LAKE AREA CORN PROCESSORS LLC - Quarter Report: 2010 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2010.

 

OR

 

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

 

For the transition period from               to               .

 

 

Commission File Number: 000-50254

 

LAKE AREA CORN PROCESSORS, LLC

(Exact name of registrant as specified in its charter)

 

 

46269 SD Highway 34

P.O. Box 100

Wentworth, South Dakota 57075

(Address of principal executive offices)

 

(605) 483-2679

(Registrant’s telephone number, including area code)

 

 

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.  x  Yes  o  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o  Yes  o  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x  No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:  As of May 17, 2010, there were 29,620,000 units outstanding.

 

See Notes to Unaudited Consolidated Financial Statements

 

 

Table of Contents

 

INDEX

 

				Page No.
PART I.  FINANCIAL INFORMATION				3
		ITEM 1.  FINANCIAL STATEMENTS		3
		ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		15
		ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		23
		ITEM 4T.  CONTROLS AND PROCEDURES		24
PART II. OTHER INFORMATION				24
		ITEM 1. LEGAL PROCEEDINGS		24
		ITEM 1A. RISK FACTORS		24
		ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		24
		ITEM 3. DEFAULTS UPON SENIOR SECURITIES		24
		ITEM 4. (REMOVED AND RESERVED)		25
		ITEM 5. OTHER INFORMATION		25
		ITEM 6. EXHIBITS		25
SIGNATURES				25

 

2

Table of Contents

 

PART I.     FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

		March 31,			December 31,
		2010			2009*
ASSETS
CURRENT ASSETS
Cash		$	528,286		$	365,066
Accounts receivable		2,062,040			3,456,380
Other receivables		25,577			276,273
Inventory		7,452,779			7,580,174
Due from broker		451,598			1,494,653
Derivative financial instruments		1,109,487			—
Prepaid expenses		157,407			167,954
Total current assets		11,787,174			13,340,500
PROPERTY AND EQUIPMENT
Land		676,097			676,097
Land improvements		2,665,358			2,665,358
Buildings		8,088,853			8,088,853
Equipment		40,768,265			40,768,265
		52,198,573			52,198,573
Less accumulated depreciation		(20,433,490		)	(19,752,594		)
Net property and equipment		31,765,083			32,445,979
OTHER ASSETS
Goodwill		10,395,766			10,395,766
Investments		2,421,605			2,345,300
Other		86,380			97,675
Total other assets		12,903,751			12,838,741
		$	56,456,008		$	58,625,220

 

* Derived from audited financial statements

 

See Notes to Unaudited Consolidated Financial Statements

 

3

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

		March 31,			December 31,
		2010			2009*
LIABILITIES AND MEMBERS’ EQUITY
CURRENT LIABILITIES
Oustanding checks in excess of bank balance		$	368,704		$	285,804
Accounts payable		2,599,015			6,245,418
Accrued liabilities		981,734			1,045,279
Derivative financial instruments		134,541			610,991
Current portion of guarantee payable		61,860			52,485
Current portion of notes payable		4,154,375			2,727,740
Total current liabilities		8,300,229			10,967,717
LONG-TERM LIABILITIES
Notes payable, net of current maturities		1,550,380			3,609,203
Guarantee payable, net of current portion		147,793			147,793
Other		177,012			166,600
Total long-term liabilities		1,875,185			3,923,596
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		31,374,194			28,827,507
Total members’ equity		46,280,594			43,733,907
		$	56,456,008		$	58,625,220

 

* Derived from audited financial statements

 

See Notes to Unaudited Consolidated Financial Statements

 

4

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2010 and 2009

 

		2010			2009
REVENUES		$	22,838,763		$	20,975,004
COST OF REVENUES		19,482,080			20,936,416
GROSS PROFIT		3,356,683			38,588
OPERATING EXPENSES		760,010			702,462
INCOME (LOSS) FROM OPERATIONS		2,596,673			(663,874		)
OTHER INCOME (EXPENSE)
Interest and other income		4,840			4,567
Equity in net income (loss) of investments		76,305			(387,402		)
Interest and other expense		(131,131		)	(203,311		)
Total other income (expense)		(49,986		)	(586,146		)
NET INCOME (LOSS)		$	2,546,687		$	(1,250,020	)
BASIC AND DILUTED EARNINGS (LOSS) PER UNIT		$	0.09		$	(0.04	)
WEIGHTED AVERAGE UNITS OUTSTANDING FOR THE CALCULATION OF BASIC AND DILUTED EARNINGS (LOSS) PER UNIT		29,620,000			29,620,000

 

See Notes to Unaudited Consolidated Financial Statements

 

5

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2010 and 2009

 

		2010			2009
OPERATING ACTIVITIES
Net income (loss)		$	2,546,687		$	(1,250,020	)
Changes to net income (loss) not affecting cash
Depreciation and amortization		692,191			680,059
Equity in net (income) loss of investments		(76,305		)	387,402
Unrealized (gain) loss on purchase commitments		237,800			(2,066,361		)
Lower of cost or market adjustment on inventory		295,809			414,430
(Increase) decrease in
Receivables		1,645,036			(501,226		)
Inventory		(168,414		)	131,156
Prepaid expenses		10,547			101,784
Derivative financial instruments and due from broker		(542,883		)	345,359
Increase (decrease) in
Accounts payable		(3,646,403		)	(3,059,114		)
Accrued liabilities		(290,932		)	(52,561		)
NET CASH FROM (USED FOR) OPERATING ACTIVITIES		703,133			(4,869,092		)
INVESTING ACTIVITIES
Purchase of property and equipment		—			(716,085		)
NET CASH USED FOR INVESTING ACTIVITIES		—			(716,085		)
FINANCING ACTIVITIES
Increase in outstanding checks in excess of bank balance		82,900			329,018
Short-term notes payable issued		—			1,393,000
Long-term notes payable issued		—			4,369,000
Principal payments on long-term notes payable		(622,813		)	(463,835		)
NET CASH FROM (USED FOR) FINANCING ACTIVITIES		(539,913		)	5,627,183
NET INCREASE IN CASH		163,220			42,006
CASH AT BEGINNING OF PERIOD		365,066			488,517
CASH AT END OF PERIOD		$	528,286		$	530,523
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest		$	253,030		$	140,742
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING AND FINANCING ACTIVITIES
Capital expenditures in accounts payable		$	—		$	317,245

 

See Notes to Unaudited Consolidated Financial Statements

 

6

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010 AND 2009

 

NOTE 1 -         NATURE OF OPERATIONS

 

Principal Business Activity

 

Lake Area Corn Processors, LLC and subsidiary (the Company) is a South Dakota limited liability company located in Wentworth, South Dakota. 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). 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 three months ended March 31, 2010 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 audited financial statements for the year ended December 31, 2009, contained in the annual report on Form 10-K  for 2009.

