GLACIAL LAKES CORN PROCESSORS CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 2005 AND 2004

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1 CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 2005 AND 2004 Excerpts from audited financial statements for August 31, 2005 Page Consolidated Balance Sheets 2 to 3 Consolidated Statements of Operations 4 Consolidated Statements of Stockholders Equity 5 Consolidated Statements of Cash Flow 6 Notes to Consolidated Financial Statements 7 to 16 1

2 CONSOLIDATED BALANCE SHEETS August 31, August 31, ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,505,348 $ 641,681 Receivables: Trade 4,816,593 3,535,448 Government programs 181, ,647 Other 257, ,421 Inventories 5,062,342 3,689,087 Hedge accounts - 899,726 Prepaid expenses 94, ,016 TOTAL CURRENT ASSETS 12,917,937 9,764,026 PROPERTY AND EQUIPMENT: Land and land improvements 1,708,350 1,681,303 Railroad equipment 848, ,874 Buildings 2,335,487 2,299,655 Process and grain storage tanks 12,166,678 12,096,512 Process equipment 35,240,486 34,433,534 Office equipment 301, ,550 Total cost 52,601,494 51,624,428 Accumulated depreciation (14,786,447) (9,656,172) PROPERTY AND EQUIPMENT, net 37,815,047 41,968,256 OTHER ASSETS: Goodwill invested in Glacial Lakes Energy, LLC 3,827,204 3,827,204 Other investments 6,634,578 6,500,000 Financing costs, net of amortization of $253,981 and $162,906, respectively 230, ,359 TOTAL OTHER ASSETS 10,692,310 10,646,563 TOTAL ASSETS $61,425,294 $62,378,845 See Notes to Financial Statements. 2

3 CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS EQUITY August 31, August 31, CURRENT LIABILITIES: Accounts payable $ 693,168 $ 1,039,483 Corn payable 2,330,073 1,483,968 Accrued expenses 846, ,726 Hedge accounts 154,157 - Revolving line of credit - - Current maturities of long-term debt 3,689,088 3,228,683 TOTAL CURRENT LIABILITIES 7,712,550 6,548,860 LONG-TERM DEBT, net of current maturities: Notes payable to Bank 24,555,179 34,500,000 Other notes payable and capital lease 8,802 13,449 Total 24,563,981 34,513,449 Current maturities (3,689,088) (3,228,683) TOTAL LONG-TERM DEBT, net of current maturities 20,874,893 31,284,786 STOCKHOLDERS EQUITY: Common stock, $0.005 and $0.01 par value for 2005 and 2004, respectively, 25,000,000 shares authorized, 15,476,628 and 7,737,314 shares issued and outstanding in 2005 and 2004, respectively 77,383 77,383 Preferred stock, $1.00 par value, 1,000,000 shares authorized with none issued - - Additional paid-in capital 15,594,119 15,594,119 Accumulated other comprehensive loss (2,731,540) (4,075,627) Capital reserve 19,897,889 12,949,344 TOTAL STOCKHOLDERS EQUITY 32,837,851 24,545,219 TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $61,425,294 $62,378,845 See Notes to Financial Statements. 3

4 CONSOLIDATED STATEMENTS OF OPERATIONS SALES $78,051,987 $74,913,182 COST OF SALES 66,829,681 61,413,429 GROSS PROFIT 11,222,306 13,499,753 GENERAL AND ADMINISTRATIVE EXPENSES 1,810,546 1,618,954 INTEREST EXPENSE 1,943,078 1,200,189 INCOME FROM OPERATIONS 7,468,682 10,680,610 OTHER INCOME (EXPENSE): CCC bio-energy program 204, ,483 State ethanol producer program 702, ,667 Total government programs 906,681 1,517,150 Interest income 20,297 34,910 Management fee income 207,097 10,000 Investment loss (112,454) - Loss on impairment of property and equipment (3,332) (75,510) Other income 9,236 23,846 TOTAL OTHER INCOME (EXPENSE) 1,027,525 1,510,396 NET INCOME BEFORE MINORITY INTEREST 8,496,207 12,191,006 MINORITY INTEREST IN SUBSIDIARY EARNINGS - (2,417,449) NET INCOME $ 8,496,207 $ 9,773,557 WEIGHTED AVERAGE SHARES OUTSTANDING (reflects 2-for-1 stock split in October 2004) 15,476,628 15,476,628 NET INCOME PER SHARE $ 0.55 $ 0.63 See Notes to Financial Statements. 4

