**U.S. SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

**FORM 10-KSB/A**

 

**AMENDMENTNO. 1 TO**

 

**ANNUALREPORT FOR SMALL BUSINESS ISSUERS SUBJECT TO THE 1934 ACT REPORTING REQUIREMENTS**

 
| **ý** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE   SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------------------------------------------------------------------------------------------|

 

**For theFiscal Year Ended December 31, 2002**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)   OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------|

 

**Forthe Transition Period from           to          **

 

**Commissionfile number  333-50568**

 

**BADGER STATE ETHANOL, LLC**

(Name of SmallBusiness Issuer in Its Charter)

 

| **Wisconsin**                                                                        |   | **39-1996522**                        |
|--------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                 |   |                                  |
| **820  West 17th Street, Monroe, Wisconsin  53566**                             |
| (Address and Zip Code  of Principal Executive Offices)                               |
|                                                                                 |   |                                  |
| Registrant’s Telephone  Number, Including Area Code  **(608) 329-3900**    |
|                                                                                 |   |                                  |
| Securities registered  pursuant to Section 12(b) of the Exchange Act:  **None** |
|                                                                                 |   |                                  |
| Securities registered  under Section 12(g) of the Exchange Act:   **None**      |

 
| Indicate by checkmark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of  the Securities Exchange Act of 1934 during the preceding 12 months (or for  such shorter period that the registrant was required to file such reports),  and (2) has been subject to such filing requirements for the past 90  days. |   | Yes  ý  No   o |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                    |   |                               |
| Indicate by checkmark if disclosure of delinquent  filers pursuant to Item 405 of Regulation S-B is not contained  herein, and will not be contained, to the best of registrant’s knowledge, in  definitive proxy or information statements incorporated by reference in Part  III of this Form 10-KSB or any amendment to this Form 10-KSB.             |   | o                                  |

 

State issuer’s revenues for its most recent fiscalyear.  $10,125,926

 

The aggregate market value of the member units held bynon-affiliates of the registrant (computed by reference to book value of suchmember units) was $10,573,462 as of December 31, 2002.  There is no established public or private tradingmarket for our securities.

 

DOCUMENTS INCORPORATED BYREFERENCE.

None.

 

 

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**TABLE OFCONTENTS**

 
| AMENDED ITEMS                                                                     |   |
|-----------------------------------------------------------------------------------|--------|
|                                                                              |   |
| PART I                                                                            |   |
| ITEM 1.  DESCRIPTION OF BUSINESS                                             | 1      |
|                                                                              |   |
| PART II                                                                           |   |
| ITEM  6.  MANAGEMENT’S DISCUSSION AND  ANALYSIS AND PLAN OF OPERATIONS  | 12     |
|                                                                              |   |
| PART III                                                                          |   |
|                                                                              |   |
| ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT  | 16     |
|                                                                              |   |
| ITEM 10.   EXECUTIVE COMPENSATION                                            | 19     |
|                                                                              |   |
| ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT    | 20     |
|                                                                              |   |
| ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                    | 20     |
|                                                                              |   |
| ITEM 13.   EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K | 22     |
|                                                                              |   |
| ITEM 14.   CONTROLS AND PROCEDURES                                           | 24     |
|                                                                              |   |
| SIGNATURES                                                                        | 25     |
|                                                                              |   |
| CERTIFICATIONS                                                                    | 26     |

 

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AMENDED ITEMS

 

EXPLANATORYNOTE

 

This Amendment No. 1 to the Annual Report on Form10-KSB of Badger State Ethanol, LLC (the “Company”) for the fiscal year endedDecember 31, 2002, is being filed for the purpose of amending andrestating Items 1, 6, 9, 10, 11, 12, 13 and 14.  In accordance with Rule 12b-15 under the Securities and ExchangeAct of 1934, the complete text of such Items, as amended, are set forthherein.  In addition to the filing withthis Amendment No. 1 and pursuant to Rule 12b-15, the Company is includingcertain currently dated certifications. The remainder of the Company’s Form 10-KSB is unchanged and is notreproduced in this Amendment No. 1. This report speaks as of the original filing date of the Form 10-KSB andhas not been updated to reflect events occurring subsequent to the originalfiling date.

 

CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This report containsforward-looking statements.  Inaddition, we may make forward-looking statements orally in the future by or onbehalf of the Company. We undertake no responsibility to update anyforward-looking statement.  When used,the words “believe,” “expect,” “will,” “can,” “estimate,” “anticipate” andsimilar expressions are intended to identify forward-looking statements.  Readers should not place undue reliance onany forward-looking statements and recognize that the statements are notpredictions of actual future results. Actual results could and likely will differ materially from thoseanticipated in the forward-looking statements due to risks and uncertainties.  These risks and uncertainties include,without limitation, the following and those business risks and factorsdescribed elsewhere in this report or our other Securities and ExchangeCommission filings, our assumptions concerning financing requirements andfuture operations, our ability to obtain debt financing to finish constructionand generate revenues, construction delays, changes in state and federalethanol subsidies, our need for additional capital, our ability to manufactureour products on a commercial scale and in compliance with regulatoryrequirements, increased competition, and changes in government regulation.

 

RISKFACTORS

 

**RISKSRELATED TO OUR FORMATION AND FINANCING PLAN**

 

**We arerecently formed.**

 

We are a start-up business venture, with limited history of operations,and we have an accumulated deficit. There can be no assurance that we will be able to operate profitably.

 

**Weanticipate having substantial debt and debt service requirements.**

 

We anticipate incurring substantial debt to implement our businessplan. Therefore, we anticipate substantial debt and debt servicerequirements.  Since our capitalstructure will be highly leveraged, the amount of debt we plan to assume willhave important consequences including:

 

•                  Ourability to borrow additional amounts for working capital, capital expendituresand other purposes will be limited or may not be available on terms favorableto us or at all;

 

•                  Asubstantial portion of our cash flows from operations will be used to payinterest and principal on our debt, which will reduce the funds that wouldotherwise be available to us for our operations and future businessopportunities;

 

•                  Wewill be vulnerable to increases in prevailing interest rates;

 

•                  Wemay be substantially more leveraged than some of our competitors, which mayplace us at a competitive disadvantage;

 

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•                  Ourindebtedness is expected to be secured by all or substantially all of ourassets, which means that there will be virtually no assets left for unitholders in the event of a liquidation; and

 

•                  Oursubstantial degree of leverage may limit our flexibility to adjust to changingmarket conditions, reduce our ability to withstand competitive pressures andmake us more vulnerable to a downturn in general economic conditions or ourbusiness.

 

**To service our debt, we will requirea significant amount of cash and our ability to generate cash depends on manyfactors.**

 

Our ability to repay our debt will depend on our financial andoperating performance and on our ability to successfully implement our businessstrategy. We cannot assure you that we will be successful in implementing ourstrategy or in realizing our anticipated financial results. Our financial andoperational performance depends on numerous factors including prevailingeconomic conditions and on certain financial, business and other factors beyondour control. We cannot assure you that our cash flows and capital resourceswill be sufficient to repay our anticipated debt obligations. In the event thatwe are unable to pay our debt service obligations, we may be forced to reduceor eliminate distributions or capital expenditures. We could be forced to sellassets, obtain additional equity capital or refinance or restructure all or aportion of our debt. In the event that we are unable to refinance ourindebtedness or raise funds through asset sales, sales of equity or otherwise,our business would be adversely affected.

 

**Our debtfinancing may contain numerous covenants, in which a breach may result indefault.**

 

Our debt obligations will likely contain a number of significantcovenants. These covenants may limit our ability to, among other things:

 

•                  Incuradditional indebtedness;

 

•                  Makecapital expenditures in excess of prescribed thresholds;

 

•                  Makedistributions to our unit holders, redeem or repurchase our units;

 

•                  Makevarious investments;

 

•                  Createliens on our assets;

 

•                  Utilizeasset sale proceeds;

 

•                  Mergeor consolidate or dispose of all or substantially all of our assets.

 

A breach of any of these covenants could result in default under ourdebt agreements. If we default on any of these covenants, and if not waived, alender could rightfully accelerate our indebtedness, in which case the debtwould become immediately due and payable. If this occurs, we may not be able torepay our debt or borrow sufficient funds to refinance it. Even if newfinancing is available, it may not be on terms that are acceptable to us.  This could cause us to cease operations.

 

**RISKSRELATED TO DEVELOPMENT**

 

**Our agreements or understandings withFagen, Inc., ICM Marketing, Inc. and Murex, N.A., Ltd. were not negotiated atarm’s length, we may not have obtained terms as favorable to us as those wecould have obtained from third parties, and any claims that we may have againstFagen or ICM may be difficult for us to enforce.**

 

We are heavily dependent upon the services that Fagen, ICM and Murexare providing. Without these services, we would not have been able to build ourethanol plant.  Representatives ofFagen, ICM, and Murex  also serve on ourboard, and have been involved in nearly all aspects of our formation, capitalraising and operation to date.

 

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Consequently, the terms of our agreements and understandings with themhave not been negotiated at arm’s length, and therefore, there is no assurancethat our arrangements with them are as favorable to us as those we could haveobtained from unaffiliated third parties. Because of Fagen’s, ICM’s and Murex’srole in this project, and their representation on our board of directors, itcould be difficult or impossible to enforce claims that we may have againstthese parties if, for example, one or both of them breaches agreements orunderstandings with us.

 

**We aredependent on a development agreement with the City of Monroe, Wisconsin.**

 

We have entered into a development agreement with the City of Monroe,Wisconsin, to construct the ethanol plant and for site improvements.  As part of the agreement, we have on-goingobligations, including representing that the fair market value of the site willnot be less than $10 million, or pay a nonperformance penalty not toexceed $280,000 per year and repaying up to $1.6 million of the City ofMonroe’s tax incremental financing for site improvements through regularproperty tax assessments.  In connectionwith the agreement, we delivered a mortgage to the City of Monroe.  The mortgage secures our performance underthe agreement.

 

**RISKSRELATED TO ETHANOL PRODUCTION**

 

**Federalregulations and tax incentives concerning ethanol could expire or change, whichcould harm our business.**

 

Congress currently provides certain federal tax incentives foroxygenated fuel producers and marketers, including those who purchase ethanolto blend with gasoline in order to meet federally mandated oxygenated fuelrequirements. These tax incentives include, generally, an excise tax exemptionfrom the federal excise tax on gasoline blended with at least 10 percent, 7.7percent, or 5.7 percent ethanol, and income tax credits for blenders of ethanolmixtures and small ethanol producers. The ethanol industry depends oncontinuation of the federal ethanol subsidy. Without this subsidy, ethanolproduction could fall to near zero in Wisconsin and the nation. The federalsubsidies and tax incentives are scheduled to expire September 30, 2007.Although these subsidies and tax incentives have been continued beyond theiroriginal and rescheduled expiration dates in the past, there can be noassurance that the federal subsidies and tax incentives to the ethanol industrycontinue beyond their scheduled expiration date or, if they continue, theincentives would continue at the same level. The elimination or reduction ofthe federal subsidy and tax incentives to the ethanol industry would have amaterial adverse impact on our business.

 

**Wisconsinstate producer incentive payment may not be available or could be modifiedwhich could harm our business.**

 

Under a recently enacted Wisconsin producer payment program, the Stateof Wisconsin will pay certain ethanol producers $0.20 per gallon for up to15,000,000 gallons of ethanol produced in Wisconsin in each 12 month period.The payments will be prorated if the State of Wisconsin has insufficient fundsto pay all eligible ethanol producers $0.20 per gallon. A Wisconsin ethanol producerwill be eligible for the payments if it has been producing ethanol in Wisconsinfor fewer than 60 months, it produces more than 10,000,000 gallons of ethanol ayear and it purchases the corn or other substances from which the ethanol isproduced from Wisconsin sources. The maximum subsidy available to an ethanolproducer under this program is $3,000,000 annually. We have applied with theWisconsin Department of Agriculture, Trade and Consumer Protection to qualifyfor the statutory maximum of these ethanol producer payments. Additionally, ifanother ethanol plant came online and produced 10 million gallons of ethanol,it could qualify for the producer payment which would reduce the fundsavailable to us. The Wisconsin legislature could reduce or eliminate thesepayments at any time. We intend to partially collateralize a substantialportion of our subordinated debt financing with these payments, and therefore,if these payments were eliminated or reduced, it would be very damaging to ourbusiness and prospects.

 

**Operatingour ethanol plant may require additional capital.**

 

The processing of corn into ethanol and the marketing of ethanol andits byproducts are capital intensive and require substantial amounts of cashreserves. We may not generate sufficient operating cash to meet these capitalrequirements. We could need additional financing in order to compete in theethanol industry. This financing will be senior in priority to the equity ofinvestors, and we could be subject to restrictive covenants that could restrictour

 

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ability to pay cash distributions or limit our ability to grow ourbusiness by issuing additional securities or debt. If we obtain additionalfinancing by issuing additional units, investors in this offering would sufferdilution of their units in our limited liability company. This could reduce thevalue of your units. There can be no assurance that additional financing wouldbe available if required or, if available, that it would be on terms acceptableto us. If future financing were unavailable for any reason, we may be forced todiscontinue operations.