 

Principles of Consolidation

 

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

 

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, based on written contract terms between Dakota Ethanol and its customers.  Collectability of revenue is reasonably assured based on historical evidence of collectability between Dakota Ethanol and its customers.  Interest income is recognized as earned.

 

Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, revenue from the sale of ethanol is recorded based on the net selling price reported to the Company from the marketer.

 

Cost of Revenues

 

The primary components of cost of revenues from the production of ethanol and related co-product are corn expense, energy expense (natural gas and electricity), raw materials expense (chemicals and denaturant), and direct labor costs.

 

Shipping costs incurred in the sale of distiller’s grains are classified in net revenues.  Shipping costs on distiller’s grains were approximately $174,000 and $260,000 for the three months ended March 31, 2010 and 2009, respectively.

 

7

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010 AND 2009

 

Inventory Valuation

 

Ethanol and related products are stated at net realizable value. Raw materials, work-in-process, and parts inventory are valued using methods which approximate the lower of cost (first-in, first-out) or market. In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.

 

Investment in commodities contracts, derivative instruments and hedging activities

 

On January 1, 2009, the Company adopted new disclosure requirements, which require entities to provide greater transparency in interim and annual financial statements about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for, and how the instruments and related hedged items affect the financial position, results of operations, and cash flows of the entity

 

We are exposed to certain risks related to our ongoing business operations.  The primary risks that we manage by using forward or derivative instruments are price risk on anticipated purchases of corn, natural gas and the sale of ethanol.

 

We are subject to market risk with respect to the price and availability of corn, the principal raw material we use to produce ethanol and ethanol by-products.  In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions.  This is especially true when market conditions do not allow us to pass along increased corn costs to our customers.  The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.

 

Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales.  Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business.  Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of derivative accounting.  Effective January 1, 2008, we applied the normal purchase and sales exemption under derivative accounting for forward purchases of corn and sales of distiller’s grains.  Transactions initiated prior to January 1, 2008 are not exempted from the accounting and reporting requirements.  As of March 31, 2010, we are committed to purchasing 2.2 million bushels of corn on a forward contract basis with an average price of $3.73 per bushel, of which 200,000 bushels are subject to derivative accounting treatment and 2.0 million bushels are accounted for as normal purchases, and accordingly, are not marked to market and are accounted for using lower of cost or market accounting.  Dakota Ethanol has a derivative financial instrument liability of approximately $135,000 related to the forward contracted purchases of corn.  The corn purchase contracts represent 13% of the annual plant corn usage.

 

We sometimes enter into firm-price purchase commitments with some of our natural gas suppliers under which we agree to buy natural gas at a price set in advance of the actual delivery of that natural gas to us.  Under these arrangements, we assume the risk of a price decrease in the market price of natural gas between the time this price is fixed and the time the natural gas is delivered.  At March 31, 2010, we are not committed to purchasing any natural gas.  We account for these transactions as normal purchases, and accordingly, do not mark these transactions to market.

 

We enter into short-term forward, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. We enter into short-term forward, option and futures contracts for sales of ethanol to manage exposure to changes in energy prices.  All of our derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.

 

8

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010 AND 2009

 

As part of our trading activity, we use futures and option contracts offered through regulated commodity exchanges to reduce risk and we are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using forward and futures contracts and options.

 

Derivatives not designated as hedging instruments at March 31, 2010 and December 31, 2009 were as follows:

 

		Balance Sheet		March 31,			December 31,
		Classification		2010			2009*
Futures and options contracts		Current Assets		$	1,109,487		$	—
Futures and options contracts		(Current Liabilities)		$	—		$	(551,420	)
Forward contracts		(Current Liabilities)		$	(134,541	)	$	(59,571	)

 

* Derived from audited financial statements

 

Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas purchases are included as a component of cost of revenues and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements.

 

		Statement of Operations		Three Months Ended March 31,
		Classification		2010			2009
Net realized and unrealized gains (losses) related to sales contracts:
Futures and options contracts		Revenues		$	252,938		$	—
Net realized and unrealized gains (losses) related to purchase contracts:
Futures and options contracts		Cost of Revenues		$	245,052		$	(58,417	)
Forward contracts		Cost of Revenues		$	(74,970	)	$	(8,742	)

 

Investments

 

Dakota Ethanol has investment interests in three unlisted companies in related industries. These investments are flow-through entities and are being accounted for by the equity method of accounting under which the Company’s share of net income is recognized as income in the Company’s income statement and added to the investment account.  Distributions or dividends received from the investments are treated as a reduction of the investment account.  The Company consistently follows the practice of recognizing the net income based on the most recent reliable data.

 

Dakota Ethanol has a nine percent investment interest in the company’s ethanol marketer, Renewable Products Marketing Group, LLC (RPMG).  The net income which is reported in the Company’s income statement for RPMG is based on RPMG’s December 31, 2009 unaudited results.  The carrying amount of the Company’s investment was approximately $1,428,000 and $1,351,000 as of March 31, 2010 and December 31, 2009, respectively.

 

9

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010 AND 2009

 

Dakota Ethanol has a twelve percent investment interest in Prairie Gold Venture Partnership, LLC (PGVP), a venture capital fund investing in cellulosic ethanol production.  The net income which is reported in the Company’s income statement for PGVP is based on PGVP’s December 31, 2009 unaudited results.  The carrying amount of the Company’s investment was approximately $994,000 as of March 31, 2010 and December 31, 2009.

 

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.

 

Recent Accounting Pronouncements

 

In January 2010, the FASB issued an update to “Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements.”  The update requires new disclosures about transfers in and out of Levels 1 and 2 and Activity in Level 3.  The update also provides clarification of disclosures about the level of disaggregation and the inputs and valuation techniques used.

 

The Company is evaluating the effect, if any, that the adoption of this new accounting standard will have on its results of operations, financial position, and the related disclosures.

 

NOTE 3 -         INVENTORY

 

Inventory consisted of the following as of March 31, 2010 and December 31, 2009:

 

		March 31,			December 31,
		2010			2009*
Raw materials		$	5,151,041		$	5,049,737
Finished goods		771,881			855,745
Work in process		532,828			679,817
Parts inventory		997,029			994,875
		$	7,452,779		$	7,580,174

 

* Derived from audited financial statements

 

Included in inventory is a lower of cost or market adjustment of approximately $295,000 and $212,000 at March 31, 2010and December 31, 2009 respectively.

