**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10-KSB**

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** **
| ý                                          | ** ** | **Annual report under Section 13  or 15(d) of the Securities Exchange Act of 1934.** |
|-------------------------------------------------|------------|--------------------------------------------------------------------------------------|
|                                            |
| **For the fiscal year ended December 31, 2005** |
|                                            |       |                                                                                 |
| **o**                                           | ** ** | **Transition report under Section  13 or 15(d) of the Exchange Act.**                |
|                                            |       |                                                                                 |
| **Commission file number 000-50733**            |

 

**UNITEDWISCONSIN GRAIN PRODUCERS, LLC**

(Name of small business issuer in its charter)

 

| **Wisconsin**                                                        | ** ** | **39-2032455**                            |
|----------------------------------------------------------------------|------------|-------------------------------------------|
| **(State or other  jurisdiction of  incorporation or organization)** | ** ** | **(I.R.S. Employer  Identification No.)** |

 

| **W1231 Tessmann Drive, Friesland, Wisconsin  53935-0247**                |
|---------------------------------------------------------------------------|
| (Address of principal executive offices)                                  |
|                                                                      |   |   |
| **(920) 348-5016**                                                        |
| (Issuer’s telephone number)                                          |
|                                                                      |   |   |
| Securities registered under Section 12(b) of the Exchange  Act: |
| ** **                                                                |
| **None**                                                                  |
|                                                                      |
| Securities registered under Section 12(g) of the Exchange  Act: |
|                                                                      |
| **Membership Units**                                                      |

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.  o Yes  ý  No

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. o Yes  ý  No

 

Check whether the issuer:  (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  ý  Yes    o  No

 

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B is not contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB. ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

o  Yes    ý  No

 

State issuer’s revenues for itsmost recent fiscal year. **$**54,234,638

 

As of December 31, 2005, theaggregate market value of the membership units held by non-affiliates (computedby reference to the most recent offering price of membership units) was$56,121,000.

 

As of December 31, 2005, therewere 28,780 membership units outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The registrant has incorporatedby reference into Part III of this Annual Report on Form 10-KSB portions of itsdefinitive proxy statement to be filed with the Securities and ExchangeCommission within 120 days after the close of the fiscal year covered by thisAnnual Report.

 

Transitional Small BusinessDisclosure Format (Check one):                   o  Yes    ý  No

 

 

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** **

**INDEX**

** **
| ** **                                                                                                                    | **Page No.** |
|-------------------------------------------------------------------------------------------------------------------------------|--------------|
| ** **                                                                                                                    | ** **   |
| **PART 1**                                                                                                                    | **5**        |
| ** **                                                                                                                    | ** **   |
| **ITEM 1. DESCRIPTION OF BUSINESS**                                                                                           | **5**        |
| **ITEM 1A.  RISK FACTORS**                                                                                                    | **16**       |
| **ITEM 2.  DESCRIPTION OF PROPERTY**                                                                                          | **21**       |
| **ITEM 3.  LEGAL PROCEEDINGS**                                                                                                | **22**       |
| **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS**                                                              | **22**       |
| ** **                                                                                                                    | ** **   |
| **PART II**                                                                                                                   | **22**       |
| ** **                                                                                                                    | ** **   |
| **ITEM 5. MARKET FOR MEMBERSHIP UNITS AND RELATED MEMBER  MATTERS**                                                           | **22**       |
| **ITEM 6.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**                                                   | **23**       |
| **ITEM 7. FINANCIAL STATEMENTS**                                                                                              | **32**       |
| **ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURES**                            | **46**       |
| **ITEM 8A. CONTROLS AND PROCEDURES**                                                                                          | **46**       |
| **ITEM 8B. OTHER INFORMATION**                                                                                                | **46**       |
| ** **                                                                                                                    | ** **   |
| **PART III**                                                                                                                  | **46**       |
| ** **                                                                                                                    | ** **   |
| **ITEM 9. DIRECTORS, EXECUTIVE OFFICERS,  PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE  ACT** | **46**       |
| **ITEM 10. EXECUTIVE COMPENSATION**                                                                                           | **46**       |
| **ITEM 11. SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS**                       | **46**       |
| **ITEM 12. CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS**                                                                  | **46**       |
| **ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K**                                                                                 | **47**       |
| **ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                                           | **48**       |
| ** **                                                                                                                    | ** **   |
| **SIGNATURES**                                                                                                                | **49**       |

 

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**CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKINGSTATEMENTS**

 

This annual report containshistorical information, as well as forward-looking statements that involveknown and unknown risks and relate to future events, our future financialperformance, or our expected future operations and actions.  In some cases, you can identify forward-lookingstatements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,”“believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” or “continue”or the negative of these terms or other similar expressions.  These forward-looking statements areonly our predictions based upon currentinformation and involve numerous assumptions, risks anduncertainties.  Our actual results oractions may differ materially from these forward-looking statements for manyreasons, including the reasons described in this report.  While it is impossible toidentify all such factors, factors that could cause actual results to differmaterially from those estimated by us include:

 
| • | Overcapacity  within the ethanol industry;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Actual  ethanol and distillers grains production varying from expectations;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Availability  and cost of products and raw materials, particularly corn and natural gas;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Changes  in the price and market for ethanol and distillers grains;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Our  ability to market and our reliance on third parties to market our products;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Changes  in or elimination of governmental laws, tariffs, trade or other controls or  enforcement practices such as:

•                  national, state or local energy policy;

•                  federal ethanol tax incentives;

•                  legislation establishing a renewable fuel  standard or other legislation mandating the use of ethanol or other oxygenate  additives;

•                  state and federal regulation restricting or  banning the use of MTBE; or

•                  environmental laws and regulations that  apply to our plant operations and their enforcement; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Changes  in the weather or general economic conditions impacting the availability and  price of corn and natural gas;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Total  U.S. consumption of gasoline;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Fluctuations  in petroleum prices;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Changes  in plant production capacity or technical difficulties in operating the  plant;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Changes  in our business strategy, capital improvements or development plans;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Results  of our hedging strategies;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Changes  in interest rates or the availability of credit;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Our  ability to generate free cash flow to invest in our business and service our  debt;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Our  liability resulting from litigation;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Our  ability to retain key employees and maintain labor relations;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Changes  and advances in ethanol production technology;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Competition  from alternative fuels and alternative fuel additives; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • | Other  factors described elsewhere in this report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

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Thecautionary statements referred to in this section also should be considered inconnection with any subsequent written or oral forward-looking statements thatmay be issued by us or persons acting on our behalf.  We undertake no duty to update these forward-lookingstatements, even though our situation may change in the future. Furthermore, wecannot guarantee future results, events, levels of activity, performance, orachievements.  We caution you not to putundue reliance on any forward-looking statements, which speak only as of thedate of this report.  You should read this report and the documents thatwe reference in this report and have filed as exhibits, completely and with theunderstanding that our actual future results may be materially different fromwhat we currently expect.  We qualify all of our forward-lookingstatements by these cautionary statements.

 

**AVAILABLE INFORMATION**

 

Informationabout us is also available at our website at**www.uwgp.com – SECInformation, under “Financial Information,” which includes links toreports we have filed with the Securities and Exchange Commission. The contentsof our website are not incorporated by reference in this Annual Report on Form10-KSB.

 

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**PART 1.**

 

**ITEM 1.****     DESCRIPTION OF BUSINESS.**

 

**BusinessDevelopment**

 

UnitedWisconsin Grain Producers, LLC was formed as a Wisconsin limited liabilitycompany on November 2, 2001 for the purpose of constructing and operating a 40million gallon per year ethanol plant near Friesland, Wisconsin.  References to “we,” “us,” “our” and the “Company”refer to United Wisconsin Grain Producers, LLC.  Our revenues are derived from the sale anddistribution of our ethanol and distillers grains throughout the continentalUnited States.

 

In May 2005 wecompleted construction of a 40 million gallon per-year (MGY) corn-based ethanolplant near Friesland, Wisconsin.  Shortlyafter completion of plant construction, we commenced operations and have beenproducing ethanol and distillers grains at the plant since May 2005.

 

We financedthe development and construction of the ethanol plant with a combination ofequity and debt capital.  We raisedequity in a public offering registered with the Securities and ExchangeCommission, in which we sold 27,500 units and received offering cash proceedsof $27,500,000, which supplemented our seed capital equity.  We closed the offering in April 2004.  To complete project financing, we enteredinto debt financing agreements securing a senior credit facility of $33,024,200from AgStar Financial Services, PCA in Rochester, Minnesota.  The construction loan was converted on July15, 2005 into two loans with the first loan a $4,000,000 revolving loan and thesecond a $29,024,200 term loan.

 

Over the past 12 months we have installed the infrastructure necessaryto support plant operations.  Thisincludes electrical substations, rail siding, water pipelines and wells, awater treatment facility and a natural gas pipeline.  We have also obtained the permits required toconstruct and operate the plant.  We haveengaged experienced marketers to market our ethanol and distillers grains tolocal, regional, and national markets. We have hired all of the personnel necessary to operate the plant.  We currently employ 34 full-time employeesand three part-time employees.

 

We expect tofund our operations during the next 12 months using cash flow from continuingoperations and our credit facilities.

 

We are subjectto industry-wide factors that affect our operating and financialperformance.  These factors include, butare not limited to, the available supply and cost of corn from which ourethanol and distillers grains are processed; the cost of natural gas, which weuse in the production process; dependence on our ethanol marketer anddistillers grains marketer to market and distribute our products; the intenselycompetitive nature of the ethanol industry; possible legislation at thefederal, state, and/or local level; changes in federal ethanol tax incentivesand the cost of complying with extensive environmental laws that regulate ourindustry.

 

**Principal Products and Markets**

 

Our ethanol plant is located nearFriesland, Wisconsin in Columbia County, in the south central section ofWisconsin.  We selected the Frieslandsite because of its location to existing grain production, accessibility toroad and rail transportation and its close proximity to major highways thatconnect to major population centers.

 

The principal products we produce at theethanol plant are ethanol and distillers grains.  Ethanol is ethyl alcohol, a fuel componentmade primarily from corn and various other grains, and can be used as: (i) anoctane enhancer in fuels; (ii) an oxygenated fuel additive for the purpose ofreducing ozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-basedgasoline substitute.  Approximately 95%of all ethanol is used in its primary form for blending with unleaded gasolineand other fuel products.  Theimplementation of a national

 

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renewable fuels standard has made ethanol fuels an importantdomestic renewable fuel additive.  Usedas a fuel oxygenate, ethanol provides a means to control carbon monoxideemissions in large metropolitan areas and in states where MTBE is banned.  The principal purchasers of ethanol aregenerally the wholesale gasoline marketer or blender.  The principal markets for our ethanol arepetroleum terminals in the continental United States.

 

A principal co-product of the ethanolproduction process is distillers grains, a high protein, high-energy animalfeed supplement primarily marketed to the dairy and beef industry.  Distillers grains contain by-pass proteinthat is superior to other protein supplements such as cottonseed meal and soybeanmeal.  By-pass proteins are more digestibleto the animal, thus generating greater lactation in milk cows and greaterweight gain in beef cattle.  Dry millethanol processing creates three forms of distiller grains: Distillers WetGrains (“DWS”), Distillers Modified Wet Grains (“DMWS”) and Distillers DriedGrains with Solubles (“DDGS”).  DWS isprocessed corn mash that contains approximately 70% moisture.  DWS has a shelf life of approximately threedays and can be sold only to farms within the immediate vicinity of an ethanolplant.  DMWS is DWS that has been driedto approximately 50% moisture.  DMWS havea slightly longer shelf life of approximately ten days and are often sold tonearby markets.  DDGS is DWS that hasbeen dried to 10% to 12% moisture.  Ithas an almost indefinite shelf life and may be sold and shipped to any marketregardless of its vicinity to an ethanol plant. Of our total distillers grains production, we currently market about 73%as DDGS and 27% as DMWS.

 

*LocalEthanol and Distillers Grains Markets* 

 

As described below in “*Distribution Methods*”,we market and distribute our ethanol through a third party.  Whether or not ethanol produced by our plantis sold in local markets will depend on decisions made by our marketers.  We independently market a portion of ourdried distillers grains to local livestock producers.  The remainder of our distillers grains ismarketed through a third party.

 

*RegionalEthanol Markets*

 

Typically a regional market is one that is outside of the local market,yet within the neighboring states.  Our regional market is within a450-mile radius of our plant and is serviced by rail.  We constructed a railroad spur to our plantso that we may reach regional and national markets with our products. Because ethanol use results in less air pollution than regular gasoline,regional markets typically include large cities that are subject to anti-smogmeasures such as either carbon monoxide or ozone non-attainment areas (e.g.,Minneapolis, Chicago, and St. Louis).

 

*NationalEthanol Markets*

 

According to the RenewableFuels Association, demand for fuel ethanol in the United States continued toincrease in 2005. In its report titled, “Ethanol Industry Outlook 2006,” theRenewable Fuels Association anticipates demand for ethanol to remainstrong.  The passage of the VolumetricEthanol Excise Tax Credit (“VEETC”) is expected to provide the flexibilitynecessary to expand ethanol blending into higher blends of ethanol such as E85,E diesel and fuel cell markets.  Inaddition, the recent implementation of a Renewable Fuels Standard contained inthe Energy Policy Act of 2005, which was signed into law on August 8, 2005 isexpected to favorably impact the ethanol industry by enhancing both theproduction and use of ethanol.

 

The provision of the EnergyPolicy Act of 2005 that is likely to have the greatest impact on the ethanolindustry is the creation of a 7.5 billion gallon Renewable Fuels Standard (the “RFS”).The RFS began at 4 billion gallons in 2006 and will increase to 7.5 billiongallons by 2012. The RFS is a national flexible program that does not requirethat any renewable fuels be used in any particular area or state, allowingrefiners to use renewable fuel blends in those areas where it is mostcost-effective. According to the Renewable Fuels Association, the RFS isexpected to lead to about $6 billion in new investment in ethanol plants acrossthe country. An increase in the number of new plants will bring an increase inthe supply of ethanol. Thus, while the RFS may cause ethanol prices to increasein the short term due to additional demand, future supply could outweigh thedemand for ethanol in the future. This would have a negative impact on ourearnings. Alternatively, since the RFS began at 4 billion gallons in 2006 andnational production is expected to exceed this amount, there could be ashort-term oversupply until the RFS requirements exceed national production.This would have an immediate adverse effect on our earnings.

 

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Ethanol is used as a fuel oxygenateadditive, where it primarily competes with methyl tertiary butyl ether (“MTBE”).  In the past few years, MTBE has been found tocause groundwater contamination and has been banned from use by manystates.  Although the Energy Policy Actof 2005 did not impose a national ban of MTBE, its failure to include liabilityprotection for manufacturers of MTBE could result in refiners and blendersusing ethanol as an oxygenate rather than MTBE to satisfy the reformulatedgasoline oxygenate requirement for areas classified as carbon monoxidenon-attainment areas. These areas are required to establish an oxygenated fuelsprogram for a period of no less than three months each winter. The minimumoxygen requirement for gasoline sold in these areas is 2.7% by weight. This isthe equivalent of 7.7% ethanol by volume in a gasoline blend. This requirementwas unaffected by the Act and a number of states, including California,participate in this program.

 

In addition, demand forethanol may also increase as a result of increased consumption of E85fuel.  E85 fuel is a blend of 70% to 85%ethanol and gasoline.  According to theEnergy Information Administration, E85 consumption is projected to increasefrom a national total of 11 million gallons in 2003 to 47 million gallons in2025.  E85 is used as an aviation fueland as a hydrogen source for fuel cells. According to the National Ethanol Vehicle Coalition, there are currentlyabout 4.5 million flexible fuel vehicles capable of operating on E85 in theU.S. and 400 retail stations supplying it. Automakers have indicated plans to produce an estimated 2 million moreflexible fuel vehicles per year. However, E85 usage may be negatively impacted because of a perception ofsome consumers that fuel efficiency is reduced and engine modification may berequired.

 

**DistributionMethods**

 

We entered into a marketing agreement withRenewable Products Marketing Group, LLC (“RPMG”) in August 2004 for thepurposes of marketing and distributing our ethanol.  Under this agreement, our shipments and netrack price will be pooled with 14 other ethanol plants for which RPMG currentlymarkets.  We pay RPMG a pooling fee forethanol delivered to the pool and RPMG pays us a netback price per gallon that isbased upon the difference between the pooled average delivered ethanol sellingprice and the pooled average distribution expense.  These averages are calculated based upon eachpool participant’s selling price and expense averaged in direct proportion tothe volume of ethanol supplied by each participant to the pool.

 

We entered into a marketing agreement withCommodity Specialist Company (“CSC”) in August 2004 for the purpose ofmarketing and selling the dried distillers grains we produce.  CSC markets our dried distillers grainsshipped via rail and we receive a percentage of the selling price actuallyreceived by CSC in marketing our distillers grains to its customers. We arealso independently marketing a portion of our dried distillers grains to locallivestock producers.

 

In April 2005 we entered into an agreementwith Commodity Specialist Company (“CSC”) for the purpose of marketing ourmodified wet distillers grain products.  Theinitial term of this agreement is one year and it automatically renews forsuccessive one-year periods unless either party gives at least 120 days priorwritten notice.

 

**NewProducts and Services**

 

We have not introduced any new products orservices during this fiscal year.

 

**GovernmentalRegulation and Federal Ethanol Supports**

 

Federal Ethanol Supports

 

Ethanol has important applications,primarily as a high-quality octane enhancer and an oxygenate capable ofreducing air pollution and improving automobile performance.  The ethanol industry is dependent on several economic incentivesto produce ethanol, including federal ethanol supports.  The most recent ethanol supports arecontained in the Energy Policy Act of 2005. See, “**National Ethanol Markets**.”

 

Most notably, the Act creates a7.5 billion gallon Renewable Fuels Standard (RFS).  The RFS requires refiners to use4 billion gallons of renewable fuels in 2006, increasing to7.5 billion gallons by 2012.  OnDecember 28, 2005, the EPA released interim rules governing the implementationof the 2006 RFS requirement.  The EPA’sinterim rule imposes a collective compliance approach, which means therequirement for 2006 fuel use is

 

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determined in theaggregate rather than on a refiner-by-refiner basis.  The EPA adopted this approach for 2006because current uncertainties regarding the RFS might result in unnecessarilyhigh costs of compliance if each party was required to independentlycomply.  Although there is not arequirement for individual parties to demonstrate compliance in 2006, the EPAfound that increases in ethanol production and projections for future demandindicate that the 2006 volume is likely to be met.  However, in the unlikely event that the RFSis not met in 2006, the EPA expects to adjust the volume requirement in 2007 tocover the deficit. There are no other consequences for failure to collectivelymeet the 2006 standard.  The EPA expectsto promulgate more comprehensive regulations by August 8, 2006, but the interimrules and collective compliance approach are expected to apply for the entire2006 calendar year.  In 2007 andsubsequent years, the EPA expects to specifically identify liable parties,determine the applicable RFS, and develop a credit trading program.  Further, the standards for compliance,record-keeping and reporting are expected to be clarified.  An EPA brief explaining its action can beviewed at www.epa.gov/otaq/renwewablefuels/. The interim rule is only expected to apply in 2006.  The Environmental Protection Agency expectsto finalize a credit trading program and other parts of the RFS required by lawbefore the start of 2007.