5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN COMPREHENSIVE CAPITAL STOCK CAPITAL INCOME (LOSS) RESERVE TOTAL BALANCE August 31, 2003 $ 77,383 $15,591,119 $ (440,017) $ 8,669,990 $23,898,475 Memberships sold - 3, ,000 Comprehensive income: Net income ,773,557 9,773,557 Reclassification adjustment for losses included in net income , ,017 Unrealized loss on hedging activities, net of premiums paid - - (4,075,627) - (4,075,627) Total comprehensive income 6,137,947 Patronage earnings allocated (7,107,644) (7,107,644) Patronage earnings allocated and unpaid 1,613,441 1,613,441 BALANCE August 31, ,383 15,594,119 (4,075,627) 12,949,344 24,545,219 Memberships sold Comprehensive income: Net income ,496,207 8,496,207 Reclassification adjustment for losses included in net income - - 4,075,627-4,075,627 Unrealized loss on hedging activities, net of premiums paid - - (2,731,540) - (2,731,540) Total comprehensive income 9,840,294 Patronage earnings allocated (3,244,710) (3,244,710) Patronage earnings allocated and unpaid 1,697,048 1,697,048 BALANCE August 31, 2005 $ 77,383 $15,594,119 $(2,731,540) $19,897,889 $32,837,851 COMPONENTS OF CAPITAL RESERVE August 31, 2005: Unallocated $16,587,400 Allocated $ 3,310,489 Total $19,897,889 DIVIDENDS DECLARED (per share): October 2003 $ January 2004 $ January 2005 $ May 2005 $ January 2006 $ See Notes to Financial Statements. 5

6 CONSOLIDATED STATEMENTS OF CASH FLOWS OPERATING ACTIVITIES: Net income $ 8,496,207 $ 9,773,557 Charges to net income not affecting cash: Depreciation and amortization 5,246,336 4,984,248 Loss on impairment of property and equipment 3,332 75,510 Loss on investment 112,454 - Net (income) expense recognized from hedging activities 10,511,983 (406,711) Minority interest in subsidiary earnings - 2,417,449 (Increase) decrease in current assets: Accounts receivable (1,233,021) (894,398) Inventories (1,373,255) (1,061,243) Hedge accounts (8,114,013) (2,980,000) Prepaid expenses 42,375 (23,616) Increase (decrease) in current liabilities: Accounts and corn payable 623,388 (106,178) Accrued expenses 49, ,994 NET CASH PROVIDED BY OPERATING ACTIVITIES 14,365,424 11,997,612 INVESTING ACTIVITIES: Purchase of property and equipment (755,351) (2,804,467) Investment in Granite Falls Energy, LLC - (6,500,000) Investment in Redfield Energy, LLC (225,000) - Other investment (22,032) - NET CASH USED IN INVESTING ACTIVITIES (1,002,383) (9,304,467) FINANCING ACTIVITIES: Net (payments) borrowings on long-term revolving note (5,000,000) 5,000,000 Proceeds from new term loans - 12,486,450 Regular principal payments on term loans (3,272,821) (3,061,701) Additional principal payments on term loans (1,672,000) (4,150,000) Principal payments on other long-term debt (4,647) (156,728) Payment of financing costs (2,244) (50,000) Repurchase of minority interest member shares - (13,513,500) Distributions to minority interest - (2,164,804) Patronage earnings allocated and paid (1,547,663) (5,494,203) Membership fees received - 3,000 NET CASH USED IN FINANCING ACTIVITIES (11,499,374) (11,101,506) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,863,667 (8,408,361) CASH AND CASH EQUIVALENTS beginning of period 641,681 9,050,042 CASH AND CASH EQUIVALENTS end of period $ 2,505,348 $ 641,681 See Notes to Financial Statements. 6

