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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 2002; 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 PROCESSING, LLC
(Exact name of registrant as specified in its charter)
Nebraska 2689 47-0836953
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(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or organization) Classification Code Number) Identification No.)
510 Locust Street
P.O. Box 10
Plainview, Nebraska 68769
(402) 582-4446
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(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 March 31, 2002
---------- -----------------------------
Membership Units 15,318 Membership Units
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HUSKER AG PROCESSING, LLC
INDEX TO 10-QSB FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2002
PART I FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS ...............................3
CONDENSED BALANCE SHEETS ...........................4
CONDENSED STATEMENTS OF OPERATIONS .................5
CONDENSED STATEMENTS OF CASH FLOWS .................6
NOTES TO CONDENSED FINANCIAL STATEMENTS ............7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ......8
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .................................16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .........16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ...................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS ..................................17
ITEM 5. OTHER INFORMATION .................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ..................17
SIGNATURES ........................................18
2
PART I
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Independent Accountants' Report
Board of Directors and Members
Husker Ag Processing, LLC
Plainview, Nebraska
We have reviewed the accompanying condensed balance sheet of Husker Ag
Processing, LLC (a development stage limited liability company) as of March 31,
2002, and the related condensed statements of operations and cash flows for the
three-months ended March 31, 2002 and 2001 and the period February 24, 2000
(inception) through March 31, 2002. These 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 generally accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet as of December 31,
2001, and the related statements of operations, members' equity, and cash flows
for the year then ended (not presented herein), and in our report dated February
1, 2002, we expressed an unqualified opinion on those financial statements. In
our opinion, the information set forth in the accompanying condensed balance
sheet as of March 31, 2002 is fairly stated, in all material respects, in
relation to the balance sheet from which it has been derived.
/s/ BKD, LLP
Omaha, Nebraska
May 7, 2002
3
Husker Ag Processing, LLC
(A Development Stage Enterprise)
Condensed Balance Sheets
Assets
March 31, December 31,
2002 2001
----------------------------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 11,505,782 $ 13,483,166
Accrued interest receivable -- 194
Prepaid insurance 53,430 --
--------------- ---------------
Total current assets 11,559,212 13,483,360
--------------- ---------------
Property and Equipment, at cost
Land 50,525 50,525
Site development 2,253,096 272,968
Office equipment 21,851 7,352
--------------- ---------------
2,325,472 330,845
Less accumulated depreciation 1,853 1,223
--------------- ---------------
2,323,619 329,622
--------------- ---------------
Other Assets
Debt origination costs 445,086 685,086
--------------- ---------------
$ 14,327,917 $ 14,498,068
=============== ===============
Liabilities and Members' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses (including $16,584 to
related parties at December 31, 2001) $ 94,175 $ 107,445
--------------- ---------------
Total current liabilities 94,175 107,445
--------------- ---------------
Members' Equity (Deficit)
Membership units, issued and outstanding - 15,318 units 14,531,162 14,531,162
Deficit accumulated during the development stage (297,420) (140,539)
--------------- ---------------
14,233,742 14,390,623
--------------- ---------------
$ 14,327,917 $ 14,498,068
=============== ===============
See Accompanying Notes to Condensed Financial
Statements and Independent Accountants' Review Report
4
Husker Ag Processing, LLC
(A Development Stage Enterprise)
Condensed Statements of Operations
Three Months Ended March 31, 2002 and 2001 and
February 24, 2000 (Inception) through March 31, 2002
(Unaudited)
February 24, 2000
(Inception)
through
Three Months March 31,
2002 2001 2002
-----------------------------------------------------
Revenue $ -- $ -- $ --
