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

**WASHINGTON,DC 20549**

 

**FORM 10-KSB**

 

**ANNUALREPORT FOR SMALL BUSINESS ISSUERS SUBJECT TO THE1934 ACT REPORTING REQUIREMENTS**

 

|   | **ý** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|--------|------------|-----------------------------------------------------------------------------------------------------|
|   |       |                                                                                                |
|   |       | **For the Fiscal Year Ended December 31, 2003**                                                |
|   |       |                                                                                                |
|   |       | **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**

 

**BADGERSTATE ETHANOL, LLC**

(Name of Small Business Issuer in ItsCharter)

 

| **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 toSection 12(b) of the Exchange Act: **None**

 

Securities registered underSection 12(g) of the Exchange Act: **None**

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

 

The issuer’s revenues for its most recent fiscal year were $74,149,226.

 

The aggregate market value of the member units held by non-affiliatesof the registrant (computed by reference to the price of certain member unitssold through Variable Investment Advisors, Inc.) was $34,604,500 as ofDecember 31, 2003.  There is noestablished public trading market for our securities.

 

As of March 15, 2004, the Company has issued 19,774****ClassA member units.

 

DOCUMENTS INCORPORATED BY REFERENCE.

**None**.

 

 

----

 

**TABLE OF CONTENTS**

 

| PART I     |                                                                                                 |
|------------|------------------------------------------------------------------------------------------------------|
|       |                                                                                                 |   |
|       | ITEM 1.   DESCRIPTION OF BUSINESS                                                               |   |
|       |                                                                                                 |   |
|       | ITEM 2.   PROPERTY                                                                              |   |
|       |                                                                                                 |   |
|       | ITEM 3.  LEGAL PROCEEDINGS                                                                      |   |
|       |                                                                                                 |   |
|       | ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |   |
|       |                                                                                                 |   |
| PART II    |                                                                                                 |
|       |                                                                                                 |   |
|       | ITEM 5.   MARKET FOR THE REGISTRANT’S MEMBER UNITS AND RELATED MEMBER MATTERS              |   |
|       |                                                                                                 |   |
|       | ITEM 6.   MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                        |   |
|       |                                                                                                 |   |
|       | ITEM 7.  FINANCIAL STATEMENTS                                                                   |   |
|       |                                                                                                 |   |
|       | ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURE |   |
|       |                                                                                                 |   |
|       | ITEM 8A.   CONTROLS AND PROCEDURES                                                              |   |
|       |                                                                                                 |   |
| PART  III  |                                                                                                 |
|       |                                                                                                 |   |
|       | ITEM 9.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    |   |
|       |                                                                                                 |   |
|       | ITEM 10.   EXECUTIVE COMPENSATION                                                               |   |
|       |                                                                                                 |   |
|       | ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                       |   |
|       |                                                                                                 |   |
|       | ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                       |   |
|       |                                                                                                 |   |
|       | ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K                                                     |   |
|       |                                                                                                 |   |
|       | ITEM 14. PRINCIPAL ACCOUNTANT FEES AND  SERVICES                                                     |   |
|       |                                                                                                 |   |
| SIGNATURES |                                                                                                 |

 

i

----

 

CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements.  In addition, we may make forward-lookingstatements orally in the future by or on behalf of the Company. We undertake noresponsibility to update any forward-looking statement.  When used, the words “believe,” “expect,”“will,” “can,” “estimate,” “anticipate” and similar expressions are intended toidentify forward-looking statements. Readers should not place undue reliance on any forward-lookingstatements and recognize that the statements are not predictions of actualfuture results.  Actual results couldand likely will differ materially from those anticipated in the forward-lookingstatements due to risks and uncertainties. These risks and uncertainties include, without limitation, the followingand those business risks and factors described elsewhere in this report or ourother Securities and Exchange Commission filings, our assumptions concerningfinancing requirements and future operations, changes in state and federalethanol subsidies, our need for additional capital, our ability to manufactureour products on a commercial scale and in compliance with regulatoryrequirements, increased competition, and changes in government regulation.

 

RISK FACTORS

 

**RISKS RELATED TO OURFORMATION AND FINANCING PLAN**

 

**We have incurredsubstantial debt and debt service requirements.**

 

We have incurred substantial debt to implement our business plan.Therefore, we have substantial debt and debt service requirements.  Since our capital structure will be highlyleveraged, the amount of debt we have incurred will have important consequencesincluding:

 

•                  Our ability toborrow additional amounts for working capital, capital expenditures and otherpurposes will be limited or may not be available on terms favorable to us or atall;

 

•                  A substantialportion of our cash flows from operations will be used to pay interest andprincipal on our debt, which will reduce the funds that would otherwise beavailable to us for our operations and future business opportunities;

 

•                  We will bevulnerable to increases in prevailing interest rates;

 

•                  We may besubstantially more leveraged than some of our competitors, which may place usat a competitive disadvantage;

 

•                  Our indebtednessis expected to be secured by all or substantially all of our assets, whichmeans that there will be virtually no assets left for unit holders in the eventof a liquidation; and

 

•                  Our substantialdegree of leverage may limit our flexibility to adjust to changing marketconditions, reduce our ability to withstand competitive pressures and make usmore vulnerable to a downturn in general economic conditions or our business.

 

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

 

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

 

1

----

 

indebtedness or raise funds through asset sales, sales of equity orotherwise, our business would be adversely affected.

 

**Our debt financingcontains numerous covenants, in which a breach may result in default.**

 

Our debt obligations contain a number of significant covenants. Thesecovenants limit our ability to, among other things:

 

•                  Incur additionalindebtedness;

 

•                  Make capitalexpenditures in excess of prescribed thresholds;

 

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

 

•                  Make variousinvestments;

 

•                  Create liens onour assets;

 

•                  Utilize assetsale proceeds;

 

•                  Merge orconsolidate or dispose of all or substantially all of our assets.

 

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

 

**RISKS RELATED TODEVELOPMENT**

 

**Our agreements or understandings with Fagen,Inc., ICM Marketing, Inc. and Murex, N.A., Ltd. were not negotiated at arm’slength, we may not have obtained terms as favorable to us as those we couldhave obtained from third parties, and any claims that we may have against Fagenor ICM may be difficult for us to enforce.**

 

We are heavily dependent upon the services that Fagen, Inc. (“Fagen”),ICM Marketing, Inc. (“ICM”) and Murex, N.A., Ltd. (“Murex”) are providing. Withoutthese services, we would not have been able to build our ethanol plant.  Representatives of Fagen are members of theCompany and representatives of ICM and Murex were previously members of theCompany.  Also, representatives of Fagenand Murex serve on our Board of Directors (and representatives of ICMpreviously served on our Board of Directors), and have been involved in nearlyall aspects of our formation, capital raising and operation to date.  Consequently, the terms of our agreementsand understandings with Fagen, ICM and Murex have not been negotiated at arm’slength, and therefore, there is no assurance that our arrangements with themare as favorable to us as those we could have obtained from unaffiliated thirdparties. Because of Fagen’s, ICM’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 orunderstandings with us.

 

**We are dependent on adevelopment agreement with the City of Monroe, Wisconsin.**

 

We entered into a development agreement with the City of Monroe,Wisconsin, for the construction of the ethanol plant and for siteimprovements.  As part of the agreement,we have on-going obligations, including representing that the fair market valueof the site will not be less than $10 million, or pay a nonperformancepenalty not to exceed $280,000 per year and repaying up to $1.6 million ofthe City of Monroe’s tax incremental financing for site improvements throughregular property tax assessments.  Inconnection with the agreement, we delivered a mortgage to the City of Monroe.  The mortgage secures our performance underthe agreement and expires in 2011.

 

2

----

 

**RISKS RELATED TOETHANOL PRODUCTION**

 

**Federal regulations and tax incentivesconcerning ethanol could expire or change, which could harm our business.**

 

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

 

Additionally, Congress provides an ethanol production incentive throughthe United States Department of Agriculture Commodity Credit Corporation’sBioenergy Program.  This programprovides a one time payment on any increase in ethanol production by qualifyingethanol plants.  The elimination orreduction of this federal incentive to the ethanol industry would have amaterial adverse impact on our business.

 

**Wisconsin stateproducer incentive payment may not be available or could be modified whichcould harm our business.**

 

Under the Wisconsin producer subsidy payment program (the “ProducerSubsidy Payment”), the State of Wisconsin authorized the payment to certainethanol producers of $0.20 per gallon for up to 15,000,000 gallons of ethanolproduced in Wisconsin in each 12 month period. The payments are prorated if the State of Wisconsin has insufficientfunds to pay all eligible ethanol producers $0.20 per gallon.  A Wisconsin ethanol producer will beeligible for the payments if it has been producing ethanol in Wisconsin forfewer than 60 months, it produces more than 10,000,000 gallons of ethanol ayear and it purchases the corn or other substances from which the ethanol isproduced from Wisconsin sources. The maximum subsidy statutorily available toan ethanol producer under this program is $3,000,000 annually. We have appliedwith the Wisconsin Department of Agriculture, Trade and Consumer Protection toqualify for the statutory maximum of these ethanol producer payments.Additionally, if another ethanol plant came online and produced 10 milliongallons of ethanol, it could qualify for the producer payment which wouldreduce the funds available to us.

 

The current Wisconsin state budget only allocated $1,900,000 to theProducer Subsidy Payment program. Therefore, assuming the legislature does not increase, reduce oreliminate the funds available under this program, the $1,900,000 million willbe prorated between the qualifying ethanol plants in Wisconsin, includingours.  It is our belief that the maximumthe Company will be eligible to receive under this program next year will beapproximately $633,000; however, other ethanol plants could begin operations inthe next year which would reduce the funds available to us.  The Wisconsin legislature could reduce oreliminate these payments at any time. We intend to partially collateralize asubstantial portion of our subordinated debt financing with these payments, andtherefore, if these payments were eliminated or reduced, it would be verydamaging to our business and prospects.

 

**Operating our ethanolplant may require additional capital.**

 

The processing of corn into ethanol and the marketing of ethanol andits byproducts are capital intensive and require substantial amounts of cashreserves. We may not generate sufficient operating cash to meet these capitalrequirements. We could need additional financing in order to compete in theethanol industry. This financing will be senior in priority to the equity ofinvestors, and we could be subject to restrictive covenants that could restrictour ability to pay cash distributions or limit our ability to grow our businessby issuing additional securities or debt. If we obtain additional financing byissuing additional units, our members would suffer dilution of their units,which would reduce the value of their units. There can be no assurance thatadditional financing would be available if required or,

 

3

----

 

if available, that it would be on terms acceptable to us. If futurefinancing were unavailable for any reason, we may be forced to discontinue operations.

 

**The ethanol industryis very competitive.**

 

The ethanol industry continues to grow and there is significantcompetition among ethanol producers. Nationally, ethanol production isconcentrated in a few large companies. Investors should understand that we facea competitive challenge from larger ethanol plants, from ethanol plants thatcan produce a wider range of products than our ethanol plant, and from otherethanol plants similar to our ethanol plant. Furthermore, we will be in direct competition with other ethanolproducers, many of which have greater resources than we currently have or willhave in the future. Large ethanol producers such as Archer Daniels Midland andCargill, among others, are capable of producing significantly greater quantitiesthan the amount of ethanol we expect to produce. In addition, there are severalWisconsin, Minnesota and other Midwestern regional ethanol producers which haverecently formed, are in the process of forming, or are under consideration,which are or would be of a similar size and have similar resources to us.

 

We will also compete with producers of other gasoline additives havingsimilar octane and oxygenate values as ethanol, such as producers of methyltertiary butyl ether (“MTBE”), a petrochemical derived from methanol whichcosts less to produce than ethanol. Many major oil companies produce MTBE andbecause it is petroleum-based, its use is strongly supported by major oilcompanies. Alternative fuels, gasoline oxygenates and alternative ethanol productionmethods are also continually under development. The major oil companies havesignificantly greater resources than we have to market MTBE, to developalternative products, and to influence legislation and public perception ofMTBE and ethanol. These companies also have sufficient resources to beginproduction of ethanol should they choose to do so.

 

**To produce ethanol weintend to purchase significant amounts of corn that is subject to disease andother risks.**

 

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

 

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

 

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

 

Water supply and water quality are important requirements to produceethanol. To satisfy our water needs, we have drilled one 500,000 gallon-per-daywell on the property.  Current plantusage is approximately 179,000 gallons per day.

 

We expect that the well will provide all of the water that we will needto operate the ethanol plant, but our estimates regarding water needs or thewater available from the well on the property could be understated and we couldneed additional water. If we need more water, we will be forced to find othersources and this could require us to spend additional capital which could harmour business and its prospects. Further, there can be no assurance that we willbe able to find alternate sources of water at commercially reasonable prices,or at all.

 

4

----

 

**Interruptions in oursupply of energy could have a material adverse impact on our business.**

 

Ethanol production also requires a constant and consistent supply ofenergy into the ethanol plant. If there is any interruption in our supply of energyfor whatever reason, such as supply, delivery or mechanical problems, we may berequired to halt production. If production is halted for any extended period oftime, it will have a material adverse effect on our business. We havecontracted with gas and electric utilities to provide our needed energy, butthere can be no assurance that those utilities will be able to reliably supplythe gas and electricity that we need. If we were to suffer interruptions in ourenergy supply, our business would be harmed.

 

**Our success willdepend on hiring and retaining key personnel.**

 

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

 

**We are subject toextensive environmental regulation.**

 

Ethanol production involves the emission of various airbornepollutants, including particulate (PM10), carbon monoxide (CO)3oxides of nitrogen (N0x) and volatile organic compounds. To operate the ethanolplant, we have obtained permits from the State of Wisconsin. Wisconsin authoritiescould impose additional conditions or other restrictions that could harm ourbusiness.

 

We are also subject to regulations on emissions from the United StatesEnvironmental Protection Agency (“EPA”) as more fully described herein in thesection entitled Regulatory Permits. Additionally, EPA and Wisconsin’senvironmental regulations are subject to change and often such changes are notfavorable to industry. We also could be subject to environmental nuisance orrelated claims by employees or property owners or residents in the vicinity ofthe ethanol plant arising from air or water discharges or other reasons.Ethanol production has been known to produce an unpleasant odor to whichsurrounding residents could object. Claims or increased environmentalcompliance costs could harm our business.

 

**Ethanol production isenergy intensive, and we will need significant amounts of electricity andnatural gas.**

 

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

 

**Our business is notdiversified.**

 

Our success depends largely upon our ability to profitably operate ourethanol plant. We do not have any other lines of business or other sources ofrevenue if we are unable to operate our ethanol plant.

 

**We established anoutput contract with only one distributor, Murex, N.A., who will purchase allof the ethanol we produce; we contracted only with ICM Marketing, Inc. for themarketing and distribution of our feed products.**

 

We will sell all of the ethanol we produce to one distributor, Murex,N.A., pursuant to an output contract. As a result, we are dependent on onedistributor to sell our ethanol. If this distributor breaches our outputcontract or is not in the financial position to purchase all of the ethanol weproduce, we will not have any readily available means to sell our ethanol andour financial performance will be adversely and materially effected. Ourfinancial performance is dependent upon the financial health of the distributorwe contract with.

 

5

----

 

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

 

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

 

**Our operating resultscould fluctuate.**

 

Our operating results could fluctuate significantly in the future as aresult of a variety of factors many of which are outside our control. Thesefactors include:

 

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

 

•                  Changes ininterest rates and availability of credit;

 

•                  Reliability andconstruction quality of the ethanol plant to permit it to operate at a levelthat we expect;

 

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

 

•                  Amount andtiming of capital expenditures and other costs relating to maintenance orexpansion of our operations;

 

•                  Technicaldifficulties in operating the ethanol plant;

 

•                  New products andnew plants from ethanol producers or oil companies; and

 

•                  General economicconditions, or economic events specific to agriculture, oil or automobilemarkets.

 

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.

