ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
As of September 30, 2010 we had approximately 14,606 membership units outstanding and approximately 1,197 unit holders of record. There is no public trading market for our units.
However, we have established through Alerus Securities a Unit Trading Bulletin Board, a private online matching service, in order to facilitate trading among our members. The Unit Trading Bulletin Board has been designed to comply with federal tax laws and IRS regulations establishing an “alternative trading service,” as well as state and federal securities laws. Our Unit Trading Bulletin Board consists of an electronic bulletin board that provides a list of interested buyers with a list of interested sellers, along with their non-firm price quotes. The Unit Trading Bulletin Board does not automatically affect matches between potential sellers and buyers and it is the sole responsibility of sellers and buyers to contact each other to make a determination as to whether an agreement to transfer units may be reached. We do not become involved in any purchase or sale negotiations arising from our Unit Trading Bulletin Board and have no role in effecting the transactions beyond approval, as required under our operating agreement, and the issuance of new certificates. We do not give advice regarding the merits or shortcomings of any particular transaction. We do not receive, transfer or hold funds or securities as an incident of operating the Unit Trading Bulletin Board. We do not receive any compensation for creating or maintaining the Unit Trading Bulletin Board. In advertising our alternative trading service, we do not characterize Cardinal Ethanol as being a broker or dealer or an exchange. We do not use the Unit Trading Bulletin Board to offer to buy or sell securities other than in compliance with the securities laws, including any applicable registration requirements.
There are detailed timelines that must be followed under the Unit Trading Bulletin Board Rules and Procedures with respect to offers and sales of membership units. All transactions must comply with the Unit Trading Bulletin Board Rules, our operating agreement, and are subject to approval by our board of directors.
As a limited liability company, we are required to restrict the transfers of our membership units in order to preserve our partnership tax status. Our membership units may not be traded on any established securities market or readily traded on a secondary market (or the substantial equivalent thereof). All transfers are subject to a determination that the transfer will not cause the Company to be deemed a publicly traded partnership.
The following table contains historical information by fiscal quarter for the past two fiscal years regarding the actual unit transactions that were completed by our unit-holders during the periods specified. We believe this most accurately represents the current trading value of the Company’s units. The information was compiled by reviewing the completed unit transfers that occurred on our qualified matching service bulletin board during the quarters indicated.
The following table contains the bid and asked prices that were posted on the Company’s alternative trading service bulletin board and includes some transactions that were not completed. The Company believes the table above more accurately describes the trading value of its units as the bid and asked prices below include some offers that never resulted in completed transactions. The information was compiled by reviewing postings that were made on the Company’s alternative trading service bulletin board.
Our board of directors approved an estimated tax distribution of $60 per unit net of non-resident withholding taxes for out of state members, for a total distribution of $842,000, which was made in March 2010.
Except for restrictions imposed in our loan agreement our board of directors has complete discretion over the timing and amount of distributions to our unit holders. Provided that we are not in default on loan covenants, and with the prior approval of our lender, which may not be unreasonably withheld, our loan agreement allows us to make cash distributions at such times and in such amounts as will permit our unit holders to satisfy their income tax liability in a timely fashion. Our expectations with respect to our ability to make future distributions are discussed in greater detail in “Item 7
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This report contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions 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. We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results, 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 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
Cardinal Ethanol, LLC was formed on February 7, 2005 with the name of Indiana Ethanol, LLC. On September 27, 2005, we changed our name to Cardinal Ethanol, LLC. We were formed for the purpose of raising capital to develop, construct, own and operate a 100 million gallon per year ethanol plant in east central Indiana near Union City, Indiana. We began producing ethanol and distillers grains at the plant in November 2008.
Results of Operations
Comparison of Fiscal Year Ended September 30, 2010 and September 30, 2009
The following table shows the results of our operations and the percentage of revenues, cost of goods sold, operating expenses and other items to total revenues in our statement of operations for the fiscal years ended September 30, 2010 and 2009.
The following table shows additional data regarding production and price levels for our primary inputs and our primary products for the fiscal years ended September 30, 2010 and 2009.
Revenues
Our revenues are derived from the sale of our ethanol, distillers grains and corn oil. For the fiscal year ended September 30, 2010, we received approximately 85% of our revenue from the sale of fuel ethanol and approximately 14% of our revenue from the sale of distillers grains. Sales of corn oil represented less than 1% of our total sales. Comparatively, for the fiscal year ended September 30, 2009, we received approximately 83% of our revenue from the sale of fuel ethanol and approximately 17% of our revenue from the sale of distillers grains, and less than 1% of total sales from corn oil.
Ethanol
Our revenues from ethanol increased for our fiscal year ended September 30, 2010 as compared to our fiscal year ended September 30, 2009. Our increase in revenues for our 2010 fiscal year as compared to our 2009 fiscal year was the result of an increase in our ethanol production in 2010 and higher ethanol prices in 2010 on average per gallon as compared to 2009. We are currently operating at 118% of our name plate capacity.
During the fiscal year ended September 30, 2010, the market price of ethanol varied between approximately $1.57 per gallon and approximately $2.43 per gallon. Our average price per gallon of ethanol sold was approximately $1.74 for our 2010 fiscal year. During the fiscal year ended September 30, 2009, the market price of ethanol varied between approximately $1.36 per gallon and approximately $1.72 per gallon. Our average price per gallon of ethanol sold was approximately $1.58. During the fiscal year ended September 30, 2010, we sold approximately 109,986,000 gallons of ethanol as compared to our sale of 87,646,000 gallons of ethanol in 2009.
Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. Management anticipates that ethanol prices will remain steady during our 2011 fiscal year given the VEETC blenders’ credit has been renewed. The ethanol industry relies on the VEETC to reduce the cost of ethanol to fuel blenders. This results in increased demand for ethanol related to what is called discretionary blending. Discretionary blending is where fuel blenders use ethanol to increase octane in the fuels that are produced as well as reduce the price of gasoline. However, when the price of ethanol increases relative the price of gasoline, after taking into account the VEETC, the amount of discretionary blending by fuel blenders decreases thereby decreasing ethanol demand. Management anticipates ethanol production will be comparable during our 2011 fiscal year provided the ethanol industry can maintain current ethanol prices. However, in the event ethanol prices decrease significantly, we may be forced to reduce ethanol production during times when our operating margins are unfavorable. Further, our operating margins also depend on corn prices which can affect the spread between the price we receive for our ethanol and our raw material costs. In times when this spread decreases or becomes negative, we may reduce or terminate ethanol production until these spreads become more favorable.
A debate continues with respect to changes in the allowable percentage of ethanol blended with gasoline for use in standard (non-flex fuel) vehicles. Currently, ethanol is blended with conventional gasoline for use in standard vehicles to create a blend which is 10% ethanol and 90% gasoline. Estimates indicate that approximately 135 billion gallons of gasoline are sold in the United States each year. However, gasoline demand may be shrinking in the United States as a result of the global economic slowdown. Assuming that all gasoline in the United States is blended at a rate of 10% ethanol and 90% gasoline, the maximum demand for ethanol is 13.5 billion gallons per year. This is commonly referred to as the “blending wall,” which represents a theoretical limit where more ethanol cannot be blended into the national gasoline pool. This is a theoretical limit because it is believed that it would not be possible to blend ethanol into every gallon of gasoline that is used in the United States and it discounts the possibility of additional ethanol used in higher percentage blends such as E85 used in flex fuel vehicles. Many in the ethanol industry believe that we will reach this blending wall in 2009 or 2010. The RFS mandate requires that 36 billion gallons of renewable fuels be used each year by 2022 which equates to approximately 27% renewable fuels used per gallon of gasoline sold. In order to meet the RFS mandate and expand demand for ethanol, management believes higher percentage blends of ethanol must be utilized in conventional automobiles. Such higher percentage blends of ethanol have continued to be a contentious issue. Automobile manufacturers and environmental groups are lobbying against higher percentage ethanol blends. State and federal regulations prohibit the use of higher percentage ethanol blends in conventional automobiles and vehicle manufacturers have indicated that using higher percentage blends of ethanol in conventional automobiles would void the manufacturer’s warranty. Without increases in the allowable percentage blends of ethanol, demand for ethanol may not continue to increase. Our financial condition may be negatively affected by decreases in the selling price of ethanol resulting from ethanol supply exceeding demand.
