UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CARDINAL ETHANOL, LLC
(Name of small business issuer in its charter)
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Indiana
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2860
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20-2327916
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State or jurisdiction of
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Primary Standard Industrial
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I.R.S. Employer Identification No.
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incorporation or organization
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Classification Code Number
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2 OMCO Square, Suite 201, Winchester, IN 47394
(765) 584-2209
(Address and telephone number of principal executive offices and principal place of business)
Troy Prescott, Chairman of the Board
2 OMCO Square, Suite 201
Winchester, IN 47394
(765) 584-2209
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies of Communications to:
William E. Hanigan
Miranda L. Hughes
Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C.
666 Grand Avenue, Suite 2000, Des Moines, Iowa 50309-2510
(515) 242-2400
Approximate date of commencement of proposed sale to the public:
As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.
þ
If this Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same
offering.
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
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If this Form is post-effective amendment filed pursuant to Rule 462(d) under the Securities
act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
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If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following
box.
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CALCULATION OF REGISTRATION FEE
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Title of each
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Maximum Number of
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Proposed maximum
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Proposed maximum
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Amount of
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class of securities
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Units to be
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offering price per
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aggregate offering
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registration
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to be registered
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Registered
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unit
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price
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fee
(1)
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Membership Units
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16,400
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$
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5,000
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$
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82,000,000
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$
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8,774
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(1)
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Determined pursuant to Section 6(b) of the Securities Act of 1933, Rule 457(o) and Fee
Rate Advisory #5 for Fiscal Year 2006.
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The Registrant hereby amends this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
Preliminary Prospectus Dated February 10, 2006
The information in this prospectus is not complete and may be changed. The securities offered
by this prospectus may not be sold until the Registration Statement filed with the Securities and
Exchange Commission is effective. This prospectus is neither an offer to sell these securities nor
a solicitation of an offer to buy these securities in any state where an offer or sale is not
permitted.
CARDINAL
ETHANOL, LLC
An Indiana Limited Liability Company
[Effective Date]
The Securities being offered by Cardinal Ethanol, LLC are Limited Liability Company Membership Units
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Minimum Offering Amount
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$
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45,000,000
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Minimum Number of Units
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9,000
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Maximum Offering Amount
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$
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82,000,000
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Maximum Number of Units
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16,400
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Offering Price: $5,000 per Unit
Minimum Purchase Requirement: 4 Units ($20,000)
Additional Increments: 1 Unit ($5,000)
This is the initial public offering of limited liability company membership units in Cardinal
Ethanol, LLC, a development-stage Indiana limited liability company. We intend to use the offering
proceeds to pay for a portion of the construction and start-up operating costs of a 100-million
gallon per year dry mill corn-processing ethanol plant to be located in east central Indiana or
west central Ohio. We estimate the total project, including operating capital, will cost
approximately $150,500,000. We expect to use debt financing to complete project capitalization.
A unit represents a pro rata ownership interest in our capital, profits, losses, and
distributions. No public market exists for our units and none is expected to develop. Our units
will not be listed on any national exchange. The units are subject to a number of transfer
restrictions imposed by our operating agreement, as well as applicable tax and securities laws. We
are selling the units directly to investors on a best efforts basis, without using an underwriter.
The offering will end no later than
[one year from the effective date of this registration
statement]
. Investments will be held in escrow until the earliest of (1) our receipt of
$45,000,000 or more in offering cash proceeds
and
a written debt financing commitment for
an amount ranging from $67,140,000 to $104,140,000, depending on the equity raised, including the
$1,360,000 we raised in previous private placement offerings; (2)
[one year from the effective date
of this registration statement]
; or (3) termination of the offering.
These securities are speculative securities and involve a significant degree of risk. Before
investing in our units, purchasers should read this prospectus and consider each of the factors
under RISK FACTORS beginning on page 6.
Neither the Securities and Exchange Commission nor any state securities commission has approved or
disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
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TABLE OF CONTENTS
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PAGE
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EXHIBITS
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Articles of Organization
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A
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Second Amended and Restated Operating Agreement
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B
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Subscription Agreement
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C
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ii
PROSPECTUS SUMMARY
This summary only highlights selected information from this prospectus and may not contain all
of the information that is important to you. You should carefully read the entire prospectus and
the financial statements, and attached exhibits before you decide whether to invest.
Cardinal Ethanol
We are an Indiana limited liability company organized on February 7, 2005 with the name of
Indiana Ethanol, LLC. On September 27, 2005, we changed our name to Cardinal Ethanol, LLC. We are
a development-stage company with no prior operating history. We do not expect to generate any
revenue until we begin operating the proposed ethanol plant. Our ownership interests are
represented by membership interests, which are designated as units. Our principal address and
location is 2 OMCO Square, Suite 201, Winchester, Indiana 47394. Our telephone number is (765)
584-2209.
The Offering
The following is a brief summary of this offering:
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Minimum number of units offered
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9,000 units
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Maximum number of units offered
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16,400 units
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Purchase price per unit
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$5000
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Minimum purchase amount
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4 units ($20,000)
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Additional purchases
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1 unit increments ($5,000)
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Maximum purchase amount
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You may purchase any number of
additional units subject to the
40% ownership limitation
contained in our operating
agreement. There are currently
568 units outstanding. If we
sell the minimum number of units
offered, the maximum number of
units you may own upon
completion of the offering is
3,827 units. If we sell the
maximum number of units offered,
the maximum number of units you
may own upon completion of the
offering is 6,787 units.
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Use of Proceeds
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The purpose of this offering is
to raise equity to help fund the
construction and start-up costs
of a 100-million gallon per year
dry mill corn-processing ethanol
plant to be located in east
central Indiana or west central
Ohio.
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Offering start date
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We expect to start selling units
as soon as possible following
the declaration of effectiveness
of this registration statement
by the Securities and Exchange
Commission.
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Offering end date
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The offering will end no later
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[one year date]
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sell the maximum number of units
prior to
[one year date],
the
offering will end on or about
the date that we sell the
maximum number of units.
Additionally, in our sole
discretion, we may also
determine that it is not
necessary to sell all available
units and we may end the
offering any time after we sell
the minimum number of units and
prior to
[one year date]
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addition, if we abandon the
project for any reason prior to
[one year date],
we will
terminate the offering and
return offering proceeds to
investors.
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Units issued and outstanding if min. sold
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9,568 units
(1)
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Units issued and outstanding if max. sold
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16,968 units
(1)
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Risk factors
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See Risk Factors beginning on
page 6 of this prospectus for a
discussion of factors that you
should carefully consider before
deciding to invest in our units.
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We currently plan to register the offering only with the Florida, Georgia, Illinois, Indiana,
Kentucky Michigan, Ohio and Tennessee state securities regulatory bodies. We may also offer or
sell our units in other states in reliance on exemptions from the registration requirements of the
laws of those other states. However, we may not generally solicit investors in any jurisdictions
other than Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Ohio and Tennessee unless we decide to register in additional states. This
limitation may result in the offering being unsuccessful. The directors and officers identified on
page 5 of this prospectus will be offering the securities on our behalf directly to investors
without the use of an underwriter. We will not pay commissions to our directors and officers for
these sales.
The Project
If we are able to fully capitalize the project as described in our financing plan below, we
will use the offering proceeds to build and operate 100-million gallon per year dry mill
corn-processing ethanol plant in east central Indiana or west central Ohio. We expect Fagen, Inc.
of Granite Falls, Minnesota to build our plant using technology developed by ICM, Inc. of Colwich,
Kansas. We have not begun design or construction of our plant. We have not selected or purchased
a site upon which to build the plant.
We expect the ethanol plant will annually process approximately 36 million bushels of corn
into approximately 100-million gallons of fuel-grade ethanol, 320,000 tons of distillers grains for
animal feed and 220,500 tons of carbon dioxide per year. Distillers grains and carbon dioxide are
the principal by-products of the ethanol manufacturing process. These production estimates are
based upon engineering specifications from our anticipated design-builder, Fagen, Inc. While we
believe our production estimates are reasonable, actual production results could vary.
We have entered into a non-binding amended letter of intent with Fagen, Inc., for the design
and construction of our proposed ethanol plant for a price of $105,997,000, exclusive of any change
orders we may approve. In addition, our letter of intent with Fagen, Inc. provides for an
adjustment to the construction price in certain circumstances. See DESCRIPTION OF BUSINESS
Design-Build Team for detailed information about our non-binding letter of intent with Fagen, Inc.
We anticipate entering into a definitive agreement with Fagen, Inc. for the design and
construction services in exchange for a lump sum price equal to 105,997,000 set forth in our letter
of intent when we have received the minimum amount of funds necessary to break escrow and have
received a debt financing commitment sufficient to carry out our business plan.
We have also entered into a phase I and phase II engineering services agreement with Fagen
Engineering, LLC for the performance of certain engineering and design work in exchange for
$92,500, which will be credited against the total design build costs of our project. Fagen
Engineering, LLC performs the engineering services for projects constructed by Fagen, Inc. Both
Fagen Engineering, LLC and Fagen, Inc. are owned by Ron Fagen. See DESCRIPTION OF BUSINESS
Design-Build Team for detailed information about our phase 1 and phase II engineering services
agreement with Fagen Engineering, LLC.
Construction of the project is expected to take 18-20 months from the date our offering
closes. Our anticipated completion date is scheduled for summer 2008. Once the plant is
operational, we intend to sell all of the ethanol and distillers grains produced at the facility.
There are no current plans to capture and market the carbon dioxide, however, at some point in the
future we may decide it is feasible to do so. We intend to market our ethanol through an
experienced ethanol marketer. We may try to market our distillers grains to the local livestock
markets surrounding the plant. However, if the local markets are unable to support purchases of
our distillers grains at the prices we desire, we will market the distillers grains through an
experienced distillers grains marketer.
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(1)
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Includes 568 units currently issued and outstanding
from our previous private placements.
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Our Financing Plan
We estimate the total project will cost approximately $150,500,000. We expect that the design
and construction of the plant will cost approximately $105,997,000, with additional start-up and
development costs of approximately $44,503,000. This is a preliminary estimate primarily based
upon the experience of our general contractor, Fagen, Inc., with ethanol plants similar to the
plant we intend to build and operate. We expect our estimate to change as we continue to develop
the project. These changes could be significant.
We expect to capitalize our project using a combination of equity and debt to supplement the
proceeds from our previous private placements. Through our previous private placements, we raised
$120,000 of founders capital equity and $1,240,000 of seed capital equity for aggregate proceeds
of $1,360,000 to fund our development, organizational and offering expenses. We intend to raise a
minimum of $45,000,000 and a maximum of $82,000,000 in this offering. Depending on the level of
equity raised in this offering and the amount of any grants, bond financing and/or other incentives
we may be awarded, we will need to obtain debt financing ranging from approximately $67,140,000 to
$104,140,000 in order to supplement our seed capital proceeds of $1,360,000 and fully capitalize
the project. We estimated the range of debt financing we will need by subtracting the minimum and
maximum amount of equity in this offering and the $1,360,000 we raised as seed capital from the
estimated total project cost.
We have no contracts or commitments with any bank, lender or financial institution for this
debt financing. There are no assurances that we will be able to obtain the necessary debt
financing, other financing or grants sufficient to capitalize the project. The level of debt we
require may be reduced by any bond financing, tax increment financing, grants and other incentives
awarded to us. Depending on the number of units sold, we may also seek third party credit
providers to provide subordinated debt for the construction and initial operating expenses of the
project.
Our financing plan will require a significant amount of debt. Before we release funds from
escrow, we must secure a written debt financing commitment. You should be aware that a commitment
for debt financing is not a binding loan agreement and the lender may not be required to provide us
the debt financing as set forth in the commitment. A commitment is an agreement to lend subject to
certain terms and conditions. It is also subject to the negotiation, execution, and delivery of
loan and loan-related documentation satisfactory to the lender. Therefore, even if we sell the
aggregate minimum number of units prior to
[one year date]
and receive a debt financing commitment,
we may not satisfy the loan commitment conditions before the offering closes, or at all. If this
occurs, we have three alternatives:
If this occurs, we have three alternatives:
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Begin construction of the plant using all or a part of the equity funds raised while
we seek another debt financing source;
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Hold the equity funds raised indefinitely in an interest-bearing account while we
seek another debt financing source; or
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Return the equity funds, if any, to investors with accrued interest, after deducting
the currently indeterminate expenses of operating our business or partially
constructing the plant before we return the funds.
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Financial Information
We are a development-stage company with no operating history and no revenues. Please see
SELECTED FINANCIAL DATA for a summary of our finances and the index to our financial statements
for our detailed financial information.
IMPORTANT NOTICES TO INVESTORS
This prospectus does not constitute an offer to sell or the solicitation of an offer to
purchase any securities in any jurisdiction in which, or to any person to whom, it would be
unlawful to do so.
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Investing in our units involves significant risk. Please see RISK FACTORS beginning on page
6 to read about important risks you should consider before purchasing our units. No
representations or warranties of any kind are intended or should be inferred with respect to
economic returns or tax benefits of any kind that may accrue to the investors of the securities.
These securities have not been requested under the securities laws of any state other than the
states of Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Ohio and Tennessee and may be
offered and sold in other states only in reliance on exemptions from the registration requirements
of the laws of those other states.
In making an investment decision, investors must rely upon their own examination of the entity
creating the securities and the terms of the offering, including the merits and risks involved.
Investors should not invest any funds in this offering unless they can afford to lose their entire
investment. There is no public market for the resale of the units in the foreseeable future.
Furthermore, state securities laws and our operating agreement place substantial restrictions on
the transferability of the units. Investors should be aware that they will be required to bear the
financial risks of this investment for an indefinite period of time.
During the course of the offering of the units and prior to the sale of the units, each
prospective purchaser and his or her representatives, if any, are invited to ask questions of, and
obtain information from, our representatives concerning the terms and conditions of this offering,
us, our business, and other relevant matters. We will provide the requested information to the
extent that we possess such information or can acquire it without unreasonable effort or expense.
Prospective purchasers or representatives having questions or desiring additional information
should contact us at (765) 584-2209, or at our business address: Cardinal Ethanol, LLC, 2 OMCO
Square, Suite 201, Winchester, Indiana 47394. Also, you may contact any of the following directors
directly at the phone numbers listed below:
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NAME
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POSITION
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PHONE NUMBER
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Troy Prescott
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Director & Chairman/President
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(765) 969-5541
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Tom Chalfant
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Director & Vice Chairman/Vice President
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(765) 729-3129
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Ralph Brumbaugh
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Director
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(937) 423-0964
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Thomas Chronister
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Director
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(260) 437-0418
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Everett Hart
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Director
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(937) 459-7301
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Jeremey Herlyn
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Director
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(765) 914-4938
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Michael Shuter
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Director
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(765) 208-2422
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Steven Snider
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Director
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(765) 744-1881
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Jerrold Voisinet
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Director
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(937) 773-1069
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Andrew Zawosky
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Director
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(937) 459-0162
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FORWARD LOOKING STATEMENTS
Throughout this prospectus, we make 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, should, plan, future,
intend, could, estimate, predict, hope, potential, continue, believe, expect or
anticipate or the negative of these terms or other similar expressions. The forward-looking
statements are generally located in the material set forth under the headings MANAGEMENTS
DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS, PLAN OF DISTRIBUTION, RISK FACTORS, USE OF
PROCEEDS and DESCRIPTION OF BUSINESS, but may be found in other locations as well. These
forward-looking statements generally relate to our plans and objectives for future operations and
are based upon managements reasonable estimates of future results or trends. Although we believe
that our plans and objectives reflected in or suggested by such forward-looking statements are
reasonable, we may not achieve such plans or objectives. Actual results may differ from projected
results due, but not limited to, unforeseen developments, including developments relating to the
following:
5
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the availability and adequacy of our cash flow to meet its requirements, including
payment of loans;
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economic, competitive, demographic, business and other conditions in our local and
regional markets;
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changes or developments in laws, regulations or taxes in the ethanol, agricultural
or energy industries;
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actions taken or not taken by third-parties, including our suppliers and
competitors, as well as legislative, regulatory, judicial and other governmental
authorities;
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competition in the ethanol industry;
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the loss of any license or permit;
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the loss of our plant due to casualty, weather, mechanical failure or any extended
or extraordinary maintenance or inspection that may be required;
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changes in our business strategy, capital improvements or development plans;
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the availability of additional capital to support capital improvements and development; and
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other factors discussed under the section entitled RISK FACTORS or elsewhere in
this prospectus.
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You should read this prospectus completely and with the understanding that actual future
results may be materially different from what we expect. The forward-looking statements contained
in this prospectus have been compiled as of the date of this prospectus and should be evaluated
with consideration of any changes occurring after the date of this prospectus. Except as required
under federal securities laws and SEC rules and regulations, we will not update forward-looking
statements even though our situation may change in the future.
RISK FACTORS
The purchase of units involves substantial risks and the investment is suitable only for
persons with the financial capability to make and hold long-term investments not readily converted
into cash. Investors must, therefore, have adequate means of providing for their current and
future needs and personal contingencies. Prospective purchasers of the units should carefully
consider the risk factors set forth below, as well as the other information appearing in this
prospectus, before making any investment in the units. Investors should understand that there is a
possibility that they could lose their entire investment in us.
Risks Related to the Offering
Failure to sell the minimum number of units will result in the failure of this offering, which
means your investment may be returned to you with nominal interest.
We may not be able to sell the minimum amount of units required to close on this offering. We
must sell and receive at least $45,000,000 worth of units to close the offering. If we do not sell
units and collect funds of at least $45,000,000 in this offering by
[one year from the effective
date of this registration statement],
we cannot close the offering and must return investors money
with nominal interest, less expenses for escrow agency fees. This means that from the date of an
investors investment, the investor would earn a nominal rate of return on the money he, she, or it
deposits with us in escrow. We do not expect the termination date to be later than
[one year from
effective date of this prospectus]
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We are not experienced in selling securities and no one has agreed to assist us or purchase any
units that we cannot sell ourselves, which may result in the failure of this offering.
We are making this offering on a best efforts basis, which means that we will not use an
underwriter or placement agent. We have no firm commitment from any prospective buyer to purchase
our units and there can be no assurance that the offering will be successful. We plan to offer the
units directly to investors in the states of Florida, Georgia,
Illinois, Indiana, Kentucky, Michigan, Ohio and Tennessee. We plan to advertise in local media and by mailing information to
area residents. We also plan to hold informational meetings throughout Florida, Georgia, Illinois,
Indiana, Kentucky, Michigan, Ohio and Tennessee. Our directors have significant responsibilities
in their primary occupations in addition to trying to raise capital. These individuals have no
broker-dealer experience and most of our directors have limited or no experience with public
offerings of securities. There can be no assurance that our directors will be successful in
securing investors for the offering.
6
Proceeds of this offering are subject to promissory notes due after the offering is closed and
investors unable to pay the 90% balance on their investment may have to forfeit their 10% cash
deposit.
As much as 90% of the total offering proceeds of this offering could be subject to promissory
notes that may not be due until after the offering is closed. The success of our offering will
depend on the investors ability to pay the outstanding balances on these promissory notes. In
order to purchase units in this offering and become a member in Cardinal Ethanol, each investor
must, among other requirements, submit a check in the amount of 10% of the total amount due for the
number of units for which subscription is sought, and a promissory note for the remaining 90% of
the total amount due for the units. That balance will become due within 30 days of the date of our
notice that our sales of units have exceeded the aggregate minimum offering amount, including the
amounts owed under the promissory notes, of $45,000,000. We may not be able to collect on
subscriptions from investors and are subject to the risk that subscribers may default on their
payment obligations under their subscription agreements and promissory notes. We will take a
security interest in the units. We intend to retain the initial payment and to seek damages from
any investor who defaults on the promissory note obligation. This means that if you are unable to
pay the 90% balance of your investment within 30 days of our notice, you may have to forfeit your
10% cash deposit. Nonetheless, the success of the offering depends on the payment of these amounts
by the obligors.
If we sell the minimum number of units by
[one year date]
, we will be able to close the
offering. However, we will not be able to release funds from escrow until the notes are paid off
and the cash proceeds in escrow equal or exceed $45,000,000, we have received a written debt
financing commitment, and our escrow agent has provided an affidavit to each state securities
department in which we have registered our securities for sale stating that the escrow agreement
requirements have been satisfied. Accordingly, we could have insufficient capital to complete the
construction of the ethanol plant or insufficient ongoing operating capital.
Investors will not be allowed to withdraw their investment, which means that you should invest only
if you are willing to have your investment unavailable to you for an indefinite period of time.
Investors will not be allowed to withdraw their investments for any reason, absent a
rescission offer tendered by Cardinal Ethanol. We do not anticipate making a rescission offer.
This means that from the date of your investment through
[the ending date of this offering]
, your
investment will be unavailable to you. You should only invest in us if you are willing to have
your investment be unavailable for this period of time, which could be up to one year. If our
offering succeeds, and we convert your cash investment into units of Cardinal Ethanol, your
investment will be denominated in our units until you transfer those units. There are significant
transfer restrictions on our units. You will not have a right to withdraw from Cardinal Ethanol
and demand a cash payment from us.
Risks Related to Our Financing Plan
Even if we raise the minimum amount of equity in this offering, we may not obtain the debt
financing necessary to construct and operate our ethanol plant, which would result in the failure
of the project and Cardinal Ethanol.
Our financing plan requires a significant amount of debt financing. We do not have contracts
or commitments with any bank, lender or financial institution for debt financing, and we will not
release funds from escrow until we secure a written debt financing commitment sufficient to
construct and operate the ethanol plant. If debt financing on acceptable terms is not available
for any reason, we will be forced to abandon our business plan and return your investment from
escrow plus nominal interest less deduction for escrow agency fees. Including the $1,360,000 we
raised in our previous private placement offerings and depending on the level of equity raised in
this offering, we expect to require approximately $67,140,000 to $104,140,000 (less any bond or tax
increment financing, grants and other incentives we are awarded) in senior or subordinated
long-term debt from one or more commercial banks or other lenders, incentives and government
grants. Because the amounts of equity and grant funding are not yet known, the exact amount and
nature of total debt is also unknown.
If we do not sell the minimum amount of units, the offering will not close. Even though we
must receive a debt financing commitment as a condition of closing escrow, the agreements to obtain
debt financing may not be fully negotiated when we close on escrow. Therefore, there is no
assurance that such commitment will be received, or if it is received, that it will be on terms
acceptable to us. If agreements to obtain debt financing are arranged and
7
executed, we expect that
we will be required to use the funds raised from this offering prior to receiving the debt
financing funds.
Future loan agreements with lenders may hinder our ability to operate the business by imposing
restrictive loan covenants, which could delay or prohibit us from making cash distributions to our
unit holders.
Our debt load and service requirements necessary to implement our business plan will result in
substantial debt service requirements. Our debt load and service requirements could have important
consequences which could hinder our ability to operate, including our ability to:
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Make distributions to unit holders, or redeem or repurchase units;
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Make certain types of investments;
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Create liens on our assets;
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Utilize the proceeds of asset sales; and
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In the event that we are unable to pay our debt service obligations, our creditors could force
us to (1) reduce or eliminate distributions to unit holders (even for tax purposes); or (2) reduce
or eliminate needed capital expenditures. It is possible that we could be forced to sell assets,
seek to obtain additional equity capital or refinance or restructure all or a portion of our debt.
In the event that we would be unable to refinance our indebtedness or raise funds through asset
sales, sales of equity or otherwise, our ability to operate our plant would be greatly affected and
we may be forced to liquidate.
If we decide to spend equity proceeds and begin plant construction before we have fulfilled all of
the loan commitment conditions, signed binding loan agreements or received loan proceeds, we may be
unable to close the loan and you may lose all of your investment.
If we sell the aggregate minimum number of units prior to
[one year from the effective date of
this registration statement]
and satisfy the other conditions of releasing funds from escrow,
including our receipt of a written debt financing commitment, we may decide to begin spending the
equity proceeds to begin plant construction or for other project-related expenses. If, after we
begin spending equity proceeds, we are unable to close the loan, we may have to seek another debt
financing source or abandon the project. If that happens, you could lose some or all of your
investment.
If we successfully release funds from escrow but are unable to close our loan, we may decide to
hold your investment while we search for alternative debt financing sources, which means your
investment will continue to be unavailable to you and may decline in value.
We must obtain a written debt financing commitment prior to releasing funds from escrow.
However, a debt financing commitment does not guarantee that we will be able to successfully close
the loan. If we fail to close the loan, we may choose to seek alternative debt financing sources.
While we search for alternative debt financing, we may continue to hold your investment in another
interest-bearing account. Your investment will continue to be unavailable while we search for
alternative debt financing. It is possible that your investment will decline in value while we
search for the debt financing necessary to complete our project.
Risks Related to Cardinal Ethanol as a Development-Stage Company
Cardinal Ethanol has no operating history, which could result in errors in management and
operations causing a reduction in the value of your investment.
We were recently formed and have no history of operations. We cannot provide assurance that
Cardinal Ethanol can manage start-up effectively and properly staff operations, and any failure to
manage our start-up effectively could delay the commencement of plant operations. A delay in
start-up operations is likely to further
8
delay our ability to generate revenue and satisfy our debt
obligations. We anticipate a period of significant growth, involving the construction and start-up
of operations of the plant. This period of growth and the start-up of the plant are likely to be a
substantial challenge to us. If we fail to manage start-up effectively, you could lose all or a
substantial part of your investment.
We have little to no experience in the ethanol industry, which may affect our ability to build and
operate the ethanol plant.
We are presently, and are likely for some time to continue to be, dependent upon our initial
directors. Most of these individuals are experienced in business generally but the majority have
very little or no experience in raising capital from the public, organizing and building an ethanol
plant, and governing and operating a public company. Many of the directors have no expertise in
the ethanol industry. See DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. In
addition, certain directors on our board are presently engaged in business and other activities
which impose substantial demand on the time and attention of such directors. You should not
purchase units unless you are willing to entrust all aspects of our management to our board of
directors.
We will depend on Fagen, Inc. for expertise in beginning operations in the ethanol industry and any
loss of this relationship could cause us delay and added expense, placing us at a competitive
disadvantage.
We will be dependent on our relationship with Fagen, Inc. and its employees. Any loss of this
relationship with Fagen, Inc., particularly during the construction and start-up period for the
plant, may prevent us from commencing operations and result in the failure of our business. The
time and expense of locating new consultants and contractors would result in unforeseen expenses
and delays. Unforeseen expenses and delays may reduce our ability to generate revenue and
profitability and significantly damage our competitive position in the ethanol industry such that
you could lose some or all of your investment.
If we fail to finalize critical agreements, such as the design-build agreement, ethanol and
distillers grains marketing agreements and utility supply agreements, or the final agreements are
unfavorable compared to what we currently anticipate, our project may fail or be harmed in ways
that significantly reduce the value of your investment.
You should be aware that this prospectus makes reference to documents or agreements that are
not yet final or executed, and plans that have not been implemented. In some instances such
documents or agreements are not even in draft form. The definitive versions of those agreements,
documents, plans or proposals may contain terms or conditions that vary significantly from the
terms and conditions described. These tentative agreements, documents, plans or proposals may not
materialize or, if they do materialize, may not prove to be profitable.
Our lack of business diversification could result in the devaluation of our units if our revenues
from our primary products decrease.
We expect our business to solely consist of ethanol and distillers grains production and
sales. We do not have any other lines of business or other sources of revenue if we are unable to
complete the construction and operation of the plant. Our lack of business diversification could
cause you to lose all or some of your investment if we are unable to generate revenues by the
production and sales of ethanol and distillers grains since we do not expect to have any other
lines of business or alternative revenue sources.
We have a history of losses and may not ever operate profitably.
For the period of February 7, 2005 through September 30, 2005, we incurred an accumulated net
loss of $43,886. We will continue to incur significant losses until we successfully complete
construction and commence operations of the plant. There is no assurance that we will be
successful in completing this offering and/or in our efforts to build and operate an ethanol plant.
Even if we successfully meet all of these objectives and begin operations at the ethanol plant,
there is no assurance that we will be able to operate profitably.
9
Your investment may decline in value due to decisions made by our initial board of directors and
until the plant is built, your only recourse to replace these directors will be through amendment
to our operating agreement.
Our operating agreement provides that the initial board of directors will serve until the
first annual or special meeting of the members following commencement of substantial operations of
the ethanol plant. If our project suffers delays due to financing or construction, our initial
board of directors could serve for an extended period of time. In that event, your only recourse
to replace these directors would be through an amendment to our operating agreement which could be
difficult to accomplish.
We have one full-time employee, but we may not be able to hire employees capable of effectively
operating the ethanol plant, which may hinder our ability to operate profitably.
Because we are a development-stage company, we have only one full-time employee. If we are
not able to hire employees who can effectively operate the plant, our ability to generate revenue
will be significantly reduced or prevented altogether such that you could lose all or a substantial
portion of your investment.
Risks Related to Construction of the Ethanol Plant
We will depend on Fagen, Inc. and ICM, Inc. to design and build our ethanol plant, however, we
currently have no binding design build agreement with them and their failure to perform could force
us to abandon business, hinder our ability to operate profitably or decrease the value of your
investment.
We will be highly dependent upon Fagen, Inc. and ICM, Inc. to design and build the plant, but
we have no definitive binding design build agreement with either company. We have entered into a
non-binding letter of intent with Fagen, Inc. for various design and construction services. We
have also entered into a phase I and phase II engineering services agreement with Fagen
Engineering, LLC for certain engineering and design work to allow us to obtain these services prior
to the execution of the design-built agreement. Fagen Engineering, LLC and Fagen, Inc. are both
owned by Ron Fagen. Fagen Engineering, LLC provides engineering services for projects constructed
by Fagen, Inc. Fagen, Inc. has indicated its intention to deliver to us a proposed design-build
contract, in which it will serve as our general contractor and will engage ICM, Inc. to provide
design and engineering services. We anticipate that we will execute a definitive binding
design-build agreement with Fagen, Inc. to construct the plant when we have received the minimum
amount of funds necessary to break escrow and have obtained a debt financing commitment sufficient
to carry out our business plan. However, we have not yet negotiated, reviewed or executed the
design-build agreement and there is no assurance that such an agreement will be executed.
If we do not execute a definitive, binding design-build agreement with Fagen, Inc., or if
Fagen, Inc. terminates its relationship with us after initiating construction, there is no
assurance that we would be able to obtain a replacement general contractor. Any such event may
force us to abandon our business. Fagen, Inc. and ICM, Inc. and their affiliates, may have a
conflict of interest with us because Fagen, Inc., ICM, Inc. and their employees or agents are
involved as owners, creditors and in other capacities with other ethanol plants in the United
States. We cannot require Fagen, Inc. or ICM, Inc. to devote their full time and attention to our
activities. As a result, Fagen, Inc. and ICM, Inc. may have, or come to have, a conflict of
interest in allocating personnel, materials and other resources to our plant.
We may need to increase cost estimates for construction of the ethanol plant, and such increase
could result in devaluation of our units if ethanol plant construction requires additional capital.
We anticipate that Fagen, Inc. will construct the plant for a contract price, based on the
plans and specifications in the anticipated design-build agreement. We have based our capital
needs on a design for the plant that will cost approximately $105,997,000 with additional start-up
and development costs of approximately $44,503,000 for a total project completion cost of
approximately $150,500,000. This price includes construction period interest. The estimated total
cost of the project is based on preliminary discussions, and there is no assurance that the final
cost of the plant will not be higher. There is no assurance that there will not be design changes
or cost overruns associated with the construction of the plant. Under the terms of the letter of
intent we signed with Fagen, Inc., if as of the date we give a notice to proceed to Fagen, Inc.,
the Construction Cost Index published by
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Engineering News-Record Magazine (CCI) for the month in
which the notice to proceed is given, has increased over the CCI for September 2005, the contract
price will be increased by an equal percentage amount. Therefore, the cost of our plant could be
significantly higher than the $105,997,000 construction price in the letter of intent.
In addition, increases in price of steel, cement and other construction materials, as well
increases in the cost of labor, could affect the final cost of construction of the ethanol plant.
Further, shortages of steel, cement and other construction materials, as well labor shortages,
could affect the final completion date of the project. We have budgeted $8,388,000 for our
construction contingency to help offset higher construction costs. However, this may not be
sufficient to offset increased costs. Advances and changes in technology may require changes to
our current plans in order to remain competitive. Any significant increase in the estimated
construction cost of the plant could delay our ability to generate revenues and reduce the value of
your units because our revenue stream may not be able to adequately support the increased cost and
expense attributable to increased construction costs.
Construction delays could result in devaluation of our units if our production and sale of ethanol
and its by-products are similarly delayed.
We currently expect our plant to be operating by summer 2008; however, construction projects
often involve delays in obtaining permits, construction delays due to weather conditions, or other
events that delay the construction schedule. In addition, changes in interest rates or the credit
environment or changes in political administrations at the federal, state or local level that
result in policy change towards ethanol or this project, could cause construction and operation
delays. If it takes longer to construct the plant than we anticipate, it would delay our ability
to generate revenue and make it difficult for us to meet our debt service obligations. This could
reduce the value of the units.
Defects in plant construction could result in devaluation of our units if our plant does not
produce ethanol and its by-products as anticipated.
There is no assurance that defects in materials and/or workmanship in the plant will not
occur. Under the terms of the anticipated design-build agreement with Fagen, Inc., Fagen, Inc.
would warrant that the material and equipment furnished to build the plant will be new, of good
quality, and free from material defects in material or workmanship at the time of delivery. Though
we expect the design-build agreement to require Fagen, Inc. to correct all defects in material or
workmanship for a period of one year after substantial completion of the plant, material defects in
material or workmanship may still occur. Such defects could delay the commencement of operations
of the plant, or, if such defects are discovered after operations have commenced, could cause us to
halt or discontinue the plants operation. Halting or discontinuing plant operations could delay
our ability to generate revenues and reduce the value of your units.
The plant site may have unknown environmental problems that could be expensive and time consuming
to correct, which may delay or halt plant construction and delay our ability to generate revenue.
Our board of directors is currently exploring the feasibility of sites in east central Indiana
and west central Ohio.
Our board of directors reserves the right to select the location of the
plant site, in their sole discretion, for any reason.
Once a plant site is selected, there can
be no assurance that we will not encounter hazardous environmental conditions that may delay the
construction of the plant. We do not anticipate Fagen, Inc. to be responsible for any hazardous
environmental conditions encountered at the plant site. Upon encountering a hazardous environmental
condition, Fagen, Inc. may suspend work in the affected area. If we receive notice of a hazardous
environmental condition, we may be required to correct the condition prior to continuing
construction. The presence of a hazardous environmental condition will likely delay construction
of the plant and may require significant expenditure of our resources to correct the condition. In
addition, Fagen, Inc. will be entitled to an adjustment in price and time of performance if it has
been adversely affected by the hazardous environmental condition. If we encounter any hazardous
environmental conditions during construction that require time or money to correct, such event
could delay our ability to generate revenues and reduce the value of your units.
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Risks Related to Ethanol Production
Changes in the prices of corn and natural gas can be volatile and these changes will significantly
impact our financial performance and the value of your investment.
Our results of operations and financial condition will be significantly affected by the cost
and supply of corn and natural gas. Changes in the price and supply of corn and natural gas are
subject to and determined by market forces over which we have no control. Generally, higher corn
and natural gas prices will produce lower profit margins. This is especially true if market
conditions do not allow us to pass through increased corn and natural gas costs to our customers.
There is no assurance that we will be able to pass through such higher prices. If we experience a
sustained period of high corn and/or natural gas prices, such pricing may reduce our ability to
generate revenues and our profit margins may significantly decrease or be eliminated and you may
lose some or all of your investment.
Ethanol production at our ethanol plant will require significant amounts of corn.
In addition, other new ethanol plants may be developed in the state of Indiana or Ohio. If
these plants are successfully developed and constructed, we expect to compete with them for corn
origination. Competition for corn origination may increase our cost of corn and harm our financial
performance and the value of your investment.
We intend to use natural gas as the power source for our ethanol plant. Natural gas
costs represent approximately 15-20% of our total cost of production. Natural gas prices are
volatile and may lead to higher operating costs, which would lower the value of your investment.
In late August and early September 2005, Hurricane Katrina and Hurricane Rita caused dramatic
damage to areas of Louisiana and Texas, which are the location of two of the largest natural gas
hubs in the United States. The damage became apparent and natural gas prices substantially
increased. At this time it is unknown how this damage will affect intermediate and long-term
prices of natural gas. Future hurricanes could create additional uncertainty and volatility. We
expect natural gas prices to remain high or increase given the unpredictable market situation.
Declines in the prices of ethanol and its by-products will have a significant negative impact on
our financial performance and the value of your investment.
Our revenues will be greatly affected by the price at which we can sell our ethanol and its
by-products, i.e., distillers grains. These prices can be volatile as a result of a number of
factors. These factors include the overall supply and demand, the price of gasoline, level of
government support, and the availability and price of competing products. For instance, the price
of ethanol tends to increase as the price of gasoline increases, and the price of ethanol tends to
decrease as the price of gasoline decreases. Any lowering of gasoline prices will likely also lead
to lower prices for ethanol, which may decrease our ethanol sales and reduce revenues, causing a
reduction in the value of your investment.
The price of ethanol has recently been much higher than its 10-year average. We do not expect
these prices to be sustainable as supply from new and existing ethanol plants increases to meet
increased demand. The total production of ethanol is at an all time high and continues to rapidly
expand at this time. Increased production of ethanol may lead to lower prices. Any decrease in the
price at which we can sell our ethanol will negatively impact our future revenues and could cause
the value of your investment to decline.
We believe that ethanol production is expanding rapidly at this time. Increased production of
ethanol may lead to lower prices and other adverse effects. For example, the increased ethanol
production could lead to increased supplies of by-products from the production of ethanol, such as
distillers grains. Those increased supplies could outpace demand, which would lead to lower prices
for those by-products. In addition, distillers grains competes with other protein based animal feed
products. The price of distillers grains may decrease when the price of competing feed products
decreases. The price of competing animal feed products is based in part on the price of the
commodity from which it is derived. Downward pressure on commodity prices, such as soybeans, will
generally cause the price of competing animal feed products to decline, resulting in downward
pressure on the price of distillers grains. Any decrease in the prices at which we can sell our
distillers grains will negatively affect our revenues and could cause the value of your investment
to decline.
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We have no current plan to sell the raw carbon dioxide we produce to a third party processor
resulting in the loss of a potential source of revenue.
At this time, we have no agreement to sell the raw carbon dioxide we produce. We cannot
provide any assurances that we will sell our raw carbon dioxide at any time in the future. If we
do not enter into an agreement to sell our raw carbon dioxide, we will have to emit it into the
air. This will result in the loss of a potential source of revenue.
Our ability to successfully operate is dependent on the availability of energy at anticipated
prices.
Adequate energy is critical to plant operations. We have not yet entered into any definitive
agreements to obtain energy resources and we may have to pay more than we expect to access
efficient energy resources. As a result, our ability to make a profit may decline.
We will depend on others for sales of our products, which may place us at a competitive
disadvantage and reduce profitability.
We expect to hire or contract with a third-party marketing firm to market all of the ethanol
we plan to produce. Although we currently expect to do our own distillers grains marketing to
livestock markets in approximately the 100 miles surrounding our plant, we may contract with one or
more brokers to market and sell our distillers grains locally. In addition, if the local livestock
markets do not provide an adequate outlet for our distillers grains at the prices we desire, we
expect to contract with one or more brokers to market and sell a portion or all of our distillers
grains regionally and nationally. As a result, we expect to be dependent on the ethanol broker and
any distillers grains broker we engage. There is no assurance that we will be able to enter into
contracts with any ethanol broker or distillers grains broker on terms that are favorable to us.
If the ethanol or distillers grains broker breaches the contract or does not have the ability, for
financial or other reasons to market all of the ethanol or distillers grains we produce, we will
not have any readily available means to sell our products. Our lack of a sales force and reliance
on third parties to sell and market our products may place us at a competitive disadvantage. Our
failure to sell all of our ethanol and distillers dried grains feed products may result in less
income from sales, reducing our revenue stream, which could reduce the value of your investment.
Changes and advances in ethanol production technology could require us to incur costs to update our
ethanol plant or could otherwise hinder our ability to compete in the ethanol industry or operate
profitably.
Advances and changes in the technology of ethanol production are expected to occur. Such
advances and changes may make the ethanol production technology installed in our plant less
desirable or obsolete. These advances could also allow our competitors to produce ethanol at a
lower cost than us. If we are unable to adopt or incorporate technological advances, our ethanol
production methods and processes could be less efficient than our competitors, which could cause
our plant to become uncompetitive or completely obsolete. If our competitors develop, obtain or
license technology that is superior to ours or that makes our technology obsolete, we may be
required to incur significant costs to enhance or acquire new technology so that our ethanol
production remains competitive. Alternatively, we may be required to seek third-party licenses,
which could also result in significant expenditures. We cannot guarantee or assure you that
third-party licenses will be available or, once obtained, will continue to be available on
commercially reasonable terms, if at all. These costs could negatively impact our financial
performance by increasing our operating costs and reducing our net income, all of which could
reduce the value of your investment.
Risks Related to Ethanol Industry
New plants under construction or decreases in the demand for ethanol may result in excess
production capacity in our industry.
The supply of domestically produced ethanol is at an all-time high. In 2004, 81 ethanol
plants located in 20 states produced a record 3.41 billion gallons; a 21% increase from 2003 and
109% increase from 2000. At the end of 2005, there were 95 ethanol plants with a combined annual
production capacity of more than 4.3 billion gallons and an additional 31 ethanol plants and nine
expansions under construction expected to result in an increase of
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combined annual capacity of more
than 1.5 billion gallons. Excess capacity in the ethanol industry would have an adverse impact on
our results of operations, cash flows and general financial condition. Excess capacity may also
result or intensify from increases in production capacity coupled with insufficient demand. If the
demand for ethanol does not grow at the same pace as increases in supply, we would expect the price
for ethanol to decline. If excess capacity in the ethanol industry occurs, the market price of
ethanol may decline to a level that may adversely affect our ability to generate profits and our
financial condition.
We operate in a competitive industry and compete with larger, better financed entities which could
impact our ability to operate profitably.
There is significant competition among ethanol producers with numerous producer and privately
owned ethanol plants planned and operating throughout the Midwest and elsewhere in the United
States. The number of ethanol plants being developed and constructed in the United States
continues to increase at a rapid pace. The recent passage of the Energy Policy Act of 2005
included a renewable fuels mandate that we expect will further increase the number of domestic
ethanol production facilities. The largest ethanol producers include Abengoa Bioenergy Corp.,
Archer Daniels Midland (ADM), Aventine Renewable Energy, Inc., Cargill, Inc., New Energy Corp.
and VeraSun Energy Corporation, all of which are each capable of producing more ethanol than we
expect to produce. ADM recently announced its plan to add approximately 500 million gallons per
year of additional ethanol production capacity in the United States. ADM is currently the largest
ethanol producer in the U.S. and controls a significant portion of the ethanol market. ADMs plan
to produce an additional 500 million gallons of ethanol per year will strengthen its position in
the ethanol industry and cause a significant increase in domestic ethanol supply. If the demand
for ethanol does not grow at the same pace as increases in supply, we expect that lower prices for
ethanol will result which may adversely affect our ability to generate profits and our financial
condition.
Our ethanol plant is also expected to compete with producers of other gasoline additives made
from raw materials other than corn having similar octane and oxygenate values as ethanol, such as
producers of methyl tertiary butyl ether (MTBE). MTBE is a petrochemical derived from methanol
which generally costs less to produce than ethanol. Many major oil companies produce MTBE and
strongly favor its use because it is petroleum-based. However, MTBE has caused groundwater
contamination and many states have enacted MTBE bans. Alternative fuels, gasoline oxygenates and
alternative ethanol production methods are also continually under development. The major oil
companies have significantly greater resources than we have to market MTBE, to develop alternative
products, and to influence legislation and public perception of MTBE and ethanol. These companies
also have significant resources to begin production of ethanol should they choose to do so.
Competition from the advancement of alternative fuels may lessen the demand for ethanol and
negatively impact our profitability, which could reduce the value of your investment.
Alternative fuels, gasoline oxygenates and ethanol production methods are continually
under development. A number of automotive, industrial and power generation manufacturers are
developing more efficient engines, hybrid engines and alternative clean power systems using fuel
cells or clean burning gaseous fuels. Vehicle manufacturers are working to develop vehicles that
are more fuel efficient and have reduced emissions using conventional gasoline. Vehicle
manufacturers have developed and continue to work to improve hybrid technology, which powers
vehicles by engines that utilize both electric and conventional gasoline fuel sources. In the
future, the emerging fuel cell industry offers a technological option to address increasing
worldwide energy costs, the long-term availability of petroleum reserves and environmental
concerns. Fuel cells have emerged as a potential alternative to certain existing power sources
because of their higher efficiency, reduced noise and lower emissions. Fuel cell industry
participants are currently targeting the transportation, stationary power and portable power
markets in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful
emissions. If the fuel cell and hydrogen industries continue to expand and gain broad acceptance,
and hydrogen becomes readily available to consumers for motor vehicle use, we may not be able to
compete effectively. This additional competition could reduce the demand for ethanol, which would
negatively impact our profitability, causing a reduction in the value of your investment.
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Corn-based ethanol may compete with cellulose-based ethanol in the future, which could make it more
difficult for us to produce ethanol on a cost-effective basis and could reduce the value of your
investment.
Most ethanol is currently produced from corn and other raw grains, such as milo or sorghum,
especially in the Midwest. The current trend in ethanol production research is to develop an
efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste,
forest residue, municipal solid waste, and energy crops. This trend is driven by the fact that
cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based
biomass would create opportunities to produce ethanol in areas which are unable to grow corn.
Although current technology is not sufficiently efficient to be competitive, a report by the U.S.
Department of Energy entitled Outlook for Biomass Ethanol Production and Demand indicates that
new conversion technologies may be developed in the future. If an efficient method of producing
ethanol from cellulose-based biomass is developed, we may not be able to compete effectively. It
may not be cost-effective to convert the ethanol plant we are proposing into a plant which will use
cellulose-based biomass to produce ethanol. If we are unable to produce ethanol as
cost-effectively as cellulose-based producers, our ability to generate revenue will be negatively
impacted and your investment could lose value.
As domestic ethanol production continues to grow, ethanol supply may exceed demand causing ethanol
prices to decline and the value of your investment to be reduced.
The number of ethanol plants being developed and constructed in the United States continues to
increase at a rapid pace. As these plants begin operations, we expect domestic ethanol production
to significantly increase. If the demand for ethanol does not grow at the same pace as increases
in supply, we would expect the price for ethanol to decline. Declining ethanol prices will result
in lower revenues and may reduce or eliminate profits causing the value of your investment to be
reduced.
Competition from ethanol imported from Caribbean basin countries may be a less expensive
alternative to our ethanol, which would cause us to lose market share and reduce the value of your
investment.
A portion of the ethanol produced or processed in certain countries in Central America and the
Caribbean region is eligible for tariff reduction or elimination upon importation to the United
States under a program known as the Caribbean Basin Initiative. Large ethanol producers, such as
Cargill, have expressed interest in building dehydration plants in participating Caribbean Basin
countries, such as El Salvador, which would convert ethanol into fuel-grade ethanol for shipment to
the United States. Ethanol imported from Caribbean Basin countries may be a less expensive
alternative to domestically produced ethanol. Competition from ethanol imported from Caribbean
Basin countries may affect our ability to sell our ethanol profitably, which would reduce the value
of your investment.
Competition from ethanol imported from Brazil may be a less expensive alternative to our ethanol,
which would cause us to lose market share and reduce the value of your investment.
Brazil is currently the worlds largest producer and exporter of ethanol. In Brazil, ethanol
is produced primarily from sugarcane, which is also used to produce food-grade sugar. Reports in
early January 2006 estimate that Brazil produced approximately 4.5 billion gallons of ethanol in
2005 and exported a total of 554 million gallons of ethanol worldwide. Ethanol imported from Brazil
may be a less expensive alternative to domestically produced ethanol, which is primarily made from
corn. Tariffs presently protecting U.S. ethanol producers may be reduced or eliminated. Competition
from ethanol imported from Brazil may affect our ability to sell our ethanol profitably, which
would reduce the value of your investment.
Risks Related to Regulation and Governmental Action
A change in government policies favorable to ethanol may cause demand for ethanol to decline.
Growth and demand for ethanol may be driven primarily by federal and state government
policies, such as state laws banning MTBE and the national renewable fuels standard. The
continuation of these policies is uncertain, which means that demand for ethanol may decline if
these policies change or are discontinued. A decline in the
15
demand for ethanol is likely to cause
lower ethanol prices which in turn will negatively affect our results of operations, financial
condition and cash flows.
Loss of or ineligibility for favorable tax benefits for ethanol production could hinder our ability
to operate at a profit and reduce the value of your investment in us.
The ethanol industry and our business are assisted by various federal ethanol tax incentives,
including those included in the Energy Policy Act of 2005. The provision of the Energy Policy Act
of 2005 likely to have the greatest impact on the ethanol industry is the creation of a 7.5 billion
gallon Renewable Fuels Standard (RFS). The RFS will begin at 4 billion gallons in 2006, increasing
to 7.5 billion gallons by 2012. The RFS helps support a market for ethanol that might disappear
without this incentive. The elimination or reduction of tax incentives to the ethanol industry
could reduce the market for ethanol, which could reduce prices and our revenues by making it more
costly or difficult for us to produce and sell ethanol. If the federal tax incentives are
eliminated or sharply curtailed, we believe that a decreased demand for ethanol will result, which
could result in the failure of the business and the potential loss of some or all of your
investment.
Another important provision involves an expansion in the definition of who qualifies as a
small ethanol producer. Historically, small ethanol producers were allowed a 10-cents-per-gallon
production income tax credit on up to 15 million gallons of production annually. The size of the
plant eligible for the tax credit was limited to 30 million gallons. Under the Energy Policy Act
of 2005 the size limitation on the production capacity for small ethanol producers increases from
30 million to 60 million gallons. Because we intend to build a plant with the capacity to annually
produce 100-million gallons of ethanol, we do not expect to qualify for this tax credit which could
hinder our ability to compete with other plants who will receive the tax credit.
A change in environmental regulations or violations thereof could result in the devaluation of our
units and a reduction in the value of your investment.
We will be subject to extensive air, water and other environmental regulations and we will
need to obtain a number of environmental permits to construct and operate the plant. In addition,
it is likely that our senior debt financing will be contingent on our ability to obtain the various
environmental permits that we will require.