 

Historically, ethanol sales have also 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 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 nine major urban areasto reduce pollutants, including those that contribute to ground level ozone,better known as smog.  The two majoroxygenates added to reformulated gasoline pursuant to these programs are MTBEand ethanol, however MTBE has caused groundwater contamination and has beenbanned from use by many states.  AlthoughtheEnergy Policy Act of 2005 did not impose a national ban of MTBE, its failure toinclude liability protection for manufacturers of MTBE is expected to result inrefiners and blenders using ethanol as an oxygenate rather than MTBE to satisfythe reformulated gasoline oxygenate requirement.

 

The use of ethanol as an alternative fuelsource has been aided by federal tax policy. On October 22,2004, President Bush signed H.R. 4520, which contained the Volumetric EthanolExcise Tax Credit (“VEETC”) and amended the federal excise tax structureeffective as of January 1, 2005.  Priorto VEETC, ethanol-blended fuel was taxed at a lower rate than regular gasoline(13.2 cents on a 10% blend).  UnderVEETC, the ethanol excise tax exemption has been eliminated, thereby allowingthe full federal excise tax of 18.4 cents per gallon of gasoline to be collectedon all gasoline and allocated to the highway trust fund.  This is expected to add approximately $1.4billion to the highway trust fund revenue annually.  In place of the exemption, the bill creates anew volumetric ethanol excise tax credit of 5.1 cents per gallon of ethanolblended at 10%.  Refiners and gasolineblenders apply for this credit on the same tax form as before only it is acredit from general revenue, not the highway trust fund.  Based on volume, the VEETC is expected toallow much greater refinery flexibility in blending ethanol since it makes thetax credit available on all ethanol blended with all gasoline, diesel and ethyltertiary butyl ether (“ETBE”), including ethanol in E-85 and the E-20 inMinnesota.  The VEETC is scheduled toexpire on December 31, 2010.

 

TheEnergy Policy Act of 2005 expands who qualifies for the small ethanol producertax credit.  Historically, small ethanolproducers were allowed a 10-cents-per-gallon production income tax credit on upto 15 million gallons of production annually. The size of the plant eligible for the tax credit was limited to 30million gallons.  Under the Energy PolicyAct of 2005 the size limitation on the production capacity for small ethanolproducers increases from 30 million to 60 million gallons.  As a result, we expect that we will qualifyunder this definition under our current production capacity of 40 milliongallons of ethanol per year.  The creditcan be taken on the first 15 million gallons of production.  The tax credit is capped at $1.5 million peryear per producer.  The credit iseffective for taxable years ending after the date of enactment.

 

In addition, the Energy Policy Act of 2005 creates a new tax creditthat permits taxpayers to claim a 30% credit (up to $30,000) for the cost ofinstalling clean-fuel vehicle refueling equipment, such as an E85 fuel pump, tobe used in a trade or business of the taxpayer or installed at the principalresidence of the taxpayer. Under the provision, clean fuels are any fuel of atleast 85% of the volume of which consists of ethanol, natural gas, compressednatural gas, liquefied natural gas, liquefied petroleum gas, and hydrogen andany mixture of diesel fuel and biodiesel containing at least 20%biodiesel.  The provision is effectivefor equipment placed in service December 31, 2005 and beforeJanuary 1, 2010. While it is unclear how this credit will affect thedemand for

 

8

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ethanol in theshort term, we expect it will help raise consumer awareness of alternativesources of fuel and could positively impact future demand for ethanol.

 

Additionally,Congress provides an ethanol production incentive to ethanol producers throughthe United States Department of Agriculture Commodity Credit Corporation’sBioenergy Program.  Under the program, incentive payments are allocated toethanol producers based primarily on an increase in gallons of ethanol producedcompared to the prior year’s production.  These payments are based upon increases in ethanol production relative toprevious years.  The receipt of these additional program payments issubject to the continued availability of program funds, which may be reduced asa result of increased participation in the program by new and expanding plantsas well as decreased federal funding.  The Bioenergy Program was scheduledto expire at the end of the federal government’s 2006 fiscal year.  However, the CCC recently announced that itsfunds would be exhausted in the third quarter of the government fiscal year andthat the program would terminate as of June 30, 2006.

 

Effect of Governmental Regulation

 

The ethanol industry and our businessdepend upon continuation of the federal ethanol supports discussed above.  These incentives have supported a market forethanol that might disappear without the incentives.  Alternatively, the incentives may becontinued at lower levels than at which they currently exist.  The elimination or reduction of such federalethanol supports would make it more costly for us to sell our ethanol and wouldlikely reduce our net income and the value of your investment.

 

Thegovernment’s regulation of the environment changes constantly.  Weare subject to extensive air, water and other environmental regulations and wehave been required to obtain a number of environmental permits to construct andoperate the plant.  It ispossible that more stringent federal or state environmental rules orregulations could be adopted, which could increase our operating costs andexpenses.  It also is possible thatfederal or state environmental rules or regulations could be adopted that couldhave an adverse effect on the use of ethanol. For example, changes in the environmental regulations regarding therequired oxygen content of automobile emissions could have an adverse effect onthe ethanol industry.  Furthermore, plantoperations are governed by the Occupational Safety and Health Administration (“OSHA”).  OSHA regulations may change such that thecosts of the operation of the plant may increase.  Any of these regulatory factors may result inhigher costs or other materially adverse conditions effecting our operations,cash flows and financial performance.

 

We have obtained all of the necessarypermits to operate the plant including, air pollution construction permits, apollutant discharge elimination system general permit, storm water dischargepermits, a water withdrawal permit, and an alcohol fuel producer’s permit.  RMT, Inc. has completed the preparation ofour spill prevention control and countermeasures plan. We are currentlyconducting preliminary emissions testing and are working with a qualifiedconsulting engineering firm in preparing for final emissions testing.  In fiscal year 2005, we incurred costs and expensesof approximately $82,000 in complying with environmental laws, including thecost of obtaining permits.  Although wehave been successful in obtaining all of the permits currently required, anyretroactive change in environmental regulations, either at the federal or statelevel, could require us to obtain additional or new permits or spendconsiderable resources on complying with such regulations.

 

**Ethanol Competition**

 

Wewill be in direct competition with numerous other ethanol producers, many ofwhom have greater resources than we do. We also expect that additional ethanolproducers will enter the market if the demand for ethanol continues toincrease.  Ethanol is a commodityproduct, like corn, which means ourethanol plant competes with other ethanol producers on the basis of price and,to a lesser extent, delivery service.  Webelieve we compete favorably with other ethanol producers due to our proximityto ample grain supplies and multiple modes of transportation.

 

Theethanol industry has grown to over 95 production facilities in the UnitedStates. There are also numerousother producer and privately owned ethanol plants planned throughout theMidwest and elsewhere in the United States. The largest ethanol producers include Abengoa BioenergyCorp., Archer Daniels Midland, Aventine Renewable Energy, Inc., Cargill, Inc.,New Energy Corp. and VeraSun Energy Corporation, all of which are each capableof producing more ethanol than we expect to produce.  Archer Daniels Midland recently announced itsplan

 

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to add approximately 500million gallons per year of additional ethanol production capacity in theUnited States.  ADM is currently thelargest ethanol producer in the U.S. and controls a significant portion of theethanol market.  ADM’s plan to produce anadditional 500 million gallons of ethanol per year will strengthen its positionin the ethanol industry and cause a significant increase in domestic ethanolsupply.

 

According to the Renewable FuelsAssociation, excluding our facility, Wisconsin currently has five ethanolplants in various stages of development or operation.  Total annual ethanol production capacity inWisconsin is currently expected to reach 228 million gallons per year.

 

Thefollowing table identifies most of the ethanol producers in the UnitedStates along with their production capacities.

 

**U.S. FUEL ETHANOL PRODUCTION CAPACITY****million gallons per year (MGY)**

 
| **Company**                        | ** ** | **Location**         | ** ** | **Feedstock** | ** ** | **Current  Capacity  (MGY)** | ** ** | **Under  Construction/  Expansions  (MGY)** |   |
|------------------------------------|------------|----------------------|------------|---------------|------------|------------------------------|------------|---------------------------------------------|--------|
| Abengoa  Bioenergy Corp.           |       | York,  NE            |       | Corn/milo     |       | 55                           |       |                                        |   |
|                               |       | Colwich,  KS         |       |          |       | 25                           |       |                                        |   |
|                               |       | Portales, NM         |       |          |       | 30                           |       |                                        |   |
|                               |       | Ravenna, NE          |       |          |       |                         |       | 88                                          |   |
| ACE  Ethanol, LLC                  |       | Stanley,  WI         |       | Corn          |       | 39                           |       |                                        |   |
| Adkins  Energy, LLC*               |       | Lena,  IL            |       | Corn          |       | 40                           |       |                                        |   |
| Advanced  Bioenergy                |       | Fairmont,  NE        |       | Corn          |       |                         |       | 100                                         |   |
| AGP*                               |       | Hastings,  NE        |       | Corn          |       | 52                           |       |                                        |   |
| Agra  Resources Coop. d.b.a. EXOL* |       | Albert  Lea, MN      |       | Corn          |       | 40                           |       | 8                                           |   |
| Agri-Energy,  LLC*                 |       | Luverne,  MN         |       | Corn          |       | 21                           |       |                                        |   |
| Alchem  Ltd. LLLP                  |       | Grafton,  ND         |       | Corn          |       | 10.5                         |       |                                        |   |
| Al-Corn  Clean Fuel*               |       | Claremont,  MN       |       | Corn          |       | 35                           |       |                                        |   |
| Amaizing  Energy, LLC*             |       | Denison,  IA         |       | Corn          |       | 40                           |       |                                        |   |
| Archer  Daniels Midland            |       | Decatur,  IL         |       | Corn          |       | 1,070                        |       |                                        |   |
|                               |       | Cedar  Rapids, IA    |       | Corn          |       |                         |       |                                        |   |
|                               |       | Clinton,  IA         |       | Corn          |       |                         |       |                                        |   |
|                               |       | Columbus,  NE        |       | Corn          |       |                         |       |                                        |   |
|                               |       | Marshall,  MN        |       | Corn          |       |                         |       |                                        |   |
|                               |       | Peoria,  IL          |       | Corn          |       |                         |       |                                        |   |
|                               |       | Wallhalla,  ND       |       | Corn/barley   |       |                         |       |                                        |   |
| ASAlliances  Biofuels, LLC         |       | Albion,  NE          |       | Corn          |       |                         |       | 100                                         |   |
|                               |       | Linden,  IN          |       | Corn          |       |                         |       | 100                                         |   |
| Aventine  Renewable Energy, LLC    |       | Pekin,  IL           |       | Corn          |       | 100                          |       | 57                                          |   |
|                               |       | Aurora,  NE          |       | Corn          |       | 50                           |       |                                        |   |
| Badger  State Ethanol, LLC*        |       | Monroe,  WI          |       | Corn          |       | 48                           |       |                                        |   |
| Big  River Resources, LLC*         |       | West  Burlington, IA |       | Corn          |       | 40                           |       |                                        |   |
| Broin  Enterprises, Inc.           |       | Scotland,  SD        |       | Corn          |       | 9                            |       |                                        |   |

 

10

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| Bushmills  Ethanol, Inc.*             |   | Atwater,  MN       |   | Corn        |   |   |   | 40     |   |
|---------------------------------------|--------|--------------------|--------|-------------|--------|--------|--------|--------|--------|
| Cargill, Inc.                         |   | Blair,  NE         |   | Corn        |   | 85     |   |   |   |
|                                  |   | Eddyville,  IA     |   | Corn        |   | 35     |   |   |   |
| Central Indiana  Ethanol, LLC         |   | Marion,  IN        |   | Corn        |   |   |   | 40     |   |
| Central MN  Ethanol Coop*             |   | Little  Falls, MN  |   | Corn        |   | 21.5   |   |   |   |
| 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        |   | 24     |   | 9      |   |
| Corn, LP*                             |   | Goldfield,  IA     |   | Corn        |   | 50     |   |   |   |
| Cornhusker Energy  Lexington, LLC     |   | Lexington,  NE     |   | Corn        |   |   |   | 40     |   |
| Corn Plus, LLP*                       |   | Winnebago,  MN     |   | Corn        |   | 44     |   |   |   |
| Dakota Ethanol,  LLC*                 |   | Wentworth,  SD     |   | Corn        |   | 50     |   |   |   |
| DENCO, LLC*                           |   | Morris,  MN        |   | Corn        |   | 21.5   |   |   |   |
| E3 Biofuels                           |   | Mead,  NE          |   | Corn        |   |   |   | 24     |   |
| East Kansas  Agri-Energy, LLC*        |   | Garnett,  KS       |   | Corn        |   | 35     |   |   |   |
| ESE Alcohol Inc.                      |   | Leoti,  KS         |   | Seed corn   |   | 1.5    |   |   |   |
| Ethanol2000, LLP*                     |   | Bingham  Lake, MN  |   | Corn        |   | 32     |   |   |   |
| Frontier Ethanol,  LLC                |   | Gowrie,  IA        |   | Corn        |   |   |   | 60     |   |
| Front Range  Energy, LLC              |   | Windsor,  CO       |   | Corn        |   |   |   | 40     |   |
| Glacial Lakes  Energy, LLC*           |   | Watertown,  SD     |   | Corn        |   | 50     |   |   |   |
| Golden Cheese  Company of California* |   | Corona,  CA        |   | Cheese whey |   | 5      |   |   |   |
| Golden Grain  Energy, LLC*            |   | Mason  City, IA    |   | Corn        |   | 40     |   |   |   |
| Golden Triangle  Energy, LLC*         |   | Craig,  MO         |   | Corn        |   | 20     |   |   |   |
| Grain Processing  Corp.               |   | Muscatine,  IA     |   | Corn        |   | 20     |   |   |   |
| Granite Falls  Energy, LLC            |   | Granite  Falls, MN |   | Corn        |   | 45     |   |   |   |
| Great Plains  Ethanol, LLC*           |   | Chancellor,  SD    |   | Corn        |   | 50     |   |   |   |
| Green Plains  Renewable Energy        |   | Shenandoah,  IA    |   | Corn        |   |   |   | 50     |   |
| Hawkeye  Renewables, LLC              |   | Iowa  Falls, IA    |   | Corn        |   | 50     |   | 50     |   |
|                                  |   | Fairbank,  IA      |   | Corn        |   |   |   | 100    |   |
| Heartland Corn  Products*             |   | Winthrop,  MN      |   | Corn        |   | 36     |   |   |   |
| Heartland Grain  Fuels, LP*           |   | Aberdeen,  SD      |   | Corn        |   | 9      |   |   |   |
|                                  |   | Huron,  SD         |   | Corn        |   | 12     |   | 18     |   |
| Heron Lake BioEnergy,  LLC            |   | Heron  Lake, MN    |   | Corn        |   |   |   | 50     |   |
| Horizon Ethanol,  LLC                 |   | Jewell,  IA        |   | Corn        |   | 60     |   |   |   |
| Husker Ag, LLC*                       |   | Plainview,  NE     |   | Corn        |   | 26.5   |   |   |   |
| Illinois River  Energy, LLC           |   | Rochelle,  IL      |   | Corn        |   |   |   | 50     |   |
| Iowa Ethanol,  LLC*                   |   | Hanlontown,  IA    |   | Corn        |   | 50     |   |   |   |
| Iroquois  Bio-Energy Company, LLC     |   | Rensselaer,  IN    |   | Corn        |   |   |   | 40     |   |
| James Valley  Ethanol, LLC            |   | Groton,  SD        |   | Corn        |   | 50     |   |   |   |
| KAAPA Ethanol,  LLC*                  |   | Minden,  NE        |   | Corn        |   | 40     |   |   |   |
| Land O’ Lakes*                   |   | Melrose,  MN       |   | Cheese whey |   | 2.6    |   |   |   |

 

