**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-K**

 
| **ý**                                           | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE   SECURITIES EXCHANGE ACT OF 1934** |
|------------------------------------------------------|-------------------------------------------------------------------------------------------------------|
| ** **                                           | ** **                                                                                            |
| **For the Fiscal Year Ended December 31, 2005** |
| ** **                                           |
| **OR**                                               |
| ** **                                           |
| **o**                                                | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D)   OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                           | ** **                                                                                            |

**For the Transition Period from      to     **

 

**Commission file number 333-50568**

 

**BADGER STATE ETHANOL, LLC**

(Exact Name of Registrant as Specified 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 theExchange Act:  **None**

 

Securities registered under Section 12(g) of the ExchangeAct:  **None**

 
| Indicate by  check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405  of the Securities Act.                                                                                                                                                                                                                                                                | Yes o  No ý              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                          |                          |
| Indicate by  check mark if the registrant is not required to file reports pursuant to Section 13  or Section 15(d) of the Act.                                                                                                                                                                                                                                                 | Yes o  No ý              |
|                                                                                                                                                                                                                                                                                                                                                                                          |                          |
| 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

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|                                                                                                                                                                                                                                                                                                                                                                                          |                          |
| Indicate by  check mark if disclosure of delinquent filers pursuant to Item 405 of  Regulation S-K (§229.405 of this chapter) 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-K  or any amendment to this Form 10-K | ý                        |
|                                                                                                                                                                                                                                                                                                                                                                                          |                          |
| Indicate by  checkmark whether the registrant is a large accelerated filer, an accelerated  filer, or a non-accelerated filer.  See  definition of “accelerated filer and large accelerated filer” in Rule 12b-2  of the Exchange Act).                                                                                                                                   | Yes o  No ý

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

                                                                                                                                                                                                                                                                | Yes o  No ý

  |

 

The aggregate market value of the member units held bynon-affiliates of the registrant (computed by reference to the price of certainmember units sold through Variable Investment Advisors, Inc.) was$84,039,500 as of December 31, 2005. There is no established public trading market for our securities.

 

As of March 2, 2006, the Company has issued19,774****Class A membership units.

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

 

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**TABLE OFCONTENTS**

 
| ** **    | ** **                                                                                                           | ** ** |
|---------------|----------------------------------------------------------------------------------------------------------------------|------------|
| PART I   |                                                                                                                 |
|          |                                                                                                                 |       |
|          | ITEM 1. BUSINESS                                                                                                     |       |
|          |                                                                                                                 |       |
|          | ITEM  2. PROPERTIES                                                                                                  |       |
|          |                                                                                                                 |       |
|          | ITEM  3. LEGAL PROCEEDINGS                                                                                           |       |
|          |                                                                                                                 |       |
|          | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                         |       |
|          |                                                                                                                 |       |
| PART II  |                                                                                                                 |
|          |                                                                                                                 |       |
|          | ITEM 5. MARKET FOR REGISTRANT’S MEMBER UNITS, RELATED  MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |       |
|          |                                                                                                                 |       |
|          | ITEM 6. SELECTED FINANCIAL DATA                                                                                      |       |
|          |                                                                                                                 |       |
|          | ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                  |       |
|          |                                                                                                                 |       |
|          | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                                 |       |
|          |                                                                                                                 |       |
|          | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                  |       |
|          |                                                                                                                 |       |
|          | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURE                        |       |
|          |                                                                                                                 |       |
|          | ITEM 9A. CONTROLS AND PROCEDURES                                                                                     |       |
|          |                                                                                                                 |       |
| PART III |                                                                                                                 |
|          |                                                                                                                 |       |
|          | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE  REGISTRANT                                                         |       |
|          |                                                                                                                 |       |
|          | ITEM 11. EXECUTIVE COMPENSATION                                                                                      |       |
|          |                                                                                                                 |       |
|          | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS                  |       |
|          |                                                                                                                 |       |
|          | ITEM 13. CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                                             |       |
|          |                                                                                                                 |       |
|          | ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                     |       |
|          |                                                                                                                 |       |
| PART IV  |                                                                                                                 |
|          |                                                                                                                 |       |
|          | ITEM 15.  EXHIBITS AND REPORTS ON FORM 8-K                                                                      |       |
|          |                                                                                                                 |       |
| SIGNATURES    |                                                                                                                 |

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

**This report containsforward-looking statements.  In addition,we may make forward-looking statements orally in the future by or on behalf ofthe Company. We undertake no responsibility to update any forward-lookingstatement.  Forward-looking statementsmay include words like “believe,” “expect,” “will,” “can,” “estimate,” “anticipate”and similar expressions intended to help you identify forward-lookingstatements.  Readers should not placeundue reliance on any forward-looking statements and recognize that the statementsare not predictions 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, changes in state and federal ethanol subsidies, our need foradditional capital, our ability to manufacture our products on a commercialscale and in compliance with regulatory requirements, increased competition,and changes in government regulation.**

** **

**RISKFACTORS**

** **

**RISKSRELATED TO OUR FINANCING PLAN**

 

**We haveincurred substantial debt and debt service requirements.**

 

We have incurredsubstantial debt to implement our business plan. Therefore, we have substantialdebt service requirements.  Since ourcapital structure is highly leveraged, the amount of debt we have incurred willhave important consequences including:

 

•                  Our ability to borrow additionalamounts for working capital, capital expenditures and other purposes will belimited or may not be available on terms favorable to us or at all;

 

•                  A substantial portion of our cashflows from operations will be used to pay interest and principal on our debt,which will reduce the funds that would otherwise be available to us for ouroperations and future business opportunities;

 

•                  We will be vulnerable to increases inprevailing interest rates;

 

•                  We may be substantially moreleveraged than some of our competitors, which may place us at a competitivedisadvantage;

 

•                  Our indebtedness is secured by all orsubstantially all of our assets, which means that there will be virtually noassets left for unit holders in the event of a liquidation; and

 

•                  Our substantial degree of leveragemay limit our flexibility to adjust to changing market conditions, reduce ourability to withstand competitive pressures and make us more vulnerable to adownturn in general economic conditions or our business.

 

**To service our debt, werequire a significant amount of cash and our ability to generate cash dependson many factors.**

** **

Our ability to repay our debt depends on our financialand operating performance and on our ability to successfully implement ourbusiness strategy. We cannot assure you that we will be successful inimplementing our strategy or in realizing our anticipated financial results.Our financial and operational performance depends on numerous factors includingprevailing economic conditions and on certain financial, business and otherfactors beyond our control. We cannot assure you that our cash flows andcapital resources will be sufficient to repay our anticipated debt obligations.In the event that we are unable to pay our debt service obligations, we may beforced to reduce or eliminate distributions or capital expenditures. We couldbe forced to sell assets, obtain additional equity capital or refinance orrestructure all or a portion of our debt. In the event that we are unable torefinance our indebtedness or raise funds through asset sales, sales of equityor otherwise, our business would be adversely affected.

 

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**Our debtfinancing contains numerous covenants, a breach of which may result in default.**

 

Our debt obligationscontain a number of significant covenants. These covenants limit our abilityto, among other things:

 

•                  Incur additional indebtedness;

 

•                  Make capital expenditures in excessof prescribed thresholds;

 

•                  Make distributions to our unitholders, redeem or repurchase our units;

 

•                  Make various investments;

 

•                  Create liens on our assets;

 

•                  Utilize asset sale proceeds;

 

•                  Merge or consolidate or dispose ofall or substantially all of our assets.

 

A breach of any of these covenants could result indefault under our debt agreements. If we default on any of these covenants, andif not waived, a lender could rightfully accelerate our indebtedness, in whichcase the debt would become immediately due and payable. If this occurs, we maynot be able to repay our debt or borrow sufficient funds to refinance it. Evenif new financing is available, it may not be on terms that are acceptable tous.  This could cause us to ceaseoperations.

 

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

 

We entered into adevelopment agreement with the City of Monroe, Wisconsin, for the constructionof the ethanol plant and for site improvements. As part of the agreement, we have on-going obligations, includingrepresenting that the fair market value of the site will not be less than $10.57million in 2005 (and which fair market value will increase over time), or pay anonperformance penalty in connection with the Company’s regular property taxassessments not to exceed $280,000 per year through 2011.  In connection with the agreement, wedelivered a mortgage to the City of Monroe. The mortgage secures our performance under the agreement and expires in2011.

 

**RISKSRELATED TO ETHANOL PRODUCTION**

 

**Our agreements orunderstandings with United Bio Energy Ingredients, LLC (successor to ICMMarking, Inc. and an affiliate of ICM, Inc. and Fagen, Inc.) andMurex, N.A., Ltd. were not negotiated at arm’s length, we may not have obtainedterms as favorable to us as those we could have obtained from third parties,and any claims that we may have against United or Murex may be difficult for usto enforce.**

** **

We are heavily dependent upon the services that Murex,N.A., Ltd. (“Murex”) and United Bio Energy Ingredients, LLC (“United”) areproviding to sell our ethanol and distillers grains.  Murex and Fagen, Inc. (an affiliate ofUnited) (“Fagen”) are members of the Company and ICM, Inc. (an affiliateof United) (“ICM”) was previously a member of the Company.** **Also, representatives of Murex andFagen currently serve on our Board of Directors and a representative of ICMpreviously served on our Board of Directors. The terms of our agreements and understandings with United and Murexhave 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 ICM’s, Fagen’s and Murex’s role in this project, and theircurrent and past representation on our Board of Directors, it could bedifficult or impossible to enforce claims that we may have against theseparties if, for example, one or all of them breaches agreements or understandingswith us.

 

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**Federal laws, regulationsand tax incentives concerning ethanol could expire or change, which could harmour business.**

** **

As described in moredetail herein, ethanol production and sales have been favorably affected by avariety of federal laws covering environmental, tax and other areas.  The Clean Air Act (including the ReformulatedGasoline Program) and the Federal Oxygen Program help spur demand for ethanolby requiring the use of oxygenated motor fuels during the fall and wintermonths in certain metropolitan areas. Further, the Volumetric Ethanol Excise Tax Credit, as passed in January 2005,offers a volumetric ethanol excise tax credit of 5.1 cents per gallon ofethanol blended at 10%.

 

The modification orelimination of any of the federal laws and programs described above (or anyother applicable law or program), or the reduction of any of the incentives ortax credits described above, could have an adverse impact on our business.

 

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

 

Asdescribed in more detail herein, ethanol production has been favorably affectedby a producer incentive from the State of Wisconsin.  The modification or elimination of any of theWisconsin laws and programs described above (or any other applicable law orprogram), or the reduction of any of the incentives described above, could havean adverse impact on our business.

 

**Theethanol industry is very competitive.**

 

The ethanol industrycontinues to grow and there is significant competition among ethanol producers.Nationally, ethanol production is concentrated in a few large companies.Investors should understand that we face a competitive challenge from largerethanol plants, from ethanol plants that can produce a wider range of productsthan our ethanol plant, and from other ethanol plants similar to our ethanolplant.  Furthermore, we will be in directcompetition with other ethanol producers, many of which have greater resourcesthan we currently have or will have in the future. Large ethanol producers suchas Archer Daniels Midland and Cargill, among others, are capable of producingsignificantly greater quantities than the amount of ethanol we expect toproduce. In addition, there are several Wisconsin, Minnesota and otherMidwestern regional ethanol producers which have recently formed, are in theprocess of forming, or are under consideration, which are or would be larger,of a similar size and/or have similar resources to us.

 

We will also compete withproducers of other gasoline additives having similar octane and oxygenatevalues as ethanol, such as producers of methyl tertiary butyl ether (“MTBE”), apetrochemical derived from methanol which generally costs less to produce thanethanol. Many major oil companies produce MTBE and, because it ispetroleum-based, its use is strongly supported by major oil companies.Alternative fuels, gasoline oxygenates and alternative ethanol production methodsare also continually under development. The major oil companies havesignificantly greater resources than we have to market MTBE, to develop andmarket alternative products, and to influence legislation and public perceptionof MTBE and ethanol. These companies also have sufficient resources to beginproduction of ethanol should they choose to do so.

 

**Toproduce ethanol we purchase significant amounts of corn that is subject todisease and other risks.**

 

Ethanol production at our facility requires corn.Corn, as with most other crops, is affected by weather conditions, disease andother factors. A significant reduction in the quantity or quality of cornharvested due to adverse weather conditions, disease or other factors couldresult in increased corn costs with adverse financial consequences to us.Significant variations in actual growing conditions from normal growingconditions may adversely affect our ability to procure corn for the plant.

 

The price of corn isinfluenced by general economic, market and government factors. These factorsinclude weather conditions, farmer planting decisions, domestic and foreigngovernment farm programs and policies, global demand 

 

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and supply and quality.Changes in the price of corn can significantly affect our business. Generally,rising corn prices produce lower profit margins and therefore representunfavorable market conditions. This is especially true if market conditions donot allow us to pass along increased corn costs to our customers. The price ofcorn has fluctuated significantly in the past and may fluctuate significantlyin the future. We cannot offer any assurance that we will be able to offset anyincrease in the price of corn by increasing the price of our products. If wecannot offset increases in the price of corn, our financial performance may bematerially and adversely effected.

 

**Toproduce ethanol, we will need a significant supply of water.**

 

Water supply and water quality are importantrequirements to produce ethanol. To satisfy our water needs, we have drilledone 500,000 gallon-per-day well on the property.  Current plant usage is approximately 370,000gallons per day.

 

We expect that the well will provide all of the waterthat we will need to operate the ethanol plant, but our estimates regardingwater needs or the water available from the well on the property could beunderstated and we could need additional water. If we need more water, we willbe forced to find other sources and this could require us to spend additionalcapital which could harm our business and its prospects. Further, there can beno assurance that we will be able to find alternate sources of water atcommercially 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 andconsistent supply of energy into the ethanol plant. If there is anyinterruption in our supply of energy for whatever reason, such as supply,delivery or mechanical problems, we may be required to halt production. Ifproduction is halted for any extended period of time, it will have a materialadverse effect on our business. We have contracted with gas and electricutilities to provide our needed energy, but there can be no assurance thatthose utilities will be able to reliably supply the gas and electricity that weneed. If we were to suffer interruptions in our energy supply, our businesswould be harmed.

 

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

 

Our success will depend in part on our ability toattract and retain competent personnel who will be able to help us achieve ourgoals. We must hire and retain qualified managers, accounting, human resourcesand other personnel to staff our business. If we are unsuccessful in hiring and retaining productive and competentpersonnel, our business could be harmed.

 

**We aresubject to extensive environmental and health and safety regulations.**

 

Ethanol productioninvolves the emission of various airborne pollutants, including particulatematter (PM10), carbon monoxide (CO), nitrogen oxide (NOx), volatileorganic compounds and sulfur dioxide. To operate the ethanol plant, we haveobtained permits from the State of Wisconsin. We are also subject to regulations and oversight from the United StatesEnvironmental Protection Agency (“EPA”). There is always a risk that the EPAmay enforce certain rules and regulations differently than Wisconsin’senvironmental administrators. Additionally, EPA and Wisconsin’s environmental regulations are subjectto change and such changes could result in greater regulatory burdens on plantoperations, which could harm our business.

 

We also could be subjectto environmental nuisance or related claims by employees or property owners orresidents in the vicinity of the ethanol plant arising from air or waterdischarges or other reasons.  Nuisanceclaims or increased environmental compliance costs could harm our business.

 

Further, plant operations are governed by the OccupationalSafety and Health Administration (“OSHA”). OSHA regulations may change such that the costs of operating the plantmay increase.

 

Any of the regulatory factors described above mayresult in higher costs or other materially adverse conditions effecting ouroperations, cash flows and financial performance.

 

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

 

We have engaged a local company to help us manage ournatural gas needs and to assist us in negotiating agreements to purchasenatural gas.  We purchase electricityfrom a local utility 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.

 

**Ourbusiness is not diversified.**

 

Our success depends upon our ability to profitablyoperate our ethanol plant. We do not have any other lines of business or othersources of revenue if we are unable to operate our ethanol plant.

 

We sell all of theethanol we produce to one distributor, Murex, pursuant to an outputcontract.  Murex then markets and resellsthat ethanol to end users on terms and at a price approved in consultation withus.  As a result, we are dependent on onedistributor to sell our ethanol.  If thisdistributor breaches our output contract or is not in the financial position topurchase all of the ethanol we produce, we may not have any readily availablemeans to sell our ethanol (or we may not find another distributor on the sameterms or on acceptable terms) and our financial performance could be adverselyand materially effected.  Our financialperformance is dependent upon the financial health of the distributor wecontract with.

 

We rely solely uponUnited to market and distribute our distillers grains. This is not an outputcontract and United will only purchase that portion of our distillers grainsthat they are able to sell.  If United isunable to sell any portion of the distillers grains we produce, we will have todispose of any distillers grains not purchased. This may have a material adverse impact on our financial performance.

 

Murex and United may have different arrangements withrespect to compensation in their agreements with other entities that producethe same products that we do.  It ispossible that either Murex’s or United’s ability or willingness to perform onour behalf could be impaired by the financial arrangements that they may havewith other entities not related to us.

 

**Ouroperating results could fluctuate.**

 

Our operating resultscould fluctuate significantly in the future as a result of a variety of factorsmany of which are outside our control. These factors include:

 

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

 

•                  Changes in interest rates andavailability of credit;

 

•                  Reliability and construction qualityof the ethanol plant to permit it to operate at a level that we expect;

 

•                  Legislative changes in policy at thefederal or state level concerning ethanol and gasoline additives;

 

•                  Amount and timing of capitalexpenditures and other costs relating to maintenance or expansion of ouroperations;

 

•                  Technical difficulties in operatingthe ethanol plant;

 

•                  New products and new plants fromethanol producers or oil companies; and

 

•                  General economic conditions, oreconomic events specific to agriculture, oil or automobile markets.

 

As a result of these factors, and other described risk factors, ouroperating results may not be indicative of future operating results and youshould not rely on them as indications of our future performance.

 

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**PART I**

** **

**ITEM 1.  BUSINESS**

** **

**Overview**

 

BadgerState Ethanol, LLC, a Wisconsin limited liability company organized in 2000(the “Company”), is engaged in the production and sale of fuel grade ethanol.We completed construction of our plant and started operations in October 2002.  Unless otherwise indicated, whenever we useterm we, us, our or ours, we mean the Company.

 

Fuelgrade ethanol is our primary product accounting for the majority of ourrevenue.  In addition, we sell distillersgrains, a principal co-product of the ethanol production process, which may besold as distillers dried grains and distillers modified wet grains, and carbondioxide.  Also, as of October, 2005, wecompleted construction of our Smart Station retail fuel station and began sellingethanol based fuel (both 10% ethanol and 85% ethanol) to retail consumers.

 

In2005, we processed over 18 million bushels of corn into over 50 million gallonsof ethanol.  We also processed over168,000 tons of distillers grains and over 97,000 tons of carbon dioxide in2005.  In 2006, we anticipate producingover 51 million gallons of ethanol, over 140,000 tons of distillers grains,over 100,000 tons of carbon dioxide and over 11,000 tons of corn germ.

 

**GeneralDevelopments**

 

*Reclassification*

 

The Company’s Board of Directors announced on January 30,2006 its intent to engage in a reclassification of the Company’s Class Amember units.  The proposed transaction will provide for thereclassification of the Company’s Class A member units held by unit holderswho are the record holders of 20 or fewer Class A member units.  Inconnection with the reclassification, each Class A unit held by suchrecord holders will be reclassified on the basis of one Class A-1 unit foreach Class A unit held by such unit holders.  All other Class Amember units will remain outstanding and be unaffected by thereclassification.  If the Company’s members approve the proposedamendments to the Company’s operating agreement and the reclassification isimplemented, the Company anticipates having fewer than 300 Class A unitholders of record, which would enable the Company to voluntarily terminate theregistration of its Class A member units under the Securities Exchange Actof 1934.

 

*FacilityAddition*

 

Wehave entered into the below agreements for the construction of an addition toour ethanol production facility in Monroe, Wisconsin.  We began construction of the addition on November 2,2005 and expect such construction to be completed by July, 2006.  Once completed, the addition to our facilityis expected to improve the efficiency of our ethanol production process andallow us to produce corn protein concentrate and corn germ.  We estimate the cost of the addition will beapproximately $25,000,000.

 

TheCompany executed an Agreement Between Owner and Design-Builder with a thirdparty (the “Design-Build Agreement”). Pursuant to the Design-Build Agreement, the design-builder will providearchitectural, engineering, construction and management services for the designand subsequent construction of an addition to the Company’s ethanol productionfacility located in Monroe, Wisconsin that incorporates certain processes andtechnology licensed to the Company.

 

TheCompany also executed a License Agreement with a third party (the “LicenseAgreement”).  Pursuant to the LicenseAgreement, the Company obtained a license to use certain technologies (the “LicensedTechnologies”) in the construction and operation of the addition to the Company’splant that will be built pursuant to the Design-Build Agreement.

 

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TheCompany executed a Services and Guarantee Agreement with a third party (the “ServicesAgreement”).  Pursuant to the ServicesAgreement, the Company will obtain certain engineering and other services inconnection with the License Agreement and the Design-Build Agreement, includingperformance guarantees for the Licensed Technologies.

 

TheCompany also executed a Corn Protein Concentrate Marketing Agreement with athird party (the “Protein Marketing Agreement”).  Pursuant to the Protein Marketing Agreement,the third party will purchase and market 100% of the Company’s production andoutput of corn protein concentrate from the Company’s plant in Monroe,Wisconsin as the Company’s exclusive purchaser and marketer of such cornprotein concentrate.  The ProteinMarketing Agreement will be effective for a period ending five years after thedate of the first commercial production of corn protein concentrate by theCompany, which commercial production is estimated to begin in May, 2006.

 

TheCompany also executed a Corn Germ Marketing Agreement with the same third partywho is marketing the corn protein concentrate (the “Germ Marketing Agreement”).  Pursuant to the Germ Marketing Agreement, thethird party will purchase and market 100% of the Company’s production andoutput of corn germ from the Company’s plant in Monroe, Wisconsin as theCompany’s exclusive purchaser and marketer of such corn germ.  The Germ Marketing Agreement will beeffective for a period ending five years after the date of the first commercialproduction of corn germ by the Company, which commercial production isestimated to begin in May, 2006.