Before we can begin construction of our plant, we must obtain numerous regulatory approvals
and permits. While we anticipate receiving these approvals and permits, there is no assurance that
these requirements can be satisfied in a timely manner or at all. If for any reason any of these
permits are not granted, construction costs for the plant may increase, or the plant may not be
constructed at all.
Additionally, environmental laws and regulations, both at the federal and state level, are
subject to change and changes can be made retroactively. Consequently, even if we have the proper
permits at the present time, we may be required to invest or spend considerable resources to comply
with future environmental regulations or new or modified interpretations of those regulations,
which may reduce our profitability and you may lose some or all of your investment.
Our lack of eligibility for payments under the Commodity Credit Corporation Bioenergy Program could
hinder our ability to operate at a profit and reduce the value of your investment in us.
The United States Department of Agricultures (the USDA) Commodity Credit Corporation
Bioenergy Program reimburses eligible ethanol producers of less than 65 million gallons of ethanol,
one bushel of corn for every two and one-half bushels of corn used for the increased production of
ethanol. However, the Bioenergy Program is scheduled to expire on September 30, 2006. The grants
available under the Bioenergy Program may not continue beyond their scheduled expiration date or if
they do continue, the grants may not be available at the same level. Based upon our current
anticipated completion date of summer 2008, we will not be eligible to participate in the Bioenergy
Program unless it is extended. In addition, even if the program were extended, because we expect
to produce approximately 100 million gallons of ethanol per year, we would not qualify for the
program unless the maximum eligible production capacity was expanded. We do not include Bioenergy
program payments in our forecasted sources of funds but we may be competing with other ethanol
plants that receive these payments. This could result in decreased profitability and you could
lose some or all of your investment.
16
Risks Related to the Units
There has been no independent valuation of the units, which means that the units may be worth less
than the purchase price.
The per unit purchase price has been determined by us without independent valuation of the
units. We established the offering prices based on our estimate of capital and expense
requirements, not based on perceived market value, book value, or other established criteria. We
did not obtain an independent appraisal opinion on the valuation of the units. The units may have
a value significantly less than the offering prices and there is no guarantee that the units will
ever obtain a value equal to or greater than the offering price.
No public trading market exists for our units and we do not anticipate the creation of such a
market, which means that it will be difficult for you to liquidate your investment.
There is currently no established public trading market for our units and an active trading
market will not develop despite this offering. To maintain partnership tax status, you may not
trade the units on an established securities market or readily trade the units on a secondary
market (or the substantial equivalent thereof). We, therefore, will not apply for listing of the
units on any securities exchange or on the NASDAQ Stock Market. As a result, you will not be able
to readily sell your units.
Public investors will experience immediate and substantial dilution as a result of this offering.
Our seed capital investors and our founders paid substantially less per unit for our
membership units than the current public offering price. Accordingly, if you purchase units in
this offering, you will experience immediate and substantial dilution of your investment. Based
upon the issuance and sale of the minimum number of units (9,000) at the public offering price of
$5,000 per unit, you will incur immediate dilution of $161.22 in the net tangible book value per
unit if you purchase units in this offering. If we sell the maximum number of units (16,400) at
the public offering price of $5,000 per unit, you will incur immediate dilution of $90.91 in the
net tangible book value per unit if you purchase units in this offering.
We have placed significant restrictions on transferability of the units, limiting an investors
ability to withdraw from Cardinal Ethanol.
The units are subject to substantial transfer restrictions pursuant to our operating agreement
and tax and securities laws. This means that you will not be able to easily liquidate your
investment and you may have to assume the risks of investments in us for an indefinite period of
time. See SUMMARY OF OUR OPERATING AGREEMENT.
To help ensure that a secondary market does not develop, our amended and restated operating
agreement prohibits transfers without the approval of our board of directors. The board of
directors will not approve transfers unless they fall within safe harbors contained in the
publicly-traded partnership rules under the tax code, which include, without limitation, the
following:
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transfers by gift to the members spouse or descendants;
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transfer upon the death of a member;
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transfers between family members; and
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transfers that comply with the qualifying matching services requirements.
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There is no assurance that an investor will receive cash distributions which could result in an
investor receiving little or no return on his or her investment.
Distributions are payable at the sole discretion of our board of directors, subject to the
provisions of the Indiana Limited Liability Company Act, our operating agreement and the
requirements of our creditors. We do not know the amount of cash that we will generate, if any,
once we begin operations. Cash distributions are not assured, and we may never be in a position to
make distributions. See DESCRIPTION OF MEMBERSHIP UNITS. Our
17
board may elect to retain future
profits to provide operational financing for the plant, debt retirement and possible plant
expansion or the addition of new technology. This means that you may receive little or no return
on your investment and be unable to liquidate your investment due to transfer restrictions and lack
of a public trading market. This could result in the loss of your entire investment.
These units will be subordinate to company debts and other liabilities, resulting in a greater risk
of loss for investors.
The units are unsecured equity interests and are subordinate in right of payment to all our
current and future debt. In the event of our insolvency, liquidation, dissolution or other winding
up of our affairs, all of our debts, including winding-up expenses, must be paid in full before any
payment is made to the holders of the units. In the event of our bankruptcy, liquidation, or
reorganization, all units will be paid ratably with all our other equity holders, and there is no
assurance that there would be any remaining funds after the payment of all our debts for any
distribution to the holders of the units.
You may have limited access to information regarding our business because our operating agreement
does not require us to deliver an annual report to security holders, we do not expect to be
required to furnish proxy statements until a later date, our directors, officers and beneficial
owners will not be required to report their ownership of units until a future time, and our
obligations to file periodic reports with the Securities and Exchange Commission could be
automatically suspended under certain circumstances.
Except for our duty to deliver audited annual financial statements to our members pursuant to
our operating agreement, we are not required to deliver an annual report to security holders and
currently have no plan to do so. We also will not be required to furnish proxy statements to
security holders and our directors, officers and beneficial owners will not be required to report
their beneficial ownership of units to the Securities and Exchange Commission pursuant to Section
16 of the Securities Exchange Act of 1934 until we have both 500 or more unit holders and greater
than $10 million in assets. This means that your access to information regarding our business will
be limited. However, as of effectiveness of our registration statement, we will be required to file
periodic reports with the Securities and Exchange Commission which will be immediately available to
the public for inspection and copying. These reporting obligations will be automatically suspended
under Section 15(d) of the Securities Exchange Act of 1934 if we have less than 300 members. If
this occurs, we will no longer be obligated to file periodic reports with the SEC and your access
to our business information would then be even more restricted.
The presence of members holding 25% or more of the outstanding units is required to take action at
a meeting of our members.
In order to take action at a meeting, a quorum of members holding at least 25% of the
outstanding units must be represented in person, by proxy or by mail ballot. See SUMMARY OF OUR
OPERATING AGREEMENT. Assuming a quorum is present, members take action by a vote of the majority
of the units represented at the meeting and entitled to vote on the matter. The requirement of a
25% quorum protects Cardinal Ethanol from actions being taken when less than 25% of the members
have not considered the matter being voted upon. However, this also means that the unit holders of
a minority of outstanding units could pass a vote and take an action which would then bind all unit
holders. Conversely, the requirement of a 25% quorum also means that members will not be able to
take actions which may be in the best interests of Cardinal Ethanol if we cannot secure the
presence in person, by proxy, or by mail ballot of members holding 25% or more of the outstanding
units.
After the plant is substantially operational, our operating agreement provides for staggered terms
for our directors.
The terms of our initial directors expire at the first annual meeting following substantial
completion of the ethanol plant. At that time, our members will elect directors for staggered
three-year terms. Because our directors will serve on the board for staggered terms, it will be
difficult for our members to replace our board of directors. In that event, your only recourse to
replace these directors would be through an amendment to our operating agreement which could be
difficult to accomplish.
18
Risks Related to Tax Issues
EACH PROSPECTIVE MEMBER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE IMPACT THAT HIS OR
HER PARTICIPATION IN CARDINAL ETHANOL MAY HAVE ON HIS OR HER FEDERAL INCOME TAX LIABILITY AND THE
APPLICATION OF STATE AND LOCAL INCOME AND OTHER TAX LAWS TO HIS OR HER PARTICIPATION IN THIS
OFFERING.
IRS classification of Cardinal Ethanol as a corporation rather than as a partnership would result
in higher taxation and reduced profits, which could reduce the value of your investment in us.
We are a Indiana limited liability company that has elected to be taxed as a partnership for
federal and state income tax purposes, with income, gain, loss, deduction and credit passed through
to the holders of the units. However, if for any reason the IRS would successfully determine that
we should be taxed as a corporation rather than as a partnership, we would be taxed on our net
income at rates of up to 35% for federal income tax purposes, and all items of our income, gain,
loss, deduction and credit would be reflected only on our tax returns and would not be passed
through to the holders of the units. If we were to be taxed as a corporation for any reason,
distributions we make to investors will be treated as ordinary dividend income to the extent of our
earnings and profits, and the payment of dividends would not be deductible by us, thus resulting in
double taxation of our earnings and profits. See FEDERAL INCOME TAX CONSEQUENCES OF OWNING OUR
UNITS- Partnership Status. If we pay taxes as a corporation, we will have less cash to distribute
as a distribution to our Unit holders.
The IRS May Classify Your Investment as Passive Activity Income, Resulting in Your Inability to
Deduct Losses Associated with Your Investment.
If you are not involved in our operations on a regular, continuing and substantial basis, it
is likely that the Internal Revenue Service will classify your interest in us as a passive
activity. If an investor is either an individual or a closely held corporation, and if the
investors interest is deemed to be passive activity, then the investors allocated share of any
loss we incur will be deductible only against income or gains the investor has earned from other
passive activities. Passive activity losses that are disallowed in any taxable year are suspended
and may be carried forward and used as an offset against passive activity income in future years.
These rules could restrict an investors ability to currently deduct any of our losses that are
passed through to such investor.
Income allocations assigned to an investors units may result in taxable income in excess of cash
distributions, which means you may have to pay income tax on your investment with personal funds.
Investors will pay tax on their allocated shares of our taxable income. An investor may
receive allocations of taxable income that result in a tax liability that is in excess of any cash
distributions we may make to the investor. Among other things, this result might occur due to
accounting methodology, lending covenants that restrict our ability to pay cash distributions, or
our decision to retain the cash generated by the business to fund our operating activities and
obligations. Accordingly, investors may be required to pay some or all of the income tax on their
allocated shares of our taxable income with personal funds.
An IRS audit could result in adjustments to Cardinal Ethanols allocations of income, gain, loss
and deduction causing additional tax liability to our members.
The IRS may audit the income tax returns of Cardinal Ethanol and may challenge positions taken
for tax purposes and allocations of income, gain, loss and deduction to investors. If the IRS were
successful in challenging Cardinal Ethanols allocations in a manner that reduces losses or
increases income allocable to investors, you may have additional tax liabilities. In addition,
such an audit could lead to separate audits of an investors tax returns, especially if adjustments
are required, which could result in adjustments on your tax returns. Any of these events could
result in additional tax liabilities, penalties and interest to you, and the cost of filing amended
tax returns.
19
Risks Related to Conflicts of Interest
Our directors and officers have other business and management responsibilities which may cause
conflicts of interest in the allocation of their time and services to our project.
Since our project is currently managed by the board of directors rather than a professional
management group, the devotion of the directors time to the project is critical. However, our
directors and officers have other management responsibilities and business interests apart from our
project. Therefore, our directors and officers may experience conflicts of interest in allocating
their time and services between us and their other business responsibilities. In addition,
conflicts of interest may arise if the directors and officers, either individually or collectively,
hold a substantial percentage of the units because of their position to substantially influence our
business and management.
We may have conflicting financial interests with Fagen, Inc., which could cause Fagen, Inc. to put
its financial interests ahead of ours.
Fagen, Inc. is expected to advise our directors and has been, and is expected to be, involved
in substantially all material aspects of our formation, capital formation and operations to date.
Consequently, the terms and conditions of our agreements and understandings with Fagen, Inc. (and,
through Fagen, Inc., with ICM, Inc.), including our design-build letter of intent, have not been
negotiated at arms length. Therefore, there is no assurance that our arrangements with such
parties are as favorable to us as they could have been if obtained from unaffiliated third parties.
Most of the cost of our project will be paid to Fagen, Inc. for the design and construction of our
ethanol plant. Fagen, Inc. may experience conflicts of interest that cause it to put its financial
interest in the design and construction of our plant ahead of our best interests. In addition,
because of the extensive roles that Fagen, Inc. and/or ICM, Inc. will have in the construction and
operation of the plant, it may be difficult or impossible for us to enforce claims that we may have
against Fagen, Inc. and/or ICM, Inc. Such conflicts of interest may reduce our profitability and
the value of the units and could result in reduced distributions to investors.
Fagen, Inc. and ICM, Inc., and their affiliates, may also have conflicts of interest because
Fagen, Inc., ICM, Inc. and their employees or agents are involved as owners, creditors and in other
capacities with other ethanol plants in the United States. We cannot require Fagen, Inc. or ICM,
Inc. to devote their full time or attention to our activities. As a result, Fagen, Inc. and ICM,
Inc. may have, or come to have, a conflict of interest in allocating personnel, materials and other
resources to our plant.
Affiliated investors may purchase additional units and influence decisions in their favor.
We may sell units to affiliated or institutional investors and they may acquire enough units
to influence the manner in which we are managed. These investors may influence our business in a
manner more beneficial to themselves than to our other investors. This may reduce the value of your
units, impair the liquidity of your units and/or reduce our profitability.
Before making any decision to invest in us, investors should read this entire prospectus,
including all of its exhibits, and consult with their own investment, legal, tax and other
professional advisors
.
DETERMINATION OF OFFERING PRICE
There is no established market for our units. We established the offering price without an
independent valuation of the units. We established the offering price based on our estimate of
capital and expense requirements, not based on perceived market value, book value, or other
established criteria. In considering our capitalization requirements, we determined the minimum
and maximum aggregate offering amounts based upon our cost of capital analysis and debt to equity
ratios acceptable in the industry. In determining the offering price per unit we considered the
additional administrative expense which would likely result from a lower offering price per unit,
such as the cost of increased unit trading. We also considered the dilution impact of our recent
private placement offering price in determining an appropriate public offering price per unit. The
units may have a value significantly less than the offering price and there is no guarantee that
the units will ever obtain a value equal to or greater than the offering price.
20
DILUTION
An investor purchasing units in this offering will receive units diluted by the prior purchase
of units by purchasers during our previous private placement offerings. We have sold units to our
founders and seed capital investors at prices substantially below the price at which we are
currently selling units. The presence of these previously sold units will dilute the relative
ownership interests of the units sold in this offering because these earlier investors received a
relatively greater share of our equity for less consideration than investors are paying for units
issued in this offering. Generally, all investors in this offering will notice immediate dilution.
We have and will continue to use this previously contributed capital to finance development costs
and for initial working capital purposes. We intend to use any remaining balance for the same
purposes as those of this offering.
As of September 30, 2005, we had 72 outstanding units, which were sold to our founders for
$1,666.67 per unit. The units, as of September 30, 2005, had a net tangible book value of $57,429
or $797.63 per unit. The net tangible book value per unit represents members equity less
intangible assets which includes deferred offering costs, divided by the number of units
outstanding. Subsequent to September 30, 2005, we sold an additional 496 units to our seed capital
investors at a purchase price of $2,500 per unit for aggregate proceeds of $1,240,000. Our seed
capital offering closed on December 7, 2005. Therefore, as of the date of this prospectus, we have
a total of 568 units outstanding. The following chart sets forth the units issued since our
inception through the date of this prospectus:
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Issuance Event
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Number of Units Issued
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Founders Private Placement
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72
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Seed Capital Private Placement
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496
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|
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TOTAL:
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568
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Assuming the additional 496 units issued to our seed capital investors have a net tangible
book value of $2,500 per unit, for a total of $1,240,000, which excludes the additional costs
Cardinal Ethanol has incurred since September 30, 2005, the net tangible book value for all
outstanding units (568 units) can be estimated at $1,297,429 ($57,429 plus $1,240,000). Therefore,
the estimated net tangible book value per unit, excluding additional costs since September 30,
2005, would be approximately $2,284.21 as of the date of this prospectus. The net tangible book
value per unit represents members equity less intangible assets which includes deferred offering
costs, divided by the number of units outstanding.
The offering price of $5,000 per unit substantially exceeds the net tangible book value per
unit of our outstanding units. Therefore, all current holders will realize an immediate increase
of at least $2,554.57 per unit in the pro forma net tangible book value of their units if the
minimum (9,000 units) is sold at a price of $5,000 per unit, and an increase of at least $2,624.88
per unit if the maximum (16,400 units) is sold at a price of $5,000 per unit. Purchasers of units
in this offering will realize an immediate dilution of at least $161.22 per unit in the net
tangible book value of their units if the minimum (9,000 units) is sold at a price of $5,000 per
unit, and a decrease of at least $90.91 per unit if the maximum (16,400 units) is sold at a price
of $5,000 per unit.
The following table illustrates the increase to existing unit holders and the dilution to
purchasers in the offering in the net tangible book value per unit assuming the minimum or the
maximum number of units is sold. The table does not take into account any other changes in the net
tangible book value of our units occurring after September 30, 2005 or offering expenses related to
this offering.
21
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Minimum
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Maximum
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Pro forma net tangible book value per
unit at September 30, 2005.
(1)
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$
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2,284.21
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|
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$
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2,284.21
|
|
|
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Increase in pro forma net tangible book
value per unit attributable to the sale of
9,000 (minimum) and 16,400 (maximum) units at
$5,000 per
unit
(2)
.
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$
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2,554.57
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$
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2,624.88
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|
|
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Pro forma net tangible book value per
unit at September 30, 2005, as adjusted for the
sale of units in this offering
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$
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4,838.78
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$
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4,909.09
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Dilution per unit to new investors in
this offering
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$
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(161.22
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)
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$
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(90.91
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)
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(1)
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As adjusted to reflect the sale of additional 496 units to seed
capital investors subsequent to September 30, 2005 for $1,240,000,
before deducting any related offering costs or other additional costs
incurred since September 30, 2005.
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(2)
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The minimum and maximum number of units is circumscribed
by the minimum offering amount of $45,000,000 and maximum offering
amount of $82,000,000.
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We may seek additional equity financing in the future, which may cause additional
dilution to investors in this offering, and a reduction in their equity interest. The holders of
the units purchased in this offering will have no preemptive rights on any units to be issued by us
in the future in connection with any such additional equity financing. We could be required to
issue warrants to purchase units to a lender in connection with our debt financing. If we sell
additional units or warrants to purchase additional units, the sale or exercise price could be
higher or lower than what investors are paying in this offering. If we sell additional units at a
lower price it could lower the value of an existing investors units.
The tables below sets forth as of this prospectus, on an as-if-converted basis, the
difference between the number of units purchased, and total consideration paid for those units, by
existing unit holders, compared to units purchased by new investors in this offering without taking
into account any offering expenses.
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Total Number of Units Purchased
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|
|
Minimum Offering
|
|
Maximum Offering
|
|
|
Units
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|
Percent of Total
|
|
Units
|
|
Percent of Total
|
Existing unit
holders
|
|
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568
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|
|
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5.94
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%
|
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|
568
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|
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3.35
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%
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New investors
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|
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9,000
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|
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94.06
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%
|
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|
16,400
|
|
|
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96.65
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%
|
|
|
|
|
|
|
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|
|
|
|
|
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Total
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9,568
|
|
|
|
100.00
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%
|
|
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16,968
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|
|
|
100.00
|
%
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|
|
|
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|
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|
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Total Consideration Paid for Units
|
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|
Minimum Offering
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Maximum Offering
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Average Price
|
|
|
|
|
|
|
|
|
|
|
Average Price
|
|
|
|
Amount Paid
|
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|
Percent of Total
|
|
|
Per Unit
|
|
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Amount Paid
|
|
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Percent of Total
|
|
|
Per Unit
|
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Existing unit
holders
|
|
$
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1,360,000
|
|
|
|
2.93
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%
|
|
$
|
2,394.37
|
|
|
$
|
1,360,000
|
|
|
|
1.63
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%
|
|
$
|
2,394.37
|
|
New investors
|
|
$
|
45,000,000
|
|
|
|
97.07
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%
|
|
$
|
5,000.00
|
|
|
$
|
82,000,000
|
|
|
|
98.37
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%
|
|
$
|
5,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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$
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46,360,000
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|
|
|
100.00
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%
|
|
$
|
4,845.32
|
|
|
$
|
83,360,000
|
|
|
|
100.00
|
%
|
|
$
|
4,912.78
|
|
22
CAPITALIZATION
We have issued a total of 72 units to our founders at a purchase price of $1,666.67 per units,
for total unit proceeds of $120,000. In addition, we have issued a total of 496 units to our seed
capital investors at a purchase price of $2,500 per unit, for total unit proceeds of $1,240,000.
If the minimum offering of $45,000,000 is attained, we will have total membership proceeds of
$46,360,000 at the end of this offering, less offering expenses. If the maximum offering of
$82,000,000 is attained, we will have total membership proceeds of $83,360,000 at the end of this
offering, less offering expenses.
Capitalization Table
The following table sets forth our capitalization at September 30, 2005 and our expected
capitalization following this offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
(1)
|
|
|
|
Actual
|
|
|
Minimum
|
|
|
Maximum
|
|
Unit holders equity contributions
|
|
|
120,000
|
(2)
|
|
|
46,360,000
|
|
|
|
83,360,000
|
|
Accumulated deficit
|
|
|
(43,886
|
)
|
|
|
(43,886
|
)
|
|
|
(43,886
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Unit holders equity (deficit)
|
|
|
76,114
|
|
|
|
46,316,114
|
|
|
|
83,316,114
|
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization
(3)
|
|
$
|
76,114
|
|
|
$
|
46,316,114
|
|
|
$
|
83,316,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As adjusted to reflect receipt of gross proceeds from this offering prior to
deducting offering expenses and prior to securing a debt financing commitment. These
totals include an additional $1,240,000 raised from our seed capital investors in our
previous private placement which concluded on December 7, 2005.
|
|
(2)
|
|
Includes founders equity of $120,000 contributed in exchange for 72 units at
$1,666.67 per unit.
|
|
(3)
|
|
In order to fully capitalize the project, we will also need to obtain debt
financing ranging from approximately $67,140,000 to $104,140,000 less any grants we
are awarded and any bond or tax increment financing we can obtain. Our estimated
long-term debt requirements are based upon our project coordinators past experience
with similar projects, preliminary discussions with lenders and our independent
research regarding capitalization requirements for ethanol plants of similar size.
|
Our previous private placements were made directly by us without use of an underwriter or
placement agent and without payment of commissions or other remuneration. The aggregate sales
proceeds, after payment of offering expenses of approximately $18,700, were applied to our working
capital and other development and organizational purposes.
With respect to the exemption from registration of issuance of securities claimed under Rule
506 and Section 4(2) of the Securities Act, neither we, nor any person acting on our behalf offered
or sold the securities by means of any form of general solicitation or advertising. Prior to
making any offer or sale, we had reasonable grounds to believe and believed that each prospective
investor was capable of evaluating the merits and risks of the investment and were able to bear the
economic risk of the investment. Each purchaser represented in writing that the securities were
being acquired for investment for such purchasers own account, and agreed that the securities
would not be sold without registration under the Securities Act or exemption from the Securities
Act. Each purchaser agreed that a legend was placed on each certificate evidencing the securities
stating the securities have not been registered under the Securities Act and setting forth
restrictions on their transferability.
DISTRIBUTION POLICY
We have not declared or paid any distributions on the units. We do not expect to generate
earnings until the proposed ethanol plant is operational, which is expected to occur approximately
18 to 20 months after we close the offering. After operation of the proposed ethanol plant begins,
it is anticipated, subject to any loan covenants or restrictions with any senior and term lenders,
that we will distribute net cash flow to our members in proportion to the units that each member
holds relative to the total number of units outstanding. Net cash flow, means our gross cash
proceeds less any portion, as determined by the board of directors in their sole discretion, used
to pay or establish reserves for operating expenses, debt payments, capital improvements,
replacements and contingencies. However, there can be no assurance that we will ever be able to
pay any distributions to the unit holders including you. Additionally, our lenders may further
restrict our ability to make distributions during the initial period of the term debt.
23
SELECTED FINANCIAL DATA
The following table summarizes important financial information from our September 30, 2005
audited financial statements. You should read this table in conjunction with the financial
statements and the notes included elsewhere in this prospectus.
|
|
|
|
|
|
|
From Inception
|
|
|
|
(Feb. 7, 2005) to
|
|
|
|
Sept. 30, 2005
|
|
Statement of Operations Data:
|
|
|
|
|
Revenues
|
|
$
|
|
|
Operating expenses:
|
|
|
|
|
Professional fees
|
|
|
35,322
|
|
General and administrative
|
|
|
10,149
|
|
|
|
|
|
Total operating expenses
|
|
|
45,471
|
|
|
|
|
|
|
Operating Loss
|
|
|
(45,471
|
)
|
|
Other Income
|
|
|
1,585
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(43,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2005
|
|
Balance Sheet Data:
|
|
|
|
|
Assets:
|
|
|
|
|
Cash and equivalents
|
|
$
|
5,295
|
|
Investments
|
|
|
66,573
|
|
Prepaid expenses
|
|
|
13,726
|
|
Net property and equipment
|
|
|
5,602
|
|
Deferred offering costs
|
|
|
18,685
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
109,881
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity:
|
|
|
|
|
Current liabilities
|
|
$
|
33,767
|
|
Total members equity
|
|
|
76,114
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
109,881
|
|
|
|
|
|
24
MANAGEMENTS DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
Overview
This prospectus contains forward-looking statements that involve risks and uncertainties.
Actual events or results may differ materially from those indicated in such forward-looking
statements. These forward-looking statements are only our predictions and involve numerous
assumptions, risks and uncertainties, including, but not limited to those risk factors described
elsewhere in this prospectus. The following discussion of the financial condition and results of
our operations should be read in conjunction with the financial statements and related notes
thereto included elsewhere in this prospectus.
We are an Indiana limited liability company. We were initially formed as Indiana Ethanol, LLC
as a Indiana limited liability company on February 7, 2005, for the purpose of constructing and
operating a plant to produce ethanol and distillers grains in east central Indiana or west central
Ohio. We then changed our name to Cardinal Ethanol, LLC on September 27, 2005. We do not expect
to generate any revenue until the plant is completely constructed and operational.
We have not chosen a site for our plant. We are looking at various potential plant sites
located in east central Indiana and west central Ohio. We are currently considering possible plant
sites in Randolph County, Indiana and Jay County, Indiana and various locations in west central
Ohio. For more information about our potential plant site, please refer to Description of
Business Project Location and Proximity to Markets.
Our board of directors reserves the
right to choose the location of the final plant site, in their sole discretion.
We anticipate
the final plant site will have access to both truck and rail transportation.
Currently, our principal place of business is located at 2 OMCO Square, Suite 201, Winchester,
Indiana 47394. On August 15, 2005, we entered into a lease of this commercial office space with
OMCO Mould, Inc. Under the terms of the lease, we pay OMCO Mould, Inc. $600 per month. The term
of the lease is through August 31, 2006, which may be extended at our option on a month-to-month
basis on the same terms and conditions as the lease.
Based upon engineering specifications produced by Fagen, Inc., the plant will annually consume
approximately 36 million bushels of corn and annually produce approximately 100-million gallons of
fuel grade ethanol and 320,000 tons of distillers grains for animal feed. We currently estimate
that it will take 18 to 20 months from the date that we close the offering, which includes
obtaining our debt financing, and obtaining all necessary permits, to complete the construction of
the plant.
We expect the project will cost approximately $150,500,000 to complete. This includes
approximately $105,997,000 to build the plant and an additional $44,503,000 in other capital
expenditures and working capital. In addition, our letter of intent with Fagen, Inc. provides for
an increase in the construction price in certain circumstances. As a result, our anticipated total
project cost is not a firm estimate and is expected to change from time to time as the project
progresses. These changes may be significant. We have budgeted $8,388,000 in construction
contingency to help offset any increases in our costs of construction. However, it is unknown
whether this allowance will be sufficient to offset any increased cost. We have also entered into
a phase I and phase II engineering services agreement with Fagen Engineering, LLC for the
performance of certain engineering and design work in exchange for $92,500, which will be credited
against the total design build costs of our project. See DESCRIPTION OF BUSINESS Design-Build
Team for detailed information about our letter of intent with Fagen, Inc. and our phase 1 and
phase II engineering services agreement with Fagen Engineering, LLC. Except for the non-binding
letter of intent with Fagen, Inc. and the engineering agreement with Fagen Engineering, LLC, we do
not have any binding or non-binding agreements with any contractor for the labor or materials
necessary to build the plant.
We are still in the development phase, and until the proposed ethanol plant is operational, we
will generate no revenue. We anticipate that accumulated losses will continue to increase until
the ethanol plant is operational.
25
Plan of Operations Until Start-Up of Ethanol Plant
We expect to spend at least the next 12 months focused on three primary activities: (1)
project capitalization; (2) site acquisition and development; and (3) plant construction and
start-up operations. Assuming the successful completion of this offering and the related debt
financing, we expect to have sufficient cash on hand to cover all costs associated with
construction of the project, including, but not limited to, site acquisition and development,
utilities, construction and equipment acquisition. In addition, we expect our seed capital
proceeds to supply us with enough cash to cover our costs through this period, including staffing,
office costs, audit, legal, compliance and staff training. We estimate that we will need
approximately $150,500,000 to complete the project.
Project capitalization
We raised $1,360,000 in our previous private placements to our founders and seed capital
investors. We will not close our current offering until we have raised the minimum offering amount
of $45,000,000. We have until
[one year date]
to sell the minimum number of units required to
raise the minimum offering amount. If we sell the minimum number of units prior to
[one year
date]
, we may decide to continue selling units until we sell the maximum number of units or
[one
year date]
, whichever occurs first. Even if we successfully close the offering by selling at least
the minimum number of units by
[one year date],
we will not release the offering proceeds from
escrow until the cash proceeds in escrow equal $45,000,000 or more and we secure a written debt
financing commitment for debt financing ranging from a minimum of $67,140,000 to a maximum of
$104,140,000 depending on the level of equity raised and any grant funding received. A debt
financing commitment only obligates the lender to lend us the debt financing that we need if we
satisfy all the conditions of the commitment. These conditions may include, among others, the
total cost of the project being within a specified amount, the receipt of engineering and
construction contracts acceptable to the lender, evidence of the issuance of all permits,
acceptable insurance coverage and title commitment, the contribution of a specified amount of
equity and attorney opinions. At this time, we do not know what business and financial conditions
will be imposed on us. We may not satisfy the loan commitment conditions before closing, or at
all. If this occurs we may:
|
|
|
commence construction of the plant using all or a part of the
equity funds raised while we seek another debt financing source;
|
|
|
|
|
hold the equity funds raised indefinitely in an interest-bearing
account while we seek another debt financing source; or
|
|
|
|
|
return the equity funds, if any, to investors with accrued
interest, after deducting the currently indeterminate expenses of operating
our business or partially constructing the plant before we return the funds.
|
While the foregoing alternatives may be available, we do not expect to begin substantial plant
construction activity before satisfying the loan commitment conditions or closing the loan
transaction because it is very likely that Fagen, Inc., and any lending institution will prohibit
substantial plant construction activity until satisfaction of loan commitment conditions or loan
closing. We expect that proceeding with plant construction prior to satisfaction of the loan
commitment conditions or closing the loan transaction could cause us to abandon the project or
terminate operations. As a result, you could lose all or part of your investment.
Site acquisition and development
During and after the offering, we expect to continue work principally on the preliminary
design and development of our proposed ethanol plant, choosing our site plant, obtaining the
necessary construction permits, identifying potential sources of debt financing and negotiating the
corn supply, ethanol and distillers grains marketing, utility and other contracts. We plan to fund
these initiatives using the $1,360,000 of equity capital raised in our previous private placements.
We believe that our existing funds will permit us to continue our preliminary activities through
the end of this offering. If we are unable to close on this offering by that time or otherwise
obtain other funds, we may need to discontinue operations.
We have not chosen a site for our plant. We anticipate building our plant in east central
Indiana or west central Ohio.
We reserve the right, in the sole discretion of our board of
directors, to select the location for the plant
.
26
We have purchased two real estate options for a proposed site in Randolph County, Indiana. On
January 10, 2006, we executed a real estate option agreement with Timothy L. and Diana S. Cheesman,
the Lydia E. Harris Trust, and the Mary Frances James Revocable Trust Agreement dated September 18,
2003, granting us an option to purchase 3 tracts of land in Randolph County, Indiana totaling
approximately 216 acres. Under the terms of the option agreement, we paid $1,500 to each party for
an aggregate option price of $4,500 and have the option to purchase the land for $4,200 per
surveyed acre plus $60,000 for the buildings located on tract 1. This option expires on January
30, 2007, unless we choose to extend the option to January 30, 2008, for an additional payment of
$1,500 to each party. On January 11, 2006, we executed a real estate option agreement with Dale
and Bonnie Bartels granting us an option to purchase 5 acres of land in Randolph County, Indiana
adjacent to the 216-acre site. Under the terms of the option agreement, we paid $1,500 for the
option and have the option to purchase the land for $40,000. This option expires on January 30,
2007, unless we choose to extend the option to January 30, 2008, for an additional payment of
$1,500.
We have also acquired one real estate option and expect to purchase two additional real estate
options for a proposed site in Jay County, Indiana. On December 21, 2005, we executed a real
estate option agreement with Rodgers Farm, LLC granting us an option to purchase approximately 133
acres of land in Jay County, Indiana. Under the terms of the option agreement, we paid $5,000 for
the option and have the option to purchase the land for $7,700 per surveyed acre. This option
expires on July 1, 2006, however we may extend the option every six months to July 1, 2008 for an
additional payment of $5,000 for each six-month extension.
Plant construction and start-up of plant operations
We expect to complete construction of the proposed plant and commence operations approximately
18 to 20 months from the date this offering closes. Our work will include completion of the final design
and development of the plant. We also plan to negotiate and execute finalized contracts concerning
the construction of the plant, provision of necessary electricity, natural gas and other power
sources and marketing agreements for ethanol and distillers grains. Assuming the successful
completion of this offering and our obtaining the necessary debt financing, we expect to have
sufficient cash on hand to cover construction and related start-up costs necessary to make the
plant operational. We estimate that we will need approximately $105,997,000 to construct the plant
and approximately $44,503,000 to cover all capital expenditures necessary to complete the project,
make the plant operational and produce revenue.
Trends and Uncertainties Impacting the Ethanol Industry and Our Future Operations
If we are able to build the plant and begin operations, we will be subject to industry-wide
factors that affect our operating and financial performance. These factors include, but are not
limited to, the available supply and cost of corn from which our ethanol and distillers grains will
be processed; the cost of natural gas, which we will use in the production process; dependence on
our ethanol marketer and distillers grain marketer to market and distribute our products; the
intensely competitive nature of the ethanol industry; possible legislation at the federal, state
and/or local level; changes in federal ethanol tax incentives and the cost of complying with
extensive environmental laws that regulate our industry.
Our revenues will consist of sales of ethanol and distillers grains. We expect ethanol sales
to constitute the bulk of our future revenues. Ethanol prices have recently been much higher than
their 10-year average. Increased demand, firm crude oil and gas markets, public acceptance, and
positive political signals have all contributed to a strengthening of ethanol prices. However, due
to the increase in the supply of ethanol from the number of new ethanol plants scheduled to begin
production and the expansion of current plants, we do not expect current ethanol prices to be
sustainable in the long term and the industry will need to continue to grow demand to offset the
increased supply brought to the market place by additional production. Areas where demand may
increase are new markets in New Jersey, Pennsylvania, Massachusetts, North Carolina, South
Carolina, Michigan, Tennessee, Louisiana and Texas. According to the Renewable Fuels Association,
Minnesota may also generate additional demand due to the recent passage of state legislation
mandating a 20% ethanol blend in its gasoline. Montana passed a similar mandate this year, but it
will not go into effect until 60 million gallons of ethanol are produced in the state. See
INDUSTRY OVERVIEW General Ethanol Demand and Supply.
27
We also expect to benefit from federal and ethanol supports and tax incentives. Changes to
these supports or incentives could significantly impact demand for ethanol. The most recent
ethanol supports are contained in the Energy Policy Act of 2005. Most notably, the Act creates a
7.5 billion gallon Renewable Fuels Standard (RFS). The RFS requires refiners to use 4 billion
gallons of renewable fuels in 2006, increasing to 7.5 billion gallons by 2012. See INDUSTRY
OVERVIEW Federal Ethanol Supports.
Demand for ethanol may also increase as a result of increased consumption of E85 fuel. E85
fuel is a blend of 70% to 85% ethanol and gasoline. According to the Energy Information
Administration, E85 consumption is projected to increase from a national total of 11 million
gallons in 2003 to 47 million gallons in 2025. E85 can be used as an aviation fuel, as reported by
the National Corn Growers Association, and as a hydrogen source for fuel cells. According to the
Renewable Fuels Association, there are currently more than 5 million flexible fuel vehicles capable
of operating on E85 in the United States and automakers such as Ford and General Motors have
indicated plans to produce several million more flexible fuel vehicles per year. The American
Coalition for Ethanol reports that there are currently approximately 600 retail gasoline stations
supplying E85. However, this remains a relatively small percentage of the total number of U.S.
retail gasoline stations, which is approximately 170,000.
Ethanol production continues to grow as additional plants become operational. Demand for
ethanol has been supported by higher prices for oil and its refined components and by clean air
standards mandated by federal agencies that require highly populated areas to blend ethanol into
their gasoline supplies as an oxygenate. The intent of the air standards is to reduce harmful
emissions into the atmosphere. These mandates have been challenged in several metropolitan areas,
and are currently being reviewed by the courts. In the future, the combination of additional
supply, successful challenges to the clean air standards and stagnant or reduced demand may damage
our ability to generate revenues and maintain positive cash flows.
Trends and Uncertainties Impacting the Corn and Natural Gas Markets and Our Future Cost of Goods
Sold
We expect our future cost of goods sold will consist primarily of costs relating to the corn
and natural gas supplies necessary to produce ethanol and distillers grains for sale.
The 2005 national corn crop was the second largest on record with national production at
approximately 11.11 billion bushels, exceeded only by the 2004 crop which is the largest ever
recorded at approximately 11.8 billion bushels. The large 2004 corn crop allowed ethanol plants to
purchase corn cheaply throughout 2005, which widened profit margins for many ethanol plants in
2005. As a result of the large 2005 corn crop, we expect corn prices to remain at relatively low
levels into the 2005-2006 marketing year. However, variables such as planting dates, rainfall, and
temperatures will likely cause market uncertainty and create corn price volatility throughout the
year. In addition, we do not expect corn prices to remain at the current low levels indefinitely.
Although we do not expect to begin operations until summer 2008, we expect these same factors will
continue to cause continuing volatility in the price of corn, which will significantly impact our
cost of goods sold.
Natural gas is an important input to the ethanol manufacturing process. We estimate that our
natural gas usage will be approximately 15-20% of our annual total production cost. We use natural
gas to dry our distillers grains products to moisture contents at which they can be stored for
longer periods and transported greater distances. Dried distillers grains have a much broader
market base, including the western cattle feedlots, and the dairies of California and Florida.
Recently, the price of natural gas has risen along with other energy sources and has only been
available at prices exceeding the 10-year historical average. The prices may increase our costs of
production when we become operational. In late August and early September 2005, Hurricane Katrina
and Hurricane Rita caused dramatic damage to Louisiana and Texas, two of the largest natural gas
hubs in the United States. As the damage from the hurricane became apparent, natural gas prices
substantially increased. It is currently unknown how the damage will affect intermediate and
long-term prices of natural gas. Future hurricanes in the Gulf of Mexico could cause similar or
greater uncertainty. In addition, the price of natural gas has historically fluctuated with
seasonal weather changes, often experiencing price spikes during extended cold spells. We look for
continued volatility in the natural gas market. Any ongoing increases in the price of natural gas
will increase our cost of production and may negatively impact our future profit margins.
28
Technology Developments
A new technology has recently been introduced, to remove corn oil from concentrated thin
stillage (a by-product of dry milling ethanol processing facilities) which would be used as an
animal feed supplement or possibly as an input for bio-diesel production. Although the recovery of
oil from the thin stillage may be economically feasible, it fails to produce the advantages of
removing the oil prior to the fermentation process. Various companies are currently working on or
have already developed starch separation technologies that economically separate a corn kernel into
its main components. The process removes the germ, pericarp and tip of the kernel leaving only the
endosperm of kernel for the production of ethanol. This technology has the capability to reduce
drying costs and the loading of volatile organic compounds. The separated germ would also be
available through this process for other uses such as high oil feeds or bio-diesel production. Each
of these new technologies is currently in its early stages of development. There is no guarantee
that either technology will be successful or that we will be able to implement the technology in
our ethanol plant.
Employees
We currently have one full-time employee, Angela Armstrong, our project coordinator. We
expect to hire approximately 45 full-time employees before commencing plant operations. Our
officers are Troy Prescott, Chairman; Tom Chalfant, Vice Chairman; Dale Schwieterman, Treasurer;
and John Shanks, II, Secretary. As of the date of this prospectus, we have not hired any
additional employees.
Recent Private Placement to Raise Seed Capital
In February 2005, we sold a total of 72 of our membership units to our founders at a price of
$1,666.67 per unit and received aggregate proceeds of $120,000. In December 2005, we sold an
additional 496 units to our seed capital investors at a price of $2,500 per unit for proceeds of
$1,240,000. We determined the offering price per unit of $1,666.67 for our founders units and
$2,500 for our seed capital units based upon the capitalization requirements necessary to fund our
development, organization and financing activities as a development-stage company. We did not rely
upon any independent valuation, book value or other valuation criteria in determining the seed
capital offering price per unit. We expect the proceeds from our previous private placements to
provide us with sufficient liquidity to fund the developmental, organizational and financing
activities necessary to advance our project. Specifically, we expect our seed capital proceeds
will be sufficient to fund the following activities which we expect to conduct during this
offering: identification of and negotiation with potential senior lenders and providers of
subordinated debt, bond and tax increment financing, initial construction permitting,
identification of and negotiation with potential ethanol and distillers grains marketing firms and
project capitalization including equity raising activities. We do not expect that we will be able
to begin significant site development and plant construction activity until we receive proceeds
from this offering.
All of the seed capital proceeds were immediately at-risk at the time of investment. We
increased the public offering price per unit based upon the differences in risk and the development
stage of our project at the time of investment.
Liquidity and Capital Resources
As of September 30, 2005, we had total assets of $109,881 consisting primarily of cash and
marketable securities. As of September 30, 2005, we had current liabilities of $33,767 consisting
primarily of our accounts payable. Since our inception through September 30, 2005, we have an
accumulated deficit of $43,886. Total liabilities and members equity as of September 30, 2005,
was $109,881. Since our inception, we have generated no revenue from operations. From our
inception to September 30, 2005, we have a net loss of $43,886, primarily due to start-up business
costs.
Capitalization Plan
Based on our business plan and current construction cost estimates, we believe the total
project will cost approximately $150,500,000. Our capitalization plan consists of a combination of
equity, including equity capital raised in our previous private placements, debt, government grants
and tax increment financing.
29
Equity Financing
We raised $1,360,000 in our previous private placement offerings. In addition, we are seeking
to raise a minimum of $45,000,000 and a maximum of $82,000,000 of equity in this offering.
Including the $1,360,000 we raised in our seed capital offering and depending on the level of
equity raised in this offering and the amount of grants and other incentives awarded to us, we
expect to require debt financing ranging from a minimum of $67,140,000 to a maximum of
$104,140,000.
Debt Financing
We hope to attract the senior bank loan from a major bank, with participating loans from other
banks, to construct the proposed ethanol plant. We expect the senior loan will be a construction
loan secured by all of our real property, including receivables and inventories. We plan to pay
near prime rate on this loan, plus annual fees for maintenance and observation of the loan by the
lender, however, there is no assurance that we will be able to obtain debt financing or that
adequate debt financing will be available on the terms we currently anticipate. If we are unable
to obtain senior debt in an amount necessary to fully capitalize the project, we may have to seek
subordinated debt financing which could require us to issue warrants. The issuance of warrants
could reduce the value of our units.
We do not have contracts or commitments with any bank, lender, underwriter, governmental
entity or financial institution for debt financing. We have started identifying and interviewing
potential lenders, however, we have not signed any commitment or contract for debt financing.
Completion of the project relies entirely on our ability to attract these loans and close on this
offering.
We are also discussing the potential issuance of $10 million in an unsecured debt or bond
financing with Randolph County, Indiana, which would be subordinate to our senior debt financing.
The issuance of this debt or bond financing could reduce the amount of equity and/or term debt
financing required to fully capitalize our project. However, we do not have any contracts or
commitments with Randolph County, Indiana to provide subordinate debt or bond financing and there
is no assurance that Randolph County, Indiana or any other governmental entity will facilitate such
debt or bond financing. In addition, even if debt or bond financing becomes available, there is no
assurance that it will be on terms favorable to us.
Grants and Government Programs
On June 8, 2005, we entered into an agreement with PlanScape Partners to serve as a consultant
in researching and applying for local and state financial incentives for our project. Under the
terms of the agreement, we will pay PlanScape Partners an hourly rate for their services. The
agreement projects a fee between $12,000 and $16,000 for PlanScape Partners services.
Indiana Incentives
. If we choose to build our ethanol plant in Indiana, we may qualify for
the following incentive programs administered by the Indiana Economic Development Corporation:
|
|
|
Ethanol Production Tax Credit. The Ethanol Production Tax Credit is available to
ethanol plants that have the capacity to produce at least 40 million gallons of ethanol
per year or which after December 31, 2003 increased its ethanol production capacity by
at least 40 million gallons per year. Under the program, eligible ethanol plants may
receive a credit against the state tax liability of $0.125 multiplied by the number of
gallons ethanol produced at the facility. The total amount of credits allowed by a
taxpayer may not exceed a total of $3,000,000 for all taxable years, however, the
aggregate total may increased to $5,000,000 with prior approval of the Indiana Economic
Development Corporation.
|
|
|
|
|
Economic Development for a Growing Economy (EDGE). The EDGE tax credit program
provides a tax credit to eligible companies creating new jobs. EDGE credits are
calculated as a percentage of payroll tax withholding may be awarded for up to 100% of
the projected state income tax withholdings attributable to the companys Indiana
project. EDGE tax credits may be awarded for a term of up to 10 years. In addition to
certain other requirements a company must commit to maintaining operations in
|
30
|
|
|
Indiana
for at least 2 years beyond the term of the companys EDGE award to be eligible for
EDGE tax credits.
|
|
|
|
|
Hoosier Business Investment Tax Credit (HBITC). The HBITC program provides a
credit against a companys Indiana tax liability to encourage capital investment in
Indiana by companies. The amount of the tax credit is based on a companys qualified
capital investment and may be up to 10% of their qualified capital investment carried
forward for up to 9 years. The final credit amount and carry forward term is
determined by the Indiana Economic Development Corporation on a case by case analysis
of the economic benefits of the proposed investment.
|
At this time, we have not yet applied for any of the above tax incentive programs. In
addition, there is no guarantee that we will be eligible to participate in any of the above tax
incentive programs or, if eligible, that the incentives will remain at current levels.
Ohio Incentives
. We are still in the process of identifying what incentives, if any, may
be available to us if we decide to locate our plant in Ohio.
USDA Grants
. We have been approved for and have accepted a USDA Rural Development Grant in
the amount of $100,000, which is to be used for start-up costs. We receive funds from this grant
on a monthly basis as reimbursement for expenses incurred.
We plan to apply for additional grants from the USDA and other sources. Although we may apply
under several programs simultaneously and may be awarded grants or other benefits from more than
one program, it must be noted that some combinations of programs are mutually exclusive. Under
some state and federal programs, awards are not made to applicants in cases where construction on
the project has started prior to the award date. There is no guarantee that applications will
result in awards of grants or loans.
Commodity Credit Corporation Bioenergy Program
. Additionally, Congress provides an ethanol
production incentive to ethanol producers through the United States Department of Agriculture
Commodity Credit Corporations Bioenergy Program. The BioEnergy Program reimburses eligible
ethanol producers of less than 65 million gallons of ethanol, one bushel of corn for every two and
one-half bushels of corn used for the increased production of ethanol. No eligible producer may
receive more than $7,500,000 annually under the program. The Bioenergy program is currently only
scheduled to continue through September 30, 2006, however, our current anticipated completion date
is summer 2008. In addition, even if the program were extended, we do not expect to qualify for
bioenergy program payments because we expect to produce approximately 100 million gallons of
ethanol per year, significantly more than the programs current maximum eligible production
capacity of 65 million gallons of ethanol. As such, we do not expect to qualify for the Commodity
Credit Corporation Bioenergy Program and our capitalization plan does not assume we will receive
any program payments. If the program is extended and expanded, we expect to apply for enrollment
in the program, however, there is no guarantee that the program will be extended beyond September
2006 or that the maximum eligible production capacity will be expanded.
Critical Accounting Estimates
Management uses 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. Significant estimates include the deferral of expenditures for
offering costs, which are dependent upon successful financing of the project. We defer the costs
incurred to raise equity financing until that financing occurs. At the time we issue new equity,
we will net these costs against the equity proceeds received. Alternatively, if the equity
financing does not occur, we will expense the offering costs. It is at least reasonably possible
that this estimate may change in the near term.
Off-Balance Sheet Arrangements.
We do not have any off-balance sheet arrangements.