11

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| Lincolnland  Agri-Energy, LLC*          |   | Palestine,  IL      |   | Corn                  |   | 48     |   |   |   |
|-----------------------------------------|--------|---------------------|--------|-----------------------|--------|--------|--------|--------|--------|
| Lincolnway  Energy, LLC*                |   | Nevada,  IA         |   | Corn                  |   |   |   | 50     |   |
| Liquid  Resources of Ohio               |   | Medina,  OH         |   | Waste Beverage        |   | 3      |   |   |   |
| Little  Sioux Corn Processors, LP*      |   | Marcus,  IA         |   | Corn                  |   | 52     |   |   |   |
| Merrick/Coors                           |   | Golden,  CO         |   | Waste beer            |   | 1.5    |   | 1.5    |   |
| MGP  Ingredients, Inc.                  |   | Pekin,  IL          |   | Corn/wheat starch     |   | 78     |   |   |   |
|                                    |   | Atchison,  KS       |   |                  |   |   |   |   |   |
| Michigan  Ethanol, LLC                  |   | Caro,  MI           |   | Corn                  |   | 50     |   |   |   |
| Mid  America Agri Products/Wheatland    |   | Madrid,  NE         |   | Corn                  |   |   |   | 44     |   |
| Mid-Missouri  Energy, Inc.*             |   | Malta  Bend, MO     |   | Corn                  |   | 45     |   |   |   |
| Midwest  Grain Processors*              |   | Lakota,  IA         |   | Corn                  |   | 95     |   |   |   |
|                                    |   | Riga,  MI           |   | Corn                  |   |   |   | 57     |   |
| Midwest  Renewable Energy, LLC          |   | Sutherland,  NE     |   | Corn                  |   | 17.5   |   | 4.5    |   |
| Minnesota  Energy*                      |   | Buffalo  Lake, MN   |   | Corn                  |   | 18     |   |   |   |
| Missouri  Ethanol                       |   | Laddonia,  MO       |   | Corn                  |   |   |   | 45     |   |
| New  Energy Corp.                       |   | South  Bend, IN     |   | Corn                  |   | 102    |   |   |   |
| North  Country Ethanol, LLC*            |   | Rosholt,  SD        |   | Corn                  |   | 20     |   |   |   |
| Northeast  Missouri Grain, LLC*         |   | Macon,  MO          |   | Corn                  |   | 45     |   |   |   |
| Northern  Lights Ethanol, LLC*          |   | Big  Stone City, SD |   | Corn                  |   | 50     |   |   |   |
| Northstar  Ethanol, LLC                 |   | Lake  Crystal, MN   |   | Corn                  |   | 52     |   |   |   |
| Otter  Creek Ethanol, LLC*              |   | Ashton,  IA         |   | Corn                  |   | 55     |   |   |   |
| Pacific  Ethanol                        |   | Madera,  CA         |   | Corn                  |   |   |   | 35     |   |
| Panhandle  Energies of Dumas, LP        |   | Dumas,  TX          |   | Corn/Grain Sorghum    |   |   |   | 30     |   |
| Parallel  Products                      |   | Louisville,  KY     |   | Beverage waste        |   | 5.4    |   |   |   |
|                                    |   | R.  Cucamonga, CA   |   |                  |   |   |   |   |   |
| Permeate  Refining                      |   | Hopkinton,  IA      |   | Sugars & starches |   | 1.5    |   |   |   |
| Phoenix  Biofuels                       |   | Goshen,  CA         |   | Corn                  |   | 25     |   |   |   |
| Pinal  Energy, LLC                      |   | Maricopa,  AZ       |   | Corn                  |   |   |   | 55     |   |
| Pine  Lake Corn Processors, LLC*        |   | Steamboat  Rock, IA |   | Corn                  |   | 20     |   |   |   |
| Platte  Valley Fuel Ethanol, LLC        |   | Central  City, NE   |   | Corn                  |   | 40     |   |   |   |
| Prairie  Ethanol, LLC                   |   | Loomis,  SD         |   | Corn                  |   |   |   | 60     |   |
| Prairie  Horizon Agri-Energy, LLC       |   | Phillipsburg,  KS   |   | Corn                  |   |   |   | 40     |   |
| Pro-Corn,  LLC*                         |   | Preston,  MN        |   | Corn                  |   | 42     |   |   |   |
| Quad-County  Corn Processors*           |   | Galva,  IA          |   | Corn                  |   | 27     |   |   |   |
| Red  Trail Energy, LLC                  |   | Richardton,  ND     |   | Corn                  |   |   |   | 50     |   |
| Redfield Energy, LLC                    |   | Redfield,  SD       |   | Corn                  |   |   |   | 50     |   |
| Reeve  Agri-Energy                      |   | Garden  City, KS    |   | Corn/milo             |   | 12     |   |   |   |
| Siouxland  Energy & Livestock Coop* |   | Sioux  Center, IA   |   | Corn                  |   | 25     |   |   |   |
| Siouxland  Ethanol, LLC                 |   | Jackson,  NE        |   | Corn                  |   |   |   | 50     |   |
| Sioux  River Ethanol, LLC*              |   | Hudson,  SD         |   | Corn                  |   | 55     |   |   |   |
| Sterling  Ethanol, LLC                  |   | Sterling,  CO       |   | Corn                  |   | 42     |   |   |   |
| Tall  Corn Ethanol, LLC*                |   | Coon  Rapids, IA    |   | Corn                  |   | 49     |   |   |   |

 

12

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| Tate & Lyle                             |       | Loudon,  TN      |   | Corn              |   | 67         |   |     |   |
|---------------------------------------------|------------|------------------|--------|-------------------|--------|------------|--------|----------|--------|
| The Andersons  Albion Ethanol LLC           |       | Albion,  MI      |   | Corn              |   |       |   | 55       |   |
| Trenton Agri  Products, LLC                 |       | Trenton,  NE     |   | Corn              |   | 35         |   | 10       |   |
| United WI Grain  Producers, LLC*            |       | Friesland,  WI   |   | Corn              |   | 49         |   |     |   |
| US BioEnergy  Corp.                         |       | Albert  City, IA |   | Corn              |   |       |   | 100      |   |
|                                        |       | Lake  Odessa, MI |   | Corn              |   |       |   | 45       |   |
| U.S. Energy  Partners, LLC                  |       | Russell,  KS     |   | Milo/wheat starch |   | 48         |   |     |   |
| Utica Energy, LLC                           |       | Oshkosh,  WI     |   | Corn              |   | 48         |   |     |   |
| Val-E Ethanol,  LLC                         |       | Ord,  NE         |   | Corn              |   |       |   | 45       |   |
| VeraSun Energy  Corporation                 |       | Aurora,  SD      |   | Corn              |   | 230        |   | 110      |   |
|                                        |       | Ft. Dodge, IA    |   | Corn              |   |       |   |     |   |
|                                        |       | Charles City, IA |   | Corn              |   |       |   |     |   |
| Voyager Ethanol,  LLC*                      |       | Emmetsburg,  IA  |   | Corn              |   | 52         |   |     |   |
| Western Plains  Energy, LLC*                |       | Campus,  KS      |   | Corn              |   | 45         |   |     |   |
| Western WI  Renewable Energy, LLC*          |       | Boyceville,  WI  |   | Corn              |   |       |   | 40       |   |
| Wind Gap Farms                              |       | Baconton,  GA    |   | Brewery waste     |   | 0.4        |   |     |   |
| Wyoming Ethanol                             |       | Torrington,  WY  |   | Corn              |   | 5          |   |     |   |
| Xethanol  BioFuels, LLC                     |       | Blairstown,  IA  |   | Corn              |   | 5          |   |     |   |
| ****Total Current Capacity****              | ** ** |             |   |              |   | **4441.4** |   |     |   |
| ****Total Under Construction/Expansions**** | ** ** |             |   |              |   |       |   | **2041** |   |
| **Total Capacity**                          | ** ** |             |   |              |   | **6482.4** |   |     |   |

 

----

* farmer-owned

 

*Source: Renewable FuelsAssociation, http://www.ethanolrfa.org/industry/locations/, updated: March3, 2006*

 

The supply of domesticallyproduced ethanol is at an all-time high. The Renewable Fuels Associationestimates that ethanol production in 2005 reached a record 4 billion gallons,an increase of 17% since 2004 and 126% since 2001.  The following table shows U.S. ethanolproduction capacity by state as of February 2006:

 

Ethanol Production Capacity Ranked by State(Largest to Smallest Production Capacity as of February 2006)

 

| **Rank** | ** ** | **State**           | ** ** | **Ethanol Production Capacity  (Million Gallons Per Year)** | ** ** |
|----------|------------|---------------------|------------|--------------------------------------------------------------------------------------|------------|
| 1        |       | Iowa                |       | 1,809.5                                                                              |       |
| 2        |       | Nebraska            |       | 1,048.5                                                                              |       |
| 3        |       | Illinois            |       | 881.0                                                                                |       |
| 4        |       | South Dakota        |       | 603.0                                                                                |       |
| 5        |       | Minnesota           |       | 593.6                                                                                |       |
| 6        |       | Indiana             |       | 282.0                                                                                |       |
| 7        |       | Wisconsin           |       | 228.0                                                                                |       |
| 8        |       | Kansas              |       | 212.5                                                                                |       |
| 9        |       | Michigan            |       | 207.0                                                                                |       |
| 10       |       | Missouri            |       | 155.0                                                                                |       |
| 11       |       | Colorado            |       | 85.0                                                                                 |       |
| 12       |       | North Dakota        |       | 83.5                                                                                 |       |
| 13       |       | California          |       | 68.0                                                                                 |       |
| 14       |       | Tennessee           |       | 67.0                                                                                 |       |
| 15       |       | Arizona             |       | 55.0                                                                                 |       |
| 16       |       | Kentucky            |       | 35.4                                                                                 |       |
| 17       |       | New Mexico          |       | 30.0                                                                                 |       |
| 18       |       | Texas               |       | 30.0                                                                                 |       |
| 19       |       | Wyoming             |       | 5.0                                                                                  |       |
| 20       |       | Ohio                |       | 3.0                                                                                  |       |
| 21       |       | Georgia             |       | 0.4                                                                                  |       |
|     |       | United States Total |       | 6,482.4                                                                              |       |

----

Source:  Renewable Fuels Association, Wash., D.C.;Nebraska Energy Office, Lincoln NE.Updated February 21, 2006.

 

13

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Ethanolproduction is also expanding internationally. Ethanol produced or processed in certain countries in Central Americanand the Caribbean region is eligible for tariff reduction or elimination uponimportation to the United States under a program known as the Caribbean BasinInitiative.  Large ethanol producers,such as Cargill, have expressed interest in building dehydration plants inparticipating Caribbean Basin countries, such as El Salvador, which wouldconvert ethanol into fuel-grade ethanol for shipment to the United States.  Ethanol imported from Caribbean Basincountries may be a less expensive alternative to domestically produced ethanoland may affect our ability to sell our ethanol profitably.

 

Brazilis one of the world’s largest producers and exporters of ethanol. In Brazil, ethanolis produced primarily from sugarcane, which is also used to produce food-gradesugar. Brazil experienced a dramatic increase in ethanol production and tradein 2004, exporting approximately 112 million gallons to the U.S. alone. Reportsin January 2006 estimated that Brazil produced approximately 4.5 billiongallons of ethanol in 2005 and exported a total of 554 million gallons ofethanol worldwide.  According to theRenewable Fuels Association, the United States imported approximately 19.8million gallons of ethanol from Brazil in 2005, down from approximately 90.3million gallons in 2004.  Ethanolimported from Brazil may be a less expensive alternative to domesticallyproduced ethanol, which is primarily made from corn. Competition from ethanolimported from Brazil may affect our ability to sell our ethanol profitably.

 

Our ethanol plant also competes withproducers of other gasoline additives having similar octane and oxygenatevalues as ethanol, such as producers of MTBE, a petrochemical derived frommethanol that costs less to produce than ethanol.  Although currently banned by several states,many major oil companies can produce MTBE and because it is petroleum-based,its use is strongly supported by major oil companies.  Alternative fuels, gasoline oxygenates andalternative ethanol production methods are also continually underdevelopment.  The major oil companieshave significantly greater resources than we have to market MTBE and otheradditives, to develop alternative products, and to influence legislation andpublic perception of MTBE and ethanol. These companies also have sufficient resources to begin production ofethanol should they choose to do so.  Newethanol products or methods of ethanol production developed by larger andbetter-financed competitors could provide them competitive advantages and harmour business.

 

A number of automotive, industrial and powergeneration manufacturers are developing alternative clean power systems usingfuel cells or clean burning gaseous fuels. Like ethanol, the emerging fuel cell industry offers a technologicaloption to address increasing worldwide energy costs, the long-term availabilityof petroleum reserves and environmental concerns.  Fuel cells have emerged as a potentialalternative to certain existing power sources because of their higherefficiency, reduced noise and lower emissions. Fuel cell industry participantsare currently targeting the transportation, stationary power and portable powermarkets in order to decrease fuel costs, lessen dependence on crude oil andreduce harmful emissions.  If the fuelcell and hydrogen industries continue to expand and gain broad acceptance andhydrogen becomes readily available to consumers for motor vehicle use, we maynot

 

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be able to compete effectively. This additional competition could reduce the demand for ethanol, whichwould negatively impact our profitability.

 

**Distillers Grains Competition**

 

Our plant primarily competes with otherethanol producers in the production and sales of distillers grains.  According to the University of Minnesota’sDDGS – General Information website (November 28, 2005) approximately 3,200,000to 3,500,000 tons of distillers grains are produced annually in North America,approximately 98% of which are produced by ethanol plants.  The remaining 1 to 2% of DDGS is produced bythe alcohol beverage industry.  Ethanolplants in South Dakota and Minnesota produce about 25% of this amount.  The amount of distillers grains produced isexpected to increase significantly as the number of ethanol plantsincrease.  In addition, our distillersgrains compete with other livestock feed products such as soybean meal, corngluten feed, dry brewers grain and mill feeds.

 

**Sourcesof Raw Materials - Corn Feedstock Supply**

 

Our plant is designed touse approximately 15 million bushels of grain per year or 42,000 bushels perday as the feedstock for its dry milling process.  Since we are a licensedWisconsin grain dealer, we intend to buy as much grain as possible from localproducers and from local elevators.  Ourcommodities manager is responsible for consistent scheduling of corn deliveriesand establishing forward contracts through local grain elevators.  Thecommodities manager coordinates corn deliveries between local producers andelevators.** **We may purchase additional grainfrom outside of our trade area as need and price dictates.

 

Although thearea surrounding the plant produces a significant amount of corn and we do notanticipate problems sourcing grain, there is no assurance that a shortage willnot develop, particularly if there were an extended drought or other productionproblem.  Grain prices are primarily dependent on world feedstuffs supplyand demand and on U.S. and global corn crop production, which can be volatileas a result of a number of factors, the most important of which are weather,current and anticipated stocks and prices, export prices and supports and thegovernment’s current and anticipated agricultural policy.  See “MANAGEMENT’S DISCUSSION AND ANALYSIS –Results of Operations – Cost of Sales.

 

**Utilities**

 

The plant requires a significant anduninterrupted supply of electricity, natural gas and water to operate.  We have entered into agreements withproviders of these utilities as follows:

 

*NaturalGas*

 

To access sufficient supplies of naturalgas to operate the plant, a connection to a distribution pipeline wasconstructed by Alliant Energy to connect our facility to an existing AlliantEnergy pipeline located approximately one and one-half mile from our plantlocation.  The Alliant Energy pipelineconnects 3.5 miles away to an interstate pipeline owned by ANR PipelineCompany.  We pay a surcharge on the gasvolume moved through the new pipeline. We have entered into a 10 year capacity agreement with ANR PipelineCompany which grants us the right to move a guaranteed volume of gas throughthe pipeline.  The additional capacity istransferable and may allow us to negotiate better pricing on our natural gas.

 

We have a natural gas purchase agreementwith WPS Energy Services, Inc. of Green Bay, Wisconsin to provide natural gasand balancing services.  We engagedEnergy Solutions Inc. of Madison Wisconsin to provide natural gas managementservices.  Since operations were commencedin 2005, there have been no interruptions in the supply of natural gas from WPSEnergy Services, Inc. and all of our natural gas requirements have beenmet.  See also “MANAGEMENT’SDISCUSSION AND ANALYSIS” for amore detailed discussion of our natural gas supply.

 

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*Electricity*

 

Electricity is necessary for lighting andpowering much of the machinery and equipment used in the productionprocess.  In October 2003, we enteredinto an agreement with Adams-Columbia Electric Cooperative for the provision ofall electrical energy required by the plant. At each anniversary date of thefirst date service was provided, the agreement is automatically extended foranother three year period unless either party gives written notice of intentnot to extend. We purchase electricity at the Cooperative’s power supply ratesthen in effect, which are applied to our metered usage.  In addition, we pay a monthly charge of $700plus a monthly facility surcharge of $2,138 for the substation distributionequipment costs.  The Cooperativeinstalled and operates a substation at our plant site to facilitate electricaldistribution to our plant.  We have hadno interruption or shortages in the supply of electricity to the plant sinceoperations were commenced in 2005.

 

*Water*

 

Water is a necessary part of theproduction process.  It is used in thefermentation process and to produce steam for the cooking, evaporation, anddistillation processes.  Our water needsare met through two 500 gallon per minute wells located at our plant.  Since our operations commenced in 2005 wehave had no interruptions or shortages in the supply of water.

 

**Dependenceon One or a Few Major Customers**

 

As discussed above, we have marketingagreements with RPMG and CSC for the purposes of marketing and distributing ourprincipal products, which consist of ethanol and distillers grains.  We rely on RPMG for the sale and distributionof all of our ethanol and on CSC for the sale and distribution of distillersgrain that we do not sell locally. Therefore, we are highly dependent on RPMG and CSC for the successfulmarketing of our products.  See “**Distribution Methods**.”

 

**Researchand Development**

 

We do not conduct any research anddevelopment activities associated with the development of new technologies foruse in producing ethanol and distillers grains.

 

**Employees**

 

We currently have 34 full-time employees andthree part-time employees and do not expect a significant change in this numberover the next twelve months.  Eleven ofour employees are involved primarily in management and administration.  The remainder are involved primarily in plantoperations.

 

**ITEM1A.  RISK FACTORS.**

 

*You should carefully read and consider the risks anduncertainties below and the other information contained in this report. The risks and uncertainties described below are not the only ones we mayface.  The following risks, together with additional risks anduncertainties not currently known to us or that we currently deem immaterialcould impair our financial condition and results of operation.*

 

**Risks Relating to Our Business**

 

***We have a limited operating history and our business may notbe as successful as we anticipate. ***We began ourbusiness in 2001 and commenced production of ethanol at our plant in May2005.  Accordingly, we have a limited operating history from which you canevaluate our business and prospects.  Our operating results couldfluctuate significantly in the future as a result of a variety of factors,including those discussed through out these risk factors.  Many of thesefactors are outside our control.  As a result of these factors, ouroperating results may not be indicative of future operating results and youshould not rely on them as indications of our future performance.  Inaddition, our prospects must be considered in light of the risks anduncertainties encountered by an early-stage company and in rapidly growingindustries, such as the ethanol industry, where supply and demand may changesubstantially in a short amount of time.

 

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***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 and manufacture ethanol and distillersgrains.  If economic or political factors adversely affect the market forethanol, the Company has no other line of business to fall back on if theethanol business declines. Our business would also be significantly harmed ifits ethanol plant could not operate at full capacity for any extended period oftime.

 

***Increases in the price of corn or natural gas would reduceour profitability.**** *Our results ofoperations and financial condition are significantly affected by the cost andsupply of corn and natural gas. Changes in the price and supply of corn andnatural gas are subject to and determined by market forces over which we haveno control

 

Ethanolproduction requires substantial amounts of corn. Corn, as with most othercrops, is affected by weather, disease and other environmentalconditions.  The price of corn is also influenced by general economic,market and government factors.  These factors include weather conditions,farmer planting decisions, domestic and foreign government farm programs andpolicies, global demand and supply and quality.  Changes in the price ofcorn can significantly affect our business. Generally, higher corn prices willproduce lower profit margins and, therefore, represent unfavorable marketconditions.  This is especially true if market conditions do not allow usto pass along increased corn costs to our customers.  The price of cornhas fluctuated significantly in the past and may fluctuate significantly in thefuture.  If a period of high corn prices were to be sustained forsome time, such pricing may reduce our ability to generate revenues because ofthe higher cost of operating and may make ethanol uneconomical toproduce.  We may not be able to offset any increase in the price of cornby increasing the price of our products.  If we cannot offset increases inthe price of corn, our financial performance may be materially and adverselyaffected.