 

10

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010 AND 2009

 

NOTE 4 -         SHORT-TERM NOTE PAYABLE

 

On June 18, 2009, Dakota Ethanol renewed a revolving promissory note from First National Bank of Omaha in the amount of $4,000,000.  The note expires on May 17, 2010 and the amount available is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital, net worth and borrowing base requirements. Interest on the outstanding principal balances will accrue at adjustable basis points above the lender’s base rate (5.25 percent at March 31, 2010.  The rate is subject to a floor of 5.0 percent.    There is a commitment fee of 1/2 percent on the unused portion of the $4,000,000 availability. In addition, the bank draws the checking account balance to a minimum balance on a daily basis. The excess cash pays down or the shortfall is drawn upon the note as needed.  The note is collateralized by the ethanol plant, its accounts receivable and inventories.  On March 31, 2010 and December 31, 2009, Dakota Ethanol had $0 outstanding and $4,000,000 available to be drawn on the revolving promissory note.

 

NOTE 5 -         LONG-TERM NOTES PAYABLE

 

Dakota Ethanol has two notes payable to First National Bank of Omaha, Nebraska (the Bank) (Term Notes 2 and 5).

 

As part of the note payable agreements, Dakota Ethanol is subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital and net worth requirements. The notes are collateralized by the ethanol plant and equipment, its accounts receivable and inventories. Term note 2 is subject to prepayment penalties based on the cost incurred by the Bank to break its fixed interest rate commitment.

 

The balance of Term Note 2 is due and payable in quarterly installments of $581,690 through September 1, 2011. Interest on outstanding principal balances will accrue at a fixed rate of 9 percent.

 

The balance of Term Note 5 is due and payable on September 1, 2011. Interest on outstanding principal balances will accrue at adjustable basis points above the lender’s rate (5.0 percent at March 31, 2010).  This rate is subject to various adjustments based on various levels of indebtedness to net worth, as defined by the agreement. The rate is subject to a floor of 5.0 percent.  Dakota Ethanol may elect to borrow any principal amount repaid on Term Note 5 up to $3,575,000 subject to the terms of the agreement. Should Dakota Ethanol elect not to utilize this feature, the lender will assess an unused commitment fee of 3/8 percent on the unused portion of the note.  Term Note 5 has a reducing feature through which the available amount of the note is reduced annually by 75 percent of the excess cash flow for the year.  On March 31, 2010, Dakota Ethanol had $0 outstanding and $3,575,000 available to be drawn on Term Note 5.  On December 31, 2009, Dakota Ethanol had $0 outstanding and $5,000,000 available to be drawn on Term Note 5.

 

During December 2008, Dakota Ethanol issued a note payable related to the purchase of land adjacent to the plant site.  The note was issued for $450,000.  The note matures on December 1, 2012.  The note is payable in annual installments of $112,500 plus interest.  Interest on outstanding principal balances will accrue at a fixed rate of 7.0 percent.

 

Dakota Ethanol conducted a private placement offering of subordinated unsecured debt securities which closed on May 30, 2009.  The securities mature two years from the date of issuance.  Interest on the outstanding balances will accrue at a fixed rate of 9 percent.  Interest will be paid annually on January 30th of each year beginning on January 30, 2010.  We have raised $1,439,000 in subordinated debt through this offering.

 

On July 24, 2009 Dakota Ethanol issued an additional $700,000 in subordinated secured debt to Guardian Eagle Investments, LLC.  The note has a fixed interest rate of 9.0%.  The note requires monthly installments of principal and interest and matures in April 2012.

 

On May 22, 2009, Dakota Ethanol entered into two loan agreements for alternative financing for our corn oil extraction equipment as we had agreed with FNBO; one loan with Rural Electric Economic Development, Inc (REED) and the other loan with First District Development Company (FDDC).

 

The note to REED for $1 million has a fixed interest rate of 4.7%.  The note requires monthly installments of principal and interest and matures on May 25, 2014.  The note is secured by the oil extraction equipment.

 

11

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010 AND 2009

 

The note to FDDC for $200,000 has a fixed interest rate of 5.5%.  The note requires monthly installments of principal and interest and matures on May 22, 2014.  The note is secured by the oil extraction equipment.

 

We are in compliance with our financial covenants as of March 31, 2010.

 

The balances of the notes payable are as follows:

 

		March 31,			December 31,
		2010			2009*
Note payable to First National Bank, Omaha Term Note 2		$	2,348,306		$	2,864,121
Note payable - Land		337,500			337,500
Note payable - Subordinated notes		1,439,000			1,439,000
Note payable - REED		849,728			895,586
Note payable - FDDC		170,358			179,394
Note payable -Guardian Eagle		559,863			621,342
		5,704,755			6,336,943
Less current portion		(4,154,375		)	(2,727,740		)
		$	1,550,380		$	3,609,203

 

* Derived from audited financial statements

 

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

 

Years Ending March 31,		Amount
2011		$	4,154,375
2012		866,468
2013		376,869
2014		261,553
2015		45,490

 

NOTE 6 -         FAIR VALUE MEASUREMENTS

 

Effective January 1, 2009, the Company completely adopted the fair value measurements and disclosures standard which defines fair value, establishes a framework for measuring fair value, and expands disclosure for those assets and liabilities carried on the balance sheet on a fair value basis.

 

The Company’s balance sheet contains derivative financial instruments that are recorded at fair value on a recurring basis.  Fair value measurements and disclosures require that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value.  There are three levels of determining fair value.

 

Level 1 uses quoted market prices in active markets for identical assets or liabilities.

 

Level 2 uses observable market based inputs or unobservable inputs that are corroborated by market data.

 

Level 3 uses unobservable inputs that are not corroborated by market data.

 

12

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010 AND 2009

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value effective January 1, 2008.

 

Derivative financial instruments. Commodity futures and options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the CBOT and NYMEX markets.  Over-the-counter commodity options contracts are reported at fair value utilizing Level 2 inputs.  For these contracts, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets.  Forward purchase contracts are reported at fair value utilizing Level 2 inputs.  For these contracts, the Company obtains fair value measurements from local grain terminal bid values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based off the CBOT markets.