Distillers Grains
Our revenues from distillers grains increased in fiscal year ended September 30, 2010 as compared to the same period in 2009. This increase was primarily the result of increased distillers grains sales in 2010 as compared to 2009 partially offset by a decrease in the average price per ton we received from our distillers grains in the fiscal year ended September 30, 2010 as compared to the fiscal year ended September 30, 2009.
During the fiscal year ended September 30, 2010, the market price of distillers grains varied between approximately $93 per ton and approximately $140 per ton. Our average price per ton of distillers grains sold was approximately $97.39. During the fiscal year ended September 30, 2009, the market price of distillers grains varied between approximately $76.64 per ton and approximately $148.15 per ton. Our average price per ton of distillers grains sold was approximately $103.53. We sold approximately 53,000 more tons of distiller grains during our 2010 fiscal year as compared to our 2009 fiscal year. During our fiscal year ended September 30, 2010, we sold approximately 321,000 tons of distillers grains compared to approximately 268,000 tons during our fiscal year ended September 30, 2009. Management attributes this increase in distillers grains sales with increased production of ethanol during the 2010 fiscal year. As we produce more ethanol, the total tons of distillers grains that we produce also increases. Offsetting the increase in distillers grains sales was a decrease in the average price we received per ton of distillers grains sold during our 2010 fiscal year compared to our 2009 fiscal year. During our 2009 fiscal year, uncertainty existed regarding the supply of distillers grains in the market due to the fact that many ethanol producers were reducing production during late 2008 and early 2009. Management believes this resulted in higher distillers grains prices due to increasing demand and lower supplies. Therefore, we experienced higher distillers grains prices during our 2009 fiscal year. Further management believes that distillers grains prices lag behind corn prices. As a result, distillers grains prices during our 2010 fiscal year may not have fully benefited from the recent increases in corn prices that we experienced in the second half of our 2010 fiscal year.
Management believes that the market prices for distiller’s grains change in relation to the prices of other animal feeds, such as corn and soybean meal. We primarily sell dried distillers grains nationally through our marketer. Given the recent increase in corn prices, we have experienced higher than normal distiller grains prices.
Corn Oil
Management anticipates continuing to increase our corn oil production during our 2011 fiscal year as we continue to refine the operation of our corn oil extraction equipment.
Cost of Goods Sold
Our cost of goods sold as a percentage of revenues was 87.13% for the fiscal year ended September 30, 2010 and 95.79% for the fiscal year ended September 30, 2009. Our two primary costs of producing ethanol and distillers grains are corn costs and natural gas costs.
Corn Costs
Our largest cost associated with the production of ethanol, distillers grains and corn oil is corn costs. During the fiscal year ended September 30, 2010 our corn costs increased as compared to our fiscal year ended September 30, 2009. This increase was the result of an increase in the amount of corn used by our plant in 2010 as compared to 2009 partially offset by a lower average price per bushel of ground corn in 2010 as compared to 2009.
During our fiscal year ended September 30, 2010, we used approximately 39,408,000 bushels of corn to produce our ethanol, distillers grain and corn oil as compared to approximately 32, 293,000 during our fiscal year ended September 30, 2009. Management attributes this increase in bushels of corn for our 2010 fiscal year to an increase in production of ethanol and distillers grains. During the fiscal year ended September 30, 2010, the market price of corn varied between approximately $3.40 per bushel and approximately $4.81 per bushel. Our average price per bushel of corn ground was approximately $3.85, without considering the effects of our risk management/hedging. During the fiscal year ended September 30, 2009, the market price of corn varied between approximately $3.41 per bushel and approximately $4.63 per bushel. Our average price per bushel of corn ground was approximately $4.04, without considering the effects of our risk management/hedging. Our corn costs associated with the beginning of our 2010 fiscal year were lower than normal. However, beginning in July corn prices increased as a result of uncertainty regarding weather factors that resulted in decreased corn yields in some parts of the United States. This led to fears regarding an imbalance between corn supply and demand which had a negative impact on corn prices. Management expects that corn prices will remain high through the first part of our 2011 fiscal year.
In the ordinary course of business, we entered into forward purchase contracts for our commodity purchases for various delivery periods through July 2012 for a total commitment of approximately $7,761,000. Approximately $1,638,000 of the forward corn purchases were with a related party. As of September 30, 2010 we also have open short positions for 5,425,000 bushels of corn on the Chicago Board of Trade and 3,570,000 gallons of ethanol on the New York Mercantile Exchange to hedge our forward corn contracts and corn inventory. Our corn and ethanol positions are forecasted to settle for various delivery periods through March 2012 and November 2010, respectively. For the fiscal year ended September 30, 2010, we recorded net losses on our corn and ethanol contracts of approximately $2,424,000. These losses were recorded against our cost of goods sold in the statement of operations. We expect continued volatility in the price of corn, which could significantly impact our cost of goods sold.
Natural Gas Costs
Our natural gas costs were higher during our fiscal year ended September 30l, 2010 as compared to our fiscal year ended September 30, 2009. This increase in cost of natural gas for our 2010 fiscal year as compared to our 2009 fiscal year was primarily the result of an increase in the amount of natural gas that we used at our plant and an increase in the average price per MMBTU of our natural gas.
During our fiscal year ended September 30, 2010 we purchased approximately 367,000 more MMBTU’s of natural gas than we purchased in our fiscal year ended September 30, 2009. During our fiscal year ended September 30, 2010 we purchased approximately 3,127,000 MMBTU’s of natural gas as compared to approximately 2,760,000 MMBTU’s during our fiscal year ended September 30, 2009. Management attributes this increase in natural gas to an increase in production. During the fiscal year ended September 30, 2010, the market price of natural gas varied between approximately $3.70 per MMBTU and approximately $6.10 per MMBTU. Our average price per MMBTU of natural gas was approximately $5.01. During the fiscal year ended September 30, 2009, the market price of natural gas varied between approximately $3.31 per MMBTU and approximately $8.028 per MMBTU. Our average price per MMBTU of natural gas was approximately $4.91.
Natural gas prices hit near historic lows during July through September 2010 based on high inventories nationwide. Management anticipates that natural gas prices will remain steady during our 2011 fiscal year unless demand significantly increases due to improved global economic conditions. Management anticipates that natural gas prices may rise slightly during the winter heating months.
Operating Expense
Our operating expenses as a percentage of revenues were 1.66% for the fiscal year ended September 30, 2010 and 2.22% for the same period in 2009. Our operating expenses have remained relatively steady for the fiscal year ended September 30, 2010 compared to the same periods of 2009. We had a decrease in professional fees expense offset by an increase in general and administrative costs. Operating expenses include salaries and benefits of administrative employees, insurance, taxes, professional fees and other general administrative costs. Our efforts to optimize efficiencies and maximize production may result in a decrease in our operating expenses on a per gallon basis. However, because these expenses generally do not vary with the level of production at the plant, we expect our operating expenses to remain steady.
Operating Income
Our income from operations for the fiscal year ended September 30, 2010 was approximately 11.21% compared to 1.99% of our revenues for the same period ended 2009. Our operating income for the fiscal year ended September 30, 2010 has increased due to increased revenues as a result of better operating margins. For the fiscal year ended September 30, 2010 operating income was primarily the net result of our revenues exceeding our costs of goods sold and our operating expenses.
Other Expense
Our other expense for the fiscal year ended September 30, 2010 was approximately 2.11% of our revenues, compared to 2.56% for the fiscal year ended September 30, 2009. Our other expense for the fiscal year ended September 30, 2010 and 2009 consisted primarily of interest expense.