 

Naturalgas has recently been available only at prices exceeding historicalaverages.  These prices are increasing our costs of production.  Theprices for and availability of natural gas are subject to volatile marketconditions.  These market conditions often are affected by factors beyondour control such as higher prices as a result of colder than average weatherconditions, overall economic conditions and foreign and domestic governmentalregulations and relations.  Significant disruptions in the supply ofnatural gas could impair our ability to manufacture ethanol for ourcustomers.  Furthermore, increases in natural gas prices or changes in ournatural gas costs relative to natural gas costs paid by competitors mayadversely affect our results of operations and financial condition.  We seek to minimize the risks fromfluctuations in the prices of corn and natural gas through the use of hedginginstruments.  However, these hedging transactions also involve risks toour business.  See “**RisksRelating to Our Business - *We engage inhedging transactions which involve risks that could harm our business***.”

 

***The spread between ethanol and corn prices can varysignificantly and we do not expect the spread to remain at recent highlevels. ***Corn costs significantly impact our cost of goodssold.  Our gross margins are principally dependent upon the spread betweenethanol and corn prices.  Recently, the spread between ethanol and cornprices has been at historically high level, due in large part to high oilprices and low corn prices.  However, this spread has fluctuatedsignificantly in 2005 and may fluctuate significantly in the future.  Anyreduction in the spread between ethanol and corn prices, whether as a result ofan increase in corn prices or a reduction in ethanol prices, would adverselyaffect our results of operations and financial condition.

 

***Declines in the price of ethanol or distillers grain wouldsignificantly reduce our revenues.*** The sales prices of ethanol and distillersgrains can be volatile as a result of a number of factors such as overallsupply and demand, the price of gasoline, level of government support, and theavailability and price of competing products. For instance, the price ofethanol tends to increase as the price of gasoline increases, and the price ofethanol tends to decrease as the price of gasoline decreases. Any lowering ofgasoline prices will likely also lead to lower prices for ethanol, which maydecrease our ethanol sales and reduce revenues.

 

Theprice of ethanol has recently been much higher than its 10-year average. We donot expect these prices to be sustainable as supply from new and existingethanol plants increases to meet increased demand. Increased production ofethanol may lead to lower prices. The increased production of ethanol couldhave other adverse effects. For example, the increased production could lead toincreased supplies of co-products from the production of ethanol, such asdistillers grains. Those increased supplies could outpace demand, which wouldlead to lower

 

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prices for thoseco-products. Also, the increased production of ethanol could result inincreased demand for corn. This could result in higher prices for corn and cornproduction creating lower profits. There can be no assurance as to the price ofethanol or distillers grains in the future. Any downward changes in the priceof ethanol and/or distillers grains may result in less revenues which woulddecrease our income and profitability.

 

***We sell all of the ethanol we produce to RPMG under our ethanolmarketing agreement.**** *RPMG is the solebuyer of all of our ethanol, and we rely heavily on its marketing efforts tosuccessfully sell our product.  BecauseRPMG sells ethanol for a number of other producers, we have limited controlover its sales efforts.  Our financialperformance is dependent upon the financial health of RPMG, as a significantportion of our accounts receivable are attributable to RPMG.  If RPMG breaches the ethanol marketingagreement or is not in the financial position to purchase and market all of theethanol we produce, we could experience a material loss and we may not have anyreadily available means to sell our ethanol, and our financial performance willbe adversely and materially affected.  Ifour agreement with RPMG terminates, we may seek other arrangements to sell ourethanol, including selling our own product, however, our sales efforts may notachieve results comparable to those achieved by RPMG.

 

***We sell a substantial portion of the distillers grains we produce toCSC under our distillers grains marketing agreements.**** *CSC is the sole buyer of all of ourdistillers grains that we do not independently sell locally, and we relyheavily on its marketing efforts to successfully sell our product.  Because CSC sells distillers grains for anumber of other producers, we have limited control over its sales efforts.  Our financial performance is dependent uponthe financial health of CSC, as a significant portion of our accounts receivableare attributable to CSC.  If CSC breachesthe distillers grains marketing agreements or is not in the financial positionto purchase and market all of the distillers grains we produce, we couldexperience a material loss and we may not have any readily available means tosell our distillers grains, and our financial performance will be adversely andmaterially affected.  If our agreementswith CSC terminate, we may seek other arrangements to sell our distillersgrains, including selling our own product, but we give no assurance that our salesefforts would achieve results comparable to those achieved by CSC.

 

***We engage in hedging transactions which involve risks thatcould harm our business.***  We are exposed to market risk fromchanges in commodity prices.  Exposure to commodity price risk resultsfrom our dependence on corn and natural gas in the ethanol productionprocess.  We seek to minimize the risks from fluctuations in the prices ofcorn, natural gas and ethanol through the use of hedging instruments.  Theeffectiveness of our hedging strategies is dependent upon the cost of corn,natural gas and ethanol and our ability to sell sufficient products to use allof the corn and natural gas for which we have futures contracts.  There isno assurance that our hedging activities will successfully reduce the riskcaused by price fluctuation which may leave us vulnerable to high corn andnatural gas prices. Alternatively, we may choose not to engage in hedgingtransactions in the future.  As a result, our results of operations andfinancial conditions may also be adversely affected during periods in whichcorn and/or natural gas prices increase.

 

Hedgingactivities themselves can result in costs because price movements in corn,natural gas and ethanol contracts are highly volatile and are influenced bymany factors that are beyond our control.  There are several variablesthat could affect the extent to which our derivative instruments are impactedby price fluctuations in the cost of corn or natural gas.  However, it islikely that commodity cash prices will have the greatest impact on thederivatives instruments with delivery dates nearest the current cashprice.  We may incur such costs and they may be significant.

 

***Changes and advances in ethanol production technology couldrequire us to incur******costs to update our plant or could otherwisehinder our ability to**compete inthe ethanol industry or operate profitably.***  Advances andchanges in the technology of ethanol production are expected to occur. Such advances and changes may make the ethanol production technology installedin our plant less desirable or obsolete.  These advances could also allowour competitors to produce ethanol at a lower cost than we are able.  Ifwe are unable to adopt or incorporate technological advances, our ethanol productionmethods and processes could be less efficient than our competitors, which couldcause our plant to become uncompetitive or completely obsolete.  If ourcompetitors develop, obtain or license technology that is superior to ours orthat makes our technology obsolete, we may be required to incur significantcosts to enhance or acquire new technology so that our ethanol productionremains competitive.  Alternatively, we may be required to seekthird-party licenses, which could also result in significant expenditures. We cannot guarantee or assure you that third-party licenses will be availableor, once obtained, will continue to be

 

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available oncommercially reasonable terms, if at all.  These costs could negativelyimpact our financial performance by increasing our operating costs and reducingour net income.

 

**RisksRelated to Ethanol Industry**

 

***New plants or decreases in the demand for ethanol mayresult in excess production capacity.***  The supplyof domestically produced ethanol is at an all-time high.  The Renewable Fuels Association estimatesthat ethanol production in 2005, reached a record 4 billion gallons, anincrease of 17% since 2004 and 126% since 2001. The ethanol industry has grown to over 95 production facilities in theUnited States.  Excluding our facility,Wisconsin currently has five ethanol plants in various stages of development oroperation.  Excess capacity in the ethanol industry would have an adverseimpact on our results of operations, cash flows and general financialcondition.  Excess capacity may also result or intensify from increases inproduction capacity coupled with insufficient demand.  If the demand forethanol does not grow at the same pace as increases in supply, we would expectthe price for ethanol to decline.  If excess capacity in the ethanolindustry occurs, the market price of ethanol may decline to a level that isinadequate to generate sufficient cash flow to cover our costs.

 

***We operate in an intensely competitive industry and competewith larger, better financed entities which could impact our ability to operateprofitably.***  There is significant competition amongethanol producers.  There are numerousproducer-owned and privately-owned ethanol plants planned and operatingthroughout the Midwest and elsewhere in the United States.  The number ofethanol plants being developed and constructed in the United States continuesto increase at a rapid pace. The recent passage of the Energy Policy Act of2005 included a renewable fuels mandate that we expect will further increasethe number of domestic ethanol production facilities.  The largest ethanolproducers include Abengoa Bioenergy Corp., Archer Daniels Midland, AventineRenewable Energy, Inc., Cargill, Inc., New Energy Corp. and VeraSunEnergy Corporation, all of which are each capable of producing more ethanolthan we expect to produce.  If the demand for ethanol does not grow at thesame pace as increases in supply, we expect that lower prices for ethanol willresult which may adversely affect our ability to generate profits and ourfinancial condition.

 

***We compete with other gasoline additives.***  The ethanol industry also competes withproducers of other gasoline additives made from raw materials other than cornhaving similar octane and oxygenate values as ethanol, such as producers ofmethyl tertiary butyl ether MTBE. MTBE is a petrochemical derived from methanolwhich generally costs less to produce than ethanol. Many major oil companiesproduce MTBE and strongly favor its use because it is petroleum-based.Alternative fuels, gasoline oxygenates and alternative ethanol productionmethods are also continually under development. The major oil companies havesignificantly greater resources than we have to market MTBE, to developalternative products, and to influence legislation and public perception ofMTBE and ethanol. These companies also have significant resources to beginproduction of ethanol should they choose to do so.

 

***Competition from the advancement of alternative fuels maylessen the demand for******ethanol.***  Alternativefuels, gasoline oxygenates and ethanol production methods are continually underdevelopment. A number of automotive, industrial and power generationmanufacturers are developing alternative clean power systems using fuel cellsor clean burning gaseous fuels. Like ethanol, the emerging fuel cell industryoffers a technological option to address increasing worldwide energy costs, thelong-term availability of petroleum reserves and environmental concerns. Fuelcells have emerged as a potential alternative to certain existing power sourcesbecause of their higher efficiency, reduced noise and lower emissions. Fuelcell industry participants are currently targeting the transportation,stationary power and portable power markets in order to decrease fuel costs,lessen dependence on crude oil and reduce harmful emissions. If the fuel celland hydrogen industries continue to expand and gain broad acceptance, andhydrogen becomes readily available to consumers for motor vehicle use, we maynot be able to compete effectively. This additional competition could reducethe demand for ethanol, resulting in lower ethanol prices that might adverselyaffect our results of operations and financial condition.

 

***Corn-based ethanol may compete with cellulose-based ethanolin the future,******which could make it more difficult for us toproduce ethanol on a**cost-effectivebasis****.*  Most ethanolis currently produced from corn and other raw grains, such as milo orsorghum.  This is especially true for theMidwest. The current trend in ethanol production research is to develop anefficient method of producing ethanol from cellulose-based biomass, such asagricultural waste, forest residue, municipal solid waste, and energy crops. Thistrend is driven by the fact that cellulose-based biomass is generally cheaperthan corn, and producing ethanol from cellulose-based biomass would

 

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createopportunities to produce ethanol in areas which are unable to grow corn.Although current technology is not sufficiently efficient to be competitive, arecent report by the U.S. Department of Energy entitled “Outlook for BiomassEthanol Production and Demand” indicates that new conversion technologies maybe developed in the future. If an efficient method of producing ethanol fromcellulose-based biomass is developed, we may not be able to competeeffectively. We do not believe it will be cost-effective to convert the ethanolplant we are operating into a plant which will use cellulose-based biomass toproduce ethanol. If we are unable to produce ethanol as cost-effectively ascellulose-based producers, our ability to generate revenue and financialcondition will be negatively impacted.

 

**C*ompetition from ethanol imported from Caribbean basincountries may be a less**expensivealternative to our ethanol.***  Ethanol produced or processed incertain countries in Central America and the Caribbean region is eligible fortariff reduction or elimination upon importation to the United States under aprogram known as the Caribbean Basin Initiative. Large ethanol producers, suchas Cargill, have expressed interest in building dehydration plants inparticipating Caribbean Basin countries, such as El Salvador, which wouldconvert ethanol into fuel-grade ethanol for shipment to the United States.Ethanol imported from Caribbean Basin countries may be a less expensivealternative to domestically produced ethanol. Competition from ethanol importedfrom Caribbean Basin countries may affect our ability to sell our ethanolprofitably, adversely affecting our results of operations and financialcondition.

 

***Competition from ethanol imported from Brazil may be a lessexpensive******alternative to our ethanol.***  Brazil iscurrently the world’s largest producer and exporter of ethanol. In Brazil,ethanol is produced primarily from sugarcane, which is also used to producefood-grade sugar. Brazil experienced a dramatic increase in ethanol productionand trade in 2004, exporting approximately 112 million gallons to the U.S.alone.  Reports in January 2006 estimatedthat Brazil produced, approximately 4.5 billion gallons of ethanol in 2005 andexported a total of 554 million gallons of ethanol worldwide. Ethanol importedfrom Brazil may be a less expensive alternative to domestically producedethanol, which is primarily made from corn. Tariffs presently protecting U.S.ethanol producers may be reduced or eliminated. Competition from ethanolimported from Brazil may affect our ability to sell our ethanol profitably andour financial condition.

 

***Consumer resistance to the use of ethanol based on thebelief that ethanol is******expensive, adds to air pollution,harms engines and/or takes more energy to**produce that it contributes may affect the demand for ethanol.***  Certainindividuals believe that use of ethanol will have a negative impact on gasolineprices at the pump. Many also believe that ethanol adds to air pollution andharms car and truck engines. Still other consumers believe that the process ofproducing ethanol actually uses more fossil energy, such as oil and naturalgas, than the amount of ethanol that is produced. These consumer beliefs couldpotentially be wide-spread. If consumers choose not to buy ethanol, it wouldaffect the demand for the ethanol we produce which could lower demand for ourproduct and negatively affect our profitability and financial condition.

 

**Risks Related to Regulation andGovernmental Action**

 

***A change in government policies favorable to ethanol maycause demand for******ethanol to decline.***  Growth anddemand for ethanol may be driven primarily by federal and state governmentpolicies, such as state laws banning MTBE and the national renewable fuelsstandard. The continuation of these policies is uncertain, which means that demandfor ethanol may decline if these policies change or are discontinued. A declinein the demand for ethanol is likely to cause lower ethanol prices which in turnwill negatively affect our results of operations, financial condition and cashflows.

 

***Government incentives for ethanol production, includingfederal tax incentives, may be eliminated in the future,******whichcould hinder our ability to operate at a profit.* **The ethanolindustry and our business are assisted by various federal ethanol tax incentives,including those included in the Energy Policy Act of 2005.  See, “**NationalEthanol Markets.” **Theprovision of the Energy Policy Act of 2005 likely to have the greatest impacton the ethanol industry is the creation of a 7.5 billion gallon Renewable FuelsStandard (RFA).  The RFS will begin at 4billion gallons in 2006, increasing to 7.5 billion gallons by 2012.  The RFS helps support a market for ethanolthat might disappear without this incentive. The elimination or reduction of tax incentives to the ethanol industrycould reduce the market for ethanol.  Ifthe federal tax incentives are eliminated or sharply curtailed, we believe thata decreased demand for ethanol will result, which could negatively affect ourprofitability and financial condition.

 

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Anotherimportant provision involves an expansion in the definition of who qualifies asa small ethanol producer. Historically, small ethanol producers were allowed a10-cents-per-gallon production income tax credit on up to 15 million gallons ofproduction annually. The size of the plant eligible for the tax credit waslimited to 30 million gallons.  Under theEnergy Policy Act of 2005 the size limitation on the production capacity forsmall ethanol producers increases from 30 million to 60 million gallons.  This tax credit may foster additional growthin ethanol plants of a larger size and increase competition in this particularplant size category.  See, “**Federal Ethanol Supports**.”

 

***Changes in environmental regulations or violations of theregulations could be******expensive and reduce our profitability.***  We aresubject to extensive air, water and other environmental laws andregulations.  In addition some of these laws require our plant to operateunder a number of environmental permits. These laws, regulations and permitscan often require expensive pollution control equipment or operation changes tolimit actual or potential impacts to the environment.  A violation ofthese laws and regulations or permit conditions can result in substantialfines, damages, criminal sanctions, permit revocations and/or plantshutdowns.  We may not have been, or may not be at all times in completecompliance with these laws, regulations or permits or have had or have all permitsrequired to operate our business.  We may be subject to legal actionsbrought by environmental advocacy groups and other parties for actual oralleged violations of environmental laws or our permits.  Additionally,any changes in environmental laws and regulations, both at the federal andstate level, could require us to invest or spend considerable resources inorder to comply with future environmental regulations. The expense ofcompliance could be significant enough to reduce our profitability and negativelyaffect our financial condition.

 

**ITEM2.  DESCRIPTION OF PROPERTY.**

 

The ethanol plant is located on anapproximately 115 acre site located on state highway 33 and two miles east ofstate highway 73.  The plant’s address is W1231 Tessmann Drive, Friesland, Wisconsin 53935.  The plant is designed togrind approximately 15 million bushels of corn per year to produceapproximately 40 million gallons of ethanol. Construction of the plant was completed in April 2005.  The ethanol plant consists of the followingbuildings:

 

•                  A dry bulk products shipping and receiving facility with mainelevators and conveyors of 15,000 bushel per hour capacity, one truck and onecombination truck and rail handling lane. As well as grain storage for 400,000 bushels and cleaning, grinding, anddust control equipment.

 

•                  An ethanol production system which is comprised of a mixingsystem, cooker, liquefaction vessels, three 750,000 gallon fermentors, a900,000 gallon beer well vessel, distillation system, and alcohol driers.  This equipment is arranged in and around theprocess and production building, which also houses the electrical and processcontrol center, control room, maintenance facilities, staff facilities, andoperations management offices.

 

•                  The ethanol storage area which consists of two 950,000 gallonstorage tanks with floating lids, two shift tanks with a combined capacity of200,000 gallons and an unleaded gasoline storage tank with a capacity of100,000 gallons.  These vessels arecontained within a spill containment area to contain any spills of the contentsof the tanks which might occur.  Thereare catch basins at the rail and truck loading stations which drain into thiscontainment area as well.

 

•                  An energy building houses the natural gas burning equipmentconsisting of the thermal oxidizer and waste heat steam boiler, and thedistiller grains dryers.

 

•                  The waste mash processing system consists of four centrifuges, amultistage evaporation system and various stainless steel vessels.

 

•                  The fire protection system consists of a 470,000 gallon waterstorage tank, two 500 gallon per minute on site water wells, a 2,500 gallon perminute diesel fire pump and underground fire water distribution piping networksupplying a series of hydrants, sprinklers and a deluge system.

