UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission file number 000-49704
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NORTHWEST ETHANOL, LLC
(Exact name of small business issuer as specified in its charter)
Ohio 34-1946951
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
P.O. Box 4505, Sherwood, Ohio 43556-0505
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(Address of principal executive offices)
(888) 437-8233
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(Issuer's telephone number)
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 [ ] No [X]
WARNING REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains forward-looking statements involving our
future performance, our expected future operations and other events, demands,
commitments and uncertainties. In many cases you can identify forward-looking
statements by the use of words such as "may," "will," "should," "anticipates,"
"believes," "expects," "plans," "future," "intends," "could," "estimate,"
"predict," "hope," "potential," "continue," or the negatives of these terms or
other similar expressions. These forward-looking statements are based on
management's beliefs and expectations and on information currently available to
management, and involve numerous assumptions, risks and uncertainties. Actual
results may differ materially for many reasons, including but not limited to:
the uncertain terms of our eventual debt financing; possible inability to
service our debt; possible need for additional capital; dependence upon our
design engineer and its business partners; risks related to our status as a
start-up enterprise and anticipated losses; our dependence on hiring and
retaining qualified personnel; lack of diversification of revenue sources;
possible price competition; price sensitivity and hedging transactions; and
risks related to changes in industry and environmental regulation. We are under
no duty to update any of these forward-looking statements after the date of this
Form 10-QSB to conform them to actual results or to changes in our expectations.
We caution you not to put undue reliance on any forward-looking statements.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
June 30, March 31,
2001 2002 (Unaudited)
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ASSETS
CURRENT ASSETS
Cash $ 34,710 $ 116,836
Restricted Cash (Note 2) -- 100,000
Prepaid Insurance -- 38,142
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Total Current Assets 34,710 254,978
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FIXED ASSETS (NOTE 3)
Equipment and Development Costs -- 99,843
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OTHER ASSETS
Deposits and Other (Note 4) -- 7,000
Costs of Raising Anticipated Capital -- 313,715
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Total Other Assets -- 320,715
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TOTAL ASSETS $ 34,710 $ 675,536
========= =========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts Payable (Note 4) $ 18,423 $ 106,194
Accrued Liabilities - Legal and Professional -- 62,816
Accrued Interest -- 250
Member Units Subscribed (Note 2) -- 100,000
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Total Current Liabilities 18,423 269,260
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LONG-TERM DEBT
Note Payable (Note 5) -- 30,000
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TOTAL LIABILITIES 18,423 299,260
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MEMBERS' EQUITY (NOTE 6)
Member Contributions 68,000 670,000
Deficit Accumulated During the Development Stage (51,713) (293,724)
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Total Members' Equity 16,287 376,276
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TOTAL LIABILITIES AND MEMBERS' EQUITY $ 34,710 $ 675,536
========= =========
See Notes to Financial Statements.
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STATEMENTS OF OPERATIONS
For the Period from February 8, 2001 (Inception Date) to March 31, 2001
and the Three and Nine Months Ended March 31, 2002 (Unaudited)
February 8, Three Months Nine Months
2001 to Ended Ended Cumulative Loss
March 31, 2001 March 31, 2002 March 31, 2002 from Inception
-------------- -------------- -------------- ---------------
REVENUE $ -- $ -- $ -- $ --
--------- --------- --------- ---------
OPERATING EXPENSES
Advertising -- 14,039 14,039 14,039
Consulting Fees 2,500 26,369 48,369 62,369
Depreciation Expense -- 312 312 312
Insurance -- 1,658 1,658 1,658
Licenses and Permits -- 200 3,650 3,650
Professional Fees (Note 4) 4,222 98,272 171,694 206,983
Miscellaneous 2,693 1,003 4,881 7,514
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Total Expenses 9,415 141,853 244,603 296,525
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OPERATING LOSS (9,415) (141,853) (244,603) (296,525)
OTHER INCOME - INTEREST 28 1,299 2,592 2,801
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NET LOSS $ (9,387) $(140,554) $(242,011) $(293,724)
========= ========= ========= =========
NET LOSS PER UNIT $ (195.56) $ (128.24) $ (327.04) $ (541.93)
========= ========= ========= =========
WEIGHTED AVERAGE UNITS OUTSTANDING 48 1,096 740 542
========= ========= ========= =========
See Notes to Financial Statements.