31
ESTIMATED SOURCES OF FUNDS
The following tables set forth various estimates of our sources of funds, depending upon the
amount of units sold to investors and based upon various levels of equity that our lenders may
require. The information set forth below represents estimates only and actual sources of funds
could vary significantly due to a number of factors, including those described in the section
entitled RISK FACTORS and elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
Minimum 9,000
|
|
|
Percent of
|
|
Sources of Funds
|
|
Units Sold
|
|
|
Total
|
|
Unit Proceeds
|
|
$
|
45,000,000
|
|
|
|
29.90
|
%
|
Previous Private Placement Proceeds
|
|
$
|
1,360,000
|
|
|
|
0.90
|
%
|
Term Debt Financing, Grants and Incentives
|
|
$
|
104,140,000
|
|
|
|
69.20
|
%
|
|
|
|
|
|
|
|
Total Sources of Funds
|
|
$
|
150,500,000
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If 12,700
|
|
|
Percent of
|
|
Sources of Funds
|
|
Units Sold
|
|
|
Total
|
|
Unit Proceeds
|
|
$
|
63,500,000
|
|
|
|
42.20
|
%
|
Previous Private Placement Proceeds
|
|
$
|
1,360,000
|
|
|
|
0.90
|
%
|
Term Debt Financing, Grants and Incentives
|
|
$
|
85,640,000
|
|
|
|
56.90
|
%
|
|
|
|
|
|
|
|
Total Sources of Funds
|
|
$
|
150,500,000
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum 16,400
|
|
|
Percent of
|
|
Sources of Funds
|
|
Units Sold
|
|
|
Total
|
|
Unit Proceeds
|
|
$
|
82,000,000
|
|
|
|
54.49
|
%
|
Previous Private Placement Proceeds
|
|
$
|
1,360,000
|
|
|
|
0.90
|
%
|
Term Debt Financing, Grants and Incentives
|
|
$
|
67,140,000
|
|
|
|
44.61
|
%
|
|
|
|
|
|
|
|
Total Sources of Funds
|
|
$
|
150,500,000
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
ESTIMATED USE OF PROCEEDS
The gross proceeds from this offering, before deducting offering expenses, will be $45,000,000
if the minimum amount of equity offered is sold and $82,000,000 if the maximum number of units
offered is sold for $5,000 per unit. We estimate the offering expenses to be $558,499. Therefore,
we estimate the net proceeds of the offering to be $44,441,501 if the minimum amount of equity is
raised, and $81,441,501 if the maximum number of units offered is sold.
|
|
|
|
|
|
|
|
|
|
|
Maximum Offering
|
|
|
Minimum Offering
|
|
Offering Proceeds ($5,000 per unit)
|
|
$
|
82,000,000
|
|
|
$
|
45,000,000
|
|
Less Estimated Offering
Expenses
(1)
|
|
$
|
558,499
|
|
|
$
|
558,499
|
|
|
|
|
|
|
|
|
Net Proceeds from Offering
|
|
$
|
81,441,501
|
|
|
$
|
44,441,501
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Estimated Offering Expenses are as follows:
|
|
|
|
|
|
Securities and Exchange Commission registration fee
|
|
$
|
8,774
|
|
Legal fees and expenses
|
|
|
75,000
|
|
Consulting Fees
|
|
|
200,000
|
|
Accounting fees
|
|
|
65,000
|
|
Blue Sky filing fees
|
|
|
9,725
|
|
Printing expenses
|
|
|
50,000
|
|
Advertising
|
|
|
150,000
|
|
Total
|
|
$
|
558,499
|
|
We intend to use the net proceeds of the offering to construct and operate a 100-million
gallon per year gas-fired ethanol plant. We must supplement the proceeds of this offering with
debt financing to meet our stated goals. We estimate that the total capital expenditures for the
construction of the plant will be approximately $150,500,000.
32
The total project cost is a preliminary estimate primarily based upon the experience of our
general contractor, Fagen, Inc., with ethanol plants similar to the plant we intend to construct
and operate. However, our letter of intent with Fagen, Inc. provides for an increase in
construction costs in certain circumstances. In addition, we expect the total project cost will
change from time to time as the project progresses. These changes may be significant.
The following table describes our proposed use of proceeds. The actual use of funds is based
upon contingencies, such as the estimated cost of plant construction, the suitability and cost of
the proposed site, the regulatory permits required and the cost of debt financing and inventory
costs, which are driven by the market. Therefore, the following figures are intended to be
estimates only, and the actual use of funds may vary significantly from the descriptions given
below depending on contingencies such as those described above. However, we anticipate that any
variation in our use of proceeds will occur in the level of proceeds attributable to a particular
use (as set forth below) rather than a change from one of the uses set forth below to a use not
identified in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
Use of Proceeds
|
|
Amount
|
|
|
Total
|
|
Plant construction
|
|
$
|
105,997,000
|
|
|
|
70.43
|
%
|
Land & site development costs
|
|
|
6,470,000
|
|
|
|
4.30
|
%
|
Railroad
|
|
|
5,500,000
|
|
|
|
3.66
|
%
|
Fire protection & water supply
|
|
|
5,495,000
|
|
|
|
3.66
|
%
|
Administrative building
|
|
|
500,000
|
|
|
|
0.33
|
%
|
Office equipment
|
|
|
100,000
|
|
|
|
0.07
|
%
|
Computers, software, network
|
|
|
190,000
|
|
|
|
0.13
|
%
|
Construction insurance costs
|
|
|
200,000
|
|
|
|
0.13
|
%
|
Construction contingency
|
|
|
8,388,000
|
|
|
|
5.57
|
%
|
Construction performance bond
|
|
|
300,000
|
|
|
|
0.20
|
%
|
Capitalized interest
|
|
|
1,750,000
|
|
|
|
1.16
|
%
|
Rolling stock
|
|
|
460,000
|
|
|
|
0.31
|
%
|
Start up costs:
|
|
|
|
|
|
|
0.00
|
%
|
Financing costs
|
|
|
800,000
|
|
|
|
0.53
|
%
|
Organization costs
(1)
|
|
|
1,500,000
|
|
|
|
1.00
|
%
|
Pre-production period costs
|
|
|
850,000
|
|
|
|
0.56
|
%
|
Inventory spare parts
|
|
|
500,000
|
|
|
|
0.33
|
%
|
Working capital
|
|
|
5,000,000
|
|
|
|
3.32
|
%
|
Inventory corn
|
|
|
3,000,000
|
|
|
|
1.99
|
%
|
Inventory chemicals and ingredients
|
|
|
500,000
|
|
|
|
0.33
|
%
|
Inventory ethanol and DDGS
|
|
|
3,000,000
|
|
|
|
1.99
|
%
|
|
|
|
|
|
|
|
Total
|
|
$
|
150,500,000
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes estimated offering expenses of $558,499.
|
We expect the total funding required for the plant to be $150,500,000 or $1.51 per gallon
of annual denatured ethanol production capacity at 100-million gallons per year. Our use of
proceeds is measured from our date of inception and we have already incurred some of the related
expenditures.
Plant Construction
. The construction of the plant itself is by far the single largest expense
at $105,997,000. We expect Fagen, Inc., will design and build the plant using ICM, Inc.,
technology. We have a letter of intent with Fagen, Inc., but we have not yet signed a binding
definitive agreement for plant construction. Our estimated cost of construction of the plant is
subject to increase in certain circumstances according to our letter of intent. These increases
could be significant. Neither Fagen, Inc., or ICM, Inc., is an affiliate.
Land cost and site development
. We expect the land to cost approximately $1,000,000 and site
development to cost an additional $5,470,000.
Construction Contingency
. We project approximately $8,388,000 for unanticipated expenditures
in connection with the construction of our plant. We plan to use excess funds for our general
working capital.
33
Construction performance bond and insurance costs
. We estimate the construction bond for the
project to cost approximately $300,000. We have budgeted approximately $200,000 for builders risk
insurance, general liability insurance, workers compensation and property insurance. We have not
yet determined our actual costs and they may exceed this estimate.
Administration Building, Furnishings, Office and Computer Equipment.
We anticipate spending
approximately $500,000 to build our administration building on the plant site. We expect to spend
an additional $100,000 on our furniture and other office equipment and $190,000 for our computers,
software and network.
Rail Infrastructure and Rolling Stock
. Depending upon the final site chosen, we anticipate
the costs of rail improvements to be $5,500,000. We anticipate the need to purchase rolling stock
at an estimated cost of $460,000.
Fire Protection and water supply
. We anticipate spending $5,495,000 to equip the plant with
adequate fire protection and water supply.
Capitalized Interest
. This consists of the interest we anticipate incurring during the
development and construction period of our project. For purposes of estimating capitalized interest
and financing costs, we have assumed senior debt financing of approximately $85,640,000. We
determined this amount of debt financing based upon an assumed equity amount of $63,500,000 and
seed capital proceeds of $1,360,000. If any of these assumptions changed, we would need to revise
the level of term debt accordingly. Loan interest during construction will be capitalized and is
estimated to be $1,750,000, based upon senior debt of $85,640,000 and an estimated interest rate of
7% or better.
Financing Costs
. We anticipate incurring $800,000 of financing costs. Financing costs
consist of all costs associated with the procurement of approximately $85,640,000 of debt
financing. These costs include bank origination and legal fees, loan processing fees, appraisal
and title insurance charges, recording and deed registration tax, our legal and accounting fees
associated with the financing and project coordinator fees, if any, associated with securing the
financing. Our actual financing costs will vary depending on the amount we borrow.
Organizational Costs
. We have budgeted $1,500,000 for developmental, organizational, legal,
accounting and other costs associated with our organization and operation as an entity, including,
but not limited to estimated offering expenses of $558,499.
Pre-production period costs and inventory
. We project $12,850,000 of pre-production period
costs and inventory. These represent costs of beginning production after the plant construction is
finished, but before we begin generating income. These costs include $850,000 of pre-production
period expenses, $3,500,000 of initial inventories of corn and other ingredients, our initial
$3,000,000 of ethanol and dried distillers grain work in process inventories, $500,000 of spare
parts for our process equipment and $5,000,000 of working capital.
INDUSTRY OVERVIEW
Ethanol is ethyl alcohol, a fuel component made primarily from corn and various other grains,
and can be used as: (i) an octane enhancer in fuels; (ii) an oxygenated fuel additive for the
purpose of reducing ozone and carbon monoxide vehicle emissions; and (iii) a non-petroleum-based
gasoline substitute. Approximately 95% of all ethanol is used in its primary form for blending
with unleaded gasoline and other fuel products. The implementation of the Federal Clean Air act
has made ethanol fuels an important domestic renewable fuel additive. Used as a fuel oxygenate,
ethanol provides a means to control carbon monoxide emissions in large metropolitan areas. The
principal purchasers of ethanol are generally the wholesale gasoline marketer or blender.
Oxygenated gasoline is commonly referred to as reformulated gasoline.
According to the Renewable Fuels Association, over the past twenty years the U.S. fuel ethanol
industry has grown from almost nothing to an estimated current annual production capacity of 4.3
billion gallons of ethanol production per year. Plans to construct new ethanol plants or expand
existing plants have been announced which would increase capacity by approximately 1.75 billion
gallons per year. There are currently over 90 ethanol production facilities producing ethanol
throughout the United States. Most of these facilities are based in the
34
Midwest because of the nearby access to the corn and grain feedstock necessary to produce
ethanol.
General Ethanol Demand and Supply
According to the Renewable Fuels Association, the annual demand for fuel ethanol in the United
States reached a new high in 2004 of 3.57 billion gallons per year. In its report titled, Ethanol
Industry Outlook 2005, the Renewable Fuels Association anticipates demand for ethanol to remain
strong. The passage of the Volumetric Ethanol Excise Tax Credit (VEETC) is expected to provide
the flexibility necessary to expand ethanol blending into higher blends of ethanol such as E85, E
diesel and fuel cell markets. In addition, the recent implementation of a Renewable Fuels Standard
(RFS) contained in the Energy Policy Act of 2005, which was signed into law on August 8, 2005, is
expected to favorably impact the ethanol industry by enhancing both the production and use of
ethanol.
The RFS will begin at 4 billion gallons in 2006, increasing to 7.5 billion gallons by 2012.
The RFS is a national flexible program that does not require that any renewable fuels be used in
any particular area or state, allowing refiners to use renewable fuel blends in those areas where
it is most cost-effective. According to the Renewable Fuels Association, the bill is expected to
lead to about $6 billion in new investment in ethanol plants across the country. An increase in the
number of new plants will bring an increase in the supply of ethanol. Thus, while this bill may
cause ethanol prices to increase in the short term due to additional demand, future supply could
outweigh the demand for ethanol. This would have a negative impact on our earnings. Alternatively,
since the RFS begins at 4 billion gallons in 2006 and national production is expected to exceed
this amount, there could be a short-term oversupply until the RFS requirements exceed national
production. This would have an immediate adverse effect on our earnings.
On December 28, 2005, the EPA released interim rules governing the implementation of the 2006
RFS requirement. The EPAs interim rule imposes a collective compliance approach, which means the
requirement for 2006 fuel use is determined in the aggregate rather than on a refiner-by-refiner
basis. The EPA adopted this approach for 2006 because current uncertainties regarding the RFS
might result in unnecessarily high costs of compliance if each party was required to independently
comply. Although there is not a requirement for individual parties to demonstrate compliance in
2006, the EPA found that increases in ethanol production and projections for future demand indicate
that the 2006 volume is likely to be met. However, in the unlikely event that the RFS is not met
in 2006, the EPA expects to adjust the volume requirement in 2007 to cover the deficit. There are
no other consequences for failure to collectively meet the 2006 standard. The EPA expects to
promulgate more comprehensive regulations by August 8, 2006, but the interim rules and collective
compliance approach are expected to apply for the entire 2006 calendar year. In 2007 and
subsequent years, the EPA expects to specifically identify liable parties, determine the applicable
RFS, and develop a credit trading program. Further, the standards for compliance, record-keeping
and reporting are expected to be clarified.
The following chart illustrates the RFS program adopted by the Energy Policy Act of 2005.
35
ETHANOL
PRODUCTION
Source: American Coalition for Ethanol (ACE)
According to the Renewable Fuels Association, the supply of domestically produced ethanol is
at an all-time high. In 2004, 81 ethanol plants located in 20 states annually produced a record
3.41 billion gallons; a 21% increase from 2003 and 109% increase from 2000. At the end of 2005,
there were 95 ethanol production facilities in operation with a combined annual production capacity
of more than 4.3 billion gallons, with an additional 31 new plants and nine expansions under
construction expected to add an additional estimated 1.5 billion gallons of annual production
capacity.
The following table shows U.S. annual ethanol production capacity by state as of January 2006:
Ethanol Production Capacity Ranked by State
(Largest to Smallest Production Capacity as of January 2006)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol Production Capacity
|
|
|
|
|
Rank
|
|
State
|
|
|
|
|
|
(Million Gallons Per Year)
|
|
|
|
|
1
|
|
Iowa
|
|
|
|
|
|
|
1,699.5
|
|
|
|
|
|
2
|
|
Nebraska
|
|
|
|
|
|
|
948.5
|
|
|
|
|
|
3
|
|
Illinois
|
|
|
|
|
|
|
881.0
|
|
|
|
|
|
4
|
|
South Dakota
|
|
|
|
|
|
|
603.0
|
|
|
|
|
|
5
|
|
Minnesota
|
|
|
|
|
|
|
593.6
|
|
|
|
|
|
6
|
|
Wisconsin
|
|
|
|
|
|
|
228.0
|
|
|
|
|
|
7
|
|
Kansas
|
|
|
|
|
|
|
212.5
|
|
|
|
|
|
8
|
|
Michigan
|
|
|
|
|
|
|
207.0
|
|
|
|
|
|
9
|
|
Indiana
|
|
|
|
|
|
|
182.0
|
|
|
|
|
|
10
|
|
Missouri
|
|
|
|
|
|
|
155.0
|
|
|
|
|
|
11
|
|
Colorado
|
|
|
|
|
|
|
85.0
|
|
|
|
|
|
11
|
|
North Dakota
|
|
|
|
|
|
|
83.5
|
|
|
|
|
|
12
|
|
Tennessee
|
|
|
|
|
|
|
67.0
|
|
|
|
|
|
13
|
|
Kentucky
|
|
|
|
|
|
|
35.4
|
|
|
|
|
|
14
|
|
California
|
|
|
|
|
|
|
33.0
|
|
|
|
|
|
15
|
|
New Mexico
|
|
|
|
|
|
|
30.0
|
|
|
|
|
|
15
|
|
Texas
|
|
|
|
|
|
|
30.0
|
|
|
|
|
|
16
|
|
Wyoming
|
|
|
|
|
|
|
5.0
|
|
|
|
|
|
17
|
|
Ohio
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
18
|
|
Georgia
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Total
|
|
|
|
|
|
|
6,082.4
|
|
|
|
|
|
Sources: Renewable Fuels Association, Nebraska Energy Office
36
Ethanol supply is also affected by ethanol produced or processed in certain
countries in Central America and the Caribbean region. Ethanol produced in these countries is
eligible for tariff reduction or elimination upon importation to the United States under a program
known as the Caribbean Basin Initiative (CBI). Large ethanol producers, such as Cargill, have
expressed interest in building dehydration plants in participating Caribbean Basin countries, such
as El Salvador, which would convert ethanol into fuel-grade ethanol for shipment to the United
States. Ethanol imported from Caribbean Basin countries may be a less expensive alternative to
domestically produced ethanol. The International Trade Commission announced the 2005 CBI import
quota of 240.4 million gallons of ethanol. Last year, legislation was introduced in the Senate
that would limit the transshipment of ethanol through the CBI. It is possible that similar
legislation will be introduced this year, however, there is no assurance or guarantee that such
legislation will be introduced or that it will be successfully passed.
Federal Ethanol Supports
The ethanol industry is heavily dependent on several economic incentives to produce ethanol,
including federal ethanol supports. The most recent ethanol supports are contained in the Energy
Policy Act of 2005. Most notably, the Act creates a 7.5 billion gallon Renewable Fuels Standard
(RFS). The RFS requires refiners to use 4 billion gallons of renewable fuels in 2006, increasing to
7.5 billion gallons by 2012.
Historically, ethanol sales have also been favorably affected by the Clean Air Act amendments
of 1990, particularly the Federal Oxygen Program which became effective November 1, 1992. The
Federal Oxygen Program requires the sale of oxygenated motor fuels during the winter months in
certain major metropolitan areas to reduce carbon monoxide pollution. Ethanol use has increased
due to a second Clean Air Act program, the Reformulated Gasoline Program. This program became
effective January 1, 1995, and requires the sale of reformulated gasoline in nine major urban areas
to reduce pollutants, including those that contribute to ground level ozone, better known as smog.
The two major oxygenates added to reformulated gasoline pursuant to these programs are MTBE and
ethanol, however MTBE has caused groundwater contamination and has been banned from use by many
states. Although the Energy Policy Act of 2005 did not impose a national ban of MTBE, its failure
to include liability protection for manufacturers of MTBE is expected to result in refiners and
blenders using ethanol as an oxygenate rather than MTBE to satisfy the reformulated gasoline
oxygenate requirement. While this may create increased demand in the short-term, we do not expect
this to have a long term impact on the demand for ethanol as the Act repeals the Clean Air Acts 2%
oxygenate requirement for reformulated gasoline immediately in California and 270 days after
enactment elsewhere. However, the Act did not repeal the 2.7% oxygenate requirement for carbon
monoxide nonattainment areas which are required to use oxygenated fuels in the winter months.
While we expect ethanol to be the oxygenate of choice in these areas, there is no assurance that
ethanol will in fact be used.
The governments regulation of the environment changes constantly. It is possible that more
stringent federal or state environmental rules or regulations could be adopted, which could
increase our operating costs and expenses. It also is possible that federal or state environmental
rules or regulations could be adopted that could have an adverse effect on the use of ethanol. For
example, changes in the environmental regulations regarding ethanols use due to currently unknown
effects on the environment could have an adverse effect on the ethanol industry. Furthermore,
plant operations likely will be governed by the Occupational Safety and Health Administration
(OSHA). OSHA regulations may change such that the costs of the operation of the plant may
increase. Any of these regulatory factors may result in higher costs or other materially adverse
conditions effecting our operations, cash flows and financial performance.
The use of ethanol as an alternative fuel source has been aided by federal tax policy. On
October 22, 2004, President Bush signed H.R. 4520, which contained the Volumetric Ethanol Excise
Tax Credit (VEETC) and amended the federal excise tax structure effective as of January 1, 2005.
Prior to VEETC, ethanol-blended fuel was taxed at a lower rate than regular gasoline (13.2 cents on
a 10% blend). Under VEETC, the ethanol excise tax exemption has been eliminated, thereby allowing
the full federal excise tax of 18.4 cents per gallon of gasoline to be collected on all gasoline
and allocated to the highway trust fund. This is expected to add approximately $1.4 billion
37
to the highway trust fund revenue annually. In place of the exemption, the bill creates a new
volumetric ethanol excise tax credit of 5.1 cents per gallon of ethanol blended at 10%. Refiners
and gasoline blenders apply for this credit on the same tax form as before only it is a credit from
general revenue, not the highway trust fund. Based on volume, the VEETC is expected to allow much
greater refinery flexibility in blending ethanol since it makes the tax credit available on all
ethanol blended with all gasoline, diesel and ethyl tertiary butyl ether (ETBE), including
ethanol in E85 and the E-20 in Minnesota. The VEETC is scheduled to expire on December 31, 2010.
The Energy Policy Act of 2005 expands who qualifies for the small ethanol producer tax credit.
Historically, small ethanol producers were allowed a 10-cents-per-gallon production income tax
credit on up to 15 million gallons of production annually. The size of the plant eligible for the
tax credit was limited to 30 million gallons. Under the Energy Policy Act of 2005 the size
limitation on the production capacity for small ethanol producers increases from 30 million to 60
million gallons. The credit can be taken on the first 15 million gallons of production. The tax
credit is capped at $1.5 million per year per producer. We anticipate that our annual production
will exceed production limits of 60 million gallons a year and that we will be ineligible for the
credit.
In addition, the Energy Policy Act of 2005 creates a new tax credit that permits taxpayers to
claim a 30% credit (up to $30,000) for the cost of installing clean-fuel vehicle refueling
equipment, such as an E85 fuel pump, to be used in a trade or business of the taxpayer or installed
at the principal residence of the taxpayer. Under the provision, clean fuels are any fuel of at
least 85% of the volume of which consists of ethanol, natural gas, compressed natural gas,
liquefied natural gas, liquefied petroleum gas, and hydrogen and any mixture of diesel fuel and
biodiesel containing at least 20% biodiesel. The provision is effective for equipment placed in
service January 9, 2007 and before January 1, 2010. While it is unclear how this credit will affect
the demand for ethanol in the short term, we expect it will help raise consumer awareness of
alternative sources of fuel and could positively impact future demand for ethanol.
The ethanol industry and our business depend upon continuation of the federal ethanol supports
discussed above. These incentives have supported a market for ethanol that might disappear without
the incentives. Alternatively, the incentives may be continued at lower levels than at which they
currently exist. The elimination or reduction of such federal ethanol supports would make it more
costly for us to sell our ethanol and would likely reduce our net income and the value of your
investment.
Our Primary Competition
We will be in direct competition with numerous other ethanol producers, many of whom have
greater resources than we do. We also expect that additional ethanol producers will enter the
market if the demand for ethanol continues to increase. Our plant will compete with other ethanol
producers on the basis of price, and to a lesser extent, delivery service. We believe that we can
compete favorably with other ethanol producers, due to our expected rail access and anticipated grain supplies at favorable prices.
According to the Renewable Fuels Association, there are 95 ethanol production facilities
operating in the United States with the capacity to produce over 4.3 billion gallons of ethanol
annually and there are 31 ethanol refineries and nine expansions under construction which if
completed will result in additional annual capacity of nearly 1.9 billion gallons. The largest
ethanol producers include Abengoa Bioenergy Corp., Archer Daniels Midland, Aventine Renewable
Energy, Inc., Cargill, Inc., New Energy Corp. and VeraSun Energy Corporation, all of which are
capable of producing more ethanol than we expect to produce. In addition, ADM recently announced
that it intends to increase its ethanol production capacity by 500 million gallons through the
construction of two new dry corn milling facilities. According to ADMs news release, the
facilities will be located adjacent to ADMs existing ethanol plants.
There are also several regional entities recently formed, or in the process of formation, of
similar size and with similar resources to ours. In addition, there are also a number of other
ethanol plants in Indiana and Ohio under construction or in the planning stage.
The following table identifies
most
of the producers in the United States along with
their production capacities.
38
U.S. FUEL ETHANOL PRODUCTION CAPACITY
million gallons per year (mmgy)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
|
|
|
|
|
|
|
Current
|
|
Construction/
|
|
|
|
|
|
|
Capacity
|
|
Expansions
|
Company
|
|
Location
|
|
Feedstock
|
|
(mmgy)
|
|
(mmgy)
|
Abengoa Bioenergy Corp.
|
|
York, NE
|
|
Corn/milo
|
|
|
55
|
|
|
|
|
|
|
|
Colwich, KS
|
|
|
|
|
25
|
|
|
|
|
|
|
|
Portales, NM
|
|
|
|
|
30
|
|
|
|
|
|
|
|
Ravenna, NE
|
|
|
|
|
|
|
|
|
88
|
|
ACE Ethanol, LLC
|
|
Stanley, WI
|
|
Corn
|
|
|
39
|
|
|
|
|
|
Adkins Energy, LLC*
|
|
Lena, IL
|
|
Corn
|
|
|
40
|
|
|
|
|
|
Advanced Bioenergy
|
|
Fairmont, NE
|
|
Corn
|
|
|
|
|
|
|
100
|
|
AGP*
|
|
Hastings, NE
|
|
Corn
|
|
|
52
|
|
|
|
|
|
Agra Resources Coop. d.b.a. EXOL*
|
|
Albert Lea, MN
|
|
Corn
|
|
|
40
|
|
|
|
8
|
|
Agri-Energy, LLC*
|
|
Luverne, MN
|
|
Corn
|
|
|
21
|
|
|
|
|
|
Alchem Ltd. LLLP
|
|
Grafton, ND
|
|
Corn
|
|
|
10.5
|
|
|
|
|
|
Al-Corn Clean Fuel*
|
|
Claremont, MN
|
|
Corn
|
|
|
35
|
|
|
|
|
|
Amaizing Energy, LLC*
|
|
Denison, IA
|
|
Corn
|
|
|
40
|
|
|
|
|
|
Archer Daniels Midland
|
|
Decatur, IL
|
|
Corn
|
|
|
1,070
|
|
|
|
|
|
|
|
Cedar Rapids, IA
|
|
Corn
|
|
|
|
|
|
|
|
|
|
|
Clinton, IA
|
|
Corn
|
|
|
|
|
|
|
|
|
|
|
Columbus, NE
|
|
Corn
|
|
|
|
|
|
|
|
|
|
|
Marshall, MN
|
|
Corn
|
|
|
|
|
|
|
|
|
|
|
Peoria, IL
|
|
Corn
|
|
|
|
|
|
|
|
|
|
|
Wallhalla, ND
|
|
Corn/barley
|
|
|
|
|
|
|
|
|
ASAlliances Biofuels, LLC
|
|
Albion, NE
|
|
Corn
|
|
|
|
|
|
|
100
|
|
|
|
Linden, IN
|
|
Corn
|
|
|
|
|
|
|
100
|
|
Aventine Renewable Energy, LLC
|
|
Pekin, IL
|
|
Corn
|
|
|
100
|
|
|
|
57
|
|
|
|
Aurora, NE
|
|
Corn
|
|
|
50
|
|
|
|
|
|
Badger State Ethanol, LLC*
|
|
Monroe, WI
|
|
Corn
|
|
|
48
|
|
|
|
|
|
Big River Resources, LLC*
|
|
West Burlington, IA
|
|
Corn
|
|
|
40
|
|
|
|
|
|
Broin Enterprises, Inc.
|
|
Scotland, SD
|
|
Corn
|
|
|
9
|
|
|
|
|
|
Bushmills Ethanol, Inc.*
|
|
Atwater, MN
|
|
Corn
|
|
|
|
|
|
|
40
|
|
Cargill, Inc.
|
|
Blair, NE
|
|
Corn
|
|
|
85
|
|
|
|
|
|
|
|
Eddyville, IA
|
|
Corn
|
|
|
35
|
|
|
|
|
|
Central Indiana Ethanol, LLC
|
|
Marion, IN
|
|
Corn
|
|
|
|
|
|
|
40
|
|
Central MN Ethanol Coop*
|
|
Little Falls, MN
|
|
Corn
|
|
|
21.5
|
|
|
|
|
|
Central Wisconsin Alcohol
|
|
Plover, WI
|
|
Seed corn
|
|
|
4
|
|
|
|
|
|
Chief Ethanol
|
|
Hastings, NE
|
|
Corn
|
|
|
62
|
|
|
|
|
|
Chippewa Valley Ethanol Co.*
|
|
Benson, MN
|
|
Corn
|
|
|
45
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
|
|
|
|
|
|
|
Current
|
|
Construction/
|
|
|
|
|
|
|
Capacity
|
|
Expansions
|
Company
|
|
Location
|
|
Feedstock
|
|
(mmgy)
|
|
(mmgy)
|
Commonwealth Agri-Energy, LLC*
|
|
Hopkinsville, KY
|
|
Corn
|
|
|
24
|
|
|
|
9
|
|
Corn, LP*
|
|
Goldfield, IA
|
|
Corn
|
|
|
50
|
|
|
|
|
|
Cornhusker Energy Lexington, LLC
|
|
Lexington, NE
|
|
Corn
|
|
|
|
|
|
|
40
|
|
Corn Plus, LLP*
|
|
Winnebago, MN
|
|
Corn
|
|
|
44
|
|
|
|
|
|
Dakota Ethanol, LLC*
|
|
Wentworth, SD
|
|
Corn
|
|
|
50
|
|
|
|
|
|
DENCO, LLC*
|
|
Morris, MN
|
|
Corn
|
|
|
21.5
|
|
|
|
|
|
E3 Biofuels
|
|
Mead, NE
|
|
Corn
|
|
|
|
|
|
|
24
|
|
East Kansas Agri-Energy, LLC*
|
|
Garnett, KS
|
|
Corn
|
|
|
35
|
|
|
|
|
|
ESE Alcohol Inc.
|
|
Leoti, KS
|
|
Seed corn
|
|
|
1.5
|
|
|
|
|
|
Ethanol2000, LLP*
|
|
Bingham Lake, MN
|
|
Corn
|
|
|
32
|
|
|
|
|
|
Frontier Ethanol, LLC
|
|
Gowrie, IA
|
|
Corn
|
|
|
|
|
|
|
60
|
|
Front Range Energy, LLC
|
|
Windsor, CO
|
|
Corn
|
|
|
|
|
|
|
40
|
|
Glacial Lakes Energy, LLC*
|
|
Watertown, SD
|
|
Corn
|
|
|
50
|
|
|
|
|
|
Golden Cheese Company of
|
|
|
|
|
|
|
|
|
|
|
|
|
California*
|
|
Corona, CA
|
|
Cheese whey
|
|
|
5
|
|
|
|
|
|
Golden Grain Energy, LLC*
|
|
Mason City, IA
|
|
Corn
|
|
|
40
|
|
|
|
|
|
Golden Triangle Energy, LLC*
|
|
Craig, MO
|
|
Corn
|
|
|
20
|
|
|
|
|
|
Grain Processing Corp.
|
|
Muscatine, IA
|
|
Corn
|
|
|
20
|
|
|
|
|
|
Granite Falls Energy, LLC
|
|
Granite Falls, MN
|
|
Corn
|
|
|
45
|
|
|
|
|
|
Great Plains Ethanol, LLC*
|
|
Chancellor, SD
|
|
Corn
|
|
|
50
|
|
|
|
|
|
Green Plains Renewable Energy
|
|
Shenandoah, IA
|
|
Corn
|
|
|
|
|
|
|
50
|
|
Hawkeye Renewables, LLC
|
|
Iowa Falls, IA
|
|
Corn
|
|
|
50
|
|
|
|
50
|
|
|
|
Fairbank, IA
|
|
Corn
|
|
|
|
|
|
|
100
|
|
Heartland Corn Products*
|
|
Winthrop, MN
|
|
Corn
|
|
|
36
|
|
|
|
|
|
Heartland Grain Fuels, LP*
|
|
Aberdeen, SD
|
|
Corn
|
|
|
9
|
|
|
|
|
|
|
|
Huron, SD
|
|
Corn
|
|
|
12
|
|
|
|
18
|
|
Heron Lake BioEnergy, LLC
|
|
Heron Lake, MN
|
|
Corn
|
|
|
|
|
|
|
50
|
|
Horizon Ethanol, LLC
|
|
Jewell, IA
|
|
Corn
|
|
|
|
|
|
|
60
|
|
Husker Ag, LLC*
|
|
Plainview, NE
|
|
Corn
|
|
|
26.5
|
|
|
|
|
|
Illinois River Energy, LLC
|
|
Rochelle, IL
|
|
Corn
|
|
|
|
|
|
|
50
|
|
Iowa Ethanol, LLC*
|
|
Hanlontown, IA
|
|
Corn
|
|
|
50
|
|
|
|
|
|
Iroquois Bio-Energy Company, LLC
|
|
Rensselaer, IN
|
|
Corn
|
|
|
|
|
|
|
40
|
|
James Valley Ethanol, LLC
|
|
Groton, SD
|
|
Corn
|
|
|
50
|
|
|
|
|
|
KAAPA Ethanol, LLC*
|
|
Minden, NE
|
|
Corn
|
|
|
40
|
|
|
|
|
|
Land O Lakes*
|
|
Melrose, MN
|
|
Cheese whey
|
|
|
2.6
|
|
|
|
|
|
Lincolnland Agri-Energy, LLC*
|
|
Palestine, IL
|
|
Corn
|
|
|
48
|
|
|
|
|
|
Lincolnway Energy, LLC*
|
|
Nevada, IA
|
|
Corn
|
|
|
|
|
|
|
50
|
|
Liquid Resources of Ohio
|
|
Medina, OH
|
|
Waste Beverage
|
|
|
3
|
|
|
|
|
|
Little Sioux Corn Processors, LP*
|
|
Marcus, IA
|
|
Corn
|
|
|
52
|
|
|
|
|
|
Merrick/Coors
|
|
Golden, CO
|
|
Waste beer
|
|
|
1.5
|
|
|
|
1.5
|
|
MGP Ingredients, Inc.
|
|
Pekin, IL
|
|
Corn/wheat
|
|
|
78
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
|
|
|
|
|
|
|
Current
|
|
Construction/
|
|
|
|
|
|
|
Capacity
|
|
Expansions
|
Company
|
|
Location
|
|
Feedstock
|
|
(mmgy)
|
|
(mmgy)
|
|
|
|
|
starch
|
|
|
|
|
|
|
|
|
|
|
Atchison, KS
|
|
|
|
|
|
|
|
|
|
|
Michigan Ethanol, LLC
|
|
Caro, MI
|
|
Corn
|
|
|
50
|
|
|
|
|
|
Mid America Agri
|
|
|
|
|
|
|
|
|
|
|
|
|
Products/Wheatland
|
|
Madrid, NE
|
|
Corn
|
|
|
|
|
|
|
44
|
|
Mid-Missouri Energy, Inc.*
|
|
Malta Bend, MO
|
|
Corn
|
|
|
45
|
|
|
|
|
|
Midwest Grain Processors*
|
|
Lakota, IA
|
|
Corn
|
|
|
50
|
|
|
|
45
|
|
|
|
Riga, MI
|
|
Corn
|
|
|
|
|
|
|
57
|
|
Midwest Renewable Energy, LLC
|
|
Sutherland, NE
|
|
Corn
|
|
|
17.5
|
|
|
|
4.5
|
|
Minnesota Energy*
|
|
Buffalo Lake, MN
|
|
Corn
|
|
|
18
|
|
|
|
|
|
Missouri Ethanol
|
|
Laddonia, MO
|
|
Corn
|
|
|
|
|
|
|
45
|
|
New Energy Corp.
|
|
South Bend, IN
|
|
Corn
|
|
|
102
|
|
|
|
|
|
North Country Ethanol, LLC*
|
|
Rosholt, SD
|
|
Corn
|
|
|
20
|
|
|
|
|
|
Northeast Missouri Grain, LLC*
|
|
Macon, MO
|
|
Corn
|
|
|
45
|
|
|
|
|
|
Northern Lights Ethanol, LLC*
|
|
Big Stone City, SD
|
|
Corn
|
|
|
50
|
|
|
|
|
|
Northstar Ethanol, LLC
|
|
Lake Crystal, MN
|
|
Corn
|
|
|
52
|
|
|
|
|
|
Otter Creek Ethanol, LLC*
|
|
Ashton, IA
|
|
Corn
|
|
|
55
|
|
|
|
|
|
Pacific Ethanol
|
|
Madera, CA
|
|
Corn
|
|
|
|
|
|
|
35
|
|
Panhandle Energies of Dumas, LP
|
|
Dumas, TX
|
|
Corn/Grain Sorghum
|
|
|
|
|
|
|
30
|
|
Parallel Products
|
|
Louisville, KY
|
|
Beverage waste
|
|
|
5.4
|
|
|
|
|
|
|
|
R. Cucamonga, CA
|
|
|
|
|
|
|
|
|
|
|
Permeate Refining
|
|
Hopkinton, IA
|
|
Sugars & starches
|
|
|
1.5
|
|
|
|
|
|
Phoenix Biofuels
|
|
Goshen, CA
|
|
Corn
|
|
|
25
|
|
|
|
|
|
Pine Lake Corn Processors, LLC*
|
|
Steamboat Rock, IA
|
|
Corn
|
|
|
20
|
|
|
|
|
|
Platte Valley Fuel Ethanol, LLC
|
|
Central City, NE
|
|
Corn
|
|
|
40
|
|
|
|
|
|
Prairie Ethanol, LLC
|
|
Loomis, SD
|
|
Corn
|
|
|
|
|
|
|
60
|
|
Prairie Horizon Agri-Energy, LLC
|
|
Phillipsburg, KS
|
|
Corn
|
|
|
|
|
|
|
40
|
|
Pro-Corn, LLC*
|
|
Preston, MN
|
|
Corn
|
|
|
42
|
|
|
|
|
|
Quad-County Corn Processors*
|
|
Galva, IA
|
|
Corn
|
|
|
27
|
|
|
|
|
|
Red Trail Energy, LLC
|
|
Richardton, ND
|
|
Corn
|
|
|
|
|
|
|
50
|
|
Redfield Energy, LLC
|
|
Redfield, SD
|
|
Corn
|
|
|
|
|
|
|
50
|
|
Reeve Agri-Energy
|
|
Garden City, KS
|
|
Corn/milo
|
|
|
12
|
|
|
|
|
|
Siouxland Energy & Livestock
|
|
|
|
|
|
|
|
|
|
|
|
|
Coop*
|
|
Sioux Center, IA
|
|
Corn
|
|
|
25
|
|
|
|
|
|
Siouxland Ethanol, LLC
|
|
Jackson, NE
|
|
Corn
|
|
|
|
|
|
|
50
|
|
Sioux River Ethanol, LLC*
|
|
Hudson, SD
|
|
Corn
|
|
|
55
|
|
|
|
|
|
Sterling Ethanol, LLC
|
|
Sterling, CO
|
|
Corn
|
|
|
42
|
|
|
|
|
|
Tall Corn Ethanol, LLC*
|
|
Coon Rapids, IA
|
|
Corn
|
|
|
49
|
|
|
|
|
|
Tate & Lyle
|
|
Loudon, TN
|
|
Corn
|
|
|
67
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
|
|
|
|
|
|
|
Current
|
|
Construction/
|
|
|
|
|
|
|
Capacity
|
|
Expansions
|
Company
|
|
Location
|
|
Feedstock
|
|
(mmgy)
|
|
(mmgy)
|
The Andersons Albion Ethanol LLC
|
|
Albion, MI
|
|
Corn
|
|
|
|
|
|
|
55
|
|
Trenton Agri Products, LLC
|
|
Trenton, NE
|
|
Corn
|
|
|
35
|
|
|
|
10
|
|
United WI Grain Producers, LLC*
|
|
Friesland, WI
|
|
Corn
|
|
|
49
|
|
|
|
|
|
US BioEnergy Corp.
|
|
Albert City, IA
|
|
Corn
|
|
|
|
|
|
|
100
|
|
|
|
Lake Odessa, MI
|
|
Corn
|
|
|
|
|
|
|
45
|
|
U.S. Energy Partners, LLC
|
|
Russell, KS
|
|
Milo/wheat starch
|
|
|
48
|
|
|
|
|
|
Utica Energy, LLC
|
|
Oshkosh, WI
|
|
Corn
|
|
|
48
|
|
|
|
|
|
Val-E Ethanol, LLC
|
|
Ord, NE
|
|
Corn
|
|
|
|
|
|
|
45
|
|
VeraSun Energy Corporation
|
|
Aurora, SD
|
|
Corn
|
|
|
230
|
|
|
|
|
|
|
|
Ft. Dodge, IA
|
|
Corn
|
|
|
|
|
|
|
|
|
Voyager Ethanol, LLC*
|
|
Emmetsburg, IA
|
|
Corn
|
|
|
52
|
|
|
|
|
|
Western Plains Energy, LLC*
|
|
Campus, KS
|
|
Corn
|
|
|
45
|
|
|
|
|
|
Western Wisconsin Renewable
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy, LLC*
|
|
Boyceville, WI
|
|
Corn
|
|
|
|
|
|
|
40
|
|
Wind Gap Farms
|
|
Baconton, GA
|
|
Brewery waste
|
|
|
0.4
|
|
|
|
|
|
Wyoming Ethanol
|
|
Torrington, WY
|
|
Corn
|
|
|
5
|
|
|
|
|
|
Xethanol BioFuels, LLC
|
|
Blairstown, IA
|
|
Corn
|
|
|
5
|
|
|
|
|
|
Total Current Capacity
|
|
|
|
|
|
|
4336.4
|
|
|
|
|
|
Total Under Construction/Expansions
|
|
|
|
|
|
|
|
|
|
|
1981
|
|
Total Capacity
|
|
|
|
|
|
|
6317.4
|
|
|
|
|
|
Updated: January 2006
Source: Renewable Fuels Association
Competition from Alternative Fuel Additives
Alternative fuels and ethanol production methods are continually under development by ethanol
and oil companies with far greater resources. Alternative fuels and alternative ethanol production
methods are continually under development. The major oil companies have significantly greater
resources than we have to develop alternative products and to influence legislation and public
perception of ethanol. New ethanol products or methods of ethanol production developed by larger
and better-financed competitors could provide them competitive advantages and harm our business.
DESCRIPTION OF BUSINESS
We are an Indiana limited liability company. We were initially formed as Indiana Ethanol, LLC
as a Indiana limited liability company on February 7, 2005, for the purpose of constructing and
operating a plant to produce ethanol and distillers grains in east central Indiana or west central
Ohio. We then changed our name to Cardinal Ethanol, LLC on September 27, 2005. Based upon
engineering specifications from Fagen, Inc., we expect the ethanol plant to annually process
approximately 36 million bushels of corn per year into approximately 100 million gallons of
denatured fuel grade ethanol, 320,00 tons of dried distillers grains with solubles and 220,500 tons
of raw carbon dioxide gas.
The following diagram from Fagen, Inc. depicts the plant we anticipate building:
42
Source: Fagen, Inc.
Primary Product Ethanol
Ethanol is an alcohol produced by the fermentation of sugars found in grains and other
biomass. Ethanol can be burned in engines just like gasoline and can be blended with gasoline as
an oxygenate to decrease harmful emissions and meet clean air standards. Unlike gasoline, which is
made by distilling crude oil, ethanol can be produced from a number of different types of grains,
such as wheat and milo, as well as from agricultural waste products such as rice hulls, cheese
whey, potato waste, brewery and beverage wastes and forestry and paper wastes. However, according
to the Renewable Fuels Association, approximately 85 percent of ethanol in the United States today
is produced from corn, and approximately 90 percent of ethanol is produced from a corn and other
input mix. Corn produces large quantities of carbohydrates, which convert into glucose more easily
than most other kinds of biomass. The U.S. Department of Energy estimated domestic ethanol
production at approximately 3.25 billion gallons in 2004.
While the ethanol we intend to produce is the same alcohol used in beverage alcohol, it must
meet fuel grade standards before it can be sold. Ethanol that is to be used as a fuel is denatured
by adding a small amount of gasoline to it in order to make it unfit for drinking. We anticipate
entering into an agreement with a company to market our ethanol, however, we have not yet
negotiated or discussed the terms of an ethanol marketing agreement with any ethanol marketing
company.
We anticipate that our business will be that of the production and marketing of ethanol and
distillers dried grains. We do not have any other lines of business or other sources of revenue if
we are unable to complete the construction and operation of the plant, or if we are not able to
market ethanol and its by-products.
43
Description of Dry Mill Process
Our plant will produce ethanol by processing corn. Changing corn to ethanol by fermentation
takes many steps. The corn will be received by rail and by truck, then weighed and unloaded in a
receiving building. It will then be transported to storage bins. Thereafter, it will be converted
to a scalper to remove rocks and debris. Starch in the corn must be broken down into simple sugars
before fermentation that produces alcohol (ethanol) can occur. This is achieved by grinding the
corn in a hammermill into a mash and conveying the mash into a slurry tank for enzymatic
processing. Then, water, heat and enzymes are added to break the ground grain into a fine slurry.
The slurry will be heated for sterilization and pumped to a liquefaction tank where additional
enzymes are added. Next, the grain slurry is pumped into fermenters, where yeast is added, to
begin a batch fermentation process. Yeast is a single-celled fungus that feeds on the sugar and
causes the fermentation. As the fungus feeds on the sugar, it produces alcohol (ethanol) and
carbon dioxide. A vacuum distillation system will divide the alcohol from the grain mash.
Alcohol is then transported through a rectifier column, a side stripper and a molecular sieve
system where it is dehydrated. The 200 proof alcohol is then pumped to farm shift tanks and
blended with five percent denaturant, usually gasoline, as it is pumped into storage tanks. The
200 proof alcohol and five percent denaturant constitute ethanol.
Corn mash from the distillation stripper is pumped into one of several decanter-type
centrifuges for dewatering. The water (thin stillage) is then pumped from the centrifuges to an
evaporator where it is dried into thick syrup. The solids that exit the centrifuge or evaporators
(the wet cake) are conveyed to the distillers dried grains dryer system. Syrup is added to the
wet cake as it enters the dryer, where moisture is removed. The process will produce distillers
grains, which is processed corn mash that can be used as animal feed.
The following chart provided by the Renewable Fuels Association, illustrates the dry mill
process:
Source: Renewable Fuels Association
44
We expect that the ethanol production technology we will use in our plant will be supplied by
Fagen, Inc. and/or ICM, Inc. and that they will either own the technology or have obtained any
license to utilize the technology that is necessary.
Thermal Oxidizer
Ethanol plants such as ours may produce odors in the production of ethanol and its primary
by-product, distillers dried grains with solubles, which some people may find unpleasant. We
intend to eliminate odors by routing dryer emissions through thermal oxidizers. Based upon
materials and information from ICM, Inc., we expect thermal oxidation to significantly reduce any
unpleasant odors caused by the ethanol and distillers grains manufacturing process. We expect
thermal oxidation, which burns emissions, will eliminate a significant amount of the volatile
organic carbon compounds in emissions that cause odor in the drying process and allow us to meet
the applicable permitting requirements. We also expect this addition to the ethanol plant to
reduce the risk of possible nuisance claims and any related negative public reaction against us.
Ethanol Markets
Ethanol has important applications. Primarily, ethanol can be used as a high quality octane
enhancer and an oxygenate capable of reducing air pollution and improving automobile performance.
The ethanol industry is heavily dependent on several economic incentives to produce ethanol.
The principal purchasers of ethanol are generally the wholesale gasoline marketer or blender.
The principal markets for our ethanol are petroleum terminals in the continental United States. We
expect to use a ethanol marketer to sell our ethanol in both the regional and national markets. We
may also attempt to access local markets, but these will be limited and must be evaluated on a
case-by-case basis. Although local markets will be the easiest to service, they may be oversold.
We intend to serve the regional and national markets by rail. Because ethanol use results in
less air pollution than regular gasoline, regional and national markets typically include large
cities that are subject to anti-smog measures in either carbon monoxide or ozone non-attainment
areas. We expect to reach these markets by delivering ethanol to terminals who then blends the
ethanol to E-10 and E85 gasoline and transports the blended gasoline to retail outlets in these
markets.
In addition to rail, we may try to service the regional markets by truck. Occasionally, there
are opportunities to obtain backhaul rates from local trucking companies. These are rates that are
reduced since the truck is loaded both ways. Normally, the trucks drive to the refined fuels
terminals empty and load gasoline product for delivery. A backhaul is the opportunity to load the
truck with ethanol to return to the terminal.
Ethanol Pricing
Ethanol prices have historically tended to track the wholesale gasoline price. The following
chart illustrates the historical relationship between the price of crude oil, retail gasoline and
ethanol:
45
Source: ProExporter Feasibility Study dated May 2005
Regional pricing tends to follow national pricing less the freight difference. Ethanol price
histories for regional markets for our proposed plant are presented in the following graph:
Source:
California Energy Commission at
http://www.energy.ca.gov/gasoline/graphs/,
Updated January 30, 2006
46
Historic prices may not be indicative of future prices. On March 23, 2005, the Chicago Board
of Trade (CBOT) launched the CBOT Denatured Fuel Ethanol futures contract. The new contract is
designed to address the growing demand for an effective hedging instrument for domestically
produced ethanol. Since we expect to engage a third party marketing firm to sell all of our ethanol
we do not expect to directly use the new ethanol futures contract. However, it is possible that any
ethanol marketing firm we engage may use the new ethanol futures contracts to manage ethanol price
volatility.
By-products
The principal by-product of the ethanol production process is distillers grains, a high
protein, high-energy animal feed supplement primarily marketed to the dairy and beef industry.
Distillers grains contain bypass protein that is superior to other protein supplements such as
cottonseed meal and soybean meal. According to a 1986 study by the University of Nebraska reported
in Nebraska Company Extension Study MP51 Distillers Grains, bypass proteins are more digestible
to the animal, thus generating greater lactation in milk cows and greater weight gain in beef
cattle. Dry mill ethanol processing creates three forms of distillers grains: distillers wet
grains with solubles (distillers wet grains), distillers modified wet grains with solubles
(distillers modified wet grains) and distillers dry grains. Distillers wet grains are processed
corn mash that contains approximately 70% moisture and has a shelf life of approximately three
days. Therefore, it can be sold only to farms within the immediate vicinity of an ethanol plant.
Distillers modified wet grains are distillers wet grains that have been dried to approximately 50%
moisture. It has a slightly longer shelf life of approximately three weeks and is often sold to
nearby markets. Distillers dried grains are distillers wet grains that have been dried to 10%
moisture. Distillers dried grains has an almost indefinite shelf life and may be sold and shipped
to any market regardless of its proximity to an ethanol plant.
The plant is expected to produce approximately 220,500 tons annually of raw carbon dioxide as
another by-product of the ethanol production process according to Fagen, Inc.s engineering
specifications. At this time, we do not intend to capture and market our carbon dioxide gas.