 

**Theethanol industry is very competitive.**

 

While the ethanol industry has been growing, there is significantcompetition among ethanol producers. Nationally, ethanol production isconcentrated in a few large companies. Investors should understand that theethanol plant faces a competitive challenge from larger factories, from plantsthat can produce a wider range of products than our ethanol plant, and fromother plants similar to our ethanol plant.

 

The ethanol plant will be in direct competition with other ethanolproducers, many of which have greater resources than we currently have or willhave in the future. Large ethanol producers such as Archer Daniels Midland,Minnesota Corn Processors and Cargill, among others, are capable of producingsignificantly greater quantities than the amount of ethanol we expect toproduce. In addition, there are several Minnesota and other Midwestern regionalethanol producers which have recently formed, are in the process of forming, orare under consideration, which are or would be of a similar size and havesimilar resources to us. In light of such competition, there is no assurancethat we can complete our project, or can successfully operate the ethanol plantif constructed.

 

The ethanol plant will also compete with producers of other gasolineadditives having similar octane and oxygenate values as ethanol, such asproducers of methyl tertiary butyl ether (“MTBE”), a petrochemical derived frommethanol which costs less to produce than ethanol. Many major oil companiesproduce MTBE and because it is petroleum-based, its use is strongly supportedby major oil companies. 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 sufficient resourcesto begin production of ethanol should they choose to do so.

 

**Toproduce ethanol we intend to purchase significant amounts of corn that issubject to disease and other agricultural risks.**

 

Ethanol production at our facility will require corn. Corn, as withmost other crops, is affected by weather conditions. A significant reduction inthe quantity of corn harvested due to adverse weather conditions, disease orother factors could result in increased corn costs with adverse financialconsequences to us. Significant variations in actual growing conditions fromnormal growing conditions may adversely affect our ability to procure corn forthe plant. We also have no definitive agreements with any corn producers toprovide corn to the ethanol plant.

 

The price of corn is influenced by general economic, market andgovernment factors. These factors include weather conditions, farmer plantingdecisions, domestic and foreign government farm programs and policies, globaldemand and supply. Changes in the price of corn can significantly affect ourbusiness. Generally, rising corn prices produce lower profit margins andtherefore represent unfavorable market conditions. This is especially true ifmarket conditions do not allow us to pass along increased corn costs to ourcustomers. The price of corn has fluctuated significantly in the past and mayfluctuate significantly in the future. We can not assure that we will be ableto offset any increase in the price of corn by increasing the price of ourproducts. If we cannot offset increases in the price of corn, our financialperformance may be materially and adversely effected.

 

**To produce ethanol, we will need a significant supply ofwater.**

 

Water supply and waterquality are important requirements to produce ethanol. To satisfy our waterneeds, we have drilled one 500,000 gallon-per-day well on the property.

 

We expect that the well will provide all of the water that we will needto operate the ethanol plant, but our estimates regarding water needs could beunderstated and we could need additional water. If we need more water, we willbe

 

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forced to find other sources and this could require us to spendadditional capital which could harm our business and its prospects. Further,there can be no assurance that we will be able to find alternate sources ofwater at commercially reasonable prices, or at all.

 

**Interruptionsin our supply of energy could have a material adverse impact on our business.**

 

Ethanol production also requires a constant and consistent supply ofenergy into the ethanol plant. If there is any interruption in our supply ofenergy or water for whatever reason, such as supply, delivery or mechanicalproblems, we may be required to halt production. If production is halted forany extended period of time, it will have a material adverse effect on ourbusiness. We have contracted with gas and electric utilities to provide ourneeded energy, but there can be no assurance that those utilities will be ableto reliably supply the gas and electricity that we need. If we were to sufferinterruptions in our energy supply, our business would be harmed.

 

**Oursuccess will depend on hiring and retaining key personnel.**

 

Our success will depend in part on our ability to attract and retaincompetent personnel who will be able to help us achieve our goals. We must hireand retain qualified managers, accounting, human resources and other personnelto staff our business.  If we areunsuccessful in hiring and retaining productive and competent personnel, ourbusiness could be harmed.

 

**We aresubject to extensive environmental regulation.**

 

Ethanol production involves the emission of various airbornepollutants, including particulate (PM10), carbon monoxide (CO), oxidesof nitrogen (N0x) and volatile organic compounds. To operate the ethanol plant,we will need permits from the State of Wisconsin. In addition, Wisconsinauthorities could impose conditions or other restrictions that could harm ourbusiness.

 

We are also be subject to regulations on emissions from the UnitedStates Environmental Protection Agency (“EPA”). Currently the EPA’s statutesand rules do not require us to obtain EPA approval in connection with theoperation of the ethanol plant. Additionally, EPA and Wisconsin’s environmentalregulations are subject to change and often such changes are not favorable toindustry. Consequently, even if we have the proper permits at the present time,we may be required to invest or spend considerable resources to comply withfuture environmental regulations. We also could be subject to environmentalnuisance or related claims by employees or property owners or residents in thevicinity of the ethanol plant arising from air or water discharges. Ethanolproduction has been known to produce an unpleasant odor to which surroundingresidents could object. Claims or increased environmental compliance costscould harm our business.

 

**Ethanolproduction is energy intensive, and we will need significant amounts ofelectricity and natural gas.**

 

We have engaged U.S. Energy Services, Inc. to help us manage ournatural gas and needs and to assist us in negotiating agreements to purchasenatural gas.  We purchaser electricityfrom Alliant Energy Company but have not entered into any agreement.  In addition, natural gas and electricityprices have historically fluctuated significantly. Increases in the price ofnatural gas or electricity would harm our business by increasing our energycosts.

 

**Our business is not diversified.**

 

Our success dependslargely upon our ability to timely complete and profitably operate our ethanolplant. We do not have any other lines of business or other sources of revenueif we are unable to operate our ethanol plant.

 

**Weestablished an output contract with only one distributor, Murex, N.A., who willpurchase all of the ethanol we produce; we contracted only with ICM Marketing,Inc. for the marketing and distribution of our feed products.**

 

We will sell all of the ethanol we produce to one distributor, Murex,N.A., pursuant to an output contract. As a result, we are dependent on onedistributor to sell our ethanol. If this distributor breaches our outputcontract or is not in the

 

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financial position to purchase all of the ethanol we produce, we willnot have any readily available means to sell our ethanol and our financialperformance will be adversely and materially effected. Our financialperformance is dependent upon the financial health of the distributor wecontract with.

 

We only contracted with ICM Marketing for the marketing anddistribution of our feed products. We rely solely upon ICM Marketing to marketand distribute our feed products. This is not an output contract and ICMMarketing will only purchase that portion of our feed products that they areable to sell. If ICM Marketing is unable to sell any portion of the feedproducts we produce, we will be left with feed products that must be disposed of.This may have a material adverse impact on our financial performance.

 

Further, ICM Marketing may also have different agreements with respectto compensation in their agreements with other entities that produce the sameproducts that we do. It is possible that ICM’s ability or willingness toperform on our behalf could be impaired by the financial agreements that theymay have with other entities not related to us.

 

**Ouroperating results could fluctuate.**

 

Our quarterly operating results could fluctuate significantly in thefuture as a result of a variety of factors many of which are outside ourcontrol. These factors include:

 

•                  Weather,supply and demand and other variables affecting the price and supply of corn;

 

•                  Changesin interest rates and availability of credit;

 

•                  Reliabilityand construction quality of the ethanol plant to permit it to operate at alevel that we expect;

 

•                  Legislativechanges in policy at the federal or state level concerning ethanol and gasolineadditives to reduce emissions;

 

•                  Amountand timing of capital expenditures and other costs relating to maintenance orexpansion of our operations;

 

•                  Technicaldifficulties in operating the ethanol plant;

 

•                  Newproducts and new plants from ethanol producers or oil companies;

 

•                  Generaleconomic conditions, or economic events specific to agriculture, oil orautomobile markets.

 

As a result of these factors, and other described in these riskfactors, our operating results for any particular quarter may not be indicativeof future operating results and you should not rely on them as indications ofour future performance.

 

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**PART I**

 

**ITEM 1.  DESCRIPTION OF BUSINESS**

 

Badger State Ethanol, LLC, a Wisconsin limitedliability company organized in 2000 (the “Company”), is engaged in theproduction and sale of fuel grade ethanol. Unless otherwise indicated, whenever we use term we, us, our or ours, wemean the Company.

 

Fuel grade ethanol is our primary product accountingfor the majority of our revenue.  Inaddition, we sell distillers grains, a principal by-product of the ethanolproduction process, which may be sold as distillers dried grains and distillersmodified wet grains.  We have an annualcapacity to process approximately 14.4 million bushels of corn intoapproximately 40 million gallons of ethanol. We completed construction of our plant and started operations in October2002.

 

**Descriptionof Dry Mill Process**

 

Our ethanol plant, which is located in Monroe,Wisconsin, produces ethanol by processing corn.  The corn is received by rail and by semi-trailer truck, and isweighed and cleaned of rocks and debris before it is conveyed to one of twoconcrete storage silos. The corn is then transported to a hammermill or grinderwhere it is ground into flour and conveyed into a slurry tank forprocessing.  We add water, heat andenzymes to break the ground corn into a corn mash.  This mash is heat sterilized and pumped to a tank where otherenzymes are added to convert the starches into glucose sugars.  Next, the mash is pumped into one of threefermenters, where yeast is added, to begin a forty-eight to fifty hour batchfermentation process.  A distillationprocess vaporizes the alcohol from the corn mash.  The alcohol is further dried in a rectifier and molecularsieve.  The resulting 200 proof alcoholis then pumped to shift tanks and blended with five percent gasoline as it ispumped into denatured ethanol storage tanks.

 

Corn mash exiting the distillation process is pumpedinto one of several centrifuges.  Waterfrom the centrifuges, called thin stillage, is condensed into a thicker syrupcalled condensed solubles.  The solidsthat exit the centrifuge are called wet cake or distillers wet grains.  Typically, this wet cake is conveyed todryers where condensed solubles are added and moisture is removed to producedistillers dried grains, which may be used as animal feed.

 

**PrincipalProducts and Their Markets**

 

The principal products we produce at our ethanol plantare fuel grade ethanol and distillers grains.

 

***Ethanol***

 

Ethanol is ethyl alcohol, which has many industrialuses.  At our plant, we produce ethanolto be used as a fuel component that serves as:

 

•                  Anoctane enhancer in fuels;

 

•                  Anoxygenated fuel additive that can reduce carbon monoxide vehicle emissions; and

 

•                  Anon-petroleum-based gasoline extender.

 

Ethanol in its primary form is mostly used forblending with unleaded gasoline and other fuel products.  The implementation of the Federal Clean AirAct has made ethanol fuels an important domestic renewable fuel additive.  Used as a fuel oxygenate, ethanol provides ameans to reduce carbon monoxide vehicle emissions.  The principal purchasers of ethanol are generally the refined andwholesale gasoline marketer or blender. Our principal end markets for our ethanol are petroleum terminals inWisconsin, Illinois and other states in the upper Midwest.

 

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***Distillers Grains***

 

A principalby-product of the ethanol production process is distillers grains, ahigh-protein, high-energy animal feed supplement primarily marketed to thedairy and beef industry.  Our plant usesa dry mill ethanol process with a dryer system that allows production of twomoisture levels of distillers grains: distillers modified wet grains anddistillers dried grains.  Distillersmodified wet grains are processed corn mash and condensed solubles that containapproximately 50% moisture.  It has ashelf life slightly longer than three days and is often sold to nearbymarkets.  Distillers dried grains arecorn mash that has been dried to 10% moisture. It has an almost indefinite shelf life and may be sold and shipped viatruck, rail car, barge or ship to any market regardless of its vicinity to ourethanol plant.

 

In fiscal 2002, we experienced higher natural gasprices, which led to higher by-product processing costs.  To mitigate higher processing costs, weincreased our production of distillers modified wet grains, which require lessnatural gas to produce.  Consequently,we also increased the marketing campaign for distillers modified wet grains, inpart by promoting the nutritional benefits of distillers modified wet grains.

 

**Customers**

 

We entered into an ethanol purchase and marketingagreement with Murex, N.A., Ltd., for the exclusive rights to purchase andmarket all ethanol produced by our plant. For fiscal year ended December 31, 2002, Murex, N.A., Ltd.accounted for all of our ethanol sales and approximately 78% of our aggregaterevenues.  We believe that the loss ofMurex, N.A., Ltd. as a customer would have a material adverse effect onour sales and revenues.  Murex ownsClass A member units and has a representative on our Board of Directors.  This exclusive agreement has an initial termof seven years until October 23, 2010, and automatically renews for successiveone-year terms unless written notice of termination is issued 90 days prior tothe end of the then current term.

 

We entered into a distillers grains purchase andmarketing agreement with ICM Marketing, Inc. for the exclusive rights topurchase and market all distillers grains produced by our plant.  For fiscal year ended December 31,2002, ICM Marketing, Inc. accounted for virtually all of our distillers grainssales and approximately 19% of our aggregate revenues.  We believe that the loss of ICM Marketing,Inc. as a customer would have a material adverse effect on our sales andrevenues.  This exclusive agreement hasan initial term of three years until October 25, 2005, and automatically renewsfor successive one-year terms unless written notice of termination is issued 90days prior to the end of the then current term.  ICM, Inc., the parent company of IMC Marketing, Inc., owns classA member units and has a representative on our Board of Directors.