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STATEMENTS OF CHANGES IN MEMBERS' EQUITY
For the Nine Months Ended March 31, 2002 (Unaudited)
Member
Member Units Accumulated
Units Contributions Subscribed Deficit Total
--------- ------------- ---------- ----------- ---------
BALANCE - JUNE 30, 2001 272 68,000 -- (51,713) 16,287
Capital Contributions,
September 28, 2001 428 107,000 -- -- 107,000
Capital Contributions,
November 27, 2001 396 495,000 -- -- 495,000
Net Loss -- -- (242,011) (242,011)
--------- --------- --------- --------- ---------
BALANCE - MARCH 31, 2002
(UNAUDITED) 1,096 $ 670,000 $ -- $(293,724) $ 376,276
========= ========= ========= ========= =========
See Notes to Financial Statements.
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STATEMENTS OF CASH FLOWS
For the Period from February 8, 2001 (Inception Date) to March 31, 2001
and the Nine Months Ended March 31, 2002 (Unaudited)
February 8, Nine Months Cumulative
2001 to Ended Cash Flows
March 31, March 31, from Inception
2001 2002 (Unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (9,387) $(242,011) $(293,724)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities
Professional Fees -- -- 17,000
Depreciation -- 312 312
Changes in Assets and Liabilities
Deposits and Other -- (45,142) (45,142)
Accounts Payable 2,617 9,036 27,459
Accrued Liabilities -- 62,816 62,816
Accrued Interest -- 250 250
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Net Cash Used in Operating Activities (6,770) (214,739) (231,029)
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Equipment and Development Costs -- (80,155) (80,155)
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Net Cash Used in Investing Activities -- (80,155) (80,155)
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CASH FLOWS FROM FINANCING ACTIVITIES
Member Contributions 26,000 602,000 653,000
Member Subscriptions -- 100,000 100,000
Proceeds from Note Payable -- 30,000 30,000
Costs of Raising Anticipated Capital -- (254,980) (254,980)
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Net Cash Provided by Financing Activities 26,000 477,020 528,020
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NET INCREASE IN CASH 19,230 182,126 216,836
CASH - BEGINNING OF PERIOD -- 34,710 --
--------- --------- ---------
$ 19,230 $ 216,836 $ 216,836
CASH - END OF PERIOD ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Members' Interest Issued for Services $ -- $ -- $ 17,000
========= ========= =========
See Notes to Financial Statements.
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Northwest Ethanol, LLC (the "Company"), an Ohio limited
liability company, was organized on February 8, 2001 to build and operate a 30
million gallon ethanol plant located in northwest Ohio. In addition, the Company
intends to produce and sell distillers grains and carbon dioxide gas as
co-products of ethanol production. Construction is anticipated to begin in the
year 2002. As of June 30, 2001 and March 31, 2002, the Company is in the
development stage, with its efforts being principally devoted to organizational
and project feasibility activities.
In the opinion of management, all adjustments, consisting of only normal
recurring items, which are necessary for a fair presentation, have been
included. The results for interim periods are not necessarily indicative of
results which may be expected from any other interim period or for the full year
and may not necessarily reflect the results of operations, financial position
and cash flows of the Company in the future.
FISCAL REPORTING PERIOD - The Company has adopted a fiscal year ending June 30
for reporting financial operations.
ACCOUNTING ESTIMATES - Management uses estimates and assumptions in preparing
these financial statements in accordance with accounting principles generally
accepted in the United States of America. Those estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported revenue and expenses. Actual results
could differ from those estimates.
CASH - The Company maintains its accounts primarily at one financial
institution.
COST OF RAISING ANTICIPATED CAPITAL - The Company defers the costs incurred to
raise equity financing until that financing occurs. At such time that the
issuance of new equity units occurs, these costs will be netted against the
proceeds received.
DEPRECIATION - Fixed assets are recorded at cost, and the Company uses the
straight-line method to depreciate assets over their useful lives.
INCOME TAXES - The Company is treated as a partnership for federal and state
income tax purposes and therefore does not incur income taxes. Instead, its
earnings and losses are included in the income tax returns of the members.
Accordingly, no provision or liability for federal or state income taxes has
been included in these financial statements.
