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

**WASHINGTON,DC 20549**

 

**FORM 10-KSB**

 

**ANNUAL REPORT FOR SMALL BUSINESS ISSUERS SUBJECT TO THE**

**1934 ACT REPORTING REQUIREMENTS**

 

**ý****        ANNUALREPORT PURSUANT TO SECTION 13 OR 15(D) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For theFiscal Year Ended December 31, 2004**

 

**OR**

 

**o****        TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For theTransition Period from          to         **

** **

**Commissionfile number 333-50568**

** **

**BADGER STATE ETHANOL, LLC**

(Name of SmallBusiness Issuer in Its Charter)

 
| **Wisconsin**                                                    | ** ** | **39-1996522**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**820 West17th Street, Monroe, Wisconsin 53566**

(Address and ZipCode of Principal Executive Offices)

 

Registrant’sTelephone Number, Including Area Code  **(608) 329-3900**

 

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Securitiesregistered pursuant to Section 12(b) of the Exchange Act:  **None**

 

Securitiesregistered under Section 12(g) of the Exchange Act:  **None**

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

 

The issuer’s revenues for its most recent fiscal yearwere $92,084,766.

 

Theaggregate market value of the member units held by non-affiliates of theregistrant (computed by reference to the price of certain member units soldthrough Variable Investment Advisors, Inc.) was $52,005,620 as of December 31,2004.  There is no established publictrading market for our securities.

 

As ofFebruary 24, 2005, the Company has issued 19,774****ClassA member units.

 

DOCUMENTSINCORPORATED BY REFERENCE.

**None.**

 

 

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**TABLE OFCONTENTS**

 
| PART I                                                                                               |   |   |
|------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                 |   |   |
| ITEM 1. DESCRIPTION OF  BUSINESS                                                                     |   |   |
| ITEM 2. DESCRIPTION OF  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                                                                                           |   |   |

 

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CAUTIONARYSTATEMENT REGARDING FORWARD-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 could andlikely 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.**

** **

**RISKFACTORS**

** **

**RISKS RELATED TO OUR FORMATIONAND FINANCING PLAN**

 

**We have incurred substantial debtand debt service requirements.**

 

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

 

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

 

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

 

•                  Wewill be vulnerable to increases in prevailing interest rates;

 

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

 

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

 

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

 

**To service our debt, we require a significant amountof cash and our ability to generate cash depends on many factors.**

** **

Ourability to repay our debt depends on our financial and operating performanceand on our ability to successfully implement our business strategy. We cannotassure you that we will be successful in implementing our strategy or inrealizing our anticipated financial results. Our financial and operationalperformance depends on numerous factors including prevailing economicconditions and on certain financial, business and other factors beyond ourcontrol. We cannot assure you that our cash flows and capital resources will besufficient to repay our anticipated debt obligations. In the event that we areunable to pay our debt service obligations, we may be forced to reduce oreliminate distributions or capital expenditures. We could be forced to sellassets, obtain additional equity capital or refinance or restructure all or aportion of our debt. In the event that we are unable to refinance ourindebtedness or raise funds through asset sales, sales of equity or otherwise,our business would be adversely affected.

 

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**Our debt financing containsnumerous covenants, in which a breach may result in default.**

 

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

 

•                  Incuradditional indebtedness;

 

•                  Makecapital expenditures in excess of prescribed thresholds;

 

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

 

•                  Makevarious investments;

 

•                  Createliens on our assets;

 

•                  Utilizeasset sale proceeds;

 

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

 

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

 

**RISKS RELATED TO OPERATIONS**

 

**Our agreements or understandings with United BioEnergy Ingredients, LLC (successor to ICM Marking, Inc. and an affiliate ofICM, Inc.) (“United”) and Murex, N.A., Ltd. (“Murex”) were not negotiated atarm’s length, we may not have obtained terms as favorable to us as those wecould have obtained from third parties, and any claims that we may have againstUnited or Murex may be difficult for us to enforce.**

** **

We areheavily dependent upon the services that Murex and United Bio EnergyIngredients, LLC (“United”) are providing to sell our ethanol and distillersgrains.  Murex is a member of the Companyand ICM, Inc. (an affiliate of United) (“ICM”) was previously a member of theCompany.** **Also,a representative of Murex currently serves on our Board of Directors and arepresentative of ICM previously served on our Board of Directors.  Consequently, the terms of our agreements andunderstandings with United and Murex have not been negotiated at arm’s length,and therefore, there is no assurance that our arrangements with them are asfavorable to us as those we could have obtained from unaffiliated thirdparties. Because of ICM’s and Murex’s role in this project, and their currentand past representation on our Board of Directors, it could be difficult orimpossible to enforce claims that we may have against these parties if, forexample, one or all of them breaches agreements or understandings with us.

 

**We are dependent on a developmentagreement with the City of Monroe, Wisconsin.**

 

We entered into adevelopment agreement with the City of Monroe, Wisconsin, for the constructionof the ethanol plant and for site improvements. As part of the agreement, we have on-going obligations, includingrepresenting that the fair market value of the site will not be less than$10 million, or pay a nonperformance penalty not to exceed $280,000 peryear and repaying up to $1.6 million of the City of Monroe’s taxincremental financing for site improvements through regular property taxassessments.  In connection with theagreement, we delivered a mortgage to the City of Monroe.  The mortgage secures our performance underthe agreement and expires in 2011.

 

**RISKS RELATED TO ETHANOLPRODUCTION**

 

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

 

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As described in moredetail herein, ethanol sales have been favorably affected by a variety offederal laws covering environmental, tax and other areas.  The Clean Air Act (including the ReformulatedGasoline Program) and the Federal Oxygen Program help spur demand for ethanolby requiring the use of oxygenated motor fuels during the fall and wintermonths in certain metropolitan areas. Further, the Volumetric Ethanol Excise Tax Credit, as passed in January2005, offers a volumetric ethanol excise tax credit of 52 cents per gallon ofethanol blended.

 

The modification orelimination of any of the federal laws and programs described above, or thereduction of any of the subsidies or tax credits described above, could have amaterial adverse impact on our business.

 

**The ethanol industry is verycompetitive.**

 

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

 

We will also compete withproducers of other gasoline additives having similar octane and oxygenatevalues as ethanol, such as producers of methyl tertiary butyl ether (“MTBE”), apetrochemical derived from methanol which costs less to produce than ethanol.Many major oil companies produce MTBE and because it is petroleum-based, itsuse is strongly supported by major oil companies. Alternative fuels, gasolineoxygenates and alternative ethanol production methods are also continuallyunder development. The major oil companies have significantly greater resourcesthan we have to market MTBE, to develop and market alternative products, and toinfluence legislation and public perception of MTBE and ethanol. Thesecompanies also have sufficient resources to begin production of ethanol shouldthey choose to do so.

 

**To produce ethanol we intend topurchase significant amounts of corn that is subject to disease and otherrisks.**

 

Ethanolproduction at our facility will require corn. Corn, as with most other crops,is affected by weather conditions, disease and other factors. A significantreduction in the quantity or quality of corn harvested due to adverse weatherconditions, disease or other factors could result in increased corn costs withadverse financial consequences to us. Significant variations in actual growingconditions from normal growing conditions may adversely affect our ability toprocure corn for the plant.

 

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

 

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

 

Watersupply and water quality are important requirements to produce ethanol. Tosatisfy our water needs, we have drilled one 500,000 gallon-per-day well on theproperty.  Current plant usage isapproximately 330,000 gallons per day.

 

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Weexpect that the well will provide all of the water that we will need to operatethe ethanol plant, but our estimates regarding water needs or the wateravailable from the well on the property could be understated and we could needadditional 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.

 

**Interruptions in our supply ofenergy could have a material adverse impact on our business.**

 

Ethanolproduction also requires a constant and consistent supply of energy into theethanol plant. If there is any interruption in our supply of energy forwhatever 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 will depend on hiringand retaining key personnel.**

 

Oursuccess will depend in part on our ability to attract and retain competentpersonnel who will be able to help us achieve our goals. We must hire andretain qualified managers, accounting, human resources and other personnel tostaff our business.  If we areunsuccessful in hiring and retaining productive and competent personnel, ourbusiness could be harmed.

 

**We are subject to extensiveenvironmental and health and safety regulations.**

 

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

 

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

 

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

 

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

 

**Ethanol production is energyintensive, and we will need significant amounts of electricity and natural gas.**

 

Wehave engaged a local company to help us manage our natural gas needs and toassist us in negotiating agreements to purchase natural gas.  We purchase electricity from a local utilitybut have not entered into any agreement. In addition, natural gas and electricity prices have historicallyfluctuated significantly. Increases in the price of natural gas or electricitywould harm our business by increasing our energy costs.

 

**Our business is not diversified.**

 

Our successdepends largely upon our ability to profitably operate our ethanol plant. We donot have any other lines of business or other sources of revenue if we areunable to operate our ethanol plant.

 

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We sell all of theethanol we produce to one distributor, Murex, pursuant to an outputcontract.  Murex then markets and resellsthat ethanol to end users on terms and at a price approved in consultation withus.  On each sale of ethanol, Murexretains a fixed price per gallon of the ethanol sold.  As a result, we are dependent on onedistributor to sell our ethanol.  If thisdistributor breaches our output contract or is not in the financial position topurchase all of the ethanol we produce, we will not have any readily availablemeans to sell our ethanol and our financial performance will be adversely andmaterially effected. Our financial performance is dependent upon the financialhealth of the distributor we contract with.

 

We contracted only withUnited for the marketing and distribution of our distillers grains. We relysolely upon United to market and distribute our distillers grains. This is notan output contract and United will only purchase that portion of our distillersgrains that they are able to sell. If United is unable to sell any portion ofthe distillers grains we produce, we will be left with distillers grains thatmust be disposed of. This may have a material adverse impact on our financialperformance.

 

Further,United may also have different arrangements with respect to compensation intheir agreements with other entities that produce the same products that wedo.  It is possible that United’s abilityor willingness to perform on our behalf could be impaired by the financialarrangements that they may have with other entities not related to us.

 

**Our operating results couldfluctuate.**

 

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

 

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

 

•                  Changesin interest rates and availability of credit;

 

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

 

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

 

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

 

•                  Technicaldifficulties in operating the ethanol plant;

 

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

 

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

 

As a result of these factors, and other described riskfactors, our operating results may not be indicative of future operatingresults and you should not rely on them as indications of our futureperformance.

 

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**PART I**

** **

**ITEM 1.  DESCRIPTION OF BUSINESS**

** **

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

 

Fuel grade ethanol is ourprimary product accounting for the majority of our revenue.  In addition, we sell distillers grains, aprincipal co-product of the ethanol production process, which may be sold asdistillers dried grains and distillers modified wet grains.  We also sell carbon dioxide.  In 2004, we processed over 17.9 millionbushels of corn into over 49.2 million gallons of ethanol.  We also processed over 153,000 tons ofdistillers grains and 35,000 tons of carbon dioxide in 2004.  In 2005, we anticipate producing over 51million gallons of ethanol, over 161,000 tons of distillers grains, and over115,000 tons of carbon dioxide.

 

**Description of Dry Mill Process**

 

Our ethanol plant, whichis located in Monroe, Wisconsin, produces ethanol by processing corn.  The corn is received by rail and bysemi-trailer truck, and is weighed and cleaned of rocks and debris before it isconveyed to one of two concrete storage silos. The corn is then transported toa hammermill or grinder where it is ground into flour and conveyed into aslurry tank for processing.  We addwater, heat and enzymes to break the ground corn into a corn mash.  This mash is heat sterilized and pumped to atank where other enzymes are added to convert the starches into glucosesugars.  Next, the mash is pumped intoone of three fermenters, where yeast is added, to begin a forty-eight to fiftyhour batch fermentation process.  Carbondioxide is produced during the fermentation process.  A distillation process vaporizes the alcoholfrom the corn mash.  The alcohol isfurther dried in a rectifier and molecular sieve.  The resulting 200 proof alcohol is thenpumped to shift tanks and blended with five percent gasoline as it is pumpedinto denatured ethanol storage tanks.

 

Corn mash exiting thedistillation process is pumped into one of several centrifuges.  Water from the centrifuges, called thinstillage, is condensed into a thicker syrup called condensed solubles.  The solids that exit the centrifuge arecalled wet cake or distillers wet grains. Typically, this wet cake is conveyed to dryers where condensed solublesare added and moisture is removed to produce distillers dried grains, which maybe used as animal feed.

 

**Principal Products and TheirMarkets**

 

The principal products weproduce at our ethanol plant are fuel grade ethanol, distillers grains andcarbon dioxide.

 

***Ethanol***

 

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

 

•                  Anoctane enhancer in fuels;

 

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

 

•                  Anon-petroleum-based gasoline extender.

 

Ethanol in its primaryform is mostly used for blending with unleaded gasoline and other fuelproducts.  The implementation of theFederal Clean Air Act has made ethanol fuels an important domestic renewablefuel additive.  Used as a fuel oxygenate,ethanol provides a means to reduce carbon monoxide vehicle emissions.  The principal

 

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purchasers of ethanol are generally the refined and wholesale gasolinemarketer or blender.  Our principal endmarkets for our ethanol are petroleum terminals in California, Wisconsin,Illinois and other states in the upper Midwest. Our primary means of distributing ethanol is by rail, although we alsoare able to ship ethanol by truck as well.

 

In November, 2004, weexpanded our production by bringing a fourth fermenter into operation.  The cost of installing and bringing thisfourth fermenter into operation was approximately $1.2 million, which we fundedfrom our operating cash flows.

 

***DistillersGrains***

 

A principal co-product ofthe ethanol production process is distillers grains, a high-protein,high-energy animal feed supplement primarily marketed to the dairy and beefindustry.  Our plant uses a dry millethanol process with a dryer system that allows production of two moisturelevels of distillers grains: distillers modified wet grains and distillersdried grains.  Distillers modified wetgrains are processed corn mash and condensed solubles that containapproximately 50% moisture.  It has ashelf life slightly longer than three days and is often sold to nearbymarkets.  Distillers dried grains arecorn mash that has been dried to approximately 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. Our primary means ofdistributing distillers grains is by truck, although we also are able to shipdistillers grains by rail as well.

 

In fiscal 2004, we facedincreasing competition in the wet distillers market because certain of ourcompetitors are only capable of producing wet distillers and not drydistillers.  In response, we increasedthe amount of dry distillers grains that we produced.

