Exhibit 99.1
VBV LLC AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Financial Statements
March 31, 2008 and 2007
(With Independent Auditors’ Report Thereon)
VBV LLC AND SUBSIDIARIES
(A Development Stage Company)
Table of Contents
| |
| Page |
Independent Auditors’ Report | F-3 |
Consolidated Balance Sheets | F-4 |
Consolidated Statements of Operations | F-5 |
Consolidated Statements of Members’ Capital | F-6 |
Consolidated Statements of Cash Flows | F-7 |
Notes to the Consolidated Financial Statements | F-8 |
F-2
|
KPMG LLP
303 East Wacker Drive
Chicago, IL 60601-5212 |
Independent Auditors’ Report
The Board of Directors
VBV LLC and Subsidiaries:
We have audited the accompanying consolidated balance sheets of VBV LLC and subsidiaries (a development stage company) (the Company) as of March 31, 2008 and 2007, and the related consolidated statements of operations, members’ capital, and cash flows for the year ended March 31, 2008 and for the periods from September 28, 2006 (date of inception) to March 31, 2007 and from September 28, 2006 (date of inception) to March 31, 2008. 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 financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of VBV LLC and subsidiaries (a development stage company) as of March 31, 2008 and 2007, and the results of their operations and their cash flows for the periods then ended in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements of cash flows for 2008, period from September 28, 2006 (Date of Inception) to March 31, 2007, and period from September 28, 2006 (Date of Inception) to March 31, 2008 have been restated, as discussed in note 2.
/s/ KPMG LLP
Chicago, Illinois
June 20, 2008, except as to
note 2, which is as of
August 1, 2008
F-3
VBV LLC AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
March 31, 2008 and 2007
| | | | |
| | 2008 | | 2007 |
ASSETS | | | | |
Current Assets: | | | | |
Cash | $ | 537,927 | $ | 87,466,300 |
Short term investments | | 893,943 | | 169,200 |
Prepaid and other expenses | | 3,853,165 | | 1,434,910 |
Total current assets | | 5,285,035 | | 89,070,410 |
Property and Equipment: | | | | |
Construction in progress, including amounts to related parties of $208,175,756 and $38,623,743, respectively | | 237,082,872 | | 57,609,904 |
Land | | 3,951,333 | | 3,939,866 |
Office equipment (net of 36,056 and 15,882 accumulated depreciation) | | 127,913 | | 21,262 |
Total property and equipment | | 241,162,118 | | 61,571,032 |
Other assets: | | | | |
Financing costs | | 3,502,488 | | 3,246,977 |
Long term investments | | 2,000 | | 2,000 |
Restricted cash | | 4,224,299 | | 21,563,244 |
Total other assets | | 7,728,787 | | 24,812,221 |
TOTAL ASSETS | $ | 254,175,940 | $ | 175,453,663 |
LIABILITIES AND MEMBERS’ CAPITAL | | | | |
Current Liabilities: | | | | |
Accounts payable, including amounts to related parties of $9,266,812 and $1,603,321, respectively | $ | 10,038,291 | $ | 1,908,979 |
Accrued expenses, including amounts to related parties of $1,389,026 and 0, respectively | | 2,861,988 | | 176,323 |
Current maturities of notes payable | | 1,750,000 | | — |
Current portion of capital lease obligations | | 93,326 | | — |
Retainage payable, principally related party | | 12,112,289 | | — |
Total current liabilities | | 26,855,894 | | 2,085,302 |
Long term liabilities: | | | | |
Capital lease obligations, less current portion | | 301,292 | | 4,094 |
Notes payable | | 58,409,998 | | — |
Retainage payable, principally related party | | — | | 3,738,782 |
Revenue bonds payable | | 22,000,000 | | 22,000,000 |
Minority interest | | 38,622,323 | | 39,102,361 |
TOTAL LIABILITIES | | 146,189,507 | | 66,930,539 |
MEMBERS’ CAPITAL | | 107,986,433 | | 108,523,124 |
TOTAL LIABILITIES AND MEMBERS’ CAPITAL | $ | 254,175,940 | $ | 175,453,663 |
See accompanying notes to the consolidated financial statements.
F-4
VBV LLC AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
Year Ended March 31, 2008, Period from September 28, 2006 to March 31, 2007 and
Period from September 28, 2006 (Date of Inception) to March 31, 2008
| | | | | | |
| | 2008 | | Period from
September 28, 2006
(Date of Inception)
to March 31, 2007 | | Period from
September 28, 2006
(Date of Inception)
to March 31, 2008 |
Expenses | | | | | | |
Professional fees, including amounts to related parties of $22,934, $118,196 and $141,130, respectively | $ | 1,564,114 | $ | 672,354 | $ | 2,236,468 |
Salaries | | 2,326,100 | | 499,320 | | 2,825,420 |
General and administrative, including amounts to related parties of $346,020, $54,000 and $400,020, respectively | | 1,513,093 | | 246,545 | | 1,759,638 |
Depreciation | | 20,174 | | 2,956 | | 23,130 |
Total expenses | | 5,423,481 | | 1,421,175 | | 6,844,656 |
Other Income | | | | | | |
Interest, net | | 1,414,821 | | 1,347,658 | | 2,762,479 |
Other income | | 8,400 | | 3,172 | | 11,572 |
Total other income | | 1,423,221 | | 1,350,830 | | 2,774,051 |
Net Loss Before Minority Interests | | (4,000,260) | | (70,345) | | (4,070,605) |
Minority Interests in losses of consolidated subsidiaries | | (480,148) | | (28,136) | | (508,284) |
Net Loss | $ | (3,520,112) | $ | (42,209) | $ | (3,562,321) |
See accompanying notes to the consolidated financial statements.