NET LOSS PER UNIT - The net loss per unit is based upon the weighted average
number of units outstanding during the periods.
RECENTLY ISSUED ACCOUNTING STANDARDS - In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 141,
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"Business Combinations". The statement requires that all future business
combinations be accounted for using the purchase method of accounting and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. This statement will be effective for the Company for
the fiscal year beginning July 1, 2002. The Company does not believe SFAS No.
141 will have a material impact on its financial position or the results of its
operations.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". Among other provisions, goodwill will no longer be amortized but will
be subject to impairment tests at least annually. This statement will be
effective for the Company for the fiscal year beginning July 1, 2002. The
Company does not believe SFAS No. 142 will have a material impact on its
financial position or the results of its operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This statement requires recognition of a liability for any
obligations associated with the retirement of a tangible long-lived asset. Any
such liability will be recorded at fair value and will be offset by an increase
to the carrying amount of the related long-lived asset. This statement will be
effective for the Company for the fiscal year beginning July 1, 2002. The
Company does not believe SFAS No. 143 will have a material impact on its
financial position or the results of its operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of" and
certain provisions of Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". The main objective of this statement is to resolve implementation
issues related to SFAS No. 121 by further clarifying certain of its provisions.
SFAS No. 144 removes goodwill from SFAS No. 121's scope and establishes a
"primary-asset" approach to determine the cash flow estimation period for a
group of assets and liabilities. Other provisions of the statement include more
stringent requirements for classifying assets available for disposal and
expanding the scope of activities that will require discontinued operations
reporting. This statement will be effective for the Company for the fiscal year
beginning July 1, 2002. The Company does not believe SFAS No. 144 will have a
material impact on its financial position or the results of its operations.
NOTE 2 - RESTRICTED CASH AND MEMBER UNITS SUBSCRIBED
In March 2002, the Company began to seek to raise capital through a public
offering of its units. The Company is currently offering a minimum of 2,400
units or a maximum of 4,400 units at $5,000 per unit. The plant is expected to
cost at least $42,000,000. The Company plans to raise at least $42,000,000
between capital and debt financing to pay for the plant. If such capital and
financing is not raised by September 30, 2002, the Company may not be able to
close on the offering, at which time it will have to return the amount of
subscriptions together with any interest earned thereon. As of March 31, 2002,
the Company has received subscriptions totaling $100,000.
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NOTE 3 - EQUIPMENT AND DEVELOPMENT COSTS
At March 31, 2002, the Company has the following fixed assets:
Office Equipment at Cost $ 7,490
Less Accumulated Depreciation (312)
--------
Office Equipment - Net 7,178
Land Development Costs 32,665
Plant and Building Development Costs 60,000
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Total $ 99,843
========
The land development costs and plant and building development costs are part of
the overall site and design costs for the proposed ethanol plant. If the
offering is not successful (see Note 2), such amounts will, in all likelihood,
be expensed.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company made a $1,000 deposit to a member of the Company for an anticipated
purchase of land to be used for the ethanol plant site. The purchase price of
the land is $171,000.
The Company incurred the following legal and professional, travel and other
miscellaneous expenses from various members of the Company:
February 8, Three Months Nine Months
2001 to Ended Ended Cumulative
March 31, 2001 March 31, 2002 March 31, 2002 from Inception
-------------- -------------- -------------- --------------
Legal and Professional 4,222 80,748 160,733 174,039
Travel and Other 261 816 4,077 4,460
At June 30, 2001, and March 31, 2002, the Company had accounts payable of $6,923
and $89,660, respectively, due to members and companies affiliated through
common ownership.
NOTE 5 - LONG-TERM DEBT
In October 2001, the Company borrowed $30,000 from The Defiance County Community
Improvement Corporation. The note bears interest at 2% per annum and is
unsecured. Principal payments of $10,000 are due June 30, 2003, 2004 and 2005.
If the proposed ethanol plant is not operational by June 30, 2003, the first
principal payment of $10,000 may be deferred until June 30, 2004.
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NOTE 6 - MEMBERS' EQUITY
As specified in the Company's operating agreement, the Company has issued 272
and 1,096 units to its founding members as of June 30, 2001 and March 31, 2002,
respectively. The first 700 units were issued at $250 per unit. In November
2001, the Company issued an additional 396 units at $1,250 per unit for a total
of $495,000. In November 2001, the directors approved a four for one split of
the units issued and outstanding. The financial statements reflect the effect of
that split.
