | Corn                       |   | 52     |   |   |   |
| Otter Creek Ethanol, LLC*            |   | Ashton, IA         |   | Corn                       |   | 55     |   |   |   |
| Pacific Ethanol                      |   | Madera, CA         |   | Corn                       |   |   |   | 35     |   |
| Panhandle Energies of Dumas,  LP     |   | Dumas, TX          |   | Corn/Grain Sorghum         |   |   |   | 30     |   |
| Parallel Products                    |   | Louisville, KY     |   | Beverage waste             |   | 5.4    |   |   |   |
|                                 |   | R. Cucamonga, CA   |   |                       |   |   |   |   |   |
| Permeate Refining                    |   | Hopkinton, IA      |   | Sugars & starches |   | 1.5    |   |   |   |
| Phoenix Biofuels                     |   | Goshen, CA         |   | Corn                       |   | 25     |   |   |   |
| Pinal Energy, LLC                    |   | Maricopa, AZ       |   | Corn                       |   |   |   | 55     |   |
| Pine Lake Corn Processors,  LLC*     |   | Steamboat Rock, IA |   | Corn                       |   | 20     |   |   |   |
| Platte Valley Fuel Ethanol,  LLC     |   | Central City, NE   |   | Corn                       |   | 40     |   |   |   |
| Prairie Ethanol, LLC                 |   | Loomis, SD         |   | Corn                       |   |   |   | 60     |   |
| Prairie Horizon Agri-Energy,  LLC    |   | Phillipsburg, KS   |   | Corn                       |   |   |   | 40     |   |
| Pro-Corn, LLC*                       |   | Preston, MN        |   | Corn                       |   | 42     |   |   |   |
| Quad-County Corn Processors*         |   | Galva, IA          |   | Corn                       |   | 27     |   |   |   |
| Red Trail Energy, LLC                |   | Richardton, ND     |   | Corn                       |   |   |   | 50     |   |
| Redfield Energy, LLC                 |   | Redfield, SD       |   | Corn                       |   |   |   | 50     |   |
| Reeve Agri-Energy                    |   | Garden City, KS    |   | Corn/milo                  |   | 12     |   |   |   |

 

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| Siouxland Energy &  Livestock Coop*                      |   | Sioux Center, IA |   | Corn              |       | 25         |       | 10       |   |
|-------------------------------------------------------------------|--------|------------------|--------|-------------------|------------|------------|------------|----------|--------|
| Siouxland Ethanol, LLC                                            |   | Jackson, NE      |   | Corn              |       |       |       | 50       |   |
| Sioux River Ethanol, LLC*                                         |   | Hudson, SD       |   | Corn              |       | 55         |       |     |   |
| Sterling Ethanol, LLC                                             |   | Sterling, CO     |   | Corn              |       | 42         |       |     |   |
| Tall Corn Ethanol, LLC*                                           |   | Coon Rapids, IA  |   | Corn              |       | 49         |       |     |   |
| Tate & Lyle                                              |   | Loudon, TN       |   | Corn              |       | 67         |       |     |   |
| The Andersons Albion Ethanol  LLC                                 |   | Albion, MI       |   | Corn              |       |       |       | 55       |   |
| Trenton Agri Products, LLC                                        |   | Trenton, NE      |   | Corn              |       | 35         |       | 10       |   |
| United WI Grain Producers,  LLC*                                  |   | Friesland, WI    |   | Corn              |       | 49         |       |     |   |
| US BioEnergy Corp.                                                |   | Albert City, IA  |   | Corn              |       |       |       | 100      |   |
|                                                              |   | Lake Odessa, MI  |   | Corn              |       |       |       | 45       |   |
| U.S. Energy Partners, LLC                                         |   | Russell, KS      |   | Milo/wheat starch |       | 48         |       |     |   |
| Utica Energy, LLC                                                 |   | Oshkosh, WI      |   | Corn              |       | 48         |       |     |   |
| Val-E Ethanol, LLC                                                |   | Ord, NE          |   | Corn              |       |       |       | 45       |   |
| VeraSun Energy Corporation                                        |   | Aurora, SD       |   | Corn              |       | 230        |       | 110      |   |
|                                                              |   | Ft. Dodge, IA    |   | Corn              |       |       |       |     |   |
|                                                              |   | Charles City, IA |   | Corn              |       |       |       |     |   |
| Voyager Ethanol, LLC*                                             |   | Emmetsburg, IA   |   | Corn              |       | 52         |       |     |   |
| Western Plains Energy, LLC*                                       |   | Campus, KS       |   | Corn              |       | 45         |       |     |   |
| Western Wisconsin Renewable  Energy, LLC*                         |   | Boyceville, WI   |   | Corn              |       |       |       | 40       |   |
| Wind Gap Farms                                                    |   | Baconton, GA     |   | Brewery waste     |       | 0.4        |       |     |   |
| Wyoming Ethanol                                                   |   | Torrington, WY   |   | Corn              |       | 5          |       |     |   |
| Xethanol BioFuels, LLC                                            |   | Blairstown, IA   |   | Corn              |       | 5          |       |     |   |
| **Total  Current Capacity at**  **97 ethanol biorefineries** |   |             |   |              | ** ** | **4481.4** |       |     |   |
| **Total Under Construction (33)/  Expansions (9)**                |   |             |   |              |       |       | ** ** | **2061** |   |
| **Total Capacity**                                                |   |             |   |              | ** ** | **6542.4** |       |     |   |

 

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*farmer-owned Updated: March 20, 2006

 

***Competition with Ethanol Imported from Other Countries***

 

Ethanol production is also expandinginternationally.  Ethanol produced orprocessed in certain countries in Central American and the Caribbean region iseligible for tariff reduction or elimination upon importation to the UnitedStates under a program known as the Caribbean Basin Initiative.  Large ethanol producers, such as Cargill,have expressed interest in building dehydration plants in participatingCaribbean Basin countries, such as El Salvador, which would convert ethanolinto fuel-grade ethanol for shipment to the United States.  Ethanol imported from Caribbean Basincountries may be a less expensive alternative to domestically produced ethanoland may affect our ability to sell our ethanol profitably.

 

Brazilis currently the world’s largest producer and exporter of ethanol. In Brazil,ethanol is produced primarily from sugarcane, which is also used to producefood-grade sugar. Brazil experienced a dramatic increase in ethanol productionand trade in 2004, exporting approximately 112 million gallons to the U.S.alone. Reports in January 2006 estimated that Brazil producedapproximately 4.5 billion gallons of ethanol in 2005 and exported a total of554 million gallons of ethanol worldwide. Ethanol imported from Brazil may be a less expensive alternative todomestically produced ethanol, which is primarily made from corn. Competitionfrom ethanol imported from Brazil may affect our ability to sell our ethanolprofitably.

 

14

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***Competition from Alternative Fuels***

 

Our ethanolplant also competes with producers of other gasoline additives having similaroctane and oxygenate values as ethanol, such as producers of MTBE, a petrochemicalderived from methanol that costs less to produce than ethanol.  Although currently the subject of severalstate bans, many major oil companies can produce MTBE and because it ispetroleum-based, its use is strongly supported by major oil companies.

 

Alternative fuels, gasoline oxygenates andalternative ethanol production methods are also continually under development by ethanol and oil companies with fargreater resources. The major oil companies have significantly greater resourcesthan we have to develop alternative products and to influence legislation andpublic perception of MTBE and ethanol. New ethanol products or methods of ethanol production developed bylarger and better-financed competitors could provide them competitiveadvantages and harm our business.

 

***Distillers Grains Competition***

 

Our plant primarily competes with other ethanolproducers in the production and sales of distillers grains.  According to the University of Minnesota’sDDGS—General Information website (November 28, 2005) approximately3,200,000 to 3,500,000 tons of distillers grains are produced annually in NorthAmerica, approximately 98% of which are produced by ethanol plants. Theremaining 1 to 2% of DDGS is produced by the alcohol beverage industry.  Ethanol plants in South Dakota and Minnesotaproduce about 25% of this amount. The amount of distillers grains produced isexpected to increase significantly as the number of ethanol plantsincrease.  In addition, our distillersgrains compete with other livestock feed products such as soybean meal, corngluten feed, dry brewers grain and mill feeds.

 

**General Ethanol Demand and Supply**

 

Ethanol has important applications,primarily as a high-quality octane enhancer and an oxygenate capable ofreducing air pollution and improving automobile performance.  Ethanolcontains 35% oxygen by weight.  Whencombined with gasoline, ethanol acts as an oxygenate.  As a result, the gasoline burns cleaner, andreleases less carbon monoxide and other exhaust emissions into the atmosphere.

 

Accordingto the Renewable Fuels Association, demand for fuel ethanol in the UnitedStates continued increase in 2005.  Inits report titled, “Ethanol Industry Outlook 2006,” the Renewable FuelsAssociation anticipates demand for ethanol to remain strong.  The implementation of the Renewable FuelsStandard contained in the Energy Policy Act of 2005 is expected to favorablyimpact the ethanol industry by enhancing both the production and use ofethanol.  In addition, the passage of theVolumetric Ethanol Excise Tax Credit (“VEETC”), is expected to provide theflexibility necessary to expand ethanol blending into higher blends of ethanolsuch as E85, E diesel and fuel cell markets.

 

Theprovision of the Energy Policy Act of 2005 likely to have the greatest impacton the ethanol industry is the creation of a 7.5 billion gallon Renewable FuelsStandard (RFS). The RFS will begin at 4 billion gallons in 2006, increasing to7.5 billion gallons by 2012. The RFS is a national flexible program that doesnot require that any renewable fuels be used in any particular area or state,allowing refiners to use renewable fuel blends in those areas where it is mostcost-effective. According to the Renewable Fuels Association, the bill isexpected to lead to about $6 billion in new investment in ethanol plants acrossthe country. An increase in the number of new plants will bring an increase inthe supply of ethanol. Thus, while this bill may cause ethanol prices toincrease in the short term due to additional demand, future supply couldoutweigh the demand for ethanol in the future. This would have a negativeimpact on our earnings. Alternatively, since the RFS begins at 4 billiongallons in 2006 and national production is expected to exceed this amount,there could be a short-term oversupply until the RFS requirements exceednational production. This would have an immediate adverse effect on ourearnings.

 

In addition, demand forethanol may also increase as a result of increased consumption of E85 fuel. E85fuel is a blend of 70% to 85% ethanol and gasoline. According to the EnergyInformation Administration, E85 consumption is projected to increase from anational total of 11 million gallons in 2003 to 47 million gallons in2025. E85 is used as an aviation fuel and as a hydrogen source for fuel cells.According to the National Ethanol Vehicle Coalition, there are currently about4.5 million flexible fuel vehicles capable of operating on E85 in the U.S.

 

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and 400 retail stations supplying it. Automakershave indicated plans to produce an estimated 2 million more flexible fuelvehicles per year.  However, E85 usagemay be negatively impacted because of reduced fuel efficiency and requiredengine modification.

 

Thesupply of domestically produced ethanol is at an all-time high. The RenewableFuels Association estimates that ethanol production in 2005 reached a record 4billion gallons, an increase of 17% since 2004 and 126% since 2001.  The following table shows U.S. ethanol productioncapacity by state as of March 2006:

 

**EthanolProduction Capacity Ranked by State**(Largestto Smallest Production Capacity as of March 2006)

 

| **Rank** | ** ** | **State**           | ** ** | **Ethanol  Production Capacity  (Million Gallons Per Year)** | ** ** |
|----------|------------|---------------------|------------|--------------------------------------------------------------|------------|
| 1        |       | Iowa                |       | 1,809.5                                                      |       |
| 2        | ** ** | **Nebraska**        |       | 1,048.5                                                      |       |
| 3        |       | Illinois            |       | 881.0                                                        |       |
| 4        |       | South Dakota        |       | 603.0                                                        |       |
| 5        |       | Minnesota           |       | 593.6                                                        |       |
| 6        |       | Indiana             |       | 282.0                                                        |       |
| 7        |       | Wisconsin           |       | 228.0                                                        |       |
| 8        |       | Kansas              |       | 212.5                                                        |       |
| 9        |       | Michigan            |       | 207.0                                                        |       |
| 10       |       | Missouri            |       | 155.0                                                        |       |
| 11       |       | Colorado            |       | 85.0                                                         |       |
| 12       |       | North Dakota        |       | 83.5                                                         |       |
| 13       |       | California          |       | 68.0                                                         |       |
| 14       |       | Tennessee           |       | 67.0                                                         |       |
| 15       |       | Arizona             |       | 55.0                                                         |       |
| 16       |       | Kentucky            |       | 35.4                                                         |       |
| 17       |       | New Mexico          |       | 30.0                                                         |       |
| 18       |       | Texas               |       | 30.0                                                         |       |
| 19       |       | Wyoming             |       | 5.0                                                          |       |
| 20       |       | Ohio                |       | 3.0                                                          |       |
| 21       |       | Georgia             |       | 0.4                                                          |       |
|     |       | United States Total |       | 6,482.4                                                      |       |

 

Sources: Renewable Fuels Association, Washington, DC.  Nebraska Energy Office,Lincoln, NE.

 

Ethanol supply is also affected by ethanolproduced or processed in certain countries in Central America and the Caribbeanregion.  A portion of the ethanol produced in these countries is eligiblefor tariff reduction or elimination upon importation to the United States undera program known as the Caribbean Basin Initiative (“CBI”).  Large ethanolproducers, such as Cargill, have expressed interest in building dehydrationplants in participating Caribbean Basin countries, such as El Salvador, whichwould convert ethanol into fuel-grade ethanol for shipment to the UnitedStates.  Ethanol imported from Caribbean Basin countries may be a lessexpensive alternative to domestically produced ethanol.  The InternationalTrade Commission recently announced the 2006 CBI import quota of 268.1 milliongallons of ethanol, up from 240.4 million gallons in 2005.  In the past,legislation was introduced in the Senate that would limit the transshipment of ethanolthrough the CBI.  It is possible that

 

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similarlegislation will be introduced this year, however, there is no assurance orguarantee that such legislation will be introduced or that it will besuccessfully passed.

 

**Research andDevelopment**

 

We do not conduct any research and developmentactivities associated with the development of new technologies for use inproducing ethanol and distillers grains.

 

**Dependence on One ora Few Major Customers**

 

As discussedabove, we have entered into marketing agreements for services related tomarketing and distributing our principal products, ethanol and distillersgrains.  Under our former agreement withBroin-related entities and our current agreements with RPMG and CSC, we rely onothers for the sale and distribution of almost all of our products, except forthose distillers grains that we market locally. Therefore, we expect to continue to be highly dependent on RPMG and CSCfor the successful marketing of our products. Any loss of RPMG or CSC as our marketing agent for our ethanol anddistillers grains or any lack of performance under the agreement or inabilityto secure competitive prices could have a significant negative impact on ourrevenues.

 

**Costs and Effects ofCompliance with Environmental Laws**

 

We aresubject to extensive air, water and other environmental regulations, and wehave been required to obtain a number of environmental permits to construct andoperate the plant.  We have obtained allof the necessary permits to operate the plant including, air pollutionconstruction permits, a pollutant discharge elimination system general permit,storm water discharge permits, a water withdrawal permit, and an alcohol fuelproducer’s permit.  In addition, we have completeda spill prevention control and countermeasures plan.  Although we have been successful in obtainingall of the permits currently required, any retroactive change in environmentalregulations, either at the federal or state level, could require us to obtainadditional or new permits or spend considerable resources on complying withsuch regulations.

 

In addition,we may be required to purchase and install equipment for controlling andimproving emissions.  In 2005, our costs of environmental compliancewere approximately $285,000, which includes the installation of pollutionequipment including a scrubber and vapor flare. We do not anticipate incurring additional significant expenses for suchequipment in 2006.

 

We aresubject to oversight activities by the EPA. There is always a risk that the EPA may enforce certain rules andregulations differently than South Dakota’s environmental administrators.  South Dakota or EPA rules are subject tochange, and any such changes could result in greater regulatory burdens onplant operations.  We could also besubject to environmental or nuisance claims from adjacent property owners orresidents in the area arising from possible foul smells or other air or waterdischarges from the plant.  Such claimsmay result in an adverse result in court if we are deemed to engage in anuisance that substantially impairs the fair use and enjoyment of real estate.

 

The government’sregulation of the environment changes constantly.  It is possible that more stringent federal orstate environmental rules or regulations could be adopted, which couldincrease our operating costs and expenses. It also is possible that federal or state environmental rules orregulations could be adopted that could have an adverse effect on the use ofethanol.  For example, changes in theenvironmental regulations regarding the required oxygen content of automobileemissions could have an adverse effect on the ethanol industry.  Furthermore, plant operations likely will begoverned by the Occupational Safety and Health Administration (“OSHA”).  OSHA regulations may change such that thecosts of the operation of the plant may increase.  Any of these regulatory factors may result inhigher costs or other materially adverse conditions effecting our operations,cash flows and financial performance.

 

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**Employees**

 

As of December 31, 2005, we had a totalof 38 full-time employees, including 32 full-time employees inethanol production operations and 6 full-time employees in general management andadministration.  We do not expect to hire a significant number of employees in the next12 months.

 

**ITEM 1A.****                                            RISKFACTORS.**

 

*You should carefully read and consider the risks and uncertaintiesbelow and the other information contained in this report.  The risks and uncertainties described beloware not the only ones we may face.  Thefollowing risks, together with additional risks and uncertainties not currentlyknown to us or that we currently deem immaterial could impair our financialcondition and results of operation.*

 

**Risks Relating to Our Business**

 

***We operate in anemerging growth industry. ***We commenced production of ethanol at ourplant in September 2001.  We haverecently terminated our contracts with Broin-related entities that have moreexperience in the ethanol industry than we do. Accordingly, we have a limited operating history from which you canevaluate our business and prospects.  Ouroperating results could fluctuate significantly in the future as a result of avariety of factors, including those discussed throughout these riskfactors.  Many of these factors areoutside our control.  As a result ofthese factors, our operating results may not be indicative of future operatingresults and you should not rely on them as indications of our futureperformance.  In addition, our prospectsmust be considered in light of the risks and uncertainties encountered by anearly-stage company and in rapidly growing industries, such as the ethanolindustry, where supply and demand may change substantially in a short amount oftime.

