AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 30, 2001
REGISTRATION NO. 333-_____________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
NORTHWEST ETHANOL, LLC
(Name of small business issuer in its charter)
OHIO 2869 34-1946951
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification
Number)
P.O. BOX 4505
SHERWOOD, OHIO 43556-0505
TOLL FREE (888) 437-8233
(Address and telephone number of principal executive offices)
STATE ROUTE 18 AND ROSEDALE ROAD
HICKSVILLE, OHIO 43526
TOLL FREE (888) 437-8233
(Address and telephone number of principal place of
business or intended place of business)
TED W. PENNER
101 CLINTON ST., SUITE 1500
DEFIANCE, OHIO 43512
(419) 784-9982
(Name, address and telephone number of agent for service)
---------------------------
Copies to:
Paul N. Edwards, Esq.
David M. Kall, Esq.
McDonald, Hopkins, Burke & Haber Co., L.P.A.
2100 Bank One Center, 600 Superior Avenue, E.
Cleveland, Ohio 44114-2653
(216) 348-5400
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: / /
---------------------------
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE REGISTRATION FEE
Limited Liability Company
Units, no par value $22,000,000.00 $5,258.00
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION DATED _____________, 200_
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SECURITIES OFFERED BY THIS PROSPECTUS MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES,
AND IT IS NOT A SOLICITATION OF AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
NORTHWEST ETHANOL, LLC
A MINIMUM OF 2,400 AND A MAXIMUM OF 4,400 LIMITED LIABILITY COMPANY UNITS
$5,000 PER UNIT, 2 UNIT MINIMUM
- This is an initial public offering of units of Northwest Ethanol,
LLC, an Ohio limited liability company. We are seeking equity capital
to acquire the site for, and design, build and operate an ethanol plant
in Defiance County, Ohio. We will need additional debt financing in
order to complete our ethanol plant, and we are selling the units
directly to investors through the efforts of our officers and
directors.
- To purchase units, you must complete our execution package, which
includes our subscription agreement and a counterpart signature page to
our amended and restated operating agreement, and forward the package,
together with a check payable to Sky Bank as our escrow agent, for the
full amount of your subscription, to Northwest Ethanol, LLC, P.O. Box
4505, Sherwood, Ohio 43556-0505.
- Until we close this offering, if we accept your subscription, your
investment will be deposited in the escrow account, where it will be
invested in highly liquid, low risk investments. We will return your
investment with interest if we do not raise $12-22 million in equity
and secure binding written commitments for at least $16-26 million in
debt financing, to finance the anticipated $38 million in project
costs, or if our preferred site is not rezoned, by March 31, 2002,
subject to extension in our sole discretion, but no later than
September 30, 2002.
- If we timely satisfy all conditions to closing, we will issue you a
certificate evidencing your ownership of units, and we will use the
proceeds of this offering, together with the proceeds of necessary debt
financing, to acquire the site for, and design, build and operate our
ethanol plant.
- We anticipate that our ethanol plant will begin processing corn into
ethanol and its 2 primary co-products, distillers grains (a livestock
feed) and carbon dioxide, beginning in the fall of 2003, and that it
will take another 2-4 months to attain efficient operation of the
plant.
BEFORE INVESTING IN OUR UNITS, PROSPECTIVE PURCHASERS SHOULD CONSIDER EACH OF
THE FACTORS UNDER "RISK FACTORS" BEGINNING ON PAGE ___, INCLUDING BUT NOT
LIMITED TO THE FOLLOWING:
- risks related to this offering, including: the lack of a trading
market for our units and the transfer restrictions to which our units
are subject; the arbitrary nature of the offering price for our units
and their difficulty to value going forward; the dilution which new
investors will suffer to the value of their units; control of us by our
founders; possible delay of the closing; the uncertain terms of our
debt financing; that future sales of units may also dilute you; and our
possible need for additional capital;
- risks related to construction of our ethanol plant, including
unanticipated delays, unanticipated costs and our dependence upon our
anticipated design engineer and its business partners, with whom we
have no binding agreements to design and build our ethanol plant;
- risks related to the operation of our ethanol plant, including: our
recent formation, possible start-up related difficulties, losses and
the expectation of continued losses for several years; our dependency
on our directors, who lack experience in the ethanol business and have
certain conflicts of interest; our dependence on hiring competent
personnel, and upon third party suppliers and customers; competition;
market saturation; lack of diversification; increased costs of corn,
water, electricity, natural gas or transportation;
i
price sensitivity and hedging transactions in corn, energy and
petroleum; possibly unavailable or inadequate insurance; and uncertain
distributions;
- risks related to: extensive environmental and other governmental
regulation; the risk that previously unknown, adverse environmental
effects from ethanol may be discovered; the risk that the federal
oxygen mandate could be eliminated or made subject to waiver; our
dependence upon federal ethanol supports; and the relative absence of
state incentives to help us compete;
- risks related to tax issues, including: possible taxation without
distributions; possible inability to deduct losses; possible greater
tax than sale proceeds upon a sale of units; possible double taxation
of earnings; possible IRS challenges to our allocations; increased IRS
audit risks; possible application of other taxes; and possible tax law
changes; and
- presently unforeseen risks.
THE FOLLOWING TABLE ILLUSTRATES THE ESTIMATED NET PROCEEDS TO US
DEPENDING UPON WHETHER THE MINIMUM OR MAXIMUM NUMBER OF UNITS ARE SOLD IN THIS
OFFERING.
MINIMUM MAXIMUM
(2,400 UNITS) (4,400 UNITS)
---------------------- ---------------------
PER UNIT TOTAL PER UNIT TOTAL
---------------------- ---------------------
Public offering price and gross
proceeds $5,000 $ 12,000,000 $ 5,000 $ 22,000,000
Net proceeds $5,000 $ 11,609,500 $ 5,000 $ 21,609,500
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 2002.
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[Conceptual plant drawing depicting the proposed ethanol plant]
IF WE SUCCESSFULLY COMPLETE THE OFFERING, OBTAIN NECESSARY DEBT FINANCING AND
COMPLETE CONSTRUCTION, THIS IS A CONCEPTUAL DRAWING OF OUR
PROPOSED ETHANOL PLANT.
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ii
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY............................................................1
RISK FACTORS..................................................................8
WARNING REGARDING FORWARD-LOOKING STATEMENTS.................................19
USE OF PROCEEDS..............................................................20
CAPITALIZATION...............................................................21
DILUTION.....................................................................21
SELECTED FINANCIAL DATA......................................................22
MANAGEMENT'S PLAN OF OPERATIONS..............................................23
BUSINESS.....................................................................29
MANAGEMENT...................................................................47
EXECUTIVE COMPENSATION.......................................................49
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.........................49
UNIT OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................50
DESCRIPTION OF THE UNITS AND OUR AMENDED AND RESTATED OPERATING AGREEMENT....51
UNITS ELIGIBLE FOR FUTURE SALE...............................................57
FEDERAL INCOME TAX CONSEQUENCES OF OWNING OUR UNITS..........................57
PLAN OF DISTRIBUTION.........................................................64
LEGAL MATTERS................................................................66
EXPERTS......................................................................66
TRANSFER AGENT...............................................................66
WHERE YOU CAN GET MORE INFORMATION...........................................66
INDEX TO FINANCIAL STATEMENTS...............................................F-1
----------------------
APPENDIX A AMENDED AND RESTATED OPERATING AGREEMENT .......................A-1
APPENDIX B EXECUTION PACKAGE (which includes our Subscription Agreement and
a counterpart signature page to our Amended and Restated Operating
Agreement)..........................................Bound Separately
Our executive offices are located at Northwest Ethanol, LLC, P.O. Box 4505,
Sherwood, Ohio 43556-0505.
Our toll free telephone number is (888) 437-8233.
You should rely only on the information contained in this document or
information to which we have referred you in making an investment decision. We
have not authorized anyone to make any representations or provide you with
information that is different. This document may only be used where it is legal
to offer and sell these securities.
iii
PROSPECTUS SUMMARY
This summary only highlights selected information from this prospectus,
and may not contain all of the information that is important to you. We urge
you to carefully read this entire document and the documents to
which it refers before making an investment decision.
NORTHWEST ETHANOL, LLC
Northwest Ethanol, LLC is a recently formed, development stage, for-profit
Ohio limited liability company. We are not a non-profit membership cooperative.
As investors, you will be treated as members in a limited liability company (not
members in a cooperative), with governance rights similar to those of
shareholders in a corporation, and your personal exposure is generally limited
to the amount invested, again similar to shareholders in a corporation. Unlike a
corporation, however, a limited liability company is generally taxed as a
partnership, or a "pass-through" entity for tax purposes.
We are seeking equity capital to acquire the site for, and design, build and
operate, a 30 million gallon per year (MGY) ethanol plant in northwest Ohio,
near the Indiana border. We will need binding commitments for sufficient debt
financing, and our preferred site will also need to be rezoned, in order to
close this offering. In addition, prior to closing we expect to finish
negotiating various definitive agreements, including: real estate purchase
agreements to purchase the 2 parcels which together comprise our preferred site;
design and construction agreements with our anticipated design engineer and lead
contractor; and supply and marketing agreements with various third parties. At
or shortly after the closing of this offering, we expect to acquire our
preferred site and begin construction. We do not expect our ethanol plant to be
completed until at least 16 months after this offering closes, and it may take
an additional 2-4 months to attain efficient operation of the plant. During
construction we plan to gradually hire and train about 30 employees. Once the
plant is constructed, we plan to use water from the site and corn purchased
through a grain originator, together with readily available electricity and
natural gas, to produce and sell ethanol and its 2 primary co-products,
distillers grains (a livestock feed) and carbon dioxide, or CO2.
We have options to purchase 2 adjacent parcels totaling approximately 207
acres of flat, tilled upland at the intersection of State Route 18 and Rosedale
Road, about 3 miles east of Hicksville, Ohio and 30 miles northeast of Fort
Wayne, Indiana. After an exhaustive search and analysis, these parcels, which
are currently row-cropped in a corn and soybean yearly rotation, together became
the preferred site for our ethanol plant. Our preferred site: is readily
accessible by truck and train; has access to enough water of sufficient quality,
and enough electricity and natural gas, to economically operate our plant; is
sufficiently remote to minimize potential problems with community opposition;
and is proximate to an ample supply of corn at attractive prices, and to bulk
gasoline terminals, cattle and dairy farms and other business customers for all
3 of our products. We have preliminary arrangements in place by which, if
finalized, we could obtain all of our corn, water, electricity, natural gas and
transportation needs, and sell all of our ethanol, distillers grains and CO2. We
have an experienced consultant to continue to guide us through the start-up
process, and we are negotiating with an experienced design engineer to design
our plant and oversee its construction, and an experienced lead contractor to
build it. Finally, we have a dedicated group of local farmers and other
businessmen among our founders, directors and officers.
THE OPPORTUNITY
The ethanol industry is experiencing sustained and accelerating growth.
Ethanol is a high octane fuel additive also used to oxygenate fuels, thereby
enhancing gasoline performance and reducing gasoline exhaust emissions. Because
it is derived primarily from corn, a domestic, readily available agricultural
commodity, ethanol is a renewable source of energy. Ethanol presently competes
primarily with the other principal high octane gasoline oxygenate, methyl
tertiary butyl ether, or MTBE, which is a petroleum-based additive that
historically dominated the market for oxygenated fuel, but is rapidly falling
out of favor due to environmental risks created primarily by the leaking of MTBE
reformulated fuels from underground storage tanks. California recently began to
phase-in a ban on MTBE after detecting unacceptable levels in groundwater. MTBE
will be banned in California beginning January 1, 2003, and in Illinois by July
24, 2004, and the entire northeast region of the United States is also moving
towards phasing out MTBE in favor of ethanol. Studies have shown that the
ethanol industry is expected to nearly double in production capacity from 2001
to 2005, in an attempt to meet anticipated demand. Ethanol supply shortfalls and
price increases are anticipated.
1
Several existing governmental programs provide incentives to ethanol
production. Two programs under the federal Clean Air Act, the Federal Oxygen
Program and the Reformulated Gasoline Program, require the sale of oxygenated
motor fuels in certain major urban areas, in order to reduce air pollution. Many
other urban areas have voluntarily adopted similar requirements. Federal tax law
also currently provides incentive programs to stimulate ethanol production,
including primarily the ethanol gasoline excise tax credit. This credit exempts
ethanol blended gasoline from a gradually declining portion of the federal
excise tax on gasoline, diesel and other transportation fuels, allowing blenders
to pay more for ethanol than for gasoline and still retain the same or better
profit margins. This credit is presently scheduled to expire on September 30,
2007, but it was extended in 2000 and bills have already been introduced to
extend it again.
A number of other proposed federal laws presently under consideration would
address various aspects of this highly politicized industry, including proposed
laws which would:
- ban MTBE;
- maintain, eliminate, permit waivers or otherwise address the federal
Clean Air Act's oxygenate requirement;
- extend, expand and improve existing federal ethanol-related tax
incentives; and
- mandate the use of ethanol as a domestic, readily available,
renewable, high octane fuel additive, including one bill aimed at
increasing annual domestic ethanol production from about two billion
gallons per year presently to about 15 billion gallons by 2016.
In Ohio, Governor Taft has recently announced his support of legislative and
economic development incentives to Ohio ethanol production, including
legislation now pending which would provide an Ohio tax credit for an investment
in an ethanol plant, make grants available to ethanol plants based upon
production, and make Ohio Air Quality Development Control Authority bond
financing, with its attendant real and personal property tax exemptions,
applicable to 100% of the costs of constructing ethanol plants in Ohio.
These existing federal laws and proposed federal and state laws generally
recognize that by building and operating our ethanol plant, we will also be:
- improving air quality and avoiding the groundwater pollution caused
by MTBE;
- spurring economic growth by providing additional local and regional
employment opportunities; and
- reducing the United States' dependence on foreign oil, and improving
our country's balance of trade.
Since the early 1970s, the United States has tried through various programs
to reduce its growing dependence on foreign oil. Nevertheless, our country's
importation of foreign oil has continued to increase while domestic production
has continued to decrease. As the ethanol industry has grown, and early
impediments to its large scale use in gasoline have been addressed, ethanol has
begun to emerge as a potentially realistic means of reducing otherwise
increasing dependence upon foreign oil. Since the horrific events of September
11, 2001, there is even more reason to strengthen our domestic economy and
strive to become more self-reliant as a nation.
The ability to invest in this growing industry is often limited to farmers
who must agree to produce and sell a specific number of bushels of corn per year
at a set price; in contrast, virtually anyone may invest in Northwest Ethanol,
and farmers who invest may invest as little or as much as they like, without
restricting future crop selection or marketing decisions.
Nearby farmers who invest in us will also get:
- a substantial additional end-user of corn;
- a substantial nearby supply of distillers grains;
- a wider harvest window, reduced field loss and increased hybrid
selection flexibility, since we will be able to buy corn earlier in
the season, for storage in our bunker;
2
- a more profitable market for corn, since our proximity will reduce
farmers' transportation costs, our bunker will allow them to avoid
excessive handling costs, and we will be able to buy wet corn,
allowing farmers to reduce drying charges; and
- the flexibility to vary the time and price of sale through our use
of a grain originator, storage in our bunker and the availability of
forward pricing options.
A farmer who invests in us will also obtain a hedge against lower corn prices,
since lower corn prices will mean higher margins for our business.
ETHANOL PLANTS BY STATE 2000
[PICTURE OF MAP]
We believe that there is a significant opportunity to build an ethanol plant
in northwest Ohio, and that our units are a good investment, for the following
reasons:
- the significant growth currently being experienced by the ethanol
industry;
- the phasing out of MTBE;
- the existing and proposed federal and state incentives to encourage
ethanol production, spur economic development and reduce dependence
on foreign oil;
- the current absence of ethanol plants in Ohio, the sixth largest
corn-producing state and the second largest ethanol-consuming state;
- the relative lack of other plants in the region or to the east,
where the absence of corn inhibits the production of ethanol;
- the transportation advantages we expect to have, given readily
available raw materials, our location and easily accessible,
under-served markets for our products; and
- our single level of tax.
SUMMARY OF RISK FACTORS
You should carefully consider each of the risks described in the section
entitled "Risk Factors" in evaluating an investment in us, including but not
limited to the following:
- risks related to this offering, including: the lack of a trading
market for our units and the transfer restrictions to which our units
are subject; the arbitrary nature of the offering price for our units;
the dilution which new investors will suffer to the value of their
units; control of us by our founders; possible delay of the closing;
the uncertain terms of our debt financing; that future sales of units
may also dilute you; and our possible need for additional capital;
3
- risks related to construction of our ethanol plant, including
unanticipated delays, unanticipated costs and our dependence upon our
anticipated design engineer and its business partners, with whom we
have no binding agreements to design and build our ethanol plant;
- risks related to the operation of our ethanol plant, including: our
recent formation, possible start-up related difficulties, losses and
the expectation of continued losses for several years; our dependency
on our directors, who lack experience in the ethanol business and have
certain conflicts of interest; our dependence on hiring competent
personnel, and upon third party suppliers and customers; competition;
market saturation; lack of diversification; increased costs of corn,
water, electricity, natural gas or transportation; price sensitivity
and hedging transactions in corn, energy and petroleum; possibly
unavailable or inadequate insurance; and uncertain distributions;
- risks related to: extensive environmental and other governmental
regulation; the risk that previously unknown, adverse environmental
effects from ethanol may be discovered; the risk that the federal
oxygen mandate could be eliminated or made subject to waiver; our
dependence upon federal ethanol supports; and the relative absence of
state incentives to help us compete;
- risks related to tax issues, including: possible taxation without
distributions; possible inability to deduct losses; possible greater
tax than sale proceeds upon a sale of units; possible double taxation
of earnings; possible IRS challenges to our allocations; increased IRS
audit risks; possible application of other taxes; and possible tax law
changes; and
- presently unforeseen risks.
THE ETHANOL BUSINESS AND OUR ETHANOL PLANT
Ethanol is ethyl alcohol, a fuel component which can be used as a fuel
additive to reduce harmful emissions and enhance octane. It is produced by the
fermentation of sugars found in grains and other biomass. Although ethanol can
be produced from a number of different types of grains, such as wheat and
sorghum, as well as from waste products such as sugar, rice hulls, cheese whey,
potato waste, brewery and beverage wastes and forestry and paper wastes,
approximately 90% of ethanol in the United States today is produced from corn
because corn produces large quantities of carbohydrates, which convert into
glucose more easily than other kinds of biomass. A typical bushel of U.S. Number
Two Corn weighs approximately 56 pounds and yields approximately 2.65 gallons of
undenatured fuel ethanol, 18 pounds of distillers grains and over 16 pounds of
CO2.
In large part because of federal and state policies promoting cleaner air
and tax and production incentives, the ethanol industry has grown substantially
in recent years. Currently, U.S. ethanol plants have the capacity to produce
over 2 billion gallons of ethanol annually, compared to only 175 million gallons
in 1980.
Our ethanol plant is expected to use a dry milling process to produce
ethanol from corn. It is less expensive to construct a dry mill than a wet mill,
and most producers up to and including 30 MGY capacity use dry milling.
The corn will be delivered to our ethanol plant primarily by truck. In
addition, CSX provides rail service adjacent to the proposed site's property
line. We are negotiating with CSX for long-term rail service which will provide
us with direct access for shippers throughout the midwest, to national MTBE
non-attainment markets on the west coast, to the ethanol-poor east coast and to
major distillers grains markets in the southeast United States.
We expect to consume about 11.3 million bushels of corn annually. We expect
to take delivery of about half of our total annual corn supply as high moisture
corn at harvest each year, with the balance purchased throughout the year as dry
corn. The high moisture corn will be compacted into a bunker to remove oxygen
and thereby stabilize the corn material, and covered with a polyethylene cover
in order to protect the grain from the elements.
As corn enters our plant, it will be transported to a hammermill or grinder
where it will be ground into a mash and conveyed into a tank for processing. The
mash is fermented and further processed to convert the starches into sugars and
then the sugars to ethanol and carbon dioxide over time. A distillation and
dehydration process will then divide the alcohol from water and the corn mash.
4
In determining the feasibility of constructing our ethanol plant, preparing
our business plan, preliminarily designing the plant and estimating costs, we
have been working with various companies affiliated with the Gaylor Alliance, a
consortium of ethanol project developers, including primarily Gaylor
Engineering, which we anticipate will be our design engineer, and Western
Bio-Mass Energy, LLC, our consultant. We expect to enter into negotiations with
several construction contractors, including another business partner of the
Gaylor Alliance, North Central Construction, to act as lead construction
contractor in the construction of our plant.
The production of ethanol requires significant amounts of corn, water,
electricity and natural gas. We already have preliminary arrangements in place
which, if finalized as anticipated, would provide us with sufficient quantities
of each of these raw materials to operate our ethanol plant economically.
According to the United States Department of Agriculture, over 430 million
bushels of corn are produced annually in Ohio, most of which is produced in the
western portion of the state. According to the Ohio, Indiana and Michigan
Agricultural Statistics Services, in 1999 approximately 110 million bushels of
corn was produced within a 45-mile radius of Defiance County. We expect our
ethanol plant to process approximately 11.3 million bushels of corn annually.
We have worked closely with our consultant, our anticipated design engineer,
contractors and government authorities to accurately assess water quality and
availability as part of the site selection process. The volume of water needed
at our proposed plant will vary greatly based on a number of factors. We
anticipate that on site wells will provide an adequate supply of water needed to
operate our proposed plant.
The principal products we will produce at our ethanol plant are ethanol,
distillers grains and CO2. Based on preliminary discussions with a number of
third party customers, we expect to be able to provide for the sale of all of
our products at market prices for years to come. It is anticipated that our
ethanol will be sold to a single customer, unless we are not able to finalize an
agreement on favorable terms. We are negotiating with several potential
purchasers for long-term agreements and a number of other blenders and marketers
on a spot market basis. Ethanol is expected to account for approximately 75 -85%
of our revenues.
Processing corn into ethanol produces a unique, natural co-product known as
distillers grains, which are the remnants of the corn after the
ethanol-producing starch has been removed. Distillers grains are a high protein,
high-energy livestock supplement. Our ethanol plant will be able to dry all the
distillers grains we produce, if necessary to achieve optimal marketing.
Distillers grains are expected to account for approximately 15-25% of our
revenues.
A second co-product of the ethanol production process, carbon dioxide, or
CO2, has commercial value primarily in the production of dry ice. CO2 is
expected to account for about 1% of our revenue.
OUR AMENDED AND RESTATED OPERATING AGREEMENT
You may become a member of Northwest Ethanol, LLC at the closing of this
offering by subscribing for units and executing the counterpart signature page
of our operating agreement included with the Execution Package accompanying this
prospectus. If your subscription is accepted and we close this offering, you
will become a member and our operating agreement will define your rights and
privileges as such.
The purchase price of your units is your capital contribution to us, and we
will credit that amount to your capital account. Your capital account will
increase with your allocable share of our recognized profits and other items of
income or gain, and decrease with your allocable share of our recognized losses
and other items of expense.
Under our operating agreement, we are governed like a corporation. Our
members elect our directors, and our directors appoint officers and committees
of directors, determine their authority and oversee their activities. Our
directors and officers are local businessmen and farmers who have been elected
from among our founding members, and they include Bill Cleland, Jr., Lynn
Bergman, Fred Schubert, Jim Joost, Gene Schubert, Virg Hoene, Gary Mavis, and
Ted Penner.
Our directors have broad authority over our business, but without the
affirmative vote of members holding an aggregate of at least 50% of our
outstanding units, the directors may not: merge us with another entity or sell
substantially all of our assets; cause us to voluntarily take any action that
would cause our bankruptcy; dispose of our goodwill; issue more than an
aggregate of 8,000 units; dissolve us; or cause us to buy a director's or
5
officer's securities or make a loan to a director or officer. A director may be
removed for cause after notice and an opportunity to be heard, by the
affirmative vote of members holding in the aggregate more than 50% of our
outstanding units. Most actions taken by the directors are determined by the
majority of the directors then serving.
Directors are elected by plurality vote of the members. Each director holds
office for a period of 3 years, and until the next annual members' meeting
following the fiscal year in which his term expires and until his successor is
elected, or until his earlier resignation, removal or death. The existing
directors have been classified in 3 classes according to the expiration of their
initial term. The initial term of the first class of directors will extend until
the annual member meeting held in 2003. The term of the second class of
directors will extend until the annual member meeting held during 2004, and the
term of the third class of directors will extend until the annual member meeting
held during 2005.
Our operating agreement requires that any transaction between us and a
member or the affiliate of a member will be on terms no less favorable to us
than would be available in an unaffiliated third party transaction.
Transfer of your units will be significantly restricted by our operating
agreement. A member is not permitted to transfer any units unless the transfer
qualifies as a permitted transfer. A permitted transfer includes a transfer to a
transferee: involuntarily by operation of law; if the basis of the units is
determined in whole or in part by reference to its basis in the hands of the
transferor; who is a family member; upon death; or who is a member or affiliate
of a member. Even if a transfer is treated as a permitted transfer, such
transfer will not be approved unless various conditions are satisfied. In no
event will any transfer be approved without the prior written approval of our
directors.
Under the operating agreement, a member may withdraw as such only with the
directors' consent, which consent may be arbitrarily withheld. Members holding
in the aggregate 67% of the outstanding units may cause us to amend our
operating agreement. Members holding in the aggregate more than 50% of the
outstanding units may elect to terminate and dissolve our company.
SUMMARY OF DISTRIBUTION POLICY
We have not declared or paid any distributions on our units and are not
required to pay or declare any distributions. We do not expect to generate
revenues for at least 16 months after this offering closes. Thereafter, subject
to restrictive covenants in our debt financing agreements, we are permitted to
distribute our net cash flow to our members in proportion to the number of units
held. By net cash flow, we mean our gross cash flow from operations, investing
and financing activities, less any portion, as determined by our directors in
their sole discretion, used to pay or establish reserves for our expenses, debt
payments, capital improvements, replacements and contingencies. If our financial
performance and restrictive covenants permit, our directors will try to make
cash distributions at times, and in amounts that will permit unit holders to
make income tax payments; however, we may never be in a position to pay cash
distributions.
SUMMARY OF TAX CONSIDERATIONS
We expect to be treated as a partnership for federal income tax purposes. We
will not pay any federal income taxes and will instead allocate our net income
to our members, who must report that income on their personal income tax
returns. This means that you will have to pay taxes on your allocated share of
our income, whether or not we make a distribution to you in that year.
Generally, you may be able to deduct your pro rata share of our losses subject
to certain limitations. You also may have state, local, self-employment and
other tax obligations that we do not address in this prospectus. To maintain our
tax status, we must limit the number of units which may be transferred in any
particular year. This could make it difficult for you to sell your units when
you wish. Please see "Federal Income Tax Consequences of Owning Our Units" for a
more complete discussion of important federal income tax consequences.
THE OFFERING AND RELATED DEBT FINANCING
The proposed ethanol plant is expected to cost approximately $38 million. We
intend to raise between $12 and $22 million in this offering, and we are also
seeking at least $16 - $26 million in debt financing, to pay for the acquisition
of the site, the construction and the initial operating costs. The amount and
nature of the debt
6
financing that we are seeking is subject to the interest rate and the credit
environment as well as other economic factors over which we have no control. We
have no commitments with any lender for debt financing, but we will not close on
this offering until we receive binding commitments for debt financing totaling,
together with the proceeds of this offering, at least $38 million. We have had
discussions with several lenders that have expressed interest in participating
in financing the project, and we are aggressively seeking and expect to maximize
our use of available government-assisted debt financing and tax abatement
programs. To the extent we are able to obtain government-assisted debt
financing, our overall cost of capital may be lower.
To the extent we are unable to obtain sufficient government-assisted debt,
when combined with the proceeds of this offering, to total at least $38 million,
we expect to seek additional debt from private lenders. We expect to obtain a
construction loan to help fund our site acquisition costs and construction
progress payments. The construction loan is expected to require payments of
interest only until our plant is scheduled to commence operations, and to be
secured by virtually all of our property, including our real property,
equipment, receivables and inventories. We also expect that the construction
loan will be converted into term debt, to be paid in full over up to 10 years,
upon completion of the ethanol plant.
We expect that we will also need a revolving line of credit to finance
receivables and inventories. We expect borrowing availability under the
revolving line of credit to be based upon 80-85% of our accounts receivable and
50% of our inventory, subject to a specified maximum amount. We plan to pay at
least prime rate on these loans, plus annual fees. It is anticipated that any
private debt we incur will be subject to various affirmative and negative
covenants.
We are offering the units directly to prospective investors through the
efforts of our directors and officers, so we will not have to pay anyone
commissions or other transaction-related compensation for the sale of our units.
Subject to compliance with applicable federal and state securities laws, we plan
to advertise this offering in newspapers in Ohio, Indiana and Michigan, and to
hold a number of informational meetings in and around northwest, Ohio. Although
we anticipate selling the units in Ohio, Indiana and Michigan, we may consider
accepting subscriptions from interested investors located in other states if it
is not unreasonably burdensome to comply with applicable securities law
requirements in such states. Each state has securities laws that may limit or
prevent us from selling our units without registering them under state law.
Investing in our units is highly speculative. Our units are suitable only as
a long-term investment. We do not expect any public market to develop for the
units, which means that it will be difficult for you to sell them. You should
not buy these units if you may need to sell them in the future, or if you cannot
afford a complete loss of your investment. Our directors reserve the right to
reject any subscription for any reason.
In order to purchase units in this offering, you must complete the Execution
Package accompanying this prospectus, which includes the subscription agreement
and a counterpart signature page to our amended and restated operating
agreement, and forward the package, together with a check for the full amount of
your subscription payable to Sky Bank as Escrow Agent for Northwest Ethanol,
LLC, to Northwest Ethanol, LLC, P.O. Box 4505, Sherwood, Ohio 43556-0505. You
must purchase a minimum of 2 units, a $10,000 minimum investment. Unless our
directors agree, no investor, together with its affiliates, may acquire more
than 300 units in this offering.
When we receive all of the required materials, we will accept or reject your
subscription. We reserve the right to reject any subscription in whole or in
part. If we reject your subscription, we will return your Execution Package and
the amount of your subscription, without interest, within 30 days. If we accept
your subscription, your check will be deposited in our escrow account at Sky
Bank. You will not be able to access any funds while they are in escrow. We will
invest all funds in the escrow account in highly liquid, low risk investments
such as short-term certificates of deposit issued by a bank, short-term
securities issued and guaranteed by the United States, or money market funds,
including funds available through the escrow agent. Any interest earned on the
escrow account will belong to us if the offering closes.
The initial closing of the offering is subject to the following conditions,
and if we accept your subscription but do not close this offering, we will
return the amount of your subscription with interest within 30 days:
- If we do not obtain the necessary rezoning of our preferred site;
7
- If we determine in our sole discretion to terminate the offering prior
to March 31, 2002, subject to extension in our sole discretion, but not
later than September 30, 2002;
- If we have not received subscriptions for the $12 million minimum by
March 31, 2002, subject to extension in our sole discretion, but not
later than September 30, 2002; or
- If we have received subscriptions for the $12 million minimum by March
31, 2002, subject to extension in our sole discretion, but not later
than September 30, 2002, we do not have binding written commitments for
at least $26 million in debt financing.
If we satisfy all these conditions and close on the offering, we will
deliver a certificate representing your ownership of units within 60 days of the
first closing. After the first closing, we may continue to offer units up to the
maximum of 4,400 units, accepting subscriptions as they are received until March
30, 2002, subject to extension in our sole discretion, but not later than
September 30, 2002. Our founders and their affiliates may purchase units in this
offering on the same terms as other investors, in order to meet the $12 million
minimum or otherwise. If we do not satisfy one or more of these conditions and
do not close on the offering, we will promptly return your Execution Package and
the amount of your subscription, together with any interest earned thereon.
RISK FACTORS
Investing in our units is risky. Investment is suitable only for persons who
can hold the units for an indefinite period of time, and bear a complete loss of
the investment. In addition to the other information in this prospectus, you
should carefully consider the following risks in deciding whether to invest in
our units. If any of the following risks actually occur, our business, financial
condition or results of operation could be materially adversely affected. In
that case, the value of your units could decline and you may lose all or part of
your investment.
RISKS RELATED TO THE OFFERING
OUR UNITS HAVE NO PUBLIC MARKET AND ARE SUBJECT TO TRANSFER RESTRICTIONS WHICH
WILL MAKE IT VERY DIFFICULT FOR YOU TO SELL YOUR UNITS.
There is no existing trading market for our units, and it is unlikely that a
market will develop. This means that it may be difficult for you to sell your
units. Your ability to transfer units will also be restricted by our operating
agreement. Generally under that agreement, a member is not permitted to transfer
any units unless the transfer qualifies as a permitted transfer. A permitted
transfer includes a transfer to a transferee: involuntarily by operation of law;
if the basis of the units is determined in whole or in part by reference to its
basis in the hands of the transferor; who is a family member; upon death; or who
is a member or affiliate of a member. Even if a transfer is treated as a
permitted transfer, such transfer will not be approved unless various conditions
are satisfied. In no event will any transfer be approved without the prior
written approval of our directors.
To maintain partnership tax status, the units may not trade on an
established securities market or be readily tradable on a secondary market, or
the substantial equivalent thereof. The directors will generally approve
transfers so long as the transfers fall within "safe harbors" contained in the
publicly traded partnership rules provided under the Internal Revenue Code and
the Treasury Regulations. Permitted transfers also include transfers by gift,
transfers upon death of a member, transfers between family members, transfers
that are treated as "block" transfers under the Treasury Regulations, and other
transfers approved by directors during the fiscal year if we are deemed to have
a lack of actual trading. If any person transfers units in violation of the
publicly traded partnership rules or without our prior consent, the transfer
will be invalid. These restrictions on transfer could reduce the value of your
units.
WE ARBITRARILY DETERMINED THE OFFERING PRICE OF THE UNITS, AND YOUR UNITS WILL
BE DIFFICULT TO VALUE GOING FORWARD.
We arbitrarily determined the $5,000 per unit offering price. This price
bears no relation to our assets, revenues or earnings, or to traditional
measures of the value of securities or businesses, such as book value,
8
market value or capitalized earnings. Also, due to the lack of a trading market,
your units will not have a readily determinable market value.
OUR FOUNDERS' UNITS WILL INCREASE IN VALUE, AND YOU WILL SUFFER IMMEDIATE AND
SUBSTANTIAL DILUTION IN THE VALUE OF YOUR UNITS, IF YOU PURCHASE UNITS IN THE
OFFERING.
Because our founders were able to purchase units for substantially less than
the $5,000 per unit offering price, and because the offering price per unit
substantially exceeds our net tangible book value per unit, our founders' units
will increase in value and you will suffer immediate and substantial dilution in
the value of your units, if you purchase units in the offering.
WE ARE CONTROLLED BY OUR FOUNDERS, AND OUR OPERATING AGREEMENT CONTAINS
RESTRICTIONS ON MEMBERS' RIGHTS TO PARTICIPATE IN OUR GOVERNANCE.
After the offering, assuming the minimum 2,400 units are sold and none of
our founders purchase units in the offering, our founders will own 1,096 units,
or approximately 31% of our outstanding units. All of our directors are founders
or affiliated with companies which are founders. Our founders, including our
directors and officers and their affiliates, may purchase units in the offering
in order to meet the minimum offering amount or otherwise. In addition, our
operating agreement contains significant restrictions on members' rights to
influence our management. Only a member or members owning at least 67% of the
outstanding units may call a special meeting of the members. If a vacancy
develops in our directors for any reason other than expiration of a term, the
remaining directors would fill it. Directors may be removed only for cause after
notice and an opportunity to be heard, and only by the affirmative vote of
members holding at least 50% of our outstanding units. These and other
restrictions may make it difficult for members to propose changes to our
operating agreement, or for a third party to acquire us without the directors'
consent. Accordingly, no one should invest in us unless willing to entrust all
aspects of our management to our directors.
In addition, directors are elected by plurality vote of the members and each
director will serve for a period of 3 years. Each director holds office until
the next annual members' meeting following the fiscal year in which his term
expires and until his successor is elected, or until his earlier resignation,
removal or death. The existing directors have been classified in 3 classes
according to the expiration of their initial term. The initial term of the first
class of directors will extend until the annual member meeting held in 2003. The
term of the second class of directors will extend until the annual member
meeting held during 2004, and the term of the third class of directors will
extend until the annual member meeting held during 2005.
THE CLOSING OF THIS OFFERING MAY BE DELAYED, WHICH WOULD IN TURN DELAY THE
CONSTRUCTION AND COMMENCEMENT OF OPERATIONS OF OUR ETHANOL PLANT.
The closing of this offering may be delayed, but not beyond September 30,
2002, by delays in the necessary rezoning process or in our obtaining
subscriptions and commitments for equity and debt financing totaling at least
$38 million. Allowing 16 months for construction, any delay in the closing of
this offering beyond April, 2002, will cause us to miss the harvest in the 2003
harvest season, during which we plan to purchase over 5 million bushels of high
moisture corn to be inventoried in our corn bunker. If we miss the 2003 harvest,
we will incur additional expenses and may require additional capital.
THE FINAL TERMS OF OUR DEBT FINANCING ARE UNCERTAIN, AND MAY RESTRICT
DISTRIBUTIONS AND OUR FINANCIAL FLEXIBILITY.
Based on current cost estimates and depending on how much equity is raised
in the offering, we believe we will need at least $38 million in total funds to
construct the proposed ethanol plant and finance start-up operations. The less
equity we raise in this offering, the more debt financing we will need and the
more highly leveraged we will become. The more leveraged we become, the less
likely it is that we will be able to make distributions to members, either as a
going concern or in liquidation, and the more vulnerable to interest rate
increases we will become.
The current credit market and competition for debt financing could make it
difficult for us to obtain commitments from one or more lenders on favorable
terms. If debt financing is only available at interest rates that are higher
than we anticipate, or our lenders impose restrictive covenants that unduly
limit our financial
9
flexibility, the value of your units may be adversely affected. Our ability to
obtain debt financing on favorable terms is dependent on the interest rate and
credit environment, general economic conditions and other factors beyond our
control.
Our ability to repay our debt will also depend on our financial and
operating performance and on our ability to successfully implement our business
strategy. Our financial and operational performance depends on numerous factors,
many of which are beyond our control. If we cannot service our debt, we may be
forced to reduce or eliminate distributions or capital expenditures. If we are
unable to repay or refinance our indebtedness or raise funds through the sale of
assets or additional equity, our ability to operate could be harmed and the
value of your units could decline. The extent of our leverage will have other
important consequences, including:
- Limiting our ability to obtain additional financing;
- Placing us at a competitive disadvantage because we may be
substantially more leveraged than many of our competitors, reducing
funds available for operations;
- Subjecting all or substantially all of our assets to liens, leaving
virtually no assets for members in the event of a liquidation; and
- Limiting our ability to adjust to changing market conditions, which
could make us more vulnerable to a downturn in general economic
conditions or our business.
Our debt agreements are expected to contain various restrictive covenants
limiting our ability to, among other things:
- Incur additional indebtedness;
- Make capital expenditures in excess of prescribed thresholds;
- Make distributions to our members or redeem or repurchase our units;
- Make various investments;
- Create liens on our assets;
- Use asset sale proceeds; or
- Merge, consolidate or dispose of all or substantially all of our
assets.