NOTE 7 - SUBSEQUENT EVENTS
On April 25, 2002, the directors of the Company extended the pubic offering of
units from April 30, 2002 until July 31, 2002, subject to further extension at
the discretion of the directors, but in no event beyond September 30, 2002. As
of May 10, 2002, the Company has received additional subscription units of 279
at $5,000 per unit for a total of $1,395,000.
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ITEM 2. MANAGEMENT'S PLAN OF OPERATION.
OVERVIEW
We are a start-up company in development stage, with no substantial
assets and no income from operations, although we have received approximately
$670,000 in seed capital in the form of capital contributions by our 27 founding
members. We are seeking to raise a total of at least $42 million through a
public offering of our Units (the "Unit Offering") and additional
government-assisted and private debt financing, in order to acquire our
preferred site, design and build an ethanol plant and engage in the production
of ethanol, distillers grains and CO2. As of May 10, we have received
approximately $1,495,000 in subscription proceeds in the Unit Offering. Our
directors have extended the Unit Offering until July 31, 2002, subject to
further extension but in no event later than September 30, 2002. We hope to
begin construction of our ethanol plant by the fall of 2002, and we expect that
it will take at least 16 months to construct the proposed ethanol plant and
begin operations. It may take an additional 2-4 months to address operational
issues as they arise, and to begin to operate our ethanol plant efficiently.
PLAN FOR THE NEXT 24 MONTHS
Prior to the closing of the Unit Offering, we are required to obtain a
binding written commitments for the debt financing we need, together with the
proceeds of the Unit Offering, to satisfy our total anticipated capital needs of
at least $42 million. Appropriate informational materials have been distributed
to a number of financial institutions, and we expect to continue to contact
lenders, and to negotiate the terms of our necessary debt financing with all the
institutions which express interest until we have obtained a binding written
commitment or commitments, on the most favorable terms available as determined
by our directors, to satisfy our debt financing closing condition. This process
could take several weeks or more.
Prior to the closing of the Unit Offering, we also expect to:
- negotiate definitive real estate purchase agreements for 2 parcels
which together comprise our preferred site, and satisfy as many
conditions to the real estate closings as possible, so that we
will be able to commence construction as promptly as possible
after the Unit Offering closes;
- finalize any necessary agreements with a design engineer and a
lead construction contractor, and advance the design of the plant
as far as possible; and
- continue to negotiate and finalize third party sales and marketing
arrangements to the extent possible.
After the closing of the Unit Offering, we expect to:
- purchase the 2 parcels of real estate which together comprise our
preferred site as promptly as possible;
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- obtain the necessary insurance coverages to commence construction;
- prepare the site for construction;
- complete the design and construction of our ethanol plant;
- arrange for the construction of the necessary infrastructure to
support our plant's operations;
- finalize the terms of, and close upon, committed debt financing;
- finalize any remaining third party sales and marketing
arrangements;
- gradually hire and train the necessary employees to operate our
plant;
- purchase our initial inventory of corn, chemicals, yeast and
denaturant; and
- commence operations, begin generating revenues, and continuously
refine our production processes to attain, maintain and improve
our plant's efficiency.
At or shortly after the closing of the Unit Offering, we expect to
acquire our preferred site for about $621,000, at the cost of $3,000 per acre
for about 207 acres (net of rail right of way). We expect to spend approximately
$600,000 to improve and prepare our site for construction. In addition, we
expect to spend approximately $270,000 on the construction of a rail siding,
consisting of a main line turnout from CSX's nearby high speed, dual line and
approximately 1,000 feet of new track.
We have arranged for certain required infrastructure improvements for
our plant, including:
- Northwest Electric Cooperative's construction of an electrical
substation and associated transmission facilities needed to run
electricity from NEC's nearby electrical lines to the plant, at an
estimated cost of about $1.3 million; and
- Murphy Brother Pipeline Company's construction of a 5-mile long
natural gas pipeline to transport natural gas from Crossroads
Pipeline to the plant, at an anticipated cost of about $1.25
million.
These construction costs are expected to be financed through the suppliers.