 

**SeasonalFactors in Business**

 

In an effort to improve air quality in regions wherecarbon monoxide and ozone are a problem, the United States federal governmentrequires the use of gasoline with a higher oxygen content in these regionsduring the fall and winter.  Gasolinethat is blended with ethanol has a higher oxygen content than gasoline thatdoes not contain ethanol.  As a result,we expect moderate seasonality with respect to our gross profit margins on ourfuel grade ethanol allowing us to, potentially, be able to sell our fuel gradeethanol at a premium during the mandated oxygenate period (which coincides withour third and fourth fiscal quarters). Conversely, we expect our average sales price for fuel grade ethanol duringthe summer, when fuel grade ethanol is primarily used as an octane enhancer ora fuel supply extender, to be lower.  Weprimarily contract for six-month blending cycles to correspond to the differentwinter and summer market periods.

 

**EthanolIndustry**

 

Ethanol has important applications, primarily as anoctane enhancer in fuels, an oxygenated fuel additive that can reduce carbonmonoxide vehicle emissions and a non-petroleum-based gasoline extender.  The ethanol industry is heavily dependent,however, on several governmental economic incentives.

 

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***Federal Ethanol Supports***

 

Ethanol sales havebeen favorably affected by the Clean Air Act Amendments of 1990, particularlythe Federal Oxygen Program which became effective November 1, 1992.  The Federal Oxygen Program requires the saleof oxygenated motor fuels during the fall and winter months in certain majormetropolitan 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 certain major urbanareas to reduce pollutants, including those that contribute to ground level ozone,better known as smog.

 

The use of ethanol as an oxygenate to blend with fuelto comply with federal mandates also has been aided by federal tax policy.  The Energy Tax Act of 1978 exempted ethanolblended gasoline from the federal gas tax as a means of stimulating thedevelopment of a domestic ethanol industry and mitigating the United State’sdependence on foreign oil.  As amended,the federal tax credit currently allows the market price of ethanol to competewith the price of domestic gasoline. Although the federal tax credit is not directly available to us, itallows us to sell our ethanol at prices that are competitive with other lessexpensive additives and gasoline.  Thecredit for an ethanol blend is the equivalent of providing a per gallon “equalization”payment that allows blenders to pay more for ethanol than the wholesale priceof gasoline and still retain the same profit margins.  Under current legislation, the federal gasoline tax is $0.184 pergallon and the tax on gasoline blended with 10% ethanol is $0.13 per gallon,providing a $0.054 difference.  Smallercredits of $0.0408 and $0.0302, are available for gasoline blended with 7.7%and 5.7% ethanol, respectively.  Thefederal tax on a gallon of 10% ethanol blended gasoline will gradually increaseto $.133 by 2005, dropping the difference to $.051 per gallon.  By 2007, the federal tax credit for ethanolblended gasoline will expire, and it is scheduled to be taxed at the standardfederal gasoline tax rate.

 

Fuel grade ethanol prices traditionally have varieddirectly with the wholesale price of gasoline. However, in some states, fuel grade ethanol typically sells for a higherprice per gallon than wholesale gasoline because of the aforementioned excisetax incentives.  Historically, fuelgrade ethanol prices have also reflected a premium due to the oxygenate andoctane enhancing properties of this motor fuel additive.

 

During the year 2003, we anticipate receiving up to$7.5 million from the United States Department of Agriculture Commodity CreditCorporation’s Bioenergy Program.  Underthe program, we are eligible to receive a cash incentive for incremental grainconsumption for the purpose of producing fuel grade ethanol.  This program is only available to ethanolplants in the first full calendar year after such ethanol plant has increasedits production, in an amount based upon the increase in production at suchplant, up to a total of $7.5 million.

 

***State Ethanol Supports***

 

In part, the success of our business is dependent uponthe availability of cash payments to ethanol producers from the State ofWisconsin under Wisconsin Statutes Section 20.115(3)(d) and 93.75 (referred tohereinafter as the “Producer Subsidy Payment”).  Under the Wisconsin Producer Subsidy Payment program, the Stateof Wisconsin will pay certain ethanol producers $.20 per gallon for up to15,000,000 gallons of ethanol produced in Wisconsin in each 12 monthperiod.  The Producer Subsidy Paymentswill be prorated if the State of Wisconsin has insufficient funds to pay all eligibleethanol producers $.20 per gallon.  Ifthis occurs, we will receive less than $0.20 per gallon of ethanolproduced.  Under the program, aWisconsin ethanol producer is eligible for the payments if it has beenproducing ethanol in Wisconsin for fewer than 60 months, it produces more than 10,000,000gallons of ethanol a year and it purchases the corn or other substances fromwhich the ethanol is produced from local Wisconsin sources.  During 2002, the total subsidies availableto all ethanol producers under the program were $2,950,000.  The maximum subsidy available to an ethanolproducer under this program is the lesser of $3,000,000 annually or the totalsubsidies available to all eligible ethanol producers in each year.  We are currently eligible for the ProducerSubsidy Payment and have applied to receive it.  Producer Subsidy Payment program is presently scheduled to expirein 2006.  Furthermore, the ProducerSubsidy Payments could be eliminated or reduced by the Wisconsin legislature atany time.

 

3

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**Business Location; Proximity toMarkets**

 

We are operating an ethanol plant in Monroe,Wisconsin, which is in Green County, in the southern central section ofWisconsin.  We purchased for $1 from theCity of Monroe, Wisconsin an approximately 28-acre site on which to build theethanol plant.  We selected the Monroesite because of its location to existing grain production, accessibility toroad and rail transportation and its proximity to major populationcenters.  It is also served by the WisconsinSouthern Railroad Company, a short line rail operator.  In addition, it is also in close proximityto major highways that connect to major population centers such as Madison andMilwaukee, Wisconsin and Chicago, Illinois.

 

**Development Agreement with the City of Monroe**

 

We entered into a development agreement with the Cityof Monroe to construct the ethanol plant and for site improvements.  As part of the development agreement, weagreed to on-going obligations, including the following:

 

•                  Constructingone or more rail spurs connecting into an existing rail line;

 

•                  Providingthe City of Monroe a warranty that on or before January 1, 2002 and for aperiod of ten years thereafter, the fair market value of the site, includingimprovements, will not be less that $10 million or pay a non-performancepenalty not to exceed $280,000 per year; and

 

•                  Repayingup to $1.6 million of the City of Monroe’s tax incremental financing for siteimprovements through regular property tax assessments that, other than the fairmarket value warranty described above, are no higher than what would otherwisebe assessed on the site after construction and operation if purchased from athird party.

 

As of December 31, 2002, we completed theconstruction of the rail spurs connecting them into an existing rail line.  The fair market value of the site, includingimprovements, as of December 31, 2002, was approximately$47 million.  Commencing January 1,2003, we expect to begin repaying the City of Monroe’s tax incrementalfinancing for site improvements through our regular property tax assessments,which we believe will be $280,000 per year.

 

In connection with the Development Agreement, weexecuted and delivered a mortgage to the City of Monroe.  The mortgage secured our performance of theon-going obligations.  The City ofMonroe’s lien of the mortgage is subordinate to the mortgage lien of the lenderproviding primary financing for the initial construction of our ethanol plantbut not to the interest of our equity holders.

 

**Procurements**

 

***Grain Delivery***

 

According to the Wisconsin Agricultural StatisticalService, over 360 million bushels of corn are produced annually inWisconsin.  Of that total, the greatestpercentage is produced in the southern portion of the state.  According to the Wisconsin AgriculturalStatistical Service, approximately 200 million bushels of corn are producedannually within a 100-mile radius of Monroe, Wisconsin.  Our plant is located in Monroe, Wisconsin,in Green County, approximately eight miles from the Illinois state border.  We obtain approximately 98% of our cornsupply from producers located within a 100-mile radius of Monroe.  This amounts to approximately 3% of the cornproduced within a 100-mile radius of Monroe. We purchase most of our corn from Wisconsin producers because cornpurchased from Wisconsin residents qualifies for incentive payments to ethanolproducers from the State of Wisconsin. We have no agreements, commitments or understandings with any cornproducers.

 

4

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***Grain Elevators***

 

We have ongoingbusiness relationships with local grain elevators to acquire the grain weneed.  We have identified approximately36 elevators as potential sources of grain in southern Wisconsin and continueto discuss with them future corn delivery. Although we are currently procuring grains from these sources, we cannotguarantee that we will be able to continue procuring such grains on acceptableterms or at all.

 

***Transportation and Delivery***

 

Grain is deliveredto our ethanol plant by trucks and rail. We also are dependent on rail and commercial trucks to distribute ourethanol and distillers grains.  Anydisruption in the rail system or commercial truck system would have asignificant detrimental effect on our operations.  The Wisconsin and Southern Railroad Company provides rail serviceto the plant.  The railroad providesdirect access for shippers via the Chicago, Illinois gateway, which connectswith all major railroads via the Belt Railway of Chicago, Burlington Northernat Prairie du Chien, Wisconsin, Union Pacific, Canadian Pacific and WisconsinCentral railroads at various points on the system.  In addition, access to barge facilities is also available atPrairie du Chien, Wisconsin.

 

In July 2001, we entered into a rail trackreimbursement and construction agreement, as well as a transportationagreement, with Wisconsin and Southern Railroad Company for construction of arail track to our ethanol plant and for rail transportation services.  Under the reimbursement and constructionagreement, we will receive reimbursements from the rail operator for trackconstruction costs based upon a rate of $10 per freight car shipped or receivedat our ethanol plant.  The reimbursementsare payable on a monthly basis not to exceed ten years or the cost of thetrack.  The transportation agreementprovides us with rail transportation services for deliveries to and from theethanol plant at negotiated rates.  Thetransportation agreement has been approved by the Surface Transportation Boardof the U.S. Department of Transportation and the agreement commenced onJanuary 1, 2003.

 

***Hedging***

 

Due to rapid fluctuations in the price of corn, withinsix months prior to our ethanol plant beginning operations, we engaged FirstCapital Ag to help us develop a Grain Risk Management Program hedging strategyto minimize our commodity risk exposure. Our Grain Risk Management Program is intended to use grain purchasecontracts together with grain futures derivatives to fix the cost of some ofour expected future grain purchases. Our policy allows for the use of fixed price forward purchase contracts,un-priced forward basis purchase contracts, and Chicago Board of Trade (CBOT)derivative contracts (over-the-counter and traditional options).  During 2002, approximately 85% of our fiscal2002 grain requirements were hedged through a combination of fixed priceforward purchase contracts, and CBOT traditional and over-the-counter optionhedges to protect our cost of grain. During 2002, our practice of protecting the cost of our grain, generallyaccounted for 85% of forecasted grain purchases in the upcoming twelvemonths.  We took this action because ofour start-up nature and the volatility of corn price.  Under our program, all components of the position are monitoredand all hedges are designated against future grain requirements to ensure thatwe do not enter into commitments or derivatives for grain in excess of expectedgrain requirements.

 

***Storage Capacity***

 

We have sufficient corn storage facilities on-site forapproximately nine days of continuous production.  Since our inception, we have maintained our own in-house grainprocurement department, to procure all our grain needs.  We believe that by establishing internalgrain procurement, we can better develop local supply relationships that willreduce the need to buy and store grain offsite and better manage our rawmaterial risk management program.  Wehired a commodities manager to ensure the consistent scheduling of graindeliveries and to establish and fill forward contracts through grainelevators.  The commodities managercoordinates grain deliveries between the railroad and the participatingelevators, as well as negotiates price protection with hedging specialists.

 

5

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***Water***

 

Water supply isimportant to our ethanol business.  Thewater quality at our plant currently meets the needs of the facility withoutsignificant filtering or processing.  Tosatisfy our water needs, we have drilled one 500,000 gallon-per-day well on theproperty.  Based upon current productionof currently existing wells in the City of Monroe, we believe there issufficient ground water to support this well. In addition, we are also connected to the City of Monroe’s water supplyin the event the water supplied by the well is not sufficient.

 

***Natural Gas***

 

Ethanol productionis an energy intensive process using significant amounts of electricity andnatural gas.  We have contracted withWisconsin Electric Power Company (“WE Energies”) for firm service natural gasdelivery and with US Energy Services, Inc. to coordinate purchase and deliveryof the gas to the plant and otherwise manage our energy needs.  Due to the competitive nature of the naturalgas market, we believe no significant risk of long-term interruptionexists.  US Energy Services, Inc. alsohelps us to negotiate and procure natural gas and electricity.  Natural gas prices have historicallyfluctuated dramatically.  According toUS Energy Services, Inc., the current price of natural gas as reported on theNew York Mercantile Exchange is up 60% from last year.  US Energy Services, Inc. provides price riskmanagement services to us to manage natural gas prices in a manner that webelieve will provide price stability.

 

Natural gas supplies must be procured and delivered ona daily basis in an amount equal to anticipated daily plant usage.  Transporters must be notified each dayregarding our plant’s expected usage and the physical supply source.  To the extent that actual plant usage isgreater than or less than expected usage (which usually is the case) theimbalance must be managed.  US EnergyServices, Inc. provides us with these kinds of management services and monitorsgas delivery, ensures timely payment of invoices, and reviews and reconcilesthe final invoices.

 

We have an arrangement with Wisconsin Gas Company tobe the exclusive supplier of transportation for natural gas for the plantoperations.