F-5
VBV LLC AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Members’ Capital
Year Ended March 31, 2008, Period from September 28, 2006
(Date of Inception) to March 31, 2007 and Period from September 28, 2006
(Date of Inception) to March 31, 2008
| | |
| | Members’ Capital |
Balance at September 28, 2006 (date of inception) | | |
Capital contributions from members | $ | 108,147,999 |
Issuance costs | | 75,000 |
Compensation expense related to share-based payments | | 342,334 |
Net Loss | | (42,209) |
Balance at March 31, 2007 | | 108,523,124 |
Capital contributions from members | | 2,474,496 |
Compensation expense related to share-based payments | | 508,925 |
Net Loss | | (3,520,112) |
Balance at March 31, 2008 | $ | 107,986,433 |
See accompanying notes to the consolidated financial statements.
F-6
VBV LLC AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
Year Ended March 31, 2008, Period from September 28, 2006 (Date of Inception) to March 31, 2007
and Period from September 28, 2006 (Date of Inception) to March 31, 2008
| | | | | | |
| | 2008
Restated | | Period from
September 28, 2006
(Date of Inception)
to March 31, 2007
Restated | | Period from
September 28, 2006
(Date of Inception)
to March 31, 2008
Restated |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net Loss | $ | (3,520,112) | $ | (42,209) | $ | (3,562,321) |
Adjustments to reconcile net income from operations to net cash provided by operating activities: | | | | | | |
Depreciation | | 20,174 | | 2,956 | | 23,130 |
Stock option expense | | 508,925 | | 342,334 | | 851,259 |
Minority interest in net loss of consolidated subsidiaries | | (480,148) | | (28,136) | | (508,284) |
Changes in assets and liabilities: | | | | | | |
Prepaid and other assets | | (2,418,255) | | (1,391,478) | | (3,809,733) |
Accounts payable | | 287,753 | | (582,231) | | (294,478) |
Accrued expenses | | 680,156 | | 167,492 | | 847,648 |
Net cash used in operating activities | | (4,921,507) | | (1,531,272) | | (6,452,779) |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Purchase of investment securities | | (724,743) | | (171,200) | | (895,943) |
Payments for construction in progress | | (160,741,032) | | (16,240,177) | | (176,981,209) |
Payments for office equipment | | (126,825) | | — | | (126,825) |
(Investment in) withdrawal of restricted cash | | 17,338,945 | | (21,563,244) | | (4,224,299) |
Land purchases | | (11,467) | | (250,821) | | (262,288) |
Net cash used in investing activities | | (144,265,122) | | (38,225,442) | | (182,490,564) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Capital contributions | | 2,474,496 | | 108,147,999 | | 110,622,495 |
Proceeds from revenue bonds | | — | | 22,000,000 | | 22,000,000 |
Proceeds from contruction notes payable | | 60,159,998 | | — | | 60,159,998 |
Payments for financing costs | | (376,238) | | (2,924,985) | | (3,301,223) |
Net cash provided by financing activities | | 62,258,256 | | 127,223,014 | | 189,481,270 |
NET (DECREASE) INCREASE IN CASH | | (86,928,373) | | 87,466,300 | | 537,927 |
CASH—Beginning of period | | 87,466,300 | | — | | — |
CASH—End of period | $ | 537,927 | $ | 87,466,300 | $ | 537,927 |
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES | | | | | | |
Capital lease obligations incurred for equipment | $ | 390,524 | $ | 4,094 | $ | 394,618 |
Acquisition of net assets for EGP & IBE | $ | — | $ | 5,343,402 | $ | 5,343,402 |
Increase in construction in progress for amounts still owed | $ | 18,220,685 | $ | 5,552,493 | $ | 23,773,178 |
Amortized financing costs capitalized in construction in progress | $ | 120,727 | $ | — | $ | 120,727 |
See accompanying notes to the consolidated financial statements.
F-7
VBV LLC AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 2008 and 2007
1. Description of Business and Summary of Significant Accounting Policies
a.
Description of Business
VBV LLC (the Company), a Delaware limited liability company, was formed on September 28, 2006 as a result of like-minded visionaries joining forces in order to capitalize on the biofuels opportunities available within the United States. The Company believes biofuels will play a significant role in meeting the increasing demand for energy from renewable sources. The Company is currently seeking opportunities in the corn-to-ethanol business to build a network combining production, distribution and marketing.
The Company has a controlling interest in two development stage ethanol plants, Indiana Bio-Energy, LLC (IBE), an Indiana limited liability company which was formed on December 7, 2004 and Ethanol Grain Processors, LLC (EGP), a Tennessee limited liability company which was formed on October 24, 2004. Both plants are 100 million gallon name plate dry mill natural gas ethanol plants which will produce fuel grade ethanol and distillers grain. Both plants are expected to be completed and operational in the Fall of 2008. Accordingly, the Company is considered to be a development stage company.
b.