 

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•                  A cooling tower installation with four 75 HP cooling fans andthree 200 HP water pumps.

 

•                  Transportation facilities include 8,000 feet of rail and witches,4,000 of road, a 90X12 foot truck scale, and truck and rail ethanol load outstations.

 

•                  A 4,200 square foot administration and sales office building,furniture and equipment, parking lot and landscaping.

 

On February 25, 2004, we executed amortgage in favor of AgStar Financial Services, PCA, creating a first lien onour real estate and ethanol plant and a security interest in all personalproperty located on our property.  Themortgage and security interest secure the construction loan of $33,024,200which was executed simultaneous to the mortgage.  On July 15, 2005, we converted theconstruction loan into two loans with the first loan a $4,000,000 revolvingloan and the second a $29,024,200 term loan.

 

**ITEM 3. LEGAL PROCEEDINGS.**

 

None.

 

**ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS.**

 

None.

 

**PART II**

 

**ITEM 5.  MARKET FOR MEMBERSHIPUNITS AND RELATED MEMBER MATTERS.**

 

Thereis no public trading market for our membership units.  We havecreated a private qualified online matching service in order to facilitatetrading of our units.  Our onlinematching service consists of an electronic bulletin board that providesinformation to prospective sellers and buyers of our units.  We do not receive any compensation forcreating or maintaining the matching service. We do not become involved in any purchase or sale negotiations arisingfrom our qualified matching service.  Inadvertising our qualified matching service, we do not characterize the Companyas being a broker or dealer or an exchange. We do not give advice regarding the merits or shortcomings of anyparticular transaction.  We do notreceive, transfer or hold funds or securities as an incident of operating theonline matching service.  We do not usethe bulletin board to offer to buy or sell securities other than in compliancewith the securities laws, including any applicable registrationrequirements.  We have no role ineffecting the transactions beyond approval, as required under our operatingagreement and the issuance of new certificates. So long as we remain a publicly reporting company, information about theCompany will be publicly available through the SEC’s filing system.  However, if at any time we cease to be apublicly reporting company, we will continue to make information about theCompany publicly available on our website.

 

As of December 31, 2005, there areapproximately 28,780 holders of record of our membership units.  There is no other class of membership unitsissued or outstanding.

 

Asof December 31, 2005, we had not declared or paid any distributions on ourunits.  On February 8, 2006 our Board ofDirectors declared a cash distribution of $200 per unit to the holders ofmembership units of record at the close of business on February 10, 2006. The distribution was paid in March 2006. Revenues generated from plant operations are distributed by theCompany to our unit holders in proportion to the number of units held by eachunit holder.  A unit holder’sdistribution is determined by dividing the number of units owned by such unitholder by the total number of units outstanding.  Our board of directors has completediscretion over the timing and amount of distributions to our unit holders,however, our operating agreement requires the board of directors to endeavor tomake cash distributions at such times and in such amounts as will permit ourunit holders to satisfy their income tax liability in a timely fashion.  Our expectations with respect to our abilityto make future distributions are discussed in greater detail in “MANAGEMENT’SDISCUSSION AND ANALYSIS**.**”  Inaddition, distributions are restricted by certain loan covenants in ourconstruction loan and revolving credit financing agreements.  These loan covenants

 

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andrestrictions are described in greater detail under “MANAGEMENT’S DISCUSSION ANDANALYSIS – Liquidity and Capital Resources.”

 

**ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS.**

 

We preparedthe following discussion and analysis to help you better understand ourfinancial condition, changes in our financial condition, and results ofoperations for the fiscal year ended December 31, 2005.  Since we only became operational in May 2005,we do not have comparable income, production and sales data for the twelve monthsended December 31, 2004.  Accordingly wedo not provide a comparison of our financial results between reporting periodsin this report.  If you undertake yourown comparison of fiscal year ending December 31, 2004 and the fiscal yearDecember 31, 2005, it is important that you keep that in mind.

 

This reportcontains forward-looking statements that involve future events, our futureperformance and our expected future operations and actions.  In some cases you can identifyforward-looking statements by the use of words such as “may,” “will,” “should,”“anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,”“predict,” “hope,” “potential,” “continue,” or the negative of these terms orother similar expressions.  Theseforward-looking statements are only our predictions and involve numerousassumptions, risks and uncertainties. Our actual results or actions may differ materially from theseforward-looking statements for many reasons, including the reasons described inthis report.  We are not under any dutyto update the forward-looking statements contained in this report.  We cannot guarantee future results, levels ofactivity, performance or achievements. We caution you not to put undue reliance on any forward-lookingstatements, which speak only as of the date of this report.  You should read this report and the documentsthat we reference in this report and have filed as exhibits, completely andwith the understanding that our actual future results may be materiallydifferent from what we currently expect. We qualify all of our forward-looking statements by these cautionarystatements.

 

**Overview**

 

UnitedWisconsin Grain Producers, LLC was formed as a Wisconsin limited liabilitycompany on November 2, 2001, for the purpose of constructing and operating a 40million gallon per year ethanol plant near Friesland in south central Wisconsin.  Since May 2005, we have been engaged in theproduction of ethanol and distillers grains. Our revenues are derived from thesale and distribution of our ethanol and distillers grains throughout thecontinental United States.

 

We expect tofund our operations during the next 12 months using cash flow from continuingoperations and our credit facilities.

 

We are subjectto industry-wide factors that affect our operating income and cost ofproduction.  Our operating results arelargely driven by the prices at which we sell ethanol, distillers grain andcorn oil and the costs related to their production.  Historically, the price of ethanol tends tofluctuate in the same direction as the price of unleaded gasoline and otherpetroleum products.  Surplus ethanolsupplies also tend to put downward price pressure on ethanol.  In addition, the price of ethanol is generallyinfluenced by factors such as general economic conditions, the weather, andgovernment policies and programs.  Theprice of distillers grains is generally influenced by supply and demand, theprice of substitute livestock feed, such as corn and soybean meal, and otheranimal feed proteins.  Surplus grainsupplies also tend to put downward price pressure on distillers grains.  In addition, our revenues are also impactedby such factors as our dependence on one or a few major customers who marketand distribute our products; the intensely competitive nature of our industry;possible legislation at the federal, state, and/or local level; and changes infederal ethanol tax incentives.

 

Our twolargest costs of production are corn and natural gas.  The cost of corn is affected primarily bysupply and demand factors such as crop production, carryout, exports,government policies and programs, risk management and weather, much of which wehave no control.  Natural gas pricesfluctuate with the energy complex in general. Over the last few years, natural gas prices have trended higher than averageand it appears prices will continue to trend higher due to the high price ofalternative fuels such as fuel oil.  Ourcosts of production are affected by the cost of complying with the extensiveenvironmental laws that regulate our industry.

 

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**Results of Operations**

 

***Financial Summary and Analysis ofthe Fiscal Year Ended December 31, 2005***

 

The following table shows the results of our operations and thepercentage of revenues, cost of goods sold, operating expenses and other itemsto total revenues in our statements of operations for the fiscal year endedDecember 31, 2005:

 

| **Statement of Operations** | ** ** | **Amount** | ** **     | **% of  Revenues** | ** ** |
|---------------------------------------|------------|------------|----------------|-------------------------|------------|
|                                  |       |       |           |                    |       |
| Revenues                              |       | $          | 54,477,044     |                    | 100.0      |   |
| Cost of Sales                         |       | $          | (43,885,629    | )                       | 80.5       |   |
| Gross Profit                          |       | $          | 10,591,415     |                    | 19.5       |   |
|                                  |       |       |           |                    |       |
| Operating Expenses                    |       | $          | 2,043,790      |                    | 3.8        |   |
| Operating Income                      |       | $          | 8,547,625      |                    | 15.8       |   |
|                                  |       |       |           |                    |       |
| Other Income (Expense)                |       | $          | 2,187,770      |                    | 4.0        |   |
| **Net Income**                        | ** ** | **$**      | **10,735,395** | ** **              | **19.8**   | ** ** |

 

We had net income of$10,735,395 in fiscal year 2005.  Sincewe only recently became operational in May 2005, we do not yet have comparableincome, production and sales data for fiscal year ended December 31, 2004.

 

Revenues. Revenues from operations for fiscal year ended December 31, 2005 totaledapproximately $54.5 million.  Revenues in fiscal year 2005 resulted fromthe sale of ethanol and distillers grains since our commencement of operationsin May 2005.  In fiscal year 2005, ethanol comprised 88% of our sales andDDGS comprised 12 percent of our sales.

 

Ethanol prices, which had experienceda seasonal decline in the spring and summer of calendar 2005, started rising inapproximately August 2005, but began to fall again through the fourth quarterof 2005. Historically, ethanol prices have been seasonal, increasing in thelate summer and fall as gasoline blenders and marketers increase inventory inanticipation of mandatory blending in the winter months, and decreasing in thespring and summer when mandatory blending ceases.  The rise in ethanol prices during 2005 wasremarkable because it started sooner than the seasonal norm and rose higherthan historical norms, due in part to the hurricanes as well as increaseddemand, public acceptance and positive political signals for ethanol.

 

Management currently expectsethanol prices to remain higher in the short-term than historicalaverages.  However, management believesthe industry will need to continue to grow demand in order to sustain thesehigher price levels.  Unless the new supply is equally met with demand,downward pressure on ethanol prices could occur. If ethanol prices start todecline, our earnings will decline in the process, especially if corn costsfail to remain low and stable.  Areas where demand may increase are newmarkets in New Jersey, Pennsylvania, Massachusetts, North Carolina, SouthCarolina, Michigan, Tennessee, Louisiana and Texas.  According to theRenewable Fuels Association, Minnesota may also generate additional demand dueto the recent passage of state legislation mandating a 20% ethanol blend in itsgasoline. Montana passed a similar mandate this year, but it will not go intoeffect until 60 million gallons of ethanol are produced in the state.

 

Our revenues and profits areimpacted by federal ethanol supports and tax incentives, such as VEETC and theRFS.  Changes to these supports or incentives could significantly impactdemand for ethanol.  Since the currentnational ethanol production capacity exceeds the 2006 RFS requirement, it ismanagement’s belief that other market factors are primarily responsible forcurrent ethanol prices.  Accordingly, it is possible that the RFSrequirements may not significantly impact ethanol prices in theshort-term.  For instance, if gasoline prices continue to trend higher,consumers will look for lower priced alternative fuels. The Consumer Federationof America recently published a report that states that consumers could save upto $0.08 per gallon at the pump if ethanol were blended at 10%.  Sinceethanol blended fuel is a cheaper alternative for consumers, the demand for suchethanol blended fuel could increase thus increasing the overall demand forethanol.  This could positively affect our earnings.  However,

 

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the increased RFS requirement of 7.5 billionby 2012 is expected to support ethanol prices in the long term.  A greatersupply of ethanol on the market from these additional plants and plantexpansions could reduce the price we are able to charge for our ethanol. This would have a negative impact on our earnings.

 

We also expect that use ofethanol as a fuel oxygenate may increase due to decreased use of methyltertiary butyl ether (“MTBE”), the primary competitor of ethanol as a fueloxygenate.  Although the Energy PolicyAct of 2005 did not impose a national ban of MTBE, the Act’s failure to includeliability protection for manufacturers of MTBE could result in refiners andblenders using ethanol as an oxygenate rather than MTBE to satisfy the CleanAir Act’s reformulated gasoline oxygenate requirement for areas classified ascarbon monoxide non-attainment areas.  These areas are required toestablish an oxygenated fuels program for a period of no less than three monthseach winter.  The minimum oxygen requirement for gasoline sold in theseareas is 2.7% by weight.  This is the equivalent of 7.7% ethanol by volumein a gasoline blend.  This requirement was unaffected by the Act and anumber of states, including California, participate in this program.  As a result, demand for ethanol in theseareas during the winter months may increase and positively effect ethanolprices.

 

Increased consumption of E85fuel and increased consumer awareness of ethanol may increase ethanoldemand.  However, consumer resistance tothe use of ethanol may affect the demand for ethanol which could affect ourability to market our product and reduce our revenues.  Certainindividuals believe that use of ethanol will have a negative impact on pricesat the pump.  Many also believe that ethanol adds to air pollution andharms car and truck engines.  Still other consumers believe that theprocess of producing ethanol actually uses more fossil energy, such as oil andnatural gas, than the amount of ethanol that is produced.  These consumerbeliefs could potentially be wide-spread.  If consumers choose not to buyethanol, it would affect the demand for the ethanol we produce which couldnegatively affect our ability sell our product and negatively affect ourprofitability.

 

Due to the several factorsaffecting the price of ethanol, we are unable to predict with any degree ofcertainty where prices might be during fiscal 2006.

 

Since we commencedoperations, the sales price for distiller’s grains has remained relativelyunchanged.  The price of distiller’s grains was largely due to a decreasein the price of corn and soybeans, which are the components of distiller’sgrains’ principal competition in the feed markets, namely corn and soybeanmeal.  The lower corn and soybean prices were the result of an abundantsupply of grains and feed protein due to a large grain harvest in 2005, thesecond largest on record, and a large grain carryout into 2006. Distillers grains prices are expected to remain low in the foreseeable futureunless the price of corn and soybean meal increases.

 

Costof Sales.  Our cost of sales from the production ofethanol and distillers grains are primarily made up of raw grains expenses andenergy expenses (natural gas and electricity).  Cost of Sales for fiscal year ended December31, 2005 totaled approximately $43.9 million.

 

We purchased 11,753,760million bushels of corn in fiscal year 2005. The 2005 national corn crop was the second largest on record withnational production at approximately 11.11 billion bushels, exceeded only bythe 2004 crop (at approximately 11.8 billion bushels).  This resulted inlower corn prices as reflected in our cost of goods sold.  A crop at this level is anticipated toprovide an ample supply of corn and we anticipate corn costs will remain lowand stable into the 2005-2006 marketing year.  However, an increase incorn exports as well as sustained domestic usage may increase total demand forcorn and result in upward pressure on corn prices.  Any increase in the price of corn would havea negative impact on our cost of goods sold. In addition, we expect the grain market to begin focusing on prospectsfor the 2006 crop, where variables such as rainfall, planting dates, andtemperatures will likely cause market uncertainty and create corn pricevolatility as the growing season begins.  Recently, many market analystsare predicting lower U.S. corn acreage this year due to higher fertilizerprices caused by high natural gas prices, decreased domestic fertilizerproduction and increased global demand for fertilizers.  Although carryoutsupplies for 2006 marketing year appear adequate, any production shortfallduring the 2006 growing season will create volatility and may increase our costof corn.

 

Natural gas is also animportant input to our manufacturing process.  We estimate that ournatural gas usage is approximately 122,000 million British thermal units (“MMBTU”)per month.  We use natural gas to dry our distillers grains products tomoisture contents at which they can be stored for long periods and transportedgreater distances, so that we can market them to broader livestock markets,including poultry and swine markets in the

 

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continental United States.  Natural gashas recently been available only at prices exceeding historical averages. Theprices are increasing our costs of production.  In late August 2005,Hurricane Katrina caused dramatic damage to areas of Louisiana, which is thelocation of one of the largest natural gas hubs in the United States. Natural gas prices rose as a result of the hurricane.  There is stillconsiderable uncertainty as to the extent of infrastructure damage and theultimate amount of lost production from Hurricane Katrina.  Therefore, weare uncertain as to how Hurricane Katrina will impact long term natural gasprices. We expect natural gas prices to remain high or increase given theunpredictable market situation.  This will increase our gas costssubstantially, which will adversely impact our cost of goods sold.  We have secured a marketing firm and energyconsultant for our natural gas and will work with them on an on-going basis tomitigate our exposure to volatile gas prices.

 

Cost of goods sold includesa liability of $88,806 for the fiscal year ended December 31, 2005 relatedto our corn and natural gas derivative instruments.  We recognize thegains or losses that result from the changes in the value of our derivativeinstruments in cost of goods sold as the changes occur.  As corn andnatural gas prices fluctuate, the value of our derivative instruments are impacted,which affects our financial performance.  We anticipate continuedvolatility in our cost of goods sold due to the timing of the changes in valueof the derivative instruments relative to the cost and use of the commoditybeing hedged.

 

OperatingExpenses.  Operating expenses for fiscal year endedDecember 31, 2005 totaled approximately $2,043,790.  Our operatingexpenses are primarily due to expenses of $342,400 from start-up operations and$1,701,390 of general and administrative expenses.

 

OperatingIncome.  Operating income for fiscal year endedDecember 31, 2005 totaled approximately $8,547,625.

 

OtherIncome (Expense).  Our other income and expense for the fiscalyear ended December 31, 2005 was $2,187,770.  This income resulted primarily from interestexpense of $1,320,055 which was offset by $2,722,912 in payments from thefederal Bioenergy Program and $475,000 in payments from the State of Wisconsinincentive program.

 

Our USDA Commodity CreditCorporation Bioenergy Program payments were $2,722,912 for the fiscal yearended December 31, 2005.  Payments under the Bioenergy Program arebased upon increases in ethanol production relative to previous years. Due to the fact we only had a partial year of operation in fiscal year 2005, weexpect to receive additional program payments in fiscal year 2006. However, based upon the reductions in Bioenergy Program payments made during2005, we do not expect to receive the maximum award of $7.5 million.  The receipt of these additional programpayments is subject to the continued availability of program funds, which maybe reduced as a result of increased participation in the program by new andexpanding plants as well as decreased federal funding.  In addition, theaccrued income from the Bioenergy Program is significantly less than the amountwe are eligible for based on our production.  This reduction is attributedto an increase in the number of eligible participants in the program, whichreduces our share of the payments.  We do not anticipate receiving unpaidamounts for past pro rata reductions.  The receipt of these additionalprogram payments is subject to the continued availability of program funds,which may be reduced as a result of increased participation in the program bynew and expanding plants as well as decreased federal funding.  TheBioenergy Program was scheduled to expire on September 30, 2006.  Funding for the program is subject to anannual apportionment.  See “***Bioenergy Program Payments***”below.  However, the CCC recentlyannounced that its funds would be exhausted in the third quarter of thegovernment fiscal year and that the program would terminate as of June 30,2006.

 

During the 2005 fiscal year,we recorded revenue of $475,000 from the State of Wisconsin incentiveprogram.  Due to a sunset date of June30, 2006, we do not expect to record any more revenue from this program.

