Husker 10QSB 2003 Q3 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 30, 2003; or

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from to .

Commission file number: 000-49773

HUSKER AG, LLC

(Exact name of registrant as specified in its charter)

Nebraska	2869 (325193 NAICS)	47-0836953
(State or other jurisdiction of	(Primary Standard Industrial	(IRS Employer
Incorporation or organization)	Classification Code Number)	Identification No.)

54048 Highway 20

P.O. Box 10

Plainview, Nebraska 68769

(402) 582-4446

(Address and telephone number of registrant’s principal executive offices)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

		Class		Outstanding at September 30, 2003
		Membership Units		15,318 Membership Units

HUSKER AG, LLC

INDEX TO 10-QSB FOR THE QUARTERLY

PERIOD ENDED SEPTEMBER 30, 2003

PART I	FINANCIAL INFORMATION		PAGE
	ITEM 1.	INDEPENDENT ACCOUNTANTS’ REPORT	4

		CONDENSED BALANCE SHEETS	5

		CONDENSED STATEMENT OF OPERATIONS	6

		CONDENSED STATEMENTS OF CASH FLOWS	7

		NOTES TO CONDENSED FINANCIAL STATEMENTS	8

	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15

	ITEM 3.	CONTROLS AND PROCEDURES	27

PART II	OTHER INFORMATION

	ITEM 1.	LEGAL PROCEEDINGS	27

	ITEM 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS	27

	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	27

	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	27

	ITEM 5.	OTHER INFORMATION	27

	ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K	27

		SIGNATURES	28

ITEM 1: FINANCIAL STATEMENTS

Husker Ag, LLC

September 30, 2003 and 2002

Contents

Independent Accountants’ Report		4

Financial Statements
Condensed Balance Sheets		5
Condensed Statements of Income (Loss)		6
Condensed Statements of Cash Flows		7
Notes to Condensed Financial Statements		8

Independent Accountants’ Report

Board of Directors

Husker Ag, LLC

Plainview, Nebraska

We have reviewed the accompanying condensed balance sheet of Husker Ag, LLC as of September 30, 2003, and the related condensed statements of income (loss) for the three-month and nine-month periods ended September 30, 2003 and 2002 and cash flows for the nine-month periods ended September 30, 2003 and 2002. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the balance sheet as of December 31, 2002, and the related statements of loss, members’ equity and cash flows for the year then ended (not presented herein); and in our report dated January 31, 2003, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

/s/ BKD,LLP

Lincoln, Nebraska

October 20, 2003

Husker Ag, LLC

Condensed Balance Sheets

September 30, 2003 and December 31, 2002

	September 30, 2003			December 31, 2002
	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	4,338,001		$	306,320
Accounts receivable
Trade		857,403			—
Incentives		1,518,998			—
Inventories		675,665			—
Margin account cash		1,077,237			321,950
Option contracts		47,925			158,050
Prepaid expenses		126,075			21,845

Total current assets		8,641,304			808,165

Property and Equipment, at cost
Land		84,318			84,318
Plant buildings and equipment		29,908,757			—
Other equipment		441,618			345,626
Office building		204,397			200,518
Vehicles		17,200			17,200
Construction in progress		—			23,650,254

		30,656,290			24,297,916
Less accumulated depreciation		1,210,779			7,895

		29,445,511			24,290,021

Other Assets
Debt origination costs, net of accumulated amortization; September 30, 2003—$11,127		433,959			445,086
Option contracts		—			173,350
Other		3,544			4,772

		437,503			623,208

	$	38,524,318		$	25,721,394

Liabilities and Members’ Equity
Current Liabilities
Accounts payable
Trade	$	424,775		$	298,618
Retainage on construction in progress		—			1,345,000
Short-term debt expected to be refinanced		19,827,860			10,192,115
Current maturities of long-term debt		28,067			—
Option and futures contracts		659,347			563,575
Accrued expenses		199,830			21,991

Total current liabilities		21,139,879			12,421,299

Long-term Debt		658,536			—

Option Contracts		—			452,850

Members’ Equity
Members’ equity—15,318 units		16,989,091			12,847,245
Accumulated other comprehensive loss		(263,188	)		—

		16,725,903			12,847,245

	$	38,524,318		$	25,721,394

See Notes to Condensed Financial Statements and Accountants’ Review Report for September 30, 2003

Husker Ag, LLC

Condensed Statements of Income (Loss)

Three and Nine Months Ended September 30, 2003 and 2002

(Unaudited)

	Three Months						Nine Months
	2003			2002			2003			2002
Net Sales
Ethanol Sales	$	7,149,332		$	—		$	14,292,093		$	—
Distiller Grain Sales		1,495,159			—			3,187,226			—
Energy Production Credits		2,809,891			—			5,130,426			—

		11,454,382			—			22,609,745			—
Cost of Sales		8,321,228			—			16,989,981			—
(Gain) Loss on Options		(235,485	)		692,000			(181,541	)		692,000

Gross Profit		3,368,639			(692,000	)		5,801,305			(692,000	)
Selling, General and Administrative Expenses		224,183			136,011			1,208,394			491,879

Operating Income (Loss)		3,144,456			(828,011	)		4,592,911			(1,183,879	)

Other Income (Expense)
Other income		29			—			29			3,600
Interest expense		(215,326	)		—			(456,463	)		—
Interest income		3,960			23,181			6,638			118,179

		(211,337	)		23,181			(449,796	)		121,779

Net Income (Loss)	$	2,933,119		$	(804,830	)	$	4,143,115		$	(1,062,100	)

Basic and Diluted Earnings (Loss) Per Membership Unit	$	191.48		$	(52.54	)	$	270.47		$	(69.34	)

Weighted Average Units Outstanding		15,318			15,318			15,318			15,318

Other Comprehensive Income
Net Income (Loss)	$	2,933,119		$	(804,830	)	$	4,143,115		$	(1,062,100	)
Loss on Cash Flow Hedge		(177,413	)		—			(263,188	)		—

Comprehensive Income (Loss)	$	2,755,706		$	(804,830	)	$	3,879,927		$	(1,062,100	)

See Notes to Condensed Financial Statements and Accountants’ Review Report

Husker Ag, LLC

Condensed Statements of Cash Flows

Nine Months Ended September 30, 2003 and 2002

(Unaudited)

	2003			2002
Operating Activities
Net income (loss)	$	4,143,115		$	(1,062,100	)
Items not requiring cash
Depreciation and amortization expense		1,215,239			2,873
Changes in
Accounts receivable		(2,376,401	)		—
Inventories		(675,665	)		—
Margin account cash		(755,287	)		(71,950	)
Option and futures contracts		(336,791	)		404,850
Prepaid expenses		(104,230	)		(39,372	)
Interest receivable		—			194
Accounts payable and accrued expenses		444,610			58,747

Net cash provided by (used in) operating activities		1,554,590			(706,758	)

Investing Activities
Purchases of property and equipment		(7,150,728	)		(10,563,837	)

Net cash used in investing activities		(7,150,728	)		(10,563,837	)

Financing Activities
Offering costs paid		—			(39,694	)
Advances on construction loan		9,635,745			—
Payments on long-term debt		(6,657	)		—
Receipt of debt origination costs		—			240,000
Distributions for state taxes of out-of-state members		(1,269	)		—

Net cash provided by financing activities		9,627,819			200,306

Increase (Decrease) in Cash and Cash Equivalents		4,031,681			(11,070,289	)
Cash and Cash Equivalents, Beginning of Period		306,320			13,483,166

Cash and Cash Equivalents, End of Period	$	4,338,001		$	2,412,877

Supplemental Cash Flows Information
Net decrease in accounts payable incurred for offering costs	$	—		$	(39,694	)
Net increase (decrease) in accounts payable incurred for site development and construction in progress	$	(1,485,614	)	$	5,529,608
Long-term debt incurred for plant, buildings and equipment	$	693,260		$	—
Interest paid (net of amount capitalized)	$	456,463		$	—

See Notes to Condensed Financial Statements and

Accountants’ Review Report

Husker Ag, LLC

Notes to Condensed Financial Statements

September 30, 2003

(Unaudited)

Note 1:

Summary of Significant Accounting Policies and Basis of Presentation

Basis of Presentation

The accompanying unaudited condensed financial statements reflect all adjustments that are, in the opinion of the Company’s management, necessary to fairly present the financial position, results of operations and cash flows of the Company. Those adjustments consist only of normal recurring adjustments. The condensed balance sheet as of December 31, 2002 has been derived from the audited balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto in the Company’s Form 10-KSB Annual Report for 2002 filed with the Securities and Exchange Commission. The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounts Receivable

Accounts receivable are stated at the amount billed to customers. As of September 30, 2003, the Company believes all receivables are fully collectible. If necessary, the Company will provide an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions.