Changes in Financial Condition for the Fiscal Year Ended September 30, 2010 and 2009
We experienced an increase in our current assets of approximately $7,240,000 at September 30, 2010 compared to September 30, 2009. We experienced an increase of approximately $7,317,000 in trade accounts receivable and an increase of $2,542,000 in inventory at September 30, 2010 compared to September 30, 2009. We also had cash of approximately $3,318,000 at September 30, 2010, compared to cash of approximately $7,265,000 at September 30, 2009 and prepaid and other current assets of approximately $965,000 at September 30, 2010, compared to approximately $847,000 at September 30, 2009.
We experienced an increase in our total current liabilities on September 30, 2010 compared to September 30, 2009. We experienced a decrease of approximately $1,992,000 in the current portion of our long term debt and capital lease obligations at September 30, 2010 compared to September 30, 2009. We experienced a decrease of approximately $269,000 for accrued expenses at September 30, 2010 compared to September 30, 2009; and an increase of approximately $1,710,000 in our accounts payable for corn purchases at September 30, 2010 compared to September 30, 2009. Such increase in our liabilities related to the current portion of our derivative instruments of approximately $1,520,000 at September 30, 2010 compared to $862,000 at September 30, 2009; and an increase in our non-corn accounts payable of approximately $2,154,000 at September 30, 2010 compared to $1,330,000 at September 30, 2009.
We experienced a decrease in our long-term liabilities as of September 30, 2010 compared to September 30, 2009. At September 30, 2010, we had approximately $56,188,000 outstanding in the form of long-term loans, compared to approximately $77,427,000 at September 30, 2009. This decrease is due to paying down our long term debt.
Comparison of Fiscal Years Ended September 30, 2009 and 2008
Because our plant was not operational until November 2008, subsequent to our 2008 fiscal year end, we do not include comparative information for the fiscal year ending September 30, 2008.
Critical Accounting Estimates
Management uses various estimates and assumptions in preparing our 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 the reported revenues and expenses. Accounting estimates that are the most important to the presentation of our results of operations and financial condition, and which require the greatest use of judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:
We enter into derivative instruments to hedge the variability of expected future cash flows related to interest rates. We do not typically enter into derivative instruments other than for hedging purposes. All derivative instruments are recognized on the September 30, 2010 balance sheet at their fair market value. Changes in the fair value of a derivative instrument that is designated as and meets all of the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income and reclassified into earnings as the underlying hedged items affect earnings.
At September 30, 2010, we had an interest rate swap with a fair value of $4,650,717 recorded as derivative instruments in the current and long-term liabilities section of the balance sheet and as a deferred loss in accumulated other comprehensive loss. We have an interest rate swap with a fair value of $4,131,549 for the same period ended in 2009. The interest rate swap is designated as a cash flow hedge.
As of September 30, 2010, we have open short positions for 5,425,000 bushels of corn and no long positions for corn on the Chicago Board of Trade and 3,570,000 gallons of ethanol on the New York Mercantile Exchange to hedge our forward corn contracts and corn inventory. These derivatives have not been designated as an effective hedge for accounting purposes. Corn and ethanol positions are forecasted to settle through March 2012 and November 2010, respectively. There may be offsetting positions that are not shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment testing for assets requires various estimates and assumptions, including an allocation of cash flows to those assets and, if required, an estimate of the fair value of those assets. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the assessment of the useful lives of property and equipment to be a critical accounting estimate.
We value our inventory at the lower of cost or market. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions which do not reflect unanticipated events and circumstances that may occur. In our analysis, we consider future corn costs and ethanol prices, break-even points for our plant and our risk management strategies in place through our derivative instruments and forward contracts. Given the significant assumptions required and the possibility that actual conditions will differ, we consider the valuation of the lower of cost or market on inventory to be a critical accounting estimate.
We enter forward contracts for corn purchases to supply the plant. These contracts represent firm purchase commitments which must be evaluated for potential losses. We have estimated a loss on these firm purchase commitments related to corn contracts in place at September 30, 2010 where the price of corn exceeds the market price and upon being used in the manufacturing process and eventual sale of products we anticipate losses. Our estimates include various assumptions including the future prices of ethanol, distillers grains and corn.
Liquidity and Capital Resources
Based on financial forecasts performed by our management, we anticipate that we will have sufficient cash from our current credit facilities and cash from our operations to continue to operate the ethanol plant for the next 12 months. We do not anticipate seeking additional equity or debt financing during our 2011 fiscal year. However, should we experience unfavorable operating conditions in the future, we may have to secure additional debt or equity sources for working capital or other purposes.
As a result of current conditions in the ethanol market that have presented favorable operating conditions, we were able to reduce our reliance on our revolving line of credit. This has allowed us greater liquidity and has increased the amount of funds that are available to us on our revolving line of credit. However, should we once again experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plant, we could have difficulty maintaining our liquidity.
The following table shows cash flows for the fiscal years ended September 30, 2010 and 2009:
Cash Flow From Operating Activities
We experienced an increase in net cash from operating activities for the fiscal year ended September 30, 2010 as compared to the same period in 2009. Overall net cash from operating activities increased due to the Company having net income of approximately $20,451,000 for the fiscal year ended September 30, 2010 as compared to a net loss of $951,000 for the same period in 2009.
Cash Flow Used in Investing Activities
We experienced a significant decrease in cash used in investing activities for our fiscal year ended September 30, 2010 as compared to 2009. This decrease was primarily a result of the cash used for construction activities which occurred during our fiscal year ended September 30, 2009.
Cash Flow Used For Financing Activities
We experienced a significant increase in cash used for financing activities in our fiscal year ended September 30, 2010 as compared to the same period in 2009. This is primarily a result of paying down our debt. We received no proceeds from our long term debt and made payments of approximately $19,239,000 for the fiscal year ended September 30, 2010. For the fiscal year ended September 30, 2009 we received proceeds from our long-term debt of approximately $24,807,000 and made payments of approximately $1,795,000.
The following table shows cash flows for the fiscal years ended September 30, 2009 and 2008:
Cash Flow Used in Operating Activities
We experienced an increase in net cash used in operating activities for the fiscal year ended September 30, 2009 as compared to the same period in 2008. Overall net cash used in operating activities increased due to the Company having accounts receivable and inventory as the plant became operational, miscellaneous receivables related to railroad refunds, and increased in prepaid expenses primarily related to insurance and natural gas purchases. The impact of these changes increased cash used for operations by approximately $11.9 million. This increase in cash used for operating activities, was offset by cash provided by operating activities of approximately $4.3 million from changes in accounts payable, accounts payable - corn, deposits on corn and accrued expenses. In addition, the Company began depreciating assets when they were placed in service during the first quarter of fiscal 2009, which resulted in an add back of approximately $8.1 million of cash provided by operating activities. During our 2009 fiscal year, our capital needs were being adequately met through cash from our operating activities and our credit facilities.
Cash Flow Used in Investing Activities
We experienced a significant decrease in cash used in investing activities for our fiscal year ended September 30, 2009 as compared to 2008. This decrease was primarily a result of the completion of our ethanol plant during the first quarter of our 2009 fiscal year. Our plant was nearly complete by the end of our fiscal year ending September 30, 2008, accordingly most of the cash used for construction activities occurred during our fiscal year ended September 30, 2008.
Cash Flow Provided by Financing Activities
We experienced a significant reduction in cash provided by financing activities in our fiscal year ended September 30, 2009 as compared to the same period in 2008 primarily as a result of the completion of plant construction in 2008.
Short Term and Long Term Debt Source
On December 19, 2006, we entered into a loan agreement with First National Bank of Omaha establishing a senior credit facility for the construction of our plant. The credit facility was in the amount of $96,000,000, consisting of an $83,000,000 construction note, a $10,000,000 revolving line of credit and a $3,000,000 letter of credit. We also entered into an interest rate swap agreement for $41,500,000 of the construction term loan in order to achieve a fixed rate on a portion of this loan.