Operating Expenses
General and administrative 209,117 74,153 527,426
--------------- --------------- ---------------
Operating Loss (209,117) (74,153) (527,426)
--------------- --------------- ---------------
Other Income
Non-member contributions 1,800 12,300 63,317
Grant -- 75,000 75,000
Interest and other income 50,436 3,610 91,689
--------------- --------------- ---------------
52,236 90,910 230,006
--------------- --------------- ---------------
Net Income (Loss) $ (156,881) $ 16,757 $ (297,420)
=============== =============== ===============
Basic and Diluted Loss Per Membership Unit $ (10.24) $ 22.00 $ (81.84)
=============== =============== ===============
Weighted Average Units Outstanding 15,318 766 3,634
=============== =============== ===============
See Accompanying Notes to Condensed Financial
Statements and Independent Accountants' Review Report
5
Husker Ag Processing, LLC
(A Development Stage Enterprise)
Condensed Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001 and
February 24, 2000 (Inception) through March 31, 2002
(Unaudited)
February 24, 2000
(Inception)
through
Three Months March 31,
2002 2001 2002
--------------------------------------------------------
Operating Activities
Net income (loss) $ (156,881) $ 16,757 $ (297,420)
Items not requiring cash
Noncash compensation -- 18,000 18,000
Depreciation expense 629 234 1,853
Changes in
Accounts payable and accrued expenses 19,452 5,663 36,200
Interest receivable 194 (929) --
Prepaid expenses (53,430) -- (53,430)
---------------- ---------------- -----------------
Net cash provided by (used in)
operating activities (190,036) 39,725 (294,797)
---------------- ---------------- -----------------
Investing Activities
Land purchase and site development (1,973,155) (53,545) (2,245,646)
Purchase of office equipment (14,499) (3,574) (21,851)
---------------- ---------------- -----------------
Net cash used in investing activities (1,987,654) (57,119) (2,267,497)
---------------- ---------------- -----------------
Financing Activities
Gross proceeds from issuance of membership
units -- 433,000 14,797,556
Offering costs paid (39,694) (44,192) (284,394)
(Payment) return of debt origination costs 240,000 -- (445,086)
Net cash provided by financing
activities 200,306 388,808 14,068,076
---------------- ---------------- -----------------
Increase (Decrease) in Cash and Cash Equivalents (1,977,384) 371,414 11,505,782
Cash and Cash Equivalents, Beginning of
Period 13,483,166 3,257 --
---------------- ---------------- -----------------
Cash and Cash Equivalents, End of Period $ 11,505,782 $ 374,671 $ 11,505,782
================ ================ =================
Supplemental Disclosure of Noncash Investing and
Financing Activities
Net increase (decrease) in accounts payable
incurred for offering costs $ (39,694) $ 13,678 $ --
Net increase (decrease) in accounts payable
incurred for site development costs $ 6,972 $ -- $ 57,975
See Accompanying Notes to Condensed Financial
Statements and Independent Accountants' Review Report
6
Husker Ag Processing, LLC
(A Development Stage Enterprise)
Notes to Condensed Financial Statements
March 31, 2002
(Unaudited)
NOTE 1: 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, 2001 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 2001 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.
NOTE 2: Commitments
On August 10, 2001, the Company entered into a contract labor agreement
with an individual to serve as the Company's construction and general
manager for $7,500 per month plus reimbursement of expenses. The
agreement expires in August 2002 and may be renewed annually by the
parties for additional one-year terms.
NOTE 3: 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 are estimated to be
$26,900,000 excluding land, site development, construction of the
administration building, connection of a rail spur, and capitalized
interest costs. As of March 31, 2002, the Company has approximately
$25,000,000 of remaining costs to be incurred under this agreement.
The design-build contract includes provisions for an incentive bonus to
or liquidated damages from the general contractor based on the scheduled
project completion date.
NOTE 4: 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 will convert to a
ten-year term note upon completion of construction (pursuant to a
November 30, 2001 financing commitment). Additionally, the Company is in
the process of applying for a USDA guarantee under which, if accepted,
the USDA will agree to guarantee 60% of borrowings under the term note.
At March 31, 2002, there were no outstanding borrowings under this
agreement. During the three months ended March 31, 2002, the Company
received $240,000 as a return of previously paid debt origination costs.