We will also probably be required to maintain specified financial ratios,
including minimum cash flow coverage, minimum working capital and minimum net
worth, and to use a portion of any excess cash flow generated by operations to
prepay our term debt. An inability to service our debt or a breach of any of
these covenants could result in a default under our debt agreements, allowing a
lender to accelerate our indebtedness, in which case the entire debt would
become immediately due and payable. If this occurs, we might not be able to
repay our debt or borrow sufficient funds to refinance it, and our assets may be
sold in foreclosure for less than the amount of our debt. Even if new financing
is available, it may not be on favorable terms.
FUTURE SALES OF OUR UNITS MAY REDUCE YOUR SHARE OF DISTRIBUTIONS, YOUR VOTING
POWER AND THE VALUE OF YOUR UNITS.
Our operating agreement permits us to issue up to 8,000 units. Currently, we
have 1,096 units outstanding. Assuming we sell only the minimum 2,400 units in
this offering, we can sell up to an additional 4,504 units after the offering
without seeking member approval. If we were to sell additional units or warrants
to purchase additional units, the sale or exercise price could be higher or
lower than what investors are paying in this offering. If we sell additional
units at a lower price, that could lower the value of your units by diluting
your ownership interest in us and reducing distributions that we may make to
you. Increasing the number of units would also reduce your voting power in us.
10
WE MAY NEED ADDITIONAL CAPITAL TO COMPLETE OUR ETHANOL PLANT AND BEGIN
OPERATIONS.
Although we estimate that $38 million will be sufficient to allow us to
complete construction and commence operation of our ethanol plant, our estimates
may be inaccurate. We may also incur additional costs for a number of different
reasons, many of which are discussed elsewhere in this "Risk Factors" section of
this prospectus. If we need additional capital, we may have difficulty obtaining
it on terms acceptable to us, if at all. Additional capital obtained through the
sale of additional units may dilute the value of your units. Additional debt
financing may increase our costs of capital and decrease our cash flow, delaying
and reducing distributions and reducing the value of your units.
RISKS RELATED TO CONSTRUCTION OF OUR ETHANOL PLANT
WE MAY ENCOUNTER UNEXPECTED DELAYS THAT MAY INCREASE CONSTRUCTION COSTS AND
DELAY OUR ABILITY TO BEGIN TO GENERATE REVENUES.
We expect that it will be at least 16 months after we close on this offering
before we begin operation of the proposed ethanol plant. Construction projects
often involve events that delay the construction schedule, including changes in
weather or other force majeure events, permitting delays, community opposition,
changes in political administrations at the federal, state or local level that
result in policy changes towards ethanol or this project, or disputes with our
anticipated design engineer which must be resolved through arbitration. If we
encounter any hazardous or unexpected conditions at the construction site,
including environmental or other types of contamination, the project could be
delayed and we could be required to spend significant resources to correct the
condition. Under those circumstances we may need to seek additional capital, and
we may not be able to continue to meet our debt service obligations. Any of
these developments could cause us to abandon our business and significantly
reduce the value of your units.
CONSTRUCTION COULD COST MORE THAN ANTICIPATED.
Assuming we are able to finalize all agreements on acceptable terms, Gaylor
Engineering and its business partners would be expected to provide a maximum
price for the design and construction of our ethanol plant based upon plans and
specifications included in its bid. However, since the plans and specifications
developed for the plant are only preliminary, the final costs to construct the
plant could be higher than our current estimates. Even after final contract
prices are established, there could be cost overruns in connection with
construction due to change orders approved by us, delays in completion of the
plant due to various factors, including acts of God, destruction of the plant by
fire or other hazards, inability to obtain materials or labor or other factors.
In addition, we must build and maintain a transportation and utility
infrastructure, such as roads, rail networks and connections to the ethanol
plant, to support deliveries of energy, water, materials and corn, and to ship
finished ethanol, distillers grains and CO2. Transportation and utility
infrastructures we need to build and maintain may be more difficult or expensive
to build and maintain than we anticipate. Any increases in the costs to
construct our ethanol plant and associated infrastructures beyond those we
currently anticipate may have a material adverse effect on our financial
condition, and may require us to seek additional capital.
WE MAY BE DEPENDENT UPON THE GAYLOR ALLIANCE TO DESIGN AND BUILD OUR ETHANOL
PLANT.
We may be dependent upon one or more members of the Gaylor Alliance and
their key employees for consulting, design engineering and construction
expertise, and we do not have definitive agreements in place with them for
design and construction of our ethanol plant. There can be no assurance that all
of the necessary agreements can be finalized, or if finalized, that they will
not impose otherwise unacceptable terms and conditions upon us. Any failure to
consummate such definitive agreements on terms acceptable to us, or any loss of
a key employee of a member of the Gaylor Alliance, may have material adverse
effects on our contemplated business and operations. In addition, each member of
the Gaylor Alliance is independently engaged in a number of other projects which
may compete with our project for their time and attention. Each member of the
Gaylor Alliance may have interests in one or more of those projects which may
cause that company to prefer those other projects over our project. Even if we
are able to negotiate acceptable agreements, our general dependence upon one or
more members of the Gaylor Alliance may pose additional risks. For example, if
construction is delayed due to permitting delays, labor strife or shortages,
supply or material shortages, delays in equipment delivery and installation or
other factors, our construction schedule and ability to begin to generate
revenues will be delayed and our financial condition will be adversely effected.
Similarity, if
11
any member of the Gaylor Alliance failed to perform its agreement with us, we
may have difficulty securing a suitable replacement, and our remedies may not be
adequate to fully compensate us for the resulting delay and expense. In that
case, our business may be adversely affected and the value of your units may
decline.
RISKS RELATED TO OUR OPERATIONS
WE ARE RECENTLY FORMED, ARE SUBJECT TO RISKS RELATED TO THE START-UP OF ANY
BUSINESS, AND EXPECT LOSSES THAT MAY REDUCE THE VALUE OF YOUR UNITS.
We are a start-up business venture with no history of operations. Our
proposed operations are subject to all the risks inherent in the establishment
of a new business. We have limited financial and human resources. We will need
to implement operational, financial and management systems and to recruit,
train, motivate and manage our employees. There is no assurance that this will
occur, and any failure to manage our start-up effectively could have a material
adverse effect on us, our financial condition, cash flows and results of
operations. For the period from February 8, 2001 (Inception Date) to June 30,
2001, and for the 3 months ended September 30, 2001, we have an accumulated
deficit of $51,713 and $86,795, respectively. We will continue to incur
significant losses until some time after we are able to secure financing and
successfully complete construction and commence operation of our proposed
ethanol plant. There is no assurance that we will be successful in our efforts
to build and operate an ethanol plant. Even if we successfully begin operations
at the ethanol plant, there is no assurance that we will be able to operate
profitably.
WE ARE DEPENDENT UPON OUR DIRECTORS, WHO HAVE VERY LITTLE EXPERIENCE OVERSEEING
THE OPERATIONS OF AN ETHANOL BUSINESS OR A PUBLIC COMPANY.
Presently we are, and for the foreseeable future we expect to continue to
be, dependent upon our directors. We have no employees other than a part time
Project Coordinator, and we do not expect to have employees until our ethanol
plant nears operational status. Most of our directors are farmers and
businessmen who live near the proposed plant site. These individuals are
experienced in their respective businesses, but have no experience in raising
capital from the public, in overseeing the design, construction and operations
of an ethanol plant, or in governing a widely owned, public company. Their
outside activities impose substantial demands upon them, making it difficult for
them to devote sufficient time, energy and attention to us. Should one or more
of our directors become unable to serve for any reason, we may have difficulty
securing suitable nominees to replace them. This lack of experience and depth
may make it difficult for us to operate efficiently, and may have material
adverse effects on our financial performance.
OUR DIRECTORS AND OFFICERS MAY ENCOUNTER CONFLICTS OF INTEREST IN ALLOCATING
THEIR TIME AND ATTENTION, AND IN SELECTING SUPPLIERS, SERVICE PROVIDERS AND
CUSTOMERS.
All of our directors and officers are affiliated with other businesses. As a
result, they may encounter conflicts of interest in allocating their time and
attention between those businesses and us. In addition, those businesses may
seek to do business with us on terms and at prices which are not necessarily
negotiated on an arm's-length basis. To the extent that we enter into any such
arrangements, our ability to make distributions and the value of your units may
be adversely affected.
OUR SUCCESS WILL DEPEND ON HIRING COMPETENT PERSONNEL, WHICH MAY BE DIFFICULT TO
ATTRACT TO A RURAL COMMUNITY.
We expect to hire approximately 3-5 employees 6 months before the plant
begins to operate. Upon completion of the plant, we plan to have about 30
employees operating our business. Our success will depend in part on our ability
to attract and retain competent personnel who will be able to help us achieve
our goals. We must hire qualified managers, accounting and other personnel to
staff our business. There are a limited number of individuals available with the
necessary qualifications to fill certain of the positions we will need to fill,
and we will compete for those individuals with other ethanol plant operators. It
may be difficult finding and hiring qualified employees at salaries that we can
afford, and attracting them to northwest Ohio, a rural and sparsely populated
area with low unemployment levels. If we are unable to hire productive and
competent personnel, our ability to produce and sell ethanol could be adversely
affected. This would reduce our revenues and the value of your units.
12
WE EXPECT TO BE DEPENDENT UPON THIRD PARTIES TO GET OUR CORN AND TO SELL OUR
ETHANOL, DISTILLERS GRAINS AND CO2.
We currently have no sales force of our own to market ethanol, distillers
grains and CO2, and do not intend to establish such a sales force. Instead, we
intend to contract with one or more marketers to sell all of our products. We
have had preliminary discussions with various third parties to this end, but
have not entered into any final contracts. There is no assurance that we will be
able to enter into contracts with any such third parties on terms acceptable to
us, or at all. Even if we do enter into such contracts on acceptable terms, we
will be dependent on these parties, so that if one or more of them breaches its
contract or is unable (for financial or other reasons) to market our products,
we will not have any other readily available means to sell those products. One
or more of such third parties may have conflicts of interest which may cause
that party to favor its own business interests over our interests. Our lack of a
sales force and reliance on third parties to market our products may place us at
a competitive disadvantage. Failure to sell all of our ethanol, Distillers
grains and CO2 on favorable terms may have a material adverse effect on us, our
operations, cash flows and financial performance.
THE ETHANOL INDUSTRY IS HIGHLY COMPETITIVE, AND LARGER, BETTER-FINANCED
COMPETITORS MAY COMPETE WITH US FOR CORN OR TO SELL ETHANOL, DISTILLERS GRAINS
OR CO2, BY SELLING MTBE OR BY DEVELOPING ALTERNATIVES TO ETHANOL.
Our business faces competitive challenges from larger plants, from plants
that can produce a wider range of products than we can, from other plants
similar to our proposed ethanol plant, and from alternative products and
technologies. Large ethanol producers such as Archer Daniels Midland, Minnesota
Corn Processors and Cargill, among others, are capable of producing a
significantly greater amount of ethanol than we expect to produce. In addition,
there are several other Midwest regional ethanol producers which have recently
formed, are in the process of forming or are under consideration, which are or
would be of a similar size and have similar resources to us. In particular, to
the extent any new ethanol plants are located in Ohio, in our region or to the
east, such plants could have an adverse impact upon our financial performance.
In addition, many ethanol producers enjoy state law subsidies and incentives
which Ohio does not provide, and so have a competitive advantage over us to that
extent.
The proposed ethanol plant will also compete with producers of other
gasoline additives having similar octane and oxygenate values as ethanol, such
as producers of MTBE, which represents about 80% of the national market for
oxygenated fuel and generally costs less to produce than ethanol. Many major oil
companies produce MTBE and strongly favor its use because it is petroleum-based.
Alternative fuels, gasoline oxygenates and alternative ethanol production
methods are also continually under development. The major oil companies have
significantly greater resources than we have to market MTBE, to develop
alternative products and to influence legislation and public perception of MTBE
and ethanol. These companies also have significant resources to begin production
of ethanol should they choose to do so.
The current trend in ethanol production research is to develop an efficient
method of producing ethanol from cellulose-based biomass such as agricultural
waste, forest residue, municipal solid waste, and energy crops. This trend is
driven by the fact that cellulose-based biomass is generally cheaper than corn,
and producing ethanol from cellulose-based biomass would create opportunities to
produce ethanol in areas which are unable to grow corn, such as the east coast.
Although current technology is not sufficiently efficient to be competitive, the
federal government anticipates that new conversion technologies will become
viable ethanol production methods in the future. If an efficient method of
producing ethanol from cellulose-based biomass is developed, we may not be able
to compete effectively.
INCREASES IN THE PRODUCTION OF ETHANOL COULD RESULT IN LOWER PRICES FOR ETHANOL
AND HAVE OTHER ADVERSE EFFECTS.
We expect that existing ethanol plants will construct additions to increase
their production and that new fuel grade ethanol plants will be constructed as
well. We cannot provide any assurance or guarantee that there will be material
increases in the demand for ethanol, so the increased production of ethanol may
lead to lower prices for ethanol, and higher transportation costs to reach
viable markets. Increased production of ethanol could have other adverse effects
as well. For example, increased production will also lead to increased supplies
of co-products from the production of ethanol, such as distillers grains and
CO2, which could in turn lead to lower
13
prices for these co-products. Also, the increased production of ethanol could
result in increased demand for corn, which could in turn lead to higher prices
for corn, resulting in higher costs of production and lower profits.
OUR BUSINESS WILL NOT BE DIVERSIFIED BECAUSE IT WILL BE LIMITED TO THE FUEL
GRADE ETHANOL INDUSTRY.
Our sole business will be the production and sale of fuel grade ethanol
produced from corn and its co-products, distillers grains and CO2. Our plant
will not have the capability of producing industrial or food and beverage grade
ethanol, which is used in such products as cosmetics, perfume, paint thinner and
vinegar. We do not have any other businesses or sources of revenue. The lack of
diversification of our business may limit our ability to adapt to changing
business and market conditions. Our success depends upon our ability to timely
complete and profitably operate our ethanol business. If we were not able to
complete construction, or if economic or political factors adversely affect the
market for ethanol, the value of your investment could decline because we have
no other lines of business or other sources of revenue to fall back on if the
ethanol business declines. Our business would also be significantly harmed if
our ethanol plant could not operate at full capacity for any extended period of
time.
WE INTEND TO PURCHASE AND STORE SIGNIFICANT AMOUNTS OF CORN THAT IS SUBJECT TO
DISEASE AND OTHER AGRICULTURAL RISKS, AND TO CHANGES IN SUPPLY, DEMAND,
PRODUCTION AND PRICE WHICH COULD MAKE IT DIFFICULT OR MORE EXPENSIVE TO PRODUCE
ETHANOL.
Ethanol production will require substantial amounts of corn. Corn production
and price are affected by weather, domestic and foreign governmental policy,
farmer planting decisions, disease, global demand and supply and other
conditions. A significant reduction in the quantity of corn harvested due to one
or more of these factors could result in increased corn costs, which would
increase our cost to produce ethanol. We have no agreements with any corn
producers or grain elevators which assure an adequate supply of corn to the
proposed ethanol plant.
TO PRODUCE ETHANOL, WE WILL NEED A SIGNIFICANT SUPPLY OF WATER OF ADEQUATE
QUALITY, WHICH MAY BE MORE DIFFICULT OR EXPENSIVE TO OBTAIN THAN WE EXPECT.
We anticipate that under a worst case scenario we will need a maximum of
approximately 700,000 gallons of water of adequate quality every day to operate
our plant as anticipated, that our water requirements will be supplied through
at least three wells that we plan to drill on site, and that our water will be
of adequate quality after treatment by reverse osmosis. If our assessment of our
water needs or the quality and quantity of the water supply believed to be
readily available at our preferred site is incorrect and we cannot obtain
sufficient water of adequate quality at reasonable prices, we may not be able to
find alternate sources of water at commercially reasonable prices, or at all.
Increased water costs or the unavailability of water could result in increased
production costs, which could adversely affect our financial performance and
reduce the value of your units.
WE WILL NEED SIGNIFICANT AMOUNTS OF ELECTRICITY AND NATURAL GAS THAT MAY BE MORE
DIFFICULT OR EXPENSIVE TO OBTAIN THAN WE EXPECT.
Currently, we have no contracts, commitments or understandings with any
electricity or natural gas supplier. We are negotiating with several providers
serving the area to enter into binding agreements. We may not be able to obtain
sufficient supplies of electricity and natural gas or procure alternative
sources on favorable terms. If there is any interruption in our supply of energy
for whatever reason, such as supply, delivery or mechanical problems, either
during construction or after we begin operating the ethanol plant, we may be
required to halt construction or production. If construction or production is
halted for any extended period of time, it will have a material adverse effect
on our business. In addition, electricity and natural gas prices have
historically fluctuated significantly. Increases in the prices of electricity or
natural gas or in our costs to obtain these commodities would harm our financial
performance by increasing our energy costs.
We will also need to build approximately 5 miles of pipeline for the
transportation of natural gas, and 1 mile of line and a substation for the
transmission of electricity. We expect that we or a third party will build, own
or operate the pipeline, substation and transmission line, depending on which
arrangement will produce the best economic results for us, but we have not
entered into any agreements for the construction of the pipeline, substation or
transmission line, and we cannot assure you that we will be able to procure an
agreement on terms acceptable to us, or at all.
14
OUR TRANSPORTATION COSTS MAY BE HIGHER THAN WE ANTICIPATED.
Transportation costs are an important part of our operating costs, and our
anticipated lower transportation costs are expected to provide us with an
important competitive advantage. If our estimates of transportation costs are
materially inaccurate, or if such costs materially increase due to any one or
more of a number of factors, many of which are discussed elsewhere in this "Risk
Factors" section of this prospectus and many of which are beyond our control,
our financial performance may be adversely affected.
WE WILL BE VULNERABLE TO VARIOUS PRICE INCREASES AND DECREASES, HAVE A LIMITED
ABILITY TO HEDGE THESE VULNERABILITIES, AND HEDGING TRANSACTIONS INVOLVE RISKS
THAT COULD HARM OUR BUSINESS.
We will be vulnerable primarily to price increases with respect to corn,
electricity, natural gas and transportation, and to price decreases with respect
to ethanol and distillers grains. Of these, corn is expected to be supplied at
market prices. Corn prices are primarily dependent on world feedstuffs supply
and demand and on U.S. and global corn crop production, which can be volatile as
a result of a number of factors, the most important of which are weather,
current and anticipated stocks and prices, export prices and supports and the
government's current and anticipated agricultural policy. The price of corn has
fluctuated significantly in the past and may fluctuate significantly in the
future. Our purchasing and hedging activities may or may not lower our price of
corn, and in a period of declining corn prices these advance purchase and
hedging strategies may result in us paying a higher price for corn than our
competitors.
Our revenues will also depend primarily on the market prices for ethanol and
distillers grains. These prices can also be volatile as a result of a number of
factors. For ethanol, these factors include the overall supply and demand of
ethanol, the price of gasoline, the current and anticipated level of government
support for ethanol and the availability and price of competing products. For
distillers grains, these factors include overall supply and demand of these and
competing products, as well as the price of corn.
In an attempt to minimize the effects of the volatility of corn, energy,
ethanol and distillers grains prices on operating profits, we expect to take
hedging positions in the corn, energy, petroleum and other futures markets.
Hedging means protecting the prices at which we will buy and sell commodities in
the future. It is a way to attempt to reduce the risk caused by price
fluctuation. It is our policy not to enter into derivative instruments for
speculative purposes. In addition, we are in the process of developing a
comprehensive risk management policy.
Depending upon the amount of financing we obtain, initially, we may be
unable to implement hedging positions we would otherwise take. In addition, if
we are unable to initiate or maintain our hedge positions for any reason, we
will be more vulnerable to commodity price fluctuations to that extent. The
effectiveness of such hedging activities is dependent, among other things, upon
the prices of corn, energy and petroleum and our ability to sell sufficient
amounts of ethanol and distillers grains to use all of the corn subject to the
futures contracts. Although we expect to attempt to link our hedging activities
to sales plans and pricing activities, such hedging activities can themselves
result in costs because price movements in grain contracts, energy and petroleum
are highly volatile and are influenced by many factors which are beyond our
control. In conducting hedging activities, we may incur such costs, and they may
be significant.
NECESSARY INSURANCE MAY NOT BE AVAILABLE OR MAY COST MORE THAN ANTICIPATED, AND
AN UNINSURED LOSS COULD OCCUR.
We expect to obtain adequate liability, property and casualty and other
available policies of insurance against foreseeable risks prior to the
commencement of construction of our plant, and to maintain such insurance
coverage thereafter during operations. There is no assurance that we will be
able to obtain such insurance on terms acceptable to us, if at all. Any failure
by us to secure and maintain adequate insurance, with adequate policy limits
and/or self-retention limits, or the occurrence of an otherwise uninsured loss,
may have a material adverse effect on us, our operations, cash flows and
financial performance.
CASH DISTRIBUTIONS ARE NOT GUARANTEED AND MAY FLUCTUATE WITH OUR PERFORMANCE.
We do not expect to generate any operating revenue until our ethanol plant
is operating, which is not expected to occur until at least 16 months after we
close on this offering. Even after we are operating the ethanol plant,
15
we do not know the amounts of cash that we will generate. Whether we will be
able to generate sufficient cash flow from our business to make distributions to
members will depend upon numerous factors, including:
- Successful and timely completion of construction;
- Required principal and interest payments on our debt, and our
compliance with applicable loan covenants;
- Our cost structure generally;
- Fluctuations in working capital and operating expenses;
- Capital expenditures;
- Our ability to operate our plant profitably;
- Amounts of cash set aside for reserves;
- Prevailing economic conditions;
- Demand and our success at selling ethanol, distillers grains and CO2;
- Government regulations and government subsidies and support for
ethanol generally; and
- Technical advances in ethanol production.
Cash distributions will depend on our net cash flow. By net cash flow, we
mean our gross cash revenues received less any portion used to pay operating
expenses, including any additions used to pay or establish reserves for our
working capital, capital expenditures, debt service and any other such reserves
as determined by our directors in their sole discretion. Cash distributions may
not be determined by our profitability, which is affected by non-cash items.
Therefore, we may make cash distributions during periods when we record losses,
and we may not make cash distributions during periods when we record profits, if
any. Cash distributions are not assured, and we may never be in a position to
make distributions.
RISKS RELATED TO REGULATION
WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL REGULATION AND OPERATIONAL SAFETY
REGULATIONS THAT COULD RESULT IN HIGHER THAN EXPECTED COMPLIANCE COSTS AND
LIABILITIES.
Ethanol production involves the emission of various airborn pollutants,
including particulate matters, carbon monoxide, oxides of nitrogen, volatile
organic compounds and sulfur dioxide. The failure to comply with or the need to
respond to threatened actions involving environmental laws and regulations may
adversely affect our business, operating results or financial condition.
Environmental issues regarding compliance with applicable environmental
standards could arise at any time during the construction and operation of the
plant. We may have difficulty obtaining the necessary environmental permits
required in connection with the operation of the plant. As a condition of
granting necessary permits, regulators could make demands that increase our
costs of construction and operation. Environmental regulations are subject to
change and often such changes are not favorable to industry. Even if we receive
all required permits, we may be required to spend considerable resources to
comply with future federal, state or local environmental regulations.
We also could be subject to environmental nuisance, trespass or related
claims by employees, property owners or residents near the proposed ethanol
plant, arising from air or water discharges. Ethanol production has been known
to produce an unpleasant odor to which surrounding residents could object. If
odors becomes a problem, we may be subject to fines and could be forced to take
costly curative measures. Environmental litigation or increased environmental
compliance cost could increase our operating costs.
16
We also will be subject to federal and state laws regarding operational
safety. Risks of substantial compliance costs and liabilities are inherent in a
large scale construction project and in ethanol production after the facility is
constructed. Costs and liabilities related to worker safety may be incurred.
Possible future developments including stricter safety laws for workers or
others, regulations and enforcement policies and claims for personal or property
damages resulting from our construction or operation could result in substantial
costs and liabilities that could reduce the amount of cash that we would
otherwise have to distribute or use to further enhance our business.
PREVIOUSLY UNKNOWN, MATERIAL ADVERSE ENVIRONMENTAL EFFECTS MAY BE DISCOVERED TO
BE CAUSED BY ETHANOL, MATERIALLY DAMAGING THE ETHANOL INDUSTRY.
With the phaseout of MTBE and increasing reliance upon ethanol has come
increased attention to the potential environmental impacts of widespread ethanol
usage. One recent study of such potential effects in the northwestern United
States, while discounting the possibility that fuel ethanol may pose significant
new health risks, also recommended further study of the potential for adverse
impacts from large scale exposure to low levels of ethanol. As the environmental
effects of widespread adoption of fuel ethanol come under heightened scrutiny,
it is possible that previously unknown and harmful environmental impacts of such
usage may be discovered. Any such discovery could have material adverse effects
on the entire ethanol industry, including our business.
THE FEDERAL OXYGEN MANDATE COULD BE ELIMINATED, MADE SUBJECT TO WAIVER OR
OTHERWISE REVISED TO THE DETRIMENT OF THE ETHANOL INDUSTRY.
Federal or state environmental rules or regulations could be adopted which
have an adverse effect on domestic use of ethanol. For example, in connection
with a large scale shift away from MTBE or because air quality in metropolitan
areas is determined to have improved sufficiently, changes in the environmental
regulations regarding the required oxygen content of automobile emissions could
be made which have an adverse effect on the ethanol industry. Various proposals
and recommendations are currently under consideration to eliminate, retain,
allow for waivers of or otherwise change the federal oxygen mandate. If that
mandate is eliminated or overall obligations to comply with it are reduced, the
ethanol industry and our business may suffer material adverse effects. The state
of California is currently challenging in federal court the recent denial of its
request for a waiver of the oxygenated fuel requirement by the federal
Environmental Protection Agency.
GOVERNMENTAL ETHANOL INCENTIVES COULD EXPIRE OR CHANGE, WHICH COULD REDUCE OUR
REVENUES.
There are various federal and state laws, regulations and programs which
have led to the increasing use of ethanol in fuel, including various subsidies
and other forms of financial incentive. Some of these provide economic
incentives to produce ethanol and some mandate the use of ethanol. The
revocation or amendment of any one or more of these laws, regulations or
programs could adversely affect the future use of ethanol, and we cannot assure
you that any of those laws, regulations or programs will be continued at all or
in their current form. Government support of the ethanol industry could change
and adversely affect the profitability and viability of our business. Congress
and state legislatures could remove economic incentives and mandates for the use
of ethanol. For example, the principal federal ethanol incentive, the federal
gas excise tax credit, gradually declines until it is scheduled to expire on
September 30, 2007. Similarly, the small ethanol producer credit is set to
expire for tax years after December 31, 2007. These tax incentives to the
ethanol industry may not continue beyond their scheduled expiration date or, if
they continue, the incentives may not remain at current levels. The elimination
or reduction of federal incentives to the ethanol industry would have a material
adverse impact on our business, by making it more costly or difficult for us to
produce or profitably sell ethanol.
THE ABSENCE OF EXISTING OR FAVORABLE PROPOSED STATE LAW INCENTIVES MAY HAVE A
MATERIAL ADVERSE AFFECT ON OUR FINANCIAL PERFORMANCE.
Presently, unlike most of the other states in the midwest, Ohio has no
special ethanol production incentives. In addition, currently proposed Ohio
incentives, if enacted, may not provide meaningful support to for-profit
entities like us, as opposed to agricultural cooperatives. The absence of state
law supports, or the enactment of state law supports which assist our potential
competition and not us, may constitute an important competitive disadvantage we
face, and may have material adverse effects on our business.
17
OTHER LAWS AND CIRCUMSTANCES REGARDING THE ETHANOL INDUSTRY MAY CHANGE IN
ADVERSE WAYS.
The federal and state regulation of environmental, health and safety matters
and the automotive and fuel industries have undergone substantial changes over
the years, and further changes should be expected. It is impossible to predict
what changes will occur, or the effect of such changes on our business and the
ethanol industry in general.
RISKS RELATED TO TAX ISSUES IN A LIMITED LIABILITY COMPANY
YOU MAY BE REQUIRED TO PAY TAXES ON YOUR SHARE OF OUR INCOME, EVEN IF WE MAKE NO
DISTRIBUTIONS TO YOU.
We expect to be treated as a partnership for federal income tax purposes.
This means that we will not pay any federal, state or local income tax and all
profits and losses will "pass-through" to you. You will be required to pay tax
on your allocated share of our taxable income every year. You may receive
allocations of taxable income that exceed any cash distributions we make. This
may occur because of various factors, including but not limited, to accounting
methodology, debt covenants that restrict our ability to pay cash distributions,
or our decision to retain or use the cash generated by the business to fund our
operating activities and appropriate reserves. Accordingly, you may be required
to pay income tax on your allocated share of our taxable income with personal
funds, even if you receive no cash distributions from us.
YOU MAY BE UNABLE TO DEDUCT OUR LOSSES, WHICH COULD HAVE ADVERSE TAX
CONSEQUENCES TO YOU.
Your interest in us may be treated as a "passive activity." If you are
either an individual or a closely held corporation, and your interest is deemed
to be passive, then your allocated share of any loss we incur will be deductible
only against your income or gains from other passive activities. This situation
often arises when limited liability companies and partnerships conduct
businesses in which the unit holder is not an active participant. 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. If a taxpayer's entire interest in a passive activity is disposed of to
an unrelated person in a taxable transaction, suspended losses with respect to
that activity may then be deducted. If you have borrowed money to purchase
units, you may not be able to deduct the related interest expense because it
must be aggregated with other items of income and loss that you have
independently experienced from passive activities and subjected to the passive
activity loss limitation. These rules could restrict your ability to deduct any
of our losses that pass through to you.
DUE TO OUR ANTICIPATED INDEBTEDNESS, IF YOU SELL UNITS YOUR TAX MAY BE GREATER
THAN YOUR SALES PROCEEDS.
Our classification as a partnership for tax purposes has various advantages
that are not applicable to other entities. Generally, any debt incurred by us
will be treated as nonreourse debt. Nonrecourse debt is defined as any debt in
which no member is personally responsible for the payment of the liability. If
we liquidate and the debt is still outstanding, our members will not have to
contribute additional capital to us to satisfy the obligation. However, for tax
purposes, the nonrecourse debt will be allocated among the members in proportion
to their unit ownership. If an allocation of nonrecourse debt is made to you,
you will be entitled to increase your tax basis by the amount of nonrecourse
debt that we allocate to you. You are permitted to deduct the losses that are
allocated to you to the extent of your tax basis. If you claim losses that are
in excess of your capital account which occurs as a result of the allocation of
the nonrecourse debt, you may be required to recognize gain on the disposition
of your units. This recognition event may occur as a result of the transfer of
units or reduction in the amount of our indebtedness. Such transfer of the
units, together with the nonrecourse debt, and the reduction in our indebtedness
will be treated as a cash distribution to the transferor.
WE COULD BE TAXED AS A CORPORATION, WHICH WOULD RESULT IN DOUBLE TAXATION OF ANY
EARNINGS OR PROFITS WE ACHIEVE, REDUCING THE FUNDS AVAILABLE FOR DISTRIBUTION TO
OUR MEMBERS.
If the IRS determined that we should be taxed as a corporation, we would be
taxed on our net income at rates of up to 35% for federal income tax purposes,
and all items of our income, gain, loss, deductions or credits would be
reflected only on our tax returns, and would not be passed through to you. We
could be classified as a corporation if, for example, our units become traded on
a secondary market or its substantial equivalent. If we were treated as a
corporation, any distributions we make to you will be treated as a dividend
taxable at ordinary income rates to the extent of our earnings and profits, and
would not be deductible by us, resulting in double
18
taxation of our earnings and profits. This result would materially adversely
affect our financial results and our ability to make distributions to you.
THE IRS MAY CHALLENGE OUR ALLOCATIONS OF INCOME, GAINS, LOSSES, DEDUCTIONS AND
CREDITS.
Our operating agreement provides for the allocation of income, gains,
losses, deductions and credits among members based on the number of units owned
by each member. The rules regarding partnership allocations are complex. It is
possible that the IRS could successfully challenge the allocations provided for
in our operating agreement, and reallocate items of income, gains, losses,
deductions or credits in a manner which reduces deductions or increases income
allocable to you, which could result in additional tax liabilities and increased
risk of an audit.
THE IRS MAY AUDIT YOUR TAX RETURNS IF AN AUDIT OF OUR TAX RETURNS RESULTS IN
ADJUSTMENTS AND THAT COULD RESULT IN ADDITIONAL TAX OBLIGATIONS TO YOU.
The IRS may audit our tax returns and may disagree with the tax positions
that we take on our returns. If challenged by the IRS, the courts may not
sustain the position we take on our tax returns. An audit of our tax returns
could lead to a separate audit of your personal income tax returns, especially
if adjustments are required which could result in adjustments on your personal
income tax returns. This could result in tax liabilities, penalties, interest
and additional costs to you.
YOU MAY BE SUBJECT TO STATE, LOCAL, SELF-EMPLOYMENT AND OTHER TAXES SIMPLY AS A
RESULT OF YOUR INVESTMENT.
In addition to federal income taxes, you may be subject to other taxes,
including state and local taxes, unincorporated business taxes, self-employment
taxes and estate, inheritance or intangible taxes that are imposed by various
jurisdictions in which you reside or in which we do business or own property.
You may be required to file state and local income tax returns and pay state and
local income taxes in some or all of the jurisdictions in which we do business,
and may be subject to penalties for failure to comply with those requirements.
THE TAX LAWS MAY CHANGE TO OUR DETRIMENT.
It is possible that the current federal and state tax treatment of us or of
an investment in our units, will be modified by subsequent legislative,
administrative or judicial action. Any such changes could significantly alter
the tax consequences of and decrease the after tax return on your investment in
our units.
YOUR INVESTMENT MAY BE SUBJECT TO OTHER RISKS WHICH WE HAVE NOT FORESEEN.
The risks explained above are not necessarily all the risks to which the
offering, construction of our plant, our operations, government regulation of us
and the anticipated federal income tax treatment of us and our units may be
subject. We may encounter additional risks which we have not yet foreseen
despite our best efforts, which risks may have adverse affects upon our business
and the value of your units.
WARNING REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements involving future events,
our future performance, our expected future operations and other events,
demands, commitments and uncertainties. In many cases you can identify
forward-looking statements by the use of words such as "may," "will," "should,"
"anticipates," "believes," "expects," "plans," "future," "intends," "could,"
"estimate," "predict," "hope," "potential," "continue," or the negatives of
these terms or other similar expressions. The forward-looking statements in this
prospectus are based on management's beliefs and expectations and on information
currently available to management. Some of the sections of this prospectus that
use forward-looking statements include, without limitation, the "Summary,"
"Management's Plan of Operations," and "Business." Forward-looking statements
involve numerous assumptions, risks and uncertainties. Our actual results or
actual business, operations, conditions, events, demands, commitments or
uncertainties may differ materially from these forward-looking statements for
many reasons, including one or more of the risks described above and appearing
elsewhere in this prospectus. We cannot guarantee future results, levels of
activity, performance, achievements or business conditions. We are under no duty
to update any of these forward-looking statements after the date of this
prospectus to conform
19
them to actual results or to changes in our expectations. We caution you not to
put undue reliance on any forward-looking statements.
USE OF PROCEEDS
We estimate that gross proceeds from this offering will be $12 million if
the minimum number of units offered is sold, and $22 million if the maximum is
sold, before deducting offering expenses. We estimate the offering expenses to
be approximately $390,500 whether the minimum or maximum is sold, and the net
proceeds of the offering to be $11,609,500 if the minimum is sold, and
$21,609,500 if the maximum is sold.
MINIMUM PERCENT MAXIMUM PERCENT
------------- ------- ------------- -------
Gross offering proceeds $ 12,000,000 100% $ 22,000,000 100%
Estimated offering expenses 390,500 3% 390,500 2%
------------- ---- ------------- ----
Estimated net proceeds to us $ 11,609,500 97% $ 21,609,500 98%
============= ==== ============= ====
The net proceeds raised in this offering will be used, together with the
proceeds from necessary debt financing, to acquire the site and design, build
and begin to operate our ethanol plant. We estimate that the net offering
proceeds and the proceeds of government-assisted and private debt which together
with the offering proceeds will total at least $38 million, will be allocated as
follows, depending upon whether the minimum of 2,400 units or the maximum of
4,400 units is sold in this offering:
MINIMUM MAXIMUM
------- -------
Offering costs $ 390,500 $ 390,500
Financing costs 50,000 40,000
Capitalized interest 1,200,000 1,051,000
Land acquisition costs 621,000 621,000
Infrastructure costs 547,000 547,000
Insurance costs 50,000 50,000
Construction costs 32,250,000 32,250,000
Startup costs for labor 125,000 125,000
Inventories 1,710,000 1,710,000
General and administrative 262,000 262,000
Working capital 550,000 550,000
Reserve for cost overruns 1,285,500 1,582,500
----------- -----------
TOTAL USES OF FUNDS $39,041,000 $39,179,000
=========== ===========
To the extent that we are able to obtain aggregate equity and debt
financing beyond that which is needed to design and build our ethanol plant and
commence operations, we may: finance additional corn inventory or hedge
transactions; build a second corn bunker; build a liquid CO2 plant to allow us
to process our CO2 into dry ice and sell the final product rather than selling
our raw CO2 "over the fence" to Airgas; or build a natural gas pipeline or an
electrical substation and transmission line rather than finance these necessary
infrastructure elements through third party energy providers.
20
CAPITALIZATION
The following table sets forth our capitalization at September 30, 2001, on
an actual and pro forma basis to reflect the units offered in this offering.
SEPTEMBER 30, 2001
-------------------------------------------------
PRO FORMA (1)(2)(3)
----------------------------------
ACTUAL MINIMUM MAXIMUM
(UNAUDITED)
-------------------------------------------------
Long term debt $ - $ 26,000,000 $ 16,000,000
========= ============ ============
Members' equity:
Units; a minimum of
3,496 units and a
maximum of 5,496 units
issued and outstanding 175,000 12,670,000 22,670,000
on an as adjusted basis
Accumulated deficit (86,795) (86,795) (86,795)
--------- ------------ ------------
Total members' equity 88,205 12,583,205 22,583,205
--------- ------------ ------------
Total capitalization $ 88,205 $ 38,583,205 $ 38,583,205
========= ============ ============
- ----------
(1) Pro forma to reflect the sale of 396 units at $1,250 per unit (post-split)
to certain of our founding members in November 2001.
(2) Pro forma to reflect a 4-to-1 split of all units in November 2001.
(3) Pro forma to reflect the sale of 2,400 (minimum) or 4,400 (maximum) units in
the offering, before deducting offering expenses.
DILUTION
At September 30, 2001 (post-split), we had a net tangible book value of
$88,205 or $126 per unit, after giving effect to the 4-to-1 unit split. The net
tangible book value per unit represents total tangible assets divided by the
number of units outstanding on an "as-if converted" basis. The offering price of
$5,000 per unit substantially exceeds the net tangible book value per unit of
our outstanding units. Therefore, all current members will realize an immediate
increase of $3,067 in the pro forma net tangible book value of their units held
prior to this offering if the minimum is sold, and an increase of $3,577 if the
maximum is sold. Purchasers of units in this offering will realize an immediate
dilution of $1,401 per unit in the net tangible book value of their units if the
minimum is sold, and a decrease of $891 if the maximum is sold.
The following table illustrates the increase to existing members and the
dilution to purchasers in the offering in the net tangible book value per unit.
In November 2001, we sold 99 units at $5,000 per unit to certain of our founding
members. Subsequently, in November 2001, we split all of our units 4-to-1. This
table also does not take into account any other changes in the net tangible book
value of our units occurring after September 30, 2001, or offering expenses
related to this offering.