7 NOTE A: BASIS OF PRESENTATION EXERPTED FROM AUDITED FINANCIAL STATEMENTS These financial statements and notes are taken from the audited consolidated financial statements for Glacial Lakes Corn Processors (the Cooperative ) as of and for the years ended August 31, 2005 and The audited financial statements are available for review at the Cooperative s office. NATURE OF BUSINESS Glacial Lakes Corn Processors (a South Dakota cooperative located in Watertown, South Dakota) was organized to operate a 40,000,000 gallon ethanol plant for commercial sales throughout the United States. The Cooperative was formed on September 15, 2000 and was in the development stage until operations began on September 1, PRINCIPLES OF CONSOLIDATION The consolidated financial statements include accounts of the Cooperative and its wholly-owned subsidiary, Glacial Lakes Energy, LLC ( GLE ). The Cooperative owned 72.07% of GLE from its formation until May 31, 2004, at which time GLE repurchased the minority interest share of 27.93% (see Note F). From June 1, 2004, the Cooperative effectively has 100% ownership of GLE. INCOME TAXES - The Cooperative is a non tax-exempt cooperative association and is subject to federal income tax on patronage and non-patronage income not associated to members. The Cooperative is permitted a deduction from taxable income for the portion of net income allocated to the members in the form of cash dividends and written notices of allocation of qualified patronage dividends. Accordingly, no income tax provision has been calculated. The Cooperative uses accelerated depreciation methods for income tax purposes, which may cause taxable income to be different than net income for financial purposes. NOTE B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Revenue from the sale of ethanol and distiller s grain is recorded when title transfers to the customer, which occurs when the product is loaded into the railcar or truck. Interest income is recognized as earned. Amounts received under incentive programs from the United States Department of Agriculture and the state of South Dakota are recognized as revenue based on terms of the agreements (based on production or sale of ethanol). 7

8 NOTE B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) INVENTORIES All inventories, except for distiller s grains, are stated at the lower of cost (First-In, First-Out) or market. Distiller s grains are stated at net realizable value. HEDGE ACCOUNTS The Cooperative hedges a portion of its future corn purchases and future ethanol sales to the extent considered necessary for minimizing risk from market price fluctuations. The hedging accounts are designated and qualify as cash flow hedges and are reported at fair value as determined by the broker. The unrealized gain or loss on the effective portion is initially included as a component of other comprehensive income and is subsequently reclassified into earnings through cost of sales when the gain or loss is realized. The Cooperative has categorized the cash flows related to the hedging activities in the same category as the item being hedged. The Cooperative expects all hedging positions outstanding as of August 31, 2005 to be realized within the next fiscal year. For the year ended August 31, 2005, the Cooperative recognized a reduction of ethanol sales of $2,420,151 and an increase in corn costs of $8,091,832, for a combined decrease in net income of $10,511,983 from hedging activities. For the year ended August 31, 2004, the Cooperative recognized a reduction of ethanol sales of $917,519 and a reduction of corn costs of $1,324,230, for a combined increase in net income of $406,711 from hedging activities. PROPERTY AND EQUIPMENT Property and equipment is stated at lower of cost or fair value. Depreciation for financial purposes is computed using the straight-line method over the estimated useful lives of the assets as follows: Land improvements years Railroad equipment years Buildings years Process and grain storage tanks 7 10 years Process equipment 7 10 years Office equipment 3 7 years Depreciation on the majority of the assets commenced when the Cooperative completed the development stage and began operations on September 1, Repairs and maintenance are expensed as incurred; major improvements are capitalized. 8