In April 2009, the construction loan was converted into multiple term loans one of which was a $41,500,000 Fixed Rate Note, which will be applicable to the interest rate swap agreement, a $31,500,000 Variable Rate Note, and a $10,000,000 Long Term Revolving Note. The term loans have a maturity of five years with a ten-year amortization.
Line of Credit
In February 2010, we extended and amended the $10,000,000 revolving line of credit to expire in February 2011 and changed the interest rate charged on the short-term revolving line of credit to the greater of the three month LIBOR rate plus 400 basis points or 5%. The spread on the three month LIBOR rate will adjust down based on the Company meeting certain debt to net worth ratios, measured quarterly. Prior to this amendment, interest on the revolving line of credit was charged at the greater of the 1-month LIBOR rate plus 300 basis points or 5%. At September 30, 2010 and September 30, 2009, there were no outstanding borrowings on the revolving line of credit.
Fixed Rate Note
As indicated above, we have an interest rate swap agreement in connection with the Fixed Rate Note payable to our senior lender. This interest rate swap helps protect our exposure to increases in interest rates and the swap effectively fixes the rate on the loan at 8.11% until April 2014. As of September 30, 2010 and September 30, 2009 we had an interest rate swap with a fair value of approximately $4,651,000 and $4,132,000, respectively, recorded in current and long term liabilities.
The Fixed Rate Note will accrue interest at a rate equal to the three month LIBOR rate plus 300 basis points. We began repaying principal on the Fixed Rate Note beginning in July 2009. The outstanding balance on this note was approximately $37,996,000 and $40,817,000 at September 30, 2010 and September 30, 2009, respectively, and is included in current liabilities and long-term debt.
Variable Rate Note and Long Term Revolving Note
We are required to make quarterly payments of approximately $1,546,000 to be applied first to accrued interest on the long term revolving note, then to accrued interest on the variable rate note and finally to principal on the variable rate note. These payments began in July 2009 and continue through April 2014. In regards to the amendment in February 2010, the Company made mandatory excess cash flow payments of $1,000,000 in February 2010 and June 2010 that were applied to the principal of the variable rate note. The maximum availability on the long term revolving note is reduced by $250,000 each quarter. Interest on the variable rate note accrues at the greater of the three month LIBOR rate plus 300 basis points or 5%. At June 30, 2010, the interest rate was 5%. The spread over the three month LIBOR rate shall adjust down based on the Company meeting certain debt to net worth ratios, measured quarterly. Interest on the long term revolving note accrues at the greater of the three month LIBOR rate plus 300 basis points or 5%. At June 30, 2010, the interest rate was 5%. The spread over the three month LIBOR rate shall adjust down based on our compliance with certain debt to net worth ratios, measured quarterly. At September 30, 2010 and September 30, 2009, the balance on the variable rate note was approximately $24,420,000 and $30,728,000, respectively. At September 30, 2009 the balance on the long term revolving loan was $9,750,000. At September 30, 2010 there were no outstanding borrowings on the long term revolving note, as we repaid the long term revolving note in full. The maximum availability on the long term revolving note at September 30, 2010 was $8,750,000.
Corn Oil Extraction Note
Effective July 31, 2008, we amended our construction loan agreement to include a new loan up to the maximum amount of $3,600,000 for the purchase and installation of a corn oil extraction system and related equipment. On April 8, 2009, the corn oil extraction note converted into a Corn Oil Extraction Term Note, which accrues interest at a rate equal to 3-month LIBOR plus 300 basis points, or 5%, whichever is greater. The principal amount of the Corn Oil Extraction Term Note is payable in equal quarterly installments of $90,000, plus accrued interest, which we began paying in July 2009. As of September 30, 2010, we had $3,150,000 outstanding on our corn oil extraction loan. At September 30, 2009, we had $3,510,000 outstanding on the corn oil extraction loan.
Letter of Credit
We had one letter of credit outstanding as of June 30, 2010 and September 30, 2009 for $450,000, which was issued in August 2009 to replace our electrical services security deposit.
Covenants
The loans are secured by our assets and material contracts. In addition, during the term of the loans, we will be subject to certain financial covenants consisting of a minimum fixed charge coverage ratio, minimum net worth, and minimum working capital. We are required to maintain a fixed charge coverage ratio of no less than 1.25:1.0 for all periods after April 8, 2009. For the first fiscal quarter after April 8, 2009 our fixed charge coverage ratio is measured on a rolling one quarter basis, for the second fiscal quarter after April 8, 2009 our fixed charge coverage ratio is measured on a rolling two quarter basis, and for the third fiscal quarter after April 8, 2009 our fixed charge coverage ratio is measured on a rolling three quarter basis. Thereafter, our fixed charge coverage ratio will be measured on a rolling four quarter basis. Our fixed charge coverage ratio is calculated by comparing our “adjusted” EBITDA, meaning EBITDA less taxes, capital expenditures and allowable distributions, to our scheduled payments of the principal and interest on our obligations to our lender, other than principal repaid on our revolving loan and long term revolving note.
We are also required to maintain a minimum net worth of $65,000,000, measured annually at the end of each fiscal year. In subsequent years, our minimum net worth requirement will increase by the greater of $500,000 or the amount of undistributed earnings accumulated during the prior fiscal year.
We are also required to maintain a minimum amount of working capital, which is calculated as our current assets plus the amount available for drawing under our long term revolving note, less current liabilities. Beginning August 1, 2009 through November 30, 2009, our minimum working capital had to be $4,000,000. Beginning December 1, 2009 through April 30, 2010, our minimum working capital had to be $7,000,000. After May 1, 2010, our minimum working capital must be $10,000,000.
Our loan agreement requires us to obtain prior approval from our lender before making, or committing to make, capital expenditures in an aggregate amount exceeding $1,000,000 in any single fiscal year. In connection with the amendment done in February 2010, the bank increased the fiscal 2010 capital expenditure limit to $4,523,800. For fiscal year 2011, the capital expenditure amount will go back to $1,000,000. We may make distributions to our members to cover their respective tax liabilities. In addition, we may also distribute up to 70% of net income provided we maintain certain leverage ratios and are in compliance with all financial ratio requirements and loan covenants before and after any such distributions are made to our members.
We were in compliance with all covenants at September 30, 2010 and we anticipate that we will continue to meet these covenants through October 1, 2011.
We have working capital of approximately $11,337,000, excluding additional amounts available under our long term revolving note at September 30, 2010. Working Capital as defined by our loan agreement was approximately $21,607,000 at September 30, 2010. This includes the additional amounts available under our long term revolving note and the current portion of the interest rate swap. We anticipate that our current margins will be sufficient to generate enough cash flow to maintain operations, service our debt and comply with our financial covenants in our loan agreements. However, significant uncertainties in the market continue to exist. Due to current commodity markets, we may produce at negative margins and therefore, we will continue to evaluate our liquidity needs for the upcoming months.
We will continue to work with our lenders to try to ensure that the agreements and terms of the loan agreements are met going forward. However, we cannot provide any assurance that our actions will result in sustained profitable operations or that we will not be in violation of our loan covenants or in default on our principal payments. Presently, we are meeting our liquidity needs and complying with our financial covenants and the other terms of our loan agreements. Should market conditions change radically, and we violate the terms or covenants of our loan or fail to obtain a waiver of any such term or covenant, our primary lender could deem us in default of our loans and require us to immediately repay a significant portion or possibly the entire outstanding balance of our loans. Our lender could also elect to proceed with a foreclosure action on our plant.
Tax Abatement
In October 2006, the real estate that our plant was constructed on was determined to be an economic revitalization area, which qualified us for tax abatement. The abatement period is for a ten year term, with an effective date beginning calendar year end 2009 for the property taxes payable in calendar year 2010. The program allows for 100% abatement of property taxes beginning in year 1, and then decreases on a ratable scale so that in year 11 the full amount of property taxes are due and payable. We must apply annually and meet specified criteria to qualify for the abatement program.