 

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***Financial Summary and Analysis of FiscalQuarter Ended December 31, 2005***

 

The following tables shows the results of our operations and thepercentage of revenues, cost of goods sold, operating expenses and other itemsto total revenues in our statement of operations for the fiscal quarter endedDecember 31, 2005:

 

| **Income Statement Data** | ** ** | **Amount** | ** **    | **% of Revenues** | ** ** |
|-------------------------------------|------------|------------|---------------|-----------------------------|------------|
|                                |       |       |          |                        |       |
| Revenues                            |       | $          | 22,473,828    |                        | 100.0      |   |
| Cost of Sales                       |       | $          | (17,615,286   | )                           | 78.3       |   |
| Gross Profit                        |       | $          | 4,858,542     |                        | 21.7       |   |
|                                |       |       |          |                        |       |
| Operating Expenses                  |       | $          | 679,965       |                        | 3.0        |   |
| Operating Income                    |       | $          | 4,178,576     |                        | 18.7       |   |
|                                |       |       |          |                        |       |
| Other Income (Expense)              |       | $          | 163,231       |                        | 0.7        |   |
| **Net Income**                      | ** ** | **$**      | **4,341,808** | ** **                  | **19.4**   | ** ** |

 

For the fourth fiscalquarter of 2005, net income totaled $4,341,808, down from net income of$5,768,486 reported in the third quarter of fiscal year 2005.  Thisdecrease was primarily due to an increase in our natural gas costs in thefourth quarter of 2005. Since we only recently became operational in May 2005,we do not have comparable income, production and sales data for fiscal quarterended December 31, 2004.

 

Revenues. Revenues from operations for the fourth fiscal quarter of 2005 totaledapproximately $22,473,828, up from $21,893,544 in the third quarter of fiscal2005.  This increase was primarily due to an increase in the netback priceof ethanol.

 

Costof Sales.  Our cost of sales for the fourth fiscalquarter of 2005 totaled $17,615,286, up from $16,890,315 in the third quarterof fiscal 2005.  The change in cost of goods sold resulted from anincrease in the price of corn and natural gas. In the fourth quarter of 2005 we recorded a net loss on the value of ourderivatives of approximately $197,186 up from a net loss of approximately$309,939 in the third quarter of fiscal 2005.

 

OperatingExpenses.  Operating expenses for the fourth quarter offiscal 2005 totaled $679,965, up from the $547,208 we reported in the thirdquarter of fiscal 2005.  The increase inour operating expenses is mainly attributable to an increase in our general andadministrative expenses.

 

OperatingIncome.  Our operating income for the fourth quarterof 2005 was $4,178,576, down from $4,456,021. This decrease was primarily due to the increased costs of natural gas inthe fourth quarter of 2005.

 

OtherIncome (Expense).  Other income and expense consisted of a gainof $163,231 in the fourth fiscal quarter of 2005, compared to approximately $1,312,465reported in the third quarter of fiscal 2005. The decrease in other income wasprimarily due to the reduction in available funding for the CCC Bioenergyprogram.

 

**Applicationof Critical Accounting Estimates**

 

Management uses estimatesand assumptions in preparing our financial statements in accordance withgenerally accepted accounting principles. These estimates and assumptions affect the reported amounts of assetsand liabilities, the disclosure of contingent assets and liabilities, and thereported revenues and expenses.  Althoughwe did not have any critical accounting estimates as of year ended December 31,2005, we anticipate that we will use estimates relating to Bioenergy programpayments throughout the next year.

 

**CommodityPrice Risk Protection**

 

We seek to minimize therisks from fluctuations in the prices of raw material inputs, such as corn andnatural gas, and finished products, such as ethanol and distillers grains,through the use of hedging instruments.  In

 

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practice, as markets move, we actively manageour risk and adjust hedging strategies as appropriate.  Although we believe our hedge positionsaccomplish an economic hedge against our future purchases, they do not qualifyfor hedge accounting, which would match the gain or loss on our hedge positionsto the specific commodity purchase being hedged.  We are using fair value accounting for ourhedge positions, which means as the current market price of our hedge positionschanges, the gains and losses are immediately recognized in our cost of sales.The immediate recognition of hedging gains and losses under fair valueaccounting can cause net income to be volatile from quarter to quarter due tothe timing of the change in value of the derivative instruments relative to thecost and use of the commodity being hedged. As of December 31, 2005, the fair values of our derivative instrumentsrelating to corn and natural gas are reflected as a loss in the amount of$259,196 for the year.  There are severalvariables that could affect the extent to which our derivative instruments areimpacted by price fluctuations in the cost of corn or natural gas.  However, it is likely that commodity cashprices will have the greatest impact on the derivative instruments withdelivery dates nearest the current cash price.

 

As of December 31, 2005, wehave entered into forward corn purchase contracts for the procurement ofapproximately 95% of our corn needs through March 2006 and 88% of our needsthrough June 2006.  As we move forward,additional protection may be necessary. As corn prices move in reaction to market trends and information, ourincome statement will be affected depending on the impact such market movementshave on the value of our derivative instruments.  As we move forward into the fall harvestmonths, additional price protection may be required to solidify our margins forfiscal year 2006.  Depending on market movements,crop prospects and weather, these price protection positions may causeimmediate adverse effects, but are expected to produce long-term positivegrowth for the Company.

 

As of December 31, 2005, wehave forward contracts to purchase approximately 43% of our projected naturalgas usage for January through April 2006 at an average price of $11.97 perMMBTU.  As of March 9, 2006 we have priceprotection in place for approximately 73% of our projected natural gas usagefor March through October 2006 at an average price of $8.01 per MMBTU.  Additional price protection for fiscal year2006 natural gas purchases may be necessary as we attempt to further reduce oursusceptibility to price increases. However, we may not be able to secure natural gas for prices less thancurrent market price and we may not recover high costs of production resultingfrom high natural gas prices, which may raise our costs of production andreduce our net income.

 

**Plan ofOperations for the Next 12 Months**

 

We expect to spend the next12 months operating the ethanol plant to produce and sell ethanol and distillersgrains.  We will continue to focus ourattention on two main areas: (i) maximizing our plant’s operational efficiencyto operate as competitively as possible; and (ii) purchasing importantmanufacturing inputs such as corn and natural gas as cost effectively aspossible.

 

***Plant Operations***

 

We commenced operations atour plant and passed performance testing in May 2005.  While management continues to direct itsefforts toward increasing production and operating efficiencies whilemaintaining or decreasing operating costs, we may not be able to consistentlysatisfy these objectives.

 

We are subject to ongoingenvironmental regulations and testing. We are currently conducting preliminary emissions testing and areworking with a qualified consulting engineering firm in preparing for finalemissions testing.  Final emissionstesting is expected to occur in May 2006. We are currently in compliance with all NDPES compliance testing for theplant.

 

As of December 31, 2005,there was no outstanding balance on the plant design-build contract except forretainage of $100,000.  We are holding$100,000 pending final completion of all the design builder’s obligations.  There are only minor items remaining.  We have substantially completed the owner’sobligations of the project, including but not limited to completion of thesecurity fencing, maintenance software implementation, business signage andsecurity systems.

 

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During the next 12 months,we expect to focus on producing ethanol and distillers grains at ourplant.  We have engaged an ethanolmarketing firm to market our ethanol and a distillers grains marketing firm tomarket our dried distillers grain.  Weare also independently marketing a portion of our dried distillers grains tolocal livestock producers.  On April 1,2005, we entered into an agreement with Commodity Specialists Company to marketour modified wet distillers grains.  Theinitial term of this agreement is one year and it automatically renews forsuccessive one-year periods unless either party gives at least 120 days priorwritten notice.  Commodity SpecialistsCompany also markets the dried distillers grains that we do not marketindependently.

 

***Operating Budget and Financing of PlantOperations***

 

We expect to have sufficientcash from cash flow generated by plant operations, current cash reserves, andour senior credit facility to cover our operating costs over the next 12months, including the cost of corn and natural gas supplies, other productioncosts, staffing, office, audit, legal, compliance and working capitalcosts.  The following is our estimate ofour operating costs and expenditures for the next 12 months:  

 

| Operating Costs:                 |   |   |       |
|----------------------------------|--------|--------|------------|
| Cost of Corn and Utilities       |   | $      | 55,441,116 |   |
| Other Production Costs           |   | $      | 12,184,419 |   |
| General and Administrative Costs |   | $      | 3,836,736  |   |
|                             |   |   |       |
| Total operating costs            |   | $      | 71,462,271 |   |

 

The estimates in the tableset forth above are based upon our limited operational experience and datagathered from other ethanol plants similar to ours.  These are only estimates and our actualexpenses and costs could be much higher due to a variety of factors outside ourcontrol, such as:

 

•                  Changes in the availability and price ofcorn;

•                  Changes in federal ethanol tax incentives;

•                  Changes in the environmental regulations thatapply to our plant operations;

•                  Increased competition in the ethanolindustry;

•                  Changes in interest rates or the availabilityof credit;

•                  Changes in our business strategy, capitalimprovements or development plans;

•                  Changes in plant production capacity ortechnical difficulties in operating the plant;

•                  Changes in general economic conditions or theoccurrence of certain events causing an economic impact in the agriculture, oilor automobile industries; and

•                  Changes in the availability and price ofnatural gas;

•                  Increases or decreases in the supply anddemand for distillers grains.

 

**Employees**

 

At the end of the 2005 fiscal year, we had 34 full-time employees andthree part-time employees.

 

**Liquidity and Capital Resources**

 

As of December 31, 2005, wehad the following assets: cash and cash equivalents of $8,786,477, totalcurrent assets of $14,475,144 and total assets of $64,915,892.  As ofDecember 31, 2005, we had total current liabilities of $5,933,507 and long termdebt, net of current maturities, of $22,074,722.

 

The members’ contributions,net of costs related to capital contributions, are $27,696,394.  Retainedearnings as of December 31, 2005 is $9,211,269. Total members’ equity as of December 31, 2005, is $36,907,663.  Revenue from operations for the year endedDecember 31, 2005 is $54,234,638.

 

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***Short-Term and Long-Term Debt Sources***

 

In February 2004, we enteredinto a $33,024,200 credit facility with AgStar Financial Services, PCA ofRochester, Minnesota.  The creditfacility is secured by substantially all of our assets.  In July 2005 we converted our constructionloan into two loans.  The first loan is aterm loan of $29,024,200.  The second loanis a $4,000,000 revolving loan.  The termloan of $29,024,200 is for five years with a ten-year amortization.  Payments on the converted term loan are paidin monthly installments including principal and interest.  The variable interest rate on the convertedterm loan is equal to the monthly LIBOR plus 2.75%.  This variable interest rate may be adjusteddownward depending on our level of owners’ equity as reported in our monthlyfinancial statements.  At a level ofownership equity equal to 50%, but less than 55% the interest rate willdecrease by 0.50%.  At a level ofownership equity equal to 45%, but less than 50%, the interest rate willdecrease by 1.0%.  At a future date, wecan elect to allocate a portion of the term loan to a fixed interest rate.  Depending on the anticipated movements ininterest rates and overall credit environment, we may elect to make thatallocation.  Interest on the revolvingloan of $4,000,000 accrues at a rate equal to the monthly LIBOR plus2.75%.  However, this interest rate maybe adjusted downward in the same manner as the term loan depending on our levelof owners’ equity.

 

As of December 31, 2005, wehad outstanding debt of $24,279,657 and an interest rate of 7.3638% on theconverted term loan.  As of December 31,2005, we did not have any borrowings on the revolving loan.

 

In March 2006, the loanagreement was amended to increase the revolver by $5 million and decrease theterm loan by $5 million to allow for additional principal reduction withoutincurring the 1% prepayment penalty which is in effect until February 24, 2007.

 

The converted term loan andline of credit agreements contain restrictions and financial covenants to whichwe will be subject during the term of the agreements.  If, for any reason, our revenues significantlydecease and/or our cost of goods significantly increases, we may not be able totimely repay the loan.  If interest ratesincrease, we will have higher interest payments, which could adversely affectour business.

 

***Bioenergy Program Payments***

 

We have enrolled in the USDACommodity Credit Corporation’s Bioenergy program.  Under the USDA CCC Bioenergy program, theCommodity Credit Corporation will reimburse eligible ethanol producers of lessthan 65 million gallons of bioenergy in the amount of one bushel of corn forevery two and one-half bushels of corn used for the increased production ofethanol.  No eligible producer mayreceive more than $7.5 million under the program. Because we qualify as aneligible producer and annually utilize at least 15 million bushels of corn inthe increased production of ethanol, we could potentially receive the maximumaward of $7.5 million.  However, theCommodity Credit Corporation may award only $100 million annually for fiscalyears 2005 through 2006, and any award we receive may be reduced based upon thevolume of applications from other eligible producers.

 

For the twelve months endedDecember 31, 2005, we recorded Bioenergy Program income of $2,722,912.  In October 2005 we enrolled in the CCCBioenergy Program for 2006.  Based uponthe reductions in Bioenergy Program payments made during 2005, we do not expectto receive the maximum award of $7.5 million. On January 23, 2006, the USDA Farm Service Agency issued a letteroutlining the funding factors for the Bioenergy Program for the governmentfiscal year 2006.  The OMB apportionedthe Bioenergy Program $60 million for the fiscal year 2006 and theapportionment includes a restriction that the funds may only be used during the2006 fiscal year.  This same restrictionhas applied for the last three fiscal year program apportionments.  As a result of this restriction, $34.5million of the $60 million apportionment was used for the fourth quarter fiscalyear 2005 payments leaving only $25.5 million available for the first threequarters of fiscal year 2006, or $8.5 million per quarter.  The program payment limitation remains atfive percent of the program’s available funding, $1.275 million for 2006.

 

Based upon the recentincrease in national ethanol production and the funding factors outlined above,we anticipate a pro rata reduction in aggregate payments to all eligibleproducers.  We anticipate the pro ratareduction to be in the range of 10% to 15%. Thus we do not expect to receive the maximum award of $7.5 million.  As of March 9, 2006, we have received$2,722,912 for our production through December 31, 2005 and we estimate anadditional $390,000 to be received in 2006.   In addition, the Bioenergy Program wasscheduled to expire on September 30, 2006. However, the CCC recently announced that its funds would be exhausted inthe third quarter of the government fiscal year and that the program wouldterminate as of June 30, 2006

 

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***Wisconsin Department of Agriculture, Tradeand Consumer Protection Ethanol Payment***

 

Wehave recorded revenue of $475,000 for the fiscal year ended December 31, 2005related to an ethanol producer incentive program administered by the WisconsinDepartment of Agriculture, Trade and Consumer Protection.  The program awards each eligible applicant apayment of up to 20 cents per gallon on the first 15 million gallons of ethanolproduced in the State of Wisconsin, however, the total award is subject to programfunding and the number of eligible applicants. We anticipate receiving an award in 2006 based upon our satisfaction ofthe eligible requirements as of the date of this report. Currently, there isestimated to be a total of $1.9 million available under the program which mustbe allocated among four qualified producers. Our recorded revenue of $475,000reflects the amount we anticipate receiving based upon current funding levelsand the number of eligible producers. The program’s sunset date is June 30, 2006. Therefore, we do notanticipate recording any additional revenue from this program.

 

***Subsequent Events***

 

On February 8, 2006 ourboard approved a $200 per unit distribution to all members of record as ofFebruary 10, 2006.  The distribution waspaid on March 15, 2006.

 

On March 8, 2006, the boardapproved a proposal from a lender to refinance the existing term debt andrevolving loan commitment at a fixed interest rate of 7.40% per year for fiveyears with a ten year amortization. However, we have not yet entered into any definitive agreements for thisdebt financing.

 

On March 9, 2006, we amendedour Amended and Restated Construction and revolving Loan Agreement datedFebruary 17, 2005 with AgStar Financial Services, PCA.  The Second Amended and Restated Constructionand Revolving Loan Agreement increased the revolving commitment amount to$9,000,000 and amends the revolving note to be payable in full on July 1,2010.  In addition, we requested that$5,000,000 of the new term revolver be applied as a special principal paymentagainst the Company’s existing term loan with a subsequent new principalbalance of $18,898,888.

 

**Off-BalanceSheet Arrangements**

 

We do not have anyoff-balance sheet arrangements.  We have commitments and contingencies asdescribed in Note 9 to our Financial Statements.

 

31

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**ITEM 7. FINANCIAL STATEMENTS.**

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

United Wisconsin GrainProducers, LLC

Friesland, Wisconsin

 

We have audited theaccompanying balance sheet of United Wisconsin Grain Producers, LLC as ofDecember 31, 2005 and the related statements of operations, changes in members’equity, and cash flows for the years ended December 31, 2005 and 2004.  These financial statements are the responsibilityof the Company's management. Our responsibility is to express an opinion onthese financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of United Wisconsin Grain Producers, LLC as ofDecember 31, 2005 and the results of its operations and its cash flows for theyears ended December 31, 2005 and 2004 in conformity with U.S. generallyaccepted accounting principles.

 

 
|   | /s/ Boulay, Heutmaker,  Zibell & Co. P.L.L.P. |
|--------|---------------------------------------------------|
|   | Certified Public  Accountants                     |

 

Minneapolis,Minnesota

February 3, 2006

 

32

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Balance Sheet

 
| ** **                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| **ASSETS**                                            | ** ** | **2005**              | ** ** |
|                                                  |       |                  |       |
| **Current Assets**                                    |       |                  |       |
| Cash and cash equivalents                             |       | $                     | 8,786,477  |   |
| Restricted cash                                       |       | 80,280                |       |
| Trade account receivable                              |       | 2,876,872             |       |
| Federal and State program receivables                 |       | 784,748               |       |
| Prepaid expenses and other assets                     |       | 536,020               |       |
| Inventory                                             |       | 1,410,747             |       |
| Total current assets                                  |       | 14,475,144            |       |
|                                                  |       |                  |       |
| **Property, Plant and Equipment**                     |       |                  |       |
| Land and land improvements                            |       | 5,747,366             |       |
| Office equipment                                      |       | 355,596               |       |
| Administration building                               |       | 429,317               |       |
| Plant and process equipment                           |       | 46,335,457            |       |
| Total property and equipment                          |       | 52,867,736            |       |
| Less accumulated depreciation                         |       | 2,976,364             |       |
| Net property, plant and equipment                     |       | 49,891,372            |       |
|                                                  |       |                  |       |
| **Other Assets**                                      |       |                  |       |
| Debt issuance costs, net of accumulated  amortization |       | 548,376               |       |
| Other                                                 |       | 1,000                 |       |
| Total other assets                                    |       | 549,376               |       |
|                                                  |       |                  |       |
| **Total Assets**                                      |       | $                     | 64,915,892 |   |

 

Notes to Financial Statementsare an integral part of this Statement.