Distillers Grains Markets
According to the University of Minnesotas DDGSGeneral Information website (November 28,
2005) approximately 3,200,000 to 3,500,000 tons of distillers grains are produced annually in North
America, approximately 98% of which are produced by ethanol plants. Ethanol plants in South Dakota
and Minnesota produce about 25% of this amount. The amount of distillers grains produced is
expected to increase significantly as the number of ethanol plants increase.
The primary consumers of distillers grains are dairy and beef cattle. In recent years, an
increasing amount of distillers grains have been used in the swine and poultry markets. Numerous
feeding trials show advantages in milk production, growth, rumen health, and palatability over
other dairy cattle feeds. With the advancement of research into the feeding rations of poultry and
swine, these markets will continue to grow. The following charts illustrate how the distillers
grain usage has changed among animal species from 2001 to 2004.
47
The market for distillers grains is generally confined to locations where freight costs allow
it to be competitively priced against other feed ingredients. Distillers grains competes with
three other feed formulations: corn gluten feed, dry brewers grain and mill feeds. The primary
value of these products as animal feed is their protein content. Dry brewers grain and distillers
grains have about the same protein content, and corn gluten feed and mill feeds have slightly lower
protein contents.
As with ethanol, the distillers grains markets are both regional and national. These national
markets are just emerging, primarily in the southeast and southwest United States where significant
dairy and poultry operations are located. In addition, there is the possibility of some local
marketing. Local markets are very limited and highly competitive for the use of distillers grains.
The following chart shows distillers grains production comparative to the potential regional
market for distillers grains:
Source:
University of Minnesota DDGS Web site:
http://www.ddgs.umn.edu/ppt-pqd.htm;
Pro
Exporter Network
Although local markets will be the easiest to service, they may be oversold, which would
depress distillers grains prices. We plan to initially market our distillers grains to the local
livestock markets surrounding the plant, however, if the local livestock markets prove insufficient
to absorb our distillers grains at the prices we desire, we will engage a company to market our
distillers grains nationally. We have not yet discussed or negotiated the terms of a distillers
grains marketing agreement with any distillers grains marketing company.
Distillers Grains Pricing
Historically, the price of distillers grains has been relatively steady. Various factors
affect the price of distillers grains, including, among others, the price of corn, soybean meal and
other alternative feed products, and the general supply and demand of domestic and international
markets for distillers grains. We believe that unless demand increases, the price of distillers
grains may be subject to future downward pressure as the supply of distillers
grains increases because of increased ethanol production. As demonstrated in the table below,
the price of distillers grains may be subject to downward pressure.
48
Soymeal, Corn, and DDG Monthly Price
(March
2003August 2005)
Source: USDA Price History
Corn Feedstock Supply
We anticipate that our plant will need approximately 36 million bushels of grain per year for
our dry milling process. The corn supply for our plant will be obtained primarily from local
markets. Traditionally, corn grown in the area has been fed locally to livestock or exported for
feeding or processing. We believe, based on our feasibility study, that in the year 2004, the
eight county area surrounding the locations we are considering for our plant produced approximately
98.9 million bushels of corn. Our feasibility study, performed by PRX Geographic and Holbrook
Consulting Services, LLC, was obtained for us by the Randolph Economic Development Corporation,
which paid approximately $34,700 for the preparation of the feasibility study. We have agreed to
repay the Randolph Economic Development Corporation for all expenses associated with obtaining the
feasibility study if we decide to locate our plant outside of Randolph County. The chart below
describes the amount of corn grown in Randolph County, Indiana and surrounding counties for 2000
through 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Corn
|
|
2003 Corn
|
|
2002 Corn
|
|
2001 Corn
|
|
2000 Corn
|
|
|
Production
|
|
Production
|
|
Production
|
|
Production
|
|
Production
|
County
|
|
(million bushels)
|
|
(million bushels)
|
|
(million bushels)
|
|
(million bushels)
|
|
(million bushels)
|
Blackford, IN
|
|
|
3.2
|
|
|
|
3.0
|
|
|
|
1.9
|
|
|
|
3.9
|
|
|
|
3.6
|
|
Delaware, IN
|
|
|
10.3
|
|
|
|
9.8
|
|
|
|
6.4
|
|
|
|
11.7
|
|
|
|
10.4
|
|
Henry, IN
|
|
|
11.9
|
|
|
|
11.6
|
|
|
|
8.0
|
|
|
|
12.2
|
|
|
|
11.3
|
|
Jay, IN
|
|
|
11.5
|
|
|
|
8.7
|
|
|
|
4.2
|
|
|
|
10.8
|
|
|
|
10.0
|
|
Randolph, IN
|
|
|
14.7
|
|
|
|
12.7
|
|
|
|
7.8
|
|
|
|
13.3
|
|
|
|
12.7
|
|
Wayne, IN
|
|
|
9.8
|
|
|
|
9.0
|
|
|
|
5.0
|
|
|
|
9.5
|
|
|
|
9.5
|
|
Darke, OH
|
|
|
21.7
|
|
|
|
20.6
|
|
|
|
7.9
|
|
|
|
18.1
|
|
|
|
18.9
|
|
Mercer, OH
|
|
|
15.8
|
|
|
|
13.0
|
|
|
|
4.5
|
|
|
|
13.6
|
|
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
98.9
|
|
|
|
88.4
|
|
|
|
45.7
|
|
|
|
93.1
|
|
|
|
90.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Source: USDA Corn Production (obtained by ProExporter for Feasibility Study)
49
We will be dependent on the availability and price of corn. The price at which we will
purchase corn will depend on prevailing market prices. Although the areas surrounding the
locations we are considering for our plant produce a significant amount of corn and we do not
anticipate problems sourcing corn, there is no assurance that a shortage will not develop,
particularly if there are other ethanol plants competing for corn, an extended drought in the area,
or other production problem. In addition, our financial projections assume that we can purchase
grain for prices near the ten-year average for corn in the areas we are considering for the
location of the plant. The following table shows the USDA ten-year average price for the Indiana
and Ohio counties surrounding the locations we are considering for our plant:
|
|
|
|
|
|
|
10-Year Average
|
County
|
|
Corn Price ($/Bu.)
|
Blackford, IN
|
|
$
|
2.35
|
|
Delaware, IN
|
|
$
|
2.39
|
|
Henry, IN
|
|
$
|
2.43
|
|
Jay, IN
|
|
$
|
2.34
|
|
Randolph, IN
|
|
$
|
2.38
|
|
Wayne, IN
|
|
$
|
2.42
|
|
Darke, OH
|
|
$
|
2.45
|
|
Mercer, OH
|
|
$
|
2.42
|
|
Total / Avg.
|
|
$
|
2.40
|
|
Source: USDA Corn Price History (obtained by ProExporter for Feasibility Study)
Grain prices are primarily dependent on world feedstuffs supply and demand and on U.S. and
global corn crop production, which can be volatile as a result of a number of factors, the most
important of which are weather, current and anticipated stocks and prices, export prices and
supports and the governments current and anticipated agricultural policy. We note that historical
grain pricing information indicates that the price of grain has fluctuated significantly in the
past and may fluctuate significantly in the future. Because the market price of ethanol is not
related to grain prices, ethanol producers are generally not able to compensate for increases in
the cost of grain feedstock through adjustments in prices charged for their ethanol. We,
therefore, anticipate that our plants profitability will be negatively impacted during periods of
high corn prices.
Grain origination and risk management
We anticipate establishing ongoing business relationships with local farmers and grain
elevators to acquire the corn needed for the project. We have no contracts, agreements or
understandings with any grain producer in the area. Although we anticipate procuring grains from
these sources, there can be no assurance that such grains can be procured on acceptable terms, or
if at all.
We expect to hire or contract with a commodities manager to ensure the consistent scheduling
of corn deliveries and to establish and fill forward contracts through grain elevators and
producers. The commodities manager will utilize forward contracting and hedging strategies,
including certain derivative instruments such as futures and option contracts, to manage our
commodity risk exposure and optimize finished product pricing on our behalf. We anticipate that
most of our grain will be acquired in this manner. Forward contracts allow us to purchase corn for
future delivery at fixed prices without using the futures market. The corn futures market allows
us to trade in standard units of corn for delivery at specific times in the future. Option
contracts consist of call options (options to purchase a fixed amount of a commodity) and put
options (options to sell a fixed amount of a commodity). We expect to use a combination of these
derivative instruments in our hedging strategies to help guard against corn price volatility.
Hedging means protecting the price at which we buy corn and the price at which we will sell our
products in the future. It is a way to attempt to reduce the risk caused by price fluctuation.
The effectiveness of such hedging
50
activities will depend on, among other things, the cost of corn
and our ability to sell enough ethanol and distillers grains to use all of the corn subject to
futures and option contracts we have purchased as part of our hedging strategy. Although we will
attempt to link hedging activities to sales plans and pricing activities, such hedging activities
themselves can result in costs because price movements in corn contracts are highly volatile and
are influenced by many factors that are beyond our control. We may incur such costs and they may
be significant.
Project Location and Proximity to Markets
We currently lease commercial office space from an unrelated third party. Our business office
is located at 2 OMCO Square, Suite 201, Winchester, Indiana 47394. We pay monthly rent of $600 and
the term of our lease is up to and including August 31, 2006.
We have not chosen a site for our plant. We anticipate building our plant in east central
Indiana or west central Ohio and are continuing to explore potential locations for our plant.
We reserve the right, in the sole discretion of our board of directors, to select the location
for the plant
.
We have purchased two real estate options for a proposed site in Randolph County, Indiana. On
January 10, 2006, we executed a real estate option agreement with Timothy L. and Diana S. Cheesman,
the Lydia E. Harris Trust, and the Mary Frances James Revocable Trust Agreement dated September 18,
2003, granting us an option to purchase 3 tracts of land in Randolph County, Indiana totaling
approximately 216 acres. Under the terms of the option agreement, we paid $1,500 to each party for
an aggregate option price of $4,500 and have the option to
purchase the land for $4,200 per surveyed acre plus $60,000 for the buildings located on tract
1. This option expires on January 30, 2007, unless we choose to extend the option to January 30,
2008, for an additional payment of $1,500 to each party. On January 11, 2006, we executed a real
estate option agreement with Dale and Bonnie Bartels granting us an option to purchase 5 acres of
land in Randolph County, Indiana adjacent to the 216-acre site. Under the terms of the option
agreement, we paid $1,500 for the option and have the option to purchase the land for $40,000.
This option expires on January 30, 2007, unless we choose to extend the option to January 30, 2008,
for an additional payment of $1,500.
We have also acquired one real estate option and expect to purchase two additional real estate
options for a proposed site in Jay County, Indiana. On December 21, 2005, we executed a real
estate option agreement with Rodgers Farm, LLC granting us an option to purchase approximately 133
acres of land in Jay County, Indiana. Under the terms of the option agreement, we paid $5,000 for
the option and have the option to purchase the land for $7,700 per surveyed acre. This option
expires on July 1, 2006, however we may extend the option every six months to July 1, 2008 for an
additional payment of $5,000 for each six-month extension.
On January 17, 2006, we entered into a service agreement with RTP Environmental Engineering
Associates, Inc., of New York, to provide environmental consulting to us for any prospective sites.
Under the terms of the agreement, we will pay RTP Environmental Engineering Associates, Inc. on an
hourly basis for services rendered. However, there can be no assurance that we will not encounter
environmental hazardous conditions such as groundwater or other subsurface contamination at the
plant site. We are relying on Fagen, Inc. to determine the adequacy of the site for construction
of the ethanol plant. We may encounter environmental hazardous conditions at the chosen site that
may delay the construction of the ethanol plant. We do not expect that Fagen, Inc. will be
responsible for any environmental hazardous conditions encountered at the site. Upon encountering
an environmental hazardous condition, Fagen, Inc. may suspend work in the affected area. If we
receive notice of an environmental hazardous condition, we may be required to correct the condition
prior to continuing construction. The presence of an environmental hazardous condition will likely
delay construction of the ethanol plant and may require significant expenditure of our resources to
correct the condition. In addition, it is anticipated that Fagen, Inc. will be entitled to an
adjustment in price if it has been adversely affected by the environmental hazardous condition. If
we encounter any environmental hazardous conditions during construction that require time or money
to correct, such event may have a material adverse effect on our operations, cash flows and
financial performance.
Transportation and delivery
We anticipate our plant will have the facilities to receive grain by truck and rail and to
load ethanol and distillers grains onto trucks and rail cars. We believe rail is considerably more
cost effective than truck
51
transportation to the more distant markets. The railways and highways we
will use will be dependent on our choice of location to build our plant. At this time, we do not
have any contracts in place with any railway.
We have engaged TerraTec Engineering, LLC of Cedarburg, Wisconsin, to assist us with the rail
engineering and design services necessary to install rail infrastructure for our proposed plant.
TerraTec Engineering is an engineering consulting firm specializing in rail track design for
industrial users. Their personnel have been involved in the design and construction of rail track
for several ethanol plants throughout the Midwest. TerraTec Engineering has teamed with several
well-known ethanol plant consultants, builders, and process technology engineers to streamline the
construction process on several projects. The four phases of rail engineering services include
Task 1 Site Selection Assistance, Task 2 Preliminary and Final Design, Task 2 Bidding
Assistance and Task 4 Construction Observance Assistance. We will pay TerraTec Engineering a
fixed fee of $1,950 for each proposed site plus $56,200 for the rail engineering services provided
in each of the Task phases.
Utilities
The production of ethanol is a very energy intensive process that uses significant amounts of
electricity and natural gas. Water supply and quality are also important considerations. We plan
to enter into agreements with local electric and water utilities to provide our needed energy and
water. In addition, we are in negotiations with suppliers to purchase the natural gas needed for
the plant. There can be no assurance that those utilities and companies will be able to reliably
supply the natural gas, electricity, and water that we need.
If there is an interruption in the supply of energy or water for any reason, such as supply,
delivery, or mechanical problems, we may be required to halt production. If production is halted
for an extended period of time, it may have a material adverse effect on our operations, cash
flows, and financial performance.
We have engaged U.S. Energy Services, Inc. to assist us in negotiating our utilities contracts
and provide us with on-going energy management services. U.S. Energy manages the procurement and
delivery of energy to their clients locations. U.S. Energy Services is an independent,
employee-owned company, with their main office in Minneapolis, Minnesota and branch offices in
Kansas City, Kansas and Omaha, Nebraska. U.S. Energy Services manages energy costs through
obtaining, organizing and tracking cost information. Their major services include supply
management, price risk management and plant site development. Their goal is to develop, implement,
and maintain a dynamic strategic plan to manage and reduce their clients energy costs. A large
percentage of U.S. Energy Services clients are ethanol plants and other renewable energy plants.
We will pay U.S. Energy Services, Inc. a fee of $3,500 per month plus pre-approved travel expenses
for its services up until plant operations. The agreement will continue until 12 months after the
plant is complete. There can be no assurance that any utility provider that we contract with will
be able to reliably supply the gas and electricity that we need.
Natural Gas
In order to operate a 100-million gallon ethanol plant, we will require 3,000,000 MMBTU of
natural gas per year. The plant will produce process steam from its own boiler system and dry the
distillers dried grains by-product via a direct gas-fired dryer. The price we will pay for natural
gas has not yet been determined. Recently, natural gas prices increased sharply as Hurricane
Katrina devastated operations and impacted infrastructure on the Gulf Coast. Natural gas prices
have risen from approximately $3.00 6.50/mcf mmbtu to nearly approximately $5.00 12.00/mcf.
mmbtu.
52
Source: Energy Information Administration
There is still considerable uncertainty as to the extent of infrastructure damage and the
ultimate amount of lost production from Hurricane Katrina. Therefore, we are uncertain as to how
Hurricane Katrina will impact long term natural gas prices.
Electricity
Based on engineering specifications, we anticipate the proposed plant will require
approximately 9.0 mw of electricity at peak demand. We have not yet negotiated, reviewed or
executed any agreement with a power company to provide electricity to our site. The price at which
we will be able to purchase electric services has not yet been determined.
Water
We will require a significant supply of water. Engineering specifications show our plant
water requirements to be approximately 774 gallons per minute depending upon the site we select and
the quality of water. That is approximately 1.1 million gallons per day. Depending upon the site
we select, and once we have assessed our water needs and available supply, we expect to drill four
500-gallon-per-minute high-capacity wells to provide for our water needs. If we are unable to
access sufficient well water supply or unable to drill the wells for any reason, we may utilize
nearby surface water or municipal water to meet the plants water needs.
Much of the water used in an ethanol plant is recycled back into the process. There are,
however, certain areas of production where fresh water is needed. Those areas include boiler
makeup water and cooling tower water. Boiler makeup water is treated on-site to minimize all
elements that will harm the boiler and recycled water cannot be used for this process. Cooling
tower water is deemed non-contact water because it does not come in contact with the mash, and,
therefore, can be regenerated back into the cooling tower process. The makeup water requirements
for the cooling tower are primarily a result of evaporation. Depending on the type of technology
utilized in the plant design, much of the water can be recycled back into the process, which will
minimize the discharge water. This will have the long-term effect of lowering wastewater treatment
costs. Many new plants today are zero or near zero effluent facilities. We anticipate our plant
design incorporating the ICM/Phoenix Bio-Methanator wastewater treatment process resulting in a
zero discharge of plant process water.
53
Employees
We presently have one full-time employee, Angela Armstrong, out project coordinator. Under
the terms of the agreement, Ms. Armstrong receives an annual salary of $50,000.
Prior to completion of the plant construction and commencement of operations, we intend to
hire approximately 45 full-time employees. Approximately nine of our employees will be involved
primarily in management and administration and the remainder will be involved primarily in plant
operations. Our executive officers are not employees and they do not currently receive any
compensation for their services.
The following table represents some of the anticipated positions within the plant and the
minimum number of individuals we expect will be full-time personnel:
|
|
|
|
|
|
|
# Full-Time
|
Position
|
|
Personnel
|
General Manager
|
|
|
1
|
|
Plant Manager
|
|
|
1
|
|
Commodities Manager
|
|
|
1
|
|
Controller
|
|
|
1
|
|
Lab Manager
|
|
|
1
|
|
Lab Technician
|
|
|
2
|
|
Secretary/Clerical
|
|
|
3
|
|
Shift Supervisors
|
|
|
4
|
|
Office Manager
|
|
|
1
|
|
Maintenance Supervisor
|
|
|
1
|
|
Maintenance Craftsmen
|
|
|
6
|
|
Plant Operators
|
|
|
23
|
|
TOTAL
|
|
|
45
|
|
The positions, titles, job responsibilities and number allocated to each position may differ
when we begin to employ individuals for each position.
We intend to enter into written confidentiality and assignment agreements with our officers
and employees. Among other things, these agreements will require such officers and employees to
keep all proprietary information developed or used by us in the course of our business strictly
confidential.
Our success will depend in part on our ability to attract and retain qualified personnel at a
competitive wage and benefit level. We must hire qualified managers, accounting, human resources
and other personnel. There is no assurance that we will be successful in attracting and retaining
qualified personnel at a wage and benefit structure at or below those we have assumed in our
project. If we are unsuccessful in this regard, we may not be competitive with other ethanol
plants which would have a material adverse affect on our operations, cash flows and financial
performance.
Sales and Marketing
We intend to sell and market the ethanol and distillers grains produced at the plant through
normal and established markets. We hope to market all of the ethanol produced with the assistance
of an ethanol distributor, but have not yet entered into any agreements regarding the sale of our
ethanol. Similarly, we hope to sell all of our distillers grains through the use of an
ethanol-byproducts marketing firm, but have not yet entered into any agreements regarding the sale
of our distillers grains.
We do not plan to hire or establish a sale organization to market any of the products or
by-products we produce. Consequently, we will be extremely dependent on the entities we plan to
engage to market each of our products.
54
Design-Build Team
Fagen, Inc.
We have entered into a non-binding letter of intent with Fagen, Inc. in connection with the
design, construction and operation of the proposed plant. Fagen, Inc. was founded by Ron Fagen,
CEO and President, and originally began in 1972 as Fagen-Pulsifer Building, Inc. It became Fagen,
Inc. in 1988. Fagen, Inc. has more than 25 years experience in the ethanol industry and been
involved in the construction of more ethanol plants than any other company in this industry.
Fagen. Inc. employed over 5,000 construction workers last year and employs approximately 120
personnel at its headquarters and two regional offices. The family-owned company posted $315
million in sales in fiscal year 2004. It is expected that fiscal year 2005 sales will top $375
million. Fagen, Inc. has designed and constructed 45 ethanol plants to date. Fagen, Inc.
continues to design and construct a number of ethanol plants around the country. Fagen, Inc.s
other construction commitments could cause Fagen, Inc. to run out of sufficient resources to timely
construct our plant. This could result in construction delays if Fagen, Inc. is not able to
perform according to the timetable we anticipate.
The expertise of Fagen, Inc. in integrating process and facility design into a construction
and operationally efficient facility is very important. Fagen, Inc. also has knowledge and support
to assist our management team in executing a successful start-up. Fagen, Inc. is a meaningful
project participant because of its desire to facilitate the projects successful transition from
start-up to day-to-day profitable operation.
Letter of intent with Fagen, Inc.
We have not entered into any legally binding agreements with Fagen, Inc. or ICM, Inc. for the
design or construction of our plant. We have executed a letter of intent with Fagen, Inc. who has
agreed to enter into good faith negotiations with us to prepare definitive agreements for
financial, design and construction services. We anticipate entering into a definitive agreement
with Fagen, Inc. Once we have received the minimum amount of funds necessary to break escrow and
have received a debt financing commitment sufficient to carry out our business plan. We expect to
pay Fagen, Inc. $105,997,000 in exchange for the following services:
|
|
|
Providing a preliminary design and construction schedule and a guaranteed maximum
price for the design and construction of the plant;
|
|
|
|
|
Assisting us with site evaluation and selection;
|
|
|
|
|
Designing and building the plant; and
|
|
|
|
|
Assisting us in locating appropriate operational management for the plant.
|
However, under the terms of the letter of intent, if as of the date we give a notice to
proceed to Fagen, Inc., the Construction Cost Index published by Engineering News-Record Magazine
(CCI) for the month in which the notice to proceed is given, has increased over the CCI for
September 2005, the contract price will be increased by an equal percentage amount. Therefore, the
cost of our plant could be significantly higher than the $105,997,000 construction price in the
letter of intent. We have included in our budget $8,388,000 for construction contingency to help
offset any increases in construction costs. However, this allowance may not be sufficient to
offset any increased costs that we may face.
We will be responsible for fees and expenses related to financing, such as printing and
publication expenses, legal fees, ratings, credit enhancements, trustee or agent fees and any
registration fees.
Phase I and Phase II Engineering Services Agreement with Fagen Engineering, LLC
Although, we have not yet entered into a design-build agreement with Fagen, Inc., we have
executed a Phase I and Phase II Engineering Services Agreement with Fagen Engineering, LLC, an
entity related to our design-builder Fagen, Inc., for the performance of certain engineering and
design work. Fagen Engineering, LLC performs the engineering services for projects constructed by
Fagen, Inc. In exchange for the following engineering and design services, we have agreed to pay
Fagen Engineering, LLC $92,500, which will be credited against the total design build costs:
55
|
|
Phase I design package consisting of the engineering and design of the
plant site, including the following drawings:
|
|
|
|
Cover sheet
|
|
|
|
|
Property layout drawing
|
|
|
|
|
Grading, drainage and erosion control plan drawing
|
|
|
|
|
Roadway alignment drawing
|
|
|
|
|
Culvert cross sections and details
|
|
|
|
|
Seeding and landscaping
|
|
Phase II design package consisting of the engineering and design of site
work and utilities for the plant, including the following:
|
|
|
|
|
Cover sheet
|
|
|
|
|
Property layout and drawing
|
|
|
|
|
Site grading and drainage drawing
|
|
|
|
|
Roadway alignment
|
|
|
|
|
Utility layout (fire loop)
|
|
|
|
|
Utility layout (potable water)
|
|
|
|
|
Utility layout (well water)
|
|
|
|
|
Utility layout (sanitary sewer)
|
|
|
|
|
Utility layout (utility water blowdown)
|
|
|
|
|
Utility layout (natural gas)
|
|
|
|
|
Geometric layout
|
|
|
|
|
Site utility piping tables drawing
|
|
|
|
|
Tank farm layout drawing
|
|
|
|
|
Tank farm details drawing
|
|
|
|
|
Sections and details drawing (if required)
|
|
|
|
|
Miscellaneous details drawing (if required)
|
ICM, Inc.
We have not entered into any legally binding agreements with ICM, Inc. Based on discussions
we have had with both Fagen, Inc. and ICM, Inc. and provisions found in our Letter of Intent with
Fagen, Inc., we expect that ICM, Inc. will serve as the principal subcontractor for the plant and
to provide the process engineering operations for Fagen, Inc.
ICM, Inc. is a full-service engineering, manufacturing and merchandising firm based in
Colwich, Kansas and founded in 1995 by President and CEO, Dave Vander Griend. ICM, Inc. is
expected to provide the process engineering operations for Fagen, Inc. ICM, Inc. has been involved
in the research, design and construction of ethanol plants for many years. The principals of ICM,
Inc. each have over 20 years of experience in the ethanol industry and have been involved in the
design, fabrication and operations of many ethanol plants. ICM employs over 250 engineers,
professional and industry experts, craftsmen, welders and painters and full-time field employees
that oversee the process. IMC, Inc. has been involved in sixty ethanol plant projects. At least
twenty of the projects involved a partnership between IMC, Inc. and Fagen, Inc. Fagen, Inc. and
ICM, Inc. could lack the capacity to serve our plant due to the increased number of plants that
they are designing and building at any one time. In addition, due to the large number of plants
that ICM, Inc. is currently designing, ICM, Inc. may not be able to devote as much time to the
advancement of new technology as other firms that have more available personnel resources.
56
Construction and timetable for completion of the project
Assuming this offering is successful, and we are able to complete the debt portion of our
financing, we estimate that the project will be completed approximately 18-20 months after we close
on this offering. This schedule further assumes that two months of detailed design will occur
prior to closing and the construction schedule will be followed by two months of commissioning.
During the period of commissioning, we expect preliminary testing, training of personnel and
start-up of operations at our plant to occur. This schedule also assumes that bad weather, and
other factors beyond our control do not upset our timetable as there is no additional time built
into our construction schedule for unplanned contingencies. There can be no assurance that the
timetable that we have set will be followed, and factors or events beyond our control could hamper
our efforts to complete the project in a timely fashion.
Regulatory Permits
We will be subject to extensive air, water and other environmental regulations and we will
need to obtain a number of environmental permits to construct and operate the plant. In addition,
it is likely that our senior debt financing will be contingent on our ability to obtain the various
required environmental permits. We anticipate Fagen, Inc. and RTP Environmental Associates, Inc.
will coordinate and assist us with obtaining certain environmental permits, and to advise us on
general environmental compliance. RTP Environmental Engineering Associates, Inc. is a full-service
environmental consulting firm with a highly experienced technical staff. They provide consulting
services in air, water, and solid waste disciplines, including air permitting, national pollutant
discharge elimination system permits, storm water pollution prevention, spill prevention,
countermeasures and control planning, and risk management planning activities. Founded in 1978,
their years of experience provide them with excellent knowledge of the complex technical and
regulatory issues involved in environmental permitting for ethanol facilities as well as numerous other applications. In addition, we may retain
consultants with specific expertise for the permit being pursued to ensure all permits are acquired
in a cost efficient and timely manner.
Of the permits described below, we must obtain a minor source construction permit for air
emissions and a construction storm water discharge permit prior to starting construction. The
remaining permits will be required shortly before or shortly after we begin to operate the plant.
If for any reason any of these permits are not granted, construction costs for the plant may
increase, or the plant may not be constructed at all. In addition to the state requirements, the
United States Environmental Protection Agency (EPA) could impose conditions or other restrictions
in the permits that are detrimental to us or which increase permit requirements or the testing
protocols and methods necessary to obtain a permit either before, during or after the permitting
process. The states of Indiana or Ohio and the EPA could also modify the requirements for
obtaining a permit. Any such event would likely have a material adverse impact on our operations,
cash flows and financial performance.
Even if we receive all required permits from either the State of Indiana or Ohio, we may also
be subject to regulatory oversight from the EPA. Currently, the EPAs statutes and rules do not
require us to obtain separate EPA approval in connection with the construction and operation of the
proposed plant. Indiana or Ohio are authorized to enforce the EPAs federal emissions program.
However, the EPA does retain authority to take action if it decides that Indiana or Ohio are not
correctly enforcing its emissions program. Additionally, environmental laws and regulations, both
at the federal and state level, are subject to change, and changes can be made retroactively.
Consequently, even if we have the proper permits at the present time, we may be required to invest
or spend considerable resources to comply with future environmental regulations or new or modified
interpretations of those regulations to the detriment of our financial performance.
Minor source construction permit for air emissions
Our preliminary estimates indicate that our facility will be considered a minor source of
regulated air pollutants. There are a number of emission sources that are expected to require
permitting. These sources include the boiler, ethanol process equipment, storage tanks, scrubbers,
and baghouses. The types of regulated pollutants that are expected to be emitted from our plant
include particulate matter (PM10), carbon monoxide (CO), nitrous oxides (NOx) and volatile
organic compounds (VOCs). The activities and emissions mean that we are expected to obtain a
minor source construction permit for the facility emissions. Because of regulatory requirements, we
anticipate that we will agree to limit production levels to a certain amount, which may be slightly
higher than the production levels described in this document (currently projected at 100 million
gallons per year at the nominal rate
57
with the permit at a slightly higher rate) in order to avoid
having to obtain Title V air permits. These production limitations will be a part of the minor
source permit-to install and permit-to-operate in Ohio or a New Source Construction/Federally
Enforceable State Operating Permit (FESOP) synthetic minor in Indiana. If we exceed these
production limitations, we could be subjected to very expensive fines, penalties, injunctive relief
and civil or criminal law enforcement actions. Exceeding these production limitations could also
require us to pursue a Title V air permit. There is also a risk that further analysis prior to
construction, a change in design assumptions or a change in the interpretation of regulations may
require us to file for a Title V air permit. If we must obtain a Title V air permit, then we will
experience significantly increased expenses and a significant delay in obtaining a subsequently
sought Title V air permit. There is also a risk that Indiana or Ohio might reject a Title V air
permit application and request additional information, further delaying startup and increasing
expenses. Even if we obtain a minor source permit to install in Ohio or a FESOP permit in Indiana
prior to construction, the air quality standards may change, thus forcing us to later apply for a
Title V air permit. There is also a risk that the area in which the plant is situated may be
determined to be a non-attainment area for a particular pollutant. In this event, the threshold
standards that require a Title V permit may be changed, thus requiring us to file for and obtain a
Title V air permit. The cost of complying and documenting compliance should a Title V air permit
be required is also higher. It is also possible that in order to comply with applicable air
regulations or to avoid having to obtain a Title V permit, we would have to install additional air
pollution control equipment such as additional or different scrubbers.
Air pollution standard
There are a number of air pollution standards which may effect the construction and operation
of the plant going forward. The Prevention of Significant Deterioration (PSD) regulation creates
more stringent and complicated permit review procedures for construction permits. It is possible,
but not expected, that the plant may exceed applicable PSD levels for NOx, CO, and VOCs.
Waste Water National Pollutant Discharge Elimination System Permits (INPDES Permit)
We expect that we will use water to cool our closed circuit systems in the proposed plant
based upon engineering specifications. Although the water in the cooling system will be
re-circulated to decrease facility water demands, a certain amount of water will be continuously
replaced to make up for evaporation and to maintain a high quality of water in the cooling tower.
In addition, there will be occasional blowdown water that will have to be discharged. The exact
details regarding the source of water and the amount of non-process and other wastewater that needs
to be discharged will not be known until tests confirm the water quality and quantity for the site.
Although unknown at this time, the quality and quantity of the water source and the specific
requirements imposed by Indiana and Ohio for discharge will materially affect the financial
performance of Cardinal Ethanol. We expect to file for a permit to allow the discharge of
non-contact cooling and boiler blowdown water. In Indiana and Ohio, a Non-Contact Cooling Water
General NPDES permit is available for non-contact cooling water discharges. If additives are used
for the cooling water, these general permits may not be available. Also, boiler blowdown water
does not qualify for a general permit in either Indiana or Ohio. Both Indiana and Ohio may
therefore require an individual permit for waste water from industrial sources. In Indiana, if an
individual permit is required then the permit application for a major discharge permit in Indiana
must be filed 270 days before discharge and a permit application for a minor discharge permit must
be filed 180 days before discharge. There can be no assurances that these permits will be granted
to us. If these permits are not granted, then our plant may not be allowed to operate.
Water Withdrawal Permit
Indiana requires registration with the Indiana Department of Natural Resources for any water
withdrawal facility that, in the aggregate from all sources and by all methods, has the capability
of withdrawing more than one hundred thousand (100,000) gallons of ground water, surface water, or
ground and surface water combined in one day. No permit is required in Ohio.
Storm Water Discharge Permit and Storm Water Pollution Prevention Program (General NPDES Permits)
Before we can begin construction of our proposed ethanol plant, we must obtain a General NPDES
permit for storm water discharges associated with construction activities from the Ohio
Environmental Protection Agency (General Permit OHC000002) or a Rule 5 General NPDES permit for
storm water runoff associated with land
58
disturbing activity in Indiana. The Ohio NPDES permit application must be filed 21 days before construction begins in Ohio. In Indiana a notice of
intent to file the Rule 5 General NPDES permit must be filed 48 hours before construction begins
and the application must be submitted to the local County Soil and Water Conservation Districts for
review. Those agencies in Indiana have 28 days in which to review an application. In addition,
if the site is located in certain municipal areas in Indiana, a Municipal Separate Storm Sewer
System may impose additional permit requirements (a Rule 13 NPDES Permit). We must also file a
separate application for a General Permit OHC000003 or draft OHC000004 for industrial storm water
discharges in Ohio and a General NPDES Rule 6 Stormwater Runoff Associated with Industrial Activity
Permit in Indiana. The Ohio application for the General Permit for industrial storm water
discharges, OHC000003 or draft OHC000004, must be filed 180 days prior to the start of operations.
A Rule 6 Storm Water Runoff Associated with Industrial Activity NPDES General Permit application
must be filed 90 days before construction in Indiana. In connection with this permit, we must have
a Pollution Prevention Plan in place that outlines various measures we plan to implement to prevent
storm water pollution.
New source performance standards
The plant will be subject to new source performance standards for both the plants
distillation processes and the storage of volatile organic compounds used in the denaturing
process. These duties include initial notification, emissions limits, compliance, monitoring
requirements, and record keeping requirements.
Spill prevention, control, and countermeasures plan
Before we can begin operations, we must prepare and implement a Spill Prevention Control and Countermeasure (SPCC) plan in accordance with the guidelines contained in 40 CFR § 112.
This plan will address oil pollution prevention regulations and must be reviewed and certified by a
professional engineer. The SPCC must be reviewed and updated every three years.
Alcohol and Tobacco Tax and Trade Bureau, Requirements
Before we can begin operations, we must comply with applicable Alcohol and Tobacco Tax and
Trade Bureau (formerly the Bureau of Alcohol, Tobacco and Firearms) regulations. These regulations
require that we first make application for and obtain an alcohol fuel producers permit. The
application must include information identifying the principal persons involved in our venture and
a statement as to whether any of them have ever been convicted of a felony or misdemeanor under
federal or state law. The term of the permit is indefinite until terminated, revoked or suspended.
The permit also requires that we maintain certain security measures. We must also secure an
operations bond pursuant to 27 CFR § 19.957. There are other taxation requirements related to
special occupational tax and a special stamp tax.
Risk management plan
Pursuant to § 112(r)(7) of the Clean Air Act, stationary sources with processes that contain
more than a threshold quantity of a regulated substance are required to prepare and implement a
Risk Management Plan. Since we plan to use anhydrous ammonia, we must establish a plan to prevent
spills or leaks of the ammonia and an emergency response program in the event of spills, leaks,
explosions or other events that may lead to the release of the ammonia into the surrounding area.
The same requirement may also be true for denaturant. This determination will be made as soon as
the exact chemical makeup of the denaturant is obtained. We will need to conduct a hazardous
assessment and prepare models to assess the impact of an ammonia and/or denaturant release into the
surrounding area. The program will be presented at one or more public meetings. In addition, it
is likely that we will have to comply with the prevention requirements under OSHAs Process Safety
Management Standard. These requirements are similar to the Risk Management Plan requirements. The
Risk Management Plan should be filed before use.
Environmental Protection Agency
Even if we receive all Ohio or Indiana environmental permits for construction and operation of
the plant, we will also be subject to oversight activities by the EPA. There is always a risk that
the EPA may enforce certain
59
rules and regulations differently than Ohio or Indianas environmental administrators. Ohios, Indianas, and EPA rules and regulations are subject to change, and any
such changes may result in greater regulatory burdens.
Nuisance
Ethanol production has been known to produce an odor to which surrounding residents could
object. Ethanol production may also increase dust in the area due to operations and the
transportation of grain to the plant and ethanol and distillers dried grains from the plant. Such
activities may subject us to nuisance, trespass, or similar claims by employees or property owners
or residents in the vicinity of the plant. To help minimize the risk of nuisance claims based on
odors related to the production of ethanol and its by-products, we intend to install a thermal
oxidizer in the plant.
See
DESCRIPTION OF BUSINESS Thermal Oxidizer for additional
information. Nonetheless, any such claims or increased costs to address complaints may have a
material adverse effect on us, our operations, cash flows, and financial performance.
We are not currently involved in any litigation involving nuisance or any other claims.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our operating agreement provides that our initial board of directors will be comprised of no
fewer than 12 and no more than 35 members. We have 24 directors on our initial board of directors.
The initial board of directors will serve until the first annual or special meeting of the members
following the date on which substantial operations of the ethanol plant commences. If our project
suffers delays due to financing or construction, our initial board of directors could serve for an extended period of time. In that event, your only recourse to
replace these directors would be through an amendment to our operating agreement which could be
difficult to accomplish.
Our operating agreement further provides that at the first annual or special meeting of the
members following the date on which substantial operations of the facilities commence, the number
of elected directors shall be a minimum of 7 and a maximum of 9. However, each member purchasing
400 units or more in this offering is entitled to appoint a director to the board. The operating
agreement requires that a majority of the board be elected by the members. Therefore, the number
of directors will be increased if the number of directors appointed by members purchasing 400 units
or more in this offering is greater than or equal to the number of elected directors on our board.
Any member eligible to appoint a director cannot vote in the general election. Appointed directors
serve until removed by the member appointing them, so long as such member owns 400 or more units.
The operating agreement further provides for a staggered board of directors, where, upon the
expiration of the initial board, the first group of directors shall serve for one year, the second
group shall serve for two years, and the third group shall serve for three years. The successors
for each group of directors shall be elected for a 3-year term and at that point, one-third of the
total number of directors will be elected by the members each year. Prior to expiration of the
initial directors terms, the initial directors shall conduct a lottery to separately identify the
director positions to be elected. Each director position will be designated as either Group I
(serving one year), Group II (serving two years) and Group III (serving three years).
Identification of Directors, Executive Officers and Significant Employees
The following table shows the directors and officers of Cardinal Ethanol as of the date of
this prospectus:
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Director
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Office
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Troy Prescott
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Director & Chairman/President
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Thomas Chalfant
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Director & Vice
Chairman/Vice President
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Dale Schwieterman
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Director & Treasurer
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John N. Shanks II
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Director & Secretary
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Robert E. Anderson
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Director
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Lawrence Allen Baird
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Director
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Larry J. Barnette
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Director
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Ralph Brumbaugh
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Director
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Thomas C. Chronister
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Director
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Director
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Office
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Robert John Davis
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Director
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David Matthew Dersch
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Director
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G. Melvin Featherston
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Director
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John W. Fisher
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Director
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Everett Leon Hart
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Director
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Jeremey Jay Herlyn
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Director
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Barry Hudson
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Director
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James Lee Kunzman
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Director
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Cyril George LeFevre
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Director
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Robert L. Morris
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Director
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Curtis Allan Rosar
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Director
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Michael Alan Shuter
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Director
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Steven John Snider
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Director
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Jerrold Lee Voisinet
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Director
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Andrew J. Zawosky
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Director
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Business Experience of Governors and Officers
The following is a brief description of the business experience and background of our officers
and governors.
Troy Prescott, Chairman/President, Director,
Age 40, 3780 North 250 East, Winchester, Indiana
47394.
Mr. Prescott has been a grain farmer in Randolph County, Indiana for the past 22 years and
presently owns and operates a 2,500-acre row crop farm near Winchester, Indiana. In addition, for
the past 11 years Mr. Prescott and his wife owned and operated Cheryls Restaurant which they sold
in December 2005. He also serves on the board of directors for the Randolph Central School
District.
Mr. Prescott has served as our president and a director since our inception. Pursuant to our
operating agreement, Mr. Prescott will serve until our first annual meeting following substantial
completion of our ethanol plant and in all cases until a successor is elected and qualified.
Thomas E. Chalfant, Vice Chairman/Vice President, Director,
Age 55, 12028 West 700 North,
Parker City, Indiana 47368.
Mr. Chalfant has been farming in Randolph County since 1974 and is the Vice President and
Secretary of Chalfant Farms, Inc. He also is a member of the board of directors for United
Communities National Bank and is the President of the Randolph County Farm Bureau. Mr. Chalfant
graduated from Purdue University with a bachelors of science in agriculture.
Mr. Chalfant has served as our vice chairman/vice president and a director since our
inception. Pursuant to our operating agreement, Mr. Chalfant will serve until our first annual
meeting following substantial completion of our ethanol plant and in all cases until a successor is
elected and qualified.
Dale
A. Schwieterman, Treasurer, Director,
Age 55, 3924 Cr 716 A, Celina, Ohio 45822.
Since 1974, Mr. Schwieterman has been employed as a Certified Public Accountant and currently
is the President of McCrate DeLaet and Co. He also manages a 940-acre grain farm operation in
Mercer County, Ohio. He graduated from Bowling Green University with a degree in business in 1972.
Mr. Schwieterman has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Schwieterman will serve until our first annual meeting following substantial
completion of our ethanol plant and in all cases until a successor is elected and qualified.
61
John Nelton Shanks II, Secretary, Director,
Age 60, 349 N 500 W, Anderson, Indiana 46011.
Mr. Shanks has been a practicing attorney since 1971. Since 2003, he has been practicing as
Shanks Law Office. Prior to that, Mr. Shanks was a partner at Ayres, Carr and Sullivan, P.C. He
is also a registered civil mediator and a public and governmental affairs consultant and a licensed
Indiana insurance agent. Mr. Shanks was admitted to practice before the Supreme Court of Indiana
in 1971, the United States District Court for the Southern District in Indiana in 1971, and the
United States Court of Appeals for the Seventh Circuit in 1972. He also is a member of the board
of directors and treasurer for Capital Plus Credit Union and serves an officer and director for
Capital Plus Service Corporation and Indiana Public Employers Plan, Inc. Mr. Shanks is also a
member of the Indiana State Bar Association where he serves as editor of the General Practice
Newsletter and is a founder, officer and director of the Indiana Workers Compensation Institute,
Inc. Since August 2005, Mr. Shanks has served as a Title IV-D Commissioner for the Unified Courts
of Madison County, Indiana. He received his bachelor of arts from Indiana University in 1968, then
went on to Indiana University School of Law, graduating in 1971 with a juris doctorate.
Mr. Shanks has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Shanks will serve until our first annual meeting following substantial completion of
our ethanol plant and in all cases until a successor is elected and qualified.
Robert E. Anderson, Director,
Age 76, 5737 East 156
th
Street, Noblesville, Indiana
46062.
For the past 33 years, Mr. Anderson has been an owner and operator of Iron Wheel Farm, Inc.,
an 1,800-acre farming operating. Until his retirement in 1987, he worked 42 years as a life
insurance agent for Equitable Life Insurance Company. He is also the Past President of Indianapolis Life Insurance Association.
Mr. Anderson previously served as Lt. Governor for Kiwanis of Indiana.
Mr. Anderson has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Anderson will serve until our first annual meeting following substantial completion
of our ethanol plant and in all cases until a successor is elected and qualified.
Lawrence Allen Baird, Director,
Age 62, 2579 S 500 West, Tipton, Indiana 46072.
Since 1962, Mr. Baird has been farming in the Tipton, Indiana area and he is currently the
owner and operator of Baird Farms, a 6,000-acre crop farming operation. Mr. Baird has been a seed
sales representative for Pioneer Hi-Bred International, Inc. since 1973.
Mr. Baird has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Baird will serve until our first annual meeting following substantial completion of
our ethanol plant and in all cases until a successor is elected and qualified.
Larry J. Barnette, Director,
Age 52, P.O. Box 127, Winchester, Indiana 47394.
Mr. Barnette is the operations manager of LPI Transportation and LPI Excavation for the past
30 years. He also has 200-acre grain farm in the Portland, Indiana area. He is a former member
of the board of directors for the Jay County Farm Bureau. Mr. Barnette has served as a director
since our inception.
Mr. Barnette has served as a director since our inception. Pursuant to our operating
agreement, Mr. Barnette will serve until our first annual meeting following substantial completion
of our ethanol plant and in all cases until a successor is elected and qualified.
Ralph E. Brumbaugh, Director,
Age 63, 6290 Willis Road, Greenville, Ohio 45331.
Mr. Brumbaugh is a director and part-owner of Brumbaugh Construction, Inc., a commercial
construction business which he founded in 1962. Since 1974, he has been the owner of Creative
Cabinets, a commercial interior supply company. In 2005, his companies employed over 200 people
and grossed over $50 million in sales.
62
Mr. Brumbaugh has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Brumbaugh will serve until our first annual meeting following substantial completion
of our ethanol plant and in all cases until a successor is elected and qualified.
Thomas C. Chronister, Director,
Age 54, 10905 Sandpiper Cover, Ft. Wayne, Indiana 46845.
Since 1975, Mr. Chronister has worked as the manager and pharmacist for Chronister
Kendallville Drug, Inc. He also owns and operates 160 apartments in the Fort Wayne, Indiana area.
Mr. Chronister graduated from Purdue University in 1975 with a bachelors degree in pharmacy.
Mr. Chronister has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Chronister will serve until our first annual meeting following substantial
completion of our ethanol plant and in all cases until a successor is elected and qualified.
Robert John Davis, Director,
Age 46, 4465 North County Road 100 E, New Castle, Indiana 47362.
Mr. Davis has been the owner and operator of Spiceland Wood Products, Inc., a manufacturing
firm supplying the residential and commercial marketplace with customized wood products, since
2001. Previously he was the Vice President of Operations for Frank Miller Lumber Company. He also
owns and operates a 160-acre farm near New Castle, Indiana. He graduated from Purdue University
School of Engineering in Materials Engineering
Mr. Davis has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Davis will serve until our first annual meeting following substantial completion of
our ethanol plant and in all cases until a successor is elected and qualified.
David Mathews Dersch, Director
, Age 69, 305 Greenbriar Road, Muncie, Indiana 47304.
In 1987, Dr. Dersch co-founded S & S Steel Corporation in Anderson, Indiana and currently
serves as its Vice President. He has also served as a member of the Deans Council of Indiana
University Medical School for past 15 years and has been a member of the Board of Directors of Bob
Jones University, in Greenville, South Carolina for the last 10 years. He is also a semi-retired
practicing physician for OB-GYN, PC. Dr. Dersch graduated from the University of Indiana.
Dr. Dersch has served as a director since December 7, 2005. Pursuant to our operating
agreement, Dr. Dersch will serve until our first annual meeting following substantial completion of
our ethanol plant and in all cases until a successor is elected and qualified.
G Melvin Featherston, Director,
Age 80, 14740 River Road, Noblesville, Indiana 46062.
Mr. Featherston began his farming career in 1943, and is now semi-retired. He currently
manages Featherston Farm, LLC, an approximately 2,200-acre farming operation located throughout
Randolph County, Wayne County and Shelby County, Indiana.
Mr. Featherston has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Featherston will serve until our first annual meeting following substantial
completion of our ethanol plant and in all cases until a successor is elected and qualified.
John Wesley Fisher, Director,
Age 90, 3711 Burlington, Muncie, Indiana 47302.
Mr. Fisher is an honorary director and chairman emeritus of the board of directors of Ball
Corporation. Mr. Fisher joined Ball Corporation in 1941 as a trainee. Following nine years in
various manufacturing assignments he was named vice president of manufacturing, and in 1954 became
vice president of sales. Mr. Fisher was elected a corporate vice president in 1963, and was named
president and CEO in 1970. He was elected chairman and CEO in 1978. Mr. Fisher retired as CEO in
1981 and as chairman of the board in 1986. He had served as a director of Ball Corporation since
1943. Mr. Fisher is a life director and past chairman of the board of directors of the National
63
Association of Manufacturers. He currently serves as chairman of Cardinal Health System in Muncie,
Indiana, a life trustee of DePauw University, a member of the University of Tennessee Development
Council, a regent of the Indiana Academy and a member of the East Central Indiana Committee on
Medical Education. Mr. Fisher received a bachelors degree from the University of Tennessee in
1938 and an MBA from the Harvard Graduate School of Business Administration in 1942.
Mr. Fisher has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Fisher will serve until our first annual meeting following substantial completion of
our ethanol plant and in all cases until a successor is elected and qualified.
Everett Leon Hart, Director,
Age 68, 6934 Bradford Childrens Home Road, Greenville, Ohio 45331.
Mr. Hart is in Sales Service with L.A.H. Development LLC, and for the past 30-years owned and
operated Nu-Way Farm Systems, Inc.
Mr. Hart has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Hart will serve until our first annual meeting following substantial completion of
our ethanol plant and in all cases until a successor is elected and qualified.
Jeremey Jay Herlyn, Director
, Age 34, 841 Hidden Valley Drive, Richmond, Indiana 47374.
Mr. Herlyn is the Plant Manager for Land OLakes Purina Feed, LLC in Richmond, Indiana. He
received a bachelors of science in Agricultural Engineering from South Dakota State University in
1994.
Mr. Herlyn has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Herlyn will serve until our first annual meeting following substantial completion of
our ethanol plant and in all cases until a successor is elected and qualified.
Barry Hudson, Director,
Age 65, 1525 S Meridian, Portland, Indiana 47371.
Mr. Hudson is the Chairman of the Board and President of First National Bank in Portland,
Indiana. He retired from First National Bank in March 2005 after 22 years of service.
Mr. Hudson has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Hudson will serve until our first annual meeting following substantial completion of
our ethanol plant and in all cases until a successor is elected and qualified.
Lee James Kunzman, Director
, Age 62, 4740 Pennington Ct, Indianapolis, Indiana 46254.
