UNITED STATES
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
ý | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. |
FOR THE QUARTERLY PERIOD ENDED June 30, 2002
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 333-50568
BADGER STATE ETHANOL, LLC.
(Exact name of registrant as specified in its charter)
| WISCONSIN (State or other jurisdiction of incorporation or organization) | 39-1996522 (IRS Employer Identification No.) |
2443 Bethel Road
Monroe, Wisconsin 53566
(Address of principal executive offices)
(608) 329-3900
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
As of May 13, 2002, the Company has issued 19,774 Class A membership units.
Transitional Small Business Disclosure Format: Yes o No ý
BADGER STATE ETHANOL, LLC
FORM 10-QSB QUARTERLY REPORT FOR THE QUARTER ENDED
June 30, 2002
TABLE OF CONTENTS
| | Page | |||
|---|---|---|---|---|
Part I—Financial Information | ||||
Item 1. Financial Statements | ||||
Condensed Balance Sheet at June 30, 2002 | 3 | |||
Condensed Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months ended June 30, 2002 and 2001 and the period from May 11, 2000 (date of inception) to June 30, 2002 | 4 | |||
Condensed Statements of Cash Flows for the Six Months ended June 30, 2002 and 2001 and the period from May 11, 2000 (date of inception) to June 30, 2002 | 5 | |||
Notes to Condensed Financial Statements | 6 | |||
Item 2. Management's Discussion and Analysis and Plan of Operations | 7 | |||
Part II—Other Information | ||||
Item 6. Exhibits and Reports on Form 8-K | 11 | |||
Signature | 12 | |||
Exhibits | ||||
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(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEET
(Unaudited)
| | June 30, 2002 | ||||
|---|---|---|---|---|---|
| ASSETS | |||||
| CURRENT ASSETS | |||||
| Cash | $ | 19,294 | |||
| Prepaid expenses | 29,699 | ||||
| Hedge contracts | 1,097,138 | ||||
| Total current assets | 1,146,131 | ||||
PROPERTY AND EQUIPMENT | |||||
| Construction in progress | 39,084,475 | ||||
| Office equipment | 10,483 | ||||
| 39,094,958 | |||||
| Less accumulated depreciation | 2,200 | ||||
| 39,092,758 | |||||
DEFERRED FINANCING FEES | 613,265 | ||||
| $ | 40,852,154 | ||||
LIABILITIES AND MEMBERS' EQUITY | |||||
| CURRENT LIABILITIES | |||||
| Current maturities of long-term debt | 60,437 | ||||
| Construction payable | 4,712,200 | ||||
| Accounts payable and accrued expenses | 193,640 | ||||
| Total current liabilities | 4,966,277 | ||||
LONG-TERM DEBT, less current maturities | 18,743,754 | ||||
COMMITMENTS AND CONTINGENCIES | — | ||||
MEMBERS' EQUITY | |||||
| Member contributions | 17,859,787 | ||||
| Deficit accumulated during the development stage | (1,238,627 | ) | |||
| Accumulated other comprehensive income | 520,963 | ||||
| 17,142,123 | |||||
| $ | 40,852,154 | ||||
The accompanying notes are an integral part of this condensed statement.