We expect to spend approximately $36.3 million to design, construct and
equip our plant. We expect these costs to include digging, pouring foundations,
material and labor to construct the ethanol plant, grain and ethanol storage and
handling facilities, drying facilities, offices and a cooling tower. We will
also be purchasing and installing ethanol production equipment, such as pumps,
grinders and processing equipment, storage tanks, a dryer and conveyors. We will
pay
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these costs by making monthly progress payments based upon the work completed
and invoiced to us.
We are dependent upon Gaylor Engineering and its key employees, and
other members of The Gaylor Alliance of Companies, for consulting, design
engineering and construction expertise. Any inability to consummate necessary
definitive agreements with Gaylor or its affiliated companies on acceptable
terms, any loss of a key employee of a member of The Gaylor Alliance, or any
failure of Gaylor Engineering or its affiliates to adequately perform any
agreement with us may have material adverse consequences on our business. If it
became necessary to do so, we may have difficulty securing a suitable
replacement or replacements, and our remedies may not be adequate to fully
compensate us for the resulting delay and expense.
We expect that it will be at least 16 months after we close the Unit
Offering before we begin operation of our ethanol plant. Construction projects
often involve events that delay the construction schedule, including changes in
weather, force majeure events, permitting delays, community opposition, changes
in political administrations at the federal, state or local level that result in
policy changes towards ethanol or this project, disputes with our anticipated
design engineer which must be resolved through arbitration, inability to obtain
materials or labor or other factors. If we encounter any hazardous or unexpected
conditions at the construction site, including environmental or other types of
contamination, the project could be delayed and we could be required to spend
significant resources to correct the condition. Under those circumstances we may
need to seek additional capital.
We are currently operating from a temporary office in Defiance, Ohio.
Once the plant is complete, our office will be located at the plant site. We
currently do not have an office staff or general manager, and we do not expect
to retain one until approximately six months before we begin operation.
Currently, we have contracted for the services of a part-time project
coordinator, a part-time administrative assistant and a part-time management
consultant who is an experienced plant manager. Otherwise, we are dependent
entirely on our directors, our officers and advisers. As we near operational
status, we expect to incur increasing costs as we hire and train additional
employees. We estimate that we will have about 30 full-time employees by the
time we begin operations.
We expect to spend a total of approximately $262,000 during the
construction period on general and administrative expenses, including salaries,
out-of-pocket reimbursements and general office expenses. We spent about $38,000
for a 1-year directors and officers' insurance policy, and we also estimate that
we will need to spend approximately $25,000 annually during construction on
builder's risk insurance, general commercial liability, worker's compensation
and property insurance. However, there is no assurance that we will be able to
obtain such insurance on terms acceptable to us, if at all. Any failure by us to
secure and maintain adequate insurance, with adequate policy limits and/or
self-retention limits, or the occurrence of an otherwise uninsured loss, may
have a material adverse effect on us, our operations, cash flows and financial
performance.
A portion of the funds raised in the Unit Offering, together with
borrowings under a revolving credit facility, are expected to be used to
purchase our initial inventory of corn,
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chemicals, yeast and denaturant, the principal raw materials we need to operate,
until we begin to collect receivables.
We will be vulnerable primarily to price increases with respect to
corn, electricity, natural gas and transportation, and to price decreases with
respect to ethanol and distillers grains. Of these, corn is expected to be
supplied to us at market prices. Corn prices are primarily dependent on world
feedstuffs supply and demand and on U.S. and global corn crop production, which
can be volatile as a result of a number of factors, the most important of which
are weather, disease, farmers' planting decisions, global supply and demand and
foreign and domestic governmental agricultural policy. Also, increased
production of ethanol could result in increased demand for corn, which could in
turn lead to higher prices for corn. The price of corn has fluctuated
significantly in the past and may fluctuate significantly in the future. For
example, in 1996 the market price of corn increased significantly with a
shortfall in supply, resulting in decreased ethanol production and widespread
unprofitable ethanol operations. If corn prices increase as they did in 1996 and
we were not adequately hedged against that price movement, our financial
performance may be adversely affected. Our purchasing and hedging activities may
or may not lower our price of corn, and in a period of declining corn prices our
advance purchase and hedging strategies may result in us paying a higher price
for corn than our competitors.