Fiscal Reporting Period
The Company has adopted a fiscal year ending March 31 for reporting financial operations.
c.
Use of Estimates
The preparation of the consolidated financial statements, in accordance with generally accepted principles in the United States of America, requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
d.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its majority owned subsidiaries (collectively, the Company). In accordance with the Financial Accounting Standards Board (FASB) Interpretation No. 46(R),Consolidation of Variable Interest Entities (FIN 46R), the Company also consolidates any variable interest entities (VIE’s) of which it is the primary beneficiary, as defined. When the Company does not have a controlling interest in an entity, but exerts a significant influence over the entity, the Company applies the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation.
e.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
f.
Short Term Investments
Short term investments consist of certificates of deposit that are stated at cost, which approximates the fair market value. These investments are held at a financial institution. The maturity dates on these securities are greater then 90 days when purchased.
g.
Prepaid Expenses
Prepaid expenses consist of utility deposits and prepaid insurance policies.
F-8
h.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation on office equipment is calculated on the straight-line method over the estimated useful lives of the assets. Depreciation on construction in progress, including capitalized interest, will begin upon commencement of operations at the plants. Both plants are expected to be completed and operational in the fall of 2008. Total depreciation for the year ended March 31, 2008 and for the period from September 28, 2006 to March 31, 2007 was $20,174 and $2,956 respectively.
i.
Financing Costs
Fees and costs related to securing debt financing are recorded as financing costs, depending on the nature of the debt instrument. Financing costs are stated at cost and are amortized as interest over the life of the loans. During the period of construction, amortization of such costs are being capitalized in construction in progress. Total amortization of such costs capitalized in construction in progress for the year ended March 31, 2008 and for the period from September 28, 2006 to March 31, 2007 was $325,205 and $0, respectively.
j.
Restricted Cash
The Company maintains cash on deposit in accounts held by a trustee, which have been restricted to be used only for approved expenses relating to the construction of ethanol plants.
k.
Minority Interests
The Company records minority interest expense which reflects the portion of the results of operations of majority-owned operations which are attributable to the minority interest members. The Company has a 78% ownership in Indiana Bio Energy LLC and a 62% ownership in Ethanol Grain Processors LLC.
l.
Retainage Payable
Retainage payable consists of amounts earned by contractors on the construction of the IBE and EGP plants and payable upon completion of the construction of the plants.
m.
Equity-Based Compensation
The Company applies SFAS No. 123(R) “Accounting for Stock-Based Compensation” for all compensation related to units, options or warrants. SFAS No. 123(R) requires the recognition of compensation cost using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes pricing model to calculate the fair value of options and warrants issued to both employees and non-employees. Units issued for compensation are valued using the estimated fair value of the units on the date of the related agreement.
n.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
VBV LLC intended to be taxed as a corporation from its inception date onward. However, the election required to be filed with Internal Revenue Service (IRS) was accepted by the IRS with an effective date of April 11, 2007, not the September 28, 2006 inception date as requested by VBV LLC on its election form. VBV LLC is considered a flow through entity for the period from September 28, 2006 to April 10, 2007. VBV LLC is in the process of appealing the corporation effective date with the IRS. The outcome of the appeal is expected during the 2008 calendar year.
F-9
VBV LLC, as a development stage company, has incurred losses for the fiscal year ended March 31, 2008 and for the period from September 28, 2006 (inception) to March 31, 2007. Those losses have appropriately been recorded as a deferred tax asset with an offsetting valuation allowance as the losses are not more likely than not to be utilized prior to their expiration. If the VBV LLC appeal of the effective date of the corporate status is denied, losses incurred from the effective date of September 28, 2006 through April 10, 2007 cannot be utilized by the corporate entity established at April 11, 2007.
2. Restatement
The Company has restated its previously issued financial statements for the year ended March 31, 2008 and for the periods from September 28, 2006 (date of inception) to March 31, 2007 and from September 28, 2006 (date of inception) to March 31, 2008 to correct the presentation in the statement of cash flows of certain purchases of property, plant and equipment.
A portion of the Company’s construction in progress was funded by the incurrence of accounts payable and accrued expenses, and the capitalization of financing costs and had been included as a cash activity in the consolidated statements of cash flows. Since these portions of construction in progress were not funded by actual cash payments within the respective periods, the Company corrected this presentation in the consolidated statements of cash flows by reducing the investing outflows for the purchases of property, plant and equipment, reducing the corresponding change in accounts payable and accrued expenses in the operating section of the consolidated statements of cash flows and increasing the amount of financing outflows for financing costs. In addition, the Company added a non-cash activity disclosure to properly reflect the portion of construction in progress funded by the incurrence of accounts payable, accrued expenses, retainage, and the capitalization of f inancing costs.