MINIMUM MAXIMUM
------- -------
Offering price per unit $ 5,000 $ 5,000
Net tangible book value per unit at September 30, 2001 $ 126 $ 126
Increase in pro forma net tangible book value per unit
attributable to the sale of 396 units in November 2001 406 406
Increase in pro forma net tangible book value per unit
attributable to the sale of 2,400 (minimum) and 4,400
(maximum) units $ 3,067 $ 3,577
------- -------
Net tangible book value per unit at September 30, 2001, as
adjusted for the sale of units 3,599 4,109
------- -------
Dilution per unit to new investors in this offering $ 1,401 $ 891
======= =======
21
An investor purchasing units in this offering will receive units diluted by
the prior purchase of units by purchasers during our seed capital offerings. We
have previously sold units at prices substantially below the price we are
selling units in this offering. We believe that these differences in pricing
accurately reflect the additional risks taken by seed capital investors. The
presence of these previously sold units will dilute the relative ownership
interests of the units sold in this offering because these earlier investors
received a relatively greater share of our equity for less consideration than
investors in this offering will receive.
The table below sets forth, as of September 30, 2001, on an
"as-if-converted" basis, the difference between the number of units purchased
and the total consideration paid for those units by existing members, compared
to units purchased by new investors in this offering, without taking into
account any offering expenses. In November 2001, we sold 99 units at $5,000 per
unit to certain of our founding members. Subsequently, in November 2001, we
split all of our units 4-to-1.
TOTAL NUMBER OF UNITS PURCHASED TOTAL CONSIDERATION AND AVERAGE PER UNIT PRICE
-------------------------------- ---------------------------------------------------------
MINIMUM MAXIMUM MINIMUM MAXIMUM
--------------- --------------- -------------------------- -------------------------
NUMBER PERCENT NUMBER PERCENT AMOUNT PERCENT AVERAGE AMOUNT PERCENT AVERAGE
------ ------- ------ ------- ------ ------- ------- ------ ------- -------
Existing members 700 20% 700 13% $175,000 1% $250 $175,000 1% $250
as of September
30, 2001
Additional 396 11% 396 7% 495,000 4% 1,250 495,000 2% 1,250
existing
members added
in November 2001
New investors 2,400 69% 4,400 80% 12,000,000 95% $5,000 22,000,000 97% $5,000
----- --- ----- --- ---------- --- ----------- ----
Total 3,496 100% 5,496 100% $12,670,000 100% $22,670,000 100%
===== === ===== === ========== === =========== ===
We may seek additional equity financing in the future, which may cause
additional dilution to investors in this offering, and a reduction in their
equity interest. Members have no preemptive rights on any units to be issued by
us in the future in connection with any such additional equity financing. We
could be forced to issue additional units or warrants to purchase units to a
lender or lenders in connection with our debt financing. If we sell additional
units or warrants to purchase additional units, the sale or exercise price of
those units or warrants could be higher or lower than the price per unit that
investors are paying in this offering. If we issue additional units or warrants
at a lower price, that could lower the value of an existing investor's units.
SELECTED FINANCIAL DATA
The following table summarizes important financial information from our
September 30, 2001 unaudited financial statements. You should read this table in
conjunction with our financial statements and their notes, and our plan of
operation and other financial information included elsewhere in this prospectus.
FROM FEBRUARY 8, 2001
(INCEPTION DATE) TO
SEPTEMBER 30,
2001 (UNAUDITED)
STATEMENT OF OPERATIONS
DATA (CUMULATIVE FROM
INCEPTION):
Revenues $ ----
Operating expenses:
Consulting fees 30,000
Professional fees 53,068
Miscellaneous 4,097
-----
Total expenses 87,165
------
Operating loss (87,165)
Interest income 370
---------
Net loss $(86,795)
=========
22
SEPTEMBER 30, 2001
(UNAUDITED)
PRO FORMA (1)(2)(3)
-------------------
ACTUAL MINIMUM MAXIMUM
BALANCE SHEET DATA:
Assets:
Cash and cash $77,275 $12,572,275 $22,572,275
equivalents
Other assets 41,114 41,114 41,114
-------- ----------- -----------
Total assets $118,389 $12,613,389 $22,613,389
======== =========== ===========
Liabilities and
members' equity:
Current liabilities $30,184 $30,184 $30,184
Total members' equity 88,205 12,583,205 22,583,205
-------- ----------- -----------
Total liabilities and $118,389 $12,613,389 $22,613,389
members' equity ======== =========== ===========
(1) Pro forma to reflect the sale of 396 units at $1,250 per unit (post-split)
to certain of our founding members in November 2001.
(2) Pro forma to reflect a 4-to-1 split of all units in November 2001.
(3) Pro forma to reflect the sale of 2,400 (minimum) or 4,400 (maximum) units in
the offering, before deducting offering expenses.
MANAGEMENT'S PLAN OF OPERATIONS
OVERVIEW
We are a start-up company in development stage, with no substantial assets
and no income from operations, although we have received approximately $670,000
in seed capital in the form of capital contributions by our 27 founding members.
We are seeking to raise a total of $38 million through this offering and
additional government-assisted and private debt financing, in order to acquire
our preferred site, design and build an ethanol plant and engage in the
production of ethanol, distillers grains and CO2. We hope to begin construction
in the spring of 2002, and we expect that it will take at least 16 months to
construct the proposed ethanol plant and begin operations. It may take an
additional 2-4 months to address operational issues as they arise, and to begin
to operate our ethanol plant efficiently.
PLAN FOR THE NEXT 24 MONTHS
Prior to the closing of this offering, we will:
- obtain written commitments for the debt financing we need, together
with the proceeds of this offering, to satisfy our total anticipated
capital needs of at least $38 million; and
- obtain the necessary rezoning of our preferred site;
Prior to the closing of this offering, we also expect to:
- negotiate definitive real estate purchase agreements for 2 parcels
which together comprise our preferred site, and satisfy as many
conditions to the real estate closings as possible, so that we will be
able to commence construction as promptly as possible after this
offering closes;
- finalize agreements with a design engineer and a lead construction
contractor, and advance the design of the plant as far as possible;
and
- continue to negotiate and finalize third party sales and marketing
arrangements to the extent possible.
After the closing of this offering, we expect to:
23
- purchase the 2 parcels of real estate which together comprise our
preferred site as promptly as possible;
- obtain the necessary insurance coverages to commence construction;
- prepare the site for construction;
- complete the design and construction of our ethanol plant;
- arrange for the construction of the necessary infrastructure to
support our plant's operations;
- finalize any remaining third party sales and marketing arrangements;
- gradually hire and train the necessary employees to operate our
plant;
- purchase our initial inventory of corn, chemicals, yeast and
denaturant; and
- commence operations, begin generating revenues, and continuously
refine our production processes to attain, maintain and improve our
plant's efficiency.
At or shortly after the closing of this offering we expect to acquire our
preferred site for about $621,000, at the cost of $3,000 per acre for about 207
acres (net of rail right of way). We expect to spend approximately $600,000 to
improve and prepare our site for construction. In addition, we expect to spend
approximately $270,000 on the construction of a rail siding, consisting of a
main line turnout from CSX's nearby high speed, dual line and just over 1,000
feet of new track.
We anticipate that we will have to arrange for various infrastructure
improvements for our plant, including:
- NEC's construction of an electrical substation and associated
transmission facilities needed to run electricity from NEC's nearby
electrical lines to the plant, at an estimated cost of about $1.3
million; and
- Murphy Brother's construction of a 5-mile long natural gas pipeline to
transport natural gas from Crossroads Pipeline to the plant, at an
anticipated cost of about $1.25 million.
In each of these situations, we expect to finance the construction costs through
the supplier unless the aggregate proceeds from this offering, together with the
proceeds from debt financing, exceed $38 million and we decide to pay the
construction costs without such financing.
A majority of our resources will be spent to design, build and equip the
proposed ethanol plant. We expect to spend approximately $32.3 million on
designing, constructing and equipping our plant. We expect these costs to
include digging, pouring foundations, material and labor to construct the
ethanol plant, grain and ethanol storage and handling facilities, drying
facilities, offices and a cooling tower. We will also be purchasing and
installing ethanol production equipment, such as pumps, grinders and processing
equipment, storage tanks, a dryer and conveyors. We will pay these costs by
making monthly progress payments based upon the work completed and invoiced to
us.
We are currently operating from a temporary office in Defiance, Ohio. Once
the plant is complete, our office will be located at the plant site. We
currently do not have an office staff or general manager, and we do not expect
to retain one until approximately six months before we begin operation.
Currently, we have contracted for the services of a part-time project
coordinator and a part-time administrative assistant. Otherwise, we are
dependent entirely on our directors, our officers and advisors for maintenance
of books and records. We intend to hire and train a staff before we start
operating, and we intend to comply with applicable rules and regulations
concerning the maintenance of accurate books and records and the timely and
accurate submission of annual, periodic and other reports with the Securities
and Exchange Commission. As we near operational status, we expect to incur
increasing costs as we hire and train additional employees. We estimate that we
will have about 30 full-time employees by the time we begin operations.
24
We estimate that we will need to spend approximately $25,000 annually on
directors and officers' insurance, builder's risk insurance, general commercial
liability, worker's compensation and property insurance. We also expect to spend
a total of approximately $262,000 during the construction period on general and
administrative expenses, including salaries, out-of-pocket reimbursements and
general office expenses.
A portion of the funds raised in this offering, together with borrowings
under a revolving credit facility, are expected to be used to purchase our
initial inventory of corn, chemicals, yeast and denaturant, the principal raw
materials we need to operate, until we begin to collect receivables.
LIQUIDITY AND CAPITAL RESOURCES
The information in this section of the prospectus should be read in
conjunction with our audited financial statements appearing under the heading
"Index to Financial Statements" elsewhere in this prospectus.
As of September 30, 2001, we had cash and cash equivalents of $77,275 and
total assets of $118,389. To date, we have raised $670,000 in seed capital from
our founding members, and received a $30,000 non-recourse loan from the Defiance
County Business Development Fund. The outstanding balance of the DCBDF loan
accrues interest at 2% per annum, and we will pay interest only semi-annually on
December 31, 2001, June 30, 2002 and December 31, 2002. Principal and interest
will be repaid in three equal annual installments starting June 30, 2003. If our
ethanol plant is not operational by June 30, 2003, our first annual principal
payment may be deferred for one year, and we will continue semi-annual
interest-only payments during the interim. As of September 30, 2001, we had
current liabilities of $30,184. Since our inception on February 8, 2001 through
September 30, 2001, we have had a net loss of $86,795, and at September 30,
2001, we had an accumulated deficit of $86,795. Members' equity as of September
30, 2001 was $88,205.
Since inception, we have had no revenues, and cash flows provided by
financing activities through September 30, 2001 were member contributions of
$158,000, and were used primarily for consulting and professional fees and land
development costs. During this period, our accounts payable increased by
$30,184.
We are seeking to raise a total of at least $38 million, consisting of at
least $12-22 million in equity and the balance in government-assisted and
private debt. The amount of debt that we obtain will depend upon how much equity
we raise. We do not have financing commitments for any loans. We have had
discussions with several lenders that have expressed interest in participating
in financing the project, but have not entered into any agreements. Completion
of the project depends on our ability to raise sufficient debt financing and
close on this offering. If we cannot obtain sufficient commitments for debt
financing before September 30, 2002, we will return the proceeds raised in this
offering with interest.
GOVERNMENT-ASSISTED DEBT FINANCING AND TAX ABATEMENT PROGRAMS
We are aggressively seeking and expect to maximize our use of available
government-assisted debt financing and tax abatement programs. To the extent we
are able to obtain government-assisted debt financing, we will require less
equity and less debt financing from the private sector, and our overall cost of
capital may be lower. While our optimized use of available government tax
abatement programs will not reduce the amount of overall financing we need to
close this offering, it is expected to significantly reduce our tax obligations
once our ethanol plant is operating, for 5-10 years.
OHIO AIR QUALITY DEVELOPMENT AUTHORITY (OAQDA) BONDS
The OAQDA finances up to 100% of the eligible costs of air quality
facilities in Ohio by issuing bonds and loaning the bond proceeds to private
companies like us. We expect any OAQDA loan we may obtain to have a term of up
to 20 years. We also expect that while any such loan is outstanding, our real
property which is part of the air quality project will be exempt from property
tax, and our tangible personal property which is part of the air quality project
will be exempt from Ohio sales and use tax. If pending Ohio legislation is
enacted as presently anticipated, we may be able to satisfy all of our debt
financing needs through the OAQDA bonds. Ohio Senate Bill 144, which has the
support of Governor Taft, would expand the definition of "air quality facility"
to permit the OAQDA to determine that an entire ethanol plant is an air quality
facility because ethanol reduces air pollution when mixed with gasoline.
25
We expect that any real and personal property related to our ethanol plant
which the OAQDA determines is not eligible for OAQDA tax-exempt bond financing
will nevertheless be exempt from real and personal property taxes through the
Ohio Enterprise Zone Program discussed below under "-Ohio Enterprise Zone
Program."
OHIO ENTERPRISE ZONE PROGRAM
To the extent that our OAQDA loan does not cover our entire ethanol
plant, as discussed above under "--Ohio Air Quality Development Authority
(OAQDA) bonds," we expect to receive up to 100% nominal real and personal
property tax abatements for up to 10 years, less negotiated donations to the
Central Local School District. These donations would reduce the net tax
abatement benefit to us from this program.
COMMUNITY DEVELOPMENT BLOCK GRANT AND SECTION 629 HIGHWAY ASSISTANCE PROGRAM
To the extent that our OAQDA loan does not cover certain necessary
infrastructure costs for road improvements, an electric substation and natural
gas lines, we expect to borrow up to $400,000 at interest rates of between 2-3%,
to finance up to 50% of the cost of these improvements, through these state
programs administered by Defiance County. These programs promote the creation
and retention of jobs, and the amount we expect to borrow is based upon the
creation and maintenance of 28 jobs in Defiance County. In addition, we may
receive up to $50,000 towards job training for public assistance recipients
under the CDBG Program.
OHIO JOB CREATION TAX CREDIT
This program is expected to provide us with a refundable state tax
credit based upon the state income tax withheld on our employees' wages, up to a
maximum of 75% of such withholding over a 10-year period. Approved projects
generally receive between 50-60% over 5-10 years. In addition to the creation of
at least 25 new jobs, to be eligible for this program the average wage of our
employees must exceed 150% of the then-current federal minimum wage.
OHIO MANUFACTURING MACHINERY AND EQUIPMENT INVESTMENT TAX CREDIT
Again to the extent our OAQDA loan does not apply, this program is expected
to provide us with a nonrefundable state income tax credit of 7.5% on our
investment in machinery and equipment. The total value of this tax credit is
divided equally over 7 years, and may be claimed by simply filing a notice and
claiming this tax credit on our state income tax returns. These state tax
credits, if unused, may be carried forward for up to 3 years.
OHIO MANUFACTURING MACHINERY AND EQUIPMENT SALES TAX EXEMPTION
Again to the extent our OAQDA loan does not apply, this program is expected
to provide us with an exemption from state and county sales tax for our
purchases of machinery, equipment, supplies and fuel.
There may be other federal and state programs which are not discussed here,
for which we may be eligible. In addition, existing programs are subject to
change and new programs may become available. We intend to continue to
aggressively seek to maximize our use of available government-assisted debt
financing and tax abatement programs.
PRIVATE DEBT
To the extent we are unable to obtain sufficient government-assisted debt,
when combined with the proceeds of this offering, to total at least $38 million,
we expect to seek additional debt from private lenders. We expect to obtain a
construction loan to help fund our site acquisition costs and construction
progress payments. The construction loan is expected to require payments of
interest only until our plant is scheduled to commence operations, and to be
secured by virtually all of our property, including our real property,
equipment, receivables and inventories. We also expect that the construction
loan will be converted into term debt, to be paid in full over up to 10 years,
upon completion of the ethanol plant.
We expect that we will also need a revolving line of credit to finance
receivables and inventories. We expect borrowing availability under the
revolving line of credit to be based upon 80-85% of our accounts receivable and
50% of our inventory, subject to a specified maximum amount. We plan to pay at
least prime rate on these loans, plus annual fees. It is anticipated that any
private debt we incur will be subject to various affirmative and
26
negative covenants. Such covenants may include negative covenants relating to:
debt service coverage of between 1.3 and 1.5 to 1; total debt to (projected)
earnings before interest, taxes, depreciation and amortization (EBITDA) of
between 3 and 3.5 to 1; funded debt to EBITDA of between 2 and 2.5 to 1; and
other standard negative covenants restricting distributions, capital
expenditures, mergers and other business combination transactions and similar
matters.
If we seek subordinated debt, we expect to pay a substantially higher
interest rate, plus possible warrants to purchase our units, to the subordinated
lender.
We are also seeking a total of $30,000 in grants from the Ohio Department of
Economic Development, all of which will be used for infrastructure. We have a
number of grant and loan applications pending with various governmental and
private entities, and we expect to continue to aggressively seek grant and loan
funds on favorable terms going forward. To the extent we are successful in
obtaining such funds, our need for additional debt and equity financing will be
reduced.
SOURCES AND USES OF FUNDS
The following table shows our estimated sources and uses of funds until
operations begin and our ethanol plant begins to generate revenues. We expect to
have sufficient financial resources to attain operational status, but we cannot
be certain that these resources will be sufficient, and we may need additional
equity or debt financing if our costs are higher than expected. These estimates
are based upon our directors' and advisors' experience with other businesses.
They are only estimates, and our actual sources and uses of funds could vary
significantly due to a variety of factors, including those described in the
section entitled "Risk Factors" appearing elsewhere in this prospectus. Because
we do not know precisely what our capital structure will look like at closing,
we present two possible scenarios: (1) we raise the minimum $12 million in the
offering and incur approximately $26 million in debt; or (2) we raise the
maximum $22 million in the offering and incur approximately $16 million in debt.
Our Sources of Funds table does not include any revenues from operations
despite our expectations that our ethanol plant will commence operations in the
fall harvest season of 2003. Our working capital estimates include 3 months of
wages and expenses. We have assumed that the net proceeds of this offering earn
interest at 2% until expensed.
SOURCES OF FUNDS:
MINIMUM MAXIMUM
------- -------
Equity $ 12,000,000 $ 22,000,000
Seed Capital 670,000 670,000
Senior debt 26,000,000 16,000,000
Grants 300,000 300,000
Interest Income 71,000 209,000
------------ ------------
TOTAL SOURCES OF FUNDS $ 39,041,000 $ 39,179,000
============ ============
USES OF FUNDS:
Construction Costs:
Engineering costs 2,000,000 2,000,000
General conditions 3,000,000 3,000,000
Site work 600,000 600,000
Bunker silo 1,500,000 1,500,000
Fermentation - distillers grains buildings 1,650,000 1,650,000
Tank slab, concrete work 750,000 750,000
Structural steel 600,000 600,000
Process equipment and tanks 4,000,000 4,000,000
Process pumps 500,000 500,000
Heat exchangers 1,200,000 1,200,000
Dryer 2,500,000 2,500,000
Evaporator 1,200,000 1,200,000
27
Chiller 500,000 500,000
Cooling tower 500,000 500,000
Boiler island 1,000,000 1,000,000
Centrifuge package 1,500,000 1,500,000
Grain handling and equipment 1,500,000 1,500,000
Painting 250,000 250,000
HVAC and administrative offices 300,000 300,000
Lab and control rooms 100,000 100,000
Piping and insulation 3,000,000 3,000,000
Electrical subcontract 2,500,000 2,500,000
Scales 100,000 100,000
Wells and water supply 1,000,000 1,000,000
Waste water management 500,000 500,000
------------ ------------
TOTAL CONSTRUCTION COSTS $ 32,250,000 $ 32,250,000
============ ============
Inventory - corn 300,000 300,000
Inventory - chemicals, yeast and denaturant 130,000 130,000
Inventory - ethanol and distillers grains 980,000 980,000
Spare parts - process equipment 300,000 300,000
Land and other infrastructure 1,168,000 1,168,000
Insurance costs 50,000 50,000
General and administrative 262,000 262,000
Start-up costs for labor 125,000 125,000
Capitalized interest 1,200,000 1,051,000
Working capital needs 550,000 550,000
Financing costs 50,000 40,000
Offering costs 390,500 390,500
Reserve for cost overruns 1,285,500 1,582,500
------------ ------------
TOTAL USES OF FUNDS $ 39,041,000 $ 39,179,000
============ ============
We expect capitalized interest to increase marginally if we raise only the
minimum amount of equity we seek. Our estimates of capitalized interest assume
that we spend the net proceeds of this offering first, and then begin to borrow
at 9% interest, with no principal payments prior to the scheduled commencement
of operations of our ethanol plant. We also expect to incur approximately
$50,000 in financing related costs if the $12 million minimum is sold, or
$40,000 if the $22 million maximum is sold. These financing costs include
advisory, service, lending and legal fees. We estimate that our financing costs
will vary depending on the amount and types of debt financing that we are able
to obtain. We have also assumed that no OAQDA bond financing is used during the
construction phase, and that no subordinated debt is incurred. Finally, to the
extent we are successful in raising the maximum of $22 million in equity, we
will have a more comfortable reserve for cost overruns. As of September 30,
2001, we have incurred $15,709 of the offering costs. In addition to the senior
debt, a significant revolving credit facility will be required to provide
working capital.
While we have attempted to provide you with the most accurate and complete
information relative to our plans which is available to us, our plans are
subject to a variety of uncertainties which may cause our actual results to vary
from our plans. These uncertainties include but are not limited to:
- - that we are a start-up company with management which is inexperienced
in the ethanol business;
- - that while we have had preliminary discussions with a number of
potential service providers, suppliers and customers, we have no
definitive agreements, and there can be no assurance that we will be
able to enter into any such agreements on favorable terms, if at all;
- - that we are vulnerable to fluctuations in the prices of corn, energy,
distillers grains and ethanol, and although we expect to attempt to
hedge against such fluctuations in price, there can be no assurance
that we will be able to initiate or maintain effective hedge positions,
or that we will not suffer losses in connection with our hedging
activities; and
28
- - that the ethanol industry is a highly politicized industry in which
competing environmental, economic, tax and foreign policy issues
interplay to create a dynamic and unpredictable landscape.
BUSINESS
We are an Ohio limited liability company formed on February 8, 2001. We are
seeking capital to develop, build and operate an ethanol plant in Defiance
County, Ohio. Our plant is expected to have an annual capacity to process
approximately 11.3 million bushels of corn into approximately 30 million gallons
of undenatured ethanol, approximately 100,000 tons of dry distillers grains and
approximately 93,000 tons of CO2.
THE ETHANOL INDUSTRY
Ethanol is ethyl alcohol, a fuel component which can be used as a fuel
additive to reduce harmful emissions and enhance octane. It is produced by the
fermentation of sugars found in grains and other biomass. Although ethanol can
be produced from a number of different types of grains, such as wheat and
sorghum, as well as from waste products such as sugar, rice hulls, cheese whey,
potato waste, brewery and beverage wastes and forestry and paper wastes,
approximately 90% of ethanol in the United States today is produced from corn
because corn produces large quantities of carbohydrates, which convert into
glucose more easily than other kinds of biomass. A typical bushel of U.S. Number
Two Corn weighs approximately 56 pounds and yields approximately 2.65 gallons of
undenatured fuel ethanol.
Ethanol contains 35% oxygen by weight. When combined with gasoline, ethanol
acts as an oxygenate by increasing the percentage of oxygen in gasoline. As a
result, the gasoline burns more cleanly, and releases less carbon monoxide and
other exhaust emissions into the atmosphere. Although not all scientists agree
about the existence or extent of environmental benefits associated with the use
of ethanol, the use of ethanol is commonly viewed as a way to improve the
quality of automobile emissions. The ethanol industry is heavily dependent,
however, on federal economic incentives.
U.S. PRODUCTION OF ETHANOL
[GRAPH]
Source: Energy Information Administration
29
FEDERAL AND STATE ETHANOL SUPPORTS
Ethanol sales have been favorably affected by the Clean Air Act Amendments
of 1990, particularly the Federal Oxygen Program, which became effective
November 1, 1992. The Federal Oxygen Program requires the sale of oxygenated
motor fuels during the winter months in certain major metropolitan areas, to
reduce carbon monoxide pollution. Ethanol use has also increased due to a second
Clean Air Act program, the Reformulated Gasoline Program. This program became
effective January 1, 1995, and requires the sale of
The use of ethanol as an oxygenate to blend with fuel to comply with federal
mandates also has been aided by federal tax policy. The Energy Tax Act of 1978
exempts ethanol blended gasoline from a gradually declining portion of the
federal gas excise tax, as a means of stimulating the development of a domestic
ethanol industry and mitigating the country's dependence on foreign oil. As
amended, the federal tax credit currently allows the market price of ethanol to
compete with the price of domestic gasoline. Although the ethanol tax credit is
not directly available to us, it allows us to sell our ethanol at prices that
are competitive with other less expensive additives and with gasoline. The
credit allows blenders to pay more for ethanol than for gasoline and still
retain the same profit margin. Under current legislation, the federal gasoline
tax is $0.184 per gallon and the tax on gasoline blended with 10% ethanol is
$0.131 per gallon, providing a $0.053 per gallon wholesale price difference.
Because blending 10% ethanol in gasoline saves the blender $0.053 per gallon,
this credit has the effect of adding $.53 of value to every gallon of fuel grade
ethanol. Smaller credits are available for gasoline blended with 7.7 percent and
5.7 percent ethanol. The federal tax on a gallon of 10% ethanol blended gasoline
will gradually increase to $.133 by 2005, dropping the per gallon wholesale
price difference to $.051 per gallon. Similar graduated reductions also apply to
the smaller credits available for gasoline blended with 7.7 percent and 5.7
percent ethanol. In 2007, the federal ethanol tax credit is scheduled to expire,
and ethanol would then be taxed at the standard federal gasoline tax rate.
The Omnibus Budget Reconciliation Act of 1990 provides an income tax credit
of $.10 per gallon for up to 15 million gallons of annual ethanol production by
a small ethanol producer, which is defined as one with ethanol production
capacity of 30 million gallons per year or less. This credit is strictly a
production tax credit available only to a manufacturer who sells the ethanol to
another person for blending into a qualified mixture in the buyer's trade or
business, for use as a fuel in the buyer's trade or business, or for sale at
retail where the ethanol is placed in the fuel tank of a retail customer.
INDUSTRY GROWTH
Because of federal and state policies promoting cleaner air and tax and
production incentives, the ethanol industry has grown substantially in recent
years. Currently, domestic ethanol plants have the capacity to produce about 2
billion gallons of ethanol annually, compared to only 175 million gallons in
1980. Automobile companies have developed ethanol-friendly vehicles. Gasoline
blends containing up to 10% ethanol are approved under the warranties of most
major domestic and foreign automobile manufacturers marketing vehicles in the
United States, and many recommend the use of cleaner burning fuel, such as
ethanol, in their vehicle owner manuals. Similarly, most major manufacturers of
power equipment, motorcycles, snowmobiles and outboard motors endorse the use of
ethanol blends in their products. In the last several years, automobile
companies have introduced a growing number of flexible fuel vehicles that
operate on fuel mixtures of up to 85% ethanol. In addition, ethanol industry
advocates have developed new diesel fuels, commonly referred to as "OxyDiesel,"
which are blends of diesel fuel and ethanol.
The discovery of unacceptable levels of MTBE in groundwater in California
has accelerated the growth of the ethanol industry and stimulated federal and
state analysis of, and legislative activity relating to, a potential large scale
shift from MTBE to ethanol. As a result, California, Illinois and other areas of
the country are phasing out the use of MTBE, and the country is shifting to
ethanol as the principal high octane gasoline oxygenate.
The California Energy Commission conducted a survey and issued a staff
report entitled "U.S. Ethanol Industry Production Capacity Outlook" (August
2001) ("PRODUCTION OUTLOOK"). PRODUCTION OUTLOOK is the most comprehensive
inventory of current and likely near-term U.S. ethanol production. According to
PRODUCTION OUTLOOK, as of the end of 2000, there were 44 companies operating 57
ethanol plants, 40 new companies planning ethanol projects, 34 new plants
planned and 13 new plants under construction. The following table derived from
PRODUCTION OUTLOOK summarizes existing and planned industry expansion through
2005:
30
PROJECTED USA ETHANOL PRODUCTION
CAPACITY
[GRAPH]
Illinois, Nebraska, Iowa and Minnesota, currently are, and are expected to
remain, the top four ethanol producing states, and the Midwest states are
expected to have over 83% of 2005 capacity. There are no existing plants and
only two planned plants totaling 26 MGY in capacity, among the east coast states
According to PRODUCTION OUTLOOK, the U.S. ethanol industry is expected to grow
from about 2200 MGY presently to about 4400 MGY by the end of 2005.
Our proposed ethanol plant is not included in these survey results. We are
aware of at least 1 other ethanol plant planned in Ohio, and other groups
investigating the feasibility of building an ethanol plant in Ohio. Nordic
Energy, LLC and Nordic Biofuels, LLC announced on November 27, 2001 their plans
to build an ethanol plant with over 80 mgy capacity in Ashtabula Township, Ohio,
in the northeast corner of the state. The Nordic Energy ethanol plant is also
expected to produce more than 300,000 tons of dried distillers grains and 200
tons of CO2 annually, to cost about $150 million, and to be operational in late
2003. Nordic Energy also announced the construction of a coal-fired merchant
energy power facility in Ashtabula, which could be operational by 2006.
South Point Ethanol, located at South Point, Ohio, was one of the oldest
ethanol plants in the country, and at one time its 6th largest producer at about
55-65 MGY. The South Point Ethanol plant was an old refinery which had been
converted to a dry mill, and it permanently closed in June of 1995 after 13
years of operation.
THE IMPENDING DEMISE OF MTBE AND RISE OF ETHANOL
Since 1995, as mandated by the federal Clean Air Act, reformulated gasoline
(RFG) must contain a minimum of 2% oxygen by weight, I.E, it must satisfy the
minimum federal oxygen requirement. In the Northeast, for example, the New York
City metropolitan area, greater Connecticut (Hartford and environs) and the
Philadelphia metropolitan area must sell RFG, and many other parts of the region
have voluntarily imposed this requirement through January 1, 2004. In addition
to the federal oxygen standard, RFG must also meet the federal RFG program's
emission performance standards and fuel specifications (such as those relating
to octane and volatility).
Until recently, MTBE has been the primary oxygenate in gasoline marketed in
the northeast United States because it burns cleanly, is a good source of
octane, is relatively inexpensive and can be blended with gasoline at the
refinery and transported through existing pipelines. However, "a broad consensus
has emerged that the use of MTBE in gasoline should be curtailed". Due to
"substantial evidence" that MTBE poses an
31
"unacceptable risk" to groundwater in the northeastern United States, the
Northeast states are "seeking ways to dramatically reduce or eliminate MTBE from
the region's gasoline supply." To that end, the New England Governor's
Conference Committee commissioned a study by the New England Interstate Water
Pollution Control Commission and the Northeast States for Coordinated Air Use
Management, to "better understand the consequences of potentially introducing
hundreds of millions of gallons of ethanol into the region's gasoline pool." The
study, entitled "Health, Environmental and Economic Impacts of Adding Ethanol to
Gasoline in the Northeast States" (July 2001) ("ETHANOL IN THE NORTHEAST"), made
a large number of interrelated and complex recommendations as to the legislative
and regulatory, health, economic and environmental impacts of a large scale
shift from MTBE to ethanol in New England.
Many of the broad policy recommendations of ETHANOL IN THE NORTHEAST -
including "the need for legislative and regulatory action to eliminate MTBE,
lift the oxygen mandate, prevent backsliding on air quality benefits, and ensure
that a federal ethanol strategy is national in scope" - have been previously
endorsed by the Northeast states. The principal legislative recommendation made
by ETHANOL IN THE NORTHEAST related to the elimination or waiver of the federal
oxygen mandate. According to the report, however, "because MTBE and ethanol are
valuable high-octane components, the use of ethanol in gasoline is likely to
increase dramatically as MTBE is phased out in the Northeast, even without the
oxygen requirement."
According to ETHANOL IN THE NORTHEAST, "given current information, ethanol
appears to be one of the least toxic of the major components of gasoline",
although the potential for adverse impacts of large scale exposure to low levels
of ethanol is still uncertain. Having considered various exposure pathways using
a "margin of exposure" analysis, ETHANOL IN THE NORTHEAST concluded that "direct
exposure to ethanol as a consequence of its use in gasoline is unlikely to
present significant new health risks to the general public," but that additional
research is needed of the potential for adverse impacts from large scale
exposure to low levels of ethanol.
Due to its high mobility in ground water and its resistance to
biodegradation, MTBE has been detected in an increasing number of public and
private water supplies at levels giving rise to concern about possible acute and
chronic health effects. One recent study suggests that $27 billion would be
required to remediate more than 140,000 leaking underground storage tanks
containing MTBE reformulated fuels. That same study estimates that another $2
billion would be needed to remove MTBE plumes from at least 500 public drinking
water wells and 45,000 private wells across the country. In contrast, ethanol
biodegrades quickly. However, given the other differing properties of MTBE as
compared with ethanol, refiners cannot simply replace MTBE with ethanol and
still meet all the other requirements of the federal RFG program's requirements.
MTBE blended gasoline satisfying the minimum federal oxygen requirement is 11%
MTBE by volume, while ethanol blended gasoline satisfying the same requirement
is 5.7% ethanol by volume, because ethanol contains more oxygen than MTBE. When
ethanol, which is more volatile than MTBE, replaces MTBE, refiners must somehow
lower the volatility of the overall blend because ethanol is more volatile than
MTBE. In addition, although ethanol has a slightly higher octane rating than
MTBE, because it takes less ethanol than MTBE to satisfy the federal oxygen
requirement, when ethanol replaces MTBE at the RFG minimum there is an overall
reduction in the octane rating which requires the addition of one or more high
octane replacements. The most likely substitutes are toxic aromatic compounds
such as benzene and toluene, which pose their own groundwater threats. Also, if
blended at the RFG minimum, ethanol is less effective at displacing and diluting
other toxic octane-enhancing constituents than MTBE. Consequently, EPA's Complex
Model, a computerized air pollution modeling program used to certify compliance
with its RFG program, predicts that emissions of the toxic air pollutant
acetaldehyde will increase 50-70% if ethanol replaces MTBE, while there would be
15% fewer emissions of the toxic air pollutant formaldehyde. In short, the
ultimate resolution of this ongoing shift from MTBE to ethanol is complicated by
scientific complexity, the political process, overriding environmental policy
and other factors beyond our control.
ETHANOL IN THE NORTHEAST also noted that any large scale transition from
MTBE to ethanol would necessitate some expansion of gasoline distribution
infrastructure facilities, including separate storage tanks and blending
equipment at distribution terminals and expanded barge, rail and track
facilities at port and bulk terminal facilities. In addition, to prevent
releases due to the degradation of non-compatible material in underground
storage tanks at gasoline stations, the report recommended that a tank
certification program be established.
In terms of the possible economic effects of a large scale shift by the New
England states from MTBE to ethanol blended gasoline, ETHANOL IN THE NORTHEAST
predicted a possible price increase of between $.03 - .11 cents per gallon in
the near term, which could be higher depending upon a variety of complex
factors. The possibility of near term volume supply shortfalls was also
anticipated.
32
USA - FUEL ETHANOL VS. MTBE
US demand in mln barrels per day
[GRAPH]
Source: EIA (data for 2000 up to May)
The above graph suggests that MTBE production volume has begun to shift to
fuel ethanol as the only realistic high octane oxygenate substitute, primarily
as a result of MTBE's adverse environmental impacts. In addition, as the ethanol
industry has grown and early impediments to its large scale use in gasoline have
been addressed, ethanol has begun to emerge as a potentially realistic means of
reducing the United States' otherwise increasing dependence upon foreign oil.
THE UNITED STATES' DEPENDENCE ON FOREIGN OIL
Of the 77 million barrels of oil produced a day worldwide, the United States
consumes about a quarter of this amount. However, the United States produces
only 40% of the oil it consumes and imports the rest from foreign countries. Of
the approximately 60% of oil that we import, half of this amount comes from OPEC
nations. With our need for oil at the center of our Middle Eastern policy, the
United States has remained deeply entangled in the conflicts of an unstable
region. As part of our anti-terrorism policy developed in light of the tragedy
that occurred on September 11, 2001, our nation now more than ever must reduce
its dependence on foreign oil.
Historically, the world price of crude oil has been determined by the
following factors: the supply decisions of the Organization of Petroleum
Exporting Countries (OPEC); the relative scarcity of oil and the lack of
substantial substitutes for oil in certain uses such as transportation; and
seasonal demand. The extent of local competition is also a factor in prices of
refined petroleum products.
Since the early 1970's, the world has experienced three major oil supply
disruptions that impacted the United States economy, including the 1973 Arab oil
embargo, the 1979 Iranian revolution and the 1990 invasion of Kuwait by Iraq. In
October 1973, the Arab oil embargo disrupted world oil supplies and caused the
price of gasoline to reach unprecedented highs. Two weeks after the first Arab
oil embargo, President Nixon announced "Project Independence", whereby the
United States would develop the potential to meet its own energy needs without
relying on foreign energy sources. In 1975, as a result of the oil crisis, the
United States created the Strategic Petroleum Reserve to reduce the impact of
severe interruptions of petroleum supply on the domestic economy.
During past oil disruptions in the Middle East, our nation's oil prices have
risen drastically. For example, during the first week after Iraq invaded Kuwait
on August 20, 1990, domestic crude oil prices rose from about $22 to about $30
per barrel, an increase of about 36%.
33
In 1995, the Clinton Administration, through its Natural Energy Policy Plan
(NEPP), adopted various policies and programs intended to reduce the nation's
growing dependence on low-cost imported oil and its resultant vulnerability to
foreign oil supply disruptions and price shocks. Among the NEPP's initiatives
were programs to increase domestic oil production and promote alternative and
renewable fuels and energy efficiency.
U.S. Crude Oil
Production vs. Imports
[GRAPH]
Increases in oil prices in 2000 caused Congress to consider various
alternatives to boost our domestic oil production. As part of its desire to
decrease foreign oil dependence, Congress advocates the increased use of
hydrogen-based fuel cells, the adoption of new automotive technologies, the
increased implementation of conservation measures, the adoption of heightened
vehicle fuel efficiency standards, and the creation and expansion of renewable
energy sources. Our government has also been debating increased drilling in
restricted land in western United States, the Gulf of Mexico and Alaska's Artic
National Wildlife Refuge. However, environmentalists continue to protest that
allowing exploration in these areas will harm our environment. To decrease its
reliance on OPEC, the United States has also sought to increase its imports from
Canada, Mexico, Russia, and Latin America.
Although diplomatic talks caused OPEC to boost its oil production in 2000,
President Bush has continued to call for increased domestic production of oil
through the opening of new areas such as the Artic National Wildlife Refuge.
Although the President's National Energy Plan has passed the House, it remains
deadlocked in the Senate.
Despite these various initiatives, our country's dependence on foreign oil
imports has continued to increase, while domestic production has continued to
decrease, as illustrated by the graph below. Today, the United Stated imports
56% of its oil compared to 35% in 1973. Although our per capita use of oil has
decreased, our domestic crude oil production has decreased as well, and as our
population continues to grow, our dependence on oil imports also continues to
grow. This reliance on foreign oil poses a serious national security risk due to
the energy needs of our armed forces. The Department of Defense accounts for
close to 80% percent of our national energy use. If we continue to rely so
heavily on foreign oil, our enemies will continue to have undue influence over
our nation. As the search continues to find alternative sources of energy, the
demand for renewable energy sources such as ethanol may increase.