 

***Our business isnot diversified.***  Our success depends largely upon our abilityto profitably operate our ethanol plant. We do not have any other lines ofbusiness or other sources of revenue if we are unable to operate our ethanolplant and manufacture ethanol and distillers grains.  If economic or political factors adverselyaffect the market for ethanol, the company has no other line of business to fallback on if the ethanol business declines. Our business would also besignificantly harmed if our ethanol plant could not operate at full capacityfor any extended period of time.

 

***Ourfinancial performance is significantly dependent on corn and natural gasprices.**** *Our results of operations and financialcondition are significantly affected by the cost and supply of corn and naturalgas.  Generally, we cannot pass onincreases in input prices to our customers. Changes in the price and supply of corn and natural gas are subject toand determined by market forces over which we have no control.

 

Corn, as with most other crops, is affected byweather, 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 and 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 a period of high corn prices were to be sustained for some time, suchpricing may reduce our ability to generate revenues because of the higher costof operating and may make ethanol uneconomical to use in fuel markets.  If our region becomes saturated by ethanolplants, the corn for ethanol could consume a significant portion of the totalcorn production in our region, which would likely drive up local cornprices.  We cannot offer any assurancethat we will be able to offset any increase in the price of corn by increasingthe price of our products.  If we cannotoffset increases in the price of corn, our financial performance may bematerially and adversely affected.

 

Natural gas has recentlybeen available only at prices greatly exceeding historical averages. These prices are increasing our costs of production.  The prices for and availability of natural gas are subject to volatilemarket conditions, including supply shortages and infrastructureincapacities.  Significant disruptions inthe supply of natural gas could impair our ability to manufacture ethanol forour customers.  Furthermore, increases innatural gas prices or changes in our natural gas costs relative to natural gascosts paid by competitors may adversely affect our results of operations andfinancial condition.

 

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We seek to minimize the risks from fluctuations inthe prices of corn and natural gas through the use of hedging instruments.  However, these hedging transactions alsoinvolve risks to our business.  See “**Risks Relating to Our Business -*****We engage in hedging transactions***.”

 

***The spread between ethanol and corn prices can vary significantly. ***Corn costs significantly impact our cost of goods sold.  Our grossmargins are principally dependent upon the spread between ethanol and cornprices.  Recently, the spread betweenethanol and corn prices has been at historically high levels, due in large partto high oil prices and low corn prices. However, this spread fluctuated significantly in 2005 and may fluctuatesignificantly in the future.  Anyreduction in the spread between ethanol and corn prices, whether as a result ofan increase in corn prices or a reduction in ethanol prices, would adverselyaffect our results of operations and financial condition.

 

***Our revenues will be greatly affected by the price at which we can sellour ethanol and distillers grains.*** The prices of ethanol and distillers grains can be volatile as aresult of a number of factors. These factors include the overall supply anddemand, the price of gasoline, level of government support, and theavailability and price of competing products. For instance, the price ofethanol tends to increase as the price of gasoline increases, and the price ofethanol tends to decrease as the price of gasoline decreases. Any lowering ofgasoline prices will likely also lead to lower prices for ethanol, which maydecrease our ethanol sales and reduce revenues.

 

Theprice of ethanol has recently been much higher than its 10-year average. We donot expect these prices to be sustainable as supply from new and existingethanol plants increases to meet increased demand. Increased production ofethanol may lead to lower prices. The increased production of ethanol couldhave other adverse effects. For example, the increased production could lead toincreased supplies of co-products from the production of ethanol, such asdistillers grains. Those increased supplies could outpace demand, which wouldlead to lower prices for those by-products. Also, the increased production ofethanol could result in increased demand for corn. This could result in higherprices for corn and corn production creating lower profits. There can be noassurance as to the price of ethanol or distillers grains in the future. Anydownward changes in the price of ethanol and/or distillers grains may result inless income which would decrease our revenues and profitability.

 

***We sell all of the ethanolwe produce to RPMG under our ethanol marketing agreement.***** **RPMG is the solebuyer of all of our ethanol, and we rely heavily on its marketing efforts tosuccessfully sell our product.  BecauseRPMG sells ethanol for a number of other producers, we have limited controlover its sales efforts.  Our financialperformance is dependent upon the financial health of RPMG, as a significantportion of our accounts receivable are attributable to RPMG.  If RPMG breaches the ethanol marketingagreement or is not in the financial position to purchase and market all of theethanol we produce, we could experience a material loss and we may not have anyreadily available means to sell our ethanol, and our financial performance willbe adversely and materially affected.  Ifour agreement with RPMG terminates, we may seek other arrangements to sell ourethanol, including selling our own product, but we give no assurance that oursales efforts would achieve results comparable to those achieved by RPMG.

 

***We sell a substantialportion of the distillers grains we produce to CSC under our distillers grainsmarketing agreement.***** **CSC is the sole buyer of all of our distillers grains that we not selllocally, and we rely heavily on its marketing efforts to successfully sell ourproduct.  Because CSC sells distillersgrains for a number of other producers, we have limited control over its salesefforts.  Our financial performance isdependent upon the financial health of CSC, as a significant portion of ouraccounts receivable are attributable to CSC. If CSC breaches the distillers grains marketing agreement or is not inthe financial position to purchase and market all of the distillers grains weproduce, we could experience a material loss and we may not have any readily availablemeans to sell our distillers grains, and our financial performance will beadversely and materially affected.  Ifour agreement with CSC terminates, we may seek other arrangements to sell ourdistillers grains, including selling our own product, but we give no assurancethat our sales efforts would achieve results comparable to those achieved byCSC.

 

***We engage in hedging transactions that may be costly and ineffective.***  Weare exposed to market risk from changes in commodity prices.  Exposure tocommodity price risk results from our dependence on corn and natural gas in theethanol production process.  We seek to minimize the risks fromfluctuations in the prices of corn and natural gas through the use of hedginginstruments.  The effectiveness of our hedging strategies is dependentupon the cost of corn and natural gas and our ability to sell sufficientproducts to use all of the corn and natural gas for which we have futurescontracts.  There is no assurance thatour hedging activities will successfully reduce the

 

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risk caused by price fluctuation which may leave usvulnerable to high corn and natural prices. Alternatively, we may choose not toengage in hedging transactions in the future. As a result, our results of operations and financial conditions may alsobe adversely affected during periods in which corn and/or natural gas pricesincrease.

 

Hedging activitiesthemselves can result in costs because price movements in corn and natural gascontracts are highly volatile and are influenced by many factors that arebeyond our control.  There are severalvariables that could affect the extent to which our derivative instruments areimpacted by price fluctuations in the cost of corn or natural gas.  However,it is likely that commodity cash prices will have the greatest impact on thederivatives instruments with delivery dates nearest the current cashprice.  We may incur such costs and theymay be significant.

 

***Advances in ethanol production technologycould require us to incur******costs to updateour plant 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.  We cannot guarantee or assure you thatthird-party licenses will be available or, once obtained, will continue to beavailable on commercially reasonable terms, if at all.  These costs could negatively impact ourfinancial performance by increasing our operating costs and reducing our netincome.

 

**Risks Related to Ethanol Industry**

 

***New plants or decreases in the demand for ethanol may result in excessproduction capacity.***  The supply of domestically produced ethanolis at an all-time high. The Renewable Fuels Association estimates that ethanolproduction in 2005 reached a record 4 billion gallons, an increase of 17% since2004 and 126% since 2001.  The ethanolindustry has grown to over 90 production facilities in the United States. Excludingour facility, South Dakota currently has at least 12 ethanol plants in variousstages of development or operation.  Excess capacity in the ethanol industry wouldhave an adverse impact on our results of operations, cash flows and generalfinancial condition.  Excesscapacity may also result or intensify from increases in production capacitycoupled with insufficient demand.  If the demand for ethanol does not grow atthe same pace as increases in supply, we would expect the price for ethanol todecline.  If excess capacity in the ethanolindustry occurs, the market price of ethanol may decline to a level that isinadequate to generate sufficient cash flow to cover our costs.

 

***Weoperate in a competitive industry******and compete with larger,better financed entities.***  There is significant competition amongethanol producers with numerousproducer and privately owned ethanol plants planned and operating throughoutthe Midwest and elsewhere in the United States. The number of ethanol plants being developed and constructedin the United States continues to increase at a rapid pace. The recent passageof the Energy Policy Act of 2005 included a renewable fuels mandate that weexpect will further increase the number of domestic ethanol productionfacilities.  The largest ethanolproducers include Abengoa Bioenergy Corp., Archer Daniels Midland, AventineRenewable Energy, Inc., Cargill, Inc., New Energy Corp. and VeraSunEnergy Corporation, all of which are each capable of producing more ethanolthan we expect to produce.  ArcherDaniels Midland recently announced its plan to add approximately500 million gallons per year of additional ethanol production capacity inthe United States. ADM is currently the largest ethanol producer in the U.S.and controls a significant portion of the ethanol market. ADM’s plan to producean additional 500 million gallons of ethanol per year will strengthen itsposition in the ethanol industry and cause a significant increase in domesticethanol supply.  If the demand for ethanoldoes not grow at the same pace as increases in supply, we expect that lowerprices for ethanol will result which may adversely affect our ability togenerate profits and our financial condition.

 

***We compete withother gasoline additives. ***Our ethanol plant also competes withproducers of other gasoline additives made from raw materials other than cornhaving similar octane and oxygenate values as ethanol, such as producers ofmethyl tertiary butyl ether (MTBE). MTBE is a petrochemical derived frommethanol which generally costs less to produce than ethanol. Many major oilcompanies produce MTBE and strongly favor its use

 

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becauseit is petroleum-based. Alternative fuels, gasoline oxygenates and alternativeethanol production methods are also continually under development. The majoroil companies have significantly greater resources than we have to market MTBE,to develop alternative products, and to influence legislation and publicperception of MTBE and ethanol. These companies also have significant resourcesto begin production of ethanol should they choose to do so.

 

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

 

***Corn-based ethanol may compete withcellulose-based ethanol in the future****.* Especially in the Midwest, most ethanol is currently produced from cornand other raw grains, such as milo or sorghum. The current trend in ethanolproduction research is to develop an efficient method of producing ethanol fromcellulose-based biomass, such as agricultural waste, forest residue, municipalsolid waste, and energy crops. This trend is driven by the fact thatcellulose-based biomass is generally cheaper than corn, and producing ethanolfrom cellulose-based biomass would create opportunities to produce ethanol inareas which are unable to grow corn. Although current technology is notsufficiently efficient to be competitive, a recent report by the U.S.Department of Energy entitled “Outlook for Biomass Ethanol Production andDemand” indicates that new conversion technologies may be developed in thefuture. If an efficient method of producing ethanol from cellulose-basedbiomass is developed, we may not be able to compete effectively. We do notbelieve it will be cost-effective to convert the ethanol plant we are proposinginto a plant which will use cellulose-based biomass to produce ethanol. If weare unable to produce ethanol as cost-effectively as cellulose-based producers,our ability to generate revenue and financial condition will be negativelyimpacted.

 

***E******thanolimported from Caribbean basin countries may be a less******expensive alternative to our ethanol.*** Ethanol produced or processed in certain countries in Central Americaand the Caribbean region is eligible for tariff reduction or elimination uponimportation to the United States under a program known as the Caribbean BasinInitiative. Large ethanol producers, such as Cargill, have expressed interestin building dehydration plants in participating Caribbean Basin countries, suchas El Salvador, which would convert ethanol into fuel-grade ethanol forshipment to the United States. Ethanol imported from Caribbean Basin countriesmay be a less expensive alternative to domestically produced ethanol.Competition from ethanol imported from Caribbean Basin countries may affect ourability to sell our ethanol profitably, adversely affect our results ofoperations and financial condition.

 

***Ethanol imported from Brazil may be a lessexpensive******alternative to ourethanol.***  Brazil is currently the world’s largestproducer and exporter of ethanol. In Brazil, ethanol is produced primarily fromsugarcane, which is also used to produce food-grade sugar. Brazil experienced adramatic increase in ethanol production and trade in 2004, exportingapproximately 112 million gallons to the U.S. alone. Reports in January 2006estimated that Brazil produced approximately 4.5 billion gallons of ethanol in2005 and exported a total of 554 million gallons of ethanol worldwide.  Ethanol imported from Brazil may be a lessexpensive alternative to domestically produced ethanol, which is primarily madefrom corn. Tariffs presently protecting U.S. ethanol producers may be reducedor eliminated. Competition from ethanol imported from Brazil may affect ourability to sell our ethanol profitably and our financial condition.

 

***Consumer beliefs may affect the demand forethanol.***  We believe that certain consumers perceivethe use of ethanol to have a negative impact on gasoline prices at the pump.Some consumers also believe that ethanol adds to air pollution and harms carand truck engines. Still other consumers believe that the process of producingethanol actually uses more fossil energy, such as oil and natural gas, than theamount of ethanol that is produced. These consumer beliefs could potentially bewidespread. If consumers choose not to buy ethanol, it would affect the

 

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demand for the ethanol weproduce which could lower demand for our product and negatively affect ourprofitability and financial condition.

 

**Risks Related to Regulation andGovernmental Action**

 

***A change in government policies favorableto ethanol may cause demand for******ethanol todecline.***  Growth and demand for ethanol may be drivenprimarily by federal and state government policies, such as state laws banningMethyl Tertiary Butyl Ether (MTBE) and the national renewable fuels standard.The continuation of these policies is uncertain, which means that demand forethanol may decline if these policies change or are discontinued. A decline inthe demand for ethanol is likely to cause lower ethanol prices which in turnwill negatively affect our results of operations, financial condition and cashflows.

 

***Government incentives for ethanolproduction may be eliminated in the future.***** **The ethanol industry and our business are assisted by various federalethanol tax incentives, including those included in the Energy Policy Act of2005. The provision of the Energy Policy Act of 2005 likely to have thegreatest impact on the ethanol industry is the creation of a 7.5 billion gallonRenewable Fuels Standard (RFS). The RFS will begin at 4 billion gallons in2006, increasing to 7.5 billion gallons by 2012. The RFS helps support a marketfor ethanol that might disappear without this incentive. The elimination orreduction of tax incentives to the ethanol industry could reduce the market forethanol, which could reduce prices and our revenues by making it more costly ordifficult for us to produce and sell ethanol. If the federal tax incentives areeliminated or sharply curtailed, we believe that a decreased demand for ethanolwill result, which could negatively affect our profitability and financialcondition.

 

Anotherimportant provision involves an expansion in the definition of who qualifies asa small ethanol producer. Historically, small ethanol producers were allowed a10-cents-per-gallon production income tax credit on up to 15 million gallons ofproduction annually. The size of the plant eligible for the tax credit waslimited to 30 million gallons. Under the Energy Policy Act of 2005 the sizelimitation on the production capacity for small ethanol producers increasesfrom 30 million to 60 million gallons. This tax credit may foster additionalgrowth in ethanol plants of a larger size and increase competition in thisparticular plant size category.

 

***Changes in environmental regulations orviolations of the regulations could reduce our profitability.***  Weare subject to extensive air, water and other environmental laws andregulations.  In addition some of theselaws require our plant to operate under a number of environmental permits.These laws, regulations and permits can often require expensive pollutioncontrol equipment or operation changes to limit actual or potential impacts tothe environment.  A violation of theselaws and regulations or permit conditions can result in substantial fines,damages, criminal sanctions, permit revocations and/or plant shutdowns.  We do not assure you that we have been, areor will be at all times in complete compliance with these laws, regulations orpermits or that we have had or have all permits required to operate ourbusiness.  We do not assure you that wewill not be subject to legal actions brought by environmental advocacy groupsand other parties for actual or alleged violations of environmental laws or ourpermits.  Additionally, any changes inenvironmental laws and regulations, both at the federal and state level, couldrequire us to invest or spend considerable resources in order to comply withfuture environmental regulations. The expense of compliance could besignificant enough to reduce our profitability and negatively affect ourfinancial condition.

 

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

 

We own an 88% interest in DakotaEthanol.  The ethanol plant is located onDakota Ethanol’s 77 acre rural site near Wentworth, South Dakota. The plantgrinds approximately 17 million bushels of corn per year to produceapproximately 48 milliongallons of ethanol.  The original construction of theplant was completed in 2001 andconsists of the following buildings:

 

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

•                  A grainreceiving and shipping building;

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

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

 

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The plantincludes a fermenter walkway, gas dryer, evaporator and storage facilities forethanol and distiller grains.  The sitealso contains improvements such as rail tracks and a rail spur, landscaping,drainage systems and access roads.

 

All of Dakota Ethanol’s tangible and intangibleproperty, real and personal, serves as the collateral for the debt financingwith First National Bank of Omaha, which is described below under “**Item 7 – Management’s Discussion and Analysis of Financial Conditionand Results of Operations – Indebtedness**.”

 

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

 

From time to time in theordinary course of business, Dakota Ethanol or we may be named as a defendantin legal proceedings related to various issues, including without limitation,workers’ compensation claims, tort claims, or contractual disputes.  We are not currently involved in any materiallegal proceedings, directly or indirectly, and we are not aware of any claimspending or threatened against us or any of the managers that could result inthe commencement of legal proceedings.

 

After Dakota Ethanol’splant was operational in late 2001, Dakota Ethanol determined through a seriesof internal tests between February and May of 2002 that certainemissions may have exceeded air quality limits under state and federallaw.  Dakota Ethanol initiated steps to correct potential excessiveemissions, including certain operational changes and installing a thermaloxidizer, which is a pollution control device designed to reduceemissions.  In addition, the South Dakota Department of Environment andNatural Resources informed Dakota Ethanol that certain emissions from the plantexceeded the limits allowed under state law and the plant’s Title V Air QualityOperating Permit.  To date, theDepartment of Environment and Natural Resources has not initiated anyregulatory action against Dakota Ethanol for these alleged excessive emissionsin 2002, and it remains uncertain whether any action will be taken or the typeand magnitude of such action.  Fines and/or other penalties couldresult.  Currently, management believes that the plant fully complies withfederal and state air quality laws and its Title V Air Quality OperatingPermit.