 

On August 30,2005, we submitted an Air Pollution Control Construction Permit application tothe Wisconsin Department of Natural Resources (“WDNR”) to authorize changes toour facility to implement the construction of the facility addition describedabove.  We received our Air PollutionControl Construction Permit from the WDNR on November 1, 2005.  We are required to conduct air emissionstesting on our facility once the construction is complete to demonstratecompliance with the emission limitations on the Construction Permit.  Following successful completion of this airemissions testing we will be issued an Air Pollution Operation Permit.

 

***Spring Valley Ventures***

** **

**On August 4th,2005, the Company loaned approximately $2,585,000 (the “Loan”) to Spring ValleyVentures, LLC, a Wisconsin limited liability company (“Spring Valley Ventures”).  On August 5, 2005, the Company acquiredall of the capital interests of Spring Valley Ventures for the amount of$103,360 and converted the Loan into equity interests in Spring ValleyVentures, which is now a wholly owned subsidiary of the Company.  The Company acquired Spring Valley Ventureswith its grain elevator bins and equipment in order to provide additional cornstorage and direct access to corn supply for the Company’s ethanol plant.  The grain elevator, bins and equipment arebeing managed by a third party.**

** **

*SmartStation Ventures*

 

InOctober, 2005, we completed construction of an ethanol retail fuel station atour location in Monroe, Wisconsin at a cost of approximately $425,000.  The fuel station sells fuel to the public ineither 10% ethanol or 85% ethanol blends (with the balance made up of gasoline)through a wholly owned subsidiary of the Company, Smart Station Ventures, LLC.

 

**Descriptionof Dry Mill Process**

 

Ourethanol plant, which is located in Monroe, Wisconsin, produces ethanol by processingcorn.  The corn is received by rail andby semi-trailer truck, and is weighed and cleaned of rocks and debris before itis conveyed to one of two concrete storage silos. The corn is then transportedto a hammermill or grinder where it is ground into flour and conveyed into aslurry tank for processing.  We addwater, heat and enzymes to break the ground corn into a corn mash.  This mash is heat sterilized and pumped to atank where other enzymes are added to convert the starches into glucose sugars. Next, the mash is pumped into one offour fermenters, where yeast is added, to begin a forty-eight to fifty hourbatch fermentation process.  Carbondioxide is produced during the fermentation process.  A distillation process vaporizes the alcoholfrom the corn mash.  The alcohol isfurther dried in a rectifier and 

 

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molecular sieve.  The resulting200 proof alcohol is then pumped to shift tanks and blended with five percentgasoline as it is pumped into denatured ethanol storage tanks.

 

Cornmash exiting the distillation process is pumped into one of severalcentrifuges.  Water from the centrifuges,called thin stillage, is condensed into a thicker syrup called condensedsolubles.  The solids that exit thecentrifuge 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**

 

Theprincipal products we produce at our ethanol plant are fuel grade ethanol,distillers grains and carbon dioxide.  Wealso sell 10% ethanol and 85% ethanol to retail consumers.  Once our facility addition is completed, weanticipate also selling corn germ and corn protein concentrate.

 

***Ethanol***

 

Ethanolis ethyl alcohol, which has many industrial uses.  At our plant, we produce ethanol to be usedas a fuel component that serves as:

 

•                  An octane enhancer in fuels;

 

•                  An oxygenated fuel additive that canreduce carbon monoxide vehicle emissions; and

 

•                  A non-petroleum-based gasolineextender.

 

Ethanolin its primary form is mostly used for blending with unleaded gasoline andother fuel products.  The implementationof the Federal Clean Air Act has made ethanol fuels an important domesticrenewable fuel additive.  Used as a fueloxygenate, ethanol provides a means to reduce carbon monoxide vehicleemissions.  The principal purchasers ofethanol are generally the refined and wholesale gasoline marketer orblender.  Our principal end markets forour ethanol are petroleum terminals in California, Wisconsin, Illinois andother states in the upper Midwest.  Ourprimary means of distributing ethanol is by rail, although we also are able toship ethanol by truck as well.

 

In thesecond fiscal quarter of 2005 and continuing through the rest of fiscal year2005, the demand for ethanol increased relative to supply causing upwardpressure on ethanol market prices.  Inthe last month of the fourth quarter some of those gains have been reduced, butprices remain historically strong. Increased demand, firm crude oil and gas markets, public acceptance, andpositive political signals have all contributed to a strengthening of ethanolprices.  In order to sustain these higherprice levels however, management believes the industry will need to continue togrow demand to offset the increased supply brought to the market place byadditional production.

 

Whilewe anticipate continued strong demand for ethanol, we are uncertain as to thesustainability of current ethanol prices given the increasing ethanol supply asnew plants begin production and existing plants continue to expand.  Ethanol production continues to grow as additionalplants become operational.  According tothe Renewable Fuels Association, there are currently 86 ethanol producers and91 ethanol plants in operation nationwide that have the capacity to annuallyproduce 4.34 billion gallons.  Inaddition, there are 32 new ethanol plants under construction and 9 expansionsof existing ethanol plants under construction constituting another almost 2billion gallons of annual capacity.  Inaddition, ADM has recently announced its plan to add 500 million gallons ofethanol production, clearly indicating its desire to maintain a significantshare of the ethanol market.

 

Changesto federal ethanol supports or incentives could significantly impact demand forethanol.  On August 8, 2005,President George W. Bush signed into law the Energy Policy Act of 2005 (the “EnergyPolicy Act”).  The Act contains numerousprovisions that are expected to favorably impact the ethanol industry byenhancing both the production and use of ethanol.  Most notably, the Act created a 7.5 billiongallon Renewable 

 

9

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Fuels Standard (the “RFS”).  TheRFS is a national renewable fuels mandate as to the total amount of nationalrenewable fuels usage but allows flexibility to refiners by allowing them touse renewable fuel blends in those areas where it is most cost-effective ratherthan requiring renewable fuels to be used in any particular area or state.  The RFS will begin at 4 billion gallons in2006, and increase to 7.5 billion gallons by 2012.  According to the Renewable Fuels Association,the Act is expected to lead to about $6 billion in new investment in ethanolplants across the country.

 

Sincecurrent national ethanol production capacity exceeds the 2006 RFS requirementof 4 billion gallons, it is management’s belief that other market factors areprimarily responsible for current ethanol prices.  Accordingly, it is possible that the RFSrequirements may not significantly impact ethanol prices in theshort-term.  For instance, if gasolineprices continue to trend higher, consumers will look for lower pricedalternative fuels.  The ConsumerFederation of America recently published a report that states that consumerscould save up to eight cents per gallon at the pump if ethanol were blended at10 percent.  Since ethanol blended fuelis a cheaper alternative for consumers, the demand for such ethanol blendedfuel could increase thus increasing the overall demand for ethanol.  This could positively affect ourearnings.  However, the increasedrequirement under the RFS of 7.5 billion gallons of ethanol by 2012 is expectedto support ethanol prices in the long term. A greater supply of ethanol on the market from these additional plantsand plant expansions could reduce the price we are able to charge for ourethanol.  This may have a negative impacton our revenues.

 

Demandfor ethanol may also increase as a result of increased consumption of E85fuel.  E85 fuel is a blend of 70% to 85%ethanol with the balance gasoline. According to the Energy Information Administration, E85 consumption isprojected to increase from a national total of 11 million gallons in 2003 to 47million gallons in 2025.  In addition tobeing used as a vehicle fuel, E85 is also used as an aviation fuel and as ahydrogen source for fuel cells.  In theU.S., there are currently about 4 million flexible fuel vehicles capable ofoperating on E85 and 400 retail stations supplying it.  Automakers have indicated plans to produce anestimated 2 million more flexible fuel vehicles per year.

 

Althoughthe Energy Policy Act of 2005 did not impose a national ban of methyl tertiarybutyl ether (“MTBE”), the primary competitor of ethanol as a fuel oxygenate,the Act’s failure to include liability protection for manufacturers of MTBEcould result in refiners and blenders using ethanol as an oxygenate rather thanMTBE to satisfy the Clean Air Act’s reformulated gasoline oxygenaterequirement.  While this may create someadditional demand in the short term, the Act repeals the Clean Air Act’s 2%oxygenate requirement for reformulated gasoline immediately in California and270 days after enactment elsewhere. However, the Clean Air Act also contains an oxygenated fuel requirementfor areas classified as carbon monoxide non-attainment areas.  These areas are required to establish anoxygenated fuels program for a period of no less than three months eachwinter.  The minimum oxygen requirementfor gasoline sold in these areas is 2.7% by weight.  This is the equivalent of 7.7% ethanol byvolume in a gasoline blend.  Thisrequirement was unaffected by the Act and a number of states, includingCalifornia, participate in this program.

 

Consumerresistance to the use of ethanol may affect the demand for ethanol which couldaffect our ability to market our product and reduce our revenues.  Certain individuals believe that use ofethanol will have a negative impact on prices at the pump.  Many also believe that ethanol adds to airpollution and harms car and truck engines. Still other consumers believe that the process of producing ethanolactually uses more fossil energy, such as oil and natural gas, than the amountof ethanol that is produced.  Theseconsumer beliefs could potentially be wide-spread.  If consumers choose not to buy ethanol, itwould affect the demand for the ethanol we produce which could negativelyaffect our ability to sell our product and negatively affect our profitability.

 

InOctober, 2005, we completed construction of an ethanol retail fuel station atour location in Monroe, Wisconsin.  Thefuel station sells fuel to the public in either 10% ethanol or 85% ethanolblends (with the balance made up of gasoline) through a wholly owned subsidiaryof the Company, Smart Station Ventures, LLC.

 

***Distillers Grains***

 

Aprincipal co-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 

 

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with a dryer system that allows production of two moisture levels ofdistillers grains: distillers modified wet grains and distillers driedgrains.  Distillers modified wet grainsare processed corn mash and condensed solubles that contain approximately 50%moisture.  It has a shelf life slightlylonger than three days and is often sold to nearby markets.  Distillers dried grains are corn mash thathas been dried to approximately 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. Our primary means of distributing distillers grains is by truck,although we also are able to ship distillers grains by rail as well.

 

Infiscal 2005, there was significant added competition among producers of distillersgrains with numerous ethanol plants operating throughout the Midwest andelsewhere in the United States.  This ineffect has created increased potential for the over production and over supplyof distillers grains.  For our fiscalyear ended December 31, 2005, revenues from sales of distillers grainswere approximately 12.4% of total revenues. For our fiscal year ended December 31, 2004, revenues from sales ofdistillers grains were approximately 17% of total revenues.

 

***Carbon Dioxide***

 

Another co-product of the ethanol production process iscarbon dioxide. Carbon dioxide can be processed and used in various food andnon-food related applications, such as beverage and dry ice production,pharmaceutical manufacturing, shrink-fitting and cryogenic blasting. Carbondioxide is principally used as expendable refrigerants and is commonly used infood processing facilities such as slaughterhouse operations, frozen foodstorage, and as supplemental cooling for refrigerated products.

 

In February, 2004 we entered into an agreement to provide and sell carbon dioxide gas to a third party from the plant at a fixed price.  The facility began operating on July 1, 2004, and we are currently supplying approximately 280 tons of liquid carbon dioxide per day.  Total capacity is approximately 400 tons of liquid carbon dioxide per day.  The initial term of the agreement is 15 years with the option to renew for additional 5 year periods thereafter.  We believe that our sales under the carbon dioxide agreement will be approximately $812,000 per year.

 

**Customers**

 

Weentered into an ethanol purchase and marketing agreement with Murex for theexclusive rights to purchase and market all ethanol produced by our plant otherthan ethanol sold at our Smart Station. For the year ended December 31, 2005, Murex accounted for 100% ofour ethanol sales and approximately 78.4% of our aggregate sales andrevenues.  We believe that the loss ofMurex as a customer could have an adverse effect on our sales and revenues.  Murex currently has a representative on ourBoard of Directors.  This exclusiveagreement has an initial term of seven years until October 23, 2009, andautomatically renews for successive one-year terms unless written notice oftermination is issued 90 days prior to the end of the then current term.

 

Weentered into a distillers grains purchase and marketing agreement with Unitedfor the exclusive rights to purchase and market all distillers grains producedby our plant.  For the year ended December 31,2005, United accounted for 100% of our distillers grains sales andapproximately 12.4% of our aggregate sales and revenues.  We believe that the loss of United as acustomer could have an adverse effect on our sales and revenues.  This exclusive agreement had an initial termwhich ended on October 25, 2005, but which also automatically renews forsuccessive one-year terms unless written notice of termination is issued 90days prior to the end of the then current term. No written notice was provided by either party, therefore, thisagreement is still in effect for an additional term of one year (subject toautomatic renewal on the terms set forth above).

 

Weentered into a sale agreement with a third party for the exclusive rights topurchase our carbon dioxide.  For theyear ended December 31, 2005, this agreement accounted for all of ourcarbon dioxide sales and approximately .7% of our aggregate sales andrevenues.  This exclusive agreement hasan initial term of 15 years until May 26, 2019 with an automatic 5 yearrenewal period.

 

Weentered into two marketing agreements with a third party for the exclusiverights to purchase and market all corn protein concentrate and corn germ weproduce once our facility addition is complete. Each marketing 

 

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agreement is effective for a term ending five years after the date offirst commercial production of such products (See description in Item 1,General Developments – Facility Addition).

 

**SeasonalFactors in Business**

 

In aneffort to improve air quality in regions where carbon monoxide and ozone are aproblem, the United States federal government requires the use of gasoline witha higher oxygen content in these regions during the fall and winter.  Gasoline that is blended with ethanol has ahigher oxygen content than gasoline that does not contain ethanol.  As a result, we expect moderate seasonalitywith respect to our gross profit margins on our fuel grade ethanol allowing usto, potentially, be able to sell our fuel grade ethanol at a premium during themandated oxygenate period (which coincides with our third and fourth fiscalquarters).  Conversely, we expect ouraverage sales price for fuel grade ethanol during the summer, when fuel gradeethanol is primarily used as an octane enhancer or a fuel supply extender, tobe lower.  We primarily contract forsix-month blending cycles to correspond to the different winter and summermarket periods.

 

**EthanolIndustry**

 

Ethanolhas important applications, primarily as an octane enhancer in fuels, anoxygenated fuel additive that can reduce carbon monoxide vehicle emissions anda non-petroleum-based gasoline extender. Fuel grade ethanol prices traditionally have varied directly with thewholesale price of gasoline.  However,historically, fuel grade ethanol prices have also reflected a premium due tothe oxygenate and octane enhancing properties of this motor fuel additive.

 

***Federal Ethanol Supports***

 

Theethanol industry is very dependent on numerous economic incentives to produceethanol, including federal ethanol supports. In 2005, the federal government enacted the Energy Policy Act , whichcontained a new support program entitled the RFS.  The RFS includes a requirement that fuelrefiners use a certain minimum amount of renewable fuels (including ethanol)which starts at 4 billion gallons of renewable fuels in 2006 and increases to7.5 billion gallons by 2012.

 

Underthe Energy Policy Act, we also expect to receive benefits from the federalsmall producer credit.  The Energy PolicyAct increased the capacity of plants eligible for the federal small producercredit from plants of 30 million gallons to plants of 60 million gallons insize.  Qualifying producers may deductfrom their federal income taxes $0.10 per gallon for the first 15 million gallonsof ethanol produced in a given year. Currently, the small producer credit is scheduled to terminate December 31,2007.  We expect to qualify in 2006.

 

Inaddition, the Energy Policy Act includes a tax credit that permits taxpayers toclaim a 30% credit (up to $30,000) for the cost of installing clean-fuelvehicle refueling equipment to be used in a trade or business or installed atthe principal residence of the taxpayer. Under the provision, clean fuels include any fuel at least 85% of thevolume of which consists of ethanol, natural gas, compressed natural gas,liquefied natural gas, liquefied petroleum gas, and/or hydrogen as well as anymixture of diesel fuel and biodiesel containing at least 20% biodiesel.  The provision is effective for equipmentplaced in service between December 31, 2005, and January 1,2010.  It is unclear how this credit willaffect the demand for ethanol in the short term, but we expect it will raiseconsumer awareness of alternative sources of fuel and could increase demand forthe same.

 

Ethanolsales have also been favorably affected by the Clean Air Act Amendments of1990, particularly the Federal Oxygen Program which became effective November 1,1992.  The Federal Oxygen Programrequires the sale of oxygenated motor fuels during the fall and winter monthsin certain major metropolitan areas to reduce carbon monoxide pollution.  Ethanol is an oxygenate that is used underthis program.  Additionally, ethanol usehas also increased due to a second Clean Air Act program, the ReformulatedGasoline Program.  This program becameeffective January 1, 1995, and requires the sale of reformulated gasolinein certain major urban areas to reduce pollutants, including those thatcontribute to ground level ozone. Ethanol is added as an oxygenate to reformulated gasoline under thisprogram as well.

 

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The use of ethanol as an oxygenate to blend with fuelto comply with federal mandates also has been aided by federal tax policy.  On October 22, 2004, President Bushsigned H.R. 4520 into law which contained the Volumetric Ethanol Excise TaxCredit (“VEETC”) and amended the federal excise tax structure effective as of January 1,2005.  The VEETC replaced the previoustax exemption with a new volumetric ethanol excise tax credit of 5.1 cents pergallon of ethanol blended at 10%. Refiners and gasoline blenders apply for this credit and the VEETC isexpected to allow much greater refinery flexibility in blending ethanol.  The tax credit under the VEETC is fromgeneral revenues and does not impact the highway trust fund (unlike theprevious exemption), and thus the VEETC removes a disincentive for states touse ethanol.  The VEETC expires on December 31,2010.

 

Additionally,Congress provides an incentive through the United States Department ofAgriculture Commodity Credit Corporation’s Bioenergy Program.  Under that program, ethanol producers areeligible for cash payments based upon increases in grain consumption for thepurpose of producing fuel grade ethanol from one year to the next.  Last year we received $175,253 under thisprogram for increasing our consumption of grain (and, therefore, production ofethanol).  This year, we expect tomarginally increase our ethanol production. Additionally, the incentive program has been modified to prioritize theproduction of other biofuels (other than ethanol) such as soy diesel, althoughethanol producers can still qualify. Therefore, we do not anticipate receiving any substantial amount ofincentive from this program this year, or in the foreseeable future.

 

***State Ethanol Supports***

 

In part, the past successof our business was dependent upon the availability of cash payments to ethanolproducers from the State of Wisconsin under Wisconsin Statutes Section 20.115(1)(d) and93.75 (referred to hereinafter as the “Ethanol Incentive Program”).  Under the Wisconsin Ethanol IncentiveProgram, the State of Wisconsin pays certain ethanol producers $.20 per gallonfor up to 15,000,000 gallons of ethanol produced in Wisconsin in each 12 monthperiod.  The Ethanol Incentive Programpayments are prorated if the State of Wisconsin has insufficient funds to payall eligible ethanol producers $.20 per gallon. Under the program, a Wisconsin ethanol producer is generally eligiblefor the payments if it has been producing ethanol in Wisconsin for fewer than60 months, it produces more than 10,000,000 gallons of ethanol a year and itpurchases the corn or other substances from which the ethanol is produced fromlocal Wisconsin sources.  In 2005, wereceived $633,333 from this program.  Weanticipate receiving an award in 2006 based upon our satisfaction of theeligibility requirements as of the date of this report.  Currently, there is estimated to be a totalof $1.9 million available under the program which must be allocated among fourqualified producers. In 2006, we anticipate receiving $475,000 based upon ourcurrent production levels, current funding levels and the number of eligibleproducers in Wisconsin.  The program’ssunset date is June 30, 2006.  We donot expect it to be renewed.

 

2005 AB 15 passed the state Assembly on December 15,2005, and the bill moved on to the Senate. This bill requires all gasoline in the state to contain 10%ethanol.  The governor has expressed hissupport for the bill.  Currently,gasoline may be sold in the state without an ethanol blend, although severalcompanies do currently sell gasoline with a 10% ethanol blend.  If passed, ethanol demand in Wisconsin couldincrease by approximately 180 millions gallons per year, from its current 120million gallons per year (based on approximately 3 billion gallons of gasolinesold in Wisconsin per year).

 

**BusinessLocation; Proximity to Markets**

 

We areoperating an ethanol plant in Monroe, Wisconsin, which is in Green County, inthe south central part of Wisconsin.  Wepurchased for $1 from the City of Monroe, Wisconsin an approximately 28-acresite on which to build the ethanol plant. We selected the Monroe site because of its location to existing grainproduction, accessibility to road and rail transportation and its proximity tomajor population centers.  It is alsoserved by the Wisconsin Southern Railroad Company, a short line rail operator.  In addition, it is also in close proximity tomajor highways that connect to major population centers such as Milwaukee,Wisconsin and Chicago, Illinois.

 

ThroughSpring Valley Ventures, LLC, our wholly owned subsidiary, we also own a grainelevator, bins and equipment which are located on 16.8 acres in Brodhead,Wisconsin, approximately 17 miles east of Monroe Wisconsin.  The grain elevator and equipment providesadditional storage capacity for our ethanol facility and is also served by theWisconsin Southern Railroad Company.

 

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**DevelopmentAgreement with the City of Monroe**

 

Weentered into a development agreement with the City of Monroe (the “DevelopmentAgreement”) to construct the ethanol plant and for site improvements.  As part of the Development Agreement, weagreed to certain on-going obligations, including, representing that the fairmarket value of the property will not be less than $10.57 million in 2005 (andwhich fair market value will increase over time).

 

On January 1, 2003, we began repaying the City ofMonroe’s tax incremental financing for site improvements through our regularproperty tax assessments, which are approximately $280,000 per year.  We paid approximately $280,000, in 2005, andan additional $280,000 in property tax will be paid in 2006, which sum ispayable upon request.  We will makeadditional payments of $280,000 until 2011, at which time we will no longer owethe City of Monroe any payments of property taxes pursuant to the Development Agreement.  Upon termination of the DevelopmentAgreement, the Company will continue to pay property taxes based upon assessedvalue.

 

Inconnection with the Development Agreement, we executed and delivered a mortgageto the City of Monroe.  The mortgagesecures our performance of the on-going obligations and expires in 2011.  The City of Monroe’s mortgage lien issubordinate to the mortgage lien of the lender providing primary financing forthe initial construction of our ethanol plant but not to the interest of ourequity holders.

