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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL
FORM FOR REGISTRATION OF SECURITIES
Pursuant
to Section 12(b) or (g) of the Securities Exchange Act of 1934
HERON
LAKE BIOENERGY, LLC
(Exact name of registrant as specified in its
charter)
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Minnesota
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41-2002393
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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91246 390th Avenue
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Heron Lake, Minnesota
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56137-3175
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(Address of principal executive offices)
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(Zip Code)
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With
copy to:
April Hamlin, Esq.
Michael
L. Weaver, Esq.
Lindquist &
Vennum P.L.L.P.
4200
IDS Center
80
South Eighth Street
Minneapolis,
Minnesota 55402
Telephone:
(612) 371-3211
Facsimile:
(612) 371-3207
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Registrant’s
telephone number, including area code:
(507) 793-0077
Securities
to be registered pursuant to Section 12(b) of the Act:
None
Securities
to be registered pursuant to Section 12(g) of the Act:
Class A Units
(Title of Class)
Indicate
by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company:
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Large
Accelerated Filer
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o
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Accelerated
Filer
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o
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Non-Accelerated
Filer
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o
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Smaller
Reporting Company
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x
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Table
of Contents
BACKGROUND
Withdrawn Form 10
On
February 28, 2006, Heron Lake BioEnergy, LLC filed with the Securities and
Exchange Commission, or SEC, a registration statement on Form 10. On April 19, 2006, we submitted a
request to withdraw such registration statement, which was granted on the same
date. You should rely only on the disclosure in this registration statement on Form 10,
as amended, and not the disclosure in the withdrawn registration statement on Form 10.
Industry and Market Data
We
obtained the industry, market and competitive position data used throughout
this registration statement from our own research, studies conducted by third
parties, independent industry associations or general publications and other
publicly available information. In
particular, we have based much of our discussion of the ethanol industry,
including government regulation relevant to the industry and forecasted growth
in demand, on information published by the Renewable Fuels Association, the
national trade association for the U.S. ethanol industry. Because the Renewable Fuels Association is a
trade organization for the ethanol industry, it may present information in a
manner that is more favorable to that industry than would be presented by an
independent source. Forecasts and
forward-looking statements by the Renewable Fuels Association are particularly
likely to be inaccurate, especially over long periods of time.
Ethanol Units
All
references in this registration statement to gallons of ethanol are to gallons
of denatured ethanol. Denatured ethanol
is ethanol blended with up to approximately 5.0% denaturant, such as gasoline,
to render it undrinkable and thus not subject to alcoholic beverage taxes.
Caution Regarding Forward-Looking Statements
This
registration statement contains forward-looking statements. In some cases, you can identify these
statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential”
and similar expressions. All of the
forward-looking statements contained in this registration statement are based
on estimates and assumptions made by our management. These estimates and assumptions
reflect our best judgment based on currently known market and other factors.
Although we believe such estimates and assumptions are reasonable, they are
inherently uncertain and involve risks and uncertainties. In addition,
management’s assumptions about future events may prove to be inaccurate. We
caution you that the forward-looking statements contained in this registration
statement are not guarantees of future performance and we cannot assure you
that such statements will be realized. In all likelihood, actual results will
differ from those contemplated by such forward-looking statements as a result
of a variety of factors, including those factors discussed in “Item 1.
Business — Risk Factors.” Except as required by law, we undertake no
obligation to update any of these forward-looking statements.
Table of Contents
Item
1. Business
Business Development
Overview
We
were organized as a Minnesota limited liability company on April 12, 2001
under the name “Generation II, LLC.” In June 2004,
we changed our name to Heron Lake BioEnergy, LLC.
When
we use the terms “Heron Lake BioEnergy,” “we,” “us,” “our,” the “Company” or
similar words in this Registration Statement on Form 10, unless the
context otherwise requires, we are referring to Heron Lake BioEnergy, LLC and
its subsidiary, Lakefield Farmers Elevator, LLC. Additionally, when we refer to “units” in
this Registration Statement on Form 10, unless the context otherwise
requires, we are referring to the Class A units of Heron Lake BioEnergy,
LLC, which is described in detail in “Item 11. Description of Registrant’s
Securities to be Registered” of this Registration Statement on Form 10.
Our
principal executive offices are located at 91246 390th Avenue, Heron Lake,
Minnesota 56137 and our telephone number is 507-793-0077.
Business of Heron Lake BioEnergy
We
were formed for the purpose of constructing and operating an ethanol
manufacturing facility near Heron Lake, Minnesota. In February 2002, we obtained an option
on land that is now part of the 216 acre site of our ethanol plant. From our formation until the selection of our
site, our business was primarily devoted to organization of our limited liability
company and initial capitalization, investigating ethanol manufacturing process
technologies, analyzing corn supply, analyzing site and related infrastructure
and improvements and evaluating the ethanol industry.
In
early 2004, we selected Fagen, Inc. to be the design-build firm to build
our ethanol plant near Heron Lake, Minnesota, using process technology provided
by ICM, Inc. In September 2005,
we entered into a lump-sum design-build agreement with Fagen, Inc. Following selection of our design build firm,
our efforts through the start of plant operations in September 2007 were
devoted principally to developing and constructing our ethanol plant and
related activities, including:
·
the completion of the equity and debt
financings necessary to fund our development efforts and to fund the
construction and start-up of our ethanol plant;
·
entering into the definitive construction
contracts with Fagen, Inc. to construct the ethanol plant;
·
the acquisition and preparation of our plant
site near Heron Lake, Minnesota; and
·
securing the necessary permits to construct
the ethanol plant.
Additionally,
on December 15, 2005, we purchased certain assets relating to elevator and
grain storage facilities in Lakefield, Minnesota and Wilder, Minnesota for a
total purchase price of approximately $3.1 million that we paid in cash. The Lakefield and Wilder facilities are each
less than 15 miles away from our plant.
The elevator and grain storage facilities, which provide us with
additional storage of corn inventory and allow us to more favorably procure
corn for the operation of our plant, have approximately 2.8 million bushels of
combined upright and flat storage capacity and grain handling equipment. We operate these facilities through our
wholly-owned subsidiary, Lakefield Farmers Elevator, LLC.
On
September 21, 2007, we began operations at our dry mill, coal fired
ethanol plant. Therefore, the period
ended April 30, 2008 is the first full six months that includes revenue
generated from our operations. In the
six months ended April 30, 2008, we sold approximately 25.6 million
gallons of ethanol. At nameplate, the
ethanol plant has the capacity to process approximately 18.0 million bushels of
corn each year, producing approximately 50 million gallons per year (mgy) of
fuel-grade ethanol and approximately 160,000 tons of distillers grains with
solubles. Under our design-build agreement with Fagen, Inc., the total
cost for the design and construction of the plant was approximately $76.7
million. Change orders increased the
total cost with Fagen, Inc. to approximately $81.3 million.
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As
of April 30, 2008, $77.5 million has been paid and we have retained
approximately $3.8 million in payments to Fagen, Inc. Final payment will be due when final
completion of construction is achieved and the operation of our plant satisfies
the air emissions warranties specified in the design-build agreement with Fagen, Inc.
Since
the beginning of operations at our ethanol plant, our primary business is the
production and sale of ethanol and co-products, including dried distillers
grains. We currently do not have or
anticipate we will have any other lines of business or other significant
sources of revenue other than the sale of ethanol and ethanol co-products.
History of Financing
We
funded our early development activities through sales of our units and, to a
lesser extent, from grants. From
inception through April 30, 2008, we have received approximately $48.7
million in gross proceeds from the sale of our units at prices from $0.50 per
unit to $2.00 per unit. We have also
issued units for the purchase of land and an easement, as well as issued
warrants to purchase units in consideration of the services of our board of
governors. From inception through April 30,
2008, we have received $250,000 in grant proceeds.
From
our inception to October 2004, we received $1.2 million in gross proceeds
from sales of our units as initial seed capital. Of the gross proceeds we received from the
sale of our units, $40.0 million of the gross proceeds was received from the
sale of 21,604,875 units at a price of $2.00 per unit, subject to discounts,
through an offering registered in the State of Minnesota. We closed on the proceeds of this offering in
October 2005.
In
September 2005, we closed on senior debt financing with AgStar Financial
Services, PCA, which consisted of $59.9 million in a term note and $2.0 million
in a revolving line of credit. With the
proceeds from the sale of units in October 2005 and this senior debt
financing, we broke ground on plant construction at our site in Heron Lake,
Minnesota in November 2005.
In
November 2006, our revolving line of credit was increased by $3.7 million
to $5.7 million. In December 2006,
AgStar Financial Services increased our construction loan by $4.7 million. In December 2006, we also completed a
$7.5 million private placement of 3,750,000 Class B units at $2.00 per
unit to Project Viking, LLC. We used the
proceeds from the sale of the Class B units, along with the additional
debt availability from AgStar Financial Services, to fund increased
construction costs of our plant.
In
April 2007, Project Viking, LLC exchanged its Class B units for an
equal number of Class A units. As
of July 31, 2008, Project Viking, LLC holds 21.8% of our outstanding
units. Project Viking, LLC is owned by
Roland J. (Ron) Fagen and Diane Fagen, the principal shareholders of Fagen, Inc.,
our design-build firm.
In
May 2007, we increased the availability on our revolving line of credit by
$1.8 million to a total of $7.5 million to provide us with additional working
capital for the operation of our business.
In
July 2007, Ron Fagen loaned us approximately $4.2 million for the purchase
of corn inventory and retention of previously purchased corn inventory. We
repaid this note in November 2007.
In
October 2007, our construction loan from AgStar Financial Services was
amended and converted into an approximately $59.6 million term note and a $5.0
million revolving term note. In November 2007,
we entered into an agreement with AgStar Financial Services to renew our $7.5
million revolving line of credit.
In
addition, we have obtained loans for specific purposes, such as to finance the
purchase of electrical equipment that services our ethanol plant and for water
treatment facilities.
Our Ethanol
Plant
Our
ethanol plant uses a dry milling process to produce fuel-grade ethanol and
distillers grains. The dry milling
process involves grinding the entire corn kernel into flour and the starch is
converted to ethanol through fermentation that also produces carbon dioxide and
distillers grains.
The
ethanol plant consists principally of a coal handling, storage and combustion
area; storage and processing areas for corn; a fermentation area comprised
mainly of fermentation tanks; a distillation finished product storage area; and
a drying unit for processing the dried distillers grains. Additionally, the
ethanol plant contains receiving facilities that have the ability to receive
corn by rail and truck, store it for use in the plant and prepare the corn to
be used in the plant. We have storage
tanks on site to store the ethanol we produce.
The plant also contains a storage building and silos to hold distillers
grains until it is shipped to market.
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Description of Design-Build Agreement
On
September 28, 2005 we entered into a Standard Form of Agreement
between Owner and Designer — Lump Sum (referred to in this Registration Statement
on Form 10 as the “design-build agreement”) with Fagen, Inc. Under
the design-build agreement, Fagen, Inc. agreed to design and build a 50
mgy coal-fired ethanol plant near Heron Lake, Minnesota for a lump-sum price of
approximately $76.7 million, subject to certain adjustments as described
below. Under the design-build agreement,
Fagen, Inc. also agreed to utilize certain proprietary property and
information of ICM, Inc. in the design and construction of our ethanol
plant.
We
have made payments to Fagen, Inc. as required under the design-build
agreement and as provided in the design-build agreement. We retained 10% of each payment until 50% of
the required work was completed by Fagen, Inc. As of April 30, 2008, we have retained
approximately $3.8 million in payments to Fagen, Inc. We will release to Fagen, Inc. all
retained amounts when final completion of construction is achieved and the
operation of our plant satisfies the air emissions warranties specified in the
design-build agreement with Fagen, Inc.
Under
the design-build agreement, substantial completion of the entire project must
be achieved no later than 485 calendar days after the date of commencement of
Fagen, Inc.’s work, excluding any delays caused by the modification of our
construction air emission permit.
Following substantial completion of the work and delivery of a
certificate of substantial completion, final completion of the work or
identified portions of the work will be achieved as expeditiously as reasonably
practicable, but not later than 60 days following issuance of the
certificate. Fagen, Inc. formally
accepted our notice to proceed on May 1, 2006 and we delivered a
certificate of substantial completion stating that substantial completion was
achieved as of September 21, 2007.
If
substantial completion is attained within 470 days after the date of
commencement, we will pay Fagen, Inc. at the time of the final payment an
early completion bonus of $10,000 per day for each day that substantial
completion occurred in advance of the 470 days.
If substantial completion is not attained within 500 days after the date
of commencement due to unexcused delay, Fagen, Inc. will pay us $20,000 as
liquidated damages for each day that substantial completion extends beyond 500
days. For the purposes of calculating
these provisions, delay due to the modification of the construction air
emission permit is specifically considered an excused delay. Fagen, Inc.’s aggregate liability for
liquidated damages, for failure to meet the performance and emission
warranties, and for costs associated with constructing our ethanol plant as a
gas-fired plant instead of a coal-fired plant is capped at $10.0 million.
As
part of our design-build agreement with Fagen, Inc., we received the
following performance guarantees on the production through put and process
efficiencies of our ethanol plant:
Plant Capacity
–
Operate at a rate of 50 mgy based on 4.76% denaturant.
Corn to Ethanol
– Not
less than 2.80 denatured gallons of ethanol per bushel.
Electrical Energy
– 0.95 kWh per denatured gallon of fuel grade
ethanol.
Btu Usage
–
Shall not exceed 37,000 Btu per denatured gallon of ethanol.
Fagen, Inc.
has also warranted that the air emissions on our ethanol facility, taken as a
whole, when operating at nameplate capacity meeting all of the performance
guarantee criteria, will meet the requirements of a synthetic minor source
within six months following the date of substantial completion. If this
warranty is not met, Fagen, Inc. will pay all design, engineering,
equipment, labor and construction costs associated with making the necessary
corrections to meet the warranty, subject to certain restrictions. Notwithstanding that our plant has been
operational since September 21, 2007, our plant does not yet meet the
warranties relating to air emissions.
See “Item 1. Business – Compliance with Environmental Laws and Other
Regulatory Matters” for a discussion of our air emissions permit.
Site Transportation
We
have made various improvements to our site and infrastructure in order to
construct and operate our ethanol plant.
In 2008, we made several roadway
improvements at the intersection of Minnesota Highway 60 and Jackson County
Road 24 for ingress and egress access to the ethanol plant off of Highway 60, as
well as completion of acceleration and turning lanes. Union Pacific Railroad is the railroad
adjacent to our site. We installed a
railroad siding with two loop tracks dedicated to outbound ethanol and
distillers grains, with the potential for inbound corn
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and coal.
The ethanol plant has the facilities necessary to receive corn by truck
and rail, coal by truck, and to load ethanol and distillers grains onto trucks
and rail cars.
Utilities and Energy Used in Our Ethanol Plant
Our
ethanol plant requires significant and uninterrupted amounts of electricity,
coal and water.
In
August 2006, we entered into an electric service agreement with Interstate
Power and Light Company (a wholly-owned subsidiary of Alliant Energy
Corporation). Pursuant to our agreement
with Interstate Power, we must obtain all of our electrical energy requirements
from Interstate Power and Interstate Power must provide us with all of our
electrical energy requirements, consisting of approximately 69,000 volts. We must notify Interstate Power if we
increase our demand for electrical energy in excess of 6,300 KVA. We must pay for this service at the rates set
out on a rate schedule applicable to bulk electricity supply, which may be
changed from time to time in accordance with the agreement and applicable
law. The rates for the electrical
service consist of a per day charge for basic service, a demand charge per
kilowatt hour, a daily charge per kilowatt hour, a facilities charge and a
reactive demand charge. The rates used
to calculate certain charges vary based on whether the kilowatt hours are used during
peak periods and by season. We are
billed a minimum charge of our actual demand for the month plus energy charges
for an additional 400 kilowatt hours. We
may not sell the electrical service to any other party and if we change
electrical service, we will be responsible for expense associated with
wiring. The agreement with Interstate
Power is for successive one-year terms beginning October 1, 2007 and may
be terminated by either party upon 90 days’ written notice.
Despite
our agreement with Interstate Power and Light Company, there can be no
assurance that we will receive a reliable supply of the electricity that we
need. Further, the price of electricity, like any commodity, could
fluctuate and increase significantly.
We
also entered into a contract with Federated Rural Electric Association in December 2006
for the construction of the distribution system and electrical substation for
the plant. To fund the purchase of the
distribution system and electrical substation for the plant, we entered into a
loan agreement with Federated Rural Electric Association pursuant to which we
borrowed $600,000 by a secured promissory note that bears no interest. Under the note we are required to make
monthly payments to Federated Rural Electric Association of $6,250 consisting
of principal and an annual handling fee of 1% beginning on October 10,
2009. In exchange for this loan,
Federated Rural Electric Association was granted a security interest in the
distribution system and electrical substation for the plant.
We
have constructed a coal receiving, handling and storage facility next to the
ethanol plant. Due to air permitting,
and performance and emissions guarantees of the design-build contract with
Fagen, Inc., a Wyoming/Montana-sourced coal must be used. As a result, in June 2007, we entered into
a master coal supply agreement with Northern Coal Transportation Company (NCTC)
to provide Powder River Basin (PRB) coal for the plant. The master coal supply agreement expires upon
60 days notice by either party. We are
obligated to purchase coal and NCTC is obligated to sell coal identified in a
confirmation that sets forth the quantity, price, term, mine and other relevant
terms. Under a letter confirmation dated
July 2007, we agreed to purchase a minimum number of tons in each contract
year which runs from June 1 to May 31 through the five year period
ending May 31, 2012. The letter
confirmation also sets the price per ton for each contract year. Also, in June 2007, we entered into a
coal transloading agreement with Southern Minnesota Beet Sugar Cooperative
(SMBSC). SMBSC also uses coal of the
same type as our ethanol plant to fuel its beet sugar plant. In order to achieve transportation
efficiencies, we and SMBSC entered into the coal transloading agreement so that
both of our coal orders could be delivered to a single facility (the
transloading facility) owned by SMBSC.
The coal is transferred from the transloading facility to each of our
respective plants and we pay SMBSC a per ton charge handling fee for the use of
the transloading facility.
Currently,
fly-ash generated from the coal burned by our plant is hauled to a
landfill. If it qualifies to predefined
industry standards, fly-ash can be used as an admixture for cement mixes
instead of being hauled to landfills. We
are continuing to explore revenue-generating alternatives from fly-ash rather
than incurring expense associated with shipping the fly-ash to landfills.
In
October 2003, we entered into an industrial water supply development and
distribution agreement with the City of Heron Lake, Jackson County, and
Minnesota Soybean Processors (“MnSP”).
Pursuant to this agreement, the City acquired property on which to
construct two water wells and associated facilities from which we draw the
water necessary for our ethanol plant.
The City designed the wells, with the engineering and related services
associated
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with such design paid by MnSP. The City owns and operates the well
facilities. These facilities may not be
connected to the City’s potable water supply nor may the City enter into supply
contracts with potable water users without the consent of MnSP and us. Under
the agreement, we have the exclusive right to the first 600 gallons per minute
(“gpm”) of capacity of the wells and MnSP has the exclusive right to the second
600 gpm. We are obligated to purchase
our supply of untreated water exclusively from the City under this agreement. In consideration of this agreement, we and
MnSP are allocated equally the debt service on $735,000 in water revenue bonds
that were issued by the City to support this project. We are also responsible
for operating costs of the well facilities in proportion to our use; these
operating costs include labor costs and other expenses associated with the
operation, maintenance and repair of the well facilities and all costs
associated with compliance with laws and permitting plus a 10% administrative
fee to the City. We began paying our
portion of the debt service and operating costs when the plant became
operational. The agreement provided for
changes in the payment schedule to result in the same aggregate payment to the
City as if our plant had become operational in 2004. Under this agreement, the City agreed to work
cooperatively with us to develop any required water treatment facilities, with
the expectation that we, together with any other users of the water treatment
facilities, will pay the costs related to the facilities. This agreement expires in February 2019
with the final scheduled maturities of the financing bonds. The parties have agreed that prior to the
scheduled expiration of the agreement, they will negotiate in good faith to
replace the agreement with a further agreement regarding the wells and related
facilities.
In
connection with our agreement to be a party to the October 2003 industrial
water supply development and distribution agreement, MnSP agreed that it would
pay us $100,000 and we agreed to issue to MnSP $50,000 of our units. In November 2003, we entered into a
payment and subscription agreement with MnSP to document the payment from MnSP
as received and by which we issued MnSP 28,750 units, the value of which was
agreed to be $50,000.
In
May 2006, we entered into an industrial water supply treatment agreement
with the City of Heron Lake and Jackson County.
Under this agreement, the City agreed to construct, finance and operate
a water treatment plant to supply treated water to our ethanol plant. In exchange, we pay for operating and
maintenance costs of the water treatment plant, as well as for certain
assessments, extraordinary maintenance expenses and monthly installments over
24 months starting January 1, 2007 equal to one years’ debt service on the
water revenue bonds, which will be returned to us if any remains after final
payment in full on the bonds and assuming we comply with all payment
obligations under the agreement.
Additionally, the industrial water supply treatment agreement allocated
to us the supply of water from the well facilities over 1,200 gpm and up to
1,800 gpm. We have the exclusive right
to the first 900 gpm of capacity from the water treatment facility (and up to
1,200 gpm if we choose to expand) and the City has the right to supply others
with the unused or excess capacity of treated water with our written
consent. We are obligated to purchase
our supply of treated water exclusively from the City under this agreement. The agreement has a term of 30 years. If the agreement is terminated and not
replaced by a similar agreement, we have the right to purchase the water
treatment facility for its fair market value at the time, subject to the
approval of the State of Minnesota.
Our
Principal Products
The
principal products that we produce are fuel grade ethanol and distillers
grains. Raw carbon dioxide is also a
product of the ethanol production process, but we do not capture or market any
carbon dioxide gas.
Ethanol
Ethanol
is a type of alcohol produced in the U.S. principally from corn. Ethanol is
primarily used in the U.S. gasoline fuel market as:
·
an octane enhancer in fuels;
·
an oxygenated fuel additive that can reduce
ozone and carbon monoxide vehicle emissions;
·
a gasoline substitute generally known as E85,
a fuel blend composed of 85% ethanol; and
·
as a renewable fuel to displace consumption
of imported oil.
Ethanol
used as an octane enhancer or fuel additive is blended with unleaded gasoline
and other fuel products. The principal
purchasers of ethanol are generally wholesale gasoline distributors or
blenders.
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Distillers Grains
The
principal co-product of the ethanol production process is distillers grains, a
high protein and high-energy animal feed ingredient.
Dry
mill ethanol processing creates three primary forms of distillers grains: wet
distillers grains, modified wet distillers grains, and dried distillers grains
with solubles. Wet distillers grains are
processed corn mash that contains a substantial amount of moisture. It has a shelf life of approximately three
days and is primarily sold to feeders of beef animals within the immediate
vicinity of the ethanol plant. Modified
wet distillers grains are similar to wet distillers grains except that it has
been partially dried and contains less moisture. Modified wet distillers grains has a shelf
life of a maximum of fourteen days, contains less water to transport, is more
easily adaptable to some feeding systems, and is sold to both local and
regional markets, primarily for both beef and dairy animals. Dried distillers grains with solubles are
corn mash that has been dried to approximately 10% moisture. It has an almost indefinite shelf life and
may be sold and shipped to any market and to almost all types of
livestock. Most of the distillers grains
that we sell are in the form of dried distillers grains.
Procurement
and Marketing Agreements
Corn Procurement
The
primary raw material used in the production of ethanol at our plant is
corn. We need to procure approximately
18 million bushels of corn per year for our dry mill ethanol process. We
generally do not have long-term, fixed price contracts for the purchase of corn
and our members are not obligated to deliver corn to us. Typically, we purchase
our corn directly from grain elevators, farmers, and local dealers within
approximately 80 miles of Heron Lake, Minnesota.
We
generally purchase corn through cash fixed-price contracts and may utilize
hedging positions in the corn futures market for a portion of our corn
requirements to manage the risk of excessive corn price fluctuations. Our
fixed-price forward contracts specify the amount of corn, the price and the
time period over which the corn is to be delivered. These forward contracts are
at fixed prices or prices based on the Chicago Board of Trade (CBOT) prices.
Our corn requirements can be forward contracted on either a fixed-price basis
or futures only contracts. The parameters of these contracts are based on the
local supply and demand situation and the seasonality of the price. We also
purchase a portion of our corn on a spot basis.
The
price and availability of corn is subject to significant fluctuation depending
upon a number of factors that affect commodity prices generally. These include,
among others, crop conditions, crop production, weather, government programs,
and export demands. Recently, corn
prices have been at historically high levels. We believe that our corn storage
facilities in Lakefield and Wilder, Minnesota will enable us to more favorably
procure corn for the operation of our plant.
Ethanol Marketing
In
August 2006, we entered into an ethanol marketing agreement with Renewable
Products Marketing Group, LLC that was transferred to its affiliate RPMG, Inc. Under the agreement, RPMG must use its best
efforts to market all ethanol produced by our ethanol plant pursuant to a
pooled marketing arrangement. We receive a price equal to the actual pooled
price received by RPMG, less the expense of distribution and a marketing fee
charged per gallon of ethanol sold. The
initial term of the agreement began on the first day of the month we shipped
ethanol from our plant and continues for a period of at least 24 months, but
will terminate at the end of the first traditional ethanol marketing contract
period after the 24-month period, the end of September or end of March,
whichever occurs first. After the initial term, the agreement automatically
renews for successive one-year terms unless terminated by either party upon 90
days’ notice. If the ethanol marketing
agreement is terminated, whether by non-renewal or otherwise, we are obligated
to leases for railcars that RPMG has procured on our behalf. Our ethanol may be distributed by truck and
rail from the plant.
Distillers Grains Marketing
In
addition to ethanol, our ethanol plant produces wet, modified wet and dried
distillers grains. We attempt to monitor the values of distillers grains and
produce a mix of wet, modified wet, and dry distillers grains to maximize
return to the plant.
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In
October 2005, we entered a marketing agreement with Commodity Specialists
Corporation for the sale to Commodity Specialists Corporation of all distillers
grains produced by our ethanol plant.
The term of the agreement is for a one-year period from the date of
start-up of our operations, and thereafter, the agreement will remain in effect
unless terminated by either party upon 90 days’ written notice. Under the terms of the agreement, we receive
a price equal to the selling price, less a charge of 2% or 4% of the price for
distillers grains and a fee of $2.00 per ton of solubles, less the cost of
delivering the product to the customer.
In August 2007, as part of CHS Inc.’s acquisition of Commodity
Specialist Corporation, our agreement with Commodity Specialist Corporation was
assigned to CHS Inc. with our consent.
Pricing of Corn and Ethanol
The
sale of ethanol represented approximately 79% of our revenue for the six months
ended April 30, 2008. The cost of
corn represented approximately 65% of our cost of sales for the six months
ended April 30, 2008. In the
future, we expect that ethanol sales will represent our primary revenue source
and corn will represent our primary
component of cost of goods sold.
Therefore, changes in the price at which we can sell the ethanol we
produce and the price at which we buy corn for our ethanol plant present
significant operational risks inherent in our business.
Generally,
the price at which ethanol can be sold does not track with the price at which
corn can be bought. Historically, ethanol prices have tended to correlate with
wholesale gasoline prices, with demand for and the price of ethanol increasing
as supplies of petroleum decreased or appeared to be threatened, crude oil
prices increased and wholesale gasoline prices increased. However, the prices of both ethanol and corn
do not always follow historical trends. Trends in ethanol prices and corn
prices are subject to a number of factors and are difficult to predict.
For
example, in 2007, although the demand for ethanol increased, additions to
ethanol production capacity and limitations on the ability to move production
to the retail market kept ethanol prices in check. Thus, as crude oil prices rose over June and
July of 2007, ethanol prices did not correspondingly increase. However, as crude prices declined in August and
September of 2007, ethanol prices declined more sharply. At the same time, the demand for and price of
corn increased dramatically, which some attributed to the increased
requirements of the ethanol industry.
However, in our fiscal year 2008, ethanol prices have increased
significantly.
Demand for
Ethanol
In
recent years, the demand for ethanol has increased, particularly in the upper
Midwest, in part because of two major programs established by the Clean Air Act
Amendments of 1990: the Oxygenated
Gasoline Program and the Reformulated Gasoline Program. Under these programs, an additive (oxygenate)
was required to be added to the gasoline used in areas with excessive carbon
monoxide or ozone pollution to help mitigate these conditions. Oxygenates allow gasoline to burn cleaner,
release less carbon monoxide and release fewer other exhaust emissions into the
atmosphere. According to the EPA, as of May 2007,
various regions of 15 states and the District of Columbia were required to
comply with the Reformulated Gasoline Program.
Although not required, according to the EPA, as of May 2007, all or
a portion of 13 states had also voluntarily opted into the program.
Methyl
tertiary butyl ether (MTBE) or ethanol were the two most common options to
increase oxygen content in the fuel, with MTBE being used until recently in a
majority of the oxygenated fuel sold in the United States. Continued use of MTBE has raised serious
environmental and health concerns.
In March 2000, the EPA announced that it had commenced regulatory
action to achieve a significant reduction in or a complete ban on the use of
MTBE. In addition to those states that
had already passed legislation banning or restricting the use of MTBE, other
states voluntarily responded to the EPA’s announcement by enacting legislation
prohibiting the sale of gasoline containing certain levels of MTBE or by
phasing out the use of MTBE entirely.
Because
of the potential health and environmental issues associated with MTBE and the
actions of the EPA, ethanol is now used as the primary oxygenate in those areas
requiring an oxygenate additive under programs associated with the Clean Air
Act Amendments of 1990 or other federal law.
In
addition to demand for ethanol as an oxygenate, ethanol demand has increased
because of the adoption of programs setting national renewable fuels standards
(RFS). These RFS programs were adopted
to help displace consumption of oil imported from non-U.S. sources and in response
to the concern that the United States’ dependence on imported oil petroleum to
meet its growing demand for transportation fuel undermines the United States’
energy security.
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The
first RFS program was introduced through the Energy Policy Act of 2005. The Energy Policy Act of 2005 introduced a
RFS program that set a national minimum usage requirement that would phase in
over seven years, beginning with approximately 4.0 billion gallons in 2006 and
increasing to 7.5 billion gallons by 2012.
The minimum usage requirements under the 2005 RFS program were increased
with the Energy Independence and Security Act of 2007. Currently, the minimum
usage requirements are 13.2 billion gallons of renewable biofuels by 2012 and
15.0 billion gallons by 2015. The Energy Independence and Security Act of
2007 also mandates a minimum requirement of 36 billion gallons of renewable
fuels by 2022, with conventional biofuels accounting for 15 billion gallons of
this total. Conventional biofuel is ethanol derived from corn starch and
conventional ethanol facilities that commence construction after the date of
enactment and must achieve a 20 percent greenhouse gas (GHG) emissions
reduction compared to baseline lifecycle GHG emissions. Advanced biofuels are defined as cellulosic
ethanol and other biofuels derived from feedstock other than corn starch that
achieves a 50 percent GHG emissions reduction requirement. Cellulosic ethanol
is any cellulose, hemicellulose, or lignin that is derived from renewable
biomass and achieves a 60 percent GHG emission reduction requirement.
We
believe the RFS program creates greater market for renewable fuels, such as
ethanol, as a substitute for petroleum-based fuels. While we cannot assure that this program’s
mandates will continue in the future, the following chart illustrates the
potential United States ethanol demand based on the schedule of minimum usage
established by the program through the year 2022 (in billions of gallons).
|
Year
|
|
Conventional
Biofuel
|
|
Total
Advanced
Biofuel
|
|
Advanced
Biofuel —
Cellulosic
Biofuel
|
|
Advanced
Biofuel —Biomass-based
Diesel
|
|
Undifferentiated
Advanced Biofuel
|
|
Total RFS
|
|
|
2008
|
|
9.00
|
|
—
|
|
—
|
|
—
|
|
—
|
|
9.00
|
|
|
2009
|
|
10.50
|
|
.60
|
|
—
|
|
.50
|
|
0.10
|
|
11.10
|
|
|
2010
|
|
12.00
|
|
.95
|
|
.10
|
|
.65
|
|
0.20
|
|
12.95
|
|
|
2011
|
|
12.60
|
|
1.35
|
|
.25
|
|
.80
|
|
0.30
|
|
13.95
|
|
|
2012
|
|
13.20
|
|
2.00
|
|
.50
|
|
1.00
|
|
0.50
|
|
15.20
|
|
|
2013
|
|
13.80
|
|
2.75
|
|
1.00
|
|
—
|
|
1.75
|
|
16.55
|
|
|
2014
|
|
14.40
|
|
3.75
|
|
1.75
|
|
—
|
|
2.00
|
|
18.15
|
|
|
2015
|
|
15.00
|
|
5.50
|
|
3.00
|
|
—
|
|
2.50
|
|
20.50
|
|
|
2016
|
|
15.00
|
|
7.25
|
|
4.25
|
|
—
|
|
3.00
|
|
22.25
|
|
|
2017
|
|
15.00
|
|
9.00
|
|
5.50
|
|
—
|
|
3.50
|
|
24.00
|
|
|
2018
|
|
15.00
|
|
11.00
|
|
7.00
|
|
—
|
|
4.00
|
|
26.00
|
|
|
2019
|
|
15.00
|
|
13.00
|
|
8.50
|
|
—
|
|
4.50
|
|
28.00
|
|
|
2020
|
|
15.00
|
|
15.00
|
|
10.50
|
|
—
|
|
4.50
|
|
30.00
|
|
|
2021
|
|
15.00
|
|
18.00
|
|
13.50
|
|
—
|
|
4.50
|
|
33.00
|
|
|
2022
|
|
15.00
|
|
21.00
|
|
16.00
|
|
—
|
|
5.00
|
|
36.00
|
|
While
the new RFS will likely stimulate the ethanol industry in the short term as
production increases to keep pace with demand to achieve compliance with the
RFS, the long-term impact of the RFS on the ethanol industry is uncertain. Starting in 2016, all of the increase in the
RFS targets must be met with advanced biofuels and the RFS targets for
conventional biofuels remain level at 15 billion gallons per year from 2015
through 2022. It is uncertain what
effect this lack of increase in targets for conventional biofuels under the RFS
program will have on the conventional biofuels industry or on our ethanol
business in particular.
In
addition to the RFS program, one important incentive for the ethanol industry
and its customers is the
Volumetric Ethanol Excise Tax Credit, commonly referred to as the “blender’s
credit.” The
tax credit is provided to gasoline distributors as an incentive to blend their
gasoline with ethanol. For each gallon
of gasoline blended with ethanol, the distributors receive a tax credit. For 2008, the tax credit is 51¢ per gallon of
pure ethanol or 5.1¢ per gallon of gasoline blended with 10% ethanol. The per gallon credit is scheduled to be
reduced to 45¢ per gallon of pure ethanol in 2009. The tax credit is authorized through December 21,
2010.
8
Table
of Contents
In
Minnesota, a market we serve, the demand for ethanol is driven, in part, by
state specific requirements. On May 10, 2005, Minnesota enacted a law that
requires all Minnesota gasoline to be blended with 20 percent ethanol. The new
E-20 mandate would take effect in 2013 unless ethanol has already replaced 20
percent of the state’s motor vehicle fuel by 2010. The rule would expire
at the end of 2010 if Minnesota is not granted federal approval to use E-20
gasoline blends. Minnesota has North
America’s largest network of E-85 (85% ethanol blend) gas stations with
approximately 130 stations now available to consumers. Minnesota was the first
state to require the use of ethanol in gasoline. Other states are beginning to enact similar
legislation. In 2004, Hawaii enacted a measure similar to Minnesota’s mandate.
Montana also adopted an E-10 requirement in May 2005.
According
to the RFA, ethanol production increased to 6.5 billion gallons in 2007 from
4.9 billion gallons in 2006, an increase of 32%. As of January 2008, ethanol was blended
into more than 50% of the gasoline sold in the U.S., the majority as E10 (a
blend of 10% ethanol and 90% gasoline). It is blended in every gallon of
gasoline sold in some areas of the U.S., including California, Minnesota,
Missouri, Texas, and along the Eastern seaboard from Washington, D.C. to
Boston.
Markets For
Ethanol
There
are local, regional and national markets for ethanol. Typically, a regional market is one that is
outside of the local market, yet within the neighboring states. Some regional markets include large cities
that are subject to anti-smog measures in either carbon monoxide or ozone non-attainment
areas, or that have implemented oxygenated gasoline programs, such as Chicago,
St. Louis, Denver and Minneapolis. We
consider our primary regional market to be large cities within a 450-mile
radius of our ethanol plant. In the
national ethanol market, the highest demand by volume is primarily in the
southern United States and the east and west coast regions.
The
markets in which our ethanol is sold will depend primarily upon the efforts of
RPMG, our ethanol marketer. However, we
believe that local markets will be limited and must typically be evaluated on a
case-by-case basis. Although local
markets will be the easiest to service, they may be oversold because of the
number of ethanol producers near our plant, which may depress the price of ethanol
in those markets. In addition, Minnesota
is a net exporter of ethanol. According
to the Minnesota Department of Agriculture, as of May 2008, Minnesota’s 17
operating ethanol plants have the capacity to produce 735 million gallons of
ethanol annually, which will use 268 million bushels of corn. In 2006, the most recent year for which
statistics are available, about 260 million gallons were consumed in Minnesota
and the state’s net ethanol export was 290 million gallons in 2006 or 53% of
Minnesota’s total annual ethanol production.
Therefore, we will likely be among the ethanol producers whose ethanol
is primarily exported from the State of Minnesota into regional markets. Access to regional markets and the national
market will be important to grow our business.
We
transport our ethanol primarily by rail.
In addition to rail, we service certain regional markets by truck from
time to time. We believe that regional
pricing tends to follow national pricing less the freight difference.
Markets for
Distillers Grains
We
sell distillers grains as animal feed for beef and dairy cattle, poultry and
hogs. However, the modified wet distillers grains typically have a shelf life
of a maximum of fourteen days. This
provides for a much smaller market and makes the timing of its sale
critical. Further, because of its
moisture content, the modified wet distillers grains are heavier and more
difficult to handle. The customer must
be close enough to justify the additional handling and shipping costs. As a result, modified wet distillers grains
are principally sold only to local feedlots and livestock operations.
Various
factors affect the price of distillers grain, including, among others, the
price of corn, soybean meal and other alternative feed products, the
performance or value of distillers grains in a particular feed market, and the
supply and demand within the market.
Like other commodities, the price of distillers grains can fluctuate
significantly.
Government
Incentives and Benefits
We
benefit both directly and indirectly from various incentive programs created by
the federal government and state governments, including the State of
Minnesota. The programs that we believe
provide us with an indirect benefit by stimulating demand for ethanol
production are discussed above under “Item 1.
Business – Demand For Ethanol.”
9
Table of Contents
These
programs are not without controversy, due in part to the cost of these programs
and the effect these programs have in reduction of tax revenues for the federal
or state government. Federal and state
regulations regarding the production of ethanol are subject to future
change. We cannot predict what material
impact, if any, these changes might have on our business. Future changes in governmental incentives and
benefits could reduce or eliminate benefits to us and that may adversely affect
our business. Future changes in
governmental incentives and benefits could result in new incentive programs or
benefits or increase benefits of programs for which we are not eligible, which
could prove beneficial to our competitors and thus adversely affect our
business.
The
programs that directly benefit our business and our members are discussed
below.
Federal Small Ethanol Producer Tax Credit
The
Federal Small Ethanol Producer Credit provides an eligible ethanol producer a
10¢ per gallon tax credit for the first 15 million gallons of ethanol produced annually,
subject to possible reduction for certain excise tax benefits. Under the program, ethanol producers that
qualify or their owners (for pass-through tax entities) can reduce their
federal income tax liability by the amount of the annual credit, subject to
limitations. However, benefit of the
credit is reduced somewhat because the amount of the credit must be added to
regular taxable income (but not to alternative minimum taxable income). Until recently, an eligible small ethanol
producer was defined as a producer whose annual production capacity was 30
million gallons or less, which effectively precluded most new plants from
qualifying for the tax credit. The
Energy Tax Incentives Act of 2005 increased the annual production capacity
limitation to 60 million gallons. The
credit is scheduled to expire on December 31, 2010. If it is not extended, taxpayers will have a
three-year carryforward in which to utilize unused credits.
For
fiscal year 2007, we were eligible as a small ethanol producer to participate
in the Federal Small Ethanol Producer Credit.
In fiscal year 2007, we produced approximately 4.9 million gallons of
ethanol that created a tax credit of approximately $493,000 that was passed on
to our members.
Job Opportunity Building Zones (“JOBZ”) Designation
Our
ethanol plant business currently qualifies for the State of Minnesota’s Job
Opportunity Building Zones (“JOBZ”) program administered by the Minnesota
Department of Employment and Economic Development (the “Department”). Our ethanol plant is located in one of the
ten Job Opportunity Building Zones designated by the Department. Our facilities in Lakefield, Minnesota and
Wilder, Minnesota are not located in a designated zone and, therefore, the
operations of these facilities do not benefit directly from the JOBZ
program. Under the JOBZ program,
qualifying businesses that operate in designated zones receive certain
exemptions from sales, income and property taxes and are eligible to receive
certain refundable jobs credits. The tax
exemptions afforded by this program will be available to qualified businesses
until the expiration of the program, currently scheduled for December 31,
2015.
For
our business, the material benefits we receive from the JOBZ program are:
·
A property tax exemption for our commercial
and industrial property, both real and personal, located in a Job Opportunity
Building Zone, excluding the land on which our ethanol plant was built.
·
A sales tax exemption that requires that
goods or taxable services must be primarily used in the Job Opportunity
Building Zone and purchased during a period when the area is designated as a
zone within the JOBZ program. This
exemption extends to contract purchases (if the final use of the property is in
the Job Opportunity Building Zone) and to local sales taxes.
We
also receive a number of benefits under the JOBZ program that are not material
to our overall operations, including, for example, an exemption from the motor
vehicle sales tax for vehicles used by a business in a zone and exemption from
certain minimum fees.
Some
of the benefits under the JOBZ program relate to income tax. We do not pay federal or state income tax as
an entity; instead, our members pay tax on their proportionate share of our
income. Therefore, certain of the
benefits under the JOBZ program will flow to our members, including the
following, which we believe will be of more significant benefit to our members.
·
An individual income tax exemption for income
derived from investing in or operating a qualified business in a Job
Opportunity Building Zone such as our business.
10
Table of Contents
·
A refundable jobs credit to us as a qualified
business operating in a Job Opportunity Building Zone equal to 7% of the lesser
of either (i) the increase in the business payroll in the zone since the year
of designation or (ii) the increases in total Minnesota payroll since the
year of designation, minus the increase in the number of full time employees in
the zone since designation multiplied by $30,000. This credit applies against chapter 290 taxes
(regular and alternative minimum tax under both the individual income and
corporate franchise taxes).
·
An extension of the individual income tax
exemption to the alternative minimum tax under the individual income tax and an
exemption from corporate alternative minimum tax for income from our zone
income.
·
A tax exemption for capital gains on our real
and tangible personal property located in a zone or the sale of our business
operated in a zone.
Our
members will also be impacted, although we believe less significantly, by other
aspects of the JOBZ program, including for example, reductions in dependent
care credits and working family credits for tax-exempt JOBZ income.
We
are required to submit an annual report to the commissioner of the Department
on our performance and compliance with the business subsidy law. Based on these annual reports, the commissioner
may take action that he considers appropriate, such as removing particular
properties from a zone or terminating a zone or subzone. In calendar year 2007, we estimate the
benefit we received as a company under the JOBZ program was approximately $2.3
million relating to the sales tax exemption on our purchases of otherwise
taxable goods and services in connection with the construction of our ethanol
plant. Because we purchased much of the
goods and services for the construction of our ethanol plant prior to the start
of plant operations in September 2007, we expect our future direct
benefits under the JOBZ program to diminish in fiscal year 2008. To the extent the JOBZ program continues as
currently enacted, we anticipate that our members will benefit from the JOBZ
program primarily through the individual income tax exemptions. As and if the income of our members
attributable to our operations increases, so too will the benefits our members
receive under the JOBZ program.
Competition
Producers of Ethanol
We
compete with producers of ethanol products both locally and nationally, with
more intense competition for sales of ethanol among ethanol producers in close
proximity to our ethanol plant as these competitors may be more likely to sell
to the same markets that we target for our ethanol. Within an approximately 100 mile radius of
our ethanol plant, there are 35 ethanol plants as of June 2008.
We
sell our ethanol in a highly competitive market. We are in direct competition with numerous
other ethanol producers, both regionally and nationally, many of which have
more experience and greater resources than we do. Some of these producers are, among other
things, capable of producing a significantly greater amount of ethanol or have
multiple ethanol plants that may help them achieve certain benefits that we
could not achieve with one ethanol plant.
Further, new products or methods of ethanol production developed by
larger and better-financed competitors could provide them competitive
advantages over us and harm our business.
A majority of the ethanol plants in the U.S. and the greatest number of
gallons of ethanol production are located in the corn-producing states, such as
Iowa, Nebraska, Illinois, Minnesota, South Dakota, Indiana, Ohio, Kansas, and
Wisconsin.
[remainder of page intentionally blank]
11
Table
of Contents
Below
is the U.S. ethanol production by state in millions of gallons for the ten
states with the most total ethanol production, either online or under
construction/expansion, as of January 2008:
|
State
|
|
Online
|
|
Under
Construction/
Expansion
|
|
Total
|
|
|
Iowa
|
|
2,059.0
|
|
1,435.0
|
|
3,494.0
|
|
|
Nebraska
|
|
1,143.5
|
|
691.0
|
|
1,834.5
|
|
|
Illinois
|
|
887.0
|
|
254.0
|
|
1,141.0
|
|
|
Minnesota
|
|
619.6
|
|
457.5
|
|
1,077.1
|
|
|
South Dakota
|
|
683.0
|
|
283.0
|
|
966.0
|
|
|
Indiana
|
|
470.0
|
|
450.0
|
|
920.0
|
|
|
Ohio
|
|
68.0
|
|
470.0
|
|
538.0
|
|
|
Kansas
|
|
432.5
|
|
75.0
|
|
507.5
|
|
|
Wisconsin
|
|
408.0
|
|
90.0
|
|
498.0
|
|
|
Texas
|
|
100.0
|
|
255.0
|
|
355.0
|
|
Source: Renewable Fuels Association, January 2008
Accordingly,
we face increased competition because of the location of our ethanol plant in
Minnesota.
According
to the Renewable Fuel Association (RFA), as of June 2008, 160 U.S.
facilities have the capacity to produce approximately 9 billion gallons of
ethanol annually with an additional 4.4 billion gallons of capacity under
construction. Despite the rapid increase
in production, consumption of ethanol has been outpacing production for the
past few years, which has led to increased imports in the United States,
primarily from Brazil. According to the
RFA, in 2007, the U.S. produced 6.5 billion gallons of fuel ethanol and
imported 426.2 million gallons, with approximately 44% imported from
Brazil. In addition to intense
competition with local, regional and national producers of ethanol, we expect
increased competition with imported ethanol and foreign producers of ethanol.
Producers of Other Fuel Additives and Alternative
Fuels
In
addition to competing with ethanol producers, we also compete with producers of
other gasoline oxygenates. Many gasoline
oxygenates are produced by other companies, including oil companies, that have
far greater resources than we do.
Historically, as an gasoline oxygenate, ethanol primarily competed with
two gasoline oxygenates, both of which are ether-based: MTBE (methyl tertiary butyl ether) and ETBE
(ethyl tertiary butyl ether). Many states have enacted legislation prohibiting
the sale of gasoline containing certain levels of MTBE or are phasing out the
use of MTBE because of heath and environmental concerns. As a result, national use of MTBE has
decreased significantly in recent years.
Use of ethanol now exceeds that of MTBE and ETBE as a gasoline
oxygenate.
While
ethanol has displaced these two gasoline oxygenates, the development of ethers
intended for use as oxygenates is continuing and we will compete with producers
of any future ethers used as oxygenates.
A
number of automotive, industrial and power generation manufacturers are
developing alternative fuels and power systems, both for vehicles and other
applications. Fuel cells have emerged as
a potential alternative power system 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.
Additionally,
there are more than a dozen alternative and advanced fuels currently in production
or use, including the following alternative fuels that, like ethanol, have been
or are currently commercially available for vehicles:
|
·
biodiesel
|
|
·
methanol
|
|
·
electricity
|
|
·
natural gas
|
|
·
hydrogen
|
|
·
propane
|
12
Table of Contents
Several
emerging fuels are currently under development. Many of these fuels are also
considered alternative fuels and may have other benefits such as reduced
emissions or decreasing dependence upon oil.
Examples of emerging fuels include:
·
Biobutanol: Like ethanol, biobutanol is an
alcohol that can be produced through processing of domestically grown crops,
such as corn and sugar beets, and other biomass, such as fast-growing grasses
and agricultural waste products
·
Biogas:
Produced from the anaerobic digestion of organic matter such as animal
manure, sewage, and municipal solid waste. After it is processed to required
standards of purity, biogas becomes a renewable substitute for natural gas and
can be used to fuel natural gas vehicles.
·
Fischer-Tropsch Diesel: Diesel made by converting gaseous
hydrocarbons, such as natural gas and gasified coal or biomass, into liquid
fuel, including transportation fuel.
·
Hydrogenation-Derived Renewable Diesel
(HDRD): The product of fats or vegetable oils—alone or blended with
petroleum—that has been refined in an oil refinery.
·
P-Series: A blend of natural gas liquids
(pentanes plus), ethanol, and the biomass-derived co-solvent
methyltetrahydrofuran (MeTHF) formulated to be used in flexible fuel vehicles.
·
Ultra-Low Sulfur Diesel: diesel fuel with 15
parts per million or lower sulfur content. This ultra-low sulfur content
enables use of advanced emission control technologies on vehicles using ULSD
fuels produced from non-petroleum and renewable sources that are considered
alternative fuels.
Additionally,
there are developed and developing technologies for converting natural gas,
coal and biomass to liquid fuel, including transportation fuels such as
gasoline, diesel, and methanol.
We
expect that competition will increase between ethanol producers, such as Heron
Lake BioEnergy, LLC and producers of these or other newly developed alternative
fuels or power systems, especially to the extent they are used in similar
applications such as vehicles.
Competition For Corn
We
will compete with ethanol producers in close proximity for the supplies of corn
we will require to operate our plant.
For 2008, Minnesota’s ethanol production is projected to reach 1 billion
gallons, consuming approximately 25% of the state’s corn crop. The existence and development of other
ethanol plants, particularly those in close proximity to our plant, will
increase the demand for corn that may result in higher costs for supplies of
corn.
We
compete with other users of corn, including ethanol producers regionally and
nationally, producers of food and food ingredients for human consumption (such
as high fructose corn syrup, starches, and sweeteners), producers of animal
feed and industrial users. According to
the U.S. Department of Agriculture, for 2007:
25.2% of U.S. corn was used in ethanol production, with 45.9% being used
in feed production, 18% exported and the remaining 10.9% being used in food,
seed and other industrial uses.
Competition For Personnel
We
will also compete with ethanol producers in close proximity for the personnel
we will require to operate our plant.
The existence and development of other ethanol plants will increase
competition for qualified managers, engineers, operators and other
personnel. We also compete for personnel
with businesses other than ethanol producers and with businesses located
outside the community of Heron Lake, Minnesota.
Competition for Distillers Grains
The
amount of distillers grains produced annually in North America is expected to
increase significantly as the number of ethanol plants increase. We compete with these producers of distillers
grains products both locally and nationally, with more intense competition for
sales of distillers grains among ethanol producers in close proximity to our
ethanol plant as these competitors may be more likely to sell to the same
markets that we target for our distillers grains.
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Additionally,
distillers grains compete with other feed formulations, including 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. Distillers grains contain nutrients, fat
content, and fiber that we believe will differentiate our distillers grains
products from other feed formulations.
However, producers of other forms of animal feed may also have greater
experience and resources than we do and their products may have greater
acceptance among producers of beef and dairy cattle, poultry and hogs. We believe that the demand for distillers
grains may increase as the feed industry becomes more familiar with its
benefits. The market for distillers
grains is generally confined to locations where freight costs allow it to be
competitively priced against other feed ingredients.
Hedging
We
may hedge anticipated corn purchases and ethanol sales through a variety of
mechanisms.
We
procure corn through spot cash, fixed-price forward, basis only, futures only,
and delayed pricing contracts.
Additionally, we may use hedging positions in the corn futures and
options market to manage the risk of excessive corn price fluctuations for a
portion of our corn requirements.
For
our spot purchases, we post daily corn bids so that corn producers can sell to
us on a spot basis. Our fixed-price forward contracts specify the amount of
corn, the price and the time period over which the corn is to be delivered.
These forward contracts are at fixed prices indexed to Chicago Board of Trade,
or CBOT, prices. Our corn requirements
can be contracted in advance under fixed-price forward contracts or
options. The parameters of these
contracts are based on the local supply and demand situation and the
seasonality of the price. For delayed
pricing contracts, producers will deliver corn to our elevators, but the
pricing for that corn and the related payment will occur at a later date.
To
hedge a portion of our exposure to corn price risk, we may buy and sell futures
and options positions on the CBOT. In
addition, our facilities have significant corn storage capacity. We generally maintain inventories of corn at
our ethanol plant, but can draw from our elevators at Lakefield and Wilder to
protect against supply disruption. At the ethanol plant, we have the ability to
store approximately 10 days of corn supply and our elevators have capacity for
approximately an additional 50 days of supply.
We
market all of our ethanol through RPMG, Inc., which is obligated to use
reasonable efforts to obtain the best price for our ethanol. To mitigate ethanol price risk and to obtain
the best margins on ethanol that is marketed and sold by RPMG, we may utilize
ethanol swaps, over-the-counter (“OTC”) ethanol swaps, or OTC ethanol options
that are typically settled in cash, rather than gallons of the ethanol we
produce.
Our
marketing and risk management committee, consisting of Doug Schmitz, David J.
Woestehoff, Timothy O. Helgemoe, and David M. Reinhart, assists the board and
our risk management personnel to, among other things, establish appropriate
policies and strategies for hedging and enterprise risk.
Compliance
with Environmental Laws and Other Regulatory Matters
Our
business subjects us to various federal, state and local environmental laws and
regulations, including those relating to discharges into the air, water and
ground; the generation, storage, handling, use, transportation and disposal of
hazardous materials; and the health and safety of our employees.
These
laws and regulations require us to obtain and comply with numerous permits to
construct and operate our ethanol plant, including water, air and other
environmental permits. On March 12,
2007, we entered into an agreement with Fagen Engineering, LLC, an affiliate of
Fagen, Inc., for the development of environmental compliance programs and
related services, which was completed in September 2007. On March 26, 2008, we entered into an
agreement with Fagen Engineering, LLC for environmental compliance training
services.
The
costs associated with obtaining these permits and meeting the demands of
regulators reflected in the permits have increased our costs of
construction. In particular, we have
incurred additional costs relating to an air-emission permit from the Minnesota
Pollution Control Agency (“MPCA”). We
applied for a synthetic minor air-emissions source permit in July 2004
that was granted by the MPCA in May 2005.
In June 2005, a coalition of two environmental and one energy group
challenged the grant of this air emissions permit by an appeal to the Minnesota
Court of Appeals and in July 2006, the Minnesota Court of Appeals affirmed
the MPCA’s issuance of the permit. In
conjunction with the permit and the permit dispute and to prevent further
appeals by the coalition, we entered into a compliance agreement with the MPCA
on January 23, 2007 that currently governs the air emissions from our
plant.
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Under the compliance agreement, we also
agreed to submit an amendment to our air permit to qualify our facility as a “major
emissions source.” We have submitted an
amendment to our air permit as required under the compliance agreement and
exclusively to comply with that agreement.
However, we are continuing discussions with the MPCA regarding the
necessity for qualifying our facility as a major emissions source, particularly
in light of recent changes in federal law that increased the limit of certain
emissions allowed as a synthetic minor source.
Pending the resolution of this air permit issue, we continue to operate
under the air emissions thresholds described in the compliance agreement in
lieu of an amended permit. During June and
July 2008, we completed air pollution control device testing to determine
compliance with synthetic minor source thresholds. Some of these results have been provided to
the MPCA, while others are still being processed. Additionally, we, with the ongoing assistance
of Fagen, Inc., anticipate conducting additional air emissions testing under
different conditions. Therefore, we
continue to operate under the compliance agreement pending the results of
testing and further discussions with the MPCA regarding qualifying our facility
as a major emissions source.
Other
than as discussed above, we have obtained all permits we believe are necessary
for the construction and operation of our ethanol plant.
Compliance
with these laws and permits in the future could require expensive pollution
control equipment or operational changes to limit actual or potential impacts
to the environment, as well as significant management time and expense. A violation of these laws, regulations or
permit conditions can result in substantial fines, natural resource damage,
criminal sanctions, permit revocations and/or plant shutdown, any of which
could have a material adverse effect on our operations.
Employees
We
presently have 46 full-time employees, of which 38 are in operations and 8 are
in executive, general management and administration. We also have three part-time employees in
operations. We also have engaged James
A. Gerber as our interim chief financial officer on a contract basis. We do not maintain an internal sales
organization, but instead rely upon third-parties to market and sell the
ethanol and distillers grains that we produce.
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Item
1A. Risk Factors
If
any of the following risks actually occur, our results of operations, cash
flows and the value of our units could be negatively impacted. Although we
believe that we have identified and discussed below the key risk factors
affecting our business, there may be additional risks and uncertainties that
are not presently known or that are not currently believed to be significant
that may adversely affect our performance or financial condition.
Risks
Related To Our Business And Operations
Our business is highly dependent on commodity prices, which are subject
to significant volatility and uncertainty, so our results could fluctuate
significantly.
We
generally do not have long-term, fixed price contracts for the purchase of
corn, our principal input, or for the sale of ethanol, our principal
product. Therefore, our results of
operations, financial position and business outlook are substantially dependent
on commodity prices, especially prices for corn, ethanol and unleaded gasoline.
Prices for these commodities are generally subject to significant volatility
and uncertainty. As a result, our future financial results may fluctuate
substantially.
In
addition, we may experience periods of declining prices for our ethanol and
increasing costs for our raw materials, which could result in operating losses.
We may attempt to offset a portion of the effects of such fluctuations by
entering into forward contracts to supply ethanol or to purchase corn, or by
engaging in transactions involving options and futures contracts. These activities involve substantial cost and
substantial risk, and ultimately may be ineffective in mitigating the
fluctuations in corn and ethanol prices.
Corn prices will fluctuate and could increase significantly, which will
increase our operating costs and could adversely affect our operating results
because we generally cannot pass on increases in corn prices to our customers.
Corn
is the principal raw material we use to produce ethanol and distillers grains.
At certain levels, corn prices would make ethanol uneconomical to use in fuel
markets. The price of corn is influenced
by weather conditions (including droughts) and other factors affecting crop
yields, farmer planting decisions and general economic, market and regulatory factors,
including government policies and subsidies with respect to agriculture and
international trade, and global and local supply and demand. In particular, increasing domestic ethanol
capacity could boost demand for corn and result in increased corn prices. Any decline in the corn harvest, caused by
farmer planting decisions or otherwise, could cause corn prices to increase and
negatively impact our gross margins. The
price of corn has fluctuated significantly in the past and may fluctuate
significantly in the future. Generally,
we are unable to pass along increased corn costs to our customers, and
accordingly, rising corn prices will tend to produce lower profit margins.
Fluctuations in the selling price and production cost of gasoline may
reduce our profit margins.
Ethanol
is marketed both as a fuel additive to reduce vehicle emissions from gasoline
and as an octane enhancer to improve the octane rating of gasoline with which
it is blended. As a result, ethanol prices are influenced by the supply and
demand for gasoline and our business, future results of operations and
financial condition may be materially adversely affected if gasoline demand or
prices decrease.
The price of distillers grains is affected by the price of other
commodity products, such as soybeans, and decreases in the price of these
commodities could decrease the price of distillers grains.
Distillers
grains compete with other protein-based animal feed products. The price of
distillers grains may decrease when the price of competing feed products
decrease. The prices of competing animal feed products are based in part on the
prices of the commodities from which they are 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. Because the price of distillers grains is not tied to
production costs, decreases in the price of distillers grains would result in
less revenue from the sale of distillers grains and could result in lower
profit margins.
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As more ethanol plants are built, ethanol production will increase and,
if demand does not sufficiently increase, the price of ethanol and distillers
grains may decrease.
According
to the RFA, domestic ethanol production capacity has increased steadily from
1.7 billion gallons per year in 1999 to 6.5 billion gallons per year in 2007.
In addition, there is a significant amount of production capacity being added
to the ethanol industry. According to the RFA, approximately 4 billion gallons
per year of production capacity will come online in 2008 from 65 plants under
construction or expanding. This capacity is being added to address anticipated
increases in demand. However, demand for ethanol may not increase as quickly as
expected or to a level that exceeds supply, or at all. Recently, several
ethanol companies have announced the postponement of ethanol plants under
construction due, in part, to concerns about excess production capacity in the
ethanol industry and its impact on ethanol prices.
Excess
ethanol production capacity also may result from decreases in the demand for
ethanol or increased imported supply, which could result from a number of
factors, including regulatory developments and reduced gasoline consumption in
the U.S. Reduced gasoline consumption could occur as a result of increased
prices for gasoline or crude oil, which could cause businesses and consumers to
reduce driving or acquire vehicles with more favorable gasoline mileage, or as
a result of technological advances, such as the commercialization of engines
utilizing hydrogen fuel-cells, which could supplant gasoline-powered engines.
There are a number of governmental initiatives designed to reduce gasoline
consumption, including tax credits for hybrid vehicles and consumer education
programs.
If
ethanol prices decline for any reason, including excess production capacity in
the ethanol industry, our business, results of operations and financial
condition may be materially and adversely affected.
In
addition, because ethanol production produces distillers grains as a
co-product, increased ethanol production will also lead to increased production
of distillers grains. An increase in the supply of distillers grains, without
corresponding increases in demand, could lead to lower prices or an inability
to sell our distillers grains production. A decline in the price of distillers
grains or the distillers grains market generally could have a material adverse
effect on our business, results of operations and financial condition.
Our operations could be adversely affected by infrastructure
disruptions and the price of our ethanol could be depressed by lack of adequate
transportation and storage infrastructure in certain areas.
We
ship our ethanol to our customers primarily by the railroad adjacent to our
site. We also have the potential to
receive inbound corn via the railroad, although we currently receive corn by
truck from our facilities Lakefield, Minnesota and Wilder, Minnesota, each of
which is less than 15 miles away from our plant. Our customers require appropriate
transportation and storage capacity to take delivery of the products we
produce. Therefore, our business is
dependent on the continuing availability of rail, highway and related
infrastructure. Any disruptions in this
infrastructure network, whether caused by labor difficulties, earthquakes,
storms, other natural disasters, human error or malfeasance or other reasons,
could have a material adverse effect on our business. We rely upon
third-parties to maintain the rail lines from our plant to the national rail
network, and any failure on their part to maintain the lines could impede our
delivery of products, impose additional costs on us and could have a material
adverse effect on our business, results of operations and financial condition.
In
addition, lack of this infrastructure prevents the use of ethanol in certain
areas where there might otherwise be demand and results in excess ethanol
supply in areas with more established ethanol infrastructure, depressing
ethanol prices in those areas. In order
for the ethanol industry to grow and expand into additional markets and for our
ethanol to be sold in these new markets, there must be substantial development
of infrastructure including:
·
additional rail capacity;
·
additional storage facilities for ethanol;
·
increases in truck fleets capable of
transporting ethanol within localized markets;
·
expansion of refining and blending facilities
to handle ethanol; and
·
growth in service stations equipped to handle
ethanol fuels.
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The
substantial investments that will be required for these infrastructure changes
and expansions may not be made on a timely basis, if at all, and decisions
regarding these infrastructure improvements are outside of our control. Significant delay or failure to improve the
infrastructure that facilitates the distribution could curtail more widespread
ethanol demand or reduce prices for our products in certain areas, which would
have a material adverse effect on our business, results of operations or
financial condition.
We face intense competition from competing ethanol producers.
Competition
in the ethanol industry is intense. We face formidable competition in every
aspect of our business from established producers of ethanol, including Archer
Daniels Midland Company, Cargill, Inc., VeraSun Energy Corporation, and
from other companies that are seeking to develop large-scale ethanol plants and
alliances. According to the RFA, the top ten producers accounted for
approximately 56% of the ethanol production capacity in the U.S. in 2007. Some of our competitors are divisions of
substantially larger enterprises and have substantially greater financial,
operational, procurement, marketing, distribution and technical resources than
we do. Additionally, smaller
competitors, such as farmer-owned cooperatives and independent companies owned
by farmers and investors, have been able to compete successfully in the ethanol
industry. Some of these competitors have business advantages, such as the
ability to more favorably procure corn by operating smaller plants that may not
affect the local price of corn as much as a larger-scale plant like ours or
requiring their farmer-owners to sell them corn as a requirement of
ownership. A significant portion of
production capacity in our industry consists of smaller-sized plants. We expect competition to increase, both from
large and small competitors, as the ethanol industry becomes more widely known
and demand for ethanol increases.
We
also face increasing competition from international suppliers. Although there
is a tariff on foreign-produced ethanol (which is scheduled to expire in 2010)
that is roughly equivalent to the federal ethanol tax incentive, ethanol
imports equivalent to up to 7.0% of total domestic production from certain
countries are exempted from this tariff under the Caribbean Basin Initiative to
spur economic development in Central America and the Caribbean. Currently, international suppliers produce
ethanol primarily from sugar cane, which is a significantly more efficient raw
material from which to produce ethanol than corn, and have cost structures that
can be substantially lower than ours.
Competing
ethanol producers may also introduce competitive pricing pressures that may
adversely affect our sales levels and margins or our ability to procure corn at
favorable prices. As a result, we cannot assure you that we will be able to
compete successfully with existing or new competitors.
We have a limited operating history and a history of losses, and our
business may not be successful.
We
were organized as a Minnesota limited liability company in April 2001 and
did not begin producing ethanol until September 21, 2007. In October 2007, we began recording
revenues from our ethanol production activity.
Accordingly, we have a limited operating history from which to evaluate
our business and prospects. We have
accumulated losses from inception through October 31, 2007 of
approximately $6.9 million. If we cannot
successfully address these risks, our business, future results of operations
and financial condition may be materially adversely affected. While we had a net profit of approximately
$10.7 million for the six months ended April 30, 2008, we cannot assure
you that we will be able to increase our revenues, operate profitably, or
successfully operate our business. Our
prospects must be considered in light of the risks and uncertainties
encountered by an early-stage company and in a rapidly evolving market, such as
the ethanol market, where supply and demand may change significantly in a short
period of time. In addition, most of our
governors and executive officers have no expertise in the ethanol industry or
governing and operating a public company.
While our governors and executive officers are experienced in business
generally, their lack of experience in the ethanol industry and managing a
public company may present additional risks to our business.
Some
of the risks and uncertainties we may encounter relate to our potential
inability to:
·
effectively manage our business and
operations, in particular the pricing risks inherent in the sale of ethanol and
purchase of corn;
·
recruit and retain key personnel;
·
comply with our obligations as a public
reporting company while maintaining a low-cost structure; and
·
successfully address the other risks
described throughout this registration statement on Form 10.
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We engage in hedging transactions which involve risks that can harm our
business.
In
an attempt to offset some of the effects of volatility of ethanol prices and
corn costs, we may enter into cash fixed-price contracts to sell a portion of
our ethanol and distillers grains production or purchase a portion of our corn
requirements. We may use exchange-traded futures contracts and options to
manage commodity risk. The impact of these activities depends upon, among other
things, the prices involved and our ability to sell sufficient products to use
all of the corn for which we have futures contracts. Hedging arrangements also
expose us to the risk of financial loss in situations where the other party to
the hedging contract defaults on its contract or, in the case of
exchange-traded contracts, where there is a change in the expected differential
between the underlying price in the hedging agreement and the actual prices
paid or received by us. Hedging activities can themselves result in losses when
a position is purchased in a declining market or a position is sold in a rising
market. A hedge position is often settled in the same time frame as the
physical commodity is either purchased (corn) or sold (ethanol). We may
experience hedging losses in the future.
We also vary the amount of hedging or other price mitigation strategies
we undertake, and we may choose not to engage in hedging transactions at
all. As a result, whether or not we
engage in hedging transactions, our business, results of operations and
financial condition may be materially adversely affected by increases in the
price of corn or decreases in the price of ethanol.
Operational difficulties at our plant could negatively impact our sales
volumes and could cause us to incur substantial losses.
Our
operations are subject to labor disruptions, unscheduled downtime and other
operational hazards inherent in our industry, such as equipment failures,
fires, explosions, abnormal pressures, blowouts, pipeline ruptures,
transportation accidents and natural disasters. Some of these operational
hazards may cause personal injury or loss of life, severe damage to or
destruction of property and equipment or environmental damage, and may result
in suspension of operations and the imposition of civil or criminal penalties.
Our insurance may not be adequate to fully cover the potential operational
hazards described above or we may not be able to renew this insurance on
commercially reasonable terms or at all.
Furthermore, we may have difficulty managing the necessary process
maintenance required to maintain our nameplate production capacity of 50
mgy. If our ethanol plant does not
produce ethanol and distillers grains at the levels we expect, our business,
results of operations, and financial condition may be materially adversely
affected.
Competition for qualified personnel in the ethanol industry is intense
and we may not be able to hire and retain qualified personnel to operate our
ethanol plant.
Our
success depends in part on our ability to attract and retain competent
personnel. For our ethanol plant, we must hire qualified managers, operations
personnel, accounting staff and others, which can be challenging in a rural
community. Competition for employees in
the ethanol industry is intense, and we may not be able to attract and retain
qualified personnel. If we are unable to
hire productive and competent personnel and retain our existing personnel, our
business may be adversely affected and we may not be able to efficiently
operate our ethanol business and comply with our other obligations.
Technology in our industry evolves rapidly, potentially causing our
plant to become obsolete, and we must continue to enhance the technology of our
plant or our business may suffer.
We
expect that technological advances in the processes and procedures for
processing ethanol will continue to occur. It is possible that those advances
could make the processes and procedures that we utilize at our ethanol plant
less efficient 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 those of our competitors, which could
cause our ethanol plant to become uncompetitive.
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Ethanol
production methods are constantly advancing. 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 and
municipal solid waste. 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
that are unable to grow corn. Another trend in ethanol production research is
to produce ethanol through a chemical or thermal process, rather than a
fermentation process, thereby significantly increasing the ethanol yield per
pound of feedstock. Although current technology does not allow these production
methods to be competitive, new technologies may develop that would allow these
methods to become viable means of ethanol production in the future. If we are
unable to adopt or incorporate these advances into our operations, our cost of
producing ethanol could be significantly higher than those of our competitors,
which could make our ethanol plant obsolete. Modifying our plant to use the new
inputs and technologies would likely require material investment.
If ethanol fails to compete successfully with other existing or
newly-developed oxygenates or renewable fuels, our business will suffer.
Alternative
fuels, additives and oxygenates are continually under development. Alternative
fuels and fuel additives that can replace ethanol are currently under
development, which may decrease the demand for ethanol. Technological advances
in engine and exhaust system design and performance could reduce the use of
oxygenates, which would lower the demand for ethanol, and our business, results
of operations and financial condition may be materially adversely affected.
We have a significant amount of debt, and our existing debt financing
agreements contain, and our future debt financing agreements may contain,
restrictive covenants that limit distributions and impose restrictions on the
operation of our business. Our debt level or our failure to comply with
applicable debt financing covenants and agreements could have a material adverse
effect on our business, results of operations and financial condition.
As
of April 30, 2008, our total long-term debt was approximately $67.4
million and our outstanding revolving line of credit balance was approximately
$4.9 million. We had total available
long-term borrowing capacity on our revolving term note of $3.9 million and
total short-term borrowing capacity on our revolving line of credit of $2.2
million. We also may incur additional
debt to fund operations at our plant or in connection with other development
projects or acquisitions.
The
use of debt financing makes it more difficult for us to operate because we must
make principal and interest payments on the indebtedness and abide by covenants
contained in our debt financing agreements. The level of our debt may have
important implications on our operations, including, among other things:
·
limiting our ability to obtain additional
debt or equity financing;
·
making us vulnerable to increases in
prevailing interest rates;
·
placing us at a competitive disadvantage
because we may be substantially more leveraged than some of our competitors;
·
subjecting all or substantially all of our
assets to liens, which means that there may be no assets left for members in
the event of a liquidation;
·
limiting our ability to adjust to changing
market conditions, which could make us more vulnerable to a downturn in the
general economic conditions of our business; and
·
limiting our ability to make business and
operational decisions regarding our business and our subsidiaries, including,
among other things, limiting our ability to pay dividends to our members, make
capital improvements, sell or purchase assets or engage in transactions we deem
to be appropriate and in our best interest.
The
terms of our existing debt financing agreements contain, and any future debt
financing agreement we enter into may contain, financial, maintenance,
organizational, operational and other restrictive covenants. If we are unable
to comply with these covenants or service our debt, we may lose control of our
business and be forced to reduce or delay planned capital expenditures, sell
assets, restructure our indebtedness or submit to foreclosure proceedings, all
of which could result in a material adverse effect upon our business, results
of operations and financial condition.
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Following the effectiveness of this Registration Statement on Form 10,
we will be subject to financial reporting and other requirements for which our
accounting, internal audit and other management systems and resources may not
be adequately prepared.
Following
the effectiveness of this Registration Statement on Form 10, we will
become subject to reporting and other obligations under the Securities Exchange
Act of 1934, as amended, or the Exchange Act.
None of our executive officers and only one of our governors has ever
served as such with a company that is required to file reports under the
Exchange Act. These reporting and other
obligations will place significant demands on our management, administrative,
operational, internal audit and accounting resources. As a result, we may not
be able or qualified to efficiently and correctly deal with our financial
accounting issues and preparation of the Exchange Act reports. If we are unable to correctly deal with our
financial accounting issues and prepare our Exchange Act reports, we may be
exposed to significant liabilities and have difficulty raising additional
capital.
Our failure to achieve and maintain effective internal controls over
financial reporting may have a material effect on our business.
In
connection with the audit of our financial statements for our fiscal year ended
October 31, 2007, the auditors noted that there were material weaknesses
in our internal control over financial reporting relating to lack of
segregation of duties, period-end closing procedures, and inadequate number of
accounting department personnel. A “material
weakness” is a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected.
We
cannot be certain that any steps we take to remediate these deficiencies will
ensure that we implement and maintain adequate controls over our financial
reporting processes. In addition, we
cannot assure you that we will not in the future identify further material
weaknesses or significant deficiencies in our internal control over financial
reporting, which may impact the reliability of our financial reporting and
financial statements.
In
the future we will be subject to Section 404 of the Exchange Act, which
requires an annual management assessment of the effectiveness of our internal
control over financial reporting and an attestation by our independent auditors
on management’s assessments. In
anticipation of these requirements, we are in the process of upgrading our
systems, implementing additional financial and management controls, reporting
systems and procedures, implementing an internal audit function and evaluating
the necessity of hiring additional accounting, internal audit and finance
staff. The requirements of Section 404
will place significant demands on our management and internal accounting and we
cannot assure you that our efforts to comply with Section 404 will result
in adequate internal controls.
If
we fail to implement required, new, or improved controls, if we encounter
difficulties in implementing internal controls, or if we fail to remediate any
existing or future material weakness, we may not be able to timely and reliably
report our financial information, which may result in material misstatements in
our financial statements or cause us to fail to meet our reporting
obligations. The existence of a material
weakness in internal controls, difficulties in implementing appropriate
internal controls, and the development and implementation of remediation plans
may also result in increased expense associated with accounting, auditing and
compliance professionals. Our inability
to provide timely and reliable financial information and otherwise meet our
reporting obligations could cause investors to lose confidence in our reported
financial information. This inability
could also damage our reputation with customers, suppliers, lenders, investors,
and others.