 

In 2002, a number ofethanol plants in Minnesota entered into consent decree settlements with theState of Minnesota and the Environmental Protection Agency arising from allegedemission violations.  Civil penalties were assessed against each ethanolplant, additional emissions devices were required, new testing protocols wereestablished and air quality permits were modified by the settlementagreements.  The Environmental Protection Agency subsequently stated thatit intends to “level the playing field,” inferring actions against otherethanol plants.

 

On January 6, 2003,the Environmental Protection Agency (EPA) issued formal information requests tomany ethanol plants including those designed, constructed, and/or managed byBroin or its affiliates.  The requests required that the subject ethanolplants, including Dakota Ethanol, provide the EPA with certain emissions data,presumably to determine whether the plants were in compliance with the CleanAir Act. Since these requests were made, Broin and Associates has been holdingongoing discussions with the EPA regarding the application and use of testingmethods for quantifying certain emissions at the plants managed by Broin.  To date, no action has been taken nor has anyfinal resolution been made regarding this matter.  It is also uncertain whether the EPA willtake any action with respect to its formal information requests, or what theresult or effect will be on Dakota Ethanol of the discussions between Broin andAssociates and the Environmental Protection Agency.  However, it ispossible that fines or other penalties could result if the EPA took action onthe matter.

 

In late 2002, the SouthDakota Department of Environment and Natural Resources began requiring newethanol plants in South Dakota to include a new method for quantifyingemissions from the plants.  The new method is commonly referred to as theMidwest Scaling Method or the “multiplier.”  When the multiplier is used,emission test results are generally higher than when traditional test measuresare employed.  In response to the Department of Environment and NaturalResource’s multiplier requirement, Dakota Ethanol, five other ethanol plants inSouth Dakota, and Broin Management filed a petition and declaratory judgment on December 29, 2003 before theSouth Dakota Board of Minerals and Environment requesting that the Board ofMinerals and Environment bar the state agency from using and applying themultiplier in quantifying emissions because its use was inappropriate andunlawful.  On June 16, 2004, theBoard of Minerals and Environment ruled that the multiplier was not allowed bystate or federal emission test methods or regulations. The effect of thisruling, if final, is that the Department of

 

23

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Environment and Natural Resources can no longeruse or require the use of the multiplier to measure emissions from DakotaEthanol’s plant.

 
| **ITEM 4.** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS.** |
|-------------|-----------------------------------------------------------|

 

We did not submit any matterto a vote of our unit holders through the solicitation of proxies or otherwiseduring the fourth quarter of 2005.

 

**PART II**

 
| **ITEM 5.** | **MARKET FOR MEMBERSHIP UNITS AND RELATED  MEMBER MATTERS AND ISSUER PURCHASES OF MEMBERSHIP UNITS.** |
|-------------|-------------------------------------------------------------------------------------------------------|

 

**Recent Sales of Unregistered Securities**

 

None.

 

**Market Information**

 

There is nopublic trading market for our units.  Ourunits may only be transferred in accordance with our Capital Units TransferSystem, which provides for transfers by gift to family members, upon death, andthrough a qualified matching service, subject to approval by our board ofmanagers.  Our qualified matching serviceis operated through Variable Investment Advisors, Inc., a registeredbroker-dealer based in Sioux Falls, South Dakota.  Variable Investment Advisor’s AlternativeTrading System may be accessed at www.agstocktrade.com. The matching serviceconsists of an electronic bulletin board that provides information toprospective sellers and buyers of our units. We do not receive any compensation relating to the matchingservice.  We have no role in effectingthe transactions beyond approval, as required under our operating agreement andthe issuance of new certificates.  Solong as we remain a Section 12 registrant and a publicly reportingcompany, information about the company will be publicly available through theSEC’s filing system.  However, if at anytime we cease to be a Section 12 registrant or publicly reporting company,we will continue to make information about the company publicly available onour website.

 

**Unit Holders**

 

As of thedate of filing of this report, the company had 29,620,000 membership unitsissued and outstanding and a total of approximately 992 membership unitholders.  There is no other class ofmembership unit issued or outstanding.

 

**Distributions**

 

Under theterms of our Amended and Restated Operating Agreement, we are required to makedistributions to our members and may not retain more than $200,000 of net cashfrom operations, unless (1) a 75% supermajority of our board decidesotherwise; (2) it would violate or cause a default under the terms of anydebt financing or other credit facilities; or (3) it is otherwiseprohibited by law.  Our ability to makedistributions to our members is dependent upon the distributions made to us byDakota Ethanol.  Revenues generated fromplant operations are distributed by Dakota Ethanol to us in proportion to ourequity ownership in Dakota Ethanol.  Wedistribute the revenues received from Dakota Ethanol to our unit holders inproportion to the number of units held by each unit holder.  A unit holder’s distribution is determined bydividing the number of units owned by such unit holder by the total number ofunits outstanding.  Our expectations withrespect to our ability to make future distributions are discussed in greaterdetail in “**Item 7 – Management’sDiscussion and Analysis of Financial Condition and Results of Operations****–****Indebtedness**.”

 

In addition,distributions to our unit holders are subject to certain loan covenants andrestrictions that require us to make additional loan payments based on excesscash flow.  These loan covenants andrestrictions are described in greater detail under “**Item 7 – Management’s Discussion and Analysis of Financial Conditionand Results of Operations****–Liquidity and Capital Resources.**”

 

24

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***2005Distributions***

 

In fiscalyear 2005, Dakota Ethanol made total cash distributions to LACP ofapproximately $11.8 million and approximately $1.6 million to the minoritymembers.  As a result,our board of managers approved cash distributions to our members totaling $11,551,800.  The followingchart lists the cash distributions made to our members in 2005:

 
| **Date of Board Approval** | ** ** | **Total  Distribution** | ** **        | **Distribution  Per Unit** | ** ** | **Distributed  to Members of Record as of:** | ** ** |
|----------------------------|------------|-------------------------|-------------------|----------------------------|------------|----------------------------------------------|------------|
| December 20, 2004     |       | $                       | 2,073,400.00      |                       | $          | 0.07                                         |       | January 1, 2005 |   |
|                       |       |                    |              |                       |       |                                         |       |
| February 18, 2005     |       | $                       | 2,962,000.00      |                       | $          | 0.10                                         |       | January 1, 2005 |   |
|                       |       |                    |              |                       |       |                                         |       |
| April 15, 2005        |       | $                       | 1,777,200.00      |                       | $          | 0.06                                         |       | January 1, 2005 |   |
|                       |       |                    |              |                       |       |                                         |       |
| August 26, 2005       |       | $                       | 1,777,200.00      |                       | $          | 0.06                                         |       | May 1, 2005 |   |
|                       |       |                    |              |                       |       |                                         |       |
| December 16, 2005     |       | $                       | 2,962,000.00      |                       | $          | 0.10                                         |       | September 1, 2005 |   |
|                       |       |                    |              |                       |       |                                         |       |
| **Totals**                 | ** ** | **$**                   | **11,551,800.00** | ** **                 | **$**      | **0.39**                                     |       |   |   |

 

***2004Distributions***

 

In 2004,Dakota Ethanol made cash distributions to LACP of approximately $4,100,000million and approximately $600,000 to the minority members.  As a result, LACP distributedapproximately $4,100,000 million, or $0.14 per capital unit, to our members in2004.

 

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

 

The following table setsforth selected consolidated financial data of Lake Area Corn Processors, LLCand Dakota Ethanol, LLC for the periods indicated. The audited financialstatements included in Item 8 of this report have been audited by ourindependent auditors, Eide Bailly, LLP.

 

| **Statement of Operations Data:**      | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Revenues                               |       | $          | 80,020,970 |       | $          | 84,432,486 |       | $ | 69,391,182 |   |
|                                   |       |       |       |       |       |       |       |
| Cost of Revenues                       |       | 63,201,108 |       | 71,736,360 |       | 60,198,865 |       |
|                                   |       |       |       |       |       |       |       |
| Gross Profit                           |       | 16,819,862 |       | 12,696,126 |       | 9,192,317  |       |
|                                   |       |       |       |       |       |       |       |
| General and Administrative Expense     |       | (3,610,590 | )          | (3,058,024 | )          | (2,620,736 | )          |
|                                   |       |       |       |       |       |       |       |
| Income From Operations                 |       | 13,209,272 |       | 9,638,102  |       | 6,571,581  |       |
|                                   |       |       |       |       |       |       |       |
| Interest Expense                       |       | (1,089,364 | )          | (1,300,647 | )          | (1,461,763 | )          |
|                                   |       |       |       |       |       |       |       |
| Other Income                           |       | 238,705    |       | 223,548    |       | 147,629    |       |
|                                   |       |       |       |       |       |       |       |
| Minority Interest in Subsidiary Income |       | (1,494,029 | )          | (1,037,458 | )          | (641,767   | )          |
|                                   |       |       |       |       |       |       |       |
| Net Income                             |       | 10,864,584 |       | 7,523,545  |       | 4,615,680  |       |
|                                   |       |       |       |       |       |       |       |
| Capital Units Outstanding              |       | 29,620,000 |       | 29,620,000 |       | 29,620,000 |       |
| Net Income Per Capital Unit            |       | 0.37       |       | 0.25       |       | 0.16       |       |
| Cash Distributions per Capital Unit    |       | 0.32       |       | 0.21       |       | 0.12       |       |
|                                        |            |            |            |            |            |            |            |  |  |  |

 

25

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| **Balance Sheet Data:**                  | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Working Capital                          |       | $          | 1,940,335  |       | $          | (145,791   | )          | $ | (115,841 | ) |
| Net Property, Plant & Equipment |       | 33,468,374 |       | 34,862,856 |       | 35,998,055 |       |
| Total Assets                             |       | 42,946,122 |       | 46,065,440 |       | 45,998,055 |       |
| Long-Term Obligations                    |       | 8,601,196  |       | 9,882,779  |       | 12,682,279 |       |
| Minority Interest                        |       | 3,234,649  |       | 3,055,597  |       | 2,863,277  |       |
| Member’s Equity                     |       | 24,013,590 |       | 22,627,406 |       | 21,324,061 |       |
| Book Value Per Capital Unit              |       | 0.81       |       | 0.76       |       | 0.72       |       |
|                                          |            |            |            |            |            |            |            |  |  |  |

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

 

Except for the historical information, the followingdiscussion contains forward-looking statements that are subject to risks anduncertainties.  We caution you not to put undue reliance on anyforward-looking statements, which speak only as of the date of thisreport.  Our actual results or actions may differ materially fromthese 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.

 

**Overview**

 

We own an 88% interest in Dakota Ethanol,LLC.  Dakota Ethanol owns and operates anethanol plant with a nameplate capacity of 40 million gallons per year.  The plant currently operates in excess of itsnameplate capacity, producing approximately 48 million gallons of ethanol peryear.  Our revenues are derived from thesale and distribution of Dakota Ethanol’s ethanol and distillers grainsthroughout the continental United States. Corn is supplied to us primarily from our members who are local agriculturalproducers and from purchases of corn on the open market. After processing thecorn, the ethanol is sold to our ethanol marketer, which subsequently marketsand sells the ethanol to gasoline blenders and refineries located throughoutthe continental United States.  For thefiscal year ending December 31, 2005, our ethanol was marketed by EthanolProducts, LLC, a Broin affiliate. Beginning January 1, 2006, our ethanol will be marketed by RMPGpursuant to our ethanol marketing agreement. Wehave elected to use a pooled marketing arrangement which means that the ethanolwe produce is pooled with other ethanol producers and marketed by RPMG.  Wepay RPMG a pooling fee for ethanol delivered to the pool, and RPMG pays us anetback price per gallon that is based upon the difference between the pooledaverage delivered ethanol selling price and the pooled average distributionexpense.  These averages are calculatedbased upon each pool participant’s selling price and expense averaged in directproportion to the volume of ethanol supplied by each participant to thepool.  Except distillers grains we selldirectly to local farmers, our distillers grains are sold through amarketer that markets and sells the product to livestock feeders.  From the commencement of our operationsthrough December 1, 2005, Dakota Gold Marketing, a Broin affiliate,marketed our distillers grains. Subsequent to December 1, 2005, our distillers grains will bemarketed by Commodity Specialist Company (CSC).  For our distillers grains,we receive a percentage of the selling price actually received by CSC inmarketing the distillers grains to its customers.

 

Our operating income orloss is significantly tied to the price at which ethanol and distillers grainsare sold.  Historically, the price ofethanol tends to fluctuate in the same direction as the price of unleadedgasoline and other petroleum products. Surplus ethanol supplies also tend to put downward price pressure onethanol.  In contrast, the price ofdistillers grains generally tends to fluctuate based on the price of substitutelivestock feed, such as corn and soybean meal. Surplus grain supplies also tend to put downward price pressure ondistillers grains.

 

Our cost of revenues,which includes production expenses, is significantly affected by the cost ofcorn and natural gas.  In 2005, for instance, the cost of corn wasapproximately 50% of total cost of revenues, whereas the cost of natural gaswas approximately 23% of total cost of revenues.  Comparatively, in 2004, the cost of corn wasapproximately 60% of total cost of revenues, whereas the cost of natural gaswas approximately 15% of total cost of

 

26

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revenues. Thecost of corn is affected primarily by supply and demand factors such as cropproduction, carryout, exports, risk management and weather, much of which wehave no control over.  Natural gas pricesfluctuate with the energy complex in general. Over the last few years, natural gas prices have trended higher thanaverage and it appears they will continue to trend higher due to the high priceof fuel oil and increased demand.

 

We are subjectto industry-wide factors that affect our revenues and profits.  These factors include, but are not limitedto, the available supply and cost of corn from which our ethanol and distillersgrains are made; the cost of natural gas, which we use in the production ofethanol and distillers grains; dependence on one or a few major customers whomarket and distribute our products; the intensely competitive nature of ourindustry; possible legislation at the federal, state, and/or local level;changes in federal ethanol tax incentives; and the cost of complying with theextensive environmental laws that regulate our industry.

 

#### **Results of Operations**

 

***Comparisonof Year Ended******December 31, 2005 and 2004*****.**

 

The following table showsthe results of our operations and the percentage of revenues, cost of goodssold, operating expenses and other items to total revenues in our consolidatedstatements of operations for the fiscal years ended December 31, 2005 and2004:

 
| ** **                             | ** ** | **2005**   | ** ** | **2004** | ** ** |
|----------------------------------------|------------|------------|------------|----------|------------|
| **Income Statement Data:**             | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                               |       | $          | 80,020,970 |     | 100.0      |   | $ | 84,432,486 |   | 100.0 |   |
|                                   |       |       |       |     |       |   |   |   |   |
| Cost of Revenues                       |       | 63,201,108 |       | 79.0     |       | 71,736,360 |   | 85.0 |   |
|                                   |       |       |       |     |       |   |   |   |   |
| Gross Profit                           |       | 16,819,862 |       | 21.0     |       | 12,696,126 |   | 15.0 |   |
|                                   |       |       |       |     |       |   |   |   |   |
| General and Administrative Expense     |       | (3,610,590 | )          | (4.5     | )          | (3,058,024 | ) | (3.6 | ) |
|                                   |       |       |       |     |       |   |   |   |   |
| Income From Operations                 |       | 13,209,272 |       | 16.5     |       | 9,638,102 |   | 11.4 |   |
|                                   |       |       |       |     |       |   |   |   |   |
| Interest Expense                       |       | (1,089,364 | )          | (1.4     | )          | (1,300,647 | ) | (1.5 | ) |
|                                   |       |       |       |     |       |   |   |   |   |
| Other Income                           |       | 238,705    |       | 0.3      |       | 223,548 |   | 0.3 |   |
|                                   |       |       |       |     |       |   |   |   |   |
| Minority Interest in Subsidiary Income |       | (1,494,029 | )          | (1.9     | )          | (1,037,458 | ) | (1.2 | ) |
|                                   |       |       |       |     |       |   |   |   |   |
| Net Income                             |       | 10,864,584 |       | 13.6     |       | 7,523,545 |   | 8.9 |   |
|                                        |            |            |            |          |            |  |  |  |  |  |  |

 

*Revenues*

 

The decrease in revenues from fiscal year 2005compared to fiscal year 2004 is due primarily to a decrease in the price ofethanol and distillers grains, which resulted in lower revenues from sales ofthose products.  In addition, revenuedecreased due to lower production volume as a result of additional plantdowntime for general maintenance.  Net gallons ofdenatured ethanol sold totaled47.8million in fiscal 2005 compared to49.3 million in fiscal 2004.  The average per gallon price we received forour ethanol sold for 2005 decreased by approximately 1% compared to the twelvemonths ended December 31, 2004. Sales of co-products decreased by approximately 15% in 2005 compared toco-products sales in 2004 due to decreased market prices for corn and otheralternative feedstocks.  In addition, thetotal incentive revenue from state and federal programs decreased byapproximately 13%.

 

Although ethanol prices were strong for part of thefirst fiscal quarter of 2005, excess supply of ethanol due to increasedproduction caused ethanol prices to decline during the first three quarters ofthe year.  Although ethanol pricesincreased in the third quarter, Dakota Ethanol was not able to take advantageof these higher prices during the third or fourth quarters because a largeportion of its ethanol production had been pre-sold below market rates.

 

27

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Increaseddemand, firm crude oil and gas markets, public acceptance, and positivepolitical signals have all contributed to a strengthening of ethanol prices.