7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, the Company had cash of $11,505,782, current assets
of $11,559,212 and total assets of $14,327,917. The Company's cash generated
interest or other income of $50,436. The Company had current liabilities
totaling $94,175. The Company had an accumulated deficit of $297,420 and
member's equity as of March 31, 2002 was $14,233,742.
For the three months ended March 31, 2002, the Company had no revenues. The
Company's net losses for the three months ended March 31, 2002 totaled $156,881.
Cash used for operating activities for the three months ended March 31, 2002
totaled $190,036 primarily to fund salaries, office and administrative expenses,
and consulting, legal, and permitting fees.
Cash used for investing activities for the three months ended March 31,
2002 totaled $1,987,654. Cash used for investing activities for the three months
ended March 31, 2002 was spent on the purchase and development of the ethanol
plant site ($1,973,155) and the purchase of office equipment ($14,499). Cash
provided by financing activities for the three months ended March 31, 2002
totaled $200,306 which consists of the return to the Company of $240,000 deposit
previously paid in connection with a USDA loan guarantee fee offset partially by
$39,694 of offering costs accrued previously and paid during the three month
period.
The Company is still in the development phase, and until the proposed
ethanol plant is complete and operating, will generate no revenue. Management
anticipates the accumulated losses will continue to increase until the ethanol
plant is operating. Funds to construct the ethanol plant will come from the
proceeds of its public offering and construction loans from Stearns Bank, N.A.
MANAGEMENT'S PLAN OF OPERATIONS
The cost of the private offering completed in January 2001 totaled $38,274
and therefore, the net proceeds to Husker Ag from the private offering and
director option exercise totaled $394,726. During Husker Ag's public offering,
the Company raised $14,402,000. In connection with the public offering, the
Company paid $285,814 in offering expenses and therefore, the net proceed to the
Company were $14,116,186. The total net proceeds to the Company during the
fiscal year ended December 31, 2001 from the private and public offerings
equaled $14,510,912.
On December 19, 2001, the Company closed on its construction financing with
Stearns Bank, N.A., St. Cloud, Minnesota. Under the Construction Loan Agreement
with Stearns Bank, N.A. (the "Bank"), the Bank agrees to provide up to
$20,000,000 of debt financing for the purpose of constructing a 20 million
gallon per year ethanol plant. The construction loan is evidenced by a demand
promissory note from the Company to the Bank, with a variable interest rate
which follows the prime rate as published by the Wall Street Journal plus 1/4%
(5.0%, as of December 19, 2001 and 4.75% as of May 13, 2002). The construction
loan is for an 18-month period, ending June 19, 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 financing costs paid by the Company at the construction loan closing
were $388,415 (not including $50,000 loan origination fee previously paid). The
total financing costs incurred by the Company in connection with the origination
of its debt financing were $445,086. The Company has not yet borrowed any funds
under its construction loan, and does not currently expect to until the 2nd
quarter of 2002.
Under the Construction Loan Agreement, the Company must use its equity
funds prior to incurring construction loan indebtedness. In addition, the
Construction Loan Agreement imposes a number of conditions which must be met by
the Company on an on-going basis prior to the Bank's disbursement of loan funds,
including providing the Bank with detailed budget and cash flow projections and
construction schedule, as well as annual audited financial statements and
monthly interim financial statements. The Bank has broad powers of discretion
with respect to its
8
disbursement of construction loan funds, depending upon the Company's compliance
with the Construction Loan Agreement covenants and conditions.
Upon the successful completion of construction of the ethanol plant,
subject to required loan documentation, and no material adverse change in the
Company's financial condition, the Bank has agreed to convert the construction
loan into a permanent loan amortized over 10 years which will accrue interest as
follows: (i) 60% ($12,000,000) at prime rate as published by the Wall Street
Journal plus 1/4%, adjusted quarterly; and (ii) 40% ($8,000,000) at prime rate
as published by the Wall Street Journal plus 1/4%, adjusted quarterly, with a
floor of 6.5% and a ceiling of 9.95% for five years beginning July 6, 2001. At
the end of five years the floor and ceiling will adjust to the same spread, plus
or minus, prime rate as published by the Wall Street Journal at that time.