Mr. Kunzman is the Vice President and General Manager for Henelgern Racing Inc. He has also
been the Vice President of Kunzman Motor Co Inc.
Mr. Kunzman has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Kunzman will serve until our first annual meeting following substantial completion
of our ethanol plant and in all cases until a successor is elected and qualified.
Cyril George LeFevre, Director,
Age 59, 1318 Fox Road, Ft. Recovery, Ohio 45846.
Mr. LeFevre is President and owner of Ft. Recovery Equipment Co. Inc. for the past 35 years.
He also owns and operates a 2,500 acre farming operation. Mr. LeFevre received an industrial
engineering degree from University of Dayton in 1969.
Mr. LeFevre has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. LeFevre will serve until our first annual meeting following substantial completion
of our ethanol plant and in all cases until a successor is elected and qualified.
64
Robert L. Morris, Director,
Age 59, 9380 W. CR 1000 South, Losantville, Indiana 47354.
Mr. Morris has been a practicing certified public accountant for the past 26 years and
currently owns and operates Robert L. Morris & Co., P.C. He also is a member of the Randolph
County Revolving Loan Board and is an advisory board member for the Winchester office of Mutual
Federal Savings Bank. Mr. Morris received a bachelors degree in accounting from Ball State
University in 1968.
Mr. Morris has served as a director since our inception. Pursuant to our operating agreement,
Mr. Morris will serve until our first annual meeting following substantial completion of our
ethanol plant and in all cases until a successor is elected and qualified.
Curtis Allan Rosar, Director,
Age 66, 3587 Wernle Road, Richmond, Indiana 47374.
Mr. Rosar is the President of C. Allan Rosar and Associates which manages family investments
and various partnerships. He is active on the Wayne County Foundation Board, where he serves as
chairman of the investment and grants committee. Mr. Rosar also serves as the chairperson of the
Reid Foundation Board. He received a bachelors degree in industrial engineering in 1962 from
Lehigh University, Bethlehem, Pennsylvania.
Mr. Rosar has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Rosar will serve until our first annual meeting following substantial completion of
our ethanol plant and in all cases until a successor is elected and qualified.
Michael Alan Shuter, Director
, Age 54, 6376 N 300 W, Anderson, Indiana 46011.
Since 1973, Mr. Shuter has been the owner and operator of Shuter Sunset Farms, Inc., a farming
operation which includes 3,000 acres of corn and soybeans, an 8,000-head wean to finish hog
operation, and 35 head beef cow herd. He graduated from Purdue University in 1972 with a bachelors
of science in agricultural economics.
Mr. Shuter has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Shuter will serve until our first annual meeting following substantial completion of
our ethanol plant and in all cases until a successor is elected and qualified.
Steven John Snider, Director,
Age 46, 7290 N. Langdon Rd., Yorktown, Indiana 47396.
Mr. Snider is the Region Manager for AgReliant Genetics in Westfield, Indiana, with whom he
began his career in 1982. He is the managing partner of SMOR, LLC, a real estate development and
investment group. He received a bachelors degree in agricultural economics from Purdue University
in 1982.
Mr. Snider has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Snider will serve until our first annual meeting following substantial completion of
our ethanol plant and in all cases until a successor is elected and qualified.
Jerrold Leo Voisinet, Director,
Age 59, 450 Garbry Road,
Piqua, Ohio 45356.
Since 1980, Mr. Voisinet has been the owner and manager of two storage rental facilities,
containing more than 1,300 units, located in Miami County and Mercer County, Ohio. Prior to that,
Mr. Voisinet served in the U.S. Army, where he retired after a 20 year career in 1980 as a Supply
Sargent.
Mr. Voisinet has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Voisinet will serve until our first annual meeting following substantial completion
of our ethanol plant and in all cases until a successor is elected and qualified..
Andrew Zawosky Jr.
, Age 64, 50 Celestial Way # 208, Juno Beach, Florida 33408.
For the past 24 years, Mr. Zawosky is the owner and operator of Zawosky Trucking in
Greenville, Ohio. He graduated from Penn State with a bachelors of science degree in engineering
in 1962.
65
Mr. Zawosky has served as a director since December 7, 2005. Pursuant to our operating
agreement, Mr. Zawosky will serve until our first annual meeting following substantial completion
of our ethanol plant and in all cases until a successor is elected and qualified.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
We currently have no person or entity known by us to be the beneficial owner of more than 5%
of the outstanding units.
Security Ownership of Management
As of the date of this prospectus, our directors and officers own membership units as follows:
UNITS BENEFICIALLY OWNED BY DIRECTORS AND OFFICERS
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Percentage of Total After
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the Offering
(1)
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Amount and
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Nature of
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Maximum
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Minimum Units
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Beneficial
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Number
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Percent of Class
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Units Sold in
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Sold in
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Title of Class
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Name and Address of Beneficial Owner
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Owner
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of Units
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Prior to Offering
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Offering
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Offering
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Membership
Units
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Troy Prescott
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3780 N. 250 East
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Winchester, IN 47394
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$
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50,000
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a22
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3.87
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%
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0.19
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%
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0.23
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%
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Membership Units
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Thomas Chalfant
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12028 W. 700 North
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Parker City, IN 47368
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$
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50,000
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22
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3.87
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%
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0.19
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%
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0.23
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%
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Membership Units
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Dale Schwieterman
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3924 CR 716 A
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Celina, OH 45822
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$
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40,000
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16
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2.82
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%
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0.14
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%
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0.17
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%
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Membership Units
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John N. Shanks, II
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349 N. 500 West
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Anderson, IN 46011
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$
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40,000
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16
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2.82
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%
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0.14
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%
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0.17
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%
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Membership Units
|
|
Robert E. Anderson
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5737 E. 156
th
Street
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|
Noblesville, IN 46062
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
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|
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Membership Units
|
|
Lawrence Allen Baird
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2579 S. 500 West
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|
Tipton, IN 46072
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
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|
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Membership Units
|
|
Larry J. Barnette
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3247 N. 300 East
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|
Portland, IN 47371
|
|
$
|
50,000
|
|
|
|
22
|
|
|
|
3.87
|
%
|
|
|
0.19
|
%
|
|
|
0.23
|
%
|
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|
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Membership Units
|
|
Ralph Brumbaugh
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P.O. Box 309
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|
Arcanum, OH 45304
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
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Membership Units
|
|
Thomas C. Chronister
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|
440 Kerr Island North
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|
Rome City, IN 46784
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
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|
|
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Membership Units
|
|
Robert John Davis
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|
4465 N. Co. Rd. 100 East
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|
New Castle, IN 47362
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
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|
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Membership Units
|
|
David Matthew Dersch
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|
305 N. Greenbriar Rd.
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|
|
Muncie, IN 47304
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
66
|
|
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|
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|
|
Percentage of Total After
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
the Offering
(1)
|
|
|
|
|
|
|
Amount and
|
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Nature of
|
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|
|
Maximum
|
|
Minimum Units
|
|
|
|
|
|
|
Beneficial
|
|
Number
|
|
Percent of Class
|
|
Units Sold in
|
|
Sold in
|
Title of Class
|
|
Name and Address of Beneficial Owner
|
|
Owner
|
|
of Units
|
|
Prior to Offering
|
|
Offering
|
|
Offering
|
|
Membership Units
|
|
G. Melvin Featherston
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|
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|
14740 River Rd.
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|
Noblesville, IN 46062
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Membership Units
|
|
John W. Fisher
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|
|
P.O. Box 1408
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|
|
|
|
|
Muncie, IN 47308
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
Membership Units
|
|
Everett Hart
|
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|
|
6934 Bradford Childrens Home Rd.
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|
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|
|
|
|
Greenville, OH 45331
|
|
$
|
0
|
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
|
|
|
|
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|
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|
|
Membership Units
|
|
Jeremey Jay Herlyn
|
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|
|
841 Hidden Valley Dr.
|
|
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|
|
|
|
|
Richmond, IN 47374
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Units
|
|
Barry Hudson
|
|
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|
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|
|
|
|
|
|
1525 Meridian St.
|
|
|
|
|
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|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
Portland, IN 47371
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Units
|
|
James Lee Kunzman
|
|
|
|
|
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|
|
|
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|
|
|
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|
|
|
|
|
4740 Pennington Ct.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indianapolis, IN 46254
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Units
|
|
Cyril George LeFevre
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1318 Fox Rd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fort Recovery, OH 45846
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Units
|
|
Robert L. Morris
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9380 W. CR 1000 S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losantville, IN 47354
|
|
$
|
50,000
|
|
|
|
22
|
|
|
|
3.87
|
%
|
|
|
0.19
|
%
|
|
|
0.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
Units
|
|
Curtis Allan Rosar
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3587 Wernle Rd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richmond, IN 47374
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Units
|
|
Michael Alan Shuter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6376 N. 300 West
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anderson, IN 46011
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Units
|
|
Steven John Snider
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7290 Langdon Rd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yorktown, IN 47396
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Units
|
|
Jerrold Lee Voisinet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450 Garby Rd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Piqua, OH 45356
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Units
|
|
Andrew J. Zawosky
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 Celestial Way # 208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Juno Beach, FL 33408
|
|
$
|
40,000
|
|
|
|
16
|
|
|
|
2.82
|
%
|
|
|
0.14
|
%
|
|
|
0.17
|
%
|
|
|
|
(1)
|
|
Assumes no additional purchases in this offering.
|
EXECUTIVE COMPENSATION
Troy Prescott is currently serving as our chairman and president and Tom Chalfant is currently
serving as our vice chairperson and vice president. Dale Schwieterman is our treasurer, and John
Shanks, II is our secretary. We do not currently compensate our executive officers.
We do not have any other compensation arrangements with our directors and officers.
Employment Agreements
We have no employment agreements with any executive officer or director. In the future, we
may enter into employment agreements with our executive officers or other employees that we may
hire.
67
Reimbursement of Expenses
We reimburse our officers and directors for expenses incurred in connection with their
service.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our operating agreement provides that none of our directors or members will be liable to us
for any breach of their fiduciary duty. This could prevent both us and our unit holders from
bringing an action against any director for monetary damages arising out of a breach of that
directors fiduciary duty or grossly negligent business decisions. This provision does not affect
possible injunctive or other equitable remedies to enforce a directors duty of loyalty for acts or
omissions not taken in good faith, involving willful misconduct or a knowing violation of the law,
or for any transaction from which the director derived an improper financial benefit. It also does
not eliminate or limit a directors liability for participating in unlawful payments or
distributions or redemptions, or for violations of state or federal securities laws. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is contrary to public policy as expressed in the Securities Act of
1933, and is, therefore, unenforceable.
Under Indiana law, no member or director will be liable for any of our debts, obligations or
liabilities merely because he or she is a member or director. In addition, Indiana law permits,
and our operating agreement contains, extensive indemnification provisions which require us to
indemnify any officer or director who was or is party, or who is threatened to be made a party to a
current or potential legal action because he or she is our director or officer. We must also
indemnify against expenses, including attorney fees, judgments, claims, costs and liabilities
actually and reasonably incurred by these individuals in connection with any legal proceedings,
including legal proceedings based upon violations of the Securities Act of 1933 or state securities
laws. Our indemnification obligations may include criminal or other proceedings.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since our inception, we have not engaged in any transactions with related parties.
PLAN OF DISTRIBUTION
Before purchasing any units, an investor must execute a subscription agreement, a promissory
note and security agreement and sign our operating agreement. The subscription agreement will
contain, among other provisions, an acknowledgement that the investor received a prospectus, such
as this, and that the investor agrees to be bound by our operating agreement. All subscriptions
are subject to approval by our directors and we reserve the right to reject any subscription
agreement.
The Offering
We are offering, on a best efforts basis, a minimum of 9,000 units and a maximum of 16,400
units at a purchase price of $5,000 per unit. You must purchase a minimum of 4 units to
participate in the offering. You may purchase any number of additional units subject to the 40%
ownership limitation provided in our operating agreement. Therefore, if we sell the minimum number
of units offered, the maximum number of units you may own is 3,827 units and if we sell the
maximum, you may own no more than 6,787 units. Our board of directors determined the offering
price for the units arbitrarily, without any consultation with third parties. The offering price
of the units is not, therefore, based on customary valuation or pricing techniques for new
issuances. We anticipate our directors, as listed on page 5 of this prospectus, will sell our
units in this offering, without the use of an underwriter. We will not pay commissions to our directors for these sales. Our directors will
rely on the safe harbor from broker-dealer registration set out in Rule 3a4-1 under the Securities
Exchange Act of 1934.
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Our minimum offering amount is $45,000,000 and our maximum offering amount is $82,000,000.
The offering will end no later than
[one year from the effective date of this registration
statement]
. If we sell the maximum number of units prior to
[one year from the effective date of
this registration statement]
, the offering will end as of the date the maximum number of units is
sold. We may choose to end the offering any time prior to
[one year date]
, after we sell the
minimum number of units. If we abandon the project for any reason, we will terminate the offering.
Even if we successfully close the offering by selling the minimum number of units by
[one year
date]
, we may still be required to return the offering proceeds to investors if we are unable to
satisfy the conditions for releasing funds from escrow, which include our receipt of a written debt
financing commitment. After the offering, there will be 9,568 units issued and outstanding if we
sell the minimum number of units offered in this offering and 16,968 units issued and outstanding
if we sell the maximum number of units offered in this offering. This includes 568 seed capital
units issued in our previous seed capital private placement.
Our directors and officers will be allowed to purchase the units that are being offered,
subject to the limitation in our operating agreement that no member can own more than 40% of the
total issued and outstanding units. These units may be purchased for the purpose of satisfying the
minimum amount of units required to close the offering. Units purchased by these individuals and
entities will be subject to the same restrictions regarding transferability as described in this
prospectus and our operating agreement, and will, therefore, be purchased for investment, rather
than resale.
You should not assume that we will sell the $45,000,000 minimum only to unaffiliated third
party investors. We may sell units to affiliated or institutional investors that may acquire
enough units to influence the manner in which Cardinal Ethanol is managed. These investors may
influence the business in a manner more beneficial to them than to other investors.
We plan to register the offering only with the Florida, Georgia, Illinois, Indiana, Kentucky,
Michigan, Ohio and Tennessee state securities regulatory bodies. We may also offer or sell our
units in other states in reliance on exemptions from the registration requirements of the laws of
those other states. However, we may not generally solicit investors in any jurisdictions other
than Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Ohio
and Tennessee unless we decide to register in additional states. This limitation
may result in the offering being unsuccessful.
We are expecting to incur offering expenses in the amount of approximately $558,499 to
complete this offering.
Suitability of Investors
Investing in the units offered hereby involves a high degree of risk. Accordingly, the
purchase of units is suitable only for persons of substantial financial means that have no need for
liquidity in their investments and can bear the economic risk of loss of any investment in the
units. Units will be sold only to persons that meet these and other requirements. You cannot
invest in this offering unless you meet one of the following 2 suitability tests: (1) You have
annual income from whatever source of at least $45,000 and you have a net worth of at least $45,000
exclusive of home, furnishings and automobiles; or (2) you have a net worth of at least $100,000
exclusive of home, furnishings and automobiles. For married persons, the tests will be applied on
a joint husband and wife basis regardless of whether the purchase is made by one spouse or the
husband and wife jointly.
Even if you represent that you meet the suitability standards set forth above, the board of
directors reserves the right to reject any subscription for any reason, including if the board
determines that the units are not a suitable investment for you.
Each subscriber must make written representations that he/she/it:
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is purchasing such units for the purpose of investment and not for resale;
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has been encouraged to rely upon the advice of such subscribers legal counsel and
accountants or other financial advisers with respect to the tax and other
considerations relating to the purchase of units; and
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will acquire the units for the subscribers own account without a view to public
distribution or resale and that such subscriber has no contract, undertaking,
agreement or arrangement to sell or otherwise transfer or dispose of any units or any
portion thereof to any other person.
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Subscription Period
The offering must close upon the earlier occurrence of (1) our acceptance of subscriptions for
units equaling the maximum amount of $82,000,000; or (2)
[one year from the effective date of this
registration statement]
. However, we may close the offering any time prior to
[one year from the
effective date of this registration statement]
upon the sale of the minimum aggregate offering
amount of $45,000,000. If we abandon the project for any reason, we will terminate the offering.
Even if we successfully close the offering by selling at least the minimum number of units prior to
[one year date],
the offering proceeds will remain in escrow until we satisfy the conditions for
releasing funds from escrow, including our receipt of a written debt financing commitment. We may
admit members to Cardinal Ethanol and continue to offer any remaining units to reach the maximum
number to be sold until the offering closes. We reserve the right to cancel or modify the
offering, to reject subscriptions for units in whole or in part and to waive conditions to the
purchase of units. Additionally, in our sole discretion, we may also determine that it is not
necessary to sell all available units. If we sell subscriptions for all of the available units, we
have the discretion to reject any subscriptions, in whole or in part, for any reason.
This offering may be terminated for a variety of reasons, most of which are discussed in
detail in the section entitled RISK FACTORS. In the event of termination of this offering prior
to its successful closing, funds invested with us will be returned with interest, less escrow fees.
We intend to return those funds by the close of the next business day or as soon as possible after
the termination of the offering.
Subscription Procedures
Before purchasing any units, you must complete the subscription agreement included as exhibit
C to this prospectus, draft a check payable to [ESCROW BANK], Escrow Agent for Cardinal Ethanol,
LLC in the amount of not less than 10% of the amount due for the units for which subscription is
sought, which amount will be deposited in the escrow account; sign a full recourse promissory note
and security agreement for the remaining 90% of the total subscription price; and deliver to us
these items and an executed copy of the signature page of our operating agreement. In the
subscription application, an investor must make representations to us concerning, among other
things, that he or she has received our prospectus and any supplements, agrees to be bound by the
operating agreement and understands that the units are subject to significant transfer
restrictions. The subscription application also requires information about the nature of your
desired ownership, your state of residence, and your taxpayer identification or Social Security
Number. We encourage you to read the subscription agreement carefully.
Once we receive subscriptions for the minimum amount of the offering, we will mail written
notice to our investors that full payment under the promissory note is due within 30 days. We will
deposit funds paid in satisfaction of the promissory notes into our escrow account where they will
be held until we satisfy the conditions for releasing funds from escrow.
The promissory note is full recourse which means that you will be liable for the balance due
and that if you do not timely repay the indebtedness upon the terms agreed, we will pursue you by
any legal means to recover the indebtedness. This includes, but is not limited to, acquisition of
a judgment against you for the amount due plus interest plus any amounts we spend to collect the
balance. We will also seek from you any attorney fees we incur in collecting the balance. Unpaid
amounts due will accrue interest at a rate of 12% per year. We will also retain the initial 10%
payment made by the subscriber. Pursuant to the terms of the promissory note, we will not be
required to give you notice of default under the terms of the promissory note, but upon your
failure to make timely payment, we will immediately have the right to pursue you for payment of the
balance due by any legal means. By signing the promissory note you will also grant to us a
purchase money security interest in any units you own or hereafter acquire to secure your promise
to pay the balance due. You also agree to allow us to retain possession of any certificates
representing these units to allow us to perfect our security interest. This means that if you
default on your obligation to pay us, you could lose your right to any of our units that you
presently own or hereafter acquire.
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If you subscribe to purchase units after we have received subscriptions for the aggregate
minimum offering amount of $45,000,000, you will be required to pay the full purchase price
immediately upon subscription.
We may, in our sole discretion, reject or accept all or any part of your subscription
agreement. We might not consider acceptance or rejection of your application until after we have
received applications totaling at least $45,000,000 from investors or until a future date near the
end of this offering. If we accept your subscription and meet the conditions for releasing funds
from escrow, your subscription will be credited to your capital account in accordance with our
operating agreement and we will issue to you a membership unit certificate signifying the ownership
of your membership units. If we reject your subscription, we will promptly return your
subscription, check, and signature page.
If you are deemed the beneficial owners of 5% or more of our issued and outstanding units you
may have reporting obligations under Section 13 and Section 16 of the Securities and Exchange Act.
If you anticipate being a beneficial owner of 5% or more of our outstanding units you should
consult legal counsel to determine what filing and reporting obligations may be required under the
federal securities laws.
Escrow Procedures
Proceeds from subscriptions for the units will be deposited in an interest-bearing escrow
account that we have established with the [ESCROW BANK], as escrow agent under a written escrow
agreement. We will not release funds from the escrow account until specific conditions are
satisfied. The conditions are (1) cash proceeds from unit sales deposited in the escrow account
equals or exceeds $45,000,000, exclusive of interest; (2) our receipt of a written debt financing
commitment for debt financing ranging from $67,140,000 to $104,140,000, depending on the amount
necessary to fully capitalize the project; (3) we elect, in writing, to terminate the escrow
agreement; and (4) the [ESCROW BANK] provides an affidavit to the states in which the units have
been registered stating that the requirements to release funds have been satisfied.
We will invest the escrow funds in short-term certificates of deposit issued by a bank,
short-term securities issued by the United States government, money market funds, repurchase
agreements or other financial vehicles including those available through the escrow agent. Even if
we are successful in releasing funds from escrow, we intend to allow the offering to continue until
[one year from date of effectiveness of this registration statement]
or some earlier date, at our
discretion. We must sell the minimum number of units and collect 10% of the minimum offering
amount in cash prior to
[one year from the effective date of this registration statement].
If we
sell the minimum number of units, collect 10% of the minimum offering amount in cash and notify our
purchasers of their obligations to remit the 90% purchase price balance prior to
[one year from the
effective date of this registration statement]
, the escrow account will continue for 3 months from
that date to allow us sufficient time to collect the 90% balance. Cash proceeds from unit sales
deposited in the escrow account must equal or exceed the minimum offering amount of $45,000,000 at
the end of the 3 month period or we will be forced to terminate the escrow account and promptly
return your investment to you
.
We may terminate the offering prior to closing the offering in which event we will return your
investment, with interest, less escrow fees, by the close of the next business day or as soon as
possible after the termination of the offering under the following scenarios:
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If we determine in our sole discretion to terminate the offering prior to
[one year
from effective date of this registration statement]
; or
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If we do not raise the $45,000,000 minimum aggregate offering amount by
[one year
from effective date of this registration statement]
.
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Delivery of Unit Certificates
If we satisfy the conditions for releasing funds from escrow, we will issue certificates for
the units subscribed in the offering upon such release. Unless otherwise specifically provided in
the subscription agreement,we will issue certificates for any subscription signed by more than one subscriber as joint tenants
with full rights of survivorship. We will imprint the certificates with a conspicuous legend
referring to the restrictions on
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transferability and sale of the units.
See
DESCRIPTION OF
MEMBERSHIP UNITS Restrictive Legend on Membership Certificates.
Summary of Promotional and Sales Material
In addition to and apart from this prospectus, we may use certain sales material in connection
with this offering. The material may include a brochure, question-and-answer booklet, speech for
public seminars, invitations to seminars, news articles, public advertisements and audio-visual
materials. In certain jurisdictions, such sales materials may not be available. This offering is
made only by means of this prospectus and other than as described herein, we have not authorized
the use of any other sales material. Although the information contained in such sales materials
does not conflict with any of the information contained in this prospectus, such material does not
purport to be complete and should not be considered as a part of this prospectus or of the
registration statement of which this prospectus is a part, or as incorporated in this prospectus or
the registration statement by reference.
DESCRIPTION OF MEMBERSHIP UNITS
An investor in us is both a holder of units and a member of the limited liability company at
the time of acceptance of the investment. We elected to organize as a limited liability company
rather than a corporation because we wish to qualify for partnership tax treatment for federal and
state income tax purposes with our earnings or losses passing through to our members and subject to
taxation at the member level. See FEDERAL INCOME TAX CONSEQUENCES OF OWNING OUR UNITS. As a
unit holder and a member of the limited liability company, an investor will be entitled to certain
economic rights, such as the right to the distributions that accompany the units and to certain
other rights, such as the right to vote at our member meetings. In the event that an investors
membership in the limited liability company later terminates, that investor may continue to own
units and retain economic rights such as the right to the distributions. However, termination of
the membership would result in the loss of other rights such as the right to vote at our member
meetings.
Membership Units
Ownership rights in us are evidenced by units. There is one class of membership units in
Cardinal Ethanol. Each unit represents a pro rata ownership interest in our capital, profits,
losses and distributions. Unit holders who are also members have the right to vote and participate
in our management as provided in the operating agreement. We maintain a membership register at our
principal office setting forth the name, address, capital contribution and number of units held by
each member.
Restrictive Legend on Membership Certificate
We will place restrictive legends on your membership certificate or any other document
evidencing ownership of our units. The language of the legend will be similar to the following:
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THE TRANSFERABILITY OF THE MEMBERSHIP UNITS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED. SUCH UNITS MAY NOT BE SOLD, ASSIGNED, OR TRANSFERRED, AND NO ASSIGNEE,
VENDEE, TRANSFEREE OR ENDORSEE THEREOF WILL BE RECOGNIZED AS HAVING ACQUIRED ANY
SUCH UNITS FOR ANY PURPOSES, UNLESS AND TO THE EXTENT SUCH SALE, TRANSFER,
HYPOTHECATION, OR ASSIGNMENT IS PERMITTED BY, AND IS COMPLETED IN STRICT ACCORDANCE
WITH, APPLICABLE FEDERAL AND STATE LAW AND THE TERMS AND CONDITIONS SET FORTH IN THE
OPERATING AGREEMENT OF THE COMPANY, AS AMENDED FROM TIME TO TIME.
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, OFFERED FOR SALE OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
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UNDER APPLICABLE
STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
SUCH TRANSACTION IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS.
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Maximum Ownership Percentage
Under our operating agreement, no member may own more than 40% of the total issued and
outstanding units of Cardinal Ethanol. The calculation of a 40% limitation includes the number of
units owned by the investor and his or her spouse, children, parents, brothers and sisters and any
units owned by any corporation, partnership or other entity in which the investor or his/her
family members owns or controls a majority of the voting power. The maximum ownership percentage
serves to prevent a change in control of Cardinal Ethanol.
Voting Limitations
Each member is entitled to one vote per unit owned. Members may vote units in person or by
proxy at a meeting of the unit holders, on all matters coming before a member vote. Members do
not have cumulative voting or pre-emptive rights.
Loss of Membership Rights
Although we are managed by our directors, our operating agreement provides that certain
transactions, such as amending our operating agreement or dissolving Cardinal Ethanol, require
member approval. An investor in us is both a holder of units and a member of the limited liability
company at the time of acceptance of the investment. Each member has the following rights:
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to receive a share of our profits and losses;
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to receive distributions of our assets, if and when declared by our directors;
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to participate in the distribution of our assets in the event we are dissolved or liquidated;
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to access information concerning our business and affairs at our place of business; and
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to vote on matters coming before a vote of the members.
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Our operating agreement provides that if your membership is terminated, then you will lose all
your rights to vote your units and the right to access information concerning our business and
affairs at our place of business. Under our operating agreement, information that will be
available exclusively to members includes state and federal tax returns and a current list of the
names, addresses and capital account information of each member and unit holder. This information
is available upon request by a member for purposes reasonably related to that persons interest as
a member. In addition, a members use of this information is subject to certain safety, security
and confidentiality procedures established by us.
Investors whose membership has been terminated but who continue to own units will continue to
have the right to a share of our profits and losses and the right to receive distributions of our
assets and to participate in the distribution of our assets in the event we are dissolved or
liquidated. These unit holders will also have access to company information that is periodically
submitted to the Securities and Exchange Commission. See DESCRIPTION OF BUSINESS.
If you transfer your units, and the transfer is permitted by the operating agreement, or has
been approved by the board of directors, then the transferee will be admitted as a substituted
member of Cardinal Ethanol only if the transferee:
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agrees to be bound by our operating agreement;
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pays or reimburses us for legal, filing and publication costs that we incur
relating to admitting such transferee as a new member, if any;
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delivers, upon our request, any evidence of the authority such person or entity has
to become a member of Cardinal Ethanol; and
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delivers, upon our request, any other materials needed to complete transferees transfer.
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The board of directors, in its discretion, may prohibit the transferee from becoming a member
if he or she does not comply with these requirements. The restrictive legend on our membership
certificates and the language of our operating agreement will alert subsequent transferees of our
units as to the restrictions on transferability of our units and the events by which a member may
lose membership rights. Investors who transfer units to transferees who do not become substituted
members will not retain the rights to vote, access information or share in profits and losses as
they do not continue as members when units are transferred to a third party.
Distributions
Distributions are payable at the discretion of our board of directors, subject to the
provisions of the Indiana Limited Liability Company Act, our operating agreement and the
requirements of our creditors. Our board has no obligation to distribute profits, if any, to
members. We have not declared or paid any distributions on our units.
Unit holders are entitled to receive distributions of cash or property if and when a
distribution is declared by our directors. Distributions will be made to investors in proportion
to the number of units investors own as compared to all of our units that are then issued and
outstanding. Our directors have the sole authority to authorize distributions based on available
cash (after payment of expenses and resources), however, we will attempt to distribute an amount
approximating the additional federal and state income tax attributable to investors as a result of
profits allocated to investors.
We do not expect to generate revenues until the proposed plant is operational. After
operations of the proposed plant begin, we anticipate, subject to any loan covenants or
restrictions with our senior and subordinated lenders, distributing a portion of our net cash flow
to our members in proportion to the units held and in accordance with our operating agreement. By
net cash flow, we mean our gross cash proceeds received less any portion, as determined by our
directors in their sole discretion, used to pay or establish reserves for our expenses, debt
payments, capital improvements, replacements and contingencies. Our board may elect to retain
future profits to provide operational financing for the plant, debt retirement and possible plant
expansion.
We do not know the amount of cash that we will generate, if any, once we begin operations.
At the start, we will generate no revenues and do not expect to generate any operating revenue
until the proposed ethanol plant is operating fully. Cash distributions are not assured, and we
may never be in a position to make distributions. Whether we will be able to generate sufficient
cash flow from our business to make distributions to members will depend on numerous factors,
including:
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Successful and timely completion of construction since we will not generate any
revenue until our plant is constructed and operational;
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Required principal and interest payments on any debt and compliance with applicable
loan covenants which will reduce the amount of cash available for distributions;
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Our ability to operate our plant at full capacity which directly impacts our revenues;
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Adjustments and amounts of cash set aside for reserves and unforeseen expenses; and
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State and federal regulations and subsidies, and support for ethanol generally
which can impact our profitability and the cash available for distributions.
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Capital Accounts and Contributions
The purchase price paid for our units constitutes a capital contribution for purposes of
becoming a unit holder and will be credited to your capital account. As a unit holder, your
capital account will be increased according to your share of our profits and other applicable
items of income or gain specially allocated to you pursuant to the special allocation rules
described below. In addition, we will increase your capital account for the amount of any of our
liabilities that are assumed by you or are secured by any property which we distribute to you. We
will decrease your capital account for your share of our losses and other applicable items of
expenses or losses specially allocated to you pursuant to the special allocation rules described
below. We will also decrease your capital account in an amount equal to the value of any property we distribute to you. In
addition, we will decrease
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your capital account for the amount of any of your liabilities that are assumed by us or are secured by property you have contributed to us. In the event you transfer
your units and we have approved such transfer, then your capital account, to the extent it relates
to the units transferred, will be transferred to the transferee. Our operating agreement does not
require you to make additional capital contributions to us. Interest will not accrue on your
capital contributions, and you have no right to withdraw or be repaid your capital contributions
made to us.
Allocation of Profits and Losses
Except as otherwise provided in the special allocation rules described below, profits and
losses that we recognize will be allocated to you in proportion to the number of units you hold.
Our profits and losses will be determined by our directors on either a daily, monthly, quarterly
or other basis permitted under the Internal Revenue Code, as amended, and corresponding Treasury
Regulations.
Special Allocation Rules
The amount of profits and losses that we allocate to you is subject to a number of exceptions
referred to as special allocations. These include special allocations required by the Internal
Revenue Code and Treasury Regulations aimed at highly leveraged limited liability companies that
allocate taxable losses in excess of a unit holders actual capital contributions. Our operating
agreement also requires that our directors make offsetting special allocations in any manner they
deem appropriate that, after such offsetting allocations are made, each Unit holders capital
account balance is equal to the capital account balance that that unit holder would have had if
special allocations required by the Internal Revenue Code and Treasury Regulations were not made
to that unit holders capital account.
Restrictions on Transfers of Units
The units will be subject to certain restrictions on transfers pursuant to our operating
agreement. In addition, transfers of the units may be restricted by state securities laws. As a
result, investors may not be able to liquidate their investments in the units and therefore may be
required to assume the risks of investing in us for an indefinite period of time. Investment in
us should be undertaken only by those investors who can afford an illiquid investment.
We have restricted the ability to transfer units to ensure that Cardinal Ethanol is not
deemed a publicly traded partnership and thus taxed as a corporation. Under our operating
agreement, no transfer may occur without the approval of the board of directors. The board of
directors will only permit transfers that fall within safe harbors contained in the publicly
traded partnership rules under the Internal Revenue Code, to include the following:
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Transfers by gift to the members descendants;
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Transfers upon the death of a member; and
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Certain other transfers provided that for the applicable tax year, the transfers in
the aggregate do not exceed 2% of the total outstanding units.
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Any transfer in violation of the publicly traded partnership requirements or our operating
agreement will be null and void. Furthermore, there is no public or other market for these
securities. We do not anticipate such a market will develop.
The units are unsecured equity interests in Cardinal Ethanol and are subordinate in right of
payment to all of our current and future debt. In the event of our insolvency, liquidation,
dissolution or other winding up of our affairs, all of our debts, including winding-up expenses,
must be paid in full before any payment is made to the unit holders. There is no assurance that
there would be any remaining funds for distribution to the unit holders, after the payment of all
of our debts.
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SUMMARY OF OUR OPERATING AGREEMENT
Statements contained in this section of the prospectus regarding the contents of our
operating agreement are not necessarily complete, and reference is made to the copy of our
operating agreement filed as exhibit B to this prospectus.
Binding Nature of the Agreement
We will be governed primarily according to the provisions of our operating agreement and the
Indiana Limited Liability Company Act. Among other items, our operating agreement contains
provisions relating to the election of directors, restrictions on transfers, member voting, and
other company governance matters. If you invest in Cardinal Ethanol, you will be bound by the
terms of our operating agreement. Its provisions may not be amended without the approval the
affirmative vote of the holders of a majority of the units constituting a quorum, represented
either in person or by proxy or mail ballot, at any regular or special meeting of the members.
Management
Initially, the total number of initial directors of Cardinal Ethanol shall be a minimum of 12
and a maximum of 35. The current directors and their business experience are set out in further
detail in DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS. At the first annual
or special meeting of the Members following the date on which substantial operations of our
ethanol plant commences, the initial directors shall fix the total number of directors which shall
be a minimum of 7 and a maximum of 9. However, each member purchasing 400 units or more in this
offering is entitled to appoint a director to the board. The operating agreement requires that a
majority of the board be elected by the members. Therefore, the number of directors will be
increased if the number of directors appointed by members purchasing 400 units or more in this
offering equals or exceeds the number of elected directors. Directors are elected by plurality
vote of the members which means that the nominees receiving the greatest number of votes relative
to all other nominees are elected as directors.
Nominations for directors may be made by the nominating committee of the board of directors or
by the board of directors as a whole. Members may also nominate candidates for our board by giving
advance written notice to Cardinal Ethanol with information about the nominee and the nominating
member. Any board nomination made by a member must be accompanied by a nominating petition signed
by unit holders representing at least 5% of our outstanding units.
No matter may be submitted to the members for approval without the prior approval of the
board of directors. This means that the board of directors controls virtually all of our affairs.
We do not expect to develop a vacancy on the board of directors until after substantial
completion of the plant.
Our operating agreement is unlike the articles of incorporation or bylaws of typical public
companies whose shares trade on NASDAQ or a stock exchange. Our units do not trade on an exchange
and we are not governed by the rules of NASDAQ or a stock exchange concerning company governance.
The directors must elect a chairman who will preside over any meeting of the board of
directors, and a vice-chairman who shall assume the chairmans duties in the event the chairman is
unable to act.
According to our operating agreement, the directors may not take the following actions
without the unanimous consent of the members:
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Cause or permit Cardinal Ethanol to engage in any activity that is inconsistent
with our purposes;
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Knowingly act in contravention of the operating agreement or act in a manner that
would make it impossible for us to carry on our ordinary business, except as otherwise
provided in the operating agreement;
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Possess our property or assign rights in specific company property other than for
Cardinal Ethanols purpose; or
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Cause us to voluntarily take any action that would cause our bankruptcy.
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In addition, without the consent of a majority of the membership voting interests the
directors do not have the authority to cause Cardinal Ethanol to:
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Merge, consolidate, exchange or otherwise dispose of at one time, all or
substantially all of our property, except for a liquidating sale of the property in
connection with our dissolution;
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Confess a judgment against us in an amount in excess of $500,000;
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Issue units at a purchase price of less than $1,666.66 per unit;
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Issue more than 25,000 units; or
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Acquire equity or debt securities of any director or affiliate of a director or
otherwise make loans to any director or affiliate or a director.
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Replacement of Directors
Our operating agreement defines a procedure to replace the board in staggered terms, where,
upon the expiration of the initial board, the first group of directors shall serve for one year,
the second group shall serve for two years, and the third group shall serve for three years. The
successors for each group of directors shall be elected for a 3-year term and, at that point,
one-third of the total number of directors will be elected by the members each year. The
directors shall be placed into groups by resolution of the initial board of directors prior to the
expiration of the initial term. These procedures provide that replacement directors may be
nominated either by the board of directors or by the members upon timely delivery of a petition
signed by investors holding at least five percent of the outstanding units, provided that the
members also meet other requirements, all of which are described in our amended and restated
operating agreement. In order for a petition to be considered timely, it must be delivered to our
secretary not less than 120 days prior to the one year anniversary of the date we delivered the
prior years proxy statement or notice of annual meeting. For the first election of directors,
such petition must be delivered not less than 30 days prior to the annual meeting of our members.
Members Meetings and Other Members Rights
There will be an annual meeting of members at which the board of directors will give our
annual company report. Members will address any appropriate business including the election of
directors to those director seats becoming vacant under the then adopted staggered term format.
In addition, members owning an aggregate of 30% of the units may demand in writing that the board
call a special meeting of members for the purpose of addressing appropriate member business. The
board of directors may also call a special meeting of members at any time.
Member meetings shall be at the place designated by the board or members calling the meeting.
Members of record will be given notice of member meeting neither more than 60 days nor less than
five days in advance of such meetings.
In order to take action at a meeting, members holding at least 25% of the outstanding units
must be represented in person, by proxy or by mail ballot. Voting by proxy or by mail ballot shall
be permitted on any matter if it is authorized by our directors. Assuming a quorum is present,
members take action by a vote of the majority of the units represented at the meeting (in person,
by proxy or by mail ballot) and entitled to vote on the matter, unless the vote of a greater or
lesser proportion or numbers is otherwise required by our operating agreement or by the Indiana
Limited Liability Company Act.
For the purpose of determining the members entitled to notice of or to vote at any members
meeting, members entitled to receive payment of any distribution, or to make a determination of
members for any other purpose, the date on which notice of the meeting is mailed (or otherwise
delivered) or the date on which the resolution declaring the distribution is adopted, as the case
may be, shall be the record date for determination of the members.
Members do not have dissenters rights. This means that in the event we merge, consolidate,
exchange or otherwise dispose of all or substantially all of our property, unit holders do not
have the right to dissent and seek payment for their units.
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We will maintain our books, accountings and records at our principal office. A member may
inspect them during normal business hours. Our books and accountings will be maintained in
accordance with generally accepted accounting principles.
Unit Transfer Restrictions
A unit holders ability to transfer units is restricted under the operating agreement. Unit
holders may not transfer their units prior to 90 days after financing closing, as defined in our
operating agreement, unless such transfer is:
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To the investors administrator or trustee to whom such units are transferred
involuntarily by operation of law, such as death; or
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Made without consideration to or in trust for the investors descendants or spouse.
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Beginning 90 days after financial closing, as defined in our operating agreement, investors
may transfer their units to any person or organization only if such transfer meets the conditions
precedent to a transfer under our operating agreement and:
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Has been approved by our directors in accordance with the terms of the operating
agreement; or
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The transfer is made to any other member or to any affiliate or related party of
another member or the transferring member.
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To maintain partnership tax status, the units may not be traded on an established securities
market or readily tradable on a secondary market. We do not intend to list the units on the New
York Stock Exchange, the NASDAQ Stock Market or any other stock exchange. To help ensure that a
market does not develop, our operating agreement prohibits transfers without the approval of the
directors. The directors will generally approve transfers so long as the transfers fall within
safe harbors contained in the publicly traded partnership rules under the Internal Revenue Code.
If any person transfers units in violation of the publicly traded partnership rules or without our
prior consent, the transfer will be null and void. These restrictions on transfer could reduce the
value of an investors units.
Amendments
Our operating agreement may be amended by the affirmative vote of the holders of a majority
of the units constituting a quorum, represented either in person or by proxy or mail ballot, at
any regular or special meeting of the members. No amendment may adversely affect a members
financial rights or modify the liability of a member, without that members consent. The
operating agreement defines financial rights as a members share of profits and losses, the right
to receive distributions of Cardinal Ethanols assets and the right to information concerning the
business and affairs of Cardinal Ethanol.
Dissolution
Our operating agreement provides that a voluntary dissolution of Cardinal Ethanol may be
affected only upon the prior approval of a 75% super majority of all units entitled to vote.
FEDERAL INCOME TAX CONSEQUENCES OF OWNING OUR UNITS
This section of the prospectus describes some of the more important federal income tax risks
and consequences of your participation in Cardinal Ethanol. No information regarding state and
local taxes is provided.
Each prospective member should consult his or her own tax advisor
concerning the impact that his or her investment in Cardinal Ethanol, LLC may have on his or her
federal income tax liability and the application of state and local income and other tax laws to
his or her investment in Cardinal Ethanol, LLC.
Although we will furnish unit holders with such
information regarding Cardinal Ethanol, LLC as is required for income tax purposes, each unit
holder will be responsible for preparing and filing his or her own tax returns.
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The following discussion of the tax aspects of an investment in our units is based on the
Internal Revenue Code of 1986, as amended (the Code), existing Treasury Department regulations
(Regulations), and administrative rulings and judicial decisions interpreting the Code.
Significant uncertainty exists regarding certain tax aspects of limited liability companies. Such
uncertainty is due, in part, to continuing changes in federal tax law that have not been fully
interpreted through regulations or judicial decisions. Tax legislation may be enacted in the
future that will affect Cardinal Ethanol, LLC and a unit holders investment in Cardinal Ethanol,
LLC. Additionally, the interpretation of existing law and regulations described here may be
challenged by the Internal Revenue Service during an audit of our information return. If
successful, such a challenge likely would result in adjustment of a unit holders individual
return.
The tax opinion contained in this section and the opinion attached as exhibit 8.1 to the
registration statement constitutes the opinion of our tax counsel, Brown, Winick, Graves, Gross,
Baskerville & Schoenebaum, P.L.C., regarding our classification for federal income tax purposes.
An opinion of legal counsel represents an expression of legal counsels professional
judgment regarding the subject matter of the opinion. It is neither a guarantee of any indicated
result nor an undertaking to defend any indicated result should that result be challenged by the
Internal Revenue Service. This opinion is in no way binding on the Internal Revenue Service or on
any court of law.
In the opinion attached as exhibit 8.1 to the registration statement, our tax counsel has also
confirmed as correct their representation to us that the statements and legal conclusions contained
in this section regarding general federal income tax consequences of owning our units as a result
of our partnership tax classification are accurate in all material respects. The tax consequences
to us and our members are highly dependent on matters of fact that may occur at a future date and
are not addressed in our tax counsels opinion. With the exception of our tax counsels opinion
that we will be treated as a partnership for federal income tax purposes, this section represents
an expression of our tax counsels professional judgment regarding general federal income tax
consequences of owning our units, insofar as it relates to matters of law and legal conclusions.
This section is based on the assumptions and qualifications stated or referenced in this section.
It is neither a guarantee of the indicated result nor an undertaking to defend the indicated result
should it be challenged by the Internal Revenue Service. No rulings have been or will be requested
from the Internal Revenue Service concerning any of the tax matters we describe. Accordingly, you
should know that the opinion of our tax counsel does not assure the intended tax consequences
because it is in no way binding on the Internal Revenue Service or any court of law. The Internal
Revenue Service or a court may disagree with the following discussion or with any of the positions
taken by us for federal income tax reporting purposes, and the opinion of our tax counsel may not
be sufficient for an investor to use for the purpose of avoiding penalties relating to a
substantial understatement of income tax under Section 6662(d).
See
FEDERAL INCOME TAX
CONSEQUENCES OF OWNING OUR UNITS Interest on Underpayment of Taxes; Accuracy-Related Penalties;
Negligence Penalties below.
Investors are urged to consult their own tax advisors with specific reference to their own tax
and financial situations, including the application and effect of state, local and other tax laws,
and any possible changes in the tax laws after the date of this prospectus. This section is not to
be construed as a substitute for careful tax planning.
Partnership Status
Our tax counsel has opined that, assuming we do not elect to be treated as a corporation, we
will be treated as a partnership for federal income tax purposes. This means that we will not pay
any federal income tax and the unit holders will pay tax on their shares of our net income. Under
recently revised Treasury regulations, known as check-the-box regulations, an unincorporated
entity such as a limited liability company will be taxed as partnership unless the entity is
considered a publicly traded limited partnership or the entity affirmatively elects to be taxed as
a corporation.
We will not elect to be taxed as a corporation and will endeavor to take steps as are feasible
and advisable to avoid classification as a publicly traded limited partnership. Congress has shown
no inclination to adopt legislation that would jeopardize the tax classification of the many
entities that have acted in reliance on the check-the-box regulations.
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As a partnership, if we fail to qualify for partnership taxation, we would be treated as a C
corporation for federal income tax purposes. As a C corporation, we would be taxed on our taxable
income at corporate rates, currently at a maximum rate of 35%. Distributions would generally be
taxed again to unit holders as corporate dividends. In addition, unit holders would not be
required to report their shares of our income, gains, losses or deductions on their tax returns
until such are distributed. Because a tax would be imposed upon us as a corporate entity, the cash
available for distribution to unit holders would be reduced by the amount of tax paid, in which
case the value of the units would be reduced.
Publicly Traded Partnership Rules
To qualify for taxation as a partnership, we cannot be a publicly traded partnership under
Section 7704 of the Internal Revenue Code. Generally, Section 7704 provides that a partnership
will be classified as a publicly traded partnership and will be taxed as a corporation if its
interests are:
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Traded on an established securities market; or
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Readily tradable on a secondary market or the substantial equivalent.
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Although there is no legal authority on whether a limited liability company is subject to
these rules, in the opinion of our counsel, it is probable that we are subject to testing under the
publicly traded partnership rules because we elected to be classified and taxed as a partnership.
We will seek to avoid being treated as a publicly traded partnership. Under Section
1.7704-1(d) of the Treasury Regulations, interests in a partnership are not considered traded on an
established securities market or readily tradable on a secondary market unless the partnership
participates in the establishment of the market or the inclusion of its interests in a market, or
the partnership recognizes any transfers made on the market by redeeming the transferor partner or
admitting transferee as a partner.
We do not intend to list the units on the New York Stock Exchange, the NASDAQ Stock Market or
any other stock exchange. In addition, our operating agreement prohibits any transfer of units
without the approval of our directors. Our directors intend to approve transfers that fall within
safe harbor provisions of the Treasury Regulations, so that we will not be classified as a publicly
traded partnership. These safe harbor provisions generally provide that the units will not be
treated as readily tradable on a secondary market, or the substantial equivalent, if the interests
are transferred:
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In private transfers;
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Pursuant to a qualified matching service; or
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In limited amounts that satisfy a 2% test.
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Private transfers include, among others:
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Transfers by gifts in which the transferees tax basis in the units is determined
by reference to the transferors tax basis in the interests transferred;
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Transfers at death, including transfers from an estate or testamentary trust;
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Transfers between members of a family as defined in Section 267(c)(4) of the
Internal Revenue Code;
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Transfers from retirement plans qualified under Section 401(a) of the Internal
Revenue Code or an IRA; and
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Block transfers. A block transfer is a transfer by a unit holder and any related
persons as defined in the Internal Revenue Code in one or more transactions during any
thirty calendar day period of units that in the aggregate represents more than two
percent of the total interests in partnership capital or profits.
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Transfers through a qualified matching service are also disregarded in determining whether
interests are readily tradable. A matching service is qualified only if:
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It consists of a computerized or printed system that lists customers bid and/or
ask prices in order to match unit holders who want to sell with persons who want to
buy;
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Matching occurs either by matching the list of interested buyers with the list of
interested sellers or through a bid and ask process that allows interested buyers to
bid on the listed interest;
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The seller cannot enter into a binding agreement to sell the interest until the
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th
calendar day after his interest is listed, which time period must be
confirmable by maintenance of contemporaneous records;
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The closing of a sale effectuated through the matching service does not occur prior
to the 45
th
calendar day after the interest is listed;
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The matching service displays only quotes that do not commit any person to buy or
sell an interest at the quoted price (nonfirm price quotes), or quotes that express an
interest in acquiring an interest without an accompanying price (nonbinding
indications of interest), and does not display quotes at which any person is committed
to buy or sell an interest at the quoted price;
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The sellers information is removed within 120 days of its listing and is not
reentered into the system for at least 60 days after its deletion; and
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The sum of the percentage interests transferred during the entitys tax year,
excluding private transfers, cannot exceed ten percent of the total interests in
partnership capital or profits.
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In addition, interests are not treated as readily tradable if the sum of the percentage of the
interests transferred during the entitys tax year, excluding private transfers, do not exceed two
percent of the total interests in partnership capital or profits. We expect to use a combination
of these safe harbor provisions to avoid being treated as a publicly traded partnership.
Tax Treatment of Our Operations; Flow-Through of Taxable Income and Loss.
Because we expect to be taxed as a partnership, we may have our own taxable year that is
separate from the taxable years of our unit holders. Unless a business purpose can be established
to support a different taxable year, a partnership must use the majority interest taxable year
which is the taxable year that conforms to the taxable year of the holders of more than 50% of its
interests. In this case, the majority interest taxable year is the calendar year.
However, pursuant to Section 444 of the Internal Revenue Code, we may make a special election
to adopt a non-calendar year fiscal year if the proposed non-calendar year fiscal year does not
defer income by more than three months. In addition, in order to make a Section 444 election we
must deposit deferred taxes pursuant to Section 7519 of the Internal Revenue Code. However, a
Section 444 special election may not be claimed if more than 5% of our outstanding units are held
by pass-through entities. Therefore, although we intend to make a Section 444 special election
and adopt a non-calendar year fiscal year, we may be required to adopt the calendar year as our
taxable year.