 

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

		Total			Level 1			Level 2			Level 3
March 31, 2010
Assets:
Derivative financial instruments		$	1,109,487		$	1,109,487		$	—		$	—
Liabilities:
Derivative financial instruments		$	134,541		$	—		$	134,541		$	—
December 31, 2009*
Assets:
Derivative financial instruments		$	—		$	—		$	—		$	—
Liabilities:
Derivative financial instruments		$	610,991		$	551,420		$	59,571		$	—

 

* Derived from audited financial statements

 

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at March 31, 2010.

 

Disclosure requirements for fair value of financial instruments require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis.  The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non recurring basis are discussed above.  The methodologies for other financial assets and financial liabilities are discussed below.

 

13

Table of Contents

 

LAKE AREA CORN PROCESSORS, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2010 AND 2009

 

The Company believes the carrying amount of cash, cash equivalents, accounts receivable, due from broker, derivative instruments, and accounts payable approximates fair value due to the short maturity of these instruments.

 

The carrying amount of long-term obligations at March 31, 2010 of $5,914,408 had an estimated fair value of approximately $5,950,983 based on estimated interest rates for comparable debt.  The carrying amount and fair value were $6,537,221 and $6,602,314 respectively at December 31, 2009.

 

NOTE 7 -         COMMITMENTS, CONTINGENCIES AND AGREEMENTS

 

Dakota Ethanol 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.  Incentive revenue of $86,000 and $58,000 was recorded for the three months ended March 31, 2009 and 2008, respectively.  Dakota Ethanol earned its final allocation in February 2010 for the program year ended June 30, 2010.  Dakota Ethanol will not receive the annual maximum for the 2010 program year due to budget constraints on the State of South Dakota program.

 

NOTE 8 -         RELATED PARTY TRANSACTIONS

 

Dakota Ethanol owns a 9% interest in RPMG, in which Dakota Ethanol has entered into marketing agreements for the exclusive rights to market, sell and distribute the entire ethanol and dried distiller’s grains inventories produced by Dakota Ethanol.  The marketing fees are included in net revenues.

 

Sales and marketing fees related to the agreements are as follows:

 

		Three Months Ended March 31,
		2010			2009
Sales ethanol		$	18,907,386		$	16,672,730
Sales distiller’s grains		1,770,823			1,161,833
Marketing fees ethanol		54,371			52,270
Marketing fees distillers grains		22,092			17,278

 

		March 31,			December 31,
		2010			2009
Amounts due included in accounts receivable		$	1,631,538		$	2,973,282

 

14

Table of Contents

 

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

 

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three month period ended March 31, 2010, compared to the same period of the prior fiscal year. This discussion should be read in conjunction with the consolidated financial statements and the Management’s Discussion and Analysis section for the fiscal year ended December 31, 2009, included in the Company’s Annual Report on Form 10-K.

 

Disclosure Regarding Forward-Looking Statements

 

This report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions.  In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,” “potential,” “continue” or the negative of these terms or other similar expressions.  These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties.  Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report.  While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:

 

 

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf.  We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.  We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this

 

15

Table of Contents

 

report.  You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect.  We qualify all of our forward-looking statements by these cautionary statements.

 

Overview

 

Lake Area Corn Processors, LLC is a South Dakota limited liability company that owns and manages its wholly-owned subsidiary, Dakota Ethanol, L.L.C.  Dakota Ethanol, L.L.C. owns and operates an ethanol plant located near Wentworth, South Dakota that has a nameplate production capacity of 40 million gallons of ethanol per year.  Lake Area Corn Processors, LLC is referred to in this report as “LACP,” the “company,” “we,” or “us.”  Dakota Ethanol, L.L.C. is referred to in this report as “Dakota Ethanol” “we” “us” or the “ethanol plant.”

 

Our revenue is derived from the sale and distribution of our ethanol, distillers grains and corn oil.  The ethanol plant currently operates in excess of its nameplate capacity, producing approximately 47 million gallons of ethanol per year.  Corn is supplied to us primarily from our members who are local agricultural producers and from purchases of corn on the open market.  We have engaged RPMG, Inc. to market all of the ethanol and corn oil that we produce at the plant.  Further, RPMG, Inc. markets all of the distillers grains that we produce that we do not market internally to local customers.

 

There have been a number of recent developments in legislation that impacts the ethanol industry.  One such development concerns the federal Renewable Fuels Standard (RFS).  The ethanol industry is benefited by the RFS which requires that a certain amount of renewable fuels must be used in the United States each year.  In February 2010, the EPA issued new regulations governing the RFS.  These new regulations have been called RFS2.  The most controversial part of RFS2 involves what is commonly referred to as the lifecycle analysis of greenhouse gas emissions.  Specifically, the EPA adopted rules to determine which renewable fuels provided sufficient reductions in greenhouse gases, compared to conventional gasoline, to qualify under the RFS program.  RFS2 establishes a tiered approach, where regular renewable fuels are required to accomplish a 20% greenhouse gas reduction compared to gasoline, advanced biofuels and biomass-based biodiesel must accomplish a 50% reduction in greenhouse gases, and cellulosic biofuels must accomplish a 60% reduction in greenhouse gases.  Any fuels that fail to meet this standard cannot be used by fuel blenders to satisfy their obligations under the RFS program.  The scientific method of calculating these greenhouse gas reductions has been a contentious issue.  Many in the ethanol industry were concerned that corn based ethanol would not meet the 20% greenhouse gas reduction requirement based on certain parts of the environmental impact model that many in the ethanol industry believed was scientifically suspect.  However, RFS2 as adopted by the EPA provides that corn-based ethanol from modern ethanol production processes does meet the definition of a renewable fuel under the RFS program.  Our ethanol plant was grandfathered into the RFS due to the fact that it was constructed prior to the effective date of the lifecycle greenhouse gas requirement and is not required to prove compliance with the lifecycle greenhouse gas reductions.  Further, certain provisions of RFS2 as adopted may disproportionately benefit ethanol produced from sugarcane.  This could make sugarcane based ethanol, which is primarily produced in Brazil, more competitive in the United States ethanol market.  If this were to occur, it could reduce demand for the ethanol that we produce.

 

In addition to RFS2 which included greenhouse gas reduction requirements, in 2009, California passed a Low Carbon Fuels Standard (LCFS).  The California LCFS requires that renewable fuels used in California must accomplish certain reductions in greenhouse gases which is measured using a lifecycle analysis, similar to RFS2.  Management believes that this lifecycle analysis is based on unsound scientific principles that unfairly disadvantages corn based ethanol.  Management believes that these new regulations will preclude corn based ethanol from being used in California.  California represents a significant ethanol demand market.  If we are unable to supply ethanol to California, it could significantly reduce demand for the ethanol we produce.  Currently, several lawsuits have been filed challenging the California LCFS.