 

Management currently expectsethanol prices to remain higher in the short-term than historicalaverages.  However, in order to sustainthese higher price levels, management believes the industry will need tocontinue to grow demand to offset the increased supply brought to the marketplace by additional production. Ethanolproduction continues to grow as additional plants become operational.  According to the Renewable Fuels Association,there are over 90 ethanol plants in operation nationwide that have the capacityto annually produce approximately 4.4 billion gallons of ethanol.  Ofthese, there are at least 8 plants undergoing expansions.  In addition, over 30 new ethanol plants areunder construction.  Expansions andplants under construction are expected to add an additional 2.1 million gallonsof annual capacity.  In addition, ADM has announced a plan to add 500million gallons of ethanol production, clearly indicating its desire tomaintain a significant share of the ethanol market.

 

We also expect that use of ethanol as a fueloxygenate may increase due to decreased use of methyl tertiary butyl ether (“MTBE”),the primary competitor of ethanol as a fuel oxygenate.  Although the Energy Policy Act of 2005 didnot impose a national ban of MTBE, the Act’s failure to include liabilityprotection for manufacturers of MTBE could result in refiners and blendersusing ethanol as an oxygenate rather than MTBE to satisfy the Clean Air Act’sreformulated gasoline oxygenate requirement.  While this may create someadditional demand in the short term, the Act repeals the Clean Air Act’s 2%oxygenate requirement.  However, the Clean Air Act also contains anoxygenated fuel requirement for areas classified as carbon monoxidenon-attainment areas.  These areas are required to establish an oxygenatedfuels program for a period of no less than three months each winter.  Theminimum oxygen requirement for gasoline sold in these areas is 2.7% byweight.  This is the equivalent of 7.7% ethanol by volume in a gasolineblend.  This requirement was unaffected by the Act and a number of states,including California, participate in this program.  As a result, demand for ethanol in theseareas during the winter months may increase and positively effect ethanolprices.

 

Increased consumption ofE85 fuel and increased consumer awareness of ethanol may increase ethanoldemand.  The US Department of Energy Alternative FuelsData Center has reported that the availability and use of E85 is growingnationally, and the availability of E85 and FFVs is expected to increasesignificantly in the next few years. According to the NationalEthanol Vehicle Coalition, the benefits of E85 include less dependence upon oilimported from other countries, in addition to environmental benefits becauseE85 contains roughly 80% less of the potential contaminants found ingasoline.  However, consumer resistanceto the use of ethanol may affect the demand for ethanol which could affect ourability to market our product and reduce our revenues. .

 

Revenues from distillers grains decreased throughoutthe fiscal year, due to decreasing distillers grain prices.  Lower distillers grain prices were attributedin part to increased distillers grains production by new ethanol plants and inpart to an abundant supply of grains and feed proteins as a result of therecord grain harvests in 2004 and 2005.

 

We expect to benefit from federal ethanol supportsand federal tax incentives. Changes to these supports or incentives couldsignificantly impact demand for ethanol. See ITEM 1. BUSINESS—Federal Ethanol Supports.  Incentive revenue from state and federalprograms decreased 35% from the fiscal year ended December 31,2004 to the fiscal year ended December 31, 2005.  The incentive revenue from the United StatesDepartment of Agriculture’s Commodity Credit Bioenergy Program decreasedbecause funding for the program has been reduced.  Thisreduction is attributed to an increase in the number of eligible participantsin the program, which reduces our share of the payments.  The receipt of these additional program paymentsis subject to the continued availability of program funds, which may be reducedas a result of increased participation in the program by new and expandingplants as well as decreased federal funding.  The Bioenergy Program isscheduled to expire at the end of the federal government’s 2006 fiscal year.

 

Incentive revenue fromthe State of South Dakota increased $35,000, or 5%.  Although funds allocated to this program increased in the 2005 programyear and are expected to increase in the 2006 program year, it is uncertainwhether the funds allocated to this program will be depleted before the end ofthese program years, much of which is dependent upon the production levels ofall plants in South Dakota during these periods.

 

28

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*Cost of Revenues*

 

Our cost of revenues as a percentage ofrevenues were 79% and 85% for the twelve months ended December 31,2005 and 2004 respectively.  The decreasein our cost of revenues from period to period is primarily due to our reducedcorn costs.  Our average per bushel pricewe paid for our corn decreased approximately 16% for the twelve months ended December 31, 2005 comparedto the twelve months ended December 31, 2004.

 

We recognize the gainsor losses that result from the changes in the value of our derivativeinstruments in cost of goods sold as the changes occur.  As corn andnatural gas prices fluctuate, the value of our derivative instruments areimpacted, which affects our financial performance.  We partially offsetthese losses with the cash price we paid for corn.  We anticipatecontinued volatility in our cost of goods sold due to the timing of the changesin value of the derivative instruments relative to the cost and use of thecommodity being hedged.

 

Corn costs significantly impact our cost of goodssold.  The 2004 corn crop was the largest corn crop on record withnational production at approximately 11.8 billion bushels and South Dakotaproduction at approximately 539 million bushels. This allowed ethanol plants topurchase corn cheaply throughout 2005, which widened profit margins for manyethanol plants in the current year.  The2005 national corn crop was the second largest on record with approximately11.1 million bushels produced nationally, and 470 million bushels produced inSouth Dakota.  As a result, we expectcorn prices to remain at relatively low levels into the 2005-2006 marketingyear.

 

We expect the grain marketto begin focusing on prospects for the 2006 crop.  Variables such as rainfall, planting dates, and temperatures willlikely cause market uncertainty and create corn price volatility as the growingseason begins. Demand for US corn is at an all time high.  Although carryout supplies for the 2006marketing year are forecasted to be the largest year to year corn carryoutsince the late 1980’s, any production shortfall during the 2006 growing seasonwill create volatility and may increase our cost of corn.  In addition, newly constructed ethanol plantsand expansions of existing plants in our geographic area may lead to increaseddemand for corn, higher prices and possibly an inadequate supply of corn fromlocal producers.

 

 Natural gas hasrecently been available only at prices exceeding historical averages.  As a result, our natural gas costs for fiscalyear ending December 31, 2005 were substantially higher than in the 2004fiscal year.  These prices are increasing our costs of production.  In late August 2005, Hurricane Katrinacaused dramatic damage to areas of Louisiana, which is the location of one ofthe largest natural gas hubs in the United States. As the damage from thehurricane became apparent, natural gas prices substantially increased. It iscurrently unknown how the damage will affect intermediate and long term pricesof natural gas. Hurricane Rita also impacted the Gulf Coast and causedshutdowns at several Texas refineries, which further increased natural gas prices.We expect continued volatility in the natural gas market. Global demand fornatural gas is expected to continue to increase, which may further drive upprices.  Any ongoing increases in the price of natural gas will increaseour cost of production and may negatively impact our future profit margins.

 

*General and Administrative Expense*

 

Our operating expenses as a percentage of revenuewere approximately 4.5%and 3.6% for fiscal year 2005 and 2004respectively.  This increase is dueprimary to an increase in the management incentive fee owed to BroinManagement, which is based directly on Dakota Ethanol’s net income.  In addition, payment to Broin Managementrelating to the termination of the contracts with Broin Management alsoincreased our administrative expense.

 

*Income from Operations*

 

Our income from operations for fiscal year2005 totaled $13,209,272 compared to $9,638,102 forfiscal year 2004.  This was a resultof the decrease in cost of revenues for the fiscal year ended December 31,2005.

 

*Other Income and Expense*

 

Our total other income and expense for thetwelve months ended December 31, 2005 was substantially the same as theother income and expense for the twelve months ended December 31, 2004.  Our interest expense for

 

29

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the fiscal year ended 2005decreased due to a reduction in the principal balance on the loans outstandingwith Dakota Ethanol’s primary lender.

 

*MinorityInterest in Subsidiary Income*

 

Minority interest insubsidiary income increased to $1,494,029 for the year ended December 31,2005, from $1,037,458 for the year ended December 31, 2004.  Theincrease in minority interest in subsidiary income was primarily due to theincreased profitability of Dakota Ethanol, which increased by approximately$3.3 million from the year ended December 31, 2004.

 

*Net Income*

 

Net income increased toapproximately $10.8 million for the year ended December 31, 2005 from $7.5million for the year ended December 31, 2004.  A decrease in corncosts was the primary factor in the increase in our net income.

 

***Comparisonof Year Ended******December 31, 2004 and 2003*****.**

 

The following table showsthe results of our operations and the percentage of revenues, cost of goodssold, operating expenses and other items to total revenues in our consolidatedstatements of operations for the fiscal years ended December 31, 2004 and2003:

 
| ** **                              | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|------------|------------|----------|------------|
| **Income Statement Data:**              | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                |       | $          | 84,432,486 |     | 100.0      |   | $ | 69,391,182 |   | 100.0 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Cost of  Revenues                       |       | 71,736,360 |       | 85.0     |       | 60,198,865 |   | 86.8 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Gross Profit                            |       | 12,696,126 |       | 15.0     |       | 9,192,317 |   | 13.2 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| General and  Administrative Expense     |       | (3,058,024 | )          | (3.6     | )          | (2,620,736 | ) | (3.8 | ) |
|                                    |       |       |       |     |       |   |   |   |   |
| Income From  Operations                 |       | 9,638,102  |       | 11.4     |       | 6,571,581 |   | 9.4 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Interest  Expense                       |       | (1,300,647 | )          | (1.5     | )          | (1,461,763 | ) | (2.1 | ) |
|                                    |       |       |       |     |       |   |   |   |   |
| Other Income                            |       | 223,548    |       | 0.3      |       | 147,629 |   | 0.2 |   |
|                                    |       |       |       |     |       |   |   |   |   |
| Minority  Interest in Subsidiary Income |       | (1,037,458 | )          | (1.2     | )          | (641,767 | ) | (0.9 | ) |
|                                    |       |       |       |     |       |   |   |   |   |
| Net Income                              |       | 7,523,545  |       | 8.9      |       | 4,615,680 |   | 6.7 |   |
|                                         |            |            |            |          |            |  |  |  |  |  |  |

 

*Revenues*

 

Revenue increased $15.0million or 22% from the year ended December 31, 2003 to the year ended December 31,2004.  The increase was due primarily to an increase in ethanol revenues,which was due primarily to an increase in the price of ethanol.  Theaverage sales price of ethanol increased 22% from the year ended December 31,2003 to the year ended December 31, 2004.  Ethanol prices increasedbecause of strong demand for ethanol and a continuation of higher prices ofunleaded gasoline.

 

Revenue from the sale ofdistillers grains increased $300,000, or 3%, from the year ended December 31,2003 to the year ended December 31, 2004. The increase in distillers grain sales was due primarily to a 4%increase in sales volume, offset by a 1% decrease in sales price.

 

Total incentive revenuesfrom federal and state government incentive programs decreased by 33% from theyear ended December 31, 2003 to the year ended December 31,2004.  The incentive revenue from theUnited States

 

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Department of Agriculture’sCommodity Credit Corporation Bioenergy Program decreased $188,000, or 35%, to$348,000 for the year ended December 31, 2004 from $536,000 for the yearended 2003.  This decrease was primarilybecause the payments under the Bioenergy Program are based in part on a plant’sincrease in production from the prior year.  Dakota Ethanol, however, hada nominal increase in production in 2004 compared to 2003, resulting in lessincentive revenue earned under the program.

 

Incentive revenue from thestate of South Dakota incentive program decreased $311,000, or 32%, to $667,000from the year ended December 31, 2003 to the year ended December 31,2004.  The decrease was primarily due toan earlier than anticipated depletion of funds allocated to the program in the2004 program year (July 1, 2003 to June 30, 2004).

 

*Cost ofRevenues*

 

Cost of revenues, which includes production expense,increased 19% to $71.7 million for the year ended December 31, 2004 from$60.2 million for the year ended December 31, 2003.  The increase inthe cost of corn was caused by an approximately 7% increase in the market priceof corn per bushel from the year ended December 31, 2003 to the year endedDecember 31, 2004 and the risk management program in 2004.

 

In terms of risk managementin 2004, the use of corn derivative instruments relative to the pricefluctuation of corn in 2004 was a primary factor for the increase in cost ofcorn. Gains and losses that result from a change in value of corn and naturalgas derivative instruments are recognized in cost of revenues as the changesoccur.  For the year ended December 31, 2004, costs of revenuesinclude losses of $3.8 million from the use of corn derivative instruments, upfrom $30,000 in 2003.  These losses werecaused by fluctuations in the price of corn in 2004. At the end of 2003, DakotaEthanol increased its use of corn derivative instruments and positions toprotect against the market price forecasts for corn.  Those forecasts predicted higher prices forcorn because of low world carryout prior to the growing season, decreasedproduction, and drought.  As the year progressed,however, and it became apparent that corn production would be much higher thanexpected, the original market forecasts proved incorrect and the market priceof corn actually declined.  When themarket price declined, the value of the corn derivative instruments fell whichled to an increase in cost of revenues. Dakota Ethanol recorded an increase tothe cost of revenues of $4,069,718, and $25,192 related to derivative contractsfor the years ended December 31, 2004 and 2003, respectively.

 

*Generaland Administrative Expenses*

 

General and administrativeexpenses increased 17%**to $3.1million for the year ended December 31, 2004 from $2.6 million for theyear ended 2003.  The increase in generaland administrative expenses was primarily due to an increase in the managementincentive fees paid to Broin Management, LLC.  As net income rose,management incentive fees increased by 21% from the year ended December 31,2003 to the year ended December 31, 2004.

 

*InterestExpense*

 

Interest expense decreased11% to $1.3 million for the year ended December 31, 2004 from $1.4 millionfor the year ended of 2003.  The decrease in interest expense wasprimarily due to a reduction in the principal balance outstanding of all loanswith First National Bank of Omaha.

 

*MinorityInterest in Subsidiary Income*

 

Minority interest insubsidiary income increased 62% to $1.0 million for the year ended December 31,2004 from $642,000 for the year ended of 2003.  The increase in minorityinterest in subsidiary income was primarily due to the increased profitabilityof Dakota Ethanol which increased by 62% for the year ended December 31,2004 from the year ended December 31, 2003.

 

*Net Income*

 

Net income increased 63% toa net income of $7.5 million for the year ended December 31, 2004 from anet income of $4.6 million for the year ended December 31, 2003.  Thischange was caused primarily by, as

 

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discussed above, an increasein ethanol and distillers grains revenues, offset by the increase in corncosts.

 

**Plant Operations**

 

We plan to continue tooperate 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 and cash reserves to cover thecosts of operations over the next 12 months, which consist primarily of cornsupply, natural gas supply, staffing, office, audit, legal, compliance, workingcapital costs and debt service obligations.

 

However, a variety of marketfactors can affect both operating costs and revenues.  These factorsinclude:

 

•                  Changes in the availability and price ofcorn;

 

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

 

•                  Increased competition in the ethanol and oilindustries;

 

•                  Changes in interest rates or the availabilityof credit;

 

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

 

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

 

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

 

•                  Changes in the availability and price ofnatural gas and the market for distillers 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**

 

Managementuses estimates and assumptions in preparing our consolidated financialstatements in accordance with generally accepted accounting principles.  These estimates and assumptions affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities, and the reported revenues and expenses.  Of the significant accounting policiesdescribed in the notes to our consolidated financial statements, we believethat the following are the most critical:

 

***Derivative Instruments***

 

We enter into derivative instruments to hedgethe variability of expected future cash flows related to forecasted corn andnatural gas purchases, forward purchase contracts, and interest rates.  We do not typically enter into derivativeinstruments other than for hedging purposes. All derivative instruments are recognized on our December 31, 2005and December 31, 2004 balance sheet at their fair market value.  Currently, none of our derivative instrumentsis classified as cash-flow hedges for accounting purposes.  On the date the derivative instrument isentered into, we will designate the derivative as either a hedge of thevariability of cash flows of a forecasted transaction or will not designate thederivative as a hedge.  Changes in thefair value of a derivative that is designated as, and meets all of the requiredcriteria for, a cash flow hedge are recorded in accumulated other comprehensiveincome and reclassified into earnings as the hedged items affect earnings.  Changes in the fair value of a derivativethat is not designated as a hedge are recorded in current period earnings.  Although certain derivative instruments maynot be designated as, and accounted for, as a cash flow hedge, they areeffective economic hedges of specified risks.

 

**Liquidity and Capital Resources**

 

The following table showscash flows for the last two years:

 
| ** **                              | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Net cash  from operating activities     |       | $                                | 14,300,244 |   | $ | 11,388,383 |   |
| Net cash  used for investing activities |       | (684,811                         | )          | (687,766 | ) |
| Net cash  used for financing activities |       | (15,118,655                      | )          | (8,589,929 | ) |
|                                         |            |                                  |            |  |  |  |  |

 

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*CashFlow From Operations**. *The increase in net cash flow provided fromoperating activities between 2005 and 2004 was primarily due to a favorablespread between the price of corn and the price of ethanol.  Ourcapital needs are being adequately met through cash from our operatingactivities and our current credit facilities.

 

*CashFlow From Investing Activities**. *We used cash provided by operating activitiesfor capital expenditures which totaled $1,154,799 for fiscal 2005compared to $890,456 for fiscal 2004.  This increase primarily reflectsexpenditures for the purchase of property and equipment.  In 2005, we installed pollution equipmentincluding a scrubber and vapor flare for the purpose of controlling airemissions from the plant.  An additional$300,000 in cash was used in 2005 to modify the distillers grains dryingsystem.  We expect to spend $350,000 onhammermill installation in the 2006 fiscal year.

 

*CashFlow From Financing Activities**.*We used cash for financing activities for distributionsand debt service of $15,118,655 infiscal 2005 compared to $8,589,929 in fiscal 2004.  The primary reason for increase in cash used wasdue to distributions made to our members and the minority members of DakotaEthanol.  Distributions of approximately$11.5 million and$1.6 million were made to our members and the minority members of DakotaEthanol, respectively, in fiscal 2005, compared to $4.1 million and $600,000,respectively during fiscal 2004.