Tax Consequences to Our Unit Holders
We have adopted a fiscal year ending September 30 for accounting and tax purposes. As a unit
holder, for your taxable year with which or within which our taxable year ends you will be required
to report on your own income tax return, your distributive share of our income, gains, losses and
deductions regardless of whether you receive any cash distributions. To illustrate, a unit holder
reporting on a calendar year basis will include his or her share of our taxable income or loss for
our taxable year ending September 30, 2005 on his or her 2005 income tax return. A unit holder
with a June 30 fiscal year will report his share of our September 30, 2005 taxable income or loss
on his income tax return for the fiscal year ending June 30, 2006. We will provide each unit
holder with an annual Schedule K-1 indicating such holders share of our income, loss and
separately stated components.
Tax Treatment of Distributions
Distributions made by us to a unit holder generally will not be taxable to the unit holder for
federal income tax purposes as long as distributions do not exceed the unit holders basis in his
units immediately before the distribution. Cash distributions in excess of unit basis, which are
unlikely to occur, are treated as gain from the sale or exchange of the units under the rules
described below for unit dispositions.
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Initial Tax Basis of Units and Periodic Basis Adjustments
Under Section 722 of the Internal Revenue Code, investors initial basis in the units
investors purchase will be equal to the sum of the amount of money investors paid for investors
units. Here, an investors initial basis in each unit purchased will be $5,000.
An investors initial basis in the units will be increased to reflect the investors
distributive share of our taxable income, tax-exempt income, gains and any increase in the
investors share of recourse and non-recourse indebtedness. If the investor makes additional
capital contributions at any time, the adjusted basis of the investors units will be increased by
the amount of any cash contributed or the adjusted basis in any property contributed if additional
units are not distributed to investors.
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The basis of an investors units will be decreased, but not below zero, by:
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The amount of any cash we distribute to the investors;
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The basis of any other property distributed to the investor;
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The investors distributive share of losses and nondeductible expenditures that are
not properly chargeable to capital account; and
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Any reduction in the investors share of Company debt.
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The unit basis calculations are complex. A member is only required to compute unit basis if
the computation is necessary to determine his tax liability, but accurate records should be
maintained. Typically, basis computations are necessary at the following times:
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The end of a taxable year during which we suffered a loss, for the purpose of
determining the deductibility of the members share of the loss;
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Upon the liquidation or disposition of a members interest, or
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Upon the non-liquidating distribution of cash or property to an investor, in order
to ascertain the basis of distributed property or the taxability of cash distributed.
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Except in the case of a taxable sale of a unit or Cardinal Ethanol, LLCs liquidation, exact
computations usually are not necessary. For example, a unit holder who regularly receives cash
distributions that are less than or equal to his or her share of Cardinal Ethanols net income will
have a positive unit basis at all times. Consequently, no computations are necessary to
demonstrate that cash distributions are not taxable under Section 731(a)(1) of the Internal Revenue
Code. The purpose of the basis adjustments is to keep track of a members tax investment in us,
with a view toward preventing double taxation or exclusion from taxation of income items upon
ultimate disposition of the units.
Tax Credits to Unit Holders
Small Ethanol Producer Tax Credit
The Energy Policy Act of 2005 signed into law by President Bush on August 8, 2005 expands the
definition of a small ethanol producer from 30 million gallons per year to 60 million gallons per
year. Small ethanol producers are allowed a tax credit on up to 15 million gallons of ethanol
production annually. The tax credit is capped at $1.5 million per year per producer. The credit is
effective for taxable years ending after the date of enactment. Even as amended under the Energy
Policy Act of 2005, we do not expect to be classified as a small ethanol producer for purposes of
the tax credit because we expect to produce approximately 100-million gallons of ethanol per year.
If in the future the small producers tax credit is expanded and we become eligible to receive
the credit, we expect that we would be classified as a partnership for tax purposes and we would
expect to pass the tax credits through to our unit holders. Unit holders would then be able to
report and utilize the tax credits on their own income tax returns. However, there is no assurance
that such tax legislation will be introduced or passed by the Congress or enacted into law by the
President. Further, even if such legislation is enacted, our production may still exceed any
expanded production limits, making us ineligible for the credit.
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The small ethanol producers tax credit originally scheduled to expire in 2007 has been
extended through 2010. Although Congress may further extend or make permanent the credit, there is
no assurance that the tax credit will be extended beyond 2010.
Deductibility of Losses; Basis, At-Risk, and Passive Loss Limitations
Generally, a unit holder may deduct losses allocated to him, subject to a number of
restrictions. An investors ability to deduct any losses we allocate to the investor is determined
by applying the following three limitations dealing with basis, at-risk and passive losses:
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Basis
. An investor may not deduct an amount exceeding the investors
adjusted basis in the investors units pursuant to Internal Revenue Code Section
704(d). If the investors share of Cardinal Ethanols losses exceed the investors
basis in the investors units at the end of any taxable year, such excess losses, to
the extent that they exceed the investors adjusted basis, may be carried over
indefinitely and deducted to the extent that at the end of any succeeding year the
investors adjusted basis in the investors units exceeds zero.
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At-Risk Rules
. Under the at-risk provisions of Section 465 of the
Internal Revenue Code, if an investor is an individual taxpayer, including an
individual partner in a partnership, or a closely-held corporation, the investor may
deduct losses and tax credits from a trade or business activity, and thereby reduce
the investors taxable income from other sources, only to the extent the investor is
considered at risk with respect to that particular activity. The amount an investor
is considered to have at risk includes money contributed to the activity and certain
amounts borrowed with respect to the activity for which the investor may be liable.
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Passive Loss Rules
. Section 469 of the Internal Revenue Code may
substantially restrict an investors ability to deduct losses and tax credits from
passive activities. Passive activities generally include activities conducted by
pass-through entities, such as a limited liability company, certain partnerships or S
corporations, in which the taxpayer does not materially participate. Generally,
losses from passive activities are deductible only to the extent of the taxpayers
income from other passive activities. Passive activity losses that are not deductible
may be carried forward and deducted against future passive activity income or may be
deducted in full upon disposition of a unit holders entire interest in Cardinal
Ethanol to an unrelated party in a fully taxable transaction. It is important to note
that passive activities do not include dividends and interest income that normally
is considered to be passive in nature. For unit holders who borrow to purchase
their units, interest expense attributable to the amount borrowed will be aggregated
with other items of income and loss from passive activities and subjected to the
passive activity loss limitation. To illustrate, if a unit holders only passive
activity is our limited liability company, and if we incur a net loss, no interest
expense on the related borrowing would be deductible. If that unit holders share of
our taxable income were less than the related interest expense, the excess would be
nondeductible. In both instances, the disallowed interest would be suspended and
would be deductible against future passive activity income or upon disposition of the
unit holders entire interest in our limited liability company to an unrelated party
in a fully taxable transaction.
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Passive Activity Income
If we are successful in achieving our investment and operating objectives, investors may be
allocated taxable income from us. To the extent that an investors share of our net income
constitutes income from a passive activity, as described above, such income may generally be offset
by the investors net losses and credits from investments in other passive activities.
Alternative Minimum Tax
Individual taxpayers are subject to an alternative minimum tax if such tax exceeds the
individuals regular income tax. Generally, alternative minimum taxable income is the taxpayers
adjusted gross income increased by
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the amount of certain preference items less certain itemized deductions. We may generate
certain preference items. Depending on a members other items of income, gain, loss, deduction and
credit, the impact of the alternative minimum tax on a members overall federal income tax
liability may vary from no impact to a substantial increase in tax. Accordingly, each prospective
investor should consult with his tax advisor regarding the impact of an investment in Cardinal
Ethanol, LLC on the calculation of his alternative minimum tax, as well as on his overall federal
income tax liability.
Allocations of Income and Losses
Your distributive share of our income, gain, loss or deduction for federal income tax purposes
generally is determined in accordance with our operating agreement. Under Section 704(b) of the
Internal Revenue Code, however, the Internal Revenue Service will respect our allocation, or a
portion of it, only if it either has substantial economic effect or is in accordance with the
partners interest in the partnership. If the allocation or portion thereof contained in our
operating agreement does not meet either test, the Internal Revenue Service may reallocate these
items in accordance with its determination of each members financial rights in us. Treasury
Regulations contain guidelines as to whether partnership allocations have substantial economic
effect. The allocations contained in the operating agreement are intended to comply with the
Treasury Regulations test for having substantial economic effect. New unit holders will be
allocated a proportionate share of income or loss for the year in which they became unit holders.
The operating agreement permits our directors to select any method and convention permissible under
Internal Revenue Code Section 706(d) for the allocation of tax items during the time any person is
admitted as a unit holder. In addition, the operating agreement provides that upon the transfer of
all or a portion of a unit holders units, other than at the end of the fiscal year, the entire
years net income or net loss allocable to the transferred units will be apportioned between the
transferor and transferee.
Tax Consequences Upon Disposition of Units
Gain or loss will be recognized on a sale of our units equal to the difference between the
amount realized and the unit holders basis in the units sold. The amount realized includes cash
and the fair market value of any property received plus the members share of certain items of our
debt. Although unlikely, since certain items of our debt are included in an investors basis, it
is possible that an investor could have a tax liability upon the sale of the investors units that
exceeds the proceeds of sale.
Gain or loss recognized by a unit holder on the sale or exchange of a unit held for more than
one year generally will be taxed as long-term capital gain or loss. A portion of this gain or
loss, however, will be separately computed and taxed as ordinary income or loss under Internal
Revenue Code Section 751 to the extent attributable to depreciation recapture or other unrealized
receivables or substantially appreciated inventory owned by us. We will adopt conventions to
assist those members that sell units in apportioning the gain among the various categories.
Effect of Tax Code Section 754 Election on Unit Transfers
The adjusted basis of each unit holder in his units, outside basis, initially will equal his
proportionate share of our adjusted basis in our assets, inside basis. Over time, however, it is
probable that changes in unit values and cost recovery deductions will cause the value of a unit to
differ materially from the unit holders proportionate share of the inside basis. Section 754 of
the Internal Revenue Code permits a partnership to make an election that allows a transferee who
acquires units either by purchase or upon the death of a unit holder to adjust his share of the
inside basis to fair market value as reflected by the unit price in the case of a purchase or the
estate tax value of the unit in the case of an acquisition upon death of a unit holder. Once the
amount of the transferees basis adjustment is determined, it is allocated among our various assets
pursuant to Section 755 of the Internal Revenue Code.
A Section 754 election is beneficial to the transferee when his outside basis is greater than
his proportionate share of the entitys inside basis. In this case, a special basis calculation is
made solely for the benefit of the transferee that will determine his cost recovery deductions and
his gain or loss on disposition of property by reference to his higher outside basis. The Section
754 election will be detrimental to the transferee if his outside basis is less than his
proportionate share of inside basis.
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If we make a Section 754 election, Treasury Regulations require us to make the basis
adjustments. In addition, these regulations place the responsibility for reporting basis
adjustments on us. We must report basis adjustments by attaching statements to our partnership
returns. In addition, we are required to adjust specific partnership items in light of the basis
adjustments. Consequently, amounts reported on the transferees Schedule K-1 are adjusted amounts.
Transferees are subject to an affirmative obligation to notify us of their basis in acquired
interests. To accommodate concerns about the reliability of the information provided, we are
entitled to rely on the written representations of transferees concerning either the amount paid
for the partnership interest or the transferees basis in the partnership interest under Section
1014 of the Internal Revenue Code, unless clearly erroneous.
Our operating agreement provides our directors with authority to determine whether or not a
Section 754 election will be made. Depending on the circumstances, the value of units may be
affected positively or negatively by whether or not we make a Section 754 election. If we decide
to make a Section 754 election, the election will be made on a timely filed partnership income tax
return and is effective for transfers occurring in the taxable year of the return in which the
election is made. Once made, the Section 754 election is irrevocable unless the Internal Revenue
Service consents to its revocation.
Our Dissolution and Liquidation may be Taxable to Investors, Unless our Properties are Distributed
In-Kind
Our dissolution and liquidation will involve the distribution to investors of the assets, if
any, remaining after payment of all of our debts and liabilities. Upon dissolution, investors
units may be liquidated by one or more distributions of cash or other property. If investors
receive only cash upon the dissolution, gain would be recognized by investors to the extent, if
any, that the amount of cash received exceeds investors adjusted bases in investors units. We
will recognize no gain or loss if we distribute our own property in a dissolution event. However,
since our primary asset will likely be the ethanol plant, it is unlikely that we will make a
distribution in kind.
Reporting Requirements
The IRS requires a taxpayer who sells or exchanges a membership unit to notify Cardinal
Ethanol in writing within 30 days, or for transfers occurring on or after December 16 of any year,
by January 15 of the following year. Although the IRS reporting requirement is limited to Section
751(a) exchanges, it is likely that any transfer of a Company membership unit will constitute a
Section 751(a) exchange. The written notice required by the IRS must include the names and
addresses of both parties to the exchange, the identifying numbers of the transferor, and if known,
of the transferee, and the exchange date. Currently the IRS imposes a penalty of $50 for failure
to file the written notice unless reasonable cause can be shown.
Tax Information to Members
We will annually provide each member with a Schedule K-1 (or an authorized substitute).
Each members Schedule K-1 will set out the holders distributive share of each item of income,
gain, loss, deduction or credit to be separately stated. Each member must report all items
consistently with Schedule K-1 or, if an inconsistent position is reported, must notify the IRS of
any inconsistency by filing Form 8062 Notice of Inconsistent Treatment or Administrative
Adjustment Request with the original or amended return in which the inconsistent position is
taken.
Audit of Income Tax Returns
The Internal Revenue Service may audit our income tax returns and may challenge positions
taken by us for tax purposes and may seek to change our allocations of income, gain, loss and
deduction to investors. If the IRS were successful in challenging our allocations in a manner that
reduces loss or increases income allocable to investors, investors may have additional tax
liabilities. In addition, such an audit could lead to separate audits of an investors tax
returns, especially if adjustments are required, which could result in adjustments on an investors
tax returns. Any of these events could result in additional tax liabilities, penalties and
interest to investors, and the cost of filing amended tax returns.
85
Generally, investors are required to file their tax returns in a manner consistent with the
information returns filed by us, such as Schedule K-1, or investors may be subject to possible
penalties, unless they file a statement with their tax returns describing any inconsistency. In
addition, we will select a tax matters member who will have certain responsibilities with respect
to any Internal Revenue Service audit and any court litigation relating to us. Investors should
consult their tax advisors as to the potential impact these procedural rules may have on them.
Prior to 1982, regardless of the size of a partnership, adjustments to a partnerships items
of income, gain, loss, deduction or credit had to be made in separate proceedings with respect to
each partner individually. Because a large partnership sometimes had many partners located in
different audit districts, adjustments to items of income, gains, losses, deductions or credits of
the partnership had to be made in numerous actions in several jurisdictions, sometimes with
conflicting outcomes. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) established
unified audit rules applicable to all but certain small partnerships. These rules require the tax
treatment of all partnership items to be determined at the partnership, rather than the partner,
level. Partnership items are those items that are more appropriately determined at the partnership
level than at the partner level, as provided by regulations. Since we will be taxed as a
partnership, the TEFRA rules are applicable to our members and us.
The Internal Revenue Service may challenge the reporting position of a partnership by
conducting a single administrative proceeding to resolve the issue with respect to all partners.
But the Internal Revenue Service must still assess any resulting deficiency against each of the
taxpayers who were partners in the year in which the understatement of tax liability arose. Any
partner of a partnership can request an administrative adjustment or a refund for his own separate
tax liability. Any partner also has the right to participate in partnership-level administrative
proceedings. A settlement agreement with respect to partnership items binds all parties to the
settlement. The TEFRA rules establish the Tax Matters Member as the primary representative of a
partnership in dealings with the Internal Revenue Service. The Tax Matters Member must be a
member-manager which is defined as a company member who, alone or together with others, is vested
with the continuing exclusive authority to make the management decisions necessary to conduct the
business for which the organization was formed. In our case, this would be a member of the board
of directors who is also a unit holder of Cardinal Ethanol. Our operating agreement provides for
board designation of the Tax Matters Member. Currently, Dale Schwieterman is serving as our Tax
Matters Member. The Internal Revenue Service generally is required to give notice of the beginning
of partnership-level administrative proceedings and any resulting administrative adjustment to all
partners whose names and addresses are furnished to the Internal Revenue Service.
Interest on Underpayment of Taxes; Accuracy-Related Penalties; Negligence Penalties
If we incorrectly report an investors distributive share of our net income, such may cause
the investor to underpay his taxes. If it is determined that the investor underpaid his taxes for
any taxable year, the investor must pay the amount of taxes he underpaid plus interest on the
underpayment and possibly penalties from the date the tax was originally due. Under recent law
changes, the accrual of interest and penalties may be suspended for certain qualifying individual
taxpayers if the IRS does not notify an investor of amounts owing within 18 months of the date the
investor filed his income tax return. The suspension period ends 21 days after the Internal
Revenue Service sends the required notice. The rate of interest is compounded daily and is
adjusted quarterly.
Under Section 6662 of the Internal Revenue Code, penalties may be imposed relating to the
accuracy of tax returns that are filed. A 20% penalty is imposed with respect to any substantial
understatement of income tax and with respect to the portion of any underpayment of tax
attributable to a substantial valuation misstatement or to negligence. All those penalties are
subject to an exception to the extent a taxpayer had reasonable cause for a position and acted in
good faith.
The Internal Revenue Service may impose a 20% penalty with respect to any underpayment of tax
attributable to negligence. An underpayment of taxes is attributable to negligence if such
underpayment results from any failure to make a reasonable attempt to comply with the provisions of
the Code, or any careless, reckless, or intentional disregard of the federal income tax rules or
regulations. In addition, regulations provide that the failure by a taxpayer to include on a tax
return any amount shown on an information return is strong evidence of negligence. The disclosure
of a position on the taxpayers return will not necessarily prevent the imposition of the
negligence penalty.
86
State and Local Taxes
In addition to the federal income tax consequences described above, investors should consider
the state and local tax consequences of an investment in us. This prospectus makes no attempt to
summarize the state and local tax consequences to an investor. Investors are urged to consult
their own tax advisors regarding state and local tax obligations.
LEGAL PROCEEDINGS
No officer, director, promoter or significant employee of Cardinal Ethanol has been involved
in legal proceedings that would be material to an evaluation of our management. From time to time
in the ordinary course of business, Cardinal Ethanol may be named as a defendant in legal
proceedings related to various issues, including without limitation, workers compensation claims,
tort claims, or contractual disputes. We are not currently involved in any material legal
proceedings, directly or indirectly, and we are not aware of any claims pending or threatened
against us or any of the directors that could result in the commencement of legal proceedings.
EXPERTS
The validity of the issuance of the units offered and the validity of the disclosure relating
to the principal federal income tax consequences of owning and disposing of the units offered will
be passed upon for us by Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C.
Boulay, Heutmaker, Zibell & Co., P.L.L.P., an independent registered public accounting firm,
has audited our financial statements at September 30, 2005, as set forth in their report appearing
in this prospectus and registration statement. We have included our financial statements in the
prospectus and elsewhere in this registration statement in reliance on the report from Boulay,
Heutmaker, Zibell & Co., P.L.L.P., given on their authority as experts in accounting and auditing.
TRANSFER AGENT
We will serve as our transfer agent and registrar.
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission (the Commission) a registration
statement on Form SB-2 (the Registration Statement) under the Securities Act, with respect to the
offer and sale of membership units pursuant to this prospectus. This prospectus, filed as a part
of the registration statement, does not contain all of the information set forth in the
registration statement or the exhibits and schedules thereto in accordance with the rules and
regulations of the Commission and no reference is hereby made to such omitted information.
Statements made in this prospectus concerning the contents of any contract, agreement or other
document filed as an exhibit to the registration statement are summaries of the terms of such
contracts, agreements or documents and are not necessarily complete. Reference is made to each
such exhibit for a more complete description of the matters involved and such statements shall be
deemed qualified in their entirety by such reference. The registration statement and the exhibits
and schedules thereto filed with the Commission may be inspected, without charge, and copies may be
obtained at prescribed rates, at the public reference facility maintained by the Commission at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission also maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file electronically with
the Commission.
As of effectiveness of our registration statement, we will be required to file periodic
reports with the Securities and Exchange Commission (SEC) pursuant to Section 15 of the
Securities Exchange Act of 1934. Our quarterly reports will be made on Form 10-QSB, and our annual
reports are made on Form 10-KSB. As of the date of this prospectus, our filings will be made
pursuant to Regulation S-B for small business filers. We will also make current
reports on Form 8-K. Except for our duty to deliver audited annual financial
statements to our members pursuant to our operating agreement, we are not required to deliver an
annual report to security holders and currently have no plan to do so. However, each filing we
make with the SEC is immediately available to the public for inspection and copying at the
Commissions public reference facilities and the web site of the Commission referred to above or by
calling the SEC at 1-800-SEC-0330.
87
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee and
Board of Directors
Cardinal Ethanol, LLC
Winchester, Indiana
We have audited the accompanying balance sheet of Cardinal Ethanol, LLC (a development stage
company), as of September 30, 2005, and the related statements of operations, changes in members
equity, and cash flows for the period from inception (February 7, 2005) to September 30, 2005.
These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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, (a development stage company) as of
September 30, 2005, and the results of its operations and its cash flows for the period from
inception (February 7, 2005) to September 30, 2005, in conformity with U.S. generally accepted
accounting principles.
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/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P
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Certified Public Accountants
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Minneapolis, Minnesota
January 3, 2006, except for Note 6, as
to which the date is January 23, 2006
F-1
CARDINAL ETHANOL, LLC
(A Development Stage Company)
Balance Sheet
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September 30,
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ASSETS
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2005
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Current Assets
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Cash and cash equivalents
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$
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5,295
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Investments
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66,573
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Prepaid expenses
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13,726
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Total current assets
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85,594
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Property and Equipment
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Office equipment
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5,681
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Less accumulated depreciation
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(79
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)
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Net property and equipment
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5,602
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Other Assets
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Deferred offering costs
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18,685
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Total Assets
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$
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109,881
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September 30,
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LIABILITIES AND EQUITY
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2005
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Current Liabilities
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Accounts payable
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$
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33,392
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Accrued expenses
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375
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Total current liabilities
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33,767
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Commitments and Contingencies
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Members Equity
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Member contributions, 72 units outstanding
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120,000
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Deficit accumulated during development stage
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(43,886
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)
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Total members equity
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76,114
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Total Liabilities and Members Equity
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$
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109,881
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Notes to Financial Statements are an integral part of this Statement.
F-2
CARDINAL ETHANOL, LLC
(A Development Stage Company)
Statement of Operations
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From Inception
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(February 7, 2005)
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to September 30, 2005
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Revenues
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$
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Operating Expenses
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Professional fees
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35,322
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General and administrative
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10,149
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Total
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45,471
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Operating Loss
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(45,471
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)
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Other Income (Expense)
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Dividend income
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1,487
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Gain on sale of investments
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98
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Total
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1,585
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Net Loss
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$
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(43,886
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)
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Net Loss Per Unit (68 weighted average
units outstanding)
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$
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(645.38
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)
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Notes to Financial Statements are an integral part of this Statement.
F-3
CARDINAL ETHANOL, LLC
(A Development Stage Company)
Period from February 7, 2005 (Date of Inception) to September 30, 2005
Statement of Changes in Members Equity
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Balance February 7, 2005 (Date of Inception)
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$
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Capital
contributions 72 units, $1,666.66 per unit, February 2005
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120,000
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Net loss for the period from inception to September 30, 2005
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(43,886
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)
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Balance September 30, 2005
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$
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76,114
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Notes to Financial Statements are an integral part of this Statement.
F-4
CARDINAL ETHANOL, LLC
(A Development Stage Company)
Statement of Cash Flows
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From Inception
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(February 7, 2005)
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to September 30, 2005
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Cash Flows from Operating Activities
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Net loss
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$
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(43,886
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)
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Adjustments to reconcile net loss to net cash from operations:
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Depreciation
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79
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Gain on sale of investments
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(98
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)
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Change in assets and liabilities
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|
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Prepaid expenses
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|
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(13,726
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)
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Accounts payable
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21,507
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Accrued expenses
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|
|
375
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|
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|
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Net cash used in operating activities
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(35,749
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)
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Cash Flows from Investing Activities
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|
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Capital expenditures
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(4,096
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)
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Purchases of investments, net
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(66,475
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)
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Net cash used in investing activities
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(70,571
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)
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Cash Flows from Financing Activities
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|
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|
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Payments for deferred offering costs
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(8,385
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)
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Member contributions
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120,000
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Net cash provided by financing activities
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111,615
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Net Increase in Cash and Cash Equivalents
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5,295
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Cash and Cash Equivalents Beginning of Period
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|
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|
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|
|
|
|
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Cash and Cash Equivalents End of Period
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$
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5,295
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Supplemental Disclosure of Noncash
Investing and Financing Activities
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Deferred offering costs included in accounts payable
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$
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10,300
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|
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|
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Capital expenditures included in accounts payable
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$
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1,585
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Notes to Financial Statements are an integral part of this Statement.
F-5
CARDINAL ETHANOL, LLC
(A Development Stage Company)
Notes to Financial Statements
September 30, 2005
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 Winchester,
Indiana. The Company was originally named Indiana Ethanol, LLC and changed its name to Cardinal
Ethanol, LLC effective September 27, 2005. Construction is anticipated to take 18-20 months with
expected completion during the summer of 2008. As of September 30, 2005, the Company is in the
development stage with its efforts being principally devoted to equity raising and organizational
activities.
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. Actual results could differ from those estimates.
Significant estimates include the deferral of expenditures for offering costs which are dependent
upon successful financing and project development, as discussed below. It is at least reasonably
possible that these estimates may change in the near term.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. Cash equivalents include money market funds of $5,012 at
September 30, 2005, which are not federally insured.
The Company maintains its accounts primarily at two financial institutions. At times throughout
the year, the Companys cash and cash equivalents balances may exceed amounts insured by the
Federal Deposit Insurance Corporation.
F-6
CARDINAL ETHANOL, LLC
(A Development Stage Company)
Notes to Financial Statements
September 30, 2005
Investments
The Company has an investment in one mutual fund. The Company classifies the investment as
available-for-sale and records it at fair market value, which at September 30, 2005 approximated
cost. Realized gains and losses, determined using the average cost method, are included in
earnings; unrealized holding gains and losses are accounted for under the average cost method and
are reported as a separate component of members equity.
During fiscal 2005, the Company received $35,000 in proceeds and made payments of $101,475 for
investment purchases. The Company recorded a realized gain of $98 for fiscal 2005. There were no
material unrealized holding gains or losses at September 30, 2005.
Property and Equipment
Property and equipment are stated at the lower of cost or estimated fair value. 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.
Deferred Offering Costs
The Company defers the costs incurred to raise equity financing until that financing occurs. At
such time that the issuance of new equity occurs, these costs will be netted against the proceeds
received; or if the financing does not occur, they will be expensed.
Grants
The Company recognizes grant proceeds as other income for reimbursement of expenses incurred upon
complying with the conditions of the grant. For reimbursements of capital expenditures, the grants
are recognized as a reduction of the basis of the asset upon complying with the conditions of the
grant.
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 its earnings and losses are included in the
income tax returns of its members. Therefore, no provision or liability for Federal or state
income taxes has been included in these financial statements.
F-7
CARDINAL ETHANOL, LLC
(A Development Stage Company)
Notes to Financial Statements
September 30, 2005
Fair Value of Financial Instruments
The carrying value of cash and equivalents and investments approximates their fair value. The
Company estimates that the fair value of all financial instruments at September 30, 2005 does not
differ materially from the aggregate carrying values of the financial instruments recorded in the
accompanying balance sheet. The estimated fair value amounts have been determined by the Company
using appropriate valuation methodologies.
Recently Issued Accounting Pronouncements
Management has reviewed recently issued accounting pronouncements and does not expect the
implementation of these pronouncements to have a significant effect on the Companys financial
statements.
2. DEVELOPMENT STAGE ENTERPRISE
The Company was formed on February 7, 2005 to have a perpetual life. The Company was
initially capitalized by 12 management committee members who contributed an aggregate of $120,000
for 72 membership units.
Subsequent to year end, the Company was further capitalized by current and additional members,
contributing an aggregate of $1,240,000 for 496 units. These additional contributions were
pursuant to a private placement memorandum in which the Company offered a maximum of 600 units of
securities at a cost of $2,500 per unit for a maximum of $1,500,000. Each investor was required to
purchase a minimum of 16 units for a minimum investment of $40,000. This offering was closed and
the units were authorized to be issued on December 7, 2005.
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.
3. MEMBERS EQUITY
The Company is preparing a Form SB-2 Registration Statement with the Securities and Exchange
Commission (SEC). The Offering is expected to be for a minimum of 9,000 membership units and up to
16,400 membership units for sale at $5,000 per unit for a minimum of $45,000,000 and a maximum of
$82,000,000.
F-8
CARDINAL ETHANOL, LLC
(A Development Stage Company)
Notes to Financial Statements
September 30, 2005
4. INCOME TAXES
The differences between financial statement basis and tax basis of assets are as follows:
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September 30,
|
|
|
|
2005
|
|
Financial statement basis of assets
|
|
$
|
109,881
|
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Plus: organization and start-up costs capitalized
|
|
|
45,471
|
|
|
|
|
|
|
|
|
|
|
Income tax basis of assets
|
|
$
|
155,352
|
|
|
|
|
|
There were no differences between the financial statement basis and tax basis of the Companys
liabilities.
5. COMMITMENTS AND CONTINGENCIES
Design Build Contract
The total cost of the project, including the construction of the ethanol plant and start-up
expenses, is expected to approximate $150,500,000. The Company anticipates funding the development
of the ethanol plant by raising equity of approximately $46,360,000 to $83,360,000 and securing
debt financing, grants, and other incentives of approximately $67,140,000 to $104,140,000. The
amount of debt financing needed depends on the amount of equity raised in the Offering. Currently,
the Company has signed a letter of intent with a contractor, an unrelated party, to design and
build the ethanol plant at a total contract price of approximately $106,000,000. The letter of
intent shall terminate on December 31, 2007 unless the basic size and design of the facility have
been agreed upon, a specific site or sites have been determined and agreed upon, and at least 10%
of the necessary equity has been raised. Further, the letter of intent terminates at December 31,
2008 unless financing for the facility has been secured. Either of the termination dates may be
extended upon mutual written agreement. If the Construction Cost Index CCI (as defined in the
letter of intent) for the month notice to proceed with the project is given has increased over the
CCI for September 2005, the contract price will be increased by an equal percentage amount.
Although the Company has not yet entered into a design-build agreement, in December 2005, the Company entered into a Phase I and Phase II engineering services agreement with an entity related to that with which the Company has a signed letter of intent as described above. In exchange for the performance of certain engineering and design services, the Company has agreed to pay $92,500, which will
be credited against the total design build cost. The Company will also be required to pay certain reimbursable expenses per the agreement.
Office Lease
In August 2005, the Company entered into a one year operating lease for office space. The agreed
upon rent for the entire term of the lease shall not exceed $7,200, payable in equal consecutive
monthly installments of $600. The Company has the option to renew this lease on a month to month
basis with the same terms and conditions of the original agreement.
F-9
CARDINAL ETHANOL, LLC
(A Development Stage Company)
Notes to Financial Statements
September 30, 2005
Feasibility Commitment
Randolph Economic Development Corporation paid approximately $34,700 for a feasibility study on the
Company. The Board of Directors of the Company have committed to repay the Randolph Economic
Development Corporation for expenses incurred related to the feasibility study if the Company
chooses to build the ethanol plant outside Randolph County, Indiana.
6. SUBSEQUENT EVENTS
In November 2005, the Company entered into an agreement with an unrelated party to develop an
internet website. The Company paid $2,500 on the date the contract was signed and will incur
additional fees of approximately $2,000 which will be based on actual time spent.
In December 2005, the Company entered into an agreement with an unrelated party for consulting and
energy management services for supplies of natural gas and electricity for the plant. The fees for
these services shall be $3,500 per month, plus pre-approved travel expenses. The agreement
commences on January 1, 2006 and will continue until twelve months after the plants completion.
The fees for the services will increase 4% per year on the anniversary date of the effective date
of the agreement. The agreement will be month-to-month after the initial term. This agreement may
be terminated by either party effective after the initial term upon sixty days prior written
notice.
In December 2005, the Company was awarded a $100,000 Value-Added Producer Grant from the United
States Department of Agriculture. The Company will match the grant funding with an amount equal to
$100,000. The matching funds will be spent at a rate equal to or in advance of grant funds, with
the expenditure of matching funds not to occur until the date the grant begins. The funding period
for the grant will conclude within one year of the date of the signed agreement, but no later than
December 31, 2006. The grant funds and matching funds shall only be used for the purposes and
activities related to equity raising, marketing, risk management, and operational plans.
In January 2006, the Company entered into an agreement with an unrelated party to provide railroad
track design services. The agreement includes site selection assistance, track engineering,
bidding assistance and construction observation for $56,200 plus an additional fee of $1,950 for
each site proposed.
The Company is considering several locations to construct the ethanol plant in east central Indiana
or west central Ohio. The Company has secured land options on potential sites in Jay County,
Indiana and Randolph County, Indiana as described below.
F-10
CARDINAL ETHANOL, LLC
(A Development Stage Company)
Notes to Financial Statements
September 30, 2005
In December 2005, the Company entered into a contract with an unrelated party to have the
option to purchase approximately 133 acres of land in Jay County, Indiana, for $7,700 per surveyed
acre. The Company paid $5,000 for this option. The initial option extends until July 1, 2006, but
the Company has the right to extend the option every six months to July 1, 2008 for an additional
payment of $5,000 for each six-month extension. The option may be exercised by giving written
notice and payment of $25,000 in earnest money. All option payments will be applied to the
purchase price of the land. If the Company does not exercise this option the seller will retain
all option payments.
In January 2006, the Company entered into an agreement with three unrelated parties to have the
option to purchase three tracts of land totaling approximately 216 acres in Randolph County,
Indiana. Under the terms of the option agreement, the Company paid $1,500 to each party for an
aggregate option price of $4,500 and has the option to purchase the land for $4,200 per surveyed
acre plus $60,000 for the buildings located on tract 1. The option expires on January 30, 2007,
unless the Company chooses to extend the option to January 30, 2008, for an additional payment of
$1,500 to each party.
In January 2006, the Company entered into an agreement with an unrelated party granting the option
to purchase 5 acres of land in Randolph County, Indiana. Under the terms of the option agreement,
the Company paid $1,500 for the option and has the option to purchase the land for $40,000. The
option expires on January 30, 2007, unless the Company chooses to extend the option to January 30,
2008, for an additional payment of $1,500. This site is adjacent to the 216 acres under option as
noted above.
F-11
MINIMUM 9,000 UNITS
MAXIMUM 16,400 UNITS
PROSPECTUS
February 10, 2006
You should rely only on the information contained in this prospectus. We have not authorized
anyone to provide you with information different from that contained in this prospectus. We are
offering to sell, and seeking offers to buy, units only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale of our common
shares.
No action is being taken in any jurisdiction outside the United States to permit a public
offering of the units or possession or distribution of this prospectus in that jurisdiction.
Persons who come into possession of this prospectus in jurisdictions outside the United States are
required to inform themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.
Through and including ___, 2006 (the 90
th
day after the effective date of this
prospectus), all dealers effecting transactions in these securities, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition to the dealers
obligation to deliver a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Directors and officers of Cardinal Ethanol may be entitled to benefit from the indemnification
provisions contained in Cardinal Ethanols operating agreement and the Indiana Limited Liability
Company Act. The general effect of these provisions is summarized below.
Our operating agreement provides that to the maximum extent permitted under the Indiana
Limited Liability Company Act and any other applicable law, no member or director of Cardinal
Ethanol, LLC shall be personally liable for any debt, obligation or liability of Cardinal Ethanol
merely by reason of being a member or director or both. No director of Cardinal Ethanol shall be
personally liable to Cardinal Ethanol or its members for monetary damages for a breach of fiduciary
duty by such director; provided that the provision shall not eliminate or limit the liability of a
director for the following: (1) receipt of an improper financial benefit to which the director is
not entitled; (2) liability for receipt of distributions in violation of the articles of
organization, operating agreement, or the Indiana Limited Liability Company Act; (3) a knowing
violation of law; or (4) acts or omissions involving fraud, bad faith or willful misconduct. To
the maximum extent permitted under the Indiana Limited Liability Company Act and other applicable
law, Cardinal Ethanol, its receiver, or its trustee (however in the case of a receiver or trustee
only to the extent of Company property) is required to indemnify, save, and hold harmless and pay
all judgments and claims against each director relating to any liability or damage incurred by
reason of any act performed or omitted to be performed by such director or officer in connection
with the business of Cardinal Ethanol. The indemnification includes reasonable attorneys fees
incurred by a director or officer in connection with the defense of any action based on covered
acts or omissions. Attorneys fees may be paid as incurred, including those for liabilities under
federal and state securities laws, as permitted by law. To the maximum extent permitted by law, in
the event of an action by a unit holder against any director, including a derivative suit, we must
indemnify, hold harmless and pay all costs, liabilities, damages and expenses of the director,
including attorneys fees incurred in the defense of the action. Notwithstanding the foregoing
provisions, no director shall be indemnified by Cardinal Ethanol in contradiction of the Indiana
Limited Liability Company Act. Cardinal Ethanol may purchase and maintain insurance on behalf of
any person in his or her official capacity against any liability asserted against and incurred by
the person arising from the capacity, regardless of whether Cardinal Ethanol would otherwise be
required to indemnify the person against the liability.
Generally, under Indiana law, a member or manager is not personally obligated for any debt or
obligation of Cardinal Ethanol solely because they are a member or manager of Cardinal Ethanol.
However, Indiana law allows a member or manager to agree to become personally liable for any or all
debts, obligations, and liabilities if the operating agreement provides. Our operating agreement
provides that no member or director of Cardinal Ethanol shall be personally liable for any debt,
obligation or liability solely by reason of being a member or director or both.
The principles of law and equity supplement the Indiana Limited Liability Company Act, unless
displaced by particular provisions of the Act.
There is no pending litigation or proceeding involving a director, officer, employee or agent
of Cardinal Ethanol as to which indemnification is being sought. Cardinal Ethanol is not aware of
any other threatened litigation that may result in claims for indemnification by any director,
officer, member, manager, employee or agent.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
|
|
|
|
|
Securities and Exchange Commission registration fee
|
|
$
|
8,774
|
|
Legal fees and expenses
|
|
$
|
75,000
|
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Consulting Fees
|
|
$
|
200,000
|
|
Accounting fees
|
|
$
|
65,000
|
|
Blue Sky filing fees
|
|
$
|
9,725
|
|
Printing expenses
|
|
$
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50,000
|
|
Advertising
|
|
$
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150,000
|
|
|
|
|
|
Total
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$
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558,499
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|
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*
|
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All of the above items except the registration fee and blue sky filing fees are
estimated.
|
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In February, 2005, we issued and sold 72 membership units to our founders at a purchase price
of $1,666.67 per unit, without registering the units with the Securities and Exchange Commission.
In addition, in December, 2005, we issued and sold 496 membership units to our seed capital
investors at a purchase price of $2,500 per unit, without registering the units with the Securities
and Exchange Commission. All sales were made pursuant to Rule 506 of Regulation D. Each of these
sales was deemed to be exempt from registration under the Securities Act in reliance on Section
4(2) and Rule 506 of the Securities Act of 1933 as transactions by an issuer not involving a public
offering. No underwriting discounts or commissions were paid in these transactions and we
conducted no general solicitation in connection with the offer or sale of the securities. The
purchasers of the securities in each transaction made representations to us regarding their status
as accredited investors as defined in Regulation C or received the information required for
non-accredited investors and made representations to us regarding their intention to acquire the
securities for investment only and not with a view to or for sale in connection with any
distribution thereof. Appropriate legends were affixed to unit certificates and instruments issued
in such transactions. All purchasers were provided a private placement memorandum containing all
material information concerning our company and the offering. All purchases were made with cash
and the total amount of cash consideration for those securities was $1,360,000.
ITEM 27. EXHIBITS.
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3.1
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Articles of Organization of Indiana Ethanol, LLC, Indiana
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3.1A
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Name Change Amendment
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3.3
|
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Second Amended & Restated Operating Agreement of the registrant
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4.1
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Form of Membership Unit Certificate
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4.2
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Form of Subscription Agreement of registrant
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|
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4.3
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Form of Escrow Agreement with [ESCROW BANK]
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|
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5.1
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|
Form of Opinion of Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C. as to
|
|
|
certain securities matters
|
|
|
|
8.1
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|
Form of Opinion of Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, P.L.C. as to
|
|
|
certain tax matters
|
|
|
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10.1
|
|
Letter of Intent dated June 13, 2005 between Cardinal Ethanol, LLC and Fagen, Inc.
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10.2
|
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Amendment Number One to Letter of Intent dated October 24, 2005 between Cardinal
|
|
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Ethanol, LLC and Fagen, Inc.
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10.3
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Letter Agreement dated June 8, 2005 between Cardinal Ethanol, LLC and PlanScape Partners
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10.4
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Commercial Lease dated August 15, 2005 between Cardinal Ethanol, LLC and OMCO Mould, Inc.
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10.5
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Employment Agreement dated November 7, 2005 between Cardinal Ethanol, LLC and Angela J.
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Armstrong
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10.6
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Phase I and II Engineering Services Agreement dated December 19, 2005.
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II-2
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|
|
10.7
|
|
Letter Agreement dated January 13, 2006 between Cardinal Ethanol, LLC and TerraTec
Engineering, LLC.
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10.8
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Service Agreement dated January 17, 2006 between Cardinal Ethanol, LLC and RTP
Environmental Associates, Inc.
|
|
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10.9
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Energy Management Agreement dated January 23, 2006 between Cardinal Ethanol, LLC and
U.S. Energy Services, Inc.
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|
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10.10
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Real Estate Option Agreement dated December 21, 2005 between the Rodgers Farms LLC and
Cardinal Ethanol, LLC
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10.11
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|
Real Estate Option Agreement dated January 10, 2005 between Timothy L. and Diana S.
Cheesman, the Lydia E. Harris Trust and the Mary Frances James Revocable Trust Agreement
dated September 18, 2003 and Cardinal Ethanol, LLC
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10.12
|
|
Real Estate Option Agreement dated January 11, 2006 between Dale and Bonnie Bartels and
Cardinal Ethanol, LLC
|
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23.1
|
|
Consent of Boulay, Heutmaker, Zibell & Co., P.L.L.P. dated February, 2006
|
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant pursuant to the
foregoing provisions or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
|
(1)
|
|
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
|
|
(i)
|
|
Include any prospectus required by section 10(a)(3) of the Securities
Act of 1933;
|
|
|
(ii)
|
|
Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement; and notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the Calculation of Registration Fee table in the
effective registration statement.
|
|
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(iii)
|
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Include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any material
change to such information in the registration statement.
|
II-3
|
(2)
|
|
To deem, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
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(3)
|
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To remove from registration by means of a post-effective amendment any of the
registered securities which remain unsold at the end of the offering.
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(4)
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For determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities, to
undertake that in a primary offering of securities of the undersigned small business
issuer pursuant to this registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the undersigned small
business issuer will be a seller to the purchaser and will be considered to offer or
sell such securities to such purchaser:
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(i)
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any preliminary prospectus or prospectus of the undersigned small
business issuer relating to the offering required to be filed pursuant to Rule 424;
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(ii)
|
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any free writing prospectus relating to the offering prepared by or on
behalf of the undersigned small business issuer or used or referred to by the
undersigned small business issuer;
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(iii)
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the portion of any other free writing prospectus relating to the
offering containing material information about the undersigned small business
issuer or its securities provided by or on behalf of the undersigned small business
issuer; and
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(iv)
|
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any other communication that is an offer in the offering made by the
undersigned small business issuer to the purchaser.
|
Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to
an offering, other than registration statements relying on Rule 430B or other than prospectuses
filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided, however
,
that no statement
made in a registration statement or prospectus that is part of the registration statement or made
in a document incorporated or deemed incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any statement that was made in the
registration statement or prospectus that was part of the registration statement or made in any
such document immediately prior to such date of first use
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements of filing this Form
SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in
the City of Winchester, Indiana on February 6, 2006.
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CARDINAL ETHANOL, LLC
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Date: 2/06/06
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/s/ Troy Prescott
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Troy Prescott
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Chairman, President and Director
(Principal Executive Officer)
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II-4
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Date: 2/06/06
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/s/ Dale Schwieterman
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Dale Schwieterman
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Treasurer and Director
(Principal Financial and Accounting Officer)
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In accordance with the requirements of the Securities Act of 1933, this registration statement
was signed by the following persons in the capacities and on the dates stated:
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Date: 2/06/06
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/s/ Troy Prescott
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Troy Prescott, Chairman, President, Director
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(Principal Executive Officer)
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Date: 2/06/06
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/s/ Dale Schwieterman
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Dale Schwieterman, Treasurer, Director
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(Principal Financial and Accounting Officer)
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Date: 2/06/06
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/s/ Thomas Chalfant
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Thomas Chalfant, Vice Chairman, Vice
President and Director
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Date: 2/06/06
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/s/ John Shanks II
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John Shanks II, Secretary, Director
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Date: 2/06/06
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/s/ Robert E. Anderson
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Robert E. Anderson, Director
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Date: 2/06/06
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/s/ L. Allen Baird
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Lawrence Allen Baird, Director
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Date: 2/06/06
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/s/ Larry J. Barnette
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Larry J. Barnette, Director
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II-5
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Date: 2/06/06
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/s/ David M. Dersch
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David M. Dersch, Director
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Date: 2/06/06
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/s/ Everett L. Hart
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Everett L. Hart, Director
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Date: 2/06/06
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/s/ Jeremey J. Herlyn
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Jeremey J. Herlyn, Director
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Date: 2/06/06
|
/s/ Barry Hudson
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Barry Hudson, Director
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Date: 2/06/06
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/s/ Cyril G. LeFevre
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Cyril G. LeFevre, Director
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Date: 2/06/06
|
/s/ Robert L. Morris
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Robert L. Morris, Director
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Date: 2/06/06
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/s/ Steven J. Snider
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Steven J. Snider, Director
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II-6
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Date: 2/06/06
|
/s/ Jerrold L. Voisinet
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Jerrold L. Voisinet, Director
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Date: 2/06/06
|
/s/ Andrew Zawosky
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Andrew Zawosky, Jr., Director
|
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II-7
Exhibit 3.3
SECOND AMENDED AND RESTATED OPERATING AGREEMENT
OF
CARDINAL ETHANOL, LLC
Dated Effective February 1, 2006
CARDINAL ETHANOL, LLC
SECOND AMENDED AND RESTATED OPERATING AGREEMENT
TABLE OF CONTENTS
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Page
|
TABLE OF CONTENTS
|
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i
|
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SECTION 1. THE COMPANY
|
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1
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1.1 Formation
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1
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1.2 Name
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1
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1.3 Purpose; Powers
|
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2
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1.4 Principal Place of Business
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2
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1.5 Term
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2
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1.6 Registered Agent
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2
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1.7 Title to Property
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2
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1.8 Payment of Individual Obligations
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2
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1.9 Independent Activities; Transactions With Affiliates
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2
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1.10 Definitions
|
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3
|
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SECTION 2. CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS
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9
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2.1 Original Capital Contributions
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9
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2.2 Additional Capital Contributions; Additional Units
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9
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2.3 Capital Accounts
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9
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SECTION 3. ALLOCATIONS
|
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10
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3.1 Profits
|
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10
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3.2 Losses
|
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10
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3.3 Special Allocations
|
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10
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3.4 Curative Allocations
|
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12
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3.5 Loss Limitation
|
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12
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3.6 Other Allocation Rules
|
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13
|
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3.7 Tax Allocations: Code Section 704(c)
|
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13
|
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3.8 Tax Credit Allocations
|
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13
|
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|
SECTION 4. DISTRIBUTIONS
|
|
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14
|
|
4.1. Net Cash Flow
|
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14
|
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4.2. Amounts Withheld
|
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14
|
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4.3. Limitations on Distributions
|
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14
|
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SECTION 5. MANAGEMENT
|
|
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14
|
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5.1. Directors
|
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14
|
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5.2. Number of Total Directors
|
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14
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5.3. Election of Directors
|
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15
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5.4. Committees
|
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17
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5.5. Authority of Directors
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17
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i
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5.6. Director as Agent
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19
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|
5.7. Restrictions on Authority of Directors
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19
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|
5.8. Director Meetings and Notice
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|
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20
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5.9. Action Without a Meeting
|
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20
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5.10. Quorum; Manner of Acting
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21
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5.11. Voting; Potential Financial Interest
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21
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5.12. Duties and Obligations of Directors
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21
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|
5.13. Chairman and Vice Chairman
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21
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5.14. President and Chief Executive Officer
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21
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5.15. Chief Financial Officer
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22
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5.16. Secretary; Assistant Secretary
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22
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5.17. Vice President
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22
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5.18. Delegation
|
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22
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5.19. Execution of Instruments
|
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22
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5.20. Limitation of Liability; Indemnification of Directors
|
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22
|
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5.21. Compensation; Expenses of Directors
|
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23
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5.22. Loans
|
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23
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SECTION 6. ROLE OF MEMBERS
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24
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6.1 One Membership Class
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24
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6.3 Additional Members
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24
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6.4 Rights or Powers
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24
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6.5 Voting Rights of Members
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24
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6.6 Member Meetings
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24
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6.7 Conduct of Meetings
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24
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6.8 Notice of Meetings; Waiver
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24
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6.9 Quorum and Proxies
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25
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6.10 Voting; Action by Members
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25
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6.11 Record Date
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25
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6.12 Termination of Membership
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25
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6.13 Continuation of the Company
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25
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6.14 No Obligation to Purchase Membership Interest
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25
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6.15 Waiver of Dissenters Rights
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25
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6.16 Limitation on Ownership
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25
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SECTION 7. ACCOUNTING, BOOKS AND RECORDS
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26
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7.1 Accounting, Books and Records
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26
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7.2 Delivery to Members and Inspection
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26
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7.3 Reports
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26
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7.4 Tax Matters
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27
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SECTION 8. AMENDMENTS
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27
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8.1 Amendments
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27
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SECTION 9. TRANSFERS
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28
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9.1 Restrictions on Transfers
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28
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9.3 Conditions Precedent to Transfers
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28
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ii
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9.4 Prohibited Transfers
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30
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9.5 No Dissolution or Termination
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30
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9.6 Prohibition of Assignment
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30
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9.7 Rights of Unadmitted Assignees
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30
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9.8 Admission of Substituted Members
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31
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9.9 Representations Regarding Transfers
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31
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9.10. Distribution and Allocations in Respect of Transferred Units
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32
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SECTION 10. DISSOLUTION AND WINDING UP
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33
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10.1. Dissolution
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33
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10.2. Winding Up
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33
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10.3. Compliance with Certain Requirements of Regulations; Deficit
Capital Accounts
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33
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10.4. Deemed Distribution and Recontribution
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34
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10.5. Rights of Unit Holders
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34
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10.6. Allocations During Period of Liquidation
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34
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10.7. Character of Liquidating Distributions
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34
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10.8. The Liquidator
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34
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10.9. Forms of Liquidating Distributions
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35
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SECTION 11. MISCELLANEOUS
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35
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11.1. Notices
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35
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11.2. Binding Effect
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35
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11.3. Construction
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35
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11.4. Headings
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35
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11.5. Severability
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35
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11.6. Incorporation By Reference
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35
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11.7. Variation of Terms
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36
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11.8. Governing Law
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36
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11.9. Waiver of Jury Trial
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36
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11.10. Counterpart Execution
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36
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iii
SECOND AMENDED AND RESTATED OPERATING AGREEMENT
OF
CARDINAL ETHANOL, LLC
THIS SECOND AMENDED AND RESTATED OPERATING AGREEMENT
(the Agreement) is entered into and
shall be effective as of February 1, 2006, by and among Cardinal Ethanol, LLC f/k/a Indiana
Ethanol, LLC, an Indiana limited liability company (the Company), each of the Persons (as
hereinafter defined) who are identified as Members on the attached Exhibit A and who have
executed a counterpart of this Agreement and a Subscription Agreement, and any other Persons as may
from time-to-time be subsequently admitted as a Member of the Company in accordance with the terms
of this Agreement. Capitalized terms not otherwise defined herein shall have the meaning set forth
in Section 1.10.