34
DESCRIPTION OF OUR ETHANOL PLANT'S PRODUCTION PROCESS
[PICTURE]
Our ethanol plant is expected to use a dry milling process to produce ethanol
from corn. It is less expensive to construct a dry mill than a wet mill, and
most producers up to and including 30 MGY capacity use dry milling.
The corn will be delivered to our ethanol plant primarily by truck. In
addition, CSX provides rail service adjacent to the proposed site's property
line. We are negotiating with CSX for long-term rail service which will provide
us with direct access for shippers throughout the midwest, to national MTBE
non-attainment markets on the west coast, to the ethanol-poor east coast and to
major distillers grains markets in the southeast United States.
We expect to purchase about half of our total annual corn supply, or around
5.7 million bushels of high moisture corn, at harvest over a 4-5 week period in
August and September each year. Depending upon the amount of equity and debt
financing we obtain, initially we may purchase and maintain only a 4-day
inventory of corn. However, the site and plant will be designed to accommodate
the estimated truck traffic necessary to deliver 5.7 million bushels of corn in
5 full weeks of 12-hour days, I.E., approximately 17 trucks per hour or 209
trucks per day, or a total of just under 8,000 trucks during the 5 week harvest
period. This high moisture corn will be weighed, tested, cracked and ramped into
a bunker that will be approximately 350' wide and 750' long. Peak height is
expected at 42'. The corn will be compacted into the bunker to remove oxygen and
thereby to stabilize the corn material, and covered with a polyethylene cover in
order to protect the grain from the elements. During the year, this grain will
be withdrawn from the bunker by cutting a consistent 1-3 feet off the face of
the pile daily. Using an estimated daily consumption rate of about 34,000
bushels, this bunkered wet corn should last about 165 days. We expect to receive
most of the balance of the expected total of annual consumption of about 11.3
million bushels as dry corn. The use of the bunker for storage of corn offers
significant advantages to us. Each producer will have less need for grain
handling and storage, drying charges will be eliminated, and we expect to earn
storage charges from producers who decide to price their corn sales to us on a
forward basis.
As corn is removed from the bunker, it will be transported to a hammermill
or grinder where it will be ground into a mash and conveyed into a tank for
processing. We will add water, heat and enzymes to break the ground corn into a
fine liquid. This liquid will be heat sterilized and pumped to a tank where
other enzymes will be added to convert the starches into glucose sugars. Next,
this liquid will be pumped into fermenters, where yeast will be added to begin a
fermentation process which will convert the sugars to ethanol and carbon dioxide
over time. A distillation and dehydration process will then divide the alcohol
from water and the corn mash. The alcohol which exits the distillation process
passes through a molecular sieve, removing the remaining water, resulting in 200
proof anhydrous ethanol. When denatured with 5% regular unleaded gasoline or
another denaturant prior to sale, 30 million undenatured gallons yields a total
saleable volume capacity of about
35
31,500,000 denatured gallons. We expect to have on-site storage capacity
sufficient to keep an 8-day ethanol inventory on site.
In the meantime, nonfermentables, also known as whole stillage, from the
distillation process will be pumped into one of several centrifuges, and thin
stillage from the centrifuges will be dried into a thick syrup. The solids that
exit the centrifuge are called wet cake and will be conveyed to a dryer. Syrup
will be added to the wet cake as it enters the dryer, where moisture is removed,
producing distillers dried grains with solubles, a livestock feed.
As part of the fermentation process, a gas is given off which is rich in
CO2. Unlike many of our competitors, which do not use the CO2 from the ethanol
production process, in our plant this gas is expected to be piped "over the
fence" to a liquid CO2 plant to be constructed near our ethanol plant, for
processing into CO2 and ultimately, dry ice.
DESIGN AND CONSTRUCTION OF OUR ETHANOL PLANT
In determining the feasibility of constructing our ethanol plant, preparing
our business plan, preliminarily designing the plant and estimating costs, we
have been working with various business partners of the Gaylor Alliance, a
consortium of ethanol project developers, including primarily Gaylor
Engineering, which is expected to be our design engineer, and Western Bio-Mass
Energy, LLC, our consultant. Another business partner of the Gaylor Alliance,
North Central Construction, is one of several contractors under consideration to
act as lead construction contractor in the construction of our plant.
THE GAYLOR ALLIANCE
Gaylor Engineering, located in Dunedin, Florida, is a leading designer of
ethanol technology and equipment, with 32 years of engineering experience and 20
years of experience in the ethanol industry. Gaylor's experience includes design
and construction, project financing, plant operation, co-product marketing,
lobbying on the state and federal levels, and participating in the development
and operation of farmer-owned ethanol businesses in Iowa, South Dakota, New
York, Montana, Illinois, Florida and the Caribbean. Gaylor is the only company
in the United States implementing the use of high moisture corn in the
fermentation process, and is currently completing ethanol process design for
Tri-State Corn Processors in Rosholt, South Dakota, Siouxland Energy in Sioux
Center, Iowa, Quad County Corn Processors in Galva, Iowa, Pine Lake Corn
Processors in Eldora, Iowa and Northeast Iowa Grain Processors in Earlville,
Iowa. Gaylor also provided project management, equipment procurement and
perimeter design for the Sunrise Energy ethanol plant and feedlot in Blairstown,
Iowa, and is contracted for one additional ethanol 30 MGY plant in Illinois,
three 20 MGY plants in South Dakota, and a biomass woodchip ethanol plant in
Wyoming. Gaylor has expertise in a variety of feedstocks used to produce
ethanol, including biomass conversion, such as the use of cellulosic material
such as hay, straw and wood waste to produce ethanol. Some of Gaylor's initial
designs led to the early use of gasohol in the mid-1980s. Since that time,
Gaylor has become one of the leading ethanol plant designers in the Midwest Corn
Belt.
Western Biomass is one of several consultants which partner with Gaylor
Engineering on ethanol-related projects. North Central Construction is a
construction contractor with significant ethanol-related construction
experience, which is one of several construction companies which partner with
Gaylor Engineering on ethanol-related construction projects.
For their services through September 30, 2001, we have paid Gaylor
Engineering and Western Biomass approximately $30,000 for consulting and
preliminary design work. We are also negotiating with Gaylor Engineering, and
expect to negotiate with several construction contractors including North
Central Construction, a business partner of the Gaylor Alliance, to finalize
several agreements which together would provide for the final design and
construction of our ethanol plant. These agreements would be based upon the form
contracts of the Construction Management Association of America, Inc., and would
include an Owner and Construction Coordinator Agreement between us and Gaylor
Engineering, an Owner and Design Professional Agreement between us and Gaylor
Engineering, and an Owner and Contractor Agreement between us and our
construction contractor.
36
OWNER AND CONSTRUCTION COORDINATOR AGREEMENT
We expect to enter into an Owner and Construction Coordinator Agreement with
Gaylor Engineering to serve as our principal agent in the design and
construction of our ethanol plant. Under the Coordinator Agreement, Gaylor
Engineering is expected to be responsible for providing certain coordinating
services, including: preparing, updating and adjusting a master schedule;
preparing, updating and adjusting a project and construction budget; reviewing
and making recommendations as to design, constructability, scheduling and time
of construction; verifying that all required permits, bonds and insurance have
been obtained; coordinating technical inspections and testing; establishing a
program to monitor construction quality; monitoring construction progress and
determining substantial and then final completion of the plant; and assisting
with post-construction occupancy.
In consideration for its services as Construction Coordinator, we expect to
pay Gaylor Engineering the sum of $1.2 million on a monthly percentage of
completion basis. Gaylor Engineering would be able to suspend services after
giving 7 days' written notice if it had not been timely paid. If the scope or
duration of Gaylor Engineering's services changed, its compensation would also
be equitably adjusted. At our request, Gaylor Engineering may also perform
additional services for which it shall be compensated in an amount and on terms
mutually agreeable to the parties. These additional services may include
services related, for example, to determining special needs, technical
inspection, recruiting and training of maintenance personnel and public
relation activities.
As proposed, we would be able to terminate the Coordinator Agreement for
convenience upon 7 days' written notice. The Coordinator Agreement could also be
terminated by either party upon 15 days' written notice, should the other party
substantially fail to perform under the agreement and fail to cure such
non-performance within the 15-day period, or if construction were stopped for a
period of 60 days by court order or government act. In the event of termination,
Gaylor Engineering would be paid for services performed to the date of
termination, for the services of professional consultants, and for all other
directly attributable termination expenses arising prior, during and subsequent
to termination.
OWNER AND DESIGN PROFESSIONAL AGREEMENT
We also expect to enter into an Owner and Design Professional Agreement with
Gaylor Engineering to provide for the design of our ethanol plant and certain
other design-related services during the construction phase of the project.
Under this agreement, we expect to pay Gaylor Engineering $800,000. Gaylor
Engineering would perform such services as developing design criteria and
requirements for the ethanol plant, identifying governmental bodies having
jurisdiction to approve different aspects of the project, verifying that
documents and services conform to applicable laws, making recommendations as the
design progresses, cooperating to achieve compliance with project and
construction budgets, and visiting the site and consulting as necessary with
respect to the readiness of certain items for substantial and final completion.
Our responsibilities under the Design Agreement would be similar to our
responsibilities under the Coordinator Agreement.
Under the Design Agreement, we anticipate that Gaylor Engineering will
provide customary architectural and civil, structural, mechanical and electrical
engineering services to be set forth in a construction management plan, and that
it will warrant that its design will be free from defects and that upon the
substantial completion of the plant, the ethanol plant will meet the following
specifications for three continuous days:
ETHANOL
Capacity: 30 million gallons of undenatured ethanol per
year, based on 330 operating days
Specifications: Denatured Ethyl Alcohol complying with an
agreed-upon ASTM standard
Steam Energy: 45,000 BTU's per gallon
Electrical Energy: 1.2 kwh per gallon
Yield: 2.65 gallons per bushel (56 pounds) #2 yellow
dent corn, 61% starch content as received
37
DISTILLERS WET GRAINS WITH
- --------------------------
SOLUBLES
- --------
Specifications: Commercially acceptable to the industry
Moisture: Maximum 72%
DISTILLERS DRY GRAINS WITH
- --------------------------
SOLUBLES
- --------
Specifications: 27-32% protein
Moisture: Maximum 12%
It is expected that Gaylor Engineering will carry adequate errors and omission
and liability insurance related to this process guarantee.
We expect that Gaylor Engineering would be paid its out-of-pocket expenses
and the maximum sum of $800,000 as compensation for its services under the
Design Agreement, which amount would be payable monthly on a time and expense
basis. Similar to the other agreements, Gaylor Engineering would be able to
suspend services after giving 7 days' written notice if it had not been timely
paid. If the scope or duration of Gaylor Engineering's services changes under
the Design Agreement, its compensation would also be equitably adjusted. At our
request, Gaylor Engineering may also perform additional services under the
Design Agreement, for which it shall be compensated in an amount and on terms
mutually agreeable by the parties.
OWNER AND CONTRACTOR AGREEMENT
We expect to enter into negotiations with several construction contractors,
including a business partner of the Gaylor Alliance, North Central Construction,
Inc., for the construction of our ethanol plant. We anticipate that any
construction contract we would negotiate would require the contractor to furnish
all labor, materials, tools, equipment, supervision and services necessary to
complete all work required for the construction of the plant. The contractor
would be responsible for the means, method, techniques and procedures of
construction and for verifying that all completed work complies with the
contract requirements.
We expect to make monthly payments on a progress billing basis, based upon
the contractor's monthly applications to Gaylor Engineering, and Gaylor's
recommendations for payment for work performed as of the application date.
Gaylor Engineering may refuse to recommend payment if, for example, any of the
work does not conform to the requirements or the progress of the work does not
comply with construction schedule. After all work has been completed, the
contractor would make application for final payment. If Gaylor Engineering is
satisfied that the work is completed, it would issue a Certificate of Final
Completion and a written recommendation for payment, and final payment would
then be due within 30 days.
We would be able to order changes to the work, subject to the review and
approval of Gaylor Engineering. The contractor would also be able to request a
change in the contract price or construction time by submitting written notice
to Gaylor Engineering within 15 days after the occurrence of the event giving
rise to the request. We would be able to order the contractor to halt
construction if the work is defective or if the contractor fails to supply
sufficiently skilled workers, suitable materials or equipment. If the contractor
fails to correct any defective work within a reasonable time after written
notice, or if the contractor fails to perform work or comply with any provision
of the contract documents, we could correct any deficiency ourselves and be
entitled to a corresponding decrease in the contract price.
We anticipate that the contractor will furnish performance, labor and
material payment bonds for 100% of the contract price, with sureties
satisfactory to us, and that the contractor will warrant that all work to be
performed will be in accordance with the Contractor Agreement and will not be
defective. Equipment warranties are expected to be as received from the
individual vendors. We anticipate that our principal lenders will have to
approve the work performed prior to the making of any progress payment. We
anticipate that the contractor will be solely responsible for the acts and
omissions of subcontractors and suppliers and for payments to subcontractors and
suppliers except as may be required by law.
If for any reason substantial completion is not accomplished by a yet to be
determined substantial completion date, the construction contract may provide
that an amount will be deducted from the contract price as liquidated
38
damages, for each day following the negotiated substantial completion date until
the plant is substantially complete. Likewise, if the work is substantially
complete prior to a yet to be determined earlier date, the construction contract
may provide that a bonus will be added to the contract price for each day prior
to the negotiated substantial completion date, up to a maximum specified bonus.
We expect that under each contract, the parties will agree to indemnify the
other, its employees, agents and representatives from any and all claims,
demands, suits, etc., for bodily injury or property damage caused by the acts or
omissions of the other party. We also expect that all disputes arising between
the parties will be subject first to mediation and then binding arbitration.
Arbitration would be subject to the Construction Industry Arbitration Rules of
the American Arbitration Association, and the prevailing party in any
arbitration proceeding would be entitled to recover reasonable attorneys' fees
and expenses. Unless otherwise agreed, the parties would continue to perform
their respective responsibilities under the Coordinator Agreement during any
such dispute.
Other, similar plants designed by Gaylor Engineering are among the most
efficient ethanol plants in the industry. Our plant will be designed and
constructed to provide us with flexibility for possible future expansion.
AVAILABILITY AND SOURCES OF RAW MATERIALS
The production of ethanol requires significant amounts of corn, water,
electricity and natural gas. We already have preliminary arrangements in place
which, if finalized as anticipated, would provide us with sufficient quantities
of each of these raw materials to operate our ethanol plant economically.
CORN
Our proposed plant will be located in Defiance County, Ohio, approximately 6
miles from the Indiana border and 28 miles from the Michigan border. According
to the United States Department of Agriculture, over 430 million bushels of corn
are produced annually in Ohio, most of which is produced in the western portion
of the state. According to the Ohio, Indiana and Michigan Agricultural
Statistics Services, in 1999 approximately 110 million bushels of corn was
produced within a 45-mile radius of Defiance County. We expect our ethanol plant
to process approximately 11.3 million bushels of corn annually. All of the corn
we purchase will be tested as it arrives, and must meet high quality control
standards to facilitate the efficient operation and quality products of our
plant. We will use the United States Department of Agriculture's grade
requirements for U.S. Number Two Corn.
We have no agreements, commitments or understandings with any corn producers
in the area. We expect to retain a grain originator to obtain the corn we need
to fuel our plant, and to provide risk management, cash management and other
comprehensive grain origination services. These services may include:
Grain Origination:
- Dedicated grain originator
- Flat price risk management
- Basis surveillance and risk management consultation
- Grain quality surveillance and risk management consultation
- Grain production surveillance and risk management consultation
- Telephonic sales and management
- Spot grain purchases
- Inbound corn scheduling, logistics and arbitrage management
- Contract administration services (legal, documentary, arbitration,
regulatory, position management and reporting)
- Forward contract services
- Integrated risk management education for producer accounts
- Precision originations and customer management
- Customer position reports
- Crop revenue profiler services
- Crop insurance services
- Settlement services
- Grain web services
- Originations policy management
39
- Inbound discount management consulting
- Grain dealer regulatory management
- Summary annual originations reporting
Grain accounting management
- Electronic ticket processing
- Data management and interface
- Daily truck report and grain position report
- Truck scale interface consulting
- Daily receipt processing and disbursements
- Grain payable and receivable management
- Contract management (customer reporting, confirmation, position
management)
- Management reporting
- Audit consultation service
Grain management consulting
- Grain quality management consulting
- Originations, trucklot, accounting and systems policy consulting
- Precision originations analysis and management
Finance and risk management
- Corn supply price management
- Corn supply hedge financing
- Daily cash receipt settlement
- Forward contract inventory management and funding
Transportation services
- Truck insurance compliance management
- Freight bill auditing
- Rail contract negotiation service
- Rail carrier management services
- Rail billing services
We expect corn producers in our trade area to respond positively to the
broad menu of crop marketing, information, delivery, flexibility and risk
management services which our grain originator is expected to provide. More
importantly, by purchasing our corn inventories in this fashion we expect:
reduced origination costs ( through purchases on a spot basis); increased
logistical flexibility; improved planning; greater quality revenue and
management; and improved space utilization. Improved use of the bunker may
provide us with the opportunity to generate additional revenues by storing corn
for others. To mitigate interest rate risk on the corn purchased for the high
moisture corn bunker, our grain originator is expected to provide financing
services to help smooth our cash flow throughout the production year.
We are currently negotiating for grain origination services with 2 firms:
The Andersons, a publicly-held grain marketing company with headquarters in
Maumee, Ohio, and FCStone LLC, which would be expected to originate our corn
inventories through a consortium of local grain elevators.
WATER
We have worked closely with our consultant, our anticipated design engineer,
contractors and government authorities to accurately assess water quality and
availability as part of the site selection process. While the daily volume of
water needed for cooling and processing at our proposed plant varies with the
weather, the water quality, final plant design, operational details and other
factors, it is anticipated that approximately 400,000-540,000 gallons of water
will be an adequate supply on most days. Our analysis suggests that on the
hottest and most humid days, approximately 700,000 gallons may be needed to
operate our plant.
We expect that water quality at the site will meet the needs of the facility
after reverse osmosis treatment, which removes iron and other particles which
are carried away in reject water. To satisfy our plant's water needs, we plan to
have 3 on-site wells, 2 of which are expected to be 8-inch wells located at
opposite corners of the site and drilled to around 750 feet deep, to reach an
aquifer which we believe does not provide a source of drinking water for anyone.
An 8-inch test well on the site, which we drilled as part of the site selection
process,
40
has produced at least 350 gallons per minute. This projects to around 500,000
gallons in 24 hours. Accordingly, 2 8-inch wells are expected to provide enough
water to operate our ethanol plant at maximum capacity on the hottest and most
humid days each year. If necessary, the plant can also tap into Gordon Creek,
approximately one mile south of the proposed site, from which water could be
pumped into a reservoir for storage and use by the plant. A third, low volume
drinking water well is also planned. The cost of the wells, water lines and
reservoir is estimated at $1,000,000, and an additional $500,000 is expected to
be used to construct an on-site wastewater treatment facility.
ELECTRICITY
Ethanol production is an energy intensive process using significant amounts
of electricity and natural gas. The proposed plant is expected to require a 3.6
megawatt electrical service load. We anticipate purchasing our electricity from
the Northwest Electric Cooperative (NEC). We have received a letter from NEC
expressing its interest in providing our electrical power requirements. The cost
of providing a 69kV transmission tap and line extension, a 69/12.47 kV
substation, the 69kV/277/480 volt pad mount transformers and associated metering
is expected to be approximately $1.3 million. Payment of this cost can be in the
form of a monthly facilities charge or an up-front contribution-in-aid to
construction. The monthly charge associated with amortizing this expense over 10
years is estimated to be $15,000, after which the charge would be eliminated.
Based on NEC's current power service rate and fuel costs, the average cost of
firm power is expected to be about $.041 per kWh. NEC has also indicated that it
would investigate the availability of transmission facilities in the area that
may reduce our anticipated transmission costs.
NATURAL GAS
A substantial amount of heat from natural gas is used in the ethanol
production process, and in drying distillers grains. To access sufficient
supplies of natural gas, approximately 5 miles of new distribution pipeline will
be required. We anticipate that Murphy Brothers Pipeline Company will build, own
and operate the necessary additional line at no cost to us, and that natural gas
will be procured from Columbia Gas on the open market, initially at a total
delivered rate of about $3.18 per MMBtu.
PRINCIPAL PRODUCTS AND THEIR MARKETS
The principal products we will produce at our ethanol plant are ethanol,
distillers grains and CO2. We already have preliminary arrangements in place
which would, if finalized as anticipated, provide for the sale of all of our
products at market prices for years to come.
ETHANOL
Ethanol is ethyl alcohol, a fuel component made primarily from corn or
various other grains, and can be used as:
- An octane enhancer in fuels;
- An oxygenated fuel additive that can reduce carbon monoxide vehicle
emissions; and
- A non-petroleum-based gasoline extender.
Most ethanol is used in its primary form for blending with unleaded gasoline and
other fuel products. The implementation of the Federal Clean Air Act has made
ethanol fuels an important domestic renewable fuel additive. Used as a fuel
oxygenate, ethanol provides a means to reduce carbon monoxide vehicle emissions.
The principal purchasers of ethanol are generally wholesale gasoline marketers
or blenders. We expect that the principal markets for our ethanol will be
petroleum terminals in the Ohio, Indiana and Michigan.
It is anticipated that our ethanol will be sold to a single customer, unless
we are not able to finalize an agreement on favorable terms. We are negotiating
with several different potential purchasers, including Williams Energy Services,
Inc., d/b/a Williams Bio-Energy (WES), the nation's second largest marketer of
ethanol. The proposed ethanol marketing agreement with WES contemplates that WES
will purchase all of our
41
ethanol for up to 10 years, and thereafter from year to year unless the
agreement is terminated by either party with at least one year's prior written
notice. The proposed agreement provides that payments to us may be based on the
actual market price WES receives for the sale of ethanol, minus all directly
attributable marketing costs and a small commission, or they may be based upon
an index price for unleaded gasoline on a traded market. Pricing our ethanol
based upon an index price for unleaded gasoline on a traded market facilitates
hedging against fluctuations in that price. The agreement contemplates that our
ethanol will meet WES' specifications and industry standards, and that our
ethanol plant will be able to store at least 8 days' production on-site.
We have also discussed the sale of our ethanol with 5 major petroleum
refiners and marketers. These potential purchasers would be willing to enter
into a contract for 6 months to 1 year, with the price being based upon the spot
market price for ethanol or indexed to the price of unleaded gasoline. We expect
ethanol to account for about 75-85% of our revenues.
DISTILLERS GRAINS
Processing corn into ethanol produces a unique, natural co-product known as
distillers grains, which are the remnants of the corn after the
ethanol-producing starch has been removed. Distillers grains are a high protein,
high-energy livestock supplement.
Corn is made up of starch, protein and a variety of other constituents.
Distillers grains have approximately 25% of the mass, but all of the original
protein, of the corn entering the plant. Watery material from other areas of the
plant, which contains corn dry matter, proteins, fiber, fats and oil, is
evaporated into a thick syrup called condensed distiller's soluble. The
condensed distiller's soluble is blended with the distillers grains in the dryer
to create the final feed product. In many applications, distillers grains have a
higher protein efficiency than the leading protein supplement, soybean meal.
Our ethanol processing creates two forms of distillers grains: Distillers
Wet Grains with Solubles (DWGS) and Distillers Dried Grains with Solubles
(DDGS). DWGS is processed corn mash that contains approximately 70% moisture. It
has a shelf life of approximately three days and can be sold only to farms
within the immediate vicinity of an ethanol plant. DDGS is corn mash that has
been dried to 10% moisture. It has an almost indefinite shelf life and may be
sold and shipped to any market regardless of its vicinity to an ethanol plant.
Our ethanol plant will be able to dry all the distillers grains we produce,
if necessary to optimally market our distillers grains. We expect to
continuously monitor and attempt to optimize the relative mix of wet and dry
grains we produce. We anticipate selling all of our distillers grains to a
single customer, unless we are not able to finalize an agreement on favorable
terms. We are negotiating with two different potential purchasers, Commodities
Specialists Company and Kalmbach Feeds, Inc.
Commodity Specialists, an international agri-business products trading
marketing company affiliated with the Pillsbury Company, has proposed to
purchase all of our distillers grains for an indefinite period of time, subject
to termination by either party on 120 days' notice. Payments to us would be
based on the actual market price Commodity Specialists receives, less expenses
and a small commission. Commodities Specialists would take delivery at our
plant, and we would be required to store at least 1,000 tons of distillers
grains on site. The agreement contemplates that our distillers grains will meet
Commodity Specialists' specifications and industry standards.
Kalmbach Feeds has expressed its interest in marketing all of our distillers
grains to area feedlots and dairies, and also in discussing the possibility of a
joint venture for the drying of the grains on site using a new technology that
could reduce operating costs.
Although distillers grains prices vary somewhat with the price of corn and
soybean meal, its high quality and consistent demand in the marketplace have
enabled it to enjoy a relatively stable average price per ton over the past
decade in major Midwest U.S. markets. Distillers grains are expected to account
for about 15-25% of our revenues.
42
CO2
A second co-product of the ethanol production process, carbon dioxide, or
CO2, has commercial value primarily in the production of dry ice. We expect that
our ethanol plant will produce about 93,000 tons of CO2 annually. We have a
letter of intent to negotiate and enter into a agreement with Airgas, Inc., the
largest U.S. distributor of industrial, medical and specialty gases, to sell
most of the CO2 we would produce. Airgas has proposed to construct, own and
operate a CO2 liquefaction plant located adjacent to our ethanol facility, and
purchase a minimum of 75% of our CO2, which constitutes substantially all of our
usable CO2, for an initial term of 15 years, continuing thereafter for two
subsequent 5-year periods unless terminated sooner at our option. Airgas will
have the right to terminate the agreement if we are unable to make 25,000 tons
of CO2 available during any consecutive 6 month period. The letter of intent
contemplates that Airgas will pay us a fixed price per year based on Airgas'
selling price per ton of liquid CO2, but in no event less than $6.00 per ton.
CO2 is expected to account for about 1% of our revenue.
COMPETITION
We expect to be in direct competition with other producers of ethanol,
distillers grains and CO2, many of whom have greater resources than we will
have. We also expect that additional producers will continue to enter the
markets for these products.
We expect to compete with other ethanol producers based on price. Our
ability to sell ethanol and distillers grains profitably depends upon:
- our expected relatively low operating cost structure;
- our grain originator's knowledge of local corn market conditions,
enabling the originator to identify and address factors influencing
marketing decisions;
- our proximity to adequate supplies of all our principal raw materials
and accessibility to major markets for our products; and
- our use of a comprehensive risk management policy to mitigate risks
related to fluctuations in the prices of corn, energy and ethanol.
ETHANOL PRODUCERS
The ethanol industry has grown to more than 55 production facilities in the
United States. Currently, more than 2.1 billion gallons of ethanol could be
produced domestically each year. The following table lists most of the major
ethanol producers in the United States.
U.S. PRODUCTION CAPACITY
MILLION GALLONS PER YEAR (MMGY)
COMPANY LOCATION FEED STOCK MMGY
- -------------------------------------------- ------------------ -------------------- ------
Adkins Energy Lena IL Corn 30
A.E. Staley Loudon TN Corn 45
AGP Hastings NE Corn 52
Agri-Energy, LLC Luverne MN Corn 17
Alchem Grafton ND Corn 10.5
Al-Corn Clean Fuel Claremont MN Corn 17
Archer Daniels Midland Decatur IL Corn 797
Peoria IL Corn
Cedar Rapids IA Corn
Clinton IA Corn
Wallhalla ND Corn/barley
BC International Jennings LA Bagasse/rice hulls 20
Broin Companies Scotland SD Corn 7
Cargill, Inc. Blair NE Corn 100
Eddyville IA Corn
43
Central Minnesota Little Falls MN Corn 18
Chief Ethanol Hastings NE Corn 62
Chippewa Valley Ethanol Co. Benson MN Corn 20
Corn Plus Winnebago MN Corn 20
DENCO, LLC Morris MN Corn 15
ESE Alcohol Leoti KS Seed corn 1.1
Ethanol2000, LLP Bingham Lake MN Corn 28
Exol, Inc. Albert Lea MN Corn 17
Georgia-Pacific Corp. Bellingham WA Paper waste 7
Golden Cheese Corona CA Cheese whey 5
Golden Triangle Energy Cooperative Craig MO Corn 15
Gopher State Ethanol St. Paul MN Corn 15
Grain Processing Corp. Muscatine IA Corn 10
Heartland Corn Products Winthrop MN Corn 35
Heartland Grain Fuels, LP Aberdeen SD Corn 8
Huron SD Corn 14
High Plains Corp. York NE Corn/milo 70
Colwich KS
Portales NM
J.R. Simplot Caldwell ID Potato waste 6
Burley ID
Kraft, Inc. Melrose MN Cheese whey 2.6
Lake Area Corn Processors Wentworth SD Corn 15
Manildra Ethanol Hamburg IA Corn/milo/wheat 7
starch
Merrick/Coors Golden CO Waste beer 1.5
Midwest Grain Pekin IL Corn/wheat starch 78
Atchison KS
Minnesota Corn Processors Columbus NE Corn 110
Marshall MN Corn
Minnesota Energy Buffalo Lake MN Corn 12
Nebraska Energy Aurora NE Corn 30
New Energy Corp. South Bend IN Corn 85
Northeast MO Grain Processors Macon MO Corn 15
Pabst Brewing Olympia WA Brewery waste 0.7
Parallel Products Louisville KY Beverage waste 12
Bartow FL
R. Cucamonga CA
Permeate Refining Hopkinton IA Sugars & Starches 1.5
Plover Ethanol Plover WI Seed corn 4
Pro-Corn Preston MN Corn 18
Reeve Agri-Energy Garden City KS Corn/milo 10
Spring Green Ethanol Spring Green WI Cheese whey .7
Sunrise Energy Blairstown IA Corn 7
Sutherland Associates Sutherland NE Corn 15
Tri County Corn Processors Rosholt SD Corn 15
Williams Bio-Energy Pekin IL Corn 100
Wyoming Ethanol Torrington WY Corn 5
--------
TOTAL CAPACITY 2,006.60
========
- --------------------
Source: BBI International, January 2001.
In addition, plans to construct new plants or to expand existing plants have
been announced which would increase the ethanol production capacity of our
competitors. We are unable to determine the number and production capacity of
plants that ultimately may be constructed, the timing of such construction or
the effect of resulting production upon the demand or price for our ethanol.
ALTERNATIVE FUEL ADDITIVES
We also expect to compete with producers of MTBE, a petrochemical derived
from methanol which costs less to produce than ethanol. MTBE is a common
oxygenate used in fuels for compliance with Federal Clean Air Act mandates. Many
major oil companies produce MTBE, and strongly support its use because it is
petroleum based. These companies have significant resources to market MTBE and
to influence legislation and public perception of MTBE. These companies also
have sufficient resources to begin production of ethanol should they choose to
do so.
44
Alternative fuels, gasoline oxygenates and ethanol production methods are
continually under development by ethanol and oil companies with far greater
resources than we have. New products or methods of ethanol production developed
by larger and better financed competitors could provide them with competitive
advantages over us and harm our business.
ENVIRONMENTAL REGULATION
Our operations will be subject to federal, state and local environmental
laws and regulations, including those governing discharges into the air and
water and the generation, handling, storage, transportation, treatment and
disposal of solid and hazardous waste materials. We expect to comply in all
material respects with applicable environmental and health and safety laws and
regulations. We also expect to incur operating costs in the future in order to
comply with existing or new environmental and health and safety requirements in
the future. The amount of any such compliance costs could be significant.
Gaylor Engineering is expected to be responsible for obtaining all necessary
environmental permits and advising us on environmental and other regulatory
compliance issues. Soil erosion, siltation and dust control measures to be used
during construction include phased construction, silt fences, settling ponds,
seeding and mulching. Hazardous wastes to be generated by the plant's operations
are expected to be limited to solvents used for part washing, which would be
stored in steel barrels for transport to a commercial recycler. Waste
lubricating oils from the plant would also be recycled through a commercial
recycler. We expect to be classified as a "small quantity generator" under the
federal Resource Conservation and Recovery Act. Measures which will be taken to
avoid or mitigate any adverse environmental impacts include, but are not limited
to:
- Zero process wastewater discharge design;
- Air pollution control devices for stack monitoring as required by
state and federal regulations;
- Storm water retention pond; and
- Secondary containment dike and liner under and around ethanol and
denaturant storage tanks.
We expect to be required to obtain the following environmental, health and
safety and other permits, and to obtain such permits on a timely basis without
the imposition of significant unanticipated conditions.
The application for an air emissions permit was submitted in October, 2001,
to the Ohio Environmental Protection Agency. The air emission data for this
project is consistent with the guidelines set forth by the federal Environmental
Protection Agency for a project this size. Based upon the advice of our
consultant and Gaylor Engineering and discussions with the Ohio Environmental
Protection Agency, we expect to receive state air permits for the installation
and operation of our ethanol plant on a timely basis.
NATIONAL POLLUTANT DISCHARGE ELIMINATION PERMITS
We must obtain National Pollutant Discharge Elimination Permits for any
wastewater discharges and surface water runoff. Specifically, we will use a
significant amount of water per day to cool our closed circuit systems in the
proposed ethanol plant and to produce ethanol. Our plant will be designed to
reuse all process-related wastewater, so there will be no discharge of that
water, but we expect to discharge about 10,000 gallons per day of wash down
water into a detention basin, and then into a nearby creek. The discharge of
wash down water from this detention basin will require a site specific NPDES
Permit. In addition, less than 1,000 gallons of sanitary wastewater from sinks
and restrooms will be sent to an on-site septic wastewater system which will
require an installation permit from the Ohio EPA. The NPDES Permit applications
will be filed with the Ohio EPA at least 180 days prior to any discharge. We
have not applied for this permit, but plan to do so before we begin
construction.
STORM WATER DISCHARGE PERMITS FOR CONSTRUCTION AND INDUSTRIAL ACTIVITIES
We must obtain coverage under the State of Ohio's General Permit for the
discharge of storm water during construction activities. In addition, we may
have to obtain coverage under the State of Ohio's General Permit for the
discharge of storm water during industrial activities, if storm water from our
site is not directed to and discharged from the detention basin, or is not
otherwise covered under our site-specific NPDES Permit.
45
WELL OPERATION
The water well logs for all 3 wells may be required to be reported to
the Ohio Department of Natural Resources, but will not require a permit.
ABOVE GROUND LIQUID STORAGE TANK PERMIT
We must obtain a permit from the State Fire Marshal for the installation
and use of above ground storage tanks for the storage of flammable or
combustible liquids.
SPILL PREVENTION, CONTROL AND COUNTERMEASURES PLAN
Before we can begin operations, we must prepare a spill prevention, control
and countermeasures plan in accordance with standards set by the Environmental
Protection Agency. The plan will outline our spill prevention measures, and will
be supervised and enforced by the EPA. The plan must be reviewed and certified
by a professional engineer, completed before the commencement of operations, and
updated every three years.
RISK MANAGEMENT PROGRAM
We are currently in the process of determining whether anhydrous ammonia or
aqua ammonia will be used in our production process. If we use anhydrous
ammonia, we will need to develop a risk management program to address handling
and use of the ammonia and gases emitted from such use. We must establish a
prevention program to prevent spills or leaks of ammonia, and an emergency
response program in the event of spills, leaks, explosions or other events that
may lead to the release of ammonia into the surrounding area. We will need to
conduct a hazard assessment and prepare models to assess the impact of an
ammonia release into the surrounding area. The program must be presented at one
or more public meetings. However, if we use aqua ammonia, no risk management
program is needed.
BUREAU OF ALCOHOL, TOBACCO AND FIREARMS PERMIT
Before we can begin operations, we will have to comply with applicable
Bureau of Alcohol, Tobacco and Firearms regulations. These regulations require
that we first make application for and obtain an alcohol fuel producer's permit,
which will also require that we maintain certain security measures, secure an
operations bond and pay a special occupational tax and a special tax stamp.
AGRICULTURAL COMMODITY HANDLING LICENSE
We expect to apply for and receive an agricultural commodity handling
license from the Ohio Department of Agriculture prior to commencement of
operations. As an agricultural commodity handler, we will be required to satisfy
specified standards of financial responsibility, insurance, recordkeeping and
other applicable requirements.
ARCHAEOLOGICAL SURVEY
We anticipate conducting a Phase I archaeological survey of the project area
for submission to the Ohio Historic Preservation Office. The purpose of this
survey is to confirm that our project will not interfere with any sites that
would otherwise be eligible for the National Register of Historic Places. The
survey will focus on the retention pond and detention basin sites to be
excavated. There are no known sites listed in the Ohio Archaeological Inventory
within our project area.
NUISANCE
We could also be subject to environmental or nuisance claims from adjacent
property owners or residents in the area arising from odors or other air or
water discharges from the plant. We are not aware of neighborhood opposition to
our facility. However, if any such opposition should materialize, it could
result in claims for nuisance which could lead to increased compliance costs and
monetary damages.
46
EMPLOYEES
As of September 30, 2001, we have no employees except a part time Project
Coordinator. By completion of the ethanol plant, we expect to have retained
approximately 30 employees, including 26 in ethanol production operations and 4
in general management and administration. We will not maintain a sales and
marketing force.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
DESCRIPTION OF PROPERTY
[SITE MAP]
We have options to purchase 2 adjacent parcels totaling approximately 207
acres which together constitute the preferred site for our ethanol plant. One of
these parcels is owned by 5C's Farms, Inc., William A. Cleland, Sr. and Doris I.
Cleland, the father and mother of William A. Cleland, Jr., our President and a
director. Mr. Cleland, Jr. did not participate in the disinterested directors'
unanimous approval of the parcel as part of the proposed site for our plant. The
directors considered a total of 11 possible sites in northwest Ohio. Of those, 2
were not for sale, 6 were too expensive and 2 were ultimately eliminated based
on considerations relating to the relative availability and cost of obtaining
sufficient water, natural gas, electricity, rail transportation and proximity to
residential areas.
In consideration for each option, we paid an option fee of $500. Each option
may be exercised by us on or before March 31, 2002, and can be extended upon the
payment of an additional option fee of $500 until September 30, 2002. If we
exercise either option, the option fee and, if applicable, the additional option
fee, will be applied to the purchase price. The purchase price of each property
will be the product of the net acreage of the property purchased, multiplied by
$3,000 per acre, a price which was negotiated at arms' length. In each case, a
real estate purchase agreement would be negotiated, pursuant to which the
premises would be conveyed to us by a general warranty deed, free and clear of
all liens and encumbrances. The owner would supply us with an ALTA owner's
policy of title insurance and an ALTA/ACSM survey containing a calculation of
the total acreage of the premises. The transaction would close on a date chosen
by us following the exercise of the options. In the case of the Cleland option
the owner would be required, at its own expense, to secure any lot splits
necessary if we elect to purchase less than all of the available acreage. The
definitive purchase agreement to be negotiated under the terms of the other
option, would permit the owners to reside on the premises for their natural
lives without any obligation to pay rent. This right could not be transferred
though lease, gift or otherwise. Each option is freely assignable by us.
We do not require all 207 acres to build and operate our ethanol plant. The
additional land, approximately 140-150 acres, is expected to be acquired:
- as a buffer zone to minimize the plant's effects upon its neighbors,
and to facilitate rezoning; and
- to assure sufficient land for the future expansion of our plant
without the need to pay a higher price per acre.