The permanent loan is subject to a 60% USDA guaranteed loan ($12 million).
If the USDA declines the loan, the Bank would proceed with a conventional
permanent loan. Any prepayment of the permanent loan by the Company would be
subject to a 5% (of loan balance) prepayment premium in year one, 4% premium in
year two, 3% premium in year three, 2% premium in year four, and 1% premium in
year five.
In January 2001, the Nebraska Department of Agriculture awarded Husker Ag a
$75,000 grant under the Agricultural Opportunities and Value-Added Partnerships
Act to assist the Company with the organization and offering costs necessary for
the construction of its ethanol plant. Husker Ag has entered into an agreement
with the Nebraska Department of Agriculture in connection with the award which
governs its obligations relating to the grant award. This agreement required the
Company to use the grant funds exclusively for the activities listed in its
application which includes payment of legal fees, accounting fees, consulting
fees and permitting costs associated with the construction of the ethanol plant.
The grant income was included in other income on the Company's statement of
operations during the fiscal year ended December 31, 2001.
Plan for Calendar Year 2002
Management expects to continue the design-development and construction of
the ethanol plant during calendar year 2002. Management also plans to negotiate
and execute finalized contracts needed in connection with the construction and
operation of the plant, including the provision of necessary electricity,
natural gas and other power sources, and marketing agreements for ethanol and
distillers grain sales. Management currently anticipates that Husker Ag will
need approximately $27.75 million to construct the plant, and a total of
approximately $33 million to cover all capital expenditures necessary to
complete the project and make the plant operational and produce revenue. Based
on the Company's completion of its public offering pursuant to which it raised
$14,402,000 (less $258,814 for offering expenses) and the execution of the
Construction Loan Agreement with Stearns Bank, N.A. (the "Bank"), pursuant to
which the Bank agrees to provide up to $20,000,000 of debt financing for the
purpose of constructing a 20 million gallon per year ethanol plant, management
expects to have sufficient cash on hand to cover construction and start-up costs
necessary to make the plant operational.
During the three month period ended March 31, 2002, the Company had
expended $1,973,155 in connection with preparing the site to meet the site
specifications required by Fagen and set forth in the Design Build Contract,
including leveling and grading the site and constructing a road from the plant
to Highway 20 and payment of a mobilization fee of $1 million (less a 10%
retainage) which is applied to the total contract price.
Operating expenses consisting of general and administrative costs for the
three month period ended March 31, 2002 totaled $209,117, including $113,678 on
accounting, legal, lobbying and other professional fees, $5,728 on utilities,
rent and depreciation, $35,526 on contract labor and compensation, $17,913 on
insurance, licenses and permits, and $36,272 on office supplies, administrative
costs and miscellaneous expenses.
Management believes that the Company currently has sufficient cash to cover
its costs through calendar year 2002, and through the completion of the plant
construction, including staffing, general and administrative expenses and legal,
accounting and related expenses. The following is management's estimate
of costs and expenditures for calendar year 2002 as of March 31, 2002.
Insurance $ 65,000
General and administrative costs 6,460,000
Site Preparation 574,000
Office building construction costs 193,000
9
Plant construction in progress payments 26,000,000
==========
TOTAL $33,292,000
Management anticipates spending approximately $33 million on its business
during calendar year 2002, the largest portion of which will be for the
construction of the ethanol plant. Of this $33 million management expects to
spend an estimated $6,460,000 on general and administrative expenses through
2002, including managerial fees, on-going legal and accounting fees, general
office expenses, and disbursement reimbursements. The $33 million includes
approximately $574,000 for additional plant site preparation which will be
necessary as construction of the ethanol plant progresses.