Certain of our members exert significant influence over us. Their interests
may not coincide with ours or the interests of our unitholders, and they may
make decisions with which we or our unitholders may disagree.
As
of July 31, 2008, Project Viking, LLC beneficially owned 21.8% of our
outstanding units. Project Viking is owned
by Roland J. (Ron) Fagen and Diane Fagen, the principal shareholders of Fagen, Inc.,
our design-build firm. Project Viking,
together with our executive officers and governors, together control
approximately 25.8% of our outstanding units as of July 31, 2008. As a
result, these unitholders, acting individually or together, could significantly
influence our management and affairs and all matters requiring member approval,
including the election of governors and approval of significant corporate transactions.
This concentration of ownership may also have the effect of delaying or
preventing a change in control of our company and might affect the market price
of our common stock.
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The
interests of these members may not coincide with our interests or the interests
of our other members. For example, Fagen, Inc. has invested and may
continue to invest in a number of other ethanol producers, some of whom may
compete with us. As a result of these
and other potential conflicting interests, these existing members may make
decisions with respect to us with which we or our members may disagree.
Because we are primarily dependent upon one product, our business is
not diversified, and we may not be able to adapt to changing market conditions
or endure any decline in the ethanol industry.
Our
success depends on our ability to efficiently produce and sell ethanol, and, to
a lesser extent, distillers grains. We
do not have any other lines of business or other significant sources of revenue
to rely upon if we are unable to produce and sell ethanol and distillers
grains, or if the market for those products decline. Our lack of diversification means that we may
not be able to adapt to changing market conditions, changes in regulation,
increased competition or any significant decline in the ethanol industry.
Risks
Related to the Units
There is no public market for our units and
no public market is expected to develop.
There
is no established public trading market for our units, and we do not expect one
to develop in the foreseeable future. To
maintain our partnership tax status, we do not intend to list the units on any
stock exchange or automatic quotation system such as OTC Bulletin Board. As a result, units held by our members may
not be easily resold and members may be required to hold their units
indefinitely. Even if members are able
to resell our units, the price may be less than the members’ investment in the
units or may otherwise be unattractive to the member.
There are significant restrictions on the
transfer of our units.
To
protect our status as a partnership for tax purposes and to assure that no
public trading market in our units develops, our units are subject to
significant restrictions on transfer and transfers are subject to approval by
our board of governors. All transfers of
units must comply with the transfer provisions of our Member Control Agreement
and a unit transfer policy adopted by our board of governors. Our board of governors will not approve
transfers which could cause us to lose our tax status or violate federal or
state securities laws. Our unit transfer
policy prohibits sales of units until 30 days after our plant has met
performance guarantees following completion of construction. As a result, members may not be able to
transfer their units and may be required to assume the risks of an investment
in for an indefinite period of time.
A
transferee may be admitted as a member only upon approval by the board of
governors and upon satisfaction of certain other requirements, including the
transferee meeting the minimum unit ownership requirements to become a member
(which for our present units requires holding a minimum of 2,500 units). Any transferee that is not admitted as a
member will be deemed an unadmitted assignee.
An unadmitted assignee will be a non-member unit holder and will have
the same financial rights as other unit holders, such as the right to receive
distributions that we declare or that are available upon our dissolution or
liquidation. As a non-member unit
holder, an unadmitted assignee will not have the voting or other governance rights
of members and will not be entitled to any information or accountings regarding
our business or to inspect our books and records.
There is no assurance that we will be able
to make distributions to our unit holders, which means that holders could
receive little or no return on their investment.
Distributions
of our net cash flow may be made at the sole discretion of our board of
governors, subject to the provisions of the Minnesota Limited Liability Company
Act, our Member Control Agreement and restrictions imposed by our creditors. There is no assurance that we will generate
any distributable cash from operations.
Although our intention is to make cash distributions sufficient to
discharge our members’ anticipated tax liabilities arising from any taxable
income generated, our board may elect to retain cash for operating purposes,
debt retirement, plant improvements or expansion. Consequently, members may receive little or
no return on their investment in the units.
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We may authorize and issue units of new
classes which could be superior to or adversely affect holders of our
outstanding units.
Our
board of governors, upon the approval of a majority in interest of our members,
has the power to authorize and issue units of classes which have voting powers,
designations, preferences, limitations and special rights, including preferred
distribution rights, conversion rights, redemption rights and liquidation
rights, different from or superior to those of our present units. New units may be issued at a price and on
terms determined by our board of governors.
The terms of the units and the terms of issuance of the units could have
an adverse impact on your voting rights and could dilute your financial
interest in us.
Our use of a staggered board of governors
and allocation of governor appointment rights may reduce the ability of
investors to affect the composition of the board.
We
are managed by a board of governors, currently consisting of eight elected
governors and two appointed governors. The seats on the board that are not
subject to a right of appointment will be elected by the other members. The initial board designated from among
themselves three classes of governors.
The terms of the three classes of governors is staggered such that,
beginning in 2008, our members will elect one-third (or as nearly as possible)
of the non-appointed members of the board of governors annually. An appointed governor serves indefinitely at
the pleasure of the member appointing him or her (so long as such member and
its affiliates continue to hold a sufficient number of units to maintain the
applicable appointment right) until a successor is appointed, or until the
earlier death, resignation or removal of the appointed governor.
The
effect of these provisions may make it more difficult for a third party to
acquire, or may discourage a third party from acquiring, control of us and may
discourage attempts to change our management, even if an acquisition or these
changes would be beneficial to our members.
Our units represent both financial and
governance rights, and loss of status as a member would result in the loss of
the holder’s voting and other rights and would allow us to redeem such holder’s
units.
Holders
of units are entitled to certain financial rights, such as the right to any
distributions, and to governance rights, such as the right to vote as a
member. If a unit holder does not
continue to qualify as a member or such holder’s member status is terminated,
the holder would lose certain rights, such as voting rights, and we could
redeem such holder’s units. The minimum
number of units presently required for membership is 2,500 units. In addition, holders of units may be
terminated as a member if the holder dies or ceases to exist, violates our
Member Control Agreement or takes actions contrary our interests, and for other
reasons. Although our Member Control Agreement
does not define what actions might be contrary to our interests, and our board
of governors has not adopted a policy on the subject, such actions might
include providing confidential information about us to a competitor, taking a
board or management position with a competitor or taking action which results
in significant financial harm to us in the marketplace. If a holder of units is terminated as a
member, our board of governors will have no obligation to redeem such holder’s
units.
Voting rights of members are not
necessarily equal and are subject to certain limitations.
Members
of our company are holders of units who have been admitted as members upon
their investment in our units and who are admitted as members by our board of
governors. The minimum number of units
required to retain membership is 2,500 units.
Any holder of units who is not a member will not have voting
rights. Transferees of units must be
approved by our board of governors to become members. Members who are holders of our present units
are entitled to one vote for each unit held.
The provisions of our Member Control Agreement relating to voting rights
applicable to any class of units will apply equally to all units of that
class. However, our Member Control
Agreement gives members who hold significant amounts of equity in us the right
to designate governors to serve on our board of governors. For every 9% of our units held, the member
has the right to appoint one person to our board. Project Viking, LLC has the right to appoint
two persons to our board pursuant to this provision. If units of any other class are issued in the
future, holders of units of that other class will have the voting rights that
are established for that class by our board of governors with the approval of
our members. Consequently, the voting
rights of members may not be completely proportional to the number of units
held. Cumulative voting for governors is
not allowed, which makes it substantially less likely that a minority of
members could elect a member to the board of governors. Members do not have dissenter’s rights. This means that they will not have the right
to dissent and seek payment for their units in the event we merge, consolidate,
exchange or otherwise dispose of all or substantially all of our property. Holders of units who are not members have no
voting rights. These provisions may
limit the ability of members to change the governance and policies of our
company.
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All members will be bound by actions taken
by members holding a majority of our units, and because of the restrictions on
transfer and lack of dissenters’ rights, members could be forced to hold a
substantially changed investment.
We
cannot engage in certain transactions, such as a merger, consolidation,
dissolution or sale of all or substantially all of our assets, without the
approval of our members. However, if
holders of a majority of our units approve a transaction, then all members will
also be bound to that transaction regardless of whether that member agrees with
or voted in favor of the transaction.
Under our Member Control Agreement, members will not have any dissenters’
rights to seek appraisal or payment of the fair value of their units. Consequently, because there is no public
market for the units, members may be forced to hold a substantially changed
investment.
Risks Related to Our Debt Financing
Our debt financing agreements contain
restrictive covenants that limit distributions and impose restrictions on the
use of working capital, and these restrictions could have a material adverse
effect upon our business.
We
must abide by the financial, maintenance, organizational, operational and other
restrictive covenants contained in our master loan agreement with AgStar
Financial Services, PCA (“AgStar”) and our other debt financing agreements,
which may make it more difficult for us to operate. These covenants may have
important implications on our operations, including, among other things:
·
Limiting our ability to obtain additional
debt or equity financing;
·
Placing us at a competitive disadvantage
because we may be substantially more leveraged than some of our competitors;
·
Limiting our ability to adjust to changing
market conditions, which could make us more vulnerable to a downturn in the
general economic conditions of our business; and
·
Limiting our ability to make business and
operational decisions regarding our business and our subsidiaries, including,
among other things, limiting our ability to make distributions to our unit
holders, make capital improvements, sell or purchase assets or engage in
transactions we deem to be appropriate and in our best interest.
If
we are unable to comply with these covenants, we may lose control of our
business and be forced to reduce or delay planned capital expenditures, sell
assets, restructure our indebtedness or submit to foreclosure proceedings, all
of which would result in a material adverse effect upon our business.
Certain provisions of our master loan
agreement with AgStar present special risks to our business.
As
of April 30, 2008, our debt with AgStar consists of approximately $45.0
million in fixed rate obligations and $14.6 in variable rate obligations after
giving effect to our election under our master loan agreement with AgStar to
fix an interest rate of 6.58% on $45.0 million of our debt effective May 1,
2008 through April 30, 2011. The
variable rate on a portion of our debt may make us vulnerable to increases in
prevailing interest rates. If the
interest rate on our variable rate debt were to increase, our aggregate
annualized interest and principal payments would also increase and could
increase significantly.
Additionally,
the principal and interest payments on our $59.6 term loan are calculated using
an amortization period of ten years even though the note will mature on October 1,
2012, five years from the date of its issuance.
As a result, at maturity of the term loan, there would be approximately
$38.9 million in principal remaining under the term loan, without any
additional payments that may be required under the master loan agreement. In order to finance this large payment of
principal that would be due at maturity, we may attempt to extend the term of
the loan under the master loan agreement, refinance the indebtedness under the
master loan agreement, in full or in part, or obtain a new loan to repay the
term loan. We cannot assure you that
will be successful in obtaining an extension of or refinancing our
indebtedness. We also cannot assure you
that we will be able to obtain a new loan in an amount that is sufficient for
our needs, in a timely manner or on terms and conditions acceptable to us or
our members.
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We
also have a $5.0 million revolving term variable rate loan. As of April 30, 2008, we have used
approximately $1.2 million of AgStar’s commitment under this loan. Beginning with October 1, 2008, and
annually thereafter, AgStar’s commitment and the available amount of the loan
decreases by $500,000 until October 2011.
The loan will mature on October 1, 2012. As with the term loan, at maturity we may
attempt to extend, refinance, or obtain a new loan to repay any outstanding
balance. We cannot assure you that any
alternative will be sufficient for our needs, available in a timely manner or
on terms and conditions acceptable to us or our members.
If
we are unable to service our debt, we may lose control of our business and be
forced to reduce or delay planned capital expenditures, sell assets,
restructure our indebtedness or submit to foreclosure proceedings, all of which
would result in a material adverse effect upon our business.
Risks Related to Construction of the Ethanol Plant
Our ethanol plant is not complete under our
design-build agreement with Fagen, Inc. because the warranties relating to
air emissions has not been satisfied.
Our
ethanol plant was constructed under a design-build agreement with Fagen, Inc.
as the design-builder. As of April 30,
2008, $77.5 million has been paid and we have retained approximately $3.8
million in payments to Fagen, Inc.
Final payment will be due when final completion of construction is
achieved and when our plant satisfies the air emissions warranties specified in
the design-build agreement. Under that
warranty, Fagen, Inc. has warranted that within six months following the
date of substantial completion, the emissions of our ethanol plant will meet
the requirements of a synthetic minor source.
In lieu of an amended permit, we are currently operating subject to a
compliance agreement with the Minnesota Pollution Control Agency that specifies
air emissions thresholds. Under the
compliance agreement, we agreed to submit an amendment to our air permit to
qualify our facility as a “major emissions source.”
During
June and July 2008, we completed air pollution control device testing
to determine compliance with synthetic minor source thresholds. Some of these results have been provided to
the MPCA, while others are still being processed. Additionally, we anticipate conducting
additional air emissions testing under different conditions. Therefore, we continue to operate under
compliance agreement pending the results of testing and further discussions
with the MPCA regarding the need to qualify our facility as a major emissions
source. We have experienced substantial
delays in construction due to issues associated with the air emissions permit
for our plant and we have incurred substantial additional costs associated with
air emissions permitting. We may be
required to incur additional costs to modify our plant to achieve compliance
with the more stringent minor source emissions limits or to qualify our
facility as a major emissions source. We
also may experience increased costs of operations to comply with any air
emissions permit we receive. Further, we
cannot assure you when our plant will be complete under the design-build
agreement or when we will remit the retainage to Fagen, Inc.
We may encounter defects in material,
workmanship or design, which may hinder our ability to efficiently operate the
ethanol plant.
If
there are defects in material, workmanship or design in our ethanol plant, we
will rely on Fagen, Inc. and ICM, Inc. to adequately address such
deficiency. The performance guarantees
and warranties we have received from Fagen are unsecured and we may not be able
to recover any losses we sustain arising from such deficiencies. If Fagen
and/or ICM were unable to correct such deficiency in an acceptable manner or
without the financial resources to pay for such deficiency as may be required
by our design-build agreement, we may be forced to halt or discontinue our
production of ethanol, which could damage our ability to generate revenues.
Government and Regulatory Risks
Federal and state regulation heavily
influence the ethanol industry and changes in government regulation that
adversely affect the demand for or supply of ethanol will have a material
adverse effect on our business.
Various
federal and state laws, regulations and programs impact the supply of and
demand for ethanol. Some government regulation, for example those that provide
economic incentives to ethanol producers, stimulate supply of ethanol by
encouraging production and the increased capacity of ethanol plants. Others, such as a federal excise tax
incentive program that provides gasoline distributors who blended ethanol with
gasoline to receive a federal excise tax rate reduction for each blended gallon
they sell, stimulate demand for ethanol by making it price competitive with
other oxygenates. Further, tariffs
generally apply to the import of ethanol from certain other countries, where
the cost of production can be significantly less than in the U.S. These tariffs are designed to
25
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increase the cost of imported ethanol to a
level more comparable to the cost of domestic ethanol by offsetting the benefit
of the federal excise tax program.
Tariffs have the effect of maintaining demand for domestic ethanol. Additionally, the federal government has
established renewable fuels standard (RFS) programs, most recently under the
Energy Independence and Security Act of 2007, that set minimum national
standards for use of renewable fuels.
The RFS and other state programs that require or provide incentives for
the use of ethanol create demand for ethanol.
Government regulation and government programs that create demand for
ethanol may also indirectly create supply for ethanol as additional producers
expand or new companies enter the ethanol industry to capitalize on demand.
Federal
and state laws, regulations and programs are constantly changing. We cannot
predict what material impact, if any, these changes might have on our business.
Future changes in regulations and programs could impose more stringent
operational requirements or could reduce or eliminate the benefits we receive,
directly and indirectly, under current regulations and programs. Future changes in regulations and programs
may increase or add benefits to ethanol producers other than us or eliminate or
reduce tariffs or other barriers to entry into the U.S. ethanol market, any of
which could prove beneficial to our competitors, both domestic and
international. Future changes in
regulation may also hurt our business by providing economic incentives to
producers of other renewable fuels or oxygenates or encouraging use of fuels or
oxygenates that compete with ethanol. In
addition, both national and state regulation is influenced by public opinion
and changes in public opinion. For
example, certain states oppose the use of ethanol because, as net importers of
ethanol from other states, the use of ethanol could increase gasoline prices in
that state and because that state does not receive significant economic benefits
from the ethanol industry, which are primarily experienced by corn and ethanol
producing states. Further, some argue
that the use of ethanol will have a negative impact on gasoline prices to
consumers, result in rising food prices, add to air pollution, harm car and
truck engines, and actually use more fossil energy, such as oil and natural
gas, than the amount of ethanol that is produced. We cannot predict the impact that opinions of
consumers, legislators, industry participants, or competitors may have on the
regulations and programs currently benefiting ethanol producers.
We may be adversely affected by
environmental, health and safety laws, regulations and liabilities.
We
are subject to various federal, state and local environmental laws and regulations,
including those relating to the discharge of materials into the air, water and
ground, and the health and safety of our employees.
Some
of these laws and regulations require our plant to operate under permits that
are subject to renewal or modification. These laws, regulations and permits may
require pollution control equipment or operational changes to limit actual or
potential impacts to the environment.
The
costs associated with obtaining and complying with permits and complying with
environmental laws have increased our costs of construction. In particular, we have incurred additional
costs relating to an air-emission permit from the Minnesota Pollution Control
Agency (“MPCA”). We applied for a
synthetic minor air-emissions source permit in July 2004 that was granted
by the MPCA in May 2005. In June 2005,
a coalition of two environmental and one energy group challenged the grant of
this air emissions permit by an appeal to the Minnesota Court of Appeals and in
July 2006, the Minnesota Court of Appeals affirmed the MPCA’s issuance of
the permit. In conjunction with the
permit and the permit dispute and to prevent further appeals by the coalition,
we entered into a compliance agreement with the MPCA on January 23, 2007
that currently governs the air emissions from our plant. Under the compliance agreement, we also
agreed to submit an amendment to our air permit to qualify our facility as a “major
emissions source.” We have submitted an
amendment to our air permit as required under the compliance agreement and
exclusively to comply with that agreement.
However, we are continuing discussions with the MPCA regarding the
necessity for qualifying our facility as a major emissions source, particularly
in light of recent changes in federal law that increased the limit of certain
emissions allowed as a synthetic minor source.
Pending the resolution of this air permit issue, we continue to operate
under the air emissions thresholds described in the compliance agreement in
lieu of an amended permit. During June and July 2008, we completed
air pollution control device testing to determine compliance with synthetic
minor source thresholds. Some of these
results have been provided to the MPCA, while others are still being processed. Additionally, we, with the ongoing assistance
of Fagen, Inc., anticipate conducting additional air emissions testing under
different conditions. Therefore, we
continue to operate under the compliance agreement pending the results of
testing and further discussions with the MPCA regarding the necessity of
qualifying our facility as a major emissions source.
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There
can be no assurance that we will be able to comply with any of the conditions
of the compliance agreement, any of our other permits, or with environmental
laws applicable to us. Compliance with
these laws and permits could require expensive pollution control equipment or
operational changes to limit actual or potential impacts to the environment, as
well as significant management time and expense. The resolution of our air emissions permit
issue will likely involve significant management time and expense and may
involve ongoing operational expense or further modifications to the design or
equipment in our plant. There can be no
assurance that we will succeed in our discussions with the MPCA to qualify our
ethanol plant as a minor emissions source.
A violation of environmental laws, regulations or permit conditions can
result in substantial fines, natural resource damage, criminal sanctions,
permit revocations or plant shutdown, any of which could have a material
adverse effect on our operations.
The
hazards and risks associated with producing and transporting our products (such
as fires, natural disasters, explosions, and abnormal pressures and blowouts)
may also result in personal injury claims or damage to property and third
parties. As protection against operating hazards, we maintain insurance
coverage against some potential losses. However, losses could be sustained for
uninsurable or uninsured risks, or in amounts in excess of existing insurance
coverage. Events that result in significant personal injury or damage to our property
or third parties or other losses that are not fully covered by insurance could
have a material adverse effect on our results of operations and our financial
position.
Federal
and state regulations affecting the operation of our ethanol plant are subject
to future change. We cannot predict what material impact, if any, these changes
might have on our business. Future changes in regulations or enforcement
policies could impose more stringent requirements on us, compliance with which
could require additional capital expenditures, increase our operating costs or
otherwise adversely affect our business.
These changes may also relax requirements that could prove beneficial to
our competitors and thus adversely affect our business. In addition, regulations of the EPA and the
MCPA depend heavily on administrative interpretations. We cannot assure you
that future interpretations made by the EPA, or other regulatory authorities,
with possible retroactive effect, will not adversely affect our business, financial
condition and results of operations.
Failure
to comply with existing or future regulatory requirements could have a material
adverse effect on our business, financial condition and results of operations.
Risks Related to Tax Issues in a Limited Liability Company
EACH UNITHOLDER SHOULD CONSULT THE INVESTOR’S OWN TAX
ADVISOR WITH RESPECT TO THE FEDERAL AND STATE TAX CONSEQUENCES OF AN INVESTMENT
IN HERON LAKE BIOENERGY, LLC AND IMPACT ON THE INVESTOR’S TAX REPORTING
OBLIGATIONS AND LIABILITY.
If we are not taxed as a partnership, we will pay taxes on all of our
net income and you will be taxed on any earnings we distribute, and this will
reduce the amount of cash available for distributions to holders of our units.
We
consider Heron Lake BioEnergy, LLC to be a partnership for federal income tax
purposes. This means that we will not
pay any federal income tax, and our members will pay tax on their share of our
net income. If we are unable to maintain
our partnership tax treatment or qualify for partnership taxation for whatever
reason, then we may be taxed as a corporation.
We cannot assure you that we will be able to maintain our partnership
tax classification. For example, there
might be changes in the law or our company that would cause us to be reclassified
as a corporation. As a corporation, we
would be taxed on our taxable income at rates of up to 35% for federal income
tax purposes. Further, distributions
would be treated as ordinary dividend income to our unit holders to the extent
of our earnings and profits. These
distributions would not be deductible by us, thus resulting in double taxation
of our earnings and profits. This would also reduce the amount of cash we may
have available for distributions.
Your tax liability from your allocated
share of our taxable income may exceed any cash distributions you receive,
which means that you may have to satisfy this tax liability with your personal
funds.
As
a partnership for federal income tax purposes, all of our profits and losses “pass-through”
to our unit holders. You must pay tax on
your allocated share of our taxable income every year. You may incur tax
liabilities from allocations of taxable income for a particular year or in the
aggregate that exceed any cash distributions you receive in that year or in the
aggregate. This may occur because of
various factors, including but not limited to, accounting methodology, the
specific tax rates you face, and payment obligations and other debt covenants
that
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restrict our ability to pay cash
distributions. If this occurs, you may
have to pay income tax on your allocated share of our taxable income with your
own personal funds.
You may not be able to fully deduct your share of our losses or your
interest expense.
It
is likely that your interest in us will be treated as a “passive activity” for
federal income tax purposes. In the case
of unit holders who are individuals or personal services corporations, this
means that a unit holder’s share of any loss incurred by us will be deductible
only against the holder’s income or gains from other passive activities, e.g.,
S corporations and partnerships that conduct a business in which the holder is
not a material participant. Some closely
held C corporations have more favorable passive loss limitations. 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. Upon disposition of a taxpayer’s entire
interest in a passive activity to an unrelated person in a taxable transaction,
suspended losses with respect to that activity may then be deducted.
Interest
paid on any borrowings incurred to purchase units may not be deductible in
whole or in part because the interest must be aggregated with other items of
income and loss that the unit holder has independently experienced from passive
activities and subjected to limitations on passive activity losses.
You may be subject to federal alternative minimum tax
Individual
taxpayers are subject to an “alternative minimum tax” if that tax exceeds the
individual’s regular income tax. For
alternative minimum tax purposes, an individual’s adjusted gross income is
increased by items of tax preference. We
may generate such preference items, the most significant of which is
accelerated depreciation. Accordingly, preference
items from our operations together with other preference items you may have may
cause or increase an alternative minimum tax to a unit holder. You are encouraged and expected to consult
with your individual tax advisor to analyze and determine the effect on your
individual tax situation of the alternative minimum taxable income you may be
allocated, particularly in the early years of our operations.
Preparation of your tax returns may be complicated and expensive.
The
tax treatment of limited liability companies and the rules regarding partnership
allocations are complex. We will file a partnership income tax return and will
furnish each unit holder with a Schedule K-1 that sets forth our determination
of that unit holder’s allocable share of income, gains, losses and deductions.
In addition to United States federal income taxes, unit holders will likely be
subject to other taxes, such as state and local taxes, that are imposed by
various jurisdictions. It is the responsibility of each unit holder to file all
applicable federal, state and local tax returns and pay all applicable taxes.
You may wish to engage a tax professional to assist you in preparing your tax
returns and this could be costly to you.
Any audit of our tax returns resulting in adjustments could result in
additional tax liability to you.
The
IRS may audit our tax returns and may disagree with the positions that we take
on our returns or any Schedule K-1. If
any of the information on our partnership tax return or a Schedule K-1 is
successfully challenged by the IRS, the character and amount of items of
income, gains, losses, deductions or credits in a manner allocable to some or
all our unit holders may change in a manner that adversely affects those unit
holders. This could result in adjustments on unit holders’ tax returns and in
additional tax liabilities, penalties and interest to you. An audit of our tax
returns could lead to separate audits of your personal tax returns, especially
if adjustments are required.
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Item
2. Financial Information
Selected
Consolidated Financial Data
The
following table presents selected consolidated financial and operating data as
of the dates and for the periods indicated. The selected consolidated balance
sheet financial data as of October 31, 2006 and 2007 and the selected
statement of operations data for the years ended October 31, 2006 and 2007
have been derived from the audited consolidated financial statements included
elsewhere in this Registration Statement on Form 10.
The
following selected consolidated financial data as of April 30, 2008 and
for the six months ended April 30, 2007 and 2008 have been derived from
our unaudited consolidated financial statements included elsewhere in this
Registration Statement on Form 10.
This
selected consolidated financial data should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
within this Item 2 and the consolidated financial statements and the
accompanying notes included elsewhere in this Registration Statement on Form 10.
Among other things, those financial statements include more detailed
information regarding the basis of presentation for the following consolidated
financial data.
|
|
|
Fiscal Year Ended
|
|
Six Months Ended
|
|
|
|
|
October 31,
2006
|
|
October 31,
2007
|
|
April 30,
2007
|
|
April 30,
2008
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
10,111,931
|
|
$
|
23,560,498
|
|
$
|
6,002,494
|
|
$
|
65,571,665
|
|
|
Cost of goods sold
|
|
9,818,395
|
|
24,313,695
|
|
7,529,077
|
|
50,655,715
|
|
|
Gross profit (loss)
|
|
293,536
|
|
(753,197
|
)
|
(1,526,583
|
)
|
14,915,950
|
|
|
Operating expenses
|
|
1,965,342
|
|
3,527,199
|
|
1,216,401
|
|
1,577,664
|
|
|
Operating income (loss)
|
|
(1,671,806
|
)
|
(4,280,396
|
)
|
(2,742,984
|
)
|
13,338,286
|
|
|
Other income (expense)
|
|
1,030,661
|
|
(1,167,890
|
)
|
(204,577
|
)
|
(2,622,468
|
)
|
|
Net income (loss)
|
|
$
|
(641,145
|
)
|
$
|
(5,448,286
|
)
|
$
|
(2,947,561
|
)
|
$
|
10,715,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding
|
|
23,129,554
|
|
26,361,406
|
|
25,740,122
|
|
27,104,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per unit – Basic and
diluted
|
|
$
|
(0.03
|
)
|
$
|
(0.21
|
)
|
$
|
(0.11
|
)
|
$
|
0.40
|
|
|
|
|
As of
|
|
As of
|
|
|
|
|
October 31, 2006
|
|
October 31, 2007
|
|
April 30,
2008
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
7,743,428
|
|
$
|
24,382,053
|
|
$
|
22,963,656
|
|
|
Property and equipment
|
|
60,484,866
|
|
108,852,921
|
|
106,372,656
|
|
|
Other assets
|
|
550,291
|
|
724,984
|
|
2,030,190
|
|
|
Total assets
|
|
$
|
68,778,585
|
|
$
|
133,959,958
|
|
$
|
131,366,502
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
25,541,399
|
|
29,712,918
|
|
$
|
17,212,741
|
|
|
Long-term debt
|
|
3,503,759
|
|
62,281,899
|
|
61,472,802
|
|
|
Members’ equity
|
|
39,733,427
|
|
41,965,141
|
|
52,680,959
|
|
|
Total liabilities and members’ equity
|
|
$
|
68,778,585
|
|
$
|
133,959,958
|
|
$
|
131,366,502
|
|
29
Table
of Contents
Trends and Uncertainties Impacting Our Operations
Our
current and future results of operation are affected and will continue to be
affected by factors such as (a) volatile and uncertain pricing of ethanol
and corn; (b) availability of corn that is, in turn, affected by trends
such as corn acreage, weather conditions, and yields on existing and new
acreage diverted from other crops; and (c) the supply and demand for
ethanol, which is affected by acceptance of ethanol as a substitute for fuel,
public perception of the ethanol industry, government incentives and
regulation, and competition from new and existing construction, among other
things. Other factors that may affect
our future results of operation include those factors discussed in “Item 1.
Business — Risk Factors.”
Critical Accounting Estimates
Our
management’s discussion and analysis of our financial condition and results of
operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
of America. The preparation of financial statements may require us to make
estimates and assumptions that may affect the reported amounts of assets and
liabilities and the related disclosures at the date of the financial
statements. We do not currently have any
estimates or assumptions where the nature of the estimates or assumptions is
material due to the levels of subjectivity and judgment necessary to account
for highly uncertain matters or the susceptibility of such matters to change or
the impact of the estimates and assumptions on financial condition or operating
performance is material.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
The
following table sets forth other key data for the six months ended April 30,
2008. Since our ethanol plant began
production on September 21, 2007, data for April 30, 2007 is not
comparable and therefore is not presented.
|
|
|
Six Months Ended
April 30, 2008
(unaudited)
|
|
|
|
|
|
|
|
Financial data:
|
|
|
|
|
Net cash flows provided by operating
activities
|
|
$
|
9,601,000
|
|
|
Operating data:
|
|
|
|
|
Ethanol sold (gallons)
|
|
25,649,000
|
|
|
Average gross price of ethanol sold per gallon
|
|
$
|
2.04
|
|
|
Dried distillers grains sold (tons)
|
|
60,000
|
|
|
Average dry distillers grains price per ton
|
|
$
|
146.17
|
|
|
Modified wet distillers grains sold (tons)
|
|
21,000
|
|
|
Average modified wet distillers grains
price per ton
|
|
$
|
43.33
|
|
Year Ended October 31, 2007 Compared to Year
Ended October 31, 2006
Executive Summary of Fiscal Year 2007.
Our
business activity for the first ten months of fiscal year 2007 consisted of
financing and overseeing the design and construction of our ethanol plant,
which was originally scheduled to start production as early as May 2007. On September 21, 2007, after significant
delays in start up of the plant primarily due to construction and permitting
issues, we began producing ethanol. We
began selling ethanol and co-products in October 2007. In anticipation of start up of the plant, we
purchased corn to be used in production and hired additional personnel. With the delay of start up of the plant, we
sold corn that would otherwise have been used in production to free up storage
for the corn we were required to purchase under our commitments. Additionally, as a result of the delay,
increased labor costs and expense was not immediately offset by corresponding
revenue, which resulted in overall higher than anticipated expenses and a
negative gross profit margin.
Highlights
for the year ended October 31, 2007 are as follows:
·
We completed construction of our ethanol
plant during the fourth quarter of fiscal year 2007 and our ethanol plant began
operations on September 21, 2007.
30
Table of Contents
·
From September 21, 2007 until the end
of fiscal year 2007, revenue from sales of ethanol and distillers grains was
approximately $6.8 million.
·
Revenue for fiscal year 2007 increased by
approximately $13.4 million to approximately $23.6 million.
·
Our net loss increased by approximately $4.8
million from approximately $0.6 million in fiscal year 2006 to approximately
$5.4 million in fiscal year 2007.
·
Loss per unit increased from $0.03 per unit
in fiscal year 2006 to $0.21 per unit for fiscal year 2007.
Revenue.
Revenue increased by approximately $13.4
million, or 133%, from approximately $10.1 million in fiscal year 2006 to
approximately $23.6 million in fiscal year 2007. Of the total revenue increase, approximately
$6.3 million was attributable to ethanol sales, approximately $439,000 to
distillers grain sales, and approximately $6.7 million in grain and other
revenue. There was no revenue from the
sale of ethanol or distillers grains in fiscal year 2006.
Ethanol
Revenue – Our plant started production in September 2007. Our ethanol was first sold in October 2007,
the last month of our fiscal year. From
the start of production to the end of our fiscal year 2007, we sold
approximately 4.0 million gallons of ethanol at an average price of $1.57 per
gallon.
Distillers
Grains – We first sold distillers grains in October 2007. We sold approximately 3,000 tons of dried
distillers grains at an average price of approximately $100 per ton. We sold approximately 7,000 tons of modified
wet distillers grains at an average price of approximately $19 per ton. We continually review market pricing, storage
availability and shelf life of product to determine the best production mix of
dried distillers grains and modified wet distillers grains at any given
time. For the period of production
during fiscal year 2007, our product mix was negatively affected by issues
associated with start up as we focused on producing ethanol as our main
product, operational issues with our distillers grains dryer, and increased
supply of modified wet distillers grains in local markets that depressed prices
for modified wet distillers grains.
Grain
and Other Revenue – Grain and other revenue consist of revenue from the sale of
grains, primarily corn and soybeans, sales of gasoline and diesel, and revenue
from grain related services, such as storage and drying. For fiscal year 2007, revenue from sales of
grain and other sources was $16.8 million as compared to $10.1 million in
fiscal year 2006. The sale of grain
accounted for a majority of this revenue in both fiscal year 2007 and 2006. The
increase in revenue from the sale of grain in fiscal year 2007 as compared to
fiscal year 2006 was primarily the result of both an increased number of corn
bushels sold by approximately 27.3% and an increase in the average price of
corn sold from $1.91 to $3.50 per bushel.
Because operations began nearly five months later than anticipated, we
sold corn that we would have used in ethanol production to create storage as we
fulfilled our ongoing corn purchase commitments, which resulted in the
increased number of bushels sold in fiscal year 2007. The increased price per bushel of corn was
due to market factors. However, with the start-up of our ethanol plant, our
primary use of the corn we purchase will be to produce ethanol. Grain and other revenue are and will be
insignificant as compared to the sale of our primary product, ethanol and its
co-product, distillers grains.
Cost of Goods Sold.
Cost
of goods sold consists primarily of the costs of corn, coal, depreciation,
electricity and denaturant. Cost of
goods sold increased from approximately $9.8 million in fiscal 2006 to
approximately $24.3 million in fiscal 2007.
This represented an increase of $14.5 million, or 148%. Of this increase, approximately $8.0 million
was related to the sale of ethanol and distillers grains in October 2007. The remaining increase of approximately $6.5
million was related to the sale of corn and other sales. Within the $6.5 million increase was
approximately a $1.9 million increase in the recognition of derivative losses,
which totaled $2.6 million in fiscal year 2007 as compared to $0.7 million in
fiscal year 2006.
We
recognize the gains or losses that result from the changes in the value of our
derivative instruments in cost of goods sold at the end of each financial
reporting period. This method of recognition
is referred to as “mark to market.” As
corn prices fluctuate, the value of our derivative instruments are impacted
and, at the end of each financial reporting period, these fluctuations result
in recognition of a gain or loss impacting cost of goods sold.
Corn
is a market based commodity whose price can vary widely due to supply and
demand circumstances, influenced by such factors as planting intentions,
weather patterns, and foreign export demand.
Our hedging strategies and instruments relating to corn affect our cost
of goods sold. We recognize gains or
losses on corn hedging instruments at the end of each financial period in cost
of goods sold. One of our strategies to
control cost of goods sold focuses on utilizing our corn storage capacity to
manage the number of bushels and the purchase price of
31
Table of Contents
corn to be used in our ethanol plant. In order to reduce the pricing risk, we may
use a significant portion of the 2.8 million bushels of space provided by our
elevator facilities as a means of mitigating the more limited storage space at
the ethanol plant, which totals 500,000 bushels. By having this space available, we have more
flexibility in the timing of our corn procurement needs and the use of
derivative instruments such as forward purchases, futures, and option contracts
to manage our corn costs.
Gross Profit
. Gross profit decreased from a
gross profit of approximately $0.3 million in fiscal 2006 to a loss of
approximately $0.8 million in fiscal year 2007.
Overall
gross profit was negatively impacted in fiscal year 2007 by derivative losses
of approximately $2.7 million in 2007 as compared to a loss of approximately $0.7
million in 2006, and an unfavorable mix between dried distillers grains and
modified wet distillers grains affecting our revenue from distillers grains.
Operating Expenses
.
Operating expenses increased approximately $1.6 million to approximately
$3.5 million for fiscal 2007 from approximately $1.9 million for fiscal
2006. The increase was primarily the
result of increases in salaries and wages of $678,000, consulting and
professional fees of approximately $336,000, repair and supply items of
$180,000, depreciation and amortization of $114,000, and insurance of
$80,000. The increase in operating
expenses in fiscal year 2007 as compared to fiscal year 2006 was primarily
attributable to delays in start up of our ethanol plant. Anticipating start up as early as May 2007,
we hired plant and other employees earlier in the year and we also experienced
increased expenses associated with addressing construction and permitting
delays.
Other Income (Expense).
Interest income decreased from approximately $995,000 in fiscal 2006 to
approximately $9,000 in fiscal 2007.
This decrease was primarily due to equity funds being invested in
property and equipment in fiscal 2007 rather than being held as cash and
equivalents.
Prior
to production, interest costs were being capitalized as part of property and
equipment cost. With the commencement of
production, interest is recognized as interest expense. Therefore, interest expense increased from
approximately $77,000 in fiscal 2006 to approximately $1.2 million in fiscal
2007. Of this increase, approximately
$732,000 was due to increased borrowings, primarily to finance inventory
costs. The remaining increase of $372,000
was due to commencement of ethanol operations.
Net Income (Loss).
For
fiscal year 2007, our net loss was approximately $5.4 million as compared to a
net loss of approximately $641,000 in fiscal year 2006. The increase in net loss was primarily
attributable to increased cost of goods sold and operating expenses. While we generated significantly more revenue
in fiscal year 2007 as compared to fiscal year 2006, cost of goods exceeded
revenue for fiscal year 2007 by 3%, whereas cost of goods sold was less than
revenue for fiscal year 2006 by 3%.
Costs of goods sold was significantly higher in fiscal year 2007 as
compared to fiscal year 2006 due to derivative losses of approximately $2.7
million in 2007 as compared to derivative losses of approximately $0.7 million
in 2006. In addition we hired more
employees in anticipation of start-up of our ethanol plant as early as May 2007
and experienced delays in start-up in fiscal year 2007. Additionally, in fiscal year 2007, we had
other expense of approximately $1.2 million as compared to other income of $1.1
million in fiscal year 2006.
Six Months Ended April 30, 2008 as Compared to
Six Months Ended April 30, 2007
Since
we began generating revenues from ethanol in October 2007, the six month
period ended April 30, 2008 represents the first full period of production
and revenue generating activities at our ethanol plant. In contrast, during the six month period
ended April 30, 2007, our business activity primarily consisted of
financing and overseeing the design and construction of our ethanol plant. Therefore, while the information may be
presented below with respect to both the six month periods ended April 30,
2008 and April 30, 2007, these periods are inherently not comparable
because of the differences in activity during these respective time periods.
Highlights of First Half of 2008.
Highlights for the six months ended April 30, 2008 are as follows:
·
Total revenues were $65.6 million for the six
months ended April 30, 2008.
·
Net income was $10.7 million for the six
months ended April 30, 2008.
·
Ethanol gallons sold were 25.6 million
gallons for the six months ended April 30, 2008.
·
Income per unit was $0.40 for the six months
ended April 30, 2008.
32
Table of Contents
Revenues
. Revenues were approximately
$65.6 million for the six months ended April 30, 2008, consisting of
revenues from the sale of ethanol of $51.5 million, from the sale of distillers
grains of $9.7 million, and from the sale of grains and other revenue of $4.4
million.
Ethanol
Revenue – We sold approximately 25.6 million gallons of ethanol during the six
months ended April 30, 2008. We
also recognized derivative losses of approximately $0.9 million or $.035 per
gallon sold for the six months ended April 30, 2008 on ethanol related
derivative instruments. We recognize the gains or losses that result from the
changes in the value of our ethanol derivative instruments at the end of each
financial reporting period. Therefore,
as ethanol prices fluctuate, the value of our derivative instruments are
impacted and, at the end of each financial reporting period, these fluctuations
may result in recognition of a gain or loss impacting revenue from the sale of
ethanol. The price per gallon we received for the sale of our ethanol
ranged between a low of $1.57 in October 2007 and a high of $2.29 in April 2008.
Distillers
Grains Revenue – We sold 60,000 tons of dried distillers grains that generated
revenues of approximately $9.0 million, or approximately $146 per ton on
average. During the six months ended April 30,
2008, the average selling price of dried distillers grains increased from
approximately $100 per ton to approximately $154 per ton. We believe the primary factor that caused the
average selling price of distillers grain to increase was the increase in the
cost of corn during the period. We also
sold approximately 20,000 tons of modified wet distillers that generated
revenues of approximating $0.9 million, or approximately $43 per ton on
average. During the six months ended April 30,
2008, the average selling price of modified wet distillers grains increased
from approximately $19 in October 2007 to approximately $49 in April 2008. During the six months ended April 30,
2008, we focused on producing a higher volume of dried distillers grains. We review market pricing, storage
availability, and shelf life of product to determine the best production mix of
dried distillers grains and modified wet distillers grains at any given time.
Grain
and Other Revenue – During the six months ended April 30, 2008, we
generated revenue from grain and other revenue of approximately $4.4
million. With our ethanol plant in
production, we use nearly all of the corn we purchase in production. However, we sold approximately 362,000
bushels of corn in November 2007 due to space limitations. We also accepted delivery of soybeans as an
accommodation to our corn producers in the local area. We do not expect these grain sales and other
revenues to be a significant percentage of revenue in the future.
Cost of Goods Sold
. Cost of goods sold was approximately $50.7
million for the six months ended April 30, 2008. Cost of goods sold for the six months ended April 30,
2008 was comprised of the following costs:
corn, approximately $33.1 million; coal, approximately $3.4 million;
depreciation, approximately $2.6 million; denaturant, approximately $1.4
million; and electricity, approximately $1.2 million. The rising cost of corn that impacted cost of
goods sold was partially offset by approximately $2.2 million of corn derivative
gains. Our corn cost of $33.1 million
was approximately 65% of our cost of goods sold for the six months ended April 30,
2008.
Corn
is a market based commodity whose price can vary widely due to supply and
demand circumstances, influenced by such factors as planting intentions,
weather patterns, and foreign export demand.
Our hedging strategies affect our cost of goods sold. We recognize gains or losses on corn
derivative instruments at the end of each financial period in cost of goods
sold. One of our strategies to control
cost of goods sold focuses on utilizing our corn storage capacity to manage the
number of bushels and purchase price of corn to be used in our ethanol
plant. In order to reduce the pricing
risk, we may use a major portion of the 2.8 million bushels of space provided
by our elevator facilities as a means of mitigating the more limited storage
space at the ethanol plant, which totals 500,000 bushels. By having this space available, we have more
flexibility in the timing of our corn procurement needs and use of derivative
instruments such as forward purchases, futures, and option contracts, to manage
our corn costs.
Gross Profit
. For the six months ended April 30,
2008, gross profit was approximately $14.9 million, which was
favorably impacted by relatively low corn costs as a result of our ability to
use stored corn purchased at a price that was less than the then-current cost
of corn on the CBOT for comparable volumes, hedging gains, and increase in
ethanol prices. We sold approximately 80,000 tons of distillers grains through
six months ended April 30, 2008.
Gross profit relating to distillers grains benefited from higher
proportionate production of dried distillers grains with a higher per ton
selling price and generally increasing average selling prices per ton for both
dried and modified wet distillers grains during the period.
Operating Expenses
. Operating expenses consist of costs not
directly related to the production process of ethanol and distillers
grains. Operating expenses for the six
months ended April 30, 2008 were $1.6 million, consisting of professional
and consulting fees of approximately $452,000 and $868,000 in general and
33
Table of Contents
administrative expenses, such as salaries and
wages, payroll taxes, employee benefits, depreciation and amortization,
insurance, office supplies, and property taxes.
Operating expenses for the six months ended April 30, 2007 were
approximately $1.2 million.
Operating expenses for the six
months ended April 30, 2008 were higher than the comparable period of
fiscal year 2007 due to increased personnel for our operation as compared to
the six months ended April 30, 2007 when our plant was not in operation.
Other Income (Expense).
Interest expense increased to approximately $2.7 million for the six
months ended April 30, 2008 as compared to approximately $0.2 million the
prior year period. The increase was
primarily due to the fact that prior to start-up of the ethanol plant, we
capitalized interest on funds borrowed for construction of our ethanol plant.
Net Income (Loss).
Net
income for the six months ended April 30, 2008 was $10.7 million as
compared to a net loss of $2.9 million for the six months ended April 30,
2007. The minimal revenues as compared
to increased expenses resulted in the loss for the six months ended April 30,
2007, whereas net income resulted from a full six months of plant production
and profitable operations in the six months ended April 30, 2008.
Liquidity
and Capital Resources
Through
fiscal 2007, our principal sources of liquidity consisted primarily of proceeds
from the sale of our units and borrowings under our original and amended loan
agreements with AgStar Financial Services, PCA (“AgStar”). Our primary uses of liquidity prior to start
up on September 21, 2007 were the use of cash to construct the plant, fund
pre-startup costs, service debt, and for general corporate purposes.
In
the six months ended April 30, 2008, our principal source of liquidity
consisted of cash flow from operations and proceeds from borrowings under our
loan agreements with AgStar.
Secondarily, we received proceeds from our shared savings contract and
related escrow agreement with Interstate Power and Light Company and loan
proceeds from a secured promissory note from Federated Rural Electric
Association.
The
following table summarizes our sources and uses of cash and equivalents from
our condensed consolidated statements of cash flows for the periods presented
(in thousands):
|
|
|
Six Months Ended
April 30,
|
|
Year Ended
October 31
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
Net cash provided by (used in) operating
activities
|
|
$
|
9,601
|
|
$
|
(12,721
|
)
|
$
|
(1,956
|
)
|
|
Net cash used in investing activities
|
|
(644
|
)
|
(4,175
|
)
|
(36,316
|
)
|
|
Net cash provided by (used in) financing
activities
|
|
(6,133
|
)
|
17,362
|
|
776
|
|
|
Net increase (decrease) in cash and
equivalents
|
|
$
|
2,824
|
|
$
|
466
|
|
$
|
(37,496
|
)
|
Year Ended October 31, 2007 Compared to Year
Ended October 31, 2006
Operating
Activities – We used approximately $12.8 million in operating activities in
fiscal 2007 compared to using approximately $2.0 million in fiscal 2006. This increase of approximately $10.8 million
was due to a number of factors.
Contributing to the increase were the following:
(1)
Our net loss for the year ended October 31,
2007 increased by $4.8 million compared to the year ended October 31,
2006. The increase in net loss can be
attributed to delays in start-up of the ethanol plant and hedging losses of
approximately $2.6 million;
(2)
We used cash to increase our inventories in
fiscal year 2007 by $14.8 million in expectation of starting the plant;
(3)
In addition, accounts receivable and
derivative instruments decreased by approximately $1.6 million and
approximately $0.9 million, respectively; and
34
Table of Contents
(4)
Increases in accounts payable, as well as
depreciation and accrued expenses, offset a portion of the increases in current
assets.
Investing
Activities – We used approximately $4.2 million in investing activities in
fiscal 2007 compared to $36.3 million in fiscal 2006. The net decrease of $32.1 million was due to
property and equipment purchases being financed in 2006 equity proceeds,
whereas the property and equipment purchases were primarily financed with debt
in fiscal 2007.
Financing
Activities – Cash provided by financing activities increased by $16.6 million
in fiscal 2007 compared to fiscal 2006.
Contributing to the increase were the following:
(1)
We received proceeds of approximately $10.3
million of term debt in fiscal 2007 compared to approximately $0.8 million in
fiscal 2006. Of this activity, $4.2
million was borrowed from a major investor to assist in the carrying of corn
inventory until our plant was operating.
(2)
We received proceeds from the issuance of
equity of approximately $7.7 million in fiscal 2007, of which $7.5 million of
funds received were from a major existing investor and $180,000 were proceeds
from the exercise of warrants issued to our governors. We received no proceeds from the sale of
equity in fiscal 2006.
In
addition to the cash activity described above, we had significant non-cash
increases in property and equipment that were financed with construction
payables of approximately $4.2 million and long-term debt of approximately
$55.1 million.
At
October 31, 2007, we had a $5.3 million dollar deficiency in working
capital. Of this deficiency, $4.1
million
was due to construction
retainage and payables, which we anticipate satisfying primarily from resources
available from our long-term borrowing capacity when certain warranties are
met. We had an additional $2.7 million
in current maturities of long-term debt at October 31, 2007, which we
anticipate satisfying from operations in fiscal 2008.
At
October 31, 2007, we had cash balances of approximately $3.1 million. In addition, we had approximately $3.9
million of long-term borrowing capacity and $126,000 of short term borrowing
capacity, net of outstanding letters of credit.
Six Months Ended April 30, 2008
Our
cash increased from $3.1 million at October 31, 2007 to $5.9 million at April 30,
2008. In addition, our working capital
increased from a $5.3 million deficit at October 31, 2007 to a positive
$5.7 million at April 30, 2008.
This increase in both cash and working capital was due primarily due to
earnings from operations for the six months ending April 30, 2008.
Operating
Activities – Operating activities provided cash flow of approximately $9.6
million for the six months ended April 30, 2008. Cash from operations was approximately $13.6
million, including $2.8 million of depreciation and amortization. The increase was offset by a $4.1 million use
of cash for changes in assets and liabilities related to working capital.
Investing
Activities - We used a net $0.6 million in the six months ended April 30,
2008 for investing activities, primarily for property and equipment additions.
Financing
Activities – We used cash for financing activities of $6.1 million in the six
months ended April 30, 2008. Of the
cash used in financing activities, we obtained $2.5 million from a draw from
our revolving term note with AgStar and used these amounts for working capital
purposes. In the six months ended April 30,
2008, we used cash to pay down debt of $2.1 million on our line of credit, $4.2
million to pay off a related party note, and $2.6 million to reduce our
long-term debt to AgStar. The $2.6
million included the repayment of $2.5 million we drew on our revolving term
note.
Working
Capital – We had $5.8 million of working capital at April 30, 2008. Our construction payable included a $3.8
million construction retainage, which we anticipate satisfying primarily from
resources available from our long-term borrowing capacity when certain
warranties are met. Taking into consideration
this long-term borrowing capacity item, we would have had $9.5 million of
working capital.
35
Table of Contents
Capital
Resources – Our cash and available debt resources at April 30, 2008
consisted of cash balances of $5.9 million, $3.9 million of long-term borrowing
capacity, and $2.2 million of short-term borrowing capacity with our primary
lender, net of outstanding letters of credit.
Our
financial position and liquidity are, and will be, influenced by a variety of
factors, including:
·
our ability to generate cash flows from
operations;
·
the level of our outstanding indebtedness and
the interest we are obligated to pay on this indebtedness; and
·
our capital expenditure requirements, which
consist primarily of completing construction of our ethanol plant and the
purchase of equipment.
In
the remainder of 2008, we expect to spend between $700,000 and $1.0 million for
the completion of all remaining punchlist items for substantial and final
completion of our ethanol plant, facility maintenance, and operational
improvements.
We
intend to fund our principal liquidity requirements through cash provided by
operations and, if necessary, borrowings under our master loan agreement with
AgStar Financial Services, PCA. We believe our sources of liquidity will be
sufficient to meet the cash requirements of our operations for at least the
next twelve months.
Off
Balance-Sheet Arrangements
We
have no off balance-sheet arrangements.
Credit
Arrangements
Credit
Arrangements with AgStar
Our
primary credit arrangement is with AgStar Financial Services, PCA (“AgStar”). The following table summarizes the history of
our agreements with AgStar from September 29, 2005, when we first entered
into the master loan agreement with AgStar, through November 19, 2007, the
date of the last supplement.
|
|
|
|
|
Maximum Borrowing Capacity
Following Agreement or
Supplement/Amendment
|
|
|
Date
|
|
Basic Terms of Agreement or
Effect of Supplement/Amendment
|
|
Construction/
Term Note
|
|
Revolving
Term Note
|
|
Revolving
Line of Credit
|
|
|
September 29, 2005
|
|
·
We
received construction loan of $59,883,000 for the purpose of acquiring,
constructing, equipping and furnishing our ethanol plant.
·
We
received a revolving line of credit of up to $2.0 million for general
corporate and operating purposes.
·
Ron
Fagen and Fagen, Inc. each executed a limited guaranty relating to our
indebtedness to AgStar.
·
Supplements
to the master loan agreement set out certain other terms and conditions,
including interest.
·
Interest
rate equal to LIBOR plus 3.25%.
·
Accrued
interest on the revolving loan was payable monthly through the maturity date
of that loan.
|
|
$
|
59,883,000
|
|
—
|
|
$
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 12, 2006
|
|
·
Amended
and restated certain terms of the credit facilities.
|
|
$
|
59,883,000
|
|
—
|
|
$
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 20, 2006
|
|
·
Increased
the line of credit by $3.7 million to provide funding for increased costs
associated with the construction of our ethanol plant.
|
|
$
|
59,883,000
|
|
—
|
|
$
|
5,700,000
|
|
36
Table of Contents
|
|
|
|
|
Maximum Borrowing Capacity
Following Agreement or
Supplement/Amendment
|
|
|
Date
|
|
Basic Terms of Agreement or
Effect of Supplement/Amendment
|
|
Construction/
Term Note
|
|
Revolving
Term Note
|
|
Revolving
Line of Credit
|
|
|
December 27, 2006
|
|
·
Increased
the construction loan by $4.7 million to pay for increased costs associated
with the construction of our ethanol plant.
|
|
$
|
64,583,000
|
|
—
|
|
$
|
5,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 18, 2007
|
|
·
Increased
the line of credit by $1.8 million to provide us with additional working
capital for the operation of our business.
|
|
$
|
64,583,000
|
|
—
|
|
$
|
7,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2007
|
|
·
Converted
the construction loan into a term loan of $59,583,000 and a revolving term
loan of initially $5.0 million.
·
The
revolving term loan commitment amount decreases from $5.0 million to $3.0
million by a decrease of $500,000 each October 1 from 2008 to 2011.
·
Both
the term loan and the revolving term loan are payable in full on
October 1, 2012.
·
Ron
Fagen executed a personal guaranty by which he agreed to personally guarantee
our obligations under the credit agreement with AgStar, up to a maximum of
$3,740,000, on a basis similar to the original September 29, 2005
guarantee.
|
|
$
|
59,583,000
|
|
$
|
5,000,000
|
|
$
|
7,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 19, 2007
|
|
·
Renewed
the revolving line of credit.
·
Our
requests for revolving advances under the revolving line of credit loan also
may be satisfied, in the sole discretion of AgStar, by issuance of letters of
credit not exceeding $500,000.
|
|
$
|
59,583,000
|
|
$
|
5,000,000
|
|
$
|
7,500,000
|
|
Our
indebtedness to AgStar as of April 30, 2008 consisted of: (a) a revolving term loan in an amount
not to exceed $5.0 million, with AgStar’s commitment on this term revolving
loan decreasing over time to $3.0 million; (b) a term loan of $59,583,000,
with a ten year amortization, of which $45.0 million carried a fixed interest
rate and of which $14,583,000 carried a variable interest rate; and (c) a
$7.5 million revolving line of credit, of which $4.9 million was outstanding.
The
following is a description of the master loan agreement, as amended and
restated, along with the supplements or amendments currently in effect, which
we refer to as the “MLA”. This
description is a summary only and does not purport to be a complete description
of every term and condition of the MLA.
Maturity, Interest Payment and Rates
All
unpaid principal and all accrued interest on the term loan and the term
revolving loan are due and payable on October 1, 2012. Amounts under the revolving line of credit
loan are due and payable on November 16, 2008.
On
the term loan, we were required to make payments of accrued interest only
monthly from November 1, 2007 to May 1, 2008. Beginning on May 1, 2008 and on the
first of each month thereafter, we are required to make equal monthly payments
of principal and accrued interest in such amounts as will be required to fully
amortize the entire outstanding principal of the term loan, together with
accrued interest, over a ten year period.
The amount of our monthly payments will be recalculated and, if
necessary, adjusted to account for changes in the effective rate of interest
under the term loan and to maintain a ten year amortization schedule. On the term revolving loan, we pay
37
Table of Contents
interest monthly on the amount outstanding
and must prepay the term revolving loan on each October 1 by the amount
the aggregate outstanding advances exceed the term revolving loan commitment
then in effect, together with accrued interest.
On the revolving line of credit, we pay interest monthly on the amounts
then outstanding and all amounts outstanding on the revolving line of credit
loan are due upon maturity. We must
repay the revolving line of credit loan to the extent advances exceed AgStar’s
maximum commitment for the revolving line of credit loan. We may borrow, repay
and reborrow amounts under the term revolving loan and revolving line of credit
loan up to the respective maximum commitment amounts.
Additionally,
we had the right to convert all or any part of the term loan into a fixed rate
loan, bearing interest at a rate listed for particular issues plus 3.00%. We exercised this right effective May 1,
2008. Therefore, beginning May 1,
2008 and ending April 30, 2011, the interest rate on $45.0 million of our
construction loan was set at 6.58% per annum.
If
the rate of interest under any loan with AgStar is variable, then the variable
rate of interest will be calculated and adjusted based on the level of our “owner’s
equity.” Under this provision of the MLA
and based on our owner’s equity, the term revolving loan and revolving line of
credit loan have interest rates equal to LIBOR in effect from time-to-time plus
between 2.75% and 3.25%. Beginning May 1,
2008, the portion of the term loan that carries a variable rate also has a rate
equal to LIBOR in effect from time to time plus 3.25%.
During
the continuance of a default in payment, such overdue payment shall bear
interest at an additional 2.00% per annum and during the continuance of
any event of default, loans may bear interest at the option of AgStar at an
additional 2.00% per annum. An additional late charge of 5.00% will be charged
on any payment of principal or interest not paid within 10 days of the
applicable due date.
Mandatory and Voluntary Prepayments
Under
the MLA, we may prepay any of the loans in whole or in part upon notice to
AgStar. On the portion of the loan that
is at a fixed interest rate, we must pay a prepayment fee; on the other
amounts, there is no penalty for prepayment.
In addition, we are required to make quarterly mandatory prepayments on
the outstanding term loan, commencing with the first calendar quarter following
the construction loan maturity date, using 25% of “excess cash flow” from the
previous fiscal quarter, provided however, that the total “excess cash flow”
payments are not to exceed $2.0 million in any calendar year. However, no “excess cash flow” payments will
be required during any fiscal year if our “tangible owner’s equity” is greater
than 50% at the end of the immediately preceding fiscal year.
Under
the revolving loan, we are required to make mandatory prepayments based on the
amount by which the outstanding credit exceeds the defined borrowing base, or
alternatively, pledge and assign additional collateral. Amounts borrowed under
the revolving loan may be repaid and reborrowed at any time until the revolving
loan is terminated.
Covenants
The
MLA contains customary affirmative and negative covenants and requirements
affecting us and our operations. The affirmative covenants provide for, among
other requirements, visitation and examination rights in favor of AgStar and
periodic delivery to AgStar of financial statements and other information,
including notices of certain events and conditions. There are also affirmative
covenants relating to the officers and governors managing our business,
safekeeping of collateral, perfection of security interests, and construction
of our ethanol plant. In addition, the
affirmative covenants include standard covenants relating to the operation of
our business, including covenants requiring it to, among other things, maintain
insurance and comply with applicable laws and material contracts.
Moreover,
the MLA contains negative covenants which, among other things, limit our
ability to:
·
incur additional indebtedness and grant liens
or encumbrances;
·
provide guarantees;
·
declare or pay dividends or distributions, or
purchase or acquire any membership interests, except for distributions to our
members for tax purposes (provided that appropriate supporting documentation is
furnished to AgStar) and redemptions or distributions in an amount that does
not exceed in the aggregate 65% of our net income in the immediately preceding
fiscal year, subject to certain exceptions;
·
make certain investments or capital
expenditures;
38
Table of Contents
·
conduct asset sales or other asset
dispositions, merge or consolidate;
·
change our line of business;
·
change our state of organization, name or
location of our executive office;
·
pay management, consulting or similar fees to
any person unless not affiliated with us for services actually rendered;
·
change the ownership or management such that
there is a failure of one or more of our members as of the closing date to hold
100% of our voting membership interests; change in our Chief Executive Officer
or change in our equity ownership of our subsidiary; and
·
conduct transactions with affiliates.
The
MLA also requires us to meet certain financial covenants, including covenants
requiring us to maintain:
·
minimum working capital of at least
$3.0 million at the end of the 12th month and $5.0 million at
the end of the 24
th
month following the closing date of October 1,
2007 and at least $5.0 million continually thereafter;
·
tangible net worth of not less than
$39.0 million on the closing date of October 1, 2007, and after the
closing date, a tangible net worth, measured at the end of each fiscal year, in
an amount equal to the lesser of (a) our tangible net worth at the end of
the immediately preceding fiscal year plus $500,000 or (b) our $39.0
million plus our retained earnings at the end of the current fiscal year;
·
tangible net worth divided by total assets of
at least 50% beginning at the end of the 48
th
month following
the completion date and maintained and measured annually thereafter; and
·
a fixed charge coverage ratio of not less
than 1.20 to 1.00 beginning at the end of the 12
th
month following
the completion date and maintained and measured annually thereafter.
Events of Default
The
MLA contains customary events of default, including:
·
failure to pay any principal, interest, fees
or other amounts on the loans when due;
·
material breaches of representations and
warranties;
·
failure to observe financial and negative
covenants;
·
failure to provide financial statements and
certain other financial information within five days of the due date;
·
failure to perform or observe any other term,
covenant or agreement in the master loan agreement or in any related loan
documents that is not cured within a specified grace period;
·
failure to pay certain indebtedness in excess
of $50,000 or any other default under agreements governing such indebtedness;
·
events of bankruptcy and insolvency;
·
commencement of enforcement proceedings with
respect to an order or judgment in excess of $50,000;
·
any provision of the master loan agreement,
any security document or any other loan document ceases to be valid and binding
on us;
·
security documents cease to create a valid
lien;
·
the termination of any marketing agreement
with a duration of more than one year;
·
the discontinuation of the business;
·
construction of our ethanol plant is halted
or abandoned for a period of 30 consecutive days;
·
construction of our ethanol plant is not
completed by the specified completion date;
39
Table of Contents
·
any event resulting in a material adverse
effect on us, any subsidiary or any guarantor;
·
any guarantee or subordination agreement
ceases to be in full force and effect;
·
breach by our subsidiary of its obligations
under any guarantee or any other agreement it may have with AgStar;
·
a material breach or termination of a
material contract or amendment of a material contract that would be materially
adverse to AgStar; or
·
the loss, suspension or revocation by any
governmental authority of the air quality emissions permit for our ethanol
plant.
If
any event of default is triggered, AgStar may terminate its obligations under
the credit facility, accelerate the due date of the unpaid principal balance of
all outstanding loans, appoint a receiver to take possession of all underlying
collateral, enter the property to take actions to complete construction of our
ethanol plant, require us to cash collateralize outstanding letters of credit
and exercise all of its other rights and remedies.
Security and Guarantees
AgStar
has been granted a security interest in substantially all of our assets. We
also assigned our interest in our agreements for the sale of ethanol and
distillers grains, and for the purchases of coal, corn and electricity, as well
as our design-build agreement with Fagen, Inc. AgStar also received a mortgage relating to
our real property. Roland J. (Ron) Fagen
also personally guarantees our obligations under the credit agreements with AgStar,
up to a maximum of $3,740,000, through a personal guaranty. Mr. Fagen did not, and has not, received
any consideration from us for acting as guarantor. Fagen, Inc. also guaranteed a portion of
our indebtedness to AgStar, but this guarantee was eliminated effective October 1,
2007.
The
guaranty agreements also specify certain events of default, including: material
breaches of representations and warranties; failure to perform or comply with
any covenant or agreement in the guaranty agreement; or the occurrence of an
event of default under the master loan agreement or other loan documents.
Fees and Expenses
We
were required to pay an underwriting fee and participation fee in connection
with the MLA of an aggregate of approximately $445,000. We are also required to pay certain on-going
fees in connection with the MLA, including annual facility fees of $20,000 paid
on each October 1, 2007 anniversary of the closing date and letter of
credit fees equal to 2.50% on an annualized basis of the maximum amount
available to be drawn.
We
must also pay a non-refundable, unused commitment fee equal to 0.25% per annum
on the average daily unused portion of the revolving loan.
Other Credit Arrangements
In
addition to our primary credit arrangement with AgStar, we have other material
credit arrangements and debt obligations.
In
October 2003, we entered into an industrial water supply development and
distribution agreement with the City of Heron Lake, Jackson County, and
Minnesota Soybean Processors. In
consideration of this agreement, we and Minnesota Soybean Processors are
allocated equally the debt service on $735,000 in water revenue bonds that were
issued by the City to support this project that mature in February 2019. The parties have agreed that prior to the
scheduled expiration of the agreement, they will negotiate in good faith to
replace the agreement with a further agreement regarding the wells and related
facilities. In May 2006, we entered
into an industrial water supply treatment agreement with the City of Heron Lake
and Jackson County. Under this
agreement, we pay monthly installments over 24 months starting January 1,
2007 equal to one years’ debt service on approximately $3.6 million in water
revenue bonds, which will be returned to us if any funds remain after final
payment in full on the bonds and assuming we comply with all payment
obligations under the agreement. As of April 30,
2008, there was a total of $4.1 million in outstanding water revenue bonds and
we classify our obligations under these bonds as assessments payable. The interest rates on the bonds range from
0.50% to 8.73%.
In
November 2007, we entered into a shared savings contract with Interstate
Power and Light Company (“IPL”), our electrical service provider. Under the agreement, IPL is required to pay
$1,850,000 to fund project costs for the purchase and installation of
electrical equipment. In exchange, we
are required to share a portion of the
40
Table of Contents
energy savings with IPL that may be derived
from the decreased energy consumption from the new equipment. We are required to pay IPL approximately
$30,000 for the first thirteen billing cycles, $140,000 at the end of the
thirteenth billing cycle, and thereafter, approximately $30,000 for the
remainder of the billing cycles. These
amounts represent IPL’s portion of the shared savings. We also granted IPL a security interest in
the electrical equipment to be installed on our site. The shared savings contract expires December 31,
2012.
In
connection with the shared savings contract, IPL deposited $1,710,000 of the
$1,850,000 in an escrow account on our behalf and we received the remaining $140,000
as cash proceeds. The escrow account expires at the same time as the shared
savings contract or a termination by IPL of the escrow arrangement, at which
time any remaining funds will be distributed to IPL. We earn interest at a rate of 4.2% on the
funds escrowed and we pay a rate of interest of 1.5% on the funds deposited
into escrow. Each month, a distribution
from the escrow account is made to IPL to pay its portion of the shared savings
under the shared savings contract.
To
fund the purchase of the distribution system and substation for the plant, we
entered into a loan agreement with Federated Rural Electric Association
pursuant to which we borrowed $600,000 by a secured promissory note. Under the note we are required to make
monthly payments to Federated Rural Electric Association of $6,250 consisting
of principal and an annual fee of 1% beginning on October 10, 2009. In exchange for this loan, Federated Rural
Electric Association was granted a security interest in the distribution system
and substation for the plant.
41
Table
of Contents
Item
3. Properties
We
own approximately 216 acres of land located near Heron Lake, Minnesota on which
we have constructed our ethanol plant, which also includes corn, coal, ethanol,
and distillers grains storage and handling facilities. Located on these 216 acres is an
approximately 7,320 square foot building that serves as our headquarters. Our address is 91246 390
th
Avenue,
Heron Lake, Minnesota 56137-3175.
We
also own elevator and grain storage facilities in Lakefield, Minnesota and
Wilder, Minnesota. The elevator and
grain storage facilities at each location have grain handling equipment and
both upright and flat storage capacity.
The storage capacity of the Lakefield, Minnesota facility is
approximately 1.9 million bushels and the storage capacity of the Wilder,
Minnesota facility is approximately 900,000 bushels.
All
of our real property is subject to mortgages in favor of AgStar Financial
Services, PCA as security for loan obligations.
42
Table of Contents
Item
4. Security Ownership of Certain
Beneficial Owners and Management
The
following table sets forth certain information as of July 31, 2008 with
respect to our units beneficially owned by (i) each governor, (ii) each
person known to us to beneficially own more than 5% percent of our units, (iii) each
executive officer named in the Summary Compensation Table (the “Named Executive
Officers”), and (iv) all current executive officers and governors as a
group. The beneficial ownership percentages are based on 27,104,625 units
issued and outstanding as of July 31, 2008.
Under
our Member Control Agreement, any member who, together with such member’s
affiliates, holds 9% or more of the units outstanding is entitled to appoint
one governor to the board for every 9% of units held. Project Viking, LLC has
appointed two governors under this provision: Brian D. Thome and David M.
Reinhart. An appointed governor serves indefinitely at the pleasure of the
member appointing him or her (so long as such member and its affiliates
continue to hold a sufficient number of units to maintain the applicable
appointment right) until a successor is appointed, or until the earlier death,
resignation or removal of the appointed governor.
In
determining the voting power present for the purpose of the election of
governors, units held by members who are entitled to appoint one or more
governors under the Member Control Agreement and such members’ affiliates will
not be considered, and members who are entitled to appoint one or more
governors under the Member Control Agreement and such member’s affiliates are
not entitled to vote for the election of governors. Therefore, Project Viking,
LLC and its affiliates are not entitled to vote for the election of governors.
Unless
otherwise indicated and subject to community property laws where applicable,
each unit holder named in the table below has sole voting and investment power
with respect to the units shown opposite such unit holder’s name. Each holder
may be reached at our offices in Heron Lake, Minnesota.
|
|
|
Units Beneficially Owned
|
|
|
Name
|
|
Number
|
|
Percent
|
|
|
|
|
|
|
|
|
|
Holders of More Than 5% of Units
|
|
|
|
|
|
|
Project Viking, LLC (1)
|
|
5,902,500
|
|
21.8
|
%
|
|
|
|
|
|
|
|
|
Governors and Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert J. Ferguson (2)(3)(4)
|
|
147,250
|
|
*
|
|
|
Doug Schmitz (2)(5)
|
|
208,000
|
|
*
|
|
|
Michael S. Kunerth (2)(6)
|
|
126,000
|
|
*
|
|
|
David J. Woestehoff (2)(7)
|
|
320,625
|
|
1.2
|
%
|
|
David J. Bach (2)(8)
|
|
101,750
|
|
*
|
|
|
Timothy O. Helgemoe (2)(9)
|
|
61,500
|
|
*
|
|
|
Milton J. McKeown (2)(10)
|
|
87,000
|
|
*
|
|
|
Robert J. Wolf (2)(11)
|
|
66,000
|
|
*
|
|
|
David M. Reinhart (2)(12)
|
|
—
|
|
*
|
|
|
Brian D. Thome (2)(12)
|
|
—
|
|
*
|
|
|
James A. Gerber (3)
|
|
—
|
|
*
|
|
|
All executive officers and governors as a
group (11 persons)
|
|
1,097,125
|
|
4.0
|
|
*
Indicates ownership of less than 1%.
(1)
Project Viking, LLC is owned by Roland J.
(Ron) Fagen and Diane Fagen, the principal shareholders of Fagen, Inc. Our
ethanol plant was design-built by Fagen, Inc.
(2)
Serves as a governor.
(3)
Named Executive Officer.
43
Table of Contents
(4)
Includes 126,250 units owned jointly by Mr. Ferguson
and his spouse and 21,000 owned by son who resides with Mr. Ferguson.
(5)
Includes 25,000 units owned by Doug Schmitz,
10,500 units owned by Doug and Karen Schmitz, 25,000 units owned by Karen
Schmitz, and 147,500 units owned by Schmitz Grain Inc., which is controlled by
Doug Schmitz.
(6)
Includes 63,000 units owned by Michael
Kunerth and Dawn Kunerth as trustees of the Michael Kunerth Trust under
agreement dated July 18, 2006, and 63,000 units owned by Dawn Kunerth and
Michael Kunerth as trustees of the Dawn Kunerth Trust under agreement dated July 18,
2006.
(7)
All units are owned jointly by Mr. Woestehoff
and his spouse.
(8)
All units are owned jointly by Mr. Bach
and his spouse.
(9)
Includes 15,000 units owned by Mr. Helgemoe’s
spouse, 25,000 units owned jointly by Mr. Helgemoe and his spouse, and
21,500 units owned jointly by Mr. Helgemoe’s spouse and Mr. Helgemoe’s
brother.
(10)
All units are owned jointly by Mr. McKeown and his spouse.
(11)
All units are owned jointly by Mr. Wolf and his spouse.
(12)
Appointed as a governor by Project Viking, LLC.
44
Table of Contents
Item
5. Directors and Executive Officers.
Our
board of governors manages our business and affairs. Under our Member Control
Agreement, the board of governors will consist of not less that seven nor more
than eleven governors. Currently, our board of governors consists of ten
governors.
Under
our Member Control Agreement, a member and its affiliates holding nine percent
or more of the units outstanding are entitled to appoint one governor to the
board for every 9% of our units held. Project Viking, LLC, which holds 21.8% of
our outstanding units as of July 31, 2008, has appointed two governors
under this provision: Brian D. Thome and David M. Reinhart. An appointed
governor serves indefinitely at the pleasure of the member appointing him or
her (so long as such member and its affiliates continue to hold a sufficient
number of units to maintain the applicable appointment right) until a successor
is appointed, or until the earlier death, resignation or removal of the appointed
governor. A member that is entitled to appoint one or more governors under the
appointment right provided in the Member Control Agreement and such member’s
affiliates are not entitled to vote for the election of governors by the
members. Currently, Project Viking, LLC
and its affiliates are not entitled to vote in the election of governors.
All
governors named below were appointed as initial board members at the time of
our formation in April 2001. In
order to preserve continuity of governance and harmonious transition from the
initial board, the initial board designated from among themselves three classes
of governors to serve staggered terms so that members will elect one-third (or
as nearly as possible) of the non-appointed members of the board of governors
annually. At the Annual Meeting of
Members held on March 29, 2008 members first elected governors and Robert
J. Ferguson, David J. Woestehoff and Timothy O. Helgemoe were elected to serve
a three year term expiring at the Annual Meeting of Members in 2011.