 

6

----

 

**PARTI**

 

**ITEM1.  DESCRIPTION OF BUSINESS**

 

Badger State Ethanol, LLC, a Wisconsin limited liability companyorganized in 2000 (the “Company”), is engaged in the production and sale offuel grade ethanol.  Unless otherwiseindicated, whenever we use term we, us, our or ours, we mean the Company.

 

Fuel grade ethanol is our primary product accounting for the majorityof our revenue.  In addition, we selldistillers grains, a principal by-product of the ethanol production process,which may be sold as distillers dried grains and distillers modified wetgrains.  We have an annual capacity toprocess between approximately 14.4 and 17.0 million bushels of corn intobetween approximately 40 and 48 million gallons of ethanol.  We completed construction of our plant andstarted operations in October 2002.

 

**Description of DryMill Process**

 

Our ethanol plant, which is located in Monroe, Wisconsin, producesethanol by processing corn.  The corn isreceived by rail and by semi-trailer truck, and is weighed and cleaned of rocksand debris before it is conveyed to one of two concrete storage silos. The cornis then transported to a hammermill or grinder where it is ground into flourand conveyed into a slurry tank for processing.  We add water, heat and enzymes to break the ground corn into acorn mash.  This mash is heat sterilizedand pumped to a tank where other enzymes are added to convert the starches intoglucose sugars.  Next, the mash ispumped into one of three fermenters, where yeast is added, to begin aforty-eight to fifty hour batch fermentation process.  A distillation process vaporizes the alcohol from the corn mash.  The alcohol is further dried in a rectifierand molecular sieve.  The resulting 200proof alcohol is then pumped to shift tanks and blended with five percentgasoline as it is pumped into denatured ethanol storage tanks.

 

Corn mash exiting the distillation process is pumped into one ofseveral centrifuges.  Water from thecentrifuges, called thin stillage, is condensed into a thicker syrup calledcondensed solubles.  The solids thatexit the centrifuge are called wet cake or distillers wet grains.  Typically, this wet cake is conveyed todryers where condensed solubles are added and moisture is removed to producedistillers dried grains, which may be used as animal feed.

 

**Principal Productsand Their Markets**

 

The principal products we produce at our ethanol plant are fuel gradeethanol and distillers grains.  InFebruary 2004, we entered into an agreement to provide and sell raw carbondioxide gas from our plant.

 

***Ethanol***

 

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

 

•                  An octaneenhancer in fuels;

 

•                  An oxygenatedfuel additive that can reduce carbon monoxide vehicle emissions; and

 

•                  Anon-petroleum-based gasoline extender.

 

Ethanol in its primary form is mostly used for blending with unleadedgasoline and other fuel products.  Theimplementation of the Federal Clean Air Act has made ethanol fuels an importantdomestic renewable fuel additive.  Usedas a fuel oxygenate, 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.

 

7

----

 

***Distillers Grains***

 

A principal by-product of the ethanol production process is distillersgrains, a high-protein, high-energy animal feed supplement primarily marketedto the dairy and beef industry.  Ourplant uses a dry mill ethanol process with a dryer system that allowsproduction of two moisture levels of distillers grains: distillers modified wetgrains and distillers dried grains. Distillers modified wet grains are processed corn mash and condensedsolubles that contain approximately 50% moisture.  It has a shelf life slightly longer than three days and is oftensold to nearby markets.  Distillers driedgrains are corn mash that has been dried to 10% moisture.  It has an almost indefinite shelf life andmay be sold and shipped via truck, rail car, barge or ship to any marketregardless of its vicinity to our ethanol plant.

 

In fiscal 2003, we experienced higher natural gas prices, which led tohigher by-product processing costs.  Tomitigate higher processing costs, we increased our production of distillersmodified wet grains, which require less natural gas to produce.  Consequently, we also increased themarketing campaign for distillers modified wet grains, in part by promoting thenutritional benefits of distillers modified wet grains.

 

***Carbon Dioxide***

 

Another by-product of the ethanol productionprocess is raw carbon dioxide. Raw carbon dioxide can be processed and used invarious food and non-food related applications, such as beverage and dry iceproduction, pharmaceutical manufacturing, shrink-fitting and cryogenicblasting. Carbon dioxide is principally used as expendable refrigerants and iscommonly used in food processing facilities such as slaughterhouse operations,frozen food storage, and as supplemental cooling for refrigerated products.

 

In February 2004, we entered into anagreement to lease land to a third party that will be constructing a plantadjacent to our plant.  Under theagreement, we will provide and sell raw carbon dioxide gas.  The initial term of the agreement is for 15years with an option to renew for additional 5 year periods thereafter.

 

**Customers**

 

We entered into an ethanol purchase and marketing agreement with Murex,N.A., Ltd., for the exclusive rights to purchase and market all ethanolproduced by our plant.  For fiscal yearended December 31, 2003, Murex, N.A., Ltd. accounted for all of ourethanol sales and approximately 70% of our aggregate sales and revenues.  We believe that the loss of Murex,N.A., Ltd. as a customer would have a material adverse effect on our salesand revenues.  Murex sold some of itsClass A member units in January of 2004 and currently has arepresentative on our Board of Directors. This exclusive agreement has an initial term of seven years untilOctober 23, 2010, and automatically renews for successive one-year termsunless written notice of termination is issued 90 days prior to the end of thethen current term.

 

We entered into a distillers grains purchase and marketing agreementwith ICM Marketing, Inc. for the exclusive rights to purchase and market alldistillers grains produced by our plant. For the fiscal year ended December 31, 2003, ICM Marketing, Inc.accounted for virtually all of our distillers grains sales and approximately15% of our aggregate sales and revenues. We believe that the loss of ICM Marketing, Inc. as a customer would havea material adverse effect on our sales and revenues.  This exclusive agreement has an initial term of three years untilOctober 25, 2005, and automatically renews for successive one-year termsunless written notice of termination is issued 90 days prior to the end of thethen current term.  ICM, Inc., theparent company of ICM Marketing, Inc., sold its Class A member units in 2003and effective December 2003 no longer has a representative on our Board ofDirectors.

 

**Seasonal Factors inBusiness**

 

In an effort to improve air quality in regions where carbon monoxideand ozone are a problem, the United States federal government requires the useof gasoline with a higher oxygen content in these regions during the fall andwinter.  Gasoline that is blended withethanol has a higher oxygen content than gasoline that does not contain

 

8

----

 

ethanol.  As a result, we expectmoderate seasonality with respect to our gross profit margins on our fuel gradeethanol allowing us to, potentially, be able to sell our fuel grade ethanol ata premium during the mandated oxygenate period (which coincides with our thirdand fourth fiscal quarters). Conversely, we expect our average sales price for fuel grade ethanolduring the summer, when fuel grade ethanol is primarily used as an octaneenhancer or a fuel supply extender, to be lower.  We primarily contract for six-month blending cycles to correspondto the different winter and summer market periods.

 

**Ethanol Industry**

 

Ethanol has important applications, primarily as an octane enhancer infuels, an oxygenated fuel additive that can reduce carbon monoxide vehicleemissions and a non-petroleum-based gasoline extender.  The ethanol industry is heavily dependent,however, on several governmental economic incentives.

 

***Federal EthanolSupports***

 

Ethanol sales have been favorably affected by the Clean Air Act Amendmentsof 1990, particularly the Federal Oxygen Program which became effectiveNovember 1, 1992.  The FederalOxygen Program requires the sale of oxygenated motor fuels during the fall andwinter months in certain major metropolitan areas to reduce carbon monoxidepollution.  Ethanol use has increaseddue to a second Clean Air Act program, the Reformulated Gasoline Program.  This program became effectiveJanuary 1, 1995, and requires the sale of reformulated gasoline in certainmajor urban areas to reduce pollutants, including those that contribute toground level ozone, better known as smog.

 

The use of ethanol as an oxygenate to blend with fuel to comply withfederal mandates also has been aided by federal tax policy.  The Energy Tax Act of 1978 exempted ethanolblended gasoline from the federal gas tax as a means of stimulating thedevelopment of a domestic ethanol industry and mitigating the United State’sdependence on foreign oil.  As amended,the federal tax credit currently allows the market price of ethanol to competewith the price of domestic gasoline. Although the federal tax credit is not directly available to us, itallows us to sell our ethanol at prices that are competitive with other lessexpensive additives and gasoline.  Thecredit for an ethanol blend is the equivalent of providing a per gallon“equalization” payment that allows blenders to pay more for ethanol than thewholesale price of gasoline and still retain the same profit margins.  Under current legislation, the federalgasoline tax is $0.184 per gallon and the tax on gasoline blended with 10%ethanol is $0.13 per gallon, providing a $0.054 difference.  Smaller credits of $0.0408 and $0.0302, areavailable for gasoline blended with 7.7% and 5.7% ethanol, respectively.  The federal tax on a gallon of 10% ethanolblended gasoline will gradually increase to $.133 by 2005, dropping thedifference to $.051 per gallon.  By2007, the federal tax credit for ethanol blended gasoline will expire, and it isscheduled to be taxed at the standard federal gasoline tax rate.

 

Fuel grade ethanol prices traditionally have varied directly with thewholesale price of gasoline.  However,in some states, fuel grade ethanol typically sells for a higher price pergallon than wholesale gasoline because of the aforementioned excise taxincentives.  Historically, fuel gradeethanol prices have also reflected a premium due to the oxygenate and octaneenhancing properties of this motor fuel additive.

 

During the year 2004, we anticipate receiving up to $3 million from theUnited States Department of Agriculture Commodity Credit Corporation’sBioenergy Program.  Under that program,we are eligible to receive a cash incentive for incremental grain consumptionfor the purpose of producing fuel grade ethanol.  Last year we received $7.5 million under this program forproducing 40 million gallons of ethanol. This year the incentive we will receive (if any) will be based on ourproduction over 40 million gallons.

 

***State EthanolSupports***

 

In part, the success of our business is dependent upon the availabilityof cash payments to ethanol producers from the State of Wisconsin underWisconsin Statutes Section 20.115(3)(d) and 93.75 (referred to hereinafteras the “Producer Subsidy Payment”). Under the Wisconsin Producer Subsidy Payment program, the State ofWisconsin will pay certain ethanol producers $.20 per gallon for up to15,000,000 gallons of ethanol produced in Wisconsin in each 12 monthperiod.  The Producer Subsidy Paymentswill be prorated if the State of Wisconsin has insufficient funds to pay alleligible ethanol producers $.20 per gallon. If this occurs, we will receive less than $0.20 per gallon

 

9

----

 

of ethanol produced.  Under theprogram, a Wisconsin ethanol producer is eligible for the payments if it hasbeen producing ethanol in Wisconsin for fewer than 60 months, it produces morethan 10,000,000 gallons of ethanol a year and it purchases the corn or othersubstances from which the ethanol is produced from local Wisconsinsources.  During 2004, the totalsubsidies available to all ethanol producers under the program are$1,900,000.  The maximum subsidyavailable to an ethanol producer under this program is the lesser of $1,900,000annually or the total subsidies available to all eligible ethanol producers ineach year.  We are currently eligiblefor the Producer Subsidy Payment and have applied to receive it.  The Producer Subsidy Payment program wasscheduled to expire in 2006.  Theprogram, however, has not been renewed and the likelihood of the ProducerSubsidy Payment program continuing is doubtful.

 

**Business Location;Proximity to Markets**

 

We are operating an ethanol plant in Monroe, Wisconsin, which is inGreen County, in the south central section of Wisconsin.  We purchased for $1 from the City of Monroe,Wisconsin an approximately 28-acre site on which to build the ethanolplant.  We selected the Monroe sitebecause of its location to existing grain production, accessibility to road andrail transportation and its proximity to major population centers.  It is also served by the Wisconsin SouthernRailroad Company, a short line rail operator. In addition, it is also in close proximity to major highways thatconnect to major population centers such as Madison and Milwaukee, Wisconsinand Chicago, Illinois.

 

**Development Agreementwith the City of Monroe**

 

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

 

•                  Constructing oneor more rail spurs connecting into an existing rail line;

 

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

 

•                  Repaying up to$1.6 million of the City of Monroe’s tax incremental financing for site improvementsthrough regular property tax assessments that, other than the fair market valuewarranty described above, are no higher than what would otherwise be assessedon the site after construction and operation if purchased from a third party.

 

During 2002, we completed the construction of the rail spurs connectingthem into an existing rail line.  Thefair market value of the site, including improvements, as of December 31,2003, was approximately $47 million. On January 1, 2003, we beganrepaying the City of Monroe’s tax incremental financing for site improvementsthrough our regular property tax assessments, which are approximately $280,000per year.

 

In connection with the development agreement, we executed and delivereda mortgage to the City of Monroe.  Themortgage secures our performance of the on-going obligations and expires in2011.  The City of Monroe’s lien of themortgage is subordinate to the mortgage lien of the lender providing primaryfinancing for the initial construction of our ethanol plant but not to theinterest of our equity holders.

 

**Procurements**

 

***Grain Delivery***

 

According to the Wisconsin Agricultural Statistical Service, over 360million bushels of corn are produced annually in Wisconsin.  Of that total, the greatest percentage isproduced in the southern portion of the state. According to the Wisconsin Agricultural Statistical Service,approximately 200 million bushels of corn are produced

 

10

----

 

annually within a 100-mile radius of Monroe, Wisconsin.  Our plant is located in Monroe, Wisconsin,in Green County, approximately eight miles from the Illinois state border.  We obtain approximately 98% of our cornsupply from producers located within a 100-mile radius of Monroe.  This amounts to approximately 3% of the cornproduced within a 100-mile radius of Monroe. We purchase most of our corn from Wisconsin producers because cornpurchased from Wisconsin residents qualifies for incentive payments to ethanolproducers from the State of Wisconsin. We have no agreements, commitments or understandings with any cornproducers.

 

***Grain Elevators***

 

We have ongoing business relationships with local grain elevators toacquire the grain we need.  We haveidentified approximately 36 elevators as potential sources of grain in southernWisconsin and continue to discuss with them future corn delivery.  Although we are currently procuring grainsfrom these sources, we cannot guarantee that we will be able to continueprocuring such grains on acceptable terms or at all.

 

***Transportation andDelivery***

 

Grain is delivered to our ethanol plant by trucks 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 for shippers via the Chicago,Illinois gateway, which connects with all major railroads via the Belt Railwayof Chicago, Burlington Northern at Prairie du Chien, Wisconsin, Union Pacific,Canadian Pacific and Wisconsin Central railroads at various points on thesystem.  In addition, access to bargefacilities is also available at Prairie du Chien, Wisconsin.

 

In July 2001, we entered into a rail track reimbursement andconstruction agreement, as well as a transportation agreement, with Wisconsinand Southern Railroad Company for construction of a rail track to our ethanolplant and for rail transportation services. Under the reimbursement and construction agreement, we receivereimbursements from the rail operator for track construction costs based upon arate of $10 per freight car shipped or received at our ethanol plant.  The reimbursements are payable on a monthlybasis not to exceed ten years or the cost of the track.  The transportation agreement, which providesus with rail transportation services for deliveries to and from the ethanolplant at negotiated rates, commenced on January 1, 2003.

 

***Hedging***

 

Due to rapid fluctuations in the price of corn, we engaged FirstCapital Ag to help us develop a grain risk management program hedging strategyto minimize our commodity risk exposure. Our grain risk management program is intended to use grain purchasecontracts together with grain futures derivatives to fix the cost of some ofour expected future grain purchases. Our policy allows for the use of fixed price forward purchase contracts,un-priced forward basis purchase contracts, and Chicago Board of Trade (CBOT)derivative contracts (over-the-counter and traditional options).  During 2003, approximately 99% of our fiscal2003 grain requirements were hedged through a combination of fixed priceforward purchase contracts, and CBOT traditional and over-the-counter optionhedges to protect our cost of grain. During 2003, our practice of protecting the cost of our grain, generallyaccounted for 50% of forecasted grain purchases in the upcoming twelvemonths.  We took this action because ofour start-up nature and 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 67% of our fiscal 2004 grainrequirements hedged.