At September 30, 2003, the Company had receivables from one customer amounting to 54% of the total trade receivables.

See Accountants’ Review Report

Husker Ag, LLC

Notes to Condensed Financial Statements

September 30, 2003

(Unaudited)

Note 1:

Summary of Significant Accounting Policies and Basis of Presentation—Continued

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. At September 30, 2003, inventories were comprised of the following:

Raw materials, enzymes and additives	$	271,589
Work-in-progress		167,370
Finished goods		236,706

	$	675,665

Revenue Recognition

The Company records revenue from federal and state incentive programs related to the production of ethanol when the Company has produced the ethanol and completed all the requirements of the applicable incentive program.

Property and Equipment

Property and equipment are depreciated over the estimated useful life of each asset which range from 3 to 30 years. Annual depreciation is computed using the straight-line method.

Reclassifications

Certain reclassifications have been made to the 2002 financial statements to conform to the 2003 financial statements presentation. These reclassifications had no effect on net loss.

See Accountants’ Review Report

Husker Ag, LLC

Notes to Condensed Financial Statements

September 30, 2003

(Unaudited)

Note 2:

Commencement of Operations

In March 2003 the production process for the Company’s ethanol plant commenced. The design-build contract (Note 4) requires a testing period to confirm that the plant is consistently producing at capacity and achieved substantial completion. The plant has achieved substantial completion.

At December 31, 2002, the Company was primarily involved in organizational activities and construction of the plant. Accordingly, at December 31, 2002, the Company was considered to be in the development stage and the financial statements presented were those of a development stage enterprise. The total deficit accumulated during the development stage amounted to $1,683,917.

Note 3:

Commitments and Related Party Transactions

On August 29, 2002, the Company entered into a natural gas distribution agreement under which the distributor has agreed to transport a minimum of 35 million therms of natural gas at a fixed price over a five-year initial term. The agreement is renewable at the end of the initial term for an additional five-year period.

In November 2002, the Company entered into a marketing agreement with an officer of the Company to sell and market the Company’s distiller grains and corn syrup. Under the terms of the agreement, the Company will pay a commission to the officer based on total gross sales contracted for and collected. The marketing agreement expires on March 31, 2004; however, it automatically renews for one year periods on the same terms and conditions unless terminated by either party.

At September 30, 2003, the Company had entered into agreements to purchase 2,174,199 bushels of corn to be delivered between October 2003 and May 2004 at agreed upon prices. Twenty contracts totaling 741,344 bushels are with related parties.

In November 2002, the Company entered into an ethanol marketing agreement with Eco-Energy, Inc. to market ethanol for an agreed-upon fee, which includes the cost of the rail shipment. Eco-Energy, Inc. also collects the sales amount from the ultimate customers and remits the net sales price to the Company within three business days after the sale. The agreement has a one-year term.

Note 4:

Design-Build Agreement

On November 30, 2001 the Company entered into a definitive design-build agreement with a general contractor for the design and construction of the ethanol plant. Plant construction costs totaled approximately $27,660,000 excluding land, site development, construction of the administration building, connection of a rail spur, and capitalized interest costs. The general contractor is a member of the Company.

See Accountants’ Review Report

Husker Ag, LLC

Notes to Condensed Financial Statements

September 30, 2003

(Unaudited)

Note 4:

Design-Build Agreement—Continued

The design-build contract included provisions for an incentive bonus to, or liquidated damages from, the general contractor based on the scheduled project completion date. Based on the completion date, as defined in the design build contract, an incentive bonus totaling $356,000 is due the general contractor. On June 5, 2003, the Company entered into a negotiable promissory note with the contractor for payment of the incentive bonus (See Note 5).

Note 5:

Debt Financing

On December 19, 2001, the Company entered into a written financing agreement with Stearns Bank, N.A. for up to $20,000,000 of debt financing. The financing agreement provides for, among other things, establishing an 18-month construction loan that matured June 19, 2003. The construction loan was extended to December 31, 2003 and as a result is classified in the accompanying balance sheet as short-term. The loan will be converted into three term notes upon maturity, as discussed below. Interest accrues at a floating rate of Wall Street Journal Prime plus 1.25% (5.25% at September 30, 2003, adjusted daily), with two monthly principal and interest payments of $285,774 beginning October 2003 and any unpaid principal and interest due at maturity. In connection with the extension of the construction loan, the Company has agreed to certain restrictive covenants including prior lender approval of distributions and the maintenance of minimum levels of tangible net worth. At September 30, 2003, there was $19,827,860 in outstanding borrowings under this agreement.

Upon successful completion of construction of the ethanol plant, the bank has agreed to convert the construction loan into three permanent loans. The proposed permanent financing is subject to the consent of a USDA guarantee for 70% of the borrowings under Loan A, required loan documentation and no material adverse change in the Company’s financial condition. The terms of the proposed financing provide for fees totaling approximately $240,000 to be paid upon loan origination. The amounts and terms of the permanent financings are as follows:

Loan	Amount		Interest Rate	Term	Payments
A	$	8,837,300	WSI Prime + 1.25%	15	Monthly Principal and Interest
B		8,837,300	WSI Prime + 1.25%	7	Monthly Principal and Interest
C		1,505,900	WSI Prime + 1.25%	3	Monthly Principal and Interest

The term notes are subject to the same restrictive covenants as the construction note discussed above and, additionally, the Company must maintain a minimum debt service coverage ratio.

On June 5, 2003, the Company entered into a negotiable promissory note in the amount of $356,000 with the general contractor for payment of an incentive bonus due the contractor. The note bears interest at a rate consumerate with the rate charged on the aforementioned construction note with unpaid accrued interest added to the principal annually. The note is due no later than September 5, 2006 and is without collateral.

See Accountants’ Review Report

Husker Ag, LLC

Notes to Condensed Financial Statements

September 30, 2003

(Unaudited)

Note 5:

Debt Financing—Continued

On July 1, 2003 the Company entered into a promissory note with Northeast Nebraska Public Power in the amount of $337,260. The note bears interest at 4.127% with principal and interest due in monthly installments of $3,438 through June 2013. The note is collateralized by a letter of credit, as discussed below, in the amount of $327,825.

The Company has a line of credit, with maximum borrowing of $1,000,000 reduced by any outstanding letters of credit (see below), expiring March 31, 2004. At September 30, 2003, there were no borrowings against the line. The line is collateralized by a security agreement dated March 11, 2003. Interest will accrue at a variable interest rate of prime plus 0.50% and is payable monthly.

The Company also has a letter of credit with the Stearns Bank amounting to $327,825, expiring December 20, 2003, to be used to secure the Company’s promissory note described above.

Note 6:

Derivative Instruments

The Company enters into option and futures contracts, which are designated as hedges of specific volumes of corn expected to be used in the manufacturing process. The Company uses derivative financial instruments to manage the exposure to price risk related to corn purchases. The Company does not typically enter into derivative instruments for any reason other than cash flow hedging purposes. The option and futures contracts presented on the September 30, 2003 condensed balance sheet are recorded at fair value. On the date that the contract is entered into, the Company designates the option or contract as a hedge of variable cash flows of certain forecasted purchases of corn used in the manufacturing process (a “cash flow hedge”). The Company formally documents relationships between the option and futures contracts, which serve as the hedging instruments, and the hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking option and futures contracts that are designated as cash flow hedges to certain forecasted purchasing activities. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the option or futures contracts that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that an option or futures contract is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.