 

Management anticipates sufficient cash flow fromoperating activities and revolving debt to cover debt service obligations,operations and planned capital expenditures for the next 12 months. Payments to Broin Management and the Broin-related entities for the terminationof the management and service contracts were paid from cash flows, while anypayment for the purchase of the Broin family members’ minority interest inDakota Ethanol, if sold, is expected to be financed with new debt.

 

The following table showscash flows for 2004 and 2003:

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

 

*Cash FlowFrom Operations-*Theincrease in net cash flow provided from operating activities between 2004 and2003 was primarily attributed to an increase in net income and a decrease inworking capital requirements.  The decrease in working capitalrequirements was related to a decrease in inventory, accounts payable andinvestments in commodity contracts, with accounts receivable increasing duringthe same period.  Inventory decreased primarily due to losses on deferredcorn purchases as the market values on deferred corn purchases were lower in2004 compared to 2003.  Accounts payable decreased due to a reduction incorn payables, as more producers delivering corn to the plant in late 2003elected to defer payment until 2004 and were paid after the beginning of theyear.  The decrease in investments in commodity contracts in 2004 wasrelated to a change in the composition of the contracts and a decrease in valueof futures’ contracts in 2004.  Accounts receivable increased based on theincrease in the market price of ethanol in 2004.

 

*Cash FlowFrom Investing Activities-*The increase in cash used for investing activities was mainlyattributed to an increase in the purchase of property and equipment. Approximately $564,000 more in cash was used in 2004 for capital improvementprojects, specifically improvements to buildings and equipment at theplant.  The increase in capital spending was offset by a $107,000 increasein cash provided by other assets, as investments provided an improved rate ofreturn in 2004.

 

*Cash FlowFrom Financing Activities-*The increase in cash used by financing activities was attributed to adecrease in outstanding checks in excess of bank balance and additionaldistributions being made to ourmembers and the minority members.  Outstanding checks in excess of bankbalances decreased approximately $800,000 as there was more cash available atthe end of 2004.  Approximately $600,000 more in distributions was made toour

 

33

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members in 2004 compared to2003.  Similarly, approximately $60,000 more in distributions was made tothe minority members in 2004 compared to 2003.

 

**Indebtedness**

 

First National Bank of Omahais Dakota Ethanol’s primary lender. Dakota Ethanol has four notes or loans outstanding with First NationalBank pursuant to a Construction Loan Agreement and Construction Note dated September 25,2000 and amendments dated July 29, 2002, November 1, 2002, and April 23,2004.

 

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

### ** **

On April 22, 2005, Dakota Ethanol renewed arevolving promissory note from First National Bank of Omaha in the amount of$3,000,000.  The note expires on April 21,2006 and the amount available is subject to certain financial ratios.  Interest on any outstanding principal balanceaccrues at .50% above the bank’s base rate. There is a commitment fee of 0.375%on the unused portion of the $3,000,000 availability.  The note is collateralized by the ethanolplant, its accounts receivable and inventories. On December 31, 2005, Dakota Ethanol did not have an outstandingbalance on the note, and the entire amount of $3,000,000 was available to bedrawn on the revolvingpromissory note.  There was nooutstanding balance as of December 31, 2004.  The note is secured by Dakota Ethanol’s realproperty, personal property, and an assignment of all rents and leases in favorof First National.

 

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

#### ** **

Dakota Ethanol originally had a $26,600,000 notepayable to First National Bank of Omaha for the construction and permanentfinancing of the plant, referred to as Term Note 1.  On July 29, 2002, Dakota Ethanol amendedthe construction loan agreement to create two term notes from its original TermNote 1, creating Term Notes 2 and 3. Term Note 3 was converted into Term Notes 4 and 5 on November 1,2002.  Pursuant to these agreements,Dakota Ethanol is subject to certain restrictive covenants establishing minimumreporting requirements, ratios, working capital and net worth requirements.  The notes are secured by the ethanol plant.The notes are subject to prepayment penalties based on the cost incurred by theBank to break its fixed interest rate commitment.  The other terms and conditions of Term Note 1remain in effect.  Except as set forthbelow, the original terms and conditions of Term Note 1 apply to Term Notes 4and 5.

 

The balance of Term Note 2 requires quarterlyinstallments of $581,690 which commenced on October 1, 2002.  The balance is due September 1,2011.  Interest on outstanding principalbalances accrues at a rate of 9% annually. The principal balance on the note as of December 31, 2005 was$9,718,308.

 

The balance of Term Note 4 is due and payable inquarterly installments of $329,777 commencing January 1, 2003, through September 1,2011.  The installment will first beapplied to the accrued interest on Term Note 5, and the remainder will beapplied to accrued interest and principal of Term Note 4.   Interest on outstanding principal balanceswill accrue at 50 basis points above the lender’s rate (7.25 percent at December 31,2005).  This rate is subject to variousadjustments based on various levels of indebtedness to net worth, as defined bythe agreement.  The principal balance dueon Term Note 4 as of December 31, 2005 was $410,472.

 

The balance of Term Note 5 is due and payable inquarterly installments of interest only commencing January 1, 2003,through September 1, 2011.  Intereston outstanding principal balances will accrue at 50 basis points above thelender’s rate.  This rate is subject tovarious adjustments based on various levels of indebtedness to net worth, asdefined by the agreement.  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 to utilize this feature, the lender willassess an unused commitment fee of 3/8 percent on the unused portion of the$5,000,000.  In addition, the bank drawsthe checking account balance to a minimum balance on a daily basis. The excesscash pays down or the shortfall is drawn upon Term Note 5 as needed. On December 31,2005, 2004 and 2003, Dakota Ethanol had $0 outstanding and $5,000,000 availableto be drawn on Term Note 5.

 

On October 1, 2001,Dakota Ethanol obtained a loan from Sioux Valley Energy for $85,000, relatingto the financing of an extension of utility lines to the plant.  The loanwas payable over ten years, beginning on October 1,

 

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2001, with an effectiveinterest rate of approximately 9%.  Principal payments of $72,701 weremade during the year ended December 31, 2004, compared to payments of$5,666 for the year ended December 31, 2003.  As of December 31,2005, there is no principal balance outstanding, as the note was fully repaidduring the fourth quarter of 2004.

 

Finally, Dakota Ethanol hasa long-term debt obligation on a portion of a $1.323 million tax incrementrevenue bond series issued by Lake County, South Dakota on December 2,2003.  The portion for which Dakota Ethanol is obligated is estimated at$511,120. The bond was issued in connection with the refunding of a taxincrement financing bond issued by Lake County in 2001, of which Dakota Ethanolwas the recipient of the proceeds.  In 2003, Lake County became aware thatthe taxes collected from the property on which the plant was located would beinsufficient to cover the debt service of the 2001 bond issue. Based on thisdeficiency and change in interest rates during December of 2003, LakeCounty refunded the 2001 bond issue and replaced it with two separate bonds: atax-exempt bond in the amount of $824,599 and a taxable bond in the amount of$1,323,024. As a part of this refund, Dakota Ethanol entered into an agreementwith the holder of these bonds to guarantee the entire debt service on thetaxable bond issue. The taxes levied on Dakota Ethanol’s property are usedfirst towards paying the debt service of the tax-exempt bonds and any remainingtaxes are used for paying the debt service of the taxable bonds. Since theproperty taxes on the property are currently sufficient to cover a portion ofthe debt service on the taxable bond series, Dakota Ethanol’s obligation underthe guarantee is to cover the shortfall in debt service, representing thedifference between the original taxable bond amount ($1,323,024) and theestimated amount expected to be collected in property taxes from the realproperty on which Dakota Ethanol’s plant is located.   The interestrate 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. WhileDakota Ethanol’s obligation under the guarantee is expected to continue untilmaturity in 2018, such obligation may cease at some point in time if theproperty on which the plant is located appreciates in value to the extent thatLake County is able to collect a sufficient amount in taxes to cover theprincipal and interest payments on the taxable bonds. Principal payments of$53,533, $49,682 and $0 were made on the bonds for year ended December 31,2005, December 31, 2004 and December 31, 2003, respectively. Theprincipal balance outstanding was $1,219,808 as of December 31, 2005.

 

In addition to ourlong-term debt obligations, we have certain other contractual cash obligationsand commitments.  The following tables provide information regarding ourconsolidated contractual obligations and commitments as of December 31,2005:

 
| ** **                                 | ** ** | **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(1)              |       | $                                        | 12,797,219 |   | $ | 2,746,178 |   | $ | 4,653,520 |   | $ | 4,653,520 |   | $ | 744,001 |   |
| Capital Lease Obligations                  |       | 0                                        |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Operating Lease Obligations                |       | 0                                        |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Purchase Obligations(2)                    |       | 19,287,910                               |       | 14,205,969 |   | 2,611,591 |   | 2,264,750 |   | 205,600 |   |
| Other Long-Term Liabilities                |       | 435,567                                  |       | 62,617 |   | 124,855 |   | 113,163 |   | 134,932 |   |
| Total Contractual Cash Obligations         |       | $                                        | 32,520,696 |   | $ | 17,014,764 |   | $ | 7,389,966 |   | $ | 7,031,433 |   | $ | 1,084,533 |   |

 

----

(1) Estimatedlong-term debt obligations are based on the current interest rates on thenotes.  The interest rate on the fixedrate note is 9.0% and the rate on the variable rate notes is 7.25%.

(2) Purchaseobligations include estimated payments for electricity supply agreements, andcorn and natural gas purchase contracts for which the Company expects to takedelivery.

 
| ** **                        | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|-----------------------------------|------------|------------------------------------------------|------------|
| **Commercial Commitments**        | ** ** | **Total**                                      | ** ** | **Less  than  One  Year** | ** ** | **One to  Three  Years** | ** ** | **Four to  Five  Years** | ** ** | **After  Five  Years** | ** ** |
| Guarantee (1)                     |       | $                                              | 1,978,819  |   | $ | 152,217 |   | $ | 304,434 |   | $ | 304,434 |   | $ | 1,217,734 |   |
| **Total  Commercial Commitments** |       | $                                              | 1,978,819  |   | $ | 152,217 |   | $ | 304,434 |   | $ | 304,434 |   | $ | 1,217,734 |   |

 

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(1) DakotaEthanol entered into a debt service guarantee in December 2003 as part ofa re-funding on a taxable bond issue. Dakota Ethanol guarantees the payment ofall principal ($1,323,024) and interest on the taxable bonds, the totalcommitment until maturity being $1,978,819. Since local property taxes cover aportion of the debt service payment, Dakota Ethanol’s current obligation underthe guarantee is to cover a shortfall or difference between the amountestimated to be collected in property taxes on the real property on whichDakota Ethanol’s plant is located and the taxable bond amount. Currently, thereis an estimated shortfall of approximately $435,567 between the taxable bondamount and the amount expected to be collected in property taxes on the realproperty. This amount is recognized as a guarantee liability in the financialstatements.  If property taxes collected on the property becameinsufficient to cover the debt service on the taxable bonds, in part or inwhole, Dakota Ethanol’s obligation under the guarantee would increase. Forfurther information on this guarantee, please “Item 7, Management’s Discussionand Analysis of Financial Conditions and Results of Operations—Indebtedness”above.

 

**Off-Balance Sheet Arrangements.**

 

We do not have any off-balancesheet arrangements.

 

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

 

We are exposed to theimpact of market fluctuations associated with interest rates and commodityprices as discussed below.  We have no exposure to foreign currency riskas all of our business is conducted in U.S. Dollars. We use derivativefinancial instruments as part of an overall strategy to manage market risk. Weuse cash, futures and option contracts to hedge changes to the commodity pricesof corn and natural gas. We do not enter into these derivative financialinstruments for trading or speculative purposes, nor do we designate thesecontracts as hedges

 

35

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for accountingpurposes pursuant to the requirements of SFAS 133, *Accountingfor Derivative Instruments and Hedging Activities*.

 

**Interest Rate Risk**

 

We are exposed to marketrisk from changes in interest rates. Exposure to interest rate risk resultsfrom holding long term notes which bear variable interest rates. Specifically, we have $410,472 outstanding in variable rate, long-term debt asof December 31, 2005.  The specifics of each note are discussed ingreater detail in “**Item7 – Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Indebtedness**.”  DakotaEthanol manages its interest rate risk by monitoring the effect of marketchanges on interest rates and using fixed rate debt.

 

**Commodity Price Risk**

 

We are also 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 hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedgingstrategies as appropriate.  Although we believe our hedge positionsaccomplish an economic hedge against our future purchases, they are notdesignated as such for hedge accounting purposes, which would match the gain orloss 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 are immediatelyrecognized in our cost of goods sold.

 

The immediate recognition ofhedging gains and losses can cause net income to be volatile from quarter toquarter due to the timing of the change in value of the derivative instrumentsrelative to the cost and use of the commodity being hedged.  We recorded adecrease to cost of revenues of $817,433 related to derivative instruments forthe year ended December 31, 2005. We recorded an increase of cost of revenues of $4,069,718 and $25,192related to derivative instruments for the years ended December 31, 2004and 2003, respectively.  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.

 

To manage our corn pricerisk, our hedging strategy is designed to establish a price ceiling and floorfor our corn purchases.  We have taken a net long position on our exchangetraded futures and options contracts, which allows us to offset increases ordecreases in the market price of corn.  The upper limit of loss on ourfutures contracts is the difference between the contract price and the cashmarket price of corn at the time of the execution of the contract. The upperlimit of loss on our exchange traded and over-the-counter option contracts islimited to the amount of the premium we paid for the option.

 

We estimate that ourexpected corn usage is approximately 17 million bushels per year for theproduction of 48 million gallons of ethanol.  We have price protection forapproximately 33% of our expected corn usage for fiscal year ended December 31,2006 using CBOT futures and options and Over the Counter optioncontracts.  As we move forward, additional protection may benecessary.  As corn prices move in reaction to market trends andinformation, our income statement will be affected depending on the impact suchmarket movements have on the value of our derivative instruments.  As wemove forward, additional price protection may be required to solidify ourmargins into fiscal year 2007.  Depending on market movements, cropprospects and weather, these price protection positions may cause immediateadverse effects, but are expected to produce long-term positive growth for us.

 

As of December 31,2005, Dakota Ethanol is committed to purchasing 177,000 mmBtu’s of natural gasfor 2006, valued at approximately $1.7 million. The natural gas purchases represent approximately 11% of the annualplant requirements.

 

A sensitivity analysis hasbeen prepared to estimate our exposure to corn and natural gas price risk. Thetable presents the fair value of our derivative instruments as of December 31,2005 and December 31, 2004 and the potential loss in fair value resultingfrom a hypothetical 10% adverse change in such prices. The fair value of the

 

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positions is a summation ofthe fair values calculated by valuing each net position at quoted market pricesas of 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,  2005 |       | $              | 170,125.00 |                                                          | $          | 17,012.50 |   |
| December 31,  2004 |       | $              | 749,832.00 |                                                          | $          | 74,983.20 |   |

 

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**ITEM 8.****                                                    ****FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Audit Committee**Lake Area Corn Processors, LLC**

Wentworth,South Dakota

 

We have audited theaccompanying consolidated balance sheets of **LakeArea Corn Processors, LLC** as of December 31, 2005 and 2004, and therelated consolidated statements of operations, changes in members’ equity, andcash flows for each of the years ended December 31, 2005, 2004 and 2003. Theseconsolidated financial statements are the responsibility of the company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based upon our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the consolidated financial statementsare free of material misstatement. An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the company’s internal control over financialreporting. Accordingly, we do not express such an opinion. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believe ouraudits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of **LakeArea Corn Processors, LLC** as of December 31, 2005 and 2004, and theresults of its operations and its cash flows for each of the years endedDecember 31, 2005, 2004 and 2003 in conformity with accounting principlesgenerally accepted in the United States of America.

 

 

Sioux Falls, South Dakota

February 6, 2006, except fornote 12, for which the date is February 15, 2006.