 

***Storage Capacity***

 

We have sufficient corn storage facilities on-site for approximatelynine days of continuous production. Since our inception, we have maintained our own in-house grainprocurement department, to procure all our grain needs.  We believe that by establishing internalgrain procurement, we can better develop local supply relationships that 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

 

11

----

 

forward contracts through grain elevators.  The commodities manager coordinates grain deliveries between therailroad and the participating elevators, as well as negotiates priceprotection with hedging specialists.

 

***Water***

 

Water supply is important to our ethanol business.  The water quality at our plant currentlymeets the needs of the facility without significant filtering orprocessing.  To satisfy our water needs,we have drilled one 500,000 gallon-per-day well on the property.  Based upon current production of currentlyexisting wells in the City of Monroe, we believe there is sufficient groundwater 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***

 

Ethanol production is an energy intensive process using significantamounts of electricity and natural gas. We have contracted with Wisconsin Electric Power Company (“WE Energies”)for firm service natural gas delivery and with US Energy Services, Inc. tocoordinate purchase and delivery of the gas to the plant and otherwise manageour energy needs.  Due to thecompetitive nature of the natural gas market, we believe no significant risk oflong-term interruption exists.  USEnergy Services, Inc. also helps us to negotiate and procure natural gas andelectricity.  Natural gas prices havehistorically fluctuated dramatically. According to US Energy Services, Inc., the current price of natural gasas reported on the New York Mercantile Exchange is up 60% from last year.  US Energy Services, Inc. provides price riskmanagement services to us to manage natural gas prices in a manner that webelieve will provide price stability.

 

Natural gas supplies must be procured anddelivered on a daily basis in an amount equal to anticipated daily plantusage.  Transporters must be notifiedeach day regarding our plant’s expected usage and the physical supplysource.  To the extent that actual plantusage is greater than or less than expected usage (which usually is the case)the imbalance must be managed.  USEnergy Services, Inc. provides us with these kinds of management services andmonitors gas delivery, ensures timely payment of invoices, and reviews andreconciles the final invoices.

 

We have an arrangement with Wisconsin Gas Company to be the exclusivesupplier of transportation for natural gas for the plant operations.

 

***Electricity***

 

We purchase electricity from Alliant Energy Company, the local utilitythat holds the service franchise for the area in which our ethanol plant islocated.  We have not entered into anyagreement with Alliant regarding electrical service.

 

**Sales and Marketing**

 

We entered into an ethanol purchase and marketing agreement with Murex,N.A., Ltd., Dallas, Texas, for the exclusive rights to purchase and market allethanol produced by our plant.  Thisagreement expires in 2008.  Murex soldsome of its Class A member units in 2004 but still has a representative on ourBoard of Directors.

 

We also entered into a purchase and marketing agreement with ICMMarketing, Inc. for the exclusive rights to purchase and market all of thedistillers grains produced by our plant. This agreement expires in 2005. ICM, Inc., the parent company of ICM Marketing, Inc., was a prime subcontractorfor the construction of the ethanol plant and sold its Class A member units in2003 and effective December 2003 no longer has a representative on ourBoard of Directors.

 

**Competition**

 

We are in direct competition with other ethanol producers, many of whomhave greater resources than we do.  Weexpect that additional ethanol producers will enter the market as the demandfor ethanol increases.

 

12

----

 

***Ethanol Producers***

 

According to the Renewable Fuels Association, U.S. Fuel EthanolProduction Capacity, January 2004 Report, the largest ethanol producersinclude Archer Daniels Midland, Cargill, New Energy Corp., MGP Ingredients,Inc., VeraSun Energy Corporation, A.E. Staley and Chief Ethanol, all of whichare capable of producing many times the amount of ethanol we produce or expectto produce in the near future.

 

In addition, we are aware that several regional ethanol productionentities have recently formed, or are forming, that are currently of a similarsize and with similar resources to ours. For example, Adkins Energy recently completed building an ethanol plantin Lena, Illinois, which is approximately 20 miles away.  The Adkins plant is capable of producing 40million gallons of ethanol annually.  Inaddition, Ace Ethanol in Stanley, Wisconsin is operating and is capable ofproducing 15 million gallons of ethanol annually and Utica Energy in Oshkosh,Wisconsin is operating and capable of producing 24 million gallons of ethanolannually.  We are also aware of severalother potential projects in Wisconsin that may or may not beginproduction.  Wisconsin projects thatrely on corn as a raw material could compete with us in the market for corn aswell as for other raw materials, and compete with us in selling ethanol andanimal feed products.  The emergence ofother Wisconsin ethanol plants that are eligible for the Producer SubsidyPayment would reduce the amount of payments we receive because the WisconsinProducer Subsidy Payment of $0.20 per gallon up to a maximum of $3,000,000annually per producer is allocated pro rata to all eligible producers.

 

Plans to construct new plants or to expand existing plants have beenannounced which would increase the ethanol production capacity of ourcompetitors.  We are unable to determinethe number and production capacity of plants that ultimately may beconstructed, the timing of such construction or the effect of resultingproduction upon the demand for or price of our ethanol.  We expect to compete with other ethanolproducers based on price and, to a lesser extent, delivery service.  The ethanol industry has grown to more than72 production facilities in the United States. It is estimated that these facilities and 16 facilities currently underconstruction could produce over 3.6 billion gallons of ethanol per year.

 

The following table lists all of the major ethanol producers in theUnited States according to the Renewable Fuels Association, U.S. Fuel EthanolProduction Capacity, March 2004 Report.

 

13

----

 

U.S. PRODUCTION CAPACITY

million gallons per year (mmgy)

 
| **COMPANY**                           |   | **LOCATION**        |   | **FEEDSTOCK**       |   | **CURRENT  CAPACITY** |   | **UNDER  CONSTRUCTION/  EXPANSIONS** |
|---------------------------------------|--------|---------------------|--------|---------------------|--------|-----------------------|--------|--------------------------------------|
|                                  |   |                |   |                |   | **(MMGY)**            |   | **(MMGY)**                           |
| Abengoa Bioenergy Corp.               |   | York, NE            |   | Corn/milo           |   | 50                    |   |                                 |
|                                  |   | Colwich, KS         |   |                |   | 20                    |   |                                 |
|                                  |   | Portales, NM        |   |                |   | 15                    |   |                                 |
| ACE Ethanol, LLC                      |   | Stanley, WI         |   | Corn                |   | 15                    |   |                                 |
| Adkins Energy, LLC*                   |   | Lena, IL            |   | Corn                |   | 40                    |   |                                 |
| A.E. Staley                           |   | Loudon, TN          |   | Corn                |   | 65                    |   |                                 |
| AGP*                                  |   | Hastings, NE        |   | Corn                |   | 52                    |   |                                 |
| Agra Resources Coop, d.b.a. EXOL*     |   | Albert Lea, MN      |   | Corn                |   | 38                    |   |                                 |
| Agri-Energy, LLC*                     |   | Luverne, MN         |   | Corn                |   | 21                    |   |                                 |
| Alchem Ltd. LLLP                      |   | Grafton, ND         |   | Corn                |   | 10.5                  |   |                                 |
| Al-Corn Clean Fuel*                   |   | Claremont, MN       |   | Corn                |   | 30                    |   |                                 |
| Archer Daniels Midland                |   | Decatur, IL         |   | Corn                |   | 1070                  |   |                                 |
|                                  |   | Cedar Rapids, IA    |   | Corn                |   |                  |   |                                 |
|                                  |   | Clinton, IA         |   | Corn                |   |                  |   |                                 |
|                                  |   | Columbus, NE        |   | Corn                |   |                  |   |                                 |
|                                  |   | Marshall, MN        |   | Corn                |   |                  |   |                                 |
|                                  |   | Peoria, IL          |   | Corn                |   |                  |   |                                 |
|                                  |   | Wallhalla, ND       |   | Corn/barley         |   |                  |   |                                 |
| Aventine Renewable Energy, Inc.       |   | Pekin, IL           |   | Corn                |   | 100                   |   |                                 |
|                                  |   | Aurora, NE          |   | Corn                |   | 35                    |   |                                 |
| Badger State Ethanol, LLC*            |   | Monroe, WI          |   | Corn                |   | 48                    |   |                                 |
| Big River Resources, LLC*^            |   | West Burlington, IA |   | Corn                |   |                  |   | 40                                   |
| Broin Enterprises, Inc.               |   | Scotland, SD        |   | Corn                |   | 9                     |   |                                 |
| Cargill, Inc.                         |   | Blair, NE           |   | Corn                |   | 83                    |   |                                 |
|                                  |   | Eddyville, IA       |   | Corn                |   | 35                    |   |                                 |
| Central Illinois Energy Cooperative*^ |   | Canton, IL          |   | Corn                |   |                  |   | 30                                   |
| Central MN Ethanol Coop*              |   | Little Falls, MN    |   | Corn                |   | 20                    |   |                                 |
| Central Wisconsin Alcohol             |   | Plover, WI          |   | Seed corn           |   | 4                     |   |                                 |
| Chief Ethanol                         |   | Hastings, NE        |   | Corn                |   | 62                    |   |                                 |
| Chippewa Valley Ethanol Co.*          |   | Benson, MN          |   | Corn                |   | 42                    |   |                                 |
| Commonwealth Agri-Energy, LLC*        |   | Hopkinsville, KY    |   | Corn                |   | 20                    |   |                                 |
| Cornhusker Energy Lexington, LLC*^    |   | Lexington, NE       |   | Corn                |   |                  |   | 42                                   |
| Corn Plus, LLP*                       |   | Winnebago, MN       |   | Corn                |   | 44                    |   |                                 |
| Dakota Ethanol, LLC*                  |   | Wentworth, SD       |   | Corn                |   | 48                    |   |                                 |
| DENCO, LLC*                           |   | Morris, MN          |   | Corn                |   | 21.5                  |   |                                 |
| ESE Alcohol Inc.                      |   | Leoti, KS           |   | Seed corn           |   | 1.5                   |   |                                 |
| Ethanol 2000, LLP*                    |   | Bingham Lake, MN    |   | Corn                |   | 30                    |   |                                 |
| Glacial Lakes Energy, LLC*            |   | Watertown, SD       |   | Corn                |   | 48                    |   |                                 |
| 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                    |   |                                 |
| Gopher State Ethanol                  |   | St. Paul, MN        |   | Corn/Beverage Waste |   | 15                    |   |                                 |
| Grain Processing Corp.                |   | Muscatine, IA       |   | Corn                |   | 10                    |   |                                 |
| Great Plains Ethanol, LLC*^           |   | Chancellor, SD      |   | Corn                |   | 42                    |   |                                 |
| Heartland Corn Products*              |   | Winthrop, MN        |   | Corn                |   | 36                    |   |                                 |
| Heartland Grain Fuels, LP*            |   | Aberdeen, SD        |   | Corn                |   | 8                     |   |                                 |

 

14

----

 
| **COMPANY**                            |   | **LOCATION**       |   | **FEEDSTOCK**         |   | **CURRENT  CAPACITY** |   | **UNDER  CONSTRUCTION/  EXPANSIONS** |
|----------------------------------------|--------|--------------------|--------|-----------------------|--------|-----------------------|--------|--------------------------------------|
|                                   |   |               |   |                  |   | **(MMGY)**            |   | **(MMGY)**                           |
|                                   |   | Huron, SD          |   | Corn                  |   | 14                    |   |                                 |
| Husker Ag, LLC*                        |   | Plainview, NE      |   | Corn                  |   | 23                    |   |                                 |
| Iowa Ethanol, LLC*                     |   | Hanlontown, IA     |   | Corn                  |   | 45                    |   |                                 |
| James Valley Ethanol, LLC              |   | Groton, SD         |   | Corn                  |   | 45                    |   |                                 |
| J.R. Simplot                           |   | Caldwell, ID       |   | Potato waste          |   | 4                     |   |                                 |
| KAAPA Ethanol, LLC*^                   |   | Minden, NE         |   | Corn                  |   | 40                    |   |                                 |
| Land O’ Lakes*                    |   | Melrose, MN        |   | Cheese whey           |   | 2.6                   |   |                                 |
| Lincolnland Agri-Energy, LLC*^         |   | Palestine, IL      |   | Corn                  |   |                  |   | 40                                   |
| Little Sioux Corn Processors, LLC*^    |   | Marcus, IA         |   | Corn                  |   | 46                    |   |                                 |
| Merrick/Coors                          |   | Golden, CO         |   | Waste beer            |   | 1.5                   |   |                                 |
| Michigan Ethanol, LLC                  |   | Caro, MI           |   | Corn                  |   | 45                    |   |                                 |
| MGP Ingredients, Inc.                  |   | Pekin, IL          |   | Corn/wheat starch     |   | 78                    |   |                                 |
|                                   |   |               |   |                  |   |                  |   |                                 |
|                                   |   | Atchison, KS       |   |                  |   |                  |   |                                 |
| Mid-Missouri Energy, Inc. *^           |   | Malta Bend, MO     |   | Corn                  |   |                  |   | 40                                   |
| Midwest Grain Processors*              |   | Lakota, IA         |   | Corn                  |   | 45                    |   |                                 |
| Midwest Renewables^                    |   | Iowa Falls, IA     |   | Corn                  |   |                  |   | 40                                   |
| Miller Brewing Co.                     |   | Olympia, WA        |   | Brewery waste         |   | 0.7                   |   |                                 |
| Minnesota Energy*                      |   | Buffalo Lake, MN   |   | Corn                  |   | 18                    |   |                                 |
| New Energy Corp.                       |   | South Bend, IN     |   | Corn                  |   | 95                    |   |                                 |
| Northeast Missouri Grain, LLC*         |   | Macon, MO          |   | Corn                  |   | 40                    |   |                                 |
| Northern Lights Ethanol, LLC*          |   | Big Stone City, SD |   | Corn                  |   | 45                    |   |                                 |
| Otter Creek Ethanol, LLC*^             |   | Ashton, IA         |   | Corn                  |   |                  |   | 45                                   |
| Parallel Products                      |   | Louisville, KY     |   | Beverage waste        |   | 4                     |   |                                 |
|                                   |   | R. Cucamonga, CA   |   |                  |   | 4                     |   |                                 |
| Permeate Refining                      |   | Hopkinton, IA      |   | Sugars & starches |   | 1.5                   |   |                                 |
| Pine Lake Corn Processors, LLC*^       |   | Steamboat Rock, IA |   | Corn                  |   |                  |   | 20                                   |
| Platte Valley Fuel Ethanol, LLC^       |   | Central City, NE   |   | Corn                  |   |                  |   | 40                                   |
| Pro-Corn, LLC*                         |   | Preston, MN        |   | Corn                  |   | 40                    |   |                                 |
| Quad-County Corn Processors*           |   | Galva, IA          |   | Corn                  |   | 23                    |   |                                 |
| Reeve Agri-Energy                      |   | Garden City, KS    |   | Corn/milo             |   | 12                    |   |                                 |
| Siouxland Energy & Livestock Coop* |   | Sioux Center, IA   |   | Corn                  |   | 18                    |   |                                 |
| Sioux River Ethanol, LLC*^             |   | Hudson, SD         |   | Corn                  |   |                  |   | 45                                   |
| Tall Corn Ethanol, LLC*                |   | Coon Rapids, IA    |   | Corn                  |   | 45                    |   |                                 |
| Trenton Agri Products, LLC^            |   | Trenton, NE        |   | Corn                  |   |                  |   | 30                                   |
| Tri-State Ethanol Co., LLC*            |   | Rosholt, SD        |   | Corn                  |   | 18                    |   |                                 |
| United WI Grain Producers, LLC*^       |   | Friesland, WI      |   | Corn                  |   |                  |   | 40                                   |
| U.S. Energy Partners, LLC              |   | Russell, KS        |   | Milo/wheat starch     |   | 40                    |   |                                 |
| Utica Energy, LLC                      |   | Oshkosh, WI        |   | Corn                  |   | 24                    |   |                                 |
| VeraSun Energy Corporation             |   | Aurora, SD         |   | Corn                  |   | 100                   |   |                                 |
| Western Plains Energy, LLC*            |   | Campus, KS         |   | Corn                  |   | 30                    |   |                                 |
| Wyoming Ethanol                        |   | Torrington, WY     |   | Corn                  |   | 5                     |   |                                 |
|                                   |   |               |   |                  |   |                  |   |                                 |
| Total Existing Capacity                |   |               |   |                  |   | 3165.8                |   |                                 |
| Total Under Construction/Expansions    |   |               |   |                  |   |                  |   | 492.0                                |
| Total Capacity                         |   |               |   |                  |   | **3657.8**            |   |                                 |

 

----

| * farmer-owned       |   |   |   |   |   |   |   |   |
|----------------------|--------|--------|--------|--------|--------|--------|--------|--------|
| ^ under construction |   |   |   |   |   |   |   |   |

 

15

----

 

***Alternative FuelAdditives***

 

We also compete with producers of methyl tertiary butyl ether (commonlyreferred as “MTBE”), a petrochemical derived from methanol which costs less toproduce than ethanol.  MTBE is acommonly 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 itsuse because it is petroleum based. These companies have significant resources to market MTBE and toinfluence legislation and public perception of MTBE.  These companies also have sufficient resources to beginproduction of ethanol should they choose to do so.