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BADGER STATE ETHANOL, LLC
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| | Three months ended | Six months ended | | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | June 30, 2002 | June 30, 2001 | June 30, 2002 | June 30, 2001 | May 11, 2000 (date of inception) to June 30, 2002 | ||||||||||||
| Revenue | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Operating expenses | |||||||||||||||||
| Project coordinator | 9,000 | 9,000 | 18,000 | 18,000 | 138,000 | ||||||||||||
| Organization costs | 8,760 | 18,438 | 19,834 | 37,780 | 117,542 | ||||||||||||
| Professional fees | 24,764 | 82,727 | 92,421 | 121,308 | 743,636 | ||||||||||||
| Office and administrative expenses | 65,880 | 25,730 | 95,835 | 26,929 | 224,475 | ||||||||||||
| Hedge contracts | 123,200 | — | 123,200 | — | 123,200 | ||||||||||||
| Miscellaneous | 9,132 | 3,800 | 13,563 | 4,740 | 28,825 | ||||||||||||
| 240,736 | 139,695 | 362,853 | 208,757 | 1,375,678 | |||||||||||||
Loss from operations | (240,736 | ) | (139,695 | ) | (362,853 | ) | (208,757 | ) | (1,375,678 | ) | |||||||
Interest income | 44 | 93 | 6,521 | 93 | 137,051 | ||||||||||||
Net loss | (240,692 | ) | (139,602 | ) | (356,332 | ) | (208,664 | ) | (1,238,627 | ) | |||||||
Unrealized gain on cash flow hedges | 520,963 | — | 520,963 | — | 520,963 | ||||||||||||
| Comprehensive income (loss) | $ | 280,271 | $ | (139,602 | ) | $ | 164,631 | $ | (208,664 | ) | $ | (717,664 | ) | ||||
| Net loss per unit—basic and diluted | $ | (12.17 | ) | (81.16 | ) | $ | (18.02 | ) | $ | (121.32 | ) | $ | (142.58 | ) | |||
| Weighted average units outstanding | 19,774 | 1,720 | 19,774 | 1,720 | 8,687 | ||||||||||||
The accompanying notes are an integral part of these condensed statements.
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(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Six months ended June 30, 2002 | Six months ended June 30, 2001 | May 11, 2000 (date of inception) to June 30, 2002 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash flows from operating activities | |||||||||||
| Net loss | $ | (356,332 | ) | $ | (208,664 | ) | $ | (1,238,627 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | |||||||||||
| Depreciation | 1,048 | 384 | 2,200 | ||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Interest receivable | 9,298 | — | — | ||||||||
| Prepaid expenses | (20,747 | ) | (3,006 | ) | (29,699 | ) | |||||
| Hedge contracts | (576,175 | ) | (576,175 | ) | |||||||
| Accounts payable | 230,189 | 109,389 | 311,688 | ||||||||
Net cash used in operating activities | (712,719 | ) | (101,897 | ) | (1,530,613 | ) | |||||
Cash flows from investing activities | |||||||||||
| Purchases of equipment and construction in progress | (19,838,449 | ) | (7,694 | ) | (34,485,573 | ) | |||||
Cash flows from financing activities | |||||||||||
| Payments of financing fees | (4,540 | ) | (12,406 | ) | (613,265 | ) | |||||
| Proceeds from long-term debt financing | 15,375,856 | 50,000 | 18,788,958 | ||||||||
| Proceeds from issuance of members' units | — | — | 18,434,000 | ||||||||
| Cost of issuing members' units | — | — | (574,213 | ) | |||||||
| Net cash provided by financing activities | 15,371,316 | 37,594 | 36,035,480 | ||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (5,179,852 | ) | (71,997 | ) | 19,294 | ||||||
Cash and cash equivalents at beginning of period | 5,199,146 | 104,620 | — | ||||||||
Cash and cash equivalents at end of period | $ | 19,294 | $ | 32,623 | $ | 19,294 | |||||
Supplemental disclosure of noncash investing and financing activities: | |||||||||||
Construction payable for construction in progress | $ | 4,712,200 | $ | — | $ | 4,712,200 | |||||
Accounts payable for costs of raising capital | $ | — | $ | 225,511 | $ | — | |||||
Accumulated other comprehensive income | $ | (520,963 | ) | $ | — | $ | (520,963 | ) | |||
Capitalized interest from long-term debt | $ | 290,492 | $ | — | $ | 305,725 | |||||
The accompanying notes are an integral part of these condensed statements.
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BADGER STATE ETHANOL, LLC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2002
NOTE A—SUMMARY OF ACCOUNTING POLICIES
Badger State Ethanol, LLC (the company) was formed May 11, 2000 to develop, construct and operate a 40 million gallon ethanol plant in the state of Wisconsin. The plant currently under construction is expected to be completed in September 2002 and when completed will distribute ethanol to the upper Midwest states.