Contractual Cash Obligations
In addition to our long-term debt obligations, we have certain other contractual cash obligations and commitments. The following tables provide information regarding our consolidated contractual obligations and approximate commitments as of September 30, 2010:
The long-term debt obligations in the table above include both principal and interest payments, excluding interest payments on the line of credit, at the interest rates applicable to the obligations as of September 30, 2010.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to the impact of market fluctuations associated with interest rates and 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 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. We used derivative financial instruments to alter our exposure to interest rate risk. We entered into an interest rate swap agreement that we designated as a cash flow hedge.
Interest Rate Risk
We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from holding a revolving line of credit and a term loan which bear variable interest rates. Specifically, we have approximately $28,000,000 outstanding in variable rate, long-term debt as of September 30, 2010. Our interest rate on our variable rate, long-term debt has a minimum interest rate of 5%. Currently, our interest rate on our variable rate, long-term debt is at 5%.
Below is a sensitivity analysis we prepared regarding our income exposure to changes in interest rates. The sensitivity analysis below shows the anticipated effect on our income from a 10% adverse change in interest rates for a one year period.
In addition, we hold a revolving line of credit which bears a variable interest rate. At September 30, 2010, we have no outstanding borrowings on our revolving line of credit. However, we may borrow on this line of credit at any time which would expose us to interest rate market risk. The specifics of each note are discussed in greater detail in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources.”
We manage our floating rate debt using an interest rate swap. We entered into a fixed rate swap to alter our exposure to the impact of changing interest rates on our results of operations and future cash outflows for interest. We use interest rate swap contracts to separate interest rate risk management from the debt funding decision. The interest rate swaps held by us as of September 30, 2010 qualified as a cash flow hedge. For this qualifying hedge, the effective portion of the change in fair value is recognized through earnings when the underlying transaction being hedged affects earnings, allowing a derivative’s gains and losses to offset related results from the hedged item on the income statement. As of September 30, 2010 our interest rate swap had a fair value of approximately $4,651,000.
Commodity Price Risk
We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distiller’s grains, 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 and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting 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.
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 prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us. As of September 30, 2010, we had price protection in place for approximately 18.5% of our anticipated corn needs for the next 12 months. In addition, we had price protection in place for approximately 4% of our natural gas needs for the next 12 months.
A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of September 30, 2010, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from September 30, 2010. The results of this analysis, which may differ from actual results, are approximately as follows:
Liability Risk
We participate in a captive reinsurance company (the “Captive”). The Captive reinsures losses related to worker’s compensation, commercial property and general liability. Premiums are accrued by a charge to income for the period to which the premium relates and is remitted by our insurer to the captive reinsurer. The Captive reinsures catastrophic losses in excess of a predetermined amount. Our premiums are structured such that we have made a prepaid collateral deposit estimated for losses related to the above coverage. The Captive insurer has estimated and collected an amount in excess of the estimated losses but less than the catastrophic loss limit insured by the Captive. We cannot be assessed in excess of the amount in the collateral fund.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Members of Cardinal Ethanol, LLC
We have audited the accompanying balance sheets of Cardinal Ethanol, LLC as of September 30, 2010 and 2009, and the related statements of operations, members’ equity, and cash flows for each of the fiscal years in the three year period ended September 30, 2010. Cardinal Ethanol, LLC’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cardinal Ethanol, LLC as of September 30, 2010 and 2009, and the results of its operations and its cash flows for each of the fiscal years in the three year period ended September 30, 2010, in conformity with accounting principles generally accepted in the United States of America.
Minneapolis, Minnesota
December 23, 2010
CARDINAL ETHANOL, LLC
Balance Sheet
Notes to Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC
Condensed Statements of Operations
Notes to Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC
Statements of Cash Flows
Notes to Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC
Statements of Cash Flows
Notes to Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC
Statement of Changes in Members’ Equity
Notes to Financial Statements are an integral part of this Statement.
CARDINAL ETHANOL, LLC
Notes to Financial Statements
September 30, 2010 and 2009
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Cardinal Ethanol, LLC, (an Indiana Limited Liability Company) was organized in February 2005 to pool investors to build a 100 million gallon annual production ethanol plant near Union City, Indiana. The Company was formed on February 7, 2005 to have a perpetual life. The Company was originally named Indiana Ethanol, LLC and changed its name to Cardinal Ethanol, LLC effective September 27, 2005. The construction of the ethanol plant was substantially completed in November 2008 and began operations at that time. Prior to November 2008, the Company was in the development stage with its efforts being principally devoted to organizational activities and construction of the plant.
Fiscal Reporting Period
The Company has adopted a fiscal year ending September 30 for reporting financial operations. Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others, the useful lives of fixed assets, allowance for doubtful accounts, the valuation of basis and delay price contracts on corn purchases, the valuation of derivatives, inventory, fixed assets, and inventory purchase commitments. Actual results may differ from previously estimated amounts, and such differences may be material to the financial statements. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made.
Cash
The Company maintains its accounts primarily at two financial institutions. At times throughout the year the Company’s cash balances may exceed amounts insured by the Federal Deposit Insurance Corporation.
Accounts Receivable
Credit terms are extended to customers in the normal course of business. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral.
Accounts receivable are recorded at their estimated net realizable value. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company’s credit terms. Amounts considered uncollectible are written off. The Company’s estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any. At September 30, 2010 and September 30,2009, the Company was of the belief that such amounts would be collectible and thus an allowance was not considered necessary. It is at least possible this estimate will change in the future.
Inventories
Inventories are stated at the lower of cost or market. Inventories consist of raw materials, work in process, finished goods and parts. Corn is the primary raw material. Finished goods consist of ethanol, dried distiller grains and corn oil. Cost for substantially all inventory is determined using the lower of (average) cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over estimated useful lives by use of the straight line depreciation method. Maintenance and repairs are expensed as incurred; major improvements and betterments are capitalized. Depreciation is computed using the straight-line method over the following useful lives:
As a result of management’s review of depreciable lives and analysis of information available in the industry, on April 1, 2009, the Company increased its estimate of the useful lives of certain processing equipment from 15 years to 20 years. As a result of this change the Company recorded approximately $520,000 less in depreciation expense for the fiscal year ended September 30, 2009.
Long-Lived Assets
The Company reviews its long-lived assets, such as property, plant, and equipment and financing costs, subject to depreciation and amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
In November 2008, the Company completed construction of its ethanol production facilities, with installed capacity of 100 million gallons per year. The carrying value of these facilities at September 30, 2010 was approximately $133 million and approximately $137 million at September 30, 2009. In accordance with the Company’s policy for evaluating impairment of long-lived assets described above, management has evaluated the recoverability of the facility based on projected future cash flows from operations over the facility’s estimated useful life. Management has determined that the projected future undiscounted cash flows from operations of this facility exceeds its carrying value at September 30, 2010 and September 30, 2009 therefore, no impairment loss was indicated or recognized. In determining the projected future undiscounted cash flows, the Company has made significant assumptions concerning the future viability of the ethanol industry, the future price of corn in relation to the future price of ethanol and the overall demand in relation to production and supply capacity. Given the recent completion of the facilities, replacement cost would likely approximate the carrying value of the facilities. However, there have been recent transactions between independent parties to purchase plants at prices substantially below the carrying value of the facilities, some of the facilities have been in bankruptcy and may not be representative of transactions outside of bankruptcy. Given these circumstances, should management be required to adjust the carrying value of the facilities to fair value at some future point in time, the adjustment could be significant and could significantly impact the Company’s financial position and results of operations. No adjustment has been made in these financial statements for this uncertainty.
Financing Costs
Costs associated with the issuance of loans are classified as financing costs. Financing costs are amortized over the term of the related debt by use of the effective interest method, beginning when the Company draws on the loans. Amortization for the years ended September 30, 2010 and 2009 was approximately $195,000 and $226,000, respectively.