Changes in the fair value of option and futures contracts that are highly effective and that are designated and qualify as cash flow hedges are recorded in other comprehensive loss. Gains or losses that are realized will be recognized in the statement of operations when the related corn purchased is recognized in cost of sales.

See Accountants’ Review Report

Husker Ag, LLC

Notes to Condensed Financial Statements

September 30, 2003

(Unaudited)

Note 7:

Disclosure Regarding Fair Value of Financial Instruments

For all financial instruments held by the Company, including cash, accounts receivable, accounts payable, long-term debt, and loan commitments, the carrying amounts are reasonable estimates of fair value.

The fair value of option contracts is reflected in the carrying amounts included in the accompanying condensed balance sheets, as discussed in Note 6.

Note 8:

Recent Accounting Pronouncement

The Financial Accounting Standards Board (FASB) has issued several new accounting pronouncements that became effective in the fiscal year commencing January 1, 2003.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123”. SFAS 148 provides alternative methods of transitions for entities that voluntarily change to the fair value method of accounting for stock-based employee compensation, and it also amends the disclosure provisions of SFAS 123.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 provides guidance with respect to the consolidation of certain variable interest entities (“VIEs”) whereby a VIE must be consolidated by its primary beneficiary if the entity does not effectively disperse risks among parties involved.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends SFAS 133 to clarify the definition of a derivative and incorporate many of the implementation issues cleared as a result of the Derivatives Implementation Group process. This statement is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively after that date.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. This statement affects the classification, measurement and disclosure requirements of certain freestanding financial instruments including mandatorily redeemable shares.

Management does not expect the implementation of these pronouncements to have a significant effect on the financial statements.

See Accountants’ Review Report

Husker Ag, LLC

Notes to Condensed Financial Statements

September 30, 2003

(Unaudited)

Note 9:

Energy Production Incentive Credits

The Company is currently participating in state and federal energy production credit programs. Under these programs, the Company earns credits based on the bushels of corn utilized in the production of ethanol and on the gallons of ethanol produced. As of September 30, 2003, accounts receivable and 2003 credits earned related to these programs totaled approximately $1,519,000 and $5,130,000, respectively. These credits are included in net sales in the accompanying condensed statements of income for 2003.

As of September 30, 2003 total credits available under the federal energy production credit program are limited to $115,000,000 for all participants in the program. Credits claimed by eligible participants are projected to exceed the amount of credits available. As a result, federal energy production credits recorded were based on the amount of credits estimated to be allocated to the Company. Actual credits received may differ from amounts recorded by a material amount.

See Accountants’ Review Report

ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Husker Ag and its representatives may from time to time make written or oral forward-looking statements, including statements made in this report, that represent Husker Ag’s expectations or beliefs concerning future events, including statements regarding future sales, future profits and other results of operations, the continuation of historical trends, the sufficiency of cash balances and cash generated from operating and financing activities for Husker Ag’s future liquidity and capital resource needs, and the effects of any regulatory changes. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Husker Ag cautions you that any forward-looking statements made by Husker Ag in this report, in other reports filed by Husker Ag with the Securities and Exchange Commission or in other announcements by Husker Ag are qualified by certain risks and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Such risks and factors include, but are not limited to, the risk factors set forth in the section below entitled “RISK FACTORS”.

Husker Ag’s Debt Financing with Stearns Bank

Husker Ag, LLC (“Husker Ag” or the “Company”) has financed the construction of its ethanol plant through Stearns Bank, N.A, St. Cloud, Minnesota (the “Bank”). On December 19, 2001, Husker Ag closed on its construction financing with the Bank under a Construction Loan Agreement, pursuant to which the Bank agreed to provide up to $20,000,000 of debt financing for the purpose of constructing the Husker Ag ethanol plant. The construction loan has been evidenced by a demand promissory note from Husker Ag to the Bank, with a variable interest rate which follows the prime rate as published by theWall Street Journal (“WSJ Prime Rate”) plus ¼% (resulting in an interest rate of 5.0% as of the time of the Company’s initial borrowing in October 2002 and 4.25% as of September 30, 2003). The construction loan was originally for an 18-month period, ending June 19, 2003, but was extended to September 30, 2003, pursuant to a Change in Terms Agreement dated June 28, 2003.

The Bank’s construction loan is secured by a first mortgage on the Company’s real estate and plant, as well as a first security interest on all accounts receivable, inventory, equipment, fixtures, all personal property and general intangibles. The Construction Loan Agreement imposed a number of conditions to be met by the Company on an on-going basis prior to the Bank’s disbursement of loan funds. As of September 30, 2003, the Company had borrowed $19,827,860 under the construction loan.

On September 29, 2003, in response to the USDA declining the original $20 million loan request of the Bank with a 60% guaranty (covering $12 million of the total loan), the Company and the Bank entered into a Change in Terms Agreement (the “September Change in Terms Agreement”) which extends the maturity date of the construction loan from September 30, 2003 until December 31, 2003, and a conditional commitment letter, dated September 26, 2003 (the “September Bank Letter”). Under the September Change in Terms Agreement, the interest rate on the demand promissory note is changed to 1.25% over the WSJ Prime Rate, adjusting daily (the WSJ Prime Rate is 4.0% as of September 30, 2003, with a resultant interest rate of 5.25%), and the Company must begin making principal and interest payments based on a 7-year amortization, requiring two regular payments as of October 31, 2003, and November 30, 2003 of $285,774.29, with the remaining balance due on December 31, 2003.

The September Change in Terms Agreement also added a 3% prepayment penalty, and additional covenants stating (i) that the Company may not make distributions without prior lender approval and issuance of the USDA loan note guarantee, (ii) requiring the Company to maintain a minimum 40% balance sheet tangible net worth, and (iii) requiring the Company to maintain a debt service coverage ratio of at least 1.2x after distributions.

Under the September Bank Letter, the Bank and the Company agree to proceed on the following terms with respect to the permanent financing. The permanent financing would be divided into three portions, as follows:

(1) Loan A: $8,837,300, a 70% USDA Guaranty loan, amortized over 15 years.

(2) Loan B: $8,837,300, conventional loan, amortized over 7 years.

(3) Loan C: $1,505,900, conventional loan, amortized over 3 years.

The interest rate on the above loans would be WSJ Prime Rate plus 1.25%, adjusted quarterly.

The September Bank Letter also includes a conversion fee of $116,227, and a 2% USDA fee of $123,722. Loans A and B would be collateralized on a pari passu basis with the USDA, with a first real estate mortgage on the ethanol plant real estate, and a first security interest on accounts receivable, inventory, equipment, fixtures, personal property and general intangibles. Loan C would have a second position on the same collateral. The permanent loan would be subject to prepayment premiums of 5% of principal balance in year one, 4% in year two, 3% in year three, 2% in year four and 1% in year five. Additional loan covenants are to be determined with USDA Rural Development, and a minimum of 40% tangible balance sheet equity must be maintained by the Company.

The September Bank Letter is subject to a 70% USDA guaranteed loan as to the Loan A portion and the negotiation of definitive credit, security and related loan documents satisfactory to the Bank, and there can be no assurance that the Bank will obtain the 70% USDA guaranty on the Loan A portion of the permanent loan, or that the Company and the Bank could mutually agree on final terms. There is no provision committing the Bank to provide conventional loan financing in the event a USDA guaranteed loan is not obtained. In such event, the Company would need to reach mutual agreement with the Bank regarding conventional loan terms, or find an alternative lending source to pay off the construction loan, which is subject to a 3% prepayment penalty. If the construction loan repayment is unpaid for a period 10 days following its due date, a late charge of 5% of the principal amount due and payable at maturity is assessed under the construction loan.