The Fagen contract price for construction of the ethanol plant does not
include the construction of the administration building at the ethanol plant
site; office, maintenance and power equipment required at the plant; and
construction of an on-site rail spur. Through calendar year 2002, the Company
expects to spend an estimated $193,000 on construction of the administrative
building, $591,000 on office maintenance and power equipment, and $352,000 on
the construction of the on-site rail spur.
Husker Ag currently expects to spend all of its equity funds and a
substantial portion of its debt financing on plant construction by December
2002. These costs will include preparing and pouring foundations, material and
labor to construct the plant, including the grain and ethanol storage and
handling facilities, offices and a cooling tower. Husker Ag will also be
purchasing and installing ethanol production equipment, such as pumps, grinders,
processing equipment, storage tanks and conveyors. Such construction, equipment
purchases and installation will be handled by Fagen, Inc., which will be paid by
the Company in monthly progress payments based on the work completed and
invoiced to the Company by Fagen, Inc.
As of May 10, 2002, Fagen had completed the foundation for the plant's 3
large fermentation tanks and its beer well and had started constructing the
stainless steel tanks on these foundations. The elapsed time from ground
breaking to mechanical completion of the plant is currently expected to take
approximately 14 to 16 months. The Company is currently targeting the first
quarter of 2003 as the date for mechanical completion of the plant; provided,
however, Fagen and the Company may encounter adverse weather conditions or
hazardous or unexpected conditions at the construction site which could delay
construction of the plant. If it takes longer to construct the plant than the
Company anticipate, it will delay the Company's ability to generate revenues and
could make it difficult for the Company to meet its debt service obligations.
Management intends to fund its costs and expenditures during 2002 through
the proceeds raised in the public offering and its debt financing. Husker Ag
currently has one person who serves as a part-time bookkeeper and interim office
manager, one full-time receptionist and a construction and general manager to
assist with organizational matters related to its business. The Company is
currently looking for a plant manager. The Company does not plan to begin hiring
additional employees related to the ethanol plant operations until approximately
six months before completion of the plant construction and commencement of
production operations.
Operating Expenses
The Company will have certain operating expenses, such as office supplies,
utilities and salaries and related employment costs, when it retains a manager
and other staff. Management has allocated funds in the Company's capital budget
for such expenses, although such expenses may be greater than those budgeted. If
such costs are greater than the funds budgeted, or if construction costs run
higher than budgeted, the Company may need to obtain additional funding to cover
such costs.
Books and Records
Husker Ag currently has one full-time receptionist. The Company has hired a
construction and general manager to assist in organizational business matters,
but the Company is currently dependent on its Board of Directors, a limited
staff and the Company's legal counsel, for the maintenance of its books and
records. Management intends to hire and train additional full-time staff
personnel prior to commencement of operations, and the salaries of such persons
are included in Husker Ag's budget. Such personnel are and will be responsible
for compliance with the rules and regulations promulgated under the Securities
and Exchange Act of 1934 concerning the maintenance of accurate books and
records, and the timely and accurate submission of annual and periodic reports
with the Securities and Exchange Commission.
10
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 profit percentages 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 following:
The project could suffer delays that could postpone Husker Ag's ability to
generate revenues and make it more difficult for Husker Ag to pay its
debts.
Husker Ag currently expects that it will be an estimated 14 to 16 months
after construction begins before the proposed ethanol plant is operational.
Construction projects often involve delays in obtaining construction permits,
construction delays due to weather conditions, or other events that delay the
construction schedule. If it takes longer to obtain necessary permits or
construct the plant than anticipated, it would delay Husker Ag's ability to
generate revenues and make it difficult for Husker Ag to meet its debt service
obligations. This could reduce the value of the Company's membership units and
the longer it takes for the Company to generate revenue, the longer its members
will have to wait to receive any distributions.
The project could also be delayed if Husker Ag encounters defective
material or workmanship from Fagen which could delay production and the
Company's' ability to generate revenues. 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 commence operations
and delay its ability to generate revenues. If defects are discovered after the
Company begins operating, 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 is a newly formed company with limited working capital which
could result in losses.