 

**Procurements**

 

***Grain Delivery***

 

Accordingto the Wisconsin Agricultural Statistical Service, over 360 million bushels ofcorn are produced annually in Wisconsin. Of that total, the greatest percentage is produced in the southernportion of the state.  According to the WisconsinAgricultural Statistical Service, approximately 200 million bushels of corn areproduced annually within a 100-mile radius of Monroe, Wisconsin.  Our plant is located in Monroe, Wisconsin, inGreen 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 9% 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 corn producers.

 

In2005, we purchased approximately 18 million bushels of grain forprocessing.  We currently haveapproximately 23% of our fiscal 2006 grain requirements purchased, which isequivalent to approximately 3 months of ethanol production.

 

***Grain Elevators***

 

Wehave ongoing business relationships with local grain elevators to acquire thegrain we need.  We have identifiedapproximately 45 elevators as potential sources of grain and continue todiscuss with them future corn delivery. Although we are currently procuring grains from many of these sources,we cannot guarantee that we will be able to continue procuring such grains onacceptable terms or at all.

 

Asdescribed above, we also own a grain elevator, bins and equipment which arelocated in Brodhead, Wisconsin through our wholly owned subsidiary SpringValley Ventures, LLC.

 

***Transportation and Delivery***

 

Grainis delivered to our ethanol plant by truck and rail.  We also are dependent on rail and commercialtrucks to distribute our ethanol and distillers grains.  Any disruption in the rail system orcommercial truck system would have a significant detrimental effect on ouroperations.  The Wisconsin and SouthernRailroad Company provides rail service to the plant.  The railroad provides direct access forshippers via the Chicago, Illinois gateway, which connects with all majorrailroads via the Belt Railway of Chicago, Burlington Northern at Prairie duChien, 

 

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Wisconsin, Union Pacific, Canadian Pacific and Wisconsin Centralrailroads at various points on the system. In addition, access to barge facilities is also available at Prairie duChien, Wisconsin.

 

In July 2001,we entered into a rail track reimbursement and construction agreement, as wellas a transportation agreement, with Wisconsin and Southern Railroad Company forconstruction of a rail track to our ethanol plant and for rail transportationservices.  Under the reimbursement andconstruction agreement, we receive reimbursements from the rail operator fortrack construction costs based upon a rate of $10 per freight car shipped orreceived at our ethanol plant.  Thereimbursements are payable on a monthly basis not to exceed ten years or thecost of the track.  The transportationagreement, which provides us with rail transportation services for deliveriesto and from the ethanol plant at negotiated rates, commenced on January 1,2004.

 

***Hedging***

 

Due torapid fluctuations in the price of corn, we developed a Grain Risk ManagementProgram (“Grain Risk Management Program”) hedging strategy to minimize ourcommodity risk exposure.  Our Grain RiskManagement Program is intended to use grain purchase contracts together withgrain futures derivatives to fix the cost of some of our expected future grainpurchases.  Our policy allows for the useof fixed price forward purchase contracts, un-priced forward basis purchasecontracts, and Chicago Board of Trade (“CBOT”) derivative contracts(over-the-counter and traditional options). During 2005, approximately 75% of our fiscal 2005 grain requirementswere hedged through a combination of fixed price forward purchase contracts,and CBOT traditional and over-the-counter option hedges to protect our cost ofgrain.  During 2005, our practice ofprotecting the cost of our grain, generally accounted for 50% of forecastedgrain purchases in the upcoming twelve months. We took this action because of the volatility of corn prices.  Under our program, all components of theposition are monitored and all hedges are designated against future grainrequirements to ensure that we do not enter into commitments or derivatives forgrain in excess of expected grain requirements. We currently have approximately 23% of our fiscal 2006 grainrequirements hedged.

 

***Storage Capacity***

 

Wehave sufficient corn storage facilities at our Monroe, Wisconsin location forapproximately 7 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 internal grainprocurement, we can better develop local supply relationships that will reducethe need to buy and store grain offsite and better manage our raw material riskmanagement program.  We have acommodities manager to ensure the consistent scheduling of grain deliveries andto establish and fill forward contracts through grain elevators.  The commodities manager coordinates graindeliveries between the railroad and the participating elevators, as well asnegotiates price protection with hedging specialists.

 

***Water***

 

Watersupply is important to our ethanol business. The water quality at our plant currently meets the needs of the facilitywithout significant filtering or processing. To satisfy our water needs, we have drilled one 500,000****gallon-per-day well on the property.  We currently use 370,000 gallons perday.  Based upon current production ofcurrently existing wells in the City of Monroe, we believe there is sufficientground water to support this well.  Inaddition, we are also connected to the City of Monroe’s water supply in theevent the water supplied by the well is not sufficient.

 

***Natural Gas***

 

Ethanolproduction is an energy intensive process using significant amounts ofelectricity and natural gas.  We havecontracted with Wisconsin Electric Power Company for firm service natural gasdelivery and with US Energy Services, Inc. (“USES”) to coordinate purchaseand delivery of the gas to the plant and otherwise manage our energyneeds.  Due to the competitive nature ofthe natural gas market, we believe no significant risk of long-terminterruption exists.  USES also helps usto negotiate and procure natural gas and electricity.  Natural gas prices have historicallyfluctuated dramatically.  According toUSES, the current price of natural gas as reported on the New 

 

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York Mercantile Exchange is up 3.54% from last year.  USES provides price risk management servicesto us to manage natural gas prices in a manner that we believe will provideprice 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.  USES providesus with these kinds of management services and monitors gas delivery, ensures timelypayment of invoices, and reviews and reconciles the final invoices.

 

Wehave an arrangement with Wisconsin Gas Company to be the exclusive supplier oftransportation for natural gas for plant operations.

 

***Electricity***

 

Wepurchase electricity from the local utility that holds the service franchisefor the area in which our ethanol plant is located.  We have not entered into any agreement withthe local utility regarding electrical service.

 

**Sales andMarketing**

 

Weentered into an ethanol purchase and marketing agreement with Murex for the exclusiverights to purchase and market all ethanol produced by our plant.  This agreement expires October 23,2009.  Murex sold some of its Class Amember units in 2005 and still has a representative on our Board of Directors.

 

We also entered into a purchase and marketingagreement with United for the exclusive rights to purchase and market all ofthe distillers grains produced by our plant. The initial term of this agreement expired in October 2005 and wasrenewed.  This agreement renewsautomatically unless either party provides written notice of termination to theother 90 days prior to the end of the then current term.  At this time, we plan on renewing ouragreement with United in October, 2006.

 

**Competition**

 

We arein direct competition with other ethanol producers, many of whom have greaterresources than we do.  We expect thatadditional ethanol producers will enter the market as the demand for ethanolincreases.

 

***Competitive Ethanol Producers***

 

Accordingto the Renewable Fuels Association, U.S. Fuel Ethanol Production Capacity, January 2006Report, the largest ethanol producers include Archer Daniels Midland, Cargill,New Energy Corp., MGP Ingredients, Inc., VeraSun Energy Corporation andAventine Renewable Energy, Inc., all of which are capable of producingmany times the amount of ethanol we produce or expect to produce in the nearfuture.

 

Inaddition, we are aware that several regional ethanol production entities haverecently formed, or are forming, that are currently of a similar size and withsimilar resources to ours.  For example,Adkins Energy operates an ethanol plant in Lena, Illinois, which isapproximately 20 miles away.  The Adkinsplant is capable of producing 40 million gallons of ethanol annually.  In addition, Ace Ethanol in Stanley, Wisconsinis operating and is capable of producing 39 million gallons of ethanolannually.  Additionally, Utica Energy inOshkosh, Wisconsin is operating and capable of producing 48 million gallons ofethanol annually and United WI Grain Producers, LLC located in Friesland,Wisconsin is operating with a capacity of 49 million gallons.  We are also aware of several other potentialprojects in Wisconsin that may or may not begin production.  Wisconsin projects that rely on corn as a rawmaterial could compete with us in the market for corn as well as for other rawmaterials, and compete with us in selling ethanol and animal feed products.

 

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 

 

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the demand for or price of our ethanol. We expect to compete with other ethanol producers based on price and, toa lesser extent, delivery service.  Theethanol industry has grown to 91 production facilities in the UnitedStates.  It is estimated that thesefacilities and 32 facilities currently under construction could produce over 6billion 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, January 2006 Report.

 

U.S. PRODUCTION CAPACITY

million gallons per year (mmgy)

 
| **Company**                       | ** ** | **Location**                                                                                      | ** ** | **Feedstock**                                   | ** ** | **Current Capacity  (mmgy)** | ** ** | **Under Construction/  Expansions  (mmgy)** |
|-----------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------|------------|---------------------------------------------|
| Abengoa Bioenergy Corp.           |       | York, NE

Colwich, KS

Portales, NM

Ravenna, NE                                                  |       | Corn/milo

                                |       | 55

25

30

            |       | 88                                          |
| ACE Ethanol, LLC                  |       | Stanley, WI                                                                                       |       | Corn                                            |       | 39                           |       |                                        |
| Adkins Energy, LLC*               |       | Lena, IL                                                                                          |       | Corn                                            |       | 40                           |       |                                        |
| Advanced Bioenergy                |       | Fairmont, NE                                                                                      |       | Corn                                            |       |                         |       | 100                                         |
| AGP*                              |       | Hastings, NE                                                                                      |       | Corn                                            |       | 52                           |       |                                        |
| Agra Resources Coop. d.b.a. EXOL* |       | Albert Lea, MN                                                                                    |       | Corn                                            |       | 40                           |       | 8                                           |
| Agri-Energy, LLC*                 |       | Luverne, MN                                                                                       |       | Corn                                            |       | 21                           |       |                                        |
| Alchem Ltd. LLLP                  |       | Grafton, ND                                                                                       |       | Corn                                            |       | 10.5                         |       |                                        |
| Al-Corn Clean Fuel*               |       | Claremont, MN                                                                                     |       | Corn                                            |       | 35                           |       |                                        |
| Amaizing Energy, LLC*             |       | Denison, IA                                                                                       |       | Corn                                            |       | 40                           |       |                                        |
| Archer Daniels Midland            |       | Decatur, IL

Cedar Rapids, IA

Clinton, IA

Columbus, NE

Marshall, MN

Peoria, IL

Wallhalla, ND |       | Corn

Corn

Corn

Corn

Corn

Corn

Corn/barley |       | 1,070                        |       |                                        |
| ASAlliances Biofuels, LLC         |       | Albion, NE

Linden, IN                                                                            |       | Corn

Corn                                      |       |                         |       | 100

100                                    |
| Aventine Renewable Energy, LLC    |       | Pekin, IL

Aurora, NE                                                                             |       | Corn

Corn                                      |       | 100

50                      |       | 57                                          |
| Badger State Ethanol, LLC*        |       | Monroe, WI                                                                                        |       | Corn                                            |       | 48                           |       |                                        |
| Big River Resources, LLC*         |       | West Burlington, IA                                                                               |       | Corn                                            |       | 40                           |       |                                        |
| Broin Enterprises, Inc.      |       | Scotland, SD                                                                                      |       | Corn                                            |       | 9                            |       |                                        |
| Bushmills Ethanol, Inc.*     |       | Atwater, MN                                                                                       |       | Corn                                            |       |                         |       | 40                                          |
| Cargill, Inc.                |       | Blair, NE

Eddyville, IA                                                                          |       | Corn

Corn                                      |       | 85

35                       |       |                                        |
| Central Indiana Ethanol, LLC      |       | Marion, IN                                                                                        |       | Corn                                            |       |                         |       | 40                                          |
| Central MN Ethanol Coop*          |       | Little Falls, MN                                                                                  |       | Corn                                            |       | 21.5                         |       |                                        |

 

17

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| **Company**                          | ** ** | **Location**                 | ** ** | **Feedstock**  | ** ** | **Current Capacity  (mmgy)** | ** ** | **Under Construction/  Expansions  (mmgy)** |
|--------------------------------------|------------|------------------------------|------------|----------------|------------|------------------------------|------------|---------------------------------------------|
| Central Wisconsin Alcohol            |       | Plover, WI                   |       | Seed corn      |       | 4                            |       |                                        |
| Chief Ethanol                        |       | Hastings, NE                 |       | Corn           |       | 62                           |       |                                        |
| Chippewa Valley Ethanol Co.*         |       | Benson, MN                   |       | Corn           |       | 45                           |       |                                        |
| Commonwealth Agri-Energy, LLC*       |       | Hopkinsville, KY             |       | Corn           |       | 24                           |       | 9                                           |
| Corn, LP*                            |       | Goldfield, IA                |       | Corn           |       | 50                           |       |                                        |
| Cornhusker Energy Lexington, LLC     |       | Lexington, NE                |       | Corn           |       |                         |       | 40                                          |
| Corn Plus, LLP*                      |       | Winnebago, MN                |       | Corn           |       | 44                           |       |                                        |
| Dakota Ethanol, LLC*                 |       | Wentworth, SD                |       | Corn           |       | 50                           |       |                                        |
| DENCO, LLC*                          |       | Morris, MN                   |       | Corn           |       | 21.5                         |       |                                        |
| E3 Biofuels                          |       | Mead, NE                     |       | Corn           |       |                         |       | 24                                          |
| East Kansas Agri-Energy, LLC*        |       | Garnett, KS                  |       | Corn           |       | 35                           |       |                                        |
| ESE Alcohol Inc.                     |       | Leoti, KS                    |       | Seed corn      |       | 1.5                          |       |                                        |
| Ethanol2000, LLP*                    |       | Bingham Lake, MN             |       | Corn           |       | 32                           |       |                                        |
| Frontier Ethanol, LLC                |       | Gowrie, IA                   |       | Corn           |       |                         |       | 60                                          |
| Front Range Energy, LLC              |       | Windsor, CO                  |       | Corn           |       |                         |       | 40                                          |
| Glacial Lakes Energy, LLC*           |       | Watertown, SD                |       | Corn           |       | 50                           |       |                                        |
| Golden Cheese Company of California* |       | Corona, CA                   |       | Cheese whey    |       | 5                            |       |                                        |
| Golden Grain Energy, LLC*            |       | Mason City, IA               |       | Corn           |       | 40                           |       |                                        |
| Golden Triangle Energy, LLC*         |       | Craig, MO                    |       | Corn           |       | 20                           |       |                                        |
| Grain Processing Corp.               |       | Muscatine, IA                |       | Corn           |       | 20                           |       |                                        |
| Granite Falls Energy, LLC            |       | Granite Falls, MN            |       | Corn           |       | 45                           |       |                                        |
| Great Plains Ethanol, LLC*           |       | Chancellor, SD               |       | Corn           |       | 50                           |       |                                        |
| Green Plains Renewable Energy        |       | Shenandoah, IA               |       | Corn           |       |                         |       | 50                                          |
| Hawkeye Renewables, LLC              |       | Iowa Falls, IA

Fairbank, IA |       | Corn

Corn     |       | 50

                    |       | 50

100                                     |
| Heartland Corn Products*             |       | Winthrop, MN                 |       | Corn           |       | 36                           |       |                                        |
| Heartland Grain Fuels, LP*           |       | Aberdeen, SD

Huron, SD      |       | Corn

Corn     |       | 9

12                        |       | 18                                          |
| Heron Lake BioEnergy, LLC            |       | Heron Lake, MN               |       | Corn           |       |                         |       | 50                                          |
| Horizon Ethanol, LLC                 |       | Jewell, IA                   |       | Corn           |       |                         |       | 60                                          |
| Husker Ag, LLC*                      |       | Plainview, NE                |       | Corn           |       | 26.5                         |       |                                        |
| Illinois River Energy, LLC           |       | Rochelle, IL                 |       | Corn           |       |                         |       | 50                                          |
| Iowa Ethanol, LLC*                   |       | Hanlontown, IA               |       | Corn           |       | 50                           |       |                                        |
| Iroquois Bio-Energy Company, LLC     |       | Rensselaer, IN               |       | Corn           |       |                         |       | 40                                          |
| James Valley Ethanol, LLC            |       | Groton, SD                   |       | Corn           |       | 50                           |       |                                        |
| KAAPA Ethanol, LLC*                  |       | Minden, NE                   |       | Corn           |       | 40                           |       |                                        |
| Land O’ Lakes*                  |       | Melrose, MN                  |       | Cheese whey    |       | 2.6                          |       |                                        |
| Lincolnland Agri-Energy, LLC*        |       | Palestine, IL                |       | Corn           |       | 48                           |       |                                        |
| Lincolnway Energy, LLC*              |       | Nevada, IA                   |       | Corn           |       |                         |       | 50                                          |
| Liquid Resources of Ohio             |       | Medina, OH                   |       | Waste Beverage |       | 3                            |       |                                        |
| Little Sioux Corn Processors, LP*    |       | Marcus, IA                   |       | Corn           |       | 52                           |       |                                        |

 

18

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| **Company**                                 | ** ** | **Location**                     | ** ** | **Feedstock**              | ** ** | **Current Capacity  (mmgy)** | ** ** | **Under Construction/  Expansions  (mmgy)** |
|---------------------------------------------|------------|----------------------------------|------------|----------------------------|------------|------------------------------|------------|---------------------------------------------|
| Merrick/Coors                               |       | Golden, CO                       |       | Waste beer                 |       | 1.5                          |       | 1.5                                         |
| MGP Ingredients, Inc.                  |       | Pekin, IL

Atchison, KS          |       | Corn/wheat starch          |       | 78                           |       |                                        |
| Michigan Ethanol, LLC                       |       | Caro, MI                         |       | Corn                       |       | 50                           |       |                                        |
| Mid America Agri Products/Wheatland         |       | Madrid, NE                       |       | Corn                       |       |                         |       | 44                                          |
| Mid-Missouri Energy, Inc.*             |       | Malta Bend, MO                   |       | Corn                       |       | 45                           |       |                                        |
| Midwest Grain Processors*                   |       | Lakota, IA

Riga, MI             |       | Corn

Corn                 |       | 50

                    |       | 45

57                                      |
| Midwest Renewable Energy, LLC               |       | Sutherland, NE                   |       | Corn                       |       | 17.5                         |       | 4.5                                         |
| Minnesota Energy*                           |       | Buffalo Lake, MN                 |       | Corn                       |       | 18                           |       |                                        |
| Missouri Ethanol                            |       | Laddonia, MO                     |       | Corn                       |       |                         |       | 45                                          |
| New Energy Corp.                            |       | South Bend, IN                   |       | Corn                       |       | 102                          |       |                                        |
| North Country Ethanol, LLC*                 |       | Rosholt, SD                      |       | Corn                       |       | 20                           |       |                                        |
| Northeast Missouri Grain, LLC*              |       | Macon, MO                        |       | Corn                       |       | 45                           |       |                                        |
| Northern Lights Ethanol, LLC*               |       | Big Stone City, SD               |       | Corn                       |       | 50                           |       |                                        |
| Northstar Ethanol, LLC                      |       | Lake Crystal, MN                 |       | Corn                       |       | 52                           |       |                                        |
| Otter Creek Ethanol, LLC*                   |       | Ashton, IA                       |       | Corn                       |       | 55                           |       |                                        |
| Pacific Ethanol                             |       | Madera, CA                       |       | Corn                       |       |                         |       | 35                                          |
| Panhandle Energies of Dumas, LP             |       | Dumas, TX                        |       | Corn/Grain Sorghum         |       |                         |       | 30                                          |
| Parallel Products                           |       | Louisville, KY

R. Cucamonga, CA |       | Beverage waste             |       | 5.4                          |       |                                        |
| Permeate Refining                           |       | Hopkinton, IA                    |       | Sugars & starches |       | 1.5                          |       |                                        |
| Phoenix Biofuels                            |       | Goshen, CA                       |       | Corn                       |       | 25                           |       |                                        |
| Pine Lake Corn Processors, LLC*             |       | Steamboat Rock, IA               |       | Corn                       |       | 20                           |       |                                        |
| Platte Valley Fuel Ethanol, LLC             |       | Central City, NE                 |       | Corn                       |       | 40                           |       |                                        |
| Prairie Ethanol, LLC                        |       | Loomis, SD                       |       | Corn                       |       |                         |       | 60                                          |
| Prairie Horizon Agri-Energy, LLC            |       | Phillipsburg, KS                 |       | Corn                       |       |                         |       | 40                                          |
| Pro-Corn, LLC*                              |       | Preston, MN                      |       | Corn                       |       | 42                           |       |                                        |
| Quad-County Corn Processors*                |       | Galva, IA                        |       | Corn                       |       | 27                           |       |                                        |
| Red Trail Energy, LLC                       |       | Richardton, ND                   |       | Corn                       |       |                         |       | 50                                          |
| Redfield Energy, LLC                        |       | Redfield, SD                     |       | Corn                       |       |                         |       | 50                                          |
| Reeve Agri-Energy                           |       | Garden City, KS                  |       | Corn/milo                  |       | 12                           |       |                                        |
| Siouxland Energy & Livestock Coop* |       | Sioux Center, IA                 |       | Corn                       |       | 25                           |       |                                        |
| Siouxland Ethanol, LLC                      |       | Jackson, NE                      |       | Corn                       |       |                         |       | 50                                          |
| Sioux River Ethanol, LLC*                   |       | Hudson, SD                       |       | Corn                       |       | 55                           |       |                                        |
| Sterling Ethanol, LLC                       |       | Sterling, CO                     |       | Corn                       |       | 42                           |       |                                        |
| Tall Corn Ethanol, LLC*                     |       | Coon Rapids, IA                  |       | Corn                       |       | 49                           |       |                                        |
| Tate & Lyle                        |       | Loudon, TN                       |       | Corn                       |       | 67                           |       |                                        |
| The Andersons Albion Ethanol LLC            |       | Albion, MI                       |       | Corn                       |       |                         |       | 55                                          |

 

19

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| **Company**                               | ** ** | **Location**                     | ** ** | **Feedstock**     | ** ** | **Current Capacity  (mmgy)** | ** ** | **Under Construction/  Expansions  (mmgy)** |
|-------------------------------------------|------------|----------------------------------|------------|-------------------|------------|------------------------------|------------|---------------------------------------------|
| Trenton Agri Products, LLC                |       | Trenton, NE                      |       | Corn              |       | 35                           |       | 10                                          |
| United WI Grain Producers, LLC*           |       | Friesland, WI                    |       | Corn              |       | 49                           |       |                                        |
| US BioEnergy Corp.                        |       | Albert City, IA

Lake Odessa, MI |       | Corn

Corn        |       |                         |       | 100

45                                     |
| U.S. Energy Partners, LLC                 |       | Russell, KS                      |       | Milo/wheat starch |       | 48                           |       |                                        |
| Utica Energy, LLC                         |       | Oshkosh, WI                      |       | Corn              |       | 48                           |       |                                        |
| Val-E Ethanol, LLC                        |       | Ord, NE                          |       | Corn              |       |                         |       | 45                                          |
| VeraSun Energy Corporation                |       | Aurora, SD

Ft. Dodge, IA        |       | Corn

Corn        |       | 230                          |       |                                        |
| Voyager Ethanol, LLC*                     |       | Emmetsburg, IA                   |       | Corn              |       | 52                           |       |                                        |
| Western Plains Energy, LLC*               |       | Campus, KS                       |       | Corn              |       | 45                           |       |                                        |
| Western Wisconsin  Renewable Energy, LLC* |       | Boyceville, WI                   |       | Corn              |       |                         |       | 40                                          |
| Wind Gap Farms                            |       | Baconton, GA                     |       | Brewery waste     |       | 0.4                          |       |                                        |
| Wyoming Ethanol                           |       | Torrington, WY                   |       | Corn              |       | 5                            |       |                                        |
| Xethanol BioFuels, LLC                    |       | Blairstown, IA                   |       | Corn              |       | 5                            |       |                                        |
| **Total Current Capacity**                | ** ** |                             |       |              |       | **4336.4**                   |       |                                        |
| **Total Under Construction/Expansions**   | ** ** |                             |       |              |       |                         |       | **1981**                                    |
| **Total Capacity**                        | ** ** |                             |       |              |       | **6317.4**                   |       |                                        |

 

----

* farmer-owned

 

***Competitive Alternative Fuel Additives***

 

Wealso compete with producers of MTBE, a petrochemical derived from methanol whichcosts less to produce than ethanol.  MTBEis a commonly used oxygenate in fuels for compliance with Federal Clean Air Actmandates, and is a major competitor of ethanol. Many major oil companies produce MTBE, and strongly support its usebecause it is petroleum based.  Thesecompanies have significant resources to market MTBE and to influencelegislation and public perception of MTBE. These companies also have sufficient resources to begin production ofethanol should they choose to do so.