The
names, ages, addresses, terms, expiration dates and certain biographical
information regarding our current governors and executive officers are set
forth below.
|
Name
|
|
Age
|
|
Position
|
|
Term Expires/Appointed
|
|
|
|
|
|
|
|
|
|
Doug
Schmitz
|
|
45
|
|
Governor,
Vice Chairman of the Board
|
|
Term
expires 2009
|
|
|
|
|
|
|
|
|
|
Robert
J. Wolf
|
|
55
|
|
Governor
|
|
Term
expires 2009
|
|
|
|
|
|
|
|
|
|
David
J. Bach
|
|
47
|
|
Governor
|
|
Term
expires 2009
|
|
|
|
|
|
|
|
|
|
Michael
S. Kunerth
|
|
40
|
|
Governor,
Board Treasurer
|
|
Term
expires 2010
|
|
|
|
|
|
|
|
|
|
Milton
J. McKeown
|
|
62
|
|
Governor
|
|
Term
expires 2010
|
|
|
|
|
|
|
|
|
|
Robert
J. Ferguson
|
|
59
|
|
Governor,
Chairman of the Board, President and Chief Executive Officer
|
|
Term
expires 2011
|
|
|
|
|
|
|
|
|
|
David
J. Woestehoff
|
|
38
|
|
Governor,
Board Secretary
|
|
Term
expires 2011
|
|
|
|
|
|
|
|
|
|
Timothy
O. Helgemoe
|
|
42
|
|
Governor
|
|
Term
expires 2011
|
|
|
|
|
|
|
|
|
|
David
M. Reinhart
|
|
59
|
|
Governor
|
|
Appointed
|
|
|
|
|
|
|
|
|
|
Brian
D. Thome
|
|
35
|
|
Governor
|
|
Appointed
|
|
|
|
|
|
|
|
|
|
James
A. Gerber
|
|
57
|
|
Interim
Chief Financial Officer
|
|
—
|
45
Table of Contents
Doug Schmitz
. Mr. Schmitz attended
Willmar Community College in Willmar, Minnesota, and majored in Ag Business.
Doug is a third generation farmer who has been farming with his brother since
1988. In addition to agriculture, Mr. Schmitz owns and operates Schmitz
Grain, Inc., which was purchased from his father in 1991. Schmitz Grain has three locations in
southwestern Minnesota and provides services to area farmers in grain
merchandising, custom drying, feed sales, seed sales and fertilizer and
chemical application. He also currently serves on the board of two
privately-held companies: Agri-Tech Systems, Inc. located in Las Vegas,
Nevada, and United Ag Resources of Slayton, Minnesota.
Robert J. Wolf
.
Since 1994, Mr. Wolf has owned and operated County Seed Inc. He is
currently a director of the Nobles County Corn & Soybean Association,
and is a member of Minnesota Corn Growers Association and Minnesota Soybean
Association. He is a Certified Crop Advisor and is a member of Knights of
Columbus. Mr. Wolf received an
Associate of Arts Degree in Ag Business from Worthington Community College in
Worthington, Minnesota.
David J. Bach
. Mr. Bach
was raised on a family farm and has been farming full-time since 2001. From
1987 to 2001, Mr. Bach was employed at Pillsbury/Green Giant in Le Sueur,
Minnesota. During his time at
Pillsbury/Green Giant, Mr. Bach held primarily supervisory positions and
was most recently the Ag Research Station Coordinator. He graduated from the
University of Minnesota in St. Paul with a B.S. degree in Agronomy.
Michael S. Kunerth
. Mr. Kunerth
has operated a corn and soybean farm in Brewster, Minnesota since 1990. Since
1992, Mr. Kunerth has also operated a retail seed service business. Since 1994, Mr. Kunerth has also served
as the Clerk of Graham Lakes Township.
He holds a B.S. Degree in Business Management from St. John’s
University, Collegeville, Minnesota.
Milton J. McKeown
. From
1991 to his retirement in October 2006, Mr. McKeown managed the Heron
Lake Insurance Agency. While he is
currently retired, Mr. McKeown is active in community affairs. In addition to serving on our board of
governors, Mr. McKeown is currently a board member of the Southwest
Minnesota Workforce Council. Mr. McKeown graduated from Dakota State
University with a B.S. degree in Industrial Arts.
Robert J. Ferguson
.
Since 1972, Mr. Ferguson has farmed near Heron Lake, Minnesota. Mr. Ferguson
is a Jackson County Commissioner and serves on the Jackson County Planning and
Zoning board and the Prairieland Economic Development board. In addition, Mr. Ferguson is a member of
the Chief Elected Officials board for the Private Industry Council and
President of Heron Lake Development Corporation. He is a member of the Jackson
County Corn and Soybean Associations, and the Heron Lake /Okabena Community
Club. Mr. Ferguson attended
Worthington Community College to pursue his associate of arts degree in
business administration but just before graduation was drafted by the U.S. Army
to serve in the Vietnam War.
David J. Woestehoff
. Mr. Woestehoff
operates grain farming operations in Belle Plaine, Minnesota and Arlington,
South Dakota. Mr. Woestehoff also serves on various committees at First
Lutheran Church in Le Sueur, Minnesota. Mr. Woestehoff graduated from the
University of Wisconsin in 1990 with a B.S. degree in Agricultural Business and
minors in Economics and Animal Science.
Timothy O. Helgemoe
. Mr. Helgemoe
is a fifth generation farmer who has been farming with his brother since 1993.
In addition to raising corn, soybeans, and custom farming, Mr. Helgemoe
has owned and operated Helgemoe Bros, Inc., a local trucking business,
since October 1999. Mr. Helgemoe
received his B.S. degree with an emphasis in dairy from the University of
Minnesota.
David M. Reinhart
.
Since 1975, Mr. Reinhart has operated family-owned supermarkets in
Guthrie Center, Panora, and Stuart, Iowa. Mr. Reinhart serves as a board
member of four privately-held ethanol production companies: CORN, LP in Goldfield, Iowa; Big River
Resources, LLC in West Burlington, Iowa; and Amaizing Energy in Dennison, Iowa.
Mr. Reinhart graduated from Iowa Central Community College with an
Associate’s Degree in Business and from the University of South Dakota with a
Bachelor of Science degree in Education.
Brian D. Thome
.
Since March 2007, Mr. Thome has owned his own business
consulting firm. After serving on its
board of directors from inception, Mr. Thome served as President of US
BioEnergy Corporation from March 2006 to March 2007. From December 2004 to March 2006,
he served as the Director of Financial Investments for Fagen, Inc. From January 1999 to December 2004,
he was employed with First National Bank of Omaha, serving as Second Vice
President of Corporate Lending. Mr. Thome
graduated from the University of Nebraska with a B.S. in Business
Administration, with majors in finance and marketing, and later completed his
Executive MBA.
46
Table of Contents
James A. Gerber
.
James A. Gerber has served as our Interim Chief Financial Officer since March 1,
2007 through our arrangement with Gerber & Haugen, PLLP, a public
accounting firm. From November 1, 2006 to February 28, 2007, Mr. Gerber,
through Gerber & Haugen, PLLP, provided accounting services to
us. Mr. Gerber has been a partner
with Gerber & Haugen, PLLP since 1989 and with Grieme, Gerber &
Associates from 1976 to 1988. Mr. Gerber
has also been an entrepreneur and had owned an aggregate business, a supper
club and a Culligan dealership. From
1979 to the present, Mr. Gerber has owned varying interests in Southwest
Minnesota Concrete, Inc. Currently,
Mr. Gerber serves as Secretary of Southwest Minnesota Concrete, Inc. Mr. Gerber holds a B.S. in Accounting
from St. Cloud State College and is a certified public accountant.
47
Table of Contents
Item
6. Executive Compensation.
Summary
Compensation Table
The
following table shows information concerning compensation earned for services
in all capacities during fiscal year 2007 and 2006 for (i) Robert J.
Ferguson, who acted as our Chief Executive Officer in fiscal year 2007; and (ii) James
A. Gerber, who served as our Interim Chief Financial Officer in fiscal year
2007 (together referred to as our “Named Executive Officers”). There were no
other executive officers of our company in fiscal years 2006 or 2007.
|
Name and Principal Position
|
|
Year
|
|
Salary ($)
|
|
All Other
Compensation
($)
|
|
Total ($)
|
|
|
Robert J. Ferguson (1)
|
|
2007
|
|
$
|
20,571
|
|
$
|
50,000
|
(2)
|
$
|
70,571
|
|
|
Chief Executive Officer
|
|
2006
|
|
—
|
|
$
|
50,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James A. Gerber (3)
|
|
2007
|
|
—
|
|
$
|
58,144
|
|
$
|
58,144
|
|
|
Interim Chief Financial Officer
|
|
2006
|
|
—
|
|
$
|
9,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Salary for Mr. Ferguson represents
amounts other than meeting fees and additional fees for service as the board
President paid to Mr. Ferguson in 2007. For an explanation of compensation
paid to Mr. Ferguson in 2007 for his services as our governor and an
officer of the board, please see the section of this Item 6 entitled “Governor
Compensation.”
(2)
Represents
compensation paid in August 2006 and January 2007 to Mr. Ferguson
for oversight of the construction of our plant. See “Employment Arrangements
with Named Executive Officers” for a description of this arrangement.
(3)
All other compensation for Mr. Gerber
represents amounts we paid to Gerber & Haugen, PLLP, a public
accounting firm of which Mr. Gerber is a partner. For fiscal year 2006 and for the period from November 1,
2006 to February 28, 2007, amounts were for accounting services rendered
by the firm to us. For the period from March 1,
2007 to October 31, 2007, amounts were for the services of Mr. Gerber
as our Interim Chief Financial Officer. See “Employment Arrangements with Named
Executive Officers and Post-Employment Compensation” for a description of the
arrangements with Gerber & Haugen, PLLP.
Employment
Arrangements with Named Executive Officers and Post-Employment Compensation
In
December 2007, our board of governors formed and adopted a written charter
for the Compensation Committee, which has responsibility for compensation of
our executive officers. Because the
Compensation Committee was only recently formed, the arrangements described
below with the Named Executive Officers were not approved by the Compensation
Committee, but instead were approved by the board of governors (excluding Mr. Ferguson
in the case of his own compensation). We
expect that future compensation agreements and arrangements with our executive
officers will be reviewed and approved by the Compensation Committee.
Robert
J. Ferguson has served as the President of our board since our inception and,
since September 1, 2007, has acted as our Chief Executive Officer through
his position as board President. As an officer of the board, Mr. Ferguson
received $27,000 in compensation in 2007 for that service in addition to the
same per meeting fees paid to other governors. The amounts for meeting fees and
additional fees for service as board President paid to Mr. Ferguson in
2007 are included in the table set forth in the section of Item 6 of this
Registration Statement on Form 10 entitled “Governor Compensation.”
In
addition to compensation for his services as our governor and an officer of the
board, we also entered into an agreement with Mr. Ferguson under which we
would pay Mr. Ferguson a total of $100,000 for his oversight of the
construction of our plant. Under this agreement we paid Mr. Ferguson
$50,000 in August 2006 and we paid $50,000 in January 2007. On September 1,
2007, we hired Mr. Ferguson an employee to serve as our Chief Executive
Officer and entered into an employment agreement with him. The amounts paid to Mr. Ferguson
in 2007 for construction oversight and for his service as our Chief Executive
Officer are included in the Summary Compensation Table set forth in Item 6 of
this Registration Statement on Form 10 entitled “Executive Compensation.”
48
Table of Contents
Under
our employment agreement with Mr. Ferguson, he will serve as our Chief
Executive Officer from September 1, 2007 to September 1, 2008. The
employment agreement may be terminated earlier by either party upon 30 days’
written notice, except in the case of termination for unsatisfactory
performance, for which notice is not required. Mr. Ferguson will be paid
an annual base salary of $120,000 on a bi-weekly basis and is eligible to
participate in any bonus to employees at the discretion of the board of
governors. The employment agreement also contains confidentiality and
non-compete provisions.
James
A. Gerber has served as our Interim Chief Financial Officer since March 1,
2007 through a services agreement with Gerber & Haugen, PLLP, a public
accounting firm. Mr. Gerber has
been a partner with Gerber & Haugen, PLLP since 1989. In fiscal year 2006 and from November 1,
2006 to February 28, 2007, Gerber & Haugen, PLLP provided
accounting services to us for which we paid $9,047 and $24,811, respectively. Under the services agreement with Gerber &
Haugen, PLLP, we will pay a minimum of $50,000 for the period from March 1,
2007 to March 1, 2008 for Mr. Gerber’s services as our Interim Chief
Financial Officer. In addition, we will pay Gerber & Haugen, PLLP
$50.00 per hour for each hour of Mr. Gerber’s service in excess of 1,000
hours in the period from March 2007 through February 2008. However, the total compensation under our
agreement with Gerber & Haugen, PLLP is capped at $85,000. The services agreement was scheduled to
terminated on March 1, 2008, but in February 2008, we extended the
arrangement with Gerber & Haugen, PLLP for a minimum of 30 additional
days. The parties continue to operate
under this services agreement on an on-going basis.
Because Mr. Gerber serves as our
chief financial officer on an interim basis, we have begun a search for an
executive officer to serve as our chief financial officer on a full time,
permanent basis. Mr. Gerber has indicated that he is willing to continue
his service to us as Interim Chief Financial Officer until a candidate is
identified and hired.
Our
agreements with Messrs. Ferguson and Gerber do not provide for severance
or any other compensation following termination of the employment or services.
Governor
Compensation
Members
of our board of governors receive a per diem of $100 per half day and $200 per
full day for attending meetings and carrying out duties on our behalf. Members of our board of governors are also
reimbursed for reasonable expenses included in carrying out their duties as
governors, including mileage reimbursement for travel to meetings.
In
addition to per meeting fees, officer of the board receive additional
compensation for their board service. Doug Schmitz served as the Vice President
of the board and received an additional $9,600 in 2007. Michael S. Kunerth
served as the Treasurer of the board and received an additional $7,000 in 2007.
David J. Woestehoff served as Secretary of the board and received an additional
$2,400 in 2007. Robert J. Ferguson has served as the President of our board
since our inception, and until September 1, 2007, acted as our Chief
Executive Officer through his position as board President. As an officer of the
board, Mr. Ferguson received an additional $27,000 in compensation in 2007
for that service. On September 1, 2007, we hired Mr. Ferguson an
employee to serve as our Chief Executive Officer. In addition to compensation
for his services as our governor and an officer of the board, we also paid Mr. Ferguson
$50,000 on January 12, 2007 and $20,571 on November 20, 2007 in
respect of his service as our Chief Executive Officer. The amounts other than
meeting fees and additional fees for service as the board President paid to Mr. Ferguson
in 2007 are included in the Summary Compensation Table set forth in Item 6 of
this Registration Statement on Form 10 entitled “Executive Compensation.”
The
following table shows for fiscal year 2007, the other compensation paid by us
to each of our governors:
|
Name
|
|
Fees Earned or Paid in Cash ($) (1)
|
|
|
Robert J. Ferguson
|
|
$
|
29,550
|
|
|
Doug Schmitz
|
|
$
|
12,700
|
|
|
Michael S. Kunerth
|
|
$
|
10,200
|
|
|
David J. Woestehoff
|
|
$
|
8,550
|
|
|
David J. Bach
|
|
$
|
2,000
|
|
|
Timothy O. Helgemoe
|
|
$
|
2,750
|
|
|
Milton J. McKeown
|
|
$
|
3,600
|
|
|
Robert J. Wolf
|
|
$
|
2,900
|
|
|
David M. Reinhart (2)
|
|
$
|
600
|
|
|
Fagen, Inc. (3)
|
|
$
|
600
|
|
(1)
Represents
cash retainer and meeting fees for fiscal year 2007 as described above and
total compensation to each governor.
49
Table of Contents
(2)
Messrs. Reinhart
and Thome were appointed by Project Viking, LLC as our governors in August 2007.
Therefore, amounts represent a partial year of service.
(3)
Represents
amounts paid to Fagen, Inc. in respect of the services of Brian D. Thome
who is separately compensated by Fagen, Inc. for his service on our board.
In
June 2004, we granted each of the nine then-serving members of our board
of governors a warrant to purchase 25,000 units at an exercise price of $0.80
per unit, for a total of up to 225,000 units. The warrants vested September 29,
2005 upon closing on our primary project financing and were to remain
exercisable for a period of five years thereafter. The warrants contained, as a
condition to exercise, a requirement that the governor serve as a member of the
board of governors up to closing on project financing. The warrants also
contained customary anti-dilution adjustment provisions. The warrants were not
transferable without our prior consent.
As of August 17, 2007, all of the warrants issued to the
then-serving members of our board of governors were exercised.
50
Table of Contents
Item
7. Certain Relationships And Related
Transactions, and Director Independence.
Transactions
Since Fiscal Year 2005
Since
the beginning of fiscal year 2005, we have not entered into any transaction and
there are no currently proposed transactions, in which we were or are to be a
participant and the amount involved exceeds $120,000, and in which any related
person had or will have a direct or indirect material interest, except as
described in “Item 6. Executive Compensation” of this Form 10 or as
described below. Further, our promoters
have not received any thing of value at any time during the past five fiscal
years except as described below.
Corn Transactions
. In the ordinary course of business, we
regularly enter into transactions to buy grain.
From time to time, we may buy grain from related persons on the same
basis as we buy grain from un-related parties. During fiscal years 2005 and
2006, no purchases from any related person exceeded $120,000. During fiscal year 2007, we purchased
approximately $511,000 in grain from Robert J. Ferguson and approximately $1.8
million in grain from Schmitz Grain, Inc.
Robert J. Ferguson is our governor and our Chief Executive Officer. Schmitz Grain, Inc. is controlled by
Doug Schmitz, our governor.
Fagen Participation in Equity and Debt Financing
. On December 26, 2006, we issued
3,750,000 Class B units at a price of $2.00 per unit, or $7.5 million to
Project Viking, LLC, a related party. On
April 11, 2007, the Class B units were exchanged for an equal number
of Class A units pursuant to the provisions of our Articles of
Organization and Member Control Agreement and with the approval of the board of
governors. Project Viking, LLC is owned
by Roland J. (Ron) Fagen and Diane Fagen, the principal shareholders of Fagen, Inc.,
our design-build firm and a related party.
As of July 31, 2008, Project Viking holds 21.8% of our outstanding
units.
Additionally,
our primary credit arrangement is with AgStar Financial Services, PCA (“AgStar”). On September 29, 2005 we entered into a
Master Loan Agreement with AgStar a construction loan and a revolving
loan. This Master Loan Agreement, along
with related agreements, has since been amended and restated, most recently as
the Fourth Amended and Restated Master Loan Agreement dated October 1,
2007. Ron Fagen is also a guarantor of
our obligations under the credit agreements with AgStar, up to a maximum of
$3,740,000. The most recent personal
guaranty executed by Ron Fagen was entered into on October 1, 2007 in
connection with the Fourth Amended and Restated Master Loan Agreement. Mr. Fagen did not received any
consideration from us for acting as a guarantor. Fagen, Inc. also guaranteed a portion of
our indebtedness to AgStar, but this guarantee was eliminated effective October 1,
2007.
Design-Build Agreement & Environmental
Agreements with Fagen
.
In September 2005, we signed a lump-sum design-build agreement with Fagen, Inc.
relating to, among other things, the design and construction of our ethanol
plant. In March 2007, we entered into a letter agreement with Fagen
Engineering, LLC, an affiliate of Fagen, Inc., for the development of
environmental compliance programs and related services. Both Fagen, Inc. and Fagen Engineering, LLC
are related parties. Under these
agreements with Fagen, Inc. and Fagen Engineering, LLC, we incurred an
aggregate of approximately $45.2 million and approximately $36.0 million in
fiscal years 2006 and 2007, respectively, as follows:
·
Fiscal Year 2006: approximately $45.2 million under our
design-build agreement with Fagen, Inc.; and
·
Fiscal Year 2007: approximately $36.0
million under our design-build agreement with Fagen, Inc. and $13,000
under our letter agreement with Fagen Engineering, LLC relating to
environmental compliance support.
We
paid no amounts in to Fagen, Inc. or its affiliates under these or similar
agreements in fiscal year 2005, 2004 or 2003.
From the beginning of fiscal year 2008 to July 31, 2008, we have
not entered into any agreements with Fagen, Inc. or its affiliates except
for a March 2008 agreement with Fagen Engineering, LLC for environmental
compliance training programs for $3,100.
Inventory Note from Ron Fagen
. In July 2007, Ron Fagen lent us
approximately $4.2 million for the purchase of corn inventory and the retention
of previously purchased corn inventory.
Ron Fagen and his spouse, Diane Fagen, are the principal shareholders of
Fagen, Inc., our design-build firm and a related party. Interest on the
note evidencing the debt accrued at 8.75% and the note matured in December 2007.
We repaid the note in November 2007.
51
Table of Contents
Issuances of Other Units and Warrants.
In
the last five fiscal years, we have entered into transactions with our
governors in which we sold governors the number of units set forth below and in
exchange, we received the aggregate cash consideration set forth below.
|
Name
|
|
Units
Purchased
in March/
April 2004
|
|
Cash
Paid
|
|
Units
Purchased
in October
2004
|
|
Cash Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert J. Ferguson
|
|
50,000
|
|
$
|
50,000
|
|
19,250
|
|
$
|
35,000
|
|
|
Michael S. Kunerth
|
|
80,000
|
|
80,000
|
|
—
|
|
—
|
|
|
David J. Woestehoff
|
|
30,000
|
|
30,000
|
|
244,625
|
|
445,000
|
|
|
David J. Bach
|
|
20,000
|
|
20,000
|
|
35,750
|
|
65,000
|
|
|
Timothy O. Helgemoe
|
|
15,000
|
|
15,000
|
|
—
|
|
—
|
|
|
Milton J. McKeown
|
|
30,000
|
|
30,000
|
|
11,000
|
|
$
|
20,000
|
|
|
Doug Schmitz
|
|
25,000
|
|
25,000
|
|
—
|
|
—
|
|
|
Robert J. Wolf
|
|
20,000
|
|
20,000
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally,
in June 2004, we issued to each of the above governors a warrant to
purchase 25,000 units at an exercise price of $0.80 per unit in consideration
of their services to us. The warrants vested September 29, 2005 upon
closing on our primary project financing and were to remain exercisable for a
period of five years thereafter. In August 2007,
all of these warrants were exercised and we issued 225,000 units to the
governors.
Process for
Review, Approval or Ratification of Transactions with Related Persons
The
charter of our Audit Committee provides that the Audit Committee is responsible
for reviewing and approving the terms and conditions of all transactions we
enter into in which an officer, governor or any member holding greater than 5%
or any affiliate of these persons has a direct or indirect material interest.
Our Code of Business Conduct and Ethics, which is applicable to all of our
employees and governors, also prohibits our employees, including our executive
officers, and our governors from engaging in conflict of interest transactions.
Requests for waivers by our executive officers and governors from the
provisions of, or requests for consents by our executive officers and governors
under, our Code of Business Conduct and Ethics must be made to the Audit
Committee.
In
addition, in December 2007, we adopted a formal related person transaction
approval policy, which sets forth our policies and procedures for the review,
approval or ratification of any transaction required to be reported in our
filings with the Securities and Exchange Commission. Our policy applies to any
financial transaction, arrangement or relationship or any series of similar
transactions, arrangements or relationships in which our company is a
participant and in which a related person has a direct or indirect interest.
Through the policy, the Audit Committee has also identified and pre-approved
certain transactions with related persons, including:
·
employment and compensation of our executive
officers or governor compensation, if required to be reported in under the
disclosure requirements of the Securities and Exchange Commission,
·
payment of ordinary expenses and business
reimbursements;
·
transactions with related companies in which
the dollar amount does not exceed $100,000 or 2% of the other company’s total
revenues;
·
transactions with another company controlled
by a related party or with a related party for the purchase by us of corn where
(A) the amount of corn sold in the transaction does not exceed 200,000
bushels; (B) the contract for delivery of the corn specifies a delivery
date of not more than sixty (60) days from the date of the contract; (C) the
price per bushel is fixed at the time of the contract; and (D) the amount
paid per bushel or other material terms of the transaction are based on
consideration or criteria generally applicable to other sellers of corn of a
like quality and quantity, given the conditions of the grain markets at the
time of sale;
·
charitable contributions in which the dollar
amount does not exceed $10,000 or 2% of the charitable organization’s receipts;
52
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·
payments made under our articles of
organization, member control agreement, insurance policies or other agreements
relating to indemnification;
·
transactions in which our members receive
proportional benefits; and
·
transactions that involve competitive bids,
banking transactions and transactions under which the terms are regulated by
law or governmental authority.
The
Audit Committee must approve any related person transaction subject to this
policy before commencement of the related party transaction. If pre-approval is
not feasible, the Audit Committee may ratify, amend or terminate the related
person transaction. The Audit Committee will analyze the following factors, in
addition to any other factors the Committee deems appropriate, in determining
whether to approve a related party transaction:
·
whether the terms are fair to us;
·
whether the terms of the related party
transaction are no less favorable than terms generally available to an
unaffiliated third-party under the same or similar circumstances;
·
whether the related party transaction is
material to us;
·
the role the related party has played in
arranging the transaction;
·
the structure of the related party
transaction;
·
the interests of all related parties in the
transaction;
·
the extent of the related party’s interest
in the transaction; and
·
whether the transaction would require a
waiver of our Code of Business Conduct and Ethics.
The
Audit Committee may, in its sole discretion, approve or deny any related person
transaction. Approval of a related person transaction may be conditioned upon
our company and the related person taking such precautionary actions as the
Audit Committees deems appropriate.
Committees
of the Board of Governors
Our
board has established five separate standing committees: the Audit Committee,
the Compensation Committee, the Nomination and Governance Committee, the
Marketing and Risk Management Committee, and the Finance and Planning
Committee. In December 2007, our board of governors adopted written
charters for the Audit Committee, the Compensation Committee, and the
Nomination
and Governance Committee. The composition and function of these committees are
set forth below.
Compensation Committee
. Currently, the Compensation Committee consists
of three governors: Michael S. Kunerth (chair), Brian D. Thome, and David M.
Reinhart. The Compensation Committee oversees our compensation and employee
benefit plans and practices, including our executive compensation plans,
governor compensation plans and incentive compensation and equity-based plans.
The charter of the Compensation Committee requires that this committee consist
of no fewer than two members. A majority of members of the Compensation
Committee must satisfy the independence requirements of the Nasdaq Marketplace
Rules, Section 16b-3 of the Exchange Act (if Section 16 is applicable
to us), and Section 162(m) of the Internal Revenue Code of 1986. Each
member of our Compensation Committee meets these requirements.
Nomination and Governance Committee
.
Currently, the Nomination and Governance Committee consists of three
governors: Robert J. Wolf (chair),
Milton J. McKeown and Doug Schmitz. The
Nomination and Governance Committee’s responsibilities include (1) identifying
and recommending to the board individuals qualified to serve as governors and
on committees of the board, (2) advising the governors with respect to the
board’s composition, procedures and committees, (3) developing and
recommending to the board a set of corporate governance principles and (4) overseeing
the evaluation of the board and the board committees. The charter of the
nomination and Governance Committee must consist of at least two members, a
majority of whom must satisfy the independence requirements of the Nasdaq
Marketplace Rules. The membership of our Nomination and Governance committee
meets these requirements.
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Audit Committee
. Currently, the Audit Committee consists of
six governors: Michael S. Kunerth (chair), David M. Reinhart, Robert J.
Wolf, David J. Bach, Milton J. McKeown, and Brian D. Thome. The Audit Committee
assists the board in fulfilling its oversight responsibility for (I) the
integrity of our financial statements and financial reporting process and our
systems of internal accounting and financial controls, (2) the performance
of our internal audit function, (3) the annual independent integrated
audit of our consolidated financial statements and internal control over
financial reporting and (4) our compliance with legal and regulatory
requirements, including our disclosure controls and procedures. The duties and
responsibilities of the Audit Committee include the engagement of our
independent registered public accounting firm and the evaluation of our
accounting firm’s qualifications, independence and performance. The charter of
the Audit Committee requires that the Audit Committee be comprised of three members,
a majority of whom must be “independent” under the Nasdaq Marketplace Rules. A
majority of the members must also be non-executive governors, free from any
relationship that would interfere with the exercise of independent judgment and
“independent” as defined by the applicable rules and regulations of the
Securities and Exchange Commission. Moreover, all members of the committee must
have a basic understanding of finance and accounting and be able to read and
understand fundamental financial statements, and at least one member of the
committee must have accounting or related financial management expertise. The
board of governors determined that each member of the Audit Committee meets the
independence requirements of the charter. The board of governors also
determined that the Audit Committee members meet the financial sophistication
requirements of the charter.
Marketing and Risk Management Committee
. Currently, the marketing and risk
management committee consists of four governors: Doug Schmitz (chair), David J.
Woestehoff, Timothy O. Helgemoe, and David M. Reinhart. The marketing and risk
management committee assists the board and our management to, among other
things, enhance our profitability and manage commodity price risk, by
establishing appropriate policies and strategies for grain procurement,
marketing of ethanol and distillers grains, and managing enterprise risk.
Finance and Planning Committee
. Currently, the finance and planning
committee consists of three governors: Michael S. Kunerth, David M. Reinhart
and Brian D. Thome. The finance and planning committee assists the board and
our management by (1) establishing effective financial management of our
company and our subsidiaries, (2) establishing appropriate capital and
operating budgets and financial forecasts and (3) evaluating matters
relating to potential mergers, acquisitions or dispositions of assets.
Board
Independence
The
board of governors undertook a review of governor independence in March 2008
and again in August 2008 as to all ten governors then serving. As part of
that process, the board reviewed all transactions and relationships between
each governor (or any member of his immediate family) and Heron Lake BioEnergy,
its executive officers and its auditors, and other matters bearing on the
independence of governors. In particular, the board reviewed corn transactions
by governors or their affiliates in relationship to the governor’s ability to
exercise independent judgment, as well as the rights of Project Viking, LLC to
appoint governors.
Although
our units are not listed on any stock exchange, the board of governors is
required to select and apply the independence standards of a stock exchange.
For the purposes of determining the independence of our governors and committee
members, the board of governors selected the Nasdaq Marketplace Rules. This is
also the definition used for “independence” for the purposes of determining
eligibility of governors to serve on committees.
As
a result of its review, the board of governors affirmatively determined that
Timothy O. Helgemoe, Robert J. Wolf, David J. Bach, Michael S. Kunerth, Milton
J. McKeown, David M. Reinhart, and Brian D. Thome are independent according to
the “independence” definition of the Nasdaq Marketplace Rules. Robert J. Ferguson is not “independent” under
the Nasdaq Marketplace Rules because he received compensation for his
oversight of the construction of the plant in fiscal year 2007, was hired as
our Chief Executive Officer in September 2007, and sold a significant
amount of grain to us in our fiscal year 2007 and in the current fiscal year. Messrs. Woestehoff
and Schmitz are also not independent because they each sold a significant
amount of grain to us in our current fiscal year, individually or through their
affiliated entities. The charters of the
Audit Committee, Compensation Committee, and Nomination and Governance
Committee also established separate criteria for eligibility to serve as a
member of those committees, which are discussed above.
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Item
9. Market Price of and Dividends on the
Registrant’s Common Equity and Related Stockholder Matters.
Market
Information
Although
matching services may be available to help match buyers and seller of our
units, there is no established public trading market for the units and we do
not expect one to develop in the foreseeable future. To maintain our partnership tax status, we do
not intend to list the units on any stock exchange or over-the-counter
securities market such as the OTC Bulletin board.
As
of July 31, 2008, there are approximately 27,104,625 units outstanding,
held of record by approximately 1,069 persons.
There are no outstanding options or warrants to purchase, or securities
convertible into, our units. No units
are being publicly offered by us pursuant to this Registration Statement on Form 10.
As
of July 31, 2008, all of our outstanding units are eligible for resale
under Rule 144 of the Securities Act because all units have been held for
at least one year, after applying the appropriate rules regarding tacking
of holding periods as provided in Rule 144. Affiliates must comply with the requirements
of Rule 144, but non-affiliates need not comply with such
requirements. We have not agreed to
register any of these units for resale under the Securities Act.
Distributions
We
have never declared any distributions.
Our agreements with lenders currently materially limit our ability to
make distributions to our members and these agreements are likely to limit
materially the future payment of distributions.
For a further description of these restrictions, please see “Item 2.
Financial Information – Management’s Discussion and Analysis of Financial Condition”
and Note 7 of the notes to our audited consolidated financial statements. In September 2007, we began operation of
our ethanol plant and began generating revenue.
If our financial performance and loan covenants permit, we expect to
make cash distributions at times and in amounts that will permit our members to
make income tax payments. If our
financial performance and loan covenants further permit, we intend to make
distributions in excess of those amounts.
Cash distributions are not assured, however, and we may never be in a
position to make distributions.
Under
Minnesota law, we cannot make a distribution to a member if, after the
distribution, we would not be able to pay our debts as they become due or our
liabilities, excluding liabilities to our members on account of their capital
contributions, would exceed our assets.
Securities
Authorized for Issuance under Equity Compensation Plans
There
are no “compensation plans” (including individual compensation arrangements)
under which any of our equity securities are authorized for issuance.
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Item
10. Recent Sales of Unregistered
Securities.
In
the past three years, we have sold the following securities in transactions not
registered under the Securities Act of 1933, as amended (the “Securities Act”):
In
June 2004, we issued to each of our then-serving nine governors warrants
to purchase 25,000 units at an exercise price of $0.80 per unit. The warrants
vested September 29, 2005 upon closing on our primary project financing
and were to remain exercisable for a period of five years thereafter. Based on the manner of sale and
representations of the governors, who are accredited by virtue of being our
governors, we relied upon the exemption from registration afforded by Rule 701
of the Securities Act and Rule 506 of Regulation D promulgated under Section 4(2) of
the Securities Act. In August 2007,
all of these warrants were exercised and we issued 225,000 units to the warrant
holders. Because the 225,000 units were
issued upon exercise of the outstanding warrants and no commission or other
remuneration was paid or given directly or indirectly for soliciting such
exercise, we relied upon the exemption from registration afforded by Section 3(a)(9) of
the Securities Act for the issuance of these 225,000 units.
From
September 2004 through January 2005, we conducted an offering of
units to residents in the State of Minnesota that was registered with the
Minnesota Department of Commerce. On October 5,
2005, we closed on the escrow associated with the offering and issued
21,604,875 units at prices of between $1.82 and $2.00 per unit, for a total
price of $40.0 million. Because the
securities were offered and sold solely to persons resident within the State of
Minnesota where we were formed, have our headquarters and where we conduct our
business, we relied upon the exemption from registration under Section 3(a)(11)
of the Securities Act or Rule 147 under the Securities Act.
On
September 29, 2005, we issued 255,000 units to a husband and wife jointly
as partial payment for land for the site of our ethanol plant. The land was purchased for $1.5 million with $500,000
of the purchase price being paid for with the issuance of 255,000 units. Based on the manner of sale in which there
was no general solicitation or general advertising, the pre-existing
relationship between us and the seller of the land (who was a member), the
limited number of offerees and purchasers consisting solely of the seller of
the land, and the representations of the seller of the land as to their
investment intent, we relied upon the exemption from registration afforded by Section 4(2) of
the Securities Act.
On
December 26, 2006, we issued 3,750,000 Class B units at a price of
$2.00 per unit, or $7.5 million to Project Viking, LLC. Based on the manner of sale of these
3,750,000 Class B units and representations of the purchaser (which represented
itself as an “accredited investor”), we relied upon the exemption from
registration afforded by Section 4(2) of the Securities Act and Rule 506
of Regulation D promulgated under Section 4(2) of the Securities
Act. On April 11, 2007, the Class B
units were exchanged for an equal number of Class A units pursuant to the
provisions of our Articles of Organization and Member Control Agreement and
with the approval of the board of governors. Because Class A units were
issued in exchange for the outstanding warrants Class B units and no
commission or other remuneration was paid or given directly or indirectly for
soliciting such exchange, we relied upon the exemption from registration
afforded by Section 3(a)(9) of the Securities Act for the issuance of
Class A units to the holder of the Class B units.
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Item
11. Description of Registrant’s
Securities to be Registered
Authorized
Capital
Our
Articles of Organization and Member Control Agreement govern how we conduct our
business and affairs, and the rights and obligations of our members under
Minnesota law.
Under
our Member Control Agreement, we are authorized to issue up to 50,000,000
units, of which 25,000,000 are designated as Class A units and 15,000,000
are designated as Class B units.
Pursuant to the Member Control Agreement, the authorized units not
designated as Class A or Class B units in the Member Control
Agreement may be designated as Class A units or Class B units by
resolution of the board of governors. A
statement setting forth our name and the text of the resolution and certifying
the adoption of the resolution and the date of adoption must be filed with the
Secretary of State of the State of Minnesota before the acceptance of any
capital contributions with respect to such units. On April 11, 2007, the board of
governors adopted resolutions designating as Class A Units the 10,000,000
authorized units that were not previously designated as Class A Units or Class B
Units. On April 13, 2007, a
statement of designation was filed with the Minnesota Secretary of State with
respect to this designation by the board of governors. Therefore, our current authorized capital
consists of 50,000,000 units, of which 35,000,000 are designated as Class A
units and 15,000,000 are designated as Class B units.
As
of July 31, 2008, we have 27,104,625 Class A units and no Class B
units issued and outstanding. There are no differences in the rights and
obligations between holders of Class A units and Class B units. The
board of governors may accept capital contributions on our behalf and authorize
the issuance of additional units, without member approval, on such terms and
conditions as the board of governors and the person acquiring the units may
agree.
Units
Our
units represent an ownership interest in us.
Each person acquiring units will be required to sign our Member Control
Agreement and become a member of our limited liability company. Each member has the right to:
·
Share in our profits and losses ratably in
proportion to units held;
·
Receive distributions when declared by the
board of governors ratably in proportion to units held;
·
Participate in the distribution of our assets
if we dissolve or liquidate our business;
·
Access and review certain information
concerning our business and affairs; and
·
Vote on matters that require the consent of
our members.
Holders
of our units have no cumulative voting rights, preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund
provisions applicable to our units.
Voting
Each
member may cast one vote for each Class A unit held. Except those matters specifically identified
in the Member Control Agreement, the members take action by the affirmative
vote of the members holding a majority of the voting power of the members
present, either in person or by proxy, at a duly held meeting of the members at
which a quorum is present for the transaction of business.
In
determining the voting power present for the purpose of the election of
governors, units held by members who are entitled to appoint one or more
governors under the Member Control Agreement and such members’ affiliates will
not be considered, and members who are entitled to appoint one or more
governors under the Member Control Agreement and such member’s affiliates are
not be entitled to vote for the election of governors. Project Viking, LLC holds 5,902,500 units,
or 21.8% of our outstanding units on July 31, 2008, and has the right to
appoint two governors under this provision of our Member Control
Agreement. Therefore, Project Viking,
LLC and its affiliates are not entitled to vote as to the election of
governors.
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Restrictions on Transfer
Transfer
of units is restricted. All transfers must comply with our Member Control
Agreement, which requires the prior approval of the board of governors. The board of governors may also adopt a unit
transfer policy setting forth the procedures and requirements for transferring
your capital units. The board of governors
has adopted the following unit transfer policy:
No sales of units will be allowed until thirty days after the ethanol
plant has met performance guarantees following completion of construction,
provided that transfers upon death or without consideration to related parties
which are made in accordance with the member control agreement and approved by
the board are excepted from such transfer restriction.
The
board of governors will not approve a transfer unless the transfer complies
with our Member Control Agreement and certain tax regulations that are
important to our maintaining our partnership tax status. In particular, we will endeavor to take steps
as are feasible and advisable to avoid classification as a “publicly traded
partnership” as defined in Section 7704 of the Internal Revenue Code. If
any member transfers his or her capital units in violation of our Member
Control Agreement or without the prior written consent of the board of
governors, the transfer will be null and void and the parties engaged in the
transfer must indemnify and hold us and our members harmless against all cost,
liability, and damage that arise from the transfer or attempted transfer. However, the member may pledge or otherwise
encumber all or any portion of his or her capital units, but any resulting
transfer must comply with our Member Control Agreement.
Even
if the board of governors approves a transfer of units by a member, the
transfer is not effective unless the member complies with the requirements of
our Member Control Agreement, such as providing opinions of counsel and
information regarding the transferee. We
expect that our board of governors will routinely consent to transfers and
admit the transferee as a member, if the transferor and transferee fully comply
with our Member Control Agreement and there are no adverse tax consequences to
us from the transfer.
Membership Requirements
On
and after September 23, 2004, each member must own, or must have entered
into a binding written agreement with and accepted by us to subscribe for, a
minimum of 2,500 units. Failure of any
member to own or to subscribe for such minimum number of units on or after such
date will result in the automatic termination of membership of such person,
without further notice or action by us, and such person shall become and be a
non-member unit holder, with no rights other than those financial rights with
respect to the units owned by such person as provided for in and subject to our
Member Control Agreement. The board of governors has the authority to increase
the minimum ownership requirements and to place other membership restrictions
on the holders of Class B units.
Classification of the Board of Governors
Under
our Member Control Agreement, the Board is to consist of not less that seven
nor more than eleven governors.
Currently, our Board of Governors consists of ten governors. Governors that are elected by members are
divided into three classes, with the term of one class expiring each year. As the term of each class expires, the
successors to the governors in that class will be elected for a three-year term
and until their successors are duly elected and qualified, or until their
earlier death, resignation or removal.
Anti-Takeover
Effects of Some Provisions of our Member Control Agreement
Some
of the provisions of our Member Control Agreement could have the effect of
delaying, deferring or preventing a change in control of our company.
Transfer Restrictions
. Transfer of capital units is restricted.
All transfers must comply with our Member Control Agreement. You cannot
transfer your capital units without the prior approval of the board of
governors. We may prohibit a transferee
from becoming a member for any reason or if the transferee does not comply with
our Member Control Agreement.
Board of Governors
. If a member holds 9% or more of the capital
units outstanding, that member will be entitled to appoint one governor to the
board for each 9% owned giving rise to the right to appoint. An appointed governor serves indefinitely at
the pleasure of the member appointing him or her (so long as such member and
its affiliates continue to hold a sufficient number of units to maintain the
applicable appointment right) until a successor is appointed, or until the
earlier death, resignation or removal of the appointed governor. A member that is entitled
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to appoint one or more governors under the
appointment right provided in the Member Control Agreement and such member’s
affiliates are not entitled to vote for the election of governors by the
members.
The
remaining seats on the board that are not subject to a right of appointment
will be elected by the members (other than the members holdings rights of
appointment). Governors that are elected
by members are divided into three classes, with the term of one class expiring
each year. As the term of each class
expires, the successors to the governors in that class will be elected for a
three-year term and until their successors are duly elected and qualified, or
until their earlier death, resignation or removal.
Transfer
Agent and Registrar
We
act as our own transfer agent and registrar for our units.
Listing or
Quotation
There
is no established public trading market for our units, and we do not expect one
to develop in the foreseeable future. To
maintain our partnership tax status, we do not intend to list the units on any
stock exchange or automatic quotation system such as the OTC Bulletin Board.
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Item
12. Indemnification of Directors and
Officers.
Under
Minnesota law and our Member Control Agreement, no governor or officer is
liable for any of our debts, obligations or liabilities merely because he or
she is a governor or officer. Further,
our Member Control Agreement provides that no governor or officer is liable to
us or our members for monetary damages for breach of fiduciary duty. However, this provision of our Member Control
Agreement will not eliminate or limit the liability of a governor or officer to
the extent provided by applicable law for (a) breach of the governor’s
duty of loyalty to us or our members; (b) acts or omissions that are not
in good faith or involve intentional misconduct or a knowing violation of law
or, with respect to officers, for acts of negligence; (c) knowing
violations of certain securities laws or illegal distributions; or (d) a
transaction from which the governor derived an improper personal benefit. If
amendments to Minnesota Statutes later authorize limited liability companies to
act to further limit or eliminate the personal liability of governors of a
limited liability company, then the liability of our governors will be limited
or eliminated to the greatest extent permitted by Minnesota Statutes, as so
amended.
In
addition, our Member Control Agreement generally requires us to indemnify each
present and former governor or officer relating to any liability or damage or
reasonable expenses incurred with respect to a proceeding if the governor or
officer was a party to the proceeding in the capacity of a governor or officer,
unless the proceedings arise out of or are related to matters for which a
governor or officer is personally liable under the prior paragraph.
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Item
13. Financial Statements and
Supplementary Data.
See
“Item 15. Financial Statements and Exhibits” of this Registration Statement on Form 10.
62
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Item
14. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.
None.
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Item
15. Financial Statements and Exhibits
(a) Financial Statements
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Page Reference
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Audited Financial Statements
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Report of
Independent Registered Public Accounting Firm
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F-1
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Consolidated
Balance Sheets as of October 31, 2007 and 2006
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F-2
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Consolidated
Statements of Operations for the fiscal years ended October 31, 2007,
2006 and 2005
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F-4
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Consolidated
Statements of Changes in Members’ Equity for the fiscal years ended
October 31, 2007, 2006, and 2005
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F-5
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Consolidated Statements of Cash Flows for
the fiscal years ended October 31, 2007, 2006, and 2005
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F-6
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Notes to
Consolidated Financial Statements
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F-8
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Unaudited Interim Financial Statements
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Condensed
Consolidated Balance Sheets as of April 30, 2008
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F-24
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Condensed
Consolidated Statements of Operations for the six months ended April 30,
2008 and 2007
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F-26
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Condensed
Consolidated Statements of Cash Flows for the six months ended April 30,
2008 and 2007
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F-27
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Notes to
Condensed Consolidated Financial Statements
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F-28
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(b) Exhibits
|
Exhibit
Number
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Exhibit Title
|
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3.1
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First
Amended and Restated Articles of Organization of Heron Lake BioEnergy, LLC
|
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3.2
|
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Member
Control Agreement of Heron Lake BioEnergy, LLC, as amended through
March 29, 2008
|
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4.1
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Form of
Class A Unit Certificate
|
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10.1
|
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Fourth
Amended and Restated Loan Agreement dated October 1, 2007 by and between
AgStar Financial Services, PCA and Heron Lake BioEnergy, LLC
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10.2
|
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Third
Supplement dated October 1, 2007 to Fourth Amended and Restated Loan
Agreement by and between AgStar Financial Services, PCA and Heron Lake
BioEnergy, LLC
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10.3
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Fourth
Supplement dated October 1, 2007 to Fourth Amended and Restated Loan
Agreement by and between AgStar Financial Services, PCA and Heron Lake
BioEnergy, LLC
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10.4
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Term
Note dated October 1, 2007 in principal amount of $59,583,000 by Heron
Lake BioEnergy, LLC to AgStar Financial Services, PCA as lender
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10.5
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Term
Revolving Note dated October 1, 2007 in principal amount of $5,000,000
by Heron Lake BioEnergy, LLC to AgStar Financial Services, PCA as lender
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10.6
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Personal
Guaranty dated October 1, 2007 by Roland Fagen, guarantor, in favor of
AgStar Financial Services, PCA
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10.7
|
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Fourth
Amended and Restated Guaranty dated October 1, 2007 by Lakefield Farmers
Elevator, LLC in favor of AgStar Financial Services, PCA.
|
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10.8
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Fifth
Supplement dated November 19, 2007 to Fourth Amended and Restated Loan
Agreement by and between AgStar Financial Services, PCA and Heron Lake
BioEnergy, LLC
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10.9
|
|
Revolving
Line of Credit Note dated November 19, 2007 in principal amount of
$7,500,000 by Heron Lake BioEnergy, LLC to AgStar Financial Services, PCA as
lender
|
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10.10
|
|
Industrial
Water Supply Development and Distribution Agreement dated October 27,
2003 among Heron Lake BioEnergy, LLC (f/k/a Generation II Ethanol, LLC), City
of Heron Lake, Jackson County, and Minnesota Soybean Processors
|
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10.11
|
|
Industrial
Water Supply Treatment Agreement dated May 23, 2006 among Heron Lake
BioEnergy, LLC, City of Heron Lake and County of Jackson
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10.12
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|
Standard
Form of Agreement between Owner and Designer — Lump Sum dated
September 28, 2005 by and between Fagen, Inc. and Heron Lake
BioEnergy, LLC†
|
|
10.13
|
|
Distiller’s
Grain Marketing Agreement dated October 5, 2005 by and between Heron
Lake BioEnergy, LLC and Commodity Specialist Company as assigned to CHS Inc.
as of August 17, 2007
|
|
10.14
|
|
Ethanol
Fuel Marketing Agreement dated August 7, 2006 by and between
RPGM, Inc. and Heron Lake BioEnergy, LLC
|
|
10.15
|
|
Letter
Agreement re: Environmental Compliance Support dated March 12, 2007 by
and between Fagen Engineering, LLC Heron Lake BioEnergy, LLC
|
|
10.16
|
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Coal
Loading, Transport, and Delivery Agreement effective as of April 1, 2007
by and between Tersteeg Transport Inc. and Heron Lake BioEnergy, LLC
|
|
10.17
|
|
Coal
Transloading Agreement dated June 1, 2007 by and between Southern
Minnesota Beet Sugar Cooperative and Heron Lake BioEnergy, LLC†
|
|
10.18
|
|
Master
Coal Purchase and Sale Agreement dated June 1, 2007 by and between
Northern Coal Transport Company and Heron Lake BioEnergy, LLC, including
confirmation letter dated July 13, 2007†
|
|
10.19
|
|
Loan
Agreement dated December 28, 2007 by and between Federated Rural
Electric Association and Heron Lake BioEnergy, LLC
|
|
10.20
|
|
Secured
Promissory Note issued December 28, 2007 by Heron Lake BioEnergy, LLC as
borrower to Federated Rural Electric Association as lender in principal
amount of $600,000
|
|
10.21
|
|
Security
Agreement dated December 28, 2007 by Heron Lake BioEnergy, LLC in favor
of Federated Rural Electric Association
|
|
10.22
|
|
Electric
Service Agreement dated October 17, 2007 by and between Interstate Power
and Light Company and Heron Lake BioEnergy, LLC
|
|
10.23
|
|
Shared
Savings Contract dated November 16, 2007 by and between Interstate Power
and Light Company and Heron Lake BioEnergy, LLC
|
|
10.24
|
|
Escrow
Agreement dated November 16, 2007 by and between Heron Lake BioEnergy,
LLC , Farmers State Bank of Hartland for the benefit of Interstate Power and
Light Company
|
|
10.25
|
|
Employment
Agreement dated February 1, 2008 by and between Heron Lake BioEnergy,
LLC and Robert J. Ferguson*
|
|
10.26
|
|
Services
Contract dated March 1, 2007 by and between Heron Lake BioEnergy, LLC
and Gerber & Haugen, P.L.L.P. relating to the services of James A.
Gerber*
|
|
10.27
|
|
Letter
Agreement dated February 28, 2008 by and between Heron Lake BioEnergy,
LLC and Gerber & Haugen, P.L.L.P. relating to the services of James
A. Gerber*
|
|
21.1
|
|
Subsidiaries
of the Registrant
|
|
*
|
|
Indicates
compensatory agreement.
|
|
†
|
|
Certain
portions of this exhibit have been redacted and filed on a confidential basis
with the Commission pursuant to a request for confidential treatment under
Rule 24b-2 of under the Exchange Act. Spaces corresponding to the
deleted portions are represented by brackets with asterisks [***].
|
66
Table
of Contents
SIGNATURE
Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
Dated:
August 20, 2008
|
HERON LAKE BIOENERGY, LLC
|
|
|
|
|
|
|
|
|
By:
|
/s/
Robert J. Ferguson
|
|
|
|
|
|
Robert
J. Ferguson
President and Chief Executive Officer
|
POWER OF ATTORNEY
The
undersigned officers and governors of Heron Lake BioEnergy, LLC hereby
constitute and appoint Robert J. Ferguson and James A. Gerber, each acting
alone, with power to act as our true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for us and in our stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this Registration Statement and all documents relating thereto,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and
perform each and every act and thing necessary or advisable to be done in and
about the premises, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his or her substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed below by the following persons in the
capacities indicated on August 20, 2008.
|
/s/ Robert J. Ferguson
|
|
Chief Executive Officer
and President
|
|
Robert J. Ferguson
|
|
(principal executive
officer), Governor
|
|
|
|
|
|
/s/ James A. Gerber
|
|
Interim Chief Financial
Officer (principal financial
|
|
James A. Gerber
|
|
and accounting officer)
|
|
|
|
|
|
/s/ Doug Schmitz
|
|
Governor
|
|
Doug Schmitz
|
|
|
|
|
|
|
|
/s/ Michael S. Kunerth
|
|
Governor
|
|
Michael S. Kunerth
|
|
|
|
|
|
|
|
/s/ David J. Woestehoff
|
|
Governor
|
|
David J. Woestehoff
|
|
|
|
|
|
|
|
/s/ David J. Bach
|
|
Governor
|
|
David J. Bach
|
|
|
|
|
|
|
|
/s/ Timothy O. Helgemoe
|
|
Governor
|
|
Timothy O. Helgemoe
|
|
|
|
|
|
|
|
/s/ Milton J. McKeown
|
|
Governor
|
|
Milton J. McKeown
|
|
|
|
|
|
|
|
/s/ David M. Reinhart
|
|
Governor
|
|
David M. Reinhart
|
|
|
|
|
|
|
|
/s/ Brian D. Thome
|
|
Governor
|
|
Brian D. Thome
|
|
|
|
|
|
|
|
/s/ Robert J. Wolf
|
|
Governor
|
|
Robert J. Wolf
|
|
|
67
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board of Governors
Heron Lake BioEnergy, LLC
and Subsidiary
Heron Lake, Minnesota
We have audited the
accompanying consolidated balance sheets of Heron Lake BioEnergy, LLC and
Subsidiary, as of October 31, 2007 and 2006, and the related consolidated
statements of operations, changes in members’ equity, and cash flows for the
years ended October 31, 2007, 2006, and 2005. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the company’s internal control
over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
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 audits provide a
reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Heron Lake Bioenergy, LLC and Subsidiary,
as of October 31, 2007 and 2006, and the results of its operations and its
cash flows for the years ended October 31, 2007, 2006, and 2005 in
conformity with accounting principles generally accepted in the United States
of America.
|
/s/ Boulay,
Heutmaker, Zibell & Co. P.L.L.P.
|
|
|
|
|
|
Certified Public Accountants
|
|
Minneapolis, Minnesota
March 18, 2008
F-1
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Consolidated Balance Sheets
|
|
|
October 31, 2007
|
|
October 31, 2006
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash and
equivalents
|
|
$
|
3,090,329
|
|
$
|
2,624,064
|
|
|
Restricted cash
|
|
221,350
|
|
512,850
|
|
|
Accounts receivable
|
|
1,954,126
|
|
403,683
|
|
|
Inventory
|
|
18,991,390
|
|
4,129,757
|
|
|
Prepaid expenses
|
|
124,858
|
|
73,074
|
|
|
Total current
assets
|
|
24,382,053
|
|
7,743,428
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
|
|
|
|
|
|
|
Land and
improvements
|
|
12,283,575
|
|
2,292,544
|
|
|
Plant buildings
and equipment
|
|
96,859,303
|
|
2,585,934
|
|
|
Vehicles and
other equipment
|
|
661,272
|
|
101,500
|
|
|
Office buildings
and equipment
|
|
566,928
|
|
143,125
|
|
|
|
|
110,371,078
|
|
5,123,103
|
|
|
Accumulated
depreciation
|
|
(1,518,157
|
)
|
(310,311
|
)
|
|
|
|
108,852,921
|
|
4,812,792
|
|
|
Construction in
progress
|
|
—
|
|
55,672,074
|
|
|
Net property and
equipment
|
|
108,852,921
|
|
60,484,866
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
Deferred loan
costs, net
|
|
572,234
|
|
549,291
|
|
|
Debt service
deposits and other
|
|
152,750
|
|
1,000
|
|
|
Total other
assets
|
|
724,984
|
|
550,291
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
133,959,958
|
|
$
|
68,778,585
|
|
Notes to
Consolidated Financial Statement are an integral part of this Statement.
F-2
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Consolidated
Balance Sheets
|
|
|
October 31, 2007
|
|
October 31, 2006
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS’ EQUITY
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
Checks written
in excess of bank balance
|
|
$
|
514,633
|
|
$
|
523,605
|
|
|
Line of credit
|
|
6,974,235
|
|
848,060
|
|
|
Note payable -
related party
|
|
4,202,930
|
|
—
|
|
|
Current
maturities of long-term debt
|
|
2,747,061
|
|
5,836,241
|
|
|
Accounts
payable:
|
|
|
|
|
|
|
Trade accounts
payable
|
|
8,610,097
|
|
2,232,296
|
|
|
Trade accounts
payable - related party
|
|
1,435,520
|
|
94,543
|
|
|
Construction
payable
|
|
349,042
|
|
1,126,734
|
|
|
Construction
payable - related party
|
|
3,839,413
|
|
13,756,214
|
|
|
Accrued expenses
|
|
853,750
|
|
208,173
|
|
|
Derivative
instruments
|
|
186,237
|
|
915,533
|
|
|
Total current
liabilities
|
|
29,712,918
|
|
25,541,399
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt,
net of
current maturities
|
|
62,281,899
|
|
3,503,759
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members’
Equity
,
27,104,625 and 23,129,625 units
outstanding at October 31, 2007
and 2006, respectively
|
|
41,965,141
|
|
39,733,427
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Members’ Equity
|
|
$
|
133,959,958
|
|
$
|
68,778,585
|
|
Notes to
Consolidated Financial Statement are an integral part of this Statement.
F-3
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Consolidated Statements of Operations
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
|
|
October 31, 2007
|
|
October 31, 2006
|
|
October 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
23,560,498
|
|
$
|
10,111,931
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Goods Sold
|
|
24,313,695
|
|
9,818,395
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
(753,197
|
)
|
293,536
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
Professional and
consulting fees
|
|
820,940
|
|
113,113
|
|
232,857
|
|
|
General and
administrative
|
|
2,706,259
|
|
1,852,229
|
|
548,658
|
|
|
Total
operating expenses
|
|
3,527,199
|
|
1,965,342
|
|
781,515
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
(4,280,396
|
)
|
(1,671,806
|
)
|
(781,515
|
)
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
Grant income
|
|
—
|
|
—
|
|
148,121
|
|
|
Interest income
|
|
9,166
|
|
994,660
|
|
287,651
|
|
|
Interest expense
|
|
(1,181,442
|
)
|
(76,695
|
)
|
(121
|
)
|
|
Other income
(expense)
|
|
4,386
|
|
112,696
|
|
1,760
|
|
|
Total
other income (expense), net
|
|
(1,167,890
|
)
|
1,030,661
|
|
437,411
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(5,448,286
|
)
|
$
|
(641,145
|
)
|
$
|
(344,104
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Units
|
|
|
|
|
|
|
|
|
Outstanding
- Basic and Diluted
|
|
26,361,406
|
|
23,129,554
|
|
2,820,534
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per
|
|
|
|
|
|
|
|
|
|
|
|
Unit -
Basic and Diluted
|
|
$
|
(0.21
|
)
|
$
|
(0.03
|
)
|
$
|
(0.12
|
)
|
Notes to
Consolidated Financial Statement are an integral part of this Statement.
F-4
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Consolidated Statements of Changes in Members’ Equity
|
Balance
- October 31, 2004
|
|
$
|
661,138
|
|
|
|
|
|
|
|
Capital
contribution - 21,604,875 Class A units $1.82, $1.90, and $2.00 per
unit, October 2005
|
|
40,000,000
|
|
|
|
|
|
|
|
Issuance of
255,000 Class A units for the purchase of land, October 2005
|
|
500,000
|
|
|
|
|
|
|
|
Warrants issued
for the purchase of 225,000 Class A units for services
|
|
69,000
|
|
|
|
|
|
|
|
Cost of raising
capital
|
|
(524,462
|
)
|
|
|
|
|
|
|
Net loss for the
year ended October 31, 2005
|
|
(344,104
|
)
|
|
|
|
|
|
|
Balance
- October 31, 2005
|
|
40,361,572
|
|
|
|
|
|
|
|
Issuance of
6,500 Class A units for the purchase of easement, November 2005
|
|
13,000
|
|
|
|
|
|
|
|
Net loss for the
year ended October 31, 2006
|
|
(641,145
|
)
|
|
|
|
|
|
|
Balance
- October 31, 2006
|
|
39,733,427
|
|
|
|
|
|
|
|
Capital
Contribution - 3,750,000 Class A units, $2.00 per unit,
December 2006
|
|
7,500,000
|
|
|
|
|
|
|
|
Capital
Contribution - exercise of warrants for 225,000 Class A units, $.80 per
unit, August 2007
|
|
180,000
|
|
|
|
|
|
|
|
Net loss for the
year ended October 31, 2007
|
|
(5,448,286
|
)
|
|
|
|
|
|
|
Balance
- October 31, 2007
|
|
$
|
41,965,141
|
|
Notes to
Consolidated Financial Statement are an integral part of this Statement.
F-5
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Consolidated Statements of Cash Flows
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
|
|
October 31, 2007
|
|
October 31, 2006
|
|
October 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow From Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,448,286
|
)
|
$
|
(641,145
|
)
|
$
|
(344,104
|
)
|
|
Adjustments to
reconcile net loss to net cash
provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
1,269,117
|
|
302,647
|
|
5,739
|
|
|
Change in fair
value of derivative instruments
|
|
150,088
|
|
915,533
|
|
—
|
|
|
Gain on disposal
of assets
|
|
(4,396
|
)
|
(28,540
|
)
|
—
|
|
|
Warrants issued
for services
|
|
—
|
|
—
|
|
69,000
|
|
|
Change in assets
and liabilities:
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
291,500
|
|
(512,850
|
)
|
—
|
|
|
Accounts
receivable
|
|
(1,550,443
|
)
|
(380,383
|
)
|
(23,300
|
)
|
|
Inventory
|
|
(14,861,633
|
)
|
(3,569,069
|
)
|
—
|
|
|
Prepaid expenses
|
|
(51,784
|
)
|
(60,580
|
)
|
(7,367
|
)
|
|
Derivative
instruments
|
|
(879,384
|
)
|
—
|
|
—
|
|
|
Accounts payable
|
|
7,718,778
|
|
1,821,999
|
|
90,445
|
|
|
Accrued expenses
|
|
645,577
|
|
196,288
|
|
9,999
|
|
|
Net cash used in
operating activities
|
|
(12,720,866
|
)
|
(1,956,100
|
)
|
(199,588
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds from
short term - investments
|
|
—
|
|
—
|
|
299,859
|
|
|
Proceeds from
sale of assets
|
|
29,421
|
|
338,000
|
|
—
|
|
|
Payments for
elevator assets
|
|
—
|
|
(1,093,298
|
)
|
(117,390
|
)
|
|
Capital
expenditures
|
|
(4,204,339
|
)
|
(35,560,610
|
)
|
(41,667
|
)
|
|
Net cash
provided by (used in) investing activities
|
|
(4,174,918
|
)
|
(36,315,908
|
)
|
140,802
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Checks written
in excess of bank balance
|
|
(8,972
|
)
|
523,605
|
|
—
|
|
|
Proceeds from
line of credit
|
|
6,126,175
|
|
848,060
|
|
—
|
|
|
Proceeds from
note payable - related party
|
|
4,202,930
|
|
—
|
|
—
|
|
|
Proceeds from
long-term debt
|
|
—
|
|
—
|
|
488,251
|
|
|
Payments on
long-term debt
|
|
(307,168
|
)
|
(98,726
|
)
|
—
|
|
|
Payments for
loan costs
|
|
(179,166
|
)
|
(496,723
|
)
|
(204,499
|
)
|
|
Debt service
deposits included with other assets
|
|
(151,750
|
)
|
—
|
|
—
|
|
|
Member
contributions
|
|
7,500,000
|
|
—
|
|
40,000,000
|
|
|
Member
contributions related to warrant exercise
|
|
180,000
|
|
—
|
|
—
|
|
|
Redemption of
member units
|
|
—
|
|
—
|
|
(750
|
)
|
|
Payments for
cost of raising capital
|
|
—
|
|
—
|
|
(199,107
|
)
|
|
Net cash
provided by financing activities
|
|
17,362,049
|
|
776,216
|
|
40,083,895
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in cash and equivalents
|
|
466,265
|
|
(37,495,792
|
)
|
40,025,109
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Equivalents- Beginning of period
|
|
2,624,064
|
|
40,119,856
|
|
94,747
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
Equivalents- End of period
|
|
$
|
3,090,329
|
|
$
|
2,624,064
|
|
$
|
40,119,856
|
|
Notes to
Consolidated Financial Statements are an integral part of this Statement.
F-6
Table
of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Consolidated Statements
of Cash Flows
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
|
|
October 31, 2007
|
|
October 31, 2006
|
|
October 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
Interest expense
paid
|
|
$
|
589,118
|
|
$
|
76,707
|
|
$
|
121
|
|
|
Interest
capitalized paid
|
|
2,802,010
|
|
378,851
|
|
9,159
|
|
|
Total interest
paid
|
|
$
|
3,391,128
|
|
$
|
455,558
|
|
$
|
9,280
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Activities
|
|
|
|
|
|
|
|
|
Property and
equipment in construction payables
|
|
$
|
4,188,455
|
|
$
|
14,882,948
|
|
$
|
314,434
|
|
|
Property and
equipment financed by long-term debt
|
|
$
|
40,245,680
|
|
$
|
2,010,575
|
|
$
|
1,438,900
|
|
|
Assessment
payable related to property and equipment
|
|
$
|
867,500
|
|
$
|
3,550,000
|
|
$
|
—
|
|
|
Loan costs
capitalized with property and equipment
|
|
$
|
99,387
|
|
$
|
151,931
|
|
$
|
—
|
|
|
Construction
payables refinanced with long-term debt
|
|
$
|
14,882,948
|
|
$
|
—
|
|
$
|
—
|
|
|
Note payable for
elevator assets purchased
|
|
$
|
—
|
|
$
|
1,950,000
|
|
$
|
—
|
|
|
Issuance of
units for easement
|
|
$
|
—
|
|
$
|
13,000
|
|
$
|
—
|
|
|
Note payable
repaid with construction note
|
|
$
|
—
|
|
$
|
439,900
|
|
$
|
—
|
|
|
Land option
exercised for land purchase
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,000
|
|
|
Issuance of
units for land purchase
|
|
$
|
—
|
|
$
|
—
|
|
$
|
500,000
|
|
|
Payments for
acquisition costs in accounts payable
|
|
$
|
—
|
|
$
|
—
|
|
$
|
20,385
|
|
|
Other assets
financed by note payable
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,000
|
|
Notes to
Consolidated Financial Statements are an integral part of this Statement.
F-7
Table
of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
October 31,
2007 and 2006
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
The
Company was organized to fund and construct a 50 million gallon ethanol plant
near Heron Lake, Minnesota with ethanol distribution to upper Midwest
states. In addition, the Company intends
to produce and sell distillers grains with solubles as co-products of ethanol
production. The Company was formed on April 12,
2001 to have an indefinite life. The
Company began its ethanol plant operations in September 2007. Prior to September 2007, the Company was
in the development stage. In December 2005,
the Company acquired certain assets of Farmers Co-operative Elevator of
Lakefield to give the Company the ability to procure and store corn more
favorably as described in Note 3. Since
the plant did not commence ethanol operations until September 2007, the
Company sold and distributed corn and other grains of approximately $16,801,000
and $10,112,000 in fiscal 2007 and 2006, respectively. The Company expects future revenue from grain
merchandising to decline significantly.
Principles
of Consolidation
The
financial statements include the accounts of Heron Lake BioEnergy, LLC and its
wholly owned subsidiary, Lakefield Farmers Elevator, LLC, collectively, the “Company.” All significant intercompany balances and
transactions are eliminated in consolidation.
Fiscal
Reporting Period
The
Company’s fiscal year end for reporting financial operations is October 31.
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.
Revenue
Recognition
Revenue
from sales is recorded when title transfers to the customer. The title transfers when the product is
loaded into the railcar or truck, the customer takes ownership and assumes risk
of loss. Shipping costs incurred by the
Company in the sale of ethanol are not specifically identifiable and as a
result, revenue from the sale of ethanol and distillers grains are recorded
based on the net selling price reported to the Company from the marketers.
In
accordance with the Company’s agreements for the marketing and sale of ethanol
and distillers grains, commissions due to the marketers are deducted from the
gross sales price at the time payment is remitted to the Company. Revenues are recorded net of commissions of
approximately $40,000 for the year ended October 31, 2007.
F-8
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to Consolidated
Financial Statements
October 31,
2007 and 2006
The
Company also receives revenue from grain storage and drying, which is based on
standard storage and drying contract terms.
Cash
and Equivalents
The
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash and equivalents.
The Company maintains its accounts at five financial institutions. At times throughout the year, the Company’s
cash balances may exceed amounts insured by the Federal Deposit Insurance
Corporation and the Securities Investor Protection Corporation. The Company does not believe it is exposed to
any significant credit risk on cash and equivalents.
Restricted
Cash
The
Company is periodically required to maintain cash balances at its broker
related to derivative instrument positions.
Accounts
Receivable
Credit
terms are extended to customers in the normal course of business. The
Company performs ongoing credit evaluations of its customers’ financial
condition and, generally, requires no collateral.
Accounts receivable are recorded at their estimated net realizable
value. Accounts are considered past due if payment is not made on a
timely basis in accordance with the Company’s credit terms. Accounts
considered uncollectible are written off. The Company’s estimate of the
allowance for doubtful accounts is based on historical experience, its
evaluation of the current status of receivables, and unusual circumstances, if
any. At October 31, 2007 and 2006, the Company was of the belief
that such accounts would be collectable and thus an allowance was not
considered necessary.
Inventory
Inventory
consists of raw materials, work in process, finished goods, supplies, and other
grain inventory. Corn is the primary raw material and, along with other raw
materials and supplies, is stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Work in process and finished goods, which consists of
ethanol and distillers grains produced, are stated at the lower of average cost
or market. Other grain inventory, which
consists of agricultural commodities, is valued at market value (net realizable
value). Other grain inventory is readily
convertible to cash because of its commodity characteristics, widely available
markets and international pricing mechanisms.
Other grain inventory is also freely traded, has quoted market prices,
may be sold without significant further processing, and has predictable and
insignificant disposal costs.
Merchandise inventory is valued at lower of cost or market on a
first-in, first-out (FIFO) basis.
F-9
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
October 31,
2007 and 2006
Derivative
Instruments
The
Company accounts for derivative instruments and hedging activities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and
Hedging Activities
, as amended. SFAS No. 133 requires a company
to evaluate its contracts to determine whether the contracts are
derivatives. Certain contracts that
literally meet the definition of a derivative may be exempted from SFAS No. 133
as normal purchases or normal sales.
Normal purchases and normal sales are contracts that provide for the
purchases or sale of something other than a financial instrument or derivative
instrument that will be delivered in quantities expected to be used or sold
over a reasonable period in the normal course of business. Contracts that meet the requirements of
normal are documented as normal and exempted from accounting and reporting
requirements of SFAS No. 133, and therefore, are not marked to market in
our financial statements.
In
order to reduce the risk caused by market fluctuations of corn, the Company may
use option, futures and swap contracts.
These contracts are used to fix the purchase price of the Company’s
anticipated requirements of corn in production activities. The fair value of these contracts is based on
quoted prices in active exchange-traded or over-the-counter markets. The fair value of the derivatives is
continually subject to change due to the changing market conditions. The Company does not typically enter into
derivative instruments other than for hedging purposes. On the date the derivative instrument is
entered into, the Company will designate the derivative as a hedge. Changes in the fair value of a derivative instrument
that is designated as, and meets all of the required criteria, for a cash flow
or fair value hedge is recorded in accumulated other comprehensive income and
reclassified into earnings as the hedged items affect earnings. Changes in the fair value of a derivative
instrument that is not designated as, and accounted for, as a cash flow or fair
value hedge is recorded in current period earnings. Although certain derivative instruments may
not be designated as, and accounted for, as a cash flow or fair value hedge,
they are economic hedges of specified risks.
Property
and Equipment
Property
and equipment are recorded at cost.
Depreciation is provided over an estimated useful life by use of the
straight-line deprecation method.
Maintenance and repairs are expensed as incurred; major improvements and
betterments are capitalized.
Construction in progress is comprised of costs related to the
construction of the ethanol plant facilities.
Interest is capitalized during the construction period. Depreciable useful lives are as follows:
|
Land
improvements
|
|
15 Years
|
|
|
Plant building
and equipment
|
|
7 - 40 Years
|
|
|
Vehicles and
equipment
|
|
5 - 7 Years
|
|
|
Office buildings
and equipment
|
|
3 - 40 Years
|
|
F-10
Table
of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
October 31,
2007 and 2006
Long-Lived Assets
The Company reviews property and equipment and other long-lived assets
for impairment in accordance with SFAS No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets
Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Circumstances
which could trigger a review include, but are not limited to: significant
decreases in the market price of the asset; significant adverse changes in the
business climate or legal factors; accumulation of costs significantly in
excess of the amount originally expected for the acquisition of construction of
the asset; current period cash flow or operating losses combined with a history
of losses or a forecast of continuing losses associated with the use of the
assets; and current expectation that the asset will more likely than not be
sold or disposed significantly before the end of its estimated useful life.
Recoverability is assumed based on the carrying amount of the asset and
its fair value which is generally determined based on the sum of the
undiscounted cash flows expected to result from the use of the eventual
disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the
carrying amount is not recoverable and exceeds fair value. The Company has not recognized any long-lived
asset impairment charges as of October 31, 2007 and 2006.
Offering
Costs
The
Company deferred the cost incurred to raise equity financing until the
financing occurred. In October 2005,
equity proceeds were released from escrow and offering costs were netted
against the proceeds received.
Deferred
Loan Costs
Costs
associated with the issuance of the debt discussed in Notes 7 and 9 are
recorded as deferred loan costs, net of accumulated amortization. Loan costs are amortized to operations over
the term of the related debt using the effective interest method. Prior to the
commencement of operations in September 2007, the Company capitalized loan
costs with interest costs during the construction of the plant. Once operations commenced, loan cost
amortization was expensed.
Grants
The
Company recognizes grant income for reimbursement of expenses incurred upon
complying with the conditions of the grant.
For reimbursements of incremental expenses (expenses the Company
otherwise would not have incurred had it not been for the grant), the grant
proceeds are recognized as a reduction of the related expense. For 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.
Financial Instruments
The Company believes the carrying value of cash and equivalents and
restricted cash approximate fair value.
The Company believes the carrying amount of derivative instruments
approximates fair value based on quoted prices in active exchange-traded or
over-the-counter markets.
F-11
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
October 31,
2007 and 2006
It is not currently practicable to estimate the fair value of the line
of credit, note payable or long-term debt. These agreements contain certain unique terms,
conditions, covenants, and restrictions, as discussed in Notes 7, 8, and 9,
which make comparisons to similar instruments impractical.
Income
Taxes
The
Company 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 the members. Therefore, no provision or liability for
federal or state income taxes has been included in these financial
statements. Differences between
financial statement basis of assets and tax basis of assets is related to
capitalization and amortization of organization and start-up costs for tax
purposes, whereas these costs are expensed for financial statement purposes. In
addition, the Company uses the alternative depreciation system (ADS) for tax
depreciation instead of the straight-line method that is used for book
depreciation, which also causes temporary differences.
Share-Based
Compensation
In
2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004) (SFAS No. 123R),
Share-Based
Payment
, which addresses the accounting for stock-based payment
transactions in which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the
fair value of the enterprise’s equity instruments or that may be settled by the
issuance of such equity instruments. In January 2005, the SEC issued SAB No. 107,
which provides supplemental implementation guidance for SFAS No. 123R.
SFAS No. 123R eliminates the ability to account for stock-based
compensation transactions using the intrinsic value method under Accounting
Principles Board (“APB”) Opinion No. 25,
Accounting
for Stock Issued to Employees
, and instead generally requires that
such transactions be accounted for using a fair-value-based method. The Company
uses the Black-Scholes-Merton (“BSM”) option-pricing model to determine the
fair-value of stock-based awards.