Results Of Operations

On March 4, 2003, the production process for the ethanol plant commenced and the plant commenced grinding corn. Under the terms of the Design-Build Agreement and the contract change order dated August 7, 2002, Fagen, Inc. was entitled to an early completion bonus of $8,000 per day, for every day that substantial completion has been attained in advance of April 26, 2003. Husker Ag and Fagen have agreed upon a “substantial completion” date of March 13, 2003, and based on this agreement, Fagen is entitled to an early completion bonus of $356,000. On June 5, 2003, Husker Ag entered into an unsecured Promissory Note in the amount of $356,000 for the early completion bonus pursuant to which Husker Ag agreed to pay such amount in installments approved by Husker Ag’s senior lender prior to June 5, 2006. The Promissory Note accrues interest at the same rate charged by the senior lender of Husker Ag as such rate may change from time to time. On each anniversary of the Promissory Note, any unpaid accrued interest converts to principal and begins to accrue interest thereafter as principal.

The Company completed construction of the plant and began operating at full capacity during the 2^nd quarter of 2003. Accordingly, we do not have comparable income, production and sales data for the quarter ended September 30, 2002.

Net income and comprehensive net income for Husker Ag for the nine months ended September 30, 2003 were $4,143,115 and $3,879,927, respectively, consisting of $4,592,911 operating income, $29 of other income and $6,638 of interest income offset by $456,463 of interest expense. Net income for the three month period ended September 30, 2003 includes a $235,485 gain on options which was offset by the $53,944 loss on options which occurred during the 1^st and 2^nd quarters of 2003 for an aggregate gain on options for the nine months ended September 30, 2003 of $181,541. The loss and gain on options represents the change in the market value of option contracts during the quarter ended September 30, 2003. It includes both option contracts held for the entire quarter and contracts that were closed out during the quarter. Net income and comprehensive net income for Husker Ag for the nine months ended September 30, 2002, during which the plant was under construction, was ($1,062,100). Husker Ag had no revenues for the nine month period ended September 30, 2002 and had operating expenses of $692,000. The operating expenses were offset by $118,179 of interest income and $3,600 of other income to the Company.

Net sales for the nine months ended September 30, 2003 were $22,609,745 and consisted of $19,422,519 (86%) in sales of ethanol which amount includes approximately $2,253,422 of ethanol producer credits from the State of Nebraska and $2,877,004 of ethanol producer credit from the federal government, and $3,187,226 (14%) in sales of distiller grains and corn syrup. Husker Ag was in the construction phase and thus had no sales of ethanol, distiller grains and corn syrup during the nine month period ended September 30, 2002.

The ethanol producer credit receivables from the federal government include incentive revenue from the United States Department of Agriculture’s Commodity Credit Corporation under its Bioenergy Program in the quarter ended September 30, 2003. This Bioenergy Program has been extended through the federal fiscal year of 2007. Cash

payments to eligible ethanol producers are based on the increase in gallons of ethanol produced from the prior federal fiscal year (which is an October 1 to September 30 fiscal year) and the market price of corn at the end of each quarter, with a more favorable calculation structure used for producers who generate less than 65 million gallons of ethanol annually. The maximum amount any one producer may receive annually under the program is $7.5 million. Funding for the program is limited to $150 million per year, with a proration factor used if estimated payments to all eligible producers for the fiscal year exceed the available funding. Husker Ag has filed agreements to be eligible for payments under this program and have submitted the required quarterly application for payment. Husker Ag anticipates it will receive less incentive revenue under the Bioenergy Program in the next program year because these incentive payments are partially based on the increase in gallons of ethanol produced compared to the prior year’s production, as opposed to the total number of gallons produced in the current year. Therefore, the Company will receive lower payments under this program in the future because the increase in production as compared to prior years will almost certainly be smaller than for our first full year of production.

In addition to Bioenergy Program cash incentives, LB 536, a State of Nebraska legislative bill which came into law on May 31, 2001, established a production tax credit of 18¢ per gallon of ethanol produced during a 96 consecutive month period by newly constructed ethanol facilities in production prior to June 30, 2004. The tax credit is only available to offset Nebraska motor fuels excise taxes. The tax credit is transferable and therefore Husker Ag intends to transfer credits received to a Nebraska gasoline retailer who will then reimburse Husker Ag for the face value of the credit amount less a handling fee. On March 24, 2003, Husker Ag entered into an agreement with Rite Way Oil & Gas Co., Inc. pursuant to which Husker Ag will transfer up to $500,000 in ethanol production credits to Rite Way per month. Rite Way will then pay Husker Ag the credit amount less a handling fee. No producer can receive tax credits for more than 15,625,000 gallons of ethanol produced in one year and no producer will receive tax credits for more than 125 million gallons of ethanol produced over the consecutive 96 month period. The minimum production level for a plant to qualify for credits is 100,000 gallons of ethanol annually. The production incentive is scheduled to expire June 30, 2012. Assuming we are producing at least 15,625,000 gallons of ethanol annually, this producer tax credit could result in payments of up to $2,812,500 to us annually, subject to the statutory maximum limit.

These two programs may not have sufficient funds to cover the allocations to eligible producers in 2003 or future years. We are currently unable to predict whether there may be a funding shortfall and what the effect on our allocation might be. In addition, although the federal government has extended the Bioenergy Program an additional five years, it is currently scheduled to expire September 30, 2007.

Husker Ag currently has engaged Eco-Energy, Inc. to market and sell its ethanol. On November 27, 2002, the Company entered into a Risk Management and Ethanol Marketing Contract with FCStone, LLC and Eco-Energy, Inc. pursuant to which FCStone provides Husker Ag with a full service price risk management program and Eco-Energy purchases Husker Ag’s entire output of ethanol in good faith at fair market rates for the term of the agreement. The initial term of the agreement is one year from the date Husker Ag plant began ethanol production and automatically renews for an additional one year term unless Husker Ag gives notice of non-renewal in writing at least four months prior to the end of the initial term.

On October 28, 2003, the Company notified FCStone, LLC and Eco-Energy, Inc. of the Company’s intention not to have the Risk Management and Ethanol Marketing Contract automatically renew in accordance with its terms and therefore the agreement will terminate on March 6, 2004. Management is currently exploring other alternatives available to the Company for the marketing and sale of its ethanol. If the Company elects to retain FCStone, LLC and Eco-Energy, Inc. again, the Company intends to negotiate a new agreement.

On November 12, 2002, Husker Ag entered into a Marketing Agreement with Jack G. Frahm (“Frahm”) pursuant to which Frahm will sell and market Husker Ag’s distiller grains and corn syrup. Under the terms of the Marketing Agreement, Husker Ag will pay Frahm a commission based on the total gross sales contracted for by Frahm and collected by Husker Ag with the commission rate established at 1.25% of total collections during the month. The Marketing Agreement expires on March 31, 2004; however, the Marketing Agreement automatically renews for one year periods on the same terms and conditions unless either party notifies the other party of its intent not to renew the agreement. Either party may terminate the Marketing Agreement upon sixty days written notice to the other party. Frahm is also Secretary of the Company and a member of its Board of Directors. The Board of Directors therefore reviewed and approved the Marketing Agreement in accordance with the Company’s Affiliated Transactions Policy. As a result of the affiliation between Frahm and Husker Ag, the Marketing Agreement requires that all contracts written by Frahm under such agreement must state that they are subject to final approval by the

Husker Ag General Manager. During the term of the Marketing Agreement, and for a period of two years thereafter, Frahm may not provide similar services to any other person or firm without Husker Ag’s prior written approval.

For the nine months ended September 30, 2003, Husker Ag had $6,638 of interest income. Interest income for the nine months ended September 30, 2003 consists of income earned on cash on hand and short-term investments pending use of the funds for construction and start-up costs and short-term investments generated from operations. For the nine months ended September 30, 2002, Husker Ag had $118,179 of interest and other income. Interest income for the nine months ended September 30, 2002 consisted of income earned on cash on hand and short-term investments pending use of the funds for construction and start-up costs.