9 NOTE B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) SHIPPING AND COMMISSION COSTS The Cooperative nets all shipping and commission costs incurred for the sale of ethanol and distiller s grains against the respective sales revenue accounts. The Cooperative incurred $8,102,121 and $7,767,174 of shipping costs in the years ended August 31, 2005 and 2004, respectively, and $613,717 and $756,261 of commissions in the years ended August 31, 2005 and 2004, respectively. NOTE C: INVENTORIES Corn $ 3,530,083 $ 1,399,203 Ethanol and distiller s grains: Finished goods 383,702 1,006,006 In process 394, ,110 Chemicals and ingredients 299, ,398 Spare parts 454, ,370 $ 5,062,342 $ 3,689,087 NOTE D: REVOLVING LINE OF CREDIT The Cooperative has a revolving line of credit with a national bank (the Bank ) available at a maximum of $3,500,000 and is secured by substantially all Cooperative assets. Interest is charged at one-month London Inter-Bank Offering Rate ( LIBOR ) plus 2.75% or % and 4.35% at August 31, 2005 and 2004, respectively. There was no balance outstanding on this line of credit as of August 31, 2005 and Effective on September 20, 2004, the Cooperative pays an unused commitment fee of 3/8 of 1% per annum on the unused portion of the revolving line of credit. The revolving line of credit expires on July 26, The amount available under the revolving line of credit is determined by a borrowing base calculation and would be reduced by any standby letters of credit. 9

10 NOTE E: LONG-TERM DEBT Notes payable to Bank (see details below): Term Loan #2 Term Loan #3 Term Loan #4 Term Loan #5 Term Loan #6 Term Loan #7 Total $ 9,264, ,520,762-7,769,963 24,555,179 $10,685,928 6,327,622 5,000,000 8,000,000 4,486,450-34,500,000 Capital lease with monthly payments of $442 with 5.79% inherent interest maturing July 25, 2007 secured by 8,802 equipment. 13,449 24,563,981 34,513,449 Current maturities (3,689,088) (3,228,683) $20,874,893 $31,284,766 Interest rates were as follows: Term Loan #2 Fixed (using interest rate swap) % % Term Loan #3 Variable (3-month LIBOR %) % Term Loan #4 Variable (1-month LIBOR %) % % Term Loan #5 Fixed (using interest rate swap) % % Term Loan #6 Variable (3-month LIBOR %) % Term Loan #7 Variable (3-month LIBOR %) % Notes Payable to Bank In July 2001, the Cooperative entered into a loan agreement ( Original Loan Agreement ) with the Bank for the construction and permanent financing of the plant. Under the Original Loan Agreement, the maximum amount available was $32,600,000. On September 20, 2004, the Cooperative entered a loan agreement ( New Loan Agreement ) based on the new borrowings put in place in July Substantially all assets and contract rights of the Cooperative are pledged as security under both Loan Agreements. Both Loan Agreements and the related mortgage documents contain reporting requirements and restrictive loan covenants, which require maintenance of various financial ratios, minimum working capital (increased to $3,500,000 under the New Loan Agreement) and allow distributions to members of up to 70% of annual net income without Bank approval. 10

11 NOTE E: LONG-TERM DEBT (continued) The Cooperative was not in compliance with the new working capital requirement as of August 31, 2004 and exceeded the annual capital expenditure limit of $500,000 for the year ended August 31, The Cooperative has obtained waivers from the Bank on these matters. In addition to regular principal and interest payments (as described below), the Cooperative is required to make an additional principal payment to the Bank of 15% of its excess cash flow on an annual basis. For the year ended August 31, 2004, the required excess cash flow payment of $1,672,000 was made in equal installments on December 20, 2004 and March 20, For the year ended August 31, 2005, the required excess cash flow payment of $1,424,252 will be made on December 20, Long- term debt maturities (excluding excess cash flow payments ) are estimated as follows: Years ending August 31, 2006 $ 3,689, ,884, ,236, ,422, ,332,514 $ 24,563,981 11