 

Alternativefuels, gasoline oxygenates and ethanol production methods are continually underdevelopment by ethanol and oil companies with far greater resources than wehave.  Development of new products andmethods of ethanol production by larger and financially more viable competitorscould provide them with significant competitive advantages over us and thuscould harm our business.

 

**Employees**

 

As of December 31, 2005, we employed 37 persons,in a full-time capacity, including 14 in ethanol production operations, 8****in general management, sales, administration and grainprocurement, and 15 in grain receiving, grain handling, maintenance and thelaboratory.  We do not expect to hire asignificant number of additional employees during the next 12 months.

 

20

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**EnvironmentalDisclosure**

 

We aresubject to extensive environmental regulation at the federal, state and locallevels.  Air quality at the plant isregulated by the U.S. Environmental Protection Agency, the Bureau of AirManagement and the Wisconsin Department of Natural Resources.  The Department of Natural Resources regulatesemissions of volatile organic compounds and hazardous air pollutants into theair.  Volatile organic compound emissionsare tested on a semi-annual basis, and we must submit semi-annual reports tothe Department of Natural Resources regarding these emissions tests.  We are required to obtain an air operatingpermit from the Department of Natural Resources and must obtain Department ofNatural Resources approval to make plant alterations that could change theemission levels.  The Department ofNatural Resources also regulates the water usage, wastewater discharge andhazardous waste under Wisconsin water pollution control and hazardous wastelaws.  Water usage and wastewatereffluent quality is monitored daily. Monthly reports regarding water usage and quality are filed with theDepartment of Natural Resources.  We alsoare required to submit periodic reports pursuant to the Wisconsin and Federal EmergencyPlanning Community Right-to-Know Act.  Atthe local level, we file semi-annual reports with the Green County EmergencyResponse Committee.

 

**RegulatoryPermits**

 

Anenvironmental consulting firm assisted us in the past, and continues to assistus, in obtaining our Air Pollution Construction and Operation Permit, a StormWater Discharge Permit and Storm Water Pollution Prevention Plan and advises uson environmental compliance generally. We also obtained various other environmental and operating permits, asdiscussed below.

 

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

 

Ourfacility is considered a Wisconsin synthetic minor source of regulated airpollutants.  The types of regulatedpollutants that may be found at our plant include, particulate matter, carbonmonoxide, nitrogen oxide, volatile organic compounds and sulfur dioxide.  To emit these agents during construction, weneeded an Air Pollution Construction Permit. We received our original Air Pollution Construction Permit on March 22,2001.

 

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 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. Air emissions testing was performed in April, 2004, which wepassed.  On June 25, 2004 wereceived the approval of an additional Modified Air Permit Application so thatwe could install a regenitive thermal oxidizer in our plant, to reduceadditional emissions from our plant.  On January 6,2005 we were awarded an Air Pollution Operation Permit, which is valid until January 5,2010.

 

We are also in good standing with the WisconsinDepartment of Natural Resources Bureau of Air Management.  We applied for and received permission to addadditional emissions control equipment which was installed and operational asof December 15, 2004.  Upon theinstallation of this equipment, additional air emissions testing was performedto verify that we are still in compliance with applicable law, which we are.

 

On August 30,2005, we submitted an Air Pollution Control Construction Permit application tothe Wisconsin Department of Natural Resources (“WDNR”) to authorize changes toour facility pursuant to the facility addition described previously.  We received our Air Pollution ControlConstruction Permit from the WDNR on November 1, 2005.  We are required to conduct air emissionstesting on our facility once the construction of the facility addition iscomplete to demonstrate compliance with the emission limitations on theConstruction Permit.  Followingsuccessful completion of this air emissions testing we will be issued an AirPollution Operation Permit.

 

21

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***Wisconsin Pollutant Discharge EliminationPermits***

 

We use approximately 66,500 gallons of water per day to cool our closedcircuit systems in the ethanol plant. We obtained a Wisconsin PollutantDischarge Elimination System general permit from the Department of NaturalResources to discharge the water into a nearby creek. We received this permiton July 18, 2002 and it is valid until July 31, 2007.

 

***Storm Water Discharge for IndustrialActivities Permit***

 

Before we could begin operating, we had to obtain a Storm WaterDischarge for Industrial Activities Permit from the Department of NaturalResources regarding our operations, which we received on April 9, 2001. Inaddition, we also prepared a Storm Water Pollution Prevention Plan outliningmeasures we plan to implement to prevent storm water pollution duringoperation.

 

***High Capacity Well Permit***

 

We drilled a 500,000****gallon per daywell near our ethanol plant. The Department of Natural Resources considers thisa high capacity well, and we have applied for and obtained a high capacity wellpermit. The high capacity well permit was issued on December 13, 2001. Thepermit allows for a maximum daily usage of 720,000 gallons of water per day andthe plant is currently consuming approximately 370,000 gallons per day ofwater.

 

***Spill Prevention, Control and CountermeasuresPlan***

 

Beforewe could begin operations, we had to prepare a spill prevention, control andcountermeasures plan. The plan outlines our spill prevention measures for oilproducts such as ethanol. The plan was preliminarily reviewed and approvedprior to when we began operations, and was certified by a professional engineeron January 3, 2004.

 

***Risk Management Program***

 

We useanhydrous ammonia in our production process. Therefore, we had to develop a riskmanagement program to address handling and use of the ammonia and gases emittedfrom such use. We established a prevention program to prevent spills or leaksof ammonia, and an emergency response program in the event of spills, leaks,explosions or other events that may lead to the release of ammonia into thesurrounding area. We conducted a hazard assessment and prepared models toassess the impact of an ammonia release into the surrounding area. The programwas presented at a public meeting.

 

***Regulations Generally; Nuisance***

 

We are subject to the regulations of the United States EnvironmentalProtection Agency, the Wisconsin Department of Natural Resources and theOccupational Safety and Health Administration (“OSHA”). EPA, Wisconsin DNR andOSHA rules can and do change, and any such changes could result in greaterregulatory burdens on us. Our ethanol production requires us to emit carbondioxide into the air, even in light of our arrangement to sell carbon dioxide. CurrentWisconsin law regulating emissions does not restrict or prevent us fromemitting carbon dioxide gas into the air, but this could change in the future. Wecould also be subject to environmental or nuisance claims from adjacentproperty owners or residents in the area arising from noise, foul smells orother air or water discharges from the plant. Further, we are aware ofneighborhood opposition to our facility in the past, but none currently. Thisopposition could arise at any time and result in claims for nuisance, whichcould lead to increased compliance costs and monetary damages.

 

**ITEM2. PROPERTIES**

** **

Our principal executive office is located at our ethanol plant site,820 West 17th Street, Monroe, Wisconsin 53566. We presently ownapproximately 28 acres of land and improvements thereon which comprise ourplant. The plant currently grinds approximately 18 million bushels of corn eachyear into approximately 50 million gallons of

 

22

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ethanol. We also own, throughour wholly owned subsidiary Spring Valley Ventures, LLC, approximately 16.8acres of land and improvements thereon at S4121 County Highway T, Brodhead,Wisconsin, which comprises our grain elevator, bins and equipment.

 

Our primary lender holds a mortgage on our land (and improvements)where the facility and grain elevator are situated as security for loansprovided to us. We believe our property is adequately covered by insurance. Weanticipate using all of our owned real estate in the operation of our ethanolplant in the foreseeable future.

 

Generally speaking, the ethanol facility consists of the followingbuildings:

•              a processing building containinglaboratories, a control room, and processing equipment;

•              a grain receiving buildingcontaining a control room and grain receiving and transfer apparatus;

•              an administrative buildingcontaining offices; and

•              railtracks and rail spur, paved access roads, dryers, evaporators, fermenters,grain bins, and storage facilities for ethanol and distillers grains.

 

Generally speaking, the grain elevator consists of the followingbuildings:

•              a grain receiving and transferapparatus;

•              an administrative building; and

•              rail tracks and rail spur, pavedaccess roads, dryers and grain bins.

 

**ITEM3. LEGAL PROCEEDINGS**

** **

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

** **

None.

 

**PART II**

 

**ITEM 5. MARKET FOR REGISTRANT’S MEMBER UNITS,RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

** **

**MarketInformation**

** **

**Thereis no public trading market for our securities and we do not expect one todevelop in the foreseeable future.**

** **

**Holders**

** **

**As ofMarch 1, 2006, there were approximately 489 unit holders of record of our ClassA member units determined by an examination of our transfer book.**

** **

**Distributions**

** **

On January 27, 2005, we declared a cash distribution of $388 per ClassA member unit payable on February 24, 2005. On January 26, 2006, wedeclared a cash distribution of $500 per Class A member unit payable on March2, 2006. The total amount of the 2006 distribution is $9,887,000, which wasapproved by our bank and is in compliance with our lending covenants.

 

**Thepayment and rate of future distributions, if any, are subject to review by theBoard of Directors in light of our financial condition, results of operations,capital requirements and other factors deemed relevant at that time. Loancovenants mandate that $4 million of working capital must be accumulated priorto making any distributions to the unit holders, unless waived. Additionalcovenants require 25% of any excess cash flow (as that term is defined in**

** **

**23**

----

** **

**such senior debt agreements) to be applied toward theprincipal of the senior debt and that we cannot make any distributions withoutthe consent of the holders of our senior debt, unless waived.**

** **

**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

** **

**Wecurrently have no equity compensation plan.**

** **

**RecentSales of Unregistered Securities; Use of Proceeds from Unregistered Securities**

** **

**Wehad no sales of unregistered securities during the past three fiscal years.**

** **

**ITEM 6. SELECTED FINANCIAL DATA**

** **

**We completed construction of our plant and started operationsin October 2002. The selected financial data sets forth our summary historicalfinancial data as of and for the years ended December 31, 2005, 2004, 2003 and2002, and was derived from the audited financial statements and notes theretofor that year. The selected historical financial data is qualified in itsentirety by, and should be read in conjunction with, “Management’s Discussionand Analysis of Financial Condition and Results of Operations” and thefinancial statements and the notes thereto included elsewhere in this Form 10-K.For additional information relating to our operations, see “Business” and “Properties.”**

** **

** **
| ** **             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003**   | ** ** | **2002(1)** | ** ** |
|------------------------|------------|----------|------------|----------|------------|------------|------------|-------------|------------|
| Net Sales              |       | $        | 97,652,135 |     | $          | 92,084,766 |       | $           | 74,149,226 |   | $ | 10,125,926 |   |
| Operating Income       |       | $        | 14,443,293 |     | $          | 13,672,927 |       | $           | 13,686,293 |   | $ | (1,888,821 | ) |
| Total Assets           |       | $        | 66,612,129 |     | $          | 60,201,606 |       | $           | 56,186,006 |   | $ | 52,682,599 |   |
| Long-Term Obligations  |       | $        | 20,808,299 |     | $          | 17,635,157 |       | $           | 24,043,579 |   | $ | 31,240,273 |   |
| Net Income per Unit    |       | $        | 673.67     |     | $          | 626.30     |       | $           | 602.43     |   | $ | (114.18 | ) |
| Distributions per Unit |       | $        | 500        |     | $          | 388        |       | $           | 250        |   | $ | 0 |   |

** **

----

**(1)           Fiscal Year 2002 represents only apartial year of operations because we did not complete**construction of our ethanol plant and commence operationsuntil October 2002.

** **

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

** **

Exceptfor the historical information, the following discussion containsforward-looking statements that are subject to risks and uncertainties. Actualresults may differ substantially from those described below, including thoserisks described in the section entitled “Risk Factors” and elsewhere in thisannual report. Our discussion and analysis of the financial condition andresults of operations of the Company should be read in conjunction with thefinancial statements and related notes.

 

**Applicationof Critical Accounting Policies**

** **

Accounting policies, methods and estimates are an integral part of our consolidated financial statements and are based upon management’s current judgments. Certain accounting policies, methods and estimates are particularly important because of their significance to the financial statements. Note A of the Notes to Financial Statements includes a summary of the significant accounting policies and methods we use. The following is a discussion of what we believe to be the most critical of these policies and methods.

 

***Revenue Recognition***

 

The Company recognizes revenue at the time title to the goods and all risks of ownership transfer to customers. This occurs upon the date of shipment.

 

24

 

We recognize revenue from federal and state incentive payments when all the requirements of the program have been met and payments are assured. The payments to be received by us may change due to a variety of factors, including legislative changes and the amount of ethanol produced by us and in the marketplace.

 

***Inventories***

 

Inventories are stated at the lower of cost or net realizable value. Costs are determined using the first-in, first-out (FIFO) method.

 

***Derivatives***

 

We enter into derivativecontracts to manage the Company’s exposure to price risk related to forecastedcorn and natural gas purchases, forward corn purchase contracts and forecastedethanol sales. We do not typically enter into derivative instruments other thanfor hedging purposes. All derivative contracts are recognized on the December31, 2005 and 2004 balance sheets at their fair market value.

 

FASB Statement No. 133,“Accounting for Derivative Instruments and Hedging Activities”. (“FAS 133”)requires a company to evaluate its contracts to determine whether the contractsare derivatives. Certain contracts that literally meet the definition of aderivative may be exempted from FAS 133 as normal purchases or normal sales. Normalpurchases and normal sales are contracts that provide for the purchase or saleof something other than a financial instrument or derivative instrument thatwill be delivered in quantities expected to be used or sold over a reasonableperiod in the normal course of business. Contracts that meet the requirementsof normal are documented as normal and exempted from the accounting andreporting requirements of FAS 133.

 

On the date thederivative instrument is entered into, we designate the derivative as either(1) a hedge of the fair value of a recognized asset or liability or of an unrecognizedfirm commitment (fair value hedge), (2) a hedge of a forecasted transaction orof the variability of cash flows to be received or paid related to a recognizedasset or liability (cash flow hedge) or (3) will not designate the derivativeas a hedge. Changes in the fair value of a derivative that is designated as andmeets all the required criteria for a fair value hedge, along with the gain orloss on the hedged asset or liability that is attributable to the hedged risk,are recorded in current period earnings. Changes in the fair value of aderivative that is designated as and meets all the required criteria for a cashflow hedge are recorded in accumulated other comprehensive income andreclassified into earnings as the underlying hedged item affects earnings. Changesin the fair value of a derivative that is not designated as a hedge arerecorded in current period earnings.

 

At December 31, 2005 and2004 no derivative contracts were designated as hedges for accounting purposesand all changes in market value have been recognized through cost of sales. Theamount recorded for derivative contracts was a liability of $100,032 and$1,989,565 at December 31, 2005 and 2004. The Company has recorded an increaseto cost of sales of $1,385,370, $2,205,578 and $621,722 related to itsderivative contracts for the years ended December 31, 2005, 2004 and 2003.

 

**Results of Operations for the Years Ended December 31, 2005 and 2004**

 

We are engaged in the production and sale of fuel grade ethanol. Ourplant was originally designed to annually process approximately 14 millionbushels of corn into approximately 40 million gallons of ethanol. In 2005, weprocessed approximately 18 million bushels of corn into approximately 50million gallons of ethanol. In addition, we sell distillers grains, a principalco-product of the ethanol-production process, which we sell as distillersmodified wet grains and distillers dried grains. We also process carbondioxide, which we started selling in July, 2005. In 2005, we produced approximately168,000 tons of distillers grains and processed 97,000 tons of carbon dioxide. Wecompleted construction of our ethanol plant and commenced operations in October2002.

 

25

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The following table shows sales and revenues, cost of sales, operatingexpenses and other items as a percentage of total sales and revenues in ourstatements of income for the years ended December 31, 2005 and 2004:

 
| ** **                                    | ** ** | **2005**   | ** ** | **2004** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------|------------|
|                                          |       |       |       |     |       |   |   |   |   |
| Sales and revenues                            |       | $          | 97,652,135 |     | 100.0      | % | $ | 92,084,766 |   | 100.0 | % |
| Cost of sales                                 |       | 79,488,978 |       | 81.4     | %          | 75,471,115 |   | 82.0 | % |
| Gross margin                                  |       | 18,163,157 |       | 18.6     | %          | 16,613,651 |   | 18.0 | % |
|                                          |       |       |       |     |       |   |   |   |   |
| Selling, general and administrative  expenses |       | 3,284,996  |       | 3.4      | %          | 2,940,724 |   | 3.2 | % |
|                                          |       |       |       |     |       |   |   |   |   |
| Operating income                              |       | 14,878,161 |       | 15.2     | %          | 13,672,927 |   | 14.8 | % |
|                                          |       |       |       |     |       |   |   |   |   |
| Interest expense                              |       | (1,591,002 | )          | 1.6      | %          | (1,311,346 | ) | 1.4 | % |
| Interest income                               |       | 34,056     |       | 0        | %          | 22,889 |   | 0 | % |
|                                          |       |       |       |     |       |   |   |   |   |
| Net income                                    |       | $          | 13,321,215 |     | 13.6       | % | $ | 12,384,470 |   | 13.4 | % |

** **

***Sales and Revenue***

** **

Our sales and revenues are divided into six categories based upon the source from which they are derived: sales of ethanol, sales of distillers grains, sales of carbon dioxide, marketing corn, ethanol supports and gas station sales. For the years ended 2005 and 2004, we derived approximately 78.4%****and 78.3%****of our sales and revenues from the sale of ethanol. Approximately 12.4%****and 17.0%****of our sales and revenues were derived from the sale of distillers grains for the years ended 2005 and 2004. Approximately 0.7% and 0.3% of our sales and revenues were derived from the sale of carbon dioxide for the years ended 2005 and 2004. The marketing of corn accounted for approximately 7.3%****and 2.2%****of our total sales and revenues during 2005 and 2004. Sales of E-85, E-10 and biodiesel, through our gas station, comprised approximately 0.3% of total sales for 2005. Ethanol supports accounted for 0.8%****and 2.2%****of our total sales and revenues for the year ended 2005 and 2004. The remaining 0.1% of sales for 2005 were from rental and miscellaneous income sources.

 

Our sales and revenues were higher in 2005 over 2004 due primarily to higher ethanol prices and increased ethanol production. Net gallons of denatured ethanol sold totaled 50,411,806 in fiscal 2005 compared to 49,041,928 in fiscal 2004. The average per gallon price we received for our ethanol sold for 2005 increased approximately 3.4% compared to the twelve months ended December 31, 2004. We sold approximately 1,369,878 more gallons of ethanol in 2005 as compared 2004. We believe that sales of ethanol, distillers grains and carbon dioxide will comprise roughly the same percentage of our aggregate sales and revenue for 2006 as our estimated sales and revenues from ethanol supports will be negligible in 2006. Further, while we foresee making new sales of corn protein concentrate and corn germ once our facility addition is completed, we do not expect the value of those sales to be significant in 2006. Additionally, we expect sales of carbon dioxide to exceed 100,000 tons in 2006 with revenues of approximately $812,000.

 

***Cost of Sales***

** **

**Ourcost of sales as a percentage of our total sales and revenues were 81.4% and82.0%**for the years ended 2005 and 2004. The decrease in cost ofsales from 2004 to 2005 is primarily due to a reduction in the cost of corn,our principal input commodity. We received approximately $.8 million and $2million in government incentive payments for the years ended 2005 and 2004. Weanticipate that ethanol supports from the federal or state government in 2006will be negligible.

** **

***Selling, General and Administrative Expenses***

** **

**Ourselling, general and administrative expenses as a percentage of total sales andrevenues were 3.4%**and 3.2%for the years ended 2005 and 2004. Excluding ethanolsupports, our total sales and revenues increased by

** **

**26**

----

** **

**approximately $6.8 million or 7.6% from the year ended 2004to the year ended 2005, while our selling, general and administrative expensesincreased by approximately $344,272 or 11.7%. The increase is due primarily tocosts associated with the opening of our Smart Station. We believe that ourselling, general and administrative expenses will remain consistent as apercentage of sales and revenues in 2006.**

** **

***Interest Expense/Income and Other Income***

** **

**Ourinterest expense as a percentage of total sales and revenues were 1.6%**and 1.4%for the years ended 2005 and2004. Interest expense was $1,591,002 and $1,311,346 for 2005 and 2004. Interestexpense increased due to the Company refinancing our existing debt on June 29,2005 and writing-off approximately $435,000 of the unamortized balance offinancing costs from the original plant construction financing. We began ourfiscal year 2005 with debt financing totaling approximately $21 million andended the fiscal year with debt financing totaling approximately $23 million. Thisincrease is due to the refinancing of our debt obligations relating to theconstruction of the facility addition.