Until it is needed for expansion or another purpose, we expect to either rent it
to or farm on shares with a local farmer.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and officers include local business and community leaders
whose qualifications and recent business experience are summarized below.
PRESIDENT AND DIRECTOR. William A. Cleland Jr., co-owner and Vice President of
5 C's Farms, Inc., operates a 4,000 head capacity cattle farm and a 1,400 acre
corn, soybean and wheat farming operation. He serves on the boards of various
community organizations and is an active member of the Central Mennonite Church
in Fort Wayne, Indiana. He is 49 years old.
47
VICE PRESIDENT AND DIRECTOR. Eugene Schubert, age 54, has been the owner and
manager of Schubert and Associates in Ney, Ohio, for about 4 years. Schubert
and Associates specializes in plastics injection molding, tool building and
custom finishing of plastics and metal. Prior to that, for 23 years he has held
various positions at Clarion Technologies, including Quality Control Manager,
Vice President of Sales and Marketing and Business Unit Manager. Gene served in
the Army from 1967 to 1969, including a year in Viet Nam as an infantry machine
gunner and squad leader. He was awarded the Purple Heart, the Combat Infantry
Badge and two Bronze Star medals, along with a host of other U.S. and South
Vietnamese decorations. Gene attended Defiance College and was awarded the
Outstanding Alumnus Award at Northwest State College. He is a member of Trinity
Lutheran Church and serves on the church board as an usher, choir member and
Sunday School Teacher. Gene Schubert and Fred Schubert are brothers.
SECRETARY/TREASURER. Ted Penner, age 37, is an area attorney and certified
public accountant. Mr. Penner also serves as our legal counsel. He was a staff
accountant for Steyer, Huber and Associates, a tax associate with Coopers and
Lybrand and has practiced law with a concentration in the areas of tax, estate
planning, probate, business formation and consulting since 1995. Ted is a
trustee for Noble Township in Defiance County and Solicitor for the Village of
Sherwood. In 1997, he served on the Noble Township Zoning Commission.
DIRECTOR. Lynn Bergman, age 53, from the Sherwood, Ohio area, has been a member
of the board and President of Ney Oil Company, for 8 years. Ney Oil operates
bulk plants in Sherwood and Edgerton that service area farms and businesses as
well as thirty-nine retail locations throughout northwest Ohio and northeast
Indiana. Lynn was a member of the Directors of the Sherwood Mutual Telephone
Association, Inc. for many years, serving as its President for eight years. He
currently serves on the Directors of the Sherwood State Bank and is Vice
President of the Defiance County Regional Airport Authority. He is actively
involved in music and is Choir Director at the Sherwood United Methodist Church
and Secretary of the Defiance Chapter of S.P.E.B.S.Q.S.A., the Northwesternaires
Barbershop Chorus.
DIRECTOR. Fred Schubert, age 49, lives in Sherwood, Ohio, and has been Sales
Manager of Al-Co Products in Latty, Ohio, for more than 16 years. He became a
co-owner in July 1994. He has served on the boards of various community
organizations and is an active member of the Sherwood United Methodist Church.
He is Gene Schubert's brother.
DIRECTOR. James Joost, age 47, lives near Sherwood, Ohio and has been co-owner
and Business Coordinator of Spatial Ag Systems, LLC, in Sherwood, Ohio, for 1
year. He was the sole owner of one of its predecessors, Joost Farms, for 28
years. He has served on the boards of various community organizations and is a
member of St. John's Lutheran Church of Sherwood.
DIRECTOR. Virgil Hoene, age 58, of Sherwood, Ohio, has been a director and Vice
President of Archbold Equipment, Inc., and has managed its location in Sherwood,
for over 10 years. He is a member of the Sherwood Mutual Telephone Company
directors and the Antwerp Equity directors. He is also a member of the St.
Stephens Catholic Church, and a part time farmer of 488 acres, raising corn and
soybeans.
DIRECTOR. Gary Mavis, age 51, lives in Farmer Township, Defiance County, and has
operated a full time grain farm with 1,350 acres for over 30 years. Gary is
serving on his sixth 3-year term as a supervisor with the Defiance Soil and
Water Conservation District Board.
Directors are elected by plurality vote of the members and each director
will serve for a period of 3 years. Each director holds office until the next
annual members' meeting following the fiscal year in which his term expires and
until his successor is elected, or until his earlier resignation, removal or
death. The existing directors have been classified in 3 classes according to the
expiration of their initial term. The initial term of the first class of
directors will extend until the annual member meeting held in 2003. The term of
the second class of directors will extend until the annual member meeting to be
held during 2004, and the term of the third class of directors will extend until
the annual member meeting to be held during 2005. Lynn Bergman, Gary Mavis and
Fred Schubert's terms expire at the annual member meeting to be held in 2003.
William A. Cleland, Jr. and Eugene Schubert's terms expire at the annual meeting
to be held in 2004. Virgil Hoene and James Joost's terms expire at the annual
meeting to be held in 2005.
48
COMMITTEES OF THE DIRECTORS
We have not established an audit, nominating or compensation committee.
Currently, these functions are fulfilled by the directors. Our operating
agreement permits the directors to establish an executive committee having the
authority of the directors, as well as other committees.
EXECUTIVE COMPENSATION
The following summarizes all compensation awarded to, earned by or paid to
our directors and officers for all services rendered in all capacities to us.
In April 2001, we issued 8 units each, as adjusted to reflect the November
2001 4-to-1 unit split, to 4 directors and 3 affiliates of the other 3 directors
for their services as directors. Ted Penner was compensated with 4 units
(post-split) for his attendance at board meetings, and otherwise is paid his
standard hourly rate for services he provides to us. Mr. Penner has agreed to
defer a portion of his fees until the closing of this offering. If this offering
does not close, deferred amounts will be forfeited. Each of the units issued to
the directors and to Mr. Penner were valued at $250.
Effective October 1, 2001, we compensate Ney Oil Company for the services of
Lynn Bergman as Project Coordinator, at the rate of $1,250 per week, which
amount is being deferred until the closing of this offering. If this offering
does not close, deferred amounts will be forfeited by Ney Oil, of which Mr.
Bergman is President and a director.
We reimburse our directors and officers for out-of-pocket expenses incurred
in connection with their services to us. We have no employee benefit
plan-related compensation in place and no such compensation is presently
contemplated until our ethanol plant nears operational status. At that time, we
intend to hire employees who will be compensated on a regular basis pursuant to
agreed-upon salaries. We expect to offer typical health and other employee
benefits to our employees. We have not and do not expect to establish any option
or other equity or non-equity incentive plans for directors, officers or
employees. A fee for attending director and committee meetings may be
established by our directors following completion of this offering.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since our inception, we have engaged in several transactions with related
parties. In addition to the compensation arrangements disclosed under "Executive
Compensation," we have entered into or expect to enter into the following
transactions with our directors and officers and their affiliates:
- we were capitalized with cash investments from our founders, each of
whom contributed $250 per unit and some of whom more recently
contributed $1,250 per unit, after giving effect to the 4-to-1 unit
split;
- we pay Spatial Ag Systems, LLC, one of our founding members and a
company whose co-owner and Business Coordinator is James Joost, one of
our directors, $19 per hour for secretarial and office support;
- Ted Penner, our Secretary/Treasurer, is a member of the Board of
Trustees of the Defiance County Community Improvement Corporation,
which administers the Business Development Fund from which we obtained
a $30,000 loan (Mr. Penner took no part in the Board of Trustees'
consideration of our loan application); and
- we expect to purchase a portion of the preferred site for our ethanol
plant from the parents of Bill Cleland, Jr., our President and a
director, and from 5C's Farms, Inc., their farming company and one of
our founding members.
In addition, many of our directors and officers are affiliated with other
businesses which may seek to do business with us. For example, we may buy or
lease some or all of our equipment, parts and supplies from Archbold Equipment,
Inc., of which Mr. Virgil Hoene, one of our directors, is Vice President. We may
also buy some or all of the petroleum products we need to operate from Ney Oil
Company, one of our members, of which Mr. Lynn Bergman, one of our directors and
our Project Coordinator, is President. Ney Oil and 5C's Farms, Inc., the farming
business of the family of our President and Chairman, William A. Cleland, Jr.,
may provide us with trucking services. Many of our directors and officers and
their families or affiliated businesses are farmers
49
who may sell corn or buy distillers grains from us. Our operating agreement
requires that any such affiliated transactions will be on terms no less
favorable to us than would be available in unaffiliated third party
transactions.
UNIT OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the beneficial
ownership of our units as of November 30, 2001, for: (1) each person who owns
beneficially more than 5% of our units prior to this offering, (2) each of our
directors, (3) each of our executive officers and (4) all directors and
executive officers as a group. The address of each director and officer is c/o
Northwest Ethanol, LLC, P.O. Box 4505, Sherwood, Ohio 43556-0505. The table is
based on the assumption that none of our directors or executive officers
purchase units in this offering.
PERCENTAGE OF UNITS BENEFICIALLY OWNED
--------------------------------------
AFTER OFFERING
----------------------
NUMBER OF UNITS
BENEFICIALLY BEFORE
NAME OWNED OFFERING MINIMUM MAXIMUM
- --------------------------------- --------------- -------- ------- -------
William A. Cleland, Jr.(1) 56 5.11 1.60 1.02
Lynn Bergman(2) 40 3.63 1.14 *
Fred Schubert 24 2.19 * *
James Joost(3) 120 10.95 3.43 2.18
Eugene Schubert 40 3.65 1.14 *
Virgil Hoene 116 10.58 3.32 2.11
Gary Mavis 44 4.01 1.26 *
Ted Penner 68 6.20 1.95 1.24
All directors and
executive officers as
a group 508 46.34 14.53 9.25
Nester Ag Management 56 5.11 1.60 1.02
Clint Zeedyk 68 6.20 1.95 1.24
*Less than 1%
- ------------------
(1) Mr. Cleland may be attributed with beneficial ownership of the units owned
by 5C's Farms, Inc.
(2) Mr. Bergman may be attributed with beneficial ownership of the units owned
by Ney Oil Company.
(3) Mr. Joost may be attributed with beneficial ownership of the units owned by
Spatial Ag Systems, LLC.
We have no outstanding options or warrants to purchase units or securities
convertible into units except as otherwise disclosed in this prospectus. At
November 30, 2001, we had 27 record holders of units.
Investors that may be deemed to be the beneficial owners of 5% or more and
10% or more of our issued and outstanding units, respectively, may have
reporting obligations under Section 13 and Section 16 of the Securities Exchange
Act. Each investor who may become the beneficial owner of 5% or more of our
units should consult his or her own counsel to determine what filing and
reporting obligations he or she may have under the federal securities.
50
DESCRIPTION OF THE UNITS AND OUR AMENDED AND RESTATED OPERATING AGREEMENT
The following is a summary of the units and our amended and restated operating
agreement. This summary does not purport to be complete, and you should
carefully read our operating agreement, which accompanies this prospectus
as Appendix A, before deciding whether to invest.
THE UNITS
We are authorized to issue up to an aggregate of 8,000 units without the
approval of the members. All units, when issued and fully paid, will be
nonassessable. Unit holders have no preemptive or other rights to subscribe for
additional units. Our units represent an ownership interest in us. Upon
subscribing to purchase units, you must execute the counterpart signature page
of our operating agreement provided with the Execution Package accompanying this
prospectus.
ORGANIZATION AND DURATION
We were organized on February 8, 2001 as an Ohio limited liability company.
We will continue to operate unless earlier dissolved and terminated pursuant to
state law or the provisions of our operating agreement.
PURPOSE
Our purposes are to construct, own and operate an ethanol plant, and engage
in the processing of corn into ethanol and related co-products and the sale of
these products. In addition, we may engage in any and all lawful activities
approved by our directors, provided that such activities are permitted under the
laws of the State of Ohio.
TITLE TO PROPERTY
All of our property is owned and titled in the name of the company, and no
member has any ownership interest in our property.
CAPITAL ACCOUNTS AND CONTRIBUTIONS
The purchase price you pay for our units is a capital contribution, which we
will credit to your capital account. You are not required to purchase any
additional units or make additional contributions to us. We will increase your
capital account according to your allocable share of our profits and other
applicable items of income or gain. We will decrease your capital account for
your allocable share of our losses and other applicable items of expenses or
losses. We will also decrease your capital account for the value of any property
we distribute to you. The provisions regarding the maintenance of your capital
accounts contained in the operating agreement are intended to, and should be
interpreted to, comply with the relevant provisions of the Internal Revenue Code
and the regulations promulgated under the Code. Interest will not accrue on your
capital contributions or account, and you have no right to withdraw or demand
payment for capital contributions you make to us. Unless otherwise approved by
our directors, the maximum number of units that you, together with your
affiliates, may purchase in this offering is 300 units. In the event we require
additional capital, our directors may sell additional units up to the aggregate
8,000 unit ceiling without member approval, and may also obtain loans, including
loans from members on agreed-upon terms.
ALLOCATIONS OF PROFITS AND LOSSES
Profits and losses will be allocated to you in proportion to the number of
units you own as compared to the total number of units owned by all the members.
Profits and losses relating to units held for a portion of a fiscal year will be
allocated based on the number of days each unit was held by a member during the
fiscal year for which the profits and losses are being calculated. If we suffer
losses as a result of which your capital account has a negative balance, the
losses will be carried as a charge against your capital account and subsequent
profits will be applied to restore the deficit in your capital account. From
time to time, we may be required to withhold
51
amounts that are distributed or allocated to you pursuant to the Internal
Revenue Code or any state, local or foreign tax law and pay over to any federal,
state, local or foreign government such withheld amount.
BOOKS AND RECORDS
Our books and records are available for your review upon written request to
our secretary setting forth the purpose for your inspection, which must be
reasonably related to your unit ownership, and the documents to be reviewed.
MEMBERS' MEETINGS
The date of our annual members' meeting will be fixed by our directors to be
within 2 months before or 5 months after the close of our fiscal year. Special
member meetings may be called upon the written request of the chairman of our
board, our president, a majority of the directors, or by unit holders holding
more than 67% of the issued and outstanding units. The directors may establish a
record date for determining members entitled to receive notice of and to vote at
any meeting, receive any distribution or for other purposes. Any such record
date may not be more than 60 days prior to the meeting, distribution or other
matter. If no record date is established by the directors, the record date for a
member meeting shall be the close of business on the date next preceding the
date on which notice is given of such meeting. Written notice of every annual or
special meeting stating the time, location and purpose for the meeting will be
deemed to have been given when mailed to each member's current address on our
records. You may elect to waive such notice in writing either before or after a
meeting. If no record date is established by the directors, the record date for
the determination of members entitled to receive a distribution or other matters
shall be the close of business on the date next preceding the day on which the
distribution is made or action taken on the other matters.
Member meetings will be held at our principal office unless the directors
chose another location. Members holding a majority of the voting power must be
present in person or by proxy at a members' meeting to constitute a quorum. Each
member is entitled to cast one vote for each unit owned on each proposal
submitted to a meeting. At any meeting in which a quorum is present, except as
otherwise expressly provided in our operating agreement, all proposals shall be
determined by the affirmative vote of members holding in the aggregate more than
50% of the outstanding units. Any action which may be taken at a meeting of
members may be taken without a meeting if approved by the written consent of
members holding enough units to approve the same action at a meeting of members.
Any member entitled to vote at a member meeting or to execute consents, waivers
and releases may appoint another person to act as his proxy by a writing signed
by such member. Any such proxy may be revoked by a written revocation or later
dated proxy received by our secretary prior to the meeting to which the proxy
relates, or by appearing at the meeting and voting in person. The directors may,
of their own accord or at the request of the chairman of the board or any member
or his proxy, appoint 1 or 3 inspectors of election, who shall not be nominees
for director. The inspector or inspectors of election by majority vote will
determine all matters relevant to voting at the meeting, and shall perform their
duties impartially, in good faith and to the best of their abilities.
A member, as such, is not required to devote any time to our management or
operations and is free to engage in other activities. Except for directors and
officers, no member has the authority to make any contracts, enter into any
transactions or make any commitments on our behalf. Similarly, we cannot make
any contracts, enter into any transactions or make any commitments on your
behalf.
MANAGEMENT
Our business and affairs are managed by our directors. The number of
directors, currently 7, may be changed by majority vote of all directors,
provided that at all times, there are at least 7 but no more than 9 directors.
Nominees for director shall be named by the then current directors or by a
nominating committee established by the directors. You may submit nominations to
the directors or nominating committee provided that you give written notice to
our secretary of your intention to make a nomination at least 60 days prior to
the date which is exactly 1 year after the date of the prior year's annual
member meeting. Such notice to the secretary shall set forth: the name and
address of record of the member who intends to make the nomination; the name,
age, business and residence address, and principal occupation or employment of
each nominee; such other information regarding each nominee proposed by such
member as would be required to be included in a proxy statement filed pursuant
to the proxy rules of the SEC; and the consent of each nominee to serve as a
director if so elected. A director need not be a member.
52
Directors are elected by plurality vote of the members and each director
will serve for a period of 3 years. Each director holds office until the next
annual members' meeting following the fiscal year in which his term expires and
until his successor is elected, or until his earlier resignation, removal or
death. The existing directors have been classified in 3 classes according to the
expiration of their initial term. The initial term of the first class of
directors will extend until the annual member meeting held in 2003. The term of
the second class of directors will extend until the annual member meeting held
during 2004, and the term of the third class of directors will extend until the
annual member meeting held during 2005.
A director may resign at any time. The members acting at a duly noticed
meeting, by the affirmative vote of members holding in the aggregate more than
50% of the outstanding units, may remove a director for cause, provided,
however, that a director may not be removed until the director has received
written notice of the alleged grounds for removal and has been given an
opportunity to be heard as to those grounds at the meeting of members called for
the purpose of removing a director for cause. By "cause", we mean fraud, gross
negligence, intentional misconduct or act outside the scope of duties and
obligations of any director pursuant to our operating agreement that has a
material adverse effect on us. Whenever a vacancy occurs other than from
expiration of a term of office, a majority of the remaining directors may
appoint a new director to fill the vacancy for the remainder of the term.
A regular meeting of the directors is held immediately following the
members' annual meeting. Other regular directors' meetings are held at such
times and places as the directors decide. Special meetings of the directors may
be held at any time upon request by the chairman of the board, the president,
any vice president or any two directors. The chairman of the board, or another
director designated by the directors in the chairman's absence, presides over
the directors' meetings. Notice of the time and place of any regular or special
meeting shall be given to each director at least 48 hours before the meeting. A
director may waive notice in writing before or after any meeting. No fewer than
a majority of the authorized number of directors must be present at a directors'
meeting to constitute a quorum, except that a majority of the directors
remaining in office constitute a quorum for filling a vacancy. If a quorum is
present, all business is decided by a majority of the directors present at the
meeting. Any action which may be taken at a directors' meeting may be taken
without a meeting if approved by the written consent of directors sufficient to
authorize the action at a meeting of directors.
Our directors may appoint committees consisting of not less than 3
directors, and may delegate to a committee any of the directors' powers and
duties, to be exercised subject to the control of the directors. In particular,
the directors may create and define the powers and duties of an executive
committee. During intervals between directors' meetings, the executive committee
will have the same authority as the directors in our management and control, and
all action taken by the executive committee will be reported to the directors at
the next directors' meeting. Any committee may prescribe its own rules for
calling meetings and its own procedure, subject to any rules prescribed by the
directors, and shall keep a written record of all its actions. Unless otherwise
provided by the directors, a majority of the members of any committee
constitutes a quorum at any meeting of the committee, and the act of a majority
of the members present at a meeting at which a quorum is present is the act of
the committee. Action may be taken by any committee without a meeting by a
writing signed by all of its members.
The directors also elect a president, a secretary and a treasurer, and
may elect a chairman of the board, one or more vice presidents and such other
officers as the directors deem necessary. Officers are elected annually by the
directors and may be removed with or without cause by the directors. An officer
may hold two or more positions, except that no officer will execute, acknowledge
or verify any instrument in more than one capacity. The directors shall also
make an annual written report of our activities for the previous fiscal year,
which shall be kept on file in our office and issued annually to you. The
directors also have the authority to engage in all acts and transactions
permitted by law that are necessary, convenient or incidental to accomplishing
or furthering our purposes, including among others:
- Acquiring any real or personal property by purchase, lease or
otherwise;
- Operating, maintaining, financing, improving, constructing,
owning, selling, conveying, assigning, mortgaging and leasing any
real estate and any personal property;
- Executing any and all agreements, contracts, documents,
certifications and instruments;
- Borrowing money and issuing evidences of indebtedness, including
by mortgage, pledge or other lien on any of our assets;
53
- Executing any deed, lease, mortgage, deed of trust, mortgage note,
promissory note, bill of sale, contract or other instrument
conveying or encumbering our assets;
- Prepaying in whole or in part, refinancing, increasing, modifying,
extending or renewing any liabilities or encumbrances affecting
our assets;
- Making distributions to members by way of distributions, return of
capital or otherwise;
- Contracting for employees, consultants or independent contractors,
and delegating any authority necessary to further our purposes;
- Instituting, prosecuting, defending, settling and dismissing
lawsuits or other judicial or administrative proceedings brought
on our behalf or against us;
- Acquiring, owning, voting, using or disposing of and otherwise
using and dealing in and with shares or other interests or
obligations of domestic or foreign entities or individuals or
direct or indirect obligations of the United States or of any
government;
- Issuing units to any person for capital contributions made to us;
- Establishing the amount of any salary or other compensation paid
to any director or officer; and
- Indemnifying and holding harmless any current or former member,
director or officer, and making any other indemnification
permitted by law or the operating agreement.
Without the unanimous consent of all of our members, our directors cannot:
- Engage in any activity that is inconsistent with our purposes;
- Knowingly do any act in contravention of our operating agreement
or which would make it impossible to carry on our ordinary
business; or
- Possess or assign rights in any of our property other than to
advance our purposes
Without the affirmative vote of members holding in the aggregate more than
50% of the outstanding units, our directors cannot:
- Merge, consolidate, exchange or otherwise dispose of at one time
all or substantially all of our property except in connection for
a liquidating sale of our property in connection with our
dissolution;
- Cause us to voluntarily take any action that would cause our
bankruptcy;
- Dispose of our goodwill;
- Issue more than an aggregate of 8,000 units; or
- Cause us to acquire any equity or debt securities of any director
or any affiliate of a director or otherwise make loans to any
director or affiliate of a director.
Under our operating agreement we may transact business with our members or
their affiliates on terms and conditions no less favorable to us then those
which could have been obtained from an unaffiliated third party.
TRANSFER OF UNITS
Transfer of your units will be restricted. You may not transfer any of your
units except in a "permitted transfer", which is a transfer:
- to your administrator or trustee, if the transfer was done
involuntarily by operation of law;
54
- to a transferee in which the basis of the units is determined in
whole or in part by reference to its basis in your possession or
is determined under Section 732 of the Code;
- to a family member as defined in Section 267(c)(4) of the Code;
- to your executor or trustee to whom your units are transferred in
the event of death;
- to any other member or affiliate of another member; or
- your affiliate.
By "affiliate", for all purposes under our operating agreement, we mean any
person or entity who (i) directly or indirectly controls, is controlled by or is
under common control with a member; (ii) is any officer, director, employee,
trustee, partner or member of a member, or of which a member is an officer,
director, employee, trustee, partner or member; (iii) directly or indirectly is
the beneficial owner of 10% or more of any class of securities or partnership or
limited liability company interests, or has a substantial beneficial interest in
a member, or of which a member directly or indirectly is the beneficial owner of
10% or more of any class of securities or partnership or limited liability
company interests, or in which a member has a substantial beneficial interest;
and (iv) the spouse, lineal descendents, ancestors and siblings of a member or
the member's spouse.
A transfer will not be treated as a "permitted transfer" until our directors
have approved it and, except in the case of transfer by operation of law, the
appropriate documents and instruments of conveyance have been executed and
delivered and the transferee has furnished his taxpayer identification number
and any other information necessary to permit us to file all required federal
and state tax returns. In addition, no transfer may be made if, in the
directors' opinion, the transfer would cause the company to be treated as a
"publicly traded partnership" within the meaning of the Code and the Treasury
Regulations and no member may sell all or any portion of his units after an
event has occurred which will cause the termination of the company under the
Code. Except in the case of transfer by operation of law, an opinion of counsel
must be provided to the effect that the transfer will not cause us to be deemed
an "investment company" under the Investment Company Act of 1940.
As to permitted transfers, the person or entity receiving your units shall
be admitted as a member provided the transferee:
- accepts the terms of our operating agreement and assumes your
obligations under the operating agreement with respect to the
transferred units;
- pays or reimburses us for any legal, filing and publication costs
that we incur in connection with admitting the transferee as a
member;
- except in the case of transfer by operation of law, delivers, if
required by our directors, evidence of the authority of the
transferee to become a member, and any and all other instruments
necessary to effect the transfer.
In connection with any transfer of units, either the transferee or the
transferor must reimburse us for our expenses.
Any purported transfer that is not a "permitted transfer" is null and void.
Any transferee that is not admitted as a member shall be treated as an
unadmitted assignee. An unadmitted assignee is only entitled to share in our
profits and losses, but is not entitled to vote or receive information or an
accounting, and has no other member rights under our operating agreement. In
this case, the transferring member shall sell to us all remaining rights and
interests retained by him in the transferred units for the amount of $100.
If any permitted transfers occur during a fiscal year, profits, losses, tax
credits and other items attributable to the transferred units shall be divided
and allocated between the transferor and transferee by taking into account their
varying interests during the fiscal year in accordance with Section 706(d) of
the Code. Upon the execution and delivery to us of an affidavit stating that a
certificate or certificates representing the ownership of our units has been
lost, destroyed or stolen, and the furnishing of such indemnity or other
assurances, including a bond, as we may request, a new certificate or
certificates may be issued in lieu of such lost, destroyed or stolen
certificate.
55
RESTRICTIVE LEGEND
We will place, on any document evidencing ownership of our units,
restrictive legends substantially similar to the following:
THE TRANSFERABILITY OF THE UNITS REPRESENTED BY THIS DOCUMENT IS
RESTRICTED. SUCH UNITS MAY NOT BE SOLD, ASSIGNED, TRANSFERRED OR
PLEDGED, NOR WILL ANY ASSIGNEE, VENDEE, TRANSFEREE, PLEDGEE OR ENDORSEE
THEREOF BE RECOGNIZED AS HAVING ACQUIRED ANY SUCH UNITS FOR ANY
PURPOSES, UNLESS AND TO THE EXTENT SUCH SALE, TRANSFER, HYPOTHECATION,
ASSIGNMENT OR PLEDGE IS PERMITTED BY, AND IS COMPLETED IN STRICT
ACCORDANCE WITH, THE TERMS AND CONDITIONS SET FORTH IN THE OPERATING
AGREEMENT OF THE COMPANY, AS AMENDED FROM TIME TO TIME. THE SECURITIES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, OFFERED FOR SALE OR
TRANSFERRED IN THE ABSENCE OF EITHER AN EFFECTIVE REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE
SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS.
MEMBER WITHDRAWAL
You may withdraw as a member only with the written consent of our directors.
A withdrawing member cannot compel a liquidation of his units and, if permitted
to withdraw, will hold his units as an assignee.
DISSOLUTION
We will terminate and dissolve in the event of a sale, transfer or other
disposition of all or substantially all of our assets, upon the affirmative vote
of members holding 50% of the outstanding units, or upon a decree of judicial
dissolution. In the event of dissolution, we will only continue for the purposes
of winding up our affairs, liquidating our assets and satisfying creditor and
member claims and no member may take any action that is inconsistent with, or
not appropriate for, winding up our affairs. Our assets will first be used to
pay the expenses of liquidation and all of our existing debts and liabilities.
Any remaining assets will be used to establish any reserves deemed necessary by
our directors for contingent liabilities or obligations and the balance, if any,
will be distributed to our members in proportion to their respective positive
capital account balances. Each member will receive a statement prepared by our
directors setting forth our assets and liabilities as of the date of
termination.
INDEMNIFICATION
We will indemnify any director or officer who was or is a party or is
threatened to be made a party, in a civil, criminal, administrative or
investigative matter because he is or was a director or officer, to the maximum
extent permitted by law. We will indemnify whether the proceeding is based on
service in an official capacity as our director, officer, employee or agent or
in any other capacity while serving as our director, officer, employee or agent.
We may, but are not required to, indemnify any employee or agent to the extent
our directors so determine. Indemnifiable expenses may be advanced to officers
and directors upon our receipt of an undertaking to repay such advances if it is
ultimately determined that the officer or director was not entitled to
indemnification. The directors may require security for any such undertaking. We
may maintain insurance to protect ourselves and on behalf of any director,
officer, employee or agent against such expenses, liabilities or losses. These
rights constitute non-exclusive contract rights of our officers and directors.
MISCELLANEOUS
The directors shall appoint a member as the tax matters partner, who shall
be authorized but not required to take various actions relating to the
resolution of tax controversies of interest to us.
By signing our operating agreement, members consent to the jurisdiction of
Ohio courts.
56
Under our operating agreement, "fiscal year" means our tax fiscal year, which
ends on December 31. Our accounting fiscal year ends on June 30.
CONFIDENTIALITY
Our members agree to maintain the confidentiality of all proprietary,
nonpublic information, documents and materials relating to our business or to
any affiliate or member, which the member may possess now or in the future,
except if required by law or authorized by us.
AMENDMENTS TO THE OPERATING AGREEMENT
Amendments to our operating agreement require the affirmative vote of
members holding at least 67% of the outstanding units. Our directors may amend
the operating agreement to reflect the sale or transfer of a member's units, to
reflect the substitution or addition of a person becoming a member, and to cure
any ambiguity in our operating agreement.
UNITS ELIGIBLE FOR FUTURE SALE
Our operating agreement authorizes our directors to issue up to 8,000 units
without member approval. Upon the closing of this offering, we will have a total
of 3,496 units issued and outstanding if the minimum number of units offered is
sold, or 5,496 units if the maximum is sold. This means that even if we sell the
maximum, we can still sell an additional 2,504 units without the approval of our
members. If we were to sell additional units or warrants to purchase additional
units, the sale or exercise price could be higher or lower than what investors
are paying in this offering. If we sell additional units at a lower price, that
could lower the value of your units by diluting your ownership interest in us
and reducing distributions that we may make to you. Increasing the number of
units would also reduce your voting power in us. The sale of a substantial
number of our units, or the perception that such sales could occur, could
adversely affect the value of our units. In addition, any sale could make it
more difficult for us to sell equity securities or equity related securities in
the future, at times and prices that we deem appropriate.
In addition, approximately 1,096 units outstanding prior to this offering
are expected to be eligible for resale pursuant to Rule 144 under the Securities
Act beginning in February 2002. Generally, under the federal securities laws,
our affiliates, as defined under federal securities laws as including our
directors, officers and controlling unit holders, may transfer units only in a
registered offering, or privately in compliance with Rule 144's holding period,
volume limitations and other requirements. Nonaffiliate founders are subject to
the same restrictions until they satisfy a 2-year holding period, after which
they may freely resell their units under federal securities law. However, both
our affiliates and nonaffiliates are subject to the significant transfer
restrictions which apply to all our unit holders under our operating agreement.
See "Description of the Units and Our Amended and Restated Operating Agreement -
Transfer of Units".
FEDERAL INCOME TAX CONSEQUENCES OF OWNING OUR UNITS
The following is a general summary of the Internal Revenue Code provisions
governing the federal income tax considerations that may affect your investment
in the units. These provisions are highly technical and complex, and this
summary is qualified in its entirety by the applicable Code provisions, rules
and Treasury Regulations promulgated thereunder, and applicable administrative
and judicial interpretations. This summary does not deal with all of the tax
aspects that might be relevant to you in light of your personal circumstances;
nor does it deal with particular types of investors that are subject to special
treatment under the Code, such as tax-exempt organizations, insurance companies,
financial institutions, foreign taxpayers and broker-dealers. Since these
provisions are highly technical and complex, you are urged to consult with your
own tax advisor with respect to the federal, state, local, foreign and other tax
consequences of the purchase, holding and sale of our units and any possible
changes in the tax laws after the date of this prospectus.
PARTNERSHIP STATUS
We expect that our limited liability company will be treated as a
partnership for federal income tax purposes. This means that we will not pay any
federal income tax and the members will pay tax on their share of our limited
liability company's net income. Under the Treasury Regulations known as the
"check-the-box"
57
regulations, an unincorporated entity, such as a limited liability company, will
be taxed as a partnership unless the entity is considered a publicly traded
limited partnership or the entity affirmatively elects to be taxed as a
corporation.
If we fail to be treated as a partnership for federal tax purposes, we would
be taxed as a "C corporation" under the relevant provisions of the Code. As a C
corporation, our taxable income would be taxed at corporate rates. Currently,
the maximum corporate tax rate is 35%. Any distributions by us would be treated
as dividends. Any amount distributed by us which is treated as a dividend will
be taxed at ordinary income rates to the extent that the dividend is treated as
a distribution of earnings and profits. In addition, you would not be required
to report your share of our income, gains, losses or deductions on your tax
return until such amounts were distributed as dividends. Because a tax would be
imposed upon us as a corporate entity, the cash available for distribution to
you would be reduced by the amount of tax paid, in which case the value of your
units would be reduced.
PUBLICLY TRADED PARTNERSHIP RULES
To qualify for taxation as a partnership, we cannot be subject to the
publicly traded partnership rules under Section 7704 of the Code. Generally,
Section 7704 provides that a publicly traded partnership will be taxed as a
corporation if its interests are:
- Traded on an established securities market; or
- Readily tradable on a secondary market (or the substantial
equivalent thereof).
Although there is no legal authority on whether a limited liability company
is subject to these rules, it is probable that we are subject to the publicly
traded partnership rules because we will be classified and taxed as a
partnership unless we specifically elect to be taxed as a corporation.
We will seek to avoid being treated as a publicly traded partnership by
falling under the safe harbors provided in the Treasury Regulations promulgated
under Section 7704 of the Code. Under Section 1.7704-1(d) of the Treasury
Regulations, interests in a partnership are not considered traded on an
established securities market or readily tradable on a secondary market (or the
substantial equivalent thereof) unless the partnership participates in the
establishment of the market or the inclusion of its interests in a market, or
the partnership recognizes any transfers made on the market by redeeming the
transferor partner or admitting the transferee as a partner.
We do not intend to list the units on the New York Stock Exchange, the
American Stock Exchange, the National Association of Securities Dealers
Automated Quotation System Stock Market or any other established securities
market. In addition, our operating agreement prohibits any transfer of units
without the approval of our directors. Our directors intend to only approve
transfers that fall within the safe harbor provisions of the Treasury
Regulations, so that we will not be classified as a publicly traded partnership.
These safe harbor provisions generally provide that the units will not be
treated as readily tradable on a secondary market, or the substantial
equivalent, if the interests are transferred:
- In "private" transfers;
- Pursuant to a qualified matching service; or
- When we are deemed to have a "lack of actual trading."
Private transfers include, among others:
- Transfers in which the basis of the units in the hands of the
transferee is determined, in whole or in part, by reference to its
basis in the hands of the transferor;
- Transfers at death, including transfers from an estate or
testamentary trust;
- Transfers between members of a family, as defined in Section
267(c)(4) of the Code;
58
- Transfers involving distributions from retirement plans qualified
under Section 401(a) of the Code or an IRA; and
- "Block" transfers.
A block transfer is a transfer by a member and any related persons, as defined
in the Code, in one or more transactions during any 30 calendar day period, of
units representing in the aggregate more than 2% of the total interests in
partnership capital or profits.
Transfers through a qualified matching service are also disregarded in
determining whether interests are readily tradable. A matching service is
qualified only if:
- It consists of a computerized or printed listing system that lists
customers' bid and/or ask quotes in order to match members who
want to sell their units with persons who want to buy those units;
- Matching occurs either by matching the list of interested buyers
with the list of interested sellers or through a bid and ask
process that allows interested buyers to bid on the listed
interest;
- The seller cannot enter into a binding agreement to sell the
interest until the 15th calendar day after the date information
regarding the offering of the units for sale is made available to
potential buyers and such time period is evidenced by
contemporaneous records ordinarily maintained by the operator at a
central location;
- The closing of a sale effected by virtue of the matching service
does not occur prior to the 45th calendar day after the date
information regarding the offering of the units for sale is made
available to potential buyers and such time period is evidenced by
contemporaneous records ordinarily maintained by the operator at a
central location;
- The matching service displays only quotes that do not commit any
person to buy or sell units at the quoted price (nonfirm price
quotes), or quotes that express interest in units without an
accompanying price (nonbinding indications of interest), and does
not display quotes at which any person is committed to buy or sell
units at the quoted price (firm quotes);
- The seller's information is removed from the matching service
within 120 calendar days after the date information regarding the
offering of units for sale is made available to potential buyers,
and following any removal of the sellers' information from the
matching service, no offer to sell units is entered into the
matching service by the seller for at least 60 calendar days; and
- The sum of the percentage interests in capital or profits
transferred during our taxable year, excluding private transfers,
does not exceed 10% of the total interests in partnership capital
or profits.
In addition, interests are not treated as readily tradable on a secondary
market (or the substantial equivalent) if we have a lack of actual trading
during the taxable year. We will be deemed to lack actual trading if the sum of
the percentage of the interests transferred during the taxable year, excluding
private transfers and transfers through qualified matching services, does not
exceed 2% of the total interests in partnership capital or profits.
TAX TREATMENT OF OUR OPERATIONS; FLOW-THROUGH OF TAXABLE INCOME AND LOSS; USE OF
CALENDAR YEAR
As long as we are treated as a partnership for federal income tax purposes,
we will pay no federal income tax. Instead, as a member you will be required to
report on your own personal income tax return your allocable share of the
income, gains, losses and deductions that we have recognized without regard to
whether cash distributions are received.
Because we will be taxed as a partnership, we will have our own taxable year
that is separate from the taxable years of our members. Unless a business
purpose can be established to support a different taxable year, a partnership
must use the "majority interest taxable year" which is the taxable year that
conforms to the taxable year of the holders of more than 50% of its interests.
In this case, the majority interest taxable year is likely to be the calendar
year.
59
TAX CONSEQUENCES TO OUR MEMBERS
As a member, you will be required to report on your personal income tax
return for your taxable year with which or within which our taxable year ends,
your distributive share of our income, gains, losses and deductions without
regard to whether any cash distributions are received. To illustrate, provided
that you are an individual, each calendar year you will be required to include
your share of our taxable income or loss on your personal income tax return. A
member with a June 30 fiscal year will report his share of our taxable income or
loss on his income tax return for the following fiscal year. We will provide
each member with an annual Schedule K-1 indicating such holder's share of our
income, loss and their separately stated components.
TAX TREATMENT OF DISTRIBUTIONS
Distributions made by us to you generally will not be taxable to you for
federal income tax purposes as long as distributions do not exceed your tax
basis in the units immediately before the distribution. Cash distributions in
excess of unit basis, which is unlikely to occur, are treated as gain from the
sale or exchange of the units under the rules described below for unit
dispositions.
INITIAL TAX BASIS OF UNITS AND PERIODIC BASIS ADJUSTMENTS
Under Section 722 of the Code, your initial tax basis in the units you
purchase will be equal to the amount you paid for your units. Your tax basis
will also be increased by the amount of nonrecourse debt that is allocated to
you based on your ownership percentage. However, see "-Deductibility of Losses;
At-Risk; Passive Loss Limitations" regarding the impact of debt on deductibility
of losses. Here, your initial tax basis in each unit purchased will be $5,000,
plus the amount of nonrecourse debt allocated to you by us.