Grants
The Company recognizes grant proceeds as other income upon complying with the conditions of the grant. For reimbursements of incremental expenses (expenses the Company otherwise would not have incurred had it not been for the grant), the grant proceeds are recognized as a reduction of the related expense. For reimbursement of capital expenditures, the grants are recognized as a reduction of the basis of the asset upon complying with the conditions of the grant.
Revenue Recognition
The Company generally sells ethanol and related products pursuant to marketing agreements. Revenues from the production of ethanol and the related products are recorded when the customer has taken title and assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. The Company believes that there are no ethanol sales, during any given month, which should be considered contingent and recorded as deferred revenue. The Company’s products are sold FOB shipping point.
In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, marketing fees, commissions and freight due to the marketers are deducted from the gross sales price at the time incurred. Commissions were approximately $2,500,000 and $1,950,000 for the years ended September 30, 2010 and 2009, respectively. Freight was approximately $10,280,000 and $12,170,000 for the years ended September 30, 2010 and 2009, respectively. Revenue is recorded net of these commissions and freight as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products.
Derivative Instruments
From time to time the Company enters into derivative transactions to hedge its exposures to commodity price fluctuations. The Company is required to record these derivatives in the balance sheet at fair value.
In order for a derivative to qualify as a hedge, specific criteria must be met and appropriate documentation maintained. Gains and losses from derivatives that do not qualify as hedges, or are undesignated, must be recognized immediately in earnings. If the derivative does qualify as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Changes in the fair value of undesignated derivatives are recorded in earnings.
Additionally, the Company is required to evaluate its contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted 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 accounting and reporting requirements, and therefore, are not marked to market in our financial statements.
Fair Value of Financial Instruments
The Company follows guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. On January 1, 2009, the Company adopted guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the consolidated financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
•
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
•
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
•
Level 3 inputs are unobservable inputs for the asset or liability.
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximates fair value at September 30, 2010 and 2009 due to the short maturity nature of these instruments. The fair value of the Company’s debt approximates its carrying value due to its variable interest rate. The fair value of derivative instruments is disclosed in Note 7.
Capitalization of interest
The Company capitalizes interest cost on construction in progress and capitalized development costs as required for the portion of interest that is attributable to the historical cost of developing or constructing the asset. The Company capitalized approximately $1,921,000 of interest through completion of construction in 2009. These costs have been included in fixed assets as of September 30, 2010 and 2009.
Environmental Liabilities
The Company’s operations are subject to environmental laws and regulations adopted by various governmental entities in the jurisdiction in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its location. Accordingly, the Company 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 the liability is probable and the costs can be reasonably estimated. No liabilities were recorded at September 30, 2010 or 2009.
Net Income (Loss) per Unit
Basic net income (loss) per unit is computed by dividing net income (loss) by the weighted average number of members’ units outstanding during the period. Diluted net income (loss) per unit is computed by dividing net income (loss) by the weighted average number of members’ units and members’ unit equivalents outstanding during the period. There were no member unit equivalents outstanding during the periods presented; accordingly, the Company’s basic and diluted net income (loss) per unit are the same.
Income Taxes
Cardinal Ethanol LLC is treated as a partnership for federal and state income tax purposes and generally does not incur income taxes. Instead, their income or losses are included in the income tax returns of the members and partners. Accordingly, no provision or liability for federal or state income taxes has been included in these financial statements. Differences between the financial statement basis of assets and tax basis of assets is related to capitalization and amortization of organization and start-up costs for tax purposes, whereas these costs are expensed for financial statement purposes. In addition, the Company uses the modified accelerated cost recovery system method (MACRS) for tax depreciation instead of the straight-line method that is used for book depreciation, which also causes temporary differences.
2. CONCENTRATIONS
One major customer accounted for approximately 93% of the outstanding accounts receivable balance at September 30, 2010 and 84% of the balance at September 30. 2009. This same customer also accounted for approximately 85% and 84% of revenue for the year ended September 30, 2010 and 2009, respectively.
3. INCOME TAXES
The differences between financial statement basis and tax basis of assets and liabilities at September 30, 2010 and 2009 are as follows:
4. MEMBERS’ EQUITY
The Company has one class of membership units, which include certain transfer restrictions as specified in the operating agreement and pursuant to applicable tax and securities laws. Income and losses are allocated to all members based upon their respective percentage of units held.
In March of 2010, the Company made a distribution of $60.00 per unit for a total of $876,360.
5. INVENTORIES
Inventories consist of the following as of September 30, 2010 and 2009:
For the fiscal year ended September 30 2009, the Company recorded a loss of approximately $1,595,000 related to inventory where the market value was less than the cost basis, attributable primarily to decreases in market prices of corn and ethanol for the inventory on hand. The loss was recorded in cost of goods sold in the statement of operations. No market value adjustments were required during the fiscal year ended September 30, 2010.
In the ordinary course of business, the Company enters into forward purchase contracts for its commodity purchases and sales. At September 30, 2010, the Company has forward corn purchase contracts for various delivery periods through July 2012 for a total commitment of approximately $34,084,000. Approximately $7,027,000 of the forward corn purchases were with a related party. At September 30, 2009, the Company had forward corn purchase contracts for various delivery periods through July 2010 of approximately $5,417,000 with approximately $810,000 due to a related party. During 2010, the Company began obtaining part of its natural gas needs by using forward purchase contracts. At September 30, 2010, the Company had forward natural gas purchase contracts with various delivery periods through December 2010 for a total commitment of approximately $2,027,000. Given the uncertainty of future ethanol and corn prices, the Company could incur a loss on the outstanding corn contracts in future periods. Management has evaluated these forward contracts using a methodology similar to that used in the impairment evaluation with respect to inventory and has determined that no loss has been incurred on these forward contracts at September 30, 2010 and 2009.
6. DERIVATIVE INSTRUMENTS
As of September 30, 2010 and 2009, the Company has entered into corn derivative instruments and interest rate swap agreements, which are required to be recorded as either assets or liabilities at fair value in the statement of financial position. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the derivative instrument and the related change in value of the underlying hedged item. The Company must designate the hedging instruments based upon the exposure being hedged as a fair value hedge, a cash flow hedge or a hedge against foreign currency exposure. The Company formally documents, designates, and assesses the effectiveness of transactions that receive hedge accounting initially and on an on-going basis. The Company does not assess the effectiveness of hedges on an ongoing basis when those hedges were originally designated under the shortcut method.
Commodity Contracts
The Company enters into commodity-based derivatives, for corn and ethanol, in order to protect cash flows from fluctuations caused by volatility in commodity prices to protect gross profit margins from potentially adverse effects of market and price volatility on commodity based purchase commitments where the prices are set at a future date. These derivatives are not designated as effective hedges for accounting purposes. For derivative instruments that are not accounted for as hedges, or for the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Commodity derivative changes in fair market value are included in costs of goods sold.
The table below shows the underlying quantities of corn and ethanol resulting from the short (selling) positions and long (buying) positions that the Company had to hedge its forward corn contracts and corn inventory. Corn positions are traded on the Chicago Board of Trade and ethanol positions are traded on the New York Mercantile Exchange. These derivatives have not been designated as an effective hedge for accounting purposes. Corn and ethanol derivatives are forecasted to settle for various delivery periods through March 2012 and November 2010, respectively as of September 30, 2010.
The following table indicates the bushels of corn under contract as of September 30, 2010 and 2009:
The following table indicates the gallons of ethanol under contract as of September 30, 2010 and 2009:
Interest Rate Swap
The Company manages its floating rate debt using an interest rate swap. The Company entered into a fixed rate swap to alter its exposure to the impact of changing interest rates on its results of operations and future cash outflows for interest. Fixed rate swaps are used to reduce the Company’s risk of the possibility of increased interest costs. Interest rate swap contracts are therefore used by the Company to separate interest rate risk management from the debt funding decision.