12 NOTE F: GOODWILL INVESTED IN GLE On July 27, 2004, GLE entered into an agreement with Glacial Lakes Capital, LLC (the minority interest in GLE) to repurchase all of its 3,000,000 shares of GLE. Under the agreement, which was effective as of May 31, 2004, GLE repurchased the shares for $13,513,500. The minority interest did not receive a distribution for the period from September 1, 2003 to May 31, This transaction was financed through additional borrowings from the Bank (see Note E). For GLE s financial reporting purposes, this transaction is being treated as a retirement of shares as there is no provision for treasury stock under South Dakota law for limited liability companies. The amount of the repurchase in excess of the initial purchase price received from the minority interest is treated as a reduction of retained earnings. For the Cooperative s financial reporting purposes, this excess is reflected through the consolidation process as goodwill invested in GLE. This consolidation goodwill is not subject to amortization and will only be adjusted if a permanent impairment of the investment in GLE occurs. NOTE G: OTHER INVESTMENTS The Cooperative had the following investments in other renewable fuel businesses at August 31, 2005 and 2004, respectively: Granite Falls Energy, LLC $6,387,546 $6,500,000 Redfield Energy, LLC 225,000 - Other 22,032 - $6,634,578 $6,500,000 Investment in Granite Falls Energy, LLC In July 2004, the Cooperative signed a subscription agreement to purchase 6,500 units for $6,500,000 in Granite Falls Community Ethanol Plant, LLC, which is doing business as Granite Falls Energy, LLC ( Granite Falls ). Granite Falls raised equity funds for the construction of a 50,000,000 gallon fuel ethanol plant near Granite Falls, Minnesota. The units were purchased on August 31, The 6,500 units owned by the Cooperative represent 20.86% of the outstanding units as of August 31,

13 NOTE G: OTHER INVESTMENTS (continued) Investment in Granite Falls Energy, LLC Related to its investment in Granite Falls, the Cooperative entered into two agreements with Granite Falls related to the construction and operations of the plant. Under the Consulting Agreement, the Cooperative will manage the construction of the plant for Granite Falls and will be paid $10,000 per month for this service. Under the Operating and Management Agreement, the Cooperative will manage the day-to-day operations of the plant for Granite Falls and will be paid (1) a monthly fee of $35,000 and (2) an annual fee of 3% of net income of Granite Falls excluding income from government programs. For the month of August 2004, the Cooperative recognized $10,000 of income under the Consulting Agreement. For the year ended August 31, 2005, the Cooperative recognized $110,000 under the Consulting Agreement and $25,000 under the Operating and Management Agreement. At August 31, 2005 and 2004, amounts due to the Cooperative under the agreements were $37,097 and $10,000, respectively. The Operating and Management Agreement started on August 11, 2005, based on mutual agreement. The Operating and Management Agreement will continue for a primary term of five years and thereafter automatically renew on a yearly basis, unless terminated by either party with at least 180 days prior written notice. Also in connection with the investment in Granite Falls, the Operating and Member Control Agreement for Granite Falls was amended to allow the Cooperative to designate 2 of the 7 on the Board of Governors for Granite Falls. The new Governors were installed in October 2004, upon the closing of the equity offering by Granite Falls. As of August 31, 2005 and 2004, the Cooperative accounts for its investment in Granite Falls using the equity method of accounting which reflects the Cooperative s share of the invested company s earnings and distributions. For the year ended August 31, 2005, the Cooperative recognized a loss of $112,454 as its share of the operating loss incurred by Granite Falls during the development stage. Granite Falls commenced the start-up of operations in mid-november