Your initial tax basis in the units will be increased to reflect your
distributive share of our taxable income, tax-exempt income, gains and any
increase in your share of our nonrecourse debt. If you make additional capital
contributions at any time, the adjusted tax basis of your units will be
increased by the amount of any cash contributed, or the adjusted basis in any
property contributed, if additional units are not distributed to you.
The tax basis of your units will be decreased, but not below zero, by:
- The amount of any cash we distribute to you;
- The basis of any other property distributed;
- Your distributive share of losses and nondeductible expenditures
that are "not properly chargeable to capital account"; and
- Any reduction in your share of our nonrecourse debt.
The unit basis calculations are complex. A member is only required to
compute unit basis if the computation is necessary to determine his tax
liability, but accurate records should be maintained. We will not be responsible
for maintaining your tax basis in your units. You are responsible for
determining your tax basis in your units. Typically, basis computations are
necessary at the following times:
- The end of a taxable year in which we suffered a loss, for the
purpose of determining the deductibility of the member's share of
the loss;
- Upon the liquidation or disposition of a member's interest, and
- Upon the nonliquidating distribution of cash or property to a
member, in order to ascertain the basis of distributed property or
the taxability of cash distributed.
Except in the case of a taxable sale of a unit or our liquidation, exact
computations usually are not necessary. For example, a member who regularly
receives cash distributions that are less than or equal to his share of our
taxable income will have a positive tax basis in his units at all times.
Consequently, no computations are necessary to demonstrate that cash
distributions are not taxable under Section 731(a)(1) of the Code. The
60
purpose of the basis adjustments is to keep track of a member's "tax investment"
in us, with a view toward preventing double taxation or exclusion from taxation
of income items upon ultimate disposition of the units.
DEDUCTIBILITY OF LOSSES; AT-RISK; PASSIVE LOSS LIMITATIONS
Generally, a member may deduct losses allocated to him, subject to a number
of restrictions. Your ability to deduct any losses we allocate to you is
determined by applying the following 3 limitations dealing with basis, at-risk
amounts and passive losses.
- Basis. You may not deduct an amount exceeding your adjusted basis
in your units pursuant to Code Section 704(d) of the Code. If your
share of our losses exceeds your tax basis in your units at the
end of any taxable year, such excess losses, to the extent they
exceed your adjusted tax basis, may be carried over indefinitely
and deducted to the extent that at the end of any succeeding year
your adjusted tax basis in your units exceeds zero.
- At-Risk Rules. Under the "at-risk" provisions of Section 465 of
the Code, if you are an individual taxpayer (including an
individual partner in a partnership) or a closely-held
corporation, you may deduct losses from a trade or business
activity, and thereby reduce your taxable income from other
sources, only to the extent you are considered "at risk" with
respect to that particular activity. The amount you are considered
to have "at risk" includes money contributed to the activity and
certain amounts borrowed with respect to the activity for which
you may be liable.
- Passive Loss Rules. Section 469 of the Code may substantially
restrict your ability to deduct losses from passive activities.
Passive activities generally include activities conducted by
pass-through entities, such as our limited liability company and
other partnerships or S corporations in which the taxpayer does
not materially participate. Generally, losses from passive
activities are deductible only to the extent of the taxpayer's
income from other passive activities. Passive activity losses
that are not deductible may be carried forward and deducted
against future passive activity income or may be deducted in full
upon disposition of a member's entire interest in the passive
actively to an unrelated party in a fully taxable transaction. It
is important to note that passive activities do not include the
receipt of dividends and interest income that normally are
considered to be passive in nature.
For members who borrow money to purchase their units, interest expense
attributable to the amount borrowed will be aggregated with other items of
income and loss from passive activities and subjected to the passive activity
loss limitation. To illustrate, if a member's only passive activity is our
limited liability company, and if we incur a net loss, no interest expense on
the related borrowing would be deductible. If that member's share of our taxable
income is less than the related interest expense, the excess would be
nondeductible. In both instances, the disallowed interest would be suspended and
would be deductible against future passive activity income or upon disposition
of the member's entire interest in our limited liability company to an unrelated
party in a fully taxable transaction.
PASSIVE ACTIVITY INCOME
If we are successful in achieving our investment and operating objectives,
we may allocate taxable income to you. To the extent that your share of our net
income constitutes income from a passive activity (as described above), such
income may generally be offset by your net losses from investments in other
passive activities.
ALLOCATIONS OF INCOME AND LOSSES
Your allocable share of our income, gain, loss, deductions and tax credits
for federal income tax purposes generally is determined in accordance with our
operating agreement. Under Section 704(b) of the Code, however, an allocation or
portion thereof will be respected only if it either has "substantial economic
effect" or is in accordance with the "partner's interest in the partnership." If
the allocation or portion thereof contained in our operating agreement does not
meet either test, the IRS may make a reallocation of such items in accordance
with their determination of each member's economic interest. Treasury
Regulations contain guidelines as to whether partnership allocations have
substantial economic effect. The allocations contained in the operating
agreement (see "Description of Amended and Restated Operating
Agreement--Allocation of Profits and
61
Losses," above) are intended to comply with the Treasury Regulations' test for
having substantial economic effect.
ALLOCATIONS TO NEWLY ADMITTED MEMBERS OR TRANSFEREES OF UNITS
New members will be allocated a proportionate share of income or loss for
the year in which they became members. The operating agreement permits our
directors to select any method and convention permissible under Section 706(d)
of the Code for the allocation of tax items during the time any person is
admitted as a member. In addition, the operating agreement provides that upon
the transfer of all or a portion of a member's units, other than at the end of
our fiscal year, the entire year's net income or net loss allocable to the
transferred units will be apportioned between the transferor and transferee
based on the number of days that each party held the units.
ALTERNATIVE MINIMUM TAX
If we adopt accelerated methods of depreciation, it is possible that taxable
income for Alternative Minimum Tax purposes might exceed regular taxable income
passed through to the members. No decision has been made on this point but we
believe that most members are unlikely to be adversely affected by excess
alternative minimum taxable income.
TAX CONSEQUENCES UPON DISPOSITION OF UNITS
Gain or loss will be recognized on a sale of units equal to the difference
between the amount realized and the member's tax basis in the units sold. Amount
realized includes cash and the fair market value of any property received plus
the member's share of our nonrecourse debt. Although unlikely, since our
nonrecourse debt is included in your tax basis, it is possible that you could
have a tax liability upon the sale of your units that exceeds the proceeds of
sale if the losses allocated to you are in excess of your capital contribution.
Gain or loss recognized by a member on the sale or exchange of units held
for more than 1 year generally will be taxed as long-term capital gain or loss.
A portion of this gain or loss, however, will be separately computed and taxed
as ordinary income or loss under Section 751 of the Code to the extent
attributable to depreciation recapture or other "unrealized receivables" or
"appreciated inventory" owned by us. We will adopt conventions to assist those
members that sell units in apportioning the gain among the various categories.
EFFECT OF TAX CODE SECTION 754 ELECTION ON UNIT TRANSFERS
The adjusted basis of each member in his or her units ("outside basis")
initially will equal his proportionate share of our adjusted basis in our assets
("inside basis"). Over time, however, it is probable that changes in unit values
and cost recovery deductions will cause the value of a unit to differ materially
from the member's proportionate share of the inside basis.
Section 754 of the Code permits a partnership to make an election that
allows a transferee who acquires units either by purchase or upon the death of a
member to adjust his share of the inside basis to fair market value. Once the
amount of the transferee's basis adjustment is determined, it is allocated among
our assets pursuant to Section 755 of the Code.
A Section 754 election is beneficial to the transferee when his or her
outside basis is greater than his or her proportionate share of the entity's
inside basis. In this case, a special basis calculation is made solely for the
benefit of the transferee that will determine his cost recovery deductions and
gain or loss on disposition of property by reference to this higher outside
basis. The Section 754 election will be detrimental to the transferee if his
outside basis is less than his or her proportionate share of inside basis.
The determination to make the election under Section 754 of the Code will be
made by our directors. If we make a Section 754 election, the Treasury
Regulations promulgated under that section of the Code require us to make the
basis adjustments. In addition, these regulations place the responsibility for
reporting basis adjustments on us. We must report basis adjustments by attaching
statements to our partnership returns. In addition, we are required to adjust
specific partnership items in light of the basis adjustments. Consequently,
amounts reported on the transferee's Schedule K-1 are adjusted amounts.
62
Transferees are subject to an affirmative obligation to notify us of their
basis in acquired interests. To accommodate concerns about the reliability of
the information provided, we are entitled to rely on the written representations
of transferees concerning either the amount paid for the partnership interest or
the transferee's basis in the partnership interest under Section 1014 of the
Code, unless clearly erroneous.
Our operating agreement provides that our directors will determine whether
or not a Section 754 election will be made. Depending on the circumstances, the
value of units may be effected positively or negatively by whether or not we
make a Section 754 election. If we decide to make a Section 754 election, the
election will be made on a timely filed partnership income tax return and will
be effective for transfers occurring in the taxable year of the return in which
the election is made. Once made, the Section 754 election is irrevocable unless
the Internal Revenue Service consents to its revocation, and the election
applies to all future transfers. Because of the administrative difficulties
associated with the Section 754 election, it is unlikely that our directors
would make the election.
OUR DISSOLUTION AND LIQUIDATION MAY BE TAXABLE TO YOU, UNLESS OUR PROPERTIES ARE
DISTRIBUTED IN-KIND
Our dissolution and liquidation will involve the distribution to you of the
assets, if any, remaining after payment of all of our debts and liabilities.
Upon dissolution, your units may be liquidated by one or more distributions of
cash or other property. If you receive only cash upon the dissolution, gain
would be recognized by you to the extent, if any, that the amount of cash
received exceeds your adjusted basis in your units. No gain or loss will be
recognized if we distribute our own property in a dissolution. However, since
our primary asset will be the ethanol plant, it is unlikely that we will make a
distribution in kind.
AUDIT OF INCOME TAX RETURNS
The IRS may audit our tax returns and may disagree with the tax positions
taken on such returns. If challenged by the IRS, the tax position that we have
taken on the returns may not be sustained by the courts. An audit of our tax
returns could lead to separate audits of your personal income tax returns, which
could result in adjustments attributable to items that may or may not be related
to us.
Generally, you are required to file your tax returns in a manner consistent
with the information returns filed by us, such as Schedule K-1, or you may be
subject to possible penalties, unless you file a statement with your tax return
describing any inconsistency. In addition, we will select a "tax matters
partner" who will have certain responsibilities with respect to any IRS audit
and any court litigation relating to us. You should consult your tax advisors as
to the potential impact these procedural rules may have on you.
INTEREST ON UNDERPAYMENT OF TAXES; ACCURACY-RELATED PENALTIES; NEGLIGENCE
PENALTIES
If we incorrectly report your allocable share of our net income, you may
underpay your taxes. If it is determined that you underpaid your taxes for any
taxable year, you must pay the amount of taxes you underpaid plus interest on
the underpayment and possibly certain penalties from the date the tax was
originally due. Under recent law changes, the accrual of interest and penalties
may be suspended for certain qualifying individual taxpayers if the IRS does not
notify you of amounts owing within 18 months of the date you filed your income
tax return. The suspension period ends 21 days after the IRS sends the required
notice. The rate of interest is compounded daily and is adjusted quarterly.
Under Section 6662 of the Code, penalties may be imposed relating to the
accuracy of tax returns that are filed. A 20% penalty is imposed with respect to
any "substantial understatement of income tax" and with respect to the portion
of any underpayment of tax attributable to a "substantial valuation
misstatement" or to "negligence." All of those penalties are subject to an
exception to the extent a taxpayer had reasonable cause for a position and acted
in good faith.
The IRS may impose a 20% penalty with respect to any underpayment of tax
attributable to negligence. An underpayment of taxes is attributable to
negligence if such underpayment results from any failure to make a reasonable
attempt to comply with the provisions of the Code, or any careless, reckless or
intentional disregard of the federal income tax rules or regulations. In
addition, regulations provide that the failure by a taxpayer to include on a tax
return any amount shown on an information return is strong evidence of
negligence. The
63
disclosure of a position on the taxpayer's return will not necessarily prevent
the imposition of the negligence penalty.
STATE AND LOCAL TAXES
In addition to the federal income tax consequences described above, you
should consider the state and local tax consequences of an investment in us.
This prospectus makes no attempt to summarize the state and local tax
consequences to an investor. You are urged to consult your own tax advisor
regarding your state and local tax obligations.
SELF-EMPLOYMENT TAX
The Code and Treasury Regulations provide that general partners are subject
to self-employment tax on their distributive share of partnership income and
that limited partners who do not render services to the partnership are not
subject to self-employment tax. Neither the Code nor the Treasury Regulations
address the treatment of limited liability company unit holders for
self-employment tax purposes. Proposed regulations, however, were issued in 1997
that provide generally for imposition of the self-employment tax on limited
liability company unit holders only if they have personal liability for the
company's obligations, have authority to contract on behalf of the company or
participate in the company's business for more than 500 hours each year. Few, if
any, of our unit holders will be subject to self-employment tax under this test.
The status of the Proposed regulations is uncertain because they were
subject to a Congressional moratorium that ended July 1, 1998 and the IRS has
not taken steps to finalize them. Nevertheless, because we will be taxed as a
partnership for federal income tax purposes, we believe that its is likely that
our unit holders will be treated similar to limited partners for purposes of
self-employment tax, i.e., they will generally not be subject to self-employment
tax on their share of our earnings.
PLAN OF DISTRIBUTION
GENERAL
Subject to the requirements of the Securities Act and applicable state
securities laws, we plan to offer and sell the units in Ohio, Indiana and
Michigan. We must obtain approval from these states' securities authorities, and
from the authorities in any other state in which we offer or sell the units. We
plan to promote the offering by issuing a press release and advertising in
newspapers, and we may distribute request cards and mail copies of our press
release, advertisements and this prospectus to prospective investors in those
states. We also plan to hold informational meetings for potential investors at
undetermined sites in and around northwest Ohio. Attendance at a meeting will
not be required to purchase units. The informational meetings are intended to
give investors an opportunity to ask questions of the directors and, if they
choose, to bring their legal or financial advisors to ask questions and obtain
information about our business. All attendees at the informational meetings will
receive a prospectus.
We are selling the units through the efforts of our directors, without the
use of a registered broker-dealer. Consequently, there may be less due diligence
performed in conjunction with this offering than would be performed in an
underwritten offering. We consider these individuals not to be brokers under the
Securities Exchange Act of 1934 because they have not been, and will not be in
the business of effecting transactions in securities for the accounts of others.
Their participation in our offering is limited to this transaction, and is not
part of a general business of effecting securities transactions. We also believe
that the directors are not brokers or associated persons of brokers under Rule
3a4-1 of the Securities Exchange Act of 1934, for the following reasons:
- Each is not subject to a statutory disqualification under the
Exchange Act at the time of his participation in the sale of our
securities;
- Each will not be compensated for his participation in the sale of our
securities by the payment of a commission or other remuneration based
either directly or indirectly on transactions in securities;
64
- Each has not been, for the past 12 months, and is not presently an
associated person of a broker or dealer; and
- Each has not participated in the offering of securities for any
issuer more than once every 12 months.
Some of our directors may have assistants who may also provide ministerial help,
but their activities will be restricted to the following:
- Preparing written communications and delivering such communications
through the mails or other means that does not involve oral
solicitation of potential purchasers, provided that such written
communications have been approved by us;
- Responding to inquiries of potential purchasers in communications
initiated by potential purchasers, provided that the content of such
communications is limited to information contained in our registration
statement; or
- Performing ministerial and clerical work in effecting any
transaction.
SUBSCRIPTION PROCEDURES
In order to purchase our units, you must complete the Execution Package
accompanying this prospectus, which includes the subscription agreement and a
counterpart signature page to our amended and restated operating agreement, and
forward the package, together with a check for the full amount of your
subscription payable to Sky Bank as Escrow Agent for Northwest Ethanol, LLC, to
Northwest Ethanol, LLC, P.O. Box 4505, Sherwood, Ohio 43556-0505. You must
purchase a minimum of 2 units, a $10,000 minimum investment. Unless our
directors agree, no investor, together with its affiliates, may acquire more
than 300 units in this offering.
Upon our receipt of the required documents, we will accept or reject your
subscription. We reserve the right to reject any subscription in whole or in
part. If we reject your subscription, we will return your Execution Package and
the amount of your subscription, without interest, within 30 days. If we accept
your subscription, your check will be deposited in our escrow account at Sky
Bank. You will not be able to access any funds while they are in escrow. We will
invest all funds in the escrow account in highly liquid, low risk investments
such as short-term certificates of deposit issued by a bank, short-term
securities issued and guaranteed by the United States, or money market funds,
including funds available through the escrow agent. Any interest earned on the
escrow account will belong to us if the offering closes.
The closing of the offering is subject to the following conditions, and we
will return your investment with interest within 30 days:
- If we do not obtain the necessary rezoning of our preferred site by
September 30, 2002;
- If we determine in our sole discretion to terminate the offering
prior to March 31, 2002, subject to extension in our sole discretion,
but not later than September 30, 2002;
- If we have not received subscriptions for the $12 million minimum by
March 31, 2002, subject to extension in our sole discretion, but not
later than September 30, 2002; or
- If we have received subscriptions for the $12 million minimum, but at
March 31, 2002, subject to extension in our sole discretion, but not
later than September 30, 2002, we do not have binding written
agreements for at least $25 million in debt financing.
If we satisfy all these conditions and close on the offering, we will
deliver a certificate representing your ownership of units within 60 days of the
initial closing. After the initial closing, we may continue to offer units up to
the maximum of 4,400 units, accepting subscriptions as they are received until
March 30, 2002, subject to extension in our sole discretion, but not later than
September 30, 2002. Our founders and their affiliates may purchase units in this
offering on the same terms as other investors, in order to meet the $12 million
minimum or
65
otherwise. If we do not satisfy one or more of these conditions and do not close
on the offering, we will promptly return your Execution Package and the amount
of your subscription, together with any interest earned thereon.
LEGAL MATTERS
McDonald, Hopkins, Burke & Haber Co., L.P.A. is providing a legal opinion on
the validity of the units we are offering.
EXPERTS
The balance sheet of Northwest Ethanol, LLC as of June 30, 2001, and the
related statements of operations, changes in members' equity and cash flows for
the period from February 8, 2001 (Inception Date) to June 30, 2001, included in
this prospectus and in the registration statement of which this prospectus is a
part, have been audited by Plante & Moran, LLP, independent public accountants,
as indicated in their report attached hereto. We have included our financial
statements in the prospectus and elsewhere in the registration statement in
reliance on the report of Plante & Moran, LLP, given on their authority as
experts in accounting and auditing.
TRANSFER AGENT
We will serve as our own transfer agent and registrar.
WHERE YOU CAN GET MORE INFORMATION
Our fiscal year ends on June 30. We intend to furnish our members annual
reports containing audited financial statements and other appropriate reports.
In addition, we intend to become a reporting company and file annual, quarterly
and current reports, proxy statements and other information with the SEC. You
may read and copy any reports, statements or other information we file at the
SEC's Public Reference Room, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 and at the SEC's Regional Offices, 233 Broadway, New
York, New York 10279-0001, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You can request copies of these documents, upon
payment of a duplicating fee, by writing the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the Public Reference
Room. Our SEC filings are also available to the public on the SEC Web site at
http: //www.sec.gov.
66
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report...............................................................................F-2
Balance Sheets as of June 30, 2001 and September 30, 2001 (Unaudited)......................................F-3
Statements of Operations for the period from February 8, 2001 (inception date)
to June 30, 2001 and for the three months ended September 30, 2001 (Unaudited).............................F-4
Statements of Changes in Members' Equity for the period from February 8, 2001
(inception date) to June 30, 2001 and for the three months ended September 30, 2001 (Unaudited)............F-5
Statements of Cash Flows for the period from February 8, 2001 (inception date)
to June 30, 2001 and for the three months ended September 30, 2001 (Unaudited).............................F-6
Notes to Financial Statements..............................................................................F-7
F-1
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Northwest Ethanol, LLC
Defiance, Ohio
We have audited the accompanying balance sheet of Northwest Ethanol, LLC (a
development stage company) as of June 30, 2001 and the related statements of
operations, changes in members' equity, and cash flows for the period from
February 8, 2001 (inception date) to June 30, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northwest Ethanol, LLC (a
development stage company) as of June 30, 2001 and the results of its operations
and its cash flows for the period from February 8, 2001 (inception date) to June
30, 2001, in conformity with accounting principles generally accepted in the
United States of America.
/s/ PLANTE & MORAN, LLP
November 12, 2001 except Note 4, as to which the date is November 28, 2001
Southfield, Michigan
F-2
NORTHWEST ETHANOL, LLC
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
SEPTEMBER 30, 2001
JUNE 30, 2001 (UNAUDITED)
------------- -----------
ASSETS
CURRENT ASSETS
Cash $ 34,710 $ 77,275
OTHER ASSETS
Deposits (Note 3) - 1,000
Costs of raising anticipated capital - 15,709
Land development cost - 24,405
---------------- ----------------
TOTAL ASSETS $ 34,710 $ 118,389
================ ================
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Note 3) $ 18,423 $ 30,184
MEMBERS' EQUITY (Note 2)
Member contributions 68,000 175,000
Deficit accumulated during the development stage (51,713) (86,795)
---------------- ----------------
Total members' equity 16,287 88,205
---------------- ----------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 34,710 $ 118,389
================ ================
See notes to Financial Statements.
F-3
NORTHWEST ETHANOL, LLC
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 8, 2001 (INCEPTION DATE) TO JUNE 30, 2001 AND THE
THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED)
CUMULATIVE LOSS
SEPTEMBER 30, 2001 FROM INCEPTION
JUNE 30, 2001 (UNAUDITED) (UNAUDITED)
--------------------- -------------- --------------
Revenue $ - $ - $ -
Operating Expenses
Consulting fees 14,000 16,000 30,000
Professional fees (Note 3) 35,289 17,779 53,068
Miscellaneous 2,632 1,465 4,097
--------------------- -------------- --------------
Total Expenses 51,921 35,244 87,165
--------------------- -------------- --------------
OPERATING LOSS (51,921) (35,244) (87,165)
OTHER INCOME - INTEREST
208 162 370
--------------------- -------------- --------------
NET LOSS $ (51,713) $ (35,082) $ (86,795)
===================== ============== ==============
NET LOSS PER UNIT $ (311.52) $ (122.66) $ (407.49)
============= ============== =============
WEIGHTED AVERAGE UNITS OUTSTANDING
166 286 213
===================== ============== ==============
See notes to Financial Statements.
F-4
NORTHWEST ETHANOL, LLC
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 8, 2001 (INCEPTION DATE) TO JUNE 30, 2001 AND
THE THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED)
MEMBER ACCUMULATED
CONTRIBUTIONS DEFICIT TOTAL
------------- ----------- ---------
BALANCE - FEBRUARY 8, 2001 (INCEPTION DATE) $ - $ - $ -
Initial capital contributions, March 8, 2001 for 104 units 26,000 - 26,000
Capital contributions, April 23, 2001 for 68 units 17,000 - 17,000
Capital contributions, April 25, 2001 for 96 units 24,000 - 24,000
Capital contributions, April 30, 2001 for 4 units 1,000 - 1,000
Net loss - (51,713) (51,713)
----------- ----------- ---------
BALANCE - JUNE 30, 2001 68,000 (51,713) 16,287
Capital contributions, September 28, 2001 for 428 units 107,000 - 107,000
Net Loss - (35,082) (35,082)
----------- ----------- ---------
BALANCE - SEPTEMBER 30, 2001 (UNAUDITED) $ 175,000 $ (86,795) $ 88,205
=========== =========== =========
See notes to Financial Statements.
F-5
NORTHWEST ETHANOL, LLC
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 8, 2001 (INCEPTION DATE) TO JUNE 30, 2001 AND THE
THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED)
CUMULATIVE CASH
FLOWS FROM
SEPTEMBER 30, 2001 INCEPTION
JUNE 30, 2001 (UNAUDITED) (UNAUDITED)
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (51,713) $ (35,082) $ (86,795)
Adjustments to reconcile net loss to net cash
from operations:
Professional fees (Note 3) 17,000 - 17,000
Changes in assets and liabilities
Deposits - (1,000) (1,000)
Accounts payable 18,423 11,761 30,184
------------- ------------- -------------
Net cash used in operating activities (16,290) (24,321) (40,611)
CASH FLOWS FROM INVESTING ACTIVITIES
Land development cost (24,405) (24,405)
CASH FLOWS FROM FINANCING ACTIVITIES
Member contributions 51,000 107,000 158,000
Costs of raising anticipated capital - (15,709) (15,709)
------------- ------------- -------------
Net cash provided by financing activities 51,000 91,291 142,291
------------- ------------- -------------
NET INCREASE IN CASH 34,710 42,565 77,275
CASH - BEGINNING OF PERIOD - 34,710 -
------------- ------------- -------------
CASH - END OF PERIOD $ 34,710 $ 77,275 $ 77,275
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Member interest issued for services $ 17,000 $ - $ 17,000
============= =========== =============
See notes to Financial Statements.
F-6
NORTHWEST ETHANOL, LLC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001 AND SEPTEMBER 30, 2001 (UNAUDITED)
I . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Northwest Ethanol, LLC (the "Company"), an Ohio Limited Liability Company
located in northwest Ohio, was organized on February 8, 2001 to pool investors,
some of whom intend to provide a corn supply, for a 30 million gallon ethanol
plant with distribution to Midwest and Eastern states. In addition, the Company
intends to produce and sell distillers grains and carbon dioxide gas (CO2) as
co-products of ethanol production. Construction is anticipated to begin in the
year 2002. As of June 30, 2001 and September 30, 2001, the Company is in the
development stage, with its efforts being principally devoted to organizational
and project feasibility activities.
Fiscal Reporting Period
The Company has adopted a fiscal year ending June 30 for reporting financial
operations.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with accounting principles generally accepted in the
United States of America. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenue and expenses. Actual results could differ
from those estimates.
Cash
The Company maintains its accounts primarily at one financial institution.
Cost of Raising Anticipated Capital
The Company defers the costs incurred to raise equity financing until that
financing occurs. At such time that the issuance of new equity units occurs,
these costs will be netted against the proceeds received.
Income Taxes
The Company is treated as a partnership for Federal and state income tax
purposes and therefore, does not incur income taxes. Instead, its earnings and
losses are included in the income tax returns of the members. Accordingly, no
provision or liability for Federal or state income taxes has been included in
these financial statements.
Interim Financial Data
The financial statements and related notes thereto as of September 30, 2001 and
for the three months ended September 30, 2001 are unaudited. The information
reflects all adjustments, consisting only of normal recurring entries, that, in
the opinion of management, are necessary to present fairly the financial
position, results of operations, and cash flows of the Company for the period
indicated. Results of operations for the interim periods are not necessarily
indicative of the results of operations for the full fiscal year.
Net Loss Per Unit
The net loss per unit is based upon the weighted average number of units
outstanding during the periods. All per unit amounts have been retroactively
adjusted for the effect of the split of founder units discussed in Note 4.
F-7
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". The
statement requires that all future business combinations be accounted for using
the purchase method of accounting and that certain acquired intangible assets in
a business combination be recognized as assets apart from goodwill. This
statement will be effective for the Company for the fiscal year beginning July
1, 2002. The Company has not yet determined the effects SFAS No. 141 will have
on its financial position or the results of its operations.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". Among other provisions, goodwill will no longer be amortized but will
be subject to impairment tests at least annually. This statement will be
effective for the Company for the fiscal year beginning July 1, 2002. The
Company has not yet determined the effects SFAS No. 142 will have on its
financial position or the results of its operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This statement requires recognition of a liability for any
obligations associated with the retirement of a tangible long-lived asset. Any
such liability will be recorded at fair value and will be offset by an increase
to the carrying amount of the related long-lived asset. This statement will be
effective for the Company for the fiscal year beginning July 1, 2002. The
Company has not yet determined the effects SFAS No. 143 will have on its
financial position or the results of its operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and certain provisions of Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". The main objective of this statement is to
resolve implementation issues related to SFAS No. 121 by further clarifying
certain of its provisions. SFAS No. 144 removes goodwill from SFAS No. 121's
scope and establishes a "primary-asset" approach to determine the cash flow
estimation period for a group of assets and liabilities. Other provisions of the
statement include more stringent requirements for classifying assets available
for disposal and expanding the scope of activities that will require
discontinued operations reporting. This statement will be effective for the
Company for the fiscal year beginning July 1, 2002. The Company has not yet
determined the effects SFAS No. 144 will have on its financial position or the
results of its operations.
2. MEMBERS' EQUITY
As specified in the Company's operating agreement, the Company has issued 272
and 700 units to its founding members as of June 30, 2001 and September 30,
2001, respectively, for $250 per unit.
3. RELATED PARTY TRANSACTIONS
The Company made one $500 deposit to a member of the Company for an anticipated
purchase of land to be used for the ethanol plant site. The purchase price of
the land is $171,000.
The Company incurred legal and professional fees of $18,289 and $17,779 for the
periods ending June 30, 2001 and September 30, 2001, respectively, from two
members of the Company. During the period ended June 30, 2001, payment of
$17,000 of professional fees was made by issuing 68 units of the Company's
equity to the members. The Company reimbursed certain members for travel
expenses incurred of $842 and $1,465 for the periods ending June 30, 2001 and
September 30, 2001, respectively.
At June 30, 2001 and September 30, 2001, the Company had accounts payable of
$6,923 and $14,475, respectively, due to members and companies affiliated
through common ownership.
F-8
4. SUBSEQUENT EVENTS
In October 2001, the Company borrowed $30,000 from The Defiance County
Community Improvement Corporation. The note bears interest at 2% per annum and
is unsecured. Principal payments of $10,000 are due on June 30, 2003, 2004, and
2005. If the proposed ethanol plant is not operational by June 30, 2003, the
first principal payment of $10,000 may be deferred until June 30, 2004.
In November 2001, the directors approved a four for one split of the units
issued and outstanding. The financial statements reflect the effect of such
split. Also, in November 2001, the Company issued an additional 396 units at
$1,250 per unit for a total of $495,000. The Company is currently preparing an
SB-2 Registration Statement for a minimum of 2,400 units or a maximum of 4,400
units which will be available for sale at $5,000 per unit.
F-9
Appendix A
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
NORTHWEST ETHANOL, LLC
AN OHIO LIMITED LIABILITY COMPANY
DATED AS OF
NOVEMBER 27, 2001
TABLE OF CONTENTS
ARTICLE 1 - ORGANIZATION....................................................1
1.1 BACKGROUND..........................................................1
1.2 FORMATION...........................................................1
1.3 NAME................................................................1
1.4 REGISTERED AGENT....................................................1
1.5 PLACE OF BUSINESS...................................................1
1.6 NATURE AND PURPOSE OF BUSINESS......................................1
1.7 TITLE TO PROPERTY...................................................1
1.8 EFFECTIVE DATE; TERM................................................1
1.9 MEMBERS.............................................................2
ARTICLE 2 - DEFINITIONS.....................................................2
ARTICLE 3 - CAPITAL CONTRIBUTIONS...........................................2
3.1 CAPITAL CONTRIBUTIONS...............................................2
3.2 ADDITIONAL CAPITAL CONTRIBUTIONS....................................3
3.3 NO INTEREST ON CAPITAL CONTRIBUTIONS................................3
3.4 NO LIABILITY FOR RETURN OF CAPITAL..................................3
3.5 LOANS...............................................................3
3.6 DISTRIBUTIONS AND WITHDRAWALS.......................................3
3.7 SUBSEQUENT MEMBERS..................................................3
ARTICLE 4 - ALLOCATIONS AND DISTRIBUTIONS...................................3
4.1 ALLOCATIONS OF PROFITS AND LOSSES...................................3
4.2 DISTRIBUTION OF NET CASH FLOW.......................................4
4.3 AMOUNTS WITHHELD....................................................4
4.4 BOOKS AND RECORDS...................................................4
4.5 FISCAL YEAR.........................................................4
4.6 METHOD OF ACCOUNTING................................................4
4.7 CAPITAL ACCOUNTS....................................................4
4.8 CHARGES AGAINST CAPITAL ACCOUNTS....................................4
4.9 TAX ELECTIONS.......................................................4
4.10 TAX MATTERS PARTNER.................................................5
ARTICLE 5 - MEMBERS.........................................................6
5.1 ANNUAL MEETING......................................................6
5.2 SPECIAL MEETINGS....................................................6
5.3 NOTICE OF MEETING...................................................6
5.4 PLACE OF MEETINGS...................................................6
5.5 QUORUM..............................................................6
5.6 RECORD DATE.........................................................6
5.7 VOTING..............................................................7
5.8 PROXIES.............................................................7
5.9 ORDER OF BUSINESS...................................................7
5.10 ACTION WITHOUT A MEETING............................................7
5.11 APPOINTMENT OF INSPECTORS OF ELECTIONS..............................7
5.12 DUTIES OF INSPECTORS................................................7
5.13 REPORT OF INSPECTORS................................................7
5.14 AUTHORITY OF MEMBERS................................................7
5.15 BUSINESS ACTIVITIES OF MEMBERS RELATED PARTY TRANSACTIONS...........7
5.16 CONFIDENTIALITY.....................................................8
ARTICLE 6 - DIRECTORS.......................................................8
6.1 MANAGEMENT..........................................................8
6.2 NUMBER..............................................................8
6.3 TENURE OF OFFICE....................................................9
6.4 NOMINATING DIRECTORS................................................9
6.5 ELECTION OF DIRECTORS...............................................9
6.6 TENURE OF OFFICE....................................................9
6.7 REMOVAL OF DIRECTORS FOR CAUSE.....................................10
6.8 RESIGNATION........................................................10
6.9 VACANCY............................................................10
6.10 MEETINGS...........................................................10
6.11 NOTICE OF MEETING..................................................10
6.12 QUORUM AND VOTING..................................................10
6.13 ACTION WITHOUT A MEETING...........................................10
6.14 COMMITTEES.........................................................10
6.15 REPORTS BY DIRECTORS...............................................11
6.16 AUTHORITY OF DIRECTORS.............................................11
6.17 RESTRICTIONS ON AUTHORITY OF DIRECTORS.............................12
ARTICLE 7 - OFFICERS.......................................................13
7.1 GENERAL PROVISIONS.................................................13
7.2 POWERS AND DUTIES..................................................13
7.3 TENURE OF OFFICE...................................................13
7.4 REMOVAL............................................................13
7.5 INITIAL OFFICERS...................................................13
ARTICLE 8 - TRANSFER OF UNITS..............................................13
8.1 GENERAL............................................................13
8.2 PERMITTED TRANSFERS................................................14
8.3 CONDITIONS TO PERMITTED TRANSFERS..................................14
8.4 PROHIBITED TRANSFERS...............................................15
8.5 RIGHTS OF UNADMITTED ASSIGNEES.....................................15
8.6 ADMISSION OF SUBSTITUTE MEMBERS....................................16
8.7 REPRESENTATIONS REGARDING TRANSFERS; LEGEND........................16
8.8 DISTRIBUTIONS AND ALLOCATIONS IN RESPECT OF TRANSFERRED UNITS......17
8.9 LOST, DESTROYED OR STOLEN CERTIFICATES.............................17
8.10 WITHDRAWAL OF MEMBER...............................................17
ARTICLE 9 - DISSOLUTION; TERMINATION OF COMPANY............................17
9.1 DISSOLUTION........................................................17
9.2 LIQUIDATION........................................................18
9.3 FINAL ACCOUNTING...................................................18
ARTICLE 10 - INDEMNIFICATION...............................................18
10.1 MANDATORY INDEMNIFICATION..........................................18
10.2 PERMISSIVE INDEMNIFICATION.........................................19
10.3 PAYMENT OF EXPENSES................................................19
10.4 ACTION TO COMPEL PAYMENT...........................................19
ii
10.5 NONEXCLUSIVE REMEDY................................................19
10.6 CONTRACTUAL OBLIGATION.............................................19
10.7 SAVINGS CLAUSE.....................................................19
10.8 INSURANCE..........................................................19
ARTICLE 11 - MISCELLANEOUS.................................................19
11.1 GOVERNING LAW......................................................19
11.2 AMENDMENTS.........................................................20
11.3 FURTHER ACTION.....................................................20
11.4 BINDING EFFECT.....................................................20
11.5 RATIFICATION.......................................................20
11.6 ENTIRE AGREEMENT...................................................20
11.7 REFERENCES.........................................................20
11.8 SEVERABILITY.......................................................20
11.9 NOTICES............................................................20
11.10 COUNTERPARTS.......................................................20
11.11 EXHIBITS...........................................................20
11.12 PARTNERSHIP STATUS FOR TAX PURPOSES; LIMITED LIABILITY COMPANY
STATUS FOR STATE LAW PURPOSES......................................21
APPENDIX....................................................................i
EXHIBIT A
iii
AMENDED AND RESTATED
OPERATING AGREEMENT OF
NORTHWEST ETHANOL, LLC
----------------------
This AMENDED AND RESTATED LIMITED LIABILITY COMPANY OPERATING
AGREEMENT ("Agreement") is entered into by and among the Members and shall be
effective as of November 27, 2001. The Members hereby agree to form a limited
liability company under and governed by the provisions of Chapter 1705 of the
Ohio Revised Code, as the same may be amended from time to time (the "Act"), and
for the purposes and upon the terms and conditions hereinafter set forth.
ARTICLE 1
---------
ORGANIZATION
------------
1.1 BACKGROUND. On February 8, 2001, the Founding Members caused
the Articles of Organization to be filed with the Secretary of State of Ohio.
The Founding Members formed the Company to be treated as a limited liability
company for state law purposes. The Founding Members now desire to amend the
original Operating Agreement of the Company in preparation for the Offering.
1.2 FORMATION. The Members hereby enter into this Agreement under
the Act for the purpose of evidencing their agreement to operate the Company as
a partnership for federal tax purposes. The Company has been formed as an Ohio
limited liability company pursuant to the provisions of the Act and has filed
Articles of Organization with the Secretary of State of the State of Ohio. The
Members shall forthwith execute and cause to be filed any additional documents
and instruments as may be necessary or appropriate in connection with the
transaction of business by the Company.
1.3 NAME. The name of the Company is "Northwest Ethanol, LLC." The
Company shall conduct business under such name or such variations of such name
as the Directors deem appropriate to comply with the laws of any other
jurisdiction in which the Company qualifies to do business.
1.4 REGISTERED AGENT. The name of the Registered Agent for service
of process on the Company shall be Ted W. Penner, whose address in the State of
Ohio is 101 Clinton Street, Suite 1500, Defiance, Ohio 43512. The Registered
Agent may be changed by the Directors. Upon any change of the Registered Agent,
the Directors shall cause to be filed a notice of change with the Secretary of
State of the State of Ohio as required under the Act.
1.5 PLACE OF BUSINESS. The principal office of the Company shall
be located at State Route 18 and Rosedale Road, Hicksville, Ohio 43526. The
mailing address of the Company is P.O. Box 4505, Sherwood, Ohio 43556-0505. The
location of the principal office and the mailing address may be changed by the
Directors.
1.6 NATURE AND PURPOSE OF BUSINESS. The nature of the business and
purpose of the Company are:
a. to own, construct, operate, lease, finance, contract with
and/or invest in the Facilities or any portion thereof as
permitted under the applicable laws of the State of Ohio;
b. to engage in the processing of corn into ethanol and any and
all related co-products, and the marketing of all products
and co-products from such processing; and
c. to engage in any and all lawful purposes for which
individuals may lawfully associate themselves, as determined
by the Directors, provided such purpose is permitted under
the Act.