At September 30, 2010 and 2009, the Company had approximately $38,000,000 and $41,000,000 respectively of notional amount outstanding in the swap agreement that exchange variable interest rates (LIBOR) for fixed interest rates over the terms of the agreements and are designated as cash flow hedges of the interest rate risk attributable to forecasted variable interest payments. The effective portion of the fair value gains or losses on this swap is included as a component of accumulated other comprehensive income loss.
The interest rate swaps held by the Company as of September 30, 2010 and 2009 qualified as a cash flow hedge. For this qualifying hedge, the effective portion of the change in fair value is recognized through earnings when the underlying transaction being hedged affects earnings, allowing a derivative’s gains and losses to offset related results from the hedged item on the income statement.
The following tables provide details regarding the Company’s derivative financial instruments at September 30, 2010 and 2009:
2010:
2009:
The following tables provide details regarding the gains and (losses) from the Company’s derivative instruments in other comprehensive income and statement of operations at September 30, 2010:
7. FAIR VALUE MEASUREMENTS
The following table provides information on those assets measured at fair value on a recurring basis as of September 30, 2010 and 2009:
We determine the fair value of the interest rate swap shown in the table above by using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each instrument. The analysis reflects the contractual terms of the swap agreement, including the period to maturity and uses observable market-based inputs and uses the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. We determine the fair value of commodity derivative instruments by obtaining 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 Chicago Board of Trade and New York Mercantile Exchange markets.
8. BANK FINANCING
On December 19, 2006, the Company entered into a definitive loan agreement with a financial institution for a construction loan of up to $83,000,000, a short-term revolving line of credit of $10,000,000 and letters of credit facility of $3,000,000. In connection with this agreement, the Company also entered into an interest rate swap agreement fixing the interest rate on $41,500,000 of debt. In April 2009, the construction loan was converted into three separate term loans: a fixed rate note, a variable rate note, and a long term revolving note. The fixed rate note is applicable to the interest rate swap agreement. The term loans have a maturity of five years with a ten-year amortization.
Line of Credit
In December 2009, the Company extended the short-term $10,000,000 revolving line of credit to February 2010, at which time the line was further extended to February 2011 which is subject to certain borrowing base limitations. As of September 30, 2010, interest on the short-term revolving line of credit will be charged at the greater of the 3-month LIBOR rate plus 400 basis points or 5%. As of September 30, 2009, interest on the short-term revolving line of credit will be charged at the greater of the 1-month LIBOR rate plus 300 basis points or 5%. There were no outstanding borrowings on the line of credit at September 30, 2010 or 2009.
Fixed Rate Note
The Company has an interest rate swap contract in connection with the note payable to its bank that contains a variable rate. The agreement requires the Company to hedge this note principal balance, up to $41,500,000, and matures on April 8, 2014. The variable interest rate is determined quarterly based on the 3-month LIBOR rate plus 300 basis points. The fixed interest rate set by the swap is 8.11%.
The fair value of the interest rate swap at September 30, 2010 and 2009 was approximately $4,651,000 and $4,132,000 respectively and is included in current and long term liabilities on the balance sheet (Note 6). The Company is required to make quarterly principal and accrued interest payments commencing July 2009 through April 2014. Although the Company may prepay this note, it would be subject to prepayment penalties to make the bank whole if it did so. The outstanding balance of this note was approximately $37,996,000 and $40,817,000 at September 30, 2010 and 2009, respectively, and is included in current liabilities and long-term debt.
Variable Rate Note and Long Term Revolving Note
The Company is required to make quarterly payments of approximately $1,546,000 to be applied first to accrued interest on the long term revolving note, then to accrued interest on the variable rate note, then $250,000 on the principle of the long term revolving note and finally to principal on the variable rate note which commenced July 2009 and continuing through April 2014. Once the variable rate note is paid in full, the payment shall be applied first to accrued interest on the long term revolving note and then to the principal outstanding on the long term revolving note until the balance is paid in full. Interest on the variable rate note accrues at the greater of the 3-month LIBOR rate plus 300 basis points or 5%. At September 30, 2010 and 2009, the interest rate was 5%. Interest on the long term revolving note accrues at the greater of the 3-month LIBOR rate plus 300 basis points or 5%. At September 30, 2010 and 2009, the interest rate was 5%. The spread over the 3-month LIBOR rate shall adjust down based on the Company meeting certain debt to net worth ratios, measured quarterly. At September 30, 2010, the balance on the variable rate note and the long term revolving note was approximately $24,420,000 and $0 respectively. At September 30, 2009, the balance on the variable rate note and the long term revolving note was approximately $30,728,000 and $9,750,000, respectively.
Corn Oil Extraction Note
In July 2008, the Company and the financial institution extended the construction loan for an additional $3,600,000 to be used for the installation of a corn oil extraction system and related equipment. In April 2009, the Corn Oil Extraction note was converted into a term note with interest at the greater of the 3-month LIBOR rate plus 300 basis points, or 5%, provided no event of default exists. Principal will be due in quarterly installments of $90,000, plus accrued interest, commencing in July 2009 through April 2014. The interest shall adjust based on the Company meeting certain targets, measured quarterly. At September 30, 2010 and 2009, the balance on the corn oil extraction note was $3,150,000 and $3,510,000, respectively.
Letters of Credit
At September 30, 2009, the Company had one letter of credit outstanding for $450,000. The financial institution issued the letter of credit in August 2009 to replace an electrical services security deposit (Note 10).
These loans are subject to protective covenants, which restrict distributions and require the Company to maintain various financial ratios, are secured by all business assets, and require additional loan payments based on excess cash flow. The covenants went into effect in April 2009. The Company was in compliance with all covenants at September 30, 2010 and 2009. The Company anticipates they will meet these covenants through October 1, 2010. A portion of the note will be subject to an annual, mandatory prepayment, based on excess cash flow, capped at $4,000,000 annually and $12,000,000 over the life of the loan. For the year ended September 30, 2010, the calculated prepayment of excess cash flow under the terms of the loan is approximately $2,900,000. The Company paid installments of $1,000,000 in March and June 2010. The remaining balance is due by January 28, 2011.
Long-term debt, as discussed above, consists of the following at September 30, 2010 and 2009:
The estimated maturities of long-term debt at September 30, 2010 are as follows:
9. LEASES
In July 2008, the Company entered into a five-year lease agreement with an unrelated party for 180 covered hopper cars. The Company is paying approximately $480 per car per month beginning in November 2008 through October 2013. In addition, a surcharge of $0.03 per mile will be assessed for each mile in excess of 36,000 miles per year a car travels.
The company leases equipment from an unrelated party under a capital lease at an implicit rate of 5.49%. Lease payments began in November 2008 and are payable in monthly installments of $744 through October 2012. As of September 30, 2010 and 2009, costs of leased capital assets were recorded in machinery and equipment for $31,889.
The Company leases equipment under non-cancelable long-term operating leases. These leases have initial terms ranging from 4 to 6 years, with minimum monthly payments of $4,000 at September 30, 2010 and 2009.
At September 30, 2010, the Company had the following commitments for payments of rentals under leases which at inception had a non-cancelable term of more than one year:
10. COMMITMENTS AND CONTINGENCIES
Corn Procurement
In July 2008, the Company entered into an agreement with an unrelated party to procure 100% of the corn to be used as feedstock at the Company’s ethanol production facility. The Company pays a monthly agency fee of $41,667 for the first two years. In following years, the agency fee shall be equal to an amount per bushel of corn delivered subject to an annual minimum amount. The initial term of the agreement is for five years to automatically renew for successive three-year periods unless properly terminated by one of the parties. In October 2008, the ethanol plant began taking delivery of corn for operations.
Marketing Agreement
The Company entered into an agreement with an unrelated company for the purpose of marketing and selling all the distillers grains the Company is expected to produce. The buyer agrees to remit a fixed percentage rate of the actual selling price to the Company for distiller’s dried grain solubles and wet distiller grains. The agreement may be terminated by either party at its unqualified option, by providing written notice of not less than 120 days to the other party.