 

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**LAKE AREACORN PROCESSORS, LLC**

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER31, 2005 AND 2004**

* *
| ** **                        | ** ** | **2005**       | ** **     | **2004**   | ** ** | **2005**                  | ** ** |
|-----------------------------------|------------|----------------|----------------|------------|------------|---------------------------|------------|
| ** **                        | ** ** | ** **     | ** **     | ** ** | ** ** | **Pro forma**        | ** ** |
| ** **                        | ** ** | ** **     | ** **     | ** ** | ** ** | **(Unaudited)**           | ** ** |
| ** **                        | ** ** | ** **     | ** **     | ** ** | ** ** | **See Note 12** | ** ** |
| **ASSETS**                        |       |           | ** **     |       |       |                      |       |
|                              |       |           | ** **     |       |       |                      |       |
| CURRENT ASSETS                    |       |           | ** **     |       |       |                      |       |
| Cash                              | ** ** | **$**          | **704,282**    | ** ** | $          | 2,207,504                 |       | $ | 223,139 |   |
| Receivables                       |       |           | ** **     |       |       |                      |       |
| Ethanol - related party           | ** ** | **4,928,479**  | ** **     | 4,037,263  |       | 4,928,479                 |       |
| Distiller’s grains           | ** ** | **343,456**    | ** **     | 501,501    |       | 343,456                   |       |
| Incentives                        | ** ** | **166,667**    | ** **     | 244,867    |       | 166,667                   |       |
| Other                             | ** ** | **75,000**     | ** **     | —     |       | 75,000                    |       |
| Inventory                         |       |           | ** **     |       |       |                      |       |
| Raw materials                     | ** ** | **449,887**    | ** **     | 613,521    |       | 449,887                   |       |
| Finished goods                    | ** ** | **651,580**    | ** **     | 940,132    |       | 651,580                   |       |
| Parts inventory                   | ** ** | **889,481**    | ** **     | 611,736    |       | 889,481                   |       |
| Work in process                   | ** ** | **304,610**    | ** **     | 358,489    |       | 304,610                   |       |
| Investment in commodity contracts | ** ** | **170,125**    | ** **     | 749,832    |       | 170,125                   |       |
| Prepaid expenses                  | ** ** | **353,455**    | ** **     | 89,022     |       | 353,455                   |       |
|                              | ** ** | ** **     | ** **     |       |       |                      |       |
| Total current assets              | ** ** | **9,037,022**  | ** **     | 10,353,867 |       | 8,555,879                 |       |
|                              |       |           | ** **     |       |       |                      |       |
| PROPERTY AND EQUIPMENT            |       |           | ** **     |       |       |                      |       |
| Land                              | ** ** | **106,394**    | ** **     | 106,394    |       | 106,394                   |       |
| Land improvements                 | ** ** | **2,329,933**  | ** **     | 2,280,805  |       | 2,329,933                 |       |
| Buildings                         | ** ** | **7,439,179**  | ** **     | 7,439,179  |       | 7,439,179                 |       |
| Equipment                         | ** ** | **32,894,616** | ** **     | 31,539,548 |       | 32,894,616                |       |
| Construction in progress          | ** ** | **19,967**     | ** **     | 580,853    |       | 19,967                    |       |
| ** **                        |       | **42,790,089** | ** **     | 41,946,779 |       | 42,790,089                |       |
| Less accumulated depreciation     | ** ** | **(9,321,715** | **)**          | (7,083,923 | )          | (9,321,715                | )          |
|                              | ** ** | ** **     | ** **     |       |       |                      |       |
| Net property and equipment        | ** ** | **33,468,374** | ** **     | 34,862,856 |       | 33,468,374                |       |
|                              |       |           | ** **     |       |       |                      |       |
| OTHER ASSETS                      |       |           | ** **     |       |       |                      |       |
| Guarantee premium                 | ** ** | **359,206**    | ** **     | 455,762    |       | 359,206                   |       |
| Other                             | ** ** | **81,520**     | ** **     | 392,955    |       | 81,520                    |       |
|                              | ** ** | ** **     | ** **     |       |       |                      |       |
| Total other assets                | ** ** | **440,726**    | ** **     | 848,717    |       | 440,726                   |       |
|                              |       |           | ** **     |       |       |                      |       |
| ** **                        |       | **$**          | **42,946,122** | ** ** | $          | 46,065,440                |       | $ | 42,464,979 |   |

 

See Notes to ConsolidatedFinancial Statements

 

39

----

* *
| ** **                                                                  | ** ** | **2005**       | ** **     | **2004**   | ** ** | **2005**                  | ** ** |
|-----------------------------------------------------------------------------|------------|----------------|----------------|------------|------------|---------------------------|------------|
| ** **                                                                  | ** ** | ** **     | ** **     | ** ** | ** ** | **Pro forma**        | ** ** |
| ** **                                                                  | ** ** | ** **     | ** **     | ** ** | ** ** | **(Unaudited)**           | ** ** |
| ** **                                                                  | ** ** | ** **     | ** **     | ** ** | ** ** | **See Note 12** | ** ** |
| **LIABILITIES AND MEMBERS’ EQUITY**                                    |       |           |           |       |       | ** **                |       |
|                                                                        |       |           |           |       |       |                      |       |
| CURRENT LIABILITIES                                                         |       |           |           |       |       |                      |       |
| Accounts payable                                                            | ** ** | **$**          | **4,427,614**  |       | $          | 4,545,911                 |       | $ | 4,427,614 |   |
| Accounts payable - related party                                            | ** ** | **180,488**    |           | 299,384    |       | 180,488                   |       |
| Accounts payable - construction - related  party                            | ** ** | **—**     |           | 270,028    |       | —                    |       |
| Distributions payable                                                       | ** ** | **—**     |           | 2,073,400  |       | —                    |       |
| Distributions payable - minority interest                                   | ** ** | **—**     |           | 280,000    |       | —                    |       |
| Accrued liabilities                                                         | ** ** | **525,434**    |           | 301,935    |       | 525,434                   |       |
| Current portion of guarantee payable                                        | ** ** | **62,617**     |           | 62,692     |       | 62,617                    |       |
| Current portion of notes payable                                            | ** ** | **1,900,534**  |           | 2,666,308  |       | 1,900,534                 |       |
|                                                                        | ** ** | ** **     |           |       |       |                      |       |
| Total current liabilities                                                   | ** ** | **7,096,687**  |           | 10,499,658 |       | 7,096,687                 |       |
|                                                                        |       |           |           |       |       |                      |       |
| LONG-TERM LIABILITIES                                                       |       |           |           |       |       |                      |       |
| Guarantee payable                                                           | ** ** | **372,950**    |           | 448,429    |       | 372,950                   |       |
| Notes payable                                                               | ** ** | **8,228,246**  |           | 9,434,350  |       | 11,125,522                |       |
|                                                                        | ** ** | ** **     |           |       |       |                      |       |
| Total long-term liabilities                                                 | ** ** | **8,601,196**  |           | 9,882,779  |       | 11,498,472                |       |
|                                                                        | ** ** | ** **     |           |       |       |                      |       |
| MINORITY INTEREST                                                           | ** ** | **3,234,649**  |           | 3,055,597  |       | 2,818,230                 |       |
|                                                                        | ** ** | ** **     |           |       |       |                      |       |
| COMMITMENTS AND CONTINGENCIES                                               |       |           |           |       |       |                      |       |
|                                                                        |       |           |           |       |       |                      |       |
| MEMBERS’ EQUITY                                                        |       |           |           |       |       |                      |       |
| Capital units, $0.50 stated value,  29,620,000 units issued and outstanding | ** ** | **14,810,000** |           | 14,810,000 |       | 14,810,000                |       |
| Additional paid-in capital                                                  | ** ** | **96,400**     |           | 96,400     |       | 96,400                    |       |
| Retained earnings                                                           | ** ** | **9,107,190**  |           | 7,721,006  |       | 6,145,190                 |       |
|                                                                        | ** ** | ** **     |           |       |       |                      |       |
| Total members’ equity                                                  | ** ** | **24,013,590** |           | 22,627,406 |       | 21,051,590                |       |
|                                                                        |       |           |           |       |       |                      |       |
|                                                                        | ** ** | **$**          | **42,946,122** |       | $          | 46,065,440                |       | $ | 42,464,979 |   |

 

40

----

 

**LAKE AREA CORN PROCESSORS, LLC**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**YEARS ENDED DECEMBER 31, 2005,2004 AND 2003**

 
| ** **                                                                                     | ** ** | **2005**       | ** **     | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------|----------------|------------|------------|------------|------------|
| REVENUES                                                                                       |       |           |           |       |       |       |       |
| Sales - related party                                                                          | ** ** | **$**          | **69,125,699** |       | $          | 71,648,488 |       | $ | 56,450,057 |   |
| Sales                                                                                          | ** ** | **10,239,951** |           | 11,769,124 |       | 11,427,190 |       |
| Incentive income                                                                               | ** ** | **655,320**    |           | 1,014,874  |       | 1,513,935  |       |
| Total revenues                                                                                 | ** ** | **80,020,970** |           | 84,432,486 |       | 69,391,182 |       |
|                                                                                           |       |           |           |       |       |       |       |
| COST OF  REVENUES                                                                              | ** ** | **63,201,108** |           | 71,736,360 |       | 60,198,865 |       |
|                                                                                           |       |           |           |       |       |       |       |
| GROSS PROFIT                                                                                   | ** ** | **16,819,862** |           | 12,696,126 |       | 9,192,317  |       |
|                                                                                           | ** ** | ** **     |           |       |       |       |       |
| EXPENSES                                                                                       |       |           |           |       |       |       |       |
| General and administrative                                                                     | ** ** | **3,610,590**  |           | 3,058,024  |       | 2,620,736  |       |
|                                                                                           | ** ** | ** **     |           |       |       |       |       |
| INCOME FROM  OPERATIONS                                                                        | ** ** | **13,209,272** |           | 9,638,102  |       | 6,571,581  |       |
| OTHER INCOME  (EXPENSE)                                                                        |       |           |           |       |       |       |       |
| Interest and other income                                                                      | ** ** | **238,705**    |           | 223,548    |       | 147,629    |       |
| Interest and other expense                                                                     | ** ** | **(1,089,364** | **)**          | (1,300,647 | )          | (1,461,763 | )          |
| Total other income (expense)                                                                   | ** ** | **(850,659**   | **)**          | (1,077,099 | )          | (1,314,134 | )          |
|                                                                                           |       |           | ** **     |       |       |       |       |
| NET INCOME  BEFORE MINORITY INTEREST                                                           | ** ** | **12,358,613** | ** **     | 8,561,003  |       | 5,257,447  |       |
|                                                                                           |       |           | ** **     |       |       |       |       |
| MINORITY  INTEREST IN SUBSIDIARY                                                               | ** ** | **(1,494,029** | **)**          | (1,037,458 | )          | (641,767   | )          |
|                                                                                           |       |           |           |       |       |       |       |
| NET INCOME                                                                                     | ** ** | **$**          | **10,864,584** |       | $          | 7,523,545  |       | $ | 4,615,680 |   |
|                                                                                           |       |           |           |       |       |       |       |
| BASIC AND  DILUTED EARNINGS PER UNIT                                                           | ** ** | **$**          | **0.37**       |       | $          | 0.25       |       | $ | 0.16 |   |
|                                                                                           |       |           |           |       |       |       |       |
| WEIGHTED AVERAGE UNITS OUTSTANDING FOR THE  CALCULATION OF BASIC AND DILUTED EARNINGS PER UNIT | ** ** | **29,620,000** |           | 29,620,000 |       | 29,620,000 |       |

 

See Notes to ConsolidatedFinancial Statements

 

41

----

 

**LAKE AREACORN PROCESSORS, LLC**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN MEMBERS’ EQUITYYEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

 
| ** **                                     | ** ** | ** **             | ** ** | ** ** | ** **       | **Additional** | ** ** | ** **   | ** ** | ** ** | ** **      |
|------------------------------------------------|------------|------------------------|------------|------------|------------------|----------------|------------|--------------|------------|------------|-----------------|
| ** **                                     | ** ** | **Capital Units** | ** ** | ** ** | ** **       | **Paid-In**    | ** ** | **Retained** | ** ** | ** ** | ** **      |
| ** **                                     | ** ** | **Units**              | ** ** | **Amount** | ** **       | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  | ** **      |
| BALANCE, DECEMBER 31, 2002                     |       | 29,620,000             |       | $          |  14,810,000 |           | $          |  96,400 |       | $          |  5,356,381 |   | 20,262,781 |   |
| Net income                                     |       | —                 |       | —     |             | —         |       | 4,615,680    |       | 4,615,680  |            |
| Distributions paid ($.12 per capital unit)     |       | —                 |       | —     |             | —         |       | (3,554,400   | )          | (3,554,400 | )               |
|                                           |       |                   |       |       |             |           |       |         |       |       |            |
| BALANCE, DECEMBER 31, 2003                     |       | 29,620,000             |       | 14,810,000 |             | 96,400         |       | 6,417,661    |       | 21,324,061 |            |
| Net income                                     |       | —                 |       | —     |             | —         |       | 7,523,545    |       | 7,523,545  |            |
| Distributions paid ($.14 per capital unit)     |       | —                 |       | —     |             | —         |       | (4,146,800   | )          | (4,146,800 | )               |
| Distributions payable ($.07 per capital  unit) |       | —                 |       | —     |             | —         |       | (2,073,400   | )          | (2,073,400 | )               |
|                                           |       |                   |       |       |             |           |       |         |       |       |            |
| BALANCE, DECEMBER 31, 2004                     |       | 29,620,000             |       | $          | 14,810,000       |           | $          | 96,400       |       | $          | 7,721,006       |   | 22,627,406 |   |
| Net income                                     |       | —                 |       | —     |             | —         |       | 10,864,584   |       | 10,864,584 |            |
| Distributions paid ($.32 per capital unit)     |       | —                 |       | —     |             | —         |       | (9,478,400   | )          | (9,478,400 | )               |
|                                           |       |                   |       |       |             |           |       |         |       |       |            |
| **BALANCE, DECEMBER 31, 2005**                 | ** ** | **29,620,000**         | ** ** | **$**      | **14,810,000**   | ** **     | **$**      | **96,400**   | ** ** | **$**      | **9,107,190**   | ** ** | **$** | **24,013,590** | ** ** |
|                                                |            |                        |            |            |                  |                |            |              |            |            |                 |  |  |  |  |

 

See Notes to ConsolidatedFinancial Statements

 

42

----

 

**LAKE AREACORN PROCESSORS, LLC**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

 
| ** **                                         | ** ** | **2005**        | ** **     | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------------|------------|-----------------|----------------|------------|------------|------------|------------|
| OPERATING ACTIVITIES                               |       |            | ** **     |       |       |       |       |
| Net income                                         | ** ** | **$**           | **10,864,584** | ** ** | $          | 7,523,545  |       | $ | 4,615,680 |   |
| Changes to net income not affecting cash           |       |            | ** **     |       |       |       |       |
| Depreciation                                       | ** ** | **2,274,401**   | ** **     | 2,195,723  |       | 2,164,551  |       |
| Amortization                                       | ** ** | **137,266**     | ** **     | 159,715    |       | 84,342     |       |
| Minority interest in subsidiary                    | ** ** | **1,494,029**   | ** **     | 1,037,458  |       | 641,767    |       |
| Other                                              | ** ** | **(199,263**    | **)**          | (214,428   | )          | (124,310   | )          |
| (Increase) decrease in                             |       |            | ** **     |       |       |       |       |
| Receivables                                        | ** ** | **(729,972**    | **)**          | (123,044   | )          | (2,834     | )          |
| Inventory                                          | ** ** | **228,320**     | ** **     | 905,491    |       | (645,267   | )          |
| Prepaid expenses                                   | ** ** | **(264,433**    | **)**          | 8,255      |       | (58,861    | )          |
| Investment in commodity contracts                  | ** ** | **579,707**     | ** **     | (21,282    | )          | (292,207   | )          |
| Increase (decrease) in                             |       |            | ** **     |       |       |       |       |
| Accounts payable                                   | ** ** | **(232,340**    | **)**          | (33,123    | )          | 753,689    |       |
| Accrued liabilities                                | ** ** | **147,945**     | ** **     | (49,927    | )          | (49,671    | )          |
|                                               | ** ** | ** **      | ** **     |       |       |       |       |
| NET CASH FROM OPERATING ACTIVITIES                 | ** ** | **14,300,244**  | ** **     | 11,388,383 |       | 7,086,879  |       |
|                                               | ** ** | ** **      | ** **     |       |       |       |       |
| INVESTING ACTIVITIES                               |       |            | ** **     |       |       |       |       |
| Change in other assets                             | ** ** | **469,988**     | ** **     | 202,690    |       | 95,906     |       |
| Purchase of property and equipment                 | ** ** | **(1,154,799**  | **)**          | (890,456   | )          | (326,194   | )          |
|                                               | ** ** | ** **      | ** **     |       |       |       |       |
| NET CASH USED FOR INVESTING ACTIVITIES             | ** ** | **(684,811**    | **)**          | (687,766   | )          | (230,288   | )          |
|                                               | ** ** | ** **      | ** **     |       |       |       |       |
| FINANCING ACTIVITIES                               |       |            | ** **     |       |       |       |       |
| Outstanding checks in excess of bank  balance      | ** ** | **—**      | ** **     | (812,144   | )          | 236,343    |       |
| Principal payments on notes payable                | ** ** | **(1,971,878**  | **)**          | (3,065,845 | )          | (2,936,067 | )          |
| Distributions paid to minority members             | ** ** | **(1,594,977**  | **)**          | (565,140   | )          | (505,651   | )          |
| Distributions paid to LACP members                 | ** ** | **(11,551,800** | **)**          | (4,146,800 | )          | (3,554,400 | )          |
|                                               | ** ** | ** **      | ** **     |       |       |       |       |
| NET CASH USED FOR FINANCING ACTIVITIES             | ** ** | **(15,118,655** | **)**          | (8,589,929 | )          | (6,759,775 | )          |
|                                               | ** ** | ** **      | ** **     |       |       |       |       |
| NET INCREASE (DECREASE) IN CASH                    | ** ** | **(1,503,222**  | **)**          | 2,110,688  |       | 96,816     |       |
|                                               | ** ** | ** **      | ** **     |       |       |       |       |
| CASH AT BEGINNING OF PERIOD                        | ** ** | **2,207,504**   | ** **     | 96,816     |       | —     |       |
|                                               |       |            | ** **     |       |       |       |       |
| CASH AT END OF PERIOD                              | ** ** | **$**           | **704,282**    | ** ** | $          | 2,207,504  |       | $ | 96,816 |   |
|                                               |       |            | ** **     |       |       |       |       |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION |       |            | ** **     |       |       |       |       |
|                                               |       |            | ** **     |       |       |       |       |
| Cash paid during the year for interest             | ** ** | **$**           | **839,838**    | ** ** | $          | 1,300,647  |       | $ | 1,461,763 |   |

 

See Notes to ConsolidatedFinancial Statements

 

43

----

 

**LAKE AREACORN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2005 AND 2004**

 

**NOTE 1 -NATURE OF OPERATIONS**

 

*PrincipalBusiness Activity*

 

Lake Area Corn Processors,LLC (the Company) is a South Dakota limited liability company located inWentworth, South Dakota. The Company was organized by investors to provide aportion of the corn supply for a 40 million-gallon (annual capacity) ethanolplant, owned by Dakota Ethanol, LLC (Dakota Ethanol). On September 4, 2001, theethanol plant commenced its principal operations. The Company sells ethanol andrelated products to customers located in North America.

 

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

 

*Principlesof Consolidation*

 

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

 

*RevenueRecognition*

 

Revenue from the productionof ethanol and related products is recorded when title transfers to customers,net of allowances for estimated returns. Generally, ethanol and relatedproducts are shipped FOB shipping point, based on written contract termsbetween Dakota Ethanol and it customers. Collectibility of revenue isreasonably assured based on historical evidence of collectibility betweenDakota Ethanol and its customers. Interest income is recognized as earned.