 

***CarbonDioxide***

 

Anotherco-product of the ethanol production process is carbon dioxide. Carbon dioxidecan be processed and used in various food and non-food related applications,such as beverage and dry ice production, pharmaceutical manufacturing,shrink-fitting and cryogenic blasting. Carbon dioxide is principally used asexpendable refrigerants and is commonly used in food processing facilities suchas slaughterhouse operations, frozen food storage, and as supplemental coolingfor refrigerated products.

 

In February, 2004 we entered into an agreement to provide and sell carbon dioxide gas to a third party from the plant.  We leased land to the third party which built a plant to capture and process the carbon dioxide adjacent to our facility.  The facility began operating on July 1, 2004, and we are currently supplying approximately 200 tons of liquid carbon dioxide per day.  Total capacity is approximately 400 tons of liquid carbon dioxide per day.  The initial term of the agreement is 15 years with the option to renew for additional 5 year periods thereafter.  We believe that our sales under the carbon dioxide agreement will be approximately $812,000 per year.

 

**Customers**

 

We entered into anethanol purchase and marketing agreement with Murex, for the exclusive rightsto purchase and market all ethanol produced by our plant.  For the year ended December 31, 2004, Murexaccounted for all of our ethanol sales and approximately 78.3% of our aggregatesales and revenues.  We believe that theloss of Murex as a customer would have a material adverse effect on our salesand revenues.  Murex currently has arepresentative on our Board of Directors. This exclusive agreement has an initial term of seven years untilOctober 23, 2009, and automatically renews for successive one-year terms unlesswritten notice of termination is issued 90 days prior to the end of the thencurrent term.

 

We entered into adistillers grains purchase and marketing agreement with United for theexclusive rights to purchase and market all distillers grains produced by ourplant.  For the year endedDecember 31, 2004, United accounted for virtually all of our distillersgrains sales and approximately 17.0% of our aggregate sales and revenues.  We believe that the loss of United as acustomer would have a material adverse effect on our sales and revenues.  This exclusive agreement has an initial termof three years until October 25, 2005, and automatically renews for

 

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successive one-year terms unless written notice of termination isissued 90 days prior to the end of the then current term.  At this time, we plan on renewing ouragreement with United.

 

We entered into a saleagreement with a third party for the exclusive rights to purchase our carbondioxide.  For the year ended December 31,2004, this agreement accounted for all of our carbon dioxide sales andapproximately 0.3% of our aggregate sales and revenues.  This exclusive agreement has an initial termof 15 years until May 26, 2019 with an automatic 5 year renewal period.

 

**Seasonal Factors in Business**

 

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

 

**Ethanol Industry**

 

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

 

The ethanol industry isheavily dependent on several governmental economic incentives.

 

***FederalEthanol Supports***

 

Ethanol sales have beenfavorably affected by the Clean Air Act Amendments of 1990, particularly theFederal Oxygen Program which became effective November 1, 1992.  The Federal Oxygen Program requires the saleof oxygenated motor fuels during the fall and winter months in certain majormetropolitan areas to reduce carbon monoxide pollution.  Ethanol use has increased due to a secondClean Air Act program, the Reformulated Gasoline Program.  This program became effective January 1,1995, and requires the sale of reformulated gasoline in certain major urbanareas to reduce pollutants, including those that contribute to ground levelozone, better known as smog.

 

A bill(S. 791) was introduced in 2004 in the United States Senate which includedprovisions known as the Renewable Fuels Standard (“RFS”).  This bill expired at the end of 2004 withoutbeing passed, however, it is expected to be reintroduced in 2005.  If passed in the 2004 form, this bill woulddetermine the specific baseline volume of ethanol to be used in gasoline on anationwide basis.  The bill anticipatedthat ethanol volumes would begin at 2.3 billions gallons and grow at a rate ofapproximately 300 million gallons per year to a volume of 5 billion gallons.  This legislation is also under deliberationas a component in both Senate and House energy bills described below, whichwere introduced in 2004 but not passed.

 

Underboth the proposed Senate and House energy bills (S. 2095 and H.R. 4503,respectively), MTBE, a key competitive product of ethanol, would be banned fromuse in the U.S. for 4 years after enactment of RFS, provided that individualstates could exempt out and choose on their own to continue to allow the use ofMTBE.  Although the Senate and Houseenergy bills were not passed and expired in 2004, similar legislation isexpected to be introduced in 2005.

 

Theuse of ethanol as an oxygenate to blend with fuel to comply with federalmandates also has been aided by federal tax policy.  The Energy Tax Act of 1978 exempted ethanolblended gasoline from the federal gas tax as a

 

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means ofstimulating the development of a domestic ethanol industry and mitigating theUnited State’s dependence on foreign oil. As amended, the federal tax credit allowed the market price of ethanolto compete with the price of domestic gasoline. As of 2004, the federal gasoline tax exemption for a 10% ethanol blendwas 5.2 cents per gallon.  This exemptionwas to gradually drop to 5.1 cents per gallon in 2005, however, as of January1, 2005, this federal tax incentive was replaced by a new volumetric ethanolexcise tax credit discussed below.

 

OnOctober 22, 2004, President Bush signed H.R. 4520 into law which contained theVolumetric Ethanol Excise Tax Credit (“VEETC”) and amended the federal excisetax structure effective as of January 1, 2005. The VEETC replaced the exemption described above with a new volumetricethanol excise tax credit of 52 cents per gallon of ethanol blended.  Refiners and gasoline blenders apply for thiscredit and the VEETC is expected to allow much greater refinery flexibility inblending ethanol.  The tax credit underthe VEETC is from general revenues and does not impact the highway trust fund(unlike the previous exemption described above), and thus the VEETC removes adisincentive for states to use ethanol.

 

Additionally, Congressprovides an incentive through the United States Department of AgricultureCommodity Credit Corporation’s Bioenergy Program.  Under that program, we previously wereeligible to receive a cash payment for incremental increases in our grainconsumption for the purpose of producing fuel grade ethanol.  Last year we received approximately $2.3million under this program for producing 49.2 million gallons of ethanol.  This year, the incentive program has beenmodified to prioritize the production of other biofuels such as soy diesel,although ethanol producers can still qualify. Additionally, funding for this program has also been recently cut.  Therefore, we do not anticipate receiving anyincentive from this program this year, or in the foreseeable future.

 

***StateEthanol Supports***

 

Inpart, the past success of our business was dependent upon the availability ofcash payments to ethanol producers from the State of Wisconsin under WisconsinStatutes Section 20.115(3)(d) and 93.75 (referred to hereinafter as the “ProducerSubsidy Payment”).  Under the WisconsinProducer Subsidy Payment program, the State of Wisconsin pays certain ethanolproducers $.20 per gallon for up to 15,000,000 gallons of ethanol produced inWisconsin in each 12 month period.  TheProducer Subsidy Payments are prorated if the State of Wisconsin hasinsufficient funds to pay all eligible ethanol producers $.20 per gallon.  Under the program, a Wisconsin ethanol produceris generally eligible for the payments if it has been producing ethanol inWisconsin for fewer than 60 months, it produces more than 10,000,000 gallons ofethanol a year and it purchases the corn or other substances from which theethanol is produced from local Wisconsin sources.  We believe that we may be eligible forpayments under the Producer Subsidy Program in 2005 but we do not know forcertain.  Given this uncertainty, we haveapplied for the payments but do not anticipate receiving any financial supportfrom the State of Wisconsin through this program.

 

TheGovernor of Wisconsin has announced a new initiative to encourage theproduction of biofuels in Wisconsin, including ethanol.  While no legislation has yet been proposed,the Governor has stated his support to fund the program initially at $2million.  We do not anticipate receivingany financial support from the State of Wisconsin through this program.

 

2005AB 15 and 2005 SB 15 have been introduced in the Wisconsin legislature thatmandate all gasoline sold in Wisconsin be blended with 10% ethanol.  Currently, gasoline may be sold in the statewithout an ethanol blend, although several companies do currently sell gasolinewith a 10% ethanol blend.  If passed,ethanol demand in Wisconsin could increase by approximately 180 millionsgallons per year, from its current 120 million gallons per year (based onapproximately 3 billion gallons of gasoline sold in Wisconsin per year).

 

**Business Location; Proximity toMarkets**

 

We are operating an ethanolplant in Monroe, Wisconsin, which is in Green County, in the south central partof Wisconsin.  We purchased for $1 fromthe City of Monroe, Wisconsin an approximately 28-acre site on which to buildthe ethanol plant.  We selected theMonroe site because of its location to existing grain production, accessibilityto road and rail transportation and its proximity to major populationcenters.  It is also served by the

 

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Wisconsin Southern Railroad Company, a short line rail operator.  In addition, it is also in close proximity tomajor highways that connect to major population centers such as Milwaukee,Wisconsin and Chicago, Illinois.

 

**Development Agreement with theCity of Monroe**

 

We entered into a developmentagreement with the City of Monroe (the “Development Agreement”) to constructthe ethanol plant and for site improvements. As part of the Development Agreement, we agreed to certain on-goingobligations, including, repaying up to $1.6 million of the City of Monroe’s taxincremental financing for site improvements through regular property taxassessments that, other than the fair market value warranty described above,are no higher than what would otherwise be assessed on the site afterconstruction and operation if purchased from a third party.

 

OnJanuary 1, 2003, we began repaying the City of Monroe’s tax incrementalfinancing for site improvements through our regular property tax assessments,which are approximately $280,000 per year. We paid approximately $280,000, in 2003, and an additional $280,000 isowed for 2004, which sum is payable upon request.

 

In connection with theDevelopment Agreement, we executed and delivered a mortgage to the City ofMonroe.  The mortgage secures ourperformance of the on-going obligations and expires in 2011.  The City of Monroe’s mortgage lien issubordinate to the mortgage lien of the lender providing primary financing forthe initial construction of our ethanol plant but not to the interest of ourequity holders.

 

**Procurements**

 

***GrainDelivery***

 

According to theWisconsin Agricultural Statistical Service, over 360 million bushels of cornare produced annually in Wisconsin.  Ofthat total, the greatest percentage is produced in the southern portion of thestate.  According to the WisconsinAgricultural Statistical Service, approximately 200 million bushels of corn areproduced annually within a 100-mile radius of Monroe, Wisconsin.  Our plant is located in Monroe, Wisconsin, inGreen County, approximately eight miles from the Illinois state border.  We obtain approximately 98% of our cornsupply from producers located within a 100-mile radius of Monroe.  This amounts to approximately 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.

 

In 2004, we purchasedapproximately 17.9 million bushels of grain for processing.  We currently have approximately 70% of ourfiscal 2005 grain requirements purchased, which is equivalent to approximately9 months of production.

 

***GrainElevators***

 

We have ongoing businessrelationships with local grain elevators to acquire the grain we need.  We have identified approximately 45 elevatorsas potential sources of grain in southern Wisconsin and continue to discusswith them future corn delivery.  Althoughwe are currently procuring grains from many of these sources, we cannotguarantee that we will be able to continue procuring such grains on acceptableterms or at all.

 

***Transportationand Delivery***

 

Grain is delivered to ourethanol plant by truck and rail.  We alsoare dependent on rail and commercial trucks to distribute our ethanol anddistillers grains.  Any disruption in therail system or commercial truck system would have a significant detrimentaleffect on our operations.  The Wisconsinand Southern Railroad Company provides rail service to the plant.  The railroad provides direct access forshippers via the Chicago, Illinois gateway, which connects with all majorrailroads via the Belt Railway of Chicago, Burlington Northern at Prairie duChien, Wisconsin, Union Pacific, Canadian Pacific and Wisconsin Centralrailroads at various points on the system. In addition, access to barge facilities is also available at Prairie duChien, Wisconsin.

 

10

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In July 2001, we enteredinto a rail track reimbursement and construction agreement, as well as atransportation agreement, with Wisconsin and Southern Railroad Company forconstruction of a rail track to our ethanol plant and for rail transportationservices.  Under the reimbursement andconstruction agreement, we receive reimbursements from the rail operator fortrack construction costs based upon a rate of $10 per freight car shipped orreceived at our ethanol plant.  Thereimbursements are payable on a monthly basis not to exceed ten years or thecost of the track.  The transportationagreement, which provides us with rail transportation services for deliveriesto and from the ethanol plant at negotiated rates, commenced on January 1,2003.

 

***Hedging***

 

Due to rapid fluctuationsin the price of corn, we developed a Grain Risk Management Program hedgingstrategy to minimize our commodity risk exposure.  Our Grain Risk Management Program is intendedto use grain purchase contracts together with grain futures derivatives to fixthe cost of some of our expected future grain purchases.  Our policy allows for the use of fixed priceforward purchase contracts, un-priced forward basis purchase contracts, andChicago Board of Trade (“CBOT”) derivative contracts (over-the-counter andtraditional options).  During 2004,approximately 99% of our fiscal 2004 grain requirements were hedged through acombination of fixed price forward purchase contracts, and CBOT traditional andover-the-counter option hedges to protect our cost of grain.  During 2004, our practice of protecting thecost of our grain, generally accounted for 50% of forecasted grain purchases inthe upcoming twelve months.  We took thisaction because of the volatility of corn price. Under our program, all components of the position are monitored and allhedges are designated against future grain requirements to ensure that we donot enter into commitments or derivatives for grain in excess of expected grainrequirements.  We currently have approximately74% of our fiscal 2005 grain requirements hedged.

 

***StorageCapacity***

 

We have sufficient cornstorage facilities on-site for approximately nine days of continuousproduction.  Since our inception, we havemaintained our own in-house grain procurement department, to procure all ourgrain needs.  We believe that byestablishing internal grain procurement, we can better develop local supplyrelationships that will reduce the need to buy and store grain offsite andbetter manage our raw material risk management program.  We have a commodities manager to ensure theconsistent scheduling of grain deliveries and to establish and fill forwardcontracts through grain elevators.  Thecommodities manager coordinates grain deliveries between the railroad and theparticipating elevators, as well as negotiates price protection with hedgingspecialists.