The net income for the nine months ended September 30, 2003 reflects accounts receivable and tax credits related to the state and federal energy production credit programs of approximately $349,713 of ethanol producer credit receivables from the State of Nebraska and $1,169,286 of ethanol producer credit receivables from the federal government.

Husker Ag’s cost of revenues, which includes production expenses, for the nine month period ended September 30, 2003 was approximately $16,989,981. Husker Ag incurred selling, general and administrative expense of approximately $1,208,394 and recorded interest expense of $456,463 on its construction loan with Stearns Bank, N.A. The selling, general and administrative expenses during the nine month period ended September 30, 2003 increased $716,515 compared to the same period during the prior year. This increase is a result of the Company’s commencement of operations and the retention of additional production and operational personnel.

Husker Ag began operating at name-plate capacity of 20 million gallons per year during the 2^nd quarter of 2003 and expects to continue operating the plant at, or above, name-plate capacity. Husker Ag expects to have sufficient cash from operations to cover its operating and administrative costs and intends to fund working capital, capital expenditures, and debt service obligations for the next twelve months primarily from its revolving line of credit with Stearns Bank, N.A. and through cash flows generated from its operating activities.

The Company has a revolving line of credit with Stearns Bank, N.A. in the amount of $1,000,000. The term of the revolving credit line is from March 11, 2003 through March 11, 2004. Advances made to Husker Ag under the credit line will accrue interest at a variable rate equal to 0.5% over the prime rate as published by theWall Street Journal with a minimum interest rate of 6.45%. As of September 30, 2003 the prime rate as published by theWall Street Journal was 4.0% with a resultant interest rate of 4.25%.

The amount of borrowing available under the Company’s line of credit is reduced by the Company’s letter of credit with Stearns Bank in the amount of $327,825 expiring December 20, 2003 to be used to service the Company’s utility obligations. As a result, as of September 30, 2003, the Company has $672,175 available for advances for operations under its revolving line of credit.

Liquidity And Capital Resources

As of September 30, 2003, the Company had current assets of $8,641,304 including cash of $4,338,001 and the Company had total assets of $38,524,318. The Company’s cash generated interest or other income of $6,638 for the nine months ended September 30, 2003. As of September 30, 2003, the Company had current liabilities totaling $21,139,879 consisting of accounts payable, accrued expenses, short-term construction financing debt expected to be refinanced and short positions and option contracts. As of September 30, 2003, the Company had accumulated other comprehensive loss of $263,188 and member’s equity was $16,725,903.

On October 3, 2002, the Company made its first draw against its construction loan. From October 3, 2002 through December 31, 2002, the Company had borrowed $10,192,114 from Stearns Bank, N.A. under its construction loan. From December 31, 2002 through September 30, 2003, the Company borrowed an additional $9,635,746 under its construction loan for total borrowings of $19,827,860. The Company’s primary source of liquidity during the construction phase of the plant was borrowing under its construction loan and its revolving line of credit with Stearns Bank, N.A. As of September 30, 2003, the Company had approximately $172,000 available under its construction loan. The amount of borrowing available under the Company’s line of credit after it is reduced by the Company’s letter of credit necessary to service the Company’s utility obligations is $672,175. The Company’s primary source of liquidity since completion of construction and commencement of operations is cash generated from operating activities and the Company’s line of credit with Stearns Bank, N.A.

Cash flow From Operating Activities. The operating activities of Husker Ag for the three months and nine months ended September 30, 2003, generated $2,933,119 and $4,143,115, respectively, of net income. As part of its operating activities, Husker Ag had $1,215,239 in items not requiring cash and had net changes in operating assets and liabilities of ($3,803,764). Therefore, the net cash used for operating activities for the nine months ended September 30, 2003 totaled $1,554,590 primarily to fund salaries, office and administrative expenses, and consulting, legal, and permitting fees as well as commodity option contracts.

Cash Flow from Investing Activities.Cash used for investing activities for the three and nine months ended September 30, 2003 totaled $143,910 and $7,150,728 respectively. Cash used for investing activities for the nine months ended September 30, 2003 was spent on the construction and development of the ethanol plant and the plant site $6,846,006 and the purchase of property and equipment $304,722.

Cash Flow from Financing Activities. Cash provided by financing activities for the three and nine months ended September 30, 2003 totaled $22,181 and $9,635,745, which consists of advances under the construction loan with Stearns Bank, N.A. and was offset by the payments made on long-term debt and the payment of $1,269 for distributions for state taxes of out-of-state members.

Stearns Bank, N.A. (the “Bank”) is Husker Ag’s primary/senior lender. The Company has a Construction Loan Agreement with the Bank dated December 19, 2001, pursuant to which the Bank agreed to provide up to $20,000,000 of debt financing for the purpose of constructing the Husker Ag ethanol plant. The construction loan has been evidenced by a demand promissory note from Husker Ag to the Bank, with a variable interest rate which follows the prime rate as published by theWall Street Journal (“WSJ Prime Rate”) plus ¼% (resulting in an interest rate of 5.0% as of the time of the Company’s initial borrowing in October 2002 and 4.25% as of September 30, 2003). The construction loan was originally for an 18-month period, ending June 19, 2003, but was extended to September 30, 2003, pursuant to a Change in Terms Agreement dated June 28, 2003.

On September 29, 2003, the Company and the Bank entered into a Change in Terms Agreement (the “September Change in Terms Agreement”) which extends the maturity date of the construction loan from September 30, 2003 until December 31, 2003. Under the September Change in Terms Agreement, the interest rate on the demand promissory note is changed to 1.25% over the WSJ Prime Rate, adjusting daily (the WSJ Prime Rate is 4.0% as of September 30, 2003, with a resultant interest rate of 5.25%), and the Company must begin making principal and interest payments based on a 7-year amortization, requiring two regular payments as of October 31, 2003, and November 30, 2003 of $285,774.29, with the remaining balance due on December 31, 2003.

As of September 30, 2003, the Company had approximately $172,000 available under its construction loan.

In addition, the Company has received a revolving line of credit from Stearns Bank, N.A. in the amount of $1,000,000. The term of the revolving credit line is from March 11, 2003 through March 11, 2004. Advances made to Husker Ag under the credit line will accrue interest at a variable rate equal to 0.5% over the prime rate as published by theWall Street Journal with a minimum interest rate of 6.45%. As of September 30, 2003 the prime rate as published by theWall Street Journal was 4.0% with a resultant interest rate of 4.25%.

The amount of borrowing available under the Company’s line of credit is reduced by the Company’s letter of credit with Stearns Bank in the amount of $327,825 expiring December 20, 2003 to be used to service the Company’s utility obligations. As a result, the Company has $672,175 available for advances for operations under its revolving line of credit.

Off-Balance Sheet Arrangements

At September 30, 2003, the Company did not have any off-balance sheet arrangements.

Related Party Transactions

In the normal course of business the Company enters into transactions, including the purchase of corn and the sale of distillers grain with its board of directors, members and key employees under normal terms and conditions and in accordance with the Company’s Affiliated Transactions Policy. See Note 3 to the Condensed Financial Statements for additional information on these related party transactions.

Customers

Management does not consider the Company’s business to be dependent on a single customer or a few customers, and the loss of any of our customers would not have a material adverse effect on our results. However, under its Risk Management and Ethanol Marketing Contract with FC Stone, LLC and Eco-Energy, Inc., Eco-Energy purchases Husker Ag’s entire output of ethanol in good faith at fair market rates during the term of the contract and as of September 30, 2003, the Company had receivables from Eco-Energy, Inc. amounting to 54% of the total trade receivables.

Management’s Plan Of Operations

During the 1^st and 2^nd quarter of 2003, the Company continued to work with Fagen, Inc. to complete construction of the plant and to achieve and maintain operation of the plant at, or above, full capacity. The Company completed construction of the plant and began operating at its name-plate capacity of 20 million gallons per year during the 2^nd quarter of 2003. Management currently expects to continue operating the plant at, or above, name-plate capacity.

