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LAKE AREA CORN PROCESSORS LLC - Quarter Report: 2004 September (Form 10-Q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 


 

FORM 10-Q

 

(Mark One)

 

 

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended September 30, 2004

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from          to          

 

COMMISSION FILE NO. 333-66552

 

LAKE AREA CORN PROCESSORS, LLC

(Exact name of registrant as specified in its charter)

 

 

 

SOUTH DAKOTA

 

46-0460790

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

46269 SD Hwy. 34, P.O. Box 100, Wentworth, South Dakota 57075

(Address of principal executive offices)

 

 

 

(605) 483-2676

(Issuer’s telephone number)

 

 

 

 

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

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 Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý   No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes  o   No  ý

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.  Yes o  No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

 

On November 2, 2004, the issuer had 29,620,000 Class A capital units outstanding.

 

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

 

 



 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

LAKE AREA CORN PROCESSORS, LLC

 

CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004 AND 2003

 



 

LAKE AREA CORN PROCESSORS, LLC

 

Table of Contents

 

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Balance Sheets

 

Statements of Operations

 

Statements of Cash Flows

 

Notes to Financial Statements

 

 



 

LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

 

 

September 30,
2004

 

December 31,
2003 *

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash

 

$

68,121

 

$

96,816

 

Receivables

 

 

 

 

 

Ethanol - related party

 

5,037,299

 

3,738,063

 

Distillers grains

 

684,321

 

468,301

 

Incentives

 

179,791

 

166,667

 

Other

 

 

287,557

 

Inventory

 

 

 

 

 

Raw materials

 

177,921

 

1,890,282

 

Finished goods

 

1,132,615

 

568,527

 

Parts inventory

 

660,975

 

461,816

 

Work in process

 

389,967

 

508,742

 

Investment in commodity contracts

 

729,411

 

728,550

 

Prepaid expenses

 

137,873

 

97,276

 

Total current assets

 

9,198,294

 

9,012,597

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT

 

 

 

 

 

Land

 

106,394

 

106,394

 

Land improvements

 

2,280,805

 

2,238,975

 

Buildings

 

7,414,314

 

7,254,757

 

Equipment

 

31,822,548

 

31,276,838

 

 

 

41,624,061

 

40,876,964

 

Less accumulated depreciation

 

(6,531,210

)

(4,888,200

)

Net property and equipment

 

35,092,851

 

35,988,764

 

 

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

Guarantee premium

 

482,129

 

564,197

 

Other

 

334,642

 

432,497

 

Total other assets

 

816,771

 

996,694

 

 

 

 

 

 

 

 

 

$

45,107,916

 

$

45,998,055

 

 

(continued on next page)

 


* Derived from audited financial statements

 

1



 

LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

 

 

September 30,
2004

 

December 31,
2003 *

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Outstanding checks in excess of bank balance

 

$

1,924,567

 

$

812,144

 

Accounts payable

 

2,816,685

 

4,584,254

 

Accounts payable - related party

 

80,252

 

289,312

 

Accounts payable - construction - related party

 

 

95,520

 

Corn contract liability

 

1,287,969

 

 

Accrued liabilities

 

230,616

 

289,669

 

Revolving promissory note

 

3,000,000

 

 

Current portion of guarantee payable

 

62,768

 

62,195

 

Current portion of notes payable

 

2,860,624

 

2,995,344

 

Total current liabilities

 

12,263,481

 

9,128,438

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

Guarantee payable

 

482,201

 

511,120

 

Notes payable

 

10,410,025

 

12,171,159

 

Total long-term liabilities

 

10,892,226

 

12,682,279

 

 

 

 

 

 

 

MINORITY INTEREST

 

2,607,518

 

2,863,277

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

MEMBERS’ EQUITY

 

 

 

 

 

Capital units, $0.50 stated value, 29,620,000 units issued and outstanding

 

14,810,000

 

14,810,000

 

Additional paid-in capital

 

96,400

 

96,400

 

Retained earnings

 

4,438,291

 

6,417,661

 

Total members’ equity

 

19,344,691

 

21,324,061

 

 

 

 

 

 

 

 

 

$

45,107,916

 

$

45,998,055

 

 


* Derived from audited financial statements

 

See Notes to Unaudited Consolidated Financial Statements

 

2



 

LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

 

 

Nine Months
Ended
September 30,
2004

 

Nine Months
Ended
September 30,
2003

 

Three Months
Ended
September 30,
2004

 

Three Months
Ended
September 30,
2003

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

Sales - related party

 

$

51,921,028

 

$

41,157,721

 

$

17,896,385

 

$

13,967,169

 

Sales

 

8,969,148

 

8,137,310

 

2,821,314

 

2,680,735

 

Incentive income

 

684,673

 

1,241,873

 

350,482

 

194,734

 

Total revenues

 

61,574,849

 

50,536,904

 

21,068,181

 

16,842,638

 

 

 

 

 

 

 

 

 

 

 

COST OF REVENUES

 

56,220,181

 

45,265,481

 

19,745,423

 

15,077,451

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

5,354,668

 

5,271,423

 

1,322,758

 

1,765,187

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

General and administrative

 

2,065,568

 

2,003,501

 

643,693

 

661,099

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

3,289,100

 

3,267,922

 

679,065

 

1,104,088

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest and other income

 

146,934

 

89,546

 

52,202

 

31,816

 

Interest expense

 

(959,225

)

(1,122,286

)

(312,132

)

(370,400

)

Total other income (expense)

 

(812,291

)

(1,032,740

)

(259,930

)

(338,584

)

 

 

 

 

 

 

 

 

 

 

NET INCOME BEFORE MINORITY INTEREST

 

2,476,809

 

2,235,182

 

419,135

 

765,504

 

 

 

 

 

 

 

 

 

 

 

MINORITY INTEREST IN SUBSIDIARY

 

(309,379

)

(283,850

)

(50,276

)

(94,516

)

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

2,167,430

 

$

1,951,332

 

$

368,859

 

$

670,988

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED EARNINGS PER UNIT

 

$

0.07

 

$

0.07

 

$

0.01

 

$

0.02

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE UNITS OF EQUITY STOCK OUTSTANDING FOR THE CALCULATION OF BASIC AND DILUTED EARNINGS PER UNIT

 

29,620,000

 