 

***Water***

 

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

 

***NaturalGas***

 

Ethanol production is anenergy intensive process using significant amounts of electricity and naturalgas.  We have contracted with WisconsinElectric Power Company for firm service natural gas delivery and with US EnergyServices, Inc. (“USES”) to coordinate purchase and delivery of the gas to theplant and otherwise manage our energy needs. Due to the competitive nature of the natural gas market, we believe nosignificant risk of long-term interruption exists.  USES also helps us to negotiate and procurenatural gas and electricity.  Natural gasprices have historically fluctuated dramatically.  According to USES, the current price ofnatural gas as reported on the New York Mercantile Exchange is up 60%****from last year.  USESprovides price risk management services to us to manage natural gas prices in amanner that we believe will provide price stability.

 

Naturalgas supplies must be procured and delivered on a daily basis in an amount equalto anticipated daily plant usage. Transporters must be notified each day regarding our plant’s expectedusage and the physical supply

 

11

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source.  To the extent that actual plant usage isgreater than or less than expected usage (which usually is the case) theimbalance must be managed.  USES providesus with these kinds of management services and monitors gas delivery, ensurestimely payment of invoices, and reviews and reconciles the final invoices.

 

We have an arrangementwith Wisconsin Gas Company to be the exclusive supplier of transportation fornatural gas for plant operations.

 

***Electricity***

 

We purchase electricityfrom the local utility that holds the service franchise for the area in whichour ethanol plant is located.  We havenot entered into any agreement with the local utility regarding electricalservice.

 

**Sales and Marketing**

 

We entered into anethanol purchase and marketing agreement with Murex for the exclusive rights topurchase and market all ethanol produced by our plant.  This agreement expires October 23, 2009.  Murex sold some of its Class A member unitsin 2004 and still has a representative on our Board of Directors.

 

Wealso entered into a purchase and marketing agreement with United for theexclusive rights to purchase and market all of the distillers grains producedby our plant.  This agreement expires inOctober 2005.  At this time, we plan onrenewing our agreement with United.

 

**Competition**

 

We are in directcompetition with other ethanol producers, many of whom have greater resourcesthan we do.  We expect that additionalethanol producers will enter the market as the demand for ethanol increases.

 

***CompetitiveEthanol Producers***

 

According to theRenewable Fuels Association, U.S. Fuel Ethanol Production Capacity, January2005 Report, the largest ethanol producers include Archer Daniels Midland,Cargill, New Energy Corp., MGP Ingredients, Inc., VeraSun Energy Corporationand Aventine Renewable Energy, Inc., all of which are capable of producing manytimes the amount of ethanol we produce or expect to produce in the near future.

 

In addition, we are awarethat several regional ethanol production entities have recently formed, or areforming, that are currently of a similar size and with similar resources toours.  For example, Adkins Energyrecently completed building an ethanol plant in Lena, Illinois, which isapproximately 20 miles away.  The Adkinsplant is capable of producing 40 million gallons of ethanol annually.  In addition, Ace Ethanol in Stanley,Wisconsin is operating and is capable of producing 30 million gallons ofethanol annually and Utica Energy in Oshkosh, Wisconsin is operating and capableof producing 48 million gallons of ethanol annually.  We are also aware of several other potentialprojects in Wisconsin that may or may not begin production.  Wisconsin projects that rely on corn as a rawmaterial could compete with us in the market for corn as well as for other rawmaterials, and compete with us in selling ethanol and animal feed products.

 

Plansto construct new plants or to expand existing plants have been announced whichwould increase the ethanol production capacity of our competitors.  We are unable to determine the number andproduction capacity of plants that ultimately may be constructed, the timing ofsuch construction or the effect of resulting production upon the demand for orprice of our ethanol.  We expect tocompete with other ethanol producers based on price and, to a lesser extent,delivery service.  The ethanol industryhas grown to more than 89 production facilities in the United States.  It is estimated that these facilities and 18facilities currently under construction could produce over 4.3 billion gallonsof ethanol per year.

 

Thefollowing table lists all of the major ethanol producers in the United Statesaccording to the Renewable Fuels Association, U.S. Fuel Ethanol ProductionCapacity, January 2005 Report.

 

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U.S. PRODUCTIONCAPACITY

million gallonsper year (mmgy)

 
| **COMPANY**                           | ** ** | **LOCATION**        | ** ** | **FEEDSTOCK** | ** ** | **CURRENT  CAPACITY  (MMGY)** | ** ** | **UNDER  CONSTRUCTION/EX  PANSIONS (MMGY)** |
|---------------------------------------|------------|---------------------|------------|---------------|------------|-------------------------------|------------|---------------------------------------------|
| Abengoa Bioenergy Corp.               |       | York, NE            |       | Corn/milo     |       | 55                            |       |                                        |
|                                  |       | Colwich, KS         |       |          |       | 25                            |       |                                        |
|                                  |       | Portales, NM        |       |          |       | 15                            |       | 15                                          |
| ACE Ethanol, LLC                      |       | Stanley, WI         |       | Corn          |       | 30                            |       |                                        |
| Adkins Energy, LLC*                   |       | Lena, IL            |       | Corn          |       | 40                            |       |                                        |
| AGP*                                  |       | Hastings, NE        |       | Corn          |       | 52                            |       |                                        |
| Agra Resources Coop,  d.b.a. EXOL*    |       | Albert Lea, MN      |       | Corn          |       | 40                            |       |                                        |
| Agri-Energy, LLC*                     |       | Luverne, MN         |       | Corn          |       | 21                            |       |                                        |
| Alchem Ltd. LLLP                      |       | Grafton, ND         |       | Corn          |       | 10.5                          |       |                                        |
| Al-Corn Clean Fuel*                   |       | Claremont, MN       |       | Corn          |       | 30                            |       |                                        |
| Amaizing Energy, LLC*^                |       | Denison, IA         |       | Corn          |       |                          |       | 40                                          |
| 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          |       | 40                            |       |                                        |
| Badger State Ethanol,  LLC*           |       | Monroe, WI          |       | Corn          |       | 48                            |       |                                        |
| Big River Resources,  LLC*^           |       | West Burlington, IA |       | Corn          |       | 40                            |       |                                        |
| Broin Enterprises, Inc.               |       | Scotland, SD        |       | Corn          |       | 9                             |       |                                        |
| Bushmills Ethanol, Inc.  *^           |       | Atwater, MN         |       | Corn          |       |                          |       | 40                                          |
| Cargill, Inc.                         |       | Blair, NE           |       | Corn          |       | 85                            |       |                                        |
|                                  |       | Eddyville, IA       |       | Corn          |       | 35                            |       |                                        |
| Central Iowa Renewable  Energy, LLC*^ |       | Goldfield, IA       |       | Corn          |       |                          |       | 50                                          |
| Central MN Ethanol  Coop*             |       | Little Falls, MN    |       | Corn          |       | 20.5                          |       |                                        |
| Central Wisconsin  Alcohol            |       | Plover, WI          |       | Seed corn     |       | 4                             |       |                                        |
| Chief Ethanol                         |       | Hastings, NE        |       | Corn          |       | 62                            |       |                                        |
| Chippewa Valley Ethanol  Co.*         |       | Benson, MN          |       | Corn          |       | 45                            |       |                                        |
| Commonwealth  Agri-Energy, LLC*       |       | Hopkinsville, KY    |       | Corn          |       | 23                            |       |                                        |
| Corn Plus, LLP*                       |       | Winnebago, MN       |       | Corn          |       | 44                            |       |                                        |
| Dakota Ethanol, LLC*                  |       | Wentworth, SD       |       | Corn          |       | 50                            |       |                                        |
| DENCO, LLC*                           |       | Morris, MN          |       | Corn          |       | 21.5                          |       |                                        |
| East Kansas  Agri-Energy, LLC *^      |       | Garnett, KS         |       | Corn          |       |                          |       | 35                                          |
| 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                            |       |                                        |
| Grain Processing Corp.                |       | Muscatine, IA       |       | Corn          |       | 20                            |       |                                        |
| Granite Falls Energy,  LLC^           |       | Granite Falls, MN   |       | Corn          |       |                          |       | 45                                          |
| Great Plains Ethanol,  LLC*^          |       | Chancellor, SD      |       | Corn          |       | 50                            |       |                                        |
| Hawkeye Renewables, LLC               |       | Iowa Falls, IA      |       | Corn          |       | 45                            |       |                                        |
| Heartland Corn Products*              |       | Winthrop, MN        |       | Corn          |       | 36                            |       |                                        |
| Heartland Grain Fuels,  LP*           |       | Aberdeen, SD        |       | Corn          |       | 8                             |       |                                        |
|                                  |       | Huron, SD           |       | Corn          |       | 14                            |       |                                        |
| Husker Ag, LLC*                       |       | Plainview, NE       |       | Corn          |       | 24                            |       |                                        |
| Iowa Ethanol, LLC*                    |       | Hanlontown, IA      |       | Corn          |       | 55                            |       |                                        |
| Illinois River Energy,  LLC^          |       | Rochelle, IL        |       | Corn          |       |                          |       | 50                                          |
| James Valley Ethanol,  LLC            |       | Groton, SD          |       | Corn          |       | 50                            |       |                                        |
| KAAPA Ethanol, LLC*^                  |       | Minden, NE          |       | Corn          |       | 40                            |       |                                        |
| Land O’ Lakes*                   |       | Melrose, MN         |       | Cheese whey   |       | 2.6                           |       |                                        |

 

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| **COMPANY**                                 | ** ** | **LOCATION**                    | ** ** | **FEEDSTOCK**           | ** ** | **CURRENT  CAPACITY  (MMGY)** | ** ** | **UNDER  CONSTRUCTION/EX  PANSIONS (MMGY)** |
|---------------------------------------------|------------|---------------------------------|------------|-------------------------|------------|-------------------------------|------------|---------------------------------------------|
| Lincolnland  Agri-Energy, LLC*^             |       | Palestine, IL                   |       | Corn                    |       | 40                            |       |                                        |
| Lincolnway Energy,  LLC*^                   |       | Nevada, IA                      |       | Corn                    |       |                          |       | 50                                          |
| Liquid Resources of  Ohio^                  |       | Medina, OH                      |       | Waste Beverage          |       |                          |       | 4                                           |
| Little Sioux Corn  Processors, LLC*^        |       | Marcus, IA                      |       | Corn                    |       | 49                            |       |                                        |
| Merrick/Coors                               |       | Golden, CO                      |       | Waste beer              |       | 1.5                           |       |                                        |
| Michigan Ethanol, LLC                       |       | Caro, MI                        |       | Corn                    |       | 50                            |       |                                        |
| MGP Ingredients, Inc.                       |       | Pekin, IL                       |       | Corn/wheat  starch      |       | 78                            |       |                                        |
| Mid-Missouri Energy,  Inc. *^               |       | Atchison, KS  Malta Bend, MO    |       | Corn                    |       |                          |       | 40                                          |
| Midwest Grain Processors*                   |       | Lakota, IA                      |       | Corn                    |       | 50                            |       | 45                                          |
| Midwest Renewable  Energy, LLC              |       | Sutherland, NE                  |       | Corn                    |       | 15                            |       |                                        |
| Miller Brewing Co.                          |       | Olympia, WA                     |       | Brewery waste           |       | 0.7                           |       |                                        |
| Minnesota Energy*                           |       | Buffalo Lake, MN                |       | Corn                    |       | 18                            |       |                                        |
| New Energy Corp.                            |       | South Bend, IN                  |       | Corn                    |       | 102                           |       |                                        |
| Northeast Missouri  Grain, LLC*             |       | Macon, MO                       |       | Corn                    |       | 40                            |       |                                        |
| Northern Lights  Ethanol, LLC*              |       | Big Stone City, SD              |       | Corn                    |       | 48                            |       |                                        |
| Northstar Ethanol, LLC^                     |       | Lake Crystal, MN                |       | Corn                    |       |                          |       | 50                                          |
| Otter Creek Ethanol,  LLC*^                 |       | Ashton, IA                      |       | Corn                    |       | 55                            |       |                                        |
| Panhandle Energies of  Dumas, LP^           |       | Dumas, TX                       |       | Corn/Grain              |       |                          |       | 30                                          |
| Parallel Products                           |       | Louisville, KY                  |       | Sorghum  Beverage waste |       | 5.4                           |       |                                        |
| Permeate Refining                           |       | R. Cucamonga, CA  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                    |       | 22                            |       |                                        |
| Sioux River Ethanol,  LLC*^                 |       | Hudson, SD                      |       | Corn                    |       | 55                            |       |                                        |
| Tall Corn Ethanol, LLC*                     |       | Coon Rapids, IA                 |       | Corn                    |       | 49                            |       |                                        |
| Tate & Lyle                             |       | Loudon, TN                      |       | Corn                    |       | 67                            |       |                                        |
| 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                    |       | 48                            |       |                                        |
| VeraSun Energy  Corporation                 |       | Aurora, SD                      |       | Corn                    |       | 102                           |       |                                        |
| VeraSun Fort Dodge,  LLC^                   |       | Ft. Dodge, IA                   |       | Corn                    |       |                          |       | 110                                         |
| Voyager Ethanol, LLC*^                      |       | Emmetsburg, IA                  |       | Corn                    |       |                          |       | 50                                          |
| Western Plains Energy,  LLC*                |       | Campus, KS                      |       | Corn                    |       | 30                            |       |                                        |
| Western  Wisconsin Renewable Energy,  LLC*^ |       | Boyceville, WI                  |       | Corn                    |       |                          |       | 40                                          |
| Wyoming Ethanol                             |       | Torrington, WY                  |       | Corn                    |       | 5                             |       |                                        |
|                                        |       |                            |       |                    |       |                          |       |                                        |
| **Total Existing Capacity**                 | ** ** | ** **                      | ** ** | ** **              | ** ** | **3,639.7**                   | ** ** | ** **                                  |
| **Total Under  Construction/Expansions**    | ** ** | ** **                      | ** ** | ** **              | ** ** | ** **                    | ** ** | **754.0**                                   |
| **Total Capacity**                          | ** ** | ** **                      | ** ** | ** **              | ** ** | **4,393.7**                   | ** ** | ** **                                  |

 

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* farmer-owned

^ underconstruction

 

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***CompetitiveAlternative Fuel Additives***

 

We also compete with producersof MTBE, a petrochemical derived from methanol which costs less to produce thanethanol.  MTBE is a commonly usedoxygenate in fuels for compliance with Federal Clean Air Act mandates, and is amajor competitor of ethanol.  Many majoroil companies produce MTBE, and strongly support its use because it ispetroleum based.  These companies havesignificant resources to market MTBE and to influence legislation and publicperception of MTBE.  These companies alsohave sufficient resources to begin production of ethanol should they choose todo so.