Prior
to 2006, the Company accounted for the grants of warrants using the intrinsic
value method of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
and related
interpretations. Had compensation cost
for share-based awards been determined consistent with SFAS 123R, the net loss
would have been adjusted to the following pro forma amounts for the year ended October 31,
2005:
|
Net loss, as
reported
|
|
$
|
(344,104
|
)
|
|
Plus: Share-based compensation expense determined
under fair value based methods
|
|
69,000
|
|
|
Less: Share-based compensation expense determined
under fair value based methods
|
|
(69,000
|
)
|
|
Pro forma net
loss
|
|
$
|
(344,104
|
)
|
F-12
Table
of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
October 31,
2007 and 2006
Net Income (Loss) per Unit
Basic net income (loss) per unit is computed by dividing net income
(loss) by the weighted average number of members’ units outstanding during the
period. Diluted net income or loss per
unit is computed by dividing net income (loss) by the weighted average number
of members’ units and members’ unit equivalents outstanding during the
period. The warrants were not included
in the calculation of diluted net loss per unit in fiscal 2007, 2006, and 2005
as they would have been anti-dilutive.
Environmental Liabilities
The
Company’s operations are subject to environmental laws and regulations adopted
by various governmental entities in the jurisdiction in which it
operates. These laws require the Company to investigate and remediate the
effects of the release or disposal of materials at its location. Accordingly,
the Company has adopted policies, practices, and procedures in the areas of
pollution control, occupational health, and the production, handling, storage
and use of hazardous materials to prevent material environmental or other
damage, and to limit the financial liability, which could result from such
events. Environmental liabilities are
recorded when the liability is probable and the costs can be reasonably
estimated.
Recently
Issued Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157 (SFAS 157),
Fair Value Measurements
.
SFAS 157 defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. The statement is
effective for financial assets and liabilities in financial statements issued
for fiscal years beginning after November 15, 2007. It is effective for
certain non-financial assets and liabilities in financial statements issued for
fiscal years beginning after November 15, 2008. The Company is currently
evaluating the effect that the adoption of SFAS 157 will have, if any, on its
results of operations, financial position and related disclosures, but does not
expect it to have a material impact on the financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, (SFAS 159),
The Fair Value Option for
Financial Assets and Financial Liabilities – including an amendment to FASB
Statement No. 115
. This statement provides companies with an
option to report selected financial assets and liabilities at fair value. This
statement is effective for fiscal years beginning after November 15, 2007
with early adoption permitted. The Company is in the process of evaluating the
effect, if any, that the adoption of SFAS No.159 will have on its results of
operations and financial position.
F-13
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
October 31,
2007 and 2006
Reclassifications
The balance sheet at October 31, 2006, changed to reclassify
property and equipment amounts within property and equipment to conform to
classifications used at October 31, 2007.
This reclassification had no effect on members’ equity, net income, or
net cash flow previously reported.
2. ASSETS PURCHASED
The Company formed its wholly owned subsidiary, Lakefield Farmers
Elevator, LLC, for the purpose of purchasing assets from Farmers Co-operative
Elevator of Lakefield. On December 15,
2005, the Company purchased certain current assets, primarily inventory, of
approximately $561,000 and property and equipment of approximately $2,600,000
for a total purchase price of approximately $3,161,000. The assets are intended to provide additional
storage of corn inventory and to allow the Company to more favorably procure
corn for its ethanol operations. The
Company paid cash for these assets.
Since the ethanol plant experienced delays in commencing operations, the
Company sold and distributed corn and other grains during fiscal 2006 and 2007,
but considers this activity ancillary to its primary purpose of providing
additional storage and procurement of corn for the ethanol plant.
3. CONCENTRATIONS
The Company sells all of the ethanol and distiller grains produced to
two customers under marketing agreements as described in Note 14. At October 31, 2007, these two customers
comprised 91% of accounts receivable.
4. INVENTORY
Inventory consists of the following at October 31:
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
14,922,916
|
|
$
|
3,268,700
|
|
|
Work in process
|
|
899,160
|
|
—
|
|
|
Finished goods
|
|
1,050,411
|
|
—
|
|
|
Supplies
|
|
160,840
|
|
—
|
|
|
Other grains
|
|
1,958,063
|
|
861,057
|
|
|
Totals
|
|
$
|
18,991,390
|
|
$
|
4,129,757
|
|
In
addition, the Company stored corn and bean inventory for farmers. The value of these inventories owned by
others is approximately $281,000 and $3,694,000 based on market prices at October 31,
2007 and 2006, respectively.
F-14
Table
of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
October 31,
2007 and 2006
5.
DERIVATIVE INSTRUMENTS
At October 31, 2007 and 2006, the Company recorded a liability for
derivative instruments of approximately $186,000 and $916,000,
respectively. None of the positions open
at October 31, 2007 and 2006 are designated as cash flow or fair value
hedges. The Company has recorded a loss of approximately $2,654,000 and
$747,000 in cost of goods sold related to its derivative instruments for fiscal
2007 and 2006, respectively. There were
no corresponding gains and losses related to derivative instruments for fiscal
2005.
6. CONSTRUCTION IN PROGRESS
The Company capitalizes construction costs and construction period
interest until the assets are placed in service. During fiscal 2007, 2006, and
2005, the Company capitalized interest during the construction period of
approximately $2,901,000, $643,000 and $18,000, respectively. Capitalized interest includes deferred loan
costs that are amortized over the life of the loans, which totaled
approximately $99,000 and $152,000 during fiscal 2007 and 2006,
respectively. Loan cost amortization was
not significant during 2005.
7. LINE OF CREDIT
The Company has a line of credit for up to $7,500,000, subject to
certain borrowing base requirements, due November 2008. In May 2007, the line of credit was
increased from $5,700,000. Amounts
available under the line of credit are reduced by outstanding standby letters
of credit. Interest accrues on borrowings
at the one month LIBOR plus 3.25%, which totaled 9.07% and 8.58% at October 31,
2007 and 2006, respectively. The Company
has a .25% commitment fee on the unused portion of the line of credit. At October 31, 2007 and 2006,
outstanding borrowings on the line of credit balance equaled $6,974,235 and
$848,060, respectively. The Company has
outstanding standby letters of credit of $400,000 at October 31, 2007.
The line of credit and the term note and revolving term note discussed
in Note 8 are subject to a general security agreement with the lending
institution bank. The terms of this
agreement require the Company to maintain certain financial ratios and
covenants such as working capital and net worth requirements, minimum debt to
equity and debt service coverage, and restrictions on distributions. Borrowings under the agreement are secured by
substantially all corporate assets.
8. NOTE PAYABLE – RELATED PARTY
In July 2007, the owner of the general contractor advanced
approximately $4,203,000 to the Company for the purchase of inventory. Interest on the note accrues at 8.75% and had
a maturity date of December 2007.
The Company repaid the note in November 2007.
F-15
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
October 31,
2007 and 2006
9. LONG-TERM DEBT
Long-term debt consists of the following at October 31:
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Term note
payable to lending institution, see terms below.
|
|
$
|
59,583,000
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Revolving term
note payable to lending institution, see terms below.
|
|
1,116,505
|
|
—
|
|
|
|
|
|
|
|
|
|
Construction
note payable to lending institution, see terms below.
|
|
—
|
|
5,690,000
|
|
|
|
|
|
|
|
|
|
Note payable to
Jackson County with interest at 4.00%, forgivable two years after plant
completion based upon job creation thresholds at specified wages as part of
the plant development, but no later than November 1, 2009. If the
Company fails to meet the terms of the note, principal and accrued interest
will be due and payable on November 1, 2009.
|
|
100,000
|
|
100,000
|
|
|
|
|
|
|
|
|
|
Assessment
payable as part of water treatment agreement described in Note 14, due in
semi-annual installments of $189,393 with interest at 6.55%, enforceable by statutory
lien, with the final payment due in 2021. The Company is required to make
deposits over 24 months, which began in January 2007, for one years
worth of debt service payments that are held on deposit to be applied with
the final payments of the assessment.
|
|
3,326,250
|
|
3,550,000
|
|
|
|
|
|
|
|
|
|
Assessment
payable as part of water treatment agreement described in Note 14, due in
semi-annual installments of $25,692 with interest at 0.50%, enforceable by
statutory lien, with the final payment due in 2016.
|
|
451,115
|
|
—
|
|
|
|
|
|
|
|
|
|
Assessment
payable as part of water supply agreement described in Note 14, due in
monthly installments of $4,126 with interest at 8.73%, enforceable by
statutory lien, with the final payment due in 2019.
|
|
354,229
|
|
—
|
|
|
|
|
|
|
|
|
|
Note payable for
equipment, with monthly payments of $3,676 including effective interest of
6.97%, due in April 2011, secured by equipment.
|
|
97,861
|
|
—
|
|
|
Totals
|
|
65,028,960
|
|
9,340,000
|
|
|
Less amounts due
within one year
|
|
2,747,061
|
|
5,836,241
|
|
|
|
|
|
|
|
|
|
Net long-term
debt
|
|
$
|
62,281,899
|
|
$
|
3,503,759
|
|
F-16
Table of
Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to Consolidated
Financial Statements
October 31,
2007 and 2006
Construction and Term Notes Payable
In September 2005, the Company obtained debt financing from a
lending institution in the form of a construction loan and line of credit, as
described in Note 7. In December 2006,
the construction loan was amended to increase the amounts available up to
$64,583,000. The construction loan
incurred interest at the one-month LIBOR plus 3.25%, which totaled 8.58% at October 31,
2006. The construction loan converted to a $59,583,000 term note and a
$5,000,000 revolving term note in October 2007.
The term note requires interest only payments from November 2007
to April 2008 at the one-month LIBOR plus 3.25%, which totaled 9.07% at October 31,
2007. Beginning in May 2008, the
Company will make equal monthly payments of principal and interest to amortize
the note over a period not to exceed ten years, with a final balloon payment
due in October 2012. In addition,
the Company is required to make additional payments on the term note of excess
cash flow, as defined in the agreement, up to $2,000,000 per year to the
lending institution until the Company meets a specified financial ratio. As part of the debt financing, the premium
above LIBOR may be reduced based on the ratio of members’ equity to assets.
The term note, the revolving term note described below, and the line of
credit described in Note 7 are subject to a common credit agreement containing
various financial and non-financial covenants that limit distributions, require
minimum debt service coverage, net worth and working capital requirements and
are secured by a security agreement on all of the Company’s business
assets. The owner of the general
contractor has guaranteed approximately $3,740,000 of the term note and
revolving term note.
Revolving Term Note
The
Company has a revolving term note with the same lending institution for up to
$5,000,000 for cash and inventory management purposes. The Company pays interest on principal
advances monthly at the one-month LIBOR rate plus 3.25%, which totaled 9.07% at
October 31, 2007. The availability
under this note declines by $500,000 annually beginning in October 2008
until October 2011 when it will be $3,000,000 until the maturity in October 2012. The Company pays a commitment fee of 0.35%
per annum on the unused portion of the revolving term note.
At October 31, 2007, the Company was not in compliance with the
debt covenant related to the annual submission of financial statements within
120 days. The lender waived compliance for this violation.
Estimated maturities of long-term debt at October 31, 2007 are as
follows:
|
2008
|
|
$
|
2,747,061
|
|
|
2009
|
|
5,107,033
|
|
|
2010
|
|
4,981,872
|
|
|
2011
|
|
5,260,566
|
|
|
2012
|
|
44,034,155
|
|
|
After 2012
|
|
2,898,273
|
|
|
|
|
|
|
|
Total long-term
debt
|
|
$
|
65,028,960
|
|
F-17
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
October 31,
2007 and 2006
10. MEMBERS’ EQUITY
The
Company is authorized to issue 50,000,000 capital units, of which 28,750,000
have been designated Class A units, 11,250,000 have been designated as Class B
units, and 10,000,000 have not yet been designated. Members shall exercise their voting power in
proportion to units held without regard to class, and are entitled to one vote
for each unit held, subject to the appointment rights to the Board as provided
in the Member Control Agreement. No
member may transfer all or any portion of an interest without prior written
consent of the Board of Governors.
Subject to the Member Control Agreement, all units share equally in the
profits and losses, distributions of assets, and voting rights on a per unit
basis.
The
Company was initially capitalized by contributions from its founding members
and additional seed capital investors.
The founding members contributed $94,750 in exchange for 189,500 Class A
units. In addition, 122 members
contributed an additional $39,750 for 79,500 Class A units.
Private Placement Memorandum
The Company issued a Private Placement Memorandum dated March 24,
2004 for the sale of 1,000,000 Class A units. The units were offered at a price of $1.00
per unit. All 1,000,000 units were sold
and issued at April 30, 2004.
In April 2004, the Company issued 28,750 Class A units in
exchange for a $50,000 contribution from Minnesota Soybean Processors as part
of the agreement described in Note 13.
In connection with an amendment to the Articles of Organization in June 2004,
members had the temporary right to demand payment for the fair value of their
units. Members had thirty days to exercise the redemption right. The Company determined the fair value of
these units was equal to the amount of capital contribution with respect of
such units. The Company had 27 members
exercise their redemption rights, which resulted in a total reduction of 13,500
Class A units and contributed capital of $6,750. In addition, the Company redeemed 21,000 Class A
units for $10,500 of a Governor who resigned.
The Company redeemed at total of 34,500 Class A units for
$17,500. All redemption rights ended in July 2004.
Warrants
The
Company authorized warrants for 25,000 Class A units to the existing nine
members of the Board of Governors. The
warrants granted to each member of the Board of Governors the right to purchase
25,000 Class A units at an exercise price of $.80 per unit. The warrants vested at financial closing in
fiscal 2005 and were exercisable for a period of five years thereafter. The warrants were subject to forfeiture if
the Governor did not continuously remain a Governor up to financial
closing. The Company recorded compensation
expense of approximately $69,000 in fiscal 2005 related to the warrants. These units were not used in the computation
of net loss per unit for fiscal 2007, 2006, or 2005 as they would have been
anti-dilutive. All of the warrants were
exercised in August 2007 whereby the Company received $180,000.
F-18
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
October 31,
2007 and 2006
Registration Statement
The
Company prepared a Registration Statement in Minnesota offering 20,000,000 Class A
units for $40,000,000 and was declared effective in September 2004. The offering included subscription incentives
for early investment by providing investors who invested by pre-determined dates
with additional units. On January 29,
2005, the Company closed the offering, having raised $40,000,000 in exchange
for 21,604,875 Class A, units and funds were released from escrow in October 2005. Included in the $40,000,000 was $4,100,000
invested by an affiliate of the general contractor.
In
October 2005, the Company issued 255,000 Class A units valued at
$500,000 as partial payment for land owned by a member, as described in Note
13.
In
November 2005, the Company issued 6,500 Class A units valued at
$13,000 as partial payment for a land easement from a member, as described in
Note 13.
In
December 2006, an affiliate of the general contractor invested an
additional $7,500,000 in exchange for 3,750,000 Class A units, as
described in Note 13.
At
October 31, 2007, the Company had 27,104,625 Class A units issued and
outstanding.
11. LEASES
The Company leases equipment, primarily rail cars, under operating
leases through 2017. Equipment under
operating lease primarily represents rail cars for which the rentals began in August 2007. Rent expense for fiscal 2007, 2006, and 2005
was approximately $225,000, $9,000 and $4,000, respectively.
At October 31, 2007, the Company had the following minimum future
lease payments, which at inception had non-cancelable terms of more than one
year:
|
2007
|
|
$
|
840,228
|
|
|
2008
|
|
837,352
|
|
|
2009
|
|
831,600
|
|
|
2010
|
|
831,600
|
|
|
2011
|
|
831,600
|
|
|
After 2011
|
|
4,019,400
|
|
|
|
|
|
|
|
Total lease
commitments
|
|
$
|
8,191,780
|
|
F-19
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
October 31,
2007 and 2006
12. INCOME TAXES
The differences between consolidated financial statement basis and tax
basis of assets were as follows at October 31:
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Consolidated
financial statement basis of assets
|
|
$
|
133,959,958
|
|
$
|
68,778,585
|
|
|
Plus: Organization and start-up costs capitalized
|
|
4,328,425
|
|
2,392,439
|
|
|
Plus: Warrant compensation expense
|
|
—
|
|
69,000
|
|
|
Less: Accumulated tax depreciation and
amortization greater than financial statement basis
|
|
(1,858,200
|
)
|
(256,322
|
)
|
|
|
|
|
|
|
|
|
Income tax basis
of assets
|
|
$
|
136,430,183
|
|
$
|
70,983,702
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Consolidated
financial statement basis of liabilities
|
|
$
|
91,994,817
|
|
$
|
29,045,158
|
|
|
Less: Unrealized
losses on derivatives
|
|
(186,238
|
)
|
(915,533
|
)
|
|
Less: Accrued
expenses
|
|
(71,311
|
)
|
—
|
|
|
|
|
|
|
|
|
|
Income tax basis
of liabilities
|
|
$
|
91,737,268
|
|
$
|
28,129,625
|
|
13. RELATED PARTY TRANSACTIONS
The Company purchased a parcel of land in fiscal 2005 from a member of
the Company that is adjacent to the site where the ethanol plant is being
built. The land was purchased for
$1,500,000 with $500,000 of the purchase price being paid for with the issuance
of 255,000 Class A units of the Company.
In November 2005, the Company entered into an agreement with a
member for a perpetual easement across the member’s land for $14,000,
consisting of $1,000 in cash and 6,500 Class A units in the Company.
An affiliate of the general contractor of the plant became a member of
the Company during fiscal 2005 by investing $4,100,000. In December 2006, the affiliate invested
an additional $7,500,000 in exchange for 3,750,000 Class A units. The Company incurred approximately
$81,287,000 in costs related to the design-build agreement and change orders as
described in Note 14. The Company was
advanced approximately $4,203,000 from the owner of the general contractor for
the purchase of inventory as described in Note 8, which was repaid in November 2007.
In May 2006, the Company purchased land and buildings from a
member for $500,000 that is adjacent to the site where the ethanol plant is
being built.
In December 2006, the Company entered into an agreement with a
member to construct an electrical substation for approximately $1,020,000. In November 2007, the Company obtained a
loan from this member as described in Note 15.
F-20
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
October 31,
2007 and 2006
The Company purchased approximately $8,836,000 and $1,218,000 of corn
from members in fiscal 2007 and 2006, respectively.
14. COMMITMENTS AND CONTINGENCIES
Plant Construction
In October 2005, the Company signed a lump-sum design-build
agreement with a general contractor, who is a related party, for approximately
$76,700,000. Change orders are provided
in the design-build agreement upon mutual agreement and have raised the total
costs to approximately $81,287,000.
Monthly applications are submitted for work performed. Final payment will be due once the plant
meets certain operating performance criteria.
The design-build agreement included a provision whereby the general
contractor receives an early completion bonus of $10,000 per day for each day
the construction is complete prior to 470 days.
In addition, the general contractor will owe the Company liquidated
damages of $20,000 per day for each day construction is not complete after 500
days, limited to $10,000,000. No amounts
have been recorded based on the completion date of the plant. The ethanol plant must meet certain
performance and emission standards and the general contractor retains liability
for failure to meet these standards along with potential liquidated damages. The Company is undergoing performance testing
in early 2008 and has not yet determined if any liquidated damages will be owed
to the Company.
Water Agreements
In October 2003, the Company entered into an industrial water
supply development and distribution agreement with the City of Heron Lake for
15 years. The Company will have the
exclusive rights to the first 600 gallons per minute of capacity that is
available from the well, and provides for the Company, combined with Minnesota
Soybean Processors (MnSP), to approve any other supply contracts that the City
may enter into. In consideration, the Company will pay one half of the City’s
water well bond payments of $735,000, plus a 5% administrative fee, totaling
approximately $594,000, and operating costs, relative to the Company’s water
usage, plus a 10% profit. These costs
will be paid as water usage fees at such time as the plant becomes
operational. The Company has recorded an
assessment of approximately $367,000 with long-term debt as described in Note
9. The Company pays operating and
administrative expenses of approximately $12,000 per year.
In November 2003, the Company entered into a water supply
agreement with MnSP. The agreement
provides for the inclusion of MnSP in the aforementioned water supply agreement
with the City of Heron Lake, with additional obligations to the City that MnSP
has agreed to. In consideration for
being included in this agreement and $50,000 worth of capital units, which was
agreed to be 28,750 units, MnSP paid the Company $100,000.
In May 2006, the Company entered into a water treatment agreement
with the City of Heron Lake and Jackson County for 30 years. The Company will pay for operating and
maintenance costs of the plant in exchange for receiving treated water. In addition, the Company agreed to an
assessment for a portion of the capital costs of the water treatment
plant. The Company has recorded
assessments with long-term debt of $500,000 and $3,550,000 in fiscal 2007 and
2006, respectively, as described in Note 9.
The Company pays operating and maintenance expenses of approximately
$205,000 per year.
F-21
Table of
Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
October 31,
2007 and 2006
Marketing Agreements
The Company has a marketing agreement with an unrelated party for the
exclusive right to market, sell and distribute the entire ethanol inventory
produced by the Company. The Company
will pay a marketing fee of $.01 per gallon.
The initial term is for two years with renewal options thereafter. The Company would assume certain rail car
leases if the agreement is not renewed.
The Company has a distiller’s grain marketing agreement with an unrelated
party to purchase all of the Company’s distillers grains. The agreement provides for predetermined
formulas for the sale of distiller’s grains and solubles. The initial term is for one year after
operations commenced and is terminable thereafter with 90 days written notice.
Legal Proceeding
The
Company was subject to a legal challenge from three special interest groups
related to its air-emissions permit for the plant. The permit and subsequent amendment were
issued by the Minnesota Pollution Control Agency and were appealed to the
Minnesota Court of Appeals and Minnesota Supreme Court. The Minnesota Court of Appeals affirmed the
issuance of the permit in 2006. In fiscal
2007, the Minnesota Supreme Court dismissed the appeal after the Company agreed
to expand their air permit to a major emissions source. The application for the major source permit
was filed in August 2007.
Contractual Obligations
The
following table provides information regarding the consolidated contractual
obligations of the Company as of October 31, 2007:
|
|
|
Total
|
|
Less than
One Year
|
|
One to Three
Years
|
|
Three to
Five Years
|
|
Greater
Than Five
Years
|
|
|
Long-term debt
obligations (1)
|
|
$
|
86,121,369
|
|
$
|
5,562,298
|
|
$
|
19,582,006
|
|
$
|
57,065,002
|
|
$
|
3,912,063
|
|
|
Operating lease
obligations
|
|
8,191,780
|
|
840,228
|
|
1,668,952
|
|
1,663,200
|
|
4,019,400
|
|
|
Purchase
obligations (2)
|
|
43,636,534
|
|
19,098,559
|
|
14,412,766
|
|
10,125,209
|
|
—
|
|
|
Total
contractual obligations
|
|
$
|
137,949,683
|
|
$
|
25,501,085
|
|
$
|
35,663,724
|
|
$
|
68,853,411
|
|
$
|
7,931,463
|
|
(1)
Long-term debt obligations include estimated interest and interest on
unused debt.
(2)
Purchase obligations primarily include forward contracts for corn and
coal.
The
Company also has agreements to pay for the operating costs and maintenance expenses
associated with the water agreement of approximately $12,000 and $205,000 per
year with term lengths of approximately 15 and 30 years, respectively.
The Company has coal supply agreements with a minimum commitment of
approximately $4,950,000 per year until May 2012, including
transportation, with provisions for fuel surcharges and adjustments for
inflation. The amounts related to these
agreements are included with purchase obligations in the table above.
F-22
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
October 31,
2007 and 2006
15. SUBSEQUENT EVENTS
In November 2007, the Company obtained a loan for $600,000 from an
electrical company, which is also an investor in the Company. The loan was passed through from government
entity that the electrical company received.
The loan requires 60 monthly payments of $6,250 with a 1% per year fee
beginning in October 2009.
In November 2007, the Company was awarded and subsequently
obtained a loan for $1,850,000 from a separate electrical company. The loan was for electrical equipment
previously installed by the Company. The
loan requires monthly payments of approximately $30,000 with implicit interest
of 1.50% until December 2013. The
loan requires an additional $140,000 payment after the first year of the
loan. In addition, the loan is secured
by equipment and approximately $1,710,000 maintained in escrow as part of the
agreement.
F-23
Table of
Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Condensed
Consolidated Balance Sheets
|
|
|
April 30, 2008
|
|
October 31, 2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash and
equivalents
|
|
$
|
5,914,456
|
|
$
|
3,090,329
|
|
|
Restricted cash
|
|
421,391
|
|
221,350
|
|
|
Accounts
receivable
|
|
4,922,080
|
|
1,954,126
|
|
|
Inventory
|
|
10,591,138
|
|
18,991,390
|
|
|
Derivative
instruments
|
|
228,039
|
|
—
|
|
|
Prepaid expenses
|
|
886,552
|
|
124,858
|
|
|
Total current
assets
|
|
22,963,656
|
|
24,382,053
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
|
|
|
|
|
|
|
Land and
improvements
|
|
12,394,525
|
|
12,283,575
|
|
|
Plant buildings
and equipment
|
|
97,066,987
|
|
96,859,303
|
|
|
Vehicles and
other equipment
|
|
622,521
|
|
661,272
|
|
|
Office buildings
and equipment
|
|
573,596
|
|
566,928
|
|
|
|
|
110,657,629
|
|
110,371,078
|
|
|
Accumulated
depreciation
|
|
(4,284,973
|
)
|
(1,518,157
|
)
|
|
|
|
106,372,656
|
|
108,852,921
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
Deferred loan
costs, net
|
|
512,578
|
|
572,234
|
|
|
Restricted cash
|
|
1,273,812
|
|
—
|
|
|
Debt service
deposits and other
|
|
243,800
|
|
152,750
|
|
|
Total other
assets
|
|
2,030,190
|
|
724,984
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
131,366,502
|
|
$
|
133,959,958
|
|
Notes to Condensed
Consolidated Financial Statement are an integral part of this Statement.
F-24
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Condensed Consolidated Balance Sheets
|
|
|
April 30, 2008
|
|
October 31, 2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
LIABILITIES AND MEMBERS’ EQUITY
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
Checks written
in excess of bank balance
|
|
$
|
—
|
|
$
|
514,633
|
|
|
Line of credit
|
|
4,900,000
|
|
6,974,235
|
|
|
Note payable -
related party
|
|
—
|
|
4,202,930
|
|
|
Current
maturities of long-term debt
|
|
5,923,065
|
|
2,747,061
|
|
|
Accounts
payable:
|
|
|
|
|
|
|
Trade accounts
payable
|
|
1,798,635
|
|
8,610,097
|
|
|
Trade accounts
payable - related party
|
|
76,344
|
|
1,435,520
|
|
|
Construction
payable
|
|
—
|
|
349,042
|
|
|
Construction
payable - related party
|
|
3,832,555
|
|
3,839,413
|
|
|
Accrued expenses
|
|
682,142
|
|
853,750
|
|
|
Derivative
instruments
|
|
—
|
|
186,237
|
|
|
Total current
liabilities
|
|
17,212,741
|
|
29,712,918
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt,
net of current maturities
|
|
61,472,802
|
|
62,281,899
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members’
Equity
,
27,104,625
units outstanding
|
|
52,680,959
|
|
41,965,141
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Members’ Equity
|
|
$
|
131,366,502
|
|
$
|
133,959,958
|
|
Notes to Condensed
Consolidated Financial Statement are an integral part of this Statement.
F-25
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Condensed Consolidated Statements of Operations
|
|
|
Six Months
|
|
Six Months
|
|
|
|
|
Ended
|
|
Ended
|
|
|
|
|
April 30, 2008
|
|
April 30, 2007
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
65,571,665
|
|
$
|
6,002,494
|
|
|
|
|
|
|
|
|
|
Cost of
Goods Sold
|
|
50,655,715
|
|
7,529,077
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
14,915,950
|
|
(1,526,583
|
)
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
1,577,664
|
|
1,216,401
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
13,338,286
|
|
(2,742,984
|
)
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
Interest income
|
|
37,665
|
|
2,594
|
|
|
Interest expense
|
|
(2,692,798
|
)
|
(210,572
|
)
|
|
Other income
|
|
32,665
|
|
3,401
|
|
|
Total
other expense, net
|
|
(2,622,468
|
)
|
(204,577
|
)
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
10,715,818
|
|
$
|
(2,947,561
|
)
|
|
|
|
|
|
|
|
|
Weighted
Average Units Outstanding - Basic and Diluted
|
|
27,104,625
|
|
25,740,122
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Unit - Basic and Diluted
|
|
$
|
0.40
|
|
$
|
(0.11
|
)
|
Notes to Condensed
Consolidated Financial Statement are an integral part of this Statement.
F-26
Table of
Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Condensed
Consolidated Statements of Cash Flows
|
|
|
Six Months
|
|
Six Months
|
|
|
|
|
Ended
|
|
Ended
|
|
|
|
|
April 30, 2008
|
|
April 30, 2007
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
Cash
Flow From Operating Activities
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
10,715,818
|
|
$
|
(2,947,561
|
)
|
|
Adjustments to
reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
2,844,472
|
|
176,908
|
|
|
Change in fair
value of derivative instruments
|
|
(116,284
|
)
|
(65,968
|
)
|
|
Gain on disposal
of assets
|
|
(16,500
|
)
|
(2,800
|
)
|
|
Change in assets
and liabilities:
|
|
|
|
|
|
|
Restricted cash
|
|
143,445
|
|
438,250
|
|
|
Accounts
receivable
|
|
(2,967,954
|
)
|
(218,025
|
)
|
|
Inventory
|
|
8,400,252
|
|
(2,223,601
|
)
|
|
Derivative
instruments
|
|
(297,992
|
)
|
(664,310
|
)
|
|
Prepaid expenses
|
|
(761,694
|
)
|
(13,942
|
)
|
|
Accounts payable
|
|
(8,170,638
|
)
|
(1,936,681
|
)
|
|
Accrued expenses
|
|
(171,608
|
)
|
245,498
|
|
|
Net cash
provided by (used in) operating activities
|
|
9,601,317
|
|
(7,212,232
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
Proceeds from
sale of assets
|
|
43,500
|
|
2,800
|
|
|
Capital
expenditures
|
|
(687,451
|
)
|
(5,751,610
|
)
|
|
Net cash used in
investing activities
|
|
(643,951
|
)
|
(5,748,810
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
Checks written
in excess of bank balance
|
|
(514,633
|
)
|
(523,605
|
)
|
|
Proceeds from
line of credit, net
|
|
(2,074,235
|
)
|
4,851,175
|
|
|
Payments from
note payable - related party
|
|
(4,202,930
|
)
|
—
|
|
|
Proceeds from
long-term debt
|
|
3,289,176
|
|
—
|
|
|
Payments on
long-term debt
|
|
(2,632,269
|
)
|
—
|
|
|
Payments for
loan costs
|
|
—
|
|
(73,234
|
)
|
|
Debt service
deposits included with other assets
|
|
(91,050
|
)
|
(60,700
|
)
|
|
Release of
restricted cash
|
|
92,702
|
|
—
|
|
|
Member contributions
|
|
—
|
|
7,500,000
|
|
|
Net cash
provided by (used in) financing activities
|
|
(6,133,239
|
)
|
11,693,636
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in cash and equivalents
|
|
2,824,127
|
|
(1,267,406
|
)
|
|
|
|
|
|
|
|
|
Cash
and Equivalents - Beginning of period
|
|
3,090,329
|
|
2,624,064
|
|
|
|
|
|
|
|
|
|
Cash
and Equivalents - End of period
|
|
$
|
5,914,456
|
|
$
|
1,356,658
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
Interest expense
paid
|
|
$
|
2,863,338
|
|
$
|
210,572
|
|
|
Interest
capitalized paid
|
|
—
|
|
830,303
|
|
|
Total interest
paid
|
|
$
|
2,863,338
|
|
$
|
1,040,875
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Activities
|
|
|
|
|
|
|
Restricted cash
from long-term debt proceeds
|
|
$
|
1,710,000
|
|
$
|
—
|
|
|
Property and
equipment financed by long-term debt
|
|
$
|
—
|
|
$
|
29,041,776
|
|
|
Assessment
payable related to property and equipment
|
|
$
|
—
|
|
$
|
867,500
|
|
|
Loan costs
capitalized with property and equipment
|
|
$
|
—
|
|
$
|
55,210
|
|
|
Construction
payables refinanced with long-term debt
|
|
$
|
—
|
|
$
|
6,927,708
|
|
Notes to
Consolidated Financial Statements are an integral part of this Statement.
F-27
Table of
Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 30,
2008
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
The
Company is organized to fund and construct a 50 million gallon ethanol plant
near Heron Lake, Minnesota with ethanol distribution to upper Midwest states. In addition, the Company produces and sells
distillers grains with solubles as co-products of ethanol production. The Company began its ethanol plant
operations in September 2007. Prior
to September 2007, the Company was in the development stage. Since the plant did not commence ethanol
operations until September 2007, the Company sold and distributed corn and
other grains of approximately $4,438,000 and $6,003,000 in the six months ended
April 30, 2008 and 2007, respectively.
The Company expects future revenue from grain merchandising to decline
significantly.
Basis
of Presentation
These
condensed consolidated financial statements and related notes should be read in
conjunction with the consolidated financial statements and notes included in
the Company’s audited consolidated financial statements for the year ended October 31,
2007, contained elsewhere in this Form 10.
The
condensed consolidated interim financial statements are unaudited. These statements included all adjustments
(consisting of normal recurring accruals) that we consider necessary to present
a fair statement of the results of operations, financial position, and cash
flows. The results reported in these
condensed consolidated financial statements should not be regarded as necessarily
indicative of results that may be expected for the entire year.
Principles
of Consolidation
The
financial statements include the accounts of Heron Lake BioEnergy, LLC and its
wholly owned subsidiary, Lakefield Farmers Elevator, LLC, collectively, the “Company.” All significant intercompany balances and
transactions are eliminated in consolidation.
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.
Revenue
Recognition
Revenue
from sales is recorded when title and risk of ownership transfers to the
customer. The title transfers when the
product is loaded into the railcar or truck, the customer takes ownership and
assumes risk of loss. Shipping costs
incurred by the Company in the sale of ethanol are not specifically
identifiable and as a result, revenue from the sale of ethanol and distillers
grains are recorded based on the net selling price reported to the Company from
the marketers. Revenues are recorded net
of commissions of approximately $472,000 for the six months ended April 30,
2008.
F-28
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
April 30,
2008
The
Company also receives revenue from grain storage and drying, which is based on
standard storage and drying contract terms.
Derivative
Instruments
The
Company accounts for derivative instruments and hedging activities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and
Hedging Activities
, as amended. SFAS No. 133 requires a company
to evaluate its contracts to determine whether the contracts are
derivatives. Certain contracts that
literally meet the definition of a derivative may be exempted from SFAS No. 133
as normal purchases or normal sales.
Normal purchases and normal sales are contracts that provide for the
purchases or sale of something other than a financial instrument or derivative
instrument that will be delivered in quantities expected to be used or sold
over a reasonable period in the normal course of business. Contracts that meet the requirements of
normal are documented as normal and exempted from accounting and reporting
requirements of SFAS No. 133, and therefore, are not marked to market in
our financial statements.
In
order to reduce the risk caused by market fluctuations of corn and ethanol, the
Company may use option, futures and swap contracts. These contracts are used to fix the price of
the Company’s anticipated purchases of corn or sales of ethanol. The fair value of these contracts is based on
quoted prices in active exchange-traded or over-the-counter markets. The fair value of the derivatives is
continually subject to change due to the changing market conditions. The Company does not typically enter into
derivative instruments other than for hedging purposes. On the date the derivative instrument is
entered into, the Company will designate the derivative as a hedge. Changes in the fair value of a derivative
instrument that is designated as, and meets all of the required criteria, for a
cash flow or fair value hedge is recorded in accumulated other comprehensive
income and reclassified into earnings as the hedged items affect earnings. Changes in the fair value of a derivative
instrument that are not designated as, and accounted for, as a cash flow or
fair value hedge are recorded in current period earnings. Although certain derivative instruments may
not be designated as, and accounted for, as a cash flow or fair value hedge,
they are economic hedges of specified risks.
Recently Issued Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 161 (SFAS No. 161),
Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133
.
SFAS 161 applies to all derivative instruments and nonderivative instruments
that are designated and qualify as hedging instruments pursuant to paragraphs
37 and 42 of SFAS 133 and related hedged items accounted for under SFAS 133.
SFAS 161 requires entities to provide greater transparency through additional
disclosures about how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted for under SFAS
133 and its related interpretations, and how derivative instruments and related
hedged items affect an entity’s financial position, results of operations, and
cash flows. SFAS 161 is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2008. The Company currently
plans to adopt SFAS 161 during its 2009 fiscal year. The Company does not believe that
implementation of this standard will have a material impact on its consolidated
financial position, results of operations or cash flows.
F-29
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
April 30,
2008
In May 2008, the FASB issued Statement of Financial Accounting Standards
No. 162 (SFAS No. 162), “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. This Statement is effective 60 days following the SEC’s approval
of the Public Company Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles
. The Company does not believe that
implementation of this standard will have a material impact on its consolidated
financial position, results of operations or cash flows.
3. INVENTORY
Inventory consists of the following at:
|
|
|
April 30
2008
|
|
October 31
2007*
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
8,134,622
|
|
$
|
14,922,916
|
|
|
Work in process
|
|
926,684
|
|
899,160
|
|
|
Finished goods
|
|
926,422
|
|
1,050,411
|
|
|
Supplies
|
|
373,618
|
|
160,840
|
|
|
Other grains
|
|
229,792
|
|
1,958,063
|
|
|
Totals
|
|
$
|
10,591,138
|
|
$
|
18,991,390
|
|
*
Derived from audited consolidated financial statements.
2.
DERIVATIVE INSTRUMENTS
At April 30, 2008 and October 31, 2007, the Company recorded
an asset for derivative instruments of approximately $228,000 and a liability
of approximately $186,000, respectively.
None of the positions open at April 30, 2008 and October 31,
2007 was designated as cash flow or fair value hedges. The Company offset
revenue with a loss of approximately $906,000 related to its ethanol derivative
instruments for the six months ended April 30, 2008. The Company did not incur any gains or losses
related to revenue for the six months ended April 30, 2007. The Company recorded a gain of approximately
$2,234,000 and a loss of approximately $2,566,000 in cost of goods sold related
to its corn derivative instruments for the six months ended April 30, 2008
and 2007, respectively.
3. LINE OF CREDIT
The Company has a line of credit for up to $7,500,000, subject to
certain borrowing base requirements, due November 2008. Amounts available under the line of credit
are reduced by outstanding standby letters of credit. Interest accrues on borrowings at the one
month LIBOR plus 3.25%, which totaled 5.98% and 9.07% at April 30, 2008
and October 31, 2007, respectively.
The Company has a .25% commitment fee on the unused portion of the line
of credit. At April 30, 2008 and October 31,
2007, outstanding borrowings on the line of credit were approximately
$4,900,000 and $6,974,000 respectively.
The Company has outstanding standby letters of credit of $400,000 at April 30,
2008.
F-30
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
April 30,
2008
The line of credit and the term note and revolving term note discussed
in Note 5 are subject to a general security agreement with the lending
institution bank. The terms of this agreement require the Company to maintain
certain financial ratios and covenants such as working capital and net worth
requirements, minimum debt to equity and debt service coverage, and
restrictions on distributions.
Borrowings under the agreement are secured by substantially all of the
Company’s assets.
4. NOTE PAYABLE – RELATED PARTY
In July 2007, the owner of the general contractor advanced
approximately $4,203,000 to the Company for the purchase of inventory. Interest on the note accrued at 8.75% and had
a maturity date of December 2007.
The Company repaid the note in November 2007.
5. LONG-TERM DEBT
Long-term debt consists of the following at:
|
|
|
April 30
|
|
October 31
|
|
|
|
|
2008
|
|
2007*
|
|
|
|
|
|
|
|
|
|
Term note
payable to lending institution, see terms below.
|
|
$
|
59,583,000
|
|
$
|
59,583,000
|
|
|
|
|
|
|
|
|
|
Revolving term
note payable to lending institution, see terms below.
|
|
1,165,681
|
|
1,116,505
|
|
|
|
|
|
|
|
|
|
Note payable to
Jackson County with interest at 4.00%, forgivable two years after plant
completion based upon job creation thresholds at specified wages as part of
the plant development, but no later than November 1, 2009. If the
Company fails to meet the terms of the note, principal and accrued interest
will be due and payable on November 1, 2009.
|
|
100,000
|
|
100,000
|
|
|
Balance forward
|
|
$
|
60,848,681
|
|
$
|
60,799,505
|
|
F-31
Table of Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
April 30,
2008
|
|
|
April 30
|
|
October 31
|
|
|
|
|
2008
|
|
2007*
|
|
|
Balance from previous page
|
|
$
|
60,848,681
|
|
$
|
60,799,505
|
|
|
|
|
|
|
|
|
|
Assessment
payable as part of water treatment agreement, due in semi-annual installments
of $189,393 with interest at 6.55%, enforceable by statutory lien, with the
final payment due in 2021. The Company is required to make deposits over 24
months, which began in January 2007, for one years’ worth of debt
service payments that are held on deposit to be applied with the final
payments of the assessment.
|
|
3,326,250
|
|
3,326,250
|
|
|
|
|
|
|
|
|
|
Assessment
payable as part of water treatment agreement, due in semi-annual installments
of $25,692 with interest at 0.50%, enforceable by statutory lien, with the
final payment due in 2016.
|
|
451,115
|
|
451,115
|
|
|
|
|
|
|
|
|
|
Assessment
payable as part of water supply agreement, due in monthly installments of
$4,126 with interest at 8.73%, enforceable by statutory lien, with the final
payment due in 2019.
|
|
344,556
|
|
354,229
|
|
|
|
|
|
|
|
|
|
Note payable for
equipment, with monthly payments of $3,676 including effective interest of
6.97%, due in April 2011, secured by equipment.
|
|
85,321
|
|
97,861
|
|
|
|
|
|
|
|
|
|
Note payable to
electrical provider, with monthly payments of $29,775 including implicit
interest of 1.50%, due in December 2013, secured by equipment and
restricted cash.
|
|
1,739,944
|
|
—
|
|
|
|
|
|
|
|
|
|
Note payable to
electrical company with monthly payments beginning in October 2009 of
$6,250 with a 1% maintenance fee due each October, due September 2017.
The electrical company is a member of the Company.
|
|
600,000
|
|
—
|
|
|
|
|
|
|
|
|
|
Totals
|
|
67,395,867
|
|
65,028,960
|
|
|
Less amounts due
within one year
|
|
5,923,065
|
|
2,747,061
|
|
|
|
|
|
|
|
|
|
Net long-term
debt
|
|
$
|
61,472,802
|
|
$
|
62,281,899
|
|
* Derived from audited consolidated financial statements.
F-32
Table of
Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
April 30,
2008
Term Note Payable
The term note required interest only payments from November 2007
to April 2008 at the one-month LIBOR plus 3.25%, which totaled 5.98% and
9.07% at April 30, 2008 and October 31, 2007, respectively. In May 2008, the Company locked in an
interest rate of 3.58% plus 3.00%, which totals 6.58% on $45,000,000 of the
note, for three years ending April 30, 2011. The Company will make equal monthly payments
of principal and interest of approximately $702,000 to amortize the note over a
period not to exceed ten years, with a final balloon payment due in October 2012. In addition, the Company is required to make
additional payments on the term note of excess cash flow, as defined in the
agreement, up to $2,000,000 per year to the lending institution until the
Company meets a specified financial ratio.
As part of the debt financing, the premium above LIBOR may be reduced
based on the ratio of members’ equity to assets.
The term note, the revolving term note described below, and the line of
credit described in Note 3 are subject to a common credit agreement containing
various financial and non-financial covenants that limit distributions, require
minimum debt service coverage, net worth and working capital requirements and
are secured by a security agreement on all of the Company’s business
assets. The owner of the general
contractor has guaranteed approximately $3,740,000 of the term note and revolving
term note.
Revolving Term Note
The
Company has a revolving term note with the same lending institution for up to
$5,000,000 for cash and inventory management purposes. The Company pays interest on principal
advances monthly at the one-month LIBOR rate plus 3.25%, which totaled 5.98%
and 9.07% at April 30, 2008 and October 31, 2007, respectively. The availability under this note declines by
$500,000 annually beginning in October 2008 until October 2011 when
it will be $3,000,000 until the maturity in October 2012. The Company pays a commitment fee of 0.35%
per annum on the unused portion of the revolving term note.
Estimated maturities of long-term debt at April 30, 2008 are as
follows:
|
2009
|
|
$
|
5,923,065
|
|
|
2010
|
|
6,241,916
|
|
|
2011
|
|
6,171,941
|
|
|
2012
|
|
6,378,942
|
|
|
2013
|
|
39,447,403
|
|
|
After 2013
|
|
3,232,600
|
|
|
|
|
|
|
|
Total long-term
debt
|
|
$
|
67,395,867
|
|
F-33
Table of
Contents
HERON
LAKE BIOENERGY, LLC AND SUBSIDIARY
Notes to
Consolidated Financial Statements
April 30,
2008
6. RELATED PARTY TRANSACTIONS
The Company was advanced approximately $4,203,000 from a member for the
purchase of inventory as described in Note 4, which was repaid in November 2007.
The Company purchased approximately $18,760,000 and $711,000 of grain
from members for the six months ended April 30, 2008 and 2007,
respectively.
F-34
EXHIBIT 3.2
HERON LAKE BIOENERGY, LLC
A
Minnesota Limited Liability Company
MEMBER CONTROL AGREEMENT
(Contains
Restrictions On
Transfer
Of Interests)
MEMBER
CONTROL AGREEMENT
OF
HERON
LAKE BIOENERGY, LLC
TABLE OF CONTENTS
|
SECTION 1:
|
THE LIMITED LIABILITY
COMPANY
|
B-1
|
|
|
|
|
|
1.1
|
Formation
|
B-1
|
|
1.2
|
Name
|
B-1
|
|
1.3
|
Purpose; Powers
|
B-1
|
|
1.4
|
Principal Place of
Business
|
B-2
|
|
1.5
|
Term
|
B-2
|
|
1.6
|
Filings; Articles and
Amendments; Agent for Service of Process
|
B-2
|
|
1.7
|
Title to Property
|
B-2
|
|
1.8
|
Payments of Individual
Obligations
|
B-3
|
|
1.9
|
Independent Activities
|
B-3
|
|
1.10
|
Member Authority
|
B-3
|
|
1.11
|
Access to and
Confidentiality of Information
|
B-4
|
|
1.12
|
Limited Liability
|
B-4
|
|
1.13
|
Definitions
|
B-5
|
|
|
|
|
|
SECTION 2:
|
CAPITAL AND INTERESTS
|
B-12
|
|
|
|
|
|
2.1
|
Members
|
B-12
|
|
2.2
|
Units
|
B-12
|
|
2.3
|
Capital Contributions;
Issuance of Units
|
B-12
|
|
2.4
|
Capital Accounts
|
B-13
|
|
|
|
|
|
SECTION 3:
|
ALLOCATIONS
|
B-14
|
|
|
|
|
|
3.1
|
Profits
|
B-14
|
|
3.2
|
Losses
|
B-14
|
|
3.3
|
Special Allocations
|
B-14
|
|
3.4
|
Curative Allocations
|
B-16
|
|
3.5
|
Loss Limitation
|
B-16
|
|
3.6
|
Other Allocation Rules
|
B-17
|
|
3.7
|
Tax Allocations: Code
Section 704(c)
|
B-17
|
|
|
|
|
|
SECTION 4:
|
DISTRIBUTIONS
|
B-18
|
|
|
|
|
|
4.1
|
Net Cash Flow
|
B-18
|
|
4.2
|
Amounts Withheld
|
B-18
|
|
4.3
|
Limitations on
Distributions
|
B-18
|
|
|
|
|
|
SECTION 5:
|
MANAGEMENT AND
OPERATIONS
|
B-19
|
|
|
|
|
|
5.1
|
Management by Board of
Governors
|
B-19
|
|
5.2
|
Actions by Governors;
Committees; Reliance on Authority
|
B-22
|
|
5.3
|
The Board of Governors
|
B-22
|
|
5.4
|
Duties and Obligations
of Governors
|
B-26
|
|
5.5
|
Officers
|
B-27
|
|
5.6
|
Limitation of
Liability; Indemnification of Governors and Officers
|
B-28
|
|
5.7
|
Member Compensation;
Expenses; Loans
|
B-29
|
|
5.8
|
Contracts with Members
or their Affiliates
|
B-29
|
|
|
|
|
|
SECTION 6:
|
MEMBERS
|
B-30
|
|
|
|
|
|
6.1
|
Members; Rights and
Powers Generally
|
B-30
|
|
6.2
|
Membership Requirements
and Member Voting
|
B-31
|
|
6.3
|
Member Meetings
|
B-31
|
|
6.4
|
Termination of
Membership
|
B-33
|
|
6.5
|
Continuation of the
Company
|
B-34
|
|
6.6
|
No Obligation to
Purchase Member’s Interest
|
B-34
|
|
6.7
|
Waiver of Dissenters’
Rights
|
B-34
|
|
|
|
|
|
SECTION 7:
|
UNIT CERTIFICATES
|
B-34
|
|
|
|
|
|
7.1
|
Certificates for Units
|
B-34
|
|
7.2
|
Transfer of
Certificates
|
B-34
|
|
7.3
|
Loss or Destruction of
Certificates
|
B-35
|
|
7.4
|
Certificate Regulations
|
B-35
|
|
7.5
|
Legends
|
B-35
|
|
|
|
|
|
SECTION 8:
|
ACCOUNTING, BOOKS AND
RECORDS
|
B-35
|
|
|
|
|
|
8.1
|
Accounting, Books and
Records
|
B-35
|
|
8.2
|
Reports
|
B-36
|
|
8.3
|
Tax Matters
|
B-37
|
|
8.4
|
Delivery to Members and
Inspection
|
B-37
|
|
|
|
|
|
SECTION 9:
|
AMENDMENTS
|
B-38
|
|
|
|
|
|
9.1
|
Amendments
|
B-38
|
ii
|
SECTION 10:
|
TRANSFERS
|
B-39
|
|
|
|
|
|
10.1
|
Restrictions on
Transfers
|
B-39
|
|
10.2
|
Permitted Transfers
|
B-39
|
|
10.3
|
Conditions to Permitted
Transfers
|
B-39
|
|
10.4
|
Prohibited Transfers
|
B-41
|
|
10.5
|
Rights of Unadmitted
Assignees
|
B-41
|
|
10.6
|
Admission of
Transferees as Members
|
B-41
|
|
10.7
|
Representations
Regarding Transfers; Legend
|
B-42
|
|
10.8
|
Distributions and
Allocations in Respect of Transferred Units
|
B-43
|
|
|
|
|
|
SECTION 11:
|
[INTENTIONALLY OMITTED]
|
B-43
|
|
|
|
|
|
SECTION 12:
|
DISSOLUTION AND WINDING
UP
|
B-43
|
|
|
|
|
|
12.1
|
Dissolution Events
|
B-43
|
|
12.2
|
Winding Up
|
B-44
|
|
12.3
|
Compliance With Certain
Requirements of Regulations; Deficit Capital Accounts
|
B-44
|
|
12.4
|
Deemed Distribution and
Recontribution
|
B-45
|
|
12.5
|
Rights of Unit Holders
|
B-45
|
|
12.6
|
Notice of
Dissolution/Termination
|
B-45
|
|
12.7
|
Allocations During
Period of Liquidation
|
B-45
|
|
12.8
|
Character of Liquidating
Distributions
|
B-46
|
|
12.9
|
The Liquidator
|
B-46
|
|
12.10
|
Form of
Liquidating Distributions
|
B-46
|
|
|
|
|
|
SECTION 13:
|
DISPUTE RESOLUTION
|
B-46
|
|
|
|
|
|
SECTION 14:
|
MISCELLANEOUS
|
B-47
|
|
|
|
|
|
14.1
|
Notices
|
B-47
|
|
14.2
|
Binding Effect
|
B-47
|
|
14.3
|
Construction
|
B-48
|
|
14.4
|
Time
|
B-48
|
|
14.5
|
Headings
|
B-48
|
|
14.6
|
Severability
|
B-48
|
|
14.7
|
Incorporation by
Reference
|
B-48
|
|
14.8
|
Variation of Terms
|
B-48
|
|
14.9
|
Governing Law
|
B-48
|
|
14.10
|
Waiver of Jury Trial
|
B-49
|
|
14.11
|
Counterpart Execution
|
B-49
|
|
14.12
|
Specific Performance
|
B-49
|
iii
MEMBER CONTROL AGREEMENT
OF
HERON
LAKE BIOENERGY, LLC
THIS
MEMBER CONTROL AGREEMENT
is hereby adopted and entered into
effective as of the Effective Date (as defined below), by the Members (as
defined below), pursuant to the provisions of the Act (as defined below), on
the terms and conditions set forth herein.
SECTION 1
THE
LIMITED LIABILITY COMPANY
1.1
Formation
and Agreement.
The Members have caused
the Company to be formed as a Minnesota limited liability company pursuant to
the provisions of the Act. The Members hereby agree that this Agreement
constitutes the “member control agreement” within the meaning of Section 322B.37
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 provisions, this
Agreement, to the extent permitted by the Act, shall control.
1.2
Name.
The name of the Company
shall be Heron Lake BioEnergy, LLC, and all business of the Company shall be
conducted in such name. The name of the Company may be changed from time to
time in accordance with the Act.
1.3
Purpose;
Powers.
(a)
The
business and purpose of the Company is (i) to engage in the development,
financing, investment into, construction, ownership and operation of bio-energy
facilities including ethanol production facilities, (ii) to pool, handle,
deal, market, manufacture, process, or otherwise change the form or
marketability of products of its Members and others, including crops,
livestock, and other agricultural products, (iii) to conduct any business
and investment activity in which a limited liability company organized under
the Act may lawfully be engaged, and (iv) to perform and conduct any and
all activities necessary, related or incidental to the foregoing.
(b)
The
Company shall possess and may exercise all the powers and privileges granted to
the Company by the Act or by any other law, subject to any limitations provided
in the Articles or in this Agreement.
B-1
1.4
Principal
Place of Business.
The principal place of
business of the Company shall be as set forth in the Articles, or at such other
place(s) within or without the State of Minnesota as the Board may
determine.
1.5
Term.
The term of the Company
began on the date the Articles were originally filed with the Secretary of
State of the State of Minnesota, 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 12 hereof.
1.6
Filings;
Agent for Service of Process.
(a)
The
Company’s organizer has caused the Articles to be filed with the Secretary of
State of the State of Minnesota, in accordance with the provisions of the Act.
The Company shall take any and all other actions reasonably necessary to
perfect and maintain the status of the Company as a limited liability company
under the laws of the State of Minnesota.
The Board shall cause amendments to the Articles to be filed whenever
required by the Act.
(b)
The
Board shall cause the Company to make such filings and take any and all other
actions as may be reasonably necessary to perfect and maintain the status of
the Company as a limited liability company or similar type of entity under the
laws of any other jurisdictions in which the Company engages in business.
(c)
The
name and address of the agent for service of process on the Company resident in
the State of Minnesota shall be as set forth in the Articles or any successor
as appointed by the Board, and the Board is hereby authorized to change the
Company’s registered office or resident agent, or both, from time to time
without Member vote or approval.
(d)
In
connection with the dissolution and completion of the winding up of the
Company, the Board shall cause to be executed and filed a notice of dissolution
and articles of termination whenever required by the Act, and make similar
filings under the laws of any other jurisdictions in which the Board deems such
filings necessary or advisable.
1.7
Title
to Property.
All Property owned by the
Company shall be owned by the Company as an entity and no Unit Holder or
Governor shall have any ownership interest in such Property in its individual
name. Each Unit Holder’s interest in the
Company shall be personal property for all purposes. The Company shall hold title to all of its
Property in the name of the Company and not in the name of any Unit Holder or
Governor.
B-2
1.8
Payments
of Individual Obligations.
The Company’s 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 Unit Holder or Governor.
1.9
Independent
Activities.
(a)
Each
Governor shall be required to devote only such time to the affairs of the
Company as may be necessary to manage the business and affairs of the Company
in accordance with Section 5 hereof, and shall be free to serve any other
Person or enterprise in any capacity that the Governor may deem appropriate in
his or her discretion.
(b)
Neither
this Agreement nor any activity undertaken pursuant hereto shall (i) prevent
any Unit Holder, Governor or its Affiliates, acting on their own behalf, from
engaging in whatever activities they choose, whether the same are competitive
with the Company or otherwise, and any such activities may be undertaken
without having or incurring any obligation to offer any interest in such
activities to the Company or any other Unit Holder or Governor, or (ii) require
any Unit Holder or Governor to permit the Company or any other Unit Holder or
Governor 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.
1.10
Member
Authority.
Each Member represents
and warrants to the Company and to the other Members that:
(a)
the
Member, if not an individual, is duly organized, validly existing and in good
standing under the laws of its state of organization and is duly qualified and
in good standing as a foreign organization in the jurisdiction of its principal
place of business if not organized therein;
(b)
the
Member, if not an individual, has full corporate, limited liability company,
partnership, trust or other applicable power and authority to execute and agree
to this Agreement and to perform its obligations hereunder and all necessary
actions by the board of directors, shareholders, managers, members, partners,
trustees, beneficiaries, or other Persons necessary or appropriate for the due
authorization, execution, delivery and performance of this Agreement by that
Member have been taken;
(c)
the
Member has duly executed and delivered this Agreement; and
(d)
the
Member’s authorization, execution, delivery and performance of this Agreement
does not conflict with any other agreement or arrangement to which that Member
is a party or by which it is bound.
B-3
1.11
Access to
and Confidentiality of Information.
(a)
In
addition to the other rights specifically set forth in this Agreement, each
Member is entitled to all information to which the Member is entitled to have
access pursuant to the Act under the circumstances and subject to the
conditions therein stated, which conditions include but are not limited to such
reasonable standards governing what information and documents are to be
furnished at what time and location and at whose expense as may be set forth
herein or otherwise established by the Board.
However, without limiting the foregoing, the Members agree that the
Board may from time to time determine, due to contractual obligations, business
concerns or other considerations, that certain Confidential Information should
be kept confidential and not provided to some or all of the Members or that it
is not just or reasonable for some or all of the Members or their assignees or
representatives to examine or copy any such information.
(b)
Each
Member acknowledges that from time to time the Member may receive Confidential
Information from or regarding the Company, the release of which may be damaging
to the Company or Persons with whom it does business. Each Member agrees to hold in strict
confidence any Confidential Information it receives regarding the Company that
is identified as being confidential (and if such information is provided in
writing, is so marked) and may not disclose such information to any Person,
except for disclosures (i) to another Member having the right to such
information, (ii) compelled by law, provided the Member must promptly
notify an officer of the Board of any request or demand for such information,
to the extent reasonably possible, (iii) to advisors or representatives of
the Member, or to Persons (and their advisors or representatives) seeking to
acquire all or any portion of the Member’s Interest through a Transfer in
accordance with this Agreement, but only if in each case such Person has agreed
to be bound by the provisions of this Section 1.11(b), or (iv) of
information that the Member has also received from a source independent of the
Company that the Member reasonably believes has the legal right to disclose
such information to the Member. Each
Member acknowledges that a breach of the provisions of this Section 1.11(b) may
cause the Company irreparable harm and injury for which monetary damages are
inadequate or difficult to calculate or both.
Accordingly, each Member specifically agrees that the Company shall be
entitled to injunctive relief to enforce the provisions of this Section 1.11(b),
that such relief may be granted without the necessity of proving actual
damages, and that such injunctive or equitable relief shall be in addition to,
not in lieu of, the right to recover monetary damages for any breach of this Section 1.11(b) by
the Member. The obligations referred to
in this Section 1.11(b) shall survive the termination of a Member’s
membership in the Company.
1.12
Limited
Liability.
Except as otherwise
expressly agreed to under a separate written agreement, the debts, liabilities
and obligations of the Company, whether arising in contract, tort or otherwise,
shall be solely the debts, obligations and liabilities of the Company, and no
Member, Unit Holder or Governor of the Company shall be personally liable for
the acts, debts, obligations or liabilities of the Company merely on account of
that status. The failure of the Company
to observe any formalities or requirements relating to the exercise of its
powers or management of its business or affairs under this Agreement or the Act
shall not be grounds for imposing liability on the Members, Unit Holders or
Governors for any debt, obligation or liability of the Company.
B-4
1.13
Definitions.
Capitalized words and
phrases used in this Agreement have the following meanings:
“2004
Offering”
means the
Company’s offering of Class A Units pursuant to the Registration Statement
dated September 17, 2004.
“Act”
means the Minnesota Limited Liability Company Act as set forth in Chapter 322B
of the Minnesota Statutes Annotated (commencing with Section 322B.01), as
amended from time to time (or any corresponding provision or provisions of any
succeeding law).
“Adjusted
Capital Account Deficit”
means, with respect to any Unit
Holder, the deficit balance, if any, in such Unit Holder’s 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.
“Affiliate”
means, with respect to another Person, any of the following: (i) any Person directly or indirectly
owning, controlling, or holding with power to vote ten percent or more of the
outstanding voting securities of such other Person, (ii) any Person ten
percent or more of whose outstanding securities are directly or indirectly
owned, controlled, or held, with power to vote, by such other Person, (iii) any
Person directly or indirectly controlling, controlled by or under common
control with such other Person, (iv) any executive officer, director,
manager, governor, trustee or partner of such other Person, or (v) any
legal entity on which such person acts as an executive officer, director,
manager, governor, trustee or partner.
For purposes of this definition, the terms “controlling,” “controlled by”
or “under common control with” 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 board of
directors or managers or governors, or persons exercising similar authority
with respect to such Person or entities.
“Agreement”
means this Member Control Agreement, as amended, modified,
supplemented or restated from time to time. Words such as “herein,” “hereinafter,”
“hereof,” “hereto” and “hereunder” refer to this Agreement as a whole, unless
the context otherwise requires.
B-5
“Articles”
means the Articles of Organization filed with the Secretary of State of the
State of Minnesota pursuant to the Act for the purpose of forming the Company,
as amended, modified, supplemented or restated from time to time.
“Assignee”
means a transferee of Units who is not admitted as a Member pursuant to
Section 10.6 hereof.
“Board”
means collectively the persons who are named as Governors of the Company in or
designated or elected as Governors pursuant to this Agreement.
“Governor”
or
“Governors”
means any such person or persons.
“Capital Account”
means the capital account maintained for each Unit Holder in accordance with
Section 2.4 hereof.
“Capital Contributions”
means, with respect to any Unit Holder, the amount of cash, property, services
rendered or a promissory note or other obligation to contribute cash or
property or to perform services contributed to the Company with respect to the
Units in the Company held or purchased by such Unit Holder.
“CEO”
means the Chief Executive Officer/General Manager of the Company, including any
interim CEO, as appointed by the Board.
“Class A Units”
means all Units that are designated as such pursuant to Section 2.2 hereof.
“Class B Units”
means all Units that are designated as such pursuant to Section 2.2 hereof.
“Code”
means
the United States Internal Revenue Code of 1986, as amended from time to time.
“Company”
means
the limited liability company formed pursuant to the filing of the with the
Secretary of State of the State of Minnesota and the limited liability company
continuing the business of this Company in the event of dissolution of the
Company as herein provided.
“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.
“Confidential
Information”
means any information or compilation of
information possessed by the Company that derives independent economic value,
actual or potential, from not being generally known to, and not being readily
ascertainable by proper means, including but not limited to: (a) any
information not generally known or readily ascertainable in the industry of the
Company, regarding the Company’s products, pricing of products, research,
marketing, business systems, and processing techniques etc.; (b) financial
information concerning the Company and customers of the Company, including but
not limited to, customer lists, information concerning accounts receivable of
the customers of the Company; (c) quantity and types of products purchased by
the Company and customers of the Company; and (d) any information that the
Company may
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from time to time
designate as “Confidential” which is not generally known in the Company’s
industry.
“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 Company’s
business and are not delinquent or are being contested in good faith by
appropriate proceedings.
“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 Board.
“Dissolution Event”
has the meaning set forth in Section 12.1 hereof.
“Effective Date”
means the date that the Company first issues Units in connection with its closing
on all or a portion of subscription agreements received and accepted in
accordance with the terms of the 2004 Offering or September 23, 2004, whichever
occurs first.
“Financial
Closing”
means when the Board determines, in its sole
discretion, that the Company has closed on the debt and equity financing
necessary to construct the Company’s proposed ethanol plant and provide working
capital at plant start-up.
“Fiscal Quarter”
means, subject to a change in Fiscal Year pursuant to Section 8.1(b), (i) the period
commencing with the formation of the Company and ending on July 31, 2003, (ii)
any subsequent three-month period commencing on each August 1, November 1,
February 1 and May 1 and ending on the last date before the next such date, and
(iii) the period commencing on the immediately preceding August 1, November 1,
February 1 and May 1 as the case may be, and ending on the date on which all
Property is distributed to the Unit Holders pursuant to Section 12 hereof.
“Fiscal Year”
means, subject to a change in Fiscal Year pursuant to Section 8.1(b), (i) the
period commencing with the formation of the Company and ending on October 31,
2003, (ii) any subsequent twelve-month period commencing on November 1 and
ending on October 31, and
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(iii) the period
commencing on the immediately preceding November 1 and ending on the date on
which all Property is distributed to the Unit Holders pursuant to Section 12
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.
“GAAP”
means
generally accepted accounting principles in effect in the United States of
America from time to time.
“Gross Asset Value”
means with respect to any asset, the asset’s adjusted basis for federal income
tax purposes, except as follows:
(i)
The
initial Gross Asset Value of any asset contributed by a Unit Holder to the
Company shall be the gross fair market value of such asset, as determined by
the Board;
(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 Board as of the following times: (A) the acquisition of an
additional interest in the Company by any new or existing Unit Holder in
exchange for more than a de minimis Capital Contribution; (B) the distribution
by the Company to a Unit Holder of more than a de minimis amount of Company
property as consideration for an interest in the Company; (C) the liquidation
of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g);
and (D) such other times as the Regulations may permit;
provided
that an
adjustment described in clauses (A), (B) or (D) of this subparagraph shall be
made only if the Board determines that such adjustment is necessary to reflect
the relative economic interests of the Unit Holders in the Company.
(iii)
The Gross Asset Value of
any item of Company assets distributed to any Unit Holder 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 Board; 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(g) 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.
“Interest”
means, collectively, a Unit Holder’s share of the “Profits” and “Losses” of the
Company, a Unit Holder’s right to receive distributions of the Company’s
assets, and, with respect to a Member, any right of the Member to vote on or
participate in the management of the Company and
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to information concerning
the business and affairs of the Company as provided for in this Agreement. An
Interest is quantified by the unit of measurement referred to herein as a “Unit”
(as defined below).
“Issuance Items”
has the meaning set forth in Section 3.3(h) hereof.
“Liquidation Period”
has the meaning set forth in Section 12.7 hereof.
“Liquidator”
has the meaning set forth in Section 12.9(a) hereof.
“Losses”
has
the meaning set forth in the definition of “Profits” and “Losses.”
“Majority in Interest”
of the Members or any class(es) or series thereof means Members holding more
than fifty percent (50%) of the Units then held by all Members, or of the Units
of the specified class(es) or series of Units then held by all Members.
“Member”
means
any Person who is described in and meets the membership requirements
established in Sections 6.1 and 6.2(a) hereof and who has not ceased to be a
Member pursuant to the terms of this Agreement. “
Members
”
means all such Persons.
“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, obligations
and liabilities, capital improvements, replacements, and contingencies, all as
reasonably determined by the Board. “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.
“Nonrecourse Deductions”
has the meaning set forth in Section 1.704-2(b)(1) of the Regulations.
“Nonrecourse Liability”
has the meaning set forth in Section 1.704-2(b)(3) of the Regulations.
“Permitted Transfer”
has the meaning set forth in Section 10.2 hereof.
“Person”
means
any individual, partnership (whether general or limited), limited liability
company, corporation, trust, estate, association, nominee or other entity.
“Profits”
and
“Losses”
mean, for each Fiscal Year, an amount equal to the Company’s 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):
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(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 Holder’s 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 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.
“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.
“Regulations”
means the Income Tax Regulations, including Temporary Regulations, promulgated
under the Code, as such regulations are amended from time to time.
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“Regulatory Allocations”
has the meaning set forth in Section 3.4 hereof.
“Securities Act”
means the Securities Act of 1933, as amended.
“Syndication Expenses”
means all expenditures classified as syndication expenses pursuant to Section
1.709-2(b) of the Regulations.
“Subsidiary”
means, with respect to any Person, 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 governing body of such entity.
“Transfer”
means,
as a noun, any voluntary or involuntary transfer, sale, pledge or hypothecation
or other disposition, whether by operation of law (e.g., pursuant to a merger)
or otherwise, and, as a verb, voluntarily or involuntarily to transfer, sell,
pledge or hypothecate or otherwise dispose of.
“Unit”
means
the unit of measurement into which an Interest is divided for purposes of those
provisions of this Agreement that require quantification of the rights, preferences
and obligations represented by an Interest, as authorized and designated in
Section 2.2 and issued pursuant to Section 2.3 hereof.
“Unit Holder”
means a Person who owns Units, regardless of whether such Person is a Member.
“Unit Holders”
means all Unit Holders. Unit Holders may be
designated with respect to specific types or classes of Units held.
“Unit Holder Nonrecourse Debt”
has the same meaning as the term “partner nonrecourse debt” in Section
1.704-2(b)(4) of the Regulations.
“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.
“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.
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SECTION 2
CAPITAL AND INTERESTS
2.1
Members.
The Members of the Company are those Persons described
in Sections 6.1 and 6.2(a) hereof, who have not ceased to be Members.
2.2
Authorized
Capital Units; Designation of Class A and Class B Units.
(a)
The
Company is authorized to issue 50,000,000 Units.
(b)
Of
the total number of authorized Units, 25,000,000 Units are hereby designated as
Class A Units and 15,000,000 Units are hereby designated Class B Units. The
authorized Units that are not designated herein as Class A or Class B Units may
be designated as Class A Units or Class B Units by resolution of the Board,
provided that a statement setting forth the name of the Company and the text of
the resolution and certifying the adoption of the resolution and the date of
adoption shall be filed with the Secretary of State of the State of Minnesota
before the acceptance of any Capital Contributions with respect to such Units. The
resolution is effective when the statement has been filed with the Secretary of
State. A statement filed with the Secretary of State in accordance with this
Section 2.2(b) shall not be considered an amendment of the Articles for
purposes of Minnesota Statutes, Sections 322B.155 and 322B.383.
(c)
The
rights of Class A and Class B Units are established herein.
2.3
Capital
Contributions; Issuance of Units.
(a)
No
Member shall be obligated to make any additional Capital Contributions to the
Company or to pay any assessment to the Company, other than the unpaid portion
of such Member’s written agreement to make Capital Contributions, and no Units
shall be subject to any mandatory assessment, requests or demands for capital.
(b)
Additional
Units may only be issued in consideration of Capital Contributions. The Board
may accept Capital Contributions from Members or persons seeking to become
Members, may authorize the Company to enter into a written subscription
agreement with such Member or persons seeking to become Members to make Capital
Contributions for the purchase of Units, and may cause the Company to issue
additional Units to such persons in consideration of Capital Contributions to
the Company. Capital Contributions and the issuance of additional Units shall
be made at such times and upon such terms and conditions as the Board and the
person acquiring the Units may agree.
(c)
Upon
acceptance of Capital Contributions and the issuance of additional Units, the
Board shall cause the books and records of the Company to be adjusted
appropriately.
(d)
The
Members shall have no preemptive rights to make contributions pursuant to
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Minnesota
Statutes, Section 322B.33 or any similar provisions of future law.
2.4
Capital
Accounts.
A Capital Account shall be maintained for each Unit Holder
in accordance with the following provisions:
(a)
To
each Unit Holder’s Capital Account there shall be credited (A) such Unit Holder’s
Capital Contributions, (B) such Unit Holder’s distributive share of Profits and
any items in the nature of income or gain which are specially allocated
pursuant to Sections 3.3 and 3.4 hereof, and (C) the amount of any Company
liabilities assumed by such Unit Holder or which are secured by any Property
distributed to such Unit Holder. The principal amount of a promissory note
which is not readily traded on an established securities market and which is
contributed to the Company by the maker of the note (or a Unit Holder related
to the maker of the note within the meaning of Regulations Section
1.704-1(b)(2)(ii)(c)) shall not be included in the Capital Account of any Unit
Holder until the Company makes a taxable disposition of the note or until (and
to the extent) principal payments are made on the note, all in accordance with
Regulations Section 1.704-1(b)(2)(iv)(d)(2);
(b)
To
each Unit Holder’s Capital Account there shall be debited (A) the amount of
money and the Gross Asset Value of any Property distributed to such Unit Holder
pursuant to any provision of this Agreement, (B) such Unit Holder’s
distributive share of Losses and any items in the nature of expenses or losses
which are specially allocated pursuant to Sections 3.3 and 3.4 hereof, and
(C) 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;
(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 allocation of
Profits and Loss, nonliquidating distributions, liquidating distributions, and
the maintenance of Capital Accounts, including and subject to Section 12.3
hereof, 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 Board 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 Board
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 12 hereof
upon the dissolution of the Company. The Board also shall (i) make any
adjustments that are necessary or appropriate to
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maintain equality between
the Capital Accounts of the Unit Holders and the amount of capital reflected on
the Company’s 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, and except as otherwise provided in Section
3.5 hereof, Profits for any Fiscal Year shall be allocated among the Unit
Holders ratably in proportion to Units held.
3.2
Losses.
After giving effect to the special allocations in
Section 3.3 and 3.4 hereof, and except as otherwise provided in Section 3.5
hereof, Losses for any Fiscal Year shall be allocated among the Unit Holders
ratably 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 Holder’s 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 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,
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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 Holder’s share of the
net decrease in Unit Holder Nonrecourse Debt, 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 Unit Holder
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 Unit Holder in an amount
and manner sufficient to eliminate, to the extent required by the Regulations,
the Adjusted Capital Account Deficit of the Unit Holder as quickly as possible,
provided that an allocation pursuant to this Section 3.3(c) shall be made only
if and to the extent that the Unit Holder 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 this Agreement.
(d)
Gross Income Allocation
. In the event any Unit Holder has a
deficit Capital Account at the end of any Fiscal Year which is in excess of the
sum of (i) the amount such Unit Holder is obligated to restore pursuant to the
penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5),
each such Unit Holder 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 Unit Holder 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 shall be specially allocated to the Unit Holders in proportion to
Units owned.
(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 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 Holder’s
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.
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(h)
Allocations Relating to Taxable Issuance of 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.
(i)
Syndication Expenses
. Syndication Expenses for any Fiscal
Year shall be specially allocated to the Unit Holders in proportion to their
Units, provided that, if Units are issued pursuant to Section 2.3 hereof during
the Fiscal Year, all Syndication Expenses shall be divided among the Unit
Holders from time to time so that, to the extent possible, the cumulative
Syndication Expenses allocated with respect to each Unit at any time is the
same amount. In the event the Board shall determine that such result is not
likely to be achieved through future allocations of Syndication Expenses, the
Board may allocate other items of income, gain, deduction, or loss so as to
achieve the same effect on the Capital Accounts of the Unit Holders.
(j)
Equalization
of Certain Profits or Loss Allocations. Immediately following Financial
Closing, and subject to Section 3.3(i) hereof, items of income, loss and
deduction shall be specially allocated to the extent possible among the Units
until the cumulative Profits or Losses allocated to each Unit since the Company’s
formation is equal.
3.4
Curative
Allocations.
The allocations set forth in Sections 3.3(a)
through (g) and 3.5 hereof (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 Board 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 Unit Holder’s Capital Account balance is,
to the extent possible, equal to the Capital Account balance such Unit Holder
would have had if the Regulatory Allocations were not part of this Agreement.
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 among the Units and
Losses not allowable to any given 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. If this Section 3.5 causes Losses to be
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allocated in
disproportion to Units, the effect of such allocation shall be reversed at the
earliest opportunity by specially allocating Net Profits to the Unit Holders to
whom such Losses were allocated, the most recently allocated Losses to be
reversed first.
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 Board using any
permissible method under Code Section 706 and the Regulations thereunder.