29,620,000

 

29,620,000

 

29,620,000

 

 

 

 

 

 

 

 

 

 

 

DISTRIBUTIONS PER UNIT

 

$

0.14

 

$

0.05

 

$

0.09

 

$

0.05

 

 

See Notes to Unaudited Consolidated Financial Statements

 

3



 

LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

 

 

 

2004

 

2003

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

2,167,430

 

$

1,951,332

 

Changes to income not affecting cash

 

 

 

 

 

Depreciation

 

1,643,010

 

1,620,549

 

Amortization

 

120,936

 

63,877

 

Minority interest in subsidiary

 

309,379

 

283,850

 

Other

 

(143,702

)

(65,323

)

(Increase) decrease in

 

 

 

 

 

Receivables

 

(1,195,248

)

(78,160

)

Inventory

 

1,067,889

 

561,644

 

Prepaid expenses

 

(40,596

)

(142,694

)

Investment in commodity contracts

 

(861

)

(360,745

)

Increase (decrease) in

 

 

 

 

 

Accounts payable

 

(2,155,635

)

(1,620,134

)

Accrued liabilities

 

1,200,571

 

24,173

 

NET CASH FROM OPERATING ACTIVITIES

 

2,973,173

 

2,238,369

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Change in other assets

 

202,690

 

95,906

 

Purchase of property and equipment

 

(709,185

)

(280,115

)

NET CASH USED FOR INVESTING ACTIVITIES

 

(506,495

)

(184,209

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Outstanding checks in excess of bank balance

 

1,112,422

 

141,576

 

Advances on revolving promissory note

 

3,000,000

 

 

Notes payable issued

 

469,000

 

1,854,000

 

Principal payments on notes payable

 

(2,364,855

)

(2,360,527

)

Distributions paid to minority members

 

(565,140

)

(208,209

)

Distributions paid to LACP members

 

(4,146,800

)

(1,481,000

)

NET CASH USED FOR FINANCING ACTIVITIES

 

(2,495,373

)

(2,054,160

)

 

 

 

 

 

 

NET DECREASE IN CASH

 

(28,695

)

 

 

 

 

 

 

 

CASH AT BEGINNING OF PERIOD

 

96,816

 

 

CASH AT END OF PERIOD

 

$

68,121

 

$

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the year for interest

 

$

959,225

 

$

1,122,286

 

 

See Notes to Unaudited Consolidated Financial Statements

 

4



 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2004 AND 2003

 

NOTE 1 - NATURE OF OPERATIONS

 

Principal Business Activity

 

Lake Area Corn Processors, LLC (formerly Lake Area Corn Processors Cooperative, or the Cooperative) is a South Dakota limited liability company located in Wentworth, South Dakota. Lake Area Corn Processors, LLC (LACP or the Company) was organized by investors to provide a portion of the corn supply for a 40 million-gallon (annual capacity) ethanol plant, owned by Dakota Ethanol, LLC (Dakota Ethanol). On September 4, 2001, the ethanol plant commenced its principal operations. The Company sells ethanol and related products to customers located in North America.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America.

 

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying financial statements.  The results of operations for the nine and three months ended September 30, 2004 and 2003 are not necessarily indicative of the results to be expected for a full year.

 

These financial statements should be read in conjunction with the financial statements and notes included in the Company’s financial statements for the year ended December 31, 2003.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its 88% owned subsidiary, Dakota Ethanol.  All significant inter-company transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

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

 

Environmental Liabilities

 

Dakota Ethanol’s operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdiction in which it operates. These laws require Dakota Ethanol to investigate and remediate the effects of the release or disposal of materials at its locations. Accordingly, Dakota Ethanol has adopted policies, practices and procedures in the areas of pollution control, occupational health and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. Environmental liabilities are recorded when Dakota Ethanol’s liability is probable and the costs can be reasonably estimated.

 

Reclassifications

 

Certain amounts on the 2003 financial statements have been reclassified to conform to the current year classification.  Such reclassifications had no effect on previously reported net income.

 

5



 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2004 AND 2003

 

NOTE 3 - LONG-TERM NOTES PAYABLE

 

The balance of the notes payable are as follows:

 

 

 

 

September 30,
2004

 

December 31,
2003 *

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Note payable to First National Bank, Omaha

 

 

 

 

 

Term Note 2

 

$

11,079,739

 

$

12,351,455

 

Term Note 4

 

1,653,894

 

2,742,347

 

Term Note 5

 

469,000

 

 

Utility line extension note

 

68,016

 

72,701

 

 

 

13,270,649

 

15,166,503

 

 

 

 

 

 

 

Less current portion

 

(2,860,624

)

(2,995,344

)

 

 

 

 

 

 

 

 

$

10,410,025

 

$

12,171,159

 

 


* Derived from audited financial statements

 

Minimum principal payments for the next five years are as follows:

 

Twelve Months Ended September 30,

 

Amount

 

 

 

 

 

2005

 

$

2,860,624

 

2006

 

2,385,908

 

2007

 

1,639,691

 

2008

 

1,793,106

 

2009

 

1,964,256

 

 

Minimum principal payments for the twelve months ending September 30, 2005 include approximately $254,000 related to the calculation of additional principal to the Bank based on excess cash flow.

 

Dakota Ethanol had an available balance of $4,531,000 and $5,000,000 on Term Note 5 to draw upon at September 30, 2004 and December 31, 2003, respectively.

 

NOTE 4 - REVOLVING PROMISSORY NOTE

 

During April 2004, Dakota Ethanol received a revolving promissory note from First National Bank of Omaha in the amount of $3,000,000.  The note expires on April 22, 2005 and the amount available is subject to certain financial ratios.  Interest on the outstanding principal balances will accrue at 50 basis points above the bank’s base rate (5.25 percent at September 30, 2004).  There is a commitment fee of 3/8 percent on the unused portion of the $3,000,000 availability.  The note is collateralized by the ethanol plant, its accounts receivable and inventories.  Dakota Ethanol had $3,000,000 outstanding on the revolving promissory note at September 30, 2004.