 

33

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

BalanceSheet

 
| ** **                                                           | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|
| **LIABILITIES AND MEMBERS’ EQUITY**              | ** ** | **2005**              | ** ** |
|                                                                 |       |                  |       |
| **Current Liabilities**                                              |       |                  |       |
| Current maturities of long-term debt                                 |       | $                     | 2,404,935  |   |
| Accounts payable                                                     |       | 3,080,121             |       |
| Derivative instruments                                               |       | 88,806                |       |
| Accrued liabilities                                                  |       | 359,645               |       |
| Total current liabilities                                            |       | 5,933,507             |       |
|                                                                 |       |                  |       |
| **Long-Term Debt, less current maturities**                          |       | 22,074,722            |       |
|                                                                 |       |                  |       |
| **Commitments and Contingencies**                                    |       |                  |       |
|                                                                 |       |                  |       |
| **Members’ Equity**                                             |       |                  |       |
| Member contributions, net of costs related  to capital contributions |       | 27,696,394            |       |
| Retained earnings                                                    |       | 9,211,269             |       |
| Total members’ equity                                           |       | 36,907,663            |       |
|                                                                 |       |                  |       |
| **Total Liabilities and Members’ Equity**                       |       | $                     | 64,915,892 |   |

 

Notes to Financial Statementsare an integral part of this Statement.

 

34

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Statement of Operations

 
| ** **                                                                                          | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                          | ** ** | **2005**              | ** ** | **2004**              | ** ** |
|                                                                                                |       |                  |       |                  |       |
| **Revenues**                                                                                        |       | $                     | 54,477,044 |                  | $          | — |   |
|                                                                                                |       |                  |       |                  |       |
| **Cost of Goods Sold**                                                                              |       | 43,885,629            |       | —                |       |
|                                                                                                |       |                  |       |                  |       |
| **Gross Profit**                                                                                    |       | 10,591,415            |       | —                |       |
|                                                                                                |       |                  |       |                  |       |
| **Operating Expenses**                                                                              |       | 2,043,790             |       | 718,431               |       |
|                                                                                                |       |                  |       |                  |       |
| **Operating Income (Loss)**                                                                         |       | 8,547,625             |       | (718,431              | )          |
|                                                                                                |       |                  |       |                  |       |
| **Other Income (Expense)**                                                                          |       |                  |       |                  |       |
| Grant income                                                                                        |       | 187,852               |       | 165,849               |       |
| Interest income                                                                                     |       | 64,283                |       | 64,130                |       |
| Federal & State program income                                                                  |       | 3,197,912             |       |                  |       |
| Interest expense                                                                                    |       | (1,320,055            | )          | (2,664                | )          |
| Unrealized loss on derivative insturments                                                           |       | —                |       | (260,224              | )          |
| Miscellaneous income                                                                                |       | 57,778                |       | 31,178                |       |
| Total other income (expense), net                                                                   |       | 2,187,770             |       | (1,731                | )          |
|                                                                                                |       |                  |       |                  |       |
| **Net Income (Loss)**                                                                               |       | $                     | 10,735,395 |                  | $          | (720,162 | ) |
|                                                                                                |       |                  |       |                  |       |
| **Net Income (Loss) Per Unit**(28,780  and 28,270 weighted average units outstanding, respectively) |       | $                     | 373.02     |                  | $          | (25.47 | ) |

 

Notes to Financial Statements are an integral part of this Statement.

 

35

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**UNITEDWISCONSIN GRAIN PRODUCERS, LLC**

 

Statement of Changes in Members’ Equity

 
| **Balance - January 1, 2004**                                                                    |   | $          | 23,710,419 |   |
|--------------------------------------------------------------------------------------------------|--------|------------|------------|--------|
|                                                                                             |   |       |       |
| Capital contributions, January through  April 2004 for 3,175 membership units at $1,000 per unit |   | 3,175,000  |       |
|                                                                                             |   |       |       |
| Costs related to capital contributions                                                           |   | 7,011      |       |
|                                                                                             |   |       |       |
| Net loss for the year ended December 31,  2004                                                   |   | (720,162   | )          |
|                                                                                             |   |       |       |
| **Balance - December 31, 2004**                                                                  |   | 26,172,268 |       |
|                                                                                             |   |       |       |
| Net Income for the year ended December 31,  2005                                                 |   | 10,735,395 |       |
|                                                                                             |   |       |       |
| **Balance - December 31, 2005**                                                                  |   | $          | 36,907,663 |   |

 

Notes to FinancialStatements are an integral part of this Statement.

 

36

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Statements of Cash Flows

 
| ** **                                                                  | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                  | ** ** | **2005**              | ** ** | **2004**              | ** ** |
|                                                                        |       |                  |       |                  |       |
| **Cash Flows from Operating Activities**                                    |       |                  |       |                  |       |
| Net income (loss)                                                           |       | $                     | 10,735,395 |                  | $          | (720,162 | ) |
| Adjustments to reconcile net income (loss)  to net cash used in operations: |       |                  |       |                  |       |
| Depreciation and amortization                                               |       | 3,006,850             |       | 4,229                 |       |
| Loss on hedging                                                             |       | 259,196               |       | 260,224               |       |
| Grant income                                                                |       | (187,852              | )          | (165,849              | )          |
| Deposits on expired land options                                            |       | —                |       | 3,000                 |       |
| Changes in assets and liabilities:                                          |       |                  |       |                  |       |
| Restricted cash                                                             |       | (80,280               | )          |                  |       |
| Derivative instruments                                                      |       | (5,614                | )          | (425,000              | )          |
| Accounts receivable                                                         |       | (3,694,136            | )          | (4,383                | )          |
| Inventory                                                                   |       | (1,410,747            | )          |                  |       |
| Prepaid expenses                                                            |       | (485,096              | )          | (8,923                | )          |
| Other payable                                                               |       |                  |       | (15,000               | )          |
| Accounts payable                                                            |       | 2,960,511             |       | 32,991                |       |
| Accrued liabilities                                                         |       | 343,503               |       | 6,933                 |       |
| Net cash provided by (used in) operating  activities                        |       | 11,441,730            |       | (1,031,940            | )          |
|                                                                        |       |                  |       |                  |       |
| **Cash Flows from Investing Activities**                                    |       |                  |       |                  |       |
| Land acquisitions                                                           |       | —                |       | (310,161              | )          |
| Capital expenditures                                                        |       | (1,175,915            | )          | (337,659              | )          |
| Payments for construction in process                                        |       | —                |       | (21,731,845           | )          |
| Other investments                                                           |       | (1,000                | )          | —                |       |
| Net cash used in investing activities                                       |       | (1,176,915            | )          | (22,379,665           | )          |
|                                                                        |       |                  |       |                  |       |
| **Cash Flows from Financing Activities**                                    |       |                  |       |                  |       |
| Member contributions                                                        |       | —                |       | 3,175,000             |       |
| Proceeds from grants for operating expenses                                 |       | 218,637               |       | 135,065               |       |
| Proceeds from grants for capital  expenditures                              |       | 443,905               |       | 42,643                |       |
| Proceeds from long term debt                                                |       | 2,453,714             |       | 408,234               |       |
| Payments for long term debt                                                 |       | (4,544,543            | )          | (1,701                | )          |
| Payments for debt issuance costs                                            |       | (59,119               | )          | (495,650              | )          |
| Refunds for costs of raising capital                                        |       | —                |       | 7,011                 |       |
| Net cash provided by (used in) financing  activities                        |       | (1,487,406            | )          | 3,270,602             |       |
|                                                                             |            |                       |            |                       |            |  |  |

 

Notes to Financial Statementsare an integral part of this Statement.

 

37

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| ** **                                                                    | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                    | ** ** | **2005**              | ** ** | **2004**              | ** ** |
|                                                                          |       |                  |       |                  |       |
| **Net Increase (Decrease) in Cash**                                           |       | 8,777,409             |       | (20,141,003           | )          |
|                                                                          |       |                  |       |                  |       |
| **Cash and Cash Equivalents–**Beginning  of Period                       |       | 9,068                 |       | 20,150,071            |       |
|                                                                          |       |                  |       |                  |       |
| **Cash and Cash Equivalents–**End  of Period                             |       | $                     | 8,786,477  |                  | $          | 9,068 |   |
|                                                                          |       |                  |       |                  |       |
| **Supplemental Cash Flow Information**                                        |       |                  |       |                  |       |
|                                                                          |       |                  |       |                  |       |
| Cash paid during the year for: Interest                                       |       | $                     | 1,315,024  |                  | $          | 2,664 |   |
|                                                                          |       |                  |       |                  |       |
| **Noncash Investing and Financing Activities**                                |       |                  |       |                  |       |
|                                                                          |       |                  |       |                  |       |
| Capital expenditures and construction in  process funded by long-term debt    |       | $                     | 8,368,571  |                  | $          | 86,000 |   |
|                                                                          |       |                  |       |                  |       |
| Capital expenditures and construction in  process funded by construction loan |       | $                     | —     |                  | $          | 13,927,308 |   |
|                                                                          |       |                  |       |                  |       |
| Operating expenses funded by construction  loan                               |       | $                     | 3,000      |                  | $          | 1,000 |   |
|                                                                          |       |                  |       |                  |       |
| Construction in process in grants  receivable                                 |       | $                     | —     |                  | $          | 428,886 |   |
|                                                                          |       |                  |       |                  |       |
| Construction in process in accounts payable                                   |       |                  |       | $                     | 3,520,554  |   |
|                                                                          |       |                  |       |                  |       |
| Debt issuance costs in accounts payable                                       |       | $                     | —     |                  | $          | 9,435 |   |

 

Notes to Financial Statementsare an integral part of this Statement.

 

38

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**UNITEDWISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to FinancialStatements

 

December 31, 2005 and 2004

 

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Nature of Business*

 

United Wisconsin Grain Producers LLC (aWisconsin limited liability company) is a 40 million gallon ethanol plantlocated near the town of Friesland in the township of Randolph, Wisconsin.  The company sells its production of ethanoland distillers grains, a co-product of ethanol production, within the UnitedStates.

 

The Company was organized in November of 2001to pool investors, some of whom provide a corn supply on a commercialbasis.  The Company was a developmentalstage entity prior to commencing operations on May 5, 2005.

 

*Accounting Estimates*

 

Management uses estimates and assumptions inpreparing these financial statements in accordance with generally acceptedaccounting principles.  Those estimates and assumptions affect the reportedamounts of assets and liabilities, the disclosure of contingent assets andliabilities, and the reported revenues and expenses.  Commodity Credit Corporation Bio-EnergyProgram incentives and the State of Wisconsin Producer Subsidy Payment Programincentives include significant estimates. Actual results could differ from those estimates.

 

*Revenue Recognition*

 

The Company recognizes revenue at the timetitle to the goods and all risks of ownership transfer to the customer, whichgenerally occurs upon shipment to the customer or when the customer picks upthe goods.  The Company records revenuefrom federal and state incentive programs related to the production of ethanolwhen the Company has sold the ethanol and completed all the known requirementsof the applicable incentive program.

 

*Cash and Cash Equivalents*

 

The Company considers all highly liquid debtinstruments purchased with a maturity of three months or less to be cashequivalents.  The Company maintains its accounts primarily at twofinancial institutions.  At times throughout the year, the Company’s cashand cash equivalents balances may exceed amounts insured by the Federal DepositInsurance Corporation.

 

*Restricted Cash*

 

TheCompany is required to deposit cash into a restricted cash account by theCompany’s broker as discussed below.

 

*Trade Accounts Receivable*

 

Trade accounts receivable are recorded attheir estimated net realizable value, net of an allowance for doubtfulaccounts.  The Company extends credit tocustomers for sales of ethanol and distillers grain in the normal course ofbusiness.  Credit is extended based on anon-going evaluation of a customer’s financial conditions and generally nocollateral is required.  If payment isnot received on a timely basis in accordance with the Company’s credit terms itis considered past due.  Managementperforms on-going credit evaluations of customers and maintains allowances forpotential credit losses when required. At December 31, 2005 and 2004, the Company believes all receivables arefully collectible and no allowance for doubtful accounts is deemed necessary.

 

39

----

 

*Inventories*

 

Inventory consists of raw materials, work inprocess, and finished goods.  Corn is the primary raw material and, alongwith other raw materials, is stated at the lower of average cost ormarket.  Finished goods consist of ethanol produced and distillers grains,and are stated at the lower of first-in, first-out, (FIFO method) cost ormarket.

 

*Property and Equipment*

 

Property and equipment are stated at thelower of cost or estimated value.  Depreciation is computed over estimateduseful lives by use of the straight-line method.  Maintenance and repairsare expensed as incurred; major improvements and betterments are capitalized.

 

The Company reviews its property andequipment for impairment whenever events indicate that the carrying amount ofthe asset may not be recoverable.  Animpairment loss is recorded when the sum of the future cash flows is less thanthe carrying amount of the asset.  Animpairment loss is measured as the amount by which the carrying amount of theasset exceeds its fair value.

 

*Deferred Loan Costs*

 

Costs associated with the issuance of theconstruction loan discussed in Note 3 are recorded as deferred loan costs, netof accumulated amortization.  Loan costs are amortized to operations overthe life of term note using the effective interest method.

 

*Derivative Instruments*

 

The Company enters into derivative contractsto hedge the Company’s exposure to price risk related to forecasted corn andnatural gas purchases and forward corn purchase contracts.  The Companydoes not typically enter into derivative instruments other than for hedgingpurposes.  All derivative contracts are recognized on the December 31,2005 balance sheet at their fair market value. Although the Company believes its derivative positions are economichedges, none have been designated as a hedge for accounting purposes.

 

The Company has recorded a liability of$88,806 as of December 31, 2005.  TheCompany has also recorded a combined realized and unrealized loss on derivativeinstruments of $259,196 related to its derivative contracts for the year endedDecember 31, 2005.  This includes a lossof $197,186 recorded during the three month period ended December 31, 2005, aloss of $309,939 recorded during the three month period ended September 30,2005, a gain of $83,384 recorded during the three month period ended June 30,2005 and a gain of $164,545 recorded during the three month period ended March31, 2005.  As the Company had notcommenced operations as of March 31, 2005, the first quarter gains wereincluded in other income and have been reclassed to cost of sales.  The unrealized loss of $260,224 for the yearending December 31, 2004 was recognized as another income and expenseitem.  The Company is required tomaintain cash balances at its broker related to derivative instrumentpositions.  At December 31, 2005,restricted cash totaled $80,280 and is not included in the cash and cash equivalentson the balance sheet or the statements of cash flows.

 

*Grants*

 

The Company recognizes grant income as otherincome for reimbursement of expenses incurred upon complying with theconditions of the grant.  For reimbursements of capital expenditures, thegrants are recognized as a reduction of the basis of the asset upon complyingwith the conditions of the grant.

 

*Government Incentive Payments*

 

For the year ended December 31, 2005 theCompany recorded as other income $2,722,912 from the Commodity CreditCorporation Bioenergy Program, a department of the United States Department ofAgriculture.  This program enables the Company to receive payments basedon increases in production of ethanol over the previous year of up to$7,500,000 per year.  New production iseligible and is considered increased production.  Payments under the

 

40

----

 

program are subject to pro rata reduction ifaggregate payments to all producers in any USDA fiscal year exceed the annual fundingof the program.  As of March 2006, theCompany had received $2,413,165 along with the $309,748 receivable recorded atyear end from the CCC Bioenergy Program. The CCC recently announced that this program will terminate as of June30, 2006.

 

The Company has recorded other income of$475,000 for the year ended December 31, 2005, related to the State ofWisconsin Producer Subsidy Payment program. Due to a designated sunset date of June 30, 2006, the Company does notanticipate recording any more revenue from this program.

 

The Company was not eligible for these federal and state programpayments prior to commencement of production in May 2005.

 

*Fair Value of Financial Instruments*

 

The carrying value of cash and equivalentsand restricted cash approximates their fair value.

 

The Company believes the carrying amount ofderivative instruments approximates fair value based on current market prices.

 

It is not currently practicable to estimatefair value of the notes payable to the lending institution.  Because theseagreements contain certain unique terms, covenants, and restrictions, asdiscussed in Note 3, these are no readily determinable similar instruments onwhich to base an estimate of fair value.

 

*IncomeTaxes*

 

The Company is treated as a partnership forfederal and state income tax purposes, and generally does not incur incometaxes.  Instead its earnings and losses are included in the income taxreturns of its members.  Therefore, no provision or liability for Federalor state income taxes has been included in these financial statements.

 

**2.  INVENTORY**

 

Inventoryconsists of the following at December 31, 2005:

 

| Raw materials   |   | $       | 617,316   |   |
|-----------------|--------|---------|-----------|--------|
| Work in process |   | 187,793 |      |
| Finished goods  |   | 605,638 |      |
| Total           |   | $       | 1,410,747 |   |

 

**3.  BANK FINANCING**

 

On February 26, 2004 theCompany closed on a construction loan from a financial institution.  Theconstruction loan for $33,024,200 was converted on July 15, 2005 into two loanswith the first loan a $4,000,000 revolving loan and the second with a$29,024,200 term loan.  The term of the loans is five years with aten-year amortization.  The term agreement provides for monthly principalinstallments with interest charged at a variable interest rate on the date ofconversion of 6.96% and increasing on the first of each month to a rate of7.3638% as of year end.  The loanagreement further requires additional principal payments of 20% of excess cashflow as defined in the agreement and 50% of the government incentive programpayments.  The Company paid additionalprincipal payments of $3,675,000 in 2005.  The outstanding balance or a portion thereofcan be converted to a fixed rate at anytime as prescribed in the loanagreement.  As of December 31, 2005, theCompany had outstanding debt of $24,479,657, on these credit facilities.  The Company pays 0.50% interest on the unusedportion of the revolving loan instrument. As of December 31, 2005, the Company did not have any borrowings on therevolving loan.

 

There is an annual facility fee of $40,000beginning at the conversion of the construction loan to the facility term noteand upon each anniversary for four years.  If any of the senior debt isprepaid in whole or in part, within three years following the date of theagreement; a prepayment penalty applies. Prepayment penalties of 3%, 2% and 1% of the amount prepaid will applyin the first, second and third year, respectively.

 

41

----

 

These loans are subject to protectivecovenants requiring the Company to maintain various financial ratios, aresecured by all business assets, restrict dividends and require additional loanpayments based on excess cash flow.  