 

***Electricity***

 

We purchaseelectricity from Alliant Energy Company, the local utility that holds theservice franchise for the area in which our ethanol plant is located.  We have not entered into any agreement withAlliant regarding electrical service.

 

**Sales and Marketing**

 

We entered into a seven-year ethanol purchase andmarketing agreement with Murex, N.A., Ltd., Dallas, Texas, for the exclusiverights to purchase and market all ethanol produced by our plant.  Murex owns Class A member units and has arepresentative on our Board of Directors.

 

We also entered into a three-year purchase andmarketing agreement with ICM Marketing, Inc. for the exclusive rights topurchase and market all of the distillers dried grains produced by ourplant.  ICM, Inc., the parent company ofICM Marketing, Inc., was a prime subcontractor for the construction of theethanol plant, owns Class A member units, and has a representative on our Boardof Directors.

 

**Competition**

 

We are in direct competition with other ethanolproducers, many of whom have greater resources than we do.  We expect that additional ethanol producerswill enter the market as the demand for ethanol increases.

 

***Ethanol Producers***

 

According to theRenewable Fuels Association, U.S. Fuel Ethanol Production Capacity, March 2003Report, the largest ethanol producers include Archer Daniels Midland, Cargill,New Energy Corp., High Plains

 

6

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Corp., MGP Ingredients, Inc., Williams Bio-Energy, A.E. Staley andChief Ethanol, all of which are capable of producing many times the amount ofethanol we produce or expect to produce in the near future.

 

In addition, we are aware that several regionalethanol production entities have recently formed, or are forming, that arecurrently of a similar size and with similar resources to ours.  For example, Adkins Energy recentlycompleted building an ethanol plant in Lena, Illinois, which is approximately20 miles away.  The Adkins plant expectsto produce 40 million gallons of ethanol annually.  Also, Ace Ethanol in Stanley, Wisconsin is operating and expectsto produce 15 million gallons of ethanol annually.  We are also aware of several other potential projects inWisconsin that may or may not begin production.  Wisconsin projects that rely on corn as a raw material couldcompete with us in the market for corn as well as for other raw materials, andcompete with us in selling ethanol and animal feed products.  The emergence of other Wisconsin ethanolplants that are eligible for the Producer Subsidy Payment would reduce theamount of payments we receive because the Wisconsin Producer Subsidy Payment of$0.20 per gallon up to a maximum of $3,000,000 annually per producer isallocated pro rata to all eligible producers.

 

Plans to construct new plants or to expand existingplants have been announced which would increase the ethanol production capacityof our competitors.  We are unable todetermine the number and production capacity of plants that ultimately may beconstructed, the timing of such construction or the effect of resultingproduction upon the demand for or price of our ethanol.  We expect to compete with other ethanolproducers based on price and, to a lesser extent, delivery service. The ethanolindustry has grown to more than 60 production facilities in the UnitedStates.  It is estimated that thesefacilities and those facilities currently under construction could produce over3.2 billion gallons of ethanol per year.

 

The following table lists all of the major ethanolproducers in the United States according to the Renewable Fuels Association,U.S. Fuel Ethanol Production Capacity, March 2003 Report.

 

7

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U.S. PRODUCTION CAPACITY

million gallonsper year (mmgy)

 
| **COMPANY**                          |   | **LOCATION**        |   | **FEEDSTOCK** |   | **CURRENT  CAPACITY  (MMGY)** |   | **UNDER  CONSTRUCTION/  EXPANSIONS  (MMGY)** |
|--------------------------------------|--------|---------------------|--------|---------------|--------|-------------------------------|--------|----------------------------------------------|
|                                 |   |                |   |          |   |                          |   |                                         |
| ACE Ethanol                          |   | Stanley, WI         |   | Corn          |   | 15                            |   |                                         |
| Adkins Energy, LLC*                  |   | Lena, IL            |   | Corn          |   | 40                            |   |                                         |
| A.E. Staley                          |   | Loudon, TN          |   | Corn          |   | 65                            |   |                                         |
| AGP*                                 |   | Hastings, NE        |   | Corn          |   | 52                            |   |                                         |
| Agra Resources Coop, d.b.a. EXOL*    |   | Albert Lea, MN      |   | Corn          |   | 37                            |   |                                         |
| Agri-Energy, LLC*                    |   | Luverne, MN         |   | Corn          |   | 21                            |   |                                         |
| Alchem Ltd. LLLP                     |   | Grafton, ND         |   | Corn          |   | 10.5                          |   |                                         |
| Al-Corn Clean Fuel*                  |   | Claremont, MN       |   | Corn          |   | 30                            |   |                                         |
| Algoma Ethanol^                      |   | Oshkosh, WI         |   | Corn          |   |                          |   | 20                                           |
| Archer Daniels Midland               |   | Decatur, IL         |   | Corn          |   | 1070                          |   |                                         |
|                                 |   | Cedar Rapids, IA    |   | Corn          |   |                          |   |                                         |
|                                 |   | Clinton, IA         |   | Corn          |   |                          |   |                                         |
|                                 |   | Columbus, NE        |   | Corn          |   |                          |   |                                         |
|                                 |   | Marshall, MN        |   | Corn          |   |                          |   |                                         |
|                                 |   | Peoria, IL          |   | Corn          |   |                          |   |                                         |
|                                 |   | Wallhalla, ND       |   | Corn/barley   |   |                          |   |                                         |
| Badger State Ethanol, LLC*           |   | Monroe, WI          |   | Corn          |   | 40                            |   |                                         |
| Big River Resources, LLC*^           |   | West Burlington, IA |   | Corn          |   |                          |   | 40                                           |
| Broin Enterprises, Inc.              |   | Scotland, SD        |   | Corn          |   | 9                             |   |                                         |
| Cargill, Inc.                        |   | Blair, NE           |   | Corn          |   | 83                            |   |                                         |
|                                 |   | Eddyville, IA       |   | Corn          |   | 35                            |   |                                         |
| Central MN Ethanol Coop*             |   | Little Falls, MN    |   | Corn          |   | 20                            |   |                                         |
| Chief Ethanol                        |   | Hastings, NE        |   | Corn          |   | 62                            |   |                                         |
| Chippewa Valley Ethanol Co.*         |   | Benson, MN          |   | Corn          |   | 21                            |   | 20                                           |
| Commonwealth Agri-Energy, LLC*^      |   | Hopkinsville, KY    |   | Corn          |   |                          |   | 20                                           |
| Cornhusker Energy Lexington, LLC*^   |   | Lexington, NE       |   | Corn          |   |                          |   | 42                                           |
| Corn Plus*                           |   | Winnebago, MN       |   | Corn          |   | 44                            |   |                                         |
| Dakota Ethanol, LLC*                 |   | Wentworth, SD       |   | Corn          |   | 47                            |   |                                         |
| DENCO, LLC*                          |   | Morris, MN          |   | Corn          |   | 20                            |   |                                         |
| ESE Alcohol Inc.                     |   | Leoti, KS           |   | Seed corn     |   | 1.5                           |   |                                         |
| Ethanol 2000, LLP*                   |   | Bingham Lake, MN    |   | Corn          |   | 30                            |   |                                         |
| Glacial Lakes Energy, LLC*           |   | Watertown, SD       |   | Corn          |   | 45                            |   |                                         |
| Golden Cheese Company of California* |   | Corona, CA          |   | Cheese whey   |   | 5                             |   |                                         |
| Golden Triangle Energy, LLC*         |   | Craig, MO           |   | Corn          |   | 20                            |   | 20                                           |
| Gopher State Ethanol                 |   | St. Paul, MN        |   | Corn          |   | 15                            |   |                                         |
| Grain Processing Corp.               |   | Muscatine, IA       |   | Corn          |   | 10                            |   |                                         |
| Great Plains Ethanol, LLC*^          |   | Chancellor, SD      |   | Corn          |   |                          |   | 40                                           |
| Heartland Corn Products*             |   | Winthrop, MN        |   | Corn          |   | 35                            |   |                                         |

 

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| **COMPANY**                            |   | **LOCATION**       |   | **FEEDSTOCK**          |   | **CURRENT  CAPACITY  (MMGY)** |   | **UNDER  CONSTRUCTION/  EXPANSIONS  (MMGY)** |
|----------------------------------------|--------|--------------------|--------|------------------------|--------|-------------------------------|--------|----------------------------------------------|
|                                   |   |               |   |                   |   |                          |   |                                         |
| Heartland Grain Fuels, LP*             |   | Aberdeen, SD       |   | Corn                   |   | 8                             |   |                                         |
|                                   |   | Huron, SD          |   | Corn                   |   | 14                            |   |                                         |
| High Plains Corp.                      |   | York, NE           |   | Corn/milo              |   | 50                            |   |                                         |
|                                   |   | Colwich, KS        |   |                   |   | 20                            |   |                                         |
|                                   |   | Portales, NM       |   |                   |   | 15                            |   |                                         |
| Husker Ag, LLC*                        |   | Plainview, NE      |   | Corn                   |   | 20                            |   |                                         |
| James Valley Ethanol, LLC^             |   | Groton, SD         |   | Corn                   |   |                          |   | 45                                           |
| J.R. Simplot                           |   | Caldwell, ID       |   | Potato waste           |   | 6                             |   |                                         |
|                                   |   | Heyburn, ID        |   |                   |   |                          |   |                                         |
| KAAPA Ethanol, LLC*^                   |   | Axtell, NE         |   | Corn                   |   |                          |   | 40                                           |
| Land O’ Lakes*                    |   | Melrose, MN        |   | Cheese whey            |   | 2.6                           |   |                                         |
| Lincolnland Agri-Energy, LLC*^         |   | Robinson, IL       |   | Corn                   |   |                          |   | 40                                           |
| Little Sioux Corn Processors, LLC*^    |   | Marcus, IA         |   | Corn                   |   |                          |   | 40                                           |
| Manildra Energy Corp.                  |   | Hamburg, IA        |   | Corn/milo/wheat starch |   | 8                             |   |                                         |
| Merrick/Coors                          |   | Golden, CO         |   | Waste beer             |   | 1.5                           |   |                                         |
| Michigan Ethanol, LLC                  |   | Caro, MI           |   | Corn                   |   | 45                            |   |                                         |
| MGP Ingredients, Inc.                  |   | Pekin, IL          |   | Corn/wheat starch      |   | 78                            |   |                                         |
| Midwest Grain Processors*              |   | Lakota, IA         |   | Corn                   |   | 45                            |   |                                         |
| Miller Brewing Co.                     |   | Olympia, WA        |   | Brewery waste          |   | 0.7                           |   |                                         |
| Minnesota Energy*                      |   | Buffalo Lake, MN   |   | Corn                   |   | 18                            |   |                                         |
| New Energy Corp.                       |   | South Bend, IN     |   | Corn                   |   | 95                            |   |                                         |
| Northeast Missouri Grain, LLC*         |   | Macon, MO          |   | Corn                   |   | 22                            |   | 18                                           |
| Northern Lights Ethanol, LLC*          |   | Big Stone City, SD |   | Corn                   |   | 45                            |   |                                         |
| Permeate Refining                      |   | Hopkinton, IA      |   | Sugars & starches  |   | 1.5                           |   |                                         |
| Pine Lake Corn Processors, LLC*^       |   | Steamboat Rock, IA |   | Corn                   |   |                          |   | 20                                           |
| Plover Ethanol                         |   | Plover, WI         |   | Seed corn              |   | 4                             |   |                                         |
| Pro-Corn, LLC*                         |   | Preston, MN        |   | Corn                   |   | 40                            |   |                                         |
| Quad-County Corn Processors*           |   | Galva, IA          |   | Corn                   |   | 18                            |   |                                         |
| Reeve Agri-Energy                      |   | Garden City, KS    |   | Corn/milo              |   | 12                            |   |                                         |
| 78th Street Ethanol, LLC               |   | Blairstown, IA     |   | Corn                   |   | 5.5                           |   |                                         |
| Siouxland Energy & Livestock Coop* |   | Sioux Center, IA   |   | Corn                   |   | 14                            |   |                                         |
| Tall Corn Ethanol, LLC*                |   | Coon Rapids, IA    |   | Corn                   |   | 45                            |   |                                         |
| Tri-State Ethanol Co., LLC*            |   | Rosholt, SD        |   | Corn                   |   | 18                            |   |                                         |
| U.S. Energy Partners, LLC              |   | Russell, KS        |   | Milo/wheat starch      |   | 40                            |   |                                         |
| U.S. Liquids                           |   | Louisville, KY     |   | Beverage waste         |   | 4                             |   |                                         |
|                                   |   | Bartow, FL         |   |                   |   | 4                             |   |                                         |
|                                   |   | R. Cucamonga, CA   |   |                   |   | 4                             |   |                                         |
| VeraSun Energy Corporation^            |   | Aurora, SD         |   | Corn                   |   |                          |   | 100                                          |
| Williams Bio-Energy                    |   | Pekin, IL          |   | Corn                   |   | 100                           |   |                                         |
|                                   |   | Aurora, NE         |   | Corn                   |   | 35                            |   |                                         |
| Wyoming Ethanol                        |   | Torrington, WY     |   | Corn                   |   | 5                             |   |                                         |
|                                   |   |               |   |                   |   |                          |   |                                         |
| Total Existing Capacity                |   |               |   |                   |   | 2726.8                        |   |                                         |
| Total Under Construction/Expansions    |   |               |   |                   |   |                          |   | 505.0                                        |
| Total Capacity                         |   |               |   |                   |   | 3231.8                        |   |                                         |

 

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* farmer-owned

^ under construction

 

Last updated March 2003

 

Source: Renewable Fuels Association, U.S. Fuel Ethanol ProductionCapacity, March 2003.