(b)
Generally,
all Profits and Losses allocated to the Unit Holders or the Holders of
specified Units or a specified class thereof shall be allocated among them in
proportion to the Units or specified Units or class thereof, respectively, held
by each. In the event Units are issued pursuant to Section 2.3 hereof during a
Fiscal Year, the Profits (or Losses) allocated to the Unit Holders for each
such Fiscal Year shall be allocated among the Unit Holders in proportion to the
number of Units each holds from time to time during such Fiscal Year in
accordance with Code Section 706, using any convention permitted by law and
selected by the Board.
(c)
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.
(d)
Solely
for purposes of determining a Unit Holder’s 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 Regulations Section 1.704-2(h)(3), the Unit Holders 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.
3.7
Tax
Allocations: Code Section 704(c).
(a)
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).
(b)
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
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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.
(c)
Allocations
pursuant to Section 3.7(a) shall be made using the “remedial allocation method”
described in Regulations Section 1.704-3(d) (or any successor Regulation). Allocations
pursuant to Section 3.7(b) shall be made as required or permitted by
Regulations Section 1.704-3 pursuant to such method provided therein as may
reasonably be designated by the Board. Any elections or other decisions
relating to allocations under this Section 3.7 shall be made in any manner that
the Board reasonably determines to reflect the purpose and intention of this
Agreement. Allocations under 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 Holder’s Capital Account or share of
Profits or Losses or distributions under any provision of this Agreement.
SECTION 4
DISTRIBUTIONS
4.1
Net
Cash Flow.
Except as otherwise provided in Section 12 hereof, Net
Cash Flow, if any, shall be distributed to the Unit Holders ratably in
proportion to the Units held.
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.
(a)
The
Company shall make no distributions to the Unit Holders except as provided in
this Section 4 and Section 12 hereof.
(b)
A
Unit Holder may not receive a distribution from the Company to the extent that,
after giving effect to the distribution, all liabilities of the Company, other
than liability to Unit Holders on account of their Capital Contributions, would
exceed the Gross Asset Value of the Company’s assets or the distribution would
otherwise be prohibited by Section 322B.54 of the Act.
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SECTION 5
MANAGEMENT AND OPERATIONS
5.1
Management
by Board of Governors.
(a)
Except those
matters for which consent or approval of the Members is required by this
Agreement or any nonwaivable provisions of the Act, and subject to the
provisions of Section 5.1(d) hereof, the powers and privileges of the
Company shall be exercised by or under the authority of, and the business and
affairs of the Company shall be managed under the direction of, the Board and
not by the Members. No Member, other than a Member acting in his or her
capacity as an officer of the Board or as an officer of the Company, has the
power or authority to act for or on behalf of the Company, to bind the Company
by any act, or to incur any expenditures on behalf of the Company, except with
the prior consent of the Board. Without limiting the foregoing authority of the
Board to manage the business and affairs of the Company or the actions the
Board may take in exercising the powers and privileges of the Company, the
Board shall have the right to make the following decisions and take the
following actions:
(i)
Acquire by
purchase, lease, or otherwise any real or personal property;
(ii)
Operate,
maintain, finance, improve, construct, own, grant operations with respect to,
sell, convey, assign, mortgage, or lease any real estate and any personal
property;
(iii)
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 affairs of the Company, including executing
amendments to this Agreement and the Articles in accordance with the terms of
this Agreement;
(iv)
Borrow money
and issue evidences of indebtedness, and secure the same by mortgage, pledge,
or other lien on any or all of the Company’s assets;
(v)
Execute 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’s assets;
(vi)
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;
(vii)
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;
(viii)
Hire or
contract on behalf of the Company for the employment and services of employees
and/or independent contractors, such as consultants, lawyers and accountants,
and delegate to such Persons the duty to manage or supervise any of the assets
or operations of the Company;
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(ix)
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 Governor
liability), as may be lawfully carried on or performed by a limited liability
company under the laws of each jurisdiction in which the Company is then formed
or qualified;
(x)
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;
(xi)
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 any Governor in connection with activities arising out
of, connected with, or incidental to this Agreement, and engage counsel or
others in connection therewith;
(xii)
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 business entities, including corporations, associations,
general or limited partnerships or 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;
(xiii)
Subject
to Section 2 hereof, designate classes or series of Units, agree with any
Person as to the form and other terms and conditions of such Person’s Capital
Contribution to the Company and cause the Company to issue Units in
consideration of such Capital Contribution; and
(xiv)
Indemnify
a Member or Governor or officer or former Member or Governor or officer, and
make any other indemnification that is authorized by this Agreement in
accordance with the Act.
The
Board may adopt such policies, rules, and regulations and may take such actions
as it shall deem advisable in furtherance of the purposes of the Company,
provided that the Board shall not act in a manner contrary to this Agreement.
(b)
No
later than sixty (60) days prior to the beginning of each Fiscal Year, the
Board shall adopt an Annual Operating Budget and Annual Capital Budget covering
the Fiscal Year commencing in sixty (60) days. The Annual Operating Budget
shall include projected operating revenues, expenses and working capital
reserves for the Fiscal Year, and the Annual Capital Budget shall include
projected capital expenditures and investments for the Fiscal Year. The Budgets
may but shall not be required to be incorporated into a business plan for the
Fiscal Year containing such other information, plans and strategies as the
Board deems advisable. The Board may amend the Company’s Annual Operating
Budget or Annual Capital Budget at any time.
(c)
Notwithstanding
any other provision of this Agreement (including without limitation Section
5.1(a)), the Board may not take or approve the following actions, agreements,
instruments or items without the affirmative vote of at least two-thirds of the
voting power of the
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Governors in
office:
(i)
The
plans and specifications of the Company’s proposed ethanol plant and the
contract to design and construct the proposed ethanol plant;
(ii)
The
amount and terms of the debt financing and all documents and agreements entered
into in connection therewith to construct and finance the start-up costs of the
proposed ethanol plant;
(iii)
The
Annual Operating and Capital Budgets for each Fiscal Year;
(iv)
Any
contract, obligation, liability, disbursement or lawsuit settlement outside of
the ordinary course of business in excess of $100,000 which is not part of the
then current Fiscal Year’s approved Annual Operating or Capital Budget
(provided that necessary expenditures to meet operational emergencies at the
proposed ethanol plant may be incurred prior to such approval if immediate
action is required for the safety or operation of the proposed ethanol plant);
(v)
Any
investment in excess of $100,000 which is not part of the then current Fiscal
Year’s approved Annual Capital Budget;
(vi)
The
acceptance of additional Capital Contributions, the issuance of additional
Units, or the issuance of options or warrants to purchase Units;
(vii)
The determination
of the Gross Asset Values of the Company Property;
(viii)
The
admission of new Members and the terms of such admission;
(ix)
The
sufficiency of any legal opinion required under Section 10 of this Agreement or
the waiver of any such legal opinion;
(x)
Any
tax elections under Section 8.3(a) of this Agreement; or
(xi)
Any
amendment to the Articles or this Agreement.
(d)
Notwithstanding
any other provision of this Agreement (including without limitation Section
5.1(a)), without the approval or consent of a Majority in Interest of the
Members, the Board shall not have authority to approve, authorize or take any
of the following actions with respect to the Company: (i) sell, lease, exchange
or otherwise dispose of all or substantially all of the assets of the Company;
(ii) merge or consolidate the Company with another Person; (iii) materially
change the business purpose of the Company; or (iv) voluntarily dissolve the
Company.
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5.2
Actions
by Governors; Committees; Reliance on Authority.
(a)
In
managing the business and affairs of the Company and in exercising the powers
and privileges of the Company, Governors shall act on behalf of the Company
only (i) collectively through meetings of the Board held and conducted
pursuant to the provisions of this Agreement or by written action taken
pursuant to the provisions of this Agreement, (ii) through committees
established pursuant to Section 5.2(b), and (iii) through officers of
the Board and officers of the Company to whom authority and duties have been
delegated pursuant to the provisions of this Agreement.
(b)
The
Board, by resolution approved by the affirmative vote of a majority of the
Governors then holding office, may from time to time establish one or more
committees, each of which shall be comprised of one or more natural persons who
may but need not be Governors or Members, provided that a majority of committee
members on each committee must be a Governor or Member. Any such committee shall have and may
exercise only such authority and duties to the extent provided by the Board in
such resolution, subject at all times to the limitations set forth in the Act,
this Agreement and to the direction and control of the Board. Unless otherwise provided by the Board, the
presence of a majority of the members of any such committee shall constitute a
quorum for the transaction of business at a meeting of the committee, and the
committee shall act by the affirmative vote of a majority of committee members
present at a duly held meeting. In other
matters of procedure the provisions of this Agreement shall apply to committees
and the members thereof to the same extent they apply to the Board and Governors,
including, without limitation, the provisions with respect to meetings and
notice thereof, absent members, written actions, and valid acts. Each committee shall keep regular minutes of
its proceedings and report the same to the Board. The Board may dissolve any committee at any
time.
(c)
Any
Person dealing with the Company, other than a Member or a Governor or an
Affiliate of a Member or Governor, may rely on the authority of any officer of
the Board or any officer of the Company in taking any action in the name of the
Company without inquiry into the provisions of this Agreement or compliance
herewith, regardless of whether the action is actually taken in accordance with
the provisions of this Agreement, unless the Person dealing with the Company
has actual knowledge that the officer lacks authority to act or the Act
establishes that the officer lacks authority to act.
5.3
The
Board of Governors.
(a)
Number, Qualification and Term of Office.
(i)
Initial Board of Governors
.
Governors shall be elected or appointed by the Members at the times, in
the manner and for the terms as prescribed by this Agreement. The initial Governors of the Company
comprising the initial Board, who shall serve for such terms and in such manner
as prescribed by this Agreement, are the following persons:
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Robert J. Ferguson
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Michael S. Kunerth
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Timothy O. Helgemoe
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Milton J. McKeown
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David J. Woestehoff
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David J. Bach
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Merrill Grisham
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Doug Schmitz
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Robert Wolf
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and such other
eligible natural persons designated as an initial Governor by the initial
Board. The number of initial Governors
serving the Company shall be established by the initial Board, provided that
the number of initial Governors shall not be less than seven (7) nor more
than thirteen (13).
(ii)
Board of Governors following Financial Closing
. Commencing on the next business day following
Financial Closing, the Board shall be composed of the Governors subject to
appointment by certain Members pursuant to Section 5.3(a)(iv) below,
if any, and the Governors subject to election by the Members pursuant to
section 5.3(a)(iii) below, if any.
The number of Governors serving the Company following Financial Closing
shall be established by the initial Board and thereafter may be changed by the
Board from time to time, in each case having due consideration for the
equitable representation of the membership, provided that (A) the number
of Governors shall not be less than seven (7) nor more than eleven (11), (B) the
number of Governors shall not be less than the number of Governors subject to
appointment by certain Members pursuant to Section 5.3(a)(iv) below,
and (C) the Board may not act so as to shorten the term of a Governor
previously elected (the initial Governors and Governors designated to serve
following Financial Closing pursuant to Section 5.3(a)(iii) below
shall not be considered “previously elected” Governors for purposes of the
foregoing clause).
(iii)
Election of Governors; Terms
. Beginning at the annual meeting of the
Members to be held in 2007 (“2007 Annual Meeting”), Governors shall be elected
by the Members in such manner and for such terms as prescribed by this
Agreement, subject to the right of certain Members to appoint Governors to the
extent provided by Section 5.3(a)(iv) below. A Member who is entitled to appoint one or
more Governors pursuant to Section 5.3(a)(iv) below and such Member’s
Affiliates shall not be entitled to vote for the election (or removal) of
Governors by the Members, as their right to representation exists in their
right of appointment. Except as
otherwise provided herein, all Governors elected by the Members shall serve
three-year terms and until their successors are duly elected and qualified, or
until their earlier death, resignation or removal. In order to preserve continuity of governance
and the harmonious transition of the initial Governors to the elected
Governors, the initial Board shall designate from among its members the
Governors subject to election by the Members pursuant to this Section 5.3(a)(iii) to
serve on the Board following Financial Closing until their successors are duly
elected and qualified, and the terms of the Governors so designated shall be
staggered such that one-third of such Governors (or as nearly as possible)
shall be elected annually by the Members at the 2007 Annual Meeting and
continuing each year thereafter. The
Board shall adopt nomination, reporting and other election procedures in
advance of the 2007 Annual Meeting to achieve the desired staggered effect and
election matters prescribed by this Agreement.
(iv)
Appointed
Governors
. Any Member who, together with such Member’s
Affiliates, holds nine percent (9%) or more of the Units outstanding shall be
entitled to appoint one Governor (each, an “
Appointed
Governor
”) to the Board for every 9% of Units
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held. In determining the appointment rights of
Members and their Affiliates under this Section 5.3(a)(iv), Members and
their Affiliates shall be counted only once, and the right of appointment
accrues only on whole blocks of 9%. For
example, a Member who, together with such Member’s Affiliates, holds 17% of the
Units outstanding would be entitled to appoint only one Governor. A Member and such Member’s Affiliates shall
agree among themselves on how the appointment rights provided in this Section 5.3(a)(iv) shall
be exercised, and shall notify the Board of such agreement. If any Member has the right to appoint more
than one Governor under this Section 5.3(a)(iv), the voting power of all
Governors such Member has the right to appoint may be exercised by any one or
more such Appointed Governors, as further described in Section 5.3(i) below. An Appointed Governor shall serve
indefinitely at the pleasure of the Member appointing him or her (so long as
such Member and its Affiliates continue to hold a sufficient number of Units to
maintain the applicable appointment right) until a successor is appointed, or
until the earlier death, resignation or removal of the Appointed Governor. An Appointed Governor may be removed for any
reason by the Member appointing him or her, upon written notice to an officer
of the Board, which notice may designate and appoint a successor Governor to
fill the vacancy, and which notice may be given at a meeting of the Board
attended by the person appointed to fill the vacancy.
(v)
Qualification
. The
initial Governors of the Company may but need not be Members, provided that a
majority of the initial Governors must be Members or elected or appointed
representatives of Members that are not natural persons. The participation of non-member Governors in
the management and decisions of the Board prior to the Effective Date of this
Agreement is hereby confirmed and ratified in all respects. Following the 2007 Annual Meeting, all
Governors subject to election by the Members must be Members or elected or
appointed representatives of Members that are not natural persons. The provisions of this Section 5.3(a)(v) shall
not apply to Appointed Governors.
(b)
Resignation.
Any
Governor may resign at any time. Such
resignation shall be made in writing and shall take effect at the time
specified therein or, if no time be specified then at the time of its receipt
by the President or the Secretary of the Company. The acceptance of a resignation shall not be
necessary to make it effective, unless expressly so provided in the
resignation.
(c)
Removal.
An initial
Governor or a Governor designated to serve following Financial Closing pursuant
to Section 5.3(a)(iii) above may be replaced or removed for cause by
the affirmative vote of two-thirds of the remaining initial or designated
Governors, as the case may be (excluding Appointed Governors). Following the election of a Governor, the
Governor may be removed for any reason by the Members in such manner as
prescribed by this Agreement. The notice
of the meeting shall state that such removal will be discussed and acted upon
at the meeting, and must also be provided to the Governor in question at least
ten (10) days in advance of such meeting.
The Governor in question has a right to be heard at such meeting. The provisions of this Section 5.3(c) shall
not apply to Appointed Governors.
(d)
Vacancies.
Any
vacancy occurring on the Board (whether by reason of an increase in the number
of Governors or by reason of a vacancy in an existing Governor seat)
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may be filled by
appointment through an affirmative vote of a majority of the remaining
Governors subject to election by the Members, though less than a quorum. A Governor appointed by the Board to fill a
vacancy at any time after the 2007 Annual Meeting shall serve until the next
annual meeting of the Members (or special meeting held for the purpose of
electing Governors), at which time the Members shall elect a new Governor to
serve for the remainder of the original term of the vacated position. The provisions of this Section 5.3(d) shall
not apply to vacancies in Appointed Governor seats.
(e)
Meetings.
Regular
meetings of the Board shall be held from time to time as determined by the
Board. Special meetings of the Board
shall be held upon the call of the President or three (3) or more
Governors. Board meetings shall be held
at the principal office of the Company or at such other place, either within or
without the State of Minnesota, as shall be designated by the person calling
the meeting and stated in the notice of the meeting or a duly executed waiver
of notice thereof. Governors may
participate in a Board meeting by means of video or audio conferencing or
similar communications equipment whereby all Governors participating in the
meeting can hear each other.
(f)
Notice.
Oral or
written notice of each meeting of the Board, stating the place, day and hour of
the meeting, shall be given to each Governor at least 3 days before the day on
which the meeting is to be held. The
notice or waiver of notice of any special or regular meeting of the Board does
not need to specify the business to be transacted or the purpose of the
meeting.
(g)
Waiver.
Whenever any
notice is required to be given to a Governor under the provisions of this
Agreement, a waiver thereof in writing signed by the Governor, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Attendance of a Governor at
any meeting of the Board shall constitute waiver of notice of such meeting by
the Governor, except where the Governor attends a meeting for the express
purpose of stating his objection to the transaction of any business because the
meeting is not lawfully called or convened.
(h)
Quorum.
Two-thirds of
the voting power of the Governors in office shall constitute a quorum necessary
for the transaction of business at any regular or special meeting of the
Board. If less than a quorum is present,
those Governors present may adjourn the meeting from time to time until a
quorum shall be present.
(i)
Voting and Act of the Board.
Each Governor shall have one vote; provided, however, that to the extent
a Member holds the right to appoint more than one Governor pursuant to Section 5.3(a)(iv),
the Board voting rights represented thereby may be exercised by any one or more
such Appointed Governors present at such a meeting. For example, if a Member is entitled to
appoint two Governors pursuant to Section 5.3(a)(iv), each of the two such
Appointed Governors may cast one vote on any matter considered by the Board at the
meeting, or one such Appointed Governor may cast two votes (regardless of
whether the there are one or two such Appointed Governors then serving). If
more than one Governor appointed by a Member is present at a meeting then,
unless such Appointed Governors shall
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announce the
voting power to be exercised by each at such meeting at the beginning of the
meeting, the voting power represented by such Appointed Governors shall be
deemed to be evenly apportioned among them.
The Board shall take action by the affirmative vote of a majority of the
voting power of the Governors present at a duly held meeting at which a quorum
is present.
(j)
Action Without a Meeting.
Any action required or permitted to be taken at a meeting of the Board
may be taken by written action signed by all of the Governors comprising the
Board.
(k)
Absentee Governors.
A
Governor of the Company may give advance written consent or opposition to a
proposal to be acted on at a Board meeting.
If the Governor is not present at the meeting, consent or opposition to
a proposal does not constitute presence for purposes of determining the
existence of a quorum, but consent or opposition shall be counted as a vote in
favor of or against the proposal and shall be entered in the minutes or other
record of action at the meeting, if the proposal acted on at the meeting is
substantially the same or has substantially the same effect as the proposal to
which the Governor has consented or objected.
(l)
Compensation.
The
Board may fix the compensation, if any, of Governors. Governors shall also be entitled to
reimbursement for actual expenses incurred in attending meetings of the Board
or other business of the Company.
5.4
Duties
and Obligations of Governors.
(a)
Duties.
The Board
shall cause the Company to conduct its business and operations separate and
apart from that of any Member, Governor or any of its Affiliates. The Board shall take all actions which may be
necessary or appropriate (i) for the continuation of the Company’s valid
existence as a limited liability company under the laws of the State of
Minnesota 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 Company’s 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 Governor
shall have the duty to discharge the foregoing duties in good faith, in a
manner the Governor reasonably 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.
No Governor shall be under any other duty to the Company or the Members
to conduct the affairs of the Company in a particular manner.
(b)
Employment of CEO.
At
a reasonable time prior to the estimated start-up date of the Company’s
operations, the Board shall select, employ, and fix the compensation of the CEO
of the Company, who may be a member of the Board. The CEO position shall be the principal
executive officer position of the Company, and the CEO shall be the chief
executive officer and chief manager of the Company. The CEO shall have responsibility for all
administrative and operational aspects of the Company, shall have
responsibility for hiring and supervising all employees, and shall perform such
other duties that may be assigned by the Board.
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(c)
Bonds and Insurance.
The Board may require all officers, agents and employees charged by this
Company with responsibility for the custody of any of its funds or property to
give bonds. Bonds shall be furnished by
a responsible bonding company and approved by the Board, and the cost shall be
paid by the Company. The Board shall
cause the Company to provide for insurance of the property of the Company, or
property which may be in the possession of the Company and not otherwise
adequately insured by the owner of the property. In addition, the Board shall cause the
Company to provide for insurance covering liability of the Company to all
employees and the public, in such commercially reasonable amounts as is
customary for businesses similar to the Company.
5.5
Officers.
(a)
Number; Qualification; Election
. Officers must be natural persons, and shall
be elected or appointed by the Board on an annual or more often basis as
determined by the Board. The officers of
the Company shall consist of a President, one or more Vice Presidents, a
Secretary, a Treasurer, a CEO, and such other officers and assistant officers
of the Company appointed by the Board as it deems necessary or advisable. The President and Vice President may also be
referred to as Chairman and Vice Chairman, respectively, and such officers must
be Governors. If the Company has more
than one Vice President, then the Vice President who is also a Governor shall
be considered the Vice Chairman officer and shall carry with it the requirement
that such Vice President / Vice Chairman position must be held by a
Governor. All other officers of the
Company, including any other Vice Presidents, may but need not be Governors. Any number of officer positions or functions
of those officer positions may be held or exercised by the same person. Except as otherwise provided in this
Agreement, the Board shall fix the powers, duties, and compensation of all
officers of the Company.
(b)
Term of Office
. Any
officer of the Company shall hold office at the pleasure of the Board and may
be removed at any time with or without cause, subject to any contract rights
which then may be in existence.
(c)
Removal and Vacancies
.
Any officer elected or appointed by the Board may be removed, with or
without cause, at any time by a resolution of the Board. Any vacancy in an office of the Company shall
be filled by a resolution of the Board.
An officer may resign at any time by giving written notice to the
Company. The resignation is effective
without acceptance when the notice is given to the Company, unless a later
effective date is specified in the notice.
(d)
President
. Unless
provided otherwise by a resolution adopted by the Board, the President shall
preside at meetings of the Members and Board; shall see that all orders and
resolutions of the Board are carried into effect; may execute all documents,
agreements, and instruments on behalf of the Company; may maintain records of
and certify proceedings of the Board and Members; and shall perform such other
duties as may from time to time be prescribed by the Board.
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(e)
Vice President
. The
Vice President shall, in the absence or disability of the President, perform the
duties and exercise the powers of the President and shall perform such other
duties as the Board or the President may from time to time prescribe. The Board may designate more than one Vice
President, in which case the Vice President shall be designated as to denote
which is most senior in office.
(f)
Treasurer
. Unless
provided otherwise by a resolution adopted by the Board, the Treasurer shall be
the Chief Financial Officer 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
Board shall designate from time to time; shall endorse for deposit all notes,
checks, and drafts received by the Company as ordered by the Board, making
proper vouchers therefor; shall disburse Company funds and issue checks and
drafts in the name of the Company as ordered by the Board, shall render to the
CEO and the Board, whenever requested, an account of all such Officer’s transactions
as Treasurer and of the financial condition of the Company, and shall perform
such other duties as may be prescribed by the Board or the President from time
to time.
(g)
Secretary
. The
Secretary shall attend all meetings of the Board and of the Members and shall
maintain records of, and whenever necessary, certify all proceedings of the
Board and of the Members. The Secretary
shall keep the required records of the Company, when so directed by the Board
or other person or persons authorized to call such meetings, shall give or
cause to be given notice of meetings of the Members and of meetings of the
Board, and shall also perform such other duties and have such other powers as
the President or the Board may prescribe from time to time.
(h)
Delegation
. Unless
prohibited by a resolution of the Board, an officer elected or appointed by the
Board may delegate in writing some or all of the duties and powers of such
person’s management position to other persons.
An officer who delegates the duties or powers of an office remains
subject to the standard of conduct for an officer with respect to the discharge
of all duties and powers so delegated.
(i)
Compensation
.
Officers shall receive such compensation as may be determined from time
to time by resolution of the Board.
5.6
Limitation
of Liability; Indemnification of Governors and Officers.
(a)
No
Governor or officer of the Company shall be personally liable to this Company
or its Members for monetary damages for a breach of fiduciary duty by such Governor
or officer; provided that this provision shall not eliminate or limit the
liability of a Governor or officer to the extent provided by applicable law (i) for
a breach of the Governor’s duty of loyalty to the Company or its Members; (ii) for
acts or omissions that are not in good faith or involve intentional misconduct
or a knowing violation of law or, with respect to an officer, for acts of
negligence; (iii) for knowing violations of securities laws section 80A.23
of Minnesota Statutes or for illegal distributions; (iv) for a transaction
from which the Governor derived an improper personal benefit; or (v) for
an act or omission occurring prior to the effective date of the corresponding
provision of the
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Articles. It is the intention of the Members to limit
or eliminate the personal liability of Governors to the greatest extent
permitted under Minnesota law. If
amendments to Minnesota Statutes are passed after this provision becomes
effective which authorize limited liability companies to act to further limit
or eliminate the personal liability of governors of a limited liability
company, then the liability of Governors shall be limited or eliminated to the
greatest extent permitted by Minnesota Statutes, as so amended. No amendment to or repeal of this provision
shall apply to or have any effect on the liability or alleged liability of any
Governor for or with respect to any acts or omissions of such Governor
occurring prior to such amendment or repeal.
(b)
The
Company, its receiver, or its trustee (in the case of its receiver or trustee,
to the extent of Company Property) shall indemnify, defend, save harmless, and
pay all judgments and claims against, and reasonable expenses of, each present
and former Governor or officer relating to any liability or damage or
reasonable expenses incurred with respect to a proceeding if the Governor or
officer (or former Governor or officer) was a party to the proceeding in the
capacity of a Governor or officer of the Company (which reasonable expenses
including reasonable attorneys’ fees may be paid as incurred). Notwithstanding
the foregoing provisions, the Company shall not indemnify, defend, save
harmless, or pay all judgments and claims against, and reasonable expenses of,
a Governor or officer (or former Governor or officer) under this provision
where such judgments and claims or proceedings arise out of or are related to
matters for which a Governor or officer (or former Governor or officer) is
personally liable under Section 5.6(a) hereof.
(c)
The
Company may purchase and maintain insurance on behalf of any person in such
person’s official capacity against any liability or expense asserted against or
incurred by such person in or arising from that capacity, whether or not the
Company would be required or permitted to indemnify the person against the
liability.
5.7
Member
Compensation; Expenses; Loans
(a)
Except
as otherwise provided in a written agreement approved by the Board, no Member
shall receive any salary, fee, or draw for services rendered to or on behalf of
the Company. Except as otherwise
approved by or pursuant to a policy approved by the Board, no Member shall be
reimbursed for any expenses incurred by such Member on behalf of the Company.
(b)
Any
Member or Affiliate may, with the consent of the Board, 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 Company’s
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 Board for
loans to its most creditworthy commercial borrowers, plus up to four percent
(4%) per annum as agreed upon by the Board and the Member, and on such other terms
and conditions no less favorable to the Company than if the lender had been an
independent third party. None of the
Members or their Affiliates shall be obligated to make any loan or advance to
the Company.
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5.8
Contracts
with Governors or their Affiliates.
(a)
No
contract or transaction between the Company and a Governor or its Affiliate or
between the Company and any other entity in which a Governor or its Affiliate
has a material financial interest shall be void or voidable or require the
Governor to account to the Company and hold as trustee for it any profit or
benefit derived therefrom solely for this reason, or solely because the
Governor is present at or participates in the Board meeting at which the
contract or transaction is authorized, if (i) the material facts as to the
contract or transaction and as to the Governor’s or Governors’ material
financial interest are fully disclosed or known to the Board, and (ii) the
Board determines that the terms of the contract or transaction are commercially
reasonable and no less favorable to the Company than could be obtained from an
unaffiliated third party and authorizes, approves or ratifies the contract or
transaction in good faith by a majority vote, but the interested Governor or
Governors are not counted in determining the presence of a quorum and must not
vote.
(b)
No
contract or transaction involving the sale or delivery of corn between the
Company and a Governor or its Affiliate or between the Company and any other
entity in which a Governor or its Affiliate has a material financial interest
shall be void or voidable or require the Governor to account to the Company and
hold as trustee for it any profit or benefit derived therefrom solely for this
reason, or solely because the Governor is present at or participates in the
Board meeting at which or pursuant to which the contract or transaction is
authorized or approved, notwithstanding the fact that the standard of Section 5.8(a) was
not met, provided that the terms of the contract or transaction are or were
commercially reasonable and no less favorable to the Company than could be or
could have been obtained from an unaffiliated third party.
SECTION 6
MEMBERS
6.1
Members;
Rights and Powers Generally.
(a)
As
of the Effective Date, the Members of the Company are the Persons who were
members of the Company immediately prior to the Effective Date as shown on the
books and records of the Company.
(b)
Additional
persons may, upon the approval of the Board, become Members of the Company: (i) by
submitting a completed subscription agreement to subscribe for Units in the
Company upon the terms and conditions as may be set forth in the subscription
agreement, which shall include a representation and warranty that the
representations and warranties required of all Members in this Agreement are
true and correct with respect to such Person, and the acceptance thereof by the
Company, (ii) by meeting any and all requirements of membership
established in or pursuant to this Agreement, (iii) by submitting an
executed counterpart signature agreeing to be bound by this Agreement, (iv) by
submitting payment of the purchase price for the number of Units subscribed for
in the subscription agreement, in accordance with the terms of the subscription
agreement, and (v) upon being admitted as a Member by the Board; or in any
other manner
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authorized in or
pursuant to this Agreement. The Board
may refuse to admit any Person as a Member in its sole discretion.
(c)
Transferees
of Units may become Members as provided in Section 10.6 hereof.
(d)
Other
than the right to elect or appoint Governors to the Board, no Member, other
than a Member acting in his, her or its capacity as an officer of the Board or
as an offericer of the Company, has any right or power to take part in the
management or control of the Company or its business and affairs. No Member other than a Member acting in his,
her or its capacity as an officer of the Board or as an officer of the Company,
has the authority or power to act for or on behalf of the Company, to do any
act that would be binding on the Company, or to incur any expenditures on
behalf of the Company, except with the prior written consent of the Board.
(e)
No
Member shall have any voting right except with respect to those matters
requiring a Member vote or approval as specifically provided for in this
Agreement or as otherwise required by the Act.
6.2
Membership
Requirements and Member Voting.
(a)
Membership.
Each
Member of the Company must own, or must have entered into a binding written
agreement with and accepted by the Company to subscribe for, a minimum of
twenty five hundred (2,500) Units, on and after the date that the Company first
issues Units in connection with its closing on all or a portion of subscription
agreements received and accepted in accordance with the terms of its 2004
Offering or September 23, 2004, whichever occurs first. Failure of any Member to own or to subscribe
for such minimum number of Units on or after such date shall result in the
automatic termination of membership of such Person, without further notice or
action by the Company, and such Person shall become and be a non-member Unit
Holder, with no rights other than those financial rights with respect to the
Units owned by such Person as provided for in and subject to this Agreement, as
further described in Section 6.4 hereof. The Board shall have authority to
increase the minimum ownership requirements and to place other membership
restrictions on the holders of Class B Units.
(b)
Voting.
Beginning
with the 2007 Annual Meeting, Members shall elect Governors to the Board as
provided in Section 5.3(a)(iii) of this Agreement. In addition, Members shall be entitled to
vote on any other matters coming to a vote of the Members as specifically
provided by this Agreement or as required by the Act. Each Member may cast one vote for each Unit
held. The Members shall not be entitled
to cumulate their voting power for the election of Governors. On those matters specifically identified in
Sections 2.2, 5.1(c) and 9.1 of this Agreement as requiring the approval
or consent of a Majority in Interest of the Members, the Members shall take
action by the affirmative vote of a Majority in Interest of the Members. On all other matters to be voted upon by the
Members, including the election (or removal) of Governors by the Members, Members
shall take action by the affirmative vote of the Members holding a majority of
the voting power of the Members present, either in person, by proxy or by
written ballot, at a duly held meeting of the Members at which a quorum is
present for the transaction of business; provided, however, that
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in determining the
voting power present for the purpose of the election (or removal) of Governors,
Units held by Members who are entitled to appoint one or more Governors
pursuant to Section 5.3(a)(iv) and such Members’ Affiliates shall not
be considered, and Members who are entitled to appoint one or more Governors
pursuant to Section 5.3(a)(iv) and such Member’s Affiliates shall not
be entitled to vote for the election (or removal) of Governors by the Members,
as their right to representation exists in their right of appointment..
6.3
Member
Meetings.
(a)
Place and Manner of Meeting.
All meetings of Members shall be held at such time and place, within or
without the State of Minnesota, as shall be stated in the notice of the meeting
or in a duly executed waiver of notice thereof.
Presence in person, or by proxy or written ballot, shall constitute
participation in a meeting, except where a person participates in the meeting
for the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully convened.
(b)
Conduct of Meetings.
All meetings of the Members shall be presided over by the
President. All meetings of the Members
shall be conducted in general accordance with the most recent edition of
Roberts’ Rules of Order
, or such other rules and
procedures as may be determined by the Board in its discretion.
(c)
Annual Meeting.
The
annual meeting of the Members for the transaction of all business which may
properly come before the meeting, including the election of Governors to the
Board as provided in Section 5.3(a)(iii) of this Agreement, shall be
held on a date determined by the Board.
Failure to hold the annual meeting at the designated time shall not be
grounds for dissolution of the Company.
(d)
Special Meetings.
Special meetings of the Members may be called at any time by the
President, the Board or by the Secretary upon the request of Members holding
ten percent (10%) or more of the Units then held by all Members. Such request shall state the purpose or
purposes of such meeting and the matters proposed to be acted on at the special
meeting.
(e)
Notice.
Written or
printed notice stating the place, day and hour of the meeting and, in case of a
special meeting, the purpose or purposes for which the meeting is called, shall
be delivered not less than 15 nor more than 60 days before the date of the
meeting either personally or by mail, by or at the direction of the President,
the Secretary or the Board calling the meeting, to each Member entitled to vote
at the meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail addressed to the Member at the Member’s
address as it appears on the records of the Company, with postage thereon
prepaid. If the purpose of the meeting
is to consider removal of a Governor or any item requiring Member consent or
approval pursuant to Section 2.2, 5.1(c) or 9.1 hereof, then the
notice shall state such purpose, identify such Governor (if applicable), and a
summary of the transaction to be considered or a verbatim statement of the
amendment to be considered must accompany the notice.
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(f)
Quorum.
At any annual
or special meeting of the Members, a Majority in Interest of Members,
represented in person or by proxy, shall constitute a quorum necessary for the
transaction of business. The Members
present at a duly organized meeting at which a quorum is present may transact
business until adjournment, notwithstanding the departure or withdrawal of
Members leaving less than a quorum. The
registration shall be verified by the Secretary and shall be reported in the
minutes of the meeting.
(g)
Record Date.
For the
purpose of determining Members entitled to notice of or to vote at any meeting
of Members or any adjournment thereof or in order to make a determination of
Members for any other proper purpose, the Board may provide that the record
books shall be closed for a stated period not exceeding 15 days. If the record
books shall be closed for the purpose of determining Members entitled to notice
of or to vote at a meeting of Members, such books shall be closed for a period
not exceeding 15 days immediately preceding such meeting. In lieu of closing
the record books, the Board may fix in advance a date as the record date for
any such determination of Members, such date in any case to be not more than 60
days and in the case of a meeting of Members, not less than 15 days prior to
the date of which the particular action requiring such determination of Members
is to be taken. If the record books are not closed and no record date is fixed
for the determination of Members entitled to notice of or to vote at a meeting
of Members, the date on which notice of the meeting is mailed, as the case may
be, shall be the record date for such determination of Members. When a
determination of Members entitled to vote at any meeting of Members has been
made as provided in this Section 6.3(g), such determination shall apply to
any adjournment thereof, except where the determination has been made through
the closing of record books and the stated period of closing has expired.
(h)
Proxies.
At all
meetings of Members, a Member may vote by proxy executed in writing by the
Member or by his duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary
of the Company before or at the time of the meeting. A proxy shall be
considered filed with the Company when received by the Company at its executive
offices, unless later revoked. No proxy shall be valid after eleven months from
the date of its execution, unless otherwise provided in the proxy. Every proxy
shall be revocable at the pleasure of the Member executing it.
6.4
Termination
of Membership.
A Member may not be
expelled, provided that the failure of a Member to comply with the membership
requirements established in, or pursuant to authority granted by, this
Agreement shall result in the termination
of membership of such Person. The
membership of a Member in the Company shall terminate upon the occurrence of
events described in this Agreement or as otherwise provided for in the Act,
including resignation and withdrawal. In
the event a Person ceases to be a Member without having transferred all of the
Units owned by such Person, such Person shall lose all voting rights and shall
be considered merely an assignee of the financial rights associated with the
Units held by such Person, having only the rights of an unadmitted
assignee. Such Person shall remain
subject to the applicable provisions of this Agreement with respect to such
financial rights. 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, shall not be
entitled to vote on any matters reserved to the Members, and shall not have any
of the other rights of a Member under this
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Agreement or of a
member under the Act. Further, such
Person shall not have the right to Transfer such Person’s Units except by means
of a Permitted Transfer in accordance with the provisions of Section 10
herein.
6.5
Continuation
of the Company.
The Company shall not be
dissolved upon the occurrence of any event which is deemed to terminate the
continued membership of a Member. The
Company’s affairs shall not be required to be wound up. The Company shall continue without
dissolution.
6.6
No
Obligation to Purchase Member’s 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 Member’s
Capital Contributions or to require the purchase or redemption of the Units
owned by such terminated Member. The
other Members and the Company shall not have any obligation to purchase or
redeem the Units or Capital Contributions of any such terminated Member or transferee
of any such terminated Member. No Member
whose membership has terminated shall be entitled to receive a distribution in
complete redemption of the fair value of the Units or Capital Contributions of
such Person (except as provided in Section 12 hereof following a
Dissolution Event), notwithstanding any provisions of the Act or any other
provision of law. As a material part of
the consideration for continuing or becoming a Member of the Company, each
Member hereby waives any right, and expressly agrees that it intends for this
provision to negate any entitlement to receive a distribution in complete
redemption of the fair value of Units or Capital Contributions of such Member
upon an event that terminates the membership of such Member which, in the
absence of the provisions in this Agreement, it may otherwise be afforded by
the Act.
6.7
Waiver
of Dissenters’ Rights.
Except for
those transactions or events for which waiver of dissenters rights is expressly
prohibited by the Act, each Member hereby waives and agrees not to assert any
dissenters’ rights under the Act.
SECTION 7
UNIT CERTIFICATES
7.1
Certificates For Units.
Certificates
representing Units of the Company shall be in such form as determined by the
Board. The President or the Vice President and by the Secretary or assistant
Secretary of the Company shall sign the certificates. All certificates shall be
consecutively numbered or otherwise identified. The name and address of the
person to whom the certificate has been issued shall be entered on the books of
the Company. All certificates surrendered to the Company for transfer shall be
canceled and no new certificates shall be issued until the former certificate
is surrendered and canceled by the Company.
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7.2
Transfer of Certificates.
Transfer
of certificates of the Company shall be made pursuant to this Agreement and
only by the holder of record thereof or by the holder’s legal representative,
who shall furnish proper evidence of authority to transfer, or by the holder’s
attorney thereunto authorized by a power of attorney duly executed and filed
with the Secretary of the Company, and upon surrender of the certificate to the
Company for cancellation. The Person in whose name the certificate appears on
the books of the Company is deemed to be the owner thereof for all purposes.
7.3
Loss or Destruction of Certificates.
In
case of loss or destruction of any certificate, another certificate may be
issued in its place upon proof of such loss or destruction, and upon the holder
of the certificate giving a satisfactory bond of indemnity to the Company and
to the transfer agent and registrar, if any, of such certificate, in such
amount as the Board may provide.
7.4
Certificate Regulations.
The
Board have the power and authority to make such further rules and
regulations, not inconsistent with this Agreement and the statutes of the State
of Minnesota, as they may deem expedient concerning the issue, transfer,
conversion and registration of certificates of the Company, including the
appointment or designation of one or more transfer agents and one or more
registrars. The Company may act as its own transfer agent and registrar.
7.5
Legends.
The
Board may place one or more legends on the certificates representing the Units
to indicate restrictions on transfer, registration requirements, or other
restrictions or obligations contained herein.
SECTION 8
ACCOUNTING, BOOKS AND RECORDS
8.1
Accounting,
Books and Records.
(a)
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, consistently
applied; provided, that the financial provisions in this Agreement relating to
Capital Contributions, Profits and Losses, distributions and Capital Accounts
shall be construed and determined in accordance with this Agreement without
regard to whether such provisions are inconsistent with GAAP. The books and records shall reflect all the
Company’s transactions and shall be appropriate and adequate for the Company’s
business. The Company shall maintain at
its principal office all of the following:
(i)
A
current list of the full name and last known business or residence address of
each Unit Holder set forth in alphabetical order, together with the Capital
Contributions, Capital Account and Units of each Unit Holder;
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(ii)
The
full name and business address of each Governor;
(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 Company’s 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;
(vi)
Copies
of the financial statements of the Company, if any, for the six most recent
Fiscal Years; and
(vii)
The
Company’s books and records as they relate to the internal affairs of the
Company for at least the current and past four Fiscal Years.
(b)
The
Company shall use the accrual method of accounting in preparing its financial
reports and for tax purposes and shall keep its books and records accordingly.
The Board may, without any further consent of the Unit Holders (except as
specifically required by the Code), apply for IRS consent to, and otherwise
effect a change in, the Company’s Fiscal Year.
8.2
Reports.
(a)
In General.
The Treasurer of the Company shall be
responsible for causing the preparation of financial reports of the Company and
the coordination of financial matters of the Company with the Company’s
accountants.
(b)
Periodic and Other Reports.
The Company shall maintain and
provide to each Member upon request, the financial statements listed in clauses
(i) and (ii) below, prepared, in each case (other than with respect
to Unit Holder’s Capital Accounts, which shall be prepared in accordance with
this Agreement) in accordance with GAAP consistently applied, and such other
reports as any Member may reasonably request from time to time;
provided
that, if the Board so determines within thirty (30) days thereof, such
other reports shall be provided at such requesting Member’s sole cost and
expense.
(i)
As
soon as practicable following the end of each Fiscal Year (and in any event not
later than ninety (90) days after the end of such Fiscal Year and at such time
as distributions are made to the Unit Holders pursuant to Section 12
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 Company’s accountants, and in each
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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).
(ii)
As
soon as practicable following the end of the first three Fiscal Quarters of
each Fiscal Year (and in any event not later than forty-five (45) days after
the end of such Fiscal Quarter), an unaudited balance sheet of the Company as
of the end of such Fiscal Quarter and the related unaudited statements of
operations and cash flows for such Fiscal Quarter and for the Fiscal Year to
date, in each case, to the extent the Company was in existence, setting forth
in comparative form the corresponding figures for the prior Fiscal Year’s
Fiscal Quarter and the Fiscal Quarter just completed.
8.3
Tax
Matters.
(a)
Tax Elections.
The Board shall, without any further consent
of the Members being required (except as specifically required herein), make
any and all elections for federal, state, local, and foreign tax purposes
including, without limitation, any election, if permitted by applicable law: (i) to
make the election provided for in Code Section 6231(a)(1)(B)(ii) or
take any other action necessary to cause the provisions of Code Sections 6221
through 6231 to apply to the Company [
refers to election by certain “small
partnerships” that are not covered by the TEFRA audit rules to have such rules apply
to them
] (ii) to adjust the basis of Property pursuant to Code
Sections 754, 734(b) and 743(b), or comparable provisions of state, local
or foreign law, in connection with Transfers of Units and Company
distributions; (iii) with the consent of all of the Members, to extend the
statute of limitations for assessment of tax deficiencies against the Unit
Holders with respect to adjustments to the Company’s federal, state, local or
foreign tax returns; and (iv) to the extent provided in Code Sections 6221
through 6231 and similar provisions of federal, state, local, or foreign law,
to 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 Board shall designate a qualifying Member to 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.
(b)
Tax Information.
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 five (5) months after the
end of each Fiscal Year.
8.4
Delivery
to Members and Inspection.
(a)
Upon
the written request of any Member for purposes reasonably related to the
interest of that Person as a Member, the Board shall cause the Company to
deliver to the requesting Member, at the expense of the Company, a copy of the
Company’s most recent annual financial statement and its most recent federal,
state, and local income tax returns and reports.
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(b)
Each
Member (or, in the case of Section 8.4(b)(i) below, his, her or its
designated representative) has the right, upon reasonable written request for
purposes reasonably related to the interest of the Person as a Member and for
proper purposes, to:
(i)
Inspect
and copy during ordinary business hours, at the Member’s expense, any of the
Company records described in Sections 8.1(a)(i) through (vi) and,
with respect to the Company records described in Section 8.1(a)(i), if
such records are not available the Member shall be entitled to bring an action
against the Company to obtain such records and recover its reasonable attorneys
fees incurred in bringing such an action;
(ii)
Obtain
from the Company true and full information regarding the current state of the
Company’s financial condition, subject to normal changes or adjustments arising
after, or following the end of, the period covered by such information; and
(iii)
Obtain
other information regarding the Company’s affairs or inspect during ordinary
business hours other books and records of the Company as is just and
reasonable.
(c)
The
rights granted to a Member pursuant to this Section 8.4 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 by the Board, and to the
provisions of Section 1.11 hereof.
Unadmitted assignees of Units shall not have the right to information
regarding the Company afforded Members hereunder or by the Act.
SECTION 9
AMENDMENTS
9.1
Amendments.
(a)
Amendments
to this Agreement may be proposed by the Board or by the request of Members
holding ten percent (10%) or more of the Units then held by all Members. The Board 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
shall include in any such submission a recommendation as to the proposed
amendment. The Board 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 a Majority in Interest
of the Members.
(b)
Notwithstanding
Section 9.1(a) hereof:
(i)
Except
as provided in Section 2.2 for authorizations and designations of
additional classes or series of Units and changes in numbers of authorized
Units of any class or
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series (including Class A
Units), this Agreement shall not be amended without the approval or consent of
each Unit Holder adversely affected if such amendment would modify the limited
liability of a Unit Holder, or the voting rights or interest of a Unit Holder
in Profits, Losses, other items, or any distributions;
(ii)
A
provision of this Agreement that requires the approval or consent of a
specified percentage in interest of the Members or any class(es) or series thereof
may not be amended without the affirmative vote of Members holding at least the
specified percentage of the Units then held by all Members, or of the Units of
the specified class(es) or series of Units then held by all Members; and
(iii)
This
Section 9 shall not be amended without the approval or consent of all
Members.
SECTION 10
TRANSFERS
10.1
Restrictions
on Transfers.
No Transfer of Units
shall be valid except as specifically permitted by this Section 10 of this
Agreement. It is the intent of this
Agreement that (i) the tax status of the Company be the same as for a
partnership, (ii) this Company preserve its partnership tax status by
complying with Regulations Section 1.7704-1, et seq., and any amendments
thereto, and (iii) to the extent possible, this Agreement shall be read
and interpreted to prohibit the free transferability of Units.
10.2
Permitted
Transfers.
(a)
No
Transfer of Units shall be binding on this Company without the approval of the
Board nor until such Transfer shall have been entered in the books and records
of this Company. The Board may adopt a Unit Transfer Policy to further
implement the provisions of this Section 10. The Board shall not approve, and the Company
shall not recognize for any purpose, any purported Transfer of Units unless and
until the provisions, conditions and restrictions set forth in this Section 10
(including Section 10.3 hereof) and of any Unit Transfer Policy adopted by
the Board have been satisfied. Any
Transfer approved by the Board and satisfying the provisions, conditions and
restrictions set forth in this Section 10 (including Sections 10.2 and
10.3 hereof) shall be referred to in this Agreement as a
“Permitted
Transfer”
. Notwithstanding
the foregoing, a Member may pledge or otherwise encumber all or any portion of
its Units as security for the payment of debt, provided that any subsequent
foreclosure or transfer to the secured party in lieu of foreclosure shall be
considered a Transfer for all purposes of this Agreement.
(b)
Following
a Permitted Transfer, the Units held by the transferee shall remain subject to
the Transfer restrictions set forth in this Section 10.
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10.3
Conditions
to Permitted Transfers.
A Transfer shall not be
treated as a Permitted Transfer under Section 10.2 hereof unless and until
the following conditions are 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 (i) such documents and
instruments of conveyance as may be necessary or appropriate in the opinion of
counsel to the Company to effect 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 Company
shall be reimbursed by the transferor and/or transferee for all costs and
expenses that it reasonably incurs in connection with such Transfer.
(b)
The
transferor and transferee shall furnish the Company with the transferee’s
taxpayer identification number, sufficient information to determine the
transferee’s 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 Units involuntarily by operation of law, either (a) such
Units shall be registered under the Securities Act, and any applicable state
securities laws, or (b) such Transfer shall be exempt from all applicable
registration requirements and will not violate any applicable laws regulating
the Transfer of securities, in the opinion of counsel to the Company.
(d)
Except
in the case of a Transfer of Units involuntarily by operation of law, such
Transfer will not cause the Company to be deemed to be an “investment company”
under the Investment Company Act of 1940, in the opinion of counsel to the
Company.
(e)
Except
in the case of a Transfer of Units involuntarily by operation of law, such
Transfer will not cause the Company to be deemed to be a “publicly-traded
limited partnership” under applicable provisions of the Code, in the opinion of
counsel to the Company.
(f)
Unless
otherwise approved by the Board, 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 Board 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. In determining whether
a particular proposed Transfer will result in a termination of the Company,
counsel to the Company shall take into account the existence of prior written
commitments to Transfer made pursuant to this Agreement and such commitments
shall always be given precedence over subsequent proposed Transfers.
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(g)
No
notice or request initiating the procedures contemplated by Section 10.3
may be given by any Member after a Dissolution Event has occurred. No Member may Transfer all or any portion of
its Units after a Dissolution Event has occurred.
The Board shall have the
authority to waive any legal opinion or other condition required in this
Section10.3.
10.4
Prohibited
Transfers.
(a)
Any
purported Transfer of Units that is not a Permitted Transfer shall be null and
void and of no force or effect whatever; provided that, if the Company is
required to recognize a Transfer that is not a Permitted Transfer (or if the
Board, in its sole discretion, elects to recognize a Transfer that is not a Permitted
Transfer), the Units Transferred shall be strictly limited to the transferor’s
rights to allocations and distributions as provided by this Agreement with
respect to the transferred Units, which allocations and distributions 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 Units may have to the Company.
(b)
In
the case of a Transfer or attempted Transfer of Units that is not a Permitted
Transfer, 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.
10.5
Rights of
Unadmitted Assignees.
Unless admitted as a
Member pursuant to Section 10.6 hereof, a Person who acquires Units and is
not already a Member shall only be entitled to allocations and distributions
with respect to such Units in accordance with this Agreement, and shall not
have any right to any information or accounting of the affairs of the Company,
and 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. In addition, the Units held
by such Person shall continue to be subject to the restrictions on Transfer
provided for in this Section 10.
10.6
Admission
of Transferees as Members.
A transferee of Units
(whether as a result of a Permitted Transfer or otherwise) may be admitted as a
Member only upon satisfaction of each of the following conditions:
(a)
The
transferee acquired its Units by means of a Permitted Transfer;
(b)
The
transferee meets all requirements of membership established in or pursuant to
this Agreement (including Section 6.2(a) hereof), and such admission
is approved by the Board which approval may be given or withheld in the sole
and absolute discretion of the Board;
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(c)
The transferee of Units (other than, with
respect to clauses (i) below, a transferee that was a Member prior to the
Transfer) shall, by submitting an executed counterpart signature page agreeing
to be bound by this Agreement and such other written instruments in form and
substance reasonably satisfactory to the Board (and, in the case of clause (ii) below,
the transferor Member), (i) accept and adopt the terms and provisions of
this Agreement, including this Section 10, and (ii) assume the
obligations of the transferor Member under this Agreement with respect to the
transferred Units;
(d)
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;
and
(e)
Except in the case of a Transfer
involuntarily by operation of law, 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 Members reasonably deems
necessary or appropriate to effect, and as a condition to, such Transfer,
including amendments to the Articles or any other instrument filed with the
State of Minnesota or any other state or governmental authority.
10.7
Representations Regarding
Transfers; Legend.
(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 10.7(a) 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 Member’s acquisition of Units
hereunder is made as principal for such Member’s own account and not for resale
or distribution of such Units. Each Member further hereby agrees that the
following legend may be placed upon any counterpart of this Agreement, the
certificate, or any other document or instrument evidencing ownership of Units:
A Public Company Legend approved by the Board; and
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The Units represented by
this document are subject to further restriction as to their sale, transfer,
hypothecation, or assignment as set forth in the Member Control Agreement and
agreed to by each Member. Said restriction provides, among other things, that
no vendee, transferee, assignee, or endorsee of a Member shall have the right
to become a Member without the consent of the Company’s Board of Governors
which consent may be given or withheld in the sole and absolute discretion of
the Board of Governors.
10.8
Distributions and Allocations in
Respect of Transferred Units.
If any Units are
Transferred during any Fiscal Year in compliance with the provisions of this Section 10,
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 adopted from time to time by the
Board. 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 distributions, the Company shall
recognize such Transfer not later than the end of the calendar month during
which it is given notice of such Transfer, provided that, if the Company is
given notice of a Transfer at least ten (10) Business Days prior to the
Transfer, the Company shall recognize such Transfer as of the date of such
Transfer, and provided further that if the Company does not receive a notice
stating the date such Units were transferred and such other information as the
Board may reasonably require within thirty (30) days after the end of the
Fiscal Year during which the Transfer occurs, then all distributions may be
made to the Person who, according to the books and records of the Company, was
the Member of the Units on the last day of such Fiscal Year. Neither the
Company nor any Unit Holder shall incur any liability for making allocations
and distributions in accordance with the provisions of this Section 10.8,
whether or not the Unitholders or the Company has knowledge of any Transfer of
any Units. The Members acknowledge that
the method and convention designated by the Board constitutes an agreement
among the partners within the meaning of Regulations Section 1.706-1.
SECTION 11
[INTENTIONALLY OMITTED]
SECTION 12
DISSOLUTION AND WINDING UP
12.1
Dissolution Events.
(a)
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”
):
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(i)
The affirmative vote of a Majority in
Interest of the Members to dissolve, wind up, and liquidate the Company; or
(ii)
The entry of a decree of judicial
dissolution pursuant to the Act.
(b)
The Members hereby agree that,
notwithstanding any provision of the Act, the Company shall not dissolve prior
to the occurrence of a Dissolution Event.
12.2
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 Unit Holder shall
take any action that is inconsistent with, or not necessary to or appropriate
for, the winding up of the Company’s 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 Unit Holders until such
time as the Property has been distributed pursuant to this Section 12.2
and the Company has been terminated 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 Company’s
liabilities and Property and shall cause the Property or the proceeds from the
sale thereof (as determined pursuant to Section 12.10 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 Governors
and Members who are creditors, to the extent otherwise permitted by law) in
satisfaction of all of the Company’s 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, the balance, if any, to the Unit
Holders in accordance with the positive balance in their Capital Accounts,
after giving effect to all contributions, distributions and allocations for all
periods.
12.3
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
),
(a) distributions shall be made pursuant to this Section 12 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 made to the Unit Holders pursuant to this
Section 12 may be:
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(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 12.2 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.
12.4
Deemed Distribution and
Recontribution.
Notwithstanding any other
provision of this Section 12, 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
Company’s Debts and other liabilities shall not be paid or discharged, and the
Company’s affairs shall not be wound up. Instead, solely for federal income tax
purposes, the Company shall be deemed to have contributed all of its Property
and liabilities to a new limited liability company in exchange for an interest
in such new company, and immediately thereafter, the Company will be deemed to
liquidate by distributing such interest in the new company to the Unit Holders.
12.5
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 Unit Holders.
12.6
Notice of
Dissolution/Termination.
(a)
Upon the occurrence of a Dissolution
Event, the Board shall, within thirty (30) days thereafter, provide written
notice thereof to each of the Unit Holders, and the Board may notify its known claimants
and/or publish notice as further provided in the Act.
(b)
Upon completion of the distribution of
the Company’s Property as provided in this Section 12, the Company shall
be terminated, and the Liquidator shall cause the filing of a Articles of Termination
in accordance with the Act and shall take all such other actions as may be
necessary to terminate the Company.
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12.7
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 12.2 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.
12.8
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.
12.9
The Liquidator.
(a)
Definition.
The
“Liquidator”
shall mean a Person appointed by the Board to oversee the liquidation of the
Company. The Liquidator may be the Board
or a committee of three or more Governors appointed by the Board.
(b)
Fees.
The Company is authorized to pay a
reasonable fee to the Liquidator for its services performed pursuant to this Section 12
and to reimburse the Liquidator for its reasonable costs and expenses incurred
in performing those services.
(c)
Indemnification.
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 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 acts or omissions that are not in
good faith or involve negligence, fraud, intentional misconduct or a knowing
violation of law, or for a transaction from which the Liquidator, officer,
director, agent or employee derived an improper personal benefit.
12.10
Form of Liquidating
Distributions.
For purposes of making
distributions required by Section 12.2 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.
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SECTION 13
DISPUTE RESOLUTION
If a dispute
arises out of or relates to this Agreement, or the performance or breach
thereof, the parties agree first to try in good faith to settle the dispute by
mediation under the Commercial Mediation Rules of the American Arbitration
Association, before resorting to arbitration.
Thereafter, any remaining unresolved controversy or claim arising out of
or relating to this Agreement, or the performance or breach thereof, shall be
settled by binding arbitration pursuant to the Commercial Arbitration Rules of
the American Arbitration Association as modified by this Section 13;
PROVIDED, that this Section 13 shall not require use of the American
Arbitration Association (only that such Rules as modified by this Section 13
shall be followed); and PROVIDED FURTHER, that arbitration shall not be
required for allegations involving breach of contract, violations of state or
federal securities laws, breach of fiduciary duty or other misconduct by the
Company. The arbitration shall be
conducted in the State of Minnesota. Any
award rendered shall be final and conclusive upon the parties and a judgment
thereon may be entered in any court having competent jurisdiction. The parties shall (i) agree upon and
appoint as the arbitrator a retired former trial Judge in Minnesota; (ii) direct
the arbitrator to follow substantive rules of law and the Federal Rules of
Evidence; (iii) allow for the parties to conduct discovery pursuant to the
rules then in effect under the Federal Rules of Civil Procedure for a
period not to exceed 60 days; (iv) require the testimony to be
transcribed; and (v) require the award to be accompanied by findings of
fact and a statement of reasons for the decision. The cost and expense of the arbitrator and
location costs shall be borne equally by the parties to the dispute. All other costs and expenses, including
reasonable attorney’s fees and expert’s fees, of all parties incurred in any
dispute which is determined and/or settled by arbitration pursuant to this Section 13
shall be borne by the party incurring such cost and expense. Except where
clearly prevented by the area in dispute, both parties agree to continue
performing their respective obligations under this Agreement while the dispute
is being resolved.
SECTION 14
MISCELLANEOUS
14.1
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 either by registered or certified mail,
postage and charges prepaid, or by facsimile, if such facsimile 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 Company and the Unit Holders:
(a)
If to the Company, to the address
determined pursuant to Section 1.4 hereof;
(b)
If to the Unit Holders, to the address
set forth on record with the company;
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14.2
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.
14.3
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.
14.4
Time.
In computing any period
of time pursuant to this Agreement, the day of the act, event or default from
which the designated period of time begins to run shall not be included, but
the time shall begin to run on the next succeeding day. The last day of the
period so computed shall be included, unless it is a Saturday, Sunday or legal
holiday, in which event the period shall run until the end of the next day
which is not a Saturday, Sunday or legal holiday.
14.5
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.
14.6
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. Notwithstanding the foregoing, if such illegality or invalidity
would be to cause any Member to lose the material benefit of its economic
bargain, then the Members agree to negotiate in good faith to amend this
Agreement in order to restore such lost material benefit.
14.7
Incorporation by Reference.
Every exhibit, schedule,
and other appendix attached to this Agreement and referred to herein is not
incorporated in this Agreement by reference unless this Agreement expressly
otherwise provides.
14.8
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.
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14.9
Governing Law.
The laws of the
State of Minnesota shall govern the validity of this Agreement, the
construction of its terms, and the interpretation of the rights and duties
arising hereunder.
14.10
Waiver of Jury Trial.
Each of the Members
irrevocably waives to the extent permitted by law, all rights to trial by jury
and all rights to immunity by sovereignty or otherwise in any action,
proceeding or counterclaim arising out of or relating to this Agreement.
14.11
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.
14.12
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 adopted and entered
into this Member Control Agreement as of the Effective Date.
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ADDITIONAL MEMBER SIGNATURE PAGE
IN
WITNESS WHEREOF,
pursuant to Sections 6.1 and/or 10.6 of the Member Control Agreement of Heron
Lake BioEnergy, LLC, of which this signature page is a part, in
consideration of and as a condition to the undersigned’s being admitted as a
Member and acquiring units in Heron Lake BioEnergy, LLC, the undersigned hereby
executes and enters into this Member Control Agreement as an additional Member
as of the Effective Date (as defined in this Member Control Agreement) or, if
later, the effective date of the undersigned’s acquisition of Units and
admission as a Member pursuant to this Member Control Agreement. By execution of this signature page and
on such date, the undersigned becomes a party to this Member Control Agreement,
and agrees to be bound in all respects by the terms and conditions of this
Member Control Agreement on and after such date.
Individuals:
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(signature)
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(signature of joint investor)
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(print name)
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(print name of joint investor)
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Entities:
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(print name of authorized signatory)
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(print title of authorized signatory)
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B-50
EXHIBIT 10.1
FOURTH AMENDED AND RESTATED
MASTER LOAN AGREEMENT
by and among
HERON LAKE BIOENERGY, LLC
and
AGSTAR FINANCIAL SERVICES, PCA
dated
as of
October 1, 2007
TABLE OF CONTENTS
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Page
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ARTICLE I.
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DEFINITIONS AND ACCOUNTING MATTERS2
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Section 1.01
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Certain Defined
Terms
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2
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Section 1.02
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Accounting
Matters
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12
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Section 1.03
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Construction
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12
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ARTICLE II.
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AMOUNTS AND TERMS OF THE TERM LOANS
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13
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Section 2.01
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Supplements
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13
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Section 2.02
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Construction
Loan
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13
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Section 2.03
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Term Revolving
Loan
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13
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Section 2.04
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Revolving Line
of Credit Loan
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13
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Section 2.05
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Conversion of Construction
Loan Into Term Loan
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14
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Section 2.06
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Adjustments to
Interest Rate
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15
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Section 2.07
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Underwriting/Participation/Facility
Fees
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16
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Section 2.08
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Default Interest
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16
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Section 2.09
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Late Charge
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16
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Section 2.10
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Prepayment of
Term Loan
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16
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Section 2.11
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Changes in Law
Rendering Certain LIBOR Rate Loans Unlawful
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17
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Section 2.12
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Payments and
Computations
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17
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Section 2.13
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Maximum Amount
Limitation
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18
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Section 2.14
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Lender Records
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18
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Section 2.15
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Loan Payments
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19
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Section 2.16
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Purchase of
Equity Interests in AgStar Financial Services, PCA
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19
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Section 2.17
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Compensation
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19
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ARTICLE III
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CONDITIONS PRECEDENT
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20
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Section 3.01
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Conditions Precedent to Preliminary Advances
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20
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Section 3.02
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Conditions Precedent to Construction Advances
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24
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ARTICLE IV.
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REPRESENTATIONS AND WARRANTIES
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24
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Section 4.01
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Representations and Warranties of the Borrower
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24
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ARTICLE V.
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COVENANTS OF THE BORROWER
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29
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Section 5.01
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Affirmative Covenants
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29
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Section 5.02
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Negative Covenants
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37
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ARTICLE VI.
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EVENTS OF DEFAULT AND REMEDIES
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40
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Section 6.01
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Events of Default
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40
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Section 6.02
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Remedies
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43
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Section 6.03
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Remedies Cumulative
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44
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i
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ARTICLE VII.
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MISCELLANEOUS
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45
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Section 7.01
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Amendments, etc
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45
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Section 7.02
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Notices, etc.
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45
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Section 7.03
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No Waiver; Remedies
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46
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Section 7.04
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Costs, Expenses and Taxes
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46
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Section 7.05
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Right of Set-off
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46
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Section 7.06
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Severability of Provisions
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47
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Section 7.07
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Binding Effect; Successors and Assigns;
Participations
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47
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Section 7.08
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Consent to Jurisdiction
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48
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Section 7.09
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Governing Law
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48
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Section 7.10
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Execution in Counterparts
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48
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Section 7.11
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Survival
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48
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Section 7.12
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Waiver of Jury Trial
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48
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Section 7.13
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Entire Agreement
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49
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LIST OF SCHEDULES AND EXHIBITS
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Schedule 3.01(d)
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Real Property
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Schedule 4.01(a)
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Description of Certain Transactions Related to the
Borrower’s Stock
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Schedule 4.01(f)
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Description of Certain Threatened Actions, etc.
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Schedule 4.01(k)
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Location of Inventory and Farm Products; Third
Parties in Possession; Crops
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Schedule 4.01(l)
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Office Locations; Fictitious Names; Etc.
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Schedule 4.01(p)
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Intellectual Property
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Schedule 4.01(t)
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Environmental Compliance
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Schedule 5.01(o)
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Management
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Schedule 5.02(a)
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Description of Certain Liens, Lease Obligations,
etc.
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Schedule 5.02(k)
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Transactions with Affiliates
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Exhibit A
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Compliance Certificate
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Exhibit B
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Project Sources and Uses Statement
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Exhibit C
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Form of Opinion Letter
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ii
FOURTH
AMENDED AND RESTATED MASTER LOAN AGREEMENT
THIS
FOURTH AMENDED AND RESTATED MASTER LOAN AGREEMENT
(this
“Agreement”
), dated as of October 1, 2007,
between
AGSTAR FINANCIAL SERVICES, PCA,
a
United States corporation
(
“Lender”
) and
HERON LAKE
BIOENERGY, LLC
, a Minnesota limited liability company (the
“Borrower”
).
RECITALS
A.
On or about
September 29, 2005, Borrower and Lender entered into a Master Loan Agreement
and First Supplement that provided for a construction loan in the amount of
$59,883,000.00, for the purposes of acquiring, constructing, equipping and
furnishing of an ethanol production facility to be located near Heron Lake,
Jackson County, Minnesota (the “Project”).
B.
Simultaneously
with the execution of the Master Loan Agreement and First Supplement, Borrower
and Lender entered into a Second Supplement that provided for a revolving loan
in the amount of $2,000,000.00, to provide for the general corporate and
operating purposes of the Borrower and its subsidiaries.
C.
On or about May
12, 2006, Borrower and Lender entered into an Amended and Restated Master Loan
Agreement and an Amended and Restated Second Supplement that amended certain
terms and conditions of the credit facilities.
D.
On or about November
20, 2006, the Borrower and Lender entered into a Second Amended and Restated
Second Supplement that increased the Elevator Revolving Note to provide for
additional construction costs and additional operating costs related to the
construction and operation of the Project.
E.
On or about
December 27, 2007, the Borrower and Lender entered into a Second Amended and
Restated Master Loan Agreement, an Amended and Restated First Supplement and a
Third Amended and Restated Second Supplement that increased the Construction
Loan to provide for additional construction costs related to the construction
and operation of the Project.
F.
On or about May
18, 2007, the Borrower and Lender entered into a Third Amended and Restated
Master Loan Agreement and a Fourth Amended and Restated Second Supplement that
increased the Elevator Revolving Loan to provide for additional working capital
related to the operation of the Project.
G.
The Borrower
has further requested that the Construction Loan be converted into a term loan
and a term revolving loan.
H.
The Lender is
willing to extend such financing to the Borrower upon the terms and subject to
the conditions set forth in this Agreement.
1
AGREEMENT
NOW,
THEREFORE,
in
consideration of the foregoing, intending to be legally bound hereby, and in
consideration of Lender making one or more loans to the Borrower, Lender and
the Borrower agree as follows:
ARTICLE I.
DEFINITIONS AND ACCOUNTING
MATTERS
Section 1.01.
Certain Defined Terms
. As used in this Agreement and in the
Supplements, the following terms shall have the following meanings. Terms not
otherwise defined in this Agreement shall have the meanings attributed to such
terms in the Uniform Commercial Code, as amended from time to time. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
“
Advances
” means
the Loans or Letters of Credit provided the Borrower pursuant to this
Agreement and the Supplements to this Agreement.
“
Affiliate
” means,
as to any Person, any other Person:
(a) that directly or indirectly, through one or more
intermediaries, controls or is controlled by, or is under common control with,
such Person; (b) that directly or indirectly beneficially owns or holds
five percent (5%) or more of any class of voting stock of such Person; or
(c) five percent (5%) or more of the voting stock of which is directly or
indirectly beneficially owned or held by the Person in question. The term
“control” means the possession, directly or indirectly, of the power to direct
or cause direction of the management and policies of a Person, whether through
the ownership of voting securities, by contract, or otherwise;
provided, however
, in no event shall the Lender or any Bank
be deemed an Affiliate of the Borrower or any of their subsidiaries.
“
Air Permit
” means the air emissions permit
the MPCA decided to issue to the Borrower for the Project in the Findings of
Fact, Conclusions of Law and Order issued by the MPCA on May 10, 2005, in all
material respects with the same terms and conditions proposed by MPCA as of
that date, including the Project’s status as a synthetic minor source, and any
amendments thereto issued by the MPCA, as modified by the compliance agreement
entered into by and between the MPCA and the Borrower dated effective January
23, 2007, and including any applications for amendments thereto submitted or to
be submitted to the MPCA by the Borrower, including the PSD major source permit
application submitted in August 2007.
“
Agreement
” means this Agreement, as this
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Agreement from time to time.
“
Borrower
” means Heron Lake BioEnergy, LLC, a
Minnesota limited liability company.
2
“
Borrower’s Equity
”
means funds of at least 41.% of Project Costs, currently estimated to be
$51,837,000.00, made up of the following amounts: (i) members’ equity (including interest
earned on member’s equity) of at least $50,747,000.00; and (ii) grants and
loans from government agencies or utilities of not less than $1,090,000.00.
“
Business Day
”
means any day other than a Saturday, Sunday, or other day on which commercial
banks are authorized to close under the Laws of, or are in fact closed in, the
state where the Lender’s Office is located and, if such day relates to any
LIBOR Rate, means any such day on which dealings in dollar deposits are
conducted by and between banks in the applicable offshore dollar interbank
market.
“
Capital Expenditures
”
means, for any period, the sum of all amounts that would, in accordance with
generally accepted accounting principles consistently applied, be included as
additions to property, plant and equipment on a statement of cash flows for the
Borrower during such period, with respect to:
(a) the acquisition, construction, improvement, replacement or
betterment of land, buildings, machinery, equipment or of any other fixed
assets or leaseholds; or (b) other capital expenditures and other uses recorded
as capital expenditures having substantially the same effect.
“
Closing Date
”
means October 1, 2007.
“
CERCLA
” means the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended.
“
Collateral
” means and includes, without
limitation, all property and assets granted as collateral security for the
Loans or Indebtedness, whether real or personal property, whether granted
directly or indirectly, whether granted now or in the future, and whether
granted in the form of a security interest, mortgage, assignment of rents, deed
of trust, assignment, pledge, chattel mortgage, chattel trust, factor’s lien,
equipment trust, conditional sale, trust receipt, lien, charge, lien or title
retention contract, lease or consignment intended as a security device, or any
other security or lien interest whatsoever, whether created by law, contract or
otherwise.
“
Commitment
” means the respective amounts
committed to by Lender under the Supplements and the Notes.
“
Compliance
Certificate
” means a certificate of the Treasurer, or any other officer
reasonably acceptable to the Lender, of the Borrower, substantially in the form
attached hereto as Exhibit A, setting forth the calculations of current financial
covenants and stating: (a) the Financial
Statements are true and correct and, other than the unaudited interim financial
statements, have been prepared in accordance with generally accepted accounting
principles consistently applied; (b) whether they have knowledge of the
occurrence of any Event of Default under this Agreement, and if so, stating in
reasonable detail the facts with respect thereto; and (c) reaffirm and ratify
the representations and warranties, as of the date of the certificate, contained
in this Agreement.
3
“
Construction Advance
”
means any Advance, other than a Preliminary Advance, for the payment of Project
Costs.
“
Construction
Contracts
” means any and all
contracts, written or oral, between the Borrower and any Contractor and any
subcontractor and between any of the foregoing and any other person or entity
relating in any way to the construction of the Project, including the
performing of labor or the furnishing of standard or specially fabricated
materials in connection therewith.
“
Construction Loan
”
means the loan from the Lender to the Borrower in the amount of $64,583,000.00
and pursuant to the terms and conditions provided for in the First Supplement
to this Agreement.
“
Construction Note
”
means that certain promissory note of even date herewith executed and delivered
to the Lender by the Borrower in the amount of $64,583,000.00 and pursuant to
the terms and conditions provided for in the Amended and Restated First Supplement
to this Agreement.
“
Contractor
” means
and includes any person or entity, including the General Contractor, engaged to
work on or to furnish materials or supplies for the Project.
“
Current Portion of
Long Term Debt
” means that portion of Funded Debt payable within one year
from the date of such determination, determined in accordance with generally
accepted accounting principles, consistently applied.
“
Debt
” means: (A) indebtedness for borrowed money or
for the deferred purchase price of property or services; (B) obligations
as lessee under leases which shall have been or should be, in accordance with
generally accepted accounting principles, recorded as capital leases;
(C) obligations under direct or indirect guaranties in respect of, and
obligations (contingent or otherwise) to purchase or otherwise acquire, or
otherwise to assure a creditor against loss in respect of, indebtedness or
obligations of others of the kinds referred to in clause (A) or (B)
above or (E) through (G) below; (D) liabilities in respect of
unfunded vested benefits under plans covered by Title IV of ERISA;
(E) indebtedness in respect of mandatory redemption or mandatory dividend
rights on equity interests but excluding dividends payable solely in additional
equity interests; (F) all obligations of a Person, contingent or
otherwise, for the payment of money under any noncompete, consulting or similar
agreement entered into with the seller of a company or its assets or any other
similar arrangements providing for the deferred payment of the purchase price
for an acquisition permitted hereby or an acquisition consummated prior to the
date hereof; and (G) all obligations of a Person under any Hedging
Agreement.
“
Default Rate
”
means the lesser of: (a) the
Maximum Rate; or (b) the rate per annum which shall from day-to-day be
equal to two percent (2%) in excess of the then applicable rate of interest
under any Supplement or Note.
4
“
Disbursing Agent
” means Lender, its successors and assigns.
“
Disbursing Agreement
”
means the Disbursing Agreement, dated December 27, 2006, executed by the Title Company, the Borrower,
and the Lender, as the same may be from time to time amended, modified, or
supplemented.
“
Distribution
”
means any dividend, distribution, payment, or transfer of property to any
member of the Borrower.
“
Elevator Revolving
Note
” means that certain promissory note in the amount of $7,500,000.00
executed and delivered to the Lender by the Borrower pursuant to the terms and
conditions provided for in the Second Supplement to this Agreement.
“
Environmental Laws
”
means all laws and regulations relating to environmental, health, safety and
land use matters applicable to any property.
“
EBITDA
” means for
any period, the total of the following each calculated without duplication for
the Borrower for such period:
(i) net income from operations; plus (ii) any provision for
(or less any benefit from) income taxes included in determining such net
income; plus (iii) Interest Expense deducted in determining such net
income; plus (iv) amortization and depreciation expense deducted in
determining such net income.