** **

**Ourinterest income and other income as a percentage of total sales and revenueswas negligible for the years ended 2005 and 2004. We do not expect to receiveany significant interest income or other income unrelated to our sales andrevenue in 2006.**

** **

***Corn Procurement***

 

In 2005, we purchased approximately 18.1 million bushels of grain forprocessing. In 2004, we purchased approximately 17.9 million bushels of grainfor processing. We currently have approximately 23% of our fiscal 2006 grainrequirements purchased, which is equivalent to approximately 3 months ofproduction. Last year at approximately this time we had roughly 70% of ourfiscal 2005 grain requirements purchased, which was equivalent to approximately9 months of production.

 

**Results of Operations for the Years Ended December 31, 2004 and 2003**

 

The following table shows sales and revenues, cost of sales, operatingexpenses and other items as a percentage of total sales and revenues in ourstatements of income for the years ended December 31, 2004 and 2003:

 

 
| ** **                                    | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------|------------|
|                                          |       |       |       |     |       |   |   |   |   |
| Sales and revenues                            |       | $          | 92,084,766 |     | 100.0      | % | $ | 74,149,226 |   | 100.0 | % |
| Cost of sales                                 |       | 75,471,115 |       | 82.0     | %          | 57,799,611 |   | 78.0 | % |
| Gross margin                                  |       | 16,613,651 |       | 18.0     | %          | 16,349,615 |   | 22.0 | % |
|                                          |       |       |       |     |       |   |   |   |   |
| Selling, general and administrative  expenses |       | 2,940,724  |       | 3.2      | %          | 2,663,322 |   | 3.6 | % |
|                                          |       |       |       |     |       |   |   |   |   |
| Operating income                              |       | 13,672,927 |       | 14.8     | %          | 13,686,293 |   | 18.4 | % |
|                                          |       |       |       |     |       |   |   |   |   |
| Interest expense                              |       | (1,311,346 | )          | 1.4      | %          | (1,846,937 | ) | 2.5 | % |
| Interest and other income                     |       | 22,889     |       | 0        | %          | 73,123 |   | 0.1 | % |
|                                          |       |       |       |     |       |   |   |   |   |
| Net income                                    |       | $          | 12,384,470 |     | 13.4       | % | $ | 11,912,479 |   | 16.1 | % |

** **

***Sales and Revenue***

** **

For fiscal year 2004, our sales and revenues are divided into five categories based upon the source from which they are derived: sales of ethanol, sales of distillers grains, sales of carbon dioxide, marketing corn and ethanol supports. For the years ended 2004 and 2003, we derived approximately 78.3%****and 70.2%****of our sales and revenues from the sale of ethanol. Approximately 17.0%****and 14.5%****of our sales and revenues were derived from the sale of distillers grains for the years ended 2004 and 2003. Approximately 0.3% of our sales and revenues were

 

27

 

derived from the sale of carbon dioxide for the year ended 2004. We did not have any sales of carbon dioxide for the year ended 2003. The marketing of corn accounted for approximately 2.2%****and 1.5%****of our total sales and revenues during 2004 and 2003. The remaining 2.2%****and 13.8%****of our total sales and revenues for the year ended 2004 and 2003 were from ethanol supports.

 

***Cost of Sales***

** **

**Ourcost of sales as a percentage of our total sales and revenues were 82% and 78%**for the years ended 2004 and2003. Since 2003 was our first full year of operations, we were able to captureeconomies of scale and such efficiencies in our production reduced the cost ofsales as a percentage of total sales and revenues, excluding ethanol supports,during 2004. We received approximately $2 million and $10 million in productionincentives for the years ended 2004 and 2003 causing our total cost of salesfor 2004 to increase as a percentage of total sales.

** **

***Selling, General and Administrative Expenses***

** **

**Ourselling, general and administrative expenses as a percentage of total sales andrevenues were 3.2%**and 3.6%for the years ended 2004 and 2003. Excluding ethanolsupports, our total sales and revenues increased by approximately $26.1 millionor 40.9% from the year ended 2003 to the year ended 2004, while our selling,general and administrative expenses increased by approximately $277,000 or10.4%.

** **

***Interest Expense/Income and Other Income***

** **

**Ourinterest expense as a percentage of total sales and revenues were 1.4%**and 2.5%for the years ended 2004 and2003. Interest expense was $1,311,346 and $1,846,937 for 2004 and 2003. Interestexpense decreased due to the decline of our outstanding debt. We began ourfiscal year 2004 with debt financing totaling approximately $27.1 million andended the fiscal year with debt financing totaling approximately $21.0 million.Our interest income and other income as a percentage of total sales andrevenues were 0%and 0.1%for the years ended 2004 and 2003.

** **

**Trendsand Factors that May Affect Future Operating Results**

** **

***Ethanol Supports***

** **

Asdescribed in Item 1 – Business, we receive significant benefits from federaland state statutes, regulations and programs and the trend at the governmentallevel appears to be to continue to try to provide economic support to theethanol industry. Notwithstanding the above, changes to federal and statestatutes, regulations or programs could have an adverse effect on our business.Recent federal legislation, however, has benefited the ethanol industry. In2005, the Energy Policy Act was passed which contained a new support program,the RFS, which requires fuel refiners to use a certain minimum amount ofrenewable fuels (including ethanol) which will rise to 7.5 billion gallons by2012. The Energy Policy Act also provides a small producer credit allowingqualifying producers to deduct form their federal income taxes $0.10 per gallonfor the first 15 million gallons of ethanol produced in a given year. TheVEETC, which provides a volumetric ethanol excise tax credit of 5.1 cents pergallon of ethanol blended at 10%, also encourages refiners and gasolineblenders to use ethanol.

 

Similarly,the Wisconsin legislature is considering a bill to mandate that all gasolinesold in Wisconsin be blended with 10% ethanol. This legislation could increasetotal ethanol demand in Wisconsin to approximately 180 million gallons fromapproximately 120 million gallons today. The failure to pass this newlegislation, or the removal of, or changes to, this legislation and programscould significantly impact our business and the ethanol industry.

 

Further,clean air standards mandated by federal agencies continue to require majorpopulation centers to blend ethanol into their gasoline supplies as anoxygenate, in order to reduce harmful emissions. These mandates have beenchallenged legally in certain metropolitan areas. We could be significantly andadversely impacted by an unsuccessful outcome in this litigation, or by theremoval of or adverse changes to these standards.

 

28

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***Competition and Product Demand***

** **

**Ethanoldemand in the United States in 2005 was approximately equal to ethanolproduction in the United States in 2005 at 4.3 billion gallons. Plans toconstruction new ethanol plants or expand existing plants have been announcedwhich would increase ethanol production (if all plants and expansions arecompleted) to approximately 6.3 billion gallons.**

** **

**Ethanoldemand is influenced primarily by its cost in relation to availability and costof gasoline and other octane enhancing products, and also by availability ofalternative oxygenates (where oxygenated fuels are required). The dramaticincrease in gasoline prices in 2005 has increased demand for ethanol as a fuelextender, as the net cost of ethanol to blenders became less than unblendedgasoline. With continued strong oil prices, and a corresponding increase ingasoline pricing, ethanol has become a much more competitive product in themarketplace. While a similarly dramatic decrease in the price of oil would havea negative effect on ethanol demand, such a decrease is not currentlyanticipated by most industry analysts. This increasing interest in ethanolcould result in additional demand for ethanol and also additional productioncapacity being planned and built. The Renewable Fuels Association is predictingan additional 2 billion gallons of ethanol production in the next fourteenmonths. This additional production will come both from new plants already underconstruction and existing plants that are currently expanding.**

** **

Negative publicity received by a competing oxygenate of ethanol, MTBE, in California and other states has also affected ethanol demand. Based on the discovery of MTBE in local water supplies, then California Governor Gray Davis issued an executive order in March of 1999 calling for the elimination of MTBE from California gasoline supplies by December 31, 2002. During 2004 and 2005, we shipped a significant quantity of ethanol to California. Other states have also legislated restrictions on the use of MTBE on the basis that the environmental risk of its use outweighs the air quality benefit. Under the provisions of the federal 1990 Clean Air Act, gasoline used in certain air quality “non-attainment” areas must contain a certain oxygen content during the wintertime months of September through March. Ethanol and MTBE are the two most common oxygenates. When MTBE use is limited, ethanol demand and usage will be substantially increased. The east coast areas of New York and Connecticut began using ethanol blended gasoline as of January 1, 2005, thus further increasing demand. The continued enforcement of the oxygenate standard could have a significant positive impact on ethanol demand. The replacement of MTBE with ethanol in California, Connecticut and New York will require approximately 1.7 billion gallons of ethanol each year to be consumed in those areas.

 

**Nationally,there is also a movement to eliminate MTBE. In addition to individual stateswhich have restricted its use, federal legislation (as discussed above) hasbeen proposed which has focused on a compromise solution which would phase outMTBE, eliminate the oxygen requirement of the Clean Air Act, and replace itwith a renewable fuels content requirement that gradually increases over thenext several years. If this solution were adopted, we believe that it wouldsignificantly increase the demand for ethanol over this time period. In short,current law is favorable to ethanol in that it requires oxygenate blending. IfMTBE usage is reduced and the law is not changed, or if the oxygen requirementis replaced with a similar “renewable fuels” requirement, the ethanol industrystands to see stronger demand. Conversely, the elimination of the oxygenrequirement without adopting a renewable fuels requirement (or other similarincentive for ethanol blending), could have a significantly negative impact onboth ethanol demand and pricing.**

** **

**Wehave traditionally sold a majority of our fuel ethanol production based onshort-term contracts. We are now attempting to make greater use of longer-termcontracts to sell fuel ethanol to take advantage of the relatively higher pricefor ethanol. We believe that this strategy will provide a better basis forlong-term planning, especially in the areas of production and marginpredictability. As of February 12, 2006, we have contracted to sell 72% of ourestimated ethanol production through December 2006.**

** **

***Commodity Prices***

** **

**Ourprimary grain feedstock is corn. The cost of corn is dependent upon factorsthat are generally unrelated to those affecting the price of ethanol. Cornprices generally vary with international and regional grain supplies, and**

** **

**29**

----

** **

**can be significantly affected by weather, planting andcarryout projections, government programs, exports, and other international andregional market conditions.**

** **

**Dueto the significant expansion of the ethanol industry, corn futures haverecently started to respond to this new demand. This trend is likely tocontinue but certainly is not the only factor. Factors such as USDA estimatesof acres planted, export demand and domestic usage also have significanteffects on the corn market. Ultimately, weather has and will probably continueto weigh the heaviest on the corn market. Current USDA estimates show a 2billion bushel excess supply of corn from 2005. This large amount of excesscorn should help limit the volatility of, and increases in, corn prices wellinto the 2006 spring planting season. Then other factors such as acres plantedand weather could start to have more of an impact and lead to potentiallyvolatile and higher corn prices.**

** **

***Natural Gas Prices***

** **

**Naturalgas is an important input in our manufacturing process. We use natural gas todry distillers grains for storage and transportation over longer distances. Thisallows us to market distillers grains to broader livestock markets in theUnited States. Throughout 2005, natural gas prices were available at pricesexceeding historic average prices. Our current natural gas usage is approximate121,000 British thermal units per month. We expect natural gas prices to remainhigh and possibly increase at least during the winter months of 2005-2006.**

** **

**Dueto the active hurricane season in late 2005 that disrupted up to 29% of thenatural gas wells, natural gas prices became historically high and volatile andwe expect this trend to continue into 2006. Natural gas prices also tend tofollow crude oil prices. Crude oil also hit historic highs during 2005 and weexpect 2006 to be similar. We are currently 52% hedged on natural gas for thebalance of 2006.**

** **

**Liquidityand Capital Resources**

** **

As of December 31, 2005, we had cash and cash equivalents of$1,526,528, current assets of $12,962,798 and available unused revolving loanproceeds of $9 million. For the year ended 2005, cash provided by operatingactivities was $14,578,273, cash paid for property and equipment was $9,977,465and net cash used in financing activities was $6,013,663.

 

On June 29, 2005, we entered into a Credit Facility with Agstar. TheCredit Facility was structured as two term loans in the aggregate amount of$15,491,087 (the “Term Loan”), a convertible loan in the amount of $20,000,000(the “Convertible Loan”), and a revolving loan in the amount of $9 million (the“Revolving Loan”). The Credit Facility replaces the Company’s prior creditfacility with First National Bank of Omaha (the “Prior Facility”), and alsoallows the Company to pay costs incurred by the Company under the Design-BuildAgreement (as defined below) and related agreements, and to provide foroperating capital.

 

The Term Loan is structured as two Promissory Notes in the originalprincipal amounts of $5,891,087 (“Note #1”) and $9,600,000 (“Note #2”). Note #1and  Note #2 bear interest at a fixedrate of 6.97%. The Convertible Loan and the Revolving Loan bear interest at avariable rate equal to 2.75% above the LIBOR rate. The Company has the optionto convert the Convertible Loan to a fixed rate loan under certain conditions,and the interest rates for Note #1, Note #2, the Convertible Loan and theRevolving Loan are subject to adjustment based on certain capital conditions ofthe Company.

 

Borrowings under the Credit Facility are secured by substantially allof the assets of the Company. The Credit Facility contains financial and othercovenants, and includes restrictions on certain activities of the Company, suchas incurring additional debt. If an event of default, such as failure to makerequired payments or a failure to comply with covenants after any applicablegrace period, were to occur under the Credit Facility, Agstar would be entitledto, among other remedies, declare all amounts outstanding under the facilityimmediately due and payable, and to enforce its security interest and mortgageon the assets of the Company. The Company is in compliance with thosecovenants.

 

30

----

 

To date we have spent approximately $7 million in construction andrelated costs on the facility addition. We anticipate that capital expendituresfor the next year will be approximately $18 million for the continued constructionof the build-out of our facility. We do not anticipate any other materialexpenditures over the next year.

 

**Off-BalanceSheet Arrangements**

** **

**Wehave not entered into any off-balance sheet arrangements that have or arereasonably likely to have a current or future effect on our financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources that are material to investors.**

** **

**ContractualObligations**

** **

**Wehave the following contractual obligations as of December 31, 2005:**

** **
| ** **                       | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-3 Years** | ** ** | **More than 5  Years** | ** ** |
| Long-term debt                   |       | $                                         | 22,952,862 |   | $ | 2,144,563 |   | $ | 8,528,557 |   | $ | 12,279,742 |   |
| Operating leases                 |       | 0                                         |       | 0 |   | 0 |   | 0 |   |
| Total contractual obligations    |       | $                                         | 22,952,862 |   | $ | 2,144,563 |   | $ | 8,528,557 |   | $ | 12,279,742 |   |

** **

**Recent Accounting Pronouncements**

 

In November 2004, theFASB issued FASB Statement No. 151, “Inventory Costs – an amendment of ARB No.43” (“FAS 151”), which is the result of its efforts to converge U.S. accountingstandards for inventories with International Accounting Standards. FAS No. 151requires idle facility expenses, freight, handling costs, and wasted material(spoilage) costs to be recognized as current-period charges. It also requiresthat allocation of fixed production overheads to the costs of conversion bebased on the normal capacity of the production facilities. FAS No. 151 will beeffective for inventory costs incurred during fiscal years beginning after June15, 2005. The adoption of FAS 151 will have no impact on the Company’sconsolidated financial position, results of operations or cash flows.

 

In May 2005, the FASBissued FASB Statement No. 154, “Accounting Changes and Error Corrections—areplacement of APB Opinion No. 20 and FASB Statement No. 3” (“FAS154”). FAS 154 replaces APB Opinion No. 20, “Accounting Changes” and FASNo. 3 “Reporting Accounting Changes in Interim Financial Statements,” andchanges the requirements for the accounting for and reporting of a change inaccounting principle. FAS 154 may require restatement of prior period financialstatements for certain changes in accounting principles. The retroactiveapplication of a change in accounting principle should be limited to the directeffect of the change. Changes in depreciation, amortization or depletionmethods should be accounted for as a change in accounting estimate. Correctionsof accounting errors will be accounted for under the guidance contained in APBOpinion No. 20. The effective date of this new pronouncement is for fiscalyears beginning after December 15, 2005 and prospective application isrequired. The Company does not expect the adoption of FAS 154 to have amaterial impact on its consolidated financial statements.

 

The Company does notexpect that the adoption of other recent accounting pronouncements will have amaterial impact on its financial statements.

 

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

** **

Our operations are exposed to market risksprimarily as a result of changes in interest rates and commodity prices. We donot use derivative financial instruments for speculative or trading purposes.

 

31

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***Interest Rate Risk***

** **

We are exposed to market risk from changes in interest rates. Exposureto interest rate risk results from holding our credit agreements.  Thespecifics of each credit agreement are discussed in greater detail in theLiquidity and Capital Resources section of Management’s Discussion and Analysisof Financial Condition and Results of Operation.  A hypothetical 1%increase in interest rates applied to exposed liabilities as of December 31,2005 would result in additional interest expense of approximately $200,000 forthe remainder of 2006.

 

We use debt to finance our expenditures. Theseagreements expose us to market risk related to changes in interest rates.

 

The following table presents the carrying andfair value of our debt along with average interest rates. Fair values arecalculated as the net present value of the expected cash flows of the financialinstruments:

 

 
| ** **                          | ** ** | **Expected Maturity Dates** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| **Financial  Instrument**           | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 & After** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
|                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Term  Loan to AgStar                |       | 1,143,451                             |       | 1,225,746 |   | 1,313,963 |   | 1,408,530 |   | 9,945,920 |   | 15,037,610 |   | 15,037,610 |   |
| Interest  Rate                      |       | 6.97                                  | %          | 6.97 | % | 6.97 | % | 6.97 | % | 6.97 | % |   |   |   |   |
| Convertible  Loan Payable to AgStar |       | 53,423                                |       | 168,055 |   | 180,401 |   | 193,654 |   | 1,709,606 |   | 2,305,139 |   | 2,305,139 |   |
|                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  Rate                      |       | Libor  +2.75                          | %          | Libor  +2.75 | % | Libor  +2.75 | %  | Libor

+2.75 | % | Libor

+2.75 | % |   |   |   |   |
| Note  Payable to Utility Company    |       | 344,626                               |       | 2,229,753 |   |   |   |   |   |   |   | 2,574,379 |   | 2,574,379 |   |
| Interest  Rate                      |       | 3.00                                  | %          | 3.00 | % |   |   |   |   |   |   |   |   |   |   |
| Note  Payable to Utility Company    |       | 576,263                               |       | 587,894 |   | 599,760 |   | 611,866 |   | 624,217 |   | 3,000,000 |   | 3,000,000 |   |
| Interest  Rate                      |       | 2.00                                  | %          | 2.00 | % | 2.00 | % | 2.00 | % | 2.00 | % |   |   |   |   |
|                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  Note Payable                 |       | 26,800                                |       | 8,934 |   |   |   |   |   |   |   | 35,734 |   | 35,734 |   |
| Interest  Rate                      |       | 0                                     | %          | 0 | % |   |   |   |   |   |   |   |   |   |   |

 

***Commodity Price Risk***

** **

We are also exposed to market risk from changes in commodityprices.  Exposure to commodity price risk results from our dependence oncorn and natural gas in the ethanol production process, and the sale ofethanol.  We seek to minimize the risks from fluctuations in the prices ofcorn through the use of hedging instruments.  In practice, as marketsmove, we actively manage our risk and adjust hedging strategies asappropriate.  Although we believe our hedge positions accomplish an economichedge against our future purchases, they do not qualify for hedge accounting,which would match the gain or loss on our hedge positions to the specificcommodity purchase being hedged.  We are using fair value accounting forour hedge positions, which means as the current market price of our hedgepositions changes, the gains and losses are immediately recognized in our costof sales.  For example, we would generally expect that a 10% increase inthe cash price of corn would produce a $100,000 increase in the fair value ofour derivative instruments based on our positions at December 31, 2005. Whereas a 10% decrease in the cash price of corn would produce a $100,000decrease in the fair value of our derivative instruments based on our positionsat December 31, 2005.

 

The immediate recognition of hedging gains and losses under fair valueaccounting can cause net income to be volatile from quarter to quarter due tothe timing of the change in value of the derivative instruments relative to thecost and use of the commodity being hedged.  As of December 31, 2005, thefair value of our derivative instruments for corn and ethanol was a liabilityof $100,032.  There are several variables that could affect the extent towhich our derivative instruments are impacted by price fluctuations in the costof corn or ethanol.  However, it is

 

32

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likely that commodity cashprices will have the greatest impact on the derivatives instruments withdelivery dates nearest the current cash price.

 

To manage our corn price risk, our hedging strategy is designed toestablish a price ceiling for our corn purchases.  We have taken a netlong position on our exchange traded futures and options contracts, whichallows us to offset increases or decreases in the market price of corn. The upper limit of loss on our futures contracts is the difference between thefutures price and the cash market price of corn at the time of the execution ofthe contract. The upper limit of loss on our exchange traded andover-the-counter option contracts is limited to the amount of the premium wepaid for the option.

 

We estimate that our expected corn usage is approximately 18.1 millionbushels per year for the production of 50.5 million gallons of ethanol. As of today, we have cash, futures, and option contract price protection inplace for 44% of our expected corn usage through December 31, 2006. We have 23%of our expected corn usage protected by cash purchase contracts throughDecember 31, 2006. As we move forward, additional protection may benecessary.  As corn prices move in reaction to market trends andinformation, our income statement will be affected depending on the impact suchmarket movements have on the value of our derivative instruments. Depending onmarket movements, crop prospects and weather, these price protection positionsmay cause immediate adverse effects but are expected to produce long-termpositive growth for the Company. Our current corn hedge position is based uponthe amount of ethanol that we have currently sold for future delivery. Thisprotects us against an increase in the variable price of our corn purchasedagainst a fixed sales price of our ethanol sold. We intend to continue ourhedging strategy based upon ethanol sales and market conditions.

 

To manage our ethanol price risk, our hedging strategy is designed toestablish a price floor for our ethanol sales. We are not offsetting ethanolsales with unleaded hedges at the current time. At present, the price ofethanol has increased. In the future, we may not be able to sell ethanol at afavorable price relative to gasoline prices, we also may not be able to sellethanol at prices equal to or more than our current price. This would limit ourability to offset our costs of production. Currently, we are attempting to lockin favorable prices through forward contracting.