 

6



 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2004 AND 2003

 

NOTE 5 - COMMITMENTS, CONTINGENCIES AND AGREEMENTS

 

Dakota Ethanol receives an incentive payment from the United States Department of Agriculture (USDA) for the use of corn to produce ethanol. In accordance with the terms of this arrangement, revenue is recorded based on incremental production of ethanol compared to the prior year. The USDA has set the annual maximum not to exceed $7,500,000 for each eligible producer. The incentive is calculated on the USDA fiscal year of October 1 to September 30.  Revenue of $472,624 has been earned for the USDA program year ended September 30, 2004.  Incentive revenue of $268,007 and $100,481 was recorded for the nine and three months ended September 30, 2004.  Incentive revenue of $513,817 was recorded for the nine months ended September 30, 2003 and incentive expense was $55,267 for the three months ended September 30, 2003 because the amount collected was less than the amount estimated through June 30, 2003.  It is uncertain if there is enough funding for the program to fully pay all applications during the year.

 

Dakota Ethanol also receives an incentive payment from the State of South Dakota to produce ethanol. In accordance with the terms of this arrangement, revenue is recorded based on ethanol sold. The State of South Dakota has set a maximum of up to $1,000,000 per year for this program per qualifying producer. Incentive revenue of $416,667 and $250,000 was recorded for the nine and three months ended September 30, 2004.  Incentive revenue of $728,056 and $250,000 was recorded for the nine and three months ended September 30, 2003. Dakota Ethanol earned $666,667 for the State of South Dakota program year ended June 30, 2004, of which, its final allocation was earned in January 2004.  Dakota Ethanol did not receive the annual maximum for the 2004 program year due to budget constraints on the program. Dakota Ethanol has earned $333,333 for the State of South Dakota program year ended June 30, 2005.  It is uncertain if there is enough funding for the program to fully pay all applications during the 2005 program year.

 

Environmental – During the year ended December 31, 2002, management became aware that the ethanol plant may have exceeded certain emission levels allowed by their operating permit. The Company has disclosed the situation to the appropriate state regulatory agency and has taken steps to reduce the emissions to acceptable levels. Management has not accrued a liability for environmental remediation costs since the costs, if any, cannot be estimated.

 

7



 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion along with our financial statements, the notes to our financial statements included elsewhere in this report and our audited financial statements for our most recently completed fiscal year included in our annual report on Form 10-KSB.  The following discussion contains forward-looking statements that are subject to risks, uncertainties and assumptions.  Our actual results, performance and achievements may differ materially from those expressed in, or implied by, these forward-looking statements.  See “Cautionary Statement Regarding Forward-Looking Information.”

 

Overview

 

Lake Area Corn Processors, LLC is the owner of an 88% interest in Dakota Ethanol, LLC, a company that owns and operates an ethanol plant in Wentworth, South Dakota. Certain members of the Broin family own the remaining minority interest. Dakota Ethanol’s business consists of the production of ethanol and an ethanol co-product, distiller’s dried grains with solubles, or DDGS.  The ethanol plant has the name-plate capacity to produce 40 million gallons of ethanol and 121,000 tons of DDGS on an annual basis.

 

8



 

Dakota Ethanol’s operating and financial performance are largely driven by the prices at which it sells ethanol and DDGS and the costs related to production.  The price of ethanol and DDGS is influenced by factors such as supply and demand, prices of unleaded gasoline and substitute products, weather, government policies and programs, and foreign trade. Although federal and state government incentive programs have been a significant source of revenue and income since Dakota Ethanol began production in September of 2001, the programs are now less significant because of the means by which the programs structure, fund, and condition the payments.  With respect to the various costs in the production process, the two most significant are the costs of corn and natural gas.  The cost of natural gas and corn is affected by factors such as supply and demand, weather, government policies and programs, foreign trade, and the risk management or hedging strategy used to protect against the price volatility of these commodities.

 

Net income decreased slightly from the third quarter 2003 to the third quarter 2004.  While revenues increased between quarters, this increase was offset by an even larger increase in cost of revenues, as cost of revenues was adversely impacted by an increase in the overall costs of corn.  Similarly, from the nine months ended September 30, 2003 to the nine months ended September 30, 2004, net income increased only slightly as the increase in revenues from the sale of ethanol and DDGS was offset by a contemporaneous increase in cost of revenues.

 

Results of Operations

 

Comparison of the three months ended September 30, 2004 and 2003

 

The following table presents, for the periods indicated, the relative composition of selected income data:

 

 

 

Quarter Ended
September 30,
2004

 

Quarter Ended
September 30,
2003

 

 

 

$

 

%
of
Revenue

 

$

 

%
of
Revenue

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Ethanol

 

17,896,385

 

 

 

13,967,169

 

 

 

DDGS

 

2,821,314

 

 

 

2,680,735

 

 

 

Incentive

 

350,482

 

 

 

194,734

 

 

 

Total

 

21,068,181

 

 

 

16,842,638

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

19,745,423

 

94

 

15,077,451

 

90

 

 

 

 

 

 

 

 

 

 

 

General and Administrative Expense

 

643,693

 

3

 

661,099

 

4

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

(259,930

)

(1)

 

(338,584

)

(2)

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

368,859

 

 

 

670,988

 

 

 

 

9



 

Revenue-Revenue for Dakota Ethanol increased $4.2 million or 25% to $21.1 million for the quarter ended September 30, 2004 from $16.9 million for the three months ended September 30, 2003.  The change in revenue is due primarily to an increase in ethanol prices and incentive revenue.

 

Revenue from the sale of ethanol increased approximately 28% from the three months ended September 30, 2003 to the three months ended September 30, 2004.  The increase is attributed to an increase in ethanol prices.  The average sales price of ethanol increased 26% from the three months ended September 30, 2003 to the three months ended September 30, 2004.  Ethanol prices increased because of strong demand for ethanol and the continuation of higher prices of unleaded gasoline.

 

Revenue from the sale of DDGS increased approximately 5% from the three months ended September 30, 2003 to the three months ended September 30, 2004.  The increase in DDGS sales is due primarily to a 10% increase in sales volume of DDGS, offset by a 4% decrease in sales price.