 

Alternative fuels, gasoline oxygenates and ethanol production methodsare continually under development by ethanol and oil companies with far greaterresources than we have.  Development ofnew products and methods of ethanol production by larger and financially moreviable competitors could provide them with significant competitive advantagesover us and thus could harm our business.

 

**Employees**

 

As of December 31, 2003, we have employed 34 persons, in afull-time capacity, including 13 in ethanol production operations, 7 in generalmanagement, sales, administration and grain procurement, and 14 in grainreceiving, grain handling, maintenance and quality control.  We also employ one part-time employee.

 

**EnvironmentalDisclosure**

 

We are subject to extensive environmental regulation at the federal,state and local levels.  Air quality atthe plant is regulated by the U.S. Environmental Protection Agency and theBureau of Air Management, Wisconsin Department of Natural Resources.  The Department of Natural Resourcesregulates emission of volatile organic compounds into the air.  Volatile organic compound emissions aretested on a semi-annual basis, and we must submit semi-annual reports to theDepartment 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.  Wealso are required to submit periodic reports pursuant to the Wisconsin andFederal Emergency Planning Community Right-to-Know Act.  At the local level, we file semi-annualreports with the Green Count Emergency Response Committee.  We do not believe we will be required tospend material amounts to maintain compliance with applicable environmentallaws.

 

**Regulatory Permits**

 

RMT Inc., an environmental consulting firm in Brookfield, Wisconsin,assisted us in obtaining an Air Pollution Construction and Operation Permit, aStorm Water Discharge Permit and Storm Water Pollution Prevention Plan andadvised us on environmental compliance generally.  We also obtained various other environmental and operatingpermits, as discussed below.

 

The Department of Natural Resources has prepared an environmentalassessment on the construction of the ethanol plant, which was made availableto the public for comment on February 19, 2001.  The environmental assessment is a public report that reviews andanalyzes the environmental impact that the ethanol plant may have on thesurrounding area.  We are aware that, inthe past, several individuals have voiced objections to our business to theWisconsin Department of Natural Resources, however, we have met no significantopposition from the public in our efforts. Public objection and complaints could arise, however, and subject us togreater regulatory scrutiny, claims and costly compliance expenditures.

 

16

----

 

***Air PollutionConstruction and Operation Permit***

 

Our facility is considered a Wisconsin synthetic minor source ofregulated air pollutants.  The types ofregulated pollutants that may be found at our plant include, particulatematter, carbon monoxide, oxides of nitrogen, volatile organic compounds andsulfur dioxide.  To emit these agentsduring construction, we needed an Air Pollution Construction Permit.  We received the Air Pollution ConstructionPermit on March 22, 2001.  Thepermit was originally valid for a period of 28 months from the date of grantand was extended on June 25, 2003, until May 29, 2005.

 

On October 31, 2001, we submitted a Modified Air PermitApplication to reflect a change in our plant design regarding emissions.  Our original plant design contemplatedrouting the boiler exhaust through dryers and then to a water scrubber for airpollution control on the distillers dried grains dryer emissions, and then to acommon stack.  In our new plant design,we proposed to utilize a thermal oxidizer for emissions control rather thanrely on the water scrubber.  The thermaloxidizer reduced emissions from our plant. We received the approval of this design and our Modified Air PermitApplication from the Environmental Protection Agency on March 22,2002.  The Environmental ProtectionAgency conducted air emissions testing in April, 2003 and we were awarded anAir Pollution Operation Permit.  We arealso in good standing with the Wisconsin Department of Natural Resources Bureauof Air Management.  We applied for andreceived permission to add additional emissions control equipment which isexpected to be installed and become operational by December 15, 2003,which were successfully completed.  Uponcompletion of the installation of this equipment, additional air emissionstesting will again be required to verify that we are still in compliance.

 

***Wisconsin PollutantDischarge Elimination Permits***

 

*General Permit*.  We use approximately 66,500 gallons of water per day to cool ourclosed circuit systems in the ethanol plant. We obtained a Wisconsin Pollutant Discharge Elimination System generalpermit from the Department of Natural Resources to discharge the water into anearby creek.  We received this permiton July 18, 2002 and it is valid until July 31, 2007.

 

*Storm Water Discharge for Industrial Activities Permit*.  Before we could begin operating, we had toobtain a Storm Water Discharge for Industrial Activities Permit from theDepartment of Natural Resources, which we received on April 9, 2001. Thispermit expires, but may automatically renew in 2006.  In addition, we also had to prepare a Storm Water PollutionPrevention Plan outlining measures we planned to implement to prevent stormwater pollution during operation.

 

***High Capacity WellPermit***

 

We drilled a 500,000-gallon per day well near our ethanol plant.  The Department of Natural Resourcesconsiders this a high capacity well, and we have applied for and obtained ahigh capacity well permit.  The highcapacity well permit was issued on December 13, 2001.  The permit allows for a maximum daily usageof 720,000 gallons of water per day and the plant is currently consuming approximately179,000 gallons per day of water.

 

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

 

Before we could begin operations, we had to prepare a spill prevention,control and countermeasures plan.  Theplan outlines our spill prevention measures for oil products such asethanol.  The plan was preliminarilyreviewed and approved prior to when we began operations, and was certified by aprofessional engineer on January 3, 2003.

 

***Risk ManagementProgram***

 

We use anhydrous 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 aprevention program to prevent spills or leaks of ammonia, and an emergencyresponse program in the event of spills, leaks, explosions or other events thatmay lead to the release of ammonia into the surrounding area.  We conducted a

 

17

----

 

hazard assessment and prepared models to assess the impact of anammonia release into the surrounding area. The program was presented at a public meeting.

 

***EPA; Nuisance***

 

We are subject to the regulations on emissions of the United StatesEnvironmental Protection Agency. Current EPA rules do not require us to obtain any permits or approvalsin connection with construction and operation of our business.  Wisconsin and EPA rules can and do change,and any such changes could result in greater regulatory burdens on us.  Our ethanol production will require us toemit a significant amount of carbon dioxide into the air.  Current Wisconsin law regulating emissionsdoes not restrict or prevent us from emitting 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 foul smells or other airor water discharges from the plant.  Weare aware of recent nuisance claims that have been brought against an ethanolbusiness in St. Paul, Minnesota.  We believethat among the objectives of this litigation are to force the ethanolmanufacturer to upgrade the facility’s emissions control system and possiblypay damages to nearby residents.  We arealso aware of neighborhood opposition to our facility.  This opposition could result in claims fornuisance, which could lead to increased compliance costs and monetary damages.

 

**ITEM2.  PROPERTY**

 

Our principal executive office is located at our ethanol plant site,820 West 17th Street, Monroe, Wisconsin 53566.  We presently own approximately 28 acres ofland and improvements thereon which comprise our plant.  Our primary lender holds a mortgage onapproximately 28 acres of land where the facility is situated as security forloans provided to us.  We anticipateusing all of our owned real estate in the operation of our ethanol plant in theforeseeable future.

 

**ITEM3.  LEGAL PROCEEDINGS**

 

On July 13, 2003, we received a Noticeof Probable Violation from the U.S. Department of Transportation’s FederalRailroad Administration (the “FRA”) for two alleged violations of regulationsapplicable to the shipment of hazardous material by rail.  The proposed penalty for these violations is$12,500.  The notice states that on orabout November 13, 2002, staff at the Union Pacific terminal in Phoenix,Arizona noticed that a small amount of ethanol (reported as approximately onegallon) had dripped from the internal liquid valve outlet while the rail carwas stopped at the terminal.  The noticealso alleges that inaccurate information was contained on the tank car’sshipping papers.  We do not believe thatwe are responsible for this problem and have responded to the FRA and requesteda conference in an attempt to reach a solution.

 

OnFebruary 20, 2004, we received two additional Notice of ProbableViolations from the FRA for two alleged violations of a regulation applicableto the shipment of hazardous material by rail. The proposed penalty for the first violation is $5,000 and for thesecond is $10,000.  The notice statesthat: (1) on or about March 17, 2003, during a routine inspection at theYard in Phoenix, Arizona an inspector discovered that the threaded plugintended as a secondary measure to secure the bottom outlet valve of a tank carwas loose (the primary seal was secure and thus no release occurred), and (2)on or about March 20, 2003, a leak of denatured alcohol was reported fromthe topside of a tank car at the yard in Phoenix, Arizona. We do not believethat we are responsible for this problem and have responded to the FRA andrequested a conference in an attempt to reach a solution.  To date, we have not received furthercorrespondence from the FRA regarding our previous response to theJuly 13, 2003, Notice of Probable Violation.  However, we do not believe that these potential violations,either individually or in the aggregate, will have a material effect on ouroperations or financial performance.

 

The Company is aware of two other potentialviolations of regulations applicable to the shipment of ethanol by rail.  We do not believe that these potentialviolations, either individually or in the aggregate, will have a materialeffect on our operations or financial performance.

 

18

----

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None.

 

**PART II**

 

**ITEM5.  MARKET FOR THE REGISTRANT’S MEMBERUNITS AND RELATED MEMBER MATTERS**

 

**Market Information**

 

There is no public trading market for oursecurities and we do not expect one to develop in the foreseeable future.

 

**Holders**

 

As of February 6, 2004, there wereapproximately 475 unit holders of record of our Class A member units determinedby an examination of our transfer book.

 

**Dividends**

 

We did not declare any cash dividends on our Class A member units forthe fiscal year ending December 31, 2002. On January 22, 2004, we declared a cash dividend of $250 per ClassA member unit payable on February 26, 2004.

 

The payment and rate of future distributions,if any, would be subject to review by the Board of Directors in light of ourfinancial condition, results of operations, capital requirements and otherfactors deemed relevant at that time. Loan covenants mandate that $3 million of working capital must beaccumulated prior to making any distributions to the unit holders.  Additional covenants require 20% of anyexcess cash flow (as that term is defined in such senior debt agreements) to beapplied toward the principal of the senior debt and that we cannot make anydistributions without the consent the holders of our senior debt.

 

**Securities Authorized for Issuance underEquity Compensation Plans**

 

We had no equity compensation plan as ofMarch 15, 2004.

 

**Recent Sales of Unregistered Securities; Useof Proceeds from Unregistered Securities**

 

We had no unregistered sales of securitiesduring the past three fiscal years.

 

**ITEM6.  MANAGEMENT’S DISCUSSION AND ANALYSISOR PLAN OF OPERATION**

 

Except for the historical information, the following discussioncontains forward-looking statements that are subject to risks anduncertainties.  Actual results maydiffer substantially from those described below, including those risksdescribed in the section entitled “Risk Factors” and elsewhere in thisannual report.  Our discussion andanalysis of the financial condition and results of operations of the Companyshould be read in conjunction with the financial statements and related notes.

 

**Application of Critical Accounting Policies**

 

Accounting policies, methods and estimates are an integral part of ourfinancial statements and are based upon management’s current judgments. Certainaccounting policies, methods and estimates are particularly important becauseof their significance to the financial statements. Note A of the Notes toFinancial Statements includes a summary of the significant accounting policiesand methods we use. The following is a discussion of what we believe to be themost critical of these policies and methods.

 

19

----

 

***Revenue Recognition***

 

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

 

***Inventories***

 

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

 

***Derivatives***

 

We enter into derivative contracts to hedge the Company’s exposure toprice risk related to forecasted corn and natural gas purchases, forward cornpurchase contracts and forecasted ethanol sales.  We do not typically enter into derivative instruments other thanfor hedging purposes.  All derivativecontracts are recognized on the December 31, 2003 and 2002 balance sheetsat their fair market value.

 

On the date the derivative instrument is entered into, we willdesignate the derivative as either (1) a hedge of the fair value of arecognized asset or liability or of an unrecognized firm commitment (fair valuehedge), (2) a hedge of a forecasted transaction or of the variability of cashflows to be received or paid related to a recognized asset or liability (cashflow hedge) or (3) will not designate the derivative as a hedge.  Changes in the fair value of a derivativethat is designated as and meets all the required criteria for a fair valuehedge, along with the gain or loss on the hedged asset or liability that isattributable to the hedged risk, are recorded in current period earnings.  Changes in the fair value of a derivativethat is designated as and meets all the required criteria for a cash flow hedgeare recorded in accumulated other comprehensive income and reclassified intoearnings as the underlying hedged item affects earnings.  Changes in the fair value of a derivativethat is not designated as a hedge are recorded in current period earnings.

 

At December 31, 2003 and 2002 no derivative contracts weredesignated as hedges and all changes in market value have been recognizedthrough cost of sales.  We have recordedan increase to cost of sales of $621,722 and $809,921 related to our derivativecontracts for the years ended December 31, 2003 and 2002.

 

**Results of Operationsfor the Years Ending December 31, 2003 and 2002**

 

We are engaged in the production and sale of fuel grade ethanol.  We have an annual capacity to processbetween approximately 14.4 and 17.0 million bushels of corn into betweenapproximately 40 and 48 million gallons of ethanol.  In addition, we sell distillers grains, a principal by-product ofthe ethanol-production process, which we sell as distillers modified wet grainsand distillers dried grains.  Wecompleted construction of our ethanol plant and commenced operations inOctober 2002.

 

The following table shows the percentage of sales and revenues, cost ofsales, operating expenses and other items to total sales and revenues in ourstatements of operations for the years ended December 31:

 

20

----

 
|                                          |   | **2003** |   | **2002**    |   |
|-----------------------------------------------|--------|----------|--------|-------------|--------|
|                                          |   |     |   |        |   |
| Sales and revenues                            |   | 100.0    | %      | 100.0       | %      |
| Cost of sales                                 |   | 78.0     | %      | 107.5       | %      |
| Gross margin (loss)                           |   | 22.0     | %      | (7.5        | )%     |
|                                          |   |     |   |        |   |
| Selling, general and administrative  expenses |   | 3.6      | %      | 11.1        | %      |
|                                          |   |     |   |        |   |
| Operating income                              |   | 18.4     | %      | (18.6  | )%     |
|                                          |   |     |   |        |   |
| Interest expense                              |   | 2.5      | %      | 3.9         | %      |
| Interest and other income                     |   | 0.1      | %      | 0.3         | %      |
|                                          |   |     |   |        |   |
| Net income (loss)                             |   | 16.0     | %      | (22.2       | )%     |

 

***Sales and Revenues***

 

Our sales and revenues are divided into four categories based upon thesource from which they are derived: sales of ethanol, sales of distillersgrains, marketing corn and ethanol supports. For the years ending 2003 and 2002, we derived approximately 70% and 78%of our sales and revenues from the sale of ethanol.  Approximately 15% and 19% of our sales and revenues were derivedfrom the sale of distillers grains for the years ending 2003 and 2002,respectively.  The marketing of cornaccounted for approximately 2% and 3% of our total sales and revenues during2003 and 2002, respectively.  Theremaining 13% of our total sales and revenues for the year ended 2003 were fromethanol supports. We did not receive nor accrue any ethanol support paymentsfor the year ended 2002.