The Company entered into an agreement with an unrelated company to sell all of the ethanol the Company produces at the plant. The Company agrees to pay a commission of a fixed percent of the net purchase price for marketing and distribution. In July 2009, the initial term of the agreement was extended to eight years and the commission increased in exchange for reducing the payment terms from 20 days to 7 days after shipment.
Utility Agreement
The Company entered into a natural gas services contract with an initial term of ten years and automatic renewals for up to three consecutive one year periods. Under the contract, the Company agrees to pay a fixed transportation charge per therm delivered for the first five years. For the remaining five years, the fixed transportation charge will be increased by the compounded inflation rate as determined by the Consumer Price Index. The contract commenced in November 2008 when plant operations began.
Software License Agreement
In October 2009, the Company entered into a license agreement effective September 30, 2009 for operational software to improve production and reduce costs. The total charge for the license to use the software is $1,825,000 payable over time as certain milestones are achieved. The Company will incur approximately $100,000 in additional costs in connection with this agreement as well as costs related to an annual maintenance fee. As of September 30, 2010, approximately $1,559,000 in costs have been incurred and included in construction in process on the balance sheet. No costs were incurred in the period ended September 30, 2009.
Development Agreement
In September 2007, the Company entered into a development agreement with Randolph County Redevelopment Commission (“the Commission”) to promote economic development in the area. Under the terms of this agreement, beginning in January 2008 through December 2028, the money the Company pays toward property tax expense is allocated to an expense and an acquisition account. The funds in the acquisition account can be used by the Commission to purchase equipment, at the Company’s direction, for the plant. At September 30, 2010 and 2009, there is approximately $109,000 in this account. However, as the Company does not have title to or control over the funds in the acquisition account, no amounts have been recorded in the balance sheet relating to this account.
Tax abatement
In October 2006, the real estate that the plant was developed on was determined to be an economic revitalization area, which qualified the Company for tax abatement. The abatement period is for a 10 year term, with an effective date beginning calendar year end 2009 for the property taxes payable in calendar year 2010. The program allows for 100% abatement of property taxes beginning in year 1, and then decreases on a ratable scale so that in year 11 the full amount of property taxes are due and payable. The Company must apply annually and meet specified criteria to qualify for the abatement program.
Legal Proceedings
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. While the ultimate outcome of these matters is not presently determinable, it is in the opinion of management that the resolution of outstanding claims will not have a material adverse effect on the financial position or results of operations of the Company. Due to the uncertainties in the settlement process, it is at least reasonably possible that management’s view of outcomes will change in the near term.
11. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan available to all of its qualified employees. The Company contributes up to 100% of the contributions of the employee up to 3% of the eligible salary of each employee. In order to receive a contribution, the employee must have worked 1,000 hours in the plan year and be employed as of the last day of the calendar year. The Company contributed approximately $29,503 and $8,500 to the defined contribution plan during the years ended September 30, 2010 and 2009, respectively.
12. ACCUMULATED OTHER COMPREHENSIVE LOSS AND COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists of changes in the fair value of derivative instruments that are designated as and meet all of the required criteria for a cash flow hedge. Changes in accumulated other comprehensive loss all related to the interest rate swap for the years ended September 30, 2010 and 2009 were as follows:
The statement of comprehensive income (loss) for the years ending September 30, 2010 and 2009 were as follows:
13. UNCERTAINTIES IMPACTING THE ETHANOL INDUSTRY AND OUR FUTURE OPERATIONS
The Company has certain risks and uncertainties that it experiences during volatile market conditions, which can have a severe impact on operations. The Company began operations in November 2008. The Company’s revenues are derived from the sale and distribution of ethanol, distillers grains and corn oil to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers and from purchases on the open market. Ethanol sales average approximately 85% of total revenues and corn costs average 78% of total cost of goods sold.
The Company’s operating and financial performance is largely driven by prices at which the Company sells ethanol and distillers grains and the cost of corn. The price of ethanol is influenced by factors such as prices of supply and demand, weather, government policies and programs, and unleaded gasoline and the petroleum markets, although since 2005 the prices of ethanol and gasoline began a divergence with ethanol selling for less than gasoline at the wholesale level. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The Company’s largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, weather, government policies and programs. The Company’s risk management program is used to protect against the price volatility of these commodities.
Management has considered expense reductions that can be made in the upcoming months related to reduced labor hours, analysis of vendor costs, efficiency of chemical usage, inventory monitoring for corn, and the possibility of sharing spare part inventories with other ethanol plants. In addition, management is continually evaluating improved technologies to either earn additional revenues or reduce operating costs. Management has entered into a software license agreement to improve production and reduce costs for the upcoming years (Note 10).
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary quarterly results are as follows:
The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these periods presented have been included.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Boulay, Heutmaker, Zibell & Co., P.L.L.P. has been our independent auditor since the Company’s inception and is the Company’s independent auditor at the present time. The Company has had no disagreements with its auditors.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Management of Cardinal Ethanol is responsible for maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits 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. In addition, the disclosure controls and procedures must ensure that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and other required disclosures.
Our management, including our Chief Executive Officer (the principal executive officer), Jeff Painter, along with our Chief Financial Officer (the principal financial officer), William Dartt, have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2010. Based on this review and evaluation, these officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission; and to ensure that the information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
Inherent Limitations Over Internal Controls
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s Annual Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of September 30, 2010.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. As we are a non-accelerated filer, management’s report is not subject to attestation by our registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were numerous and substantial improvements in our internal control over financial reporting during the fourth quarter of our 2010 fiscal year, which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In February 2010, William Dartt was appointed as the Company’s Chief Financial Officer and Principal Financial and Accounting Officer. We believe this management change has significantly and progressively improved our controls during each reporting period during our 2010 fiscal year in the areas of reconciliation of significant accounts, review of top sided journal entries and segregation of duties in financial reporting.
None.
PART III.
Pursuant to General Instruction E(3), we omit Part III, Items 10, 11, 12, 13 and 14 and incorporate such items by reference to an amendment to this Annual Report on Form 10-K or to a definitive proxy statement to be filed with the Securities and exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report (September 30, 2010).
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated by reference from the definitive proxy statement for our 2011 Annual Meeting of Members to be filed with the Securities and Exchange Commission within 120 days after the end of our 2010 fiscal year. This proxy statement is referred to in this report as the 2011 Proxy Statement.
The information required by this Item is incorporated by reference from the 2011 Proxy Statement.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MEMBER MATTERS.
The information required by this Item is incorporated by reference from the 2011 Proxy Statement.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference from the 2011 Proxy Statement.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference from the 2011 Proxy Statement.
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits and financial statements are filed as part of, or are incorporated by reference into, this report:
(1) Financial Statements
The financial statements appear beginning at page of this report.
(2) Financial Statement Schedules
All supplemental schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
(3) Exhibits
(+)
Confidential Treatment Requested.
(X)
Filed herewith
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: December 21, 2010
/s/ Robert Davis
Robert Davis
Chairman and Director
Date: December 21, 2010
/s/ Dale Schwieterman
Dale Schwieterman
Treasurer and Director
Date: December 21, 2010
/s/ Tom Chalfant
Tom Chalfant
Secretary and Director
Date: December 21, 2010
/s/ Troy Prescott
Troy Prescott
Vice Chairman and Director
Date: December 21, 2010
/s/ Ralph Brumbaugh
Ralph Brumbaugh, Director
Date: December 21, 2010
/s/ Thomas C. Chronister
Thomas C. Chronister, Director
Date: December 21, 2010
David Matthew Dersch, Director
Date: December 21, 2010
/s/ Everett Leon Hart
Everett Leon Hart, Director
Date: December 21, 2010
/s/ Cyril G. LeFevre
Cyril G. LeFevre, Director
Date: December 21, 2010
/s/ C. Allan Rosar
C. Allan Rosar, Director
Date: December 21, 2010
Lawrence A. Lagowski, Director
Date: December 21, 2010
/s/ Robert Baker
Robert Baker, Director
Date: December 21, 2010
L. Marshall Roch, Director