 

Alternative fuels,gasoline oxygenates and ethanol production methods are continually underdevelopment by ethanol and oil companies with far greater resources than wehave.  Development of new products and methodsof ethanol production by larger and financially more viable competitors couldprovide them with significant competitive advantages over us and thus couldharm our business.

 

**Employees**

 

As ofDecember 31, 2004, we employed 36 persons, in a full-time capacity, including14 in ethanol production operations, 7 in general management, sales,administration and grain procurement, and 15 in grain receiving, grainhandling, maintenance and the laboratory. We also employ one part-time employee. We do not expect to hire a significant number of additional employeesduring the next 12 months.

 

**Environmental Disclosure**

 

We are subject toextensive environmental regulation at the federal, state and local levels.  Air quality at the plant is regulated by theU.S. Environmental Protection Agency and the Bureau of Air Management,Wisconsin Department of Natural Resources. The Department of Natural Resources regulates emissions of volatileorganic compounds and hazardous air pollutants 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.  We alsoare required to submit periodic reports pursuant to the Wisconsin and FederalEmergency Planning Community Right-to-Know Act. At the local level, we file semi-annual reports with the Green CountyEmergency Response Committee.

 

**Regulatory Permits**

 

An environmentalconsulting firm assisted us in obtaining an Air Pollution Construction andOperation Permit, a Storm Water Discharge Permit and Storm Water PollutionPrevention Plan and advised us on environmental compliance generally.  We also obtained various other environmentaland operating permits, as discussed below.

 

The Department of NaturalResources has prepared an environmental assessment on the construction of theethanol plant, which was made available to the public for comment on February19, 2001.  The environmental assessmentis a public report that reviews and analyzes the environmental impact that theethanol plant may have on the surrounding area. We are aware that, in the past, several individuals have voicedobjections to our business to the Wisconsin Department of Natural Resources,however, we met no significant opposition from the public in the constructionof the plant and are not aware of any opposition to the plant since we beganoperating.  Public objection andcomplaints could arise, however, and subject us to greater regulatory scrutiny,claims and costly compliance expenditures.

 

15

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***AirPollution Construction and Operation Permit***

 

Our facility isconsidered a Wisconsin synthetic minor source of regulated air pollutants.  The types of regulated pollutants that may befound at our plant include, particulate matter, carbon monoxide, nitrogenoxide, volatile organic compounds and sulfur dioxide.  To emit these agents during construction, weneeded an Air Pollution Construction Permit. We received the Air Pollution Construction Permit on March 22, 2001.

 

OnOctober 31, 2001, we submitted a Modified Air Permit Application to reflect achange in our plant design regarding emissions. Our original plant design contemplated routing the boiler exhaustthrough dryers and then to a water scrubber for air pollution control on thedistillers dried grains dryer emissions, and then to a common stack.  In our new plant design, we proposed toutilize a thermal oxidizer for emissions control rather than rely on the waterscrubber.  The thermal oxidizer reducedemissions from our plant.  We receivedthe approval of this design and our Modified Air Permit Application from theEnvironmental Protection Agency on March 22, 2002.  Air emissions testing was performed in April,2003, which we passed.  On June 25, 2003we received the approval of an additional Modified Air Permit Application sothat we could install a regenitive thermal oxidizer in our plant, to reduceadditional emissions from our plant.  OnJanuary 6, 2005 we were awarded an Air Pollution Operation Permit, which isvalid until January 5, 2010.

 

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 wasinstalled and operational as of December 15, 2003.  Upon the installation of this equipment,additional air emissions testing was performed to verify that we are still incompliance with applicable law, which we are.

 

***WisconsinPollutant Discharge Elimination Permits***

 

*GeneralPermit*.  We useapproximately 66,500 gallons of water per day to cool our closed circuitsystems in the ethanol plant.  Weobtained a Wisconsin Pollutant Discharge Elimination System general permit fromthe Department of Natural Resources to discharge the water into a nearbycreek.  We received this permit on July18, 2002 and it is valid until July 31, 2007.

 

***StormWater Discharge for Industrial Activities Permit***

 

Before we could beginoperating, we had to obtain a Storm Water Discharge for Industrial ActivitiesPermit from the Department of Natural Resources regarding our operations, whichwe received on April 9, 2001. This permit expires, but may automatically renewin 2006.  In addition, we also had toprepare a Storm Water Pollution Prevention Plan outlining measures we plannedto implement to prevent storm water pollution during operation.

 

***HighCapacity Well Permit***

 

We drilled a500,000-gallon per day well near our ethanol plant.  The Department of Natural Resources considersthis a high capacity well, and we have applied for and obtained a high capacitywell permit.  The high capacity wellpermit was issued on December 13, 2001. The permit allows for a maximum daily usage of 720,000 gallons of waterper day and the plant is currently consuming approximately 330,000 gallons perday of water.

 

***SpillPrevention, Control and Countermeasures Plan***

 

Beforewe could begin operations, we had to prepare a spill prevention, control andcountermeasures plan.  The plan outlinesour spill prevention measures for oil products such as ethanol.  The plan was preliminarily reviewed andapproved prior to when we began operations, and was certified by a professionalengineer on January 3, 2003.

 

***RiskManagement Program***

 

We useanhydrous ammonia in our production process. Therefore, we had to develop a risk management program to addresshandling and use of the ammonia and gases emitted from such use.  We established a prevention

 

16

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program to preventspills or leaks of ammonia, and an emergency response program in the event ofspills, leaks, explosions or other events that may lead to the release ofammonia into the surrounding area.  Weconducted a hazard assessment and prepared models to assess the impact of anammonia release into the surrounding area. The program was presented at a public meeting.

 

***RegulationsGenerally; Nuisance***

 

We are subject to theregulations of the United States Environmental Protection Agency, the WisconsinDepartment of Natural Resources and the Occupational Safety and HealthAdministration (“OSHA”).** **EPA, Wisconsin DNR and OSHA rulescan and do change, and any such changes could result in greater regulatoryburdens on us.  Our ethanol productionrequires us to emit carbon dioxide into the air, even in light of ourarrangement to sell carbon dioxide. Current Wisconsin law regulating emissions does not restrict or preventus from emitting carbon dioxide gas into the air, but this could change in thefuture.  We could also be subject toenvironmental or nuisance claims from adjacent property owners or residents inthe area arising from foul smells or other air or water discharges from theplant.  Further, we are aware of neighborhoodopposition to our facility in the past, but none currently.  This opposition could arise at any time andresult in claims for nuisance, which could lead to increased compliance costsand monetary damages.

 

**ITEM 2.  DESCRIPTION OF PROPERTY**

** **

Our principal executiveoffice is located at our ethanol plant site, 820 West 17th Street,Monroe, Wisconsin 53566.  We presentlyown approximately 28 acres of land and improvements thereon which comprise ourplant.  The plant currently grindsapproximately 18.6 million bushels of corn each year into approximately 51.2million gallons.

 

Our primary lender holdsa mortgage on approximately 28 acres of land (and improvements) where thefacility is situated as security for loans provided to us.  We believe our property is adequately coveredby insurance.  We anticipate using all ofour owned real estate in the operation of our ethanol plant in the foreseeablefuture.

 

Generally speaking, thefacility consists of the following buildings:

 

•                                          aprocessing building containing laboratories, a control room, and processingequipment;

•                                          agrain receiving building containing a control room and grain receiving andtransfer apparatus;

•                                          anadministrative building containing offices; and

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

 

**ITEM 3.  LEGAL PROCEEDINGS**

** **

**None.**

** **

**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 marketfor our securities and we do not expect one to develop in the foreseeablefuture.**

** **

**17**

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** **

**Holders**

** **

**As of February 24, 2005, there wereapproximately 475 unit holders of record of our Class A member units determinedby an examination of our transfer book.**

** **

**Distributions**

** **

On January 22, 2004, wedeclared a cash distribution of $250 per Class A member unit payable onFebruary 26, 2004.  On January 27, 2005,we declared a cash distribution of $388 per Class A member unit payable onFebruary 24, 2005.  The total amount ofthis distribution is approximately $7.67 million and was approved by our bankand is in compliance with our lending covenants.

 

**The payment and rate of futuredistributions, if any, are subject to review by the Board of Directors in lightof our financial condition, results of operations, capital requirements andother factors 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, unlesswaived.  Additional covenants require 20%of any excess cash flow (as that term is defined in such senior debtagreements) to be applied toward the principal of the senior debt and that wecannot make any distributions without the consent of the holders of our seniordebt, unless waived.**

** **

**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

** **

**We currently have no equitycompensation plan.**

** **

**Recent Sales ofUnregistered Securities; Use of Proceeds from Unregistered Securities**

** **

**We had no unregistered sales ofsecurities during the past three fiscal years.**

** **

**ITEM6.  MANAGEMENT’S DISCUSSION AND ANALYSIS**

** **

Exceptfor the historical information, the following discussion containsforward-looking statements that are subject to risks and uncertainties.  Actual results may differ substantially fromthose described below, including those risks described in the section entitled “RiskFactors” and elsewhere in this annual report. Our discussion and analysis of the financial condition and results ofoperations of the Company should be read in conjunction with the financialstatements and related notes.

 

**Application ofCritical Accounting Policies**

** **

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

 

***Revenue Recognition***

 

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

 

***Inventories***

 

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

 

18

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***Derivatives***

 

We enter into derivative contracts to hedge theCompany’s exposure to price risk related to forecasted corn and natural gaspurchases, forward corn purchase contracts and forecasted ethanol sales.  We do not typically enter into derivativeinstruments other than for hedging purposes. All derivative contracts are recognized on the December 31, 2004 and2003 balance sheets at their fair market value.

 

On the date the derivative instrument is entered into,we designate 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, 2004 and 2003 no derivative contracts were designated as hedges and all changes in market value have been recognized through cost of sales.  We have recorded an increase to cost of sales of $2,205,578 and $621,722 related to our derivative contracts for the years ended December 31, 2004 and 2003.

 

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

 

We are engaged in theproduction and sale of fuel grade ethanol. Our plant was originally designed to annually process approximately 14million bushels of corn into approximately 40 million gallons of ethanol.  In 2004, we processed approximately 17.9million bushels of corn into approximately 49.2 million gallons of ethanol.  In addition, we sell distillers grains, aprincipal co-product of the ethanol-production process, which we sell asdistillers modified wet grains and distillers dried grains.  We also process carbon dioxide, which westarted selling in July, 2004.  In 2004,we produced approximately 153,000 tons of distillers grains and processed35,000 tons of carbon dioxide.  Wecompleted construction of our ethanol plant and commenced operations in October2002.

 

The following table showssales and revenues, cost of sales, operating expenses and other items as a percentageof total sales and revenues in our statements of income for the years endedDecember 31, 2004 and 2003:

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

 

***Sales andRevenue***

 

Our sales and revenues are divided into five categories based upon the source from which they are derived: sales of ethanol, sales of distillers grains, sales of carbon dioxide, marketing corn and ethanol supports.  For

 

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the years ended 2004 and 2003, we derived approximately 78.3%****and 70.2%****of our sales and revenues from the sale of ethanol.  Approximately 17.0%****and 14.5%****of our sales and revenues were derived from the sale of distillers grains for the years ended 2004 and 2003.  Approximately 0.3% of our sales and revenues were derived from the sale of carbon dioxide for the year ended 2004.  We did not have any sales of carbon dioxide for the year ended 2003.  The marketing of corn accounted for approximately 2.2%****and 1.5%****of our total sales and revenues during 2004 and 2003.  The remaining 2.2%****and 13.8%****of our total sales and revenues for the year ended 2004 and 2003 were from ethanol supports.

 

We believe that sales of ethanol, distillers grains and carbon dioxide will comprise a larger percentage of our aggregate sales and revenue for 2005 as our estimated sales and revenues from ethanol supports will be negligible in 2005.  Additionally, we will have sales of carbon dioxide for the entire year ending 2005 as opposed to sales for 6 months during 2004.  We expect sales of carbon dioxide to exceed 115,000 tons in 2005 with revenues of approximately $812,000.

 

***Cost ofSales***

** **

**Our cost of sales as a percentageof our total sales and revenues were 82% and 78%**for the years ended 2004 and 2003.  Since 2003 was our first full year ofoperations, we were able to capture economies of scale and such efficiencies inour production reduced the cost of sales as a percentage of total sales andrevenues, excluding ethanol supports, during 2004.  We received approximately $2 million and $10million in production incentives for the years ended 2004 and 2003 causing ourtotal cost of sales for 2004 to increase as a percentage of total sales.  We anticipate that ethanol supports from thefederal or state government in 2005 will be negligible.  We believe that we will improve ouroperations and achieve further efficiencies in our production during 2005,which we believe will reduce our cost of sales as a percentage of total salesand revenues during 2005.

** **

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

** **

**Our selling, general andadministrative expenses as a percentage of total sales and revenues were 3.2%**and 3.6%forthe years ended 2004 and 2003.  Excludingethanol supports, our total sales and revenues increased by approximately $26.1million or 40.9% from the year ended 2003 to the year ended 2004, while ourselling, general and administrative expenses increased by approximately$277,000 or 10.4%.  We believe that ourselling, general and administrative expenses will remain consistent as apercentage of sales and revenues in 2005.

** **

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

** **

**Our interest expense as apercentage of total sales and revenues were 1.4%**and 2.5%forthe years ended 2004 and 2003.  Interestexpense was $1,311,346 and $1,846,937 for 2004 and 2003.  Interest expense decreased due to the declineof our outstanding debt.  We began ourfiscal year 2004 with debt financing totaling approximately $27.1 million andended the fiscal year with debt financing totaling approximately $21.0 million.

** **

**Our interest income and otherincome as a percentage of total sales and revenues were 0%**and 0.1%forthe years ended 2004 and 2003.  Wereceived a training grant from the State of Wisconsin totaling $62,850 in2003.  We do not expect to receive anysignificant interest income or other income unrelated to our sales and revenuein 2005.

** **

***CornProcurement***

 

In 2004, we purchasedapproximately 17.9 million bushels of grain for processing.  We currently have approximately 70% of ourfiscal 2005 grain requirements purchased, which is equivalent to approximately9 months of production.