 

*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), shipping costs on sales, and direct labor costs.

 

Shipping costs incurred byDakota Ethanol in the sale of ethanol are recorded as a component of cost of revenues.Shipping costs incurred in the sale of distiller’s grains, however, arededucted from the gross sales price and are not included in the cost ofrevenues. Accordingly, revenue for the sale of distiller’s grains is recordedbased on the net selling price reported to Dakota Ethanol by the marketer. Theshipping costs for the sale of distiller’s grains are recorded as a reductionfrom the gross sales prices and revenues. Shipping costs on distiller’s grainswere $3,045,394, $3,017,827, and $2,887,124 for the years ended December 31,2005, 2004 and 2003, respectively.

 

*Generaland Administrative Expenses*

 

The primary components ofgeneral and administrative expenses are management fee expenses, professionalfee expenses (legal and audit), and insurance expenses.

 

*InventoryValuation*

 

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

 

In addition, futures andoption contracts are marked to market through cost of revenues.

 

44

----

 

**LAKE AREACORN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2005 AND 2004**

 

*Cash andCash 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 afinancing activity on the statement of cash flows.

 

*Receivablesand Credit Policies*

 

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

 

Trade receivables are statedat the amount billed to the customer.

 

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

 

The carrying amount of tradereceivables is reduced by a valuation allowance that reflects management’s bestestimate 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*

 

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

 

Dakota Ethanol enters intoshort-term cash grain, option and futures contracts as a means of securing cornfor the ethanol plant and managing exposure to changes in commodity prices. Allof Dakota Ethanol’s derivatives are designated as non-hedge derivatives.Although the contracts are effective economic hedges of specified risks, theyare not designated as and accounted for as hedging instruments.

 

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

 

Unrealized gains and lossesrelated to derivative contracts are included as a component of cost of revenuesin the accompanying consolidated financial statements. Inventories are recordedat net realizable value so that gains and losses on derivative contracts areoffset by gains and losses on inventories and reflected in earnings currently.For the statement of cash flows, such contract transactions are classified asoperating activities.

 

Dakota Ethanol has recordeda decrease to cost of revenues of $817,433 related to derivative contracts forthe year ended December 31, 2005. Dakota Ethanol has recorded an increase tocost of revenues of $4,069,718, and $25,192 related to derivative contracts forthe years ended December 31, 2004 and 2003, respectively.

 

45

----

 

**LAKE AREACORN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2005 AND 2004**

 

*GuaranteePremium*

 

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

 

*MinorityInterest*

 

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

 

*Use ofEstimates*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amount of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

*Concentrationsof Credit Risk*

 

The Company’s cash balancesare maintained in bank depositories and periodically exceed federally insuredlimits.

 

*Propertyand Equipment*

 

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

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

 

Equipment relates to twogeneral categories: mechanical equipment and administrative and maintenanceequipment. 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 is equipment with useful lives of 5 to15 years, including vehicles, computer systems, security equipment, testingdevices and shop equipment.

 

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

 

*EarningsPer Unit*

 

For purposes of calculatingbasic earnings per unit, units issued are considered outstanding on theeffective date of issuance. Diluted earnings per unit are calculated byincluding dilutive potential equity units in the denominator.

 

46

----

 

**LAKE AREACORN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2005 AND 2004**

 

*IncomeTaxes*

 

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

 

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

 

*EnvironmentalLiabilities*

 

Dakota Ethanol’s operationsare subject to environmental laws and regulations adopted by variousgovernmental authorities in the jurisdiction in which it operates. These lawsrequire Dakota Ethanol to investigate and remediate the effects of the releaseor disposal of materials at its locations. Accordingly, Dakota Ethanol hasadopted policies, practices and procedures in the areas of pollution control,occupational health and the production, handling, storage and use of hazardousmaterials to prevent material environmental or other damage, and to limit thefinancial liability which could result from such events. Environmentalliabilities are recorded when Dakota Ethanol’s liability is probable and thecosts can be reasonably estimated.

 

*RecentlyIssued Accounting Pronouncements*

 

There are no recently issuedaccounting pronouncements that have a material impact on the Company.

 

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

 

On April 22, 2005, DakotaEthanol renewed a revolving promissory note from First National Bank of Omahain the amount of $3,000,000. The note expires on April 21, 2006 and the amountavailable is subject to certain financial ratios. Interest on the outstandingprincipal balances will accrue at 50 basis points above the bank’s base rate(7.25 percent at December 31, 2005). There is a commitment fee of 3/8 percenton the unused portion of the $3,000,000 availability. The note iscollateralized by the ethanol plant, its accounts receivable and inventories.On December 31, 2005 and 2004, Dakota Ethanol had $0 outstanding and $3,000,000available to be drawn on the revolving promissory note.

 

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

 

Dakota Ethanol originallyhad a $26,600,000 note payable to First National Bank of Omaha, Nebraska (theBank) for the construction and permanent financing of the plant (Term Note 1).On July 29, 2002, Dakota Ethanol amended the construction loan agreement tocreate two term notes from its original Term Note 1, creating Term Notes 2 and3, and converted Term Note 3 into Term Notes 4 and 5 on November 1, 2002.

 

As part of the note payableagreement, Dakota Ethanol is subject to certain restrictive covenantsestablishing minimum reporting requirements, ratios, working capital and networth requirements. Dakota Ethanol is in compliance with the covenants as ofDecember 31, 2005. The note is collateralized by the ethanol plant, which had anet book value of approximately $33,500,000 on December 31, 2005, its accountsreceivable and inventories. The note is subject to prepayment penalties basedon the cost incurred by the Bank to break its fixed interest rate commitment.

 

The balance of Term Note 2is due and payable in quarterly installments of $581,690 commencing October 1,2002, through September 1, 2011. Interest on outstanding principal balanceswill accrue at a rate of 9 percent. The other terms and conditions of Term Note1 remain in effect.

 

47

----

 

**LAKE AREACORN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2005 AND 2004**

 

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

 

The balance of Term Note 4is due and payable in quarterly installments of $329,777 commencing January 1,2003, through September 1, 2011. The installment will first be applied to theaccrued interest on Term Note 5, and the remainder will be applied to accruedinterest and principal of Term Note 4. Interest on outstanding principalbalances will accrue at 50 basis points above the lender’s rate (7.25 percentat December 31, 2005). This rate is subject to various adjustments based onvarious levels of indebtedness to net worth, as defined by the agreement.

 

The balance of Term Note 5is due and payable in quarterly installments of interest only commencingJanuary 1, 2003, through September 1, 2011. Interest on outstanding principalbalances will accrue at 50 basis points above the lender’s rate (7.25 percentat December 31, 2005). This rate is subject to various adjustments based onvarious levels of indebtedness to net worth, as defined by the agreement.Dakota Ethanol may elect to borrow any principal amount repaid on Term Note 5up to $5,000,000 subject to the terms of the agreement. Should Dakota Ethanolelect to utilize this feature, the lender will assess an unused commitment feeof 3/8 percent on the unused portion of the $5,000,000. In addition, the bankdraws the checking account balance to a minimum balance on a daily basis. Theexcess cash pays down or the shortfall is drawn upon Term Note 5 as needed. OnDecember 31, 2005, 2004 and 2003, Dakota Ethanol had $0 outstanding and$5,000,000 available to be drawn on Term Note 5.

 

The balance of the notespayable as of December 31, 2005 and 2004 is as follows:

 
| ** **                                 | ** ** | **2005**       | ** **    | **2004**   | ** ** |
|--------------------------------------------|------------|----------------|---------------|------------|------------|
|                                       |       |           |          |       |       |
| Note payable to First National Bank, Omaha |       |           |          |       |       |
| Term Note 2                                | ** ** | **$**          | **9,718,308** |       | $          | 10,752,883 |   |
| Term Note 4                                | ** ** | **410,472**    |          | 1,347,775  |       |
| Term Note 5                                | ** ** | **—**     |          | —     |       |
| ** **                                 |       | **10,128,780** |          | 12,100,658 |       |
|                                       | ** ** | ** **     |          |       |       |
| Less current portion                       | ** ** | **(1,900,534** | **)**         | (2,666,308 | )          |
| ** **                                 |       | ** **     |          |       |       |
| ** **                                 |       | **$**          | **8,228,246** |       | $          | 9,434,350 |   |

 

Minimum principal paymentsfor the next five years are as follows:

 
| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2006                                         |       | $          | 1,900,534  |   |
| 2007                                         |       | 1,630,754  |       |
| 2008                                         |       | 1,783,116  |       |
| 2009                                         |       | 1,953,092  |       |
| 2010                                         |       | 2,137,503  |       |
|                                              |            |            |            |  |

 

**NOTE 5 -TAX INCREMENT FINANCING**

 

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

 

48

----

 

**LAKE AREACORN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2005 AND 2004**

 

related to the improvementof Dakota Ethanol’s real property. The proceeds of the financing were recordedas a reduction of the cost basis of the applicable property and equipment.

 

**NOTE 6 -EMPLOYEE BENEFIT PLANS**

 

Dakota Ethanol maintains a401(k) plan for the employees who meet the eligibility requirements set forthin the plan documents. Dakota Ethanol matches a percentage of the employees’contributed earnings. Employer contributions to the plan totaled approximately$16,000, $19,000 and $9,000 for the years ended December 31, 2005, 2004 and2003, respectively.

 

**NOTE 7 -INCOME TAXES**

 

The difference between thefinancial statement basis and tax basis of assets is as follows:

 
| ** **                                         | ** ** | **2005**        | ** **     | **2004**    | ** ** |
|----------------------------------------------------|------------|-----------------|----------------|-------------|------------|
|                                               | ** ** | ** **      | ** **     |        |       |
| Financial  statement basis of assets               | ** ** | **$**           | **42,946,122** | ** **  | $          | 46,065,440 |   |
| Less tax  over book depreciation                   | ** ** | **(12,382,942** | **)**          | (10,553,100 | )          |
| Organization  and start-up costs capitalized - net | ** ** | **94,569**      | ** **     | 236,723     |       |
| TIF  guarantee                                     | ** ** | **(359,206**    | **)**          | (455,762    | )          |
| Other book  and tax differences                    | ** ** | **1,250,535**   | ** **     | (283,559    | )          |
|                                               | ** ** | ** **      | ** **     |        |       |
| Tax basis of  assets                               | ** ** | **$**           | **31,549,078** | ** **  | $          | 35,009,742 |   |

 
| ** **                                | ** ** | **2005**     | ** **     | **2004**   | ** ** |
|-------------------------------------------|------------|--------------|----------------|------------|------------|
|                                      | ** ** | ** **   | ** **     | ** ** |       |   |   |
| Financial  statement basis of liabilities | ** ** | **$**        | **42,946,122** | ** ** | $          | 46,065,440 |   |
| TIF  guarantee payable                    | ** ** | **(435,567** | **)**          | (511,121   | )          |
| Other book  and tax differences           | ** ** | **(54,800**  | **)**          | (47,908    | )          |
|                                      |       |         | ** **     |       |       |
| Tax basis of  liabilities                 | ** ** | **$**        | **42,455,755** | ** ** | $          | 45,506,411 |   |

 

**NOTE 8 - FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

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

 

The carrying amount oflong-term obligations of $10,564,347 had a fair value of approximately$10,812,000 based on estimated interest rates for comparable debt.

 

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

 

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

 

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

 

The Company has entered intocontracts and agreements regarding the operation and management of the ethanolplant.

 

49

----

 

**LAKE AREACORN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2005 AND 2004**

 

Dakota Ethanol has enteredinto agreements for the purchase of electricity and natural gas. The followingagreements commenced on or about September 4, 2001.

 

Natural Gas – The agreement provides Dakota Ethanol witha fixed transportation rate for natural gas for a ten-year term, renewable forten-year terms. In addition, the agreement provides a pricing structure fornatural gas for a two-year period based on market rates. The agreement does notrequire minimum purchases of natural gas during their initial term.

 

Electricity – The agreement provides Dakota Ethanol withelectric service for a term of ten years, renewable for five-year periods. Theagreement sets rates for energy usage based on market rates and requires aminimum purchase of electricity each month during the initial term of theagreement.

 

Expenses related to theagreement for the purchase of electricity and natural gas were $15,484,077,$12,168,447 and $11,303,754 for the years ended December 31, 2005, 2004 and2003, respectively.

 

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

 
| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2006                                         |       | $          | 303,600    |   |
| 2007                                         |       | 303,600    |       |
| 2008                                         |       | 308,400    |       |
| 2009                                         |       | 308,400    |       |
| 2010                                         |       | 308,400    |       |
| 2011                                         |       | 205,600    |       |
|                                         |       |       |       |
|                                         |       | $          | 1,738,000  |   |

 

Ethanol Fuel MarketingAgreement – DakotaEthanol has an agreement with Renewable Products Marketing Group, a jointventure of ethanol producers, for the sale, marketing, billing and receipt ofpayment and other administrative services for all ethanol produced by the planteffective January 1, 2006. The initial agreement expires on March 31, 2007, andis automatically renewed for successive one-year terms unless terminated 90days prior to expiration.

 

Distiller’s Grain MarketingAgreement – DakotaEthanol has an agreement with Commodity Specialists Company for the marketingof all distiller’s dried grains produced by the plant effective on December 1,2005. The agreement expires on December 1, 2006, and is automatically renewedfor successive one-year terms unless terminated 120 days prior to expiration.In addition, Commodity Specialists Company has entered into rail car leases forthe shipment of Dakota Ethanol’s products. Dakota Ethanol has agreed toreimburse Commodity Specialists Company for the costs related to the leases.

 

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

 

50

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**LAKE AREACORN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2005 AND 2004**

 
| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|
|                                         |       |       |       |
| 2006                                         |       | $          | 859,800    |   |
| 2007                                         |       | 859,800    |       |
| 2008                                         |       | 859,800    |       |
| 2009                                         |       | 859,800    |       |
| 2010                                         |       | 788,150    |       |
|                                              |            |            |            |  |

 

Risk Management Agreement – Dakota Ethanol has an agreement withFCStone, LLC for the risk management and grain procurement program related tocorn and energy requirements of the plant. The agreement expires on November 1,2006, and is renewable for successive one-year terms unless terminated fourmonths prior to expiration.

 

Dakota Ethanol receives anincentive payment from the United States Department of Agriculture (USDA) forthe use of corn to produce ethanol. In accordance with the terms of thisarrangement, revenue is recorded based on incremental production of ethanolcompared to the prior year. Incentive expense of $46,328 was recorded for theyear ended December 31, 2005, as ethanol production decreased compared to theprior year and a refund of incentives received earlier in the program year wasowed. Incentive revenue of $348,207 and $535,878 was recorded for the yearsended December 31, 2004 and 2003, respectively. It is uncertain if there isenough funding for the program to pay fully all applications during the year.The incentive will expire on September 30, 2006.

 

Dakota Ethanol also receivesan incentive payment from the State of South Dakota to produce ethanol. Inaccordance with the terms of this arrangement, revenue is recorded based onethanol sold. Incentive revenue of $701,648, $666,667 and $978,057 was recordedfor the years ended December 31, 2005, 2004 and 2003, respectively. DakotaEthanol did not receive the annual maximum for the 2005 program year due tobudget constraints on the State of South Dakota program and will not likelyreceive the annual maximum under the 2006 program year.

 

As of December 31, 2005,Dakota Ethanol is committed to purchasing 5.7 million bushels of corn on aforward contract basis through December 31, 2006, valued at approximately $11.7million. The corn purchase contracts represent 33% of the annual plant cornusage. Further, Dakota Ethanol is committed to purchasing 177,000 mmBtu’s ofnatural gas for 2006, valued at approximately $1.7 million. The natural gaspurchases represent approximately 11% of the annual plant requirements.

 

The following commitments,contingencies and agreements are with related parties.

 

Each capital unit holder hasentered into a corn delivery agreement with the Company. For each unit owned,one-fourth bushel of corn is required to be delivered annually. The price paidfor the corn is the average corn price for the applicable four-month period(trimester) based on several local grain elevators’ cash corn price. Thedelivery agreements commence at the discretion of the Company to coincide withthe completion and operation of the plant. Members can opt out of delivery ifthey meet certain criteria and are approved by the Board of Managers. Based onthe number of units outstanding, 3,970,000 bushels of corn will be deliveredannually by the unit holders. This represents approximately 28 percent of thecorn required for the operation of the plant at its 40,000,000 gallon capacity.Purchases of corn from corn delivery agreements and cash contracts from theCompany’s stockholders totaled approximately $7,090,000, $10,620,000 and$11,960,000 for the years ended December 31, 2005, 2004 and 2003, respectively,of which $621,000, $442,000 and $997,000 was recorded as a liability atDecember 31, 2005, 2004 and 2003, respectively.

 

The Company and the minoritymembers of Dakota Ethanol, or parties related to the minority members throughcommon ownership, have entered into the following agreements:

 

51

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**LAKE AREACORN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2005 AND 2004**

 

Ethanol Marketing Contract – Dakota Ethanol has an agreement withEthanol Products, LLC, a joint venture of ethanol producers, for the sale,marketing, billing and receipt of payment and other administrative services forall ethanol produced by the plant. In the event Ethanol Products, LLC is unableto collect from their customer, Dakota Ethanol is charged for the applicablebad debt. The initial agreement expires on September 4, 2006, and isautomatically renewed for successive five-year terms unless terminated threemonths prior to expiration. Dakota Ethanol terminated the agreement effectiveJanuary 1, 2006.

 

Distiller’s Grains MarketingContract – DakotaEthanol has an agreement with Dakota Gold Marketing (formerly known as DakotaCommodities) for the marketing of all distiller’s grains produced by the plant.The agreement provides for an agency relationship in that Dakota Gold Marketingdoes not take title to the distiller’s grains, but acts as a broker on behalfof Dakota Ethanol. The agreement expires on September 4, 2006, and isautomatically renewed for successive five-year terms unless terminated threemonths prior to expiration. Dakota Ethanol terminated the agreement effectiveDecember 1, 2005.