 

In addition, the total incentive revenue from federal and state government incentive programs increased 80% from the three months ended September 30, 2003 to the three months ended September 30, 2004.  The incentive revenue from the United States Department of Agriculture’s Commodity Credit Bioenergy Program increased $155,000 or 300% to $100,000 for the three months ended September 30, 2004 from ($55,000) for the three months ended September 30, 2003.  This increase is attributed to an increase in ethanol production from the same period in the prior year, as payments under the program are based in part on a plant’s increase in production from the previous year’s corresponding quarter, and the effect of an over estimation of incentive revenue from this program in 2003.  Management anticipates receiving less under the program during the 2005 program year (through September 30, 2005), as Congress is expected to reduce funding for the entire program and the plant’s ethanol production levels are likely to remain about the same for 2005 compared to 2004.

 

Incentive revenue from the state of South Dakota for the third quarter in 2004 and 2003 remained the same at $250,000.  Management anticipates, however, that payments under this program are not likely to continue through the entire 2005 program year (through June 30, 2005) as available funding is expected to be depleted in full before such date.

 

Management anticipates that the passage of the American Jumpstart Our Business Strength Act (JOBS) on October 22, 2004 will have a positive effect on the ethanol industry overall, at least through 2010.  Before the passage of this legislation, ethanol plants were able to sell ethanol at prices competitive with less expensive additives and gasoline through an excise tax exemption.  Blenders of ethanol were able to claim an

 

10



 

exemption of $0.052 per gallon from the excise tax of $0.184 per gallon for a 10% ethanol blend.  Smaller exemptions amounts were available for lower percentage ethanol blends.  This incentive was expected to expire in 2007 until the legislation extended the incentive to 2010.  The legislation also changed the exemption to a $0.051 tax credit, basing the credit not on an ethanol blend percentage but on the volume of ethanol used by the blender.  It is expected that the credit will continue to encourage use of ethanol in the blending process and even more than before this legislation, all of which should contribute to higher use and demand for ethanol.

 

Cost of Revenues-Cost of revenues increased $4.6 million or 31% to $19.7 million for the three months ended September 30, 2004 from $15.1 million for the three months ended September 30, 2003. This increase occurred primarily because of an increase in the overall corn cost. Corn costs increased 41% from the three months ended September 30, 2003 to the three months ended September 30, 2004.  The increase in the cost of corn is the result of a 16% increase in the market price of corn per bushel from the three months ended September 30, 2003 to the three months ended September 30, 2004.  The increase in the price of corn is attributed to the impact of low world corn carryout prior to the 2004 growing season, downcast projections about the quantity of corn to be harvested, increased demand for corn nationally and globally, and inclement weather.

 

In addition, corn costs increased because of the risk management strategy implemented in 2004, as losses on hedging contracts and forward contracts increased from $430,000 for the three months ended September 30, 2003 to $2.9 million for the three months ended September 30, 2004.  These losses were principally caused by the impact of significant price volatility of corn on such contracts during the three months ended September 30, 2004.

 

While we believe that the price of corn will be subject to some volatility in the coming months, current industry forecasts predict a record corn crop.  A record corn crop should decrease the price of corn and bring some overall stability in the next few months, all of which should reduce overall corn costs.  Reduced corn costs may be partially offset by the potential for an increase in natural gas prices during the ensuing winter months.

 

General and Administrative Expenses-General and administrative expenses decreased approximately $17,000 or 3% to $644,000 for the three months ended September 30, 2004, from $661,000 for the three months ended September 30, 2003.  The decrease in general and administrative expenses is primarily due to a decrease in the management incentive fee owed to Broin Management, LLC, the fee being based directly on Dakota Ethanol’s net income.  As the net income decreased, management fees decreased by 13% in the third quarter of 2004 compared to the same period of 2003.

 

Interest Expense-Interest expense decreased $58,000 or 16% to $312,000 for the three months ended September 30, 2004 from $370,000 for the three months ended September 30, 2003.  The reduction to interest expense is due to a reduction in the principal balance on the loans outstanding with First National Bank of Omaha.

 

11



 

Net Income-Net income decreased $302,000 or 45% to $369,000 million for the quarter ended September 30, 2004 from a net income of $671,000 for the three months ended September 30, 2003.  This decrease in net income is primarily due to, as discussed above, an increase in corn costs, partially offset by an increase in ethanol and DDGS revenues.

 

Comparison of the nine months ended September 30, 2004 and 2003

 

The following table presents, for the periods indicated, the relative composition of selected income data:

 

 

 

Nine Months Ended
September 30,
2004

 

Nine Months Ended
September 30,
2003

 

 

 

$

 

%
of
Revenue

 

$

 

%
of
Revenue

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Ethanol

 

51,921,028

 

 

 

41,157,721

 

 

 

DDGS

 

8,969,148

 

 

 

8,137,310

 

 

 

Incentive

 

684,673

 

 

 

1,241,873

 

 

 

Total

 

61,574,849

 

 

 

50,536,904

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

56,220,181

 

91

 

45,265,481

 

90

 

 

 

 

 

 

 

 

 

 

 

General and Administrative Expense

 

2,065,568

 

3

 

2,003,501

 

4

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

(812,291

)

(1

)

(1,032,740

)

(2

)

 

 

 

 

 

 

 

 

 

 

Net Income

 

2,167,430

 

4

 

1,951,332

 

4

 

 

Revenue-Revenue for Dakota Ethanol increased $11.0 million or 22% to $61.6 million for the nine months ended September 30, 2004 from $50.5 million for the nine months ended September 30, 2003.  The change in revenue is due to an increase in the sales prices of ethanol and DDGS.  Revenue from the sale of ethanol increased approximately 26% from the nine months ended September 30, 2003 to the nine months ended September 30, 2004.  The increase is due primarily to an increase in ethanol prices.  The average sales price of ethanol increased 22% from the nine months ended September 30, 2003 to the nine months ended September 30, 2004.  The increase in ethanol prices continued to be positively impacted by the strong demand for ethanol and a continuation of higher prices for unleaded gasoline.

 

Revenue from the sale of DDGS increased approximately 10% from the nine months ended September 30, 2003 to the nine months ended September 30, 2004.  This

 

12



 

increase is due primarily to an increase in DDGS prices.  The average sale price of DDGS increased 4% from the nine months ended September 30, 2003 to the nine months ended September 30, 2004.  The sales price of DDGS increased primarily because of higher prices of corn and soybean meal.