The Company has expended $621,042 in connection with preparing the site to meet the site specifications required by Fagen, Inc. and set forth in the Design Build Contract, including leveling and grading the site and constructing a road from the plant to Highway 20. The Company has paid $27,559,241 to Fagen, Inc. in connection with the construction of the plant and the purchase and installation of machinery and equipment. O. Wayne Mitchell sits on the Company’s Board of Directors and is an officer and employed by Fagen, Inc., which is the Company’s design-build contractor.

During the nine months ended September 30, 2003, the Company expended $117,508 for payments to third parties other than Fagen, Inc. for expenses related to the construction of the administrative building and rail spur and the purchase of the on-site power distribution transformers. The total amount expended by the Company for payments to third parties other than Fagen, Inc. since construction commenced totaled $806,594.

Operating expenses consisting of general and administrative costs for the three and nine month periods ended September 30, 2003 totaled $224,183 and $1,208,394 respectively.

The Company completed construction of the plant and began operating at name-plate capacity during the 2^nd quarter of 2003. Management currently expects that it will have sufficient funds for the 2003 year from its construction loan with Stearns Bank, N.A. and its revolving line of credit with Stearns Bank, N.A. as well as income generated from operating activities. During the three months and nine months ended September 30, 2003, Husker Ag borrowed $22,181 and $9,635,746, respectively, under its construction loan with Stearns Bank, N.A. for with Husker Ag’s total borrowing under the construction loan totaling $19,827,860.

As of September 30, 2003, the Company had approximately $172,000 available under its construction loan. The amount of borrowing available under the Company’s line of credit after it is reduced by the Company’s letter of credit necessary to service the Company’s utility obligations is $672,175.

Management intends to fund its operational costs and expenditures through the calendar year 2003 through its existing construction loan from Stearns Bank (which management believes will be converted to a permanent loan in the 4^th quarter of 2003), the revolving credit line established with Stearns Bank, and through revenue from operations. Management currently believes that the Company has adequate liquidity to fund its remaining construction costs and its operational costs and expenditures through calendar year 2003. Management intends to continually review and revise its operational budget based on its evaluation of the Company’s then current revenues, expenses and cash flow, market risks and possible opportunities for increasing its liquidity.

Management currently expects to be paid for its ethanol within 72 hours of shipment. The principal costs associated with the operation of the plant are employment costs, utilities, purchase of corn inventory, purchase of

enzymes, chemicals and other materials necessary to operate the plant, interest on indebtedness and general and administrative expenses. Increases and decreases in the price of corn and/or the price of ethanol may have a material impact on the liquidity and profitability of the Company. Increases in the price of corn will increase costs to the Company and therefore, would reduce its liquidity and profitability. Rising corn prices produce lower profit margins for the production of ethanol and therefore, represent unfavorable market conditions. Similarly, decreases in the price of corn may increase revenues to the Company and therefore, would increase the liquidity and profitability of the Company.

In an attempt to minimize the effects of the volatility of corn costs on operating profits, Husker Ag has taken hedging positions in corn futures and option markets. Hedging means protecting the price at which the Company buys corn and the price at which it will sell its products in the future. It is a way to attempt to reduce the risk caused by price fluctuation. The effectiveness of hedging activities is dependent upon, among other things, the cost of corn and Husker Ag’s ability to sell sufficient amounts of ethanol and distillers grains to utilize all of the corn subject to the futures contracts. Hedging activities can result in costs to the Company because price movements in grain contracts are highly volatile and are influenced by many factors which are beyond the Company’s control. Husker Ag may incur similar costs in connection with its hedging transactions and these costs may be significant.

Prices for ethanol products can vary significantly over time and decreases in price levels could adversely affect Husker Ag’s profitability and viability. The price for ethanol has some relation to the price for gasoline. The price of ethanol tends to increase as the price of gasoline increases, and the price of ethanol tends to decrease as the price of gasoline decreases. Any lowering of gasoline prices will likely also lead to lower prices for ethanol and adversely affect the Company’s operating results.

Changes in the cost of utilities may also have a material impact on the liquidity and profitability of the Company. Ethanol production requires a constant and consistent supply of energy. If there is any interruption in Husker Ag’s supply of energy for whatever reason, such as supply, delivery or mechanical problems, the Company may be required to halt production. If production is halted for any extended period of time, it will have a material adverse effect on the Company’s business. If Husker Ag were to suffer interruptions in its energy supply, either during construction or after the Company begins operating the ethanol plant, its business would be harmed. In addition, natural gas and electricity prices have historically fluctuated significantly. Increases in the price of natural gas or electricity would harm Husker Ag’s business by increasing its energy costs. Currently, the price of natural gas has increased significantly, increasing the cost to the Company to produce ethanol. The Company will also need to purchase significant amounts of electricity to operate the proposed ethanol plant. The prices which Husker Ag will be required to pay for electrical power will have a direct impact on its costs of producing ethanol and its financial results.

Husker Ag’s liquidity and profitability may also be adversely impacted if there is an increase in the supply of ethanol. Husker Ag expects that existing ethanol plants will expand to increase their production and that new fuel grade ethanol plants will be constructed as well. Although management believes that there may be a corresponding increase in the demand for ethanol as a result of the phase out of MTBE, Husker Ag cannot provide any assurance or guarantee that there will be any material or significant increases in the demand for ethanol, so the increased production of ethanol may lead to lower prices for ethanol. The increased production of ethanol could have other adverse effects as well. For example, the increased production will also lead to increased supplies of co-products from the production of ethanol, such as distillers grain/solubles. Those increased supplies could lead to lower prices for those co-products. Also, the increased production of ethanol could result in increased demand for corn which could in turn lead to higher prices for corn, resulting in higher costs of production and lower profits.

In addition to general market fluctuations and economic conditions, Husker Ag could experience significant cost increases associated with the on-going operation of the plant caused by a variety of factors, many of which are beyond the Company’s control. Labor costs can increase over time, particularly if there is any shortage of labor, or shortage of persons with the skills necessary to operate the ethanol plant. Changes in price, operation and availability of truck and rail transportation may affect the Company’s profitability with respect to the transportation of ethanol and other products to its customers. In addition, the operation of the ethanol plant will be subject to ongoing compliance with all applicable governmental regulations, such as those governing pollution control, ethanol production, grain purchasing and other matters. If any of these regulations were to change, it could cost Husker Ag significantly more to comply with them. Further, other regulations may arise in future years regarding the operation of the ethanol plant, including the possibility of required additional permits and licenses. Husker Ag might have

difficulty obtaining any such additional permits or licenses, and they could involve significant unanticipated costs. Husker Ag will be subject to all of those regulations whether or not the operation of the ethanol plant is profitable.

Permit Update

As of September 30, 2003, the NDEQ had not yet issued Husker Ag its Air Quality Operating Permit. Because Husker Ag elected to purchase a thermal oxidizer, the NDEQ determined that the Husker Ag Air Quality Construction Permit needed modification to include the impact of the thermal oxidizer on the plant’s dispersion modeling. The modified Air Quality Construction Permit also seeks to increase the amount of ethanol production permitted. The Company has completed stack testing as required under the NDEQ regulations and submitted the results of such testing on October 24, 2003. The submission also included a request to increase the ethanol production permitted under the permit to approximately 27,000,000 gallons of denatured alcohol per year. Once the modified Air Quality Construction Permit is issued, management believes the NDEQ will issue Husker Ag its Air Quality Operating Permit. The Company has twelve months once the plant becomes operational to obtain an Air Quality Operating Permit from the NDEQ and once granted, the Company expects the permit will be valid for five years.

Husker Ag Policy with respect to Announcement of Any Future Distributions

Effective September 17, 2003, the Husker Ag Board of Directors has adopted the following policy with respect to the announcement of any future distributions to be made by Husker Ag to its members, in order to provide members, and any persons considering the purchase of Husker Ag membership units, adequate prior notice of such distributions: The Company will make a public announcement of any distribution to members which has been approved by the Husker Ag Board of Directors within the 60 day period prior to the commencement of the calendar trimester in which the record date for the distribution would occur. The calendar trimester commencement dates are January 1, May 1, and September 1, and the announcement by Husker Ag would include both the future record date for the distribution and the amount per membership unit of such distribution.