14 NOTE G: OTHER INVESTMENTS (continued) Investment in Redfield Energy, LLC In August 2005, the Cooperative signed a subscription agreement to purchase 225,000 Class B units for $225,000 in Redfield Energy, LLC ( Redfield ). Redfield raised equity funds in September 2005 for the construction of a 50,000,000 gallon fuel ethanol plant near Redfield, South Dakota. The units were purchased in August 2005 and represent 50% of the outstanding units of Redfield as of August 31, Related to its investment in Redfield, the Cooperative entered into a Consulting and Management agreement with Redfield related to the construction and operations of the plant. Under the agreement (effective July 1, 2005), the Cooperative will manage the construction of the plant, will manage the day-to-day operations of the plant for Redfield and will be paid (1) a monthly fee of $35,000 and (2) an annual fee of 3% of net income of Redfield.. For the year ended August 31, 2005, the Cooperative recognized $70,000 under the Consulting and Management Agreement. At August 31, 2005, amounts due to the Cooperative under the agreement were $70,000 and will not be paid until Redfield is able to break the escrow account from the offering of additional units. Also as part of the Consulting and Management agreement, the Cooperative will receive units in Redfield representing 5% of the outstanding equity after the close of the offering. Redfield competed its offering in September 2005, raising $37,500,000 in addition to the $450,000 of seed stock money originally raised. The Cooperative has signed a Subscription Agreement to purchase 400,000 Class A units for $800,000 in the offering. Upon completion of the terms to break the escrow account, Redfield will issue new units to the Cooperative. The amount of units under this agreement is expected to be approximately 1,010,500 units. Also in connection with the investment in Redfield, the Operating Agreement for Redfield designates the Cooperative as the managing member of Redfield and allows the Cooperative to appoint 1 of the 7 on the Board of Managers for Redfield as long as the Cooperative is the managing member. The new Manager was installed in August The Cooperative also has a five-year option to purchase 25,000 units in Redfield at an exercise price of $1.00 per unit, with the option vesting at financial closing (as defined). The Cooperative will account for its investment in Redfield using the equity method of accounting once material operations begin and has currently recorded its investment at cost. 14

15 NOTE H: STOCKHOLDERS EQUITY The Cooperative is an agricultural association whereby members must meet established membership criteria including being an agricultural producer, hold a minimum of 2,500 shares of common stock, pay the required membership fee and enter into a uniform delivery and marketing agreement. The common stock of the Cooperative is the membership stock of the Cooperative and entitles each member to one vote in the affairs of the Cooperative regardless of the number of common stock shares owned. No ordinary dividends can be paid on the common stock. The preferred stock of the Cooperative is non-voting with allowable dividends paid on preferred stock not to exceed 8% annually of the par value of the preferred stock. Dividends on the preferred stock are not cumulative. Net income of the Cooperative shall be distributed annually to the members on the basis of patronage in such acceptable forms as approved by the Board of Directors. During 2005 and 2004, the Board of Directors authorized patronage allocations of earnings in the amount of $3,244,710 ($ per share) and $7,107,644 ($ per share) to its members, respectively. In 2005 and 2004, the Cooperative paid $1,547,662 ($ per share) and $5,494,203 ($ per share), respectively, of these allocations in cash with the remaining portions being included in the allocated capital reserve. Payments of these allocated capital reserves are at the discretion of the Board of Directors and will remain in the reserve until payment is made. In the event of a liquidation of dissolution of the Cooperative any net assets remaining after the liabilities of the Cooperative are settled will be distributed first to the holders of preferred stock up to an amount equal to the consideration given, second to the holders of the common stock up to an amount equal to the consideration given, third to the members holding patron equities in the order from oldest to most recent and finally to the existing members on the basis of their past patronage. In October 2004, the Board of Directors of the Cooperative declared a 2-for-1 stock split effective for shareholders of record at that date. All per share amounts from previous years have been restated to reflect the stock split. 15

16 NOTE I: SUBSEQUENT EVENTS On December 20, 2005, the Cooperative reduced the outstanding balance on Term Loan with a payment of $1,500,000, which was the excess cash flow requirement for On December 14, 2005, a distribution of $3,869,157 ($0.25 per share) was declared by the Board of Directors of the Cooperative. #7 16