Our revenues will also depend primarily on the market prices for
ethanol and distillers grains, which can also be volatile as a result of a
number of factors. For ethanol, these factors include the overall supply and
demand of ethanol, the price of gasoline, the current and anticipated level of
government support for ethanol and the availability and price of competing
products. For distillers grains, these pricing factors also include the overall
supply and demand of competing products, as well as the price of corn. Many
existing ethanol plants are constructing or will construct additions to increase
their production, and new fuel grade ethanol plants are being and will be
constructed to meet perceived demand. We cannot provide any assurance or
guarantee that there will continue to be material increases in the demand for
ethanol, so the increased production of ethanol may ultimately lead to lower
prices for ethanol and distillers grains.
In an attempt to minimize the effects of the volatility of corn,
energy, ethanol and distillers grains prices on operating profits, we expect to
take hedge positions in the corn, energy, petroleum and possibly other futures
markets. It is our policy not to enter into derivative instruments for
speculative purposes. In addition, we are in the process of developing a
comprehensive risk management policy. Depending upon the amount of financing we
obtain, especially initially we may be unable to implement hedging positions we
would otherwise take. If we are unable to initiate or maintain our desired hedge
positions for any reason, we will be more vulnerable to commodity price
fluctuations to that extent. The effectiveness of our hedging activities will be
dependent, among other things, upon the prices of corn, energy and petroleum and
our ability to sell sufficient ethanol and distillers grains to use all of the
corn subject to our futures contracts. Although we expect to attempt to link our
hedging activities to sales plans and pricing activities, such hedging
activities can themselves result in costs because price movements in grain
contracts, energy and petroleum are highly volatile and are influenced by many
factors which are beyond our control. In conducting hedging activities, we may
incur such costs, and they may be significant.
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LIQUIDITY AND CAPITAL RESOURCES
The information in this section should be read in conjunction with our
financial statements appearing under the heading "Financial Statements"
elsewhere in this Form 10-QSB.
As of March 31, 2002, we had cash and cash equivalents of $216,836 and
total assets of $675,536. $100,000 of the cash and cash equivalents is in an
escrow account with a bank and is not assessable by us unless and until we
satisfy the closing conditions for the Unit Offering by September 30, 2002. To
date, we have raised $670,000 in seed capital from our founding members, and
received a $30,000 non-recourse loan from the Defiance County Business
Development Fund (the "DCBDF"). The outstanding balance of the DCBDF loan
accrues interest at 2% per annum, with interest only payments due on June 30,
2002 and December 31, 2002. Principal and interest will be repaid in three equal
annual installments starting June 30, 2003. If our ethanol plant is not
operational by June 30, 2003, our first annual principal payment may be deferred
for one year, and we will continue semi-annual interest-only payments during the
interim. As of March 31, 2002, we had current liabilities of $269,260. Since our
inception on February 8, 2001 through March 31, 2002, we have had a net loss of
$293,724, and at March 31, 2002, we had an accumulated deficit of $293,724.
Members' equity as of March 31, 2002 was $376,276.
Since inception, we have had no revenues, and cash flows provided by
financing activities through March 31, 2002 were member contributions of
$653,000, of which $545,510 was used primarily for consulting and professional
fees, insurance, equipment and development costs and costs of raising
anticipated capital. During this period, our accounts payable and accrued
liabilities increased by $169,260. We are planning to raise additional capital
to help meet those obligations which will be due prior to the closing of the
Unit Offering.
ANTICIPATED DEBT FINANCING
We are seeking to raise a total of at least $42 million, consisting of
at least $12-22 million in equity and the balance in government-assisted and
private debt. The amount of our debt will depend upon how much equity we raise,
and our financing costs will depend on the amount and types of debt financing we
obtain. We are aggressively seeking and expect to maximize our use of available
government-assisted debt financing and tax abatement programs. To the extent we
are able to obtain government-assisted debt financing, we will require less
equity and less debt financing from the private sector, and our overall cost of
capital may be lower. While our optimized use of available government tax
abatement programs will not reduce the amount of overall financing we need to
close the Unit Offering, it is expected to significantly reduce our tax
obligations once our ethanol plant is operating, for 5-10 years.