Since formation, the company has been primarily involved in organizational activities, raising capital and construction of the plant. Planned operations, as described above, will not commence until completion of the plant. Accordingly, the company is considered to be in the development stage and the accompanying condensed financial statements represent those of a development stage company.
The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These condensed financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the company's audited financial statements for the year ended December 31, 2001 contained in the company's annual Report on Form 10-KSB for 2001. In the opinion of management, the interim condensed financial statements reflect adjustments, consisting of normal recurring accruals, which are necessary to present fairly the company's financial position, results of operations and cash flows for the periods indicated. The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year.
NOTE B—DERIVATIVE INSTRUMENTS
The company enters into option and future contracts, which are designated as hedges of specific volumes of corn expected to be used in the manufacturing process once the plant is completed. 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 purpose other than cash flow hedging purposes. The option and future contracts are recognized on the June 30, 2002 balance sheet at their fair value. On the date the option or future contracts are entered into, the company designates the option or future 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 all relationships between the option and future 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 all option and future contracts that are designated as cash flow hedges to specific forecasted transactions. The company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the option and 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 future contracts that are highly effective and that are designated and qualify as cash flow hedges are recorded in other comprehensive income and recognized in the statement of operations when the finished goods produced using the hedged item are sold.
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The company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated or exercised, or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued, the company continues to carry the derivative at its fair value on the balance sheet, and recognizes any changes in its fair value in earnings.
The company has recorded an asset related to hedge contracts at June 30, 2002 of $1,097,138. The company has recorded $123,200 of expense included within the three and six month periods ended June 30, 2002 and the period from May 11, 2000 (date of inception) to June 30, 2002 related to option contracts and hedging activities.
Item 2: Management's Discussion and Analysis and Plan of Operations
This report contains forward-looking statements. In addition, we may make forward-looking statements orally in the future by or on behalf of the Company. When used, the words "believe," "expect," "will," "can," "estimate," "anticipate" and similar expressions are intended to identify forward-looking statements. Readers should not place undue reliance on any forward-looking statements and recognize that the statements are not predictions of actual future results. Actual results could and likely will differ materially from those anticipated in the forward-looking statements due to the risks and uncertainties set forth in our Form SB-2 registration statement under the caption "Risk Factors," as well as others not now anticipated. These risks and uncertainties include, without limitation, our assumptions concerning financing requirements and future operations, our ability to obtain debt financing to finish construction and generate revenues, construction delays, changes in state and federal ethanol subsidies, our need for additional capital, our ability to manufacture our products on a commercial scale and in compliance with regulatory requirements, increased competition, and changes in government regulation. We undertake no responsibility to update any forward-looking statement.
Overview
We are a start-up company in the construction stage. We are building an ethanol plant and will engage in the production of ethanol and animal feed products in Monroe, Wisconsin. We estimate that the project will be completed in September 2002.
Plan of Operations for the Next 12 Months
We expect to spend the next 12 months constructing and operating the ethanol plant. We expect to have sufficient cash available to cover our costs over the next 12 months, including construction, staffing, office, audit, legal, compliance costs and start up working capital costs. The following is our estimate of our costs and expenditures for the next 12 months. These estimates are based upon our general contractor, prime subcontractor and financial advisor's experience with other businesses. It is
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only an estimate and our actual expenses could be much higher due to a variety of factors described in our Form SB-2 registration statement under the section entitled "Risk Factors."