The original and restated balances for the line items affected by these adjustments are:
| | | | | | | | | | | | |
| | 2008
As Reported | | 2008
As Restated | | Period from
September 28, 2006
(Date of Inception)
To March 31, 2007
As Reported | | Period from September 28,
2006 (Date of
Inception) to March 31, 2007
As Restated | | Period from September 28,
2006 (Date of
Inception) to
March 31, 2008
As Reported | | Period from
September 28,
2006 (Date of
Inception) to
March 31, 2008
As Restated |
CASH FLOW STATEMENT | | | | | | | | | | | | |
Increase (decrease) in accounts payable | $ | 8,129,312 | $ | 287,753 | $ | 1,230,480 | $ | (582,231) | $ | 9,359,792 | $ | (294,478) |
Increase (decrease) in accrued expenses | $ | 2,685,665 | $ | 680,156 | $ | 167,492 | $ | 167,492 | $ | 2,853,157 | $ | 847,648 |
Net cash provided by (used in) operating activities | $ | 5,090,197 | $ | (4,921,507) | $ | 281,439 | $ | (1,531,272) | $ | 5,371,636 | $ | (6,452,779) |
Payments for construction in progress, less retainage | $ | (170,873,463) | $ | (160,741,032) | $ | (18,052,888) | $ | (16,240,177) | $ | (188,926,351) | $ | (176,981,209) |
Net cash used in investing activities | $ | (154,397,553) | $ | (144,265,122) | $ | (40,038,153) | $ | (38,225,442) | $ | (194,435,706) | $ | (182,490,564) |
Payments for financing costs | $ | (255,511) | $ | (376,238) | $ | (2,924,985) | $ | (2,924,985) | $ | (3,180,496) | $ | (3,301,223) |
Net cash provided by financing activities | $ | 62,378,983 | $ | 62,258,256 | $ | 127,223,014 | $ | 127,223,014 | $ | 189,601,997 | $ | 189,481,270 |
These adjustments did not affect the reported amounts of net income or the change in cash for any period.
F-10
3. Long Term Debt
Long-term debt at March 31, 2008 and 2007 consists of the following:
| | | | |
| | 2008 | | 2007 |
EGP Construction Term Loan through Farm Credit Services, Agent Base Rate + 25 Basis Points | $ | 29,600,000 | $ | — |
EGP Commercial Loan through Tennessee Valley Authority at 2% | | 1,000,000 | | — |
IBE Construction Note through Agstar Financial Services, LIBOR + 350 basis points, IBE Senior Debt | | 29,559,998 | | — |
IBE Revenue Bonds Payable, 7.5% bond issuance through the City of Bluffton, IN and U.S. Bank, IBE Junior Debt | | 22,000,000 | | 22,000,000 |
Total Debt | $ | 82,159,998 | $ | 22,000,000 |
Less current maturities of notes payable | $ | 1,750,000 | $ | — |
Total Long Term Debt | $ | 80,409,998 | $ | 22,000,000 |
In January 2007, EGP entered into a credit agreement with Farm Credit Services of Mid-America to partially finance the construction of one of the plants. In August 2007, EGP amended the credit agreement to include an additional $5,000,000. The credit agreement is comprised of a $60,000,000 construction term loan, a revolving construction term loan of $37,400,000 and a $2,600,000 revolving line of credit (the EGP Loan Agreements).
Construction Term Loan—This loan of $60,000,000 is available for advances until construction for the plant has been completed. Principal payments are to commence with $2,400,000 due on May 20, 2009, and each quarter thereafter with a final maturity on May 20, 2015. Interest shall be calculated on the actual number of days each loan is outstanding and is payable on a monthly basis. In addition, for fiscal years 2008 and ending with the fiscal year 2013, the Company is also required to make a special payment equal to 75% of the available (if any) free cash flow from operations (as defined in the agreement), not to exceed $8,000,000 per year and provided, however, that if such payments would result in a covenant default under the EGP Loan Agreements, the amount of the payments shall be reduced to an amount which would not result in a covenant default. The free cash flow payments are discontinued when the aggregate total received from such payments exceed s $18,000,000.
Revolving Construction Term Loan—This loan of $37,400,000 is available for advances beginning April 1, 2008 throughout the life of the commitment, which expires May 1, 2019. This loan requires semi-annual $4,675,000 payments on/step-downs of the commitment to commence on the first day of the month beginning approximately six months after repayment of the construction term loan, by November 1, 2015 at the latest with a final maturity no later than November 1, 2018. The Company has no borrowings under this arrangement as of March 31, 2008 and 2007. EGP has an additional revolving line of credit in the amount of $2,600,000 which requires interest to be paid monthly on the unpaid balance in accordance with one or more of the following interest rate options: agent base variable rate plus 0.25%, quoted fixed per annum rate or a fixed rate of LIBOR plus 3.15%. The Company has no borrowings under this arrangement as of March 31, 2008 and 2 007.
In February 2007, IBE entered into a credit agreement with Agstar Financial Services to partially finance the construction of one of the plants. The IBE loan is comprised of a $90,000,000 construction loan, which will convert into a $70,000,000 amortizing term loan, and a $20,000,000 revolving line of credit at plant completion (the IBE Loan Agreements).