As previously disclosed by Husker Ag, any distributions are payable at the discretion of the Husker Ag Board of Directors, subject to approval by Stearns Bank, N.A., the Company’s primary lender, as well as the provisions of the Nebraska Limited Liability Company Act, and the Husker Ag Operating Agreement. The Board of Directors has no obligation to distribute profits, if any, to members, and Husker Ag has not to date declared or paid any distributions on its memberships units. There can be no assurance as to the ability of Husker Ag to declare or pay distributions in the future, and the terms of any permanent debt financing entered into by Husker Ag may prohibit or significantly restrict the ability of the Company to make such distributions without prior consent of the lender.

Temporary Suspension of Variable Investment Advisers, Inc. Trading

The Nebraska Department of Banking and Finance (the “Department”) contacted Variable Investment Advisers, Inc. (“VIA”) regarding the internet based alternative trading system VIA operates for the Company. Although VIA is currently registered as a restricted broker-dealer with the Securities and Exchange Commission (“SEC”) and the National Association of Securities Dealers, Inc. (“NASD”), the Department stated that it believed VIA should be registered as a full-service broker-dealer rather than a restricted broker-dealer. VIA has informed the Company that prior to the Department’s request, VIA had already submitted the necessary applications to both the SEC and the NASD seeking registration as a full-service broker-dealer. However, the Department informed VIA that until such registration is completed, the alternative trading system VIA operates for the Company must be suspended. Although the Department will permit the Company to effect the trades matched as of September 25, 2003, no further trades may be effected during the current trading trimester. The Company currently anticipates that trading on the VIA alternative trading system will recommence with the January 2004 trading trimester, or as soon thereafter as VIA has met its regulatory requirement.

Critical Accounting Policies

The Securities and Exchange Commission (“SEC” or the “Commission”) recently issued disclosure guidance for “critical accounting policies”. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

Use of Estimates

Accounts Receivable

Accounts receivable are stated at the amount billed to customers. If necessary, the Company will provide an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.

Revenue Recognition

Revenue from the sale of the Company’s products is recognized at the time title to the goods and all risks of ownership transfer to the customers. This generally occurs upon shipment to the customer or when the customer picks up the goods. The Company records revenue from federal and state incentive programs related to the production of ethanol when the Company has produced the ethanol and completed all the requirements of the applicable incentive program.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) has issued several new accounting pronouncements that became effective in the fiscal year commencing January 1, 2003.

Management does not expect the implementation of these pronouncements to have a significant effect on the financial statements.

RISK FACTORS

The project could encounter defects that could adversely impact the plant and Husker Ag’s ability to generate revenues and make it more difficult for Husker Ag to pay its debts.

If Husker Ag encounters defective material or workmanship from Fagen, the Company’s ability to generate revenues could be adversely impacted. Under the Design-Build Contract with Fagen, Fagen warrants that the ethanol plant will be free from defects in material or workmanship. If this warranty is breached and there are defects in material or workmanship, it may delay Husker Ag’s ability to generate revenues. If defects are discovered, it could cause the Company to halt or discontinue its operation, which could damage the Company’s ability to generate revenues and reduce the value of the membership units. Husker Ag’s recourse in the event of a breach of this warranty by Fagen is to file an action against Fagen for breach of contract or breach of warranty which will be subject to the applicable statutes of limitations under the laws of the State of Nebraska.

Husker Ag’s business is not diversified and this could reduce the value of the membership units.

Husker Ag’s success depends largely upon its ability to timely complete and profitably operate its ethanol business. Husker Ag does not have any other lines of business or other sources of revenue if it is unable to manufacture ethanol. If economic or political factors adversely affect the market for ethanol, the value of its membership units could decline because the Company has no other line of business to fall back on if the ethanol business declines. Husker Ag’s business would also be significantly harmed if it’s ethanol plant could not operate at full capacity for any extended period of time.

Husker Ag will be operating in an intensely competitive industry and will compete with larger, better financed entities which could impact its ability to operate profitably.

There is significant competition among ethanol producers. Husker Ag faces a competitive challenge from larger plants, from plants that can produce a wider range of products than it can, and from other plants similar to its proposed ethanol plant. Husker Ag’s ethanol plant will be in direct competition with other ethanol producers, many of which have greater resources than Husker Ag currently has. Large ethanol producers such as Archer Daniels Midlands and Cargill, among others, are capable of producing a significantly greater amount of ethanol than Husker Ag currently expects to produce. In addition, there are several Nebraska, Kansas, Minnesota, Wisconsin, South Dakota and other Midwest regional ethanol producers which have recently formed, are in the process of forming, or are under consideration, which are or would be of a similar or larger size and have similar resources to Husker Ag.

The proposed ethanol plant will also compete with producers of other gasoline additives made from raw materials other than corn having similar octane and oxygenate values as ethanol, such as producers of methyl tertiary butyl ether (MTBE). MTBE is a petrochemical derived from methanol which generally costs less to produce than ethanol. Many major oil companies produce MTBE and strongly favor its use because it is petroleum-based. Alternative fuels, gasoline oxygenates and alternative ethanol production methods are also continually under development. The major oil companies have significantly greater resources than Husker Ag has to market MTBE, to develop alternative products, and to influence legislation and public perception of MTBE and ethanol. These companies also have significant resources to begin production of ethanol should they choose to do so.

Increases in the production of ethanol could result in lower prices for ethanol and have other adverse effects which could reduce our profitability.

The Company expects that existing ethanol plants will expand to increase their production and that new fuel grade ethanol plants will be constructed as well. Husker Ag cannot provide any assurance or guarantee that there will be any material or significant increases in the demand for ethanol, so the increased production of ethanol may lead to lower prices for ethanol. The increased production of ethanol could have other adverse effects as well. For example, the increased production will also lead to increased supplies of co-products from the production of ethanol, such as distillers grain/solubles. Those increased supplies could lead to lower prices for those co-products. Also, the increased production of ethanol could result in increased demand for corn which could in turn lead to higher prices for corn, resulting in higher costs of production and lower profits. Recently ethanol prices have declined because of increased supply and decreased demand for ethanol, and some gasoline retailers have been pricing ethanol-blended fuel below the lower-octane unleaded fuel. In addition, there are a number of ethanol plants which are under construction or proposed to be constructed in the near future, both regionally and nationally. As a result, the supply

of ethanol is expected to continue to increase, and, while the demand for ethanol is also expected to increase in the future as the MTBE bans become effective, there is a risk that the market supply of ethanol will increase faster than the market demand, continuing to place downward pressure on the price of ethanol, which would negatively impact our revenue and potential profitability.

Changes in the supply and demand, and production and price with respect to corn could make it more expensive to produce ethanol which could decrease Husker Ag’s profits.

Ethanol production will require substantial amounts of corn. Corn, as with most other crops, is affected by weather, governmental policy, disease and other conditions. A significant reduction in the quantity of corn harvested due to adverse weather conditions such as drought, farmer planting decisions, domestic and foreign government farm programs and policies, global demand and supply or other factors could result in increased corn costs which would increase Husker Ag’s cost to produce ethanol. The significance and relative impact of these factors on the price of corn is difficult to predict. Significant variations in actual growing conditions from normal growing conditions also may adversely affect Husker Ag’s ability to procure corn for the proposed plant. Any events that tend to negatively impact the supply of corn will tend to increase prices and harm Husker Ag’s business.

Rising corn prices produce lower profit margins for the production of ethanol and therefore, represent unfavorable market conditions. This is especially true when market conditions do not allow Husker Ag to pass along increased corn costs to its customers. The price of corn has fluctuated significantly in the past and may fluctuate significantly in the future. Substantial increases in the price of corn in 1996 caused some ethanol plants to temporarily cease production or lose money. Husker Ag cannot assure you that it will be able to offset any increase in the price of corn by increasing the price of its products. If Husker Ag cannot offset increases in the price of corn, its financial performance may be materially and adversely affected.