 

We commenced operations in October 2002.  The abbreviated operating term for 2002 accounts for the majordifferences in total sales and revenues between 2003 and 2002.  We believe that sales of ethanol willcomprise a larger percentage of our total sales and revenues for 2004 becausewe believe that our sales and revenues from ethanol supports will besubstantially less during 2004 than it was during 2003.  We estimate that sales and revenues fromethanol supports will comprise approximately 2% to 3% of our aggregate salesand revenues during 2004.

 

In February, 2004 we entered into an agreement with a third party toprovide and sell raw carbon dioxide gas from the plant.  We will be leasing land to the third partythat will be constructing a plant adjacent to our plant.  The initial term of the agreement is 15years with the option to renew for additional 5 year periods thereafter.  We believe that our sales under the carbondioxide agreement will be approximately $735 thousand per year.

 

***Cost of Sales***

 

Our cost of sales as a percentage of ourtotal sales and revenues were 78% and 107.5% for the years ended 2003 and 2002,respectively.  We commenced distillationoperations in October 2002.  Thestart-up costs negatively impacted our cost of sales during 2002.  Since we operated our plant for the entireyear in 2003, we were able to capture economies of scale and such efficienciesin our production reduced the cost of sales as a percentage of total salesduring 2003.  We believe that we willcontinue to improve our operations and achieve further efficiencies in ourproduction during 2004, which we believe will reduce our cost of sales as apercentage of total sales and revenues during 2004.

 

***Selling, General andAdministrative Expenses***

 

Our selling, general and administrativeexpenses as a percentage of total sales and revenues were 3.6% and 11.1% forthe years ended 2003 and 2002, respectively. With the abbreviated production period in 2002, our fixed selling,general and administrative expenses were spread over a smaller revenuebase.  We operated our plant for theentire year in 2003 and were able to spread the expenses over a substantiallyhigher sales and revenue base,

 

21

----

 

approximately $74.1 million in 2003 versus$10.1 million in 2002.  We believe thatour selling, general and administrative expenses for 2003 will more accuratelyreflect our expenses as a percentage of sales and revenue in future years ofoperations.

 

***InterestExpense/Income and Other Income***

 

Our interest expense as a percentage of totalsales and revenues were 2.5% and 3.9% for the years ended 2003 and 2002, respectively.  Interest expense was $1,846,937 and $398,165for 2003 and 2002, respectively. Interest expense in 2002 encompassed the period from mid-October toDecember 31.  Interest expense for2003 encompassed the entire year.  Webegan our fiscal year 2003 with debt financing totaling approximately $35.1million and ended the fiscal year with debt financing totaling approximately$27.1 million.

 

Our interest income and other income as apercentage of total sales and revenues were 0.1% and 0.3% for the years ended2003 and 2002, respectively.  Wereceived a training grant from the State of Wisconsin totaling $62,850 in2003.  We do not expect to receive anysignificant revenue from interest income or other income unrelated to our salesand revenue during 2004.

 

**Trends and Factors that May Affect FutureOperating Results**

 

Under the federal government’s excise tax incentive program, gasolinedistributors who blend gasoline with ethanol receive a federal excise taxcredit for each blended gallon, resulting in an indirect pricing incentive forethanol.  Originally scheduled to expirein September of 2000, this excise tax credit was extended untilSeptember 2007.  The current taxrate reduction equals $.054 per blended gallon which contains 10% or moreethanol by volume.  However, the taxrate reduction decreases to $.051 in 2005. Consequently, we expect that the excise tax credit will continue toenhance the value of fuel grade ethanol through that date and provide a levelof continuity which supports funding and expansion in the industry.

 

Another federal incentive targets new and expanded production of fuelethanol.  The United States Departmentof Agriculture Commodity Credit Corporation’s Bioenergy Program becameeffective in December of 2000 and provides for “large” ethanol producersto receive reimbursement for the cost of one bushel of grain for every 3.5bushels of increased grain usage in fuel ethanol production.  “Small” producers (less than 65 milliongallons annually) would receive one bushel for every 2.5 bushels of increasedusage.  Based on additional ethanolproduction at our Monroe plant, we received $7.5 million in 2003 and expect toreceive approximately $3 million from this program during 2004.  We did not receive nor accrue any incentivepayments for 2002.

 

The ethanol industry also benefits fromvarious state production incentives. During 2003, we received approximately $1.63 million as a productionincentive from the state of Wisconsin and expect to receive approximately$633,000 in 2004.  The state program hasnot been renewed and the likelihood of this incentive being available in thefuture is in doubt.

 

We produced approximately 7.5 million gallonsin 2002, 41.4 million gallons in 2003 and are projecting production for 2004 at48 million gallons of denatured ethanol. We are continuing to explore different means to increase our productionof ethanol.

 

In addition to incentives, fuel ethanol salesprices reflect a premium due to the oxygenate, as discussed below, and octaneenhancing properties of ethanol.  Demandfor ethanol also affects price.  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 dramatic increase in gasoline prices hasincreased demand for ethanol as a fuel extender, as the net cost of ethanol toblenders became less than unblended gasoline. With continued strong oil prices, and a corresponding increase ingasoline pricing, ethanol has become a much more competitive product in themarketplace.  While a similarly dramaticdecrease in the price of oil would have a negative effect on ethanol demand,such a decrease is not currently anticipated by most industry analysts.

 

22

----

 

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 watersupplies, then California Governor Gray Davis issued an executive order inMarch of 1999 calling for the elimination of MTBE from California gasolinesupplies by December 31, 2002. During 2003, we shipped by rail approximately 14 million gallons of denaturedethanol to California.  Other stateshave also legislated restrictions on the use of MTBE on the basis that theenvironmental risk of its use outweighs the air quality benefit.  Under the provisions of the federal 1990Clean Air Act, gasoline used in certain air quality “non-attainment” areas mustcontain a certain oxygen content during the wintertime months ofSeptember through March.  Ethanoland MTBE are the two most common oxygenates. When MTBE use is limited, ethanol demand and usage will be substantiallyincreased.  The east coast areas of NewYork and Connecticut began using ethanol blended gasoline as of January 1,2004, thus further increasing demand. The continued enforcement of the oxygenate standard could have asignificant positive impact on ethanol demand. The replacement of MTBE with ethanol in California, Connecticut and NewYork will require an additional 1.7 billion gallons of ethanol each year to beconsumed in those areas.

 

Nationally, there is also a movement toeliminate MTBE.  In addition toindividual states which have restricted its use, federal legislation has beenproposed which has focused on a compromise solution which would phase out MTBE,eliminate the oxygen requirement of the Clean Air Act, and replace it with arenewable fuels content requirement that gradually increases over the nextseveral years.  If this solution wereadopted, we believe that it would significantly increase the demand for ethanolover this time period.  In short,current law is favorable to ethanol in that it requires oxygenateblending.  If MTBE usage is reduced andthe law is not changed, or if the oxygen requirement is replaced with a similar“renewable fuels” requirement, the ethanol industry stands to see strongerdemand and significant benefit. Conversely, the elimination of the oxygen requirement without adopting arenewable fuels requirement (or other similar incentive for ethanol blending),could have a significantly negative impact on both ethanol demand andpricing.  We have traditionally sold amajority of our fuel ethanol production based on short-term contracts.  We are now attempting to make greater use oflonger-term contracts to sell fuel ethanol. We believe that this strategy will provide a better basis for long-termplanning, especially in the areas of production and margin predictability.  As of February 2004, we had contractedto sell over half of our estimated ethanol production through December of2004. While most of these sales were made on fixed price contracts,approximately 20% were done on variable price agreements tied to reportedprices of gasoline.

 

Our primary grain feedstock is corn. The costof corn is dependent upon factors that are generally unrelated to thoseaffecting the price of ethanol. Corn prices generally vary with regional grainsupplies, and can be significantly affected by weather, storages, planting andcarryout projections, government programs, exports, and other national andinternational market conditions.

 

Grain markets have been extremely volatile during2003 and 2004. As always, weather, exports, and other factors all havepotentially major impacts on grain pricing, and any unexpected changes in thosefactors could adversely affect the price which we pay for our feedstock.Tightening world supply and growing demand has created some of the tightestsupply to use ratios in recent history. We are at 7 year highs on corn pricesand 15 year highs on bean prices. These high prices have also brought higherprices for our feed by-products, wet and dried distillers grain with solubles.Prices have remained higher than normal through a better part of 2003 and havecontinued their strength to date in 2004. We have included the forwardcontracting of feed sales in our overall decisions regarding risk management asdistillers grains are a vital source of revenue for the business.

 

**Liquidity and Capital Resources**

 

As of December 31, 2003, we had cash and cash equivalents of$1,810,490, current assets of $10,395,551 and available unused lines of creditof $3,500,000.  For the year ended 2003,cash provided by operating activities was $10,649,199, cash paid for propertyand equipment was $1,162,794 and cash used in financing activities was$8,268,281.

 

In August 2001, we entered into a $30.6 million construction loanfacility with First National Bank of Omaha. Effective as of January 1, 2003, this construction loan wasconverted into a $30.6 million term loan. Quarterly payments, including principal and interest, of $1,021,839began on April 1, 2003 based upon a five-year amortization with a balloonpayment due on the maturity date of January 1, 2008.  The term loan is structured as

 

23

----

 

three notes and interest accrues monthly on the notes at both fixed andvariable rates.  The fixed rate accruesat 6.528% on $14,465,278 of the term loan and the variable rate will accrue on$9,336,462 of the term loan based on the prime rate (effective rate of 5% atDecember 31, 2003).  The amountoutstanding on the term loan was $23,801,740 at December 31, 2003.  The term loan is secured by substantiallyall of our assets and contains various restrictions, including the maintenanceof certain financial covenants.

 

On August 22, 2001, we entered into a subordinated credit facilityof $3.6 million with Alliant Energy to finance the electrical infrastructureand other construction needs.  Thiscredit facility was converted to a term note upon completion of construction ofour facility.  Monthly payments,including principal and interest, of $34,762 began November 1, 2002 basedupon a ten-year amortization with a balloon payment due on the maturity date ofNovember 1, 2007.   Interestaccrues monthly on the loan at 3%.  Theamount outstanding on the electric utility note payable is $3,233,412 atDecember 31, 2003.  The electricutility note payable is secured by our equipment, inventory and a guarantee bythe City of Monroe, and contains various restrictions.

 

In connection with our construction loan, we entered into a $3,500,000364 day revolving credit facility with First National Bank of Omaha.  The revolving line of credit is limited tothe borrowing base collateral, which is based upon 75% of the value of theinventory and allowable accounts receivable, and has a variable interest ratebased upon the prime rate (effective rate of 5% at December 31, 2003).  There was no amount outstanding on therevolving loan at December 31, 2003. The revolving loan is secured by substantially all of our assets andcontains various restrictions.

 

We believe that our start-up cost related to the new carbon dioxidefacility will be approximately $450,000, which we plan to finance from ouroperating cash flows in 2004.

 

**Off-Balance Sheet Arrangements**

 

We have not entered into any off-balancesheet arrangements that have or are reasonably likely to have a current orfuture effect on our financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources that ismaterial to investors.

 

**Contractual Obligations**

 

We have the following contractual obligationsas of December 31, 2003:

 
|                          |   | **Payments  Due by Period** |       |
|-------------------------------|--------|-----------------------------|------------|
| **Contractual Obligations**   |   | **Total**                   |       | **Less than  1 year** |   | **1-3 Years** |   | **More than  5  Years** |   |
| Long-Term Debt                |   | $                           | 27,100,259 |   | $ | 3,056,680 |   | $ | 12,051,435 |   | $ | 11,992,144 |   |
| Operating Leases              |   | $                           | 33,750     |   | $ | 33,750 |   | $ | 0 |   | $ | 0 |   |
| Total Contractual Obligations |   | $                           | 27,134,009 |   | $ | 3,090,430 |   | $ | 12,051,435 |   | $ | 11,992,144 |   |

 

**Recent AccountingPronouncements**

 

In April 2003, the FASB issued SFAS No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities”.  SFAS No. 149 amends and clarifies theaccounting for derivative instruments, including certain derivative instrumentsembedded in other contracts, and for hedging activities under SFAS No.133.  SFAS No. 149 is generallyeffective for contracts entered into or modified after June 30, 2003.  The adoption of SFAS No. 149 had no impacton the Company’s financial position, results of operations or cash flows.

 

We do not expect that the adoption or theexpected adoption of other recent accounting pronouncements will have amaterial impact on the financial statements of the Company.

 

24

----

 

**ITEM7.  FINANCIAL STATEMENTS**

 

Our financial statements and supplementarydata are included on pages F-1 to F-14 of this Report.

 

**ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

 

None.

 

**ITEM 8A. CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

Our Chief Executive Officer and ChiefFinancial Officer, after evaluating the effectiveness of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934, as amended), as of December 31, 2003 (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.

 

**Changesin Internal Controls**

 

There have been no changes in our internalcontrol over financial reporting that occurred during the fiscal year endedDecember 31, 2003, that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

 

**PART III**

 

**ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 
| **Name**         |   | **Age** |   | **Position**                                       |
|------------------|--------|---------|--------|----------------------------------------------------|
|             |   |    |   |                                               |
| John L. Malchine |   | 66      |   | Chairman of the Board and Chief Executive  Officer |
| Gary L. Kramer   |   | 55      |   | President, General Manager and Director            |
| David Kolsrud    |   | 55      |   | Secretary and Director                             |
| Don Endres       |   | 43      |   | Treasurer and Director                             |
| Wayne Mitchell   |   | 48      |   | Director                                           |
| Robert Wright    |   | 51      |   | Director                                           |
| David Fick       |   | 52      |   | Director                                           |
| James Leitzinger |   | 48      |   | Chief Financial Officer                            |

 

***John L. Malchine, Chairman of the Board andChief Executive Officer***

 

Mr. Malchine has served on our Board ofDirectors since May 2000.  His term as aDirector expires in 2006.  Approximatelyseventy percent of Mr. Malchine’s professional time is devoted to his capacityas Chairman of the Board and Chief Executive Officer.  Mr. Malchine assumed the role of Chief Executive Officer of theCompany on August 30, 2001.  From1989 to March 2001, he served as president and co-owner of Norway Associates,Inc., a private real estate company that develops real estate projects forclinics. Norway Associates is currently inactive. From 1954 to 1994, Mr.Malchine was a self-employed farmer. From 1995 to the present, Mr. Malchine hasbeen the chairman of the Wisconsin Agriculture, Trade and Consumer ProtectionBoard. From 1997 to the present, he has also been a member of the Board of theWisconsin Tax Commission, which regulates agricultural assessments inWisconsin. From 1983 to the present, he has been a member of the Board ofDirectors of a unit of M & I Bank, in

 

25

----

 

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 thecooperative redeemed his investment without interest.

 

***Gary L. Kramer, D.V.M., President, GeneralManager and Director***

 

Dr. Kramer has served on our Board ofDirectors since May 2000. His term as a Director expires in 2004.  Mr. Kramer devotes all of his professionaltime to his capacity as President, General Manager and Director.  From 1973 to 2001, Dr. Kramer was aveterinarian, and recently retired as president and senior partner at Chapin,Sutter, Chapin, Ltd., of Lena, Illinois, a veterinary service corporationemploying eight veterinarians. He received a doctorate in Veterinary Medicinefrom Iowa State University. Prior to co-founding Badger State Ethanol, Dr.Kramer served as President of the Adkins Energy Cooperative fromDecember 1998 to April 2000. Adkins Energy Cooperative was formed inMay 1996 to build a 30 million gallon dry mill ethanol plant in Lena, Illinois.The Adkins site is approximately 20 miles from our Monroe site. Dr. Kramerinvested in this farmers cooperative in 1997. He was appointed to fill avacancy on the Board of Directors in August 1997. In November 1998,he was elected to the Board by the members to serve a three year term. He waselected president of the Board in December 1998 and re-elected inMarch 2000. Dr. Kramer resigned from the Adkins Board in April 2000,and the cooperative redeemed his investment, without interest. At the time ofhis resignation, the proposed Adkins ethanol project had not been constructed,although the cooperative was continuing its efforts and negotiations to securenecessary commitments and contracts to complete the project. Dr. Kramerreceived no compensation from Adkins for his service other than reimbursementof out-of-pocket expenses of approximately $4,600. Dr. Kramer has also servedas a member of a number of professional organizations, and has served on otherprofit and non-profit Boards, including the American Veterinary MedicalAssociation, American Association of Bovine Practitioners, Illinois VeterinaryMedical Association, Northern Illinois Veterinary Medical Association and theLena Park District Board.