 

Ethanol production in the United States is benefited by various tax incentives.  The most significant of these tax incentives is the federal Volumetric Ethanol Excise Tax Credit (VEETC).  VEETC provides a volumetric ethanol excise tax credit of 4.5 cents per gallon of ethanol blended with gasoline at a rate of 10%.  VEETC is scheduled to expire on December 31, 2010.  If this tax credit is not renewed, it likely would have a negative impact on the price of ethanol and demand for ethanol in the marketplace.  On December 31, 2009, the biodiesel blenders’ tax credit was allowed to expire.  Recently, Congress passed legislation to reinstate the biodiesel credit until

 

16

Table of Contents

 

December 31, 2010.  However, the bills passed by the House and Senate must be reconciled and the final bill must be signed by the President before the biodiesel blenders’ tax credit will be reinstated.  If the VEETC that benefits the ethanol industry is allowed to expire, it could negatively impact demand for ethanol and may harm our financial condition.

 

Results of Operations for the Three Months Ended March 31, 2010 and 2009

 

The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items in relation to total revenues in our consolidated statements of operations for the three months ended March 31, 2010 and 2009:

 

		March 31, 2010 (unaudited)					March 31, 2009 (unaudited)
Income Statement Data		Amount			%		Amount			%
Revenues		$	22,838,763		100.0		$	20,975,004		100.0
Cost of Revenues		$	19,482,080		83.5		$	20,936,416		99.8
Gross Profit		$	3,356,683		14.7		$	38,588		0.2
Operating Expenses		$	760,010		3.3		$	702,462		3.3
Income (Loss) from Operations		$	2,596,673		11.4		$	(663,874	)	3.2
Other Expense		$	(49,986	)	0.2		$	(586,146	)	2.8
Net Income (Loss)		$	2,546,687		11.2		$	(1,250,020	)	6.0

 

Revenues

 

Our ethanol revenue increased by approximately 15% during the first quarter of 2010 compared to the same period of 2009, which in real terms equaled an increase of approximately $2,488,000.  Our total distillers grains revenue decreased by approximately 25% for the first quarter of 2010 compared to the same period of 2009.  In real terms, this equaled a decrease of approximately $1,022,000 in total distillers grains revenue.  Our other sales increased by approximately $372,000 for the first quarter of 2010 compared to the same period of 2009, primarily related to our corn oil sales.

 

Ethanol

 

Our ethanol revenue increased during the first quarter of 2010 compared to the first quarter of 2009 because we increased our ethanol production and the average price we received for our ethanol during the 2010 period also increased.  We increased our ethanol sales by approximately 4% to more than 12 million gallons for the first quarter of 2010.  This increase in our ethanol sales was the result of increasing our ethanol production during the 2010 period.  In addition to the increase in ethanol sales, the average price we received per gallon of ethanol during the first quarter of 2010 was approximately $0.15 per gallon higher compared to the first quarter of 2009.  This was an increase of approximately 10%.  Management attributes this increase in ethanol prices with more favorable conditions in the ethanol industry during the first quarter of 2010 compared to the first quarter of 2009.  During the first quarter of 2009, commodity prices were low as a result of the significant economic uncertainty that existed in the world economies.  As the world economies have started to recover, commodity prices have begun to increase.

 

Management anticipates that ethanol prices for the remaining quarters of 2010 will gradually increase.  Management anticipates that ethanol prices will be affected by increasing corn costs and rising energy prices in the remaining quarters of 2010.  We anticipate some seasonality of demand for ethanol that coincides with increased gasoline demand during the summer driving season.  The ethanol plant is currently operating at capacity.  Management anticipates that ethanol production will continue at operating capacity for the remaining quarters of 2010.

 

17

Table of Contents

 

Distillers Grains

 

For the first quarter of 2010, total distillers grains revenue decreased by approximately 25%.  This decrease was primarily the result of significant decreases in the market prices of distillers grains.  The average price we received per ton of dried distillers grains during the first quarter of 2010 was approximately 33% lower than during the first quarter of 2009.  This decrease in real terms was approximately $46 per ton of dried distillers grains.  Similarly, the average price we received for our modified/wet distillers grains was approximately 27% lower during the first quarter of 2010 compared to the first quarter of 2009.  In real terms, this decrease equaled approximately $31 per ton of modified/wet distillers grains.  Management attributes these decreases in the average prices we received for our distillers grains with increased supply of distillers grains in the market and lower cost alternative feeds that pushed down the price of distillers grains.

 

During the first quarter of 2010 we sold approximately 76% more tons of dried distillers grains than we sold in the first quarter of 2009.  This was an increase of approximately 6,000 tons of dried distillers grains.  This increase in dried distillers grains sales was related to market conditions that made it more favorable to sell our distillers grains in the dried form.  As a result, during the first quarter of 2010, we sold approximately 5,000 less tons (on a dry-equivalent basis) of modified/wet distillers grains compared to the first quarter of 2009.  This was a decrease of approximately 20%.  Based on total tons of distillers grains sold, we continue to sell more distillers grains in the modified/wet form compared to the dried form.  We make the decision regarding the amount of distillers grains we produce in the dried form versus the modified/wet form based on market conditions and the relative costs associated with producing each form of distillers grains.  We experience increased natural gas consumption when we produce more dried distillers grains.

 

Corn Oil

 

During the first quarter of 2010, we sold approximately 1,772,000 pounds of corn oil compared to approximately 331,000 pounds of corn oil during the first quarter of 2009.  This increase in the number of pounds of corn oil that we sold was the result of the fact that we only operated our corn oil extraction equipment for a short period of time during the first quarter of 2009.  The average price we received for our corn oil during the first quarter of 2010 was approximately 79% higher than the price we received for the first quarter of 2009.  This was an increase of approximately $0.11 per pound.  Management attributes this increase in corn oil prices with rising energy prices.  Management anticipates that corn oil prices will be stable or may fall depending on the demand from the biodiesel market.  Currently most biodiesel production in the United States is idled due to the fact that the biodiesel blenders’ tax credit was allowed to expire.  Corn oil can be used as the feedstock to produce biodiesel.  We may experience decreased demand for corn oil if the biodiesel blenders’ tax credit is not renewed.  We are continuing to refine our operation of the corn oil extraction equipment and anticipate that this may lead to increased production in the future.