| Construction and development costs: | ||||
| Insurance | $ | 60,000 | ||
| General and administrative costs | 150,000 | |||
| Capitalized construction interest | 500,000 | |||
| Pre-production startup training costs | 700,000 | |||
| Initial inventories | 1,730,000 | |||
| Spare parts | 300,000 | |||
| Working capital | 2,070,000 | |||
| Railroad infrastructure costs | 432,000 | |||
| Construction in progress payments | 12,931,000 | |||
| Total construction and development costs | $ | 18,873,000 | ||
| Operating costs: | ||||
| Cost of goods sold and direct production | $ | 38,014,000 | ||
| General and administration costs | 1,226,000 | |||
| Interest expense | 2,348,000 | |||
| Total operating costs | $ | 41,588,000 | ||
| Total | $ | 60,461,000 | ||
We anticipate spending approximately $60.5 million over the next twelve months. We estimate that we will spend approximately $18.9 million during the next three months completing the construction and development phase of the project. These costs are projected to include $60,000 for directors and officers' insurance, builder's risk insurance, general commercial liability, worker's compensation and property insurance. We also expect to spend approximately $150,000 on general and administrative expenses, including managerial fees, out-of-pocket reimbursements and general office expenses. Interest on the construction loans will accrue as loan proceeds are advanced. We estimate to accrue approximately $500,000 of interest expense during the next three months that will be capitalized into the construction costs of the project. We also expect to spend approximately $432,000 to construct the railroad track infrastructure for rail access and switching and rail car parking. We have funded a majority of the land costs with tax increment financing from the City of Monroe and also expect to use grant proceeds from the Wisconsin Department of Commerce. We anticipate spending a majority of our resources to design and build the ethanol plant. We expect to spend approximately $12.9 million on construction progress payments within the next three months. We expect these costs to include material and labor to construct the ethanol plant, grain and ethanol storage and handling facilities, drying facilities, offices and a cooling tower. We also expect to purchase and install ethanol production equipment, such as pumps, grinders and processing equipment, storage tanks, dryers, and conveyors. We plan to pay these costs by making monthly progress payments based upon the work completed and invoiced to us by our general contractor.
We expect to fund our construction and development costs and expenditures for the next three months through cash on hand, senior and subordinated debt financing, our development agreement with Monroe, and a grant from the Wisconsin Department of Commerce. A $400,000 grant from the Wisconsin Department of Commerce, of which $300,000 will be used for site improvement and approximately $100,000 for training employees was approved on October 6, 2001.
After the projected completion of the ethanol production facility, estimated in approximately three months, the Company will begin processing operations. After the purchase of the initial raw materials inventory which is projected in the development costs, we expect to incur $41.6 million of operating costs during the first nine months of operation. We have projected to spend $38 million on direct cost
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of goods sold and production costs. We also expect to incur approximately $1.2 million for general and administration costs plus $2.3 million for interest expense during this nine month period. We have projected to fund the operating costs for the first nine months of operations with the sales of ethanol and dried distillers grain and solubles.
During the next three months we plan on hiring approximately 31 employees needed to operate the ethanol facility. We intend to hire staff only for the direct operations and administration of our ethanol business, such as production, shipping, and receiving. We do not intend to hire a sales staff to market our products. We intend to rely on third-party marketing arrangements, and pay commissions to marketing agents to market and sell our products.
Liquidity and Capital Resources
As of June 30, 2002, we had cash of $19,294, current assets of $1,146,131 and total assets of $40,852,154. The current assets include an investment in corn hedge contracts totaling $1,097,138. As of June 30, 2002, we had current liabilities totaling $4,966,277. The components of Members' Equity were comprised of an accumulated deficit of $1,238,627 and member's contributions, net of the cost of raising capital, of $17,859,787. Also included in Members' Equity is accumulated other comprehensive income of $520,963 as a result of recording the change in the fair value of the option and future contracts designated as cash flow hedges for specific volumes for corn expected to be used in the manufacturing process. Realized gains and losses for the option and futures contracts will be recognized in the statement of operations when the finished goods produced using the hedged item are sold.