 

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

 

Mr. Kolsrud has served on our Board ofDirectors since August 2001.  Histerm as a Director expires in 2005. Approximately five percent of his professional time is devoted to his capacityas Secretary and Director of the Company.** **Mr.Kolsrud is the General Manager and a member of the Board of Directors ofCORN-er Stone Farmers Cooperative, which he founded in 1995 and served asChairman until 2000. Mr. Kolsrud also continues to work as a self-employedfarmer, an occupation he has had since 1973. He also serves as Chairman of theValley Springs Farmers Cooperative, a farm supply co-op in Valley Springs,South Dakota. He has served on that Board for 15 years and served as Chairmanfor the past 12 years. He formerly served as the Chairman of the MinnesotaCoalition for Ethanol. Mr. Kolsrud also serves on the Board of Governors ofAGRI-Energy, LLC (a 12 million gallon a year ethanol facility in Luverne,Minnesota). He has served on that Board since 1997 and served as its VicePresident until 1999.

 

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

 

Mr. Endres has served on our Board ofDirectors since August 2001.  Histerm as a Director expires in 2004. Approximately five percent of hisprofessional time is devoted to his capacity as Treasurer and Director of theCompany.** **Mr. Endres currently serves onthe Board of Directors of Glacial Lakes Energy and First National Bank VentureCapital. He is currently Chairman of the Brookings Chamber e-commerce committee.Mr. Endres is also the President of VeraSun Energy Corporation, a company hefounded in June 2001. Prior to forming VeraSun, he served as ChiefExecutive Officer of ExpressGold.com, Inc., a company he co-founded in 1997.ExpressGold.com merged with Cybersource Corporation in 2000. Prior to that, Mr.Endres served as President and General Manager of Special Teams, Inc., acompany he founded in 1985. Special Teams was acquired by the American ExpressCompany in 1995, and Mr. Endres served as President of American Express SpecialTeams until 1997. He has also served on the Board of Directors of CoEv, Inc., amagnetic component company, until its merger with Tyco International Ltd. in2000. Mr. Endres graduated from South Dakota State University with a degree inAnimal Science and minors in Computer Science and Economics. In 2001, he wasrecognized by South Dakota State University’s College of Engineering as“Entrepreneur of the Year.”

 

26

----

 

***Wayne Mitchell, Director***

 

Mr. Mitchell has served on our Board ofDirectors since May 2001, when he was appointed to fill the Fagen, Inc. seat.He occupies Fagen, Inc.’s permanent seat on the Board of Directors.Approximately five percent of his professional time is devoted to his capacityas a Director of the Company.** **Mr.Mitchell is Vice President, Technology and Business Development for Fagen, Inc.and has worked for Fagen since June 2000. Prior to joining Fagen, he served as Process Team Leader from may 1998to June 2000 for Reilly Industries, Inc., where he directedmultidisciplinary teams engaged in chemical process research and owner of SolidRock Consulting, LLC, a private company providing consulting services to theethanol industry.  Solid Rock Consultingis currently inactive.  From May 1996 toMay 1998, he worked as Plant Manager and Quality Assurance Manager forMicronutrients, LLC, an animal feed supplement manufacturer.  From January 1993 to May 1996, heserved as the Design Engineer for Broin and Associates, Inc. where he performeddetailed process design and start-up of dry grind ethanol plants.  Prior to joining Broin, he served as seniorenvironmental project engineer for Heritage Environmental Services, Inc. where hewas involved in environmental consulting and project management at major oilrefineries.  Prior to that, Mr. Mitchellserved as an area manager for Ethyl Corporation. Mr. Mitchell also serves onthe Board of Directors of Golden Triangle Energy, LLC, an ethanol plant inCraig, Missouri, and Husker Ag Processing, LLC, an ethanol plant underconstruction in Plainview, Nebraska. Mr. Mitchell has a B.S. in Chemical Engineering from the University ofWisconsin-Madison.

 

***Robert Wright, Director***

 

Mr. Wright has served on our Board ofDirectors since August 2001.  Histerm as a Director expires in 2006. Approximately five percent of his professional time is devoted to hiscapacity 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***

 

David Fick has served on our Board ofDirectors since December 2003, when he was nominated by the Board ofDirectors to fill a vacated position.  In February 2004, Mr. Fick waselected by the members of the Company to the Board of Directors.  His term as a Director expires in 2006.  Approximately five percent of hisprofessional time is devoted to his capacity as a Director of the Company.  Mr. Fick has been a self-employed farmersince 1970 and also has owned and operated a farm equipment business near Hill,Minnesota since 1986.  Mr. Fick is amember of CORN-er Stone Farmers Cooperative, Min Wind Energies and MinnesotaSoybean Processors.

 

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

 

Mr. Leitzinger has served as our ChiefFinancial Officer since July, 2002. Previously, Mr. Leitzinger served as the Director of Finance for theCity of Freeport, IL for approximately two years.  Prior to that, Mr. Leitzinger was employed as the Controller forAgri-Tech FS, Inc. from 1990 until 2000, and as the Controller for WidenColourgraphics, LTD from 1988 to 1990. Mr. Leitzinger graduated from Edgewood College in Madison, Wisconsin.

 

**Audit Committee and Audit Committee FinancialExpert**

 

The Company does not have an audit committeefinancial expert, as defined under 17 C.F.R. § 228.401, serving on itsaudit committee because it does not have an audit committee and is not requiredto have an audit committee because it is not a listed issuer, as defined inRule 10A-3 under the Securities Exchange Act of 1934.

 

27

----

 

**Code of Ethics**

 

The Company is in the process of adopting acode of ethics.

 

**ITEM 10.  EXECUTIVE COMPENSATION**

 

Gary Kramer serves as our President andGeneral Manager.  He was compensated asan independent contractor at the rate of $3,000 each month in 2002 through theend of July, 2002.  In August, 2002, Dr.Kramer became employed by us at a base salary of $100,000 per year, which ishis current yearly salary.  JohnMalchine serves as Chief Executive Officer and, in January 2002, wascompensated $60,000 by us for services he provided to us as an independentcontractor in 2000 and 2001.  Mr.Malchine became employed by us in October, 2002 at a base salary of $3,000 eachmonth, which is his current salary.

 

We reimburse our officers for expensesincurred relating to services rendered on our behalf.  We recruit and hire permanent employees who are compensated on aregular basis pursuant to agreed upon salaries.  We have not and do not expect to establish any option based orother type of equity incentive plan for employees.  However, we offer typical health and other employee benefits toour full time employees that do not discriminate in scope, terms or operationin favor of our executive officers or directors and that are available to allof our salaried employees.

 

The following table shows the compensationthat we paid to our officers for services that they rendered to us.

 
|                                                 |   |             |   | **Annual Compensation** |    | **Long-Term Compensation** |   |
|------------------------------------------------------|--------|------------------|--------|-------------------------|---------|----------------------------|--------|
| **Name and  Principal  Position**                    |   | **Fiscal  Year** |   | **Salary**              |    | **Bonus**                  |   | **Other** |   | **Restricted  Stock Awards** |   | **Securities  Underlying  Options/SARS** |   | **LTIP  Payout** |   | **All Other  Compensation** |   |
| John L.  Malchine                                    |   | 2001             |   | $                       | 36,000  | [1]                        | $      | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| Chief  Executive                                     |   | 2002             |   | $                       | 9,000   | [1]                        | $      | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| Officer                                              |   | 2003             |   | $                       | 36,000  |                       | $      | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
|                                                 |   |             |   |                    |    |                       |   |   |   |   |   |   |   |   |   |   |   |
| Gary Kramer                                          |   | 2001             |   | $                       | 36,000  |                       | $      | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| President  and                                       |   | 2002             |   | $                       | 62,154  |                       | $      | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| General  Manager  (formerly Chief Executive Officer) |   | 2003             |   | $                       | 100,000 |                       | $      | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |

 

----

[1] Mr. Malchine was paid a salary of $60,000 in January 2002 forservices performed during 2000 and 2001.

 

**Employment Agreements**

 

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

 

**Reimbursement of Expenses**

 

Other than Mr. Malchine, Dr. Kramer and ourChief Financial Officer, we do not pay our officers and Directors any fees orsalaries for their services to us; however, we do reimburse our officers forexpenses incurred in connection with their service to us.  Our reimbursement policy is to reimburse ourofficers and Directors for out-of-pocket expenses.  Since our inception in May 2000, we have reimbursed our officersand Directors a total of $28,100.  Weestimate that our officers and Directors will incur approximately $20,000 inout-of-pocket expenses in the next 12 months. This is only an estimate and our officers and Directors expenses couldbe substantially higher than we anticipate.

 

28

----

 

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

 

We have not and do not expect to establishany compensation plans under which the Company’s securities are authorized forissuance.  The following table setsforth certain information concerning the beneficial ownership of our Class Amember units as of March 15, 2004.

 
| **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                                | [3]    | 725                                        |   | 3.67                  | %      |
| Director                                      |   | David Kolsrud                             | [4]    | 50                                         |   | 0.25                  | %      |
| Director                                      |   | Don Endres                                | [5]    | 2,000                                      |   | 10.11                 | %      |
| Director                                      |   | Wayne Mitchell                            | [6]    | 0                                          |   | 0.00                  | %      |
| Director                                      |   | Robert Wright                             | [7]    | 25                                         |   | 0.13                  | %      |
| Executive  Officer                            |   | James Leitzinger                          | [8]    | 5                                          |   | 0.03                  | %      |
| Director  & Executive Officers as a group |   | All executive officers and directors      | [9]    | 4,325                                      |   | 21.87                 | %      |

 

----

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

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

[3]  David Fick’s address is 63851st Street, Hills, MN 56138.

[4]  David Kolsrud’s address is203 81st Street, Beaver Creek, MN 56116.

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

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

[7]  Robert Wright’s address atMurex, N.A., Ltd. is 15411 Knoll Trail, Suite 260, Dallas, TX 75248.  This amount includes 25 units owned by Murex,N.A., Ltd., for which Mr. Wright disclaims beneficial interest.

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

[9] Includes the beneficial ownership of eight Directors and executiveofficers.  

 

**ITEM 12.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

Since ourinception, we have engaged in several transactions with related parties.  We currently do not have outside Directorsor unaffiliated members to evaluate related party transactions.  Management believes that these transactionswere as favorable as those that could have been obtained in an arms-lengthtransaction.

 

**Fagenand ICM**

 

OnJuly 11, 2001, we entered into a contract with Fagen in which Fagen wouldprovide services to us in connection with our plan to build an ethanolplant.  Under the terms of the contract,Fagen agreed to design and provide construction related services to us not toexceed $43.8 million.

 

Additionally,Fagen and ICM, Inc. have entered into a subcontractor relationship for theconstruction of the ethanol plant, whereby Fagen was the general contractor andICM, Inc. was the subcontractor.

 

Fagenpurchased 500 Class A member units in our public offering.  ICM also purchased 500 Class A member unitsas well as 100 Class B member units (which were converted to 100 Class A memberunits).  Fagen and ICM’s purchase of theunits were for investment purposes, and are subject to the same terms andconditions, including restrictions on transfer, as all other investors.   ICM sold its 600 Class A member units in2003.

 

29

----

 

**Start-upCapital**

 

We werecapitalized with limited cash investments from Dr. Gary Kramer and Mr. JohnMalchine, our founders.  Dr. Kramer andMr. Malchine each contributed $10,000 to us in exchange for 500 Class C memberunits. Dr. Kramer and Mr. Malchine paid $20 per unit.  These units have been converted to Class A member units.

 

**ExecutiveSalaries**

 

We arecurrently compensating Gary Kramer, our President and General Manager, $100,000per year pursuant to an oral agreement. We are compensating James Leitzinger,our Chief Financial Officer, $65,000 per year for his services pursuant to anoral agreement.

 

**EthanolAgreement**

 

We enteredinto an ethanol purchase and marketing agreement with Murex, N.A., Ltd. for theexclusive rights to purchase and market all ethanol produced by the plant.  This agreement expires in 2008.  Murex is a Class A member and has arepresentative on our Board of Directors. Under the agreement, we have agreed to provide Murex with estimates ofour production. Murex has agreed to purchase and deliver all the ethanolproduced by the plant.

 

Theagreement with Murex automatically renews for one-year terms after 2008 unlesseither party provides notice prior to the renewal anniversary date.  In addition, the agreement may be terminatedby either party in the event of the other party’s insolvency, force majeure forat least a period of twelve months, or the default, which is not cured, by the otherparty in the performance of any term or covenant.  We may also terminate the agreement, following a decision of anarbitrator, if Murex breaches its obligation to use its best efforts to obtainfor us the highest purchase price available for ethanol, after considering itsown resale costs and transportation costs.

 

**DistillersGrains and Solubles Agreement**

 

We enteredinto a purchase and marketing agreement with ICM Marketing, Inc. for theexclusive rights to purchase and market all of the distillers grains producedby the plant.  This agreement expires in2005.  ICM Marketing was a primesubcontractor for the construction of the ethanol plant and had arepresentative on our Board of Directors. Under the agreement, ICM has agreed to purchase all of the wetdistiller’s grains with solubles and the dried distiller’s grains with solublesproduced at the ethanol production plant. We are obligated to provide ICM a production schedule, the labor,equipment and facilities to meet ICM’s loading schedule and to reservestorage space for the products.  ICM hasagreed to use its commercially reasonable efforts to achieve the highest resaleprice available under prevailing market conditions, in ICM’s and our reasonablejudgment.

 

Theagreement with ICM automatically renews for successive one-year terms after2005 unless either party provides notice that it elects not to renew theagreement. The agreement may be terminated by the nondefaulting party in theevent of default, which includes the failure to make payment when due, adefault in the performance of a party’s covenants and agreements and theinsolvency of a party.

 

**Promissory Notes from Officers**

 

We received proceeds of $50,000 in June of 2001 from the issuanceof a $12,500 promissory note to Dr. Gary Kramer, our President and GeneralManager and Director, a $12,500 promissory note to Mr. John Malchine, our ChiefExecutive Officer and Director, and a $25,000 promissory note to ICM, Inc., ourprime subcontractor.  The notes boreinterest at the rate of 9% per annum and were due when we closed our publicoffering.  The notes were unsecured debtobligations of the Company.  The noteswere paid with interest upon the closing of our public offering.

 

30

----

 

**Conflictsof Interest**

 

Conflicts ofinterest exist and may arise in the future as a result of the relationshipsbetween and among our members, officers, Directors and their affiliates.  Although our officers and Directors havefiduciary duties to us, certain of our Directors also owe fiduciary duties andother obligations to entities with whom we 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 Director will not participate when theBoard considers a transaction where he or she has a conflict of interest.  We do not have a committee of independentDirectors or members or an otherwise disinterested body to considertransactions or arrangements that result from, or are fraught with conflicts ofinterest.  Some conflict situationsinclude disputes that may arise between us and Fagen or ICM as a result of theconstruction of the ethanol plant are expected to be resolved through bindingarbitration according to construction industry rules.