 

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

 

Corn Price Risk ManagementAgreement – DakotaEthanol has an agreement with Broin Management, LLC for the hedge and pricerisk management related to corn requirements of the plant. The agreementexpires on August 1, 2005, and is renewable for successive one-year termsunless terminated thirty days prior to expiration. Dakota Ethanol terminatedthe agreement effective January 1, 2006.

 

Information TechnologyManagement – DakotaEthanol has an agreement with Broin and Associates, Inc., for informationtechnology and systems management. The agreement expires on September 11, 2005,and is automatically renewed for successive two-year terms unless terminatedsixty days prior to expiration. Dakota Ethanol terminated the agreementeffective October 1, 2005.

 

Dakota Ethanol has anagreement with Broin and Associates, Inc., for the purchase of certain softwareand data management services. The annual fee for the management service isadjusted each year for changes in the consumer price index. The agreementexpires on December 15, 2006, and is automatically renewed for successivetwo-year terms unless terminated sixty days prior to expiration. Dakota Ethanolterminated the agreement effective January 1, 2006.

 

Construction Contract – Dakota Ethanol has an agreement with Broinand Associates, Inc., for the design and construction of process equipment andenvironmental control equipment. The total value of the project isapproximately $740,000. The project began in November of 2004 and was completedin 2005.

 

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

 

| ** **                            | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|
| ** **                            | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Ethanol Sales                         |       | $                                           | 69,125,699 |   | $ | 71,648,488 |   | $ | 56,450,057 |   |
| Management fees expense               |       | 1,071,338                                   |       | 903,884 |   | 751,686 |   |
| Marketing fees expense - all products |       | 1,229,662                                   |       | 691,076 |   | 651,485 |   |
|                                       |            |                                             |            |  |  |  |  |  |  |  |

 

52

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**LAKE AREACORN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2005 AND 2004**

 

Environmental – During the year ended December 31, 2002,management became aware that the ethanol plant may have exceeded certain emissionlevels allowed by their operating permit. The Company has disclosed thesituation to the appropriate state regulatory agency and has taken steps toreduce the emissions to acceptable levels. Management has not accrued aliability for environmental remediation costs since the costs, if any, cannotbe estimated.

 

**NOTE 10 -RELATED PARTY TRANSACTIONS**

 

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

 

Purchases of supplies andchemicals from related parties totaled approximately $54,000, $145,000 and$92,000 for the years ended December 31, 2005, 2004 and 2003, respectively. TheCompany has an agreement with Dakota Gold Marketing for the use of rail cars totransport distiller’s grains. The agreement provides a flat rate per car, pershipment. Fees under the rail car agreement were approximately $214,000,$218,000 and $46,000 for the years ended December 31, 2005, 2004 and 2003, respectively.Dakota Ethanol terminated the agreements effective December 1, 2005.

 

Amounts owed to Broin &Associates, Inc. related to the construction contracts as of December 31, 2005,2004 and 2003 were $0, $270,028 and $95,520, respectively.

 

Amounts owed to BroinManagement, LLC related to the management agreement as of December 31, 2005,2004 and 2003, were $97,462, $228,703 and $228,620, respectively.

 

Additional agreements withrelated parties are included in Note 9.

 

**NOTE 11 -TIF BOND GUARANTEE**

 

During December 2003, DakotaEthanol entered into an agreement to guarantee a bond issued by Lake County,South Dakota. The bond issue was in conjunction with the refunding of the taxincrement financing (TIF) bond issued by Lake County in 2001, of which Dakota Ethanolwas the recipient of the proceeds. During 2003, Lake County became aware thatthe taxes collected based on the incremental tax would not be sufficient tocover the debt service of the 2001 bond issue. Based on the aforementioneddeficiency and changes in interest rate during December of 2003, Lake Countyrefunded the 2001 bond issue replacing it with two separate bonds. A tax-exemptbond in the amount of $824,599 and a taxable bond in the amount of $1,323,024were issued. As a part of the refunding, Dakota Ethanol entered into theagreement to guarantee the taxable bond issue. The taxes levied on DakotaEthanol’s property will first go towards the semiannual debt service of thetax-exempt bonds and any remaining taxes will be used for the debt service ofthe taxable bonds. Dakota Ethanol guarantees any shortfall in debt service forthe taxable bonds. The guarantee expires in December of 2018.

 

The maximum amount ofestimated future payments on the taxable bond debt service is $1,978,819. Thecarrying amount of the guarantee liability on Dakota Ethanol’s balance sheet is$435,567, which represents the estimated shortfall between the taxable bondamount and the amount of taxes estimated to be collected on Dakota Ethanol’sproperty.

 

Estimated maturities of theguarantee for the next five years are as follows:

 

53

----

 

**LAKE AREACORN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2005 AND 2004**

 
| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|
|                                         |       |       |       |
| 2006                                         |       | $          | 62,617     |   |
| 2007                                         |       | 62,536     |       |
| 2008                                         |       | 62,319     |       |
| 2009                                         |       | 60,678     |       |
| 2010                                         |       | 52,485     |       |
|                                              |            |            |            |  |

 

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

 

Management has applied theguidance from Financial Accounting Standards Board Interpretation No. 45, (FIN45) related to accounting for guarantee obligations. Management has determinedthe probability weighted present value of the estimated cash flows related tothe guarantee obligation and recorded a liability and related asset of$435,567.

 

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

 
| **Years Ending December 31,** | ** ** | **Amount** | ** ** |
|----------------------------------------------|------------|------------|------------|
|                                         |       |       |       |
| 2006                                         |       | $          | 84,592     |   |
| 2007                                         |       | 72,641     |       |
| 2008                                         |       | 60,710     |       |
| 2009                                         |       | 53,623     |       |
| 2010                                         |       | 95,607     |       |
|                                              |            |            |            |  |

 

**NOTE 12 -SUBSEQUENT EVENTS**

 

During February 2006, DakotaEthanol distributed $3.5 million of cash to its members. The Company receivedapproximately $3,084,000 and the minority members received approximately$416,000. In conjunction with this distribution, the Company declared and paida distribution to its members of $2,962,000, or $.10 per capital unit, with adistribution date of February 15, 2006. A pro forma balance sheet has beenincluded in the accompanying financial statements to reflect the effects of theFebruary 2006 distribution as if it had been paid on December 31, 2005.Adjustments applied to the historical December 31, 2005 financial statementsinclude a reduction of cash, minority interest and retained earnings, and anincrease in long-term notes payable.

 

54

----

 

**LAKE AREACORN PROCESSORS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2005 AND 2004**

 

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

 

Summary quarterly resultsare as follows:

 
| ** **                                 | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|--------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                 | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Year Ended December 31, 2005               |       |        |       |        |       |        |       |        |       |
| Total revenues                             |       | $           | 21,523,608 |        | $          | 17,218,242  |       | $           | 18,871,816 |   | $ | 22,407,304 |   |
| Gross profit (loss)                        |       | 6,211,744   |       | 2,334,117   |       | 2,795,219   |       | 5,478,782   |       |
| Income (loss) from operations              |       | 5,184,450   |       | 1,588,697   |       | 1,778,144   |       | 4,657,981   |       |
| Net income (loss)                          |       | 4,351,948   |       | 1,179,629   |       | 1,390,874   |       | 3,942,133   |       |
| Basic and diluted earnings (loss) per unit |       | 0.15        |       | 0.04        |       | 0.05        |       | 0.13        |       |
|                                       |       |        |       |        |       |        |       |        |       |
| Year ended December 31, 2004               |       |        |       |        |       |        |       |        |       |
| Total revenues                             |       | $           | 18,915,005 |        | $          | 21,591,665  |       | $           | 21,068,181 |   | $ | 22,857,635 |   |
| Gross profit (loss)                        |       | 5,047,916   |       | (969,415    | )          | 1,322,758   |       | 7,294,867   |       |
| Income (loss) from operations              |       | 4,138,269   |       | (1,528,232  | )          | 679,065     |       | 6,349,000   |       |
| Net income (loss)                          |       | 3,404,201   |       | (1,605,629  | )          | 368,859     |       | 5,356,114   |       |
| Basic and diluted earnings (loss) per unit |       | 0.11        |       | (0.05       | )          | 0.01        |       | 0.18        |       |
|                                       |       |        |       |        |       |        |       |        |       |
| Year ended December 31, 2003               |       |        |       |        |       |        |       |        |       |
| Total revenues                             |       | $           | 18,152,120 |        | $          | 15,542,147  |       | $           | 16,842,638 |   | $ | 18,854,277 |   |
| Gross profit (loss)                        |       | 2,916,261   |       | 614,167     |       | 1,765,187   |       | 3,896,702   |       |
| Income (loss) from operations              |       | 2,198,372   |       | (34,537     | )          | 1,104,088   |       | 3,303,658   |       |
| Net income (loss)                          |       | 1,614,686   |       | (334,342    | )          | 670,988     |       | 2,664,348   |       |
| Basic and diluted earnings (loss) per unit |       | 0.05        |       | (0.01       | )          | 0.02        |       | 0.10        |       |

 

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.

 

55

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

 

Eide Bailly,LLP has been our independent auditor since the Company’s inception and is theCompany’s independent auditor at the present time.  The Company has had no disagreements with itsauditors.

 

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

 

Our management, including our Chief ExecutiveOfficer (the principal executive officer), Douglas Van Duyn, along with our ChiefFinancial Officer (the principal financial officer), Brian Woldt, have reviewedand evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934,as amended) as of December 31, 2005.  Based upon this review andevaluation, these officers have concluded that our disclosure controls andprocedures are effective to ensure that information required to be disclosed inthe reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods required by theforms and rules of the Securities and Exchange Commission; and to ensurethat the information required to be disclosed by an issuer in the reports thatit files or submits under the Exchange Act is accumulated and communicated toour management including our principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.

 

Our management, including our principalexecutive officer and principal financial officer, have reviewed and evaluatedany changes in our internal control over financial reporting that occurred asof December 31, 2005 and there has been no change that has materiallyaffected or is reasonably likely to materially affect our internal control overfinancial reporting.

 
| **ITEM 9B.** | ** ** | **OTHER  INFORMATION.** |
|--------------|------------|-------------------------|

 

None.

 

**PART III****.**

 
| **ITEM****10.** | ** ** | **MANAGERS****AND****EXECUTIVE OFFICERS OF THE****REGISTRANT** |
|-----------------|------------|----------------------------------------------------------------|

 

The information required bythis Item is incorporated by reference to the definitive proxy statement forour 2006 Annual Meeting of Members to be filed with the Securities and ExchangeCommission within 120 days after the end of our 2005 fiscal year.  This proxy statement is referred to in thisreport as the 2006 Proxy Statement.

 
| **ITEM 11.** | ** ** | **EXECUTIVE  COMPENSATION** |
|--------------|------------|-----------------------------|

 

The information required bythis Item is incorporated by reference to the 2006 Proxy Statement.

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

 

The information required bythis Item is incorporated by reference to the 2006 Proxy Statement.

 
| **ITEM 13.** | ** ** | **CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS** |
|--------------|------------|-----------------------------------------------------|

 

The information required bythis Item is incorporated by reference to the 2006 Proxy Statement.

 
| **ITEM 14.** | ** ** | **PRINCIPAL  ACCOUNTING FEES AND SERVICES** |
|--------------|------------|---------------------------------------------|

 

The information required bythis Item is incorporated by reference to the 2006 Proxy Statement.

 

56

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**PART IV.**

 
| **ITEM  15.** | ** ** | **EXHIBITS****AND FINANCIAL  STATEMENT SCHEDULES****.** |
|---------------|------------|---------------------------------------------------------|

 

The following exhibits andfinancial statements are filed as part of, or are incorporated by referenceinto, this report:

 

(a)         The following are filed as part of this report:

 

(1)                                  Financial Statements – Reference is made tothe “Index to Financial Statements” of Lake Area Corn Processors, LLC locatedunder Part II Item 8 of this report for a list of the financial statementsand schedules for the fiscal year ended December 31, 2005, includedherein.

 

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

 

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

 

(b)         SeeItem 15(a)(3).

 

(c)          Not applicable.

 

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

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                      |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                  |       | Plan of  Reorganization. Filed as Appendix A to the registrant’s SB-2 filed with the  Commission on July 19, 2002, and incorporated by reference herein.                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 3.1                  |       | Articles of  Organization of the registrant. Filed as Appendix B to the registrant’s SB-2  filed with the Commission on July 19, 2002, and incorporated by  reference herein.                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 3.2                  |       | Amended and  Restated Operating Agreement of the registrant. Filed as Exhibit 3.6 to  the registrant’s Form 10-K for the fiscal year ended December 31,  2004, and incorporated by reference herein.                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 10.1                 |       | Risk  Management Agreement dated November 28, 2005 between FCStone, LLC and  Dakota Ethanol, LLC. Filed as Exhibit 10.1 on the registrant’s  Form 8-K filed with the Commission on December 2, 2005 and  incorporated by reference herein.                              |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 10.2                 |       | Distillers  Grain Marketing Agreement dated November 28, 2005 between Commodity  Specialists Company and Dakota Ethanol, LLC. Filed as Exhibit 10.2 on  the registrant’s Form 8-K filed with the Commission on December 2,  2005 and incorporated by reference herein.  |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 10.3                 |       | Ethanol Fuel  Marketing Agreement dated November 30, 2005 between Renewable Products  Marketing Group, LLC and Dakota Ethanol. Filed as Exhibit 10.3 on the  registrant’s Form 8-K filed with the Commission on December 2, 2005  and incorporated by reference herein. |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 10.4                 |       | Ethanol  Marketing Contract Termination dated November 4, 2005 between Ethanol  Products, LLC and Dakota Ethanol, LLC. Filed as Exhibit 10.1 on the  registrant’s Form 10-Q filed with the Commission on November 14, 2005  and incorporated by reference herein.       |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 10.5                 |       | Redemption  Agreement dated November 4, 2005 between Ethanol Products, LLC and  Dakota Ethanol, LLC. Filed as Exhibit 10.2 on the registrant’s  Form 10-Q filed with the Commission on November 14, 2005 and incorporated  by reference herein.                         |

 

57

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| 10.6   |   | DDGS  Marketing Contract Termination dated November 4, 2005 between Broin  Enterprises, Inc. and Dakota Ethanol, LLC. Filed as Exhibit 10.3 on  the registrant’s Form 10-Q filed with the Commission on  November 14, 2005 and incorporated by reference herein.       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                 |
| 10.7   |   | Fourth  Amendment to Construction Loan Agreement dated April 22, 2005 between  First National Bank of Omaha and Dakota Ethanol, LLC. Filed as  Exhibit 10. 1 on the registrant’s Form 10-Q filed with the  Commission on May 16, 2005 and incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 10.8   |   | Revolving  Promissory Note dated April 21, 2005 between First National Bank of  Omaha and Dakota Ethanol, LLC. Filed as Exhibit 10.2 on the registrant’s  Form 10-Q filed with the Commission on May 16, 2005 and  incorporated by reference herein.                        |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 10.9   |   | Employment  Agreement with Scott Mundt dated October 17.                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 31.1   |   | Certificate  Pursuant to 17 CFR 240.13a-14(a).                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 31.2   |   | Certificate  Pursuant to 17 CFR 240.13a-14(a).                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 32.1   |   | Certificate  Pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 32.2   |   | Certificate  Pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                |

 

58

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
|                                                                                                                                                                                                     |                              | LAKE AREA CORN PROCESSORS, LLC                                        |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------|-----------------------------------------------------------------------|
|                                                                                                                                                                                                     |                              |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
| Date:                                                                                                                                                                                                    | March 29, 2006               |                                                                  | /s/ Douglas Van Duyn |   |
|                                                                                                                                                                                                     |                              | Douglas Van Duyn                                                      |
|                                                                                                                                                                                                     |                              | Chief Executive Officer  (Principal Executive Officer)                |
|                                                                                                                                                                                                     |                              |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
| Date:                                                                                                                                                                                                    | March 29, 2006               |                                                                  | /s/ Brian Woldt |   |
|                                                                                                                                                                                                     |                              | Brian Woldt                                                           |
|                                                                                                                                                                                                     |                              | Chief Financial Officer  (Principal Financial and Accounting Officer) |
|                                                                                                                                                                                                     |                              |                                                                  |
| Pursuant  to the requirements of the Securities Exchange Act, this report has  been signed below by the following persons on behalf of the registrant and in  the capacities and on the dates indicated. |
|                                                                                                                                                                                                     |
|                                                                                                                                                                                                     |
| Date: March 29, 2006                                                                                                                                                                                | /s/ Douglas  Van Duyn             |                                                                  |
|                                                                                                                                                                                                     | Douglas Van Duyn, CEO and Manager |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
| Date: March 29, 2006                                                                                                                                                                                | /s/ Brian  Woldt                  |                                                                  |
|                                                                                                                                                                                                     | Brian Woldt, CFO and Manager      |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
| Date: March 29, 2006                                                                                                                                                                                | /s/ Gregory  Van Zanten           |                                                                  |
|                                                                                                                                                                                                     | Gregory Van Zanten, Manager       |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
| Date: March 29, 2006                                                                                                                                                                                | /s/ Dale  Schut                   |                                                                  |
|                                                                                                                                                                                                     | Dale Schut, Manager               |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
| Date: March 29, 2006                                                                                                                                                                                | /s/ Ronald Alverson               |                                                                  |
|                                                                                                                                                                                                     | Ronald Alverson, Manager          |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
| Date: March 29, 2006                                                                                                                                                                                | /s/ Dale  Thompson                |                                                                  |
|                                                                                                                                                                                                     | Dale Thompson, Manager            |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
|                                                                                                                                                                                                     |                              |                                                                  |
| Date: March 29, 2006                                                                                                                                                                                | /s/ Todd  Brown                   |                                                                  |
|                                                                                                                                                                                                     | Todd Brown, Manager               |                                                                  |
|                                                                                                                                                                                                          |                                   |                                                                       |  |  |  |

 

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