WHEREAS,
the Companys organizers caused to be filed with the State of Indiana, Articles of
Organization dated February 3, 2005, pursuant to the Indiana Business Flexibility Act (the Act);
and
WHEREAS,
the Companys organizers adopted an Operating Agreement of the Company dated February
14, 2005, pursuant to the Act;
WHEREAS the Company amended the Operating Agreement of the Company effective October 24, 2005;
WHEREAS,
the Company amended its Articles of Organization to change its name to Cardinal
Ethanol, LLC; and
WHEREAS,
the Members desire to amend and restate the Operating Agreement to revise and set
forth their respective rights, duties, and responsibilities with respect to the Company and its
business and affairs.
NOW, THEREFORE,
in consideration of the covenants and agreements contained herein, and other
good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
SECTION 1. THE COMPANY
1.1
Formation
. The initial Members formed the Company as an Indiana limited liability
company by filing Articles of Organization with the Indiana Secretary of State on February 3, 2005,
pursuant to the provisions of the Act. To the extent that the rights or obligations of any Member
are different by reason of any provision of this Agreement than they would be in the absence of
such provision, this Agreement shall, to the extent permitted by the Act, control.
1.2
Name
. The name of the Company shall be Cardinal Ethanol, LLC and all business of the
Company shall be conducted in such name.
1
1.3
Purpose; Powers
. The nature of the business and purposes of the Company are: (i) to
own, construct, operate, lease, finance, contract with, and/or invest in ethanol production and
co-product production facilities as permitted under the applicable laws of the State of Indiana;
(ii) to engage in the processing of corn, grains and other feedstock into ethanol and any and all
related co-products, and the marketing of all products and co-products from such processing; and
(iii) to engage in any other business and investment activity in which an Indiana limited liability
company may lawfully be engaged, as determined by the Directors. The Company has the power to do
any and all acts necessary, appropriate, proper, advisable, incidental or convenient to or in
furtherance of the purpose of the Company as set forth in this Section 1.3 and has, without
limitation, any and all powers that may be exercised on behalf of the Company by the Directors
pursuant to Section 5 hereof.
1.4
Principal Place of Business
. The Company shall continuously maintain a principal place
of business in Indiana. The principal place of business of the Company shall be at 102 West
Washington Street, Winchester, Indiana 47394, or elsewhere as the Directors may determine. Any
documents required by the Act to be kept by the Company shall be maintained at the Companys
principal place of business.
1.5
Term
. The term of the Company commenced on the date the Articles of Organization (the
Articles) of the Company were filed with the Indiana Secretary of State and shall continue until
the winding up and liquidation of the Company and its business is completed following a Dissolution
Event as provided in Section 10 hereof.
1.6
Registered Agent
. The Company shall continuously maintain a registered office and a
registered agent for service of process in the State of Indiana. The name and address of the
initial Registered Agent shall be John Shanks, 338 Historic West Eighth Street, Anderson, Indiana
46016.
1.7
Title to Property
. All Property owned by the Company shall be owned by the Company as
an entity and no Member shall have any ownership interest in such Property (as hereinafter defined)
in his/her/its individual name. Each Members interest in the Company shall be personal property
for all purposes. At all times after the Effective Date, the Company shall hold title to all of
its Property in the name of the Company and not in the name of any Member.
1.8
Payment of Individual Obligations
. The Companys credit and assets shall be used
solely for the benefit of the Company, and no asset of the Company shall be Transferred or
encumbered for, or in payment of, any individual obligation of any Member.
1.9
Independent Activities; Transactions With Affiliates.
The Directors shall be required
to devote such time to the affairs of the Company as may be necessary to manage and operate the
Company, and shall be free to serve any other Person or enterprise in any capacity that the Director may deem appropriate
in its discretion. Neither this Agreement nor any activity undertaken pursuant hereto shall (i)
prevent any Member or Director or its Affiliates, acting on its own behalf, from engaging in
whatever activities it chooses, whether the same are competitive with the Company or otherwise, and
any such activities may be undertaken without having or
2
incurring any obligation to offer any
interest in such activities to the Company or any Member; or (ii) require any Member or Director to
permit the Company or Director or Member or its Affiliates to participate in any such activities,
and as a material part of the consideration for the execution of this Agreement by each Member,
each Member hereby waives, relinquishes, and renounces any such right or claim of participation.
To the extent permitted by applicable law and subject to the provisions of this Agreement, the
Directors are hereby authorized to cause the Company to purchase Property from, sell Property to or
otherwise deal with any Member (including any Member who is also a Director), acting on its own
behalf, or any Affiliate of any Member; provided that any such purchase, sale or other transaction
shall be made on terms and conditions which are no less favorable to the Company than if the sale,
purchase or other transaction had been made with an independent third party.
1.10
Definitions
. Capitalized words and phrases used in this Agreement have the following
meanings:
(a) Act means the Indiana Business Flexibility Act, as amended from time to time (or any
corresponding provision or provisions of any succeeding law).
(b) Adjusted Capital Account Deficit means, with respect to any Unit Holder, the deficit
balance, if any, in such Unit Holders Capital Account as of the end of the relevant Fiscal Year,
after giving effect to the following adjustments: (i) Credit to such Capital Account any amounts
which such Unit Holder is deemed to be obligated to restore pursuant to the next to the last
sentences in Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and (ii) Debit to such
Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5)
and 1.704-1(b)(2)(ii)(d)(6) of the Regulations. The foregoing definition is intended to comply
with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted
consistently therewith.
(c) Affiliate means, with respect to any Person: (i) any Person directly or indirectly
controlling, controlled by or under common control with such Person; (ii) any officer, director,
general partner, member or trustee of such Person; or (iii) any Person who is an officer, director,
general partner, member or trustee of any Person described in clauses (i) or (ii) of this sentence.
For purposes of this definition, the terms controlling, controlled by or under common control
with shall mean the possession, direct or indirect, of the power to direct or cause the direction
of the management and policies of a Person or entity, whether through the ownership of voting
securities, by contract or otherwise, or the power to elect at least 50% of the directors, members,
or persons exercising similar authority with respect to such Person or entities.
(d) Agreement means this Second Amended and Restated Operating Agreement of Indiana Ethanol,
LLC, as amended from time to time.
(e) Articles means the Articles of Organization of the Company filed with the Indiana
Secretary of State, as same may be amended from time to time.
(f) Assignee means a transferee of Units who is not admitted as a substituted member
pursuant to Section 9.8.
3
(g) Capital Account means the separate capital account maintained for each Unit Holder in
accordance with Section 2.3.
(h) Capital Contributions means, with respect to any Member, the amount of money (US
Dollars) and the initial Gross Asset Value of any assets or property (other than money) contributed
by the Member (or such Members predecessor in interest) to the Company (net of liabilities secured
by such contributed property that the Company is considered to assume or take subject to under Code
Section 752) with respect to the Units in the Company held or purchased by such Member, including
additional Capital Contributions.
(i) Code means the United States Internal Revenue Code of 1986, as amended from time to
time.
(j) Company means Cardinal Ethanol, LLC, an Indiana limited liability company.
(k) Company Minimum Gain has the meaning given the term partnership minimum gain in
Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations.
(l) Debt means (i) any indebtedness for borrowed money or the deferred purchase price of
property as evidenced by a note, bonds, or other instruments; (ii) obligations as lessee under
capital leases; (iii) obligations secured by any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind existing on any asset owned or held by the Company whether or not the
Company has assumed or become liable for the obligations secured thereby; (iv) any obligation under
any interest rate swap agreement; (v) accounts payable; and (vi) obligations under direct or
indirect guarantees of (including obligations (contingent or otherwise) to assure a creditor
against loss in respect of) indebtedness or obligations of the kinds referred to in clauses (i),
(ii), (iii), (iv) and (v), above provided that Debt shall not include obligations in respect of any
accounts payable that are incurred in the ordinary course of the Companys business and are not
delinquent or are being contested in good faith by appropriate proceedings.
(m) Depreciation means, for each Fiscal Year, an amount equal to the depreciation,
amortization, or other cost recovery deduction allowable with respect to an asset for such Fiscal
Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal
income tax purposes at the beginning of such Fiscal Year, Depreciation shall be an amount which
bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation,
amortization, or other cost recovery deduction for such Fiscal Year bears to such beginning
adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes
of an asset at the beginning of such Fiscal Year is zero, Depreciation shall be determined with
reference to such beginning Gross Asset Value using any reasonable method selected by the
Directors.
(n) Director means any Person who (i) is referred to as such in Section 5.1 of this
Agreement or has become a Director pursuant to the terms of this Agreement, and (ii) has not ceased
to be a Director pursuant to the terms of this Agreement. Directors mean all such
4
Persons. For purposes of the Act, the Directors shall be deemed to be the managers (as such term is defined
and used in the Act) of the Company.
(o) Dissolution Event shall have the meaning set forth in Section 10.1 hereof.
(p) Effective Date means February 1, 2006.
(q) Facilities shall mean the ethanol production and co-product production facilities in
Indiana or such other location as may be determined by the Directors to be constructed and operated
by the Company pursuant to the business plan.
(r) Financing Closing shall mean the actual closing (execution and delivery of all required
documents) by the Company with its project lender(s) providing for all debt financing, including
senior and subordinated debt and any other project financing characterized by debt obligations and
repayable as debt which is required by the project lender(s) or which is deemed necessary or
prudent in the sole discretion of the Directors.
(s) Fiscal Year means (i) any twelve-month period commencing on January 1 and ending on
December 31 and (ii) the period commencing on the immediately preceding January 1 and ending on the
date on which all Property is distributed to the Unit Holders pursuant to Section 10 hereof, or, if
the context requires, any portion of a Fiscal Year for which an allocation of Profits or Losses or
a distribution is to be made. The Directors may establish a different Fiscal Year by a resolution
approved by the affirmative vote of a majority of the Directors so long as the Fiscal Year chosen
is not contrary to the Code or any provision of any state or local tax law.
(t) GAAP means generally accepted accounting principles in effect in the United States of
America from time to time.
(u) Gross Asset Value means with respect to any asset, the assets adjusted basis for
federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset
contributed by a Member to the Company shall be the gross fair market value of such asset, as
determined by the Directors provided that the initial Gross Asset Values of the assets contributed
to the Company pursuant to Section 2.1 hereof shall be as set forth in such section; (ii) The Gross
Asset Values of all Company assets shall be adjusted to equal their respective gross fair market
values (taking Code Section 7701(g) into account), as determined by the Directors as of the
following times: (A) the acquisition of an additional interest in the Company by any new or
existing Member in exchange for more than a de minimis Capital Contribution; (B) the distribution
by the Company to a Member of more than a de minimis amount of Company property as consideration
for an interest in the Company; and (C) the liquidation of the Company within the meaning of
Regulations Section 1.704-1(b)(2)(ii)(g), provided that an adjustment described in clauses (A) and
(B) of this paragraph shall be made only if the Directors reasonably
determine that such adjustment is necessary to reflect the relative economic interests of the
Members in the Company; (iii) The Gross Asset Value of any item of Company assets distributed to
any Member shall be adjusted to equal the gross fair market value (taking Code Section 7701(g) into
account) of such asset on the date of distribution as determined by the
5
Directors; and (iv) The
Gross Asset Values of Company assets shall be increased (or decreased) to reflect any adjustments
to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but
only to the extent that such adjustments are taken into account in determining Capital Accounts
pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and subparagraph (vi) of the definition of
Profits and Losses or Section 3.3(c) hereof; provided, however, that Gross Asset Values shall
not be adjusted pursuant to this subparagraph (iv) to the extent that an adjustment pursuant to
subparagraph (ii) is required in connection with a transaction that would otherwise result in an
adjustment pursuant to this subparagraph (iv). If the Gross Asset Value of an asset has been
determined or adjusted pursuant to subparagraph (ii) or (iv), such Gross Asset Value shall
thereafter be adjusted by the Depreciation taken into account with respect to such asset, for
purposes of computing Profits and Losses.
(v) Issuance Items has the meaning set forth in Section 3.3(h) hereof.
(w) Liquidation Period has the meaning set forth in Section 10.6 hereof.
(x) Liquidator has the meaning set forth in Section 10.8 hereof.
(y) Losses has the meaning set forth in the definition of Profits and Losses.
(z) Member means any Person (i) whose name is set forth as such on Exhibit A initially
attached hereto or has become a Member pursuant to the terms of this Agreement, and (ii) who is the
owner of one or more Units.
(aa) Members means all such Members.
(bb) Membership Economic Interest means collectively, a Members share of Profits and
Losses, the right to receive distributions of the Companys assets, and the right to information
concerning the business and affairs of the Company provided by the Act. The Membership Economic
Interest of a Member is quantified by the unit of measurement referred to herein as Units.
(cc) Membership Interest means collectively, the Membership Economic Interest and Membership
Voting Interest.
(dd) Membership Register means the membership register maintained by the Company at its
principal office or by a duly appointed agent of the Company setting forth the name, address, the
number of Units, and Capital Contributions of each Member of the Company, which shall be modified
from time to time as additional Units are issued and as Units are transferred pursuant to this
Agreement.
(ee) Membership Voting Interest means collectively, a Members right to vote as set forth in
this Agreement or required by the Act. The Membership Voting Interest of a Member
shall mean as to any matter to which the Member is entitled to vote hereunder or as may be
required under the Act, the right to one (1) vote for each Unit registered in the name of such
Member as shown in the Membership Register.
6
(ff) Net Cash Flow means the gross cash proceeds of the Company less the portion thereof
used to pay or establish reserves for all Company expenses, debt payments, capital improvements,
replacements, and contingencies, all as reasonably determined by the Directors. Net Cash Flow
shall not be reduced by depreciation, amortization, cost recovery deductions, or similar
allowances, but shall be increased by any reductions of reserves previously established.
(gg) Nonrecourse Deductions has the meaning set forth in Section 1.704-2(b)(1) of the
Regulations.
(hh) Nonrecourse Liability has the meaning set forth in Section 1.704-2(b)(3) of the
Regulations.
(ii) Officer or Officers has the meaning set forth in Section 5.18 hereof.
(jj) Permitted Transfer has the meaning set forth in Section 9.2 hereof.
(kk) Person means any individual, partnership (whether general or limited), joint venture,
limited liability company, corporation, trust, estate, association, nominee or other entity.
(ll) Profits and Losses mean, for each Fiscal Year, an amount equal to the Companys taxable
income or loss for such Fiscal Year, determined in accordance with Code Section 703(a) (for this
purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to
Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments
(without duplication): (i) Any income of the Company that is exempt from federal income tax and not
otherwise taken into account in computing Profits or Losses pursuant to this definition of
Profits and Losses shall be added to such taxable income or loss; (ii) Any expenditures of the
Company described in Code Section 705(a)(2)(b) or treated as Code Section 705(a)(2)(b) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in
computing Profits or Losses pursuant to this definition of Profits and Losses shall be
subtracted from such taxable income or loss; (iii) In the event the Gross Asset Value of any
Company asset is adjusted pursuant to subparagraphs (ii) or (iii) of the definition of Gross Asset
Value, the amount of such adjustment shall be treated as an item of gain (if the adjustment
increases the Gross Asset Value of the asset) or an item of loss (if the adjustment decreases the
Gross Asset Value of the asset) from the disposition of such asset and shall be taken into account
for purposes of computing Profits or Losses; (iv) Gain or loss resulting from any disposition of
Property with respect to which gain or loss is recognized for federal income tax purposes shall be
computed by reference to the Gross Asset Value of the Property disposed of, notwithstanding that
the adjusted tax basis of such Property differs from its Gross Asset Value; (v) In lieu of the
depreciation, amortization, and other cost recovery deductions taken into account in computing such
taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year,
computed in accordance with the definition of Depreciation; (vi) To the extent an adjustment to the
adjusted tax basis of any Company asset pursuant to Code Section 734(b) is required, pursuant to
Regulations Section 1.704-(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as a result
of a distribution other than in liquidation of a Unit Holders interest in the Company, the amount
of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of
the asset) or loss (if the adjustment decreases such basis) from the disposition of such asset and
shall
7
be taken into account for purposes of computing Profits or Losses; and (vii) Notwithstanding
any other provision of this definition, any items which are specially allocated pursuant to Section
3.3 and Section 3.4 hereof shall not be taken into account in computing Profits or Losses. The
amounts of the items of Company income, gain, loss or deduction available to be specially allocated
pursuant to Sections 3.3 and Section 3.4 hereof shall be determined by applying rules analogous to
those set forth in subparagraphs (i) through (vi) above.
(mm) Property means all real and personal property acquired by the Company, including cash,
and any improvements thereto, and shall include both tangible and intangible property.
(nn) Regulations means the Income Tax Regulations, including Temporary Regulations,
promulgated under the Code, as such regulations are amended from time to time.
(oo) Regulatory Allocations has the meaning set forth in Section 3.4 hereof.
(pp) Related Party means the adopted or birth relatives of any Person and such Persons
spouse (whether by marriage or common law), if any, including without limitation
great-grandparents, grandparents, parents, children (including stepchildren and adopted children),
grandchildren, and great-grandchildren thereof, and such Persons (and such Persons spouses)
brothers, sisters, and cousins and their respective lineal ancestors and descendants, and any other
ancestors and/or descendants, and any spouse of any of the foregoing, each trust created for the
exclusive benefit of one or more of the foregoing, and the successors, assigns, heirs, executors,
personal representatives and estates of any of the foregoing.
(qq) Securities Act means the Securities Act of 1933, as amended.
(rr) Subsidiary means any corporation, partnership, joint venture, limited liability
company, association or other entity in which such Person owns, directly or indirectly, fifty
percent (50%) or more of the outstanding equity securities or interests, the holders of which are
generally entitled to vote for the election of the board of directors or other governing body of
such entity.
(ss) Tax Matters Member has the meaning set forth in Section 7.4 hereof.
(tt) Transfer means, as a noun, any voluntary or involuntary transfer, sale, pledge or
hypothecation or other disposition and, as a verb, voluntarily or involuntarily to transfer, give,
sell, exchange, assign, pledge, bequest or hypothecate or otherwise dispose of.
(uu) Units or Unit means an ownership interest in the Company representing a Capital
Contribution made as provided in Section 2 in consideration of the Units, including any and all
benefits to which the holder of such Units may be entitled as provided in this Agreement, together
with all obligations of such Person to comply with the terms and provisions of this Agreement.
(vv) Unit Holders means all Unit Holders.
(ww) Unit Holder means the owner of one or more Units.
8
(xx) Unit Holder Nonrecourse Debt has the same meaning as the term partner nonrecourse
debt in Section 1.704-2(b)(4) of the Regulations.
(yy) Unit Holder Nonrecourse Debt Minimum Gain means an amount, with respect to each Unit
Holder Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Unit Holder
Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section
1.704-2(i)(3) of the Regulations.
(zz) Unit Holder Nonrecourse Deductions has the same meaning as the term partner
nonrecourse deductions in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations.
SECTION 2. CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS
2.1
Original Capital Contributions
. The name, original Capital Contribution, and initial
Units quantifying the Membership Interest of each Member are set out in Exhibit A attached hereto,
and shall also be set out in the Membership Register along with those Members admitted after the
Effective Date.
2.2
Additional Capital Contributions; Additional Units
. No Unit Holder shall be obligated
to make any additional Capital Contributions to the Company or to pay any assessment to the
Company, other than any unpaid amounts on such Unit Holders original Capital Contributions, and no
Units shall be subject to any calls, requests or demands for capital. Subject to Section 5.7,
additional Membership Economic Interests quantified by additional Units may be issued in
consideration of Capital Contributions as agreed to between the Directors and the Person acquiring
the Membership Economic Interest quantified by the additional Units. Each Person to whom
additional Units are issued shall be admitted as a Member in accordance with this Agreement. Upon
such Capital Contributions, the Directors shall cause Exhibit A and the Membership Register to be
appropriately amended.
2.3
Capital Accounts
. A Capital Account shall be maintained for each Unit Holder in
accordance with the following provisions:
(a) To each Unit Holders Capital Account there shall be credited (i) such Unit Holders
Capital Contributions; (ii) such Unit Holders distributive share of Profits and any items in the
nature of income or gain which are specially allocated pursuant to Section 3.3 and Section 3.4; and
(iii) the amount of any Company liabilities assumed by such Unit Holder or which are secured by any
Property distributed to such Unit Holder;
(b) To each Unit Holders Capital Account there shall be debited (i) the amount of money and
the Gross Asset Value of any Property distributed to such Unit Holder pursuant to any provision of
this Agreement; (ii) such Unit Holders distributive share of Losses and any items in the nature of
expenses or losses which are specially allocated pursuant to Section 3.3 and 3.4 hereof; and (iii)
the amount of any liabilities of such Unit Holder assumed by the Company or which are secured by
any Property contributed by such Unit Holder to the Company;
9
(c) In the event Units are Transferred in accordance with the terms of this Agreement, the
transferee shall succeed to the Capital Account of the transferor to the extent it relates to the
Transferred Units; and
(d) In determining the amount of any liability for purposes of subparagraphs (a) and (b) above
there shall be taken into account Code Section 752(c) and any other applicable provisions of the
Code and Regulations.
The foregoing provisions and the other provisions of this Agreement relating to the maintenance of
Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be
interpreted and applied in a manner consistent with such Regulations. In the event the Directors
shall determine that it is prudent to modify the manner in which the Capital Accounts, or any
debits or credits thereto (including, without limitation, debits or credits relating to liabilities
which are secured by contributed or distributed property or which are assumed by the Company or any
Unit Holders), are computed in order to comply with such Regulations, the Directors may make such
modification, provided that it is not likely to have a material effect on the amounts distributed
to any Person pursuant to Section 10 hereof upon the dissolution of the Company. The Directors
also shall (i) make any adjustments that are necessary or appropriate to maintain equality between
the Capital Accounts of the Unit Holders and the amount of capital reflected on the Companys
balance sheet, as computed for book purposes, in accordance with Regulations Section
1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events
might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b).
SECTION 3. ALLOCATIONS
3.1
Profits
. After giving effect to the special allocations in Section 3.3 and Section 3.4
hereof, Profits for any Fiscal Year shall be allocated among the Unit Holders in proportion to
Units held.
3.2
Losses
. After giving effect to the special allocations in Section 3.3 and 3.4 hereof,
Losses for any Fiscal Year shall be allocated among the Unit Holders in proportion to Units held.
3.3
Special Allocations
. The following special allocations shall be made in the following
order:
(a) Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(f) of the
Regulations, notwithstanding any other provision of this Section 3, if there is a net decrease in
Company Minimum Gain during any Fiscal Year, each Unit Holder shall be specially allocated items of
Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an
amount equal to such Unit Holders share of the net decrease in Company Minimum Gain, determined in
accordance with Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence
shall be made in proportion to the respective amounts required to be allocated to each Unit Holder
pursuant thereto. The items to be so allocated shall be determined in accordance with sections
1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This
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Section 3.3(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f)
of the Regulations and shall be
interpreted consistently therewith.
(b) Unit Holder Minimum Gain Chargeback. Except as otherwise provided in Section
1.704-2(i)(4) of the Regulations, notwithstanding any other provision of this Section 3, if there
is a net decrease in Unit Holder Nonrecourse Debt Minimum Gain attributable to a Unit Holder
Nonrecourse Debt during any Fiscal Year, each Unit Holder who has a share of the Unit Holder
Nonrecourse Debt Minimum Gain attributable to such Unit Holder Nonrecourse Debt, determined in
accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of
Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an
amount equal to such Unit Holders share of the net decrease in Unit Holder Nonrecourse Debt
Minimum Gain, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations
pursuant to the previous sentence shall be made in proportion to the respective amounts required to
be allocated to each Unit Holder pursuant thereto. The items to be so allocated shall be
determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations. This
Section 3.3(b) is intended to comply with the minimum gain chargeback requirement in Section
1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith.
(c) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments,
allocations, or distributions described in Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6) of the Regulations, items of Company income and
gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate,
to the extent required by the Regulations, the Adjusted Capital Account Deficit as soon as
practicable, provided that an allocation pursuant to this Section 3.3(c) shall be made only if and
to the extent that the Member would have an Adjusted Capital Account Deficit after all other
allocations provided for in this Section 3 have been tentatively made as if this Section 3.3(c)
were not in the Agreement.
(d) Gross Income Allocation. In the event any Member has a deficit Capital Account at the end
of any Fiscal Year which is in excess of the sum of (i) the amount such Member is obligated to
restore pursuant to any provision of this Agreement; and (ii) the amount such Member is deemed to
be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and
1.704-2(i)(5) of the Regulations, each such Member shall be specially allocated items of Company
income and gain in the amount of such excess as quickly as possible, provided that an allocation
pursuant to this Section 3.3(d) shall be made only if and to the extent that such Member would have
a deficit Capital Account in excess of such sum after all
other allocations provided for in this Section 3 have been made as if Section 3.3(c) and this
Section 3.3(d) were not in this Agreement.
(e) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Year or other period shall
be specially allocated among the Members in proportion to Units held.
(f) Unit Holder Nonrecourse Deductions. Any Unit Holder Nonrecourse Deductions for any Fiscal
Year shall be specially allocated to the Unit Holder who bears the economic risk
11
of loss with respect to the Unit Holder Nonrecourse Debt to which such Unit Holder Nonrecourse Deductions are
attributable in accordance with Regulations Section 1.704-2(i)(1).
(g) Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any
Company asset, pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to
Regulations Section 1.704-1(b)(2)(iv)(m)(2) or 1.704-1(b)(2)(iv)(m)(4), to be taken into account in
determining Capital Accounts as the result of a distribution to a Unit Holder in complete
liquidation of such Unit Holders interest in the Company, the amount of such adjustment to Capital
Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset)
or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated
to the Unit Holders in accordance with their interests in the Company in the event Regulations
Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Unit Holder to whom such distribution was made
in the event Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies.
(h) Allocations Relating to Taxable Issuance of Company Units. Any income, gain, loss or
deduction realized as a direct or indirect result of the issuance of Units by the Company to a Unit
Holder (the Issuance Items) shall be allocated among the Unit Holders so that, to the extent
possible, the net amount of such Issuance Items, together with all other allocations under this
Agreement to each Unit Holder shall be equal to the net amount that would have been allocated to
each such Unit Holder if the Issuance Items had not been realized.
3.4
Curative Allocations
. The allocations set forth in Sections 3.3(a), 3.3(b), 3.3(c),
3.3(d), 3.3(e), 3.3(f), 3.3(g) and 3.5 (the Regulatory Allocations) are intended to comply with
certain requirements of the Regulations. It is the intent of the Members that, to the extent
possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or
with special allocations of other items of Company income, gain, loss or deduction pursuant to this
Section 3.4. Therefore, notwithstanding any other provision of this Section 3 (other than the
Regulatory Allocations), the Directors shall make such offsetting special allocations of Company
income, gain, loss or deduction in whatever manner it determines appropriate so that, after such
offsetting allocations are made, each Members Capital Account balance is, to the extent possible,
equal to the Capital Account balance such Member would have had if the Regulatory Allocations were
not part of the Agreement and all Company items were allocated pursuant to Sections 3.1, 3.2, and
3.3(h).
3.5
Loss Limitation
. Losses allocated pursuant to Section 3.2 hereof shall not exceed the
maximum amount of Losses that can be allocated without causing any Unit Holder to have an Adjusted
Capital Account Deficit at the end of any Fiscal Year. In the event some but not all of the Unit
Holders would have Adjusted Capital Account Deficits as a consequence of an allocation of Losses
pursuant to Section 3.2 hereof, the limitation set forth in this Section 3.5
shall be applied on a Unit Holder by Unit Holder basis and Losses not allocable to any Unit Holder
as a result of such limitation shall be allocated to the other Unit Holders in accordance with the
positive balances in such Unit Holders Capital Accounts so as to allocate the maximum permissible
Losses to each Unit Holder under Section 1.704-1(b)(2)(ii)(d) of the Regulations.
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3.6
Other Allocation Rules
.
(a) For purposes of determining the Profits, Losses, or any other items allocable to any
period, Profits, Losses, and any such other items shall be determined on a daily, monthly, or other
basis, as determined by the Directors using any permissible method under Code Section 706 and the
Regulations thereunder.
(b) The Unit Holders are aware of the income tax consequences of the allocations made by this
Section 3 and hereby agree to be bound by the provisions of this Section 3 in reporting their
shares of Company income and loss for income tax purposes.
(c) Solely for purposes of determining a Unit Holders proportionate share of the excess
nonrecourse liabilities of the Company within the meaning of Regulations Section 1.752-3(a)(3),
the Unit Holders aggregate interests in Company profits shall be deemed to be as provided in the
capital accounts. To the extent permitted by Section 1.704-2(h)(3) of the Regulations, the
Directors shall endeavor to treat distributions of Net Cash Flow as having been made from the
proceeds of a Nonrecourse Liability or a Unit Holder Nonrecourse Debt only to the extent that such
distributions would cause or increase an Adjusted Capital Account Deficit for any Unit Holder.
(d) Allocations of Profits and Losses to the Unit Holders shall be allocated among them in the
ratio which each Unit Holders Units bears to the total number of Units issued and outstanding.
3.7
Tax Allocations: Code Section 704(c).
In accordance with Code Section 704(c) and the
Regulations thereunder, income, gain, loss, and deduction with respect to any Property contributed
to the capital of the Company shall, solely for tax purposes, be allocated among the Unit Holders
so as to take account of any variation between the adjusted basis of such Property to the Company
for federal income tax purposes and its initial Gross Asset Value (computed in accordance with the
definition of Gross Asset Value). In the event the Gross Asset Value of any Company asset is
adjusted pursuant to subparagraph (ii) of the definition of Gross Asset Value, subsequent
allocations of income, gain, loss, and deduction with respect to such asset shall take account of
any variation between the adjusted basis of such asset for federal income tax purposes and its
Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder.
Any elections or other decisions relating to such allocations shall be made by the Directors in any
manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant
to this Section 3.7 are solely for purposes of federal, state, and local taxes and shall not
affect, or in any way be taken into account in computing, any Unit Holders Capital Account or share of Profits,
Losses, other items, or distributions pursuant to any provision of this Agreement.
3.8
Tax Credit Allocations
. All credits against income tax with respect to the Companys
property or operations shall be allocated among the Members in accordance with their respective
membership interests in the Company for the Fiscal Year during which the expenditure, production,
sale, or other event giving rise to the credit occurs. This Section 3.8 is intended to comply with
the applicable tax credit allocation principles of section 1.704-1(b)(4)(ii) of the Regulations and
shall be interpreted consistently therewith.
13
SECTION 4. DISTRIBUTIONS
4.1.
Net Cash Flow
. The Directors, in their discretion, shall make distributions of Net
Cash Flow, if any, to the Members. Except as otherwise provided in Section 10 hereof, Net Cash
Flow, if any, shall be distributed to the Unit Holders in proportion to Units held subject to, and
to the extent permitted by, any loan covenants or restrictions on such distributions agreed to by
the Company in any loan agreements with the Companys lenders from time to time in effect. In
determining Net Cash Flow, the Directors shall endeavor to provide for cash distributions at such
times and in such amounts as will permit the Unit Holders to make timely payment of income taxes.
4.2.
Amounts Withheld
. All amounts withheld pursuant to the Code or any provision of any
state, local or foreign tax law with respect to any payment, distribution or allocation to the
Company or the Unit Holders shall be treated as amounts paid or distributed, as the case may be, to
the Unit Holders with respect to which such amount was withheld pursuant to this Section 4.2 for
all purposes under this Agreement. The Company is authorized to withhold from payments and
distributions, or with respect to allocations, to the Unit Holders and to pay over to any federal,
state and local government or any foreign government, any amounts required to be so withheld
pursuant to the Code or any provisions of any other federal, state or local law or any foreign law,
and shall allocate any such amounts to the Unit Holders with respect to which such amount was
withheld.
4.3.
Limitations on Distributions
. The Company shall make no distributions to the Unit
Holders except as provided in this Section 4 and Section 10 hereof. Notwithstanding any other
provision, no distribution shall be made if it is not permitted to be made under the Act.
SECTION 5. MANAGEMENT
5.1.
Directors
. Except as otherwise provided in this Agreement, the Directors shall direct
the business and affairs of the Company, and shall exercise all of the powers of the Company except
such powers as are by this Agreement conferred upon or reserved to the Members. The Directors
shall adopt such policies, rules, regulations, and actions not inconsistent with law or this
Agreement as they may deem advisable. Subject to Section 5.7 hereof or any other express
provisions hereof, the business and affairs of the Company shall be managed by or under the
direction of the Directors and not by its Members. It is not necessary
that an individual be a Member of the Company in order to serve as a Director hereunder. The
amendment or repeal of this section or the adoption of any provision inconsistent therewith shall
require the approval of a majority of the total Membership Voting Interests entitled to vote under
the terms of this Agreement.
5.2.
Number of Total Directors
. The total number of initial Directors of the Company shall
be a minimum of 12 and a maximum of 35. Prior to the expiration of the initial terms of the
Directors, the initial Directors, by resolution approved by the majority vote of the initial
Directors, shall fix the total number of Directors, which shall be a minimum of 7 and a maximum of
9, that will serve following the first special or annual meeting of the Members following the date
on which substantial operations of the Facilities commence. The number of Directors shall
14
be increased by the appointment of additional Directors, if any, pursuant to section 5.3(c) below. At
any annual or special meeting, the Members may increase or decrease this fixed number of Directors
last approved and may change from a fixed number to a variable range or visa versa by majority vote
of the total Membership Voting Interests entitled to vote pursuant to this Agreement. However, the
relative ratio of the number of Directors elected pursuant to section 5.3(a) below to Directors
appointed pursuant to section 5.3(c) below shall always result in a majority of elected Directors.
5.3.
Election of Directors
.
(a)
Election of Directors and Terms
. The initial Directors shall be appointed by the
initial Members and shall include the individuals set forth on Exhibit B attached hereto. The
initial Directors shall serve until the first special or annual meeting of the Members following
the date on which substantial operations of the Facilities commence, and in all cases until a
successor is elected and qualified, or until the earlier death, resignation, removal or
disqualification of any such Director. After the expiration of the initial terms of the Directors,
at the first special or annual meeting of the Members following the date on which substantial
operations of the Facilities commence, and at each annual meeting of the Members thereafter,
Directors shall be elected by the Members for staggered terms of three (3) years and until a
successor is elected and qualified; provided however, that any Member who is authorized to appoint
a Director pursuant to Section 5.3(c) shall not be entitled to vote for the election of any other
Directors that the Members are entitled to elect, and the Units held by such Member shall not be
included in determining a plurality of the Membership Voting Interests for purposes of electing
Directors. Prior to the expiration of their initial terms, the initial Directors shall, by
resolution approved by a majority vote of the initial Directors, separately identify the Director
positions to be elected and so classify each such Director position as Group I, Group II, or Group
III, with such classification to serve as the basis for the staggering of terms among the elected
Directors. The terms of Group I Directors shall expire first (initial term of one year with
successors elected to three year terms thereafter), followed by those of Group II Directors
(initial term of two years with successors elected to three year terms thereafter), and then Group
III Directors (initial and subsequent terms of three years). Except for the special right of
appointment of certain Directors as provided in subsection (c) hereof, Directors shall be elected
by a plurality vote of the Membership Voting Interests so that the nominees receiving the greatest
number of votes relative to all other nominees are elected as Directors.
(b)
Nominations for Directors
. One or more nominees for Director positions up for
election shall be named by the then current Directors or by a nominating committee established by
the Directors. Nominations for the election of Directors may also be made by any Member entitled
to vote generally in the election of Directors. However, any Member that intends to nominate one
or more persons for election as Directors at a meeting may do so only if written notice of such
Members intent to make such nomination or nominations has been given, either by personal delivery
or by United States mail, postage prepaid, to the Secretary of the Company not less than one
hundred twenty (120) calendar days prior to the one year anniversary of the date on which the
Company delivered the prior years proxy statement or notice of annual meeting to Members. Provided, however, that for the first election of Directors, such notice shall be delivered not
less that thirty (30) days prior to the date of the date of the special or annual
15
meeting of the
Members at which the election will be held . Each such notice to the Secretary shall set forth:
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(i)
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the name and address of record of the Member who intends to
make the nomination;
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(ii)
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a representation that the Member is a holder of record of Units
of the Company entitled to vote at such meeting and intends to appear in person
or by proxy at the meeting to nominate the person or persons specified in the
notice;
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(iii)
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the name, age, business and residence addresses, and principal
occupation or employment of each nominee;
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(iv)
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a description of all arrangements or understandings between the
Member and each nominee and any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are to be made by the
Members;
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(v)
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such other information regarding each nominee proposed by such
Member as would be required to be included in a proxy statement filed pursuant
to the proxy rules of the Securities and Exchange Commission;
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(vi)
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the consent of each nominee to serve as a Director of the
Company if so elected; and
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(vii)
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a nominating petition signed and dated by the holders of at
least five percent (5%) of the then outstanding Units and clearly setting forth
the proposed nominee as a candidate of the Directors seat to be filled at the
next election of Directors.
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The Company may require any proposed nominee to furnish such other information as may reasonably be
required by the Company to determine the eligibility of such proposed nominee to serve as a
Director of the Company. The presiding Officer of the meeting may, if the facts warrant, determine
that a nomination was not made in accordance with the foregoing procedures, and if he should so
determine, he shall so declare to the meeting and the defective nomination shall be disregarded.
The amendment or repeal of this Section or the adoption of any provision inconsistent therewith
shall require the approval of a majority of the total Membership Voting Interests entitled to vote
pursuant to this Agreement. Whenever a vacancy occurs other than from expiration of a term of
office or removal from office, a majority of the remaining Directors shall appoint a new Director
to fill the vacancy for the remainder of such term.
(c)
Special Right of Appointment of Directors for Certain Members
. Commencing on a
date within thirty (30) days following the Financing Closing, each Member who holds Four Hundred
(400) or more Units, all of which were purchased by such Member from the Company during its initial
public offering of equity securities filed with the Securities and Exchange Commission, shall be
deemed an Appointing Member and shall be entitled to appoint one (1) Director, so long as the
Appointing Member is the holder of Four Hundred (400) Units. Units held by an Affiliate or Related
Party of a Member shall be included in the determination of whether the Member holds the requisite
number of Units for purposes of this section and shall, together, be limited to the appointment of
one (1) Director, regardless of the number of Units held by that Member, Affiliate or Related
Party. Only Members who hold the requisite Four
16
Hundred (400) or more Units are granted appointment rights hereunder. Accordingly, any Member who purchases Units that equal or exceed
Four Hundred (400) Units other than those offered by the Company during the Companys initial
public offering of equity securities filed with the Securities and Exchange Commission, shall not
be entitled to appoint any Directors, regardless of the amount of Units purchased by such Member.
A Director appointed by a Member under this section shall serve indefinitely at the pleasure of the
Member appointing him or her until a successor is appointed, or until the earlier death,
resignation, or removal of the Director. Any Director appointed under this section may be removed
for any reason by the Member appointing him or her, upon written notice to the Board of Directors,
which notice may designate and appoint a successor Director to fill the vacancy, and which notice
may be given at a meeting of the Board of Directors attended by the person appointed to fill the
vacancy. Any such vacancy shall be filled within thirty days of its occurrence by the Member
having the right of appointment. In the event that the number of Units held by an Appointing
Member falls below the threshold of Four Hundred (400) Units, the term of any Director appointed by
such Member shall terminate, the seat will dissolve, and the Member shall elect Directors
collectively with the other Members in accordance with Section 5.3(a). In the event that an
Appointing Member transfers such Units, the appointment rights shall not transfer with the Units,
but shall expire upon the date of transfer unless said transfer is to an Affiliate or Related Party
of the Appointing Member.
5.4.
Committees
. A resolution approved by the affirmative vote of a majority of the
Directors may establish committees having the authority of the Directors in the management of the
business of the Company to the extent consistent with this Agreement and provided in the
resolution. A committee shall consist of one or more persons, who need not be Directors, appointed
by affirmative vote of a majority of the Directors present. Committees may include a compensation
committee and/or an audit committee, in each case consisting of one or more independent Directors
or other independent persons. Committees are subject to the direction and control of the Directors
and vacancies in the membership thereof shall be filled by the Directors. A majority of the
members of the committee present at a meeting is a quorum for the transaction of business, unless a
larger or smaller proportion or number is provided in a resolution approved by the affirmative vote
of a majority of the Directors present.
5.5.
Authority of Directors
. Subject to the limitations and restrictions set forth in this
Agreement, the Directors shall direct the management of the business and affairs of the Company and
shall have all of the rights and powers which may be possessed by a manager under the Act
including, without limitation, the right and power to do or perform the following and, to the extent permitted by the Act or this Agreement, the further
right and power by resolution of the Directors to delegate to the Officers or such other Person or
Persons to do or perform the following:
(a) Conduct its business, carry on its operations and have and exercise the powers granted by
the Act in any state, territory, district or possession of the United States, or in any foreign
country which may be necessary or convenient to effect any or all of the purposes for which it is
organized;
(b) Acquire by purchase, lease, or otherwise any real or personal property which may be
necessary, convenient, or incidental to the accomplishment of the purposes of the Company;
17
(c) Operate, maintain, finance, improve, construct, own, grant operations with respect to,
sell, convey, assign, mortgage, and lease any real estate and any personal property necessary,
convenient, or incidental to the accomplishment of the purposes of the Company;
(d) Execute any and all agreements, contracts, documents, certifications, and instruments
necessary or convenient in connection with the management, maintenance, and operation of the
business, or in connection with managing the affairs of the Company, including, executing
amendments to this Agreement and the Articles in accordance with the terms of this Agreement, both
as Directors and, if required, as attorney-in-fact for the Members pursuant to any power of
attorney granted by the Members to the Directors;
(e) Borrow money and issue evidences of indebtedness necessary, convenient, or incidental to
the accomplishment of the purposes of the Company, and secure the same by mortgage, pledge, or
other lien on any Company assets;
(f) Execute, in furtherance of any or all of the purposes of the Company, any deed, lease,
mortgage, deed of trust, mortgage note, promissory note, bill of sale, contract, or other
instrument purporting to convey or encumber any or all of the Company assets;
(g) Prepay in whole or in part, refinance, recast, increase, modify, or extend any liabilities
affecting the assets of the Company and in connection therewith execute any extensions or renewals
of encumbrances on any or all of such assets;
(h) Care for and distribute funds to the Members by way of cash income, return of capital, or
otherwise, all in accordance with the provisions of this Agreement, and perform all matters in
furtherance of the objectives of the Company or this Agreement;
(i) Contract on behalf of the Company for the employment and services of employees and/or
independent contractors, such as lawyers and accountants, and delegate to such Persons the duty to
manage or supervise any of the assets or operations of the Company;
(j) Engage in any kind of activity and perform and carry out contracts of any kind (including
contracts of insurance covering risks to Company assets and Directors and Officers liability)
necessary or incidental to, or in connection with, the accomplishment of the purposes of
the Company, as may be lawfully carried on or performed by a limited liability company under
the laws of each state in which the Company is then formed or qualified;
(k) Take, or refrain from taking, all actions, not expressly proscribed or limited by this
Agreement, as may be necessary or appropriate to accomplish the purposes of the Company;
(l) Institute, prosecute, defend, settle, compromise, and dismiss lawsuits or other judicial
or administrative proceedings brought on or in behalf of, or against, the Company, the Members or
the Directors or Officers in connection with activities arising out of, connected with, or
incidental to this Agreement, and to engage counsel or others in connection therewith;
18
(m) Purchase, take, receive, subscribe for or otherwise acquire, own, hold, vote, use, employ,
sell, mortgage, lend, pledge, or otherwise dispose of, and otherwise use and deal in and with,
shares or other interests in or obligations of domestic or foreign corporations, associations,
general or limited partnerships, other limited liability companies, or individuals or direct or
indirect obligations of the United States or of any government, state, territory, government
district or municipality or of any instrumentality of any of them;
(n) Agree with any Person as to the form and other terms and conditions of such Persons
Capital Contribution to the Company and cause the Company to issue Membership Economic Interests
and Units in consideration of such Capital Contribution; and
(o) Indemnify a Member or Directors or Officers, or former Members or Directors or Officers,
and to make any other indemnification that is authorized by this Agreement in accordance with, and
to the fullest extent permitted by, the Act.
5.6.
Director as Agent
. Notwithstanding the power and authority of the Directors to manage
the business and affairs of the Company, no Director shall have authority to act as agent for the
Company for the purposes of its business (including the execution of any instrument on behalf of
the Company) unless the Directors have authorized the Director to take such action. The Directors
may also delegate authority to manage the business and affairs of the Company (including the
execution of instruments on behalf of the Company) to such Person or Persons (including to any
Officers) designated by the Directors, and such Person or Persons (or Officers) shall have such
titles and authority as determined by the Directors.
5.7.
Restrictions on Authority of Directors
.
(a) The Directors shall not have authority to, and they covenant and agree that they shall
not, do any of the following acts without the unanimous consent of the Members:
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(i)
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Cause or permit the Company to engage in any activity that is
not consistent with the purposes of the Company as set forth in Section 1.3
hereof;
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(ii)
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Knowingly do any act in contravention of this Agreement or
which would make it impossible to carry on the ordinary business of the
Company, except as otherwise provided in this Agreement;
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(iii)
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Possess Company Property, or assign rights in specific Company
Property, for other than a Company purpose; or
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(iv)
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Cause the Company to voluntarily take any action that would
cause a bankruptcy of the Company. Notwithstanding the foregoing, the
Directors of the Company may, subject to Section 10 hereof, declare bankruptcy
or cause the Company to proceed to Chapter 11 reorganization if deemed
necessary as a result of the financial condition of the Company.
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(b) The Directors shall not have authority to, and they covenant and agree that they shall not
cause the Company to, without the consent of a majority of the Membership Voting Interests:
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(i)
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Merge, consolidate, exchange or otherwise dispose of at one
time all or substantially all of the Property, except for a liquidating sale of
the Property in connection with the dissolution of the Company;
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(ii)
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Confess a judgment against the Company in an amount in excess
of $500,000;
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(iii)
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Issue Units at a purchase price of less than $1,666.66 per
Unit. Notwithstanding the foregoing, the Directors shall have the authority to
issue Units below the purchase price as compensation for services rendered for
the Company or for any other compensation purpose;
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(iv)
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Issue more than an aggregate of 25,000 Units; and
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(v)
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Cause the Company to acquire any equity or debt securities of
any Director or any of its Affiliates, or otherwise make loans to any Director
or any of its Affiliates.
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The actions specified herein as requiring the consent of the Members shall be in addition to any
actions by the Director that are specified in the Act as requiring the consent or approval of the
Members. Any such required consent or approval may be given by an affirmative vote of a majority
of the total Membership Voting Interests entitled to vote pursuant to this Agreement.
5.8.
Director Meetings and Notice
. Meetings of the Directors shall be held at such times
and places as shall from time to time be determined by the Directors. Meetings of the Directors
may also be called by the Chairman of the Company or by any two or more Directors. If the date,
time, and place of a meeting of the Directors has been announced at a previous meeting, no notice
shall be required. In all other cases, five (5) days written notice of meetings, stating the
date, time, and place thereof and any other information required by law or desired by the Person(s) calling such meeting, shall be given to each Director.
Any Director may waive notice of any meeting. A waiver of notice by a Director is effective
whether given before, at, or after the meeting, and whether given orally, in writing, or by
attendance. The attendance of a Director at any meeting shall constitute a waiver of notice of
such meeting, unless such Director objects at the beginning of the meeting to the transaction of
business on the grounds that the meeting is not lawfully called or convened and does not
participate thereafter in the meeting.
5.9.
Action Without a Meeting
. Any action required or permitted to be taken by the
Directors may also be taken by a written action signed by one hundred percent (100%) of all
Directors authorized to vote on the matter as provided by this Agreement, provided that a copy of
such written action shall be promptly given to all such Directors. The Directors may participate
in any meeting of the Directors by means of telephone conference or similar means of communication
by which all persons participating in the meeting can simultaneously hear each other.
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5.10.
Quorum; Manner of Acting
. Not less than fifty percent (50%) of the Directors
authorized to vote on a matter as provided by this Agreement shall constitute a quorum for the
transaction of business at any Directors meeting. Each Director shall have one (1) vote at
meetings of the Directors. The Directors shall take action by the vote of a majority of the number
of Directors constituting a quorum as provided by this Agreement. Voting by proxy or by mail
ballot shall be permitted on any matter presented for a vote at any Directors meeting held after
substantial operations of the Facilities commence; provided, however, that a Director may not vote
by proxy or by mail ballot more than two times per calendar year. All such proxies shall be in
writing and filed with the Companys Secretary prior to or at the time of the meeting.