The Ohio Air Quality Development Authority (the "OAQDA") finances up to
100% of the eligible costs of air quality facilities. Under recently enacted
Ohio law, we expect to be able to obtain most of our necessary debt financing
through the OAQDA. We expect any OAQDA loan we may obtain to have a term of up
to 20 years. We also expect that while any such loan is outstanding, most or all
of our real property will be exempt from property tax, and most or all of
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our tangible personal property will be exempt from Ohio sales and use tax and
personal property tax. We have entered into an inducement agreement with the
OAQDA which constitutes the OAQDA's commitment to provide us with up to $42
million of OAQDA bond financing, subject to the successful sale of the bonds. A
portion of our anticipated OAQDA bond offering may involve tax-exempt bonds, but
most, if not all, of the OAQDA bonds would be taxable, and supported by a loan
guarantee from the United States Department of Agriculture (the "USDA").
The purpose of the USDA Rural Development Business and Industry
Guaranteed Loan Program is to encourage economic development in rural areas.
Under this program, we expect the USDA to provide us with a loan guarantee of up
to 60% of debt incurred from authorized lenders to build our ethanol plant, up
to a maximum guarantee of $15 million. In connection with our anticipated USDA
loan guarantee, we will have to pay a fee of up to 2% of the principal loan
amount multiplied by the guarantee percentage, and we will also be responsible
for all closing costs. We expect to apply for this program as soon as we are
able to identify a bank or banks on the application, as required. In order to do
so, we need to obtain contingent approval by the bank(s) to make the loan. For
45 days after filing the application, we can change the bank(s), and within 90
days of filing the application, the USDA is expected to grant our application.
Through the cooperative efforts of the USDA and the OAQDA and its
advisers, a proposed structure has emerged which should allow the benefits of
both programs to be combined in one transaction, we believe for the first time.
Under that structure, at a single closing we will enter into a loan agreement
with the OAQDA, which will issue its taxable bonds to a bank or banks (the
"Bank"). The OAQDA will assign all of its rights and interest in the loan
agreement to the Bank. The Bank will pay the purchase price of the bonds
directly to us, and we will issue an air quality facilities note evidencing the
debt directly to the Bank. The USDA will guarantee our debt to the Bank, which
will also be secured by virtually all our property, including our real property
and equipment.
We will also need a revolving line of credit to finance receivables and
inventories. We expect that borrowing availability under the revolving line of
credit may be based upon 80-85% of our accounts receivable and 50% of our
inventory, subject to a specified maximum amount. We plan to pay at least prime
rate on these loans, plus annual fees. Ultimately, we will also need letters of
credit to secure various payment obligations we expect to have under our
arrangements with our anticipated grain originator and for ethanol hedging
transactions. These letters of credit will be subordinated to our principal
credit facilities. We estimate that as our plant nears operational status, we
may need to provide letters of credit securing: between $3-3.5 million in
delayed price corn delivered to our bunker; between $3-4 million in margin
exposure on outstanding corn forward pricing contracts; and between $2-6 million
on outstanding unleaded gasoline forward pricing contracts. However, these
amounts are only estimates, and the actual amounts may vary, at times
substantially.
Any debt we incur may be subject to various affirmative and negative
covenants. In particular, our debt agreements may contain various restrictive
covenants limiting our ability to, among other things: incur additional
indebtedness; make capital expenditures in excess of prescribed thresholds; make
distributions to our members or redeem or repurchase our units;
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make various investments; create other liens on our assets; use asset sale
proceeds; or merge, consolidate or dispose of all or substantially all of our
assets. We may also be required to maintain specified financial ratios,
including minimum cash flow coverage, minimum working capital and minimum net
worth, and to use a portion of any excess cash flow generated by operations to
prepay our term debt.
We are also seeking a total of $30,000 in grants from the Ohio
Department of Economic Development, all of which will be used for
infrastructure. We have a number of grant and loan applications pending with
various governmental and private entities, and we expect to continue to
aggressively seek grant and loan funds on favorable terms going forward. To the
extent we are successful in obtaining such funds, our need for additional debt
and equity financing may be reduced.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. No additional exhibits are required to be filed with this
report.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter for which this report is filed.
SIGNATURES
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.
NORTHWEST ETHANOL, LLC
Date: May 14, 2002 /s/ Ted W. Penner
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Ted W. Penner
Secretary/Treasurer
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