“
ERISA
” means the
Employee Retirement Income Security Act of 1974.
“
Events of Default
”
has the meaning specified in Section 6.01.
“
Excess Cash Flow
”
means EBITDA, less the sum of: (i)
required payments in respect of Funded Debt; (ii) Maintenance Capital
Expenditures and (iii) an amount equal to 40% of Borrower’s current year’s Net
Income.
“
Extraordinary Items
”
means items which are material and significantly different from the Borrower’s
typical business activities, determined in accordance with generally accepted
accounting principles, consistently applied.
“
Fixed Charge Coverage
Ratio
” means the ratio of (EBITDA +/- Extraordinary Items) divided by the
sum of Current Portion of Long Term Debt + Interest Expense + dividends +
Distributions + Tax Distributions + Maintenance Capital Expenditures) measured
on a consolidated basis.
“
Food Security Act
”
means the Food Security Act of 1985, 7 U.S.C. §1631, as amended, and the
regulations promulgated thereunder.
“
Funded Debt
”
means the principal amount of all Debt of the Borrower having a final maturity
of more than one year from the date of origin thereof (or which is renewable or
5
extendible at the option
of the obligor for a period or periods more than one year from the date of
origin) excluding, however, the principal amount due under the Revolving Notes
or any other line of credit used by Borrower for working capital purposes, all
determined in accordance with generally accepted accounting principles,
consistently applied for the period in question.
“
General Contractor
”
means Fagen, Inc., a Minnesota corporation, and its successors and assigns.
“
Governmental
Authority
” means and includes any and all courts, boards, agencies,
commissions, offices, or authorities of any nature whatsoever for any
governmental unit (federal, state, county, district, municipal, city, or
otherwise) whether now or hereafter in existence.
“
Guarantor(s)
” means Lakefield Farmers Elevator, LLC, a
Minnesota limited liability company, and Roland Fagen, together with all other
of the guarantors, sureties, and accommodation parties in connection with any
Indebtedness.
Guaranties
. The terms “Guaranty” and “Guaranties”
shall mean those guaranties given by the Guarantor, pursuant to which the
Guarantor shall guarantee the full and prompt payment and performance of the
Borrower under the Notes and this Agreement.
“
Impound Agreement
”
means that certain agreement dated as of September 16, 2004, by and between the
Borrower and First State Bank Southwest, as amended, supplemented, modified,
extended or restated.
“
Income Taxes
”
means the applicable state, local or federal tax on the net income of the
Borrower.
“
Inspecting Engineer
”
means BBI, Inc., and its successors and permitted assigns.
“
Intellectual Property
”
has the meaning specified in Section 4.01(p).
“
Interest Expense
”
means for any period, the total interest expense of the Borrower calculated on
a consolidated basis.
“
Interest Period
”
means the period commencing on the date of an Advance and ending on the
numerically corresponding day in the first calendar month thereafter, except
that each such Interest Period which commences on the last Business Day of a
calendar month (or on any day for which there is no numerically corresponding
day in the appropriate subsequent calendar month) shall end on the last
Business Day of the appropriate subsequent calendar month. Notwithstanding the
foregoing: (a) each Interest Period
which would otherwise end on a day which is not a Business Day shall end on the
next succeeding Business Day or if such succeeding Business Day falls in the
next succeeding calendar month, on the next preceding Business Day;
(b) any Interest Period which would otherwise extend beyond the
6
Maturity Date shall end
on the Maturity Date; and (c) no Interest Period shall have a duration of
less than one (1) month.
“
Inventory
” means
all of the Borrower’s inventory, as such term is defined in the UCC, whether
now owned or hereafter acquired, whether consisting of whole goods, spare parts
or components, supplies or materials, whether acquired, held or furnished for
sale, for lease or under service contracts or for manufacture or processing,
and wherever located.
“
Lender
”
means AgStar Financial Services, PCA, and its successors and assigns.
“
Letter of Credit
”
means any letter of credit issued by Lender pursuant to the terms of this
Agreement and any Supplement.
“
Letter of Credit
Liabilities
” means, at any time, the aggregate maximum amount available to
be drawn under all outstanding Letters of Credit (in each case, determined
without regard to whether any conditions to drawing could then be met) and all
unreimbursed drawings under Letters of Credit.
“
LIBOR Rate
”
(London Interbank Offered Rate) means the
rate (rounded upward to the nearest sixteenth and adjusted for reserves
required on Eurocurrency Liabilities (as hereinafter defined) for banks subject
to FRB Regulation D (as hereinafter defined) or required by any other federal
law or regulation, quoted by the British Bankers Association (the “BBA”) at
11:00 a.m. London time two Banking Days (as hereinafter defined) before the
commencement of the Interest Period for the offering of U.S. Dollar deposits in
the London interbank market for an Interest Period of one month, as published
by Bloomberg or another major information vendor listed on BBA’s official website.
“Banking Day” shall mean a day on which Lender is open for business, dealings
in U.S. dollar deposits are being carried out in the London interbank market,
and banks are open for business in New York City and London, England.
“Eurocurrency Liabilities” has the meaning as set forth in FRB Regulation D.
“FRB Regulation D” means Regulation D as promulgated by the Board of Governors
of the Federal Reserve System, 12 CFR Part 204, as amended from time to time.
“Loan and Carrying
Charges
” means
all commitment fees to the Lender, brokerage fees, standby fees, interest
charges, service fees, attorneys’ fees, contractors’ fees, developers’ fees,
funding fees, title insurance fees and charges, recording fees, registration
taxes, real estate taxes, special assessments, insurance premiums, utility
charges incurred by the Borrower in the construction of the Project and
issuance of the Notes, all costs incurred in acquisition of the Real Property
and any other costs incurred in the development of the Project.
“
Loan Documents
”
means this Agreement, any and all Supplements to this Agreement, the Notes,
Letters of Credit, the Security Agreement, the Mortgage and all other
agreements, documents, instruments, and certificates of the Borrower delivered
to, or in favor of, the Lender under this Agreement or in connection herewith or
therewith, including, without
7
limitation, all
agreements, documents, instruments, certificates and delivered in connection
with the extension of Advances by the Lender.
“
Loan Obligations
”
means all obligations, indebtedness, and liabilities of the Borrower to the
Lender, including the Reimbursement Obligations, arising pursuant to any of the
Loan Documents, whether now existing or hereafter arising, whether direct,
indirect, related, unrelated, fixed, contingent, liquidated, unliquidated,
joint, several, or joint and several, including, without limitation, the
obligation of the Borrower to repay the Advances, interest on the Advances, and
all fees, costs, and expenses (including attorneys’ fees and expenses) provided
for in the Loan Documents.
“
Loan/Loans
” means
and includes the Construction Loan, the Revolving Loan and any other financial
accommodations extended to the Borrower by the Lender pursuant to the terms of
this Agreement and any Supplements.
“
Long Term Debt
”
means indebtedness that matures more than one year after the date of
determination thereof.
“
Long Term Marketing
Agreement
” means any contract, agreement or understanding of the Borrower
having a term of one year or more after the date of determination thereof
relating to the sale of any raw materials, inventory, products or by-products
of the Borrower.
“
Maintenance Capital
Expenditures
” means all Capital Expenditures made in the ordinary course of
business to maintain existing business operations of the Borrower in any fiscal
year, determined in accordance with generally accepted accounting principles,
consistently applied.
“
Material Adverse
Effect
” means any set of circumstances or events which: (i) has or could reasonably be expected to
have any material adverse effect upon the validity or enforceability of any
Loan Documents or any material term or condition contained therein; (ii) is or could
reasonably be expected to be material and adverse to the condition (financial
or otherwise), business assets, operations, or property of the Borrower; or
(iii) materially impairs or could reasonably be expected to materially impair
the ability of the Borrower to perform the obligations under the Loan
Documents.
“
Material Contract
”
means (i) any contract or any other agreement, written or oral, or any of the
Borrower or its Subsidiaries involving monetary liability of or to any such
person in an amount in excess of $500,000.00 per annum; and (ii) any other
contract or agreement, written or oral, of any of the Borrower or any of its
Subsidiaries the failure to comply with which could reasonably be expected to
have a Material Adverse Effect on any of the Borrower or its Subsidiaries;
provided, however, that any contract or agreement which is terminable by a
party other than any of the Borrower or its Subsidiaries without cause upon
notice of 90 days or less shall not be considered a Material Contract.
“
Maturity Date
”
means October 1, 2012.
8
“
Maximum Rate
”
means the maximum nonusurious interest rate, if any, at any time, or from time
to time, that may be contracted for, taken, reserved, charged or received under
applicable state or federal laws.
“
Mortgage
” means
that certain Third Amended and Restated Mortgage of even date
herewith, pursuant to which a mortgage
interest shall be given by the Borrower to the Lender
in the Real Property to secure payment to the Lender
of the Loan Obligations.
“
MPCA
” means the
Minnesota Pollution Control Agency of the State of Minnesota.
“
Net Income
” means
income after all operating expenses including salaries and bonuses.
“
Note/Notes
” means
and includes the Construction Note, Term Note, Term Revolving Note, and the
Elevator Revolving Note and any promissory notes executed and delivered to the
Lender by the Borrower pursuant to the terms of this Agreement and any
Supplements as the same may be amended, modified, supplemented, extended or
restated from time to time.
“
Ordinary Trade
Payable Dispute
” means trade accounts payable, in an aggregate amount not
in excess of $50,000.00 with respect to the Borrower, with respect to
which: (a) there exists a
bona
fide
dispute between Borrower and the vendor; (b) the Borrower is
contesting the same in good faith by appropriate proceedings; and (c) the
Borrower has established appropriate reserves on its financial statements.
“
Owner Equity Ratio
”
means Tangible Net Worth divided by total assets, measured on a consolidated
basis.
“
Participation Fee
”
shall have the meaning specified in Section 2.06.
“
Permit Litigation
”
means (i) the dispute initiated by the Minnesota Center for Environmental
Advocacy, Izaak Walton League of America, and Minnesotans for an
Energy-Efficient Economy challenging the MPCA’s issuance of an air quality
emissions permit to the Borrower for the Project as a synthetic minor source
and any amendments thereto; and (ii) the compliance agreement entered into by
and between the MPCA and the Borrower dated effective January 23, 2007,
including any applications for amendments thereto submitted or to be submitted
to the MPCA by the Borrower, including the PSD major source permit application
submitted in August 2007, and any actions taken by the parties in connection
therewith.
“
Person
” means any
individual, corporation, business trust, association, company, partnership,
joint venture, governmental authority, or other entity.
“
Personal Guarantor
”
means Roland Fagen.
“
Personal Property
”
means all buildings, structures, equipment, fixtures, improvements, building
supplies and materials and personal property now or hereafter attached to,
located
9
in, placed in or
necessary to the use of the improvements on the Real Property including, but
without being limited to, all machinery, fixtures, equipment, furnishings, and
appliances, as well as all renewals, replacements, additions, and substitutes
thereof, and all products and proceeds thereof, and including without limitation
all accounts, instruments, chattel paper, other rights to payment, money,
deposit accounts, insurance proceeds and general intangibles of the Borrower,
whether now owned or hereafter acquired.
“
Plans and
Specifications
” means the final plans and specifications for the
construction of the Project, to be prepared by the General Contractor, and
approved by the Lender, and all amendments and modifications thereof approved
by Lender.
“
Preliminary Advance
”
means an Advance for purposes of (i) the acquisition of real property upon
which the Project is to be constructed in an amount not to exceed
$1,440,000.00; (ii) preliminary
excavation costs in an amount not to exceed $1,800,000.00; (iii) the
acquisition of certain real property and improvements located in Lakefield,
Minnesota in an amount not to exceed $1,950,000.00; and (iv) miscellaneous
operating expenses of the Borrower in an amount not to exceed $500,000.00.
“
Program
” means
the funds held program that Lender may offer, in its sole discretion and on
such terms and conditions as Lender may establish from time to time, to permit
the Borrower to make advance conditional payments on eligible loans.
“
Program Account
”
means that account established by the Lender under the Program.
“
Project
” means
any and all buildings, structures, fixtures, and other improvements made to the
Real Property and other uses identified in the Project Sources and Uses
Statement as part of the acquisition and construction of an ethanol production
facility in Heron Lake, Minnesota, for which the Loans to Borrower are being
made hereunder.
“
Project Costs
”
means the total of all costs of acquiring the Real Property and constructing
the Project as identified in the Project Sources and Uses Statement, together
with all Loan and Carrying Charges.
“
Project Sources and
Uses Statement
” means the statement attached hereto as Exhibit B which
identifies the sources and uses of monies in a total amount of
$123,920,000.00 related to the Project.
“
Real Property
”
means that real property located in the County of Jackson, State of Minnesota,
owned by the Borrower, upon which the Project is to be constructed and which is
described in Schedule 3.01(d).
“
Reimbursement
Obligation
” means the obligation of the Borrowers to reimburse the Lender for
any demand for payment or drawing under a Letter of Credit.
10
“
Related Documents
” means and includes without
limitation all promissory notes, credit agreements, loan agreements,
guaranties, security agreements, mortgages, deeds of trust, assignments and all
other instruments, agreements and documents, whether now or hereafter existing,
executed in connection with the Indebtedness.
“
Revolving Loan
” means any revolving loan
provided by the Lender to the Borrower pursuant to the terms and conditions
provided for in this Agreement and in any Revolving Loan Supplement.
“
Revolving Note
” means any promissory note
executed and delivered to the Lender by the Borrower pursuant to the terms and
conditions provided for in this Agreement and any Revolving Loan Supplement.
“
SARA
” means the Superfund Amendment and
Reauthorizations Act of 1986, as amended.
“
Security Agreement
” means and includes,
without limitation, any agreements, promises, covenants, arrangements,
understandings, or other agreements, whether created by law, contract, or
otherwise, which evidence, govern, represent, or create a Security Interest, as
the same has been and may hereafter be amended or otherwise modified.
“
Security Interest
” means and includes without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, assignment of rents, deed of trust, assignment, pledge,
chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional
sale, trust receipt, lien or title retention contract, lease or consignment
intended as a security device, or any other security or lien interest
whatsoever, whether created by law, contract, or otherwise.
“
Subordinated Debt
” means the following
Debt: (i) tax increment financing; (ii)
debt owed the State of Minnesota or its agencies; and (iii) debt owed Federated
Rural Electric Ass’n/USDA; and (iv) other Debt which has been approved by
Lender in writing and subject to a subordination agreement acceptable to Lender
in its sole discretion.
“
Subsidiary Guarantor
” means Lakefield Farmers
Elevator, LLC, a Minnesota limited liability company.
“
Supplement
” has the meaning set forth in
Section 2.01 of this Agreement.
“
Tangible Net Worth
” means the excess of total
assets over total liabilities except Subordinated Debt, total assets and total
liabilities each to be determined in accordance with generally accepted
accounting principles consistent with those applied in the preparation of the
financial statements referred to in Section 5.01(c) for the Borrower,
excluding, however, from the determination of total assets: (i) goodwill, organizational expenses,
research and development expenses, trademarks, trade names, copyrights,
patents, patent applications, licenses and rights in any thereof, and other
similar intangibles; (ii) treasury stock; (iii) securities which are not
readily marketable; (iv) cash held in a sinking or other analogous
11
fund established for the purpose of redemption,
retirement or prepayment of capital stock or Debt; (v) any write-up in the book
value of any asset resulting from a revaluation thereof subsequent to the
Closing Date; (vi) amortized start-up costs; and (vii) any items not included
in clauses (i) through (vi) above which are treated as intangibles in
conformity with generally accepted accounting principles.
“
Tax Distributions
” has the meaning specified
in Section 5.02(b).
“
Term Loan
” means any amortizing loan with a
maturity of greater than one year provided by the Lender to the Borrower
pursuant to the terms and conditions of this Agreement and Third Supplement to
this Agreement.
“
Term Note
” means that certain promissory note
of even date herewith executed and delivered to the Lender by the Borrower in
the amount of $59,583,000.00 and pursuant to the terms and conditions provided
for in the Agreement and the Third Supplement to this Agreement.
“
Term Revolving Loan Commitment
” shall mean the
following:
|
On the Closing
Date
|
|
$
|
5,000,000.00
|
|
|
October 1, 2008
|
|
$
|
4,500,000.00
|
|
|
October 1, 2009
|
|
$
|
4,000,000.00
|
|
|
October 1, 2010
|
|
$
|
3,500,000.00
|
|
|
October 1, 2011
|
|
$
|
3,000,000.00
|
|
“
Term
Revolving Note
” means that certain promissory note of even date herewith
executed and delivered to the Lender by the Borrower in the amount of
$5,000,000.00 and pursuant to the terms and conditions provided for in this
Agreement and the Fourth Supplement to this Agreement.
“
Underwriting Fee
” shall have the meaning
specified in Section 2.06.
“
Working Capital
” means current assets of the
Borrower, including the available commitment under the Term Revolving Loan,
less current liabilities of the Borrower.
Section 1.02.
Accounting Matters
. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles consistently applied, except as otherwise stated herein.
To enable the ready and consistent determination of compliance by the Borrower
with its obligations under this Agreement, the Borrower will not change the
manner in which either the last day of its fiscal year or the last days of the
first three fiscal quarters of its fiscal years is calculated.
Section 1.03.
Construction
. Wherever herein the singular number is used, the
same shall include the plural where appropriate, and words of any gender shall
include each other gender where appropriate. The headings, captions or
arrangements used in any of the Loan Documents are, unless
12
specified otherwise, for convenience only and shall not be deemed to
limit, amplify or modify the terms of the Loan Documents, nor affect the
meaning thereof.
ARTICLE II
AMOUNTS AND TERMS OF THE LOANS
Section 2.01.
Supplements
.
In the event the Borrower desires to borrow from
Lender and Lender is willing to lend to the Borrower, or in the event Lender
and Borrower desire to consolidate any existing loans hereunder, the parties
will enter into a supplement to this Agreement (each supplement, as it may be
amended, modified, supplemented, extended or restated from time to time, a
“
Supplement
”
and, collectively, the
“
Supplements
”
). Each Supplement will set forth
Lender’s commitment to make a Loan to the Borrower, the amount of the Loan(s),
the purpose of the Loan(s), the interest rate or rate options applicable to the
Loan(s), the repayment terms of the Loan(s), and any other terms and conditions
applicable to the Loan(s). Each Supplement will also be accompanied by a Note
of the Borrower setting forth the Borrower’s obligation to make payments of
interest on the unpaid principal balance of the Loan(s), and fees and premiums,
if any, and to repay the principal balance of the Loan(s). Each Loan will be
governed by the terms and conditions contained in this Agreement and in the
Note and the Supplement relating to that Loan.
Section 2.02.
Construction Loan
.
Subject to the terms and conditions of
this Agreement and in reliance upon the representations and warranties set
forth in this Agreement, the Lender has agreed to lend to Borrower and Borrower
has agreed to borrow from Lender $64,583,000.00. Such amount shall be loaned by
Lender pursuant to the terms and conditions set forth in this Agreement and the
First Supplement to this Agreement.
Section 2.03
Term Revolving Loan
.
Subject to the terms and conditions of this Agreement
and in reliance upon the representations and warranties set forth in this
Agreement, the Lender has agreed to lend to Borrower and Borrower has agreed to
borrow from Lender, as of the Closing Date and from time to time thereafter, on
a revolving basis an amount not to exceed the Term Revolving Loan Commitment.
Such amount shall be loaned by Lender pursuant to the terms and conditions set
forth in this Agreement and the Fourth Supplement to this Agreement. Pursuant
to the terms and conditions in this Agreement, the Lender may extend additional
Term Revolving Loans shall be provided by Lender pursuant to the terms and
conditions of a further Term Revolving Loan Supplement.
Section 2.04.
Revolving Line of Credit Loan
.
Subject to the terms and conditions of this Agreement
and in reliance upon the representations and warranties set forth in this
Agreement, the Lender has agreed, as of the Closing Date, to lend to Borrower
and Borrower has agreed to borrow from Lender from time to time on a revolving
basis an amount not to exceed $7,500,000.00. Such amount shall be loaned by
Lender pursuant to the terms and conditions set forth in this Agreement and the
Second Supplement to this Agreement. Pursuant to the terms and conditions in
this Agreement, the Lender may extend additional Revolving Loans to the
Borrower. Any such future Revolving Loans shall be provided by Lender pursuant
to the terms and conditions of a future Revolving Loan Supplement.
13
Section 2.05.
Conversion of
Construction Loan Into Term Loan and Term Revolving Loan
.
Pursuant to the
terms and conditions contained in this Agreement, the Lender shall extend a
Term Loan and Term Revolving Loan to the Borrower on the Closing Date, provided
all of the terms, conditions, warranties, representations, and covenants of the
Borrower set forth in this Agreement, the Third Supplement and the Fourth
Supplement are satisfied.
Any such amount shall be provided by Lender pursuant to the terms and
conditions set forth in this Agreement, the Third Supplement, and the Fourth
Supplement to this Agreement setting forth the terms and conditions of such
term loan,
provided, however
, that (i) all unpaid
principal and all accrued interest on the Term Loan and the Term Revolving Loan
shall be due and payable on the Maturity Date and (ii) the Borrower shall have
the right to convert all or any part of the Term Loan into a fixed rate loan,
subject to the terms and conditions of this Agreement, which shall bear
interest at a rate equal to the most recent ten-year fixed rate bonds sold by
the Federal Farm Credit Banks Funding Corporation prior to the Construction
Loan Maturity Date, plus 300 basis points. Should the Borrower elect such fixed
rate option, such rate of interest shall not be subject to any adjustments
under Section 2.06 of this Agreement.
(a)
Conditions Precedent
. In addition to the terms and conditions
of disbursement set forth in this Agreement and the Disbursing Agreement, the
Lender shall not be obligated to extend a term loan to the Borrower on the
Closing Date unless and until:
(i)
Amount of Term Loan
. The maximum amount of the Term Loan shall
be $64,583,000.00. On the Borrower’s written request on or before the Closing
Date, the Construction Loan may be segmented into two credit facilities: (i) a term revolving loan in an amount not to
exceed $5,000,000.00, with no required amortization; and (ii) a term loan in an
amount not to exceed $59,583,000.00, with a ten (10) year amortization. Both
the term revolving loan and the term loan shall be payable in full on the
Maturity Date;
(ii)
Construction Loan Exceeds Term Loan
. In the event that the amount of the
Construction Loan advanced by Lender exceeds the amount of the term loan to be
made by the Lender, the Borrower shall immediately repay the amount of the
Construction Loan which is not being converted into a term loan;
(iii)
Facility Fee
. The Borrower shall have paid Lender the
Facility Fee which is due pursuant to Section 2.07;
(iv)
Representations and Warranties
. The representations and warranties set
forth in this Agreement, the Second Supplement, the Third Supplement, and the
Fourth Supplement, are true and correct in all material respects as of the
Closing Date, except as disclosed in writing to the Lender, to the same extent
and with the same effect as if made at and as of the date thereof;
(v)
No Defaults
. The Borrower and each of its
subsidiaries are not in default under the terms of this Agreement, the Related
Documents or any other agreement to which the Borrower and each of its
subsidiaries are a party and which relates to the construction or operation of
the Project;
14
(vi)
Government Action
. No license, permit, permission or
authority necessary for the construction or operation of the Project has been
revoked or challenged by or before any Governmental Authority except for the
Permit Litigation; and
(vii)
Marketing Agreements
. The Borrower has executed marketing agreements for
all ethanol and DDGS to be produced at the Project and provided Lender with
collateral assignments of all such agreements in form and content which is
reasonably satisfactory to Lender and its counsel and acknowledged by the
non-Borrower party to all such agreements.
(b)
Excess Cash Flow
.
Such term loan shall require that, beginning with the
first fiscal year end following the Closing Date, and every year thereafter,
and in addition to all other payments of principal and interest required by the
terms of the Third Supplement, an amount equal to 25% of the Borrower’s Excess
Cash Flow for the immediately proceeding fiscal year (the “
Excess Cash
Flow Payment
”),
provided however
,
that the total Excess Cash Flow Payments required hereunder shall not exceed
$2,000,000.00 in any calendar year. All Excess Cash Flow Payments shall be
applied to the reduction of the outstanding principal balance of the Term Loan.
No Excess Cash Flow Payments shall be required during any calendar year should
the Tangible Owner’s Equity be greater than 50% at the end of the immediately
proceeding fiscal year of the Borrower.
Section 2.06.
Adjustments to Interest Rate
. Notwithstanding any other provision of
this Agreement, the Supplements, the Notes, or the Related Documents, the rate
of interest under any Loan which bears interest on a variable rate, shall be
adjusted according to the following schedule should the Owner’s Equity of the
Borrower, measured on a consolidated basis, achieve the levels set forth below:
|
Owner’s Equity
|
|
Interest Rate
|
|
|
|
|
|
Less than 49.99%
|
|
Applicable
LIBOR Rate plus 325 basis points
|
|
|
|
|
|
50.00%—59.99%
|
|
Applicable
LIBOR Rate plus 300 basis points
|
|
|
|
|
|
Greater
Than 60.00%
|
|
Applicable
LIBOR Rate plus 275 basis points
|
Upon delivery of the monthly financial statements and the Compliance
Certificate pursuant to Section 5.01(c)(iii) for each month that
corresponds with each month end, the rate of interest for any month shall
automatically be adjusted in accordance with the Owner’s Equity set forth
therein and the rates set forth above. Such automatic adjustment to the rate of
interest shall take effect as of the first Business Day of the month following
the month in which the Lender received the related Compliance Certificate. The
term “
Adjustment Date
” shall mean each such
Business Day when such rates, margins or fees change pursuant to the
immediately prior sentence or the next following sentence. If the Borrower
fails to deliver such Compliance Certificate which so sets forth the
15
Owner’s Equity within the period of time required by
Section 5.01(c)(iii) hereof or if any Event of Default occurs, the rate of
interest shall automatically be adjusted to a rate equal to the applicable
LIBOR Rate plus 375 basis points, such automatic adjustments: (a) to take effect as of the first
Business Day after the last day on which the Borrower were required to deliver
the applicable Compliance Certificate in accordance with
Section 5.01(c)(iii) hereof or in the case of an Event of Default, on the
date the written notice is given to the Borrower; and (b) to remain in effect
until subsequently adjusted in accordance herewith upon the delivery of such
Compliance Certificate or, in the case of an Event of Default, when such Event
of Default has been cured to the satisfaction of the Lender.
Section 2.07.
Underwriting/Participation/Facility Fees
. The Borrower has paid to the Lender;
the following: (a) an Underwriting Fee
of $75,000.00; and (b) a Participation Fee of
$371,298.00. In addition, the Borrower shall pay to Lender on or before
the Closing Date, and on each anniversary of the Closing Date through the
fourth anniversary, an annual Facility Fee of $20,000.00.
Section 2.08.
Default Interest
. In addition to the rights and remedies
set forth above and notwithstanding any Note:
(i) if the Borrower fails to make any payment to Lender when due
(including, without limitation, any purchase of equity of Lender when
required), then at Lender’s option in each instance, such obligation or payment
shall bear interest from the date due to the date paid at 2% per annum in
excess of the rate of interest that would otherwise be applicable to such
obligation or payment; (ii) upon the occurrence and during the continuance of
an Event of Default beyond any applicable cure period, if any, at Lender’s
option in each instance, the unpaid balances of the Loans shall bear interest
form the date of the Event of Default or such later date as Lender shall elect
at 2% per annum in excess of the rate(s) of interest that would otherwise be in
effect on the Loans under the terms of the applicable Note; (iii) after the
maturity of any Loan, whether by reason of acceleration or otherwise, the
unpaid principal balance of the Loan (including without limitation, principal,
interest, fees and expenses) shall automatically bear interest at 2% per annum
in excess of the rate of interest that would otherwise be in effect on the Loan
under the terms of the applicable Note. Interest payable at the Default Rate
shall be payable from time to time on demand or, if not sooner demanded, on the
last day of each calendar month.
Section 2.09.
Late Charge
.
If any payment of principal or interest due under this
Supplement or the Construction Note is not paid within ten (10) days of the due
date thereof, the Borrower shall, in addition to such amount, pay a late charge
equal to five percent (5%) of the amount of such payment.
Section 2.10.
Prepayment of Term Loan
.
The Borrower may, by notice to the Lender, prepay the
outstanding amount of the Term Loan in whole or in part with accrued interest
to the date of such prepayment on the amount prepaid, without penalty or
premium, except as provided in this Section. In the event any Loan is converted
to a fixed rate loan, the Borrower shall pay the prepayment fee applicable to
that fixed interest rate, if any. Prepayments made by the Borrower under
Section 2.05(b) of this Agreement are not subject to any prepayment penalty.
16
Section 2.11.
Changes in Law Rendering Certain LIBOR Rate Loans
Unlawful
. In
the event that any change in any applicable law (including the adoption of any
new applicable law) or any change in the interpretation of any applicable law
by any judicial, governmental or other regulatory body charged with the
interpretation, implementation or administration thereof, should make it (or in
the good-faith judgment of the Lender should raise a substantial question as to
whether it is) unlawful for the Lender to make, maintain or fund LIBOR Rate
Loans, then: (a) the Lender shall
promptly notify each of the other parties hereto; and (b) the obligation
of the Lender to make LIBOR rate loans of such type shall, upon the
effectiveness of such event, be suspended for the duration of such
unlawfulness. During the period of any suspension, Lender shall make loans to
Borrower that are deemed lawful and that as closely as possible reflect the
terms of this Agreement.
Section 2.12.
Payments and Computations
.
(a)
Method of Payment
. Except as otherwise expressly provided
herein, all payments of principal, interest, and other amounts to be made by
the Borrower under the Loan Documents shall be made to the Lender in U.S.
dollars and in immediately available funds, without set-off, deduction, or
counterclaim, not later than 2:00 P.M. (Minneapolis, Minnesota time) on
the date on which such payment shall become due (each such payment made after
such time on such due date to be deemed to have been made on the next
succeeding Business Day). The Borrower shall, at the time of making each such
payment, specify to the Lender the sums payable under the Loan Documents to
which such payment is to be applied and in the event that the Borrower fail to
so specify or if an Event of Default exists, the Lender may apply such payment
and any proceeds of any Collateral to the Loan Obligations in such order and
manner as it may elect in its sole discretion.
(b)
Application of Funds
.
Lender may apply all payments received by it to the
Loan Obligations in such order and manner as Lender may elect in its sole
discretion; provided that any payments received from any guarantor or from any
disposition of any collateral provided by such guarantor shall only be applied
against obligations guaranteed by such guarantor.
(c)
Payments on a Non-Business
Day
. Whenever
any payment under any Loan Document shall be stated to be due on a day that is
not a Business Day, such payment may be made on the next succeeding Business
Day, and such extension of time shall in such case be included in the
computation of the payment of interest and fees, as the case may be.
(d)
Proceeds of Collateral
. All proceeds received by the Lender
from the sale or other liquidation of the Collateral when an Event of Default
exists shall first be applied as payment of the accrued and unpaid fees and
expenses of the Lender hereunder, including, without limitation, under Section
7.04 and then to all other unpaid or unreimbursed Loan Obligations (including
reasonable attorneys’ fees and expenses) owing to the Lender and then any
remaining amount of such proceeds shall be applied to the unpaid amounts of
Loan Obligations, until all the Loan Obligations have been paid and satisfied
in full or cash collateralized. After all the Loan Obligations (including
without limitation, all contingent Loan Obligations) have been paid and
satisfied in full, all Commitments terminated and all other obligations of the
Lender to the Borrower otherwise satisfied, any proceeds of Collateral shall be
delivered to the Person entitled thereto as directed by the Borrower or as
otherwise determined by applicable law or applicable court order.
17
(e)
Computations
. Except as expressly provided otherwise
herein, all computations of interest and fees shall be made on the basis of
actual number of days lapsed over a year of 365 or 366 days, as appropriate.
Interest shall accrue from and include the date of borrowing, but exclude the
date of payment.
Section 2.13.
Maximum Amount Limitation
. Anything in this Agreement, any
Supplement, any Note, or the other Loan Documents to the contrary
notwithstanding, Borrower shall not be required to pay unearned interest on any
Note or any of the Loan Obligations, or ever be required to pay interest on any
Note or any of the Loan Obligations at a rate in excess of the Maximum Rate, if
any. If the effective rate of interest which would otherwise be payable under
this Agreement, any Note or any of the other Loan Documents would exceed the
Maximum Rate, if any, then the rate of interest which would otherwise be
contracted for, charged, or received under this Agreement, any Note or any of
the other Loan Documents shall be reduced to the Maximum Rate, if any. If any
unearned interest or discount or property that is deemed to constitute interest
(including, without limitation, to the extent that any of the fees payable by Borrower
for the Loan Obligations to the Lender under this Agreement, any Supplement,
any Note, or any of the other Loan Documents are deemed to constitute interest)
is contracted for, charged, or received in excess of the Maximum Rate, if any,
then such interest in excess of the Maximum Rate shall be deemed a mistake and
canceled, shall not be collected or collectible, and if paid nonetheless,
shall, at the option of the holder of such Note, be either refunded to the
Borrower, or credited on the principal of such Note. It is further agreed that,
without limitation of the foregoing and to the extent permitted by applicable
law, all calculations of the rate of interest or discount contracted for,
charged or received by the Lender under its Note, or under any of the Loan
Documents, that are made for the purpose of determining whether such rate
exceeds the Maximum Rate applicable to the Lender, if any, shall be made, to
the extent permitted by applicable laws (now or hereafter enacted), by
amortizing, prorating and spreading during the period of the full terms of the
Advances evidenced by the Notes, and any renewals thereof all interest at any
time contracted for, charged or received by Lender in connection therewith.
This Section 2.11 shall control every other provision of all agreements
among the parties to this Agreement pertaining to the transactions contemplated
by or contained in the Loan Documents, and the terms of this Section 2.11
shall be deemed to be incorporated in every Loan Document and communication related
thereto.
Section 2.14.
Lender Records
. All advances and all payments or prepayments made
thereunder on account of principal or interest may be evidenced by the Lender
in accordance with its usual practice in an account or accounts evidencing such
advances and all payments or prepayments thereunder from time to time and the
amounts of principal and interest payable and paid from time to time
thereunder; in any legal action or proceeding in respect of the Notes, the
entries made in such account or accounts shall be
prima
facie
evidence of the existence and amounts of all advances and all payments or
prepayments made thereunder on account of principal or interest. Lender shall
provide monthly statements of such entries to Borrower for the purpose of confirming
the accuracy of such entries.
18
Section 2.15.
Loan Payments
. During the continuance of an Event of Default, the
Lender may deduct any obligations due or any other amounts due and payable by
the Borrower under the Loan Documents from any accounts maintained with the
Lender.
Section 2.16.
Purchase of Equity Interests in AgStar Financial
Services, PCA
.
In addition to (and not in lieu of) the other amounts payable by Borrower under
this Agreement or any Supplement, Borrower shall purchase $1,000.00 of equity
interests in AgStar Financial Services, PCA. The purchase price for the equity
interests shall be payable in full on or prior to the date hereof. Such
purchases of equity interests shall comply with AgStar Financial Services,
PCA’s respective by-laws and capital plans applicable to borrowers generally.
Borrower hereby acknowledges receipt of the following information and materials
pertaining to AgStar Financial Services, PCA prior to the execution of this
Agreement: (i) copies of the by-laws of AgStar Financial Services, PCA; (ii) a
written description of the terms and conditions under which the equity
interests are issued; (iii) a copy of the most recent annual reports of AgStar
Financial Services, PCA; and (iv) if more recent than the latest annual
reports, the latest quarterly reports of AgStar Financial Services, PCA. AgStar
Financial Services, PCA shall possess a statutory security interest in its
equity interests. AgStar Financial Services, PCA reserves the right to sell
participations on a non-patronage basis.
Borrower acknowledges and agrees that: (a) only the portions of the Loans provided
to Borrower by AgStar Financial Services, PCA are entitled to patronage
distributions in accordance with the bylaws of AgStar Financial Services, PCA
and its practices and procedures; and (b) any patronage or similar payments to
which Borrower is entitled as a result of its ownership of the equity interests
in AgStar Financial Services, PCA will not be based on any of the Loans not
belonging to AgStar Financial Services, PCA or in which AgStar Financial
Services, PCA has granted a participation interest at any time.
Section 2.17.
Compensation
.
Upon the request of the Lender, the Borrower shall pay
to the Lender such amount or amounts as shall be sufficient (in the reasonable
opinion of the Lender) to compensate it for any loss, cost, or expense
(excluding loss of anticipated profits incurred by it) as a result of: (i) any
payment, prepayment, or conversion of a LIBOR rate loan for any reason on a
date other than the last day of the Interest Period for such Loan; or (ii) any
failure by the Borrower for any reason (including, without limitation, the
failure of any condition precedent specified in Section 3.01 to be satisfied)
to borrow, extend, or prepay a LIBOR rate loan on the date for such borrowing,
extension, or prepayment specified in the relevant notice of borrowing,
extension or prepayment under this Agreement.
Such indemnification may include any amount equal to
the excess, if any, of: (a) the amount
of interest which would have accrued on the amount so prepaid, or not so
borrowed, converted or extended, for the period from the date of such
prepayment or of such failure to borrower, convert or extend to the last day of
the applicable Interest Period (or in the case of a failure to borrow, convert
or extend, the Interest Period that would have commenced on the date of such
failure) in each case at the applicable rate of interest for such loan as
provided for herein; over (b) the amount of interest (as reasonably determined
by the Lender) which would have accrued to the Lender on such amount by placing
such amount on deposit for a comparable period with leading banks in the
interbank LIBOR
19
market. The covenants of the Borrower set forth in this Section 2.16
shall survive the repayment of the Loans and other obligations under the Loan
Documents hereunder.
ARTICLE III.
CONDITIONS PRECEDENT
Section 3.01.
Conditions Precedent to Preliminary Advances
. The effectiveness of this Agreement and
obligations of the Lender to make any Advance, including any Preliminary
Advance except for any fees or advances required to be paid by the Borrower
under Section 7.04, are subject to the conditions precedent that the Lender
shall have received the following, in form and substance satisfactory to the
Lender:
(a)
This Agreement, duly executed by the
Borrower and the Lender;
(b)
The Supplements, duly executed by the
Borrower and the Lender;
(c)
The Notes, duly executed by the Borrower;
(d)
The Third Amended and Restated Mortgage,
fully executed and notarized, to secure the Loans encumbering on a first Lien
basis the fee interest and/or leasehold interest of the Borrower in the Real
Property and the fixtures thereon described in Schedule 3.01(d);
(e)
A Security Agreement duly executed by the
Borrower and in a form as provided by the Lender by which security agreement
the Lender is granted a security interest by the Borrower in the Collateral;
(f)
A copy of the Construction Contract(s)
and a complete set of the Plans and Specifications, together with copies of all
permits and government approvals relating to the construction and use of the
Project;
(g)
An assignment of contract for each of the
Construction Contracts and the Plans and Specifications, duly executed by the
Borrower and pursuant to which the Borrower shall have assigned to the Lender
all of the Borrower’s right, title and interest in and to each such Construction
Contract, and which assignment shall have been consented to and certified in
writing by the other party(ies) to each such Construction Contract;
(h)
Copies of all Material Contracts between
Borrower and third parties used in the normal operations of Borrower, including
but not limited to management agreements, marketing agreements, and corn
delivery agreements;
(i)
Assignments of the Material Contracts
between Borrower, duly executed by the Borrower and pursuant to which the
Borrower shall have assigned to the Lender all of the Borrower’s right, title
and interest in and to each such contracts, and which assignment shall have
been consented to and certified in writing by the other party(ies) to each such
contract;
20
(j)
Financing Statements in form and content
satisfactory to the Lender and in proper form under the Uniform Commercial Code
of all jurisdictions as may be necessary or, in the opinion of the Lender,
desirable to perfect the security interests created by the Security Agreement;
(k)
Copies of UCC, tax and judgment lien
search reports listing all financing statements and other encumbrances which
name the Borrower (under its present name and any previous name) and which are
filed in the jurisdictions in which the Borrower is located, organized or
maintains collateral, together with copies of such financing statements (none
of which shall cover the collateral purported to be covered by the Security
Agreement);
(l)
Evidence that all other actions necessary
or, in the opinion of the Lender, desirable to enable the Lender to perfect and
protect the security interests created by the Security Agreement have been
taken;
(m)
An ALTA mortgagee title insurance policy
issued by a title insurance company acceptable to Lender, with respect to the
Real Property, assuring the Lender that the Mortgage creates a valid and
enforceable encumbrance on the Real Property, free and clear of all defects and
encumbrances except Permitted Liens and containing: (i) a comprehensive endorsement (ALTA form
9); (ii) a zoning endorsement (ALTA form 3.1) specifying an ethanol production
facility as a permitted use for all of the parcels included in the Real
Property; and (iii) such endorsements as the Lender shall reasonably require.
All such title insurance policies shall be in form and substance reasonably
satisfactory to the Lender and shall provide for affirmative insurance and such
reinsurance as the Lender may reasonably request, all of the foregoing in form
and substance reasonably satisfactory to the Lender;
(n)
Maps or plats of the Real Property
certified to the Lender and the title insurance company issuing the policy
referred to in Subsection 3.01(n) (the “
Title Insurance Company
”)
in a manner reasonably satisfactory to each of the Lender and the Title
Insurance Company, dated a date reasonably satisfactory to each of the Lender
and the Title Insurance Company by an independent professional licensed land
surveyor, which maps or plats and the surveys on which they are based shall be
sufficient to delete any standard printed survey exception contained in the
applicable title policy and be made in accordance with the Minimum Standard
Detail Requirements for Land Title Surveys jointly established and adopted by
the American Land Title Association and the American Congress on Surveying and
Mapping in 1992, and, without limiting the generality of the foregoing, there
shall be surveyed and shown on such maps, plats or surveys the following: (i) the locations on such sites of all
the buildings, structures and other improvements and the established building
setback lines; (ii) the lines of streets abutting the sites and width
thereof; (iii) all access and other easements appurtenant to the sites
necessary to use the sites; (iv) all roadways, paths, driveways,
easements, encroachments and overhanging projections and similar encumbrances
affecting the site, whether recorded, apparent from a physical inspection of
the sites or otherwise known to the surveyor; (v) any encroachments on any
adjoining property by the building structures and improvements on the sites;
and (vi) if the site is described as being on a filed map, a legend
relating the survey to said map;
21
(o)
Evidence as to: (i) whether any portion of the Real
Property is in an area designated by the Federal Emergency Management Agency as
having special flood or mud slide hazards (a “
Flood Hazard
Property
”); and (ii) if any portion of the Real Property is a
Flood Hazard Property: (A) whether
the community in which such Real Property is located is participating in the
National Flood Insurance Program; (B) the Borrower’s written
acknowledgment of receipt of written notification from the Lender (1) as
to the fact that such Real Property is a Flood Hazard Property and (2) as
to whether the community in which each such Flood Hazard Property is located is
participating in the National Flood Insurance Program; and (C) copies of
insurance policies or certificates of insurance of the Borrower evidencing
flood insurance satisfactory to the Lender and naming the Lender as sole loss
payee on behalf of the Lender;
(p)
Evidence reasonably satisfactory to the Lender that the Real Property and
the contemplated use of the Real Property, are in compliance in all material
respects with all applicable Laws including without limitation health and
Environmental Laws, including, but not limited to all concentrated animal
feedlot operations rules and regulations, erosion control ordinances, storm
drainage control laws, doing business and/or licensing laws, zoning laws (the
evidence submitted as to zoning should include the zoning designation made for
the Real Property, the permitted uses of the Real Property under such zoning
designation and zoning requirements as to parking, lot size, ingress, egress
and building setbacks) and laws regarding access and facilities for disabled
persons including, but not limited to, the Federal Architectural Barriers Act,
the Fair Housing Amendments Act of 1988, the Rehabilitation Act of 1973 and the
Americans with Disabilities Act of 1990;
(q)
Certificates of the secretary of the
Borrower and the Guarantor together with true and correct copies of the
following: (i) the Articles of
Organization of the Borrower and Guarantor, including all amendments thereto,
certified by the Office of the Secretary of State of the state of its
incorporation and dated within 30 days prior to the date hereof;
(ii) the Operating Agreements of the Borrower and the Guarantor, including
all amendments thereto; (iii) the resolutions of the Board of Governors of
the Borrower and the Guarantor authorizing the execution, delivery and
performance of this Agreement, the other Loan Documents, and all documentation
executed and delivered in connection therewith to which the Borrower is a
party; (iv) certificates of the appropriate government officials of the
state of organization of the Borrower and the Guarantor as to their existence
and good standing, and certificates of the appropriate government officials in
each state where each corporate Borrower and Guarantor does business and where
failure to qualify as a foreign corporation would have a material adverse
effect on the business and financial condition of the Borrower and Guarantor,
as to their good standing and due qualification to do business in such state,
each dated within 30 days prior to the date hereof; and (v) the names of
the officers of the Borrower and Guarantor authorized to sign this Agreement
and the other Loan Documents to be executed by each corporate Borrower and
Guarantor, together with a sample of the true signature of each such officer;
(r)
Legal opinion of Lindquist & Vennum
P.L.L.P., legal counsel for the Borrower, in the form attached hereto as
“Exhibit C”;
(s)
Evidence the Facility Fee due pursuant to
Section 2.07 and the costs and expenses (including, without limitation,
attorney’s fees) referred to in Section 7.04, to the extent incurred and
invoiced, shall have been paid in full;
22
(t)
The results of the Lender’s inspection of
the Collateral, and the Lender’s receipt of an appraisal of the Collateral
acceptable to Lender in its sole discretion;
(u)
A Phase I Environmental Assessment in
form and substance acceptable to the Lender;
(v)
The Borrower shall have provided to
Lender evidence of ownership indicating that at least 50% of the owners of
Borrower are eligible borrowers;
(w)
A Commodity Account Control Agreement for
all commodity accounts kept and maintained by the Borrower or any of its
Subsidiaries;
(x)
A Deposit Account Control Agreement for
all deposit accounts kept and maintained by the Borrower or any of its
Subsidiaries;
(y)
The Subsidiary Guarantor shall have
executed and delivered to Lender the Guaranty pursuant to which the Subsidiary
Guarantor shall have guaranteed the full and prompt payment and performance by
Borrower of the Notes, Indebtedness, the Supplements and this Agreement;
(z)
The Subsidiary Guarantor shall have
executed and delivered to the Lender a Security Agreement in all of its assets
to secure its guaranty;
(aa)
Financing Statements in form and content
satisfactory to the Lender and in proper form under the Uniform Commercial Code
of all jurisdictions as may be necessary or, in the opinion of the Lender,
desirable to perfect the security interests created by the Security Agreement
of the Subsidiary Guarantor;
(bb)
The Subsidiary Guarantor shall have
executed and delivered to the Lender a Third Amended and Restated Mortgage in
all of its real property to secure its guaranty;
(cc)
The Personal Guarantor shall have
executed and delivered to the Lender a Guaranty pursuant to which the Personal
Guarantor shall have guaranteed $3,740,000.00 of the Borrower’s Indebtedness
provided that the execution and delivery of the Guaranty by the Personal
Guarantor shall not be a condition precedent to any Advance following the
termination of that Guaranty in accordance with the terms thereof.
(dd)
Evidence that the insurance required by
Sections 5.01(j) and 5.01(r)(xii) has been obtained by the Borrower; and
(ee)
An assignment of the Borrower’s business
interruption insurance policy, duly executed by the Borrower and pursuant to
which the Borrower shall have assigned to the Lender all of the Borrower’s
right, title and interest in and to it’s business interruption insurance
policy, and which assignment shall have been consented to and certified in
writing by the other party(ies) to the insurance policy.
23
Section 3.02
Conditions Precedent to Construction Advances
The effectiveness of this Agreement and
obligations of the Lender to make any Construction Advance are subject to the
conditions precedent that the Lender shall have received the following, in form
and substance satisfactory to the Lender:
(a)
The Participation Fee due pursuant to
Section 2.06 has been paid;
(b)
The Borrower shall have ordered the
General Contractor to begin construction of the Project, and construction shall
have commenced;
(c)
A schedule, certified by Borrower as
accurate and complete, setting forth:
(i) the necessary licenses, permits and consents required by applicable
federal, state, and local governmental entities required for the lawful construction
and operation of the Project; and (ii) the deadlines to obtain such licenses,
permits and consents so that the completion of the Project occurs as scheduled;
(d)
Lender shall have received in form and
substance acceptable to Lender, an agreement with an Inspecting Engineer of
recognized standing and acceptable to Lender, by which agreement such
Inspecting Engineer agrees to assist Lender in its inspection of the Project
during construction, review and approve requests for Advances on the
Construction Loan on behalf of Lender, and provide such additional services as
Lender may reasonably require at the sole expense of Borrower; and
(e)
The Borrower shall have provided
commitment to the Lender of its Borrower’s Equity.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
Section 4.01
Representations and Warranties of the Borrower
. The Borrower and each of its
subsidiaries represent and warrant as follows:
(a)
Borrower
. The Borrower and each of its
subsidiaries are limited liability companies duly organized and validly
existing and in good standing under the laws of the State of Minnesota and are
qualified to do business in all jurisdictions in which the nature of their
businesses make such qualification necessary and where failure to so qualify
would have a Material Adverse Effect on their respective financial conditions
or operations. Except for Permit Litigation, the Borrower and each of its
subsidiaries have the power and authority to own and operate their assets and
to carry on their business and to execute, deliver, and perform their respective
obligations under the Loan Documents to which they may become a party. There
are no outstanding subscriptions, options, warrants, calls, or rights
(including preemptive rights) to acquire, and no outstanding securities or
instruments convertible into, membership interests (units) of the Borrower or
any of its subsidiaries, except for those transactions set forth on Schedule
4.01(a);
24
(b)
The Loan Documents
. The execution, delivery and performance
by the Borrower and the Subsidiary Guarantor of the Loan Documents are within
their respective powers, have been duly authorized by all necessary action, do
not contravene: (i) the articles or
organization or operating agreements of either the Borrower or the Subsidiary
Guarantor; or (ii) any law or any contractual restriction binding on or
affecting the Borrower or the Subsidiary Guarantor, and do not result in or
require the creation of any lien, security interest or other charge or
encumbrance (other than pursuant to the terms thereof) upon or with respect to
any of their respective properties;
(c)
Governmental Approvals
. Except for (i) the Permit Litigation;
(ii) the authorizations required under the Impound Agreement; (iii) the
outstanding permits per the schedule provided under Section 3.02(c) of this
Agreement; and (iv) the registration of the Borrower’s Class A Units pursuant
to Section 12(g) of the Securities Exchange Act of 1934 and regulations
promulgated thereunder relating thereto, no consent, permission, authorization,
order or license of any Governmental Authority or of any party to any agreement
to which any of the Borrower or any of its subsidiaries is a party or by which
they or any of their respective property may be bound or affected, is necessary
in connection with the project, acquisition or other activity being financed by
this Agreement, the execution, delivery, performance or enforcement of the Loan
Documents or the creation and perfection of the liens and security interest
granted thereby, except as such have been obtained and are in full force and
effect or which are required in connection with the exercise of remedies
hereunder;
(d)
Enforceability
. This Agreement is, and each other Loan
Document to which the Borrower or the Subsidiary Guarantor is a party when
delivered will be, legal, valid and binding obligations of the Borrower or the
Subsidiary Guarantor enforceable against the Borrower or the Subsidiary
Guarantor in accordance with their respective terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws
affecting the enforcement of creditor’s rights generally and by general
principles of equity;
(e)
Financial Condition and
Operations
.
The balance sheets of the Borrower on a consolidated basis with each of its
subsidiaries, as of October 31, 2006, and the related statements of income and,
with respect to the period ended October 31, 2006, the related statement of
cash flow of the Borrower for the fiscal period then ended, copies of which
have been furnished to the Lender, fairly present in all material respects the
financial condition of the Borrower as at such date and the results of the
operations of the Borrower for the period ended on such dates, all in
accordance with generally accepted accounting principles, except for unaudited
statements, consistently applied, and since October 31, 2006, there has been no
material adverse change in such condition or operations, except for the Permit
Litigation, the outstanding licenses, permits and consents per the schedule
provided under Section 3.02(c) and outstanding claims, if any, that Borrower
may have against Fagen, Inc., under the Design – Build Contract between
Borrower and Fagen, Inc.;
(f)
Litigation
. Except as described on Schedule 4.01(f),
there is no pending or threatened action or proceeding affecting the Borrower
or any of its subsidiaries or the transactions contemplated hereby before any
court, governmental agency or arbitrator, which may materially adversely affect
the financial condition or operations of the Borrower. As of the Closing Date,
there are no outstanding judgments against the Borrower or any of its
subsidiaries;
25
(g)
Use of Proceeds of
Advances, etc
.
(i) No proceeds of the Loans will be used to acquire any security in any
transaction which is subject to Sections 13 and 14 of the Securities
Exchange Act of 1934 (provided, however, that this provision shall not prohibit
Borrower from investing in certain value added cooperatives for the purposes of
carrying out their overall business operations); (ii) the Borrower and any of
its subsidiaries are not engaged in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of
Regulation U issued by the Board of Governors of the Federal Reserve
System); and (iii) no proceeds of the Loans will be used to purchase or
carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock;
(h)
Liens
. There is no lien, security interest or
other charge or encumbrance, and no other type of preferential arrangement,
upon or with respect to any of the properties or income of the Borrower or any
of its subsidiaries, which secures Debt of any Person, except as permitted by
Section 5.02(a) and liens created by the Loan Documents;
(i)
Taxes
.
Each of the Borrower and its subsidiaries have filed
or caused to be filed all federal, state and local tax returns that are
required to be filed and have paid all other taxes, assessments, and
governmental charges or levies upon it and its property, income, profits and
assets which are due and payable, except where the payment of such tax,
assessment, government charge or levy is being contested in good faith and by
appropriate proceedings and adequate reserves in compliance with GAAP have been
set aside on the Borrower’s or such subsidiary’s books therefore;
(j)
Solvency
. As of and from and after the date of
this Agreement, the Borrower:
(i) owns and will own assets the fair saleable value of which are:
(A) greater than the total amount of liabilities (including contingent
liabilities); and (B) greater than the amount that will be required to pay
the probable liabilities of its then existing debts as they become absolute and
matured considering all financing alternatives and potential asset sales
reasonably available to it; (ii) has capital that is not unreasonably
small in relation to its business as presently conducted or any contemplated or
undertaken transaction; and (iii) does not intend to incur and does not
believe that it will incur debts beyond its ability to pay such debts as they
become due;
(k)
Location of Inventory and
Farm Products; Third Parties in Possession; Crops
. The inventory and farm products pledged
as collateral under the Security Agreement are located at the places (or, as
applicable, jurisdictions) specified in Schedule 4.01(k) for the Borrower
and its subsidiaries, except to the extent any such inventory and farm products
are in transit. Schedule 4.01(k) correctly identifies, as of the date
hereof, the landlords or mortgagees, if any, of each of its locations
identified in Schedule 4.01(k) currently leased or owned by the Borrower
or its subsidiaries. Except for the Persons identified on
Schedule 4.01(k), no Person other than the Borrower or its subsidiaries
and the Lender has possession of any of the Collateral. Except as described in
above, none of its Collateral has been located in any location within the past
four months other than as set forth on Schedule 4.01(k) for the Borrower
and its subsidiaries;
(l)
Office Locations;
Fictitious Names; Predecessor Companies; Tax I.D. Number
. Each of the Borrower’s and the
Subsidiary Guarantor’s chief places of business, chief executive offices, and
jurisdiction of organization is located at the place identified for the
Borrower
26
and its subsidiary on Schedule 4.01(l). Within the last four
months neither the Borrower or any of its subsidiaries has had any other chief
place of business, chief executive office, or jurisdiction of organization.
Schedule 4.01 (l) also sets forth all other places where the Borrower and
the Subsidiary Guarantor keep their books and records and all other locations where
the Borrower and the Subsidiary Guarantor have a place of business. Neither the
Borrower or the Subsidiary Guarantor does business nor has the Borrower or the
Subsidiary Guarantor done business during the past five (5) years under
any trade-name or fictitious business name except as disclosed on
Schedule 4.01(l). Schedule 4.01(l) sets forth an accurate list of all
names of all predecessor companies of the Borrower and the Subsidiary Guarantor
including the names of any entities it acquired (by stock purchase, asset
purchase, merger or otherwise) and the chief place of business and chief
executive office of each such predecessor company. For purposes of the
foregoing, a “predecessor company” shall mean any Person whose assets or equity
interests are acquired by the Borrower or any of its subsidiaries or who was
merged with or into the Borrower or any of its subsidiaries within the last
four months prior to the date hereof. The Borrower’s and the Subsidiary
Guarantor’s United States Federal Income Tax I.D. Numbers and state
organizational identification numbers are identified on Schedule 4.01(l);
(m)
Title to Properties
.
Each of the Borrower and its subsidiaries have such
title or leasehold interest in and to the Real Property owned or leased by them
as is necessary or desirable to the conduct of their business and valid and
legal title or leasehold interest in and to all of their Personal Property,
including those reflected on the financial statements of the Borrower and it
subsidiaries previously delivered to Lender, except those which have been
disposed of by the Borrower and its subsidiaries subsequent to the date of such
delivered financial statements which dispositions have been in the ordinary
course of business or as otherwise expressly permitted hereunder;
(n)
Disclosure
. All factual information furnished by or
on behalf of the Borrower or its subsidiaries in writing to the Lender
(including, without limitation, all factual information contained in the Loan
Documents) for purposes of or in connection with this Agreement, the other Loan
Documents or any transaction contemplated herein or therein is, and all other
such factual information hereafter furnished by or on behalf of the Borrower or
its subsidiaries to the Lender, will be true and accurate in all material
respects on the date as of which such information is dated or certified and not
incomplete by omitting to state any fact necessary to make such information not
misleading in any material respect at such time in light of the circumstances under
which such information was provided;
(o)
Operation of Business
. Except for the Permit Litigation, the
outstanding licenses, permits and consents per the schedule provided under
Section 3.02(c) and the registration of Borrower’s Class A Units under Section
12(g) of the Securities Exchange Act of 1934, the Borrower and each of its
subsidiaries possess all licenses, permits, franchises, patents, copyrights,
trademarks, and tradenames, or rights thereto, necessary to conduct their
businesses substantially as now conducted and will obtain all such licenses,
permits, franchises, patents, copyrights, trademarks, and tradenames, or rights
thereto necessary to conduct its business as presently proposed to be conducted
except those that the failure to so possess could not reasonably be expected to
have a Material Adverse Effect on its financial condition or operations, and
the Borrower and its subsidiaries are not
27
in violation of any valid rights of others with respect to any of the
foregoing except violations that could not reasonably be expected to have such
a Material Adverse Effect;
(p)
Intellectual Property
. The Borrower and each of its
subsidiaries owns, or has the legal right to use, all patents, trademarks,
tradenames, copyrights, technology, know-how and processes (the “
Intellectual Property
”) necessary for them to conduct their
businesses as currently conducted except for those the failure to own or have
such legal right to use could not reasonably be expected to have a Material
Adverse Effect. As of the Closing Date, set forth in Schedule 4.01(p) is a list
of all Intellectual Property registered with the United States Copyright Office
or the United States Patent and Trademark Office and owned by the Borrower and
each of its subsidiaries or that the Borrower and its subsidiaries have the
right to use. Except as provided in Schedule 4.01(p), no claim has been
asserted and is pending by any Person challenging or questioning the use of any
such Intellectual Property or the validity or effectiveness of any such
Intellectual Property, nor does the Borrower or any of its subsidiaries know of
any such claim, and, to the knowledge of the Borrower and its subsidiaries, the
use of such Intellectual Property by the Borrower or its subsidiaries does not
infringe on the rights of any Person, except for such claims and infringements
that, in the aggregate, could not reasonably be expected to have a Material
Adverse Effect;
(q)
Employee Benefit Plans
.
Each of the Borrower and its subsidiaries are in
compliance in all material respects with the applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended, and the
regulations and published interpretations thereunder, the failure to comply
with which could have a Material Adverse Effect on the Borrower or any of its
subsidiaries;
(r)
Investment Company Act
. The Borrower and its subsidiaries are
not required to be registered as an “investment company” within the meaning of
the Investment Company Act of 1940, as amended;
(s)
Compliance with Laws
.
Each of the Borrower and its subsidiaries are in
compliance in all material respects with all laws, rules, regulations,
ordinances, codes, orders, and the like, the failure to comply with which could
have a Material Adverse Effect on any of the Borrower or its subsidiaries;
(t)
Environmental Compliance
. Borrower and each of its subsidiaries,
except as set forth in Schedule 4.01(t), are in material compliance with all
applicable Environmental Laws; and
(u)
Material Change
.
Except as previously disclosed in writing to the
Lender, each of the Borrower and its subsidiaries have performed all of their
material obligations, other than those obligations for which performance is not
yet due, under all Material Contracts and, to the best knowledge of the
Borrower or its subsidiaries, each other party thereto is in compliance with
each such Material Contract. Each such Material Contract is in full force and
effect in accordance with the terms thereof. Each of the Borrower and its
subsidiaries has made available a true and complete copy of each such Material
Contract for inspection by Lender.
28
ARTICLE V.
COVENANTS OF THE BORROWER
Section 5.01.
Affirmative Covenants
.
So long as any
Loan Obligations remain unpaid or the Lender shall have any commitment
hereunder, the Borrower and each of its subsidiaries will, unless the Lender
shall otherwise consent in advance in writing:
(a)
Compliance
with Laws, etc
. Comply in
all material respects with all applicable laws, rules, regulations and orders,
such compliance to include, without limitation, (i) all applicable zoning
and land use laws; (ii) all employee benefit and Environmental Laws, and (iii) paying
before the same become delinquent all taxes, assessments and governmental
charges imposed upon it or upon its property except to the extent contested in
good faith;
(b)
Visitation
Rights; Field Examination
. At any reasonable time and from time to time,
permit the Lender or representatives, to
(i) examine and make copies of and abstracts from the records and books of
account of the Borrower and each of its subsidiaries, and (ii) enter onto
the property of the Borrower and each of its subsidiaries to conduct
unannounced field examinations and collateral inspections, with such frequency
as Lender in its sole discretion may deem appropriate, and (iii) discuss
the affairs, finances, and accounts of the Borrower and each of its
subsidiaries with any of Borrower’s and its subsidiaries officers or
directors. Borrower and any of its
subsidiaries consent to and authorize Lender to enter onto the property of
Borrower or any of its subsidiaries for purposes of conducting the
examinations, inspections and discussions provided above. Upon and during the occurrence of an Event of
Default or in the event that there are deemed by the Lender to be any material
inconsistencies and/or material noncompliance with respect to any financial or
other reporting on the part of the Borrower or any of its subsidiaries, any and
all visits and inspections deemed necessary or desirable on account of such
Event of Default, inconsistency and/or noncompliance shall be at the expense of
the Borrower. In addition to the
foregoing, at any reasonable time and from time to time, the Borrower and its
subsidiaries also shall permit the Lender or representatives thereof, at the
expense of the Lender, to examine and make copies of and abstracts from the
records and books of account of, and visit the properties of, the Borrower or
its subsidiaries, and to discuss the affairs, finances and accounts of the
Borrower or its subsidiaries with any of their respective officers or
directors;
(c)
Reporting
Requirements
. Furnish to
the Lender:
(i)
As soon as
available, but in no event later than 120 days after the end of each fiscal
year of the Borrower occurring during the term hereof, annual consolidated
financial statements of the Borrower, prepared in accordance with GAAP
consistently applied and in a format that demonstrates any accounting or
formatting change that may be required by the various jurisdictions in which
the business of the Borrower is conducted (to the extent not inconsistent with
GAAP). Such financial statements
shall: (i) be audited by
independent certified public accountants selected by the Borrower and
reasonably acceptable to Lender; (ii) be accompanied by a report of such
accountants containing a certified opinion, without qualification, thereon
reasonably acceptable to Lender; (iii) be prepared in reasonable detail,
and in comparative form; and (iv) include a balance
29
sheet, a statement of income, a statement of stockholders’, members’ or
partner’s equity, a statement of cash flows, and all notes and schedules
relating thereto and any management letter;
(ii)
Beginning with
the first (1
st
) month following the Closing Date, as soon as
available and in any event within 30 days after the end of each month,
consolidated balance sheets of the Borrower as of the end of such month and
consolidated statement of income of the Borrower for the period commencing at
the end of the previous fiscal year and ending with the end of such month,
certified by an authorized officer of the Borrower;
(iii)
As soon as available but in no event later than 30
days after the end of each of the first three fiscal quarters of each fiscal
year of the Borrower occurring during the term hereof, unaudited quarterly
consolidated financial statements of the Borrower, in each case prepared in
accordance with GAAP consistently applied (except for the omission of footnotes
and for the effect of normal year-end audit adjustments) and in a format that
demonstrates any accounting or formatting change that may be required by
various jurisdictions in which the business of the Borrower is conducted (to
the extent not inconsistent with GAAP).
Each of such financial statements shall (i) be prepared in
reasonable detail and in comparative form, including a comparison of actual
performance to the budget for such quarter and year-to-date, delivered to
Lender under Subsection 5.01(c)(vi) below, and (ii) include a balance
sheet, a statement of income for such quarter and for the period year-to-date,
and such other quarterly statements as Lender may specifically request which
quarterly statements shall include any and all supplements thereto.
Such quarterly statements shall be
certified by an authorized officer of the Borrower,
and be
accompanied
by a Compliance Certificate which: (A) states that no Event of Default,
and no event or condition that but for the passage of time, the giving of
notice or both would constitute an Event of Default, has occurred or is in
existence; and (B) shows in detail satisfactory to the Lender the
calculation of, and the Borrower’ compliance with, each of the covenants
contained in Sections 5.01(d), 5.01(e), 5.01(f), and 5.01(g);
(iv)
promptly upon
the Lender’s request therefor, copies of all reports and notices which the
Borrower or any of its subsidiaries files under ERISA with the Internal Revenue
Service or the Pension Benefit Guaranty Corporation or the U.S. Department of
Labor or which the Borrower or any its
subsidiary receives from such Corporation;
(v)
notwithstanding
the foregoing Section 5.01(c)(iv), provide to Lender within 30 days after
it becomes aware of the occurrence of any Reportable Event (as defined in Section 4043
of ERISA) applicable to the Borrower or any of its Subsidiaries, a statement
describing such Reportable Event and the actions it proposes to take in
response to such Reportable Event;
(vi)
by November 1 of each fiscal year of the
Borrower, an annual (with monthly break out) operating and capital assets
budget of the Borrower for the immediately succeeding fiscal year containing,
among other things, pro forma financial statements and forecasts for all
planned lines of business;
(vii)
as soon as available but in any event not more than
30 days after the end of each month, production reports for the
immediately preceding calendar month setting forth
30
corn inputs, ethanol output, DDGS output, natural gas usage and CO
2
output, together with such additional production information as reasonably
requested by Lender;
(viii)
promptly, upon the occurrence of an Event of Default
or an event or condition that but for the passage of time or the giving of
notice or both would constitute an Event of Default, notice of such Event of
Default or event;
(ix)
promptly after
the receipt thereof, a copy of any management letters or written reports
submitted to the Borrower by its independent certified public accountants with
respect to the business, financial condition or operation of the Borrower;
(x)
promptly after
the receipt thereof, a copy of any notice of default under any Long-Term
Marketing Agreement;
(xi)
furnish to the
Lender, promptly after transmittal or filing thereof by the Borrower, copies of
all proxy statements, notices and reports as it shall send to its members and
copies of all registration statements (without exhibits) and all reports which
it files with the Securities and Exchange Commission (or any governmental body
or agency succeeding to the functions of the Securities and Exchange
Commission), and promptly after the receipt thereof by the Borrower, copies of
all management letters or similar documents submitted to the Borrower by
independent certified public accountants in connection with each annual and any
interim audit of the accounts of the Borrower or of the Borrower and any of its
Subsidiaries.
(xii)
such other information respecting the condition or
operations, financial or otherwise, of the Borrower or any of its respective
subsidiaries as the Lender may from time to time reasonably request;
(xiii)
promptly after the commencement thereof, notice of
the commencement of all actions, suits, or proceedings before any court,
arbitrator, or government department, commission, board, bureau, agency, or
instrumentality affecting the Borrower or any of its subsidiaries which, if
determined adversely, could have a Material Adverse Effect on any of the
Borrower or its subsidiaries;
(xiv)
without limiting the provisions of Section 5.01(c)(xiii)
above, promptly after receipt thereof, notice of the receipt of all pleadings,
orders, complaints, indictments, or any other communication alleging a
condition that may require the Borrower or any of its subsidiaries to undertake
or to contribute to a cleanup or other response under all laws relating to
environmental protection, or which seek penalties, damages, injunctive relief,
or criminal sanctions related to alleged violations of such laws, or which
claim personal injury or property damage to any person as a result of environmental
factors or conditions;
(xx)
promptly after
filing, receipt or becoming aware thereof, copies of any filings or
communications sent to and notices or other communications received by the
Borrower or any of its subsidiaries from any Governmental Authority, including,
without limitation, the Securities and Exchange Commission, the FCC, the PUC,
or any other state utility commission relating to any
31
material noncompliance by the Borrower or any of its subsidiaries with
any laws or with respect to any matter or proceeding the effect of which, if
adversely determined, could have a Material Adverse Effect on any of the
Borrower of its subsidiaries;
(xxi)
promptly after becoming aware thereof, notice of any
matter which has had or could have a Material Adverse Effect on any of the
Borrower or its subsidiaries.
(d)
Working Capital
. Achieve and
maintain, on a consolidated basis, Working Capital of at least $3.0 million at
the end of the 12
th
month following the Closing Date. Achieve and maintain Working Capital of at
least $5.0 million at the end of the 24
th
month following the
Closing Date. Thereafter, continually
maintain Working Capital, on a consolidated basis, of at least $5.0 million;
(e)
Tangible
Net Worth
. On the
Closing Date, the Borrower’s Tangible Net Worth shall be not less than
$39,000,000.00 on a consolidated basis.
After the Closing Date, the Borrower shall maintain Tangible Net Worth,
measured annually on a consolidated basis, in an amount equal to the lesser
of: (i) the Borrower’s Tangible Net
Worth for the immediately preceding fiscal year plus $500,000.00; or (ii) $39,000,000.00
plus the Borrower’s retained earnings at the end of the current fiscal year;
(f)
Owner Equity Ratio
.
Maintain at all times during
the term of this Agreement, an Owner Equity Ratio of at least 50%, beginning at
the end of the 48
th
month following the Closing Date and measured
annually thereafter on a consolidated basis;
(g)
Fixed
Charge Coverage Ratio
. Maintain
a Fixed Charge Coverage Ratio of not less than 1.20 to 1.00, measured initially
at the end of the 12
th
month following the Closing Date and
maintained and measured annually thereafter on a consolidated basis.
(h)
Liens
. There shall be no lien, security interest or
other charge or encumbrance, and no other type of preferential arrangement,
upon or with respect to any of the properties or income of the Borrower or any
of its subsidiaries, which secures Debt of any Person, except for the security
interests of the Security Agreement or except as permitted by Section 5.02(a);
(i)
Landlord
and Mortgagee Waivers
.
Obtain and furnish to the Lender as soon as available, waivers,
acknowledgments and consents, duly executed by each: (i) real property owner, landlord and
mortgagee having an interest in any of the premises owned or leased by the
Borrower or any of its subsidiaries or
in which any Collateral of the Borrower or any of its subsidiaries is located
or to be located (and if no Collateral is located at a parcel of property not
owned or leased by a Borrower or any of its subsidiaries, no such waivers,
acknowledgments or consents will be required); and (ii) each third party
holding any Collateral, all in form and substance acceptable to the Lender, except
as otherwise agreed to by the Lender;
(j)
Insurance
. Maintain insurance with financially sound and
reputable insurance companies in such amounts and covering such risks as are
usually carried by entities engaged in similar businesses and owning similar
properties in the same general areas in which the
32
Borrower and any of its subsidiaries operate, and make such increases
in the type of amount or coverage as Lender may reasonably request, provided that
in any event the Borrower will maintain and cause each of its subsidiaries to
maintain workers’ compensation insurance, property insurance and comprehensive
general liability insurance reasonably satisfactory to the Lender. All such policies insuring any collateral for
the Borrower’s obligations to Lender shall have lender or mortgagee loss
payable clauses or endorsements in form and substance acceptable to
Lender. Each insurance policy covering
Collateral shall be in compliance with the requirements of the Security
Agreement;
(k)
Property
and Insurance Maintenance
.
Maintain and preserve all of its property and each and every part and
parcel thereof that is necessary to or useful in the proper conduct of its
business in good repair, working order, and condition, ordinary wear and tear
excepted, and in material compliance with all applicable laws, and make all
alterations, replacements, and improvements thereto as may from time to time be
necessary in order to ensure that its properties remain in good working order
and condition and compliance. The
Borrower and each of its subsidiaries agree that upon the occurrence and
continuing existence of an Event of Default, at Lender’s request, which request
may not be made more than once a year, the Borrower and each of its
subsidiaries will furnish to Lender a report on the condition of the Borrower’s
and any of its subsidiaries’ property prepared by a professional engineer
satisfactory to Lender;
(l)
Keeping
Books and Records
.
Maintain and cause each of its subsidiaries to, maintain proper books of
record and account in which full, true, and correct entries in conformity with
generally accepted accounting principles shall be made of all dealings and
transactions in relation to its business and activities;
(m)
Food
Security Act Compliance
. If the Borrower or any of its subsidiaries
acquire any Collateral which may have constituted farm products in the
possession of the seller or supplier thereof, such Borrower or subsidiary
shall, at its own expense, use its commercially reasonable efforts to take such
steps to insure that all Liens (except the liens granted pursuant hereto) in
such acquired Collateral are terminated or released, including, without
limitation, in the case of such farm products produced in a state which has
established a Central Filing System (as defined in the Food Security Act),
registering with the Secretary of State of such state (or such other party or
office designated by such state) and otherwise take such reasonable actions
necessary, as prescribed by the Food Security Act, to purchase farm products
free of liens (except the liens granted pursuant hereto); provided, however,
that such Borrower or any of its subsidiaries may contest and need not obtain
the release or termination of any lien asserted by any creditor of any seller
of such farm products, so long as it shall be contesting the same by proper
proceedings and maintain appropriate accruals and reserves therefor in
accordance with the generally accepted accounting principles. Upon the Lender’s request made, the Borrower
and each of its subsidiaries agree to forward to the Lender promptly after
receipt copies of all notices of liens and master lists of Effective Financing
Statements delivered to the Borrower and its subsidiaries pursuant to the Food
Security Act, which notices and/or lists pertain to any of the Collateral. Upon the Lender’s request, the Borrower and
each of its subsidiaries agree to provide the Lender with the names of Persons
who supply the Borrower and its subsidiaries with such farm products and such
other information as the Lender may reasonably request with respect to such
Persons;
33
(n)
Warehouse
Receipts
. If any
warehouse receipt or receipts in the nature of a warehouse receipt is issued in
respect of any portion of the Collateral, then the Borrower and its
subsidiaries: (i) will not permit
such warehouse receipt or receipts in the nature thereof to be “negotiable” as
such term is used in Article 7 of the Uniform Commercial Code; and (ii) will
deliver all such receipts to the Lender (or a Person designated by the Lender)
within five (5) days of the Lender’s request and from time to time
thereafter. If no Event of Default
exists, the Lender agrees to deliver to such Borrower or subsidiary any receipt
so held by the Lender upon such Borrower’s request in connection with such sale
or other disposition of the underlying inventory, if such disposition is in
ordinary course of the Borrower’s or
subsidiary’s business;
(o)
Management
of Borrower
. Management of the Borrower shall be
maintained as set forth on Schedule 5.01(o) hereto, unless otherwise
approved in Lender’s reasonable discretion;
(p)
Compliance
with Other Agreements
.