 

 As of today, we have forward cash contract price protection inplace for 72% of our expectedethanol production through December 31, 2006.  As we move forward,additional protection may be necessary.  As ethanol prices move inreaction to market trends and information, our income statement will beaffected depending on the impact such market movements have on the value of ourderivative instruments.  As we move forward into summer, additional priceprotection may be required.  Depending on energy market movements, cropprospects and weather, these price protection positions may cause short-termadverse effects but are expected to produce long-term positive growth for theCompany.

 

To manage our natural gas price risk, we entered into a natural gaspurchase agreement with our supplier to supply us with natural gas, fixing theprice at which we purchase natural gas. The price of natural gas has risensubstantially over the last several months and our strategy has been topurchase natural gas as needed and as the opportunities arise. However, webelieve that the price of natural gas could drop in the future and are waitingto take advantage of such lower prices before making substantial new purchasesof natural gas.

 

**ITEM 8. FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA**

** **

Our financial statements and supplementary dataare included on pages F-1 to F-16 of this Report.

 

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

** **

**None.**

** **

**33**

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** **

**ITEM 9A. CONTROLS AND PROCEDURES**

** **

**Evaluation of Disclosure Controls and Procedures**

 

Our Chief ExecutiveOfficer and Chief Financial Officer, after evaluating the effectiveness of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934, as amended), as of December 31, 2005 (the“Evaluation Date”), have concluded that our disclosure controls and proceduresare effective in ensuring that material information required to be disclosed isincluded in the reports that we file with the Securities and ExchangeCommission.

 

**Changes in Internal Controls**

 

There have been no changes in our internalcontrol over financial reporting that occurred during the fiscal year endedDecember 31, 2005, that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART III**

** **

**ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 
| **Name**         | ** ** | **Age** | ** ** | **Position**                                      |
|------------------|------------|---------|------------|---------------------------------------------------|
| John L. Malchine |       | 68      |       | Chairman of the Board and Chief Executive Officer |
| Gary L. Kramer   |       | 57      |       | President, General Manager and Director           |
| David Kolsrud    |       | 57      |       | Secretary and Director                            |
| Don Endres       |       | 45      |       | Treasurer and Director                            |
| Wayne Mitchell   |       | 50      |       | Director                                          |
| Robert Wright    |       | 53      |       | Director                                          |
| David Fick       |       | 54      |       | Director                                          |
| James Leitzinger |       | 50      |       | Chief Financial Officer                           |

 

***John L. Malchine, Chairman of the Board and ChiefExecutive Officer***

** **

Mr.Malchine is a co-founder and has served on our Board of Directors as Chairmansince May 2000. His term as a Director expires in 2007. Approximately seventypercent of Mr. Malchine’s professional time is devoted to his capacity asChairman of the Board and Chief Executive Officer. Mr. Malchine assumed therole of Chief Executive Officer of the Company on August 30, 2001. From 1989 toMarch 2001, he served as president and co-owner of Norway Associates, Inc., aprivate real estate company that develops real estate projects for clinics.Norway Associates is currently inactive. From 1954 to 1994, Mr. Malchine was aself-employed farmer. From 1995 to 2002, Mr. Malchine was the chairman of theWisconsin Agriculture, Trade and Consumer Protection Board. From 1997 to thepresent, he has also been a member of the Board of the Wisconsin TaxCommission, which regulates agricultural assessments in Wisconsin. From 1983 tothe present, he has been a member of the Board of Directors of a unit ofM&I Bank, in Burlington, Wisconsin, and is currently chairman of the loan committee.Mr. Malchine is also on the Board of Governors of the Southern Region of theAurora Health Care System, which owns three hospitals and 21 clinics insouthern Wisconsin. Mr. Malchine was elected to the Board of Adkins Energy inFebruary 2000. He resigned in April 2000 from Adkins, and the cooperativeredeemed his investment.

 

***Gary L. Kramer, D.V.M., President, General Managerand Director***

** **

Dr. Kramer is a co-founder and has served on our Board of Directorssince May 2000. His term as a Director expires in 2008. Mr. Kramer devotes allof his professional time to his capacity as President, General Manager andDirector. From 1973 to 2001, Dr. Kramer was a veterinarian, and recentlyretired as president and 

 

34

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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. Dr. Kramer has also served as a member of a number ofprofessional organizations, including the American Veterinary MedicalAssociation, American Association of Bovine Practitioners, Illinois VeterinaryMedical Association, and Northern Illinois Veterinary Medical Association.

 

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

** **

Mr. Kolsrud has served on our Board of Directors since August 2001. Histerm as a Director expires in 2006. Approximately five percent of hisprofessional time is devoted to his capacity as Secretary and Director of theCompany. Mr. Kolsrud is the General Manager and a member of the Board ofDirectors of CORN-er Stone Farmers Cooperative, which he founded in 1995 andserved as Chairman until 2000. Mr. Kolsrud also continues to work as aself-employed farmer, an occupation he has had since 1973. He also serves asChairman of the Valley Springs Farmers Cooperative, a farm supply co-op inValley Springs, South Dakota. He has served on that Board for 15 years andserved as Chairman for the past 12 years. He formerly served as the Chairman ofthe Minnesota Coalition for Ethanol. Mr. Kolsrud also serves on the Board ofGovernors of AGRI-Energy, LLC (a 12 million gallon a year ethanol facility inLuverne, Minnesota). He has served on that Board since 1997 and served as itsVice President until 1999.

 

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

** **

Mr. Endres has served on our Board of Directors since August 2001. Histerm as a Director expires in ** **2008. Approximately five percent ofhis professional time is devoted to his capacity as Treasurer and Director ofthe Company. Mr. Endres contributes more than 15 years of experience inbuilding, operating and managing successful businesses. Mr. Endres currentlyserves as principal investor, Chairman and Chief Executive Officer of VeraSunEnergy Corporation, an ethanol producer in Brookings, South Dakota. Mr. Endresalso serves on the Board of Directors and Executive Committee of the RenewableFuels Association. In 1999, Mr. Endres became a principal investor and boardmember of CoEv, Inc. CoEv turned profitable within the first year of operationsand later merged with Tyco International Ltd. He also served as co-founder andVice-Chairman of Glacial Lakes Energy, an ethanol production facility inWatertown, South Dakota. In 1985, Mr. Endres founded Special Teams, Inc. andserved as President and General Manager. Special Teams was recognized by Inc.Magazine as one of the fastest growing privately held companies in the U.S. onthe annual Inc. 500 List for both 1994 and 1995. It was sold to the AmericanExpress Company in 1995, and Mr. Endres served for two years as President ofAmerican Express Special Teams. Mr. Endres then co-founded and served as CEO ofExpressGold.com, Inc., an internet payments system company, which successfullymerged with CyberSource Corporation in January of 2000. Mr. Endres graduatedfrom South Dakota State University with a degree in Animal Science and minorsin Computer Science and Economics. In 2000, he was recognized by South DakotaState University’s College of Engineering as “Entrepreneur of the Year.”

 

***Wayne Mitchell, Director***

** **

Mr. Mitchell has served on our Board of Directors since May 2001, whenhe was appointed to fill the Fagen, Inc. permanent seat. Approximately fivepercent of his professional time is devoted to his capacity as a Director ofthe Company. Mr. Mitchell is Senior Vice President, Technology and BusinessDevelopment for Fagen, Inc. and has been in their employee since June 2000. Priorto joining Fagen, he served as Process Team Leader from May 1998 to June 2000for Reilly Industries, Inc., where he directed multidisciplinary teams engagedin chemical process research and development. From March 1998 to June 2000, Mr.Mitchell was President and owner of Solid Rock Consulting, LLC, a privatecompany providing consulting services to the ethanol industry. Solid RockConsulting, LLC is currently inactive. From May 1996 to May 1998, he worked asPlant Manager and Quality Assurance Manager for Micronutrients, LLC, an animalfeed supplement manufacturer. Prior to joining Micronutrients, from January1993 to May 1996, he served as the Design Engineer for Broin and Associates,Inc. where he performed detailed process design and start-up of dry grindethanol plants. From August 1991 to January 1993, he served as seniorenvironmental project engineer for Heritage Environmental Services, Inc. wherehe was involved in environmental consulting and project management at major oilrefineries. Prior to that, Mr. Mitchell

 

35

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served as an area manager forEthyl Corporation. Mr. Mitchell serves on the Board of Directors of five otherethanol plants, Husker Ag, LLC, in Plainview, NE, Platte Valley Fuel Ethanol,LLC in Central City, NE, United Wisconsin Grain Producers, LLC in Friesland,WI, Western Wisconsin Energy, LLC in Boyceville, WI, and Bushmills Ethanol, LLCin Atwater, MN. Mr. Mitchell has a B.S. in Chemical Engineering from theUniversity of Wisconsin-Madison.

 

***Robert Wright, Director***

** **

Mr. Wright has served on our Board of Directors since August 2001. Histerm as a Director expires in 2007. Approximately five percent of hisprofessional time is devoted to his capacity as a Director of the Company. Mr.Wright has served as the President, Chief Executive Officer and a principalshareholder of Murex N.A. since May 1992. Murex is a marketer of gasoline“blendstocks,” such as fuel grade Ethanol, MTBE, Toluene, Methanol andAlkylate, to independent and major refiners in the United States. Mr. Wright isa graduate of Ohio State University with a degree in Chemical Engineering andthe University of Toledo with a Masters in Business Administration.

 

***David Fick, Director***

 

Mr. Fick has served on our Board of Directors since December 2004, whenhe was nominated by the Board of Directors to fill a vacated position.  InFebruary 2005, Mr. Fick was elected by the members of the Company to the Boardof Directors. Mr. Fick resigned his position on the Board of Directors onJanuary 31, 2006. His term as a Director would have expired in 2006.

 

***Nathan Klassy, New Nominee, Director***

 

Mr. Klassy recently retired as Director of Public Works for the City ofMonroe, Wisconsin a position he held for over 14 years. Through this position,Mr. Klassy effectively directed the business of the city while at the same timeestablishing hundreds of contacts throughout Wisconsin. Mr. Klassy continues tomaintain contacts with several departments of the State of Wisconsin includingthe Departments of Transportation, Highways, Airports, Railroads, and DNR. Mr.Klassy serves on the Monroe Planning Commission and the Southwestern RegionalPlanning Commission, appointed by the Governor. Mr. Klassy is also on the GreenCounty Solid Waste Board and Greenwood Cemetery Board, serving as chair onboth.

 

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

 

Mr. Leitzinger has served as our Chief Financial Officer since July2002. Previously, Mr. Leitzinger served as the Director of Finance for the Cityof Freeport, IL for approximately two years. Prior to that, Mr. Leitzinger wasemployed as the Controller for Agri-Tech FS, Inc. from 1990 until 2000, and asthe Controller for Widen Colourgraphics, LTD from 1988 to 1990. Mr. Leitzingergraduated from Edgewood College in Madison, Wisconsin and is a Certified PublicAccountant licensed in Wisconsin since 1989.

 

**AuditCommittee and Audit Committee Financial Expert**

** **

The Company does not have a separately-designated standing auditcommittee and our Board of Directors has not determined whether or not anyDirector qualifies as an audit committee financial expert, as defined under 17C.F.R. § 228.401. The Company is not required to have an audit committeebecause it is not a listed issuer, as defined in Rule 10A-3 under theSecurities Exchange Act of 1934.

 

**Codeof Ethics**

** **

The Company has adopted a code of ethics. A copy of the Company’s codeof ethics is filed as Exhibit 14.1 hereto.

 

36

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**ITEM 11. EXECUTIVE COMPENSATION**

 

Gary Kramer serves as our President and General Manager. In 2005, hewas compensated by us at an annual base salary of $100,000 per year. Hiscurrent yearly salary is $125,000. John Malchine serves as Chief Executive Officer.In 2005, he was compensated by us at an annual base salary of $36,000 per year.His current salary is $45,000.

 

We reimburse our officers for reasonable expenses incurred inconnection with services rendered on our behalf. We recruit and hire permanentemployees who are compensated on a regular basis pursuant to agreed uponsalaries. We have not and do not expect to establish any option based or othertype of equity incentive plan for employees. However, we offer to our full-timeemployees typical health and other employee benefits that do not discriminatein scope, terms or operation in favor of our executive officers or directorsand that are available to all of our salaried employees.

 

The following table summarized the compensation earned by our ChiefExecutive Officer and each of the other four most highly compensated executiveofficers in 2005, and for the years indicated below.

 
| ** **                                 | ** ** | ** **       | ** ** | **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                           |       | 2004             |       | $                            | 36,000     |                            | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| Chief Executive                            |       | 2005             |       | $                            | 36,000     |                            | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| Officer                                    |       | 2006             |       | $                            | 45,000     |                            | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
|                                       |       |             |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Gary Kramer                                |       | 2004             |       | $                            | 100,000    |                            | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| President and                              |       | 2005             |       | $                            | 100,000    |                            | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| General Manager                            |       | 2006             |       | $                            | 125,000    |                            | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
|                                       |       |             |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| James Leitzinger                           |       | 2004             |       | $                            | 65,000     |                            | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| Chief Financial                            |       | 2005             |       | $                            | 72,100     |                            | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| Officer                                    |       | 2006             |       | $                            | 78,355     |                            | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |

 

 

**EmploymentAgreements**

** **

We have no written employment agreements with any officer or Director. Wemay in the future enter into employment agreements with our officers or otheremployees that we may hire.

 

**Reimbursementof Expenses**

** **

Otherthan Mr. Malchine, Dr. Kramer and our Chief Financial Officer, we do not payour officers and Directors any fees or salaries for their services to us;however, we do reimburse our officers for reasonable expenses incurred inconnection with their service to us. During 2005, we reimbursed our officersand Directors a total of $36,274. We estimate that our officers and Directorswill incur approximately $40,000 in reimbursable out-of-pocket expenses in thenext 12 months. This is only an estimate and our officers and Directorsexpenses could be substantially higher than we anticipate.

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED MEMBER MATTERS**

 

We have no compensation plans under which the Company’s securities areauthorized for issuance. The following table sets forth certain informationconcerning the beneficial ownership of our Class A member units as of March 2,2006. Unless otherwise indicated, the business address of each of the personsbelow is 820 West 17th Street, Monroe, Wisconsin 53566.

 

37

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| **Title**                                     | ** ** | **Name and Address  of 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                                      |       | David Fick                                                    |       |                                                           |       | 937                              |       | 4.73 | % |
| Director                                      |       | David  Kolsrud                                                |       |                                                           |       | 60                               |       | 0.30 | % |
| Director                                      |       | Don Endres                                                    |       |                                                           |       | 2,000                            |       | 10.11 | % |
| Director                                      |       | Wayne  Mitchell                                               |       |                                                           |       | 0                                |       | 0.00 | % |
| Director                                      |       | Robert  Wright                                                |       | [3]                                                            |       | 25                               |       | 0.13 | % |
| Executive Officer                             |       | James  Leitzinger                                             |       |                                                           |       | 5                                |       | 0.03 | % |
| Director & Executive Officers as a  group |       | All  executive officers and directors                         |       | [4]                                                            |       | 4,547                            |       | 22.99 | % |

 

----

| [1]  Beneficial ownership  includes 500 units owned individually and 100 units owned in joint tenancy. |
|-------------------------------------------------------------------------------------------------------------|
| [2]  Beneficial ownership  includes 520 units owned individually and 400 units owned by arrangement.   |
| [3]  Includes 25 units owned by  Murex, for which Mr. Wright disclaims beneficial interest.            |
| [4]  Includes the beneficial  ownership of eight Directors and executive officers.                     |

 

**ITEM 13. CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

**Sinceour inception, we have engaged in several transactions with related parties. Wecurrently do not have outside Directors or unaffiliated members to evaluaterelated party transactions. Management believes that these transactions were asfavorable as those that could have been obtained in an arms-length transaction.**

** **

**ExecutiveSalaries**

** **

**Wecurrently compensate our executive officers pursuant to oral agreements for thesalaries set forth below. We are currently compensating John Malchine, ourChief Executive Officer, $45,000 per year pursuant to an oral agreement. We arecurrently compensating Gary Kramer, our President and General Manager, $125,000per year pursuant to an oral agreement.**

** **

**EthanolAgreement**

** **

**Weentered into an ethanol purchase and marketing agreement with Murex grantingMurex the exclusive rights to purchase and market all ethanol produced by theplant. 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.**

** **

**Theagreement with Murex expires in 2009 and automatically renews for one-yearterms after 2009 unless either party provides notice prior to the renewalanniversary date. In addition, the agreement may be terminated by either partyin the event of the other party’s insolvency, force majeure for at least aperiod of twelve months, or the default, which is not cured, by the other partyin the performance of any term or covenant. We may also terminate theagreement, following a decision of an arbitrator, if Murex breaches itsobligation to use its best efforts to obtain for us the highest purchase priceavailable for ethanol, after considering its own resale costs andtransportation costs.**

** **

**Murexis a member of the Company and has a representative on our Board of Directors.**

** **

**DistillersGrains and Solubles Agreement**

** **

**Weentered into a purchase and marketing agreement with United for the exclusiverights to purchase and market all of the distillers grains produced by theplant. Under the agreement, United has agreed to purchase our wet**

** **

**38**

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** **

**distillers grains withsolubles and our dried distillers grains with solubles produced at the ethanolproduction plant. We are obligated to provide United a production schedule, thelabor, equipment and facilities to meet United’s loading schedule and toreserve storage space for the products. United has agreed to use itscommercially reasonable efforts to achieve the highest resale price availableunder prevailing market conditions, in United’s and our reasonable judgment.**

** **

This exclusive agreement has an initial term which ended on October 25,2005. The agreement was renewed under the automatic renewal provision whichprovides for successive one-year terms unless written notice of termination isissued 90 days prior to the end of the then current term. No written notice wasprovided by either party, therefore, this agreement is still in effect. Thisagreement may be terminated by the nondefaulting party in the event of default,which includes the failure to make payment when due, a default in theperformance of a party’s covenants and agreements and the insolvency of aparty.

 

United is an affiliate of ICM and Fagen. ICM was a member of theCompany and had a representative on our Board of Directors until December, 2003.ICM was a prime subcontractor for the construction of the ethanol plant. Fagenis a member of the Company and currently has a representative on our Board ofDirectors. Fagen was the general contractor for the construction of the ethanolplant.

 

**Conflictsof Interest**

** **

**Conflictsof interest exist and may arise in the future as a result of the relationshipsbetween and among our members, officers, Directors and their affiliates. Althoughour officers and Directors have fiduciary duties to us, certain of ourDirectors also owe fiduciary duties and other obligations to entities with whomwe compete or do business with. Whenever conflicts arise between us and anofficer or Director or an entity with whom that officer or Director isaffiliated, the Board as a whole will seek to resolve the conflict. A Directorwill not participate when the Board considers a transaction where he or she hasa conflict of interest. We do not have a committee of independent Directors ormembers or an otherwise disinterested body to consider transactions orarrangements that result from, or are fraught with conflicts of interest. Someconflict situations include disputes that may arise between us and Fagen or ICMas a result of the construction of the ethanol plant are expected to beresolved through binding arbitration according to construction industry rules.**

** **

**Conflictsof interest could arise in the situations described below, among others:**

** **

**•**                  We will engage in transactions with affiliates of ourDirectors. Members will have no right to individually enforce the obligationsof our Directors or their affiliates in our favor.

** **

**•**                  Our Directors’ decisions regarding various matters,including expenditures that we make for our business, reserves for accruedexpenses, including officers salaries and reimbursement of Director’s expenses,loan covenants, capital improvements and contingencies that will effect theamount of cash available for distribution to members. We have representativesof Murex and Fagen (an affiliate of United) on our Board and formerly had arepresentative of ICM (an affiliate of United) on our Board. We engage intransactions with Murex and United. Our expenditures, reserves and the amountof cash available for distribution may be affected by these transactions andour relationship with Murex and United.

** **

**•**                  We will reimburse our Directors for out-of-pocket expensesrelating to our business. We do not have a reimbursement policy or guidelinefor determining what expenses will be reimbursed. We will review and reimburseall reasonable expenses that Directors submit to us.

** **

**•**                  We have retained counsel that has assisted us in variousaspects of our formation and development. We have not retained separate counselon behalf of unit holders.

** **

**•**                  Fagen Inc., Mr. Mitchell, Mr. Endres, Mr. Kolsrud, Mr. Fickand Mr. Wright, are involved in and/or own interests in various ethanolconstruction and development projects throughout the United States

** **

**39**

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** **

**and in Wisconsin. These projects will compete with ourproject for purchasing corn and other raw material supplies, and the sale of ethanoland distillers grains. Our operating agreement does not prevent our Directorsfrom being involved in activities that compete with us.**

** **

**•**                  Our Directors or their affiliates may loan money to us forwhich we may pay interest up to a rate of prime plus 4%.

** **

**ITEM 14. PRINCIPALACCOUNTANT FEES AND SERVICES**

 

AUDIT AND NON-AUDIT FEES

 

For the fiscal year ended December 31, 2005 and 2004, professionalservices were performed by Grant Thornton LLP. The following table presentsfees for professional services rendered by Grant Thornton LLP for the audit ofthe Company’s annual financial statements for the years ended December 31, 2005and 2004, and fees billed for other services rendered by Grant Thornton LLPduring those periods.

 

 
| ** **     | ** ** | **December 31, 2005** | ** **  | **December 31, 2004** | ** ** |
|----------------|------------|---------------------------------|-------------|---------------------------------|------------|
| Audit Fees (1) |       | $                               | 99,115      |                            | $          | 74,900 |   |
| Tax Fees       |       | 20,225                          |        | 11,000                          |       |
| All Other Fees |       | 0                               |        | 0                               |       |
| **TOTAL**      | ** ** | **$**                           | **119,340** | ** **                      | **$**      | **85,900** | ** ** |

 

----

(1)Represents the aggregate fees billed covering the audit of our annual financialstatements and the review of our financial statements for the first, second andthird quarters of 2004 and 2005.

 

The above listed fees were pre-approved by the Board of Directors ofthe Company. The percentage of hours expended on audit by persons other thanthe Company’s principal accountant’s full-time, permanent employees did notexceed 50%.

 

It is the Company’s policy to pre-approve all services provided byGrant Thornton LLP. As of the date of this filing, the Company’s current policyis to not engage Grant Thornton LLP to provide, among other things, bookkeepingservices, appraisal or valuation services, or internal audit services. Thepolicy provides that the Company engage Grant Thornton to provide audit, taxand other assurance services, such as review of SEC reports or filings. TheBoard of Directors considered and determined that the provision of the servicesother than the services described under “Audit Fees” is compatible withmaintaining the independence of the independent auditors.