 

In addition, the total incentive revenue from federal and state government incentive programs decreased 45% from the nine months ended September 30, 2003 to the nine months ended September 30, 2004.  The incentive revenue from the United States Department of Agriculture’s Commodity Credit Bioenergy Program decreased $246,000 or 48% to $268,000 for the nine months ended September 30, 2004 from $514,000 for the nine months ended September 30, 2003.  This decrease is primarily because the payments under the Bioenergy Program are based in part on a plant’s increase in production from the prior year.  Dakota Ethanol, however, had a nominal increase in production in 2004 compared to 2003, resulting in less incentive revenue earned under the program.

 

Incentive revenue from the state of South Dakota decreased $311,000 or 43% to $417,000 for the nine months ended September 30, 2004 from $728,000 for the nine months ended September 30, 2003.  The decrease between periods is attributed to a change in payment formula and an earlier than anticipated depletion of funds under the program in the 2004 program year.

 

Cost of Revenues-Cost of revenues increased $11.0 million or 24% to $56.2 million for the nine months ended September 30, 2004 from $45.2 million for the nine months ended September 30, 2003.  This increase occurred primarily because of an increase in overall corn costs.  The increase in the cost of corn is the result of a 16% increase in the market price of corn per bushel from the nine months ended September 30, 2003 to the nine months ended September 30, 2004.

 

In addition, corn costs increased because of the risk management strategy used in 2004, as losses on hedging contracts and forward contracts contributed to approximately 15% of total corn costs.  Losses on hedging and forward contracts increased from $300,000 during the nine months ended September 30, 2003 to $5.7 million during the nine months ended September 30, 2004.  These losses were principally caused by the impact of the price volatility of corn on such contracts during 2004.

 

General and Administrative Expenses-General and administrative expenses increased approximately $60,000 or 3% to $2.1 million for the nine months ended September 30, 2004, from $2.0 million for the nine months ended September 30, 2003.  The increase in general and administrative expenses is due to an increase in the management incentive fees paid to Broin Management, LLC.  As net income rose, management incentive fees increased by 2% for the nine months ended September 30, 2004, compared to the same period of 2003.

 

13



 

Interest Expense-Interest expense decreased $160,000 or 15% to $1.0 million for the nine months ended September 30, 2004 from $1.1 million for the nine months ended September 30, 2003.  The reduction in interest expense is due to a reduction in the principal balance outstanding on all loans with First National Bank of Omaha.

 

Net Income-Net income increased $200,000 or 11% to $2.2 million for the quarter ended September 30, 2004 from $2.0 million for the nine months ended September 30, 2003.  This increase is primarily due to an increase in ethanol and DDGS revenues, offset by the increase in corn costs.

 

Liquidity and Capital Resources

 

The following table shows the cash flows between the nine months ended September 30, 2004 and the nine months ended September 30, 2003:

 

 

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

 

 

$

 

$

 

Net cash from operating activities

 

2,973,173

 

2,238,369

 

Net cash used for investing activities

 

(506,495

)

(184,209

)

Net cash used for financing activities

 

(2,495,373

)

(2,054,160

)

 

Cash Flow From Operating Activities-The increase in net cash flow provided from operating activities between 2004 and 2003 is primarily attributed to a decrease in working capital requirements.  The decrease in working capital requirements is related to a decrease in inventory, accounts payable and investments in commodity contracts, with accounts receivable increasing during the same period.  Inventory decreased primarily due to a reduction in corn inventory, as the local market supply of corn was lower in 2004 compared to 2003.  Accounts payable decreased due to a reduction in corn payables, as more producers delivering corn to the plant in late 2003 elected to defer payment until 2004 and were paid after the beginning of the year.  The decrease in investments in commodity contracts in 2004 is related to a change in the composition of the contracts and a decrease in the value of futures’ contracts in 2004.  Accounts receivable increased because of an increase in the market price of ethanol in 2004.

 

Cash Flow From Investing Activities-The increase in cash used for investing activities is mainly attributed to an increase in the purchase of property and equipment.  Approximately $429,000 more in cash was used in 2004 for capital improvement projects, specifically to buildings and equipment at the plant.  The increase in capital spending was offset by a $107,000 increase in cash provided by other assets, as investments provided improved rates of return in 2004.

 

Management estimates that approximately $1,000,000 in capital expenditures will be made in the next six months for general improvements to the plant, all of which are

 

14



 

expected to be financed from cash flows from operations and revolving debt. Improvements are expected to be made in the areas of air pollution control equipment and dryer systems.

 

Cash Flow From Financing Activities-The increase in cash used by financing activities is attributed to additional distributions being made to Lake Area Corn Processors’ members and the minority members.  Approximately $2.7 million more in distributions was made to Lake Area Corn Processors’ members in 2004 compared to 2003.  Similarly, approximately $360,000 more in distributions was made to the minority members in 2004 compared to 2003.  The increase in distributions between 2004 and 2003 was offset by a $1.6 million increase in funds being drawn on Dakota Ethanol’s revolving debt and a $1.0 million increase in outstanding checks drawn in excess of bank balances.

 

First National Bank of Omaha is Dakota Ethanol’s primary lender. Dakota Ethanol has three notes or loans outstanding with First National Bank pursuant to a Construction Loan Agreement and Construction Note dated September 25, 2000 and amendments dated July 29, 2002, November 1, 2002 and April 23, 2004:  a $14.5 million fixed rate note, a $4.4 million variable rate note, a $5.0 million variable rate, revolving note, and a $3.0 million variable rate, revolving note.

 

The fixed rate note bears 9% interest annually, requires quarterly installment payments, and is due on September 1, 2011.  A portion of the principal is required to be prepaid each year in an amount equal to 10% of the excess cash flow payment. Excess cash flow is defined as net income plus interest expense, depreciation and amortization, less annual debt service.  The excess cash flow payment is applied pro rata to the $4.4 million note, then the $5 million note, followed by the fixed note. Principal payments made on the fixed rate note were $1,272,000 for the nine months ended September 30, 2004, compared to payments of $1,274,000 for the nine months ended September 30, 2003.  The principal balance outstanding on this note was $11.1 million as of September 30, 2004.

 

The $5.0 million and $4.4 million variable rate notes bear interest at .50% over the national base rate set by First National Bank of Omaha, which may be reduced if Dakota Ethanol’s ratio of indebtedness to net worth improves, with a minimum interest rate of 5% annually.  As of September 30, 2004, Dakota Ethanol’s variable rate was 5.25%.  Until July 29, 2005, Dakota Ethanol has the option to fix the variable rate notes at 2.5% over and above the rate published by the Federal Home Loan Bank of Topeka, Kansas at the time the note is fixed.