Husker Ag Processing, LLC was organized on August 29, 2000 and has no
operating history. The Company is promotional and in its early development
stages. The Company has limited experience concerning whether it will be
successful in the proposed construction and operation of the ethanol plant or
that its plans will materialize or prove successful. Husker Ag cannot make
representations about its future profitable operation or the future income or
losses of Husker Ag. The Company does not know whether it will ever operate at a
profit or that Husker Ag will appreciate in value. If the Company's plans prove
to be unsuccessful, its members will lose all or a substantial part of their
investment.
Operation costs could be higher than anticipated which could reduce
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. These cost increases could arise from an inadequate
supply and resulting increased prices for corn. 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. Adequacy and cost of
water, electric and natural gas utilities could also affect the Company's
operating costs. 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.
11
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.
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 build the ethanol
plant and manufacture ethanol. If Husker Ag were not able to complete
construction, or 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 factories, 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 Midland,
Minnesota Corn Processors 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 size and have similar resources to Husker Ag. There are
currently seven operational ethanol plants in Nebraska with at least one new
plant in the process of forming.
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.
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, 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
12
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.
Husker Ag does not currently have any definitive agreements with any corn
producers or grain elevators to provide corn to its ethanol plant. The Company
currently does not anticipate entering into agreements with corn producers or
grain elevators until shortly before the plant becomes operational and subject
to management's evaluation of local feed product availability and market prices
and conditions.
Low ethanol prices and low gasoline prices could reduce Husker Ag's
profitability.
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.
Increases in the production of ethanol could result in lower prices for
ethanol and have other adverse effects which could reduce Husker Ag's
profitability.
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. 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.
Hedging transactions involve risks that could harm Husker Ag's business.
In an attempt to minimize the effects of the volatility of corn costs on
operating profits, Husker Ag currently intends to take hedging positions in corn
futures 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. Husker Ag may also take
similar hedging positions in connection with the sale its ethanol.
Ethanol production is energy intensive and interruptions in its supply of
energy could have a material adverse impact on its business.
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.
Husker Ag has entered into discussions with natural gas suppliers; however,
at the present time the Company has no binding commitments with any natural gas
supplier. If Husker Ag is unable to obtain a natural gas supply or procure an
alternative source of natural gas on terms that are satisfactory to Husker Ag,
the adverse impact on its plant and operations could be material. 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.
13
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.
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 current credit for gasoline blended with 10% ethanol is 5.4(cent)
per gallon of blended gasoline. The subsidy will gradually drop to 5.1(cent) per
gallon by 2005. Currently, a gasoline marketer that sells gas without ethanol
must pay a federal tax of 18.4(cent) per gallon compared to 13(cent) per gallon
for gas with 10% ethanol. The tax on gasoline blended with 10% ethanol will
gradually increase to 13.3(cent) per gallon by 2005. Smaller credits are
available for gasoline blended with 7.7 percent and 5.7 percent 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.
On May 31, 2001, the governor of the State of Nebraska approved LB 536, a
legislative bill which established a production tax credit of 18(cent) 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.
Because Husker Ag will not be in a position to produce 100,000 gallons of
ethanol until at least 2003, the Company will not qualify for the payments until
that time. 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 profitability.
14
The production incentive is scheduled to expire June 30, 2012, and the
longer it takes Husker Ag to complete construction of the plant and to become
operational, the greater the risk that the Company will receive less subsidy
payments than the maximum permitted under Nebraska law.
The failure to enforce existing environmental and energy policy regulations
will result in a decreased demand for ethanol which will impact the
profitability of Husker Ag's business.
Husker Ag's success will depend in part on effective enforcement of
existing environmental and energy policy regulations. Many of the Company's
potential consumers are unlikely to switch from the use of conventional fuels
unless compliance with applicable regulatory requirements leads, directly or
indirectly, to the use of ethanol. Both additional regulation and enforcement of
such regulatory provisions are likely to be vigorously opposed by the entities
affected by such requirements. If existing emissions-reducing standards are
weakened, or if governments are not active and effective in enforcing such
standards, Husker Ag's business and results of operations could be adversely
affected. Even if the current trend toward more stringent emissions standards
continues, Husker Ag will depend on the ability of ethanol to satisfy such
emissions standards more efficiently than other alternative technologies.