 

Conflicts ofinterest could arise in the situations described below, among others:

 
| • |   | We will engage in transactions  with affiliates of our Directors.   Members will have no right to individually enforce the obligations of  our Directors or their affiliates in our favor.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| • |   | Our Directors’ decisions  regarding various matters, including expenditures that we make for our  business, reserves for accrued expenses, including officers salaries and  reimbursement of Director’s expenses, loan covenants, capital improvements  and contingencies that will effect the amount of cash available for  distribution to members.  We have  representatives of Fagen on the Board and formerly ICM and engage in  transactions with ICM and Fagen. Our expenditures, reserves and the amount of  cash available for distribution may be affected by these transactions and our  relationship to Fagen and ICM. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| • |   | We will reimburse our Directors  for out-of-pocket expenses relating to our business.  We do not have a reimbursement policy or  guideline for determining what expenses will be reimbursed.  We will review and reimburse all  reasonable expenses that Directors submit to us.                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| • |   | We have retained counsel that  has assisted us in various aspects of our formation and development.  We have not retained separate counsel on  behalf of unit holders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| • |   | Fagen Inc., Mr. Mitchell, Mr.  Endres, Mr. Kolsrud, Mr. Fick and Mr. Wright, are involved in various ethanol  construction and development projects throughout the United States and in  Wisconsin.  These projects will  compete with our project for financing, corn and other raw material supplies,  and the sale of ethanol and distillers grains.  Our operating agreement does not prevent our Directors from  being involved in activities that compete with us.                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| • |   | Our Directors or their  affiliates may loan money to us for which we may pay interest up to a rate of  prime plus 4%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

**ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)                                  FinancialStatements.  An index to the financialstatements included in this report appears at page F-1.  The financial statements appear at page F-2through F-14 of this report.

 

Exhibits. The following exhibits are filed as part of this report.  Exhibits previously filed are incorporatedby reference, as noted.

 

31

----

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

 

32

----

 
| 10.6   |   | Purchase and Sale Agreement dated  August 28, 2001, between Badger State Ethanol, LLC and ICM Marketing,  Inc. Filed as Exhibit 10.2 to the registrant’s quarterly report for the  period ending September 30, 2001 on Form 10-QSB (Commission File  333-50568) and incorporated by reference herein.*                                        |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.7   |   | Construction Loan Agreement dated  August 28, 2001, by and between Badger State Ethanol, LLC and First  National Bank of Omaha. Filed as Exhibit 10.3 to the registrant’s quarterly  report for the period ending September 30, 2001 on Form 10-QSB  (Commission File 333-50568) and incorporated by reference herein.                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.8   |   | First Amendment to Construction Loan  Agreement dated August 27, 2002, by and between First National Bank of  Omaha and Badger State Ethanol, LLC.   Filed as Exhibit 10.8 to the registrant’s annual report for the period  ending December 31, 2002 on Form 10-KSB (Commission File 333-50568) and  incorporated by reference herein.  |
|   |   |                                                                                                                                                                                                                                                                                                                                                         |
| 10.9   |   | Second Amendment to Construction Loan  Agreement dated January 1, 2003, by and between First National Bank of  Omaha and Badger State Ethanol, LLC.   Filed as Exhibit 10.9 to the registrant’s annual report for the period  ending December 31, 2002 on Form 10-KSB (Commission File 333-50568) and  incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                                                         |
| 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 omittedpursuant to a request for confidential treatment and such materials have beenfiled separately with the Securities and Exchange Commission.

 
|  (b)   |   | Reports on Form 8-K.  Current Report on Form 8-K, dated  December 11, 2003, containing a copy of the Company’s |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------|
| newsletter. |

 

**ITEM 14. PRINCIPALACCOUNTANT FEES AND SERVICES**

 

AUDIT AND NON-AUDIT FEES

 

For the fiscal year ended December 31,2002 and 2003, professional services were performed by Grant Thornton LLP.  The following table presents fees forprofessional services rendered by Grant Thornton LLP for the audit of theCompany’s annual financial statements for the years ended December 31,2002 and 2003, and fees billed for other services rendered by Grant ThorntonLLP during those periods.

 

33

----

 
|                    |   | **December 31, 2002** |       | **December 31, 2003** |   |
|-------------------------|--------|----------------------------|------------|----------------------------|--------|
| Audit Fees  (1)         |   | $                          | 59,700     |                       | $      | 84,800 |   |
| Audit  Related Fees (2) |   | 2,200                      |       | 5,600                      |   |
| Tax Fees                |   | 28,000                     |       | 14,500                     |   |
| All Other  Fees         |   | 0                          |       | 0                          |   |
| **TOTAL**               |   | **$**                      | **89,900** | ** **                 | **$**  | **104,900** | ** ** |

 

----

(1) Represents the aggregate fees billedcovering the audit of our annual financial statements and the review of ourfinancial statements for the first, second and third quarters of 2003 and 2003.

(2) Represents the aggregate fees billed forassurance and related services that are reasonably related to the performanceof the audit or review.

 

The above listed fees were pre-approved bythe Board of Directors of the Company. The percentage of hours expended on audit by persons other than theCompany’s principal accountant’s full-time, permanent employees did not exceed50%.

 

It is the Company’s policy to pre-approve allservices provided by Grant Thornton LLP. As of the date of this filing, the Company’s current policy is to notengage Grant Thornton LLP to provide, among other things, bookkeeping services,appraisal or valuation services, or internal audit services. The policyprovides that the Company engage Grant Thornton to provide audit, tax and otherassurance services, such as review of SEC reports or filings.  The Board of Directors considered anddetermined that the provision of the services other than the services describedunder “Audit Fees” is compatible with maintaining the independence of the independentauditors.

 

34

----

 

**SIGNATURES**

 

In accordance with Section 13 or 15(d)of the Securities Exchange Act of 1934, the Registrant has duly caused thisReport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| Dated:   March 25, 2004 | BADGER STATE ETHANOL, LLC |
|-----------------------------------|---------------------------|
|                              |                      |
|                              | By:                       | /s/ Gary L.  Kramer |   |
|                              |                      | Gary L.  Kramer |
|                              |                      | President  and General Manager |

 

In accordance with the requirements of theSecurities Exchange Act of 1934, this Report has been signed below by thefollowing persons on behalf of the Registrant, and in the capacities and on thedates indicated.

 

 
|    /s/ John L. Malchine                       |   | March 25, 2004 |
|----------------------------------------------------|--------|---------------------|
| John L. Malchine                                   |   |
| Chairman of the Board and Chief Executive  Officer |   |
|                                               |   |
|                                               |   |
|    /s/ Gary L. Kramer                         |   | March 25, 2004 |
| Gary L. Kramer                                     |   |
| Director, President and General Manager            |   |
|                                               |   |
|                                               |   |
|    /s/ David Fick                             |   | March 25, 2004 |
| David Fick                                         |   |
| Director                                           |   |
|                                               |   |
|                                               |   |
|    /s/ David Kolsrud                          |   | March 25, 2004 |
| David Kolsrud                                      |   |
| Director and Secretary                             |   |
|                                               |   |
|                                               |   |
|    /s/  Don Endres                       |   | March 25, 2004 |
| Don Endres                                         |   |
| Director and Treasurer                             |   |
|                                               |   |
|                                               |   |
|    /s/  Wayne Mitchell                   |   | March 25, 2004 |
| Wayne Mitchell                                     |   |
| Director                                           |   |
|                                               |   |
|                                               |   |
|    /s/ Robert Wright                          |   | March 25, 2004 |
| Robert Wright                                      |   |
| Director                                           |   |
|                                               |   |
|                                               |   |
|    /s/ James Leitzinger                       |   | March 25, 2004 |
| James Leitzinger                                   |   |
| Chief Financial Officer                            |   |

 

35

----

 

**SupplementalInformation to be Furnished with Reports FiledPursuant to § 15(d) of the Exchange Act by Nonreporting Issuers**

 

TheRegistrant has sent an annual report or proxy materials to its securityholderscovering the registrant’s last fiscal year. The Registrant will furnish to the Commission for its information, atthe time of filing its report on this Form, four copies of the annual reportand form of proxy.

 

----

 

**INDEXTO FINANCIAL STATEMENTS**

 
| Report of Independent Certified Public  Accountants |   |
|-----------------------------------------------------|--------|
|                                                |   |
| Financial Statements                                |   |
|                                                |   |
| Balance  Sheets                                     |   |
|                                                |   |
| Statements of Operations                            |   |
|                                                |   |
| Statements of Members’ Equity                  |   |
|                                                |   |
| Statements of Cash Flows                            |   |
|                                                |   |
| Notes to Financial Statements                       |   |

 

F-1

----

 

**REPORTOF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS**

 

Board of Directors and Members

Badger State Ethanol, LLC

 

We have audited the accompanying balance sheets of Badger StateEthanol, LLC as of December 31, 2003 and 2002, and the related statementsof operations, members’ equity, and cash flows for the years then ended.  These financial statements are the responsibilityof the company’s management.  Our responsibilityis to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Badger StateEthanol, LLC as of December 31, 2003 and 2002, and the results of itsoperations and its cash flows for the years then ended, in conformity withaccounting principles generally accepted in the United States of America.

 

 
| /s/ GRANT THORNTON LLP |   |
|------------------------|--------|
|                   |
| Madison, Wisconsin     |
| January 23, 2004  |

 

F-2

----

 

**BADGERSTATE ETHANOL, LLC**

BALANCE SHEETS

December 31, 2003 and 2002

 
|                                            |   | **2003**   |       | **2002**   |   |
|-------------------------------------------------|--------|------------|------------|------------|--------|
| ASSETS                                          |   |       |       |       |   |
|                                            |   |       |       |       |   |
| CURRENT  ASSETS                                 |   |       |       |       |   |
| Cash and  cash equivalents                      |   | $          | 1,810,490  |       | $      | 592,366 |   |
| Accounts  receivable:                           |   |       |       |       |   |
| Trade                                           |   | 4,129,164  |       | 3,416,381  |   |
| Government  incentive payments                  |   | 1,112,426  |       | —     |   |
| Inventories                                     |   | 2,619,014  |       | 1,320,004  |   |
| Margin  deposits                                |   | 234,000    |       | 410,000    |   |
| Other assets                                    |   | 490,457    |       | 272,017    |   |
|                                            |   |       |       |       |   |
| Total  current assets                           |   | 10,395,551 |       | 6,010,768  |   |
|                                            |   |       |       |       |   |
| PROPERTY AND  EQUIPMENT, at cost                |   |       |       |       |   |
| Plant  buildings and equipment                  |   | 45,734,888 |       | 44,816,297 |   |
| Land  improvements                              |   | 1,398,917  |       | 1,170,214  |   |
| Office  buildings and equipment                 |   | 464,018    |       | 448,518    |   |
|                                            |   | 47,597,823 |       | 46,435,029 |   |
| Less  accumulated depreciation and amortization |   | 2,521,949  |       | 358,254    |   |
|                                            |   | 45,075,874 |       | 46,076,775 |   |
|                                            |   |       |       |       |   |
| OTHER ASSETS                                    |   | 714,581    |       | 595,056    |   |
|                                            |   |       |       |       |   |
| TOTAL ASSETS                                    |   | $          | 56,186,006 |       | $      | 52,682,599 |   |
|                                            |   |       |       |       |   |
| LIABILITIES AND MEMBERS’ EQUITY            |   |       |       |       |   |
|                                            |   |       |       |       |   |
| CURRENT  LIABILITIES                            |   |       |       |       |   |
| Line of  credit                                 |   | $          | —     |       | $      | 1,747,980 |   |
| Current  maturities of long-term debt           |   | 3,056,680  |       | 2,074,287  |   |
| Accounts  payable                               |   | 739,841    |       | 1,908,619  |   |
| Accrued  liabilities                            |   | 1,713,655  |       | 991,668    |   |
|                                            |   |       |       |       |   |
| Total  current liabilities                      |   | 5,510,176  |       | 6,722,554  |   |
|                                            |   |       |       |       |   |
| LONG-TERM  DEBT, less current maturities        |   | 24,043,579 |       | 31,240,273 |   |
|                                            |   |       |       |       |   |
| COMMITMEMTS  AND CONTINGENCIES                  |   | —     |       | —     |   |
|                                            |   |       |       |       |   |
| MEMBERS’  EQUITY                           |   |       |       |       |   |
| Members’  contributions                    |   | 17,859,787 |       | 17,859,787 |   |
| Retained  earnings (accumulated deficit)        |   | 8,772,464  |       | (3,140,015 | )      |
|                                            |   | 26,632,251 |       | 14,719,772 |   |
|                                            |   |       |       |       |   |
| TOTAL  LIABILITIES AND MEMBERS’ EQUITY     |   | $          | 56,186,006 |       | $      | 52,682,599 |   |

 

The accompanying notes are an integral part of these statements.

 

F-3

----

 

**BADGERSTATE ETHANOL, LLC**

STATEMENTS OF OPERATIONS

Years ended December 31,2003 and 2002

 
|                                                    |   | **2003**   |       | **2002**   |   |
|---------------------------------------------------------|--------|------------|------------|------------|--------|
|                                                    |   |       |       |       |   |
| Sales and  revenues                                     |   | $          | 74,149,226 |       | $      | 10,125,926 |   |
| Cost of  sales                                          |   | 57,799,611 |       | 10,889,768 |   |
|                                                    |   |       |       |       |   |
| Gross margin  (loss)                                    |   | 16,349,615 |       | (763,842   | )      |
|                                                    |   |       |       |       |   |
| Selling,  general and administrative expenses           |   | 2,663,322  |       | 1,124,979  |   |
|                                                    |   |       |       |       |   |
| Operating  income (loss)                                |   | 13,686,293 |       | (1,888,821 | )      |
|                                                    |   |       |       |       |   |
| Interest  expense                                       |   | (1,846,937 | )          | (398,165   | )      |
| Interest  income                                        |   | 7,894      |       | 6,521      |   |
| Other income                                            |   | 65,229     |       | 22,745     |   |
|                                                    |   |       |       |       |   |
| Net income  (loss)                                      |   | $          | 11,912,479 |       | $      | (2,257,720 | ) |
|                                                    |   |       |       |       |   |
| Net income  (loss) per unit - basic and diluted         |   | $          | 602.43     |       | $      | (114.18 | ) |
|                                                    |   |       |       |       |   |
| Weighted  average units outstanding - basic and diluted |   | 19,774     |       | 19,774     |   |

 

The accompanying notes are an integral part of these statements.

 

F-4

----

 

**BADGERSTATE ETHANOL, LLC**

STATEMENTS OF MEMBERS’ EQUITY

Years ended December 31,2003 and 2002

 
|                             |   | **Members’  units** |   | **Members’  contributions** |       | **Retained  earnings  (accumulated  deficit)** |   | **Total**  |   |
|----------------------------------|--------|--------------------------|--------|----------------------------------|------------|------------------------------------------------|--------|------------|--------|
|                             |   |                     |   |                             |       |                                           |   |       |   |
| Balance,  January 1, 2002   |   | 19,774                   |   | $                                | 17,859,787 |                                           | $      | (882,295   | )      | $ | 16,977,492 |   |
|                             |   |                     |   |                             |       |                                           |   |       |   |
| Net loss                         |   | —                   |   | —                           |       | (2,257,720                                     | )      | (2,257,720 | )      |
|                             |   |                     |   |                             |       |                                           |   |       |   |
| Balance,  December 31, 2002 |   | 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 |   |

 

The accompanying notes are an integral part of these statements.