Term Loan—This loan is available for advances until construction for the plant has been completed. Principal payments are to commence with $583,333 due the earlier of 60 days from completion of construction of the plant or December 31, 2008, and each month thereafter with a final maturity on December 31, 2018 at the latest. In addition, for fiscal years ending in 2009 and thereafter, the Company is also required to make a special payment equal to 75% of the available (if any) free cash flow from operations (as defined in the agreement), not to exceed $4,000,000 per year, and provided, however, that if such payments would result in a covenant default under the IBE Loan Agreements, the amount of the payments shall be reduced to an amount which would not result in a covenant default. The free cash flow payments are discontinued when the aggregate total received from such payments exceeds $16,000,000.
F-11
Revenue Bond—IBE also entered into an agreement on March 1, 2007 and received $22,000,000 from the City of Bluffton, IN, Subordinate Solid Waste Disposal Facility Revenue Bonds (the IBE Revenue Bonds). Funds from the revenue bond have been received at March 31, 2008 and 2007. The revenue bonds require semi-annual principal and interest payments beginning in March 2010 through September 2019.
Pricing and fees
The EGP Loan Agreements bear interest at either Agent Base Rate (prime) plus 0%-1/2% (based on a ratio of total equity to total assets) or short-term fixed rates at LIBOR +290 to 315 basis points (based on a ratio of total equity to total assets). The lenders may, however, allow the Company to elect to pay interest at a fixed interest rate to be determined. Origination fees of $1,100,000 and $2,000 for equity in lenders have been incurred by the company through March 31, 2008 and are recorded in financing costs in the consolidated balance sheets. The Company paid an application of fee of $40,000 on August 9, 2006 and has annual recurring fees of $30,000. An unused commitment fee of1/2% is charged on the $37,400,000 Revolving Construction Term Loan and2/5% on the $2,600,000 Revolving Line of Credit.
The IBE Loan Agreements bear interest at LIBOR short-term fixed rates plus 350 basis points during the construction phase and plus 250 to 325 basis points thereafter (based on a ratio of total equity to total assets). Origination fees of $1,300,000 and other fees in the amount of $26,000 have been incurred by the company through March 31, 2008 and are recorded in financing costs in the consolidated balance sheets.
The IBE Revenue bond bears interest at 7.50% per annum. An annual administrative fee of $5,000 begins May 2008. Bond issue costs totaled $1,000,000 and are recorded in financing costs in the consolidated balance sheets.
Security
As security for the EGP Loan Agreements and the IBE Loan Agreements (collectively, the Loan Agreements), the lenders received a first-position lien on all personal property and real estate owned by EGP and IBE, including an assignment of all contracts and rights pertinent to construction and on-going operations of the plants. The Company will be required to maintain certain financial and non-financial covenants during the term of the loans.
Representations, Warranties and Covenants
The Loan Agreements contain representations, warranties, conditions precedent, affirmative covenants (including financial covenants) and negative covenants.
The EGP Loan Agreements require working capital (current assets over current liabilities in accordance with GAAP consistently applied) of not less than $9,000,000 at the commencement of operations and increasing to $12,000,000 for fiscal year 2009, and thereafter, except that in determining current assets, any amounts available not drawn on the loan agreement (less the amount that would be considered a current liability as a result from drawing the additional funds under GAAP) may be included.
The EGP Loan Agreements require net worth (total assets over total liabilities in accordance with GAAP consistently applied) of $66,000,000, increasing to $67,000,000 on completion date, and increasing to $70,000,000 for fiscal year ending 2009 and thereafter.
The EGP Loan Agreements also require a Debt Service Coverage Ratio of 1.25 to 1.0 for fiscal year 2009 and thereafter. Debt Service Coverage Ratio is defined as (all as calculated for the most current year-end in accordance with GAAP consistently applied): 1) net income (after taxes), plus depreciation and amortization; divided by 2) all current portions of regularly scheduled long term debt for the prior period (previous year end).
In addition, dividends or other distributions to equity holders will be limited to 40% of the profit net of income taxes for each fiscal year and may be paid only where the Company is expected to remain in compliance with all loan covenants, terms and conditions. Furthermore, with respect to fiscal years 2009 and thereafter, an additional distribution may be made to equity holders in excess of the 40% limit for such fiscal year if the Company has made the required free cash flow payment for/based on such fiscal year, and will thereafter remain in compliance with all loan covenants, terms and conditions on a pro forma basis net of said potential additional payment.
F-12
The IBE Loan Agreements require working capital (current assets over current liabilities in accordance with GAAP consistently applied) of not less than $10,000,000 at the commencement of operations and increasing to $12,000,000 no later than 12 months after the date construction for the plant has been completed and continuing thereafter.
The IBE Loan Agreements requires net worth (total assets over total liabilities plus subordinated debt in accordance with GAAP consistently applied) of $80,000,000 at the date construction for the plant has been completed and continuing thereafter.
The IBE Loan Agreements require tangible owner’s equity (net worth divided by total assets) of at least 40% at the end of the first fiscal year following the date construction for the plant has been completed and at least 50% by the end of the second fiscal year following the date construction for the plant has been completed and continuing thereafter.
The IBE Loan Agreements also require a Debt Service Coverage Ratio of 1.25 to 1.0 for the fiscal year end 12 months following the date construction for the plant has been completed and continuing thereafter. Debt Service Coverage Ratio is defined as (all as calculated for the most current year-end in accordance with GAAP consistently applied): 1) net income (after taxes), plus depreciation and amortization, divided by 2) all current portions of regularly scheduled long term debt for the prior period (previous year end).