Certain standards imposed by regulatory programs may limit or preclude the use
of Husker Ag's products to comply with environmental or energy requirements. Any
decrease in the emission standards or the failure to enforce existing emission
standards and other regulations could result in a reduced demand for ethanol. A
significant decrease in the demand for ethanol will reduce the price of ethanol,
and adversely affect Husker Ag's profitability.
Husker Ag is subject to extensive environmental regulation and operational
safety regulations that could result in higher than expected compliance
costs and liabilities.
Ethanol production involves the emission of various airborne pollutants,
including particulate matters, carbon monoxide, oxides of nitrogen, volatile
organic compounds and sulfur dioxide. To construct the plant and operate its
business, Husker Ag will need an Air Quality Construction Permit and an Air
Quality Operating Permit from the State of Nebraska Department of Environmental
Quality (the "DEQ"). The DEQ has issued Husker Ag's Air Quality Construction
Permit on January 16, 2002. An Air Quality Construction Permit is valid for 18
months. If Husker Ag cannot complete construction by June 16, 2003, its Air
Quality Construction Permit will lapse unless Husker Ag can demonstrate that the
construction of its plant requires additional time and therefore, Husker Ag will
need to apply for an extension. Once the proposed ethanol plant is completed,
Husker Ag must conduct emission testing and apply for an Operating Permit that
will allow it to operate its business. Husker Ag anticipates submitting an
application for this permit before it begin operations. Husker Ag needs to
obtain this permit to operate the ethanol plan after the Air Pollution
Construction Permit expires. Husker Ag has twelve months once the plant becomes
operational to obtain an Air Quality Operating Permit. If granted, Husker Ag
currently expects the permit will be valid for five years.
Husker Ag also currently plans to apply for a Nebraska Pollutant Discharge
Elimination General Permit to allow it to discharge approximately 50,400 gallons
per day of water into a nearby creek and for general discharges. This permit
requires a 30-day public comment period. Husker Ag may also need to apply with
the Nebraska Department of Environmental Quality for a Storm Water Runoff Permit
or a similar permit. Husker Ag has not applied for these permits, but anticipate
doing so at least 180 days before it begins operations. If these permits are not
granted, Husker Ag will have to construct an alternative discharge and treatment
system (e.g. storm pond) on site for which it will need to obtain different
permits.
Husker Ag will need to obtain certain well permits from the Nebraska
Department of Environmental Quality to construct and operate its on-site wells.
Without these permits, Husker Ag cannot drill its wells and could be forced to
use water from the City of Plainview, Nebraska if a sufficient supply is
available, or terminate its business. Using water from the City of Plainview may
significantly increase Husker Ag's operating costs or harm its financial
performance.
Even if Husker Ag receives all required permits from the State of Nebraska,
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.
15
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.
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
(d) Use of Proceeds:
On August 28, 2001 the 1933 Act Registration Statement for the
initial public offering of Husker Ag's membership units became effective. Husker
Ag registered 15,000 membership units with an aggregate offering price of
$15,000,000. The offering commenced on August 29, 2001 in the states of
Nebraska, Kansas (accredited investors only), Minnesota (accredited investors
only pursuant to state exemption) and South Dakota; on September 10, 2001 in the
state of Iowa (accredited investors only pursuant to state exemption); and on
October 17, 2001 in the state of Colorado.
On December 1, 2001, the Company completed its public offering
of membership units. Completion of the offering required the Company to raise at
least $13 million from the sale of membership units and obtaining at least $20
million of debt financing necessary to complete the construction of the ethanol
plant. Pending satisfaction of these conditions, all funds were held in escrow.
The Company satisfied all conditions to closing and raised $14,402,000 from the
sale of 14,402 membership units and secured up to $20 million in debt financing.