 

9

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***Alternative Fuel Additives***

 

We also competewith producers of methyl tertiary butyl ether (commonly referred as “MTBE”), apetrochemical derived from methanol which costs less to produce thanethanol.  MTBE is a commonly usedoxygenate in fuels for compliance with Federal Clean Air Act mandates, and is amajor competitor of ethanol.  Many majoroil companies produce MTBE, and strongly support its use because it ispetroleum based.  These companies havesignificant resources to market MTBE and to influence legislation and publicperception of MTBE.  These companiesalso have sufficient resources to begin production of ethanol should theychoose to do so.

 

Alternative fuels, gasoline oxygenates and ethanolproduction methods are continually under development by ethanol and oilcompanies with far greater resources than we have.  Development of new products and methods of ethanol production bylarger and financially more viable competitors could provide them withsignificant competitive advantages over us and thus could harm our business.

 

**Employees**

 

As of December 31, 2002, we have employed 34 persons,in a full-time capacity, including 13 in ethanol production operations, 6 ingeneral management, sales, administration and grain procurement, and 15 ingrain receiving, grain handling, maintenance and the laboratory.  We also employ one part-time employee.

 

**EnvironmentalDisclosure**

 

We are subject to extensive environmental regulationat the federal, state and local levels. Air quality at the plant is regulated by the U.S. EnvironmentalProtection Agency and the Bureau of Air Management, Wisconsin Department ofNatural Resources.  The Department ofNatural Resources regulates emission of volatile organic compounds into theair.  Volatile organic compoundemissions are tested on a semi-annual basis, and we must submit semi-annualreports to the Department of Natural Resources regarding these emissions tests. We are required to obtain an airoperating permit from the Department of Natural Resources and must obtainDepartment of Natural Resources approval to make plant alterations that couldchange the emission levels.  TheDepartment of Natural Resources also regulates the water usage, wastewaterdischarge and hazardous waste under Wisconsin water pollution control andhazardous waste laws.  Water usage andwastewater effluent quality is monitored daily.  Monthly reports regarding water usage and quality are filed withthe Department of Natural Resources.  Wealso are required to submit periodic reports pursuant to the Wisconsin andFederal Emergency Planning Community Right-to-Know Act.  At the local level, we file semi-annualreports with the Green Count Emergency Response Committee.  We do not believe we will be required tospend material amounts to maintain compliance with applicable environmentallaws.

 

**RegulatoryPermits**

 

RMT Inc., an environmental consulting firm inBrookfield, Wisconsin, assisted us in obtaining an Air Pollution Constructionand Operation Permit, a Storm Water Discharge Permit and Storm Water PollutionPrevention Plan and advised us on environmental compliance generally.  We also obtained various other environmentaland operating permits, as discussed below.

 

The Department of Natural Resources has prepared anenvironmental assessment on the construction of the ethanol plant, which wasmade available to the public for comment on February 19, 2001.  The environmental assessment is a public reportthat reviews and analyzes the environmental impact that the ethanol plant mayhave on the surrounding area.  We areaware that, in the past, several individuals have voiced objections to ourbusiness to the Wisconsin Department of Natural Resources, however, we have metno significant opposition from the public in our efforts.  Public objection and complaints could arise,however, and subject us to greater regulatory scrutiny, claims and costlycompliance expenditures.

 

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***Air Pollution Construction and Operation Permit***

 

Our facility isconsidered a Wisconsin synthetic minor source of regulated air pollutants.  The types of regulated pollutants that maybe found at our plant include, particulate matter, carbon monoxide, oxides ofnitrogen, volatile organic compounds and sulfur dioxide.  To emit these agents during construction, weneeded an Air Pollution Construction Permit. We received the Air Pollution Construction Permit on March 22,2001.  The permit is valid for a periodof 28 months from the date of grant.

 

On October 31, 2001, we submitted a Modified AirPermit Application to reflect a change in our plant design regardingemissions.  Our original plant designcontemplated routing the boiler exhaust through dryers and then to a waterscrubber for air pollution control on the distillers dried grains dryeremissions, and then to a common stack. In our new plant design, we proposed to utilize a thermal oxidizer foremissions control rather than rely on the water scrubber.  The thermal oxidizer reduced emissions fromour plant.  We received the approval ofthis design and our Modified Air Permit Application from the EnvironmentalProtection Agency on March 22, 2002. The Environmental Protection Agency is scheduled to conduct airemissions testing in April, 2003.  If wesuccessfully complete the air emissions testing we will be awarded an AirPollution Operation Permit.

 

***Wisconsin Pollutant Discharge Elimination Permits***

 

*GeneralPermit*.  We useapproximately 66,500 gallons of water per day to cool our closed circuitsystems in the ethanol plant.  Weobtained a Wisconsin Pollutant Discharge Elimination System general permit fromthe Department of Natural Resources to discharge the water into a nearby creek.  We received this permit on July 18, 2002 andit is valid until July 31, 2007.

 

*StormWater Discharge for Industrial Activities Permit*.  Before we could begin operating, we had toobtain a Storm Water Discharge for Industrial Activities Permit from the Departmentof Natural Resources, which we received on April 9, 2001.  In addition, we also had to prepare a StormWater Pollution Prevention Plan outlining measures we planned to implement toprevent storm water pollution during operation.

 

***High Capacity Well Permit***

 

We drilled a 500,000-gallon per day well near ourethanol plant.  The Department ofNatural Resources considers this a high capacity well, and we have applied forand obtained a high capacity well permit. The high capacity well permit was issued on December 13, 2001.  The permit allows for a maximum daily usageof 720,000 gallons of water per day.

 

***Spill Prevention, Control and Countermeasures Plan***

 

Before we could begin operations, we had to prepare aspill prevention, control and countermeasures plan.  The plan outlines our spill prevention measures for oil productssuch as ethanol.  The plan waspreliminarily reviewed and approved prior to when we began operations, and wascertified by a professional engineer on January 3, 2003.

 

***Risk Management Program***

 

We use anhydrous ammonia in our productionprocess.  Therefore, we had to develop arisk management program to address handling and use of the ammonia and gasesemitted from such use.  We established aprevention program to prevent spills or leaks of ammonia, and an emergencyresponse program in the event of spills, leaks, explosions or other events thatmay lead to the release of ammonia into the surrounding area.  We conducted a hazard assessment and preparedmodels to assess the impact of an ammonia release into the surroundingarea.  The program was presented at apublic meeting.

 

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***EPA; Nuisance***

 

We are subject tothe regulations on emissions of the United States Environmental Protection Agency.  Current EPA rules do not require us toobtain any permits or approvals in connection with construction and operationof our business.  Wisconsin and EPArules can and do change, and any such changes could result in greaterregulatory burdens on us.  Our ethanolproduction will require us to emit a significant amount of carbon dioxide intothe air.  Current Wisconsin lawregulating emissions does not restrict or prevent us from emitting carbondioxide gas into the air, but this could change in the future.  We could also be subject to environmental ornuisance claims from adjacent property owners or residents in the area arisingfrom foul smells or other air or water discharges from the plant.  We are aware of recent nuisance claims thathave been brought against an ethanol business in Saint Paul, Minnesota.  We believe that among the objectives of thislitigation are to force the ethanol manufacturer to upgrade the facility’semissions control system and possibly pay damages to nearby residents.  We are also aware of neighborhood oppositionto our facility.  This opposition couldresult in claims for nuisance, which could lead to increased compliance costsand monetary damages.

 

**PART II**

 

**ITEM 6.  MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS**

 

**Application of Critical AccountingPolicies**

 

Accounting policies,methods and estimates are an integral part of our financial statements and arebased upon management’s current judgments. Certain accounting policies, methodsand estimates are particularly important because of their significance to thefinancial statements. Note A of the Notes to Financial Statements includes asummary of the significant accounting policies and methods we use. Thefollowing is a discussion of what we believe to be the most critical of thesepolicies and methods.

 

***Inventories***

 

Inventories are stated atthe lower of cost or net realizable value. Estimates are used in determiningthe net realizable value of our inventories. These estimates include themeasurement of inventories in bins, other storage facilities and in production,which use formulas in addition to actual measurements taken to arrive atappropriate quantities.

 

***Derivatives***

 

We enter intoexchange-traded commodity futures and options contracts to hedge exposure toprice fluctuations on grain and ethanol transactions to the extent consideredpracticable for minimizing risk. We do not use derivatives for speculativepurposes. Futures and options contracts used for hedging are purchased and soldthrough regulated commodity exchanges. Fluctuations in inventory valuations,however, may not be completely hedged, due to our assessment of exposure fromexpected price fluctuations. We also manage risk by entering into fixed pricepurchase contracts and establishing appropriate limits with pre-approved grainelevators. We are exposed to loss in the event of nonperformance by thecounterparties to the contracts. However, we do not anticipate nonperformanceby counterparties. The fair value of futures and options contracts are determinedprimarily from quotes listed on regulated commodity exchanges.  Fixed price purchase contracts are withvarious counterparties, and the fair values of such contracts are determinedfrom the market price of the underlying product.

 

Our derivative contracts arerecorded in accordance with Financial Accounting Standards Board Statement ofFinancial Accounting Standards (SFAS) No. 133, Accounting for DerivativeInstruments and Hedging Activities.   AtDecember 31, 2002, none of our derivative contracts are designated as hedges asdefined within SFAS No. 133 for the purpose of applying hedge accounting.  Accordingly, all the company’s derivativecontracts at December 31, 2002 are recorded at fair market value with changesin the fair value of the derivatives recorded in current period earnings.

 

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**Overview**

 

We are engaged in the production and sale of fuelgrade ethanol.  We have an annualcapacity to process approximately 14.4 million bushels of corn intoapproximately 40 million gallons of ethanol. In addition, we sell distillers grains, a principal by-product of theethanol-production process, which we sell as distillers modified wet grains anddistillers dried grains.

 

During fiscal 2002, we completed construction of theplant, negotiated for the conversion our construction loan to a term mortgage(which was finalized on January 1, 2003), successfully began plant production,passed performance tests, established our marketing presence and established ourflexibility in the delivery of products and improved operationalefficiencies.  At the same time, weestablished a risk management strategy that helped us to level out the effectsof the volatility of the commodity markets that affect our industry.

 

**Plan ofOperation for the Next 12 Months**

 

We expect to spendthe next 12 months operating our ethanol plant.  We expect to have sufficient cash available from cash to coverour costs over the next 12 months, including staffing, office, audit, legal,compliance costs and working capital costs. The following is our estimate of our costs and expenditures for the next12 months.  It is only an estimate andour actual expenses could be much higher due to a variety of factors describedin this report under the section entitled “Risk Factors.”

 
| Insurance                            |   | $ | 463,000    |   |
|--------------------------------------|--------|---|------------|--------|
| Selling, General  and Administrative |   | $ | 7,170,079  |   |
| Interest                             |   | $ | 1,593,820  |   |
| Production                           |   | $ | 50,208,078 |   |
| Total                                |   | $ | 59,434,977 |   |

 

We anticipate spending approximately $59.4 millionover the next 12 months.  Of thatamount, we estimate that we will spend approximately: (i) $463,000 on directorsand officers’ insurance, general commercial liability, worker’s compensationand property insurance; (ii) $7,170,079 on selling, general and administrativeexpenses, including managerial fees, out-of-pocket reimbursements and generaloffice expenses; and (iii) $3,065,518 on mortgage payments.

 

During the next 12 months we plan on hiring oneadditional employee needed to operate our ethanol plant.  We intend to hire staff only for the directoperations and administration of our ethanol business, such as production,shipping, and receiving.  We currentlyemploy one individual to make sales of distillers grains to the local market.  We intend to rely on third-party marketingarrangements, and pay commissions to marketing agents to market and sell ourproducts.

 

We expect to fund our costs and expenditures for thenext 12 months using cash flow from continuing operations, drawing on ourexisting lines of credit and receiving up to $7.5 million from the UnitedStates Department of Agriculture Commodity Credit Corporation’s BioenergyProgram and cash supports from the State of Wisconsin under the ProducerSubsidy Payment Program.

 

Our primary raw material during fiscal 2002 wascorn.  Early in the year ended December31, 2002, we implemented a new Grain Risk Management Program.  This program’s stated objective is tostabilize our cost of grain and to generate more predictable margins.

 

Operation of our ethanol production facilitiesrequires the purchase of corn, and the sale of fuel-grade ethanol. Accordingly,assuming ongoing operations, we are naturally “short” on grain and “long” onfuel ethanol.

 

Our Grain Risk Management Program is intended to usegrain purchase contracts together with grain futures derivatives to fix thecost of some of our expected future grain purchases.  Our policy allows for the use of fixed price forward purchasecontracts, un-priced forward basis purchase contracts, and Chicago Board ofTrade (CBOT) derivative contracts (over-the-counter and traditional options).During 2002, we had approximately 85% of our fiscal

 

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2002 grain requirements were hedged through a combination of fixedprice forward purchase contracts, and CBOT traditional and over-the-counteroption hedges to protect our cost of grain. During 2002, our practice of protecting the cost of our grain, generallyaccounted for 85% of forecasted grain purchases in the upcoming twelve months.  We took this action because of our start-upnature and the volatility of corn price. Under our program, all components of the position are monitored and allhedges are designated against future grain requirements to ensure that we donot enter into commitments or derivatives for grain in excess of expected grainrequirements.