 

Long term debt consists of the following:

 
| ** **                        | ** ** | **December  31, 2005** | ** ** |
|-----------------------------------|------------|------------------------|------------|
|                              |       |                   |       |
| Bank Financing                    |       | $                      | 24,479,657 |   |
|                              |       |                   |       |
| Less: amounts due within one year |       | 2,404,935              |       |
|                              |       |                   |       |
| Totals                            |       | $                      | 22,074,722 |   |

 

Theestimated maturities of long term debt at December 31, 2005 are as follows:

 

| 2006       |   | $          | 2,404,935  |   |
|------------|--------|------------|------------|--------|
| 2007       |   | 2,577,287  |       |
| 2008       |   | 2,762,708  |       |
| 2009       |   | 2,969,580  |       |
| 2010       |   | 3,187,735  |       |
| Thereafter |   | 10,577,412 |       |
| Total      |   | $          | 24,479,657 |   |

 

**4.  OPERATING LEASEOBLIGATIONS**

 

TheCompany signed a ten-year lease agreement in August 2004 with a leasing companyfor eighty-five covered hopper rail cars at $460 per month per rail car.

 

TheCompany entered into two, five-year rental agreements in April and May of 2005for two wheel loaders at approximately $1600 per month per wheel loader.

 

TheCompany entered into a five-year lease agreement in April 2005 with a bank tolease a rail shuttle wagon at $3,300 per month.

 

Leaseexpense for operating leases for the year ending December 31, 2005 was$335,180.  There was no lease expense in2004.

 

At December 31, 2005 theCompany had the following minimum commitments for payment of leases:

 

| 2006       |   | $         | 545,805   |   |
|------------|--------|-----------|-----------|--------|
| 2007       |   | 545,805   |      |
| 2008       |   | 545,805   |      |
| 2009       |   | 545,805   |      |
| 2010       |   | 491,478   |      |
| Thereafter |   | 2,306,900 |      |
| Total      |   | $         | 4,981,598 |   |

 

42

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**5.  MEMBERS’EQUITY**

 

Asspecified in the Company’s operating agreement, the Company has one class of membershipunits.  The Company is authorized toissue up to 28,000 membership units in addition to the 1,280 seed capital unitsissued prior to the Company’s initial registered offering.

 

As of December 31, 2005 and December 31, 2004the Company had 28,780 units outstanding.

 

**6.  RELATED PARTY TRANSACTIONS**

 

Inthe year ending December 31, 2005, the Company had incurred $71,557 in directorfees and related expense, of which $797 to one member is included in accountspayable at December 31, 2005. In the year ending December 31, 2004, theCompany had incurred $67,307 in director fees and related expense, of which$44,478 to eight members is included in accounts payable at December 31, 2004.

 

The Company purchasedapproximately $11,300,000 of corn from members.

 

The Company had a contract witha member, Fagen, Inc., to construct the Company’s ethanol plant. As of December31, 2005, the Company had incurred approximately $46,000,000 in costs relatedto this contract. As of December 31, 2004, the Company had incurred approximately$38,000,000 in costs related to this contract.

 

**7. GRANTS**

 

InOctober 2003, the Wisconsin Department of Commerce approved a grant for$271,000 in funds to reimburse the Company for infrastructure costs.  Inthe year ending December 31, 2005, the Company had incurred the $271,000 ofcosts eligible for reimbursement under this grant and received the entireamount.  $268,525 of this amount isassociated with capital expenditures and has been recognized as a reduction ofthe basis of the asset and the remaining $2,475 of this amount is associatedwith expenses and is reflected in 2004 grant income.

 

InJanuary 2004, the Company was approved for a matching grant from the UnitedStated Department of Agriculture for $450,000. At December 31, 2005, the Company had incurred costs of $450,000associated with this grant and has been reimbursed the $450,000.  $351,227 of this amount is associated withexpenses and has been reflected in grant income; $187,852 in the year endingDecember 31, 2005 and $163,374 in the year ending December 31, 2004.  $98,773 of the $450,000 is associated withcapital expenditures and has been recognized as a reduction of the basis of theasset; 15,019 in the year ending December 31, 2005 and $83,754 in the yearending December 31, 2004.

 

InFebruary 2004, the Company was approved for a matching grant from theTransportation Facilities Economic Development Program (TEA) for $160,000.  At December 31, 2005 the Company has incurredthe $160,000 of costs eligible for reimbursement under this grant and has beenreimbursed the $160,000.  This amount wasrecognized as a reduction of the basis of the asset.

 

AtDecember 31, 2005 the Company has received all of the approved funding for thegrants and has no grants receivable.

 

**8.  INCOME TAXES**

 

Thedifferences between financial statement basis and tax basis of assets are asfollows at December 31:

 
| ** **                                     | ** ** | **2005**   | ** ** |
|------------------------------------------------|------------|------------|------------|
|                                           |       |       |       |
| Financial statement basis of total assets      |       | $          | 64,915,892 |   |
|                                           |       |       |       |
| Organizational and start-up costs  capitalized |       | 1,769,494  |       |
| Accumulated depreciation and amortization      |       | (8,743,854 | )          |
|                                           |       |       |       |
| Taxable income tax basis of total assets       |       | $          | 57,941,532 |   |

 

Therewere no differences between the financial statement basis and tax basis of theCompany’s liabilities.

 

43

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**9.  COMMITMENTS AND CONTINGENCIES**

 

TheCompany was party to an unasserted claim as of December 31, 2004.  In April 2005 the Company paid $18,975 insettlement of the claim.

 

*Utility Agreements*

 

In October 2003, the Company entered into anagreement with an electric cooperative to provide electrical service.  The agreement shall be in effect as of thedate of the agreement and thereafter for a period of three years after electricservice was first provided in January of 2004. At the anniversary of the commencement of services the agreement shallautomatically be extended so that the term again covers a period of threeyears, unless either party gives written notice of intent not to extend.

 

In April 2004, the Company entered into twonatural gas related agreements.  Thenatural gas purchase agreement commits the Company to purchase specifiedquantities of natural gas at a then prevailing market price in April 2005.  The agreement shall renew automatically atthe end of its initial term, April 20, 2006 if notice terminating is not given60 days prior.  The second agreement, thenatural gas transportation service agreement, provides transportation of thenatural gas to the plant at specific transportation rates for a period of fiveyears.

 

*Marketing Agreements*

 

In August 2004, the Company entered into amarketing agreement with an unrelated company to market, sell and distributethe entire ethanol produced at this facility. The agreement shall commence on the first day of the month that theCompany initially ships ethanol and shall continue for a period of 12 months.  This Company accounted for approximately 88%of revenues during 2005 and approximately 59% of accounts receivable for theyear ended December 31, 2005.

 

In August 2004, the Company entered into amarketing agreement with an unrelated company for the purpose of marketing andselling all the distillers grains the Company elects to ship by rail out ofstate.  The initial term of the agreementis one year, and shall remain in effect until terminated by either party at itsunqualified option, by providing written notice of not less than 90 days to theother party.

 

In April 2005, the Company entered into amarketing agreement with an unrelated company for the purpose of developing andmarketing our modified wet distillers grain product.  The initial term of this agreement is oneyear and shall automatically renew for an additional one year unless eitherparty gives the other party not less than 120 days notice prior to the annual renewaldate.

 

*Corn and Natural Gas Contracts*

 

At December 31, 2005, the Company had forwardcorn purchase contracts totaling 9,618,000 bushels for various delivery periodsfrom January 2006 to November 2007 of which approximately 40% are with members.  The prices on these contracts range from$1.88 to $2.58 per bushel or have a basis level established by the CBOT futuresbetween $-0.10 and $-0.23.  At December 31, 2005, the Company had forwardcontracts to purchase approximately 207,920 million British thermal units(MMBTU) of natural gas during the months of January through April 2006 at anaverage price of approximately $11.97 per MMBTU.

 

**10.  SUBSEQUENT EVENTS**

 

On February 8, 2006 the Board of Directors ofthe Company approved a $200 per unit distribution to all members of record asof February 10, 2006.  The distribution,which totaled $5,756,000, was paid on March 15, 2006.

 

44

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On March 8, 2006 the Boardapproved a proposal from a lender to refinance the existing term debt andrevolving loan commitment at a fixed rate of 7.40% per year for five years witha ten year amortization.  However, theyhave not yet entered into any definitive agreements for this debt financing.

 

OnMarch 9, 2006, the Company amended its Amended and Restated Construction and RevolvingLoan Agreement dated February 17, 2005 with AgStar Financial Services,PCA.  The Second Amended and RestatedConstruction and Revolving Loan Agreement increased the revolving commitmentamount to $9,000,000 and amends the revolving note to be payable in full onJuly 1, 2010.  In addition, the Companyrequested that $5,000,000 of the new term revolver be applied as a specialprincipal payment against the Company’s existing term loan with a subsequentnew principal balance of approximately $18,900,000.

 

45

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

 

Boulay, Heutmaker, Zibell& Co., P.L.L.P. has been our independent registered public accounting firmsince the Company’s inception and is the Company’s independent registeredpublic accounting firm at the present time. The Company has had no disagreements with its auditors.

 

**ITEM8A.  CONTROLS AND PROCEDURES.**

 

Our management, includingour Chief Executive Officer (the principal executive officer), Jeff Robertson,along with our Chief Financial Officer (the principal financial officer), BarbBontrager, have reviewed and evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934, as amended) as of December 31, 2005.  Based uponthis review and evaluation, these officers have concluded that our disclosurecontrols and procedures are effective to ensure that information required to bedisclosed in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods requiredby the forms and rules of the Securities and Exchange Commission; and to ensurethat the information required to be disclosed by an issuer in the reports thatit files or submits under the Exchange Act is accumulated and communicated toour management including our principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure.

 

Our management, includingour principal executive officer and principal financial officer, have reviewedand evaluated any changes in our internal control over financial reporting thatoccurred as of December 31, 2005 and there has been no change that hasmaterially affected or is reasonably likely to materially affect our internalcontrol over financial reporting.

 

**ITEM 8B.  OTHER INFORMATION.**

 

None.

 

**PART III**

 

**ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCEWITH SECTION 16(A) OF THE EXCHANGE ACT.**

 

Theinformation required by this Item is incorporated by reference to thedefinitive proxy statement from our 2006 Annual Meeting of Members to be filedwith the Securities and Exchange Commission on the same day as this10-KSB.  This proxy statement is referredto in this report as the 2006 Proxy Statement.

 

**ITEM 10.  EXECUTIVECOMPENSATION.**

 

The Information required bythis Item is incorporated by reference to the 2006 Proxy Statement.

 

**ITEM 11.  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBERMATTERS.**

 

The Information required bythis Item is incorporated by reference to the 2006 Proxy Statement.

 

**ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

 

The Information required bythis Item is incorporated by reference to the 2006 Proxy Statement.

 

 

46

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**ITEM 13.  EXHIBITS.**

 

**Exhibits Filed as Part of this Report and ExhibitsIncorporated by Reference.**

 

The following exhibits are filed as part of this report.  Exhibits previously filed are incorporated byreference, as noted.

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                       |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |       | Articles of Organization of  registrant.  Filed as Exhibit 3.1 to the registrant’s registration  statement on Form SB-2 (Commission File 333-92188) and incorporated by  reference herein.                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 3.2             |       | Amended and Restated Operating  Agreement of the registrant.  Filed as Exhibit 3.2 to the registrant’s periodic  report on Form 10-QSB filed August 15, 2005 (Commission File 000-50733)  and incorporated by reference herein.                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 4.1             |       | Form of Subscription  Agreement of Registrant.  File as Exhibit 4.1 to the registrant’s  registration statement on Form SB-2 (Commission File 333-92188) and  incorporated by reference herein.                                                                                                                         |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 4.2             |       | Form of Membership Unit  Certificate.  Filed as Exhibit 4.2 to the registrant’s registration  statement on Form SB-2 (Commission File 333-92188) and incorporated by reference  herein.                                                                                                                                 |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 4.3             |       | Escrow Agreement dated  June 18, 2002.  Filed as Exhibit 4.3 to the registrant’s registration  statement on Form SB-2 (Commission File 333-92188) and incorporated by  reference herein.                                                                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 10.1            |       | Agreement by and between  Key Railroad Development, LLC and United Wisconsin Grain Producers, LLC dated  January 30, 2003. Filed as Exhibit 10.10 to the registrant’s registration  statement on Form SB-2/A (Commission File 333-92188) filed May 8, 2003 and  incorporated by reference herein.                            |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 10.2            |       | Accepted Proposal for  Provision of Services by Key Engineering Group, Inc. dated June 10, 2003.  Filed as Exhibit 10.14 to registrant’s periodic report on Form 10-QSB  (Commission File 333-92188) filed November 11, 2003 and incorporated by  reference herein.                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 10.3            |       | Change Order Request No. 1  by Key Railroad Development, LLC dated July 21, 2003. Filed as Exhibit 10.15  to registrant’s periodic report on Form 10-QSB (Commission File 333-92188)  filed November 11, 2003 and incorporated by reference herein.                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 10.4            |       | Electric Service Agreement  dated October 3, 2003 by and between Adams-Columbia Electric Cooperative of  Friendship and United Wisconsin Grain Producers, LLC. Filed as Exhibit 10.6  to registrant’s periodic report on Form 10-KSB (Commission File 333-92188)  filed March 30, 2004 and incorporated by reference herein. |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 10.5            |       | Contract for Construction  Services between Iverson and Son’s LLC and United Wisconsin Grain Producers,  LLC. Filed as Exhibit 10.7 to registrant’s periodic report on Form 10-KSB  (Commission File 333-92188) filed March 30, 2004 and incorporated by  reference herein.                                             |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 10.6            |       | Design-Build Contract  dated October 8, 2003 between Fagen, Inc. and United Wisconsin Grain  Producers, LLC.* Filed as Exhibit 10.8 to registrant’s periodic report on  Form 10-KSB (Commission File 333-92188) filed March 30, 2004 and incorporated  by reference herein.                                                  |

 

47

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| 10.7   |   | Contract  Change Order dated December 30, 2003 between Fagen, Inc. and United Wisconsin  Grain Producers, LLC.* Filed as Exhibit 10.9 to registrant’s periodic report  on Form 10-KSB (Commission File 333-92188) filed March 30, 2004 and  incorporated by reference herein.                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.8   |   | Natural Gas Sales &  Service agreement dated April 1, 2004 between WPS Energy Services, Inc. and  United Wisconsin Grain Producers LLC. Filed as Exhibit 10.2 to registrant’s  period report on Form 10-QSB (Commission File 000-50733) filed August 16,  2004 and incorporated by reference herein.            |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.9   |   | Natural Gas Transportation  Service agreement dated April 8, 2004 between Wisconsin Power and Light  Company and United Wisconsin Grain Producers LLC. Filed as Exhibit 10.1 to  registrant’s period report on Form 10-QSB (Commission File 000-50733) filed  August 16, 2004 and incorporated by reference herein. |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.10  |   | Ethanol Fuel Marketing  Agreement dated August 25, 2004 between Renewable Products Marketing Group  LLC and United Wisconsin Grain Producers LLC. Filed as Exhibit 10.1 to  registrant’s periodic report on Form 10-QSB (Commission File 333-92188) filed  November 15, 2004 and incorporated by reference herein.  |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.11  |   | Distiller’s Grain  Marketing Agreement dated August 31, 2004 between Commodity Specialist  Company and United Wisconsin Grain Producers LLC. Filed as Exhibit 10.2 to registrant’s  periodic report on Form 10-QSB (Commission File 333-92188) filed November 15,  2004 and incorporated by reference herein.  |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.12  |   | Facility Use Agreement  dated October 4, 2004 between Town of Randolph and United Wisconsin Grain  Producers LLC. Filed as Exhibit 10.3 to registrant’s periodic report on Form  10-QSB (Commission File 333-92188) filed November 15, 2004 and incorporated  by reference herein.                                  |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 10.13  |   | Railroad Spur Construction  Agreement dated October 15, 2004 between the Town of Randolph and Volkmann  Railroad Builders, Inc. filed as Exhibit 10.13 to registrant’s periodic  report on Form 10-KSB (Commission File 333-92188) filed March 21, 2005 and  incorporated by reference herein.                      |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 14.1   |   | Code of Ethics of United  Wisconsin Grain Producers, LLC adopted March 18, 2004. Filed as Exhibit 14.1  to registrant’s periodic report on Form 10-KSB (Commission File 333-92188)  filed March 30, 2004 and incorporated by reference herein.                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 31.1   |   | Certificate pursuant to 17  CFR 240.15d-14(a).                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 31.2   |   | Certificate pursuant to 17  CFR 240.15d-14(a).                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 32.1   |   | Certificate pursuant to 18  U.S.C. Section 1350.                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                     |
| 32.2   |   | Certificate pursuant to 18  U.S.C. Section 1350.                                                                                                                                                                                                                                                                         |

 

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*Material has been omitted pursuant to a request for confidentialtreatment and such materials have been filed separately with the Securities andExchange Commission.

 

**ITEM14.  PRINCIPAL INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM FEES AND SERVICES.**

 

TheInformation required by this Item is incorporated by reference to the 2006Proxy Statement.

 

48

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**SIGNATURES**

 

Inaccordance with Section 13 or 15(d) of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   |                | UNITED WISCONSIN GRAIN  PRODUCERS, LLC                                |
|--------|---------------------|-----------------------------------------------------------------------|
|   |                |                                                                  |
| Date:  | March 24, 2006 |                                                                  | /s/ J.F. Robertson |   |
|   |                | J.F. Robertson                                                        |
|   |                | Chief Executive Officer  (Principal Executive Officer)                |
|   |                |                                                                  |
| Date:  | March 24, 2006 |                                                                  | /s/ Barb Bontrager |   |
|   |                | Barb Bontrager                                                        |
|   |                | Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
| Date:  | March 24, 2006 |                                              | /s/Kevin M. Roche       |   |
|--------|---------------------|---------------------------------------------------|-------------------------|--------|
|   |                | Kevin M Roche, Chairman,  President and Director  |
|   |                |                                              |
| Date:  | March 24, 2006 |                                              | /s/ William R. Herrmann |   |
|   |                | William R. Herrmann,  Vice-President and Director |
|   |                |                                              |
| Date:  | March 24, 2006 |                                              | /s/ Robert J. Miller    |   |
|   |                | Robert J. Miller, Director                        |
|   |                |                                              |
| Date:  | March 24, 2006 |                                              | /s/ Carl Benck          |   |
|   |                | Carl Benck, Director                              |
|   |                |                                              |
| Date:  | March 24, 2006 |                                              | /s/ Cal Dalton          |   |
|   |                | Cal Dalton, Director                              |
|   |                |                                              |
| Date:  | March 24, 2006 |                                              | /s/ Jerry H. Franz      |   |
|   |                | Jerry H. Franz, Director                          |
|   |                |                                              |
| Date:  | March 24, 2006 |                                              | /s/ Berwyn G. Westra    |   |
|   |                | Berwyn G. Westra, Director                        |
|        |                     |                                                   |                         |        |  |

 

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