The Company did not utilize the services of an underwriter in
either its private or public offering. The Company's directors and officers sold
the membership units directly to investors. The Company did not pay its
officers, directors or any other person any commission in connection with the
purchase or sale of the membership units. Therefore, the Company incurred no
expenses in connection with the issuance and distribution of the
16
membership units for underwriting discounts, commissions, finder's fees or other
expenses paid to or for underwriters.
The Company incurred $285,814 of offering costs relating to its public
offering resulting in net proceeds to the Company of $14,116,186. As of December
31, 2001, the Company used the public proceeds to pay the offering costs,
including the $3,750 SEC registration fee, Blue Sky filing fees and expenses,
printing expenses, legal fees, and miscellaneous expenses. None of these
expenses represented a direct or indirect payment to directors, officers or
persons owning 10% or more of any class of Husker Ag's membership units.
During the three month period ended March 31, 2002, the Company had
expended a total of $1,987,654 of the public offering net proceeds as follows:
(1) $1,973,155 to prepare the site to meet the site specifications
required by Fagen, including leveling and grading the site and constructing a
road from the plant to Highway 20 and payment of a mobilization fee of $1
million (less a 10% retainage) which is applied to the total contract price; and
(2) $14,499 to purchase office equipment.
As of March 31, 2002, the total amount of public offering proceeds
expended by the Company was $3,069,333.
The remainder of the net proceeds are located in an interest bearing
construction loan deposit account with Stearns Bank, N.A. As of March 31, 2002,
Husker Ag had not expended any of the proceeds from the public offering on the
purchase or installation of machinery and equipment, purchases of real estate;
acquisition of other businesses or repayment of indebtedness.
As of May 10, 2002, there were 508 holders of record of Husker
Ag's membership units.
Husker Ag has never declared or paid any cash dividends on the
membership units. Husker Ag does not expect to generate revenues until the
ethanol plant construction is completed and the ethanol plant is operational.
Once operational, subject to loan covenants and restrictions, Husker Ag
anticipates distributing its net cash flow to its members in proportion to the
membership units held. By net cash flow, Husker Ag means its gross cash proceeds
received less any portion, as determined by its Board of Directors in their sole
discretion, used to pay or establish reserves for the Company's expenses, debt
payments, capital improvements, replacements and contingencies. If Husker Ag's
financial performance and loan covenants permit, the Board of Directors will try
to make cash distributions at times, and in amounts that will permit members to
make income tax payments, but Husker Ag may never be in a position to pay cash
distributions.
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
None.
17
(b) REPORTS ON FORM 8-K
(1) The Company filed a current report on Form 8-K on
January 14, 2002 reporting the completion of its
public offering, the execution of the Construction
Loan Agreement with Stearns Bank, N.A., the
execution of the Design Build Contract with Fagen,
Inc. and the expansion of the Board of Directors to
include four additional director seats and the
appointment of four new directors.
(2) The Company filed a current report on Form 8-K on
January 15, 2002 reporting the change in the Company's
independent accountants.
(3) The Company filed a current report on Form 8-K on
March 27, 2002 reporting an amendment to the Company's
Second Amended and Restated Operating Agreement.
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: May 14, 2002 By: /s/ Gary Kuester
-----------------------------------------
Gary Kuester, Chairman of the Board,
President and Director
Date: May 14, 2002 By: /s/ Fredrick J. Knievel
------------------------------------------
Fredrick J. Knievel, Treasurer and Director
(Principal Accounting Officer)
18
EXHIBIT INDEX
Exhibit
No. Description Method of Filing
--- ----------- ----------------
99(i) Form 8-K filed January 14, 2002 Incorporated by reference to the Form 8-K filed January 14, 2002
99(ii) Form 8-K filed January 15, 2002 Incorporated by reference to the Form 8-K filed January 15, 2002
99(iii) Form 8-K filed March 27, 2002 Incorporated by reference to the Form 8-K filed March 27, 2002
19