 

The $5 million variable rate note is set up as a revolving loan that allows Dakota Ethanol to reborrow up to $5 million of any repaid principal on a revolving basis, subject to a 0.375% annual commitment fee assessed quarterly on any funds not borrowed.  There is also a prepayment penalty on both variable rate notes if Dakota Ethanol prepays in full before July 29, 2005.  Principal payments of $1,088,000 were made on the $4.4 million variable rate note during the nine months ended September 30, 2004, compared to

 

15



 

principal payments of $1,082,000 during the nine months ended September 30, 2003.  The principal balance outstanding on this note was $1,654,000 as of September 30, 2004. During the nine months ended September 30, 2004, Dakota Ethanol borrowed $469,000 on the $5 million revolving note compared to borrowings of $1,854,000 during the nine months ended September 30, 2003.  The principal balance outstanding on this note was $469,000 as of September 30, 2004.

 

On April 23, 2004 Dakota Ethanol entered into an amendment to its Construction Loan Agreement with First National Bank in order to obtain a revolving line of credit. The primary purpose of the line of credit is for working capital. The maximum amount available under the line of credit is $3 million. Dakota Ethanol can borrow up to the maximum amount available and pay down without penalty whenever excess cash is available.  Once paid down, the amount available to borrow under the line of credit increases back to the maximum.  The line of credit is subject to a 0.375% annual commitment fee assessed quarterly on any funds not borrowed.  The line of credit is subject to a maturity of April 22, 2005, and bears interest at .50% over the national base rate set by First National Bank of Omaha which may be reduced if Dakota Ethanol’s ratio of indebtedness to net worth improves, with a minimum interest rate of 5% annually.  As of September 30, 2004, the variable rate was 5.25% and the principal balance outstanding on the line was $3,000,000.

 

There are various debt service coverage ratios, working capital, net worth, capital expenditure limitation, and other standard negative and affirmative covenants contained in the notes and loans which, if not complied with, could result in a default.  Management believes that Dakota Ethanol is currently in compliance with all covenants and restrictions contained by such notes and loans.

 

Dakota Ethanol also has a note payable to Sioux Valley Energy for $85,000 related to the extension of utility lines to the plant.  The loan is payable over ten years, beginning on October 1, 2001, with an effective interest rate of approximately 9%.  Principal payments of $4,600 were made during the nine months ended September 30, 2004, compared to the payment of $4,100 for the nine months ended September 30, 2003.

 

On September 27, 2004 Dakota Ethanol declared and issued a $3,000,000 cash distribution to its members, of which $2,643,000 was issued to Lake Area Corn Processors and $357,000 was issued to the minority members.  On September 28, 2004, Lake Area Corn Processors declared and issued a $2,665,800 cash distribution to its members, or $0.09 per Class A capital unit.

 

On June 1, 2004, Dakota Ethanol commenced paying principal and interest on a portion of a $1.323 million tax increment revenue bond series issued by Lake County, South Dakota on December 2, 2003.  The portion for which Dakota Ethanol is obligated to pay is estimated at $573,315. Dakota Ethanol is obligated to make payment to the sole purchaser of these bonds in connection with a guarantee dated September 23, 2003 that Dakota Ethanol provided to the purchaser.  The interest rate on the bonds is 7.75% per year.  The bonds require semi-annual payments of interest on December 1 and June 1,

 

16



 

along with payment of principal on December 1. Dakota Ethanol’s payment obligation will continue until maturity in 2018 unless Lake County realizes a sufficient increase in property taxes from the real estate on which the ethanol plant is located to cover the principal and interest payments of the tax increment revenue bond series. Interest payments of $28,346 were made on the tax increment revenue bond for the nine months ended September 30, 2004.

 

Management anticipates that the plant will continue to operate at or above name-plate capacity for the next twelve months.  Management also expects for the next twelve months to have sufficient cash flows from operating activities and the revolving debt to fund working capital and to cover operating and administrative costs, capital expenditures, and debt service obligations.

 

The following table summarizes amounts due pursuant to our consolidated contractual obligations as of September 30, 2004:

 

 

 

 

 

Payment Due By Period

 

 

 

Total

 

Less than
One Year

 

One to
Three
Years

 

Four to
Five
Years

 

After
Five
Years

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt Obligations

 

$

13,270,649

 

$

2,860,624

 

$

4,025,599

 

$

3,757,362

 

$

2,627,064

 

 

 

 

 

 

 

 

 

 

 

 

 

Electricity Purchase Agreements

 

2,101,000

 

290,400

 

603,900

 

615,600

 

591,100

 

 

 

 

 

 

 

 

 

 

 

 

 

Related-Party Agreements

 

795,855

 

612,522

 

183,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantee Liability

 

544,969

 

62,769

 

130,617

 

137,771

 

213,812

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Contractual Cash Obligations

 

$

16,712,473

 

$

3,826,315

 

$

4,943,449

 

$

4,510,733

 

$

3,431,976

 

 

Off-Balance Sheet Transactions

 

We do not use or have any off-balance sheet arrangements.

 

Recent Accounting Pronouncements

 

None.

 

17



 

Critical Accounting Policies and Estimates

 

Preparation of our financial statements requires estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and expenses reported.  Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates.  Management continually evaluates these estimates based on historical experience and other assumptions we believe to be reasonable under the circumstances.

 

The difficulty in applying these policies arises from the assumptions, estimates and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions.  As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated.

 

Of the significant accounting policies described in the notes to the financial statements, we believe that the following may involve a higher degree of estimates, judgments, and complexity:

 

Commitments and Contingencies

 

Contingencies, by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred, as well as in estimating the amount of the potential expense.  In conformity with accounting principles generally accepted in the United States, we accrue an expense when it is probable that a liability has been incurred and the amount can be reasonably estimated.

 

Inventory Valuation

 

Dakota Ethanol accounts for its corn inventory at estimated net realizable market value.  Corn is an agricultural commodity that is freely traded, has quoted market prices, may be sold without significant further processing and has predictable and insignificant costs of disposal.  Dakota Ethanol derives its estimates from local market prices determined by grain terminals in its area.  Change in the market value of corn inventory is recognized as a component of cost of revenues.  Ethanol and DDGS inventories are stated at net realizable value.  Work-in-process, supplies, parts and chemical inventory are stated at the lower of cost or market on the first-in, first-out method.