Borrower will perform in all material respects all obligations and abide
in all material respects by all covenants and agreements contained in the
following agreements: (i) any and
all Long Term Marketing Agreements; and (ii) any other Material Contracts;
(q)
Additional
Assurances
. Make, execute
and deliver to Lender such promissory notes, mortgages, deeds of trust,
financing statements, control agreements, instruments, documents and other
agreements as Lender or its counsel may reasonably request to evidence and
secure the Loans and to perfect all Security Interest; and
(r)
Construction of Project
.
Borrower shall:
(i)
diligently
proceed with construction of the Project in accordance with the Plans and
Specifications and in accordance with all applicable laws and ordinance and
will complete the Project;
(ii)
use the
proceeds of all Advances solely to pay the Project Costs as specified in the
Project Sources and Uses Statement;
(iii)
use its
commercially reasonable best efforts to require the Contractor(s) to
comply with all rules, regulations, ordinances and laws relating to work on the
Project;
(iv)
obtain the
Lender’s prior written approval of any change in the Plans and Specifications
for the Project approved by the Lender which might materially adversely affect
the value of the Lender’s security, and has a cost of $25,000.00 or
greater. The Lender will have a
reasonable time to evaluate any requests for its approval of any changes
referred to in this paragraph. The Lender may approve or disapprove changes in
its discretion, subject to the foregoing provisions of this Section 5.01(r)(iv). If it reasonably appears to the Lender that
any change may increase the Project Costs, the Lender may require the Borrower
to deposit additional funds with the Lender
34
pursuant to the provisions
of this Agreement in an amount sufficient to cover the increased costs as a
condition to giving its approval;
(v)
comply with and keep in
effect all necessary permits and approvals obtained from any Governmental
Authority relating to the lawful construction of the Project. The Borrower will comply with all applicable
existing and future laws, regulations, orders, and requirements of any
Governmental Authority, judicial, or legal authorities having jurisdiction over
the Real Property or Project, and with all recorded restrictions affecting the
Real Property;
(vi)
furnish to the
Lender from time to time on request by the Lender, in a form acceptable to the
Lender, correct lists of all contractors and subcontractors employed in
connection with construction of the Project and true and correct copies of all
executed contracts and subcontracts. The
Lender may contact any contractor or subcontractor to verify any facts disclosed
in the lists, Borrower must consent to the disclosure of such information by
the contractors and subcontractors to Lender or its agents upon Lender’s
request, and Borrower must assist Lender or its agents in obtaining such
information upon Lender’s request;
(vii)
upon completion
of the building foundation of the Project, deliver to the Lender an “as-built”
survey of the Real Property which: (a) sets
forth the location and exterior lines and egress and other improvements
completed on the Real Property and demonstrates compliance with all applicable
setback requirements; (b) demonstrates that the Project is entirely within
the exterior boundaries of the Real Property and any building restriction lines
and does not encroach upon any easements or rights-of-way; and (c) contains
such other information as the Lender may reasonably request;
(viii)
not purchase
any materials, equipment, fixtures, or articles of personal property placed in
the Project prior to the Construction Loan Maturity Date under any security
agreement or other agreement where the seller reserves or purports to reserve
title or the right of removal or repossession, or the right to consider them
personal property after their incorporation in the work of construction, unless
authorized by the Lender in writing;
(ix)
provide the Lender
and its representatives with access to the Real Property and the Project at any
reasonable time and upon reasonable notice to enter the Real Property and
inspect the work or construction and all materials, plans, specifications, and
other matters relating to the construction.
The Lender will also have the right to, at any reasonable time and upon
reasonable notice, examine, copy, and audit the books, records, accounting
data, and other documents of the Borrower and its contractors relating to the
Real Property or construction of the Project;
(x)
pay and
discharge all claims and liens for labor done and materials and services
furnished in connection with the construction of the Project. The Borrower will have the right to contest
in good faith any claim or lien, provided that it does so diligently and
without prejudice to the Lender or the ability to obtain title insurance in the
manner required by this Agreement and the Disbursing Agreement. Upon the Lender’s request, the Borrower will
promptly
35
provide a bond, cash deposit, or other
security reasonably satisfactory to the Lender to protect the Lender’s interest
and security should the contest be unsuccessful;
(xi)
at the Lender’s
request and expense, post signs on the Real Property for the purpose of
identifying the Lender as the “Lender.”
At the request of the Lender, or the participating local community
banks, the Borrower will use its reasonable best efforts to identify the Lender
as the lender in publicity concerning the Project;
(xii)
maintain in
force until full payment of the Loan builder’s risk insurance in such amounts, form, risk
coverage, deductibles, insurer, loss payable and cancellation provisions as
reasonably required by the Lender. The
Lender’s approval, however, will not be a representation of the solvency of any
insurer or the sufficiency of any amount of insurance;
(xiii)
cooperate at
all times with the Lender in bringing about the timely completion of the
Project, and resolve all disputes arising during the work of construction in a
manner which will allow work to proceed expeditiously. With respect to such disputes, the Borrower
will have the right to contest in good faith claims resulting in disputes,
provided that it does so diligently and without prejudice to the Lender. Upon the Lender’s request, the Borrower will
promptly provide a bond, cash deposit, or other security reasonably
satisfactory to the Lender to protect the Lender’s interest and security should
the contest be unsuccessful;
(xiv)
pay the Lender’s
and the Disbursing Agent’s out-of-pocket costs and expenses incurred in
connection with the making or disbursement of the Loans or in the exercise of
any of its rights or remedies under this Agreement, including but not limited
to title insurance and escrow charges, disbursing agent fees, recording
charges, and mortgage taxes, reasonable legal fees and disbursements, and
reasonable fees and costs for services which are not customarily performed by
the Lender’s salaried employees and are not specifically covered by the fees
charged to originate the Loan, if any.
The provision of this paragraph will survive the termination of this
Agreement and the repayment of the Loan;
(xv)
keep true and
correct financial books and records on a cash basis for the construction of the
Project and maintain adequate reserves for all contingencies. If required by the Lender, the Borrower will
submit to the Lender at such times as it requires (which will in no event be
more often than monthly) a statement which accurately shows the application of
all funds expended to date for construction of the Project and the source of
those funds as well as the Borrower’s best estimate of the funds needed to
complete the Project and the source of those funds. The Borrower will promptly supply the Lender
with any financial statements or other information concerning its affairs and
properties as the Lender may reasonably request, and will promptly notify the
Lender of any material adverse change in its financial condition or in the
physical condition of the Property or Project;
(xvi)
comply with the
requirements of any commitment or agreement entered into by Borrower with any
Governmental Authority to assist the construction or financing of the Real Property
and/or Project and with the terms of all applicable laws, regulations, and
requirements governing such assistance;
36
(xvii)
indemnify and
hold the Lender harmless from and against all liabilities, claims, damages,
reasonable costs, and reasonable expenses (including but not limited to
reasonable legal fees and disbursements) arising out of or resulting from any
defective workmanship or materials occurring in the construction of the
Project. Upon demand by the Lender, the
Borrower will defend any action or proceeding brought against the Lender
alleging any defective workmanship or materials, or the Lender may elect to
conduct its own defense at the reasonable expense of the Borrower. The provisions of this paragraph will survive
the termination of this Agreement and the repayment of the Loan; and
(xviii)
obtain and
deliver to the Lender copies of all necessary occupancy certificates relating
to the Project.
Section 5.02.
Negative Covenants
. So long as any of the Loan Obligations remain
unpaid or the Lender shall have any commitment hereunder, the Borrower will
not, without the prior written consent of the Lender:
(a)
Liens, etc
.
Create or
suffer to exist, or permit any of its subsidiaries to create or suffer to
exist, any lien, security interest or other charge or encumbrance, or any other
type of preferential arrangement, upon or with respect to any of its
properties, whether now owned or hereafter acquired, or assign, or permit any
of its subsidiaries to assign, any right to receive income, in each case to
secure any Debt (as defined below) of any Person, other than:
(i)
those described
on Schedule 5.02(a) hereto and renewals and extensions on the same or
substantially the same terms and conditions and at no increase in the debt or
obligation; or
(ii)
liens or
security interests which are subject to an intercreditor agreement in form and
substance acceptable to Lender in Lender’s sole discretion; or
(iii)
the liens or security interests of the Security
Agreement; or
(iv)
liens (other
than liens relating to environmental liabilities or ERISA) for taxes,
assessments, or other governmental charges that are not more than 30 days
overdue or, if the execution thereof is stayed, which are being contested in
good faith by appropriate proceedings diligently pursued and for which adequate
reserves have been established; or
(v)
liens of
warehousemen, carriers, landlords, mechanics, materialmen, or other similar
statutory or common law liens securing obligations that are not yet due and are
incurred in the ordinary course of business or, if the execution thereof is
stayed, which are being contested in good faith by appropriate proceedings
diligently pursued and for which adequate reserves have been established in
accordance with generally accepted accounting principles; or
(vi)
liens resulting
from good faith deposits to secure payments of workmen’s compensation
unemployment insurance, or other social security programs or to secure the
37
performance of tenders, leases, statutory obligations, surety, customs
and appeal bonds, bids or contracts (other than for payment of Debt); or
(vii)
any attachment or judgment lien not constituting an
Event of Default; or
(viii)
liens arising from filing UCC financing statements
regarding leases not prohibited by this Agreement; or
(ix)
customary
offset rights of brokers and deposit banks arising under the terms of
securities account agreements and deposit agreements; or
(x)
any real estate
easements and easements, covenants and encumbrances that customarily do not
affect the marketable title to real estate or materially impair its use; or
(xi)
purchase money
security interests in equipment and vehicles, not to exceed $25,000.00 for any
single purchase.
(b)
Distributions, etc
.
Declare or pay
any dividends, purchase or otherwise acquire for value any of its membership
interests (units) now or hereafter outstanding, or make any distribution of
assets to its stockholders, members or general partners as such, or permit any
of its subsidiaries to purchase or otherwise acquire for value any stock,
membership interest or partnership interest of the Borrower, provided, however,
the Borrower and its subsidiaries may: (i) declare
and pay dividends and distributions payable in membership interests (units); (ii) purchase
or otherwise acquire shares of the membership interests (units) of the Borrower
or its subsidiaries with the proceeds received from the issuance of new
membership interests (units); (iii) so long as the Borrower first provides
such supporting documentation as the Lender may
request with respect to any fiscal year of the Borrower, the Borrower
may pay aggregate cash dividends/distributions, during such fiscal year in an
amount not to exceed the amount necessary for the members of the Borrower to
pay their Income Taxes on such member’s allocable share of the taxable income
of the Borrower for such taxable year or fiscal year, as applicable (“
Tax Distributions
”); (iv) pay redemptions, dividends or
distributions in an amount not to exceed, in the aggregate, 65% of the Borrower’s
Net Income (
“Allowed Distributions
”); (v) pay
dividends or distributions which are immediately reinvested in the Borrower (“
Reinvestment Distributions
”) provided, however, that
immediately prior to the proposed payment of any such dividends or
distributions, or after giving effect thereto, no Default or Event of Default
shall exist; and (vi) complete the transactions reflected on Schedule
4.01(a); or
(c)
Capital
Expenditures
.
Except for costs identified in the Project
Costs and Uses Statement, make any investment in fixed assets in the aggregate
amount of $500,000.00 during any fiscal year during the term of this Agreement; or
(d)
Consolidation, Merger,
Dissolution, Etc.
D
irectly or indirectly, merge
or consolidate with any other Person or permit any other Person to merge into
or with or consolidate with the Borrower or any of its subsidiaries; or
38
(e)
Indebtedness,
etc
. Create, incur, assume or
suffer to exist any Debt or other indebtedness, liabilities or obligations,
whether matured or unmatured, liquidated or unliquidated, direct or contingent,
joint or several, except: (i) the
liabilities of the Borrower to the Lender hereunder; (ii) trade accounts
payable and accrued liabilities (other than Debt) arising in the ordinary
course of the Borrower’s or any of its subsidiaries business; (iii) Subordinated
Debt; (iv) the liabilities of the Borrower or its subsidiaries described
on Schedule 5.02(a); and (v) under Material Contracts; or
(f)
Organization;
Name; Chief Executive Office
. Change its state of organization, name or the
location of its chief executive office without the prior written consent of the Lender, except that the principal
office shall be moved to the plant site when construction of the administration
office is substantially complete; or
(g)
Loans, Guaranties, etc
.
Make any loans
or advances to (whether in cash, in-kind, or otherwise) any Person, or directly
or indirectly guaranty or otherwise assure a creditor against loss in respect
of any indebtedness, obligations or liabilities (contingent or otherwise) of
any Person; or
(h)
Subsidiaries;
Affiliates
.
Form or otherwise acquire any subsidiary
or affiliated business, or acquire the assets of or acquire any equity or
ownership interest in any Person, unless such subsidiary, affiliate or Person
executes and delivers to the Lender: (i) a
guaranty of all of the Loan Obligations, in form and substance acceptable to
the Lender in its sole discretion; (ii) security agreements in form
substantially similar to the Security Agreement; and (iii) such other
documents and amendments to this Agreement and the other Loan Documents as the
Lender shall reasonably require; or
(i)
Transfer
of Assets
. Sell,
lease, assign, transfer, or otherwise voluntarily dispose of any of its assets,
or permit any of its subsidiaries to sell, lease, assign, transfer, or
otherwise voluntarily dispose of any of its assets except: (i) dispositions of inventory in the
ordinary course of business; and (ii) dispositions of: (A) obsolete
or worn out equipment; (B) equipment or real property not necessary for
the operation of its business; or (C) equipment or real property which is
replaced with property of equivalent or greater value as the property which is
disposed;
(j)
Lines
of Business
.
Engage in any
line or lines of business activity other than the production of ethanol and
DDGS and any activities incidental or reasonably related thereto;
(k)
Transactions
with Affiliates
.
Directly or indirectly enter into or permit
to exist any transaction (including the purchase, sale, lease or exchange of
any property or the rendering of any service) with any Affiliate or with any
director, officer or employee of the Borrower or any Affiliate, except (i) transactions
listed on Schedule 5.02(k), (ii) transactions in the ordinary course of
and pursuant to the reasonable requirements of the business of the Borrower or
any of its subsidiaries and upon fair and reasonable terms which are fully
disclosed to Lender and are no less favorable to the Borrower or such
subsidiary than would be obtained in a comparable arm’s length transaction with
a person or entity that is not an Affiliate, and (iii) payment of
compensation to directors, officers
39
and employees in the ordinary course of business for services actually
rendered in their capacities as directors, officers and employees,
provided
such compensation is reasonable and comparable with compensation paid by
companies of like nature and similarly situated. Notwithstanding the foregoing, upon the
election of Lender, no payments may be made with respect to any items set forth
in clauses (i) and (ii) of the preceding sentence upon the occurrence
and during the continuation of a Potential Default or an Event of Default; or
(l)
Management
Fees and Compensation
.
Directly or
indirectly pay any management, consulting or other similar fees to any person,
except legal or consulting fees paid to persons or entities that are not
Affiliates of the Borrower or its subsidiaries for services actually rendered
and in amounts typically paid by entities engaged in the Borrower’s or such
subsidiary’s business; or
(m)
Material
Control or Management
.
(i) One or more of the members of the
Borrower as of the date hereof shall fail, in the aggregate, to own, directly
or indirectly, 100% of the common (voting) membership interests in the
Borrower, or (ii) there should be any change in the chief executive
officer of the Borrower, unless within 90 days of such event a person
reasonably acceptable to Lender is appointed to such position, or (iii) the
Borrower shall fail at any time to hold, legally or beneficially, 100% of the
equity of each of the Guaranteeing Subsidiaries.
ARTICLE VI.
EVENTS OF DEFAULT AND REMEDIES
Section 6.01.
Events of Default
. Each of the following events shall be an “
Event of Default
”:
(a)
The Borrower shall fail to
pay any installments of principal or interest, fees, expenses, charges or other
amounts payable hereunder or under the other Loan Documents or to make any
deposit of funds required under this Agreement when due; or
(b)
Any
representation or warranty made by the Borrower, or any of its officers or
directors under or in connection with any Loan Document shall prove to have
been incorrect in any material respect when made; or
(c)
The Borrower
shall fail to perform or observe any term, covenant or agreement contained in Sections
5.01(d), (e), (f) or (g) or take any action as prohibited by Section 5.02;
or
(d)
The Borrower
shall fail to deliver the financial statements or Compliance Certificate under Section 5.01(c) within
5 days of the date due; or
(e)
The Borrower
shall fail to perform or observe any term, covenant or agreement contained in
any Loan Document (other than those listed in clauses (a) through (d) of
this Section 6.01) on its part to be performed or observed (other than the
covenants to pay the Loan Obligations) and any such failure shall remain
unremedied for ten (10) days after written notice
40
thereof shall have been given to the Borrower by the Lender, provided,
however, that no Event of Default shall be deemed to exist if, within said ten (10) day
period, Borrower have commenced appropriate action to remedy such failure and
shall diligently and continuously pursue such action until such cure is
completed, unless such cure is or cannot be completed within thirty (30) days
after written notice shall have been given; or
(f)
The Borrower
shall fail to pay any indebtedness in an amount in excess of $50,000.00 (either
in any individual case or in the aggregate) excluding indebtedness evidenced by
the Notes and excluding Ordinary Trade Payable Disputes, or any interest or
premium thereon, when due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise) and such failure shall continue after the
applicable grace period, if any, specified in the agreement or instrument
relating to such indebtedness; or any other default under any agreement or
instrument relating to any such indebtedness, or any other event, shall occur
and shall continue after the applicable grace period, if any, specified in such
agreement or instrument, if the effect of such default or event is to
accelerate, or to permit the acceleration of, the maturity of such indebtedness
(excluding Ordinary Trade Payable Disputes); or any such indebtedness shall be
declared to be due and payable, or required to be prepaid (other than by a
regularly scheduled required prepayment), prior to the stated maturity thereof
(excluding Ordinary Trade Payable Disputes); or
(g)
The Borrower
shall generally not pay its debts as such debts become due, or shall admit in
writing its inability to pay its debts generally, or shall make a general
assignment for the benefit of creditors; or any proceeding shall be instituted
by or against the Borrower seeking to adjudicate it a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee or other
similar official for it or for any substantial part of its property, and, in
the case of any such proceeding instituted against it (but not instituted by
it) either such proceeding shall remain undismissed or unstayed for a period of
30 days or any of the actions sought in such proceeding (including, without
limitation, the entry of an order for relief against it or the appointment of a
receiver, trustee, custodian or other similar official for it or for any
substantial part of its property) shall occur; or the Borrower shall take any
corporate action to authorize any of the actions set forth above in this
subsection; or
(h)
Any one or more
judgment(s) or order(s) for the payment of money in excess of
$50,000.00 in the aggregate shall be rendered against the Borrower and
either: (i) enforcement proceedings
shall have been commenced by any creditor upon such judgment or order; or (ii) there
shall be any period of 10 consecutive days during which a stay of enforcement
of such judgment or order, by reason of a pending appeal or otherwise, shall
not be in effect; or
(i)
Any provision
of any Loan Document shall for any reason cease to be valid and binding on the
Borrower or the Borrower shall so state in writing; or
(j)
The Mortgage or
the Security Agreement shall for any reason, except to the extent permitted by
the terms thereof, cease to create a valid lien, encumbrance or security
interest in any of the property purported to be covered thereby; or
41
(k)
The termination
of any Long Term Marketing Agreement prior to its stated expiration date,
unless such Long Term Marketing Agreement is replaced by another Long Term
Marketing Agreement acceptable to the Lender, within thirty (30) days of the
termination of such Long Term Marketing Agreement; or
(l)
The Borrower
dissolves, suspends, or discontinues doing business; or
(m)
Construction of
the Project is halted or abandoned prior to completion for any period of thirty
(30) consecutive days for any cause which is not beyond the reasonable control
of the Borrower, its contractors and subcontractors; or
(n)
The
construction of the Project shall be delayed for any reason and for such period
that, in the reasonable judgment of the Lender, the Project will not be
completed. If such delay is curable and
if Borrower has not been given a notice of a similar breach within the
preceding twelve (12) months, it may be cured (and no Event of Default will
have occurred) if Borrower cures the failure within thirty (30) days, which
shall include advancing the progress of the Project to the point that, in the
reasonable judgment of the Lender, the Project will be completed;
(o)
Any event,
change or condition not referred to elsewhere in this Section 6.01 should
occur which results in a Material Adverse Effect on the Borrower, any
subsidiary or any guarantor of the Borrower’s obligations hereunder; or
(p)
Any guarantee,
suretyship, subordination agreement, maintenance agreement, or other agreement
furnished in connection with the Borrower’s obligations hereunder and under any
Note shall, at any time, cease to be in full force and effect, or shall be
revoked or declared null and void, or the validity or enforceability thereof
shall be contested by the guarantor, surety or other maker thereof, or the
Guarantor shall deny any further liability or obligations thereunder, or shall
fail to perform its obligations thereunder, or any representation or warranty
set forth therein shall be breached, or the Subsidiary Guarantor shall breach
or be in default under the terms of any other agreement with Lender (including
any loan agreement or security agreement);
or
(q)
The loss,
suspension or revocation of, or failure to renew, any franchise, license,
certificate, permit, authorization, approval or the like now held or hereafter
acquired by the Borrower or any of its subsidiaries, if such loss, suspension,
revocation or failure to renew could reasonably be expected to have a Material
Adverse Effect on the Borrower or (ii) any regulatory or Governmental
Authority replaces the management of the Borrower or any of its subsidiaries or
assumes control over the Borrower or such subsidiary; or
(r)
The Borrower or
any of its subsidiaries should breach or be in default under a Material
Contract in any material respect, including any material breach or default, or
any termination shall have occurred, or any other event which would permit any
party other than the Borrower or its subsidiaries to cause a termination, or
any Material Contract shall have ceased for any reason to be in full force and
effect prior to its stated or optional expiration date.
42
(s)
The Borrower or
any of its subsidiaries should terminate, change, amend or restate, without the
Lender’s prior consent any Material Contract, or any material Construction
Contract.
(t)
Any
Governmental Authority having jurisdiction over the Permit Litigation shall
have issued any order, judgment or decree which has the affect of revoking or
suspending the Air Quality Emissions permit for the Project.
Section 6.02.
Remedies
. Upon the occurrence of an Event of Default
and at any time while such Event of Default is continuing, the Lender:
(a)
may accelerate
the due date of the unpaid principal balance of the Notes, all accrued but
unpaid interest thereon and all other amounts payable under this Agreement
making such amounts immediately due and payable, whereupon the Notes, all such
interest and all such amounts shall become and be forthwith immediately due and
payable, without presentment, notice of intent to accelerate or notice of
acceleration, demand, protest or further notice of any kind, all of which are
hereby expressly waived by the Borrower and its subsidiaries;
provided, however
, that in the event of an actual or deemed
entry of an order for relief with respect to any of the Borrower or any of its
subsidiaries under the Federal Bankruptcy Code, the Notes, all such
interest and all such amounts shall automatically become due and payable,
without presentment, demand, protest or any notice of any kind, all of which
are hereby expressly waived by the Borrower and its subsidiaries;
(b)
may withhold or
direct the Disbursing Agent to withhold any one or more Advances in its
discretion, and terminate the Lender’s
obligations, if any, under this Agreement to make any Advances whereupon the
commitment and obligations of the Lender to extend credit or to make Advances
hereunder shall terminate, and no disbursement of Loan funds by the Lender will
cure any default of the Borrower, unless the Lender agrees otherwise in
writing;
(c)
may, by notice
to the Borrower and its subsidiaries, obtain the appointment of a receiver to
take possession of all Collateral of the Borrower and its subsidiaries,
including, but not limited to all personal property, including all fixtures and
equipment leased, occupied or used by
any of the Borrower and its subsidiaries.
Borrower and each of its subsidiaries hereby irrevocably consent to the
appointment of such receiver and agree to cooperate and assist any such
receiver as reasonably requested to facilitate the transfer of possession
of the Collateral to such receiver and
to provide such receiver access to all books, records, information and
documents as requested by such receiver;
(d)
in its
discretion, enter the Real Property and take any and all actions necessary in
its judgment to complete construction of the Project, including but not limited
to making changes in Plans and Specifications, work or materials, and entering
into, modifying, or terminating any contractual arrangements, subject to the
Lender’s right at any time to discontinue any work without liability. If the Lender elects to complete the Project,
it will not assume any liability to the Borrower or any other person for
completing the Project or for the manner or quality of construction of the
Project, and the Borrower expressly waives any such liability. The Borrower irrevocably appoints the Lender
as its attorney-in-fact, with full power of substitution, to complete the
Project in the
43
Borrower’s name, or the Lender may elect to complete construction in
its own name. In any event, all sums
expended by the Lender in completing construction will be considered to have
been disbursed to the Borrower and will be secured by the Mortgage and any
other instruments or documents securing the Loans, and any such sums that cause
the principal amount of the Loans to exceed the face amount of the Notes will
be considered to be an additional loan to the Borrower bearing interest at the
rate provided in the Notes and will be secured by the Mortgage and any other instrument or documents
securing the Loans. The Lender will not
have any obligation under the Plans and Specifications prepared for the
Project, any studies, data, and drawings with respect thereto prepared by or
for Borrower, or the contracts and agreements relating to the Plans and
Specifications, or the aforesaid studies, data, and drawings, or to the
construction of the Project unless it expressly hereafter agrees in
writing. The Lender will have the right
to exercise any rights of the Borrower under those contracts and agreements or
with respect to such Plans and Specifications, studies, data, and drawings upon
any default by the Borrower under this Agreement, and shall have such other
rights and remedies with respect thereto as are afforded a secured creditor
under applicable law; and
(e)
may, by notice
to the Borrower, require the Borrower to pledge to the Lender as security for
the Loan Obligations an amount in immediately available funds equal to the then
outstanding Letter of Credit Liabilities, such funds to be held in an interest
bearing cash collateral account at the Lender without any right of withdrawal
by the Borrower;
provided, however,
that in the
event of an actual or deemed entry of an order for relief with respect to the
Borrower or any of its subsidiaries under the Federal Bankruptcy Code, the
Borrower shall, without notice, pledge to the Lender as security for the Loan
Obligations an amount in immediately available funds equal to the then
outstanding Letter of Credit Liabilities, such funds to be held in such an
interest bearing cash collateral account at the Lender;
(f)
may exercise
all rights to notify or instruct any Commodity Intermediary under any Commodity
Account Control Agreement or Bank under any Deposit Account Control Agreement;
(g)
may apply any
funds held by Lender in a Program Account toward the outstanding Loan
Obligations of the Borrower; and
(h)
may exercise
any other rights and remedies afforded to the Lender under the Loan Documents
or by applicable law or equity.
Section 6.03.
Remedies
Cumulative
.
Each and every power or remedy herein
specifically given shall be in addition to every other power or remedy,
existing or implied, given now or hereafter existing at law or in equity, and
each and every power and remedy herein specifically given or otherwise so
existing may be exercised from time to time and as often and in such order as
may be deemed expedient by Lender, and the exercise or the beginning of the
exercise of one power or remedy shall not be deemed a waiver of the right to
exercise at the same time or thereafter any other power or remedy. No delay or
omission of Lender in the exercise of any right or power accruing hereunder
shall impair any such right or power or be construed to be a waiver of any
default or acquiescence therein.
44
ARTICLE VII.
MISCELLANEOUS
Section 7.01.
Amendments, etc
.
No amendment or
waiver of any provision of any Loan Document to which the Borrower and its
subsidiaries are a party, nor any consent to any departure by the Borrower and
its subsidiaries therefrom, shall in any event be effective unless the same
shall be agreed or consented to by the Lender and the Borrower, and each such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
Section 7.02.
Notices, etc
.
All notices and
other communications provided for under any Loan Document shall be in
writing and mailed, faxed, or delivered
at the addresses set forth below, or at such other address as such party may
specify by written notice to the other parties hereto:
|
If to the Borrower:
|
Heron Lake BioEnergy, LLC
|
|
|
91246 390
th
Avenue
|
|
|
P.O. Box 198
|
|
|
Heron Lake, MN 56137-0198
|
|
|
Telephone: (507) 793-0077
|
|
|
Fax: (507) 793-0078
|
|
|
Attention: President
|
|
|
|
|
With a copy to:
|
Lindquist & Vennum P.L.L.P.
|
|
|
4200 IDS Center
|
|
|
80 South Eighth Street
|
|
|
Minneapolis, MN 55402-2205
|
|
|
Telephone: (612) 371-3211
|
|
|
Fax: (612) 371-3207
|
|
|
Attn. Michael Weaver
|
|
|
|
|
If to the Lender:
|
AgStar Financial Services, PCA
|
|
|
1921 Premier Drive
|
|
|
P.O. Box 4249
|
|
|
Mankato, MN 56002-4249
|
|
|
Telephone: (507) 386-4242
|
|
|
Facsimile: (507) 344-5088
|
|
|
Attention: Mark Schmidt
|
|
|
|
|
With copy to:
|
Phillip L. Kunkel
|
|
|
Gray Plant Mooty
|
|
|
1010 West St. Germain,
Suite 600
|
|
|
St. Cloud, MN 56301
|
|
|
Facsimile: (320) 252-4482
|
All such notices and communications shall have been duly given and
shall be effective: (a) when
delivered; (b) when transmitted via facsimile to the number set forth
above; (c) the Business Day
45
following the day on which the same has been delivered prepaid (or
pursuant to an invoice arrangement) to a reputable national overnight air
courier service; or (d) the third Business Day following the day on which
the same is sent by certified or registered mail, postage prepaid. Any confirmation sent by the Lender to the
Borrower of any borrowing under this Agreement shall, in the absence of
manifest error, be conclusive and binding for all purposes
Section 7.03.
No
Waiver; Remedies
. No failure
on the part of the Lender to exercise, and no delay in exercising, any right
under any Loan Document shall operate as a waiver thereof; nor shall any single
or partial exercise of any right under any Loan Document preclude any other or
further exercise thereof or the exercise of any other right. The remedies provided in the Loan Documents
are cumulative and not exclusive of any remedies provided by law.
Section 7.04.
Costs,
Expenses and Taxes.
(a)
The Borrower
agrees to pay on demand all costs and expenses in connection with the preparation,
execution, delivery, filing, recording and administration of the Loan Documents
and the other documents to be delivered under the Loan Documents, including,
without limitation, the reasonable fees and out-of-pocket expenses of counsel
for the Lender (who may be in-house counsel), and local counsel who may be
retained by said counsel, with respect thereto and with respect to advising the
Lender as to its respective rights and responsibilities under the Loan
Documents, and all costs and expenses (including reasonable counsel fees and
expenses) for the Lender in connection with the filing of the Financing
Statements and the enforcement of the Loan Documents and the other documents to
be delivered under the Loan Documents, including, without limitation, in the
context of any bankruptcy proceedings.
In addition, the Borrower agrees to pay on demand the expenses described
in Section 5.01(b). In addition,
the Borrower shall pay any and all stamp and other taxes and fees payable or
determined to be payable in connection with the execution, delivery, filing and
recording of the Loan Documents and the other documents to be delivered under
the Loan Documents, and agrees to save the Lender harmless from and against any
and all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes and fees.
(b)
If, due to
payments made by the Borrower pursuant to Section 2.09 or due to
acceleration of the maturity of the Advances pursuant to Section 6.01 or
due to any other reason, the Lender receives payments of principal of any Loan
other than on the last day of an Interest Period relating thereto, the Borrower
shall pay to the Lender on demand any amounts required to compensate the Lender
for any additional losses, costs or expenses which it may incur as a result of
such payment, including, without limitation, any loss (including loss of
anticipated profits), cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by the Lender to fund or maintain
such Loan.
Section 7.05.
Right
of Set-off
. The Lender
is hereby authorized at any time and from time to time after an Event of
Default, to the fullest extent permitted by law, to set off and apply any and
all deposits (general or special, time or demand, provisional or final) at any
time held and other indebtedness at any time owing by the Lender to or for the
credit or the account of the Borrower and each of its subsidiaries against any
and all of the Loan Obligations, irrespective of whether or not the Lender
shall have made any demand under such Loan Document and although deposits,
indebtedness
46
or such obligations may be unmatured or contingent. The Lender agrees promptly to notify the Borrower
after any such set-off and application, provided that the failure to give such
notice shall not affect the validity of such set-off and application. The rights of the Lender under this Section are
in addition to other rights and remedies (including, without limitation, other
rights of set-off) which the Lender may have.
Section 7.06.
Severability
of Provisions
. Any
provision of this Agreement or of any other Loan Document which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or thereof or affecting the
validity or unenforceability of such provision in any other jurisdiction.
Section 7.07.
Binding
Effect; Successors and Assigns; Participations
.
(a)
This Agreement
shall be binding upon and inure to the benefit of the Borrower, the Lender and
their respective successors and assigns, except that the Borrower shall not
have the right to assign or otherwise transfer its rights hereunder or any
interest herein without the prior written consent of the Lenders. Upon the request of Borrower, Lender shall
provide copies of all invoices for costs and expenses to be reimbursed by
Borrower under this Agreement or under any of the Loan Documents.
(b)
Borrower agrees
and consents to Lender’s sale or transfer, whether now or later, of one or more
participation interests in the Loans to one or more purchasers, whether related
or unrelated to Lender. Lender may provide,
without any limitation whatsoever, to any one or more purchasers, or potential
purchasers, any information or knowledge Lender may have about Borrower or
about any other matter relating to the Loans, and Borrower hereby waives any
rights to privacy it may have with respect to such matters; provided, however,
that any information received by any such purchaser or potential purchaser
under this provision which concerns the personal, financial or other affairs of
the Borrower shall be received and kept by the purchaser or potential purchaser
in full confidence and will not be revealed to any other persons, firms or
organizations nor used for any purpose whatsoever other than for determining
whether or not to participate in the Loans and in accord with the rights of
Lender if a participation interest is acquired.
Borrower additionally waives any and all notices of sale of
participation interests, as well as all notices of any repurchase of such participation interest. Borrower also agrees that the purchasers of
any such participation interests will be considered as the absolute owners of
such interests in the Loans and will have all the rights granted under the
participation agreement or agreements governing the sale of such participation
interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against Lender
or against any purchaser of such a participation interest arising out of or by
virtue of the participation and unconditionally agrees that either Lender or
such purchaser may enforce Borrower’s obligation under the Loans irrespective
of the failure or insolvency of any holder of any interests in the Loans. Borrower further agrees that the purchaser of
any such participation interests may enforce its interests irrespective of any
personal claims or defenses that Borrower may have against Lender.
47
Section 7.08.
Consent
to Jurisdiction
.
(a)
The Borrower
hereby irrevocably submits to the jurisdiction of any Minnesota state court or
federal court over any action or proceeding arising out of or relating to this
Agreement, the Note and any instrument, agreement or document related hereto or
thereto, and the Borrower hereby irrevocably agrees that all claims in respect
of such action or proceeding may be heard and determined in such Minnesota
state court or federal court. The
Borrower hereby irrevocably waives, to the fullest extent it may effectively do
so, the defense of an inconvenient forum to the maintenance of such action or
proceeding. The Borrower irrevocably
consents to the service of copies of the summons and complaint and any other
process which may be served in any such action or proceeding by the mailing of
copies of such process to Borrower at its address specified in Section 7.02. The Borrower agrees that a final judgment in
any such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
(b)
Nothing in this
Section 7.08 shall affect the right of the Lender to serve legal process
in any other manner permitted by law or affect the right of the Lender to bring
any action or proceeding against the Borrower or its property in the courts of
other jurisdictions.
Section 7.09.
Governing
Law
. THIS AGREEMENT AND THE NOTES
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF
THE STATE OF MINNESOTA.
Section 7.10.
Execution
in Counterparts
. This
Agreement may be executed in any number of counterparts and on telecopy
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute but one and the same
agreement.
Section 7.11.
Survival
. All covenants, agreements, representations
and warranties made by the Borrower in the Loan Documents and in the
certificates or other instruments delivered in connection with or pursuant to
this Agreement or any other Loan Document shall be considered to have been
relied upon by the other parties hereto and shall survive the execution and
delivery of the Loan Documents and the making of any Advances and issuance of
any Letters of Credit, regardless of any investigation made by any such other
party or on its behalf and notwithstanding that Lender may have had notice or
knowledge of any Event of Default or incorrect representation or warranty at
the time any credit is extended hereunder, and shall continue in full force and
effect as long as any Loan Obligations are outstanding and unpaid and so long
as the Lender has any unexpired commitments under this Agreement or the Loan
Documents. The expense reimbursement,
additional cost, capital adequacy and indemnification provisions of this
Agreement shall survive and remain in full force and effect regardless of the
consummation of the transactions contemplated hereby, the repayment of the Loan
Obligations or the termination of this Agreement or any provision hereof.
Section 7.12.
WAIVER
OF JURY TRIAL
. THE
BORROWER AND THE LENDER HEREBY IRREVOCABLY WAIVE ALL RIGHTS TO TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY LOAN
48
DOCUMENT TO WHICH IT IS A PARTY OR ANY INSTRUMENT OR DOCUMENT DELIVERED
THEREUNDER.
Section 7.13.
Entire
Agreement
. THIS
AGREEMENT, THE NOTES, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY
THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL
PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER
WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE
CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG
THE PARTIES THERETO.
The execution and delivery of this Third Amended and Restated Master
Loan Agreement shall supersede and replace in its entirety the Amended and
Restated Master Loan Agreement which shall thereafter be of no force or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers and duly authorized, as of the date first
above written.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS THIRD
AMENDED AND RESTATED MASTER LOAN AGREEMENT, AND BORROWER AGREES TO ITS
TERMS. THIS AGREEMENT IS DATED AS OF THE
DATE FIRST ABOVE STATED.
[SIGNATURE PAGE ON FOLLOWING
PAGE]
49
SIGNATURE PAGE TO:
FOURTH AMENDED AND RESTATED MASTER LOAN AGREEMENT
by and among
HERON LAKE BIOENERGY, LLC
and
AGSTAR FINANCIAL SERVICES, PCA
DATED:
October 1, 2007
BORROWER:
HERON LAKE BIOENERGY, LLC, a Minnesota limited liability company
|
/s/ Robert J. Ferguson
|
|
|
By Robert J. Ferguson
|
|
|
Its President
|
|
LENDER:
AGSTAR FINANCIAL SERVICES, PCA
a United States instrumentality
|
/s/ Mark Schmidt
|
|
|
By Mark Schmidt
|
|
|
Its Vice President
|
|
50
EXHIBIT A
COMPLIANCE
CERTIFICATE
TO:
AGSTAR
FINANCIAL SERVICES, PCA (the “Lender”)
Pursuant to that certain Fourth Amended and
Restated Master Loan Agreement dated October 1, 2007, by and between HERON
LAKE BIOENERGY, LLC, a Minnesota limited liability company (the “Borrower”),
and the Lender, and any amendments thereto and extensions thereof (the “Loan
Agreement”), the undersigned hereby represents, warrants and certifies to the
Lender as follows:
1.
The financial
statement(s) attached hereto are complete and correct in all material
respects and fairly present the financial condition of the Borrower as of the
date of said financial statement(s) and the result of its business
operations for the period covered thereby;
2.
Repeats and
reaffirms to the Lender each and all of the representations and warranties made
by the Borrower in the Loan Agreement and the agreements referred to therein or
related thereto, and represents and warrants to the Lender that each and all of
said warranties and representations are true and correct as of the date hereof
except as set forth in Schedule 1 to this Compliance Certificate;
3.
No Event of
Default (as that term is defined in the Loan Agreement), and no event which
with the giving of notice or the passage of time or both would constitute an
Event of Default, has occurred and is continuing as of the date hereof;
4.
All the
calculations set forth below are made pursuant to the terms of the Loan
Agreement and are true and accurate as of the date of the attached financial
statements:
|
1.
|
Section 5.01(d) – Working Capital
.
|
|
|
|
|
|
(tested annually)
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Current Assets
|
|
$
|
|
|
|
(b)
|
Available Commitment on the Term Revolving Loan
|
|
$
|
|
|
|
(c)
|
Total Current Assets (line (a) plus line (b)
|
|
$
|
|
|
|
(d)
|
Current Liabilities
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Line (c) less line (d)
|
|
|
|
|
|
|
|
|
|
In Compliance
|
Yes
o
|
|
No
o
|
|
|
|
|
|
|
2.
|
Section 5.01(e) – Tangible Net Worth
.
|
|
|
|
|
|
(tested annually)
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Required Tangible Net Worth
|
|
$
|
39,000,000.00
|
|
|
|
|
|
|
|
|
(b)
|
Actual Tangible Net Worth
|
|
|
|
|
|
|
|
|
|
|
|
(1) Total Assets
|
|
$
|
|
|
|
|
(2) Less Intangible Assets (per definition)
|
|
$
|
|
|
|
|
(3) Total Tangible Assets
|
|
$
|
|
|
|
|
|
|
|
|
|
|
51
|
|
(4) Total Liabilities
|
|
$
|
|
|
|
|
(5) Tangible Net Worth
|
|
$
|
|
|
|
|
(line (4) minus line (5))
|
|
|
|
|
|
|
|
|
|
In Compliance
|
Yes
o
|
No
o
|
|
|
|
|
|
|
|
3.
|
Section 5.01(f) – Owner Equity Ratio
|
|
|
|
|
|
(tested annually)
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Tangible Net Worth
|
|
$
|
|
|
|
(b)
|
Total Assets
|
|
$
|
|
|
|
(c)
|
Owner Equity Ratio
|
|
|
|
|
|
(ratio of line (b) to (c))
|
|
to 1.00
|
|
|
|
|
|
|
|
|
|
Required Ratio of 0.50 to 1.00
|
|
|
|
|
|
|
|
|
|
In Compliance
|
Yes
o
|
No
o
|
|
|
|
|
|
|
|
4.
|
Section 5.01(g) – Fixed Charge Ratio
|
|
|
|
|
|
|
|
|
|
|
(a)
|
EBITDA
|
|
$
|
|
|
|
(b)
|
Extraordinary Items
|
|
$
|
|
|
|
(c)
|
Numerator (sum of lines (a) and (b))
|
|
$
|
|
|
|
|
|
|
|
|
|
(d)
|
Current Portion of Long Term Debt
|
|
$
|
|
|
|
(e)
|
Interest Expense
|
|
$
|
|
|
|
(f)
|
Dividends
|
|
$
|
|
|
|
(g)
|
Tax Distributions
|
|
$
|
|
|
|
(h)
|
Maintenance Capital Expenditures
|
|
$
|
|
|
|
(i)
|
Denominator (sum of lines (d) through (h))
|
|
$
|
|
|
|
|
|
|
|
|
|
Ratio of line (c) to (i)
|
|
to 1.00
|
|
|
|
|
|
|
|
|
Required Ratio of 1.20 to 1.00
|
|
|
|
|
|
|
|
|
|
In Compliance
|
Yes
o
|
No
o
|
|
|
|
|
|
|
|
|
|
|
|
IN
WITNESS WHEREOF, the undersigned has signed and delivered this Certificate to
the Lender as of the day of ,
.
BORROWER:
HERON LAKE BIOENERGY, LLC
a Minnesota limited liability company
52
EXHIBIT B
PROJECT SOURCE AND USE STATEMENT
|
|
|
Revised Budget
|
|
Budget
|
|
Revised Budget
|
|
|
|
|
December 13, 2006
|
|
Changes
|
|
5/1/2007
|
|
|
Sources:
|
|
|
|
|
|
|
|
|
Senior Debt - Construction Loan
|
|
64,583,000
|
|
—
|
|
64,583,000
|
|
|
Senior Debt - Elevator Revolver
|
|
5,500,000
|
|
2,000,000
|
|
7,500,000
|
|
|
Member Equity
|
|
48,767,000
|
|
|
|
48,767,000
|
|
|
Member Equity - Land Exchange
|
|
500,000
|
|
|
|
500,000
|
|
|
Member Equity - Board Warrants
|
|
160,000
|
|
20,000
|
|
180,000
|
|
|
Grants - USDA
|
|
250,000
|
|
|
|
250,000
|
|
|
Grants - Jackson County
|
|
100,000
|
|
|
|
100,000
|
|
|
Interest
|
|
1,300,000
|
|
—
|
|
1,300,000
|
|
|
Water bond, other
|
|
—
|
|
—
|
|
—
|
|
|
USDA / Alliant Energy - Loan
|
|
740,000
|
|
—
|
|
740,000
|
|
|
TOTAL:
|
|
121,900,000
|
|
2,020,000
|
|
123,920,000
|
|
|
Uses:
|
|
|
|
|
|
|
|
|
Plant Construction Costs
|
|
|
|
|
|
|
|
|
Plant design build contract
|
|
81,286,872
|
|
—
|
|
81,286,872
|
|
|
Change Order Loadouts
|
|
—
|
|
|
|
—
|
|
|
Unit train loadout (75) ethanol
|
|
—
|
|
|
|
—
|
|
|
Unit train loadout (75) DDGS
|
|
—
|
|
|
|
—
|
|
|
Elevator facility
|
|
2,600,000
|
|
|
|
2,600,000
|
|
|
Scale upgrade
|
|
35,000
|
|
|
|
35,000
|
|
|
Administration building
|
|
1,200,000
|
|
—
|
|
1,200,000
|
|
|
Scale House
|
|
130,000
|
|
—
|
|
130,000
|
|
|
Office Equipment
|
|
135,000
|
|
—
|
|
135,000
|
|
|
Computers, Software, Network
|
|
65,000
|
|
—
|
|
65,000
|
|
|
Construction Performance Bond
|
|
—
|
|
—
|
|
—
|
|
|
Construction Insurance Builders Risk
|
|
205,000
|
|
—
|
|
205,000
|
|
|
Capitalized Interest
|
|
1,350,000
|
|
—
|
|
1,350,000
|
|
|
Construction Contingency
|
|
1,618,299
|
|
—
|
|
1,618,299
|
|
|
TOTAL:
|
|
88,625,171
|
|
—
|
|
88,625,171
|
|
53
|
Site Costs
|
|
|
|
|
|
|
|
|
Land Acquisition - 201 acres
|
|
2,130,000
|
|
—
|
|
2,130,000
|
|
|
Site Engineering (survey & borings)
|
|
70,000
|
|
—
|
|
70,000
|
|
|
Site fencing
|
|
25,000
|
|
—
|
|
25,000
|
|
|
Site maintenance
|
|
25,000
|
|
—
|
|
25,000
|
|
|
Site improvements (includes phase 1)
|
|
3,350,000
|
|
—
|
|
3,350,000
|
|
|
Soil Stabilization
|
|
1,000,000
|
|
—
|
|
1,000,000
|
|
|
Electrical Sub Station
|
|
1,205,000
|
|
—
|
|
1,205,000
|
|
|
City water & sewer
|
|
—
|
|
—
|
|
—
|
|
|
Highway road safety upgrade
|
|
650,000
|
|
—
|
|
650,000
|
|
|
Hard Surface Roads
|
|
800,000
|
|
—
|
|
800,000
|
|
|
Site utilities (includes phase II)
|
|
50,000
|
|
—
|
|
50,000
|
|
|
Liquid propane fuel storage
|
|
100,000
|
|
—
|
|
100,000
|
|
|
Permitting
|
|
200,000
|
|
—
|
|
200,000
|
|
|
Construction manager fees
|
|
—
|
|
—
|
|
—
|
|
|
TOTAL:
|
|
9,605,000
|
|
—
|
|
9,605,000
|
|
|
|
|
|
|
|
|
|
|
|
Railroad
|
|
|
|
|
|
|
|
|
Mainline Rail Switch
|
|
300,000
|
|
—
|
|
300,000
|
|
|
Yard rail switches
|
|
110,000
|
|
—
|
|
110,000
|
|
|
Rail track - Loop
|
|
4,385,548
|
|
—
|
|
4,385,548
|
|
|
Rail track - additional
|
|
400,000
|
|
—
|
|
400,000
|
|
|
Coal track contingency
|
|
—
|
|
—
|
|
—
|
|
|
Railroad contingency
|
|
425,781
|
|
—
|
|
425,781
|
|
|
TOTAL:
|
|
5,621,329
|
|
—
|
|
5,621,329
|
|
|
|
|
|
|
|
|
|
|
|
Fire protection/Water Supply
|
|
|
|
|
|
|
|
|
Fire protection loop
|
|
410,000
|
|
—
|
|
410,000
|
|
|
Fire water tank
|
|
323,351
|
|
—
|
|
323,351
|
|
|
Fire water pumps
|
|
125,000
|
|
—
|
|
125,000
|
|
54
|
Wells or water access
|
|
50,000
|
|
—
|
|
50,000
|
|
|
Water system pumps
|
|
—
|
|
|
|
—
|
|
|
Drain field & septic tank
|
|
90,000
|
|
—
|
|
90,000
|
|
|
Reverse osmosis water system
|
|
431,649
|
|
—
|
|
431,649
|
|
|
TOTAL:
|
|
1,430,000
|
|
—
|
|
1,430,000
|
|
|
Rolling Stock
|
|
|
|
|
|
|
|
|
Used front end loader - Coal
|
|
|
|
|
|
|
|
|
Used front end loader - DDGS
|
|
75,000
|
|
—
|
|
75,000
|
|
|
New skid loader
|
|
35,000
|
|
—
|
|
35,000
|
|
|
Used fork lift
|
|
30,000
|
|
—
|
|
30,000
|
|
|
Used scissor lift - 30’
|
|
10,000
|
|
—
|
|
10,000
|
|
|
Rail engine
|
|
290,000
|
|
—
|
|
290,000
|
|
|
Used pick-up
|
|
20,000
|
|
—
|
|
20,000
|
|
|
TOTAL:
|
|
460,000
|
|
—
|
|
460,000
|
|
|
|
|
|
|
|
|
|
|
|
Financing Costs
|
|
|
|
|
|
|
|
|
Participation & Loan Origination Fees
|
|
575,000
|
|
—
|
|
575,000
|
|
|
Bank commitment fees
|
|
80,000
|
|
—
|
|
80,000
|
|
|
Filing fees
|
|
—
|
|
—
|
|
—
|
|
|
Bank service fees
|
|
25,000
|
|
—
|
|
25,000
|
|
|
Construction inspectors - bank required
|
|
40,000
|
|
—
|
|
40,000
|
|
|
Bank Attorney Fees
|
|
100,000
|
|
—
|
|
100,000
|
|
|
Title Insurance
|
|
60,000
|
|
—
|
|
60,000
|
|
|
Disbursement Agent Fee
|
|
15,000
|
|
—
|
|
15,000
|
|
|
Appraisal Cost
|
|
22,500
|
|
—
|
|
22,500
|
|
|
TOTAL:
|
|
917,500
|
|
—
|
|
917,500
|
|
|
|
|
|
|
|
|
|
|
|
Pre-production period costs
|
|
|
|
|
|
|
|
|
Startup costs
|
|
—
|
|
—
|
|
—
|
|
|
Administration labor
|
|
120,000
|
|
—
|
|
120,000
|
|
55
|
Production labor
|
|
200,000
|
|
—
|
|
200,000
|
|
|
Utilities
|
|
200,000
|
|
—
|
|
200,000
|
|
|
Training costs
|
|
30,000
|
|
—
|
|
30,000
|
|
|
Operating costs
|
|
100,000
|
|
—
|
|
100,000
|
|
|
TOTAL:
|
|
650,000
|
|
—
|
|
650,000
|
|
|
|
|
|
|
|
|
|
|
|
Inventory - Working Capital
|
|
|
|
|
|
|
|
|
Inventory - working capital
|
|
1,000,000
|
|
—
|
|
1,020,000
|
|
|
Inventory - working capital elevator
|
|
5,625,000
|
|
1,875,000
|
|
7,500,000
|
|
|
Inventory - Corn
|
|
1,200,000
|
|
125,000
|
|
1,325,000
|
|
|
Inventory - spare parts
|
|
200,000
|
|
—
|
|
200,000
|
|
|
Inventory - ethanol
|
|
2,500,000
|
|
—
|
|
2,500,000
|
|
|
Denaturant, chem., yeasts, enzymes
|
|
250,000
|
|
—
|
|
250,000
|
|
|
Inventory - corn hedged
|
|
—
|
|
—
|
|
—
|
|
|
Inventory - DDGS
|
|
600,000
|
|
—
|
|
600,000
|
|
|
Inventory - Coal
|
|
30,000
|
|
—
|
|
30,000
|
|
|
Inventory - propane
|
|
30,000
|
|
—
|
|
30,000
|
|
|
TOTAL:
|
|
11,435,000
|
|
2,000,000
|
|
13,455,000
|
|
|
|
|
|
|
|
|
|
|
|
Organizational Costs
|
|
|
|
|
|
|
|
|
401k expense
|
|
—
|
|
—
|
|
—
|
|
|
Accounting
|
|
267,000
|
|
—
|
|
267,000
|
|
|
Advertising
|
|
5,000
|
|
—
|
|
5,000
|
|
|
Bank charges
|
|
2,000
|
|
—
|
|
2,000
|
|
|
Consulting fees
|
|
475,000
|
|
—
|
|
475,000
|
|
|
Depreciation
|
|
25,000
|
|
—
|
|
25,000
|
|
|
Directors expense
|
|
450,000
|
|
—
|
|
450,000
|
|
|
Directors travel expense
|
|
100,000
|
|
—
|
|
100,000
|
|
|
Donations
|
|
2,500
|
|
—
|
|
2,500
|
|
56
|
Dues
|
|
8,500
|
|
—
|
|
8,500
|
|
|
Insurance - D&O
|
|
175,000
|
|
—
|
|
175,000
|
|
|
Insurance - operations
|
|
30,000
|
|
—
|
|
30,000
|
|
|
Internet service
|
|
4,000
|
|
—
|
|
4,000
|
|
|
Legal
|
|
700,000
|
|
—
|
|
700,000
|
|
|
Membership fees
|
|
2,000
|
|
—
|
|
2,000
|
|
|
Membership meetings
|
|
20,000
|
|
—
|
|
20,000
|
|
|
Miscellaneous
|
|
20,000
|
|
—
|
|
20,000
|
|
|
Office equipment
|
|
20,000
|
|
—
|
|
20,000
|
|
|
Office expense
|
|
50,000
|
|
—
|
|
50,000
|
|
|
Office labor
|
|
250,000
|
|
—
|
|
250,000
|
|
|
Payroll tax expense
|
|
25,000
|
|
—
|
|
25,000
|
|
|
Postage
|
|
30,000
|
|
—
|
|
30,000
|
|
|
Printing
|
|
35,000
|
|
—
|
|
35,000
|
|
|
Telephone
|
|
30,000
|
|
—
|
|
30,000
|
|
|
Cost of raising capital
|
|
430,000
|
|
—
|
|
430,000
|
|
|
Office Utilities
|
|
—
|
|
—
|
|
—
|
|
|
TOTAL:
|
|
3,156,000
|
|
—
|
|
3,156,000
|
|
|
|
|
—
|
|
|
|
|
|
|
TOTAL
USES:
|
|
121,900,000
|
|
4,020,000
|
|
123,920,000
|
|
57
EXHIBIT C
FORM OF
OPINION LETTER
Date: October 1, 2007
[
Draft]
AgStar
Financial Services, PCA
1921
Premier Drive
P.O. Box
4249
Mankato,
MN56002-4249
Re:
Fourth Amended Master Loan Agreement Dated October 1,
2007, by and between Heron Lake BioEnergy, LLC and AgStar Financial Services,
PCA
Ladies and Gentlemen:
We have acted as counsel to Heron
Lake BioEnergy, LLC, a Minnesota limited liability company (the “Company”), in
connection with the negotiation of the Fourth Amended and Restated Master Loan
Agreement (the “Loan Agreement”) by and between the Company and Agstar
Financial Services, PCA (the “Lender” or “you”) dated as of the date hereof and
the consummation of the transactions described therein. This letter is furnished to satisfy a
condition set forth in Section 3.01(r) of the Loan Agreement. All capitalized terms used in this letter
that are not otherwise defined herein have the meanings assigned to them in the
Loan Agreement unless the context requires otherwise.
In our capacity as counsel to the
Company, and for purposes of this opinion, we have examined the following
documents:
(i)
the Loan Agreement;
(ii)
the Fourth Amended and Restated Second
Supplement;
(iii)
the Third Supplement to the Loan Agreement;
(iv)
the Fourth Supplement to the Loan Agreement;
(v)
the Second Amended and Restated Revolving
Note;
(vi)
the Term Note;
(vii)
the Revolving Term Note;
(viii)
the Revolving Line of Credit Note;
(ix)
the Security Agreement;
(x)
the Mortgage;
58
(xi)
the Disbursing Agreement;
(ix)
the Articles of Organization and Member
Control Agreement, as amended, of the Company;
(x)
the records of proceedings and actions of the
members and Board of Governors of the Company with respect to the transactions
between you and the Company contemplated by the Loan Agreement;
(xi)
such other documents, agreements and
materials as we have deemed necessary and appropriate to render the opinions
set forth in this letter, subject to the limitations, assumptions and
qualifications noted below.
The documents listed as items (i) through
(x) above are dated as of the first date written above and are
collectively referred to herein as the “Loan Documents.” In addition, we have examined and relied upon
representations and warranties as to matters of fact (other than facts
constituting conclusions of law) contained in and made pursuant to the Loan
Documents.
In addition, we have examined
such other resolutions, documents, certificates and records and have made such
investigations of law and fact as we have deemed necessary or appropriate to
enable us to render the opinions expressed herein.
In reaching the opinions set
forth below, we have assumed, and have not independently verified, the
genuineness of all signatures on all documents, the legal capacity and
competency for all purposes relevant hereto of all natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
the authentic originals of all documents submitted to us as copies, the
correctness, completeness and accuracy of all facts set forth in all
representations, warranties and certificates referred to or identified in this
opinion, and that there are no documents, agreements or understandings to which
the Lender is a party between the Lender, on the one hand, and the Company on
the other hand, other than the Loan Documents, which would have an effect on
the opinions set forth below. In
examining documents executed by parties other than the Company, we have assumed
that such parties had the requisite power, right and authority (corporate or
otherwise) to execute, deliver and perform all of their respective obligations
thereunder and have also assumed the due authorization by all requisite
corporate action and execution and delivery of such documents by such parties,
and the validity, legality and binding effect of those documents on those
parties. As to questions of fact
material to our opinions, we have relied upon the representations and
warranties made in the Loan Documents and upon certificates of officers or
other representatives of the Company and of public officials (“Certificates”).
We have not independently or through third parties verified such
representations and warranties or Certificates, or made any independent
investigation as to the existence of agreements, instruments or other
documents, orders, judgments or decrees by which the Company or any of its
properties or assets may be bound.
In basing the opinions and other
matters set forth herein on phrases such as “best of our knowledge,” “our
knowledge,” or “known to us,” such phrases signify that, in the course of our
representation of the Company in matters with respect to which we have been
engaged by the
59
Company to give substantive attention as counsel, no
information has come to our attention that would give us actual knowledge that
any such opinion or other matters are not accurate or that any of the foregoing
Certificates and other matters on which we have relied are not accurate and
complete. Except as otherwise stated
herein, we have undertaken no independent investigation or verification of such
matters. The phrases “best of our
knowledge,” “our knowledge,” “known to us” and similar language used herein are
intended to be limited to the knowledge of the lawyers currently employed by
our firm who have performed substantive legal services related to the Loan
Documents and have specific knowledge of the substance of this opinion.
Based on our review of the
foregoing, and subject to the assumptions, qualifications and limitations set
forth herein, it is our opinion that:
1.
The Company is a limited liability company
duly organized, validly existing, and in good standing under the laws of the State
of Minnesota.
2.
The Company has the power to enter into and
perform its obligations under the Loan Documents.
3.
The Company has taken all necessary company
action to authorize the execution, delivery, and performance by the Company of
the Loan Documents, and the consummation by the Company of the transactions set
forth in the Loan Documents.
4.
The Loan Documents have been duly and validly
executed and delivered by the Company and constitute legal, valid, binding, and
enforceable obligations of the Company.
5.
The execution and delivery by the Company of
the Loan Documents do not, and the consummation by the Company of the
transactions contemplated by the Loan Documents and the compliance by the
Company with the provisions of the Loan Documents do not, (a) conflict
with or result in a breach of any provision of the Company’s Articles of
Organization, or Member Control Agreement, (b) to our knowledge, conflict
with or result in a material violation of any applicable state or federal law
or regulation, (c) to our knowledge, conflict with any order, judgment, or
decree to which the Company are a party or subject or by which any of its
properties or assets are bound, or (d) to our knowledge, conflict with any
Material Contract to which the Company is a party or by which the Company or
any of its properties or assets are bound.
6.
To our knowledge, except as expressly
disclosed in the Loan Documents, there are no actions, suits or proceedings
pending or threatened in writing against or affecting the Company before any
court or arbitrator or by or before any administrative agency or government
authority, which, if adversely determined, would constitute an material adverse
effect on the Company. We do, however,
call your attention to the Permit Litigation to which the Company is a party,
the outstanding licenses, permits and consents per the schedule provided under Section 3.02(c) to
the Loan Agreement, and the claims and action described on Schedule 4.01(f) to
the Loan Agreement. We make no opinions
herein with respect to the outcome or impact of those matters.
60
The foregoing opinions are subject to the following
qualifications (in addition to the qualifications, exceptions, limitations and
assumptions specified above):
A.
Our opinions as they relate to the legality,
validity, binding effect and/or enforceability of the Loan Documents are
subject to the limitations that might result from bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent or preferential transfer,
fraudulent conveyance, and other state and federal laws relating to or
affecting the rights or remedies of creditors generally, now or hereafter, in
effect.
B.
Our opinions as they relate to the legality,
validity, binding effect and/or enforceability of the Loan Documents are
subject to the qualification that the availability of the remedies of specific
performance or injunctive relief, or any other equitable remedy, is subject to
the discretion of the court before which a proceeding therefor may be brought,
equitable defenses and the application of general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law), including without limitation, concepts of materiality,
reasonableness, good faith, fair dealing and other similar doctrines affecting
the enforcement of agreements generally.
C.
Except as expressly stated herein, no opinion
is expressed or implied as to the truth, accuracy or completeness of any of the
representations, warranties or other statements of the Company or any other
person contained in any of the Loan Documents or in any exhibit, schedule or
attachment thereto.
D.
We express or imply no opinion as to what
actions the parties to the Loan Documents are required to or may take or fail
to take on or after the date hereof which, if taken or not taken, would affect
or impair the legality, validity, binding effect and/or enforceability of the
Loan Documents or the rights and remedies of the parties thereunder.
E.
With respect to the legality, validity,
binding effect and enforceability of the remedies available to the Lender under
the Uniform Commercial Code in force in the State of Minnesota (“UCC”), we have
assumed that the Lender will enforce such remedies in accordance with the UCC
and under such circumstances and in a manner in which it is commercially
reasonable to do so. In addition,
because a claimant bears the burden of proof required to support its claim, our
opinion assumes that you will undertake the effort and expense necessary to
present your claims in the prosecution of any remedy accorded you under the
Loan Documents.
F.
We express or imply no opinion as to the
creation, attachment, perfection or priority of any security interest, mortgage
or other lien which the Lender may claim in any real or personal property of
the Company under any of the Loan Documents or otherwise.
G.
Our opinions as they relate to the legality,
validity, binding effect and/or enforceability of the Loan Documents are
subject to the limitations arising from state and federal court decisions
involving statutes, public policy and/or principles of equity holding that (i) purported
waivers of notice, remedies (or the delay in, omission of, or enforcement
thereof) or the benefits of
61
statutory provisions or constitutional or common law
rights and broadly or vaguely stated provisions waiving rights or waivers of
unknown future rights or duties imposed by law are or may be void or
unenforceable, (ii) under certain circumstances, provisions declaring that
the failure to exercise or delay in exercising rights or remedies will not
operate as a waiver of any such right or remedy are invalid, (iii) provisions
declaring that the documents may only be amended or waived in writing may be
unenforceable to the extent that an oral agreement or an implied agreement by
trade practice or course of conduct has been created modifying one or more
provisions of the Loan Documents, (iv) the enforcement of public policy is
of a paramount public interest which may prohibit enforcement of certain
contractual provisions; (v) the indemnification and exculpation provisions
of the Loan Documents may be unenforceable to the extent that the enforcement
of such provisions is determined to be against public policy; and (vi) certain
other provisions in the Loan Documents, including, without limitation,
self-help provisions, provisions that purport to establish evidentiary
standards, provisions requiring the payment of a late payment or repayment
charge, fee, reinvestment charge, premium or penalty, however denominated, are
or may be unenforceable in whole or in part.
H.
Since it is necessary for the Lender to elect
its proper remedy in certain instances, no opinion is expressed or implied that
any cumulative remedy provision contained in any of the Loan Documents is valid
or enforceable.
I.
No opinion is expressed or implied as to the
legality, validity, binding effect or enforceability of (i) any power of
attorney granted to the Lender in any of the Loan Documents, or (ii) any
document, certificate, agreement or instrument executed or delivered by the
Lender pursuant thereto.
J.
Minnesota Statutes, Section 290.371,
subd. 4, provides that any corporation required to file a Notice of Business
Activities Report does not have a cause of action upon which it may bring suit
under Minnesota law unless the corporation has filed a Notice of Business
Activities Report and that the use of the courts of the State of Minnesota for
all contracts executed and all causes of action that arose before the end of
any period for which a corporation failed to file a required report is
precluded. We note, however, that a
court may excuse the failure to file such a report under certain circumstances
described in the statute. Insofar as the
foregoing opinion may relate to the legality, validity, binding effect and/or
enforceability of any agreement under Minnesota law or in a Minnesota court, we
have assumed that any party seeking to enforce the agreement has at all times
been, and will continue at all times to be, exempt from the requirement of
filing a Notice of Business Activities Report or, if not exempt, has duly
filed, and will continue to duly file, all Notice of Business Activities
Reports.
K.
In giving this opinion, we advise you that a
Minnesota court may not strictly enforce certain covenants contained in the
Loan Documents or allow acceleration of the maturity of the indebtedness
evidenced by the Notes if it concludes that such enforcement or acceleration
would be unreasonable under the then existing circumstances. We do believe, however, that subject to the
limitations expressed elsewhere in this opinion, enforcement or acceleration
would be available if an Event of Default occurs as a result of a material
breach of a material covenant contained in the Loan Documents.
62
L.
Certain rights, remedies, waivers and
indemnities contained in the Loan Documents, in addition to those specifically
enumerated above, may be limited or rendered ineffective by applicable
Minnesota laws or judicial decisions governing such provisions, but such laws
and judicial decisions do not render the Loan Documents invalid as a whole, and
there exist, in the Loan Documents or pursuant to applicable law, legally
adequate remedies for a realization of the principal benefits intended to be
provided by the Loan Documents.
In addition to the qualifications set forth above,
the opinions set forth herein are also subject to the following qualifications:
M.
We are members of the Bar of the State of
Minnesota. The opinions expressed herein
are limited to matters of Minnesota and federal law. We express no opinion with respect to the
laws of any other jurisdiction. For
purposes of this opinion we have assumed that the internal laws (as opposed to
the choice of law rules) of the State of Minnesota and applicable federal law
would apply and have rendered our opinion on that basis. To the extent that the law of another
jurisdiction applies, we have assumed that the law of that jurisdiction would
be the same as Minnesota law. We render
no opinion as to the enforceability of any choice of law provision.
N.
We express no opinion with respect to title
to any property, nor do we express any opinion with respect to the existence of
encumbrances upon any property or the attachment, validity, perfection or
priority of any liens or security interests.
O.
Except as explicitly addressed in the
numbered opinions above, no opinion is expressed herein as to any of the topics
listed under Section 19 “Specific Legal Issues” of the Third-Party Legal
Opinion Report, published in 1991 by the Section of Business Law of the
American Bar Association.
This opinion is limited to the
specific legal issues addressed herein and no opinion is implied or may be
inferred beyond the matters expressly set forth herein. Our opinion is rendered to you solely for
your benefit in connection with consummation of the transactions set forth in the
Loan Documents and may not be quoted in whole or in part, filed publicly or
delivered to, or relied upon by any other person without our prior written
consent. Our opinion is based upon the
state of facts and the law existing and in effect on the date hereof, and we
assume no obligation to revise, supplement or update this opinion in any
respect at any time subsequent to the date hereof in order to account for any
change in the law (whether or not hereinafter enacted or adopted) or future
facts, events or circumstances affecting any of the transactions contemplated
by any of the Loan Documents.
|
|
Very truly yours,
|
|
|
|
|
|
LINDQUIST & VENNUM P.L.L.P.
|
63
Schedule 3.01(d)
Real Property
Tract 1:
Part of the SE1/4 of Sec. 16, T104N, R37W, Jackson County,
Minnesota, described as follows:
Beginning at an existing iron monument at the SW corner of the SE1/4 of
said Sec. 16; thence North 00°29’31” East, bearing based on Jackson County
Coordinate System, along the West line of the SE1/4 of said Sec. 16, a distance
of 1995.89 feet, to a point on the Southerly right of way line of the Union
Pacific Railroad; thence North 76°38’53” East, along the Southerly right of way
line of said Union Pacific Railroad, a distance of 2701.22 feet, to a point on
the East line of the SE1/4; thence South 00°18’29” West, along the East line of
said SE1/4 a distance of 1950.98 feet; thence South 89°57’40” West, parallel with the South line
of said SE1/4, a distance of 1005.15 feet; thence South 61°35’10” West a
distance of 172.03 feet; thence South 00°18’29” West, parallel with the East
line of said SE1/4, a distance of 585.18 feet, to a point on the South line of
said SE1/4; thence South 89°57’40” West, along the South line of SE1/4, a distance
of 1475.25 feet, to the point of beginning.
Tract 2:
Part of the SW1/4 of Sec. 16, T104N, R37W, Jackson County,
Minnesota, lying Southerly of the Southerly right of way line of the Union
Pacific Railroad, described as follows:
Beginning at an existing iron monument at the SE
corner of the SW1/4 of said Sec. 16; thence South 89°57’49” West, along the
South line of said SW1/4, a distance of 1031.09 feet; thence North 00°37’05”
East, parallel with the West line of said SW1/4, a distance of 275.02 feet;
thence South 89°57’49” West, parallel with the South line of said SW1/4, a
distance of 1600.10 feet, to a point on the West line of said SW1/4; thence
North 00°37’05” East, along the West line of said SW1/4, a distance of 593.98
feet; thence South 89°22’55” East a distance of 412.00 feet; thence North 00°37’05”
East, parallel with the West line of said SW1/4, a distance of 400.00 feet;
thence North 89°22’55” West a distance of 412.00 feet, to a point on the West
line of said SW1/4; thence North 00°37’05” East, along the West line of SW1/4,
a distance of 103.50 feet, to a point on the Southerly right of way line of the
Union Pacific Railroad, thence North 76°38’53” East, along the Southerly right
of way line of said Union Pacific Railroad, a distance of 2706.70 feet, to a
point on the East line of said SW1/4; thence South 00°29’31” West, along the
East line of said SW1/4, a distance of 1995.89 feet, to the point of beginning.
64
Schedule 4.01(a)
Description of Certain Transactions Related to the Borrowers’ Stock
Up to 225,000 Class A Units (in aggregate) were
issued in August 2007, at the price of $.80 per unit, pursuant to
five-year options granted to the Borrower’s Board of Governors (including
estate of deceased former Governor).
3,750,000 Class A Units were issued, in
exchange for 3,750,000 Class B Units, pursuant to a subscription and
exchange agreement were entered into with Project Viking, LLC, an affiliate of
Roland Fagen, in May 2007.
65
Schedule 4.01(f)
Description of Certain Threatened Actions, etc.
Permit Litigation (as defined in the Loan
Documents) and Borrower’s proceedings in front of MPCA relating to the Air
Permit.
The following proceeding is contemplated
before the Securities and Exchange Commission:
Borrower intends to file a registration statement relating to the
registration of the Borrower’s Class A Units pursuant to Section 12(g)(1) of
the Securities Exchange Act of 1934 and regulations promulgated thereunder
relating thereto.
Outstanding licenses, permits and consents on
the schedule provided under Section 3.02(c).
Any claims between the Borrower and Fagen, Inc.,
under or in connection with the Design Build Contract (“Fagen Claims”).
Administrative Penalty Order issued by the
MPCA dated August 7, 2007, requiring the Borrower to undertake certain
specified corrective actions.
66
Schedule 4.01(k)
Location of Inventory and Farm Products; Third Parties in Possession;
Crops
See Schedule 4.01(l) below (which
locations are incorporated herein by reference).
Borrower and Subsidiary maintain various
accounts with lenders/financial institutions that are subject to account
control agreements in favor of Lender.
Borrower and Subsidiary will lease certain real property from Union
Pacific Railroad Company with respect to the acquisition of the elevator
facilities located at (Lakefield Facility):
105 Main Street, Lakefield, Minnesota 56150 and (Wilder Facility): Highway 60, Wilder, Minnesota 56101, as
further described in the purchase agreement for the facilities between
Subsidiary and seller of such property.
Borrower and Subsidiary maintain petroleum, soybeans, corn and other
inventory at the Real Property, on the leased real property referenced above
and on the real property and improvements owned by Subsidiary.
67
Schedule 4.01(l)
Office Locations; Fictitious Names; Etc.
Locations
:
Lakefield Facility: 105 Main Street, Lakefield, Minnesota 56150
Wilder Facility: Highway 60, Wilder, Minnesota 56101
Heron Lake: 91246 390
th
Avenue, PO
Box 198, Heron Lake, Minnesota 56137-0198 (Jackson County)
Jurisdiction of Organization
:
Minnesota
Other Names
:
Heron Lake BioEnergy, LLC, f.k.a. Generation
II Ethanol, LLC
Heron Lake BioEnergy (assumed name)
Lakefield Farmers Elevator
Income Tax Numbers
:
Heron Lake BioEnergy - FEIN: 41-2002393; MN TID: 5537084
Lakefield Farmers Elevator, LLC – FEIN: 20-2990455;
MN TID: 7995842
MN State Charter Numbers:
Heron Lake BioEnergy, LLC: 22013-LLC
Lakefield Farmers Elevator, LLC: 1398208-2
68
Schedule 4.01(p)
Intellectual Property
Tradenames: Heron Lake BioEnergy;
Generation II Ethanol; Lakefield Farmers Elevator
Domain Names used in the ordinary course of business.
69
Schedule 4.01(t)
Environmental Compliance
The environmental conditions identified on the
Limited Phase II Assessment for the Lakefield elevator facility located at 105
and 111 Main Street, Lakefield, Minnesota 56150, a copy of which is attached
hereto and incorporated herein, and any potential remediation measures
identified in said Assessment that may be required to be addressed and/or taken
prior to or in conjunction with acquisition of the Lakefield elevator facility
or pursuant to a post-closing undertaking agreement between the Borrower or its
subsidiaries and the seller of said property.
The Environmental Laws implicated by the
schedule provided under Section 3.02(c).
70
Schedule 5.01(o)
Management
Our business
and affairs are managed by or under the direction of our Board of Governors. Our Board of Governors may create additional
governorships and may fill those vacancies by the affirmative vote of a
majority of the members of the Board of Governors serving at the time of the
increase. The members of this first
Board of Governors shall serve until our first annual meeting of members.
|
Name
|
|
Position
|
|
Address
|
|
Robert J. Ferguson
|
|
Governor, Board
President, CEO and General Manager
|
|
P.O. Box 167
Heron Lake, MN 56137
|
|
Michael
S. Kunerth
|
|
Governor,
Board Treasurer
|
|
34858
150
th
Street
Brewster, MN 56119
|
|
David
J. Woestehoff
|
|
Governor,
Board Secretary
|
|
15466
West 270
th
Street
Belle Plaine, MN 56011
|
|
David
J. Bach
|
|
Governor
|
|
27817
351
st
Avenue
Henderson, MN 56044
|
|
Timothy O. Helgemoe
|
|
Governor
|
|
16087 Henry Drive
Utica, MN 55979
|
|
Milton
J. McKeown
|
|
Governor
|
|
P.O. Box
201
Heron Lake, MN 56137
|
|
Doug
Schmitz
|
|
Governor,
Board Vice President
|
|
P.O. Box
175, Hwy 30
Currie, MN 56123
|
|
Robert
Wolf
|
|
Governor
|
|
748
Kentucky Avenue
Adrian, MN 56110
|
|
Brian
Thome
|
|
Governor
(Fagen Appointee)
|
|
501
W. Highway 212
Granite Falls, MN 56241
|
|
Dave
Reinhart
|
|
Governor
(Fagen Appointee)
|
|
501
W. Highway 212
Granite Falls, MN 56241
|
|
Jim
Gerber
|
|
Chief
Financial Officer – Contractor
|
|
1029
Frontage Rd
Slayton, MN 56172
|
We expect the balance of our
employees will be hired and trained before we complete construction on the
plant. We expect that training of
employees and on-site, start-up assistance will be part of our design-build
contract with our Fagen, Inc.