5.11.
Voting; Potential Financial Interest
. No Director shall be disqualified from voting
on any matter to be determined or decided by the Directors solely by reason of such Directors (or
his/her Affiliates) potential financial interest in the outcome of such vote, provided that the
nature of such Directors (or his/her Affiliates) potential financial interest was reasonably
disclosed at the time of such vote.
5.12.
Duties and Obligations of Directors
. The Directors shall cause the Company to
conduct its business and operations separate and apart from that of any Director or any of its
Affiliates. The Directors shall take all actions which may be necessary or appropriate (i) for the
continuation of the Companys valid existence as a limited liability company under the laws of the
State of Indiana and each other jurisdiction in which such existence is necessary to protect the
limited liability of Members or to enable the Company to conduct the business in which it is
engaged, and (ii) for the accomplishment of the Companys purposes, including the acquisition,
development, maintenance, preservation, and operation of Company Property in accordance with the
provisions of this Agreement and applicable laws and regulations. Each Director shall have the
duty to discharge the foregoing duties in good faith, in a manner the Director believes to be in
the best interests of the Company, and with the care an ordinarily prudent person in a like
position would exercise under similar circumstances. The Directors shall be under no other
fiduciary duty to the Company or the Members to conduct the affairs of the Company in a particular
manner.
5.13.
Chairman and Vice Chairman
. Unless provided otherwise by a resolution adopted by the
Directors, the Chairman shall preside at meetings of the Members and the Directors; shall see that
all orders and resolutions of the Directors are carried into effect; may maintain records of and
certify proceedings of the Directors and Members; and shall perform such other duties as may from
time to time be prescribed by the Directors. The Vice Chairman shall, in the absence or disability
of the Chairman, perform the duties and exercise the powers of the Chairman and shall perform such
other duties as the Directors or the Chairman may from time to time prescribe. The Directors may
designate more than one Vice Chairmen, in which case the Vice Chairmen shall be designated by the
Directors so as to denote which is most senior in office.
5.14.
President and Chief Executive Officer
. Until provided otherwise by a resolution of
the Directors, the Chairman shall also act as the interim President and CEO of the Company (herein
referred to as the President; the titles of President and CEO shall constitute a reference to one
and the same office and Officer of the Company), and the Chairman may exercise the duties of the
office of Chairman using any such designations. The Directors shall appoint someone other than the
Chairman as the President and CEO of the Company not later than the commencement
21
of substantial operations of the Facilities, and such President shall perform such duties as the Directors may
from time to time prescribe, including without limitation, the management of the day-to-day
operations of the Facilities.
5.15.
Chief Financial Officer
. Unless provided otherwise by a resolution adopted by the
Directors, the Chief Financial Officer of the Company shall be the Treasurer of the Company and
shall keep accurate financial records for the Company; shall deposit all monies, drafts, and checks
in the name of and to the credit of the Company in such banks and depositories as the Directors
shall designate from time to time; shall endorse for deposit all notes, checks, and drafts received
by the Company as ordered by the Directors, making proper vouchers therefore; shall disburse
Company funds and issue checks and drafts in the name of the Company as ordered by the Directors,
shall render to the President and the Directors, whenever requested, an account of all such
transactions as Chief Financial Officer and of the financial condition of the Company, and shall
perform such other duties as may be prescribed by the Directors or the President from time to time.
5.16.
Secretary; Assistant Secretary
. The Secretary shall attend all meetings of the
Directors and of the Members and shall maintain records of, and whenever necessary, certify all
proceedings of the Directors and of the Members. The Secretary shall keep the required records of
the Company, when so directed by the Directors or other person or person authorized to call such
meetings, shall give or cause to be given notice of meetings of the Members and of meetings of the
Directors, and shall also perform such other duties and have such other powers as the Chairman or
the Directors may prescribe from time to time. An Assistant Secretary, if any, shall perform the
duties of the Secretary during the absence or disability of the Secretary.
5.17.
Vice President
. The Company may have one or more Vice Presidents. If more than one,
the Directors shall designate which is most senior. The most senior Vice President shall perform
the duties of the President in the absence of the President.
5.18.
Delegation
. Unless prohibited by a resolution of the Directors, the President, Chief
Financial Officer, Vice President and Secretary (individually, an Officer and collectively,
Officers) may delegate in writing some or all of the duties and powers of such Officers
management position to other Persons. An Officer who delegates the duties or powers of an office
remains subject to the standard of conduct for such Officer with respect to the discharge of all
duties and powers so delegated.
5.19.
Execution of Instruments
. All deeds, mortgages, bonds, checks, contracts and other
instruments pertaining to the business and affairs of the Company shall be signed on behalf of the
Company by (i) the Chairman; or (ii) when authorized by resolutions(s) of the Directors, the
President; or (iii) by such other person or persons as may be designated from time to time by the
Directors.
5.20.
Limitation of Liability; Indemnification of Directors
. To the maximum extent
permitted under the Act and other applicable law, no Member, Director or Officer of this Company
shall be personally liable for any debt, obligation or liability of this Company merely by reason
of being a Member, Director, Officer or all of the foregoing. No Director or Officer of this
Company shall be personally liable to this Company or its Members for monetary damages for a breach
of
22
fiduciary duty by such Director or Officer; provided that this provision shall not eliminate or
limit the liability of a Director or Officer for any of the following: (i) for any breach of the
duty of loyalty to the Company or its Members; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of law; or (iii) for a transaction from
which the Director or Officer derived an improper personal benefit or a wrongful distribution in
violation of Section 807 of the Act. To the maximum extent permitted under the Act and other
applicable law, the Company, its receiver, or its trustee (in the case of its receiver or trustee,
to the extent of Company Property) shall indemnify, save and hold harmless, and pay all judgments
and claims against each Director or Officer relating to any liability or damage incurred by reason
of any act performed or omitted to be performed by such Director, or Officer, in connection with
the business of the Company, including reasonable attorneys fees incurred by such Director in
connection with the defense of any action based on any such act or omission, which attorneys fees
may be paid as incurred, including all such liabilities under federal and state securities laws as
permitted by law. To the maximum extent permitted under the Act and other applicable law, in the
event of any action by a Unit Holder against any Director or Officer, including a derivative suit,
the Company shall indemnify, save harmless, and pay all costs, liabilities, damages and expenses of
such Director or Officer, including reasonable attorneys fees incurred in the defense of such
action. Notwithstanding the foregoing provisions, no Director or Officer shall be indemnified by
the Company to the extent prohibited or limited (but only to the extent limited) by the Act. The
Company may purchase and maintain insurance on behalf of any Person in such Persons official
capacity against any liability asserted against and incurred by such Person in or arising from that
capacity, whether or not the Company would otherwise be required to indemnify the Person against
the liability.
5.21.
Compensation; Expenses of Directors
. No Member or Director shall receive any salary,
fee, or draw for services rendered to or on behalf of the Company merely by virtue of their status
as a Member or Director, it being the intention that, irrespective of any personal interest of any
of the Directors, the Directors shall have authority to establish reasonable compensation of all Directors for
services to the Company as Directors, Officers, or otherwise. Except as otherwise approved by or
pursuant to a policy approved by the Directors, no Member or Director shall be reimbursed for any
expenses incurred by such Member or Director on behalf of the Company. Notwithstanding the
foregoing, by resolution by the Directors, the Directors may be paid as reimbursement therefor,
their expenses, if any, of attendance at each meeting of the Directors. In addition, the
Directors, by resolution, may approve from time to time, the salaries and other compensation
packages of the Officers of the Company.
5.22.
Loans
. Any Member or Affiliate may, with the consent of the Directors, lend or
advance money to the Company. If any Member or Affiliate shall make any loan or loans to the
Company or advance money on its behalf, the amount of any such loan or advance shall not be treated
as a contribution to the capital of the Company but shall be a debt due from the Company. The
amount of any such loan or advance by a lending Member or Affiliate shall be repayable out of the
Companys cash and shall bear interest at a rate not in excess of the prime rate established, from
time to time, by any major bank selected by the Directors for loans to its most creditworthy
commercial borrowers, plus four percent (4%) per annum. If a Director, or any Affiliate of a
Director, is the lending Member, the rate of interest and the terms and conditions of such loan
shall be no less favorable to the Company than if the lender had been an
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independent third party. None of the Members or their Affiliates shall be obligated to make any loan or advance to the
Company.
SECTION 6. ROLE OF MEMBERS
6.1
One Membership Class
. There shall initially be one class of Membership Interests and
one class of Units.
6.2
Members
. Each Person who desires to become a Member must complete and execute a
signature page to this Agreement in the form of Exhibit C attached hereto and such other
documents as may be required by the Directors. Each prospective Member must be approved and
admitted to the Company by the Board of Directors. The Membership Interests of the Members shall
be set forth on Exhibit A to this Agreement.
6.3
Additional Members
. No Person shall become a Member without the approval of the
Directors. The Directors may refuse to admit any Person as a Member in their sole discretion. Any
such admission must comply with the requirements described in this Agreement and will be effective
only after such Person has executed and delivered to the Company such documentation as determined
by the Directors to be necessary and appropriate to effect such admission including the Members
agreement to be bound by this Agreement.
6.4
Rights or Powers
. Except as otherwise expressly provided for in this Agreement, the
Members shall not have any right or power to take part in the management or control of the Company
or its business and affairs or to act for or bind the Company in any way.
6.5
Voting Rights of Members
. The Members shall have voting rights as defined by the
Membership Voting Interest of such Member and in accordance with the provisions of this Agreement.
Members do not have a right to cumulate their votes for any matter entitled to a vote of the
Members, including election of Directors.
6.6
Member Meetings
. Meetings of the Members shall be called by the Directors, and shall
be held at the principal office of the Company or at such other place as shall be designated by the
person calling the meeting. Members representing an aggregate of not less than thirty percent
(30%) of the Membership Voting Interests may also in writing demand that the Directors call a
meeting of the Members. Annual meetings of the Members shall be held not less than once per Fiscal
Year.
6.7
Conduct of Meetings
. Subject to the discretion of the Directors, the Members may
participate in any meeting of the Members by means of telephone conference or similar means of
communication by which all persons participating in the meeting can simultaneously hear and speak
with each other.
6.8
Notice of Meetings; Waiver
. Notice of the meeting, stating the place, day and hour of
the meeting, shall be given to each Member in accordance with Section 11.1 hereof at least five (5)
days and no more than sixty (60) days before the day on which the meeting is to be held. A Member
may waive the notice of meeting required hereunder by written notice of waiver signed by the Member
whether given before, during or after the meeting. Attendance by a Member at a meeting is waiver
of notice of that meeting, unless the Member objects at the beginning of the
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meeting to the transaction of business because the meeting is not lawfully called or convened and thereafter does
not participate in the meeting.
6.9
Quorum and Proxies
. The presence (in person or by proxy or mail ballot) of Members
representing an aggregate of at least twenty-five percent (25%) of the Membership Voting Interests
is required for the transaction of business at a meeting of the Members. Voting by proxy or by
mail ballot shall be permitted on any matter if authorized by the Directors.
6.10
Voting; Action by Members.
If a quorum is present, the affirmative vote of a majority
of the Membership Voting Interests represented at the meeting and entitled to vote on the matter
(including units represented in person, by proxy or by mail ballot) shall constitute the act of the
Members, unless the vote of a greater or lesser proportion or numbers is otherwise required by this
Agreement.
6.11
Record Date
. For the purpose of determining Members entitled to notice of or to vote
at any meeting of Members or any adjournment of the meeting, or Members entitled to receive payment
of any distribution, or to make a determination of Members for any other purpose, the date on which
notice of the meeting is mailed (or otherwise delivered) or the date on which the resolution
declaring the distribution is adopted, as the case may be, shall be the record date for
determination of Members.
6.12
Termination of Membership
. The membership of a Member in the Company shall terminate
upon the occurrence of events described in the Act, including registration and withdrawal. If for
any reason the membership of a Member is terminated, the Member whose membership has terminated
loses all Membership Voting Interests and shall be considered merely as Assignee of the Membership
Economic Interest owned before the termination of membership, having only the rights of an
unadmitted Assignee provided for in Section 9.7 hereof.
6.13
Continuation of the Company
. The Company shall not be dissolved upon the occurrence
of any event that is deemed to terminate the continued membership of a Member. The Companys
affairs shall not be required to be wound up. The Company shall continue without dissolution.
6.14
No Obligation to Purchase Membership Interest
. No Member whose membership in the
Company terminates, nor any transferee of such Member, shall have any right to demand or receive a
return of such terminated Members Capital Contributions or to require the purchase or redemption
of the Members Membership Interest. The other Members and the Company shall not have any
obligation to purchase or redeem the Membership Interest of any such terminated Member or
transferee of any such terminated Member.
6.15
Waiver of Dissenters Rights
. Each Member hereby disclaims, waives and agrees, to the
fullest extent permitted by law or the Act, not to assert dissenters or similar rights under the
Act.
6.16
Limitation on Ownership
. Notwithstanding any other provision herein, subsequent to
the close of the Companys initial public offering of equity securities filed with the Securities
and Exchange Commission following the Companys seed capital offering, no Member shall directly or
indirectly own or control more than forty percent (40%) of the issued and outstanding Units at
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any time. Units under indirect ownership or control by a Member shall include Units owned or
controlled by such Members Related Parties, Subsidiaries and Affiliates. For purposes of this
Section 6.16, the offering will close upon the earliest occurrence of any of the following: (1) the
Companys acceptance of subscriptions for units equaling the maximum amount as set forth in the
Companys registration statement or offering memorandum; (2) one year from the effective date of
the Companys initial registration statement or offering memorandum; or (3) the Companys decision
to close any time after the acceptance of subscriptions for units equaling the minimum amount as
set forth in the Companys registration statement or offering memorandum.
SECTION 7. ACCOUNTING, BOOKS AND RECORDS
7.1
Accounting, Books and Records
. The books and records of the Company shall be kept, and
the financial position and the results of its operations recorded, in accordance with GAAP. The
books and records shall reflect all the Company transactions and shall be appropriate and adequate
for the Companys business. The Company shall maintain at its principal place of business all of
the following: (i) A current list of the full name and last known business or residence address of
each Member and Assignee set forth in alphabetical order, together with the Capital Contributions, Capital Account and Units of
each Member and Assignee; (ii) The full name and business address of each Director; (iii) A copy of
the Articles and any and all amendments thereto together with executed copies of any powers of
attorney pursuant to which the Articles or any amendments thereto have been executed; (iv) Copies
of the Companys federal, state, and local income tax or information returns and reports, if any,
for the six most recent taxable years; (v) A copy of this Agreement and any and all amendments
thereto together with executed copies of any powers of attorney pursuant to which this Agreement or
any amendments thereto have been executed; and (vi) Copies of the financial statements of the
Company, if any, for the six most recent Fiscal Years. The Company shall use the accrual method of
accounting in preparation of its financial reports and for tax purposes and shall keep its books
and records accordingly.
7.2
Delivery to Members and Inspection
. Any Member or its designated representative shall
have reasonable access during normal business hours to the information and documents kept by the
Company pursuant to Section 7.1. The rights granted to a Member pursuant to this Section 7.2 are
expressly subject to compliance by such Member with the safety, security and confidentiality
procedures and guidelines of the Company, as such procedures and guidelines may be established from
time to time. Upon the request of any Member for purposes reasonably related to the interest of
that Person as a Member, the Directors shall promptly deliver to the requesting Member, at the
expense of the requesting Member, a copy of the information required to be maintained under Section
7.1. Each Member has the right, upon reasonable request for purposes reasonably related to the
interest of the Person as a Member and for proper purposes, to: (i) inspect and copy during normal
business hours any of the Company records described in Section 7.1; and (ii) obtain from the
Directors, promptly after their becoming available, a copy of the Companys federal, state, and
local income tax or information returns for each Fiscal Year. Each Assignee shall have the right
to information regarding the Company only to the extent required by the Act.
7.3
Reports
. The chief financial officer of the Company shall be responsible for causing
the preparation of financial reports of the Company and the coordination of financial matters of
the
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Company with the Companys accountants. The Company shall cause to be delivered to each Member
the financial statements listed below, prepared, in each case (other than with respect to Members
Capital Accounts, which shall be prepared in accordance with this Agreement) in accordance with
GAAP consistently applied. As soon as practicable following the end of each Fiscal Year (and in
any event not later than one hundred and twenty (120) days after the end of such Fiscal Year) and
at such time as distributions are made to the Unit Holders pursuant to Section 10 hereof following
the occurrence of a Dissolution Event, a balance sheet of the Company as of the end of such Fiscal
Year and the related statements of operations, Unit Holders Capital Accounts and changes therein,
and cash flows for such Fiscal Year, together with appropriate notes to such financial statements
and supporting schedules, all of which shall be audited and certified by the Companys accountants,
and in each case, to the extent the Company was in existence, setting forth in comparative form the
corresponding figures for the immediately preceding Fiscal Year end (in the case of the balance
sheet) and the two (2) immediately preceding Fiscal Years (in the case of the statements). For
purposes of this paragraph, public access to the financial statements through either the Companys
or the Securities and Exchange Commissions website shall constitute delivery pursuant to this
Section 7.3.
7.4
Tax Matters
. The Directors shall, without any further consent of the Unit Holders
being required (except as specifically required herein), make any and all elections for federal,
state, local, and foreign tax purposes as the Directors shall determine appropriate and represent
the Company and the Unit Holders before taxing authorities or courts of competent jurisdiction in
tax matters affecting the Company or the Unit Holders in their capacities as Unit Holders, and to
file any tax returns and execute any agreements or other documents relating to or affecting such
tax matters, including agreements or other documents that bind the Unit Holders with respect to
such tax matters or otherwise affect the rights of the Company and the Unit Holders. The Directors
shall designate a Person to be specifically authorized to act as the Tax Matters Member under the
Code and in any similar capacity under state or local law; provided, however, that the Directors
shall have the authority to designate, remove and replace the Tax Matters Member who shall act as
the tax matters partner within the meaning of and pursuant to Regulations Sections 301.6231(a)(7)-1
and -2 or any similar provision under state or local law. Necessary tax information shall be
delivered to each Unit Holder as soon as practicable after the end of each Fiscal Year of the
Company but not later than three (3) months after the end of each Fiscal Year.
SECTION 8. AMENDMENTS
8.1
Amendments
. Amendments to this Agreement may be proposed by the Board of Directors or
any Member. Following such proposal, the Board of Directors shall submit to the Members a verbatim
statement of any proposed amendment, providing that counsel for the Company shall have approved of
the same in writing as to form, and the Board of Directors shall include in any such submission a
recommendation as to the proposed amendment. The Board of Directors shall seek the written vote of
the Members on the proposed amendment or shall call a meeting to vote thereon and to transact any
other business that it may deem appropriate. A proposed amendment shall be adopted and be
effective as an amendment hereto only if approved by Member action as set forth in Section 6.10.
Notwithstanding any provision of this Section 8.1 to the contrary, this Agreement shall not be
amended without the consent of each Member
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adversely affected if such amendment would modify the
limited liability of a Member, or alter the Membership Economic Interest of a Member.
SECTION 9. TRANSFERS
9.1
Restrictions on Transfers
. Except as otherwise permitted by this Agreement, no Member
shall Transfer all or any portion of its Units. In the event that any Member pledges or otherwise
encumbers all or any part of its Units as security for the payment of a Debt, any such pledge or
hypothecation shall be made pursuant to a pledge or hypothecation agreement that requires the
pledgee or secured party to be bound by all of the terms and conditions of this Section 9. In the
event such pledgee or secured party becomes the Unit Holder hereunder pursuant to the exercise of
such partys rights under such pledge or hypothecation agreement, such pledgee or secured party
shall be bound by all terms and conditions of this Operating Agreement and all other agreements
governing the rights and obligations of Unit Holders. In such case, such pledgee or secured party,
and any transferee or purchaser of the Units held by such pledgee or secured party, shall not have
any Membership Voting Interest attached to such Units unless and until the Directors have approved
in writing and admitted as a Member hereunder, such pledgee, secured party, transferee or purchaser of such
Units.
9.2
Permitted Transfers
. Subject to the conditions and restrictions set forth in this
Section 9, a Unit Holder may:
(a) at any time Transfer all or any portion of its Units:
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(i)
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to the transferors administrator or trustee to whom such Units
are transferred involuntarily by operation of law or judicial decree, or;
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(ii)
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without consideration to or in trust for descendants or the
spouse of a Member; and
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(b) beginning ninety (90) days following Financing Closing, Transfer all or any portion of its
Units:
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(i)
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to any Person approved by the Directors in writing,
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(ii)
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to any other Member or to any Affiliate or Related Party of
another Member; or
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(iii)
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to any Affiliate or Related Party of the transferor.
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Any such Transfer set forth in this Section 9.2 and meeting the conditions set forth in Section 9.3
below is referred to in this Agreement as a Permitted Transfer.
9.3
Conditions Precedent to Transfers
. In addition to the conditions set forth above, no
Transfer of a Membership Interest shall be effective unless and until all of the following
conditions have been satisfied:
(a) Except in the case of a Transfer involuntarily by operation of law, the transferor and
transferee shall execute and deliver to the Company such documents and instruments of Transfer as
may be necessary or appropriate in the opinion of counsel to the Company to effect
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such Transfer. In the case of a Transfer of Units involuntarily by operation of law, the Transfer shall be
confirmed by presentation to the Company of legal evidence of such Transfer, in form and substance
satisfactory to counsel to the Company. In all cases, the transferor and/or transferee shall pay
all reasonable costs and expenses connected with the Transfer and the admission of the Transferee
as a Member and incurred as a result of such Transfer, including but not limited to, legal fees and
costs.
(b) The transferor and transferee shall furnish the Company with the transferees taxpayer
identification number, sufficient information to determine the transferees initial tax basis in
the Units transferred, and any other information reasonably necessary to permit the Company to file
all required federal and state tax returns and other legally required information statements or
returns. Without limiting the generality of the foregoing, the Company shall not be required to
make any distribution otherwise provided for in this Agreement with respect to any transferred
Units until it has received such information.
(c) Except in the case of a Transfer of any Units involuntarily by operation of law, either
(i) such Units shall be registered under the Securities Act, and any applicable state securities
laws, or (ii) the transferor shall provide an opinion of counsel, which opinion and counsel shall
be reasonably satisfactory to the Directors, to the effect that such Transfer is exempt from all
applicable registration requirements and that such Transfer will not violate any applicable laws
regulating the Transfer of securities.
(d) Except in the case of a Transfer of Units involuntarily by operation of law, the
transferor shall provide an opinion of counsel, which opinion and counsel shall be reasonably
satisfactory to the Directors, to the effect that such Transfer will not cause the Company to be
deemed to be an investment company under the Investment Company Act of 1940.
(e) Unless otherwise approved by the Directors and Members representing in the aggregate a 75%
majority of the Membership Voting Interests, no Transfer of Units shall be made except upon terms
which would not, in the opinion of counsel chosen by and mutually acceptable to the Directors and
the transferor Member, result in the termination of the Company within the meaning of Section 708
of the Code or cause the application of the rules of Sections 168(g)(1)(B) and 168(h) of the Code
or similar rules to apply to the Company. If the immediate Transfer of such Unit would, in the
opinion of such counsel, cause a termination within the meaning of Section 708 of the Code, then
if, in the opinion of such counsel, the following action would not precipitate such termination,
the transferor Member shall be entitled to (or required, as the case may be) (i) immediately
Transfer only that portion of its Units as may, in the opinion of such counsel, be transferred
without causing such a termination and (ii) enter into an agreement to Transfer the remainder of
its Units, in one or more Transfers, at the earliest date or dates on which such Transfer or
Transfers may be effected without causing such termination. The purchase price for the Units shall
be allocated between the immediate Transfer and the deferred Transfer or Transfers pro rata on the
basis of the percentage of the aggregate Units being transferred, each portion to be payable when
the respective Transfer is consummated, unless otherwise agreed by the parties to the Transfer. In
the case of a Transfer by one Member to another Member, the deferred purchase price shall be
deposited in an interest-bearing escrow
29
account unless another method of securing the payment
thereof is agreed upon by the transferor Member and the transferee Member(s).
(f) No notice or request initiating the procedures contemplated by Section 9.3 may be given by
any Member after a Dissolution Event has occurred. No Member may sell all or any portion of its
Units after a Dissolution Event has occurred.
(g) No Person shall Transfer any Unit if, in the determination of the Directors, such Transfer
would cause the Company to be treated as a publicly traded partnership within the meaning of
Section 7704(b) of the Code.
The Directors shall have the authority to waive any legal opinion or other condition required in
this Section 9.3 other than the Member approval requirement set forth in Section 9.3(e).
9.4
Prohibited Transfers
. Any purported Transfer of Units that is not permitted under this
Section shall be null and void and of no force or effect
whatsoever; provided that, if the Company is required to recognize such a Transfer (or if the
Directors, in their sole discretion, elect to recognize such a Transfer), the Units Transferred
shall be strictly limited to the transferors Membership Economic Interests as provided by this
Agreement with respect to the transferred Units, which Membership Economic Interests may be applied
(without limiting any other legal or equitable rights of the Company) to satisfy any debts,
obligations, or liabilities for damages that the transferor or transferee of such Interest may have
to the Company. In the case of a Transfer or attempted Transfer of Units that is not permitted
under this Section, the parties engaging or attempting to engage in such Transfer shall be liable
to indemnify and hold harmless the Company and the other Members from all cost, liability, and
damage that any of such indemnified Members may incur (including, without limitation, incremental
tax liabilities, lawyers fees and expenses) as a result of such Transfer or attempted Transfer and
efforts to enforce the indemnity granted hereby.
9.5
No Dissolution or Termination
. The transfer of a Membership Interest pursuant to the
terms of this Article shall not dissolve or terminate the Company. No Member shall have the right
to have the Company dissolved or to have such Members Capital Contribution returned except as
provided in this Agreement.
9.6
Prohibition of Assignment
. Notwithstanding the foregoing provisions of this Article,
Transfer of a Membership Interest may not be made if the Membership Interest sought to be sold,
exchanged or transferred, when added to the total of all other Membership Interests sold, exchanged
or transferred within the period of twelve (12) consecutive months prior thereto, would result in
the termination of the company under Section 708 of the Internal Revenue Code. In the event of a
transfer of any Membership Interests, the Members will determine, in their sole discretion, whether
or not the Company will elect pursuant to Section 754 of the Internal Revenue Code (or
corresponding provisions of future law) to adjust the basis of the assets of the Company.
9.7
Rights of Unadmitted Assignees
. A Person who acquires Units but who is not admitted as
a substituted Member pursuant to Section 9.8 hereof shall be entitled only to the Membership
Economic Interests with respect to such Units in accordance with this Agreement, and shall not
30
be entitled to the Membership Voting Interest with respect to such Units. In addition, such Person
shall have no right to any information or accounting of the affairs of the Company, shall not be
entitled to inspect the books or records of the Company, and shall not have any of the rights of a
Member under the Act or this Agreement.
9.8
Admission of Substituted Members
. As to Permitted Transfers, a transferee of Units
shall be admitted as a substitute Member provided that such transferee has complied with the
following provisions: (a) The transferee of Units shall, by written instrument in form and
substance reasonably satisfactory to the Directors; (i) accept and adopt the terms and provisions
of this Agreement, including this Section 9, and (ii) assume the obligations of the transferor
Member under this Agreement with respect to the transferred Units. The transferor Member shall be
released from all such assumed obligations except (x) those obligations or liabilities of the
transferor Member arising out of a breach of this Agreement, (y) in the case of a Transfer to any
Person other than a Member or any of its Affiliates, those obligations or liabilities of the
transferor Member based on events occurring,
arising or maturing prior to the date of Transfer, and (z) in the case of a Transfer to any of its
Affiliates, any Capital Contribution or other financing obligation of the transferor Member under
this Agreement; (b) The transferee pays or reimburses the Company for all reasonable legal, filing,
and publication costs that the Company incurs in connection with the admission of the transferee as
a Member with respect to the Transferred Units; and (c) Except in the case of a Transfer
involuntarily by operation of law, if required by the Directors, the transferee (other than a
transferee that was a Member prior to the Transfer) shall deliver to the Company evidence of the
authority of such Person to become a Member and to be bound by all of the terms and conditions of
this Agreement, and the transferee and transferor shall each execute and deliver such other
instruments as the Directors reasonably deem necessary or appropriate to effect, and as a condition
to, such Transfer.
9.9
Representations Regarding Transfers.
(a) Each Member hereby covenants and agrees with the Company for the benefit of the Company
and all Members, that (i) it is not currently making a market in Units and will not in the future
make a market in Units, (ii) it will not Transfer its Units on an established securities market, a
secondary market (or the substantial equivalent thereof) within the meaning of Code Section 7704(b)
(and any Regulations, proposed Regulations, revenue rulings, or other official pronouncements of
the Internal Revenue Service or Treasury Department that may be promulgated or published
thereunder), and (iii) in the event such Regulations, revenue rulings, or other pronouncements
treat any or all arrangements which facilitate the selling of Company interests and which are
commonly referred to as matching services as being a secondary market or substantial equivalent
thereof, it will not Transfer any Units through a matching service that is not approved in advance
by the Company. Each Member further agrees that it will not Transfer any Units to any Person
unless such Person agrees to be bound by this Section 9 and to Transfer such Units only to Persons
who agree to be similarly bound.
(b) Each Member hereby represents and warrants to the Company and the Members that such
Members acquisition of Units hereunder is made as principal for such Members own account and not
for resale or distribution of such Units. Each Member further hereby agrees that the following
legend, as the same may
31
be amended by the Directors in their sole discretion, may be placed upon
any counterpart of this Agreement, the Articles, or any other document or instrument evidencing
ownership of Units:
THE TRANSFERABILITY OF THE MEMBERSHIP UNITS REPRESENTED BY THIS DOCUMENT IS RESTRICTED. SUCH UNITS
MAY NOT BE SOLD, ASSIGNED, OR TRANSFERRED, NOR WILL ANY ASSIGNEE, VENDEE, TRANSFEREE OR ENDORSEE
THEREOF BE RECOGNIZED AS HAVING ACQUIRED ANY SUCH UNITS FOR ANY PURPOSES, UNLESS AND TO THE EXTENT
SUCH SALE, TRANSFER, HYPOTHECATION, OR ASSIGNMENT IS PERMITTED BY, AND IS COMPLETED IN STRICT
ACCORDANCE WITH, THE TERMS AND CONDITIONS SET FORTH IN THE OPERATING AGREEMENT OF THE COMPANY AND
AGREED TO BY EACH MEMBER.
THE UNITS REPRESENTED BY THIS DOCUMENT MAY NOT BE SOLD, OFFERED FOR SALE, OR TRANSFERRED IN ABSENCE
OF AN EFFECTIVE REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS, OR AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS.
9.10.
Distribution and Allocations in Respect of Transferred Units
. If any Units are
Transferred during any Fiscal Year in compliance with the provisions of this Section 9, Profits,
Losses, each item thereof, and all other items attributable to the Transferred Units for such
Fiscal Year shall be divided and allocated between the transferor and the transferee by taking into
account their varying interests during the Fiscal Year in accordance with Code Section 706(d),
using any conventions permitted by law and selected by the Directors. All distributions on or
before the date of such Transfer shall be made to the transferor, and all distributions thereafter
shall be made to the transferee. Solely for purposes of making such allocations and distributions,
the Company shall recognize such Transfer to be effective as of the first day of the month
following the month in which all documents to effectuate the transfer have been executed and
delivered to the Company, provided that, if the Company does not receive a notice stating the date
such Units were transferred and such other information as the Directors may reasonably require
within thirty (30) days after the end of the Fiscal Year during which the Transfer occurs, then all
such items shall be allocated, and all distributions shall be made, to the Person, who according to
the books and records of the Company, was the owner of the Units on the last day of such Fiscal
Year. Neither the Company nor any Member shall incur any liability for making allocations and
distributions in accordance with the provisions of this Section 9.10 whether or not the Directors
or the Company has knowledge of any Transfer of ownership of any Units.
9.11.
Additional Members
. Additional Members may be admitted from time to time upon the
approval of the Directors. Any such additional Member shall pay such purchase price for
his/her/its Membership Interest and shall be admitted in accordance with such terms and conditions,
as the Directors shall approve. All Members acknowledge that the admission of additional Members
may result in dilution of a Members Membership Interest. Prior to the admission of any Person as
a Member, such Person shall agree to be bound by the provisions of this Agreement and shall sign
and deliver an Addendum to this Agreement in the form of Exhibit C, attached hereto. Upon
execution of such Addendum, such additional Members shall be
32
deemed to be parties to this Agreement
as if they had executed this Agreement on the original date hereof, and, along with the parties to
this Agreement, shall be bound by all the provisions hereof from and after the date of execution
hereof. The Members hereby designate and appoint the Directors to accept such additional Members
and to sign on their behalf any Addendum in the form of Exhibit C, attached hereto.
SECTION 10. DISSOLUTION AND WINDING UP
10.1.
Dissolution
. The Company shall dissolve and shall commence winding up and
liquidating upon the first to occur of any of the following (each a Dissolution Event): (i) The
affirmative vote of a 75% majority in interest of the Membership Voting Interests to dissolve, wind
up, and liquidate the Company; or (ii) The entry of a decree of
judicial dissolution pursuant to the Act. The Members hereby agree that, notwithstanding any
provision of the Act, the Company shall not dissolve prior to the occurrence of a Dissolution
Event.
10.2.
Winding Up
. Upon the occurrence of a Dissolution Event, the Company shall continue
solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and
satisfying the claims of its creditors and Members, and no Member shall take any action that is
inconsistent with, or not necessary to or appropriate for, the winding up of the Companys business
and affairs, PROVIDED that all covenants contained in this Agreement and obligations provided for
in this Agreement shall continue to be fully binding upon the Members until such time as the
Property has been distributed pursuant to this Section 10.2 and the Articles have been canceled
pursuant to the Act. The Liquidator shall be responsible for overseeing the prompt and orderly
winding up and dissolution of the Company. The Liquidator shall take full account of the Companys
liabilities and Property and shall cause the Property or the proceeds from the sale thereof (as
determined pursuant to Section 10.8 hereof), to the extent sufficient therefor, to be applied and
distributed, to the maximum extent permitted by law, in the following order: (a) First, to
creditors (including Members and Directors who are creditors, to the extent otherwise permitted by
law) in satisfaction of all of the Companys Debts and other liabilities (whether by payment or the
making of reasonable provision for payment thereof), other than liabilities for which reasonable
provision for payment has been made; and (b) Second, except as provided in this Agreement, to
Members in satisfaction of liabilities for distributions pursuant to the Act; (c) Third, the
balance, if any, to the Unit Holders in accordance with the positive balance in their Capital
Accounts calculated after making the required adjustment set forth in clause (t) of the definition
of Gross Asset Value in Section 1.10 of this Agreement, after giving effect to all contributions,
distributions and allocations for all periods.
10.3.
Compliance with Certain Requirements of Regulations; Deficit Capital Accounts
. In
the event the Company is liquidated within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Section 10 to the Unit Holders
who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2).
If any Unit Holder has a deficit balance in his Capital Account (after giving effect to all
contributions, distributions and allocations for all Fiscal Years, including the Fiscal Year during
which such liquidation occurs), such Unit Holder shall have no obligation to make any contribution
to the capital of the Company with respect to such deficit, and such deficit shall not be
considered a debt owed to the Company or to any other Person for any purpose whatsoever. In the
discretion of the Liquidator, a pro rata portion of the distributions that would otherwise be
33
made to the Unit Holders pursuant to this Section 10 may be: (a) Distributed to a trust established for
the benefit of the Unit Holders for the purposes of liquidating Company assets, collecting amounts
owed to the Company, and paying any contingent or unforeseen liabilities or obligations of the
Company. The assets of any such trust shall be distributed to the Unit Holders from time to time,
in the reasonable discretion of the Liquidator, in the same proportions as the amount distributed
to such trust by the Company would otherwise have been distributed to the Unit Holders pursuant to
Section 10.2 hereof; or (b) Withheld to provide a reasonable reserve for Company liabilities
(contingent or otherwise) and to reflect the unrealized portion of any
installment obligations owed to the Company, provided that such withheld amounts shall be
distributed to the Unit Holders as soon as practicable.
10.4.
Deemed Distribution and Recontribution
. Notwithstanding any other provision of this
Section 10, in the event the Company is liquidated within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g) but no Dissolution Event has occurred, the Property shall not be liquidated,
the Companys Debts and other liabilities shall not be paid or discharged, and the Companys
affairs shall not be wound up.
10.5.
Rights of Unit Holders
. Except as otherwise provided in this Agreement, each Unit
Holder shall look solely to the Property of the Company for the return of its Capital Contribution
and has no right or power to demand or receive Property other than cash from the Company. If the
assets of the Company remaining after payment or discharge of the debts or liabilities of the
Company are insufficient to return such Capital Contribution, the Unit Holders shall have no
recourse against the Company or any other Unit Holder or Directors.
10.6.
Allocations During Period of Liquidation
. During the period commencing on the first
day of the Fiscal Year during which a Dissolution Event occurs and ending on the date on which all
of the assets of the Company have been distributed to the Unit Holders pursuant to Section 10.2
hereof (the Liquidation Period), the Unit Holders shall continue to share Profits, Losses, gain,
loss and other items of Company income, gain, loss or deduction in the manner provided in Section 3
hereof.
10.7.
Character of Liquidating Distributions
. All payments made in liquidation of the
interest of a Unit Holder in the Company shall be made in exchange for the interest of such Unit
Holder in Property pursuant to Section 736(b)(1) of the Code, including the interest of such Unit
Holder in Company goodwill.
10.8.
The Liquidator
. The Liquidator shall mean a Person appointed by the Directors(s)
to oversee the liquidation of the Company. Upon the consent of a majority in interest of the
Membership Voting Interests, the Liquidator may be the Directors. The Company is authorized to pay
a reasonable fee to the Liquidator for its services performed pursuant to this Section 10 and to
reimburse the Liquidator for its reasonable costs and expenses incurred in performing those
services. The Company shall indemnify, save harmless, and pay all judgments and claims against
such Liquidator or any officers, Directors, agents or employees of the Liquidator relating to any
liability or damage incurred by reason of any act performed or omitted to be performed by the
Liquidator, or any officers, Directors, agents or employees of the Liquidator in connection with
the liquidation of the Company, including reasonable attorneys fees incurred by the Liquidator,
officer, Director, agent or employee in connection with the defense of any action
34
based on any such act or omission, which attorneys fees may be paid as incurred, except to the extent such liability
or damage is caused by the fraud, intentional misconduct of, or a knowing violation of the laws by
the Liquidator which was material to the cause of action.
10.9.
Forms of Liquidating Distributions
. For purposes of making distributions required by
Section 10.2 hereof, the Liquidator may determine whether to distribute all or any portion of the
Property in-kind or to sell all or any portion of the Property and distribute the proceeds
therefrom.
SECTION 11. MISCELLANEOUS
11.1.
Notices
. Any notice, payment, demand, or communication required or permitted to be
given by any provision of this Agreement shall be in writing and shall be deemed to have been
delivered, given, and received for all purposes (i) if delivered personally to the Person or to an
officer of the Person to whom the same is directed, or (ii) when the same is actually received, if
sent by regular or certified mail, postage and charges prepaid, by facsimile or electronic mail, if
such facsimile or electronic mail is followed by a hard copy of the facsimile communication sent
promptly thereafter by registered or certified mail, postage and charges prepaid, addressed as
follows, or to such other address as such Person may from time to time specify by notice to the
Members and the Directors: (a) If to the Company, to the address determined pursuant to Section 1.4
hereof; (b) If to the Directors, to the address set forth on record with the Company; (c) If to a
Member, either to the address set forth in Section 2.1 hereof or to such other address that has
been provided in writing to the Company.
11.2.
Binding Effect
. Except as otherwise provided in this Agreement, every covenant,
term, and provision of this Agreement shall be binding upon and inure to the benefit of the Members
and their respective successors, transferees, and assigns.
11.3.
Construction
. Every covenant, term, and provision of this Agreement shall be
construed simply according to its fair meaning and not strictly for or against any Member.
11.4.
Headings
. Section and other headings contained in this Agreement are for reference
purposes only and are not intended to describe, interpret, define, or limit the scope, extent, or
intent of this Agreement or any provision hereof.
11.5.
Severability
. Except as otherwise provided in the succeeding sentence, every
provision of this Agreement is intended to be severable, and, if any term or provision of this
Agreement is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not
affect the validity or legality of the remainder of this Agreement. The preceding sentence of this
Section 11.5 shall be of no force or effect if the consequence of enforcing the remainder of this
Agreement without such illegal or invalid term or provision would be to cause any Member to lose
the material benefit of its economic bargain.
11.6.
Incorporation By Reference
. Every exhibit, schedule, and other appendix attached to
this Agreement and referred to herein is incorporated in this Agreement by reference unless this
Agreement expressly otherwise provides.
35
11.7.
Variation of Terms
. All terms and any variations thereof shall be deemed to refer to
masculine, feminine, or neuter, singular or plural, as the identity of the Person or Persons may
require.
11.8.
Governing Law
. The laws of the State of Indiana shall govern the validity of this
Agreement, the construction of its terms, and the interpretation of the rights and duties arising
hereunder.
11.9.
Waiver of Jury Trial
. Each of the Members irrevocably waives to the extent permitted
by law, all rights to trial by jury in any action, proceeding or counterclaim arising out of or
relating to this Agreement.
11.10.
Counterpart Execution
. This Agreement may be executed in any number of counterparts
with the same effect as if all of the Members had signed the same document. All counterparts shall
be construed together and shall constitute one agreement.
11.11.
Specific Performance
. Each Member agrees with the other Members that the other
Members would be irreparably damaged if any of the provisions of this Agreement are not performed
in accordance with their specific terms and that monetary damages would not provide an adequate
remedy in such event. Accordingly, it is agreed that, in addition to any other remedy to which the
nonbreaching Members may be entitled, at law or in equity, the nonbreaching Members shall be
entitled to injunctive relief to prevent breaches of the provisions of this Agreement and
specifically to enforce the terms and provisions hereof in any action instituted in any court of
the United States or any state thereof having subject matter jurisdiction thereof.
IN WITNESS WHEREOF, the parties have executed and entered into this Second Amended and Restated
Operating Agreement of the Company as of the day first set forth above.
COMPANY:
CARDINAL ETHANOL, LLC
By:
/s/ Troy Prescott
Its: Chairman
36
EXHIBIT A
Membership List
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Capital
|
Name of Initial Members
|
|
Units
|
|
Contribution
|
Thomas E. Chalfant,
12028 West 700 North
Parker City, IN 47368
|
|
|
22
|
|
|
$
|
50,000
|
|
|
Kenneth R. Beshears
1560 West 500 North
Winchester, IN 47394
|
|
|
22
|
|
|
$
|
50,000
|
|
|
Anthony J. Kritsch
178 South 400 West
Winchester, IN 47394
|
|
|
22
|
|
|
$
|
50,000
|
|
|
Troy A. Prescott
3780 North 250 East
Winchester, IN 47394
|
|
|
22
|
|
|
$
|
50,000
|
|
|
Larry J. Barnette
3247 North 300 East
Portland, IN 47371
|
|
|
22
|
|
|
$
|
50,000
|
|
|
J. Phillip Zicht
5653 North U.S. Highway 27
Winchester, IN 47394
|
|
|
22
|
|
|
$
|
50,000
|
|
|
Danny Huston
616 W. Jackson
Parker City, IN 47368
|
|
|
22
|
|
|
$
|
50,000
|
|
|
Joel D. Flesher
8913 North 1150 West
Ridgeville, IN 47380
|
|
|
22
|
|
|
$
|
50,000
|
|
|
Jimmie K. Davis
6037 South 1000 West
Modoc, IN 47358
|
|
|
22
|
|
|
$
|
50,000
|
|
|
Greg A. Cassel
12415 West 300 North
Parker City, IN 47368
|
|
|
6
|
|
|
$
|
10,000
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Capital
|
Name of Initial Members
|
|
Units
|
|
Contribution
|
Robert L. Chalfant
3384 South 900 West
Farmland, IN 47340
|
|
|
22
|
|
|
$
|
50,000
|
|
|
Robert L. Morris
P.O. Box 127
Winchester, IN 47394
|
|
|
22
|
|
|
$
|
50,000
|
|
|
Dale Schwieterman
3924 CR 716 A
Celina, OH 45822
|
|
|
16
|
|
|
$
|
40,000
|
|
|
John N. Shanks II
349 N. 500 West
Anderson, IN 46011
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Robert E. Anderson
5737 E. 156
th
Street
Novlesville, IN 46062
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Lawrence Allen Baird
2579 S. 500 West
Tipton, IN 46072
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Ralph Brumbaugh
P.O. Box 309
Arcanum, OH 45304
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Thomas C. Chronister
440 Kerr Island North
Rome City, IN 46784
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Robert John Davis
4465 N. Co. Rd. 100 East
New Castle, IN 47362
|
|
|
16
|
|
|
$
|
40,000
|
|
|
David Matthew Dersch
305 N. Greenbriar Rd.
Muncie, IN 47304
|
|
|
16
|
|
|
$
|
40,000
|
|
|
G. Melvin Featherston
14740 River Rd.
Noblesville, IN 46062
|
|
|
16
|
|
|
$
|
40,000
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Capital
|
Name of Initial Members
|
|
Units
|
|
Contribution
|
John W. Fisher
P.O. Box 1408
Muncine, IN 47308
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Jeremey Jay Herlyn
841 Hidden Valley Dr.
Richmond, IN 47374
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Barry Hudson
1525 Meridian St.
Portland, IN 47371
|
|
|
16
|
|
|
$
|
40,000
|
|
|
James Lee Kunzman
4740 Pennington Ct.
Indianapolis, IN 46254
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Cyril George LeFevre
1318 Fox Rd.
Fort Recovery, OH 45846
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Curtis Allan Rosar
3587 Wernle Rd.
Richmond, IN 47374
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Michael Alan Shuter
6376 N. 300 West
Anderson, IN 46011
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Steven John Snider
7290 Langdon Rd.
Yorktown, IN 47396
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Jerrold Lee Voisinet
450 Garby Rd.
Piqua, OH 45356
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Everett Leon Hart
6934 Bradford Childrens Home Road
Greenville, OH 45331
|
|
|
16
|
|
|
$
|
40,000
|
|
|
Andrew J. Zawosky
1012 Manchester Dr.
Greenville, OH 45331
|
|
|
16
|
|
|
$
|
40,000
|
|
|
TOTAL:
|
|
|
568
|
|
|
$
|
1,360,000,
|
|
|
|
|
|
|
|
|
|
|
39
EXHIBIT B
Initial Board of Directors
|
|
|
|
|
|
Initial
|
|
Addresses of
|
Board of Directors
|
|
Initial Board of Directors
|
Thomas E. Chalfant
|
|
12028 West 700 North
|
|
|
Parker City, IN 47368
|
|
|
|
Troy A. Prescott
|
|
3780 North 250 East
|
|
|
Winchester, IN 47394
|
|
|
|
Larry J. Barnette
|
|
3247 North 300 East
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Portland, IN 47371
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Robert L. Morris
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P.O. Box 127
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Winchester, IN 47394
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Dale Schwieterman
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3924 CR 716 A
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Celina, OH45822
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John N. Shanks II
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349 N. 500 West
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Anderson, IN 46011
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Robert E. Anderson
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5737 E. 156
th
Street
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Noblesville, IN 46062
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Lawrence Allen Baird
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2579 S. 500 West
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Tipton, IN 46072
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Ralph Brumbaugh
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P.O. Box 309
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Arcanum, OH 45304
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Thomas C. Chronister
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440 Kerr Island North
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Rome City, IN 46784
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Robert John Davis
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4465 N. Co. Rd. 100 East
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New Castle, IN 47362
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David Matthew Dersch
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305 N. Greenbriar Rd.
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Muncie, IN 47304
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G. Melvin Featherston
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14740 River Rd.
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Noblesville, IN 46062
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40
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Initial
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Addresses of
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Board of Directors
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Initial Board of Directors
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John W. Fisher
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P.O. Box 1408
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Muncie, IN 47308
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Everett Leon Hart
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6934 Bradford Childrens Home Road
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Greenville, OH 45331
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Jeremey Jay Herlyn
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841 Hidden Valley Dr.
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Richmond, IN 47374
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Barry Hudson
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1525 Meridian St.
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Portland, IN 47371
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James Lee Kunzman
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4740 Pennington Ct.
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Indianapolis, IN 46254
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Cyril George LeFevre
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1318 Fox Rd.
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Fort Recovery, OH 45846
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Curtis Allan Rosar
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3587 Wernle Rd.
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Richmond, IN 47374
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Michael Alan Shuter
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6376 N. 300 West
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Anderson, IN 46011
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Steven John Snider
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7290 Langdon Rd.
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Yorktown, IN 47396
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Jerrold Lee Voisinet
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450 Garby Rd.
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Piqua, OH 45356
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Andrew J. Zawosky
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1012 Manchester Dr.
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Greenville, OH 45331
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41
EXHIBIT C
MEMBER SIGNATURE PAGE
ADDENDA TO THE
SECOND AMENDED AND RESTATED OPERATING AGREEMENT OF CARDINAL
ETHANOL, LLC
The undersigned does hereby represent and warrant that the undersigned, as a condition to
becoming a Member in Cardinal Ethanol, LLC, has received a copy of the Second Amended and Restated
Operating Agreement dated February 1, 2006, and, if applicable, all amendments and modifications
thereto, and does hereby agree that the undersigned, along with the other parties to the
SecondAmended and Restated Operating Agreement, shall be subject to and comply with all terms and
conditions of said Second Amended and Restated Operating Agreement in all respects as if the
undersigned had executed said Second Amended and Restated Operating Agreement on the original date
thereof and that the undersigned is and shall be bound by all of the provisions of said Second
Amended and Restated Operating Agreement from and after the date of execution hereof.
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Individuals:
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Entities:
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Name of Individual Member (Please Print)
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Name of Entity (Please Print)
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Signature of Individual
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Print Name and Title of Officer
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Name of Joint Individual Member (Please Print)
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Signature of Officer
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Signature of Joint Individual Member
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Agreed and Accepted on Behalf of the
Company and its Members:
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CARDINAL ETHANOL, LLC
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By:
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Its:
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42