 

Grain markets were relatively volatile during fiscal2002.  As always, weather, exports,government programs, and other factors all have potentially major impacts ongrain pricing, and any unexpected changes in those factors could adverselyaffect the price that we pay for our grain. As of January 1, 2003, we had hedged or purchased approximately 11million bushels or 73% of our anticipated corn requirements for the upcoming 12months.

 

Volatility in grain prices has brought both higherprices and stronger demand for our feed by-products,  distillers modified wet grains and distillers dried grains.  While prices for feed by-productshistorically rise in the late fall and winter, they also tend to follow cornprices.  Significant improvement inthese prices occurred due to anticipated volatility in grain prices, andlocalized storage of feed ingredients in the marketplace.  In response, we have emphasized theproduction and marketing of distillers modified wet grains rather than drieddistillers grain with solubles. Distillers modified wet grains has certain benefits that distinguish itfrom other competing feed products, and allow some price premium to be realizedin highly competitive markets.  We haveincluded the forward contracting of feed sales in our overall decisionsregarding risk management.

 

During 2002, we also implemented a Fuel Ethanol RiskManagement Program.  The program’sstated objectives are to stabilize our sales price of fuel ethanol, and togenerate more predictable margins.  Partof this program involves un-priced forward contracts to sell portions of ourfuel ethanol output to customers with variable prices that are tied directly tothe price of unleaded gasoline as quoted on national exchanges.  We may use derivative contracts to fix theprice under the forward contract.

 

Under this program, we do not enter into forward salescommitments in excess of expected fuel ethanol output, and we only enter intogasoline derivatives to the extent that we have un-priced forward salescontracts with customers with variable pricing arrangements that are tied tothe price of gasoline as quoted on national exchanges.  During the fourth quarter of 2002, we soldapproximately 11% of our fuel ethanol output under the above-described program.

 

Our risk management also includes the oversight ofpurchases of natural gas needed to produce steam to run the plants, and fuel tofire the distillers grain dryers.  Werequire a substantial uninterrupted supply of natural gas to maintaincontinuous production.  Consequently, wecontracted with WE Energies for firm service natural gas delivery and with USEnergies to coordinate purchase and delivery of the gas to the plant.  However, due to the competitive nature ofthe natural gas market, we believe no significant risk of long-terminterruption exists.  Natural gas pricesincreased significantly through the last half of fiscal 2002.

 

**Liquidityand Capital Resources**

 

As of December 31, 2002, we had cash and cashequivalents of $592,366, current assets of $5,442,007 and available unusedlines of credit of $1,752,020.  InOctober 2002, we completed the construction of our plant and began operations.  During 2002, cash used in operatingactivities was $4,468,313 and cash paid for property and equipment was$30,849,545.  These activities weresubstantially financed through increases of $1,747,980 in our line of creditand long-term debt financing of $29,018,738.

 

As of January 1, 2003, our indebtedness and lines ofcredit consisted primarily of the following:

 

•                                          $30,600,000term loan due January 1, 2008;

•                                          $3,548,411electric utility note payable due November 1, 2007; and

•                                          $3,500,000line of credit expiring August 28, 2003.

 

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In August 2001, we entered into a $30.6 millionconstruction loan facility with First National Bank of Omaha.  Effective as of January 1, 2003, thisconstruction loan was converted into a $30.6 million term loan.  Quarterly payments, including principal andinterest, of $1,021,839 are scheduled to begin on April 1, 2003 based upon afive-year amortization with a balloon payment due on the maturity date ofJanuary 1, 2008.  The term loan is structuredas three notes and interest accrues monthly on the notes at both fixed andvariable rates.  The fixed rate willaccrue at 6.528% on $15,300,000 of the term loan and the variable rate willaccrue on $15,300,000 of the term loan based on the prime rate (effective rateof 5.25% at December 31, 2002).  Theamount outstanding on the construction loan was $29,672,120 at December 31,2002.  The term loan is secured bysubstantially all of our assets and contains various restrictions, includingthe maintenance of certain financial covenants.

 

On August 22, 2001, we entered into a subordinatedcredit facility of $3.6 million from Alliant Energy – Wisconsin Power and LightCompany to finance the electrical infrastructure and other constructionneeds.  This credit facility wasconverted to a term note upon completion of construction of our facility.  Monthly payments, including principal andinterest, of $34,762 began November 1, 2002 based upon a ten-year amortizationwith a balloon payment due on the maturity date of November 1, 2007.   Interest accrues monthly on the loan at3%.  The amount outstanding on theelectric utility note payable is $3,548,411 at December 31, 2002.  The electric utility note payable is securedby our equipment, inventory and a guarantee by the City of Monroe, and containsvarious restrictions.

 

In connection with our construction loan, we enteredinto a $3,500,000 364 day revolving credit facility with First National Bank ofOmaha.  The revolving line of credit islimited to the borrowing base collateral, which is based upon 75% of the valueof the inventory and allowable accounts receivable, and has a variable interestrate based upon the prime rate.  Theamount outstanding on the revolving loan was $1,747,980 at December 31, 2002.  The revolving loan is secured by substantiallyall of our assets and contains various restrictions.  Upon expiration of our revolving line of credit in August 2003,we believe that we will have the ability to renew our line of credit.

 

Our gross loss on sales of $763,842 for the year endedDecember 31, 2002 was adversely impacted by manufacturing expenses recorded ascost of sales during the fourth quarter prior to the plant operating at fullcapacity, additional cost of sales of $809,921 related to derivative contractsand lower than expected ethanol pricing received by the company.  We expect margins to improve in 2003 as ourplant is expected to operate at or near full capacity.  Gross margin (loss) on ethanol sales ishighly dependent on the cost of corn and natural gas, the companies hedging contractsand the sales price of ethanol and will fluctuate from quarter to quarter. Thesales price of ethanol is volatile, but tends to vary with the wholesale priceof gasoline.  Corn prices generally varywith regional grain supplies, and can be significantly affected by weather,storage, planting and carryout projections, government loan programs, exports,and other national and international market conditions.

 

We believe that state and federal government subsidieswill have a positive impact on our gross margin in 2003.  However, at December 31, 2002, the companyis unable to reasonably estimate the amount to be received due to uncertaintyof the final funding of the applicable state and federal programs and morespecifically the amount to be allocated to us.

 

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**PART III**

 

**ITEM 9****.  DIRECTORS,EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT**

 

 
| **Name**         |   | **Age** |   | **Position**                                      |
|------------------|--------|---------|--------|---------------------------------------------------|
|             |   |    |   |                                              |
| John L. Malchine |   | 65      |   | Chairman of the Board and Chief Executive Officer |
| Gary L. Kramer   |   | 54      |   | President, General Manager and Director           |
| Jeff Roskam      |   | 45      |   | Vice President and Director                       |
| David Kolsrud    |   | 54      |   | Secretary and Director                            |
| Don Endres       |   | 42      |   | Treasurer and Director                            |
| Wayne Mitchell   |   | 47      |   | Director*                                         |
| Robert Wright    |   | 50      |   | Director                                          |
| Kevin Stroup     |   | 43      |   | Director*                                         |
| James Leitzinger |   | 47      |   | Chief Financial Officer                           |

 

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*Mr. Wayne Mitchell and Mr. Kevin Stroup collectivelyoccupy the Fagen, Inc.’s seat on the Board of Directors.  They may attend Board meetings but areentitled to only one vote on matters coming before the Board.  Except to the extent that such liability isotherwise limited as set forth in the Second Amended and Restated OperatingAgreement of the Company, each of Mr. Mitchell and Mr. Stroup is liable foractions taken in his capacity as director.

 

***John L. Malchine, Chairman of the Board and Chief ExecutiveOfficer***

 

Mr. Malchine hasserved on our Board of Directors since May 2000. His term as a Director expiresin 2003.  Approximately seventy percentof Mr. Malchine’s professional time is devoted to his capacity as Chairman ofthe Board and Chief Executive Officer. Mr. Malchine assumed the role of Chief Executive Officer of the Companyon August 30, 2001.  From 1989 to March2001, he served as president and co-owner of Norway Associates, Inc., a privatereal estate company that develops real estate projects for clinics. NorwayAssociates is currently inactive. From 1954 to 1994, Mr. Malchine was aself-employed farmer. From 1995 to the present, Mr. Malchine has been thechairman of the Wisconsin Agriculture, Trade and Consumer Protection Board.From 1997 to the present, he has also been a member of the Board of theWisconsin Tax Commission, which regulates agricultural assessments inWisconsin. From 1983 to the present, he has been a member of the Board ofDirectors of a unit of M & I Bank, in Burlington, Wisconsin, and iscurrently chairman of the loan committee. Mr. Malchine is also on the Board ofGovernors of the Southern Region of the Aurora Health Care System, which ownsthree hospitals and 21 clinics in southern Wisconsin. Mr. Malchine was electedto the Board of Adkins Energy in February 2000. He resigned in April 2000 fromAdkins, and the cooperative redeemed his investment without interest.

 

***Gary L. Kramer, D.V.M., President, General Manager andDirector***

 

Dr. Kramer hasserved on our Board of Directors since May 2000. His term as a Director expiresin 2004.  Mr. Kramer devotes all of hisprofessional time to his capacity as President, General Manager and Director.  From 1973 to 2001, Dr. Kramer was aveterinarian, and recently retired as president and senior partner at Chapin,Sutter, Chapin, Ltd., of Lena, Illinois, a veterinary service corporationemploying eight veterinarians. He received a doctorate in Veterinary Medicinefrom Iowa State University. Prior to co-founding Badger State Ethanol, Dr.Kramer served as President of the Adkins Energy Cooperative from December 1998to April 2000. Adkins Energy Cooperative was formed in May 1996 to build a 30million gallon dry mill ethanol plant in Lena, Illinois. The Adkins site isapproximately 20 miles from our Monroe site. Dr. Kramer invested in thisfarmers cooperative in 1997. He was appointed to fill a vacancy on the Board ofDirectors in August 1997. In November 1998, he was elected to the Board by themembers to serve a three year term. He was elected president of the Board inDecember 1998 and re-elected in March 2000. Dr. Kramer resigned from the AdkinsBoard in April 2000, and the cooperative redeemed his investment, withoutinterest. At the time of his resignation, the proposed Adkins ethanol projecthad

 

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not been constructed, although the cooperative was continuing itsefforts and negotiations to secure necessary commitments and contracts tocomplete the project. Dr. Kramer received no compensation from Adkins for hisservice other than reimbursement of out-of-pocket expenses of approximately$4,600. Dr. Kramer has also served as a member of a number of professionalorganizations, and has served on other profit and non-profit Boards, includingthe American Veterinary Medical Association, American Association of BovinePractitioners, Illinois Veterinary Medical Association, Northern IllinoisVeterinary Medical Association and the Lena Park District Board

** **

***Jeff Roskam, Vice-President and Director***

 

Mr. Roskam has served on ourBoard of Directors since May 2000.  Heoccupies ICM’s permanent seat on the Board of Directors.  Approximately five percent of hisprofessional time is devoted to his capacity as Vice-President and Director ofthe Company.  Mr. Roskam assumed hisrole as Vice-President and Director on August 30, 2001.  He has served as Senior Vice President ofICM, Inc. since March 1997. Prior to joining ICM, he served as operations managerfrom October 1996 to February 1997 for Renewable Oxygenates, Inc., whichproduced ethanol from whey and potato paste. From March 1994 to October 1996,he worked as an engineer at Broin & Associates, Inc. where he served asProject Manager on the development and management of several ethanol plants.Prior to joining Broin & Associates, Inc. he served as Reverse OsmosisProduction Manager for EBCO, Inc., an Ohio drinking water equipmentmanufacturer, and as Vice President of Operations for Pure-Best Water, Inc., aCalifornia beverage company. Prior to that, Mr. Roskam served as assistantmanager for Household Finance Corporation. Mr. Roskam has a B.A. degree inFinance from Iowa State University.

 

***David Kolsrud, Secretary and Director***

 

Mr. Kolsrud has served on our Board of Directors sinceAugust 2001. His term as a Director expires in 2002. Approximately five percentof his professional time is devoted to his capacity as Secretary and Directorof the Company.** **Mr. Kolsrud is theGeneral Manager and a member of the Board of Directors of CORN–er Stone FarmersCooperative, which he founded in 1995 and served as Chairman until 2000. Mr.Kolsrud also continues to work as a self-employed farmer, an occupation he hashad since 1973. He also serves as Chairman of the Valley Springs FarmersCooperative, a farm supply co-op in Valley Springs, South Dakota. He has servedon that Board for 15 years and served as Chairman for the past 12 years. Heformerly served as the Chairman of the Minnesota Coalition for Ethanol. Mr.Kolsrud also serves on the Board of Governors of AGRI-Energy, LLC (a 12 milliongallon a year ethanol facility in Luverne, Minnesota). He has served on thatBoard since 1997 and served as its Vice President until 1999.