71
Schedule 5.02(a)
Description of Certain Liens, Lease Obligations, etc.
See Section 5.02(a) and liens set
forth therein and contemplated thereby.
The Borrower leases a copy machine and is
subject to a lease agreement.
The Borrower intends to enter into a secured
loan arrangement with the Federated Rural Electric Ass’n/USDA to obtain funds
in the approximate principal amount of $600,000.00. The Borrower’s obligations under the loan
arrangement may be secured by a security interest in certain assets of the Borrower
to be specified, provided any such security interest shall be subject to an
intercreditor agreement reasonably satisfactory to the Lender.
The Borrower intends to enter into a secured
loan arrangement with Interstate Power and Light Company and Alliant Energy
Company to obtain funds in the approximate principal amount of
$140,000.00. The Borrower’s obligations
under the loan arrangement may be secured by a security interest in certain
assets of the Borrower to be specified; provided any such security interest
shall be subject to an intercreditor agreement reasonably satisfactory to the
Lender.
The Borrower leases 100 covered hopper cars
pursuant to that certain Railroad Car Lease Agreement between Trinity
Industries Leasing Company and Borrower dated June 26, 2006 and that
certain Rider One (1) dated November 1, 2006.
At October 31, 2006, the Borrower had
recorded a liability for derivative instruments related to corn futures
positions of approximately $916,000.00.
The Borrower expects to incur and record liabilities for derivative
instruments relating to commodity futures positions in future periods.
The Borrower has entered into a note payable
in the original principal amount of $100,000.00 to Jackson County with interest
at 4.00%, forgivable upon job creation thresholds at specified wages as part of
the plant development within two years of plant completion, but no later than November 1,
2009.
Assessment payable as part of water treatment
agreement in the amount of $3,550,000.00 as of October 31, 2006.
72
Schedule 5.02(k)
Transactions with Affiliates
Purchase of corn from any governor, officer or their
affiliate, provided said purchase is in accordance with Borrower’s Member
Control Agreement
The options and exchange agreement referenced in
Schedule 4.01(a)
Transactions between Borrower and its subsidiaries
pursuant to or in accordance with their respective member control agreements.
The Borrower has procured a software package from a
vendor in conjunction with an Affiliate in order to maximize economic
efficiencies associated with the procurement.
Transactions with Fagen, Inc. pursuant to the Design-Build
Agreement between Fagen, Inc. and Borrower dated September 28, 2005.
Transaction with Federated Electric to construct and operate a
sub-station.
73
EXHIBIT 10.12
CERTAIN
INFORMATION INDICATED BY [***] HAS BEEN DELETED FROM THIS EXHIBIT AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2.
Standard Form of Agreement Between
Owner and Design-Builder - Lump Sum
This document has important legal
consequences. Consultation with
an attorney is recommended with
respect to its completion or modification.
This
AGREEMENT
is made as
of the 28th day of September in the year of 2005, by and between the
following parties, for services in connection with the Project identified
below.
OWNER:
(Name
and address)
Heron Lake
BioEnergy, LLC
201 10
th
Street
PO Box 198
Heron Lake, MN
56137
DESIGN-BUILDER:
(Name
and address)
Fagen, Inc.
501 W. Highway 212
P. O. Box 159
Granite Falls, MN
56241
PROJECT:
(Include
Project name and location
as
it will appear in the Contract
Documents)
50 MGY Coal-fired
Dry Grind Ethanol Plant
In consideration
of the mutual covenants and obligations contained herein, Owner and
Design-Builder agree as set forth herein.
Article 1
Scope of Work
1.1
Design-Builder shall
perform all design and construction services, and provide all material,
equipment, tools and labor, necessary to complete the Work described in and
reasonably inferable from the Contract Documents.
Article 2
Contract Documents
2.1
The Contract Documents
are comprised of the following:
.1
All written modifications, amendments and
change orders to this Agreement issued in accordance with DBIA Document
No. 535,
Standard Form of General
Conditions of Contract Between Owner and Design-Builder
(1998
Edition) (“General Conditions of Contract”);
.2
This Agreement, including all exhibits and
attachments, executed by Owner and Design-Builder, said Exhibits being:
Exhibit A - Performance
Guarantee Criteria – (2) Pages;
Exhibit B - General Project
Scope - (3) Pages;
Exhibit C –Owner’s
Responsibilities - (7) Pages;
Exhibit D – License of
Proprietary Property of ICM, Inc. – (6) Pages;
Exhibit E – Start-up Services
to be Provided to Owner (1) Page;
Exhibit F – Project Schedule;
Exhibit G – Letter Agreement
between Owner and Design-Builder;
Exhibit H – Letter Agreement #2
between Owner and Design-Builder.
.3
Written
Supplementary Conditions, consisting of three pages, to the General Conditions
of Contract;
.4
The General
Conditions of Contract;
.5
Preliminary Construction Documents
prepared by Design-Builder; and
.6
The following other documents, if
any: N/A
Article 3
Interpretation and Intent
3.1
The Contract
Documents are intended to permit the parties to complete the Work and all
obligations required by the Contract Documents within the Contract
Time(s) for the Contract Price. The Contract Documents are intended to be
complementary and interpreted in harmony so as to avoid conflict, with words
and phrases interpreted in a manner consistent with construction and design
industry standards. In the event
2
of any
inconsistency, conflict, or ambiguity between or among the Contract Documents,
the Contract Documents shall take precedence in the order in which they are
listed in Section 2.1 hereof.
3.2
Terms, words and phrases
used in the Contract Documents, including this Agreement, shall have the meanings
given them in the Supplementary Conditions and General Conditions of Contract.
3.3
The Contract Documents
form the entire agreement between Owner and Design-Builder and by incorporation
herein are as fully binding on the parties as if repeated herein. The Contract
Documents supercede any prior letters of intent between the parties, and such
letters of intent are now null and void. No oral representations or other
agreements have been made by the parties except as specifically stated in the
Contract Documents.
Article 4
Ownership of Work Product
4.1
Work Product
. All
drawings, specifications and other documents and electronic data furnished by
Design-Builder to Owner under this Agreement (“Work Product”) are deemed to be
instruments of service and Design-Builder shall retain the ownership and
property interests therein, including the copyrights thereto.
4.2
Owner’s Limited License
Upon Payment in Full.
Upon Owner’s payment in full for all Work performed
under the Contract Documents, Design-Builder shall vest in Owner a limited
license to use the Work Product in connection with Owner’s occupancy and repair
of the Project and Design-Builder shall provide Owner with a copy of the “as
built” plans, conditioned on Owner’s express understanding that its use of the
Work Product and its acceptance of the “as built” plans is at Owner’s sole risk
and without liability or legal exposure to Design-Builder or anyone working by
or through Design-Builder, including Design Consultants of any tier
(collectively the “Indemnified Parties”), provided, however, that any
performance guarantees and warranties (of equipment or otherwise) shall remain
in effect according to the terms of this Agreement. Owner shall be entitled to
use the Work Product for the purpose relating to this Project, but shall not be
entitled to use the Work Product on any other projects, including expansion of
this Project. The limited license to use the Work Product granted herein by
Design-Builder to Owner shall be governed by and construed in accordance with
the same terms and provisions contained in the License Agreement between Owner
and ICM, attached hereto as Exhibit D and incorporated herein by reference
thereto, except (i) references in such License Agreement to ICM and
Proprietary Property shall refer to Design-Builder and Work Product,
respectively, (ii) the laws of the State of Minnesota shall govern such
limited license, and (iii) the arbitration provisions contained in
Article 10 of the General Conditions shall apply to any breach or
threatened breach of Owner’s duties or obligations under such limited license
other than Design-Builder shall have the right to seek injunctive relief in a
court of competent jurisdiction against Owner or its Representatives for any
such breach or threatened breach. Design-Builder is utilizing certain
proprietary property and information of ICM, Inc., a Kansas corporation
(“ICM”), in the design and construction of the Project, and Design-Builder may
incorporate proprietary property and information of ICM into the Work Product.
Owner’s use of the proprietary property and information of ICM shall be
governed by the terms and provisions of the License Agreement between Owner and
ICM, attached hereto as Exhibit D, to be executed by such parties in
connection with the execution of this Agreement. The preceding last three
sentences of this paragraph also apply to Articles 4.3 and 4.4 below.
4.3
Owner’s Limited License Upon Owner’s Termination for
Convenience or Design-Builder’s Election to Terminate.
If Owner
terminates the Project for its convenience as set forth in Article 8
hereof, or if Design-Builder elects to terminate this Agreement in accordance
with Section 11.4 of the General Conditions of Contract, Design-Builder
shall, then upon Owner’s payment in full of the amounts due Design-Builder
under the Contract Documents, vest in Owner a limited license to use the Work
Product to complete the Project and subsequently occupy and repair the Project,
subject to the following:
3
.1
Use of the Work Product is at Owner’s sole
risk without liability or legal exposure to any Indemnified Party; provided,
however, that any “pass through” warranties regarding equipment or express
warranties regarding equipment provided by this Agreement shall remain in
effect according to their terms; and
.2
If the termination for convenience is by
Owner or if Design-Builder elects to terminate this Agreement in accordance
with Section 11.4 of the General Conditions of Contract, then Owner agrees
to pay Design-Builder the additional sum of One Million Dollars ($1,000,000.00)
as compensation for the limited right to use the Work Product (completed “as
is” on the date of termination) in accordance with this Article 4.
4.4
Owner’s Limited License Upon Design-Builder’s Default.
If this Agreement is terminated due to Design-Builder’s default
pursuant to Section 11.2 of the General Conditions of Contract and
(i) it is determined that Design-Builder was in default and
(ii) Owner has fully satisfied all of its obligations under the Contract
Documents through the time of Design-Builder’s default, then Design-Builder
shall grant Owner a limited license to use the Work Product in connection with
Owner’s completion and occupancy and repair of the Project. This limited
license is conditioned on Owner’s express understanding that its use of the
Work Product is at Owner’s sole risk and without liability or legal exposure to
any Indemnified Party; provided, however, that any “pass through” warranties
regarding equipment or express warranties regarding equipment provided by this
Agreement shall remain in effect according to their terms. This limited license
would grant Owner the ability to repair the Project at Owner’s discretion.
4.5
Owner’s Indemnification for Use of Work Product.
If
Owner uses the Work Product under any of the circumstances identified in this
Article 4, Owner shall defend, indemnify and hold harmless the Indemnified
Parties from and against any and all claims, damages, liabilities, losses and
expenses, including attorneys’ fees, arising out of or resulting from the use
of the Work Product; provided, however, that any “pass through” warranties
regarding equipment or express warranties regarding equipment provided by this
Agreement shall remain in effect according to their terms.
Article 5
Contract Time
5.1
Date of Commencement.
The Work shall
commence within five (5) days of Design-Builder’s receipt of Owner’s
written Notice to Proceed (“Date of Commencement”) unless the parties mutually
agree otherwise in writing. The parties agree that a valid Owner’s Notice to
Proceed cannot be given until: 1) Owner has title to the real estate on which
the project will be constructed; 2) a Letter of Commitment for all necessary
financing to construct the project is received; 3) the Phase I and Phase II
site work required of Owner, as described in Exhibit ”C” is completed
along with Phase II redline drawings; however, Design-Builder will consider
accepting Owner’s Notice to Proceed after the site is graded and the road/laydown
is completed and rocked; 4) the air
permit(s) and/or other applicable local, state or federal permits
necessary so that construction can begin, have been obtained; 5) it appears
reasonable that financial close on the Letter of Commitment will occur within
sixty (60) days of the issuance of said Notice to Proceed; and 6) Owner shall
execute a sales tax exemption certificate and provide to Design-Builder.
Design-Builder must receive a valid Owner’s Notice to Proceed within 270 days
of the signing of this Agreement; otherwise, the Contract Price referred to in
Section 6.1 is subject to a price increase.
5.2
Substantial Completion and Final Completion
4
5.2.1
Substantial Completion
of the entire Work shall be achieved no later than four hundred eighty-five
(485) calendar days after the Date of Commencement. However, any delays caused
by the modification of Owner’s construction air emission permit as referenced
in Section 11, are hereby specifically excluded from the 485 calendar days
specified in this section.
5.2.2
Interim milestones and/or
Substantial Completion of identified portions of the Work shall be achieved as
described in Exhibit F. The Scheduled Substantial Completion date will
likewise be extended a corresponding amount of days for each day Owner exceeds
the deliverable timeframes referred to in Exhibit F.
5.2.3
Final Completion of the
Work or identified portions of the Work shall be achieved as expeditiously as reasonably
practicable, but not later than sixty (60) days following issuance of the
Certificate of Substantial Completion.
5.2.4
All of the dates set forth
in this Article 5 (“Contract Time(s)”) shall be subject to adjustment in
accordance with the General Conditions of Contract. Specifically, if delays in
the Contract Time occur because of delay in the delivery of materials or
equipment that is beyond the control of Design-Builder, the Contract Time will
be adjusted, without penalty to Design-Builder, pursuant to Sections 8.2.1 and
8.2.2 of the General Conditions of Contract.
5.3
Time is of the Essence.
Owner
and Design-Builder mutually agree that time is of the essence with respect to
the dates and times set forth in the Contract Documents.
5.4
Early Completion Bonus.
5.4.1
If Substantial Completion
is attained within 470 days after the Date of Commencement, Owner shall pay
Design-Builder at the time of Final Payment under Section 7.3 hereof an early completion bonus of
$10,000.00 per day, for each day that Substantial Completion occurred in
advance of said 470 days.
5.4.2
In all events, payment
of said bonus, if applicable, at the time of Final Payment is subject to
release of funds by senior lender. If senior lender does not allow release of
funds at the time of Final Payment to pay said early completion bonus in full,
any unpaid balance shall be converted to an unsecured Promissory Note payable
by Owner to Design-Builder, accruing interest at ten percent (10%), as such
rate may change from time to time. On each anniversary of the Note, any unpaid
accrued interest shall be converted to principal and shall accrue interest as
principal thereafter. Owner shall pay said Promissory Note as soon as allowed
by senior lender; in any event, the Note, plus accrued interest, shall be paid
in full before Owner pays or makes any distributions to or for the benefit of
its owners (shareholders, members, partners, etc.). All payments shall be
applied first to accrued interest and then to principal.
5.5
Liquidated Damages.
5.5.1
Design-Builder
understands that if Substantial Completion is not attained by the Scheduled
Substantial Completion Date, Owner will suffer damages which are difficult to
determine and accurately specify. Design-Builder agrees that if Substantial
Completion is not attained within 500 days after the Date of Commencement due
to unexcused delay (delay due to the modification of the construction air
emission permit, as referenced in Article 11 and Exhibit G, is
specifically considered an excused delay and is therefore not subject to the
calculation of liquidated damages), Designer-Builder shall pay Owner Twenty
Thousand Dollars ($20,000.00) as liquidated damages for each day that
Substantial Completion extends beyond 500 days. Owner, at its discretion, may
elect to offset any such liquidated damages from any retainage or any amounts
owed by Owner to Design Builder. The liquidated damages provided herein shall
be in lieu of all
5
liability for any
and all extra costs, losses, expenses, claims, penalties and any other damages,
whether special or consequential, and of whatsoever nature incurred by Owner
which are occasioned by any delay in achieving Substantial Completion.
5.5.2
Design-Builder’s total
aggregate liability for liquidated damages under section 5.5.1, for failure to
meet the performance and emission warranties under Article 11, and for
liability under Exhibit H, shall be capped at and shall not exceed $10.0
Million.
Article 6
Contract Price
6.1
Contract Price.
Owner shall pay
Design-Builder in accordance with Article 6 of the General Conditions of
Contract the sum of Seventy-six million, six hundred eighty-six thousand three
hundred eighty-two and 00/100 Dollars ($76,686,382.00) (“Contract Price”),
subject to adjustments made in accordance with the General Conditions of
Contract. The Contract Price assumes the use of Wyoming/Montana-sourced coal as
the energy source as further described in Exhibit C and referred to in
Exhibit A. Owner acknowledges that it has taken no action which would
impose a union labor or prevailing wage requirement on Design-Builder, Owner or
the Project. The Parties acknowledge and agree that if after the date hereof, a
change in Applicable Law or a Governmental Authority acting pursuant to a change
in Applicable Law shall require Design-Builder to employ union labor or
compensate labor at prevailing wages, the Contract Price shall be adjusted
upwards to include any increased costs associated with such labor or wages.
Unless otherwise provided in the Contract Documents, the Contract Price is
deemed to include all sales, use, consumer and other taxes mandated by
applicable Legal Requirements. If Owner directs Design Builder to claim an
exemption from such taxes for all or part of the Work (over and above what is
generally available under capital equipment exemptions etc), then, subject to
Section 7.2 of the General Conditions of Contract, Owner and
Design-Builder will enter into a Change Order (pursuant to Article 9 of
the General Conditions of Contract) to adjust the Contract Price to pass along
any such savings to Owner.
6.2
Markups for Changes.
The
parties agree that changes shall not occur pursuant to Sections 9.4.1.3 or
9.4.1.4 of the General Conditions of Contract, but may occur pursuant to the
other provisions therein.
Article 7
Procedure for Payment
7.0
Payment at Financial
Close
. As part of the Contract Price, Owner shall pay Design-Builder Five
Million Dollars ($5,000,000) as soon as allowed by its organizational
documents, the Escrow Agreement and any other relevant agreements or laws as a
mobilization fee. Provided, however, that said payment, if not made earlier,
shall be paid at Financial Close. Financial Close is defined as Owner executing
final loan documents obtaining all necessary financing to construct the project
and funds are available to pay disbursements. Said Five Million ($5,000,000)
Dollar payment shall be subject to the retainage as provided by
Article 7.2.1.
6
7.1
Progress Payments
7.1.1
Design-Builder shall
submit to Owner on the twenty-fifth ( 25
th
) day of each month,
beginning with the first month after the Date of Commencement, Design-Builder’s
Application for Payment in accordance with Article 6 of the General Conditions
of Contract.
7.1.2
Owner shall make
payment within ten (10) days after Owner’s receipt of each properly
submitted and accurate Application for Payment in accordance with
Article 6 of the General Conditions of Contract, but in each case less the
total of payments previously made, and less amounts properly withheld under
Section 6.3 of the General Conditions of Contract.
7.2
Retainage on Progress Payments
7.2.1
Owner will retain ten
percent ( 10%) of each payment provided, however, that when fifty percent (50%)
of the Work ($38,343,191.00 aggregate payment) has been completed by
Design-Builder, Owner will not retain any additional amounts from
Design-Builder’s subsequent payments, unless there is less than $3,834,319.10
total retainage. Owner will also reasonably consider reducing retainage for
Subcontractors completing their work early in the Project.
7.2.2
Upon Substantial Completion
of the entire Work or, if applicable, any portion of the Work, pursuant to
Section 6.6 of the General Conditions of Contract, Owner shall release to
Design-Builder all retained amounts relating, as applicable, to the entire Work
or completed portion of the Work, less an amount equal to the reasonable value
of all remaining or incomplete items of Work as noted in the Certificate of
Substantial Completion, provided that such payment shall only be made if
Design-Builder has met the Performance Guarantee Criteria listed in
Exhibit A.
7.3
Final Payment.
Design-Builder
shall submit its Final Application for Payment to Owner in accordance with
Section 6.7 of the General Conditions of Contract. Owner shall make
payment on Design-Builder’s properly submitted and accurate Final Application
for Payment within thirty (30) days after Owner’s receipt of the Final
Application for Payment, provided that Design-Builder has satisfied the
requirements for final payment set forth in Section 6.7.2 of the General
Conditions of Contract and Design-Builder has met the Performance Guarantee
Criteria listed in Exhibit A.
7.4
Interest.
Payments which are due and unpaid
by Owner to Design-Builder, whether progress payments or final payment, shall
bear interest commencing five (5) days after payment is due at the rate of
eighteen percent (18%) per annum.
7.5
Record Keeping and
Finance Controls.
With respect to changes in the Work performed on a cost
basis by Design-Builder pursuant to the Contract Documents, Design-Builder
shall keep full and detailed accounts and exercise such controls as may be
necessary for proper financial management, using accounting and control systems
in accordance with generally accepted accounting principles and as may be
provided in the Contract Documents. During the performance of the Work and for
a period of three (3) years after Final Payment, Owner and Owner’s accountants
shall be afforded access from time to time, upon reasonable notice, to
Design-Builder’s records, books, correspondence, receipts, subcontracts,
purchase orders, vouchers, memoranda and other data relating to changes in the
Work performed on a cost basis in accordance with the Contract Documents, all
of which Design-Builder shall preserve for a period of three (3) years
after Final Payment.
7
Article 8
Termination for Convenience
8.1
Upon ten (10) days’
written notice to Design-Builder, Owner may, for its convenience and without
cause, elect to terminate this Agreement. In such event, Owner shall pay
Design-Builder for the following:
.1
All Work executed, and for proven loss,
cost or expense in connection with the Work;
.2
The reasonable costs and expenses
attributable to such termination, including demobilization costs and amounts
due in settlement of terminated contracts with Subcontractors and Design
Consultants; and
.3
Overhead and profit margin in the amount
of fifteen percent ( 15 %) on the sum of items .1 and .2 above, except that
overhead and profit shall not be due regarding amounts due in settlement of
terminated contracts with subcontractors and design consultants.
8.2
In addition to the
amounts set forth in Section 8.1 above, Design-Builder shall be entitled
to receive all retainage withheld by Owner.
8.3
If Owner terminates this
Agreement pursuant to Section 8.1 above and proceeds to design and
construct the Project through its employees, agents or third parties, Owner’s
rights to use the Work Product shall be as set forth in Section 4.3
hereof.
Article 9
Representatives of the Parties
9.1
Owner’s Representatives
9.1.1
Owner designates the
individual listed below as its Senior Representative (“Owner’s Senior
Representative”), which individual has the authority and responsibility for
avoiding and resolving disputes under Section 10.2.3 of the General
Conditions of Contract:
(Identify individual’s name, title, address and
telephone numbers)
TBD
9.1.2
Owner designates the
individual listed below as its Owner’s Representative, which individual has the
authority and responsibility set forth in Section 3.4 of the General
Conditions of Contract:
(Identify individual’s name, title, address and telephone
numbers)
TBD
9.2
Design-Builder’s
Representatives
9.2.1
Design-Builder designates
the individual listed below as its Senior Representative (“Design-Builder’s
Senior Representative”), which individual has the authority and responsibility
for avoiding and resolving disputes under Section 10.2.3 of the General
Conditions of Contract:
(Identify individual’s name, title, address and
telephone numbers)
8
Roland “Ron” Fagen, CEO and President
501 W. Highway 212
P.O. Box 159
Granite Falls, MN 56241
Telephone: (320) 564-3324
9.2.2
Design-Builder
designates the individual listed below as its Design-Builder’s Representative,
which individual has the authority and responsibility set forth in
Section 2.1.1 of the General Conditions of Contract:
(Identify
individual’s name, title, address and telephone numbers)
Aaron Fagen
Chief Operating Officer
501 W. Highway 212, PO Box 159
Granite Falls, MN 56241
Telephone: (320) 564-3324
Article 10
Bonds and Insurance
10.1
Insurance.
Design-Builder
shall procure in accordance with Article 5 of the General Conditions of
Contract the following insurance coverage: A certificate of insurance will be
provided prior to starting construction. Policy limits shall be as follows:
|
Commercial
General Liability:
|
|
|
|
|
|
|
|
|
|
General
Aggregate
|
|
$
|
2,000,000
|
|
|
Products-Comp/Op
AGG
|
|
$
|
2,000,000
|
|
|
Personal &
Adv Injury
|
|
$
|
1,000,000
|
|
|
Each Occurrence
|
|
$
|
1,000,000
|
|
|
Fire Damage (Any
one fire)
|
|
$
|
50,000
|
|
|
Med Exp (Any one
person)
|
|
$
|
5,000
|
|
|
|
|
|
|
|
Automobile
Liability:
|
|
|
|
|
Combined Single
Limit
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
Excess Liability
– Umbrella Form
|
|
|
|
|
Each Occurrence
|
|
$
|
20,000,000
|
|
|
Aggregate
|
|
$
|
20,000,000
|
|
|
|
|
|
|
|
Workers
Compensation and Employers’ Liability:
|
|
|
|
|
Statutory Limits:
|
|
|
|
|
Each Accident
|
|
$
|
1,000,000
|
|
|
Disease-Policy
Limit
|
|
$
|
1,000,000
|
|
|
Disease-Each
Employee
|
|
$
|
1,000,000
|
|
9
|
Contractor’s
Professional Liability Coverage:
|
|
|
|
|
Per Claim
|
|
$
|
5,000,000
|
|
|
Aggregate
|
|
$
|
5,000,000
|
|
Owner shall provide the following within 10 days of Design-Builder’s
receipt of Owner’s Notice to Proceed:
·
Owner shall obtain a
builder’s risk policy naming Owner as the insured, with Design-Builder as
additional insured, in an amount not less than the Contract Price.
·
Owner shall also
obtain Boiler and Machinery Insurance protecting Owner, Design-Builder, Design
Consultants, Subcontracts and Subcontractors.
·
In addition, Owner
shall obtain terrorism coverage as described by the Terrorism Risk Insurance
Act of 2002.
Article 11
Other Provisions
11.1
Other provisions, if any,
are as follows:
·
Performance Guarantee: The Design-Builder guarantees the Criteria
listed in Exhibit A. If there is a performance shortfall, Design-Builder
will pay all design and construction costs associated with making the necessary
corrections. Design-Builder retains the right to use its sole discretion in
determining the method to remedy any performance related issues.
·
If Owner, for whatever
reason, prevents Design-Builder from demonstrating the Performance
Guarantee Criteria within 30 days of
Design-Builder’s notice that the Project is ready for Performance Testing,
Design-Builder is thereby deemed to have fulfilled all of its Performance Guarantee
obligations listed in Exhibit A.
·
Price Guarantee: The Design-Builder guarantees the Contract
Price for the Work delineated by the Contract Documents. Any and all price
increases would require, in addition to Owner’s approval, the approval of
Owner’s senior lender.
·
Winter Construction: Owner shall have no responsibility for any
winter construction related activities including, but not limited to, special
material costs, sheltering, heating, and equipment rental, except that Owner
shall pay all the reasonable costs incurred for frost removal including, but
not limited to, equipment costs, equipment rental costs, and associated labor
costs so that winter construction can proceed.
·
Design-Builder shall obtain
or cooperate in obtaining a performance bond if such a bond is requested by
Owner. If the bond is obtained by Design-Builder, Owner shall pay
Design-Builder for the cost of the bond, plus pay Design-Builder a fee of 7.5%,
said fee calculated by multiplying 7.5% on the cost of the bond. If purchased
by Owner, Owner shall pay all costs of obtaining the bond.
·
Design-Builder warrants that
within six (6) months following the date of Substantial Completion, the
atmospheric emissions of the ethanol plant, taken as a whole, when operating at
nameplate capacity meeting all performance guarantee criteria listed in
Exhibit A (including but not limited to the drying of all DDGS to produce
11% moisture DDGS), shall meet the requirements of a “synthetic minor source”
of air pollutants (1) as currently
10
prescribed, as of the date hereof, by the State of Minnesota Pollution
Control Agency and (2) as necessary to maintain its designation and status
as a “synthetic minor source” for purposes of the federal Clean Air Act and
associated regulations adopted by the U.S. Environmental Protection Agency as
currently prescribed as of the date hereof. Verification shall be provided by a
written report from Design-Builder. If this warranty is not met, Design-Builder
will pay all design, engineering, equipment, labor and construction costs
associated with making the necessary corrections in order to meet the warranty,
subject to Exhibit G. Design-Builder retains the right to use its sole
discretion in determining the method to remedy the warranty related issues,
subject to commercial reasonableness.
·
Owner acknowledges that
Owner’s current air emission permit may require modifications prior to
Design-Builder being able to construct certain process equipment and emission
control devices. Construction or Equipment ordering delays due to such
modification are the responsibility and expense of Owner as follows:
(1) Owner shall be solely responsible for its own costs and expenses
incurred by such delay, including attorneys fees; (2) Owner will issue
Design-Builder a Change Order (pursuant to Article 9 of the General
Conditions of Contract) for the time adjustment(s) necessitated by such
delay and to reimburse Design-Builder for price increases on equipment (at
cost) or increases in subcontractor costs necessitated by such delay. If such
delay would require Design-Builder to demobilize and remobilize, Design-Builder
and Owner will share in such costs under an agreed-upon in good faith Change
Order issued pursuant to Article 9 of the General Conditions of Contract
·
To the fullest extent
permitted by law, Owner hereby agrees to indemnify, defend and hold harmless
Design-Builder, Design Consultants, Subcontractors, anyone employed directly or
indirectly for any of them, and their officers, directors, employees and
agents, from and against any and all claims, losses, damages, liabilities and
expenses incurred as a result of third party claims or actions brought against
such indemnified party (other than claims or actions brought by any such indemnified
party), including attorneys’ fees and expenses, arising out of or resulting
from such modification to Owner’s current air emission permit.
·
Subject to
Section 10.5.2 of the General Conditions of Contract, Owner agrees that
Design-Builder shall not be liable for any consequential losses or damages
resulting Owner’s requirement to modify its existing construction air emission
permit, whether arising in contract, warranty, tort (including negligence),
strict liability or otherwise, including but not limited to losses of use,
profits, business, reputation or financing.
In executing this
Agreement, Design-Builder represents that it has the necessary financial
resources to fulfill its obligations under this Agreement and has the necessary
corporate approvals to execute this Agreement and perform the services
described herein. Owner represents that it has the necessary organizational
approvals to execute this Agreement; that Owner is seeking financing for the
project and that Owner agrees to keep Design-Builder informed of Owner’s
progress in obtaining commitments for and closing on such financing.
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OWNER:
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DESIGN-BUILDER:
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Heron Lake
BioEnergy, LLC
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Fagen, Inc.
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(Name
of Owner)
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(Name
of Design-Builder)
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(Signature)
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(Signature)
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Roland “Ron”
Fagen
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11
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(Printed
Name)
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(Printed
Name)
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CEO and
President
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(Title)
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(Title)
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Date:
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Date:
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12
EXHIBIT A
Performance Guarantee
Criteria
Table 1
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Criteria
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Specification
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Testing Statement
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Documentation
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Plant Capacity –
fuel grade ethanol
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Operate at a
rate of 50 million gallons per year of denatured fuel grade ethanol meeting
the specifications of ASTM 4806 based on 353 days of operation per calendar
year and 4.76% denaturant.
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Seven day
performance test
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Production
records and a written report by Design-Builder.
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Dried Distillers
Grains with Solubles (DDGS)
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Dry all DDGS to
produce 11% moisture DDGS
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Seven day
performance test
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Production
records and written analysis by Design-Builder.
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Corn to Ethanol
Conversion ratio; [***]
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Not be less than
2.80 denatured gallons of ethanol per bushel (56#) of corn
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As determined by
meter readings during a seven day performance test.
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Production
records and written analysis by Design-Builder.
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Electrical
Energy (guarantee subject to adjustment per Exhibit G).
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0.95 kWh per
denatured gallon of fuel grade ethanol [***]
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As determined by
meter readings during a seven day performance test.
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Production
records and written analysis by Design-Builder.
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Coal (Powder
River Coal Company’s North Antelope Mine, located in Gillette, Cambell
County, Wyoming).
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Shall not exceed
37,000 Btu per denatured gallon of fuel grade ethanol. (This Performance
Criteria relates to production of ethanol and excludes any energy usage that
may occur for drying corn.)
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As determined by
meter readings during a seven day performance test.
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Production
records and written analysis by Design-Builder.
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Process Water
Discharge
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Zero gallons
under normal operations
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Process
discharge meter
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Control System
reports
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DISCLAIMER:
Owner’s failure to materially
comply with the operating procedures issued by ICM, Inc./Fagen, Inc.
shall void all performance guaranties and warranties set forth in this
Design-Build Agreement.
Owner understands that
the startup of the plant requires resources and cooperation of the Owner,
vendors and other suppliers to the project.
Design-Builder disclaims any liability and Owner indemnifies
Design-Builder for non-attainment of the Performance Guarantee Criteria
directly or indirectly caused by material non-performance or negligence of
third parties not retained by Design-Builder.
Owner should expect the plant to experience more downtime with
coal-fired equipment than natural gas fired equipment, provided the attainment
of the Plant Capacity Specification Guarantee shall still be met.
EXHIBIT
B
General Project Scope
Construct a 50 million-gallon per year (MGY) coal-fired ethanol plant
near Heron Lake, Minnesota. The plant
will grind approximately 17.9 million bushels per year to produce approximately
50 MGY year of fuel grade ethanol denatured with five percent gasoline. The plant will also produce approximately
160,750 tons per year of 11% moisture dried distillers grains with solubles
(DDGS), and approximately 151,250 tons per year of raw carbon dioxide (CO
2
)
gas.
Delivered
corn will be dumped in the receiving building.
The receiving building will have two truck grain receiving bays and a
rail receiving bay, including an underground conveyor from the rail pit to the
second truck receiving bay both of which share a common receiving leg. Said receiving building shall have sufficient
height to accommodate end-dump trailers.
There will be two 14’ x 100’ scales for the truck drivers to drive onto
for weigh-in and weigh-out located near the administration building. The trucks will be weighed and sampled, then
drive to the receiving building, dump the grain, then proceed to the second
scale and obtain a final weight ticket from the scale operator. The trucks will not be required to move
during the unloading process in the receiving building. Maximum truck dump time is ten minutes. Two independent 15,000-bushel legs will lift
the corn to one of two 250,000 — bushel concrete storage bins or corn day
bin. A dust collection system will be
installed on the grain receiving system to limit particulate emissions as
described in the Air Quality Permit application.
Ground
corn will be mixed in a slurry tank, routed through a pressure vessel and steam
flashed off in a flash vessel. Cooked
mash will continue through liquefaction tanks and into one of the fermenters. Simultaneously, propagated yeast will be
added to the mash as the fermenter is filling.
After batch fermentation is complete, the beer will be pumped to the
beer well and then to the beer column to vaporize the alcohol from the mash.
Alcohol
streams are purified in the rectifier column and the side stripper, and
dehydrated in the molecular sieve system.
Two hundred proof alcohol is pumped to the tank farm day tank and
blended with five percent natural gasoline as the product is being pumped into
one of two 1,200,000 gallon final storage tanks. One loading facility for truck and two
loading facilities for rail cars will be provided and are supplied by three
loadout pumps rated at 3600 gallons per minute.
The loading facility is sized to allow loading of 75 car unit trains of
ethanol. Emissions from the rail and
truck loading is controlled by a flare.
Tank farm tanks include: one tank
for 190 proof storage, one tank for 200 proof storage, one tank for denaturant
storage and two 1,200,000 gallon tanks for denatured ethanol storage.
Corn
mash from the beer column is dewatered in the centrifuge(s). The solids, called wet cake are conveyed to
the dryer system. The liquid, called thin stillage is routed to the evaporators
where moisture is removed. The wet cake
and syrup are routed to the steam tube drying system. The exhaust from the steam tube drying system
will be routed as combustion air to the coal combustor.
A
modified wet or wet cake pad is located along side the DDGS dryer building to
divert modified wet or wet cake to the pad when necessary such as start up or
for limited production of modified wet or wet cake for sales. DDGS is pneumatically conveyed to flat
storage in the DDGS storage building.
DDGS is transferred to the bulk storage silo with the in-floor conveyor
system. The bulk storage silo has a
capacity of approximately 4,000 tons of DDGS.
An approximately 225 ton per hour capacity unloader is used to transfer
the
DDGS
from the DDGS bulk storage silo through the approximately 10,600 bushel per
hour capacity bulk weigh system and into railcars or trucks via telescopic
spouts. The system will simultaneously
load two railcars with DDGS.
Steam
will be generated in a waste heat boiler driven by the flue gases from the coal
combustor. Since the dryer exhaust is
routed to the coal combustor for combustion air, the coal combustor destroys
VOCs and acts like a Thermal Oxidizer.
The combustion air is routed in such fashion that it also fluidizes a
sand bed in which the coal is introduced to combust. The combustor requires natural gas or propane
for start up. To achieve emission
constraints, limestone will be metered in with the coal to react with
sulfur. The layout of the combustor, boiler,
and economizer are intended to provide drop out points for fly ash. The final item in the layout before the
induced draft fan is a dust collector.
All ash exiting the system will exit as fly ash. Both fly ash and limestone silos are
included. The fly ash and limestone
silos have nominal storage capacities of seven days.
Coal,
received by truck delivery, will be stored in two silos with a combined storage
capacity of seven days. At the outlet of
each coal silo, coal will be sized (3/4” minus) and limestone added before
being routed to the coal feeder bunkers.
The coal combustor will also utilize anhydrous ammonia for NOx emission
reduction. A CEMS (Continuous emission
monitoring system) is included.
Fresh
water for the boilers, cooking, cooling tower and other processes will be
obtained from the Owner supplied water pretreatment system. Boiler water conditioned in regenerative
softeners will be pumped through a deaerator scrubber and into a deaerator
tank. Appropriate boiler chemicals will
be added as preheated water is sent to the boiler.
The
process will be cooled by circulating water through heat exchangers, a chiller,
and a cooling tower.
The
design includes a compressed air system consisting of air compressor(s), a
receiver tank, pre-filter, coalescing filter, and double air dryer(s).
The
design also incorporates the use of a clean-in-place (CIP) system for cleaning
cook, fermentation, distillation, evaporation, centrifuges, and other
systems. Fifty percent caustic soda is
received by truck and stored in a tank.
Under
normal operating circumstances, the plant will not have any wastewater
discharges that have been in contact with corn, corn mash, cleaning system, or
contact process water. An ICM/Phoenix
Bio-Methanator will reduce the BOD in process water allowing complete reuse
within the plant. The plant will have
blowdown discharges from the cooling tower and may have water discharge from
any water pre-treatment processes. Owner
shall provide on-site connection to sanitary sewer or septic system.
Most
plant processes are computer controlled by a Siemens/Moore APACS distributed
control system with graphical user interface and three workstations. The process control room control console will
have dual monitors to facilitate operator interface between two graphics
screens at the same time. Additional
programmable logic controllers (PLCs) will control certain process
equipment. Design Builder provides lab
equipment.
The
cooking system requires the use of anhydrous ammonia, and other systems require
the use of sulfuric acid. Therefore, a
storage tank for ammonia and a storage tank for acid will be on site to provide
the quantities necessary. The ammonia
storage requires that plant
management
implement and enforce a Process Safety Management (PSM) program. The plant design may require additional
programs to ensure safety and to satisfy regulatory authorities.
NOTE: Exhibit B
is a general description of the plant’s basic operation. Not all equipment and equipment sizes quoted
may be used on every plant. Site
specific equipment and equipment sizes will be determined during each plant’s
final design.
EXHIBIT C
Owner’s
Responsibilities
The
Owner shall perform and provide the permits, authorizations, services and
construction as specifically described hereafter:
1)
Land and Grading –
Owner
shall provide a site near or in Heron Lake, MN. Owner shall obtain all legal
authority to use the site for its intended purpose and perform technical due
diligence to allow Design-Builder to perform including, but not limited to,
proper zoning approvals, building permits, elevation restrictions, soil tests,
and water tests. The site shall be rough graded per Design-Builder
specifications and be +/- three inches of final grade including the rough
grading for Site roadways. The site
soils shall be modified as required to provide a minimum allowable soil bearing
pressure as described in Table 1.
Other items to be provided by the Owner include, but are not limited
to, the following: initial site survey (boundary and topographic) as required
by the Design-Builder, layout of the property corners including two
construction benchmarks, Soil Borings and subsequent Geotechnical Report
describing recommendation for Roads, foundations and if required, soil
stabilization/remediation, land disturbance permit, erosion control permit,
site grading as described above with minimum soil standards, placement of
erosion control measures, plant access road from a county, state or federal
road designed to meet local county road standards, plant storm and sanitary
sewers, fire water system with hydrants and plant water main branches taken
from the system to be within five feet of the designated building locations,
all tanks, motors and other equipment associated with or necessary to operate
the fire water loop and associated systems, plant roads as specified and
designed for the permanent elevations and effective depth, “construction”
grading plan as drawn (including site retention pond), plant water well and
associated permit(s). Owner shall also
provide the final grading, seeding and mulching, and site fencing at the site.
Owner is encouraged to obtain preliminary designs/information and
estimates of the cost of performing all Owner required permits and services as
stated in this Exhibit C.
Specifically, the cost of the fire water systems (including associated
fire water pumps, required tank, building (if required), sprinklers, and all
other equipment and materials associated with the fire water delivery systems)
is estimated being in excess of $1,000,000.
The requirements of each state and the decisions of each Owner will
increase or decrease the actual cost.
The Owner’s required activities related to site preparation for
construction are to be divided into Phase I and Phase II activities as
described below:
Deliverables by
Owner
prior
to start of Phase 1
Civil Design:
Procure Boundary &
Topographic Survey (to one foot contours)
Procure Soil Borings and Geotechnical Report
with recommendations (at Design-Builder’s requested locations and depth)
Phase 1 (Deliverable Site):
Design-Builder provides engineering services
to develop these items:
1.
Final Plant Layout with FFE and Top of Road
Elevations
2.
Final Cut/Fill Quantity Calculations
3.
Grading and Erosion Control Plan
4.
Clear & Grubbing Plan - graded to
+/- 3” of subgrade
Subgrade is defined as 1’ below proposed
Building FFE and Administration Building FFE and 20” to 30” (based on rail
designer input) below top of rail for the rail spurs. Subgrade for the in-plant roads will be
determined upon recommendations from the geotechnical engineer (12” to 24”
below final top of road)
*Owner shall prepare site according to
Design-Builder’s engineering plans for the above items.
Plant Access Road and all
in-plant roads (which will act as base for final roadway system)
Soil Stabilization
Site Grading
Replacement Fill
Construction Layout (parking, laydown, access
areas, temp. drainage and temp. facilities)
Storm Water Drainage & Detention
Phase 2 Site Work (Final
Civil Design Plans):
Design-Builder provides engineering services
to develop these items:
Site Utilities (Within
Property Line):
1. Sanitary Sewer System
2. Potable Water Supply and
Distribution
3. Process Water Supply and
Distribution
4. Gas Supply and
Distribution
5. Fire Loop and Fire
Protection System
6. Site Electric
7. Site Natural Gas/Propane
Wells and Well Pumps (supply of sufficient
quantity for construction activities)
Minimum 3 Phase, 480 Volt,
1,000 KVA Electrical Power Available for Construction at two locations (at
Design-Builder’s requested location)
Design/Builder shall be reimbursed on a “Time & Material”
basis for any management of these Owner requirements and any design engineering
requested by the Owner not otherwise required to be provided by Design-Builder
pursuant to this Agreement.
2)
Permits
- Owner
shall obtain all Operating Permits including, but not limited to, air quality
permits, in a timely manner to allow startup of the plant as designed by
Design-Builder. Owner shall obtain all
testing and site inspections required to secure the necessary operating
permits.
3)
Storm Water Runoff Permit
– Owner shall obtain the construction storm – water runoff permit,
permanent storm-water runoff permit, and the erosion control/land disturbance
permit.
4)
Minnesota Pollutant Elimination Discharge Permit –
Owner shall obtain a permit to discharge
cooling tower water and reverse osmosis (“R.O.”) reject water and any other
waste water directly to a designated waterway or other location Owner shall
supply the discharge piping to transport to the designated waterway or other
location.
5)
Natural Gas, Propane, Coal Supply and Ash Disposal Agreements
– Owner shall procure and supply a supply of
natural gas or propane for the preheat and start up of the coal combustor. For the coal combustor, two separate gas
burners will require natural gas or propane:
the underbed air preheater rated for 20 mmbtu/hr and the overfire air
preheater rated for 50 mmbtu/hr.
Consumption will start at approximately 30 % of the total rating and be
ramped up to maximum over a nominal 8 hr period, depending on the starting
temperature. Minimum demand will be 21
mm btu/hr and ramp up to a maximum of 70 mm btu/hr. Owner shall provide all natural gas and/or
propane piping to the use points and supply meters, regulators, and vaporizers
to provide burner tip pressures as specified by Design-Builder. Owner shall also supply a digital flowmeter
on-site with appropriate output for monitoring by the plant’s computer control
system.
The coal combustor design will be based on
typical analysis of coal provided by owner, which to date is from the Powder
River Coal Company’s North Antelope mine located in Gillette, Cambell County,
Wyoming. Planned emission control is to
mix limestone with the coal, as the sulfur content is .24%. The as received heat value is 8,800 btu/lb,
and the expected consumption will be 300 tons/day at the 50 mm gpy production
rate. Procurement and supply of coal and
limestone will be the responsibility of the owner.
Ash is noted to be 5.3%, so a nominal 18
tons/day of ash will need to be removed from the site each day. All ash is removed from the system as fly
ash. Disposal will be at owner’s
responsibility.
6)
Electrical Service –
(1) The
Owner is responsible to secure continuous service from an energy supplier to
serve the facility. The service from the
energy supplier shall be of sufficient size to provide at a minimum 10 MW of
electrical capacity to the site. (2) The
Owner is responsible for procurement, installation and maintenance of the site
distribution system, including but not limited to the required substation and
all associated distribution lines, switchgear, sectional cabinets, distribution
transformers, transformer pads, etc. An
on-site primary digital meter is also to be supplied for monitoring of
electrical usage and demand. This meter
must have the capability to be monitored via a telephone line or other
electrical signal. (3) The
responsibility of the Design-Builder starts at the secondary electrical
terminals of the site distribution system transformers that have been installed
by Owner (i.e., the 480 volt terminals for the process building transformers;
the 480 volt terminals for the energy center transformers; the 480 volt
terminals for the grains transformer; the 480 volt terminals for the pumphouse
transformer; and the 4160 volt terminals for the chiller transformer; and the
4160 volt terminals of the thermal oxidizer transformer). (4) The site distribution system
requirements, layout, and meters are to be determined jointly by the Owner, the
Design-Builder and the energy supplier.
Design-Builder will be providing soft start motor
controllers for all motors greater than 150 horsepower and where demanded by
process requirements. Owner is
encouraged to discuss with its electrical service supplier whether additional
soft start motor
controllers are advisable for this facility and such can
be added, with any increased cost being an Owner’s cost.
Design-Builder will provide
power factor correction to 0.92 lagging at plant nameplate capacity. Owner is encouraged to discuss with its
electrical service supplier any requirements for power factor correction above
0.92 lagging. Additional power factor
correction can be added with any increased cost being an Owner’s cost.
7)
Water Supply and Service Agreement –
Owner shall supply on-site process wells or other water source capable
of providing a quantity of water which includes process water, R.O. feed water,
cooling tower make-up water, of a quality which will allow discharges to comply
with NPDES limits. Owner should consider
providing a redundant supply source.
Design-Builder shall provide the standard zeolite water softener
system. Any increased costs incurred for
another water treatment system if water does not meet the quality requirements
shall be the responsibility of the Owner.
Owner will supply one process fresh water supply line terminating within
five (5) feet of the point of entry designated by Design-Builder, one
potable supply line terminating within five (5) feet of the process
building at a point of entry designated by Design-Builder, and one potable
supply line to the administration building at a point of entry designated by
administration building contractor.
Owner is advised that most projects require a water pre-treatment
system. Such system is an Owner’s cost
and Owner is advised that the purchase and installation cost of such water
pre-treatment system may exceed $2,000,000.
Owner is also advised that such systems may be leased if Owner desires
to avoid the costs of owning such a system.
8)
Wastewater Discharge System, Permits and/or Service Agreement –
Owner shall provide the discharge piping,
septic tank and drainfield system or connect to municipal system as required
for the sanitary sewer requirements of the Plant. These provisions shall comply with all
federal, state, and local regulations, including any permitting issues.
9)
Roads and Utilities
–
Owner shall provide and maintain the ditches and permanent roads, including the
gravel, pavement or concrete, with the roads passing standard compaction
tests. (Design-Builder will maintain
aggregate construction roads during construction of the Plant and will return
to original pre-construction condition prior to Owner completing final grade and
surfacing.)
Except as otherwise specifically stated herein the Owner shall install
all utilities so that they are within five (5) feet of the designated
building/structure locations.
10)
Administration Building
– The administration building – one story free standing, office computer
system, telephone system, office copier and fax machine and office furniture
and any other office equipment and personal property for the administration
building shall be the sole and absolute cost and responsibility of Owner and
Design-Builder shall have no responsibility in regards thereto.
11)
Maintenance and Power Equipment
– The maintenance and power equipment as described in Table 2 and any
other maintenance and power equipment as required by
the plant or desired by
Owner shall be the sole and absolute cost and responsibility of Owner and
Design-Builder shall have no responsibility in regards thereto.
12)
Railroads
– Owner is
responsible for any costs associated with the railroads including, but not
limited to, all rail design and engineering and construction and Design-Builder
shall have no responsibility in regards thereto.
13)
Drawings
– Owner
shall supply drawings to Design-Builder of items supplied under items 10) and
12) and also supply Phase II redline drawings.
14)
Fire
Protection System
– Fire protection system requirements vary by
governmental requirements per location and by insurance carrier
requirements. Owner is responsible to
provide the required fire protection system for the Plant. This may include storage tanks, pumps,
underground fire water mains, fire hydrants, foam or water monitor valves,
sprinkler systems, smoke and heat detection, deluge systems, or other
provisions as required by governmental codes or Owner’s insurance carrier’s
fire protection criteria. Design-Builder
will provide assistance to the Owner on a “Time & Material” basis for
design and/or construction of the Fire Protection Systems required for the
plant.
Table 1 Minimum Soil Bearing Pressure – Responsibility of Owner
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Description
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Required Allowable Soil Bearing Pressure
(pounds per square foot)
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Grain Storage
Silos
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8,000
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Cook Water Tank
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3,500
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Methanator Feed
Tank
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|
3,500
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Liquifaction
Tank #1
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|
3,500
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Liquifaction
Tank #2
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|
3,500
|
|
|
Coal Combustor
|
|
4,000
|
|
|
Coal Surge Silo
#1
|
|
6,000
|
|
|
Coal Surge Silo #2
|
|
6,000
|
|
|
Boiler
|
|
4,000
|
|
|
Dust Collector
|
|
3,500
|
|
|
Fermentation
Tank #1
|
|
4,000
|
|
|
Fermentation
Tank #2
|
|
4,000
|
|
|
Fermentation
Tank #3
|
|
4,000
|
|
|
Fermentation
Tank #4
|
|
4,000
|
|
|
Beerwell
|
|
4,000
|
|
|
Whole Stillage
Tank
|
|
3,500
|
|
|
Thin Stillage
Tank
|
|
3,500
|
|
|
Syrup Tank
|
|
3,500
|
|
|
190 Proof Day
Tank
|
|
3,000
|
|
|
200 Proof Day
Tank
|
|
3,000
|
|
|
Denaturant Tank
|
|
3,000
|
|
|
Fire Water Tank
|
|
3,000
|
|
|
Denatured
Ethanol Tank #1
|
|
4,000
|
|
|
Denatured
Ethanol Tank #2
|
|
4,000
|
|
|
All Other Areas
|
|
3,000
|
|
Table 2 Maintenance and
Power Equipment – Responsibility of Owner
|
Description
|
|
Additional Description
|
|
Spare Parts
|
|
Spare parts
Parts bins
Misc. materials, supplies and
equipment
|
|
|
|
|
|
Shop supplies and
equipment
|
|
One shop welder
One portable gas welder
One plasma torch
One acetylene torch
One set of power tools
Two sets of hand tools with tool
boxes
Carts and dollies
Hoists (except centrifuge overhead
crane)
Shop tables
Maintenance office
furnishings & supplies
Fire Extinguishers
Reference books
Safety manuals
Safety cabinets & supplies,
etc.
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Rolling stock
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Used 1 ½ yard front end loader
New Skid loader
Used Fork lift
Used Scissors lift, 30 foot
Used Pickup truck
Track Mobile
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EXHIBIT
D
LICENSE AGREEMENT
THIS LICENSE AGREEMENT
(this “License Agreement”) is entered into and made effective as of the
day of
,
2005 (“Effective Date”) by and between Heron Lake BioEnergy, LLC, a
limited liability company (“OWNER”), and ICM, Inc., a Kansas corporation
(“ICM”).
WHEREAS, OWNER has entered
into that certain Design-Build Lump Sum Contract dated September 28, 2005
(the “Contract”) with Fagen, Inc., a Minnesota corporation (“Fagen”),
under which Fagen is to design and construct a 50 million gallon per year
ethanol plant for OWNER to be located in or near Heron Lake, Minnesota (the
“Plant”);
WHEREAS, ICM has granted
Fagen the right to use certain proprietary technology and information of ICM in
the design and construction of the Plant; and
WHEREAS, OWNER desires from
ICM, and ICM desires to grant to OWNER, a license to use such proprietary
technology and information in connection with OWNER’s ownership and operation
of the Plant, all upon the terms and conditions set forth herein;
NOW, THEREFORE, the parties,
in consideration of the foregoing premises and the mutual promises contained
herein and for other good and valuable consideration, receipt of which is
hereby acknowledged, agree as follows:
1.
ICM grants to OWNER a limited license to use
the Proprietary Property (hereinafter defined) solely in connection with the
design, construction, operation, maintenance and repair of the Plant, subject
to the limitations provided herein (the “Purpose”). In the event OWNER fails to pay to Fagen all
amounts due and owing Fagen under the Contract or the Contract is terminated
for any reason prior to the substantial completion of the Plant, ICM may
terminate the limited license granted to OWNER herein upon written notice to
OWNER.
2.
The “Proprietary Property” means, without
limitation, documents, Operating Procedures (hereinafter defined), materials
and other information that are furnished by ICM to OWNER, whether directly or
indirectly through Fagen, in connection with the Purpose including, without
limitation, the design, arrangement, configuration, and specifications of
(i) the combinations of distillation, evaporation, and alcohol dehydration
equipment (including, but not limited to, pumps, vessels, tanks, heat
exchangers, piping, valves and associated electronic control equipment) and all
documents supporting those combinations; (ii) the combination of the
distillers grain drying (DGD), and heat recovery steam generation (HRSG)
equipment (including, but not limited to, pumps, vessels, tanks, heat
exchangers, piping and associated electronic control equipment) and all
documents supporting those combinations; and (iii) the computer system,
known as the distributed control system (DCS and/or PLC) (including, but not
limited to, the software configuration, programming, parameters, set points,
alarm points, ranges, graphical interface, and system hardware connections) and
all documents supporting that system.
The “Operating Procedures” means, without limitation, the process
equipment and specifications manuals, standards of quality, service protocols,
data collection methods, construction specifications, training methods,
engineering standards and any other information prescribed by ICM from time to
time concerning the Purpose. Proprietary
Property shall not include any information or materials that OWNER can
demonstrate by written documentation:
(i) was lawfully in the possession of OWNER prior to disclosure by
ICM; (ii) was in the public domain prior to disclosure by ICM;
(iii) was disclosed to OWNER by a third party other than Fagen having the
legal right to possess and disclose such information or materials; or
(iv) after disclosure by ICM comes into the public domain through no fault
of OWNER or its directors, officers, employees, agents, contractors,
consultants or other representatives (hereinafter collectively referred to as
“Representatives”). Information and
materials shall not be deemed to be in the public domain merely because such information
is embraced by more general disclosures in the public domain, and any
combination of features shall not be deemed to be within the foregoing
exceptions merely because individual features are in the public domain if the
combination itself and its principles of operation are not in the public
domain.
3.
OWNER shall not use the Proprietary Property
for any purpose other than the Purpose.
OWNER shall not use the Proprietary Property in connection with any
expansion or enlargement of the Plant.
4.
OWNER’s failure to materially comply with the
Operating Procedures shall void all guarantees, representations and warranties,
whether expressed or implied, if any, that were given by ICM to OWNER, directly
or indirectly through Fagen, concerning the performance of the Plant that ICM
reasonably determines are materially affected by OWNER’s failure to materially
comply with such Operating Procedures.
OWNER agrees to indemnify, defend and hold harmless ICM, Fagen and their
respective Representatives from any and all losses, damages and expenses
including, without limitation, reasonable attorneys’ fees resulting from,
relating to or arising out of (a) Owner’s or its Representatives’ failure
to materially comply with the Operating Procedures or (b) negligent or unauthorized use of
the Proprietary Property.
5.
Any and all modifications to the Proprietary
Property by OWNER or its Representatives shall be the property of ICM. OWNER shall promptly notify ICM of any such
modification and OWNER agrees to assign all right, title and interest in such
modification to ICM; provided, however, OWNER shall retain the right, at no
cost, to use such modification in connection with the Purpose.
6.
ICM has the exclusive right and interest in
and to the Proprietary Property and the goodwill associated therewith. OWNER will not, directly or indirectly,
contest ICM’s ownership of the Proprietary Property. OWNER’s use of the Proprietary Property does
not give OWNER any ownership interest or other interest in or to the Proprietary
Property except for the limited license granted to OWNER herein.
7.
OWNER shall pay no license fee or royalty to
ICM for OWNER’s use of the Proprietary Property pursuant to the limited license
granted to OWNER, the consideration for this limited license is included in the
amounts payable by OWNER to Fagen for the construction of the Plant under the
Contract.
8.
OWNER may not assign the limited license
granted herein, in whole or in part,
without the prior written consent of ICM, which will not be unreasonably
withheld or delayed. Prior to any
assignment, OWNER shall obtain from such assignee a written instrument, in form
and substance reasonably acceptable to ICM, agreeing to be bound by all the
terms and provisions of this License Agreement.
Any assignment of this License Agreement shall not release OWNER from
(i) its duties and obligations hereunder concerning the disclosure and use
of the Proprietary Property by OWNER or its Representatives, or
(ii) damages to ICM resulting from, or arising out of, a breach of such
duties or obligations by OWNER or its Representatives. ICM may assign its right, title and interest
in the Proprietary Property, in whole or part, subject to the limited license
granted herein.
9.
The Proprietary Property is confidential and
proprietary. OWNER shall keep the
Proprietary Property confidential and shall use all reasonable efforts to
maintain the Proprietary Property as secret and confidential for the sole use
of OWNER and its Representatives for the Purpose. OWNER shall retain all Proprietary Property
at its principal place of business and/or the Plant. OWNER shall not at any time without ICM’s
prior written consent, copy, duplicate, record, or otherwise reproduce the
Proprietary Property, in whole or in part, or otherwise make the same available
to any unauthorized person provided, OWNER shall be permitted to copy,
duplicate or otherwise reproduce the Proprietary Property in whole or in part
in connection with the Purpose so long as all such copies, duplicates or reproductions
are kept at its principal place of business and/or the Plant and are treated
the same as any other Proprietary Property.
OWNER shall not disclose the Proprietary Property except to its
Representatives who are directly involved with the Purpose, and even then only
to such extent as is necessary and essential for such Representative’s
involvement. OWNER shall inform such
Representatives of the confidential and proprietary nature of such information
and, if requested by ICM, OWNER shall obtain from such Representative a written
instrument, in form and substance reasonably acceptable to ICM, agreeing to be
bound by all of the terms and provisions of this License Agreement relating to
the disclosure and use of the Proprietary Property. OWNER shall make all reasonable efforts to
safeguard the Proprietary Property from disclosure by its Representatives to
anyone other than permitted hereby. In
the event that OWNER or its Representatives are required by law to disclose the
Proprietary Property, OWNER shall provide ICM with prompt written notice of
same so that ICM may seek a protective order or other appropriate remedy. In the event that such protective order or
other appropriate remedy is not obtained, OWNER or its Representatives will
furnish only that portion of the Proprietary Property which in the reasonable
opinion of its or their legal counsel is legally required and will exercise its
reasonable efforts to obtain reliable assurance that the Proprietary Property
so disclosed will be accorded confidential treatment.
10.
OWNER agrees to indemnify ICM for any and all
damages (including, without limitation, reasonable attorneys’ fees) arising out
of or resulting from any unauthorized disclosure or use of the Proprietary
Property by OWNER or its Representatives.
OWNER agrees that ICM would be irreparably damaged by reason of a
violation of the provisions contained herein and that any remedy at law for a
breach of such provisions would be inadequate.
Therefore, ICM shall be entitled to seek injunctive or other equitable
relief in a court of competent jurisdiction against OWNER or its
Representatives for any unauthorized disclosure or use of the Proprietary
Property without the necessity of proving actual monetary loss or posting any
bond. It is expressly understood that
the remedy described herein shall not be the
exclusive remedy of ICM for any breach of such covenants, and ICM shall be
entitled to seek such other relief or remedy, at law or in equity, to which it
may be entitled as a consequence of any breach of such
duties or obligations.
11.
The duties and obligations of OWNER under
this License Agreement, and all provisions relating to the enforcement of such
duties and obligations shall survive and remain in full force and effect
notwithstanding any termination or expiration of the Contract or the license
granted herein under paragraph 1 or 12.
12.
ICM may terminate the limited license granted
to OWNER herein upon written notice to OWNER if OWNER willfully or wantonly
(a) uses the Proprietary Property for any purpose, or (b) discloses
the Proprietary Property to anyone, in each case other than permitted
herein. Upon termination of the license
under paragraph 1 or this paragraph 12, OWNER shall cease using the Proprietary
Property for any purpose (including the Purpose) and, upon request by ICM,
shall promptly return to ICM all documents or other materials in OWNER’s or its
Representatives’ possession that contain Proprietary Property.
13.
The laws of the State of Kansas, United
States of America, shall govern the validity of the provisions contained
herein, the construction of such provisions, and the interpretation of the
rights and duties of the parties. Any
legal action brought to enforce or construe the provisions of this License
Agreement shall be brought in the federal or state courts located in Wichita,
Kansas, and the parties agree to and hereby submit to the exclusive
jurisdiction of such courts and agree that they will not invoke the doctrine of
forum non conveniens or other similar defenses in any such action brought in
such courts. In the event the Plant is
located in, or OWNER is organized under the laws of, a country other than the
United States of America, OWNER hereby specifically agrees that any injunctive
or other equitable relief granted by a court located in the State of Kansas,
United States of America, or any award by a court located in the State of
Kansas, shall be specifically enforceable as a foreign judgment in the country
in which the Plant is located, OWNER is organized or both, as the case may be,
and agrees not to contest the validity of such relief or award in such foreign
jurisdiction, regardless of whether the laws of such foreign jurisdiction would
otherwise authorize such injunctive or other equitable relief, or award. OWNER agrees that the aggregate recovery of
OWNER (and everyone claiming by or through OWNER), as a whole, under this
License Agreement and the Contract against ICM and ICM’s Representatives,
collectively, shall not exceed the amount paid by Fagen to ICM for the issuance
of this License Agreement in connection with the Contract.
14.
OWNER hereby agrees to waive all claims against ICM and ICM’s
Representatives for any consequential damages that may arise out of or relate
to this License Agreement, the Contract or the Proprietary Property whether
arising in contract, warranty, tort (including negligence), strict liability or
otherwise, including but not limited to losses of use, profits, business,
reputation or financing. OWNER further
agrees that the aggregate recovery of OWNER and Fagen (and everyone claiming by
or through OWNER and Fagen), as a whole, against ICM and ICM’s
Representatives, collectively, for any and all claims that arise out
of, relate to or result from this License Agreement, the Proprietary Property
or the Contract, whether arising in contract, warranty, tort (including
negligence), strict liability or otherwise, shall not exceed the amount paid by
Fagen to ICM in connection with the OWNER’s project under the Contract.
15.
The terms and conditions of this License Agreement constitute the entire
agreement between the parties with respect to the subject matter hereof and
supersede any prior understandings, agreements or representations by or between
the parties, written or oral. Any
rule of construction to the effect that any ambiguity is to be resolved
against the drafting party shall not be applicable in the interpretation of
this License Agreement. This License
Agreement may not be modified or amended at any time without the written
consent of the parties.
16. All notices, requests, demands, reports, statements or other
communications (herein referred to collectively as “Notices”) required to be
given hereunder or relating to this License Agreement shall be in writing and shall
be deemed to have been duly given if transmitted by personal delivery or mailed
by certified mail, return receipt requested, postage prepaid, to the address of
the party as set forth below. Any such
Notice shall be deemed to be delivered and received as of the date so
delivered, if delivered personally, or as of the third business day following
the day sent, if sent by certified mail.
Any party may, at any time, designate a different address to which
Notices shall be directed by providing written notice in the manner set forth
in this paragraph.
17. In the event that any of the terms, conditions, covenants or
agreements contained in this License Agreement, or the application of any
thereof, shall be held by a court of competent jurisdiction to be invalid,
illegal or unenforceable, such term, condition, covenant or agreement shall be
deemed void ab initio and shall be deemed severed from this License
Agreement. In such event, and except if
such determination by a court of competent jurisdiction materially changes the
rights, benefits and obligations of the parties under this License Agreement,
the remaining provisions of this License Agreement shall remain unchanged
unaffected and unimpaired thereby and, to the extent possible, such remaining
provisions shall be construed such that the purpose of this License Agreement
and the intent of the parties can be achieved in a lawful manner.
18. The duties and obligations
herein contained shall bind, and the benefits and advantages shall inure to,
the respective successors and permitted assigns of the parties hereto.
19. The waiver by any party hereto of the breach of any term, covenant,
agreement or condition herein contained shall not be deemed a waiver of any
subsequent breach of the same or any other term, covenant, agreement or
condition herein, nor shall any custom, practice or course of dealings arising
among the parties hereto in the administration hereof be construed as a waiver
or diminution of the right of any party hereto to insist upon the strict performance
by any other party of the terms, covenants, agreement and conditions herein
contained.
20. In this License Agreement, where applicable, (i) references to
the singular shall include the plural and references to the plural shall
include the singular, and (ii) references to the male, female, or neuter
gender shall include references to all other
such genders where the context so requires.
IN WITNESS WHEREOF, the parties hereto have executed this License
Agreement, the Effective Date of which is indicated on page 1 of this
License Agreement.
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OWNER:
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ICM:
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Heron Lake BioEnergy, LLC
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ICM, Inc.
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By:
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By:
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Title:
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Title:
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Date Signed:
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Date Signed:
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Address for giving notices:
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Address for giving notices:
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301 N First Street
Colwich, KS 67030
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EXHIBIT E
START-UP SERVICES TO BE PROVIDED TO OWNER
Start-up services will be
provided to Owner as follows: Electrical and instrumentation checkout, and approximately two (2) weeks of
on-site training at the US Energy Partners Plant (USEP) in Russell, Kansas, or
other location, such to be provided for project Owner employees, including
operators, laboratory personnel, general, plant and maintenance managers. (Other personnel of the project Owner can be
provided such on-site training by separate agreement and as time is
available.) All trainer and costs
associated with the trainer, including labor and all training materials will be
provided to Owner without cost. The
Owner will be responsible for all travel and related expenses of its employees
and the project Owner will pay all wages for its personnel during the training
and will cover all other expenses related to the on-site training. Said training services will include training
on computers, lab procedures, field operating procedures, and overall plant
section performance expectations. Two
persons shall be provided to lead the Owner during the initialization and
start-up of the plant. The Owner will
provide all other personnel and pay all other costs related to start-up of the
plant. Personnel will be maintained
on-site by Design-Builder or a subcontractor until all performance testing is
complete and accepted by the Owner, unless the Owner fails to execute or allow
performance testing within 30 days after receiving a written request from
Design-Builder or its subcontractor to begin performance testing or the work on
the project work is substantially stopped for any reason for a period of 30
days or more. Design-Builder or its subcontractor
will provide an additional one month on-site support after Substantial
Completion start-up of the plant and from date of Substantial Completion
start-up will provide six (6) months of off-site technical and operating
procedure support by telephone, computer modem, the Internet and email.
Design-Builder shall deliver
to Owner all manuals, instructions or other written materials that it receives
from equipment manufacturers and suppliers/vendors of equipment.
EXHIBIT
F
Work
Schedule
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OWNER’S RESPONSIBILITIES
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NUMBER
OF DAYS TO BE
COMPLETED AFTER
NOTICE TO PROCEED
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Notice
to Proceed
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0
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Obtain
Builder’s Risk policy in the amount of the Contract Price, obtain Boiler and
Machinery Insurance, and obtain Terrorism Coverage per TRIA
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[***]
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Storm
Water Permits Complete
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[***]
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Natural
Gas/Propane Supply Agreements Complete
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[***]
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Water
Supply and Service Agreements Complete
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[***]
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Risk
Insurance Provider Selected/Fire Protection Requirements Known
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[***]
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NPDES
Discharge Point Selected
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[***]
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Electrical
Service
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[***]
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Water
Pre-Treatment System Design Complete
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[***]
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Wastewater
Discharge System Complete
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[***]
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Operating
Permits Complete
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[***]
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Discharge
Permits Complete
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[***]
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Pumphouse/Water
Pre-treatment System Complete
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[***]
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Fire
Protection System Complete
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[***]
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Administration
Building Complete
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[***]
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Paving
(Plant Roads) Complete
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[***]
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Rail
Spur Complete
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[***]
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Employees
Hired and Ready for Training
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[***]
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Natural
Gas Pipeline Complete
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[***]
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DESIGN-BUILDER’S
RESPONSIBILITIES
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NUMBER
OF DAYS TO BE
COMPLETED AFTER
NOTICE TO PROCEED
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Substantial
Completion
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485
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Final
Completion
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545
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EXHIBIT
G
Letter Agreement
to the
Design-Build Lump Sum Agreement
by and between
Heron Lake BioEnergy, LLC (OWNER)
and
Fagen, Inc. (DESIGN-BUILDER)
Dated September 28, 2005
The
parties have agreed to the following additions to the above-referenced
Agreement:
In
the event design, engineering, equipment, labor and construction costs (the
“Costs”) are required in order for [***] to be reduced to Owner’s air permit
limit, then, as to the amount of such Costs, Owner and Design-Builder agree as
follows:
(1)
Design-Builder shall be responsible for [***] to reduce the [***] to
[***]. Owner and Design-Builder agree
[***] in the responsibility for the Costs required to reduce the [***] from [***]
to Owner’s permit limit, such that each party shall be responsible for [***] of
those Costs;
(2)
The amount of that portion of [***] required to reduce the [***] from
[***] to Owner’s permit limits shall be calculated based on the actual cost of
materials and labor plus burden, in addition to any additional jobsite overhead
costs, incurred by Design-Builder, with no mark-up applied;
(3)
Owner’s [***] of the Costs under the second sentence of paragraph 1
above will be made at the time and subject to the conditions as provided for in
Section 5.4.2 of the Lump Sum Contract regarding payment of any early
completion bonus, such that Design-Builder will pay [***] of the Costs at the
time they are incurred and due and owing, and Owner will pay its [***]share to
Design-Builder at the time and in accordance with the payment terms and
conditions described in Section 5.4.2.
As to priority between any early completion bonus payment and payment of
Owners [***] share of costs hereunder, Design-Builder shall be reimbursed its
[***] share of costs first.
(4)
If the additional work required by this Exhibit G requires
additional equipment to [***] from [***] to Owner’s permit limits, then the
electrical performance guarantees as provided in Exhibit A shall be
subject to commercial reasonable adjustment.
This
Agreement shall hereafter constitute part of the Contract Documents. All other terms and conditions of the
Contract Documents shall remain in full force and effect, except as
specifically modified by this Agreement.
This
Agreement is hereby entered into and effective between the parties as of the
28th day of September, 2005.
IN WITNESS WHEREOF, the
undersigned have entered into and agreed to the foregoing Exhibit G-
Letter Agreement- to the Design-Build Agreement as of the date first set forth
above.
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OWNER:
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DESIGN-BUILDER:
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HERON
LAKE BIOENERGY, LLC
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FAGEN,
INC
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By:
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By:
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Authorized
Representative
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Authorized
Representative
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Title:
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Title:
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EXHIBIT
H
Letter Agreement No. 2
to the
Design-Build Lump Sum Agreement
by and between
Heron Lake BioEnergy, LLC (OWNER)
and
Fagen, Inc. (DESIGN-BUILDER)
Dated September 28, 2005
The
parties have agreed to the following additions to the above-referenced
Agreement:
In the event the design, engineering, equipment,
labor and construction costs required in order for Design-Builder to meet its
Performance and Emission Guarantees set forth in Article 11 of the
Agreement would exceed 10 million dollars (based on supporting documentation
provided to Owner), then Owner and Design-Builder agree as follows:
(5)
Owner
will consider and accept a commercially reasonable proposal presented by
Design-Builder to design and construct a 50 or 100 MGY Gas-fired Dry Grind
Ethanol Plant in lieu of the 50 MGY Coal-fired Dry Grind Ethanol Plant
described in the Agreement, and the contract price of such ethanol plant shall
be $56,619,000 (for 50 mgy) or $98,000,000 (for 100 mgy), as the case may be;
(6)
In
consideration of Owner accepting the foregoing proposal, Design-Builder shall
be responsible for and agrees to pay [***] of the construction costs of the gas
plant including the costs to bring the natural gas line to the site, less the
amount of any costs (if any) incurred and paid by Design-Builder in trying to
meet its performance and emission guaranty under Article 11 of the
Agreement;
(7)
In
consideration of Owner accepting the foregoing proposal, Design-Builder will
pay for [***] of Owner during the period from when the decision to switch to
gas is made to when Owner can deliver a valid notice to proceed to
Design-Builder on the gas-fired ethanol plant (which notice shall require among
other items that all financing for such plant be secured and available for
construction and that Owner have an issued air permit for the gas plant);
(8)
In
consideration of Owner accepting the foregoing proposal, Design-Builder hereby
agrees to indemnify, defend and hold harmless Owner, its consultants,
subcontractors, anyone employed directly or indirectly for any of them, and
their officers, directors, employees and agents (including Owner’s legal
counsel), from and against any and all claims, losses, damages, liabilities and
expenses incurred as a result of third party claims or actions brought against
such indemnified party (other than claims or actions brought by any such
indemnified party against another indemnified party), including attorneys’ fees
and expenses, arising out of or resulting from this Agreement or the switch to
a natural-gas fired ethanol plant;
(9)
Design-Builder’s
total aggregate liability for liquidated damages under section 5.5.1 of the
Design-Build Lump Sum Agreement, for failure to meet the
performance and emission warranties under Article 11 of the
Design-Build Lump Sum Agreement, [***] shall be capped at and shall not exceed
$10.0 Million.
This
Agreement shall hereafter constitute part of the Contract Documents. All other terms and conditions of the
Contract Documents shall remain in full force and effect, except as
specifically modified by this Agreement.
This
Agreement is hereby entered into and effective between the parties as of the
28th day of September, 2005.
This
Agreement shall be considered drafted equally by both parties hereto, and shall
not be construed for or against either party.
IN
WITNESS WHEREOF, the undersigned have entered into and agreed to the foregoing
Agreement as of September 29, 2005.
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OWNER:
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DESIGN-BUILDER:
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HERON
LAKE BIOENERGY, LLC
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FAGEN,
INC
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By:
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By:
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Authorized
Representative
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Authorized
Representative
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Title:
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Title:
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