Federal regulations concerning tax incentives could expire or change which could reduce Husker Ag’s revenues.

Congress currently provides certain federal tax incentives for oxygenated fuel producers and marketers, including those who purchase ethanol to blend with gasoline in order to meet federally mandated oxygenated fuel requirements. These tax incentives include, generally, a lower federal excise tax rate for gasoline blended with at least 10 percent, 7.7 percent, or 5.7 percent ethanol, and income tax credits for blenders of ethanol mixtures and small ethanol producers. Gasoline marketers pay a reduced tax on gasoline that they sell that contains ethanol.

The ethanol industry and Husker Ag’s business depend on continuation of the federal ethanol credit. This credit has supported a market for ethanol that might disappear without the credit. The federal subsidies and tax incentives are scheduled to expire September 30, 2007. These subsidies and tax incentives to the ethanol industry may not continue beyond their scheduled expiration date or, if they continue, the incentives may not be at the same level. The revocation or amendment of any one or more of those laws, regulations or programs could adversely affect the future use of ethanol in a material way, and Husker Ag cannot guarantee that any of those laws, regulations or programs will be continued. The elimination or reduction of federal subsidy and tax incentives to the ethanol industry would have a material adverse impact on Husker Ag’s business by making it more costly or difficult for it to produce and sell ethanol. If the federal ethanol tax incentives are eliminated or sharply curtailed, Husker Ag believes that a decreased demand for ethanol will result.

Nebraska state producer incentives may be unavailable or could be modified which could reduce Husker Ag’s revenues.

In 2001, LB 536 became law and established a production tax credit of 18¢ per gallon of ethanol produced during a 96 consecutive month period by newly constructed ethanol facilities in production prior to June 30, 2004. The tax credit is only available to offset Nebraska motor fuels excise taxes. The tax credit is transferable and therefore Husker Ag intends to transfer credits received to a Nebraska gasoline retailer who will then reimburse Husker Ag for the face value of the credit amount less a handling fee. No producer can receive tax credits for more than 15,625,000 gallons of ethanol produced in one year and no producer will receive tax credits for more than 125 million gallons of ethanol produced over the consecutive 96 month period. The minimum production level for a plant to qualify for credits is 100,000 gallons of ethanol annually. Husker Ag has entered into a written agreement with the Tax Commissioner on behalf of the State of Nebraska pursuant to which Husker Ag agreed to produce

ethanol at its designated facility and the State of Nebraska agreed to furnish the producer tax credits in accordance with the terms of the new law. The production incentive is scheduled to expire June 30, 2012.

In 2002, because of State of Nebraska budget shortfalls, various tax credit provisions in effect in Nebraska, including LB 536, have come under increased scrutiny from the Nebraska Unicameral. As a result there can be no assurance that the Nebraska legislature will not in subsequent legislative sessions enact new legislation which would revise LB 536, or otherwise adversely impact ethanol plants, such as that built by Husker Ag, which are to benefit from LB 536.

Husker Ag believes there are several existing projects in Nebraska that could compete with the Company for payments. If another ethanol plant came online and produced 100,000 or more gallons of ethanol, it could also qualify for the producer payment. This would require the legislature to increase funding for the producer incentive program through either an increase in general fund appropriation or other sources such as the grain checkoff program. Despite the Company’s written agreement with the State of Nebraska, the Nebraska legislature could reduce or eliminate the producer tax credits at any time; however, a reduction or elimination would constitute a breach of the contract by the State of Nebraska. The State of Nebraska could also impose taxes on the ethanol plants to provide additional funds for the ethanol production incentive fund. Nebraska legislators are currently discussing and reviewing legislative bills which would establish a direct tax on distiller grains. If the State of Nebraska establishes such a tax, Husker Ag will be required to pay taxes on the distiller grains it produces which will have a serious adverse impact on Husker Ag’s net income from the production incentive and will reduce its revenue.

Husker Ag is subject to extensive environmental regulation and operational safety regulations that could result in higher than expected compliance costs and liabilities.

The Company may be subject to regulations on emissions from the United States Environmental Protection Agency. Further, EPA and Nebraska’s environmental regulations are subject to change and often such changes are not favorable to industry. Consequently, even if Husker Ag has the proper permits now, the Company may be required to invest or spend considerable resources to comply with future environmental regulations.

The Company’s failure to comply or the need to respond to threatened actions involving environmental laws and regulations may adversely affect its business, operating results or financial condition. Once Husker Ag’s ethanol plant becomes operational and as its business grows, Husker Ag will have to develop and follow procedures for the proper handling, storage, and transportation of finished products and materials used in the production process and for the disposal of waste products. In addition, state or local requirements may also restrict the Company’s production and distribution operations. Husker Ag could incur significant costs to comply with applicable laws and regulations as production and distribution activity increases. Protection of the environment will require Husker Ag to incur expenditures for equipment or processes.

Husker Ag could also be subject to environmental nuisance or related claims by employees, property owners or residents near the proposed ethanol plant arising from air or water discharges. Ethanol production has been known to produce an odor to which surrounding residents could object. If odors become a problem, Husker Ag may be subject to fines and could be forced to take costly curative measures. Environmental litigation or increased environmental compliance costs could increase its operating costs.

Members may be required to pay taxes on their share of Husker Ag’s income even if it makes no distributions to members.

Husker Ag expects to be treated as a partnership for federal income tax purposes unless there is a change of law or trading in the membership units is sufficient to classify Husker Ag as a “publicly traded partnership.” This means that Husker Ag will pay no income tax and all profits and losses will “pass-through” to its members who will pay tax on their share of Husker Ag’s profits. It is likely that Husker Ag’s members may receive allocations of taxable income that exceed any cash distributions made, if any. This may occur because of various factors, including but not limited to, accounting methodology, lending covenants that restrict Husker Ag’s ability to pay cash distributions, or its decision to retain or use the cash generated by the business to fund its operating activities and obligations. Accordingly, members may be required to pay income tax on the allocated share of Husker Ag’s taxable income with personal funds, even if the members receive no cash distributions from the Company.

ITEM 3:

CONTROLS AND PROCEDURES

(a)Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer within the 90-day period preceding the filing date of this quarterly report. Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) accumulated and communicated to Company management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s rules and forms.

(b)Changes in Internal Controls: In the quarter ended September 30, 2003, the Company did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls.

PART II

OTHER INFORMATION

ITEM 1:

LEGAL PROCEEDINGS

The Company has not been informed of any legal matters that would have a material adverse effect on its financial condition, results of operations or cash flows.

ITEM 2:

CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3:

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4:

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5:

OTHER INFORMATION

None.

ITEM 6:

EXHIBITS AND REPORTS ON FORM 8-K

(a)

EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K

Certifications required by Rule 13a-15(e) and 15d-15(e).

Section 1350 Certifications.

(b)

REPORTS ON FORM 8-K

(1)

The Company filed a report on Form 8-K on September 30, 2003 reporting (a) the extension of its Construction Loan Agreement with Stearns Bank and certain changes in its agreements with Stearns Bank applicable to the Construction Loan Agreement and the terms of the permanent financing, (b) a policy on public announcement of distributions, and (c) the temporary suspension of trading on the Variable Investment Advisors, Inc. trading system.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 14, 2003.	By:	/S/ GARY KUESTER
		Gary Kuester, Chairman of the Board, President and Director (Principal Executive Officer)


Date: November 14, 2003.	By:	/S/ CORY A. FURSTENAU
		Cory A. Furstenau, Treasurer and Director (Principal Financial Officer)

EXHIBIT INDEX

Exhibit No.	Description	Method of Filing

31	Certifications required by Rule 13a-15(e) and 15d-15(e).	Filed herewith.

32	Section 1350 Certifications.	Filed herewith.

99	Form 8-K filed September 30, 2003.	Incorporated by reference to the Form 8-K filed September 30, 2003.

Husker Inactive 10QSB2003 Q3 Quarterly report (small business)

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