In addition, dividends or other distributions to equity holders will be limited to 50% of the profit net of income taxes for each fiscal year.
The IBE Revenue Bonds require a Debt Service Coverage Ratio of 1.25 to 1.0 for the fiscal year end 12 months following the date construction for the plants has been completed and continuing thereafter.
At March 31, 2008, the aggregate long term debt maturities were as follows:
| | | | | | | | | | |
| | | | Payments Due by Period |
Contractual Obligations—IBE | | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | Thereafter |
IBE Revenue Bonds | $ | 22,000,000 | $ | — | $ | 2,120,000 | $ | 3,220,000 | $ | 16,660,000 |
IBE Loan Agreements | | 29,559,998 | | 1,750,000 | | 14,000,000 | | 13,809,998 | | — |
Purchase Obligations | | 24,859,185 | | 24,859,185 | | — | | — | | — |
Total | $ | 76,419,183 | $ | 26,609,185 | $ | 16,120,000 | $ | 17,029,998 | $ | 16,660,000 |
| | | | | | | | | | |
| | | | Payments Due by Period |
Contractual Obligations—EGP | | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | Thereafter |
Capital Lease Obligation | $ | 394,618 | $ | 93,326 | $ | 301,292 | $ | — | $ | — |
EGP Loan Agreements | | 29,600,000 | | — | | 19,200,000 | | 10,400,000 | | — |
Other Long-Term Liabilities | | 1,000,000 | | — | | 200,000 | | 200,000 | | 600,000 |
Purchase Obligations | | 30,246,709 | | 30,246,709 | | — | | — | | — |
Total | $ | 61,241,327 | $ | 30,340,035 | $ | 19,701,292 | $ | 10,600,000 | $ | 600,000 |
The Company is in compliance with all debt covenants as of March 31, 2008.
Capitalized Interest
There was $41,250 of interest capitalized through March 31,2007 for EGP or IBE and $2,561,522 as of March 31, 2008.
4. Members’ Equity
VBV LLC (the Company), a Delaware limited liability company, was formed on September 28, 2006. The Company was capitalized by its three members initially to purchase the investments in Indiana Bio-Energy LLC and Ethanol Grain Processors LLC and thereafter to fund the ongoing expenditures arising from the management team and related development activities in Chicago.
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The investment in Indiana Bio-Energy LLC (IBE) was purchased for cash consideration of $51,130,000, which was contributed by its members on December 22, 2006. VBV LLC acquired 5,113 shares, representing 78% ownership.
The investment in Ethanol Grain Processors LLC (EGP) was purchased for cash consideration of $49,527,500, which was contributed by its members on January 19, 2007.VBV LLC acquired 24,764,000 shares, representing 62% ownership.
Thereafter, there were cash calls for VBV LLC in June and October 2007 for $1,000,000 each and one in February 2008 for $475,000.
The Company also incurred finders fees on both investments which were paid to Ethanol Capital Management LLC of $7,490,000 in May 2007. The funding of these fees came from contributions by each of the shareholders in their respective shareholdings. These fees were considered part of the purchase price of these investments and resulted in additional amounts being recorded as construction in progress.
The total number of units in VBV LLC issued was 1,000 units.
5. Equity Based Compensation
There are equity based compensation arrangements at VBV LLC and both of its subsidiaries. These are set out below for each company.
Ethanol Grain Processors LLC
VBV LLC invested in EGP on January 19, 2007. Prior to VBV LLC’s investment EGP had granted options to certain members of management and non-employees to purchase 55,884 units each at an exercise price of $0.45 per unit for a total of 502,956 units. Prior to the Company’s inception date of January 19, 2007, eight of the nine individuals exercised their options and purchased 447,072 membership units at $.45 per unit for total cash received of $201,182. The company has options outstanding and exercisable to one non-employee to purchase 55,884 units as of March 31, 2008 and March 31, 2007. The options have a weighted average exercise price of $0.45 and weighted average remaining contractual term of 3.9 and 4.9 years as of March 31, 2008 and March 31, 2007, respectively. The fair value of the option was estimated using the Black-Scholes option-pricing model. The weighted average fair value of the option granted was estimate d to be $1.86 per unit. All of the expense associated with the options had been recorded by EGP prior to the Company’s acquisition of EGP on January 19, 2007. The aggregate intrinsic value of the award is $86,620 as of March 31, 2008 and March 31, 2007 and is calculated as the difference between the weighted average exercise price of the underlying awards and the company’s estimated current fair market value at March 31, 2008 and March 31, 2007, which was the offering price of $2.00 per unit.
In July 2007, the Company authorized 20,000 restricted units to a related party member acting as Chief Financial Officer and Chief Executive Officer of EGP, vesting upon substantial completion of the EGP plant. The weighted average grant-date fair value is $2.00 per unit. As of March 31, 2008, there is $17,500 of total unrecognized compensation cost related to the nonvested share-based awards. The cost is expected to be recognized over a weighted average period of 0.6 years. The total fair value of shares vested during the year ended March 31, 2008 was $22,500.