1.7 TITLE TO PROPERTY. All property owned by the Company, whether
real or personal, tangible or intangible, shall be deemed to be owned by the
Company as an entity and no Member, individually, shall have any ownership of
such property.
1.8 EFFECTIVE DATE; TERM. The Company was formed on the date that
the executed copy of the Articles of Organization required by the Act were filed
with the Secretary of State of the State of Ohio and the term of the Company
shall be perpetual unless earlier dissolved and terminated pursuant to the Act
or to any provision of this Agreement. This Agreement became effective as of the
date first above written in the preamble to the Agreement.
1.9 MEMBERS.
a. The Persons listed on EXHIBIT A have been admitted to the
Company as the Founding Members. The Founding Members
previously purchased Units and agreed to be bound by the
terms and conditions of the original operating agreement
having an effective date of February 8, 2001. The names,
mailing address and number of Units of each Founding Member
are set forth in EXHIBIT A attached hereto.
b. The Founding Members anticipate that additional Persons may
be admitted as Members as a result of the Offering. A Person
who subscribes for Units in the Offering will not be
admitted as a Member unless and until: (i) such Person has
submitted a completed Subscription Agreement, including a
counterpart signature page agreeing to be bound by this
Agreement; (ii) such Person has submitted full payment of
the purchase price for the number of Units subscribed for as
reflected in the Subscription Agreement; and (iii) the
Directors have, in writing, admitted such Person as a Member
by countersigning such Person's Subscription Agreement,
which shall not be effective until the Offering closes. If
the Offering closes, the Directors shall cause EXHIBIT A to
be amended to reflect the admission of new Members.
c. After the closing or termination of the Offering, a Person
may become a Member by acquiring one or more: (i) newly
issued Units directly from the Company as permitted by this
Agreement; or (ii) existing Units from a Member in a
Transfer in compliance with the provisions of this
Agreement. If a Person acquires Units pursuant to this
Section 1.9(c), the Directors shall cause EXHIBIT A to be
amended to reflect the issuance or Transfer of Units.
ARTICLE 2
---------
DEFINITIONS
-----------
For purposes of this Agreement, unless the context clearly indicates
otherwise: (i) all of the capitalized words in this Agreement shall have the
meanings set forth in the Appendix; and (ii) all non-capitalized words defined
in the Act shall have the meanings set forth therein.
ARTICLE 3
---------
CAPITAL CONTRIBUTIONS
---------------------
3.1 CAPITAL CONTRIBUTIONS.
a. FOUNDING MEMBERS' CAPITAL CONTRIBUTIONS. At various times
prior to the execution of this Agreement, the Founding
Members made Capital Contributions to the Company.
Concurrently with the execution of this Agreement, some or
all of the Founding Members will make an additional Capital
Contribution. The total Capital Contribution and the number
of Units held by each Founding Member upon the execution of
this Agreement shall be as set forth on EXHIBIT A attached
hereto.
b. ANTICIPATED SALE OF UNITS IN THE OFFERING. Additional Units
of the Company are expected to be offered for sale pursuant
to the terms and conditions contained in the Prospectus to
be filed with the Securities and Exchange Commission as soon
as practicable after the adoption of this Agreement. The
Capital Contributions by each Investor pursuant to this
Section 3.1(b) shall be subject to the terms and conditions
of the Subscription Agreement. Each Investor shall execute,
deliver, and perform all obligations required under its
Subscription Agreement. Each Investor shall make an initial
Capital Contribution to the Company consisting of cash, in
accordance with the terms and conditions of such Investor's
Subscription Agreement. The Directors shall consider all
subscriptions for Units pursuant to the Offering and shall,
in their sole discretion and by majority vote, either accept
or reject such subscriptions. Upon acceptance of any
subscription for Units, the Company shall enter into a
Subscription Agreement without requirement of any
2
further act, approval, or vote of any other Person. Except
as otherwise approved by the Directors, no Investor or their
Affiliate shall be entitled to purchase more than three
hundred (300) Units in the Offering. If the Offering closes,
EXHIBIT A shall be amended by the Directors to reflect the
Capital Contribution and the number of Units held by each
Member.
3.2 ADDITIONAL CAPITAL CONTRIBUTIONS. No Member shall be obligated
to make additional Capital Contributions to the Company. No Member shall be
subject to any calls, requests or demands of capital. If additional capital is
required, as determined by the majority vote of the Directors, the Directors
shall be permitted to take any and all actions necessary to raise such
additional capital by, but not limited to, conducting another public offering or
through a private placement. In the event that additional capital is raised,
additional Units shall be issued by the Company to such Persons purchasing
Units. The Members acknowledge and agree that if the Company raises additional
capital pursuant to this Section 3.2, it may result in the dilution of their
ownership interest in the Company by the reason of the issuance of additional
Units. In the event that additional capital is raised by the Company, the
Directors shall cause EXHIBIT A to be amended to reflect the additional Capital
Contributions and the number of Units held by each Member.
3.3 NO INTEREST ON CAPITAL CONTRIBUTIONS. No Member shall be
entitled to any interest on its Capital Account or on its contributions to the
capital of the Company.
3.4 NO LIABILITY FOR RETURN OF CAPITAL. The Members shall in no
event be personally liable for the return of any Capital Contributions made by
any of the Members, it being expressly agreed that any return of capital as may
be made at any time, or from time to time, shall be made solely from the assets
of the Company, and only in accordance with the terms hereof.
3.5 LOANS. In the event that the Company shall require funds to
carry on the business of the Company, the Directors may solicit funds from any
Member. The Member shall have the right, but not be required, to loan money upon
terms and conditions acceptable to such Member and the Directors ("Loans"). Upon
loaning money to the Company, the Member shall have the same rights regarding
the Loan as would any unaffiliated Person making a loan to the Company.
3.6 DISTRIBUTIONS AND WITHDRAWALS. No Member shall be entitled to
make withdrawals from the Company except to the extent of Distributions made
pursuant to express provisions of this Agreement. Distributions may be made in
cash or in property or partly in each, but no Member shall have the right to
require that a Distribution be made other than in cash, except as expressly
provided otherwise in this Agreement.
3.7 SUBSEQUENT MEMBERS. Any party hereafter contributing property
to the Company in exchange for Units shall be given full and fair Capital
Account credit therefor based upon the net fair market value at the date of the
contribution, and upon any such contributions, the other Capital Account
balances may be adjusted to reflect the then fair market value in accordance
with Section 704(b) of the Code and the Regulations promulgated thereunder.
ARTICLE 4
---------
ALLOCATIONS AND DISTRIBUTIONS
-----------------------------
4.1 ALLOCATIONS OF PROFITS AND LOSSES. For purposes of maintaining the
Capital Accounts and in determining the rights of the Members among themselves,
the Company's items of income, gain, loss and deduction shall be allocated among
the Members for each Fiscal Year (or portion thereof) as provided herein below:
a. Except as otherwise provided in this Agreement, after giving
affect to the Regulatory and Curative Allocations, Profits,
Losses and any credits of the Company for any Fiscal Year
shall be allocated among the Members in proportion to the
total number of Units owned by each Member as compared to
the total number of Units owned by all of the Members.
b. Members holding Units for a portion of a Fiscal Year shall
be allocated Profits, Losses and any credits based on the
number of days each Unit was held by such Member during the
Fiscal Year for which such Profits, Losses, and any credits
of the Company are being calculated.
3
4.2 DISTRIBUTION OF NET CASH FLOW. Except as required by Article 9
hereof, Distributions of Net Cash Flow may be made in the following order and
priority, provided that such Distributions are permitted by any covenants or
restrictions contained in any debt instrument in effect between the Company and
any Person at the time of the Distribution and the Directors have adequately
funded Working Capital Reserves:
a. first, pursuant to the terms of any Loan, to the payment of
principal and accrued interest, if any, of the Loans
contemplated by Section 3.5 hereof, in proportion to the
relative amounts of each; and
b. second, such amounts as determined by the Directors, in
proportion to the total number of Units owned by each Member
as compared to the total number of Units owned by all of the
Members.
4.3 AMOUNTS WITHHELD. From time to time, the Company may be required
to withhold various amounts that are Distributed or allocated to the Members as
mandated by the Code or other state, local or foreign tax law. All amounts
withheld pursuant to the Code or any provision of any state, local or foreign
tax law with respect to any Distribution or allocation by the Company shall be
treated as amounts distributed or allocated, as the case may be, to the Member
with respect to which such amount was withheld pursuant to this Section 4.3 for
all purposes under this Agreement. The Company is authorized to withhold from
Distributions, or with respect to any allocations, 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, and shall allocate any such amounts to the Members
with respect to which such amount was withheld.
4.4 BOOKS AND RECORDS. The books and records of the Company shall be
kept in sufficient detail to determine the Profits or Losses, credits and the
federal income tax items of the Company for each period for which an allocation
is to be made pursuant to this Agreement. The Company shall also keep such books
and records in sufficient detail so as to permit preparation of financial
statements in accordance with generally accepted accounting principles
consistently applied. Such books and records and financial statements, together
with any other records and documents required to be made available by the
Company for inspection under the Act, shall be maintained by the Company. A
Member desiring to inspect such documents shall provide a written request to the
secretary of the Company setting forth the purpose for such inspection, which
must be reasonably related to their ownership of Units, and the documents to be
reviewed. The secretary of the Company shall inform the requesting Member, in
writing, within thirty (30) days of the receipt of such notice, of the time and
place at which such Member or its duly authorized representative may inspect and
examine the requested documents.
4.5 FISCAL YEAR. For financial reporting purposes, the Company's
annual financial statements shall be based on the period ending June 30 each
year. For tax reporting purposes, the Fiscal Year of the Company shall be the
period ending December 31 each year.
4.6 METHOD OF ACCOUNTING. For financial reporting purposes, the
Company shall prepare all financial statements on the accrual basis in
accordance with generally accepted accounting principles consistently applied.
For tax purposes, the Company shall keep all records on the accrual method or
such other reasonable accounting method approved by the Directors.
4.7 CAPITAL ACCOUNTS. A separate Capital Account shall be determined
and maintained for each Member. No Member shall have any interest in the Capital
Account of any other Member. Capital Accounts shall be determined and maintained
on the same basis as Capital Accounts are determined and maintained by the
Company for purposes of federal income taxation in accordance with the
requirements of Section 704(b) of the Code and Section 1.704-1(b) of Regulations
promulgated thereunder.
4.8 CHARGES AGAINST CAPITAL ACCOUNTS. If the Company shall suffer
Losses that result in the Capital Account of any Member being negative, such
Losses shall be carried as a charge against such Member's Capital Account and a
subsequent share of Profits and gain of the Company shall be applied to restore
such deficit in such Member's Capital Account.
4.9 TAX ELECTIONS. All elections and options available to the Company
for Federal or state income tax purposes shall be taken or rejected by the
Company in the sole discretion of the Directors. The Directors may elect
pursuant to Section 754 of the Code to adjust the basis of the Company's assets,
in the case of a Distribution of
4
property, in the manner provided in Section 734 of the Code and, in the case of
a Transfer of a Member's Units, in the manner provided in Section 743 of the
Code.
4.10 TAX MATTERS PARTNER.
a. The Directors shall appoint a Member who will act as the Tax
Matters Partner as defined in Section 6231 of the Code,
provided that such Member is eligible to serve in such
capacity. Upon receipt of notice from the Internal Revenue
Service of the beginning of an administrative proceeding
with respect to the Company, the Tax Matters Partner shall
furnish to the Internal Revenue Service the name, mailing
address and ownership information of each Member; provided,
however, that such information is provided to the Company by
the Members.
b. The Tax Matters Partner is authorized, but not required to:
i. enter into any settlement agreement with the Internal
Revenue Service with respect to any administrative or
judicial proceedings for the adjustment of any item
required to be taken into account by a Member for
federal income tax purposes (such administrative
proceedings being referred to as a "tax audit" and such
judicial proceedings being referred to as "judicial
review"), and in the settlement agreement the Tax
Matters Partner may expressly state that such agreement
shall not bind any Member who (within the time
prescribed pursuant to the Code and the Regulations)
files a statement with the Internal Revenue Service
providing that the Tax Matters Partner shall not have
the authority to enter into a settlement agreement on
behalf of such Member or who is a "notice partner" (as
defined in Section 6231 of the Code) or a member of a
"notice group" (as defined in Section 6223(b)(2) of the
Code);
ii. in the event that a notice of a final administrative
adjustment at the Company level of any item required to
be taken into account by a Member for federal tax
purposes (a "final adjustment") is mailed to the Tax
Matters Partner, seek judicial review of such final
adjustment, including the filing of petition for
readjustment with the Tax Court or the United States
Claims Court, or the filing of a complaint for refund
with the District Court of the United States for the
district in which the Company's principal place of
business is located;
iii. intervene in any action brought by any other Member for
judicial review of a final adjustment;
iv. file a request for an administrative adjustment with
the Internal Revenue Service at any time and, if any
part of such request is not allowed by the Internal
Revenue Service, to file an appropriate pleading
(petition or complaint) for judicial review with
respect to such request;
v. enter into an agreement with the Internal Revenue
Service to extend the period for assessing any tax
which is attributable to any item required to be taken
into account by a Member for federal tax purposes, or
an item affected by such item; and
vi. take any other action on behalf of the Company in
connection with any tax audit or judicial review
proceeding to the extent permitted by applicable law or
regulations.
c. The taking of any action and the incurrence of any expense
by the Tax Matters Partner in connection with any such
proceeding, except to the extent required by law, is a
matter in the sole and absolute discretion of the Tax
Matters Partner and the provisions relating to the
indemnification of such Member as set forth in Article 10
hereof shall be fully applicable to the Tax Matters Partner
in its capacity as such.
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d. All third party costs and expenses incurred by the Tax
Matters Partner in performing his duties as such (including
legal and accounting fees) shall be borne by the Company.
ARTICLE 5
---------
MEMBERS
-------
5.1 ANNUAL MEETING. The annual meeting of the Members of the Company shall
be held at such time and on such date within two (2) months before or five (5)
months after the close of the Fiscal Year, as may be fixed by the Directors and
stated in the notice of the meeting.
5.2 SPECIAL MEETINGS. Special meetings of the Members shall be called upon
the written request of the chairman of the board, the president, the Directors
by action at a meeting, a majority of the Directors acting without a meeting, or
the holders of Units totaling more than sixty-seven percent (67%) of the voting
rights of the issued and outstanding Units of the Company. Calls for such
meetings shall specify the purposes thereof. No other business other than that
specified in the call shall be considered at any special meeting.
5.3 NOTICE OF MEETINGS. Unless waived, written notice of every annual or
special meeting of the Members stating the time, location and purpose thereof
shall be given, as of a record date fixed by the Directors, to each Member
entitled to vote thereat, or entitled to notice thereof as provided by law, by
mailing such notice to the last known address of each Member as it appears on
the records of the Company, or by personal delivery, not less than seven (7) nor
more than sixty (60) days prior to such meeting. A Member may waive in writing
such notice either before or after the meeting, and notice shall be waived by
attendance at the meeting unless lack of proper notice is alleged prior to or at
the commencement of the meeting. Any written waiver shall be filed with or
entered upon the records of the Company.
5.4 PLACE OF MEETINGS. Meetings of the Members shall be held at the
principal office of the Company unless the Directors determine that a meeting
shall be held at some other place within or without the State of Ohio and causes
the notice thereof to so state.
5.5 QUORUM. The holders of Units entitling them to exercise a majority of
the voting power of the Company entitled to vote at any meeting, in person or by
proxy, shall constitute a quorum for the transaction of business to be
considered at such meeting; provided, however, that no action required by law or
by this Agreement to be authorized or taken by the holders of a designated
proportion of the Units may be authorized or taken by a lesser proportion. The
Members holding a majority of the Units represented at a meeting, whether or not
a quorum is present, may adjourn such meeting from time to time, until a quorum
shall be present.
5.6 RECORD DATE. The Directors may fix a record date for any lawful
purpose, including, without limiting the generality of the foregoing, the
determination of the Members entitled to:
a. receive notice of or vote at any meeting;
b. receive any Distribution;
c. receive or exercise rights of purchase of or subscription for, or
exchange or conversion of, Units, subject to any contract right
with respect thereto; or
d. participate in the execution of written consents, waivers or
releases.
Said record date shall not be more than sixty (60) days preceding the date of
such meeting, the date fixed for any Distribution or the date fixed for the
receipt of the exercise of rights, as the case may be. If a record date shall
not be fixed, the record date for the determination of the Members who are
entitled to notice of, or who are entitled to vote at, a meeting of the Members,
shall be the close of business on the date next preceding the day on which
notice is given. If a record date shall not be fixed, the record date for the
determination of Members entitled to receive a Distribution or the receipt of
the exercise of rights, shall be the close of business on the date next
preceding the day on which the Distribution is made or the receipt of the
exercise of rights.
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5.7 VOTING. Except as provided by the Act or this Agreement, every
Member entitled to vote shall be entitled to cast one vote on each proposal
submitted to the meeting for each Unit held of record by him or her on the
record date for the determination of the Members entitled to vote at the
meeting. At any meeting at which a quorum is present, all questions and business
which may come before the meeting shall be determined by a Majority Vote, except
when a greater proportion is required by the Act or this Agreement.
5.8 PROXIES. A Person who is entitled to attend a Member meeting, to
vote thereat, or to execute consents, waivers and releases, may be represented
at such meeting or vote thereat, and execute consents, waivers and releases, and
exercise any of such Person's rights, by proxy or proxies appointed by a writing
signed by such Person, or by such Person's duly authorized attorney. Holders of
the proxies need not be Members. Any Member giving a proxy may revoke it at any
time prior to its use by filing a written notice of revocation or a duly
executed proxy bearing a later date with the secretary of the Company, or by
attending a meeting and voting in person. Notice to the Company, in writing or
at a meeting, of the revocation of the proxy shall not affect any act previously
taken. No proxy shall be valid after eleven (11) months from the date of
execution unless otherwise provided in the proxy.
5.9 ORDER OF BUSINESS. The order of business at all meetings of the
Members shall be as determined by the chairman of the meeting.
5.10 ACTION WITHOUT A MEETING. Any action which may be authorized or
taken at a meeting of the Members may be authorized or taken without a meeting
if the consent or consensus setting forth the action taken is signed by Members
holding the number of Units sufficient to take such action at a meeting of the
Members, which writing or writings shall be filed with or entered upon the
records of the Company.
5.11 APPOINTMENT OF INSPECTORS OF ELECTIONS. In advance of any meeting
of the Members, the Directors may appoint inspectors of elections to act at such
meeting or any adjournment thereof. If inspectors of elections are not so
appointed, the chairman of any such meeting may, and on the request of any
Member or his proxy shall, make such appointment at the meeting. The number of
inspectors shall be either one (1) or three (3). If appointed at a meeting on
the request of one (1) or more Members or proxies, the Members by Majority Vote
shall determine whether one (1) or three (3) inspections are to be appointed. No
person who is a nominee shall act as an inspector. In case any person appointed
as an inspector fails to appear or fails or refuses to act, the vacancy may be
filled by appointment made by the Directors in advance of the convening of the
meeting, or at the meeting by the person or officer acting as chairman.
5.12 DUTIES OF INSPECTORS. The inspectors of elections shall determine
the number of Units outstanding and the voting rights of each; the Units
represented at the meeting; the existence of a quorum; the authenticity,
validity, and effect of proxies, ballots, consents, waivers, or releases; hear
and determine all challenges and questions in any way arising in connection with
the vote; count and tabulate all votes, ballots, consents, waivers, or releases;
determine and announce the result; and perform such other acts as may be proper
to conduct the election or vote with fairness to all Members. The inspectors of
elections shall perform their duties impartially, in good faith, to the best of
their ability, and as expeditiously as is practical. If there be three (3)
inspectors of elections, the decision, act, or certificate of a majority shall
be effective in all respects as the decision, act, or certificate of all.
5.13 REPORT OF INSPECTORS. On request of the chairman of the meeting,
or of any Member or his proxy, the inspectors shall make a report in writing of
any challenge or question or matter determined by them, and execute a
certificate of any fact found by them.
5.14 AUTHORITY OF MEMBERS. Except as otherwise provided in Article 6
and Article 7, no individual Member has the authority to make any contracts,
enter into any transactions, or make any commitments on behalf of the Company.
The Company has no authority to make any contracts, enter into any transactions,
or make any commitments on behalf of any Member.
5.15 BUSINESS ACTIVITIES OF MEMBERS; RELATED PARTY TRANSACTIONS.
a. No Member, as such, shall be required to devote any time to
the management or operations of the Company, and shall be
free to serve any other Person or enterprise in any
capacity.
7
b. Neither this Agreement nor any activity undertaken pursuant
hereto shall prevent any Member or their Affiliates, acting
on their own behalf, from engaging in whatever activities
they choose, whether the same are competitive with the
Company or otherwise, and such activities may be undertaken
without having or incurring any obligation to offer any
interest in such activities to the Company or any Member, or
require any Member to permit the Company, the Directors, the
Members or their 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 and relinquishes any such right or claim of
participation.
c. To the extent permitted by applicable law and subject to the
provisions of this Agreement, the Directors are hereby
authorized to cause the Company to purchase property from,
sell property to, or otherwise deal with any Member
(including any Member who is also a Director or Officer),
acting on its own behalf, or any Affiliate of any Member;
provided that any such purchase, sale or other transaction
shall be made on terms and conditions which are no less
favorable to the Company than if the sale, purchase or other
transaction had been made with an independent third party.
5.16 CONFIDENTIALITY. Each Member and its representatives agree to
maintain the confidentiality of all proprietary, nonpublic information,
documents and materials relating to the business of the Company ("Confidential
Information") which such Member or its representatives now or in the future may
possess, except to the extent disclosure of any such information is required by
law or authorized by the Company. If any Member or its representatives are
requested or become legally compelled to disclose any Confidential Information,
such Member or its representatives shall provide the secretary of the Company
with notice of such request within forty-eight (48) hours of its receipt and the
Company shall have the right to seek any appropriate legal remedy or waive
compliance with this Section 5.16. In no event shall a Member or its
representatives furnish more than that portion of the Confidential Information
which it is legally required to disclose. In the event of a breach or threatened
breach of this Section 5.16, the Company shall be entitled to any and all
additional and alternative legal and equitable remedies available.
ARTICLE 6
---------
DIRECTORS
---------
6.1 MANAGEMENT. The business and affairs of the Company shall be
managed by the Directors. For purposes of Section 1705.25 of the Act and this
Agreement, a Director shall have the same rights and authority to act on behalf
of the Company as would a "Manager" as that term is defined in the Act. A
director need not be a Member. Except for situations in which the approval of
the Members is expressly required by this Agreement or by nonwaivable provisions
of applicable law, the Directors shall have full and complete authority, power
and discretion to manage and control the business, affairs and properties of the
Company, to make all decisions regarding those matters and to perform any and
all other acts or activities customary or incident to the management of the
Company's business.
6.2 NUMBER.
a. The number of Directors serving the Company shall be
determined initially by the Founding Members, and after the
Offering, shall be determined by the majority vote of all
Directors then serving, and shall at all times from and
after the Offering consist of not less than seven (7) and no
more than nine (9) Directors. If the Directors vote to
increase or decrease the number of Directors, a majority of
the Directors then serving shall appoint a new Director or
Directors to fill the vacancy and set the initial term or
remove a Director or Directors in order to decrease the
number of Directors then serving.
b. The Founding Members hereby designate the following persons
to serve as the initial Directors of the Company:
William A. Cleland, Jr.
Eugene Schubert
Lynn Bergman
8
Gary Mavis
James Joost
Virgil Hoene
Fred Schubert
6.3 TENURE OF OFFICE. The Persons designated above shall each serve as
Directors for initial terms as follows:
a. Lynn Bergman, Gary Mavis and Fred Schubert's initial term
shall end at the annual Member meeting held in 2003;
b. William A. Cleland, Jr. and Eugene Schubert's initial term
shall end at the annual Member meeting held in 2004; and
c. Virgil Hoene and James Joost's initial term shall end at the
annual Member meeting held in 2005.
6.4 NOMINATING DIRECTORS. One or more nominees for each Director
vacancy up for election shall be named by the then current Directors or by a
nominating committee established by the Directors. The nominating committee
established by the Directors is permitted to accept nominations from any Member,
provided, however, that any Member desiring to make a nomination shall provide
written notice of such Member's intent to make such nomination or nominations,
either by personal delivery or by United States mail, postage prepaid, to the
secretary of the Company at least sixty (60) days prior to the date established
for the purpose of electing Directors, which date for such meeting shall be
determined by reference to the date which is exactly one year after the date
established for the immediately preceding annual meeting of the Members. Each
notice to the secretary shall set forth:
a. the name and address of record of the Member who intends to
make the nomination;
b. the name, age, business and residence address, and principal
occupation or employment of each nominee;
c. such other information regarding each nominee proposed by
such Member as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the
Securities and Exchange Commission; and
d. the consent of each nominee to serve as a Director of the
Company if so elected.
The Directors or the nominating committee may require any proposed nominee to
furnish such other information as may be reasonably required by the Company to
determine the eligibility of such proposed nominee to serve as a Director of the
Company. The Directors or the nominating committee may, if the facts warrant,
determine that a nomination was not made in accordance with the foregoing
procedure, and if it is so determined, the Directors or the nominating committee
so shall declare that the nomination is defective and it shall be disregarded.
In addition to the procedure outlined above in which the Directors or the
nominating committee can declare a nomination defective, the Directors or the
nominating committee shall, from time to time, establish a procedure and
formulate criteria by which nominees shall be considered to serve as Directors
of the Company. The Directors or the nominating committee shall review such
nominees and make recommendations to all of the Directors then serving
concerning a nominee's qualifications to serve as a Director. The Directors
shall then determine the nominees who are eligible to serve as Directors and
shall present such nominees to the Members for approval.
6.5 ELECTION OF DIRECTORS. At each meeting of the Members for the
election of Directors, the nominees receiving the greatest number of votes shall
become the Directors. Directors may be elected at any meeting of the Members if
the notice thereof states that one of the purposes of such meeting is the
election of Directors.
6.6 TENURE OF OFFICE. Except as otherwise provided in Section 6.3
herein, the Directors shall serve for a period of three (3) years. Each Director
shall hold office until the annual meeting of the Members following the Fiscal
Year in which such Director's term expires and shall serve until his or her
successor is elected and qualified, or until his or her earlier resignation,
removal from office or death. A Director may be removed for cause by the Members
pursuant to Section 6.7.
9
6.7 REMOVAL OF DIRECTORS FOR CAUSE. At a duly noticed meeting, the
Members, by a Majority Vote, may remove a Director or Directors for "Cause".
Cause is defined as any fraud, gross negligence, intentional misconduct or act
outside the scope of duties and obligations of any Director pursuant to this
Agreement that has a material adverse effect on the Company. A Director shall
not be removed until the Director is notified of the alleged grounds for removal
and is given an opportunity to respond to such allegations at such duly noticed
meeting. The removal of a Director or Directors shall be effective upon the
Majority Vote of the Members.
6.8 RESIGNATION. A Director 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 is specified, then at the time of its receipt by 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.
6.9 VACANCY. Whenever a vacancy occurs other than from expiration of a
term of office, a majority of the remaining Directors shall appoint a new
Director to fill the vacancy for the remainder of such term.
6.10 MEETINGS. A regular meeting of the Directors shall be held
immediately following the adjournment of the annual meeting of the Members or a
special meeting of the Members at which Directors are elected. The holding of
such Members' meeting shall constitute notice of such Directors' meeting and
such meeting may be held without further notice. Other regular meetings of the
Directors shall be held at such other times and places as may be fixed by the
Directors. Special meetings of the Directors may be held at any time upon call
of the chairman of the board, the president, any vice president or any two
Directors. Any meeting of Directors may be held at any place within or without
the State of Ohio in person and/or through any communications equipment if all
persons participating in the meeting can hear each other or as otherwise
provided by the Act. The chairman of the board, or in his absence, such other
person as may be designated by the Directors, shall preside at any meeting of
the Directors.
6.11 NOTICE OF MEETING. Except as provided in Section 6.10, notice of
the time and place of any regular or special meeting of the Directors shall be
given to each Director by personal delivery, by mail, or by facsimile at least
forty-eight (48) hours before the meeting, which notice need not specify the
purpose of the meeting. Such notice, however, may be waived in writing by any
Director either before or after any such meeting, or by attendance at such
meeting (including presence by means of participation through any communications
equipment as provided in Section 6.10 herein) without protest prior to the
commencement thereof.
6.12 QUORUM AND VOTING. At any meeting of the Directors, no fewer than
a majority of the whole authorized number of Directors must be present, in
person and/or through any communications equipment, to constitute a quorum for
such meeting, except that a majority of the remaining Directors in office
constitute a quorum for filling any vacancy. At any meeting at which a quorum is
present, all acts, questions and business which may come before the meeting
shall be determined by a majority of the Directors present at such meeting,
unless the vote of a greater number is required by law or this Agreement.
6.13 ACTION WITHOUT A MEETING. Any action which may be authorized or
taken by the Directors may be authorized or taken without a meeting if the
consent or consensus setting forth the action taken is signed by the number of
Directors sufficient to take such action at a meeting of the Directors, which
writing or writings shall be filed with or entered upon the records of the
Company.
6.14 COMMITTEES. The Directors may from time to time appoint from
among their members at least three Directors to act as a committee or committees
in the intervals between meetings of the Directors and may delegate to such
committee or committees powers to be exercised under the control and direction
of the Directors. Each such committee and each member thereof shall serve at the
pleasure of the Directors. In particular, the Directors may create and define
the powers and duties of an executive committee. During the intervals between
meetings of the Directors, the executive committee shall possess and may
exercise all of the powers of the Directors in the management and control of the
business of the Company. All action taken by the executive committee shall be
reported to the Directors at its first meeting thereafter. Unless otherwise
provided by the Directors, a majority of the members of any committee appointed
by the Directors pursuant to this Section 6.14 shall constitute a quorum at any
meeting thereof and the act of a majority of the members present at a meeting at
which a quorum is present shall be the act of such committee. Action may be
taken by any such committee without a meeting by a writing signed by all of its
members. Any such committee shall prescribe its own rules for calling meetings
and its method of procedure, subject to any rules prescribed by the Directors,
and shall keep a written record of all action taken by it.
10
6.15 REPORTS BY DIRECTORS. The Directors shall annually make a written
report of the Company's activities during the proceeding Fiscal Year, showing
the receipts, disbursements and the assets and conditions of the Company. Such
report shall be kept on file at the principal place of business of the Company.
Reports regarding the Company's financial condition, business and operations
shall be issued not less frequently than annually to all Members.
6.16 AUTHORITY OF DIRECTORS. Subject to the limitations and
restrictions set forth in this Agreement, the Directors shall direct the
management of the business and affairs of the Company and shall have all of the
rights and powers which may be possessed by a "Manager" under the Act,
including, without limitation, the right and power to do or perform the
following and, to the extent permitted by the Act or this Agreement, the further
right and power by resolution of the Directors to delegate to the Officers or
such other person or persons to do or perform the following:
a. conduct its business, carry on its operations and exercise
the powers granted by the Act in any state, territory,
district or possession of the United States, or in any
foreign country which may be necessary or convenient to
effect any or all the purposes for which it is organized;
b. acquire by purchase, lease or otherwise any real or personal
property which may be necessary, convenient or incidental to
the accomplishment of the purposes of the Company;
c. operate, maintain, finance, improve, construct, own, grant
operations with respect to, sell, convey, assign, mortgage,
and lease any real estate and any personal property
necessary, convenient or incidental to the accomplishment of
the purposes of the Company;
d. execute any and all agreements, contracts, documents,
certifications and instruments necessary or convenient in
connection with the management, maintenance and operation of
the business, or in connection with managing the affairs of
the Company, including executing amendments to this
Agreement and the Articles of Organization in accordance
with the terms of this Agreement, both as Directors and, if
required, as attorney in fact for a Member pursuant to any
power of attorney granted by such Member to the Directors;
e. borrow money and issue evidences of indebtedness necessary,
convenient or incidental to the accomplishment of the
purposes of the Company, including the execution of a
cognovit note, and secure the same by mortgage, pledge or
other lien on any Company assets;
f. execute, in furtherance of any or all of the purposes of the
Company, a deed, lease, mortgage, deed of trust, mortgage
note, promissory note, bill of sale, contract or other
instrument purporting to convey or encumber any or all of
the Company assets;
g. prepay in whole or in part, refinance, increase, modify or
extend any liabilities affecting the assets of the Company
and in connection therewith execute any extensions or
renewals of encumbrances on any or all of such assets;
h. care for and distribute funds to the Members by way of cash,
return of capital or otherwise, all in accordance with the
provisions of this Agreement;
i. contract on behalf of the Company for the employment and
services of employees and/or independent contractors, such
as attorneys and accountants, and delegate to such persons
the duty to manage or supervise any of the assets or
operations of the Company;
j. engage in any kind of activity and perform and carry out
contracts of any kind (including contracts of insurance
covering risks to the Company's assets and Directors' and
Officers' liability) necessary or incident or in connection
with the accomplishment of the purposes of the Company, as
may be lawfully carried on or performed by a limited
liability company under the laws of each state in which the
Company is then formed or qualified;
11
k. take, or refrain from taking, all actions, not expressly
prescribed or limited by this Agreement, as may be necessary
or appropriate to accomplish the purposes of the Company;
l. institute, prosecute, defend, settle, compromise and dismiss
lawsuits or other judicial or administrative proceedings
brought on or on behalf of, or against the Company,
Directors or Officers in connection with the activities
arising out of, connected with, or incidental to this
Agreement, and to engage counsel or others in connection
therewith;
m. purchase, take, receive, subscribe for or otherwise acquire,
own, hold, vote, use, employ, sell, mortgage, lend, pledge
or otherwise dispose of, and otherwise use and deal in and
with shares or other interests and/or obligations of
domestic or foreign corporations, associations, general or
limited partnerships, other limited liability companies or
individuals, or direct and indirect obligations of the
United States of America or of any government, state,
territory, government, district or municipality or any other
instrumentality of any of them;
n. 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 as permitted by
this Agreement;
o. submit a claim or liability of the Company to arbitration;
p. establish the amount of any salary or other compensation
paid to any Director or Officer; and
q. indemnify a Director or Officer, or former Director or
Officer, and to make any other indemnification as authorized
by this Agreement in accordance with, and to the fullest
extent permitted by the Act.
6.17 RESTRICTIONS ON AUTHORITY OF DIRECTORS.
a. The Directors shall not have authority to do any of the
following acts without the unanimous consent of the Members:
i. cause or permit the Company to engage in any activity
that is inconsistent with the purposes of the Company
as set forth in Section 1.6 hereof;
ii. knowingly do any act in contravention of this Agreement
or which would make it impossible to carry on the
ordinary business of the Company, except as otherwise
provided in this Agreement; or
iii. possess Company property, or assign rights in specific
Company property, for other than a Company purpose.
b. The Directors shall not have authority to do any of the
following acts without the Majority Vote of the Members:
i. merge, consolidate, exchange or otherwise dispose of at
one time all or substantially all of the property,
except for a liquidating sale of the property in
connection with the dissolution of the Company;
ii. cause the Company to voluntarily take any action that
would cause the bankruptcy of the Company;
iii. dispose of the goodwill of the Company;
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iv. issue more than an aggregate of eight thousand (8,000)
Units; or
v. cause the Company to acquire any equity or debt
securities of any Director or any Affiliate of a
Director or otherwise make loans to any Director or any
Affiliate of a Director.
ARTICLE 7
---------
OFFICERS
--------
7.1 GENERAL PROVISIONS. The Directors shall elect a president, a
secretary and a treasurer, and may elect a chairman of the board, one or more
vice presidents, and such other Officers and assistant Officers as the Directors
may from time to time deem necessary. The chairman of the board, if any, shall
be a Director, but none of the other Officers need be a Director. Any two or
more of the offices may be held by the same person, but no Officer shall
execute, acknowledge or verify any instrument in more than one capacity if such
instrument is required to be executed, acknowledged or verified by two or more
Officers.
7.2 POWERS AND DUTIES. All Officers, as between themselves and the
Company, shall respectively have such authority and perform such duties as are
customarily incident to their respective offices, and as may be specified from
time to time by the Directors, regardless of whether such authority and duties
are customarily incident to such office. In the absence of any Officer of the
Company, or for any other reason the Directors may deem sufficient, the
Directors may delegate for the time being, the powers or duties of such Officer,
or any of them, to any other Officer or Director.
7.3 TENURE OF OFFICE. Each Officer of the Company shall hold office at
the pleasure of the Directors until his or her successor has been elected or
until his or her earlier resignation, removal from office or death. It shall be
necessary for the Officers of the Company to be elected annually by the
Directors. The election or appointment of an Officer for a given term, or a
general provision in this Agreement with respect to a term of office, shall not
be deemed to create contract rights.
7.4 REMOVAL. Any Officer may be removed, with or without cause, by the
Directors, without prejudice to the contract rights, if any, of such Officer.
7.5 INITIAL OFFICERS. As of the date of this Agreement, the Company
shall have the following Officers: president, secretary, treasurer and vice
president, and such additional offices as the Directors may from time to time
determine. As of the date of this Agreement, the following named persons shall
be elected to the offices opposite their respective names:
President William A. Cleland, Jr.
Treasurer Ted W. Penner
Secretary Ted W. Penner
Vice President Eugene Schubert
ARTICLE 8
---------
TRANSFER OF UNITS
-----------------
8.1 GENERAL. Except as otherwise permitted by this Agreement, no
Member shall Transfer all or any portion of its Units. In the event that any
Member pledges or otherwise encumbers any part of its Units as security for the
payment of a debt, any such pledge or hypothecation shall be made pursuant to a
pledge or hypothecation agreement that requires the pledgee or secured party to
be bound by all of the terms and conditions of this Article 8. In the event such
pledgee or secured party becomes a Member hereunder pursuant to the exercise of
such party's rights under such pledge or hypothecation agreement, such pledgee
or secured party shall be bound by all of the terms and conditions of this
Agreement. In such case, such pledgee or secured party, and any transferee or
purchaser of the Units held by such pledgee or secured party, shall not have any
voting rights associated with such Units unless and until the Directors have
approved in writing and admitted as a Member hereunder, such pledgee, secured
party, transferee or purchaser of such Units.
13
8.2 PERMITTED TRANSFERS. Subject to the conditions and restrictions
set forth in this Article 8, a Member may, at any time, Transfer all or any
portion of its Units:
a. to the transferor's administrator or trustee to whom such
Units are transferred involuntarily by operation of law;
b. to a transferee in which the basis of the Units in the hands
of such transferee is determined in whole or in part, by
reference to its basis in the hands of the transferor or is
determined under Section 732 of the Code;
c. to a family member, as defined in Section 267(c)(4) of the
Code;
d. to the transferor's executor or trustee to whom such Units
are transferred as a result of such transferor's death;
e. to any Member or Affiliate of another Member; or
f. to any Affiliate of the transferor.
8.3 CONDITIONS TO PERMITTED TRANSFERS. A Transfer shall not be treated
as a Permitted Transfer under Section 8.2 hereof unless and until the Directors
have approved such Transfer as set forth in Section 8.2 and 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 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 to the Company
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 any other
information statements or returns as required by law.