 

***Don Endres, Treasurer and Director***

 

Mr. Endres has served on our Board of Directors sinceAugust 2001.  His term as a Directorexpires in 2004. Approximately five percent of his professional time is devotedto his capacity as Treasurer and Director of the Company.** **Mr. Endres currently serves on the Board of Directors ofGlacial Lakes Energy and First National Bank Venture Capital. He is currentlyChairman of the Brookings Chamber e-commerce committee. Mr. Endres is also thePresident of VeraSun Energy Corporation, a company he founded in June 2001.Prior to forming VeraSun, he served as Chief Executive Officer ofExpressGold.com, Inc., a company he co-founded in 1997. ExpressGold.com mergedwith Cybersource Corporation in 2000. Prior to that, Mr. Endres served asPresident and General Manager of Special Teams, Inc., a company he founded in1985. Special Teams was acquired by the American Express Company in 1995, andMr. Endres served as President of American Express Special Teams until 1997. Hehas also served on the Board of Directors of CoEv, Inc., a magnetic componentcompany, until its merger with Tyco International Ltd. in 2000. Mr. Endresgraduated from South Dakota State University with a degree in Animal Scienceand minors in Computer Science and Economics. In 2001, he was recognized bySouth Dakota State University’s College of Engineering as “Entrepreneur of theYear.”

 

***Wayne Mitchell, Director***

 

Mr. Mitchell hasserved on our Board of Directors since May 2001, when he was appointed to fillthe Fagen, Inc. seat. He occupies Fagen, Inc.’s permanent seat on the Board ofDirectors. Approximately five percent of his professional time is devoted tohis capacity as a Director of the Company.** **Mr.Mitchell is Vice President,

 

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Technology and Business Development for Fagen, Inc. and has worked forFagen since June 2000.  Prior to joiningFagen, he served as Process Team Leader from may 1998 to June 2000 for ReillyIndustries, Inc., where he directed multidisciplinary teams engaged in chemicalprocess research and owner of Solid Rock Consulting, LLC, a private companyproviding consulting services to the ethanol industry.  Solid Rock Consulting is currentlyinactive.  From May 1996 to May 1998, heworked as Plant Manager and Quality Assurance Manager for Micronutrients, LLC,an animal feed supplement manufacturer. From January 1993 to May 1996, he served as the Design Engineer forBroin and Associates, Inc. where he performed detailed process design andstart-up of dry grind ethanol plants.  Prior to joining Broin, he served as senior environmental projectengineer for Heritage Environmental Services, Inc. where he was involved inenvironmental consulting and project management at major oil refineries.  Prior to that, Mr. Mitchell served as anarea manager for Ethyl Corporation. Mr. Mitchell also serves on the Board ofDirectors of Golden Triangle Energy, LLC, an ethanol plant in Craig, Missouri,and Husker Ag Processing, LLC, an ethanol plant under construction inPlainview, Nebraska.  Mr. Mitchell has aB.S. in Chemical Engineering from the University of Wisconsin-Madison.

 

***Robert Wright, Director***

 

Mr. Wright has served on our Board of Directors sinceAugust 2001. His term as a Director expires in 2003. Approximately five percentof his professional time is devoted to his capacity as a Director of theCompany.** **Mr. Wright has served as thePresident, Chief Executive Officer and a principal shareholder of Murex N.A.since May 1992. Murex is a marketer of gasoline “blendstocks,” such as fuel gradeEthanol, MTBE, Toluene, Methanol and Alkylate, to independent and majorrefiners in the United States. Mr. Wright is a graduate of Ohio StateUniversity with a degree in Chemical Engineering and the University of Toledowith a Masters in Business Administration.

 

***Kevin Stroup, Director***

 

Mr. Stroup hasserved on our Board of Directors since May 2001, when he was appointed to fillthe Fagen, Inc. seat. As described above, Mr. Wayne Mitchell and Mr. KevinStroup collectively occupy one seat on the Board of Directors, which is Fagen,Inc.’s permanent seat on the Board of Directors. Approximately five percent ofhis professional time is devoted to his capacity as a Director of the Company.** **Mr. Stroup is a partner in thelaw firm of Christianson, Stoneberg, Giles & Stroup, P.A. in Marshall,Minnesota, where he has been employed since 1986.  Mr. Stroup practices in the areas of business law andtransactions, including commercial litigation. Mr. Stroup is a 1985 graduate of the University of Minnesota Law Schooland 1982 graduate of Southwest State University in Marshall, Minnesota, wherehe received a B.A. degree in history. Mr. Stroup currently serves on the Board of Directors of the GraniteFalls Bank, Granite Falls, Minnesota, and the Foundation Board for SouthwestState University, Marshall, Minnesota. Mr. Stroup just completed a one-year term as President of the 9thDistrict Bar Association of the State of Minnesota.

 

***James Leitzinger, Chief Financial Officer***

 

Mr. Leitzinger has served as our Chief FinancialOfficer since July, 2002.  Previously,Mr. Leitzinger served as the Director of Finance for the City of Freeport, ILfor approximately two years.  Prior tothat, Mr. Leitzinger was employed as the Controller for Agri-Tech FS, Inc. from1990 until 2000, and as the controller for Widen Colourgraphics, LTD from 1988to 1990.  Mr. Leitzinger graduated fromEdgewood College in Madison, Wisconsin.

 

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**ITEM 10****.  EXECUTIVE COMPENSATION**

 

Gary Kramer servesas our President and General Manager. He was compensated as an independent contractor at the rate of $3,000each month during 2002 until the end of July, 2002.  In August, 2002, Dr. Kramer became employed by us at a basesalary of $100,000 per year.  JohnMalchine serves as Chief Executive Officer and, in January 2002, wascompensated $60,000 by us for services he provided to us as an independentcontractor in 2000 and 2001.  Mr.Malchine became employed by us in October, 2002 at a base salary of $3,000 eachmonth.  On July 22, 2002, we hiredJames Leitzinger as our Chief Financial Officer.  Mr. Leitzinger receives a base salary of $65,000 per year.

 

We reimburse our officers for expenses incurredrelating to services rendered on our behalf. We recruit and hire permanent employees who are compensated on a regularbasis pursuant to agreed upon salaries. We have not and do not expect to establish any option based or othertype of equity incentive plan for employees. However, we offer typical health and other employee benefits to our fulltime employees that do not discriminate in scope, terms or operation in favorof our executive officers or directors and that are available to all of oursalaried employees.

 

The following table shows the compensation that wepaid to our officers for services that they rendered to us.

 
|                                                |   |             |   | **Annual  Compensation** |   | **Long-Term  Compensation** |   |
|-----------------------------------------------------|--------|------------------|--------|--------------------------|--------|-----------------------------|--------|
| **Name and Principal  Position**                    |   | **Fiscal  Year** |   | **Salary**               |   | **Bonus**                   |   | **Other** |   | **Restricted  Stock Awards** |   | **Securities  Underlying  Options/SARS** |   | **LTIP  Payout** |   | **All Other  Compensation** |   |
| John L. Malchine                                    |   | 2000             |   | $                        | 24,000 | [1]                         | $      | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| Chief Executive                                     |   | 2001             |   | $                        | 36,000 | [1]                         | $      | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| Officer                                             |   | 2002             |   | $                        | 9,000  |                        | $      | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
|                                                |   |             |   |                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Gary Kramer                                         |   | 2000             |   | $                        | 24,000 |                        | $      | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| President and                                       |   | 2001             |   | $                        | 36,000 |                        | $      | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| General Manager  (formerly Chief Executive Officer) |   | 2002             |   | $                        | 62,154 |                        | $      | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
|                                                |   |             |   |                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| James Leitzinger                                    |   | 2000             |   | $                        | — |                        | $      | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Chief Financial                                     |   | 2001             |   | $                        | — |                        | $      | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Officer                                             |   | 2002             |   | $                        | 28,750 |                        | $      | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |

 

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[1] This salary was paid in January 2002 for services performed in 2000and 2001.

 

**EmploymentAgreements**

 

We have no written employment agreements with anyofficer or Director.  We may in thefuture enter into employment agreements with our officers or other employeesthat we may hire.

 

**Reimbursement of Expenses**

 

Other than Mr.Malchine, Dr. Kramer, and Mr. Leitzinger, we do not pay our officers andDirectors any fees or salaries for their services to us; however, we doreimburse our officers for expenses incurred in connection with their serviceto us.  Our reimbursement policy is toreimburse our officers and Directors for out-of-pocket expenses.  Since our inception in May 2000, we havereimbursed our officers and Directors a total of $28,100.  We estimate that our officers and Directorswill incur approximately $20,000 in out-of-pocket expenses in the next 12months.  This is only an estimate andour officers and Directors expenses could be substantially higher than weanticipate.

 

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**ITEM 11****.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT**

 

The following table sets forth certain informationconcerning the beneficial ownership of our Class A member units as of March 18,2003.

 
| **Title**                                    |   | **Name and Address Beneficial  Owner** |   | **Amount and Nature of  Beneficial Owner** |   | **Percent of Class** |   |
|----------------------------------------------|--------|----------------------------------------|--------|--------------------------------------------|--------|----------------------|--------|
| Director & Executive Officer             |   | John L. Malchine                       | [1]    | 600                                        |   | 3.03                 | %      |
| Director & Executive Officer             |   | Gary L. Kramer                         | [2]    | 920                                        |   | 4.65                 | %      |
| Director                                     |   | Jeff Roskam                            | [3]    | 0                                          |   | 0.00                 | %      |
| Director                                     |   | David Kolsrud                          | [4]    | 50                                         |   | 0.25                 | %      |
| Director                                     |   | Don Endres                             | [5]    | 2,000                                      |   | 10.11                | %      |
| Director                                     |   | Wayne Mitchell                         | [6]    | 0                                          |   | 0.00                 | %      |
| Director                                     |   | Robert Wright                          | [7]    | 1,000                                      |   | 5.06                 | %      |
| Director                                     |   | Kevin Stroup                           | [8]    | 0                                          |   | 0.00                 | %      |
| Chief Financial Officer                      |   | James Leitzinger                       | [9]    | 0                                          |   | 0.00                 | %      |
| Director &  Executive Officersas a group |   | All executive officers and directors   | [10]   | 4,570                                      |   | 23.11                | %      |
| Beneficial Owner                             |   | Murex, N.A., Ltd.                      | [11]   | 1,000                                      |   | 5.06                 | %      |

 

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[1]  John Malchine’s address atBadger State Ethanol, LLC is 820 West 17th Street, Monroe,Wisconsin  53566.  Beneficial ownership includes 500 unitsowned individually and 100 units owned in joint tenancy.

[2]  Gary Kramer’s address atBadger State Ethanol, LLC is 820 West 17th Street, Monroe,Wisconsin  53566.  Beneficial ownership includes 520 unitsowned individually and 400 units owned by arrangement.

[3]  Jeff Roskam’s address atICM, Inc. is 310 North First Street, P.O. Box 397, Colwich, KS 67030.

[4]  David Kolsrud’s address isRR 1 Box 58, Beaver Creek, MN 56116.

[5]  Don Endres’ address is 10022nd Ave., Suite 103, Brookings, SD 57006.

[6]  Wayne Mitchell’s address atFagen, Inc. is 501 W. Hwy 212 P.O. Box 159, Granite Falls, MN 56241.

[7]  Robert Wright’s address atMurex, N.A., Ltd. is 15411 Knoll Trail, Suite 260, Dallas, TX 75248.  This amount includes 1,000 units owned byMurex, N.A., Ltd.,  for which Mr. Wrightdisclaims beneficial interest.

[8]  Kevin Stroup’s address atFagen, Inc. is 501 W. Hwy 212 P.O. Box 159, Granite Falls, MN 56241.

[9]  James Leitzinger’s addressat Badger State Ethanol, LLC is 820 West 17th Street, Monroe,Wisconsin  53566.

[10] Includes the beneficial ownership of seven Directors and executiveofficers (except Mr. Kevin Stroup, who, with Mr. Wayne Mitchell, are bothaffiliated with Fagen, Inc. and collectively occupy one seat on the Board ofDirectors).

[11] Murex, N.A., Ltd.’s address is 15411 Knoll Trail, Suite 260,Dallas, TX 75248.

 

**ITEM 12****.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

Since our inception, we have engaged in several transactions with relatedparties.  We currently do not haveoutside Directors or unaffiliated members to evaluate related partytransactions.  Management believes thatthese transactions were as favorable as those that could have been obtained inan arms-length transaction.

 

**Fagen and ICM**

 

On July 11, 2001, we enteredinto a contract with Fagen in which Fagen would provide services to us inconnection with our plan to build an ethanol plant.  Under the terms of the contract, Fagen agreed to design andprovide construction related services to us not to exceed $43.8 million.

 

Additionally, Fagen and ICM,Inc. have entered into a subcontractor relationship for the construction of theethanol plant, whereby Fagen was the general contractor and ICM, Inc. was thesubcontractor.

 

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Fagen purchased 500 Class Amember units in our public offering. ICM also purchased 500 Class A member units as well as 100 Class Bmember units (which were converted to 100 Class A member units).  Fagen and ICM’s purchase of the units werefor investment purposes, and are subject to the same terms and conditions,including restrictions on transfer, as all other investors.

 

**Start-upCapital**

 

We were capitalized with limited cash investments from Dr. Gary Kramerand Mr. John Malchine, our founders. Dr. Kramer and Mr. Malchine each contributed $10,000 to us in exchangefor 500 Class C member units. Dr. Kramer and Mr. Malchine paid $20 perunit.  These units have been convertedto Class A member units.