In December 2007, the Company authorized 125,000 options to a related party member acting as Chief Financial Officer and Chief Executive Officer of EGP, vesting immediately upon issue and expiring three years from date of issuance. The options have a weighted average exercise price of $2.00 and weighted contractual term of 2.75 years as of March 31, 2008. The fair value of the option was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield 0%, volatility 98%, weighted average risk free interest rate 3.0% and expected life of three years. Since the Company’s shares are not publicly traded, expected volatility is computed based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the options is based on the U.S. Treasury yield curve in effect at the time of the grant. The weighted average fair value of the option grante d was estimated to be $1.25 per unit. The Company recognized expense associated with the option of $155,649 for the year ended March 31, 2008. The aggregate intrinsic value of the award is zero as of March 31, 2008 based on the weighted average exercise price of the underlying awards and the company’s estimated current fair market value at March 31, 2008 to be equal to $2.00 per unit.
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Indiana Bio-Energy LLC
IBE issued 328 options in total to two employees of Midwest Bio-Management LLC, pursuant to an agreement between IBE and Mid-West dated August 10, 2005. The options were issued to allow the two individuals each to purchase 164 units of IBE equal to two and one-half percent (2.5%) of the total number of equity units upon financing closing of the IBE plant, an event that occurred on February 27, 2007. The exercise price was the lesser of $100 per unit or one percent (1%) of the then-current unit price. The options have a weighted average exercise price of $100 and weighted contractual term of 0.9 years and 1.9 years as of March 31, 2008 and March 31, 2007, respectively. The fair value of the option was estimated using the Black- Scholes option-pricing model with the following weighted-average assumptions: dividend yield 0%, volatility 98%, weighted average risk free interest rate 4.2% and expected life of 3.5 years. Since the Company&# 146;s shares are not publicly traded, expected volatility is computed based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the options are based on the U.S. Treasury yield curve in effect at the time of the grant. The weighted average fair value of the option granted was estimated to be $9,915 per unit. IBE recognized expense associated with the options of $2,909,834 prior to being acquired by VBV. VBV recognized expense associated with the options of $342,334 for the period from September 28, 2006 (Inception Date) to March 31, 2007 and zero for the year ended March 31, 2008. The aggregate intrinsic value of the awards is $3,247,200 as of March 31, 2008 and March 31, 2007 based on the weighted average exercise price of the underlying awards being $100 and the company’s estimated current fair market value at to be equal to $10,000 per unit.
During June 2007, IBE issued 16 restricted units to an employee of the company. The weighted average grant-date fair value of the award is $10,000 per unit. The award vests over 5 years. As of March 31, 2008, there was $136,000 of total unrecognized compensation cost related to the nonvested share- based awards. The cost is expected to be recognized over a weighted average period of 4.2 years. The total fair value of shares vested during the year ended March 31, 2008 was $24,000.
VBV LLC
On May 15, 2007, the Company granted to an executive restricted units of up to 0.3% of the Company’s units, to incrementally vest over a period of four 4 years based on the following schedule: (a) 33% of the restricted units shall vest year one; (b) another 33% of the restricted units shall vest year two; (c) another 16% of the restricted units shall vest year 3; and (d) the remaining 17% of the restricted units shall vest year four. The weighted average grant-date fair value of the award is $102,657 per unit. As of March 31, 2008 the restricted units granted are equal to 3 units based on 0.3% of the Company’s common units. As of March 31, 2008, there was $147,035 of total unrecognized compensation cost related to the nonvested share-based awards. The cost is expected to be recognized over a weighted average period of 3.2 years. The total fair value of shares vested during the year ended March 31, 2008 was $160,93 6.
On May 15, 2007, the Company also granted the executive options to purchase 0.35% of the Company’s common units, to incrementally vest over a period of four 4 years based on the following schedule: (a) 33% of the restricted units shall vest year one; (b) another 33% of the restricted units shall vest year two; (c) another 16% of the restricted units shall vest year 3; and (d) the remaining 17% of the restricted units shall vest year four. The Company granted the executive the option to purchase up to 0.35% of the Company’s common units, at an exercise price equal to the actual percentage exercised under the option by the executive multiplied by the total invested equity in the Company at the time of the exercise of the option. The options have a weighted average exercise price of $110,623 and weighted contractual term of 3.2 years as of March 31, 2008. The fair value of the option is estimated using the Black-Scholes option - -pricing model at each reporting date. The following weighted-average assumptions are used in the model as of March 31, 2008: dividend yield 0%, volatility 98%, weighted average risk free interest rate 4.7% and expected life of 4 years. Since the Company’s shares are not publicly traded, expected volatility is computed based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the options is based on the U.S. Treasury yield curve in effect at the time of the grant. The weighted average fair value of the option granted was estimated to be $77,774 per unit. The Company recognized expense associated with the options of $142,249 for the year ended March 31, 2008. The aggregate intrinsic value of the award is zero as of March 31, 2008 based on the weighted average exercise price of the underlying awards being equal to the company’s estimated current fair market value of $110,623 per unit.
6. Commitments and Contingencies
Both IBE and EGP have entered into design-build agreements with various contractors related to the construction at the plant sites. As of March 31, 2008 the Company had approximately $24,900,000 and $30,200,000 in contractual purchase obligations related to IBE and EGP, respectively.