For the six months ended June 30, 2002, we had no revenues. Our net losses for the six months ended June 30, 2002 totaled $356,332. Cash flows used for operating activities for the six months ended June 30, 2002, was $712,719. These cash flows were used primarily to fund salaries, office and administrative expenses, consulting, legal, and insurance costs. During the six months ended June 30, 2002, our prepaid expenses increased by $20,747, cash paid for hedge contracts was $576,175 and our accounts payable decreased by $230,189. Cash used for investing activities includes purchases of equipment and construction costs totaling $19,838,449. For the six months ended June 30, 2002, we received net proceeds from long-term debt borrowings totaling $15,375,856.
We are still in the development stage and are in the process of constructing an ethanol plant. Until the ethanol plant is complete and operating, which is projected to be in approximately three months, we will generate no revenue. Management anticipates that accumulated losses will continue to increase until the ethanol plant is operating.
We estimate that the total construction cost for the ethanol plant will be approximately $43.8 million. On August 28, 2001, we entered into a $32.6 million credit facility with First National Bank of Omaha consisting of $30.6 million in long-term financing and a $2 million revolving line of credit. The credit facility is secured by substantially all of our assets. When the ethanol plant is complete and operating, we anticipate converting the construction loan senior debt into a term loan, amortized over ten years with a balloon payment due after five years and to be paid in quarterly payments including principal and interest. The interest rate of the term loan includes incentive pricing that is variable based upon the indebtedness to net worth ratio of the Company. The terms also include a requirement to fix the interest rate on at least 50% of the term debt for not less than five years upon conversion from a construction loan to a term loan. The $2 million revolving line of credit is limited to the borrowing base collateral, which is based upon 75% of the value of the inventory and allowable accounts receivable, and has a variable interest rate. The revolving line of credit has a term of 364 days after funding and is expected to renew annually. We anticipate that we will require access to the revolving line during the first year of operation, and at least a portion of the second year, before generating sufficient surplus cash flow to finance inventories and receivables. The term loan and the
9
revolving line of credit agreements contain restrictions and financial covenants the Company will be subject to during the term of the agreements.
On August 22, 2001, we entered into a subordinated credit facility of $3.6 million from Alliant Energy—Wisconsin Power and Light Company to finance the electrical infrastructure and other construction needs. The terms of credit facility include a fixed interest rate with payments that include principal and interest which amortize the loan over 7 years and mature with a balloon payment due in five years. On July 10, 2001 the City of Monroe passed a resolution authorizing a loan guarantee of the repayment obligations of the subordinated credit facility from Alliant Energy. We are also relying upon $1.6 million in tax increment financing from Monroe to fund improvements to the site. A $400,000 grant from the Wisconsin Department of Commerce, of which $300,000 will be used for site improvement and approximately $100,000 for training employees was approved on October 6, 2001.
The following tables show updated sources and uses of our liquidity relating to the construction and start-up of our business.
| Sources of Funds: | |||
| Equity | $ | 18,054,000 | |
| Seed capital | 380,000 | ||
| Senior debt | 30,600,000 | ||
| Revolving line of credit | 2,000,000 | ||
| Subordinated debt | 3,600,000 | ||
| Tax increment financing | 1,600,000 | ||
| Department of Commerce grant(1) | 400,000 | ||
| Total Sources of Funds | $ | 56,634,000 | |
Uses of Funds: | |||
| Expected maximum contract price | $ | 43,800,000 | |
| Railroad infrastructure costs | 1,098,000 | ||
| Land and infrastructure | 2,000,000 | ||
| Insurance costs | 226,500 | ||
| Organization costs | 378,000 | ||
| Start-up costs | 700,000 | ||
| Capitalized interest | 1,526,000 | ||
| Working capital needs | 3,800,000 | ||
| Financing costs | 1,200,000 | ||
| Offering costs | 574,000 | ||
| Contingency | 1,331,500 | ||
| Total Uses of Funds | $ | 56,634,000 |
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Item 6: Exhibits and Reports on Form 8-K
| 99.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BADGER STATE ETHANOL, LLC | ||||
Date: August 14, 2002 | By: | /s/ GARY L. KRAMER Gary L. Kramer President and General Manager (principal financial officer) | ||
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