 

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**Trends and Factorsthat May Affect Future Operating Results**

 

***EthanolSupports***

 

Wereceive significant benefits from federal and state statutes, regulations andprograms.  Changes to federal and statestatutes, regulations or programs could have an adverse effect on ourbusiness.  Additionally, new legislationthat is proposed at the federal and state level could have a significant impacton our business, if passed. Specifically, if the federal RFS is passed in its current form, thendemand for ethanol in the US will be mandated to grow to 5 billion gallons peryear.  Similarly, if Wisconsin mandatesthat all gasoline sold in Wisconsin be blended with 10% ethanol, this could addan additional 180 million gallons to local demand for ethanol.  The failure to pass this new legislation, orthe removal of, or changes to, this legislation and programs couldsignificantly impact our business and the ethanol industry.

 

Additionally, Congressprovides an incentive through the United States Department of AgricultureCommodity Credit Corporation’s Bioenergy Program.  Under that program, we previously wereeligible to receive a cash payment for incremental increases in our grainconsumption for the purpose of producing fuel grade ethanol.  Last year we received approximately $2.3million under this program for producing 49.2 million gallons of ethanol.  This year, the incentive program has beenmodified to prioritize the production of other biofuels such as soy diesel,although ethanol producers can still qualify. Additionally, funding for this program has also been recently cut.  Therefore, we do not anticipate receiving anyincentive from this program in 2005, or in the foreseeable future.

 

Further,clean air standards mandated by federal agencies continue to require majorpopulation centers to blend ethanol into their gasoline supplies as anoxygenate, in order to reduce harmful emissions.  These mandates have been challenged legallyin certain metropolitan areas.  We couldbe significantly and adversely impacted by an unsuccessful outcome in thislitigation, or by the removal of or adverse changes to these standards.

 

Federaltax law also provides an incentive to use ethanol.  As of January 1, 2005, the VEETC becameeffective and grants ethanol refiners and gasoline blenders a volumetricethanol excise tax credit of 52 cents per gallon of ethanol blended.  The VEETC allows much greater refineryflexibility in blending ethanol.  The taxcredit under the VEETC is from general revenues and not the highway trust fund(as provided in the previous exemption), and thus the VEETC removes adisincentive for states to use ethanol. Any adverse change to the VEETC could have an adverse effect on us.

 

***ProductDemand***

 

**In addition to incentives, fuelethanol sales prices reflect a premium due to the oxygenate, as discussedbelow, and octane enhancing properties of ethanol.  Demand for ethanol also affects price.  Ethanol demand is influenced primarily by itscost in relation to availability and cost of gasoline and other octaneenhancing products, and also by availability of alternative oxygenates (whereoxygenated fuels are required).  Thedramatic increase in gasoline prices has increased demand for ethanol as a fuelextender, as the net cost of ethanol to blenders became less than unblendedgasoline.  With continued strong oilprices, and a corresponding increase in gasoline pricing, ethanol has become amuch more competitive product in the marketplace.  While a similarly dramatic decrease in theprice of oil would have a negative effect on ethanol demand, such a decrease isnot currently anticipated by most industry analysts.**

 

Negative publicity received by a competing oxygenate of ethanol, MTBE, in California and other states has also affected ethanol demand.  Based on the discovery of MTBE in local water supplies, then California Governor Gray Davis issued an executive order in March of 1999 calling for the elimination of MTBE from California gasoline supplies by December 31, 2002.  During 2003 and 2004, we shipped a significant quantity of ethanol to California.  Other states have also legislated restrictions on the use of MTBE on the basis that the environmental risk of its use outweighs the air quality benefit.  Under the provisions of the federal 1990 Clean Air Act, gasoline used in certain air quality “non-attainment” areas must contain a certain oxygen content during the wintertime months of September through March.  Ethanol and MTBE are the two most common oxygenates.  When MTBE use is limited, ethanol demand and usage will be substantially increased.  The east coast areas of New York and Connecticut began using ethanol blended gasoline as of January 1, 2004, thus further increasing demand.  The continued enforcement of

 

21

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the oxygenate standard could have a significant positive impact on ethanol demand.  The replacement of MTBE with ethanol in California, Connecticut and New York will require approximately 1.7 billion gallons of ethanol each year to be consumed in those areas.

 

**Nationally, there is also amovement to eliminate MTBE.  In additionto individual states which have restricted its use, federal legislation (asdiscussed above) has been proposed which has focused on a compromise solutionwhich would phase out MTBE, eliminate the oxygen requirement of the Clean AirAct, and replace it with a renewable fuels content requirement that graduallyincreases over the next several years. If this solution were adopted, we believe that it would significantlyincrease the demand for ethanol over this time period.  In short, current law is favorable to ethanolin that it requires oxygenate blending. If MTBE usage is reduced and the law is not changed, or if the oxygenrequirement is replaced with a similar “renewable fuels” requirement, theethanol industry stands to see stronger demand. 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 14, 2005, we have contractedto sell 23% of our estimated ethanol production through December 2005.  While most of these sales were made on fixedprice contracts, approximately 20% were done on variable price agreements tiedto reported prices of gasoline.**

 

***CommodityPrices***

** **

**Our primary grain feedstock iscorn. The cost of corn is dependent upon factors that are generally unrelatedto those affecting the price of ethanol. Corn prices generally vary withinternational and regional grain supplies, and can be significantly affected byweather, planting and carryout projections, government programs, exports, andother international and regional market conditions.**

** **

**Grain markets were extremelyvolatile during 2004.  Tightening worldsupply and growing demand created some of the tightest supply to use ratios inrecent history.  During 2004, corn priceswere at 7 year highs.  These high pricesalso brought higher prices for our feed co-products, wet and dried distillersgrain with solubles.  In the last half of2004, however, corn farmers in the United States harvested the largest crop inhistory which sent corn prices lower. Given strong export competition from other nations which produce andsell corn, we believe that corn prices could remain low for at least the firsthalf of 2005.  After that, corn priceswill respond in great measure based on the quality and quantity of the corncrop grown during the summer of 2005 and harvested in the fall.**

** **

***NaturalGas Prices***

** **

**Natural gas is an important inputin our manufacturing process. We use natural gas to dry distillers grains forstorage and transportation over longer distances.  This allows us to market distillers grains tobroader livestock markets in the United States. Throughout 2004, natural gas prices were available at prices exceedingits historic average price.  Our currentnatural gas usage is approximate 121,000 British thermal units per month.  We expect natural gas prices to remain highand possibly increase at least during the winter months of 2004-2005.**

** **

**Liquidity andCapital Resources**

** **

As of December 31, 2004,we had cash and cash equivalents of $3,807,383, current assets of $14,698,283and available unused lines of credit of $3,500,000.  For the year ended 2004, cash provided byoperating activities was $15,154,539, cash paid for property and equipment was$2,077,890 and cash used in financing activities was $11,079,756.

 

We have a term loan,originally in the amount of $30.6 million, which we have paid down as describedbelow.  Quarterly payments, includingprincipal and interest, of $1,021,839 are payable based upon a five-yearamortization with a balloon payment of $8,403,569 due on the maturity date ofJanuary 1, 2008.  The term loan isstructured as three notes and interest accrues monthly on the notes at bothfixed and variable rates.  The fixed rateaccrues at 6.528% on $11,749,974 of the term loan and the variable rate accrueson $6,287,245 of the term loan

 

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based on the prime rate (effective rate of 5.50% at December 31,2004).  The amount outstanding on theterm loan was $18,037,219 at December 31, 2004. The term loan is secured by substantially all of our assets and containsvarious restrictions, including the maintenance of certain financial covenants.

 

We have a term loan of$3.6 million with Alliant Energy to finance the electrical infrastructure andother construction needs.  This creditfacility was converted to a term note upon completion of construction of ourfacility.  Monthly payments, includingprincipal and interest, of $34,762 are payable based upon a ten-yearamortization with a balloon payment due on the maturity date of November 1,2007.  Interest accrues monthly on theloan at 3%.  The amount outstanding onthe electric utility note payable is $2,908,831 at December 31, 2004.  The electric utility note payable is securedby our equipment, inventory and a guarantee by the City of Monroe, and containsvarious restrictions.

 

We have a 364 dayrevolving credit facility with First National Bank of Omaha, for an amount upto $3.5 million.  The revolving line ofcredit is limited to the borrowing base collateral, which is based upon 75% ofthe value of the inventory and allowable accounts receivable, and has avariable interest rate based upon the prime rate.  There was no amount outstanding on therevolving loan at December 31, 2004.  Therevolving loan is secured by substantially all of our assets and containsvarious restrictions.

 

Our start-up costsrelated to our carbon dioxide agreement were approximately $500,000, which wefinanced from our operating cash flows in 2004. We originally budgeted $450,000 to cover these startup costs.  In November, 2004, we expanded our productionby bringing a fourth fermenter into operation. The cost of installing and bringing this fourth fermenter into operationwas approximately $1.2 million, which we funded from our operating cash flows.

 

**Off-Balance SheetArrangements**

 

**We have not entered into anyoff-balance sheet arrangements that have or are reasonably likely to have acurrent or future effect on our financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resourcesthat are material to investors.**

 

**ContractualObligations**

** **

**We have the following contractualobligations as of December 31, 2004:**

 
| ** **                     | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| **Contractual Obligations**    | ** ** | **Total**                  | ** ** | **Less than 1 year** | ** ** | **1-3 Years** | ** ** | **More than 5  Years** | ** ** |
| Long-term debt                 |       | $                          | 21,044,403 |   | $ | 3,409,246 |   | $ | 17,635,157 |   | 0 |   |
| Operating leases               |       | 90,000                     |       | 90,000 |   | 0 |   | 0 |   |
| Total  contractual obligations |       | $                          | 21,134,403 |   | $ | 3,499,246 |   | $ | 17,635,157 |   | 0 |   |

 

**RecentAccounting Pronouncements**

 

**In November 2004, the FASB issuedFASB Statement No. 151, “Inventory Costs – an amendment of ARB No. 43” (“FAS151”), which is the result of its efforts to converge U.S. accounting standardsfor inventories with International Accounting Standards.  FAS 151 requires idle facility expense,freight, handling costs, and wasted material (spoilage) costs to be recognizedas current-period charges.  It alsorequires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities.  FAS 151 will be effective for inventory costsincurred during fiscal years beginning after June 15, 2005.  We are evaluating the impact of this standardon our financial statements.  The Companydoes not expect that the adoption of FAS 151 will have an impact on the Company’sfinancial position, results of operations or cash flows.**

** **

**The Company does not expect thatthe adoption of other recent accounting pronouncements will have a materialimpact on its financial statements.**

 

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**ITEM7.**  FINANCIAL STATEMENTS

** **

Ourfinancial statements and supplementary data are included on pages F-1 to F-14of this Report.

 

**ITEM 8.**  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE

 

**None.**

 

**ITEM8A.**  CONTROLS AND PROCEDURES

 

**Evaluation of Disclosure Controlsand Procedures**

 

Our Chief ExecutiveOfficer and Chief Financial Officer, after evaluating the effectiveness of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934, as amended), as of December 31, 2004 (the“Evaluation Date”), have concluded that our disclosure controls and proceduresare effective in ensuring that material information required to be disclosed isincluded in the reports that we file with the Securities and ExchangeCommission.

 

**Changes in Internal Controls**

 

Therehave been no changes in our internal control over financial reporting thatoccurred during the fiscal year ended December 31, 2004, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PARTIII**

** **

**ITEM 9.**  DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT

 
| **Name**         | ** ** | **Age**    | ** ** | **Position**                                       |
|------------------|------------|------------|------------|----------------------------------------------------|
| ** **       | ** ** | ** ** | ** ** | ** **                                         |
| John L. Malchine |       | 67         |       | Chairman of the Board  and Chief Executive Officer |
| Gary L. Kramer   |       | 56         |       | President, General  Manager and Director           |
| David Kolsrud    |       | 56         |       | Secretary and Director                             |
| Don Endres       |       | 44         |       | Treasurer and Director                             |
| Wayne Mitchell   |       | 49         |       | Director                                           |
| Robert Wright    |       | 52         |       | Director                                           |
| David Fick       |       | 53         |       | Director                                           |
| James Leitzinger |       | 49         |       | Chief Financial Officer                            |

 

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

 

Mr.Malchine is a co-founder and has served on our Board of Directors as Chairmansince May 2000.  His term as a Directorexpires in 2007.  Approximately seventypercent of Mr. Malchine’s professional time is devoted to his capacity asChairman of the Board and Chief Executive Officer.  Mr. Malchine assumed the role of ChiefExecutive Officer of the Company on August 30, 2001.  From 1989 to March 2001, he served aspresident and co-owner of Norway Associates, Inc., a private real estatecompany that develops real estate projects for clinics. Norway Associates iscurrently inactive. From 1954 to 1994, Mr. Malchine was a self-employed farmer.From 1995 to 2002, Mr. Malchine was the chairman of the Wisconsin Agriculture,Trade and Consumer Protection Board. From 1997 to the present, he has also beena member of the Board of the Wisconsin Tax Commission, which regulatesagricultural assessments in Wisconsin. From 1983 to the present, he has been amember of the Board of Directors of a unit of M & I Bank, in Burlington,Wisconsin, and is currently chairman of the loan committee. Mr. Malchine is

 

24

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alsoon the Board of Governors of the Southern Region of the Aurora Health CareSystem, which owns three hospitals and 21 clinics in southern Wisconsin. Mr.Malchine was elected to the Board of Adkins Energy in February 2000. Heresigned in April 2000 from Adkins, and the cooperative redeemed hisinvestment.

 

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

 

Dr. Kramer is aco-founder and has served on our Board of Directors since May 2000. His term asa Director expires in 2005.  Mr. Kramerdevotes all of his professional time to his capacity as President, GeneralManager and Director.  From 1973 to 2001,Dr. Kramer was a veterinarian, and recently retired as president and seniorpartner at Chapin, Sutter, Chapin, Ltd., of Lena, Illinois, a veterinaryservice corporation employing eight veterinarians. He received a doctorate inVeterinary Medicine from Iowa State University. Prior to co-founding BadgerState Ethanol, Dr. Kramer served as President of the Adkins Energy Cooperativefrom December 1998 to April 2000.  Dr.Kramer has also served as a member of a number of professional organizations,including the American Veterinary Medical Association, American Association ofBovine Practitioners, Illinois Veterinary Medical Association, and NorthernIllinois Veterinary Medical Association.