 

**PART IV**

** **

**ITEM 15. EXHIBITS ANDREPORTS ON FORM 8-K**

** **

(a)           FinancialStatements. An index to the financial statements included in this reportappears at page F-1. The financial statements appear at page F-2 through F-16of this report.

 

Exhibits. The followingexhibits are filed as part of this report. Exhibits previously filed areincorporated by reference, as noted.

 
| **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.      |

 

40

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| 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.* |
|   |   |                                                                                                                                                                                                                                                                                                            |
| 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.*     |

 

41

----

 
| 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. Filed as Exhibit 10.8  to the registrant’s annual report for the period ending December 31, 2002 on  Form 10-K (Commission File 333-50568) and incorporated by reference herein.                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.9   |   | Second Amendment  to Construction Loan Agreement dated January 1, 2004, by and between First  National Bank of Omaha and Badger State Ethanol, LLC. Filed as Exhibit 10.9  to the registrant’s annual report for the period ending December 31, 2002 on  Form 10-K (Commission File 333-50568) and incorporated by reference herein.                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.10  |   | Revolving  Promissory Note dated August 25, 2005, by and between First National Bank of  Omaha and Badger State Ethanol, LLC. Filed as Exhibit 10.10 to the  registrant’s annual report for the period ending December 31, 2005 on Form  10-K (Commission File 333-50568) and incorporated by reference herein.                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.11  |   | Loan Agreement, dated June 22, 2005 by and among Badger State  Ethanol, LLC and Agstar Financial Services, PCA, and the related Promissory  Notes, Convertible Note and Revolving Note. Filed as Exhibit 10.1 to the  registrant’s quarterly report for the period ending June 30, 2005 on Form  10-Q (Commission File 333-50568) and incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.12  |   | Agreement Between Owner and Design-Builder, dated June 23, 2005, by  and between Badger State Ethanol, LLC and AMG/GCI, LLC. Filed as Exhibit 10.2  to the registrant’s quarterly report for the period ending June 30, 2005 on  Form 10-Q (Commission File 333-50568) and incorporated by reference herein.                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.13  |   | License Agreement, dated June 23, 2005, by and between Badger State  Ethanol, LLC and CVP, LLC. Filed as Exhibit 10.3 to the registrant’s  quarterly report for the period ending June 30, 2005 on Form 10-Q (Commission  File 333-50568) and incorporated by reference herein. *                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.14  |   | Services and Guarantee Agreement, dated June 23, 2005, by and between  Badger State Ethanol, LLC and CVP, LLC. Filed as Exhibit 10.4 to the  registrant’s quarterly report for the period ending June 30, 2005 on Form  10-Q (Commission File 333-50568) and incorporated by reference herein. *                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.15  |   | Corn Protein Concentrate Marketing Agreement, dated June 23, 2005, by  and between Badger State Ethanol, LLC and Quality Technology International,  Inc. Filed as Exhibit 10.5 to the registrant’s quarterly report for the  period ending June 30, 2005 on Form 10-Q (Commission File 333-50568) and incorporated  by reference herein. *                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.16  |   | Corn Germ Marketing Agreement, dated July 7, 2005, by and between  Badger State Ethanol, LLC and Quality Technology International, Inc. Filed as  Exhibit 10.6 to the registrant’s quarterly report for the period ending June  30, 2005 on Form 10-Q (Commission File 333-50568) and incorporated by  reference herein. *                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.17  |   | Membership Interest Purchase Agreement dated August 5, 2005, by and  between Badger State Ethanol, LLC and Farm City Elevator, Inc. Filed as Exhibit  10.7 to the registrant’s quarterly report for the period ending June 30, 2005  on Form 10-Q (Commission File 333-50568) and incorporated by reference  herein.                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 14.1   |   | Code of Ethics  of Badger State Ethanol, LLC adopted September 29, 2005. Filed as Exhibit  14.1 to the registrant’s annual report for the period ending December 31,  2005 on Form 10-K (Commission File 333-50568).                                                                                                                                                    |

 

42

----

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                            |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                   |
| 31.1            |       | Certification by Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the  Securities Exchange Act of 1934). |
|            |       |                                                                                                                                                                   |
| 31.2            |       | Certification by Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the  Securities Exchange Act of 1934). |
|            |       |                                                                                                                                                                   |
| 32.1            |       | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                               |
|            |       |                                                                                                                                                                   |
| 32.2            |       | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                               |

 

----

*  Material has been omitted pursuant to arequest for confidential treatment and such materials have been filedseparately with the Securities and Exchange Commission.

 

(b)           Reports on Form 8-K.  Current Report on Form 8-K, dated December27, 2005, containing a copy of the Company’s newsletter and Current Report onForm 8-K, dated January 30, 2006 announcing the reclassification of theCompany’s Class A Membership units.

 

43

----

 

**SIGNATURES**

** **

Inaccordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this Report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| Dated: March 2, 2006 | BADGER STATE ETHANOL, LLC |
|----------------------|---------------------------|
|                 |                      |
|                 | By:                       | /s/  Gary L. Kramer |
|                 |                      | Gary  L. Kramer |
|                 |                      | President  and General Manager |

 

Inaccordance with the requirements of the Securities Exchange Act of 1934, thisReport has been signed below by the following persons on behalf of theRegistrant, and in the capacities and on the dates indicated.

 
| /s/ John L. Malchine                               |   | March 2,  2006 |
|----------------------------------------------------|--------|----------------|
| John L.  Malchine                                  |   |           |
| Chairman of  the Board and Chief Executive Officer |   |           |
|                                               |   |           |
| /s/ Gary L. Kramer                                 |   | March 2,  2006 |
| Gary L.  Kramer                                    |   |           |
| Director,  President and General Manager           |   |           |
|                                               |   |           |
| /s/ David Kolsrud                                  |   | March 2,  2006 |
| David  Kolsrud                                     |   |           |
| Director and  Secretary                            |   |           |
|                                               |   |           |
| /s/ Don Endres                                     |   | March 2,  2006 |
| Don Endres                                         |   |           |
| Director and  Treasurer                            |   |           |
|                                               |   |           |
| /s/ Wayne Mitchell                                 |   | March 2,  2006 |
| Wayne  Mitchell                                    |   |           |
| Director                                           |   |           |
|                                               |   |           |
| /s/ Robert Wright                                  |   | March 2,  2006 |
| Robert  Wright                                     |   |           |
| Director                                           |   |           |
|                                               |   |           |
| /s/ James Leitzinger                               |   | March 2,  2006 |
| James Leitzinger                                   |   |           |
| Chief Financial Officer                            |   |           |

 

44

----

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
|                                                     |                                             |
|----------------------------------------------------------|--------------------------------------------------|
|                                                     |                                             |
| Report of Independent  Registered Public Accounting Firm |                                             |
|                                                     |                                             |
| Financial  Statements                                    |                                             |
|                                                     |                                             |   |
|                                                     | Consolidated Balance Sheets                      |   |
|                                                     |                                             |   |
|                                                     | Consolidated Statements of  Income               |   |
|                                                     |                                             |   |
|                                                     | Consolidated Statements of Members’  Equity |   |
|                                                     |                                             |   |
|                                                     | Consolidated Statements of Cash Flows            |   |
|                                                     |                                             |
| Notes to Consolidated Financial  Statements              |                                             |   |
|                                                          |                                                  |  |  |

 

F-1

----

 

## **REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

Boardof Directors and Members

**Badger State Ethanol, LLC**

 

Wehave audited the accompanying consolidated balance sheets of Badger StateEthanol, LLC and subsidiaries as of December 31, 2005 and 2004, and the relatedconsolidated statements of income, members’ equity, and cash flows for each ofthe three years in the period ended December 31, 2005.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  The Company isnot required to have, nor were we engaged to perform an audit of its internalcontrol over financial reporting.  Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Badger State Ethanol,LLC and subsidiaries as of December 31, 2005 and 2004, and the consolidatedresults of their operations and their consolidated cash flows for each of thethree years in the period ended December 31, 2005 in conformity with accountingprinciples generally accepted in the United States of America.

 

 
| /s/  GRANT THORNTON LLP |   |
|-------------------------|--------|
|                    |
| Madison,  Wisconsin     |
| January  30, 2006       |

 

F-2

----

 

##### **BADGER STATE ETHANOL, LLC**

**CONSOLIDATEDBALANCE SHEETS**

December 31, 2005 and 2004

 
| ** **                                      | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                      |       |       |       |       |       |
| ** **                                      |       |       |       |       |       |
| **CURRENT  ASSETS**                             |       |       |       |       |       |
| Cash and cash equivalents                       |       | $          | 1,526,528  |       | $          | 3,807,383 |   |
| Accounts receivable:                            |       |       |       |       |       |
| Trade                                           |       | 6,045,414  |       | 5,896,669  |       |
| Government incentive payments                   |       | —     |       | 100,000    |       |
| Inventories                                     |       | 5,127,902  |       | 2,513,357  |       |
| Margin deposits                                 |       | 144,234    |       | 2,191,259  |       |
| Other assets                                    |       | 118,720    |       | 189,615    |       |
|                                            |       |       |       |       |       |
| **Total current assets**                        |       | 12,962,798 |       | 14,698,283 |       |
|                                            |       |       |       |       |       |
| **PROPERTY  AND EQUIPMENT, at cost**            |       |       |       |       |       |
| Plant buildings and equipment                   |       | 51,117,796 |       | 47,880,729 |       |
| Land and land improvements                      |       | 1,609,737  |       | 1,398,917  |       |
| Office buildings and equipment                  |       | 499,467    |       | 476,467    |       |
|                                            |       | 53,227,000 |       | 49,756,113 |       |
| Less accumulated depreciation and  amortization |       | 7,170,632  |       | 4,780,896  |       |
|                                            |       | 46,056,368 |       | 44,975,217 |       |
| Construction in progress                        |       | 6,500,133  |       | —     |       |
|                                            |       | 52,556,501 |       | 44,975,217 |       |
|                                            |       |       |       |       |       |
| **OTHER  ASSETS**                               |       |       |       |       |       |
| Intangible assets                               |       | 868,000    |       | —     |       |
| Other                                           |       | 224,830    |       | 528,106    |       |
|                                            |       | 1,092,830  |       | 528,106    |       |
|                                            |       |       |       |       |       |
| **TOTAL ASSETS**                                |       | $          | 66,612,129 |       | $          | 60,201,606 |   |
|                                            |       |       |       |       |       |
| **LIABILITIES AND MEMBERS’ EQUITY**        |       |       |       |       |       |
|                                            |       |       |       |       |       |
| **CURRENT  LIABILITIES**                        |       |       |       |       |       |
| Current maturities of long-term debt            |       | $          | 2,144,563  |       | $          | 3,409,246 |   |
| Accounts payable                                |       | 2,084,725  |       | 1,700,616  |       |
| Accrued property taxes                          |       | 307,449    |       | 419,973    |       |
| Accrued liabilities                             |       | 434,737    |       | 644,259    |       |
| Derivative contracts                            |       | 100,032    |       | 1,989,565  |       |
| Deferred revenue                                |       | 1,010,200  |       | 329,569    |       |
|                                            |       |       |       |       |       |
| **Total current liabilities**                   |       | 6,081,706  |       | 8,493,228  |       |
|                                            |       |       |       |       |       |
| **LONG-TERM  DEBT, less current maturities**    |       | 20,808,299 |       | 17,635,157 |       |
|                                            |       |       |       |       |       |
| **COMMITMENTS  AND CONTINGENCIES**              |       |       |       |       |       |
|                                            |       |       |       |       |       |
| **MEMBERS’  EQUITY**                       |       |       |       |       |       |
| Members’ contributions                     |       | 17,859,787 |       | 17,859,787 |       |
| Retained earnings                               |       | 21,862,337 |       | 16,213,434 |       |
|                                            |       | 39,722,124 |       | 34,073,221 |       |
|                                            |       |       |       |       |       |
| **TOTAL LIABILITIES AND MEMBERS’ EQUITY**  |       | $          | 66,612,129 |       | $          | 60,201,606 |   |

 

The accompanying notes are anintegral part of these consolidated statements.

 

F-3

----

##### **BADGER STATE ETHANOL, LLC**

**CONSOLIDATEDSTATEMENTS OF INCOME**

Years ended December 31, 2005, 2004 and 2003

 
| ** **                                              | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                    |       |       |       |       |       |       |       |
| Sales and  revenues                                     |       | $          | 97,652,135 |       | $          | 92,084,766 |       | $ | 74,149,226 |   |
| Cost of  sales                                          |       | 79,488,978 |       | 75,471,115 |       | 57,799,611 |       |
|                                                    |       |       |       |       |       |       |       |
| **Gross margin**                                        |       | 18,163,157 |       | 16,613,651 |       | 16,349,615 |       |
|                                                    |       |       |       |       |       |       |       |
| Selling,  general and administrative expenses           |       | 3,284,996  |       | 2,940,724  |       | 2,663,322  |       |
|                                                    |       |       |       |       |       |       |       |
| **Operating income**                                    |       | 14,878,161 |       | 13,672,927 |       | 13,686,293 |       |
|                                                    |       |       |       |       |       |       |       |
| Interest  expense                                       |       | (1,591,002 | )          | (1,311,346 | )          | (1,846,937 | )          |
| Interest  income                                        |       | 34,056     |       | 22,889     |       | 7,894      |       |
| Other income                                            |       | —     |       | —     |       | 65,229     |       |
|                                                    |       |       |       |       |       |       |       |
| **Net income**                                          |       | $          | 13,321,215 |       | $          | 12,384,470 |       | $ | 11,912,479 |   |
|                                                    |       |       |       |       |       |       |       |
| Net income  per unit - basic and diluted                |       | $          | 673.67     |       | $          | 626.30     |       | $ | 602.43 |   |
|                                                    |       |       |       |       |       |       |       |
| Weighted  average units outstanding - basic and diluted |       | 19,774     |       | 19,774     |       | 19,774     |       |

 

The accompanying notes are anintegral part of these consolidated statements.

 

F-4

----

 

**BADGER STATE ETHANOL, LLC**

**CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY**

Years ended December 31, 2005, 2004 and 2003

 
| ** **                  | ** ** | **Members’  units** | ** ** | **Members’  contributions** | ** ** | **Retained  earnings  (accumulated  deficit)** | ** ** | **Total**  | ** ** |
|-----------------------------|------------|--------------------------|------------|----------------------------------|------------|------------------------------------------------|------------|------------|------------|
|                        |       |                     |       |                             |       |                                           |       |       |       |
| Balance,  January 1, 2003   |       | 19,774                   |       | $                                | 17,859,787 |                                           | $          | (3,140,015 | )          | $ | 14,719,772 |   |
|                        |       |                     |       |                             |       |                                           |       |       |       |
| Net income                  |       | —                   |       | —                           |       | 11,912,479                                     |       | 11,912,479 |       |
|                        |       |                     |       |                             |       |                                           |       |       |       |
| Balance,  December 31, 2003 |       | 19,774                   |       | 17,859,787                       |       | 8,772,464                                      |       | 26,632,251 |       |
|                        |       |                     |       |                             |       |                                           |       |       |       |
| Dividends  paid             |       | —                   |       |                             |       | (4,943,500                                     | )          | (4,943,500 | )          |
|                        |       |                     |       |                             |       |                                           |       |       |       |
| Net income                  |       | —                   |       |                             |       | 12,384,470                                     |       | 12,384,470 |       |
|                        |       |                     |       |                             |       |                                           |       |       |       |
| Balance,  December 31, 2004 |       | 19,774                   |       | 17,859,787                       |       | 16,213,434                                     |       | 34,073,221 |       |
|                        |       |                     |       |                             |       |                                           |       |       |       |
| Dividends  paid             |       | —                   |       |                             |       | (7,672,312                                     | )          | (7,672,312 | )          |
|                        |       |                     |       |                             |       |                                           |       |       |       |
| Net income                  |       | —                   |       |                             |       | 13,321,215                                     |       | 13,321,215 |       |
|                        |       |                     |       |                             |       |                                           |       |       |       |
| Balance,  December 31, 2005 |       | 19,774                   |       | $                                | 17,859,787 |                                           | $          | 21,862,337 |       | $ | 39,722,124 |   |

 

The accompanying notes are anintegral part of these consolidated statements.

 

F-5

----

 

**BADGER STATE ETHANOL, LLC**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

Years ended December 31, 2005, 2004 and 2003

 
| ** **                                                                         | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------|------------|
| Cash flows  from operating activities                                              |       |        |       |        |       |       |       |
| Net income                                                                         |       | $           | 13,321,215 |        | $          | 12,384,470 |       | $ | 11,912,479 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities  |       |        |       |        |       |       |       |
| Depreciation and amortization                                                      |       | 2,949,267   |       | 2,445,422   |       | 2,350,170  |       |
| Changes in operating assets and  liabilities:                                      |       |        |       |        |       |       |       |
| Trade accounts receivable                                                          |       | (148,745    | )          | (1,767,505  | )          | (712,783   | )          |
| Government incentive payments receivable                                           |       | 100,000     |       | 1,012,426   |       | (1,112,426 | )          |
| Inventories                                                                        |       | (2,614,545  | )          | (130,080    | )          | (632,034   | )          |
| Margin deposits                                                                    |       | 2,047,025   |       | (1,957,259  | )          | 176,000    |       |
| Other assets                                                                       |       | 70,895      |       | 300,842     |       | (218,440   | )          |
| Derivative contracts                                                               |       | (1,889,533  | )          | 2,225,302   |       | (666,976   | )          |
| Accounts payable                                                                   |       | 384,109     |       | 960,775     |       | (1,168,778 | )          |
| Accrued property taxes                                                             |       | (112,524    | )          | 139,973     |       | 280,000    |       |
| Accrued liabilities                                                                |       | (209,522    | )          | (789,396    | )          | 441,987    |       |
| Deferred revenue                                                                   |       | 680,631     |       | 329,569     |       | —     |       |
|                                                                               |       |        |       |        |       |       |       |
| **Net cash provided by operating activities**                                      |       | 14,578,273  |       | 15,154,539  |       | 10,649,199 |       |
|                                                                               |       |        |       |        |       |       |       |
| Cash flows  from investing activities                                              |       |        |       |        |       |       |       |
| Cost of property and equipment                                                     |       | (9,977,465  | )          | (2,077,890  | )          | (1,162,794 | )          |
| Payments for intangible assets                                                     |       | (868,000    | )          | —      |       | —     |       |
|                                                                               |       |        |       |        |       |       |       |
| **Net cash used in investing activities**                                          |       | (10,845,465 | )          | (2,077,890  | )          | (1,162,794 | )          |
|                                                                               |       |        |       |        |       |       |       |
| Cash flows  from financing activities                                              |       |        |       |        |       |       |       |
| Net change in line of credit                                                       |       | —      |       | —      |       | (1,747,980 | )          |
| Payments of financing fees                                                         |       | (249,810    | )          | —      |       | (306,000   | )          |
| Proceeds from long-term debt financing                                             |       | 20,796,226  |       | —      |       | 927,880    |       |
| Payments on long-term debt financing                                               |       | (18,887,767 | )          | (6,136,256  | )          | (7,142,181 | )          |
| Payment of dividends                                                               |       | (7,672,312  | )          | (4,943,500  | )          | —     |       |
|                                                                               |       |        |       |        |       |       |       |
| **Net cash used in financing activities**                                          |       | (6,013,663  | )          | (11,079,756 | )          | (8,268,281 | )          |
| ** **                                                                         |       |        |       |        |       |       |       |
| **NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS**                          |       | (2,280,855  | )          | 1,996,893   |       | 1,218,124  |       |
|                                                                               |       |        |       |        |       |       |       |
| Cash and  cash equivalents at beginning of year                                    |       | 3,807,383   |       | 1,810,490   |       | 592,366    |       |
|                                                                               |       |        |       |        |       |       |       |
| Cash and  cash equivalents at end of year                                          |       | $           | 1,526,528  |        | $          | 3,807,383  |       | $ | 1,810,490 |   |
|                                                                               |       |        |       |        |       |       |       |
| Supplemental  disclosure of cash flow information:                                 |       |        |       |        |       |       |       |
| Interest paid                                                                      |       | $           | 1,310,148  |        | $          | 1,381,947  |       | $ | 1,858,655 |   |
|                                                                               |       |        |       |        |       |       |       |
| Supplemental disclosure of noncash  operating, investing and financing activities: |       |        |       |        |       |       |       |
| Purchase of equipment with long-term debt                                          |       | $           | —     |        | $          | 80,400     |       | $ | — |   |

 

The accompanying notes are anintegral part of these consolidated statements.

 

F-6

----

 

**BADGER STATE ETHANOL, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

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

 

Badger State Ethanol, LLC (the “Company”) operates an ethanol plant inWisconsin that began operations in October 2002 and a fuel station that beganoperations in October 2005.  The Companysells its production of ethanol and related products domestically and operatesin one business segment.  Revenue fromfuel sales was not material for the year ended December 31, 2005.

 

A summary of the significant accounting policies applied in thepreparation of the accompanying consolidated financial statements follows:

 

**1.   Principles of Consolidation**

 

The accompanying consolidated financial statements for fiscal 2005include the accounts of the Company and it’s wholly-owned subsidiaries, SpringValley Ventures, LLC and Smart Station Ventures, LLC.  All significant intercompany transactions andbalances have been eliminated in consolidation.

 

**2.   Use of Estimates**

 

Preparing financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

 

**3.   Revenue Recognition**

 

The Company recognizes revenue at the time title to the goods and allrisks of ownership transfer to customers. This occurs upon the date of shipment.

 

TheCompany recognizes revenue from federal and state incentive payments when allrequirements of the program have been met and payments are assured.

 

**4.   Freight Costs**

 

The Company reflects freight costs associated with shipping itsproducts to customers as a component of cost of goods sold.

 

**5.   Cash and Cash Equivalents**

 

The Company considers all highly liquid debt instruments purchased withoriginal maturities of three months or less to be cash equivalents.