 

Cost of Revenues

 

Our cost of revenues decreased in the first quarter of 2010 compared to the first quarter of 2009, primarily as a result of decreased corn costs per bushel and decreased natural gas costs per mmBtu.  These per unit cost decreases were partially offset by increases in our corn and natural gas consumption due to our increased production of ethanol, distillers grains and corn oil during the first quarter of 2010 compared to the first quarter of 2009.

 

Corn

 

Our total cost of corn, including derivative instruments, was approximately 10% lower for the first quarter of 2010 compared to the same period of 2009.  Our average cost per bushel of corn decreased but was partially offset by an increase in our corn consumption.  Our average cost per bushel of corn during the first quarter of 2010, including our derivative instrument costs, was approximately $3.59 per bushel, compared to approximately $4.17 per bushel during the first quarter of 2009, a decrease of approximately 14% per bushel of corn.  Management attributes this decrease in corn costs to lower market corn prices during the first quarter of 2010 compared to the first quarter of 2009 along with more favorable risk management positions during the 2010 period.  We anticipate that our corn costs will be relatively stable during the remaining quarters of our 2010 fiscal year.  However, poor weather conditions could significantly impact corn prices.

 

18

Table of Contents

 

We increased our corn consumption during the first quarter of 2010 compared to the first quarter of 2009 because of increased ethanol, distillers grains and corn oil production.  We consumed approximately 186,000 more bushels of corn during the first quarter of 2010 compared to the first quarter of 2009.  This was an approximately 4% increase.  Our operating margins during the first quarter of 2010 were more favorable than the first quarter of 2009.  In order to take advantage of these increased margins, we increased production at the plant during the first quarter of 2010.

 

Natural Gas

 

Our total cost of revenue associated with natural gas was approximately 15% lower for the first quarter of 2010 compared to the first quarter of 2009.  Our average natural gas cost, which includes costs associated with our derivative instrument positions, for the first quarter of 2010 was approximately $6.31 per mmBtu compared to approximately $7.90 per mmBtu for the first quarter of 2009, a decrease of approximately 20%.  Management attributes this decrease in natural gas costs with lower market natural gas prices.  Management believes that there are currently adequate natural gas supplies which have lowered the market prices of natural gas.  Management anticipates that natural gas prices may increase should the world economies continue to rebound which could result in increased natural gas demand.

 

Our natural gas consumption increased approximately 6% during the first quarter of 2010 compared to the first quarter of 2009.  In real terms, we experienced an increase of approximately 20,000 mmBtu of natural gas for the first quarter of 2010 compared to the first quarter of 2009.  This increase in natural gas consumption was the result of increased ethanol and distillers grains production by the ethanol plant during the first quarter of 2010 compared to the first quarter of 2009.  We also increased our production of dried distillers grains during the first quarter of 2010 compared to the first quarter of 2009.  Production of dried distillers grains requires more natural gas than production of modified/wet distillers grains.  We anticipate that in the future, our natural gas consumption will be comparable to current natural gas usage.  However, should we continue to produce more dried distillers grains as opposed to modified/wet distillers grains, we expect our natural gas consumption will increase as natural gas is used to fire our distillers grains dryers.

 

Operating Expenses

 

Our operating expenses were higher for the first quarter of 2010 compared to the first quarter of 2009 as a result of increases in our wages and bonuses.  Our wage and bonus costs increased due to the fact that the ethanol plant operated more profitably during the first quarter of 2010 compared to the first quarter of 2009.  Our insurance costs also decreased for the first quarter of 2010 compared to the first quarter of 2009 as a result of our participation in a captive insurance company.

 

Other Expense

 

Our total other expense was significantly lower during the first quarter of 2010 compared to the first quarter of 2009.  Our investments produced income during the first quarter of 2010 compared to a loss for the first quarter of 2009.  This income was primarily a result of our investment in RPMG.  We paid less interest during the first quarter of 2010 compared to the first quarter of 2009 as a result of our ongoing retirement of our long-term debt.

 

Changes in Financial Condition for the Three Months Ended March 31, 2010

 

We had more cash on hand at March 31, 2010 compared to December 31, 2009 as a result of profits we earned from our operations during the first quarter of 2010.  Our accounts receivable at March 31, 2010 significantly decreased compared to December 31, 2009 as a result of decreased ethanol values.  In addition, the amount that we had due from our commodities broker was significantly less at March 31, 2010 compared to December 31, 2009 as a result of less margin cash being required to fund our hedge positions.  Our derivative instruments represented an asset on our balance sheet at March 31, 2010 compared to a liability at December 31, 2009.  At the end of each period we compare the value of our derivative instruments to the market price of the underlying commodities to determine whether our derivative instruments represent an asset or a liability.

 

19

Table of Contents

 

The net value of our property and equipment was lower at March 31, 2010 compared to December 31, 2009 as a result of our accumulated depreciation.  We did not make any capital expenditures during the first quarter of 2010.  In addition, our other assets were comparable at March 31, 2010 and at December 31, 2009.

 

Our current liabilities were lower at March 31, 2010 compared to December 31, 2009.  Our accounts payable at March 31, 2010 significantly decreased compared to December 31, 2009.  Management attributes this decrease with our corn suppliers seeking to defer corn payments at the end of 2009 until early 2010.  The value of our derivative financial instruments liability was lower at March 31, 2010 compared to December 31, 2009 as a result of reductions to losses on futures contracts.  The current portion of our notes payable at March 31, 2010 significantly increased compared to December 31, 2009 because many of the subordinated promissory notes that we issued at the beginning of 2009 will become due starting in January 2011.

 

Our long-term liabilities were lower at March 31, 2010 compared to December 31, 2009 as a result of the fact that our subordinated promissory notes became a current liability during the first quarter of 2010.  In addition, our long-term notes payable were decreased as a result of our ongoing debt service payments.

 

Liquidity and Capital Resources

 

Our main sources of liquidity are cash from our continuing operations and amounts we have available to draw on our revolving lines of credit.  Management does not anticipate that we will need to raise additional debt or equity financing in the next twelve months and management believes that our current sources of liquidity will be sufficient to continue our operations during that time period.  We do not anticipate making any significant capital expenditures in the next 12 months other than ordinary repair and replacement of equipment in our ethanol plant.