 

***DavidKolsrud, Secretary and Director***

 

Mr. Kolsrud has served onour Board of Directors since August 2001. His term as a Director expires in 2006. Approximately five percent of his professional time is devoted to hiscapacity as Secretary and Director of the Company.** **Mr. Kolsrud is the General Managerand a member of the Board of Directors of CORN-er Stone Farmers Cooperative,which he founded in 1995 and served as Chairman until 2000. Mr. Kolsrud alsocontinues to work as a self-employed farmer, an occupation he has had since1973. He also serves as Chairman of the Valley Springs Farmers Cooperative, afarm supply co-op in Valley Springs, South Dakota. He has served on that Boardfor 15 years and served as Chairman for the past 12 years. He formerly servedas the Chairman of the Minnesota Coalition for Ethanol. Mr. Kolsrud also serveson the Board of Governors of AGRI-Energy, LLC (a 12 million gallon a yearethanol facility in Luverne, Minnesota). He has served on that Board since 1997and served as its Vice President until 1999.

 

***DonEndres, Treasurer and Director***

 

Mr. Endres has served onour Board of Directors since August 2001. His term as a Director expires in ** **2005.  Approximately five percent of hisprofessional time is devoted to his capacity as Treasurer and Director of theCompany.** **Mr.Endres contributes more than 15 years of experience in building, operating andmanaging successful businesses.  Mr.Endres currently serves as principal investor, Chairman and Chief ExecutiveOfficer of VeraSun Energy Corporation, an ethanol producer in Brookings, SouthDakota.  Mr. Endres also serves on theBoard of Directors and Executive Committee of the Renewable Fuels Association.  In 1999, Mr. Endres became a principalinvestor and board member of CoEv, Inc. CoEv turned profitable within the first year of operations and latermerged with Tyco International Ltd.   Healso served as co-founder and Vice-Chairman of Glacial Lakes Energy, an ethanolproduction facility in Watertown, South Dakota. In 1985, Mr. Endres founded Special Teams, Inc. and served as Presidentand General Manager. Special Teams was recognized by Inc. Magazine as one ofthe fastest growing privately held companies in the U.S. on the annual Inc. 500List for both 1994 and 1995.  It was soldto the American Express Company in 1995, and Mr. Endres served for two years asPresident of American Express Special Teams. Mr. Endres then co-founded and served as CEO of ExpressGold.com, Inc., an internet payments system company, which successfullymerged with CyberSource Corporation in January of 2000.  Mr. Endres graduated from South Dakota StateUniversity with a degree in Animal Science and minors in Computer Science andEconomics. In 2000, he was recognized by South Dakota State University’sCollege of Engineering as “Entrepreneur of the Year.”

 

***WayneMitchell, Director***

 

Mr. Mitchell has servedon our Board of Directors since May 2001, when he was appointed to fill theFagen, Inc. seat.  He occupies Fagen,Inc.’s permanent seat on the Board of Directors. Approximately five percent ofhis professional time is devoted to his capacity as a Director of the Company.** **Mr. Mitchell isSenior Vice President, Technology and Business Development for Fagen, Inc. andhas been in their employee since June 2000. Prior to joining Fagen, he served as Process Team Leader from May 1998to June 2000 for Reilly Industries, Inc., where he

 

25

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directed multidisciplinary teamsengaged in chemical process research and development.  From March 1998 to June 2000, Mr. Mitchellwas President and owner of Solid Rock Consulting, LLC, aprivate company providing consulting services to the ethanol industry.  Solid Rock Consulting, LLC is currentlyinactive.  From May 1996 to May 1998, heworked as Plant Manager and Quality Assurance Manager for Micronutrients, LLC, an animal feed supplement manufacturer.  Prior to joining Micronutrients, from January1993 to May 1996, he served as the Design Engineer for Broin and Associates,Inc. where he performed detailed process design and start-up of dry grindethanol plants.  From August 1991 toJanuary 1993, he served as senior environmental project engineer for HeritageEnvironmental Services, Inc. where he was involved in environmental consultingand project management at major oil refineries. Prior to that, Mr. Mitchell served as an area manager for EthylCorporation.  Mr. Mitchell serves on theBoard of Directors of five other ethanol plants, Husker Ag, LLC, in Plainview,NE, Platte Valley Fuel Ethanol, LLC in Central City, NE, United Wisconsin GrainProducers, LLC in Friesland, WI, Western Wisconsin Energy, LLC in Boyceville,WI, and Bushmills Ethanol, LLC in Atwater, MN. Mr. Mitchell has a B.S. in Chemical Engineering from the University ofWisconsin-Madison.

 

***RobertWright, Director***

 

Mr. Wright has served onour Board of Directors since August 2001. His term as a Director expires in 2007. Approximately five percent of his professional time is devoted to hiscapacity as a Director of the Company.** **Mr. Wright has served as thePresident, Chief Executive Officer and a principal shareholder of Murex N.A.since May 1992. Murex is a marketer of gasoline “blendstocks,” such as fuelgrade Ethanol, MTBE, Toluene, Methanol and Alkylate, to independent and majorrefiners in the United States. Mr. Wright is a graduate of Ohio StateUniversity with a degree in Chemical Engineering and the University of Toledowith a Masters in Business Administration.

 

***DavidFick, Director***

 

David Fick has served onour Board of Directors since December 2003, when he was nominated by the Boardof Directors 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 2007.  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.

 

***JamesLeitzinger, Chief Financial Officer***

 

Mr. Leitzinger has servedas our Chief Financial 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 asthe Controller for Agri-Tech FS, Inc. from 1990 until 2000, and as theController for Widen Colourgraphics, LTD from 1988 to 1990.  Mr. Leitzinger graduated from EdgewoodCollege in Madison, Wisconsin and is a Certified Public Accountant licensed inWisconsin since 1989.

 

**Audit Committeeand Audit Committee Financial Expert**

** **

The Company does not havean audit committee financial expert, as defined under 17 C.F.R. § 228.401,serving on its audit committee because it does not have an auditcommittee.  The Company 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.

 

**Code of Ethics**

** **

The Company has adopted acode of ethics.  A copy of the Company’scode of ethics is filed as Exhibit 14.1 hereto.

 

26

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

 

Gary Kramer serves as ourPresident and General Manager.  In 2004,he was compensated by us at an annual base salary of $100,000 per year.  His current yearly salary is $103,000.  John Malchine serves as Chief ExecutiveOfficer.  In 2004, he was compensated byus at an annual base salary of $36,000 per year.  His current salary is $37,080.

 

We reimburse our officersfor expenses incurred relating to services rendered on our behalf.  We recruit and hire permanent employees whoare compensated on a regular basis pursuant to agreed upon salaries.  We have not and do not expect to establishany option based or other type of equity incentive plan for employees.  However, we offer typical health and otheremployee benefits to our full time employees that do not discriminate in scope,terms or operation in favor of our executive officers or directors and that areavailable to all of our salaried employees.

 

The following table showsthe compensation that we paid to our officers for services that they renderedto 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                    |       | 2002             |       | $                       | 9,000        | [1]                        | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| Chief Executive                     |       | 2003             |       | $                       | 36,000       |                       | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| Officer                             |       | 2004             |       | $                       | 36,000       |                       | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
|                                |       |             |       |                    |         |                       |       |   |   |   |   |   |   |   |   |   |   |
| Gary Kramer                         |       | 2002             |       | $                       | 62,154  |                       | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| President and                       |       | 2003             |       | $                       | 100,000      |                       | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| General Manager                     |       | 2004             |       | $                       | 100,000      |                       | $          | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   | $ | 0 |   |
| (formerly Chief  Executive Officer) |       |             |       |                    |         |                       |       |   |   |   |   |   |   |   |   |   |   |

 

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[1] In addition to hissalary of $3,000 per month, Mr. Malchine was compensated $60,000 in January2002 for services performed on behalf of the Company during 2000 and 2001.

 

**EmploymentAgreements**

 

We have no writtenemployment agreements with any officer or Director.  We may in the future enter into employmentagreements with our officers or other employees that we may hire.

 

**Reimbursement ofExpenses**

 

Otherthan Mr. Malchine, Dr. Kramer and our Chief Financial Officer, we do not payour officers and Directors any fees or salaries for their services to us;however, we do reimburse our officers for expenses incurred in connection withtheir service to us.  Our reimbursementpolicy is to reimburse our officers and Directors for out-of-pocketexpenses.  During 2004, we reimbursed ourofficers and Directors a total of $19,306. We estimate that our officers and Directors will incur approximately$25,000 in reimburseable out-of-pocket expenses in the next 12 months.  This is only an estimate and our officers andDirectors expenses could be substantially higher than we anticipate.

 

**ITEM 11.****  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

We have not and do notexpect to establish any compensation plans under which the Company’s securitiesare authorized for issuance.  Thefollowing table sets forth certain information concerning the beneficialownership of our Class A member units as of February24, 2005.

 

27

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| **Title**                                     | ** ** | **Name and Address  of Beneficial Owner** | ** ** | **Amount and Nature  of Beneficial Owner** | ** ** | **Percent of  Class** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | ** **                                | ** ** | ** **                                 | ** ** | ** **            | ** ** |
| Director &  Executive Officer             |       | John L. Malchine                          | [1]        | 600                                        |       | 3.03                  | %          |
| Director &  Executive Officer             |       | Gary L. Kramer                            | [2]        | 920                                        |       | 4.65                  | %          |
| Director                                      |       | David Fick                                | [3]        | 937                                        |       | 4.73                  | %          |
| Director                                      |       | David Kolsrud                             | [4]        | 60                                         |       | 0.30                  | %          |
| 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]        | 4,547                                      |       | 22.99                 | %          |

 

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[1]  John Malchine’s addressat Badger State Ethanol, LLC is 820 West 17th Street, Monroe,Wisconsin 53566. Beneficial ownership includes 500 units owned individually and100 units owned in joint tenancy.

[2]  Gary Kramer’saddress at Badger State Ethanol, LLC is 820 West 17th Street,Monroe, Wisconsin 53566. Beneficial ownership includes 520 units ownedindividually and 400 units owned by arrangement.

[3]  David Fick’saddress at Badger State Ethanol, LLC is 820 West 17th Street,Monroe, Wisconsin 53566.

[4]  David Kolsrud’saddress at Badger State Ethanol, LLC is 820 West 17th Street,Monroe, Wisconsin 53566.

[5]  Don Endres’ addressat Badger State Ethanol, LLC is 820 West 17th Street, Monroe,Wisconsin 53566.

[6]  Wayne Mitchell’saddress at Badger State Ethanol, LLC is 820 West 17th Street,Monroe, Wisconsin 53566.

[7]  Robert Wright’saddress at Badger State Ethanol, LLC is 820 West 17th Street,Monroe, Wisconsin 53566. This amount includes 25 units owned by Murex, forwhich Mr. Wright disclaims beneficial interest.

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

[9]  Includes thebeneficial ownership of eight Directors and executive officers.

 

**ITEM 12.****  CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS**

 

**Since our inception, we haveengaged in several transactions with related parties.  We currently do not have outside Directors orunaffiliated members to evaluate related party transactions.  Management believes that these transactionswere as favorable as those that could have been obtained in an arms-lengthtransaction.**

** **

**Executive Salaries**

 

**We are currently compensating GaryKramer, our President and General Manager, $103,000 per year pursuant to anoral agreement. We are compensating James Leitzinger, our Chief FinancialOfficer, $72,100 per year for his services pursuant toan oral agreement.**

 

**Ethanol Agreement**

 

**We entered into an ethanol purchaseand marketing agreement with Murex for the exclusive rights to purchase andmarket all ethanol produced by the plant. This agreement expires in 2009. Murex is a member of the Company and has a representative on our Boardof Directors.  Under the agreement, wehave agreed to provide Murex with estimates of our production. Murex has agreedto purchase and deliver all the ethanol produced by the plant.**

 

**The agreement with Murexautomatically renews for one-year terms after 2009 unless either party providesnotice prior to the renewal anniversary date. In addition, the agreement may be terminated by either party in theevent of the other party’s insolvency, force majeure for at least a period oftwelve months, or the default, which is not cured, by the other party in theperformance of any term or covenant.  Wemay also terminate the agreement, following a decision of an arbitrator, ifMurex breaches its obligation to use its best efforts to obtain for us thehighest purchase price available for ethanol, after considering its own resalecosts and transportation costs.**

 

28

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**Distillers Grainsand Solubles Agreement**

** **

**We entered into a purchase andmarketing agreement with United for the exclusive rights to purchase and marketall of the distillers grains produced by theplant.  This agreement expires in2005.  ICM was a prime subcontractor forthe construction of the ethanol plant and had a representative on our Board ofDirectors.  Under the agreement, Unitedhas agreed to purchase our wet distillers grains with solubles and our drieddistillers grains with solubles produced at the ethanol production plant.**  We areobligated to provide United a production schedule, the labor, equipment andfacilities to meet United’s loading schedule and to reserve storage space forthe products. United has agreed to use its commercially reasonable efforts toachieve the highest resale price available under prevailing market conditions,in United’s and our reasonable judgment.

** **

**The agreement with Unitedautomatically renews for successive one-year terms after 2005 unless eitherparty provides notice that it elects not to renew the agreement. The agreementmay be terminated by the nondefaulting party in the event of default, whichincludes the failure to make payment when due, a default in the performance ofa party’s covenants and agreements and the insolvency of a party.**

** **

**Conflicts ofInterest**

** **

**Conflicts of interest exist and mayarise in the future as a result of the relationships between and among ourmembers, 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 thatofficer or Director is affiliated, the Board as a whole will seek to resolvethe conflict.  A Director will notparticipate when the Board considers a transaction where he or she has aconflict of interest.  We do not have acommittee of independent Directors or members or an otherwise disinterestedbody to consider transactions or arrangements that result from, or are fraughtwith conflicts of interest.  Someconflict situations include disputes that may arise between us and Fagen or ICMas a result of the construction of the ethanol plant are expected to beresolved through binding arbitration according to construction industry rules.**

** **

**Conflicts of interest could arisein the situations described below, among others:**

** **

**•**                  We will engage in transactions with affiliates ofour Directors.  Members will have noright to individually enforce the obligations of our Directors or theiraffiliates 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, loancovenants, capital improvements and contingencies that will effect the amountof cash available for distribution to members. We have representatives of Murex on our Board and formerly had arepresentative of ICM (an affiliate of United) on our Board.  We engage in transactions with Murex andUnited. Our expenditures, reserves and the amount of cash available fordistribution may be affected by these transactions and our relationship withMurex and United.