 

Revenue Recognition

 

Revenue from the production of ethanol and related products is recorded when title transfers to customers, net of allowances for estimated returns.  Generally, ethanol and related products are shipped FOB shipping point.  Interest income is recognized when earned.

 

Revenue from federal and state incentive programs is recorded when we have produced or sold the ethanol and satisfied the reporting requirements under each

 

18



 

applicable program.  When it is uncertain whether we will receive full allocation and payment due under the federal incentive program, we derive an estimate of the incentive revenue for the relevant period based on various factors including the most recently used payment factor applied to the program.  The estimate is subject to change as management becomes aware of increases or decreases in the amount of funding available under the federal incentive program or other factors that affect funding or allocation of funds under such program.

 

Long-Lived Assets

 

Depreciation and amortization of Dakota Ethanol’s property, plant and equipment is provided on the straight-line method by charges to operations at rates based upon the expected useful lives of individual or groups of assets.  Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.

 

Long-lived assets, including property, plant and equipment and investments are evaluated for impairment on the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  An impaired asset is written down to its estimated fair market value based on the best information available.  Considerable management judgment is necessary to estimate future cash flows and may differ from actual.

 

Accounting for Derivative Instruments and Hedging Activities

 

Dakota Ethanol minimizes the effects of changes in the price of agricultural commodities by engaging Broin Management, LLC to use exchange-traded futures and options contracts to minimize its net positions in these inventories and contracts.  Dakota Ethanol accounts for changes in market value on exchange-traded futures and option contracts at exchange values.  Dakota Ethanol also accounts for changes in value of forward purchase and sales contracts at local market prices determined by grain terminals in its area.  Changes in the market value of all these contracts are recognized in earnings as a component of cost of revenues.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risks

 

Dakota Ethanol is exposed to the impact of market fluctuations associated with commodity prices and interest rates as discussed below.  Dakota Ethanol has no exposure to foreign currency risk as all of its business is conducted in U.S. dollars.

 

Commodity Price Risk

 

Dakota Ethanol produces ethanol and its co-product, distiller’s dried grains with solubles (DDGS), from corn, and as such is sensitive to changes in the price of corn.  The price of corn is subject to fluctuations due to unpredictable factors such as weather, total corn planted and harvested acreage, changes in national and global supply and demand, and government programs and policies. Dakota Ethanol also uses natural gas in the

 

19



 

ethanol and DDGS production process, and as such is sensitive to changes in the price of natural gas.  The price of natural gas is influenced by such weather factors as extreme heat or cold in the summer and winter, in addition to the threat of hurricanes in the spring, summer and fall.  Other natural gas price factors include the U.S. domestic onshore and offshore rig count, the amount of U.S. natural gas in underground storage during both the injection (April 1st – November 7th) and withdrawal (November 14th – March 31st) seasons, and government programs and policies.

 

Dakota Ethanol attempts to reduce the market risk associated with fluctuations in the price of corn and natural gas by employing a variety of risk management strategies.  Strategies include the use of derivative financial instruments such as futures and options initiated on the Chicago Board of Trade and/or the New York Mercantile Exchange, as well as the daily cash management of Dakota Ethanol’s total corn and natural gas ownership relative to its monthly demand for each commodity, which may incorporate the use of forward cash contracts or basis contracts.

 

Corn is hedged with derivative instruments including futures and options contracts offered through the Chicago Board of Trade.  Forward cash corn and basis contracts are also utilized to minimize future price risk.  Similarly, natural gas is hedged with futures and options contracts offered through the New York Mercantile Exchange.  Basis contracts are likewise utilized to minimize future price risk.

 

Gains and losses on futures and options contracts, as well as forward cash corn and basis contracts used as economic hedges of corn inventory, are recognized as a component of cost of revenues for financial reporting on a monthly basis using month-end settlement prices for corn futures on the Chicago Board of Trade.  Corn inventories are marked to fair value using market based prices so that gains or losses on the derivative contracts, as well as forward cash corn and basis contracts, are offset by gains or losses on inventories during the same accounting period.

 

Gains and losses on futures and options contracts, as well as basis contracts used as economic hedges of natural gas, are recognized as a component of cost of revenues for financial reporting on a monthly basis using month-end settlement prices for natural gas futures on the New York Mercantile Exchange.  The natural gas inventories hedged with these derivatives or basis contracts are valued at the spot price of natural gas, plus or minus the gain or loss on the futures or options positions relative to the month-end settlement price on the New York Mercantile Exchange.

 

While Dakota Ethanol’s hedging activities may have a material effect on future operating results or liquidity in a specific quarter of its fiscal year, particularly in the quarters prior to harvest, management does not believe that such activities will have a material, long-term effect on future operating results or liquidity.

 

20



 

Interest Rate Risk

 

Dakota Ethanol’s interest rate risk exposure pertains primarily to its long-term, variable rate debt. Specifically, Dakota Ethanol has $2.1 million outstanding in variable rate, long-term debt as of September 30, 2004.  The interest rate on the variable rate, long-term debt is .50% over the base rate set by First National Bank of Omaha, which was 5.25% as of September 30, 2004.  Dakota Ethanol manages its interest rate risk by monitoring the effects of market changes on interest rates and using fixed rate debt.  Until July 29, 2005, Dakota Ethanol has the option to fix a substantial portion of the variable rate debt to 2.5% over the rate published by the Federal Home Loan Bank of Topeka, Kansas.  Dakota Ethanol has $11.1 million outstanding in fixed rate, long-term debt as of September 30, 2004, all of which is subject to a rate of 9.0%.

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Lake Area Corn Processors’ chief executive officer and chief financial officer, after evaluating the effectiveness of Lake Area Corn Processors’ “disclosure controls and procedures” (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this report (the “Evaluation Date”), have concluded that the disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that Lake Area Corn Processors files with the Securities and Exchange Commission.

 

Changes in Internal Controls

 

There were no significant changes in Lake Area Corn Processors’ or Dakota Ethanol’s internal controls or, to the knowledge of our management, in other factors that could significantly affect these controls subsequent to the Evaluation Date.