 

Currently, we have two revolving loans which allow us to borrow funds for working capital.  These two revolving loans are described in greater detail below in the section entitled “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Indebtedness.”  As of March 31, 2010, we had $0 outstanding and $8,575,000 available to be drawn on these revolving loans.  Management anticipates that this is sufficient to maintain our liquidity and continue our operations for the next 12 months.

 

The following table shows cash flows for the three months ended March 31, 2010 and 2009:

 

		Three months Ended March 31,
		2010			2009
Net cash provided by (used in) operating activities		$	703,133		$	(4,869,092	)
Net cash (used in) investing activities		$	—		$	(716,085	)
Net cash provided by (used in) financing activities		$	(539,913	)	$	5,627,183

 

Cash Flow From Operations

 

Our cash flow from operations was significantly greater for the first quarter of 2010 compared to the first quarter of 2009.  We had net income for the first quarter of 2010 compared to a net loss during the first quarter of 2009.  In addition to the net loss we had for the first quarter of 2009, we had a significant unrealized gain on our risk management activities that further impacted our cash flow from operations.

 

Cash Flow From Investing Activities

 

We did not use any cash for investing activities during the first quarter of 2010.  We used cash for investing activities during the first quarter of 2009 related to our purchase and installation of corn oil extraction equipment.

 

Cash Flow From Financing Activities

 

We used cash for our financing activities during the first quarter of 2010, primarily due to payments we made on our long-term loans.  During the first quarter of 2009, our financing activities provided cash as a result of amounts that we received from our revolving loans as well as the proceeds of the issuance of our unsecured promissory notes.

 

20

Table of Contents

 

Indebtedness

 

First National Bank of Omaha (FNBO) is our primary lender.  We have three loans outstanding with FNBO, a short-term revolving loan, a long-term revolving loan, and a term loan which was used to finance the construction of our ethanol plant.  In addition, we entered into subordinated unsecured debt financing with various individuals following the end of our 2008 fiscal year for additional working capital.  We also secured two loans to offset the cost of our corn oil extraction equipment which total $1,200,000.  Finally, we have a long-term loan related to a piece of property that we purchased adjacent to our ethanol plant.  The specifics of each credit facility we have outstanding are discussed below.

 

Short-Term Debt Sources

 

We have a short-term revolving promissory note with FNBO.  We can borrow up to $4,000,000 pursuant to this revolving promissory note.  The maturity date of the revolving promissory note is May 17, 2010.  We are in the process of renewing this promissory note.  We agreed to pay a variable interest rate on the revolving promissory note at an annual rate 2% higher than FNBO’s base rate.  The interest rate for this loan as of March 31, 2010 was 5.25%.  The revolving promissory note is subject to a minimum interest rate of 5% per year.  Interest on the revolving promissory note is paid quarterly.  We are required to pay a quarterly fee of 1/2 percent on the unused portion of the revolving promissory note.  The revolving promissory note is collateralized by the ethanol plant, its accounts receivable and inventories.  As of March 31, 2010, we had $0 outstanding on our revolving promissory note and $4,000,000 available to be drawn.

 

Long-Term Debt Sources

 

We have one long-term note that was used for the permanent financing of the ethanol plant.  We are subject to certain restrictive covenants establishing minimum reporting requirements, ratios, working capital and net worth requirements pursuant to the loan agreement.  The term note is secured by the ethanol plant.  The note is subject to prepayment penalties based on the cost incurred by FNBO to break its fixed interest rate commitment.

 

The balance of the term note requires quarterly payments which commenced on October 1, 2002.  The balance is due September 1, 2011.  Interest on the outstanding principal balance accrues at a fixed rate of 9% annually.  The principal balance due pursuant to the note as of March 31, 2010 was approximately $2,348,000.

 

We have a long-term revolving loan pursuant to which we may elect to borrow up to $3,575,000 through September 1, 2011 known as Term Note 5.  The available amount of funds we can borrow pursuant to Term Note 5 reduces each year by 75% of certain excess cash flow we have at the end of each of our fiscal years.  Therefore, the funds available for us to draw on Term Note 5 may decrease each year.  If in any year we have a principal balance outstanding on Term Note 5 in excess of the new credit limit, we must make a payment to FNBO such that the amount outstanding on Term Note 5 does not exceed the new credit limit.

 

Interest accrues on Term Note 5 at a variable interest rate of 0.5% above FNBO’s base rate.  This interest rate is subject to reductions based on ratios of our total indebtedness to our net worth.  Term Note 5 is subject to a minimum interest rate of 5% per year.  We are required to pay a quarterly fee of 3/8 percent on the unused portion of Term Note 5.  On March 31, 2010, we had $0 outstanding and $3,575,000 available to be drawn on this loan.  As of March 31, 2010, interest accrued on Term Note 5 at the minimum interest rate of 5% per year.

 

We also have a long-term debt obligation related to our purchase of an additional 135 acres of land pursuant to a land purchase contract.  The total cost of this additional land was $550,000.   As of March 31, 2010, we had $337,500 remaining to be paid pursuant to this land purchase contract.

 

We have a long-term debt obligation on a portion of a tax increment revenue bond series issued by Lake County, South Dakota of which we were the recipient of the proceeds.  The portion for which we are obligated is currently estimated at $200,000.  Taxes levied on our property are used for paying the debt service on the bonds.  We are obligated to pay any shortfall in debt service on the bonds should the property taxes collected not be sufficient to pay the entire debt service.  The interest rate on the bonds is 7.75% annually.  The bonds require semi-

 

21

Table of Contents

 

annual payments of interest on December 1 and June 1, in addition to a payment of principal on December 1 of each year. While our obligation under the guarantee is expected to continue until maturity in 2018, such obligation may cease at some point in time if the property on which the plant is located appreciates in value to the extent that Lake County is able to collect a sufficient amount in taxes to cover the principal and interest payments on the taxable bonds. The principal balance outstanding was approximately $1,370,000 as of March 31, 2010.

 

Subordinated Debt

 

During our 2009 fiscal year, we completed a private placement offering of subordinated unsecured debt securities.  The debt securities that we offered were not registered with the Securities and Exchange Commission and were offered pursuant to claimed exemptions from registration under state and federal securities laws.  We raised a total of $1,439,000 in subordinated debt through this offering.  Interest on the subordinated notes accrues at a fixed interest rate of 9% per year, which is the same rate we incur on our term loan with FNBO.  These subordinated debt securities have a two-year maturity from the date they were issued, with interest being paid on January 30th of each year and at maturity.