 

**Executive Salaries**

 

We are currentlycompensating Gary Kramer, our chief executive officer, $100,000 per yearpursuant to an oral agreement.  Prior tocompletion of the ethanol plant, we were compensating Dr. Kramer $36,000 peryear.  We are compensating John L.Malchine $36,000 per year for his services. Mr. Malchine was paid $60,000 in January, 2002, for services providedduring 2001 and 2000.

 

**Ethanol Agreement**

 

We entered into a seven-yearethanol purchase and marketing agreement with Murex, N.A., Ltd. for theexclusive rights to purchase and market all ethanol produced by the plant.  Murex is a Class A member and has arepresentative on our Board of Directors. Under the agreement, we have agreed to provide Murex with estimates ofour production. Murex has agreed to purchase and deliver all the ethanolproduced by the plant.

 

The agreement with Murex automaticallyrenews for one-year terms after the initial seven-year term unless either partyprovides notice prior to the renewal anniversary date.  In addition, the agreement may be terminatedby either party in the event of the other party’s insolvency, force majeure forat least a period of twelve months, or the default, which is not cured, by theother party in the performance of any term or covenant.  We may also terminate the agreement,following a decision of an arbitrator, if Murex breaches its obligation to useits best efforts to obtain for us the highest purchase price available forethanol, after considering its own resale costs and transportation costs.

 

**Dried Distillers Grains and SolublesAgreement**

 

We entered into a three-yearpurchase and marketing agreement with ICM Marketing, Inc. for the exclusiverights to purchase and market all of the distillers dried grains produced bythe plant.  ICM Marketing was a primesubcontractor for the construction of the ethanol plant, is a Class A memberand has a representative on our Board of Directors.  Under the agreement, ICM has agreed to purchase all of the wetdistiller’s grains with solubles and the dried distiller’s grains with solublesproduced at the ethanol production plant. We are obligated to provide ICM a production schedule, the labor,equipment and facilities to meet ICM’s loading schedule and to reserve storagespace for the products.  ICM has agreedto use its commercially reasonable efforts to achieve the highest resale priceavailable under prevailing market conditions, in ICM’s and our reasonablejudgment.

 

The initial term of theagreement with ICM is for three years, but it will automatically renew forsuccessive one-year terms unless either party provides notice that it electsnot to renew the agreement. The agreement may be terminated by thenondefaulting party in the event of default, which includes the failure to makepayment when due, a default in the performance of a party’s covenants andagreements and the insolvency of a party.

 

**Promissory Notes from Officers**

 

We received proceeds of$50,000 in June of 2001 from the issuance of a $12,500 promissory note to Dr.Gary Kramer, our President and General Manager and Director, a $12,500promissory note to Mr. John Malchine, our Chief Executive Officer and Director,and a $25,000 promissory note to ICM, Inc., our prime subcontractor andDirector.  The notes bore interest atthe rate of 9% per annum and were due when we closed our public offering.  The

 

21

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notes were unsecured debt obligations of theCompany.  The notes were paid withinterest upon the closing of our public offering.

 

**Conflictsof Interest**

 

Conflicts of interest exist and may arise in the future as a result ofthe relationships between and among our members, officers, Directors and theiraffiliates.  Although our officers andDirectors have fiduciary duties to us, certain of our Directors also owefiduciary duties and other obligations to entities with whom we compete or do businesswith.  Whenever conflicts arise betweenus and an officer or Director or an entity with whom that officer or Directoris affiliated, the Board as a whole will seek to resolve the conflict.  A Director will not participate when theBoard considers a transaction where he or she has a conflict of interest.  We do not have a committee of independentDirectors or members or an otherwise disinterested body to considertransactions or arrangements that result from, or are fraught with conflicts ofinterest.  Some conflict situationsincluding, disputes that may arise between us and Fagen or ICM as a result ofthe construction of the ethanol plant are expected to be resolved throughbinding arbitration according to construction industry rules.

 

Conflicts of interest couldarise in the situations described below, among others:

 

•                  We will engage in transactions withaffiliates of our Directors.  Memberswill have no right to individually enforce the obligations of our Directors ortheir affiliates in our favor.

 

•                  Our Directors’ decisions regarding variousmatters, including expenditures that we make for our business, reserves foraccrued expenses, including officers salaries and reimbursement of Director’sexpenses, loan covenants, capital improvements and contingencies that willeffect the amount of cash available for distribution to members.  We have representatives of Fagen and ICM onthe Board and engage in transactions with ICM and Fagen. Our expenditures,reserves and the amount of cash available for distribution may be affected bythese transactions and our relationship to Fagen and ICM.

 

•                  We will reimburse our Directors forout-of-pocket expenses relating to our business.  We do not have a reimbursement policy or guideline fordetermining what expenses will be reimbursed. We will review and reimburse all reasonable expenses that Directorssubmit to us.

 

•                  We have retained counsel that has assisted usin various aspects of our formation and development.  We have not retained separate counsel on behalf of unit holders.

 

•                  Fagen and ICM, and Mr. Roskam, Mr. Mitchelland Mr. Stroup, are involved in various ethanol construction and developmentprojects throughout the United States and in Wisconsin.  These projects will compete with our projectfor financing, corn and other raw material supplies, and the sale of ethanoland animal feed.  Our operatingagreement does not prevent our Directors from being involved in activities thatcompete with us.

 

•                  John Malchine’s role on the WisconsinAgriculture, Trade and Consumer Protection Board, and the Wisconsin TaxCommission.

 

•                  Our Directors or their affiliates may loanmoney to us for which we may pay interest up to a rate of prime plus 4%.

 

**ITEM 13****.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULESAND REPORTS ON FORM 8-K**

 

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

 

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| **Exhibit No.** |   | **Exhibit**                                                                                                                                                                                                                                                                                                          |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |   | Articles of  Organization of the registrant.  Filed  as Exhibit 3.1 to the registrant’s registration statement on Form SB-2  (Commission File 333-50568) and incorporated by reference herein.                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 3.2             |   | Operating Agreement of the registrant.  Filed as Exhibit 3.2 to the registrant’s  registration statement on Form SB-2 (Commission File 333-50568) and  incorporated by reference herein.                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 3.3             |   | Amended and Restated Operating Agreement of the  registrant. Filed as Exhibit 3.2 to the registrant’s February 27, 2001  amendment to the registration statement on Form SB-2 (Commission File  333-50568) and incorporated by reference herein.                                                                |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 3.4             |   | Second Amended and Restated Operating Agreement of  the registrant.  Filed as Exhibit 3.2  to the registrant’s March 29, 2001 amendment to the registration statement on  Form SB-2 (Commission File 333-50568) and incorporated by reference herein.                                                      |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 4.1             |   | Form of Class A Unit Certificate of the  registrant.  Filed as Exhibit 4.1 to  the registrant’s February 27, 2001 amendment to the registration statement on  Form SB-2 (Commission File 333-50568) and incorporated by reference herein.                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 4.2             |   | Form of Subscription Agreement of the  registrant.  Filed as Exhibit 4.2 to  the registrant’s February 27, 2001 amendment to the registration statement on  Form SB-2 (Commission File 333-50568) and incorporated by reference herein.                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 4.3             |   | Escrow Agreement.   Filed as Exhibit 4.3 to the registrant’s February 27, 2001 amendment  to the registration statement on Form SB-2 (Commission File 333-50568) and  incorporated by reference herein.                                                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 4.4             |   | Form of Class A Unit Certificate of the  registrant.  Filed as Exhibit 4.1 to  the registrant’s March 29, 2001 amendment to the registration statement on  Form SB-2 (Commission File 333-50568) and incorporated by reference herein.                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 4.5             |   | Form of Subscription Agreement of the  registrant.  Filed as Exhibit 4.2 to  the registrant’s March 29, 2001 amendment to the registration statement on  Form SB-2 (Commission File 333-50568) and incorporated by reference herein.                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 4.6             |   | Form of Subscription Agreement of the  registrant.  Filed as Exhibit 4.2 to  the registrant’s April 20, 2001 amendment to the registration statement on  Form SB-2 (Commission File 333-50568) and incorporated by reference herein.                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 10.1            |   | Agreement dated June 14, 2000 between Badger State  Ethanol, LLC and U.S. Energy Services. Filed as Exhibit 10.4 to the  registrant’s registration statement on Form SB-2 (Commission File 333-50568)  and incorporated by reference herein.                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 10.2            |   | Development Agreement dated October 11, 2000 between  Badger State Ethanol, LLC and the City of Monroe, Wisconsin. Filed as Exhibit  10.5 to the registrant’s registration statement on Form SB-2 (Commission File  333-50568) and incorporated by reference herein.                                            |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 10.3            |   | Form of Teaming Agreement. Filed as Exhibit 10.6 to  the registrant’s registration statement on Form SB-2 (Commission File  333-50568) and incorporated by reference herein.                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 10.4            |   | Amendment to Development Agreement between Badger  State Ethanol, LLC and the City of Monroe, Wisconsin. Filed as Exhibit 10.1  to the registrant’s quarterly report for the period ending March 31, 2001 on  Form 10-QSB (Commission File 333-50568) and incorporated by reference herein.                     |
|            |   |                                                                                                                                                                                                                                                                                                                 |
| 10.5            |   | Ethanol Purchase and Sale Agreement dated August 8,  2001, between Badger State Ethanol, LLC and Murex N.A., Ltd.  Filed as Exhibit 10.1 to the registrant’s  quarterly report for the period ending September 30, 2001 on Form 10-QSB  (Commission File 333-50568) and incorporated by reference herein.* |

 

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| **Exhibit No.** |   | **Exhibit**                                                                                                                                                                                                                                                                                                                 |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6            |   | Purchase and Sale Agreement dated August 28, 2001,  between Badger State Ethanol, LLC and ICM Marketing, Inc. Filed as Exhibit  10.2 to the registrant’s quarterly report for the period ending September 30,  2001 on Form 10-QSB (Commission File 333-50568) and incorporated by reference  herein.*                 |
|            |   |                                                                                                                                                                                                                                                                                                                        |
| 10.7            |   | Construction Loan Agreement dated August 28, 2001,  by and between Badger State Ethanol, LLC and First National Bank of Omaha.  Filed as Exhibit 10.3 to the registrant’s quarterly report for the period  ending September 30, 2001 on Form 10-QSB (Commission File 333-50568) and  incorporated by reference herein. |
|            |   |                                                                                                                                                                                                                                                                                                                        |
| 10.8            |   | First Amendment to Construction Loan Agreement dated  August 27, 2002, by and between First National Bank of Omaha and Badger State  Ethanol, LLC.                                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                                        |
| 10.9            |   | Second Amendment to Construction Loan Agreement  dated January 1, 2003, by and between First National Bank of Omaha and Badger  State Ethanol, LLC.                                                                                                                                                                         |
|            |   |                                                                                                                                                                                                                                                                                                                        |
| 99.1            |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                        |
| 99.2            |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                    |

 

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*  Material has been omittedpursuant to a request for confidential treatment and such materials have beenfiled separately with the Securities and Exchange Commission.

 

Financial Statements. An index to the financial statements included in this report appears atpage F-1.  The financial statementsappear at page F-2 through F-14 of this report.

 

Form 8-K. None.

 

**ITEM 14****.  CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Our Chief Executive Officer and Chief FinancialOfficer, after evaluating the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of1934, as amended), as of a date (the “Evaluation Date”) within 90 days beforethe filing date of this annual report, have concluded that our disclosurecontrols and procedures are effective in ensuring that material informationrequired to be disclosed is included in the reports that we file with theSecurities and Exchange Commission.

 

**Changes in Internal Controls**

 

There were no significant changes in our internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of the Evaluation Date referred to above.

 

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this Report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| Dated:  May  13, 2003 | BADGER STATE ETHANOL, LLC |
|----------------------------|---------------------------|
|                       |                      |   |
|                       |                      |   |
|                       | By:                       | /s/ Gary L.  Kramer |
|                       |                      | Gary L. Kramer |
|                       |                      | President and General  Manager |

 

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**CERTIFICATIONS**

 

I, John L. Malchine, certify that:

 

1.             I have reviewedthis annual report on Form 10-KSB/A of Badger State Ethanol, LLC;

 

2.             Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.             The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a) Designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b) Evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

 

c) Presented in this annual report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.             The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) All significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b) Any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.             The registrant’sother certifying officer and I have indicated in this annual report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date: May 13, 2003 |   |   |                    |
|--------------------|--------|--------|-------------------------|
|               |   |   |                    |
|               |   |   | /s/ John L.  Malchine   |
|               |   |   | John L. Malchine        |
|               |   |   | Chief Executive Officer |

 

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I, James Leitzinger, certify that:

 

1.             I have reviewedthis annual report on Form 10-KSB/A of Badger State Ethanol, LLC;

 

2.             Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.             The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a) Designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b) Evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

 

c) Presented in this annual report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.             The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) All significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b) Any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.             The registrant’sother certifying officer and I have indicated in this annual report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date: May 13, 2003 |   |   |                    |
|--------------------|--------|--------|-------------------------|
|               |   |   |                    |
|               |   |   | /s/ James  Leitzinger   |
|               |   |   | James Leitzinger        |
|               |   |   | Chief Financial Officer |

 

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