 

F-5

----

 

**BADGERSTATE ETHANOL, LLC**

STATEMENTS OF CASH FLOWS

Years ended December 31,2003 and 2002

 
|                                                                                                |   | **2003**   |       | **2002**    |   |
|-----------------------------------------------------------------------------------------------------|--------|------------|------------|-------------|--------|
|                                                                                                |   |       |       |        |   |
| Cash flows  from operating activities                                                               |   |       |       |        |   |
| Net income  (loss)                                                                                  |   | $          | 11,912,479 |        | $      | (2,257,720 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities |   |       |       |        |   |
| Depreciation  and amortization                                                                      |   | 2,350,170  |       | 388,420     |   |
| Changes in  operating assets and liabilities:                                                       |   |       |       |        |   |
| Trade  accounts receivable                                                                          |   | (712,783   | )          | (3,416,381  | )      |
| Government  incentive payments receivable                                                           |   | (1,112,426 | )          | —      |   |
| Inventories                                                                                         |   | (1,299,010 | )          | (1,320,004  | )      |
| Margin  deposits                                                                                    |   | 176,000    |       | (410,000    | )      |
| Other assets                                                                                        |   | (218,440   | )          | (253,767    | )      |
| Accounts  payable                                                                                   |   | (1,168,778 | )          | 1,827,120   |   |
| Accrued  liabilities                                                                                |   | 721,987    |       | 991,668     |   |
|                                                                                                |   |       |       |        |   |
| Net cash  provided by (used in) operating activities                                                |   | 10,649,199 |       | (4,450,664  | )      |
|                                                                                                |   |       |       |        |   |
| Cash flows  from investing activities                                                               |   |       |       |        |   |
| Cost of  property and equipment                                                                     |   | (1,162,794 | )          | (30,849,565 | )      |
|                                                                                                |   |       |       |        |   |
| Cash flows  from financing activities                                                               |   |       |       |        |   |
| Net change  in line of credit                                                                       |   | (1,747,980 | )          | 1,747,980   |   |
| Payments of  financing fees                                                                         |   | (306,000   | )          | (17,649     | )      |
| Proceeds  from long-term debt financing                                                             |   | 927,880    |       | 29,018,738  |   |
| Payments on  long-term debt financing                                                               |   | (7,142,181 | )          | (55,620     | )      |
|                                                                                                |   |       |       |        |   |
| Net cash  provided by (used in) financing activities                                                |   | (8,268,281 | )          | 30,693,449  |   |
|                                                                                                |   |       |       |        |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                               |   | 1,218,124  |       | (4,606,780  | )      |
|                                                                                                |   |       |       |        |   |
| Cash and  cash equivalents at beginning of year                                                     |   | 592,366    |       | 5,199,146   |   |
|                                                                                                |   |       |       |        |   |
| Cash and  cash equivalents at end of year                                                           |   | $          | 1,810,490  |        | $      | 592,366 |   |
|                                                                                                |   |       |       |        |   |
| Supplemental  disclosure of cash flow information:                                                  |   |       |       |        |   |
| Interest  paid                                                                                      |   | $          | 1,858,655  |        | $      | 25,830 |   |
|                                                                                                |   |       |       |        |   |
| Supplemental  disclosure of noncash operating, investing and financing activities:                  |   |       |       |        |   |
| Purchases of  equipment with long-term debt                                                         |   | $          | —     |        | $      | 269,725 |   |
|                                                                                                |   |       |       |        |   |
| Capitalized  interest related to long-term debt                                                     |   | $          | —     |        | $      | 653,382 |   |

 

The accompanying notes are an integral part of these statements.

 

F-6

----

 

**BADGER STATE ETHANOL, LLC**

NOTES TO FINANCIAL STATEMENTS

December 31, 2003 and 2002

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Badger State Ethanol, LLC (the company)operates an ethanol plant in Wisconsin that began operations inOctober 2002.  The company sellsits production of ethanol and related by-products domestically and operates inone business segment.

 

A summary of the significant accountingpolicies consistently applied in the preparation of the accompanying financialstatements follows:

 

1.  Useof Estimates

 

Preparing financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

2.  RevenueRecognition

 

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

 

The company recognizes revenue from federaland state incentive payments when all requirements of the program have been metand payments are assured.

 

3.  FreightCosts

 

The company reflects freight costs associatedwith shipping its products to customers as a component of cost of goods sold.

 

4.  Cashand Cash Equivalents

 

The company considers all highly liquid debtinstruments purchased with original maturities of three months or less to becash equivalents.

 

F-7

----

 

5.  AccountsReceivable

 

Trade accounts receivable are due fromcustomers for ethanol and distillers grains sales.  The company grants credit to customers in the normal course ofbusiness.  Credit is extended based onan evaluation of a customer’s financial condition and, generally, collateral isnot required.  Accounts outstandinglonger than the contractual payment terms are considered past due.  Management performs on-going creditevaluations of customers and maintains allowances for potential credit losseswhen required.  At December 31,2003 and 2002, the company believes all receivables are fully collectible andno allowance 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.  Interestis not charged on past due receivables.

 

6.  Concentrationsof Credit Risk

 

The company’s cash balances are maintained inbank depositories primarily at one financial institution and exceed federallyinsured limits.  Accounts receivable areprimarily with two customers (see Note I) and the company does not requirecollateral or other security to support these receivables.

 

7.  FairValue of Financial Instruments

 

The carrying amounts of financial instrumentsincluding cash and cash equivalents, accounts receivable and accounts payableapproximate fair value, because of the relatively short maturity of theseinstruments.   The carrying value oflong-term debt, including the current portion, approximates fair value due toeither the interest being determined by variable rates, repricing periodically,or because the fixed rate approximates the current market rate of interestavailable to the company.  Allderivative contracts are recorded at fair market value.

 

8.  Inventories

 

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

 

F-8

----

 

9.  DerivativeInstruments

 

The company enters into derivative contractsto hedge the company’s exposure to price risk related to forecasted corn andnatural gas purchases, forward corn purchase contracts and forecasted ethanolsales.  The company does not typicallyenter into derivative instruments other than for hedging purposes.  All derivative contracts are recognized onthe December 31, 2003 and 2002 balance sheets at their fair market value.

 

On the date the derivative instrument isentered into, the company will designate the derivative as either (1) a hedgeof the fair value of a recognized asset or liability or of an unrecognized firmcommitment (fair value hedge), (2) a hedge of a forecasted transaction or ofthe 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 valueof a derivative that is designated as and meets all the required criteria for afair value hedge, along with the gain or loss on the hedged asset or liabilitythat is attributable to the hedged risk, are recorded in current periodearnings.  Changes in the fair value ofa derivative that is designated as and meets all the required criteria for acash flow hedge are recorded in accumulated other comprehensive income andreclassified into earnings as the underlying hedged item affects earnings.  Changes in the fair value of a derivativethat is not designated as a hedge are recorded in current period earnings.

 

At December 31, 2003 and 2002 noderivative contracts were designated as hedges and all changes in market valuehave been recognized through cost of sales. The Company has recorded an increase to cost of sales of $621,722 and$809,921 related to its derivative contracts for the years ended December 31,2003 and 2002.

 

10.  Propertyand Equipment

 

Depreciation and amortization of property andequipment are provided in amounts sufficient to relate the cost of the relatedassets to operations over their estimated service lives using the straight-linemethod.  Depreciation and amortizationfor income tax reporting purposes are computed using accelerated methods.  The ranges of the estimated useful lives forthe major classes of property and equipment are as follows:

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

 

F-9

----

 

11.  NetIncome (Loss) Per Unit

 

Basic and diluted net income (loss) per unitare computed by dividing the net income (loss) by the weighted average unitsoutstanding for the year.  AtDecember 31, 2003 and 2002, the company had no equity instruments thatwould be considered unit equivalents for purposes of calculating net income(loss) per unit.

 

12.  Reclassifications

 

Certain prior year amounts have beenreclassified to conform with the current year’s presentation.  These reclassifications had no effect onpreviously recorded net loss or members’ equity.

 

13.  RecentAccounting Pronouncements

 

In April 2003, the FASB issued SFAS No.149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities”.  SFAS No. 149 amends andclarifies the accounting for derivative instruments, including certainderivative instruments embedded in other contracts, and for hedging activitiesunder SFAS No. 133.  SFAS No. 149 isgenerally effective for contracts entered into or modified after June 30,2003.  The adoption of SFAS No. 149 hadno impact on the company’s financial position, results of operations or cashflows.

 

The company does not expect that the adoptionof other recent accounting pronouncements will have a material impact on itsfinancial statements.

 

NOTE B - GOVERNMENT INCENTIVE PAYMENTS

 

The company has recorded revenue of$1,632,292 related to incentive payments received under the State of WisconsinProducer Subsidy Payment program (Wisconsin Producer program) for the program’syear ended June 30, 2003.  Thecompany has recorded revenue of $7,500,000 related to incentive paymentsreceived under the United States Department of Agriculture Commodity CreditCorporation’s Bioenergy Program (US CCC Program) for the program’s year endedSeptember 30, 2003.  All funds havebeen received for both incentive programs for the program years ended in 2003.  No federal or state incentive programrevenue was recognized for the year ended December 31, 2002.

 

F-10

----

 

The company has recorded revenue of $633,000related to incentive payments to be received under the Wisconsin Producerprogram for the program year ending June 30, 2004.  The company has recorded revenue of $479,000related to incentive payments to be received under the US CCC program for thefirst quarter of the program year ending September 30, 2004.

 

NOTE C -INVENTORIES

 

Inventories consist of the following atDecember 31:

 
|                  |   | **2003** |      | **2002** |   |
|-----------------------|--------|----------|-----------|----------|--------|
|                  |   |     |      |     |   |
| Raw  materials        |   | $        | 1,412,088 |     | $      | 981,688 |   |
| Work-in-process       |   | 296,430  |      | 282,552  |   |
| Finished  goods       |   | 674,759  |      | 487,003  |   |
| Derivative  contracts |   | 235,737  |      | (431,239 | )      |
|                  |   |     |      |     |   |
| Total  inventories    |   | $        | 2,619,014 |     | $      | 1,320,004 |   |

 

NOTE D - LINE OF CREDIT

 

The company has available a $3,500,000 lineof credit with a financial institution expiring in August 2004.  There were no borrowings outstanding underthe line of credit as of December 31, 2003.  Borrowings outstanding under the line of credit were $1,747,980at December 31, 2002.   Borrowingsoutstanding under the line are collateralized by a general business securityagreement.  Interest is payable monthlyat a variable rate (effective rate of 5% at December 31, 2003).  Upon expiration of the current line ofcredit in August 2004, the company has the intent and believes it willhave the ability to renew its line of credit.

 

F-11

----

 

NOTE E - LONG-TERM DEBT

 

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

 

 
|                                                                                                                                                                                                                                                                   |   | **2003**   |       | **2002**   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| Note payable  to First National Bank; secured by a general business security agreement;  payable in quarterly principal and interest payments of $1,021,839, with a  final payment due January 2008   (A)                                                    |   | $          | 23,801,740 |       | $      | 29,672,120 |   |
| 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 |   | 3,233,412  |       | 3,548,411  |   |
| Notes  payable; secured by specific equipment; payable in monthly principal and  interest payments of $2,441, with final payments due in 2007 (B)                                                                                                                      |   | 65,107     |       | 94,029     |   |
|                                                                                                                                                                                                                                                                   |   | 27,100,259 |       | 33,314,560 |   |
| Less current  maturities                                                                                                                                                                                                                                               |   | 3,056,680  |       | 2,074,287  |   |
|                                                                                                                                                                                                                                                                   |   |       |       |       |   |
|                                                                                                                                                                                                                                                                   |   | $          | 24,043,579 |       | $      | 31,240,273 |   |

 

----

| (A)    |   | Interest accrues as follows:  6.528% on $14,465,278, and at prime rate  plus 1% (effective rate of 5% at December 31, 2003) on $9,336,462.             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                             |
|   |   | The loan is collateralized by all assets of  the company and contains various customary restrictions, including the  maintenance of certain financial covenants. |
|   |   |                                                                                                                                                             |
| (B)    |   | Interest accrues at 2.5% on $43,085.  The remaining balance was offered at zero  percent financing.                                                         |

 

Future maturities of long-term debt as of December 31, 2003 are asfollows:

 

| **Year ending December 31,** |   |       |       |
|-----------------------------------|--------|------------|------------|
| 2004                              |   | $          | 3,056,680  |   |
| 2005                              |   | 3,223,960  |       |
| 2006                              |   | 3,381,953  |       |
| 2007                              |   | 5,445,522  |       |
| 2008                              |   | 11,992,144 |       |
|                              |   |       |       |
|                              |   | $          | 27,100,259 |   |

 

F-12

----

 

NOTE F - COMMITMENTS

 

The company had forward contracts to purchaseapproximately 3,467,000 and 3,004,000 bushels of corn at various prices atDecember 31, 2003 and 2002.  Thecompany had additional forward contracts to purchase approximately 1,485,000and 117,500 bushels of corn that were not yet priced at December 31, 2003and 2002.  There were no unrealizedlosses on open forward contracts that were priced at December 31, 2003.  The company recorded an unrealized loss of$248,887 on open forward contracts that were priced at December 31, 2002.

 

The company leases railcars under operatingleases that expire in 2004.  Total rentexpense for all operating leases was $68,625 and $13,500 for the years endedDecember 31, 2003 and 2002.  Futureminimum lease payments under these leases as of December 31, 2003 are$33,750 for the year ending December 31, 2004.

 

NOTE G - RELATED PARTIES

 

The company’s general contractor and asubcontractor that were used to construct the plant are members of the companyand have representatives on the company’s Board of Directors.  The subcontractor also has exclusive rightsto market the company’s distillers grains. As of December 31, 2003, there is no amount due to these membersfor construction activities.  As ofDecember 31, 2002 the company owed these members $500,000 for constructionactivities.  For the years endedDecember 31, 2003 and 2002, the company made payments to the members of$673,177 and $33,103,403.  Sales to thesubcontractor for the years ended December 31, 2003 and 2002 were$10,765,583 and $1,968,351. Trade accounts receivable were $339,144 and$432,767 from the subcontractor at December 31, 2003 and 2002.  The subcontractor sold its units inNovember 2003 and its representative on the company’s Board of Directorsresigned in December 2003.

 

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 31,2003 and 2002 to the member were $52,077,172 and $7,924,945.  Trade accounts receivable were $3,790,109and $2,978,692 from the ethanol marketing company at December 31, 2003 and2002.

 

In connection with the sales activities ofthe ethanol marketing company and the subcontractor, the company recordedexpenses of  $4,832,854 and $735,273related to railcar, freight and marketing fees for the years endedDecember 31, 2003 and 2002.

 

F-13

----

 

NOTE H - RETIREMENT PLAN

 

Effective January 1, 2003, the companyestablished a 401(k) Plan for all employees of the company.  The company may make profit sharingcontributions to the plan at the discretion of the company’s Board of Directors.  The company’s discretionary contribution was$21,592 in 2003.  No contributions weremade in 2002.

 

NOTE I - MAJOR CUSTOMERS

 

The company has two major customers thataccounted for 70% and 15% of  sales andrevenues for the year ended December 31, 2003 and 78% and 19% of sales andrevenues for the year ended December 31, 2002.  Revenue from major customers follows for the years endedDecember 31:

 
|       |   | **2003**   |       | **2002**  |   |
|------------|--------|------------|------------|-----------|--------|
|       |   |       |       |      |   |
| Customer A |   | $          | 52,077,172 |      | $      | 7,924,945 |   |
| Customer B |   | 10,765,583 |       | 1,968,351 |   |
|            |        |            |            |           |        |  |  |

 

Accounts receivable from major customersconsisted of the following as of December 31:

 
|       |   | **2003** |      | **2002** |   |
|------------|--------|----------|-----------|----------|--------|
|       |   |     |      |     |   |
| Customer A |   | $        | 3,790,109 |     | $      | 2,978,692 |   |
| Customer B |   | 339,144  |      | 432,767  |   |
|            |        |          |           |          |        |  |  |

 

NOTE J - INCOME TAXES

 

Due to the company’s organization as alimited liability company, the income or loss of the company is reportable bythe respective members on their personal income tax returns.  Therefore, no income tax provision has beenincluded in the accompanying financial statements.

 

NOTE K - SUBSEQUENT EVENT

 

The Board of Directors of Badger StateEthanol declared a dividend of $250 per unit to be paid to all members ofrecord at January 31, 2004.  Thetotal distribution will be $4,943,500.

 

 

F-14

----