 

**•**                  We will reimburse our Directors for out-of-pocketexpenses relating to our business.  We donot have a reimbursement policy or guideline for determining what expenses willbe reimbursed.  We will review andreimburse all reasonable expenses that Directors submit to us.

 

**•**                  We have retained counsel that has assisted us invarious aspects of our formation and development.  We have not retained separate counsel onbehalf of unit holders.

** **

**•**                  Fagen Inc., Mr. Mitchell, Mr. Endres, Mr. Kolsrud,Mr. Fick and Mr. Wright, are involved in various ethanol construction anddevelopment projects throughout the United States and in Wisconsin.  These projects will compete with our projectfor purchasing corn and other raw material supplies, and the sale of ethanoland distillers grains.  Our operatingagreement does not prevent our Directors from being involved in activities thatcompete with us.

 

29

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**•**                  Our Directors or their affiliates may loan money tous for which we may pay interest up to a rate of primeplus 4%.

** **

**ITEM 13.****  EXHIBITS AND REPORTS ON FORM8-K**

 

(a)           Financial Statements.  An index to the financial statements includedin this report appears at page F-1.  Thefinancial statements appear at page F-2 through F-14 of this report.

 

Exhibits.  The following exhibits are filed as part ofthis report.  Exhibits previously filedare incorporated by reference, as noted.

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                               |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      | ** ** | ** **                                                                                                                                                                                                                                                                |
| 3.1             |       | Articles of Organization of the registrant. Filed as  Exhibit 3.1 to the registrant’s registration statement on Form SB-2  (Commission File 333-50568) and incorporated by reference herein.                                                                         |
|            |       |                                                                                                                                                                                                                                                                      |
| 3.2             |       | Operating Agreement of the registrant. Filed as  Exhibit 3.2 to the registrant’s registration statement on Form SB-2  (Commission File 333-50568) and incorporated by reference herein.                                                                              |
|            |       |                                                                                                                                                                                                                                                                      |
| 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. |

 

30

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| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                 |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                  |
| 10.3            |       | Form of Teaming Agreement. Filed as Exhibit 10.6 to  the registrant’s registration statement on Form SB-2 (Commission File  333-50568) and incorporated by reference herein.                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                        |
| 10.4            |       | Amendment to Development Agreement between Badger  State Ethanol, LLC and the City of Monroe, Wisconsin. Filed as Exhibit 10.1  to the registrant’s quarterly report for the period ending March 31, 2001 on  Form 10-QSB (Commission File 333-50568) and incorporated by reference herein.                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                        |
| 10.5            |       | Ethanol Purchase and Sale Agreement dated August 8,  2001, between Badger State Ethanol, LLC and Murex N.A., Ltd. Filed as Exhibit  10.1 to the registrant’s quarterly report for the period ending September 30,  2001 on Form 10-QSB (Commission File 333-50568) and incorporated by reference  herein.*                             |
|            |       |                                                                                                                                                                                                                                                                                                                                        |
| 10.6            |       | Purchase and Sale Agreement dated August 28, 2001,  between Badger State Ethanol, LLC and ICM Marketing, Inc. Filed as Exhibit  10.2 to the registrant’s quarterly report for the period ending September 30,  2001 on Form 10-QSB (Commission File 333-50568) and incorporated by reference  herein.*                                 |
|            |       |                                                                                                                                                                                                                                                                                                                                        |
| 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. |
|            |       |                                                                                                                                                                                                                                                                                                                                        |
| 10.10           |       | Revolving  Promissory Note dated August 25, 2004, by and between First National Bank of  Omaha and Badger State Ethanol, LLC. Filed as Exhibit 10.10 to the  registrant’s annual report for the period ending December 31, 2004 on Form  10-KSB (Commission File 333-50568).                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                        |
| 14.1            |       | Code of Ethics  of Badger State Ethanol, LLC adopted September 29, 2004. Filed as Exhibit  14.1 to the registrant’s annual report for the period ending December 31,  2004 on Form 10-KSB (Commission File 333-50568).                                                                                                                 |
|            |       |                                                                                                                                                                                                                                                                                                                                        |
| 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.                                                                                                                                                                                                                   |

 

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*  Material has been omitted pursuant to a request forconfidential treatment and such materials have been filed separately with theSecurities and Exchange Commission.

 

(b)           Reports on Form 8-K.  Current Report on Form 8-K,dated December 27, 2004, containing a copy of the Company’s newsletter.

 

31

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**ITEM 14.****  PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

AUDIT ANDNON-AUDIT FEES

 

For the fiscal year endedDecember 31, 2004 and 2003, professional services were performed by GrantThornton LLP.  The following tablepresents fees for professional services rendered by Grant Thornton LLP for theaudit of the Company’s annual financial statements for the years endedDecember 31, 2004 and 2003, and fees billed for other services rendered byGrant Thornton LLP during those periods.

 

 
| ** **              | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|-------------------------|------------|-----------------------|------------|-----------------------|------------|
| Audit Fees (1)          |       | $                     | 74,900     |                  | $          | 84,800 |   |
| Audit Related  Fees (2) |       | 0                     |       | $                     | 5,600      |   |
| Tax Fees                |       | $                     | 11,000     |                  | $          | 14,500 |   |
| All Other Fees          |       | 0                     |       | 0                     |       |
| **TOTAL**               | ** ** | **$**                 | **85,900** | ** **            | **$**      | **104,900** | ** ** |

 

----

(1) Represents theaggregate fees billed covering the audit of our annual financial statements andthe review of our financial statements for the first, second and third quartersof 2003 and 2004.

(2) Represents theaggregate fees billed for assurance and related services that are reasonablyrelated to the performance of the audit or review.

 

The above listed feeswere pre-approved by the Board of Directors of the Company.  The percentage of hours expended on audit bypersons other than the Company’s principal accountant’s full-time, permanentemployees did not exceed 50%.

 

It is the Company’spolicy to pre-approve all services provided by Grant Thornton LLP.  As of the date of this filing, the Company’scurrent policy is to not engage Grant Thornton LLP to provide, among otherthings, bookkeeping services, appraisal or valuation services, or internalaudit services. The policy provides that the Company engage Grant Thornton toprovide audit, tax and other assurance services, such as review of SEC reportsor filings.  The Board of Directorsconsidered and determined that the provision of the services other than theservices described under “Audit Fees” is compatible with maintaining theindependence of the independent auditors.

 

32

----

 

**SIGNATURES**

 

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

 
| Dated: February 24, 2005 | BADGER STATE ETHANOL, LLC      |
|--------------------------|--------------------------------|
|                     |                           |   |
|                     | By:                            | /s/  Gary L. Kramer |
|                     | Gary  L. Kramer                |
|                     | President  and General Manager |

 

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

 
| /s/  John L. Malchine                              |   | February  24, 2005 |
|----------------------------------------------------|--------|--------------------|
| John L. Malchine                                   |   |
| Chairman of the Board  and Chief Executive Officer |   |
|                                               |   |
|                                               |   |
| /s/  Gary L. Kramer                                |   | February  24, 2005 |
| Gary L. Kramer                                     |   |
| Director, President and  General Manager           |   |
|                                               |   |
|                                               |   |
| /s/  David Fick                                    |   | February  24, 2005 |
| David Fick                                         |   |
| Director                                           |   |
|                                               |   |
|                                               |   |
| /s/ David  Kolsrud                                 |   | February  24, 2005 |
| David Kolsrud                                      |   |
| Director and Secretary                             |   |
|                                               |   |
|                                               |   |
| /s/  Don Endres                                    |   | February  24, 2005 |
| Don Endres                                         |   |
| Director and Treasurer                             |   |
|                                               |   |
|                                               |   |
| /s/  Wayne Mitchell                                |   | February  24, 2005 |
| Wayne Mitchell                                     |   |
| Director                                           |   |
|                                               |   |
|                                               |   |
| /s/  Robert Wright                                 |   | February  24, 2005 |
| Robert Wright                                      |   |
| Director                                           |   |
|                                               |   |
|                                               |   |
| /s/  James Leitzinger                              |   | February  24, 2005 |
| James Leitzinger                                   |   |
| Chief Financial Officer                            |   |

 

33

----

 

**Supplemental Information to be Furnished with ReportsFiled**

**Pursuant to § 15(d) of the Exchange Act byNonreporting Issuers**

 

**The Registrant has sent an annualreport or proxy materials to its security holders covering the registrant’slast fiscal year.  The Registrant willfurnish to the Commission for its information, at the time of filing its reporton this Form, four copies of the annual report and form of proxy.**

 

----

 

INDEX TO FINANCIAL STATEMENTS

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

 

F-1

----

 

## **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

## ** **

Boardof Directors and Members

BadgerState Ethanol, LLC

 

Wehave audited the accompanying balance sheets of Badger State Ethanol, LLC as ofDecember 31, 2004 and 2003, and the related statements of income, members’ equity,and cash flows for the years then ended. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Badger State Ethanol, LLC as ofDecember 31, 2004 and 2003, and the results of its operations and its cashflows for the years then ended in conformity with accounting principlesgenerally accepted in the United States of America.

 

 
| /s/ GRANT THORNTON LLP |   |
|------------------------|--------|
|                   |
| Madison,  Wisconsin    |
| January 27, 2005       |

 

F-2

----

 

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

BALANCE SHEETS

December 31, 2004 and 2003

 
| ** **                                      | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
| ASSETS                                          |       |       |       |       |       |
|                                            |       |       |       |       |       |
| CURRENT ASSETS                                  |       |       |       |       |       |
| Cash and cash  equivalents                      |       | $          | 3,807,383  |       | $          | 1,810,490 |   |
| Accounts  receivable:                           |       |       |       |       |       |
| Trade                                           |       | 5,896,669  |       | 4,129,164  |       |
| Government  incentive payments                  |       | 100,000    |       | 1,112,426  |       |
| Inventories                                     |       | 2,513,357  |       | 2,383,277  |       |
| Margin deposits                                 |       | 2,191,259  |       | 234,000    |       |
| Derivative  contracts                           |       | —     |       | 235,737    |       |
| Other assets                                    |       | 189,615    |       | 490,457    |       |
|                                            |       |       |       |       |       |
| Total current  assets                           |       | 14,698,283 |       | 10,395,551 |       |
|                                            |       |       |       |       |       |
| PROPERTY AND  EQUIPMENT, at cost                |       |       |       |       |       |
| Plant buildings  and equipment                  |       | 47,880,729 |       | 45,734,888 |       |
| Land  improvements                              |       | 1,398,917  |       | 1,398,917  |       |
| Office buildings  and equipment                 |       | 476,467    |       | 464,018    |       |
|                                            |       | 49,756,113 |       | 47,597,823 |       |
| Less accumulated  depreciation and amortization |       | 4,780,896  |       | 2,521,949  |       |
|                                            |       | 44,975,217 |       | 45,075,874 |       |
|                                            |       |       |       |       |       |
| OTHER ASSETS                                    |       | 528,106    |       | 714,581    |       |
|                                            |       |       |       |       |       |
| TOTAL ASSETS                                    |       | $          | 60,201,606 |       | $          | 56,186,006 |   |
|                                            |       |       |       |       |       |
| LIABILITIES AND MEMBERS’ EQUITY            |       |       |       |       |       |
|                                            |       |       |       |       |       |
| CURRENT  LIABILITIES                            |       |       |       |       |       |
| Current  maturities of long-term debt           |       | $          | 3,409,246  |       | $          | 3,056,680 |   |
| Accounts payable                                |       | 1,700,616  |       | 739,841    |       |
| Accrued  liabilities                            |       | 1,064,232  |       | 1,713,655  |       |
| Derivative contracts                            |       | 1,989,565  |       | —     |       |
| Deferred revenue                                |       | 329,569    |       | —     |       |
|                                            |       |       |       |       |       |
| Total current  liabilities                      |       | 8,493,228  |       | 5,510,176  |       |
|                                            |       |       |       |       |       |
| LONG-TERM DEBT,  less current maturities        |       | 17,635,157 |       | 24,043,579 |       |
|                                            |       |       |       |       |       |
| COMMITMENTS AND  CONTINGENCIES                  |       | —     |       | —     |       |
|                                            |       |       |       |       |       |
| MEMBERS’ EQUITY                            |       |       |       |       |       |
| Members’  contributions                    |       | 17,859,787 |       | 17,859,787 |       |
| Retained  earnings                              |       | 16,213,434 |       | 8,772,464  |       |
|                                            |       | 34,073,221 |       | 26,632,251 |       |
|                                            |       |       |       |       |       |
| TOTAL  LIABILITIES AND MEMBERS’ EQUITY     |       | $          | 60,201,606 |       | $          | 56,186,006 |   |

 

The accompanying notes are an integral part of these statements.

 

F-3

----

 

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

STATEMENTS OF INCOME

Years ended December 31, 2004 and 2003

 
| ** **                                              | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                    |       |       |       |       |       |
| Sales and  revenues                                     |       | $          | 92,084,766 |       | $          | 74,149,226 |   |
| Cost of sales                                           |       | 75,471,115 |       | 57,799,611 |       |
|                                                    |       |       |       |       |       |
| Gross margin                                            |       | 16,613,651 |       | 16,349,615 |       |
|                                                    |       |       |       |       |       |
| Selling, general  and administrative expenses           |       | 2,940,724  |       | 2,663,322  |       |
|                                                    |       |       |       |       |       |
| Operating income                                        |       | 13,672,927 |       | 13,686,293 |       |
|                                                    |       |       |       |       |       |
| Interest expense                                        |       | (1,311,346 | )          | (1,846,937 | )          |
| Interest income                                         |       | 22,889     |       | 7,894      |       |
| Other income                                            |       | —     |       | 65,229     |       |
|                                                    |       |       |       |       |       |
| Net income                                              |       | $          | 12,384,470 |       | $          | 11,912,479 |   |
|                                                    |       |       |       |       |       |
| Net income per  unit - basic and diluted                |       | $          | 626.30     |       | $          | 602.43 |   |
|                                                    |       |       |       |       |       |
| Weighted average  units outstanding - basic and diluted |       | 19,774     |       | 19,774     |       |

 

The accompanying notesare an integral part of these statements.

 

F-4

----

 

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

STATEMENTS OF MEMBERS’EQUITY

Years ended December 31, 2004 and 2003

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

 

The accompanying notesare an integral part of these statements.