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7. Related Party Transactions
Support
An equity owner of VBV, NTR PLC, has agreed to financially support the Company’s operations, if necessary, for a period of not less than one year from March 31, 2008.
Construction Contracts
In August 2006, EGP signed a lump-sum design-build agreement with Fagen Inc., a general contractor who is also a member of EGP, for approximately $119,600,000 including change orders. EGP has incurred $89,677,888 for these services since inception of the contract with $65,677,888 during the year ended March 31, 2008 and $24,000,000 in the period from inception to March 31, 2007 with $5,027,238 included in accounts payable and accrued expenses, and $5,717,244 included in retainage payable amounts in the accompanying consolidated balance sheets at March 31, 2008 and $2,400,000 included within retainage payable at March 31, 2007.
In December 2006, EGP entered into an agreement with Harold Coffey, a general contractor who is also a member of EGP for Phase 1 (grading and drainage) and Phase 2 (rail spur track) for the site work for approximately $10,466,017, including change orders. EGP has incurred $10,141,420 for these services since inception of the contract with $6,272,087 during the year ended March 31, 2008 and $3,869,333 in the period from inception to March 31, 2007 with $489,543 included in accounts payable and accrued expenses, and $160,200 included within retainage payable amounts in the accompanying consolidated balance sheets at March 31, 2008 and $1,603,321 included in accounts payable and $429,926 included in retainage payable at March 31, 2007.
In May 2006, IBE signed a lump-sum design-build agreement with Fagen Inc., a general contractor who is also a member of IBE, for approximately $116,600,000. IBE has incurred $95,400,000 for these services since inception of contract, $87,400,000 during the year ended March 31, 2008 and $8,000,000 in the period from inception (September 28, 2006) to March 31, 2007 with $5,139,057 included in accounts payable and accrued expenses, and $5,670,829 included in retainage payable amounts in the accompanying consolidated balance sheets at March 31, 2008 and $800,000 included in retainage payable at March 31, 2007.
Jackson-Briner Joint Venture LLC, a related party, owned and managed by James Jackson and Michael Swinford, both investors in IBE, has a contract to provide “Owners scope” services to IBE. IBE has incurred $12,956,448 for these services since inception of the contract, $10,202,038 during the year ended March 31, 2008 and $2,754,410 in period from inception to March 2007 with $564,016 included in retainage payable amounts in the accompanying consolidated balance sheets at March 31, 2008 and $108,856 included in retainage payable at March 31, 2007.
Grain Origination Contracts
Obion Grain is EGP’s exclusive supplier of corn produced in the seven counties surrounding the plant and has an ownership interest in EGP and will have a subordinate lien on EGP’s real property if EGP defaults under its corn purchase agreement with Obion Grain. In addition, Obion Grain is controlled by Dyersburg Elevator Company, James Baxter Sanders, Michael D. Miller and William H. Latimer, whom all have ownership interests in EGP, and the latter two of whom also serve as directors of the EGP board.
Cargill Biofuels Investment, a related party of IBE, has contracted with Cargill Incorporated, through its AgHorizons Business Unit (“Cargill”), for all of IBE’s corn supplies. IBE has agreed to pay Cargill for its cost of procuring the corn plus a per bushel origination fee. At March 31, 2008 and 2007, Cargill had not contracted any priced contracts of corn on behalf of IBE.
Consulting Contracts
In July 2005, EGP entered into a management consulting agreement with a related party to provide management services in the capacity of Chief Executive Officer and Chief Financial Officer. EGP incurred $190,020 of expenses with this related party in the year ended March 31, 2008 and $15,000 in the period from inception to March 31, 2007. Nothing is outstanding to this related party for the periods ended March 31, 2008 and 2007.
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Steve Hogan and Troy Flowers are investors in IBE and they are the principles of Midwest Bio-Management LLC. Midwest Bio-Management LLC has an agreement for consulting and services with IBE dated August 10, 2005. The contract for services and consulting is for $13,000 a month and expires July 31, 2009. IBE has incurred $156,000 in consulting and administrative services from this related party during the year ended March 31,2008 and $39,000 from inception to March 31,2007. Nothing is outstanding to this related party for the periods ended March 31, 2008 and 2007, respectively.
David Dale of Dale & Huffman is an investor in IBE and Dale & Huffman provided legal services to IBE. IBE has incurred $22,934 in legal services from this related party in the year ended March 31, 2008 and $118,196 in the period to from inception to March 31, 2007. There were no amounts outstanding to this related party at March 31, 2008 and 2007.
Marketing Contracts
IBE has entered into an agreement with Aventine Renewable Energy, Inc. (“Aventine”), an investor in IBE, to sell to them all of the ethanol produced at the plant. IBE will pay Aventine a certain percentage of the sales price determined on a pooled basis for certain marketing, storage, and transportation costs. No ethanol has been sold for the periods ended March 31, 2008 and 2007.
8. Subsequent Events
On May 7, 2008, the Company announced its plan to enter into a merger with another ethanol producer, Green Plains Renewable Energy, Inc. Upon approval of the merger and closing, the Company will be merged into a subsidiary of Green Plains Renewable Energy, Inc.
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