 

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION

 

This report contains forward-looking statements involving future events, future business and other conditions, our future performance, and our expected operations.  These statements are based on management’s beliefs and expectations and on information currently available to management. Forward-looking statements may include statements which use words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,” “future,” “potential,” or the negatives of these words, and all similar expressions.

 

Forward-looking statements involve numerous assumptions, risks and uncertainties.  Lake Area Corn Processors’ and Dakota Ethanol’s actual results or actual business or other conditions may differ materially from those contemplated by any forward-looking statements.  While Lake Area Corn Processors believes that these statements are accurate, its business is dependent upon general economic conditions and various conditions specific to its industry and future trends and these factors could cause

 

21



 

actual results to differ materially from the forward looking statements that have been made.  In particular,

 

                  While it is expected that the emissions control equipment and technology installed at the plant will eliminate any potentially dangerous emissions from the ethanol production process and allow Dakota Ethanol to comply with existing environmental regulations, there is no guarantee that it will.

 

                  Dakota Ethanol’s operating income may be adversely affected by decreases or potential shortfalls in available government subsidies and incentive payments.

 

                  Any lowering of gasoline prices will likely also lead to lower prices for ethanol and adversely affect Dakota Ethanol’s operating results.

 

                  The ethanol industry and Dakota Ethanol’s business is sensitive to corn prices. When corn prices increase, Dakota Ethanol’s operating results may suffer.

 

                  The ethanol industry and Dakota Ethanol’s business is sensitive to natural gas prices.  When natural gas prices increase, Dakota Ethanol’s operating results may suffer.

 

                  Dakota Ethanol’s cost of revenues could be adversely affected by the risk management strategy used to protect against the price fluctuations of corn and natural gas.

 

                  The ethanol industry and Dakota Ethanol may be subject to additional regulation, such as environmental restrictions, or regulatory action, which could include fines, penalties, or injunctive relief as a result of any potential excessive emissions, which could increase costs.

 

                  The ethanol industry is an intensely competitive industry with an increasing number of ethanol plants coming into production. As more plants come into production, the price of ethanol and corn could be adversely affected and, accordingly, so could Dakota Ethanol’s operating results.

 

                  Dakota Ethanol is dependent upon Broin Management, LLC to manage the day-to-day activities of the plant and upon Broin-related entities to market the ethanol and DDGS produced at the plant.  If any of these entities cease providing services to Dakota Ethanol, the plant’s operations may be adversely affected.

 

Lake Area Corn Processors is not under any duty to update the forward-looking statements contained in this report.  Lake Area Corn Processors cannot guarantee future results or performance, or what future business conditions will be like.  Lake Area Corn

 

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Processors cautions you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.

 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

On June 16, 2004, Dakota Ethanol was a party to a hearing before the South Dakota Board of Minerals and Environment in Pierre, South Dakota.  The Board of Minerals and Environment is a nine person citizen board that serves a quasi-judicial and legislative role in matters involving South Dakota’s air quality laws.  The Board of Minerals and Environment is authorized to hear petitions regarding the application of South Dakota Department of Environment and Natural Resources’ (DENR) rules governing air quality.  The hearing was initiated on December 29, 2003 when Dakota Ethanol, five other ethanol plants from South Dakota, and Broin Management, LLC, filed a petition with the Board of Minerals and Environment requesting that the Board of Minerals and Environment bar DENR from using and applying a new method for quantifying emissions from ethanol plants known as the Midwest Scaling Method or “multiplier.”  The petition alleged that DENR’s intended use of the multiplier for quantifying emissions was inappropriate and unlawful because South Dakota and federal environmental regulations, and Dakota Ethanol’s Title V Air Quality Operating Permit, do not require or permit the use of the multiplier as a testing method.

 

The Board of Minerals and Environment ruled on June 16, 2004, that the multiplier is not contained in state and federal emissions test methods or regulations.    The effect of the ruling is that the DENR cannot use or require use of the multiplier to measure emissions from Dakota Ethanol’s plant.  However, a final order from the Board of Minerals and Environment will not be entered until the petitioners, including Dakota Ethanol, submit their proposed findings of fact and conclusions of law and a hearing is held, if necessary, to resolve objections to either party’s findings and conclusions.

 

Item 2.  Changes in Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

None.

 

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Item 5.  Other Information

 

None.

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a) Exhibits.  See Exhibit Index following the signature page to this report.

 

(b) Reports on Form 8-K.  None.

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

LAKE AREA CORN
PROCESSORS, LLC

 

 

 

 

Dated:  November 15, 2004

 

 

 

 

 

 

By

/s/ Douglas Van Duyn

 

 

 

Douglas Van Duyn

 

 

 

Chief Executive Officer

 

 

EXHIBIT INDEX
TO
FORM 10-Q
OF LAKE AREA CORN PROCESSORS, LLC

 

Exhibit
Number

 

Description

2.1

 

Plan of Reorganization(1)

3.1(i)

 

Articles of Organization(2)

31.1(iii)

 

Articles of Amendment to Articles of Organization(3)

3.2

 

Third Amended and Restated Operating Agreement (4)

4.1

 

Form of Class A Unit Certificate(5)

31.1

 

Rule 13a-14(a)/15d-14(a) Certification

31.2

 

Rule 13a-14(a)/15d-14(a) Certification

32.1

 

Section 1350 Certification

32.2

 

Section 1350 Certification

 


(1)  Incorporated by reference from Appendix A to the information statement/prospectus filed as a part of the issuer’s Registration Statement on Form S-4 filed with the Commission on August 2, 2001 (File No. 333-66552).

(2)  Incorporated by reference from Appendix B to the information statement/prospectus filed as a part of the issuer’s Registration Statement on Form S-4 filed with the Commission on August 8, 2001. (File No. 333-66552).

 

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(3)  Incorporated by reference from the same numbered exhibit to the issuer’s Form 10-QSB filed with the Commission on November 14, 2002.

(4)  Incorporated by reference from the same numbered exhibit to the issuer’s Form 10-QSB filed with the Commission on November 14, 2003.

(5) Incorporated by reference from the same number exhibit to the issuer’s Registration Statement on Form S-4 filed with the Commission on August 8, 2001 (File No. 333-66552).

 

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