 

F-5

----

 

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

STATEMENTS OF CASH FLOWS

Years ended December 31, 2004 and 2003

 
| ** **                                                                         | ** ** | **2004**    | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|
|                                                                               |       |        |       |       |       |
| Cash flows from  operating activities                                              |       |        |       |       |       |
| Net income                                                                         |       | $           | 12,384,470 |       | $          | 11,912,479 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities  |       |        |       |       |       |
| Depreciation and  amortization                                                     |       | 2,445,422   |       | 2,350,170  |       |
| Changes in  operating assets and liabilities:                                      |       |        |       |       |       |
| Trade accounts  receivable                                                         |       | (1,767,505  | )          | (712,783   | )          |
| Government  incentive payments receivable                                          |       | 1,012,426   |       | (1,112,426 | )          |
| Inventories                                                                        |       | (130,080    | )          | (632,034   | )          |
| Margin deposits                                                                    |       | (1,957,259  | )          | 176,000    |       |
| Other assets                                                                       |       | 300,842     |       | (218,440   | )          |
| Derivative  contracts                                                              |       | 2,225,302   |       | (666,976   | )          |
| Accounts payable                                                                   |       | 960,775     |       | (1,168,778 | )          |
| Accrued  liabilities                                                               |       | (649,423    | )          | 721,987    |       |
| Deferred revenue                                                                   |       | 329,569     |       | —     |       |
|                                                                               |       |        |       |       |       |
| Net cash  provided by operating activities                                         |       | 15,154,539  |       | 10,649,199 |       |
|                                                                               |       |        |       |       |       |
| Cash flows from  investing activities                                              |       |        |       |       |       |
| Cost of property  and equipment                                                    |       | (2,077,890  | )          | (1,162,794 | )          |
|                                                                               |       |        |       |       |       |
| Cash flows from  financing activities                                              |       |        |       |       |       |
| Net change in  line of credit                                                      |       | —      |       | (1,747,980 | )          |
| Payments of  financing fees                                                        |       | —      |       | (306,000   | )          |
| Proceeds from  long-term debt financing                                            |       | —      |       | 927,880    |       |
| Payments on  long-term debt financing                                              |       | (6,136,256  | )          | (7,142,181 | )          |
| Payment of  dividends                                                              |       | (4,943,500  | )          | —     |       |
|                                                                               |       |        |       |       |       |
| Net cash used in  financing activities                                             |       | (11,079,756 | )          | (8,268,281 | )          |
|                                                                               |       |        |       |       |       |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                         |       | 1,996,893   |       | 1,218,124  |       |
|                                                                               |       |        |       |       |       |
| Cash and cash  equivalents at beginning of year                                    |       | 1,810,490   |       | 592,366    |       |
|                                                                               |       |        |       |       |       |
| Cash and cash  equivalents at end of year                                          |       | $           | 3,807,383  |       | $          | 1,810,490 |   |
|                                                                               |       |        |       |       |       |
| Supplemental  disclosure of cash flow information:                                 |       |        |       |       |       |
| Interest paid                                                                      |       | $           | 1,381,947  |       | $          | 1,858,655 |   |
|                                                                               |       |        |       |       |       |
| Supplemental  disclosure of noncash operating, investing and financing activities: |       |        |       |       |       |
| Purchase of  equipment with long-term debt                                         |       | $           | 80,400     |       | $          | — |   |

 

The accompanying notesare an integral part of these statements.

 

F-6

----

 

**BADGERSTATE ETHANOL, LLC**

NOTES TO FINANCIALSTATEMENTS

December 31, 2004 and 2003

 

NOTEA - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Badger State Ethanol, LLC (the “Company”) operatesan ethanol plant in Wisconsin that began operations in October 2002.  The Company sells its production of ethanoland related products domestically and operates in one business segment.

 

A summary of the significant accounting policiesconsistently applied in the preparation of the accompanying financialstatements follows:

 

1.  Use ofEstimates

 

Preparing financial statements in conformity withaccounting 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 thoseestimates.

 

2.  RevenueRecognition

 

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

 

The Company recognizes revenue from federal and state incentivepayments when all requirements of the program have been met and payments areassured.

 

3.  FreightCosts

 

The Company reflects freight costs associated withshipping 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 from customers for ethanol anddistillers grains sales.  The Companygrants credit to customers in the normal course of business.  Credit is extended based on an evaluation ofa customer’s financial condition and, generally, collateral is notrequired.  Accountsoutstanding longer 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, 2004 and2003, the Company believes all receivables are fully collectible and noallowance for doubtful accounts is deemed necessary.  This decision is based on considering a numberof factors, including length of time trade accounts receivable are past due,the customers’ previous loss history, the customers’ current ability to paytheir obligations to the Company, and the condition of the general economy andthe industry as a whole.   Interest isnot charged on past due receivables.

 

6.  Concentrationsof Credit Risk

 

The Company’s cash balances are maintained in bankdepositories primarily at one financial institution and exceed federallyinsured limits.  Accounts receivable are primarilywith two customers (see Note I) and the Company does not require collateral orother 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.  All derivativecontracts are recorded at fair market value.

 

8.  Inventories

 

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

 

F-8

----

 

9.  Derivative Instruments

 

TheCompany enters 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.  The Company does not typically enter intoderivative instruments other than for hedging purposes.  All derivative contracts are recognized onthe December 31, 2004 and 2003 balance sheets at their fair market value.

 

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

 

AtDecember 31, 2004 and 2003 no derivative contracts were designated as hedges andall changes in market value have been recognized through cost of sales.  The amount recorded for derivative contractsat December 31, 2004 was a liability of $1,989,565 and at December 31, 2003 wasan asset of $235,737.  The Company hasrecorded an increase to cost of sales of $2,205,578 and $621,722 related toderivative contracts for the years ended December 31, 2004 and 2003.

 

10.  Property and Equipment

 

Depreciationand amortization of property and equipment are provided in amounts sufficientto relate the cost of the related assets to operations over their estimatedservice lives using the straight-line method. Depreciation and amortization for income tax reporting purposes arecomputed using accelerated methods.  Theranges of the estimated useful lives for the major classes of property andequipment are as follows:

 

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

 

F-9

----

 

11.  Net Income Per Unit

 

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

 

12.  Reclassifications

 

Certainprior year amounts have been reclassified to conform withthe current year’s presentation.  Thesereclassifications had no effect on previously recorded net income or members’equity.

 

13.  Recent AccountingPronouncements

 

InNovember 2004, the FASB issued FASB Statement No. 151, “Inventory Costs – anamendment of ARB No. 43” (“FAS 151”), which is the result of its efforts toconverge U.S. accounting standards for inventories with InternationalAccounting Standards.  FAS No. 151requires idle facility expenses, freight, handling costs, and wasted material(spoilage) costs to be recognized as current-period charges.  It also requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities.  FAS No. 151 willbe effective for inventory costs incurred during fiscal years beginning afterJune 15, 2005.  We are evaluating theimpact of this standard on our financial statements.  The Company does not expect that the adoptionof FAS 151 will an impact on the Company’s financial position, results ofoperations or cash flows.

 

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

 

NOTE B - GOVERNMENTINCENTIVE PAYMENTS

 

The Company has recorded revenue of $333 and $2,265,292 for the yearsended December 31, 2004 and 2003, related to incentive payments received underthe State of Wisconsin Producer Subsidy Payment program (the “WisconsinProducer Subsidy Program”).  The Companydoes not anticipate receiving any payments under the Wisconsin Producer SubsidyProgram for 2005.

 

F-10

----

 

The Company has recorded revenue of $2,060,129 and $7,979,426 for theyears ended December 31, 2004 and 2003 related to incentive payments receivedunder the United States Department of Agriculture Commodity Credit Corporation’sBioenergy Program (US CCC Program).

 

NOTE C - INVENTORIES

 

Inventoriesconsist of the following at December 31:

 
| ** **         | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
|               |       |     |       |     |       |
| Raw materials      |       | $        | 1,244,352  |     | $          | 1,412,088 |   |
| Work-in-process    |       | 355,202  |       | 296,430  |       |
| Finished goods     |       | 913,803  |       | 674,759  |       |
|               |       |     |       |     |       |
| Total  inventories |       | $        | 2,513,357  |     | $          | 2,383,277 |   |

 

NOTED - LINE OF CREDIT

 

The Company has available a $3,500,000 line of credit with a financialinstitution expiring in August 2005. There were no borrowings outstanding under the line of credit as of December31, 2004 and 2003.  Borrowingsoutstanding under the line are collateralized by a general business securityagreement.  Interest is payable monthlyat a variable rate (effective rate of 6.25% at December 31, 2004).  Upon expiration of the current line of creditin August 2005, the Company has the intent and believes it will have theability to renew its line of credit.

 

F-11

----

 

NOTEE - LONG-TERM DEBT

 

Long-term debt consists of the following as of December31:

 
| ** **                                                                                                                                                                                                                                                   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| 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)                                                      |       | $          | 18,037,219 |       | $          | 23,801,740 |   |
| Note payable to  utility Company; secured by specific equipment and guaranteed by the City of  Monroe, Wisconsin; interest accrues at 3%. The note is payable in monthly  principal and interest payments of $34,762 with a final payment due November  2007 |       | 2,908,831  |       | 3,233,412  |       |
| Notes payable;  secured by specific equipment; payable in monthly principal and interest  payments of $4,720, with final payments due in 2007 (B)                                                                                                            |       | 98,353     |       | 65,107     |       |
|                                                                                                                                                                                                                                                         |       | 21,044,403 |       | 27,100,259 |       |
| Less current  maturities                                                                                                                                                                                                                                     |       | 3,409,246  |       | 3,056,680  |       |
|                                                                                                                                                                                                                                                         |       |       |       |       |       |
|                                                                                                                                                                                                                                                         |       | $          | 17,635,157 |       | $          | 24,043,579 |   |

 

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(A)           Interest accrues as follows: 6.528% on $11,749,974, and at prime rate plus..25% (effective rate of 5.50% at December 31, 2004) on $6,287,245.

 

The loan is collateralized by all assets of theCompany and contains various customary restrictions, including the maintenanceof certain financial covenants.

 

(B)             Interest accrues at 2.5% on $13,880.  The remaining balance was offered at zeropercent financing.

 

Future maturities of long-term debt as of December 31, 2004 are asfollows:

 

| Year ending  December 31, |   |      |       |
|---------------------------|--------|-----------|------------|
| 2005                      |   | $         | 3,409,246  |   |
| 2006                      |   | 3,582,804 |       |
| 2007                      |   | 5,648,784 |       |
| 2008                      |   | 8,403,569 |       |
|                      |   |      |       |
|                      |   | $         | 21,044,403 |   |
|                           |        |           |            |  |  |

 

F-12

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NOTE F - COMMITMENTS

 

The Company had forward contractsto purchase approximately 3,280,000 and 3,467,000 bushels of corn at variousprices at December 31, 2004 and 2003. The Company had additional forward contracts to purchase approximately3,021,000 and 1,485,000 bushels of corn that were not yet priced at December31, 2004 and 2003.  The Company recordedan unrealized loss of $218,989 on open forward contracts that were priced atDecember 31, 2004.  There were nounrealized losses on open forward contracts that were priced at December 31,2003.

 

The Company leases railcarsunder operating leases that expire in 2005. Total rent expense for all operating leases was$63,750 and $68,625 for the years ended December 31, 2004 and 2003.  Future minimum lease payments under theseleases as of December 31, 2004 are $90,000 for the year ending December 31,2005.

 

NOTE G - RELATED PARTIES

 

The Company’s general contractor used toconstruct the plant is a member of the Company and has representatives on theCompany’s Board of Directors.  Thesubcontractor that was used to construct the plant has exclusive rights tomarket the Company’s distillers grains.  The subcontractor was a member of the Companyand had a representative on the Company’s Board of Directors until it sold itsunits in November 2003.  The subcontractor’srepresentative on the Company’s Board of Directors resigned in December2003.  There were no constructionpayments to the members made in 2004. For the year ended December 31, 2003, the Company made constructionpayments to the members of $673,177.  Sales to the subcontractor for the years ended December 31, 2004 and2003 were $15,667,440 and $10,765,583, respectively. Trade accounts receivablefrom the subcontractor at December 31, 2004 and 2003 were $243,362 and$339,144, respectively.

 

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, 2004and 2003 to the member were $72,095,421 and $52,077,172, respectively.  Trade accounts receivable from the ethanolmarketing company at December 31, 2004 and 2003 were $5,545,505 and $3,790,109,respectively.

 

In connection with the sales activities ofthe ethanol marketing company and the subcontractor, the Company recordedexpenses of $5,489,004 and $4,832,854 related to railcar, freight and marketingfees for the years ended December 31, 2004 and 2003.

 

F-13

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NOTEH - RETIREMENT PLAN

 

Effective January1, 2003, the Company established a 401(k) Plan for all employees of theCompany.  The Company may make profitsharing contributions to the plan at the discretion of the Company’s Board ofDirectors.  The Company’s discretionarycontribution was $21,949 and $21,592 in 2004 and 2003.

 

NOTEI - MAJOR CUSTOMERS

 

The Company has twomajor customers that accounted for 78% and 17% of sales and revenues for theyear ended December 31, 2004 and 70% and 15% of sales and revenues for the yearended December 31, 2003. Revenue from major customers follows for the years endedDecember 31:

 
| ** ** | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------|------------|------------|------------|------------|------------|
|       |       |       |       |       |       |
| Customer A |       | $          | 72,095,421 |       | $          | 52,077,172 |   |
| Customer B |       | 15,667,440 |       | 10,765,583 |       |
|            |            |            |            |            |            |  |  |

 

Accounts receivable from major customers consistedof the following as of December 31:

 
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |
| Customer A |       | $        | 5,545,505  |     | $          | 3,790,109 |   |
| Customer B |       | 243,362  |       | 339,144  |       |
|            |            |          |            |          |            |  |  |

 

NOTE J - INCOMETAXES

 

Due to the Company’s organization as a limited liability Company, theincome or loss of the Company is reportable by the respective members on theirpersonal income tax returns.  Therefore,no income tax provision has been included in the accompanying financialstatements.

 

NOTE K – SUBSEQUENTEVENT

 

The Company’s Board of Directors on January27, 2005 declared a distribution of $388 per unit to be paid to all members ofrecord at December 31, 2004.  The totaldistribution will be $7,672,312.

 

F-14

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