 

In addition, on July 24, 2009, we entered into a $700,000 subordinated secured loan with Guardian Eagle Investments, LLC.  The note accrues interest at a fixed rate of 9% per year and requires monthly installments of principal and interest.  This loan matures in April 2012.  The principal balance of the Guardian Eagle loan was approximately $560,000 as of March 31, 2010.  This loan, together with the $1,439,000 in subordinated unsecured debt securities discussed above were sufficient to meet FNBO’s requirement that we raise an additional $2,000,000 in subordinated debt.

 

We raised a total of $1,200,000 in subordinated loans to help offset the cost of our corn oil extraction equipment from two different parties.  We secured $1,000,000 in financing for the corn oil extraction equipment from the Rural Electric Economic Development, Inc. (REED) and $200,000 from the First District Development Company (FDDC).  We closed on these loans on May 22, 2009.  FNBO agreed that the $1,200,000 in additional financing we secured for our corn oil extraction equipment was sufficient to satisfy its requirements.  We agreed to pay 4.70% interest on the $1,000,000 loan from REED and 5.5% interest on the $200,000 FDDC loan.  Both loans are amortized over a period of five years and both loans require monthly payments.  The principal balance of the REED loan was approximately $850,000 as of March 31, 2010.  The principal balance of the FDDC loan was approximately $170,000 as of March 31, 2010.

 

Covenants

 

As of March 31, 2010, we were in compliance with all of our loan covenants.  We had difficulty satisfying our loan covenants at the end of our 2008 fiscal year and the beginning of our 2009 fiscal year due to unfavorable operating conditions in the ethanol industry at that time.  If these unfavorable operating conditions return, we may not be able to continue to meet our loan covenants or other terms and conditions of our credit agreements.  However, management’s current financial projections indicate that we will be in compliance with our financial covenants for the next 12 months and we expect to remain in compliance thereafter.  If we fail to comply with the terms of our credit agreements with FNBO, and FNBO refuses to waive the non-compliance, FNBO may require us to immediately repay all amounts outstanding on our loans.

 

Application of Critical Accounting Policies

 

Management uses estimates and assumptions in preparing our consolidated financial statements in accordance with generally accepted accounting principles.  These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and our reported revenues and expenses.  Of the significant accounting policies described in the notes to our consolidated financial statements, we believe that the following are the most critical:

 

Derivative Instruments

 

We enter into short-term cash grain, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices.  We enter into short-

 

22

Table of Contents

 

term forward, option and futures contracts for sales of ethanol to manage exposure to changes in energy prices.  All of our derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.

 

As part of our trading activity, we use futures and option contracts offered through regulated commodity exchanges to reduce our risk.  We are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using cash and futures contracts and options.

 

Unrealized gains and losses related to derivative contracts for corn and natural gas purchases are included as a component of cost of revenues and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements.  The fair values of derivative contracts are presented on the accompanying balance sheet as derivative financial instruments.

 

Off-Balance Sheet Arrangements.

 

We currently have no off-balance sheet arrangements.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are exposed to the impact of market fluctuations associated with commodity prices as discussed below.  We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We do not currently have any amounts outstanding on variable interest loans.  We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of derivative and hedging accounting.

 

Commodity Price Risk

 

We are exposed to market risk from changes in commodity prices.  Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process.  We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments.  In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate.  Although we believe our hedge positions accomplish an economic hedge against our future purchases, they are not designated as such for hedge accounting purposes, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged.  We are marking to market our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of revenues.

 

We have adjusted our hedging strategy in order to avoid significant long-term fixed price contracts for our corn and natural gas.  Further, our primary lender, has required us to provide periodic reports regarding our hedging activities along with changes to our risk management strategy.

 

The immediate recognition of hedging gains and losses can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.  We recorded a decrease to our cost of revenues of approximately $170,000 related to derivative instruments for the quarter ended March 31, 2010.  We recorded an increase to our cost of revenues of approximately $68,000 related to derivative instruments for the quarter ended March 31, 2009.  There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn or natural gas.  However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.

 

As of March 31, 2010, we had price protection for approximately 13% of our expected corn usage for the next twelve months using CBOT futures and options and over-the-counter option contracts.  As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments.  Depending on market movements, crop

 

23

Table of Contents

 

prospects and weather, these price protection positions may cause immediate adverse effects to our financial results, but are designed to produce long-term positive growth for us.

 

As of March 31, 2010, we do not have any commitments to purchase natural gas for our  2010 fiscal year.

 

A sensitivity analysis has been prepared to estimate our exposure to corn price risk. The following table presents the fair value of our derivative instruments as of March 31, 2010 and December 31, 2009 and the potential loss in fair value resulting from a hypothetical 10% adverse change in such price. The fair value of the positions is a summation of the fair values calculated by valuing each net position at quoted market prices as of the applicable date.  The results of this analysis, which may differ from actual results, are as follows:

 

		Fair Value			Effect of Hypothetical Adverse Change— Market Risk
March 31, 2010		$	1,746,695		$	174,670
December 31, 2009		$	3,562,370		$	356,237

 

ITEM 4T.  CONTROLS AND PROCEDURES.

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.

 

Our management, including our Chief Executive Officer (the principal executive officer), Scott Mundt, along with our Chief Financial Officer (the principal financial officer), Robbi Buchholtz, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2010.  Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.

 

For the fiscal quarter ended March 31, 2010, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.     OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS.

 

No material developments have occurred in the three month period ended March 31, 2010.

 

ITEM 1A.  RISK FACTORS.

 

There have been no material changes in the risks that we face since the date when we filed our annual report on Form 10-K.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

24

Table of Contents

 

ITEM 4.  (REMOVED AND RESERVED).

 

ITEM 5.  OTHER INFORMATION.

 

None.

 

ITEM 6.  EXHIBITS.

 

The following exhibits are filed as part of this report.

 

Exhibit No.		Exhibit		Filed Herewith		Incorporated by Reference
31.1		Certificate Pursuant to 17 CFR 240.13a-14(a)		X
31.2		Certificate Pursuant to 17 CFR 240.13a-14(a)		X
32.1		Certificate Pursuant to 18 U.S.C. Section 1350		X
32.2		Certificate Pursuant to 18 U.S.C. Section 1350		X

 

SIGNATURES

 

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

 

 

			LAKE AREA CORN PROCESSORS, LLC
Date:	May 17, 2010		/s/ Scott Mundt
			Scott Mundt
			Chief Executive Officer
Date:	May 17, 2010		/s/ Robbi Buchholtz
			Robbi Buchholtz
			Chief Financial Officer

 

25