 

F-7

----

 

**6.   Accounts Receivable**

 

Tradeaccounts receivable are due from customers for ethanol and distillers grainssales.  The Company grants credit tocustomers in the normal course of business. Credit is extended based on an evaluation of a customer’s financialcondition and, generally, collateral is not required.  Accounts outstanding longer than thecontractual payment terms are considered past due.  Management performs on-going creditevaluations of customers and maintains allowances for potential credit losseswhen required.  At December 31, 2005 and2004, the Company believes all receivables are fully collectible and noallowance for doubtful accounts is deemed necessary.  This decision is based on considering anumber of factors, including length of time trade accounts receivable are pastdue, the customers’ previous loss history, the customers’ current ability topay their obligations to the Company, and the condition of the general economyand the industry as a whole.  The Companywrites-off accounts receivables when they become uncollectible, and paymentssubsequently received on such receivables are directly credited as a reductionto bad debt expense.  As of this filing,there have been no write-offs.  Interestis charged on past due receivables for purchases on the Company’s fuel chargecard.

 

**7.   Concentrations of CreditRisk**

 

The Company’s cash balances are maintained in bank depositoriesprimarily at one financial institution and exceed federally insuredlimits.  The Company does not believe itis exposed to significant credit risk as it relates to cash balances.  Accounts receivable are primarily with twocustomers (see note I) and the Company, generally, does not require collateralor other security to support these receivables.

 

**8.   Fair Value of FinancialInstruments**

 

The carrying amounts of financial instruments including cash and cashequivalents, accounts receivable and accounts payable approximate fair value,because of the relatively short maturity of these instruments.  The carrying value of long-term debt,including the current portion, approximates fair value due to either theinterest being determined by variable rates, repricing periodically, or becausethe fixed rate approximates the current market rate of interest available tothe Company.  All derivative contractsare recorded at fair market value.

 

**9.   Inventories**

 

Inventoriesare stated at the lower of cost or net realizable value.  Costs are determined using the first-in,first-out (FIFO) method.

 

F-8

----

 

**10.  Derivative Instruments**

 

TheCompany enters into derivative contracts to manage the Company’s exposure toprice risk related to forecasted corn, forward corn purchase contracts andforecasted ethanol sales.  The Companydoes not typically enter into derivative instruments other than for hedgingpurposes.  All derivative contracts arerecognized on the December 31, 2005 and 2004 balance sheets at their fairmarket value.

 

FASBStatement No. 133, “Accounting for Derivative Instruments and HedgingActvities”, (“FAS 133”) requires a company to evaluate its contracts todetermine whether the contracts are derivatives. Certain contracts thatliterally meet the definition of a derivative may be exempted from FAS 133 asnormal purchases or normal sales. Normal purchases and normal sales arecontracts that provide for the purchase or sale of something other than afinancial instrument or derivative instrument that will be delivered inquantities expected to be used or sold over a reasonable period in the normalcourse of business. Contracts that meet the requirements of normal aredocumented as normal and exempted from the accounting and reportingrequirements of FAS 133.

 

Onthe date the derivative instrument is entered into, the Company will designatethe derivative as either (1) a hedge of the fair value of a recognized asset orliability or of an unrecognized firm commitment (fair value hedge), (2) a hedgeof a forecasted transaction or of the variability of cash flows to be receivedor paid related to a recognized asset or liability (cash flow hedge) or (3)will not designate the derivative as a hedge. Changes in the fair value of a derivative that is designated as andmeets all the required criteria for a fair value hedge, along with the gain orloss on the hedged asset or liability that is attributable to the hedged risk,are recorded in current period earnings. Changes in the fair value of a derivative that is designated as andmeets all the required criteria for a cash flow hedge are recorded inaccumulated other comprehensive income and reclassified into earnings as theunderlying hedged item affects earnings. Changes in the fair value of a derivative that is not designated as ahedge are recorded in current period earnings.

 

AtDecember 31, 2005 and 2004 no derivative contracts were designated as hedgesfor accounting purposes and all changes in market value have been recognizedthrough cost of sales.  The amountrecorded for derivative contracts was a liability of $100,032 and $1,989,565 atDecember 31, 2005 and 2004.  The Companyhas recorded an increase to cost of sales of $1,385,370, $2,205,578 and$621,722 related to its derivative contracts for the years ended December 31,2005, 2004 and 2003.

 

**11.  Property and Equipment**

 

Propertyand equipment are stated at cost, including capitalized interest incurredduring the period of asset completion or preparation for use, less accumulateddepreciation.  Depreciation andamortization of property and equipment are provided in amounts sufficient torelate the cost of the related assets to operations over their estimatedservice lives using the straight-line method. Depreciation and amortization for income tax reporting purposes arecomputed using accelerated methods.  Theranges of the estimated useful lives for the major classes of property andequipment are as follows:

 
| Plant buildings and equipment  |   | 5 to 30 years  |
|--------------------------------|--------|----------------|
| Land and land improvements     |   | 10 to 30 years |
| Office buildings and equipment |   | 3 to 30 years  |

 

F-9

----

 

**12.  Intangible Assets**

 

Intangibleassets consist of costs related to licensed technology for use within theCompany’s plant. The costs are capitalized as incurred and amortized over theirestimated useful lives of two years using the straight-line method.

 

**13.  Net Income Per Unit**

 

Basicand diluted net income per unit are computed by dividing the net income by theweighted average units outstanding for the year.  At December 31, 2005, 2004 and 2003, theCompany had no equity instruments that would be considered unit equivalents forpurposes of calculating net income per unit.

 

**14.  Recent Accounting Pronouncements**

 

InNovember 2004, the FASB issued FASB Statement No. 151, “Inventory Costs – anamendment of ARB No. 43” (“FAS 151”), which is the result of its efforts toconverge U.S. accounting standards for inventories with InternationalAccounting Standards.  FAS No. 151requires idle facility expenses, freight, handling costs, and wasted material(spoilage) costs to be recognized as current-period charges.  It also requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities.  FAS No.151 will be effective for inventory costs incurred during fiscal years beginningafter June 15, 2005.  The adoption of FAS151 will have no impact on the Company’s consolidated financial position,results of operations or cash flows.

 

In May 2005, the FASB issued FASB Statement No. 154,“Accounting Changes and Error Corrections–a replacement of APB OpinionNo. 20 and FASB Statement No. 3” (“FAS 154”). FAS 154 replaces APBOpinion No. 20, “Accounting Changes” and FAS No. 3 “ReportingAccounting Changes in Interim Financial Statements,” and changes the requirementsfor the accounting for and reporting of a change in accounting principle. FAS154 may require restatement of prior period financial statements for certainchanges in accounting principles. The retroactive application of a change inaccounting principle should be limited to the direct effect of the change.Changes in depreciation, amortization or depletion methods should be accountedfor as a change in accounting estimate. Corrections of accounting errors willbe accounted for under the guidance contained in APB Opinion No. 20. Theeffective date of this new pronouncement is for fiscal years beginning afterDecember 15, 2005 and prospective application is required. The Companydoes not expect the adoption of FAS 154 to have a material impact on itsconsolidated financial statements.

 

TheCompany does not expect that the adoption of other recent accountingpronouncements will have a material impact on its financial statements.

 

**NOTE B - GOVERNMENTINCENTIVE PAYMENTS**

 

The Company has recorded revenue of $633,333, $333 and $2,265,292 forthe years ended December 31, 2005, 2004 and 2003, related to incentive paymentsreceived under the State of Wisconsin Producer Subsidy Payment program(Wisconsin Producer program).

 

F-10

----

 

The Company has recorded revenue of $175,253, $2,060,129 and $7,979,426for the years ended December 31, 2005, 2004 and 2003 related to incentivepayments received under the United States Department of Agriculture CommodityCredit Corporation’s Bioenergy Program (US CCC Program).

 

**NOTE C - INVENTORIES**

 

Inventories consist of thefollowing at December 31:

 
| ** **        | ** ** | **2005**  | ** ** | **2004** | ** ** |
|-------------------|------------|-----------|------------|----------|------------|
|              |       |      |       |     |       |
| Raw  materials    |       | $         | 3,411,478  |     | $          | 1,244,352 |   |
| Work-in-process   |       | 395,198   |       | 355,202  |       |
| Finished  goods   |       | 1,321,226 |       | 913,803  |       |
|              |       |      |       |     |       |
| Total inventories |       | $         | 5,127,902  |     | $          | 2,513,357 |   |

 

**NOTE D - ASSET ACQUISITION**

 

OnAugust 4, 2005, the Company loaned approximately $2,585,000 (the “Loan”) toSpring Valley Ventures, LLC, a Wisconsin limited liability Company (“SpringValley Ventures”).  On August 5, 2005,the Company acquired all of the capital interests of Spring Valley Ventures forthe amount of $103,360 and converted the Loan into equity interests in SpringValley Ventures, which is now a wholly-owned subsidiary of the Company.  The Company acquired Spring Valley Venturesin order to provide additional corn storage and direct access to corn supplyfor the Company’s ethanol plant.  Theassets of Spring Valley Ventures consisted only of land and grain elevator assetsand did not include any other business operations or assumptions ofliabilities.  The final acquisition priceof approximately $2,700,000 has been allocated to land and land improvementsand plant buildings and equipment on the balance sheet.

 

**NOTE E - LONG-TERM DEBT**

 

TheCompany executed a credit facility (the “Credit Facility”) with AgStarFinancial Services, PCA (“AgStar”) dated June 22, 2005, which was held inescrow pursuant to an agreement between the parties and entered into onJune 29, 2005.  The Credit Facility is structured as two notespayable in an original aggregate amount of $15,491,087 (the “Term Loan”), aconvertible note payable in the amount of $20,000,000 (the “Convertible Loan”),and a revolving loan in the amount of $9,000,000 (the “Revolving Loan”). The Credit Facility replaces the Company’s prior credit facility (the “PriorFacility”), and allows the Company to pay costs expected to be incurred undervarious agreements to construct the addition to the plant to produce cornprotein concentrate and corn germ (see note F) and to provide for operatingcapital.

 

TheTerm Loan is structured as two Promissory Notes in the original principalamounts of $5,891,087 (“Note #1”) and $9,600,000 (“Note #2”).  Note #1 andNote #2 bear interest at a fixed rate of 6.97%.  The Convertible Loan andthe Revolving Loan bear interest at a variable rate equal to 2.75% above theLIBOR rate.  The Company has the option to convert the Convertible Loan toa fixed rate loan under certain conditions, and the interest rates for Note #1,Note #2, the Convertible Loan and the Revolving Loan are subject to adjustmentbased on certain capital conditions of the Company.

 

F-11

----

 

Borrowingsunder the Credit Facility are secured by substantially all of the assets of theCompany.  The Credit Facility contains financial and other covenants, andincludes restrictions on certain activities of the Company, such as incurringadditional debt.  If an event of default, such as failure to make requiredpayments or a failure to comply with covenants after any applicable graceperiod, were to occur under the Credit Facility, AgStar would be entitled to,among other remedies, declare all amounts outstanding under the facilityimmediately due and payable, and to enforce its security interest and mortgageon the assets of the Company.  The Company was in compliance with thesecovenants at December 31, 2005.

 

AtDecember 31, 2005, the Company had $15,037,610 outstanding under the Term Loanand $2,305,139 under the Convertible Loan. There were no amounts outstanding on the Revolving Loan at December 31,2005.  At December 31, 2004 the balance outstanding under the PriorFacility was $18,037,219.

 

Long-term debt consists of the following as of December 31:

 

| ** **                                                                                                                                                                                                                                                                                            | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                                                                                                                                                                                                  |       |       |       |       |       |
| Note payable to First National Bank;  refinanced with AgStar in June 2005                                                                                                                                                                                                                             |       | $          | —     |       | $          | 18,037,219 |   |
| Term loan to AgStar, secured by a general  business security interest; interest accrues at 6.97%. This note is payable  in monthly principal and interest payments of $179,625, with a final payment  due July 1, 2010.                                                                               |       | 15,037,610 |       | —     |       |
| Convertible loan to AgStar, secured by  general business security interest; variable interest rate at LIBOR + 2.75%,  (6.86% at December 31, 2005) with final payment due on the Conversion Date,  the Conversion Date being such time as when the lender receives a project  completion certificate. |       | 2,305,139  |       |       |       |
| Note payable to utility company; secured by  specific equipment and guaranteed by the City of Monroe, Wisconsin; interest  accrues at 3%. The note is payable in monthly principal and interest payments  of $34,762 with a final payment due November 2007                                           |       | 2,574,379  |       | 2,908,831  |       |
| Note payable to utility company; secured by  specific equipment, interest accrues at 2%. The note is payable in monthly principal  and interest payments of $52,583 with a final payment due December 2010.                                                                                           |       | 3,000,000  |       | —     |       |
| Note payable; secured by specific  equipment; payable in monthly principal payments of $2,233, with final  payment due in 2007. This note was offered at zero percent financing.                                                                                                                      |       | 35,734     |       | 98,353     |       |
|                                                                                                                                                                                                                                                                                                  |       | 22,952,862 |       | 21,044,403 |       |
| Less current maturities                                                                                                                                                                                                                                                                               |       | 2,144,563  |       | 3,409,246  |       |
|                                                                                                                                                                                                                                                                                                  |       |       |       |       |       |
|                                                                                                                                                                                                                                                                                                  |       | $          | 20,808,299 |       | $          | 17,635,157 |   |

 

F-12

----

 

Future maturities of long-term debt as of December 31, 2005 are asfollows:

 
| **Years ending December 31,** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|
| 2006                          |       | $          | 2,144,563  |   |
| 2007                          |       | 4,220,382  |       |
| 2008                          |       | 2,094,125  |       |
| 2009                          |       | 2,214,050  |       |
| 2010                          |       | 10,778,017 |       |
| Thereafter                    |       | 1,501,725  |       |
|                          |       |       |       |
|                          |       | $          | 22,952,862 |   |

** **

**NOTE F – COMMITMENTS ANDCONTINGENCIES**

 

The Company had forward contracts topurchase approximately 4,389,000 and 3,280,000 bushels of corn at variousprices at December 31, 2005 and 2004. The Company had additional forward contracts to purchase approximately3,403,000 and 3,021,000 bushels of corn that were not yet priced at December31, 2005 and 2004.  There were nounrealized losses on open forward contracts that were priced atDecember 31, 2005.   The Companyrecorded an unrealized loss of $218,989 on open forward contracts that werepriced at December 31, 2004.

 

On June 29, 2005, theCompany entered into various agreements to construct an approximately$25,000,000 addition to the Company’s ethanol plant for the production of cornprotein concentrate and corn germ.  The Company expects commercialproduction to begin July 2006.  In addition, the Company entered into twomarketing agreements with a third party: one for the sale of all the cornprotein concentrate produced by the Company and the other for the sale of allcorn germ produced by the Company.  These agreements expire on the fifthanniversary of the date of first commercial production.  As of December 31, 2005, construction costsof $6,500,133 are included in construction in progress.

 

In addition, the Companyexecuted a license agreement dated as of June 23, 2005 with a third party (the“License Agreement”), which was entered into on June 29, 2005.  Pursuant to the License Agreement, theCompany will license certain technology to use in the construction andoperation of the addition to the Company’s plant.  The license provided under the LicenseAgreement is irrevocable and perpetual. The Company paid $868,000 in connection with the License Agreement whichis recorded as intangible assets at December 31, 2005.

 

The Company leases railcars under anoperating lease.  This lease continues ona month to month basis.  Total rentexpense for all operating leases was $120,000, $63,750 and $68,625 for theyears ended December 31, 2005, 2004 and 2003.  There were no future minimum lease paymentsunder this lease as of December 31, 2005.

 

F-13

----

 

**NOTE G - RELATED PARTIES**

 

The Company’s sole ethanol marketing companyis a member and has a representative on the Company’s Board of Directors.  Sales for the years ended December 31, 2005,2004 and 2003 to the member were $76,540,450, $72,095,421 and $52,077,172,respectively.  Trade accounts receivablefrom the ethanol marketing company at December 31, 2005 and 2004 were $5,682,150and $5,145,505, respectively.

 

In connection with the sales activities ofthe ethanol marketing company the Company recorded expenses of $5,080,378,$4,773,310 and $4,832,854 related to railcar, freight and marketing fees forthe years ended December 31, 2005, 2004 and 2003.

 

An affiliate ofthe Company’s sole distillers grain marketing company is a member and has arepresentative on the Company’s Board of Directors. Sales for the years endedDecember 31, 2005, 2004 and 2003 to the distillers grain marketing company were$12,150,780, $15,667,441 and $10,765,583, respectively.  Trade accounts receivable from the distillersgrain marketing company at December 31, 2005 and 2004 were $227,810 and$243,263, respectively.

 

**NOTE H - RETIREMENT PLAN**

 

Effective January 1, 2003, the Company establisheda 401(k) Plan for all employees of the Company. The Company may make profit sharing contributions to the plan at thediscretion of the Company’s Board of Directors. The Company’s discretionary contribution was $54,243, $21,949 and$21,592 in 2005, 2004 and 2003.

 

**NOTE I - MAJOR CUSTOMERS**

 

The Company has two major customers thataccounted for 79% and 13% of sales and revenues for the year ended December 31,2005, 78% and 17% of sales and revenues for the year ended December 31, 2004and 70% and 15% of sales and revenues for the year ended December 31, 2003.Revenue from major customers follows for the years ended December 31:

 
| ** **                 | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------|------------|------------|------------|------------|------------|------------|------------|
|                       |       |       |       |       |       |       |       |
| Ethanol  marketing company |       | $          | 76,540,450 |       | $          | 72,095,421 |       | $ | 52,077,172 |   |
| Customer A                 |       | 12,150,780 |       | 15,667,440 |       | 10,765,583 |       |
|                            |            |            |            |            |            |            |            |  |  |  |

 

Accountsreceivable from major customers consisted of the following as of December 31:

 
| ** **                 | ** ** | **2005** | ** ** | **2004** | ** ** | ** ** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|------------|------------|
|                       |       |     |       |     |       |       |       |
| Ethanol  marketing company |       | $        | 5,682,150  |     | $          | 5,145,505  |       |   |   |
| Customer A                 |       | 227,810  |       | 243,362  |       |       |       |
|                            |            |          |            |          |            |            |            |  |  |

 

F-14

----

 

**NOTE J - INCOME TAXES**

 

Due to the Company’s organization as a limited liabilitycompany, the income or loss of the Company is reportable by the respectivemembers on their personal income tax returns. Therefore, no income tax provision has been included in the accompanyingconsolidated financial statements.

 

The differences between consolidated financial statementbasis and tax basis of assets are as follows as of December 31:

 
| ** **                                                                                  | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
|                                                                                        |       |        |       |        |       |
| Consolidated financial statement basis of  assets                                           |       | $           | 66,612,129 |        | $          | 60,201,606 |   |
| Plus: derivative contracts, start-up costs  and other, net                                  |       | (548,164    | )          | (376,282    | )          |
| Less: accumulated tax depreciation and  amortization greater than financial statement basis |       | (31,885,329 | )          | (26,815,539 | )          |
|                                                                                        |       |        |       |        |       |
| Income tax basis of assets                                                                  |       | $           | 34,178,636 |        | $          | 33,009,785 |   |

 

There were no significant differences between theconsolidated financial statement basis and tax basis of the Company’sliabilities.

 

**NOTE K - MEMBERS’ EQUITY**

 

As specified in the Company’s operating agreement, theCompany has three classes of member units:  Class A, Class B, andClass C.

 

All members’ units outstanding at December 31, 2005,2004 and 2003 are Class A member units and provide for voting and incomeallocation rights based upon the number of units held.

 

F-15

----

 

**NOTE L - QUARTERLY INFORMATION(UNAUDITED)**

 

The following is a summaryof the Company’s quarterly operating results for the years ended December 31,2005 and 2004:

 
| ** **                              | ** ** | **Quarterly** | ** ** |
|-----------------------------------------|------------|---------------|------------|
| ** **                              | ** ** | **1st Qtr**   | ** ** | **2nd Qtr** | ** ** | **3rd Qtr** | ** ** | **4th Qtr** | ** ** |
| Year ended  December 31, 2005           |       |          |       |   |   |   |   |   |   |
| Sales and revenues                      |       | $             | 24,682,721 |   | $ | 22,629,981 |   | $ | 24,792,787 |   | $ | 25,546,646 |   |
| Gross margin                            |       | 5,253,202     |       | 3,491,657 |   | 4,605,599 |   | 4,812,699 |   |
| Net income                              |       | 4,205,134     |       | 2,026,971 |   | 3,527,398 |   | 3,561,712 |   |
| Net income per unit - basic and diluted |       | $             | 212.66     |   | $ | 102.51 |   | $ | 178.39 |   | $ | 180.11 |   |

 
| ** **                              | ** ** | **Quarterly** | ** ** |
|-----------------------------------------|------------|---------------|------------|
| ** **                              | ** ** | **1st Qtr**   | ** ** | **2nd Qtr** | ** ** | **3rd Qtr** | ** ** | **4th Qtr** | ** ** |
| Year ended  December 31, 2004           |       |          |       |   |   |   |   |   |   |
| Sales and revenues                      |       | $             | 23,431,743 |   | $ | 22,318,528 |   | $ | 24,032,104 |   | $ | 22,302,391 |   |
| Gross margin                            |       | 9,229,219     |       | 1,117,404 |   | 1,345,899 |   | 4,921,129 |   |
| Net income                              |       | 8,124,885     |       | 40,339 |   | 312,195 |   | 3,907,052 |   |
| Net income per unit - basic and diluted |       | $             | 410.89     |   | $ | 2.04 |   | $ | 15.79 |   | $ | 197.58 |   |

 

**NOTE M – SUBSEQUENT EVENTS**

 

The Company’s Board of Directors on January 26, 2006declared a distribution of $500 per unit to be paid to all members of record atDecember 31, 2005.  The totaldistribution will be $9,887,000.

 

The Company’s Board of Directors announced on January30, 2006 its intent to engage in a reclassification of the Company’sClass A units.  The proposed transaction will provide for thereclassification of the Company’s Class A units held by unit holders whoare the record holders of 20 or fewer Class A units.  In connectionwith the reclassification, each Class A unit held by such record holderswill be reclassified on the basis of one Class A-1 unit for eachClass A unit held by such unit holders.  All other Class A unitswill remain outstanding and be unaffected by the reclassification.  If theCompany’s members approve the proposed amendments to the Company’s operatingagreement and the reclassification is implemented, the Company anticipateshaving fewer than 300 Class A unit holders of record, which would enablethe Company to voluntarily terminate the registration of its Class A unitsunder the Securities Exchange Act of 1934.

 

F-16

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