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 involuntarily by operation
of law, either: (i) such Units shall be registered under the
Securities Act, and any applicable state securities laws; or
(ii) the transferor or transferee shall provide an opinion
of counsel, which opinion of counsel shall be reasonably
satisfactory to the Directors, to the effect that such
Transfer is exempt from all applicable registration
requirements and that such Transfer will not violate any
applicable laws regulating the transfer of securities.
d. Except in the case of a Transfer involuntarily by operation
of law, the transferor shall provide an opinion of counsel,
which opinion of counsel shall be reasonably satisfactory to
the Directors, to the effect that such Transfer will not
cause the Company to be deemed to be an "investment company"
under the Investment Company Act of 1940.
e. Unless otherwise approved by the Directors and Members
holding in the aggregate sixty-seven percent (67%) of the
voting rights of the Units, a Transfer may not occur if such
14
Transfer results in the termination of the Company within
the meaning of Section 708 of the Code. If the immediate
Transfer of such Units would cause a termination of the
Company within the meaning of Section 708 of the Code, then
the transferor Member may be entitled (or required, as the
case may be) to: (i) immediately Transfer only that portion
of its Units that will not cause such termination; and (ii)
enter into an agreement to Transfer the remainder of its
Units, in one or more Transfers, at the earliest date or
dates on which such Transfer or Transfers may be effected
without causing such termination. The purchase price for the
Units shall be allocated between the immediate Transfer and
the deferred Transfer or Transfers pro rata on the basis of
the percentage of the aggregate Units being transferred,
each portion to be payable when the respective Transfer is
consummated, unless otherwise agreed by the parties to the
Transfer. In the case of a Transfer by one Member to another
Member, the deferred purchase price shall be deposited in an
interest-bearing escrow account unless another method of
securing the payment thereof is agreed upon by the
transferor Member and the transferee Member(s). 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 all prior
written commitments to Transfer made pursuant to this
Agreement and such commitments shall always be given
precedence over subsequent proposed Transfers.
f. No notice or request initiating the procedures contemplated
by Section 8.3 may be given by any Member after a
Liquidating Event has occurred. No Member may sell all or
any portion of its Units after a Dissolution Event has
occurred.
g. No Person shall Transfer any Unit if, in the determination
of the Directors, such Transfer would cause the Company to
be treated as a "publicly traded partnership" within the
meaning of Section 7704(b) of the Code.
h. The Directors shall have the authority to waive any legal
opinion or other condition required in this Section 8.3
other than the Member approval requirement set forth in
Section 8.3(e).
8.4 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 Directors, in their sole discretion, elect to recognize
a Transfer that is not a Permitted Transfer), the Units
Transferred shall strictly be limited to the Transferor's
Membership Economic Interest as provided by this Agreement
with respect to the transferred Units, which Membership
Economic Interest may be applied (without limiting any other
legal or equitable rights of the Company) to satisfy any
debts, obligations or liabilities for damages that the
transferor or transferee of such interest may have to the
Company.
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, attorneys' fees and
expenses) as a result of such Transfer or attempted Transfer
and efforts to enforce the indemnity granted hereby.
8.5 RIGHTS OF UNADMITTED ASSIGNEES. A Person who acquires Units but who
is not admitted as a Substitute Member pursuant to this Article 8 shall be
entitled only to the Membership Economic Interest with respect to such Units in
accordance with this Agreement, and shall not be entitled to any voting rights
with respect to such Units. In addition, such Person shall be treated as an
Assignee for all purposes under the Act and this Agreement. Upon the Transfer of
a Member's Units to an Assignee who is not admitted as a Member with respect to
the transferred Units, the Company shall purchase from the transferring Member,
and the transferring Member shall sell to the Company for the purchase price of
one hundred dollars ($100.00), all remaining rights and interests retained by
the transferring Member associated with the transferred Units.
15
8.6 ADMISSION OF SUBSTITUTE MEMBERS. As to Permitted Transfers, a
transferee of Units shall be admitted as a Substitute Member provided that such
transferee has complied with the following provisions:
a. The transferee of Units shall, by written instrument in form
and substance reasonably satisfactory to the Directors: (i)
accept and adopt the terms and provisions of this Agreement,
including this Article 8, unless such transferee is already
a Member; and (ii) assume the obligations of the transferor
Member under this Agreement with respect to the transferred
Units. Except as provided herein, the transferor Member
shall be released from all such assumed obligations except
those obligations or liabilities arising out of breach of
this Agreement. In the case of a Transfer to any Person,
other than a Member or any of its Affiliates, the transferor
Member shall not be released from those obligations or
liabilities based on events occurring, arising or maturing
prior to the date of Transfer. Finally, in the case of a
Transfer to any of its Affiliates, the transferor Member
shall not be released from its obligation to make any
Capital Contribution or other financing obligation
previously agreed upon.
b. The transferor or the transferee shall pay or reimburse the
Company for all reasonable legal, filing and publication
costs that the Company incurs in connection with the
admission of the transferee as a Member with respect to the
transferred Units.
c. Except in the case of a Transfer involuntarily by operation
of law, the transferee 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.
The transferee and transferor shall each execute and deliver
such other instruments as the Directors reasonably deem
necessary or appropriate to effect such Transfer. The
Directors may waive the requirements specified above if the
transferee was a Member prior to the Transfer.
8.7 REPRESENTATIONS REGARDING TRANSFERS; LEGEND.
a. Each Member hereby covenants and represents to 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 or a secondary market (or the substantial
equivalent thereof) within the meaning of Section 7704(b) of
the Code and the Regulations promulgated thereunder; and
(iii) it will not Transfer its Units through a matching
service as that term is defined under the Regulations
promulgated under Section 7704 of the Code unless such
Transfer is 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
8.7 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 solely for such Member's own account and
not for resale or distribution of such Units. Each Member
further hereby agrees that the following legend, as the same
may be amended by the Directors in their sole discretion,
may be placed upon any counterpart of this Agreement, any
certificates issued by the Company representing the
ownership of Units or any other document or instrument
evidencing ownership of Units:
THE TRANSFERABILITY OF THE UNITS REPRESENTED BY THIS
DOCUMENT IS RESTRICTED. SUCH UNITS MAY NOT BE SOLD,
ASSIGNED, TRANSFERRED OR PLEDGED, NOR WILL ANY ASSIGNEE,
VENDEE, TRANSFEREE, PLEDGEE OR ENDORSEE THEREOF BE
RECOGNIZED AS HAVING ACQUIRED ANY SUCH UNITS FOR ANY
PURPOSES, UNLESS AND TO THE EXTENT SUCH SALE, TRANSFER,
HYPOTHECATION, ASSIGNMENT OR PLEDGE IS PERMITTED BY, AND IS
COMPLETED IN STRICT ACCORDANCE WITH THE
16
TERMS AND CONDITIONS SET FORTH IN THE OPERATING AGREEMENT OF
THE COMPANY, AS AMENDED FROM TIME TO TIME. THE SECURITIES
REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, OFFERED FOR
SALE OR TRANSFERRED IN THE ABSENCE OF EITHER AN EFFECTIVE
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND UNDER APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH TRANSACTION IS
EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND UNDER APPLICABLE STATE SECURITIES LAWS.
8.8 DISTRIBUTIONS AND ALLOCATIONS IN RESPECT OF TRANSFERRED UNITS. If
any Units are Transferred during any Fiscal Year in compliance with the
provisions of this Article 8, Profits, Losses, credits 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 Section 706(d) of
the Code, using any conventions permitted by law and selected by the Directors.
Any Transfer of Units shall be deemed effective as of the last day of the
calendar month in which the last of the conditions specified in this Article 8
is satisfied. All Distributions on or before the date of Transfer shall be made
to the transferor, and all Distributions thereafter shall be made to the
transferee.
8.9 LOST, DESTROYED OR STOLEN CERTIFICATES. Unless otherwise provided
in this Agreement, those Persons listed on EXHIBIT A attached hereto shall be
treated as the record owners of the Units reflected opposite their name. The
Company shall have the ability to rely on such information for all purposes
under the Act or this Agreement. A new Unit certificate or certificates may be
issued in place of any certificate theretofore issued by the Company which is
alleged to have been lost, destroyed or wrongfully taken upon: (a) the execution
and delivery to the Company by the record owner claiming the certificate to have
been lost, destroyed or wrongfully taken of an affidavit or affirmation of that
fact, in a form satisfactory to the Company, specifying whether or not, at the
time of such alleged loss, destruction or taking, the certificate was endorsed;
and (b) the furnishing to the Company of indemnity and other assurances
satisfactory to the Company against any and all losses, damages, costs, expenses
or liabilities to which they or any of them may be subjected by reason of the
issue and delivery of such new certificate or certificates or in respect of the
original certificate. In its discretion, the Company may require a bond of
indemnity, in such form and with one or more sureties satisfactory to the
Company, from the person claiming the certificate to have been lost, destroyed
or wrongfully taken. When a Unit certificate has been lost, or appears to have
been destroyed or wrongfully taken, and the owner fails to notify the Company of
that fact within a reasonable time after he has notice of it, and the Company
registers a transfer of the Unit represented by the certificate before receiving
such a notification, the owner shall be precluded from asserting against the
Company any claim arising from the registration of the transfer or any claim to
a new certificate.
8.10 WITHDRAWAL OF MEMBER. A Member may not withdraw from the Company
unless and until the Directors consent in writing to such withdrawal, which
consent may be arbitrarily withheld. In the event any Member withdraws prior to
the termination of the Company, the withdrawing Member shall have no right to
compel a liquidation of his Units and the withdrawing Member shall thereafter
hold Units as an Assignee.
ARTICLE 9
---------
DISSOLUTION; TERMINATION OF COMPANY
-----------------------------------
9.1 DISSOLUTION. The Company shall terminate upon the earliest to
occur of any of the following events ("Liquidating Event"):
a. the sale, transfer or other disposition of all or
substantially all of the Company's assets;
b. the affirmative vote of Members holding in the aggregate
more than fifty percent (50%) of voting rights of the Units,
to dissolve, windup and liquidate the Company; or
c. upon entry of a decree of judicial dissolution.
17
Upon the occurrence of any Liquidating Event, a certificate of
cancellation containing the information required by the Act shall be delivered
to the Secretary of State of the State of Ohio for filing.
9.2 LIQUIDATION. Upon the occurrence of a Liquidating Event of the
Company under Section 9.1, the Company shall continue solely for the purposes of
winding up its affairs in an orderly manner, liquidating its assets and
satisfying the claims of its creditors and Members, and no Member shall take any
action that is inconsistent with, or not necessary to or appropriate for,
winding up the Company's business and affairs. To the extent not inconsistent
with the foregoing, all covenants and obligations in this Agreement shall
continue in full force and effect until such time as the assets have been
distributed pursuant to this Section 9.2 and the Company is terminated. The
Directors shall be responsible for overseeing the winding up and dissolution of
the Company, shall take full account of the Company's assets and liabilities,
and shall apply and distribute the assets in kind or distribute the proceeds
therefrom in the following order and priority:
a. first, to the payment of the expenses of liquidation and the
expenses, debts and liabilities of the Company, including
any loans or advances that may have been made by the Members
to the Company (including the Loans), but if the amount
available for such repayment shall be insufficient, then pro
rata on account thereof;
b. second, to the establishment of any reserves deemed
necessary by the Directors for any contingent liabilities or
obligations of the Company; c. third, to the Members in
proportion to their respective positive Capital Account
balances (as determined after giving effect to all
contributions, Distributions and allocations for all Fiscal
Years of the Company, including the Fiscal Year during which
the dissolution of the Company occurs); and d. the balance,
if any, shall be distributed among the Members in proportion
to the total number of Units owned by each Member as
compared to the total number of Units owned by all of the
Members.
No Member shall receive any additional compensation for any services performed
pursuant to this Section 9.2. This Section 9.2 shall not apply in the case of a
Regulatory Liquidation.
9.3 FINAL ACCOUNTING. Each Member (or his legal representative or
successor-in-interest) shall be furnished with a statement prepared by the
Directors that shall set forth the assets and liabilities of the Company as of
the date of termination. Upon compliance with the foregoing distribution plan,
the Members shall cease to be such, and the DIRECTORS shall execute and cause to
be filed, distributed or published any and all notices and documents as may be
necessary or appropriate with respect to the termination of the Company.
ARTICLE 10
----------
INDEMNIFICATION
---------------
10.1 MANDATORY INDEMNIFICATION. The Company shall indemnify, to the
fullest extent now or hereafter permitted by law, any Director or Officer who
was or is a party or is threatened to be made a party to, or is involved in, any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereafter, a "proceeding"), by reason
of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a Director or Officer of the Company, whether the
basis of such proceeding is alleged action in an official capacity as a
Director, Officer, employee or agent or in any other capacity while serving as a
Director, Officer, employee or agent, against all expense, liability and loss
(including attorneys' fees), judgments, fines, excise taxes or penalties and
amounts paid or to be paid in settlement, reasonably incurred or suffered by
such person in connection therewith and such indemnification shall continue as
to a person who has ceased to be a Director, Officer, employee or agent and
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that, except as provided in Section 10.4 hereof, the Company
shall indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such proceeding
(or part thereof) was authorized by the Directors of the Company.
18
10.2 PERMISSIVE INDEMNIFICATION. The Company may indemnify any
employee or agent of the Company only if and to the extent that the Directors
may, in their discretion, so determine.
10.3 PAYMENT OF EXPENSES. Expenses, including attorneys' fees,
incurred by a Director or Officer of the Company in defending any proceeding
referred to in Section 10.1 hereof, shall be paid by the Company in advance of
the final disposition of such proceeding upon receipt of an undertaking by or on
behalf of the Director or Officer to repay such amount unless it shall
ultimately be determined that he or she is entitled to be indemnified by the
Company as authorized in this Article 10, which undertaking may be secured or
unsecured, at the discretion of the Directors.
10.4 ACTION TO COMPEL PAYMENT. If a claim under Article 10 hereof is
not paid in full by the Company within thirty (30) days after a written claim
therefor has been received by the Company, the claimant may at any time
thereafter bring suit against the Company to recover the unpaid amount of the
claim and, if successful in whole or in part, the claimant shall be entitled to
also be paid the expenses of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the Company)
that the claimant has not met the standards of conduct which makes it
permissible under the Act for the Company to indemnify the claimant for the
amount claimed, but the burden of proving such defense shall be on the Company.
Neither the failure of the Company (including its Directors, independent legal
counsel, or its Members) to have made a determination prior to the commencement
of such action that indemnification of the claimant is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in the Act, nor an actual determination by the Company (including its
Directors, independent legal counsel, or it Members) that the claimant has not
met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
10.5 NONEXCLUSIVE REMEDY. The indemnification and advancement of
expenses provided under this Article 10 shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any law, the Articles of Organization, this Agreement, any
other agreement, vote of the Members or of disinterested Directors or otherwise,
both as to action in their official capacity and as to action in another
capacity while holding such office.
10.6 CONTRACTUAL OBLIGATION. This Article 10 shall be deemed to be a
contract between the Company and each Director or Officer of the Company who
serves in such capacity at any time while this Article 10 is in effect, and any
repeal, amendment or other modification of this Article 10 shall not affect any
rights or obligations then existing with respect to any state of facts then or
theretofore existing or any action, suit or proceeding theretofore or thereafter
brought or threatened based in whole or in part upon any such state of facts.
10.7 SAVINGS CLAUSE. If this Article 10 or any portion hereof shall be
invalidated or found unenforceable on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify each Director,
Officer, employee or agent, of the Company against expenses (including
attorneys' fees), judgments, fines, excise taxes, penalties and amounts paid in
settlement with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, to the full extent permitted by any
applicable portion of this Article 10 that shall not have been invalidated or
found unenforceable, or by any other applicable law.
10.8 INSURANCE. The Company may maintain insurance, at its expense, to
protect itself and on behalf of any Director, Officer, employee or agent of the
Company, against any such expense, liability or loss, whether or not the Company
would have the power to indemnify such person against such expense, liability or
loss under the Act.
ARTICLE 11
----------
MISCELLANEOUS
-------------
11.1 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Ohio without regard to principals of
conflicts of law. The Members consent to the jurisdiction of the courts of the
State of Ohio and agree that any action arising out of or to enforce this
Agreement must be brought and maintained in Ohio.
19
11.2 AMENDMENTS. This Agreement may be amended by the Directors to:
(a) reflect the disposition by a Member of all or any part of his Units (subject
to the provisions hereof); (b) reflect the substitution or addition of a Person
becoming a Member (subject to the provisions hereof); or (c) cure any ambiguity
or to correct or supplement any provision herein which may be inconsistent with
any other provision herein. All other amendments to this Agreement shall require
the approval of Members holding in the aggregate at least sixty-seven percent
(67%) of the voting rights of the outstanding Units.
11.3 FURTHER ACTION. As required from time to time in furtherance of
the business of the Company, the parties hereto agree to execute and deliver all
documents, provide all information and take or refrain from taking all such
action as may be necessary or appropriate to achieve the purpose of this
Agreement.
11.4 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and, subject to the provisions hereof, their
respective heirs, executors, personal representatives, successors and assigns.
11.5 RATIFICATION. Each Member shall, and does hereby ratify each,
every, and all of the acts heretofore accomplished and/or performed by the
Directors, the Officers, the Members and their agents for or on behalf of the
Company prior to the execution of this Agreement.
11.6 ENTIRE AGREEMENT. This Agreement contains the entire
understanding among the parties and supersedes any prior understanding and
agreements among them with respect to the subject matter hereof. There are no
representations, agreements, arrangements or understandings, oral or written,
between and among the parties hereto relating to the subject matter of this
Agreement which are not fully expressed herein.
11.7 REFERENCES. The use of the term "this Agreement" and/or the words
"herein", "hereof", "hereunder" and other similar compounds of the word "here"
shall refer to this entire instrument (and any agreement supplemental to this
instrument) and not merely to any particular article, section, paragraph,
provision or item. Unless something in the subject matter or the context is
inconsistent therewith, references herein to articles, sections and paragraphs
are to articles, sections and paragraphs of this Agreement. Whenever in this
Agreement the word "including" is used, it shall be deemed to be for purposes of
identifying only one or more of the possible alternatives, and the entire
provision in which such word appears shall be read as if the phrase "including
without limitation" were actually used in the text. The titles, headings or
captions contained in this Agreement are for convenience of reference only and
in no way define, limit, extend or describe the scope of this Agreement or the
intent of any of the provisions hereof. As used in this Agreement, the words
Member, Director, Officer or any pronoun used in designation shall be construed
to include the plural as well as the singular number, and the masculine,
feminine and/or neuter gender, as appropriate to the designation of the party or
parties to which such words refer.
11.8 SEVERABILITY. This Agreement is intended to be performed in
accordance with, and only to the extent permitted by, all applicable laws,
ordinances, rules and regulations of the jurisdiction in which the Company does
business. If any provision of this Agreement, or the application thereof to any
Person or circumstances, shall, for any reason and to any extent, be invalid or
unenforceable, the remainder of this Agreement and the application of such
provision to other Persons or circumstances, shall not be affected thereby, but
rather shall be enforced to the greatest extent permitted by law.
11.9 NOTICES. Notice to Members or to the Company shall be deemed to
have been given when mailed by regular mail, to the addresses set forth in
EXHIBIT A attached hereto, unless a more current address appears on the books
and records of the Company or has been provided by a Member in writing delivered
to the Company at the location of the principal place of business stated in
Section 1.5 hereof.
11.10 COUNTERPARTS. This Agreement and any amendments hereto may be
executed in multiple counterparts, each of which shall be deemed an original and
all of which shall constitute one and the same instrument, binding on all
Members, and the signature of any party to any counterpart shall be deemed to be
a signature to, and may be appended to, any other counterpart.
11.11 EXHIBITS. Each exhibit, schedule or certificate attached to this
Agreement is incorporated and made a part of this Agreement for all purposes.
20
11.12 PARTNERSHIP STATUS FOR TAX PURPOSES; LIMITED LIABILITY COMPANY
STATUS FOR STATE LAW PURPOSES.
a. It is intended that the Company be treated as a partnership
for federal, state and local income tax purposes (but not
for non-tax purposes). Accordingly, this Agreement shall be
construed in a manner that ensures the Company's
classification as a partnership for federal, state and local
income tax purposes at all times, and any provision of this
Agreement that would have the effect of preventing the
Company from being classified as a partnership for federal,
state and local income tax purposes shall be null and void.
The Members shall take all actions, and execute, acknowledge
and deliver all documents, which in the judgment of the
Directors, or in the opinion of counsel satisfactory to the
Company, are necessary or desirable to obtain and/or
maintain the Company's classification as a partnership for
such purposes at all times.
b. Notwithstanding the foregoing, it is intended (and the
Members specifically agree) that the Company be classified
as a limited liability company under the Act and for all
other non-tax purposes. No Member shall be construed to be a
partner in the Company or a partner of any other Member or
Person. The Articles of Organization and this Agreement and
the relationships created thereby and arising therefrom
shall not be construed to suggest otherwise.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
21
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
/s/ Richard Yoder /s/ J.J. Timbrook
- ----------------------------------------------------- ----------------------------------------------------
Richard Yoder J.J. Timbrook
/s/ Gary Mavis /s/ Richard Wirth
- ----------------------------------------------------- ----------------------------------------------------
Gary Mavis Richard Wirth
/s/ Virgil Hoene /s/ Joseph Schubert
- ----------------------------------------------------- ----------------------------------------------------
Virgil Hoene Joseph Schubert
/s/ Eugene H. Schubert /s/ John D. Mcguire
- ----------------------------------------------------- ----------------------------------------------------
Eugene H. Schubert John D. McGuire
/s/ Fred Schubert /s/ Ted W. Penner
- ----------------------------------------------------- ----------------------------------------------------
Fred Schubert Ted W. Penner
/s/ Rick Hall /s/ Mike Cook
- ----------------------------------------------------- ----------------------------------------------------
Rick Hall Mike Cook
/s/ Donald Rethmel
- -----------------------------------------------------
Donald Rethmel 5C's Farms, Inc.
/s/ Robert Rethmel By: /s/ William A. Cleland, President
- ----------------------------------------------------- -------------------------------------------------
Robert Rethmel
Spatial Ag Systems, LLC
/s/ David R. Bruggeman
- -----------------------------------------------------
David R. Bruggeman By: /s/ James F. Joost, Member
-------------------------------------------------
/s/ Philip Yoder Timbrook Farms
- -----------------------------------------------------
Philip Yoder
By: /s/ Steve Timbrook
-------------------------------------------------
/s/ Scott Mavis
- -----------------------------------------------------
Scott Mavis Rosebrock Farms
/s/ Clint Zeedyk By: /s/ Randy Rosebrock
- ----------------------------------------------------- -------------------------------------------------
Clint Zeedyk
Nester Ag Management
/s/ Chad Bok
- -----------------------------------------------------
Chad Bok By: /s/ Joel Nester, Owner
-------------------------------------------------
/s/ William Bauer, Jr.
- -----------------------------------------------------
William Bauer, Jr. Ney Oil Company
/s/ Bernard J. Czartoski By: /s/ Lynn Bergman, President
- ----------------------------------------------------- ------------------------------------------------
Bernard J. Czartoski
"FOUNDING MEMBERS"
22
APPENDIX
--------
"Act" means Chapter 1705 of the Ohio Revised Code, as amended from
time to time.
"Adjusted Capital Account Deficit" of a Member or Assignee means the
deficit balance, if any, in a Capital Account as of the end of the relevant
Fiscal Year, after giving effect to the following adjustments:
a. increase such Capital Account by any amounts which such
Person is obligated to restore to the Company pursuant to
Section 1.704-1(b)(2)(ii)(c) of the Regulations or is deemed
to be obligated to restore pursuant to the next to the last
sentence of Section 1.704-2(g)(1) of the Regulations or the
next to the last sentence of Section 1.704-2(i)(5) of the
Regulations; and
b. decrease such Capital Account by the amount of the items
described in Sections 1.704-1(b)(2)(ii)(d)(4), (5), and (6)
of the Regulations.
The foregoing definition of Adjusted Deficit Capital Account Balance
is intended to comply with the provision of Section 1.704-1(b)(2)(ii)(d) of the
Regulations and shall be interpreted consistently therewith.
"Affiliate" means, when used with reference to a specified Person: (a)
any Person who directly or indirectly, controls or is controlled by, or is under
common control with the specified Person; (b) any Person who is an officer,
director, employee, trustee, partner or member of, or serves in a similar
capacity with respect to the specified Person, or of which the specified Person
is an officer, director, employee, trustee, partner or member, or with respect
to which the specified Person serves in a similar capacity; (c) any Person who,
directly or indirectly, is the beneficial owner of ten percent (10%) or more of
any class of equity securities or partnership or limited liability company
interests of, or otherwise has a substantial beneficial interest in, the
specified Person or of which the specified Person is directly or indirectly the
owner of ten percent (10%) or more of any class of equity securities or
partnership or limited liability company interests or in which the specified
Person has a substantial beneficial interest; and (d) any relative of the
specified Person (and for this purpose, a relative means a Person's spouse and
the lineal descendants, ancestors and siblings of such Person or his spouse).
"Agreement" means this Operating Agreement as amended from time to
time.
"Articles of Organization" means the Articles of Organization of the
Company as properly adopted and amended from time to time by the Members and
filed with the Secretary of State of the State of Ohio pursuant to the Act.
"Assignee" means an assignee or transferee of Units who is not a
Member at the time of the assignment or Transfer and is not admitted as a
Substitute Member.
"Capital Account" means the amount of cash and fair market value of
services or property (net of any liabilities secured by contributed property
that the Company is considered to assume or take subject to under Section 752 of
the Code) that a Member or Assignee has contributed to the Company as Capital
Contributions, adjusted as follows:
a. the Capital Account shall be increased by all Profits
allocated to such Person pursuant to Article 4 hereof;
b. the Capital Account shall be decreased by: (i) the amount of
cash and the fair market value of all property distributed
to such Person by the Company (net of liabilities securing
such distributed property that such Person is considered to
assume or take subject to under Section 752 of the Code) and
(ii) all Losses allocated to such Person pursuant to Article
4 hereof;
c. the Capital Account shall be credited in the case of an
increase or debited in the case of a decrease to reflect
such Person's allocable share of any adjustment to the
adjusted basis of Company assets pursuant to Section 734(b)
of the Code to the extent provided by Section
1.704-1(b)(2)(iv)(m) of the Regulations;
d. the Capital Account shall be adjusted in any other manner
required by Section 1.704-1(b)(2)(iv) of the Regulations or
otherwise, in order to be deemed properly maintained for
federal income tax purposes;
e. Capital Accounts shall not bear interest; and
f. the transferee of Units shall succeed to the Capital Account
attributable to the Units transferred.
"Capital Contributions" means any contribution of cash or property to
the Company made by or on behalf of a Member or Assignee pursuant to Article 3
hereof.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Company" means the limited liability company organized pursuant to
the Articles of Organization and this Agreement, and any successor limited
liability company.
"Company Minimum Gain" has the meaning set forth in Sections
1.704-2(b)(2) and 1.704-2(d) of the Regulations.
"Curative Allocations" means the following allocations of income,
gain, loss or deduction. 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 as
described herein. Therefore, notwithstanding any other provision of Article 4
hereof (other than the Regulatory Allocations), the Directors shall make such
offsetting allocations of income, gain, loss or deduction in whatever manner the
Directors determine appropriate so that, after such offsetting allocations are
made, each Capital Account balance is, to the extent possible, equal to the
Capital Account balance such Person would have had if the Regulatory Allocations
were not part of this Agreement. In exercising their discretion hereunder, the
Directors shall take into account future Regulatory Allocations that, although
not yet made, are likely to offset other Regulatory Allocations previously made.
"Directors" means those individuals set forth in Section 6.2(b)
hereof, and their successors.
"Dissolution" means the voluntary or involuntary cessation of business
activities of any Person under the laws of the state in which the entity is
organized.
"Distribution" means a transfer of cash or property to a Member or
Assignee on account of Units as described in Article 4 hereof.
"Facilities" shall mean the ethanol production facility to be located
near Hicksville, Ohio or such other location as may be determined by the
Directors to be constructed and operated by the Company.
"Fiscal Year" means the taxable year of the Company.
"Founding Members" shall mean those Persons who have purchased Units
prior to the Offering and more fully described on EXHIBIT A attached hereto.
"Investor" means any Person who purchases Units pursuant to the
Offering.
"Liquidating Event" means an event, the occurrence of which will
result in the dissolution of the Company under Article 9 hereof.
"Majority-in-Interest" means Members holding from time to time a
majority of the outstanding Units.
"Majority Vote" means, at any given time, Members voting affirmatively
on a matter holding in the aggregate more than fifty percent (50%) of the
outstanding Units held by such Members and entitled to vote thereon.
ii
"Member" means any Person, including the Founding Members, who has
signed this Agreement as a Member and whose subscription has been accepted by
the Company or who is hereafter admitted as a Substitute Member of the Company
pursuant to this Agreement.
"Member Nonrecourse Debt" has the meaning set forth in Sections
1.704-2(b)(4) of the Regulations.
"Member Nonrecourse Debt Minimum Gain" means an amount, with respect
to each Member Nonrecourse Debt, equal to the Company Minimum Gain that would
result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Section 1.704-2(i)(3) of the Regulations.
"Member Nonrecourse Deductions" has the meaning set forth in Sections
1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations.
"Membership Economic Interest" shall mean a Member's share of Profits
and Losses, the right to receive Distributions, and the right to information
concerning the business and affairs of the Company provided by the Act. It shall
not include a Member's right to vote as set forth in this Agreement or required
by the Act.
"Net Cash Flow" means, for any period, the gross cash revenues
actually received from Company operations for such period less the portion
thereof used to pay operating expenses (including any additions to the Working
Capital Reserves) for such period, all as determined by the Directors. Net Cash
Flow shall not be reduced by depreciation, amortization, cost recovery
deductions or similar allowances, but shall be increased by any reductions of
Working Capital Reserves previously established.
"Nonrecourse Deductions" has the meaning set forth in Section
1.704-2(b)(1) of the Regulations.
"Nonrecourse Liability" means any Company liability (or portion
thereof) for which no Member or Assignee bears the economic risk of loss as
determined in accordance with Sections 1.704-2(b)(3) and 1.752-1(a)(2) of the
Regulations (without regard to whether those Sections apply to such liability).
"Offering" means the public offer and sale of the Units pursuant to
the Prospectus which is part of a registration statement expected to be filed
with the Securities and Exchange Commission.
"Officers" means those individuals set forth in Section 7.5 hereof,
and their successors.
"Person" means a natural person, trust, estate, partnership, limited
liability company or any incorporated or unincorporated organization,
association, or entity.
"Permitted Transfers" means any Transfer set forth in Section 8.2 that
meets the conditions set forth in Section 8.3 hereof.
"Profits" and "Losses" means, for each Fiscal Year, an amount equal to
the Company's taxable income or loss for such year or fraction thereof, as
determined in accordance with Section 703(a) of the Code, adjusted as follows:
a. tax-exempt income as described in Section 705(a)(1)(B) of
the Code realized by the Company during such Fiscal Year
shall be taken into account as if it is income;
b. expenditures of the Company described in Section
705(a)(2)(B) of the Code for such year, including items
treated under Section 1.704-1(b)(2)(iv)(i) of the
Regulations as items described in Section 705(a)(2)(B) of
the Code, shall be taken into account as if they were
deductible items;
c. items that are specially allocated shall not be taken into
account;
d. with respect to property (other than money) which has been
contributed to the capital of the Company, Profits and
Losses shall be computed in accordance with the provisions
of Section 1.704-1(b)(2)(iv)(g) of the Regulations by
computing depreciation, amortization, gain or loss upon the
fair market value of such property on the books of the
Company;
iii
e. with respect to any property of the Company which has been
revalued as required or permitted by the Regulations under
Section 704(b) of the Code, Profits or Losses shall be
determined based upon the fair market value of such property
as determined in such revaluation;
f. the differences between the adjusted basis for federal
income tax purposes and the fair market value of any asset
of the Company may be treated as gain or loss from the
disposition of such asset in the event (i) any new or
existing Member acquires an additional interest in the
Company in exchange for a contribution to capital of the
Company; or (ii) such asset of the Company is distributed to
a Member as consideration for a reduction of such Member's
interest in the Company or in liquidation of such interest
as defined in Section 1.704-1(b)(2)(ii)(g) of the
Regulations; and
g. interest paid on loans made to the Company by a Member and
salaries, fees and other compensation paid to any Member
shall be deducted in computing Profits and Losses.
"Prospectus" shall mean the final prospectus, or disclosure document,
used in the Offering.
"Registered Agent" shall mean the agent designated by the Company from
time to time for service of process pursuant to the Act.
"Regulations" except where the context indicates otherwise, means the
permanent, temporary, proposed, or proposed and temporary regulations
promulgated by the Treasury Department under the Code as such regulations may be
changed from time to time.
"Regulatory Allocations" means the following allocations of income,
gain, loss and deductions which 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
provision hereof to the contrary, if there is a net decrease
in Company Minimum Gain during any Fiscal Year, each Member
and Assignee shall be specially allocated items of Company
income and gain for such Fiscal Year (and, if necessary,
subsequent years) in an amount equal to such Member's or
Assignee's share of the net decrease in Company Minimum
Gain, determined in accordance with Section 1.704-2(g) of
the Regulations. Allocations made pursuant to the previous
sentence shall be made in proportion to the respective
amounts required to be allocated to each Member and Assignee
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 paragraph (a) is
intended to comply with the minimum gain chargeback
requirement in Section 1.704-2(f) of the Regulations and
shall be interpreted consistent therewith.
b. MEMBER MINIMUM GAIN CHARGEBACK. Except as otherwise provided
in Section 1.704-2(i)(4) of the Regulations, notwithstanding
any provision hereof to the contrary, if there is a net
decrease in Member Nonrecourse Debt Minimum Gain
attributable to a Member Nonrecourse Debt during any Fiscal
Year, each Member and Assignee who has a share of the Member
Nonrecourse Debt Minimum Gain attributable to such Member
Nonrecourse Debt, all as 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 Member's or Assignee's share of the net
decrease in Member Nonrecourse Debt Minimum Gain
attributable to such Member Nonrecourse Debt, determined in
accordance with Section 1.704-2(i)(4) of the Regulations.
Allocations pursuant to the previous sentence shall be made
in proportion to the respective amounts required to be
allocated to each Member and Assignee 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 paragraph (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.
iv
c. QUALIFIED INCOME OFFSET. In the event any Member or Assignee
unexpectedly receives any adjustments, allocations or
distributions described in Sections 1.704(b)(2)(ii)(d)(4),
1.704(b)(2)(ii)(d)(5) or 1.704(b)(2)(ii)(d)(6) of the
Regulations, items of Company income or gain (consisting of
a pro rata portion of each item of Company income, including
gross income, and gain) shall be specially allocated to each
such Member or Assignee in an amount and in a manner
sufficient to eliminate, to the extent required by the
Regulations, the Adjusted Capital Account Deficit as quickly
as possible, provided that an allocation pursuant to this
paragraph (c) shall be made only if and to the extent that
such Member or Assignee would have Adjusted Capital Account
Deficit after all other allocations provided for in these
paragraphs have been tentatively made as if this paragraph
(c) were not in this Agreement.
d. GROSS INCOME ALLOCATION. In the event any Member or Assignee
has a deficit Capital Account at the end of any Fiscal Year
that is in excess of the sum of (i) the amount such Member
or Assignee is obligated to restore pursuant to any
provision of this Agreement, and (ii) the amount such Member
or Assignee is deemed to be obligated to restore pursuant to
the penultimate sentences of Sections 1.704-2(g)(1) and
1.704-2(i)(5) of the Regulations, each such Member or
Assignee 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
paragraph (d) shall be made only if and to the extent that
such Member or Assignee would have a deficit Capital Account
in excess of such sum after all other allocations provided
for in these paragraphs have been made as if paragraph (c)
and (d) were not in this Agreement.
e. ALLOCATION OF NONRECOURSE DEDUCTIONS. Nonrecourse Deductions
for any Fiscal Year or other period shall be specially
allocated among the Members and Assignees in proportion to
their respective Capital Accounts at the end of the Fiscal
Year for which the allocation is made.
f. ALLOCATION OF MEMBER NONRECOURSE DEDUCTIONS. Any Member
Nonrecourse Deductions for any Fiscal Year or other period
shall be specially allocated to the Member or Assignee who
bears the economic risk of loss with respect to the Member
Nonrecourse Debt to which such Member Nonrecourse Deductions
are attributable in accordance with Section 1.704-2(i)(1) of
the Regulations.
g. SECTION 754 ADJUSTMENTS. To the extent an adjustment to the
adjusted tax basis of any Company asset pursuant to Section
734(b) or Section 743(b) of the Code is required pursuant to
Section 1.704-1(b)(2)(iv)(m)(2) of the Regulations to be
taken into account in determining Capital Accounts as the
result of a distribution to a Member or Assignee in complete
liquidation of his interest, 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 Members or Assignees in
accordance with their interests in the Company in the event
Section 1.704-1(b)(2)(iv)(m)(2) of the Regulations applies,
or to the Member or Assignee to whom such distribution was
made in the event Section 1.704-1(b)(2)(iv)(m)(4) of the
Regulations applies.
h. ALLOCATIONS RELATING TO TAXABLE ISSUANCE OF COMPANY
INTERESTS. Any income, gain, loss, or deduction realized as
a direct or indirect result of the issuance of a Unit by the
Company to a Member (the "Issuance Items") shall be
allocated among the Members and Assignees so that, to the
extent possible, the net amount of such Issuance Items,
together with all other allocations hereunder to each Member
and Assignee, shall be equal to the net amount that would
have been allocated to each such Member and Assignee if the
Issuance Items had not been realized.
i. TAX ALLOCATIONS. For income tax purposes, any item of
income, gain, deduction, or loss with respect to any
property (other than money) that has been contributed by a
Member or Assignee to the capital of the Company and which
is required to be allocated to Members and Assignees for
income tax purposes under Section 704(c) of the Code so as
v
to take into account the variation between the tax basis of
such property and its fair market value at the time of its
contribution, shall be allocated to the Members and
Assignees for income tax purposes in the manner required by
Section 1.704-1(b)(2)(iv)(g) of the Regulations. If the
Capital Accounts are required to be adjusted pursuant to
Section 1.704-1(b)(2)(iv)(f) or (g) of the Regulations with
respect to a revaluation of any asset of the Company,
subsequent allocation of income, gain, loss, and deduction,
including without limitation depreciation or deductions for
cost recovery with respect to such assets, shall take
account of any variation between the then existing adjusted
basis of such asset for federal income tax purposes and the
fair market value of such assets as required by Section
1.704-1(b)(2)(iv)(g) of the Regulations.
"Regulatory Liquidation" means that the Company is "liquidated" within
the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations. Notwithstanding
any other provision of Article 9 of this Agreement, in the event the Company is
liquidated within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations
but no Liquidating Event has occurred, the assets of the Company shall not be
liquidated, the Company's 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 assets and
liabilities to a new limited liability company. Immediately thereafter, the
Company shall be treated as having liquidated by distributing the interests in
the new limited liability company to the Members (and the purchaser, if any),
followed by the continuation of the business by the new limited liability
company or its dissolution and winding up. The deemed contribution of assets to
the new limited liability company and the distribution of the new limited
liability company interests to the Members of the Company shall be disregarded
for purposes of maintaining Capital Accounts. The termination of the Company
shall not change the Capital Accounts of the Members or the books of the Company
nor shall the deemed contribution of assets to the new limited liability company
create additional Section 704(c) property.
"Subscription Agreement" means any subscription or contribution
agreement or application required by the Company for a Member to own Units in
the Company.
"Substitute Member" means an Assignee who is admitted as a Member.
"Transfer" means any transfer of Units, including any sale, exchange,
gift, bequest, assignment, pledge, granting of a security interest or other
disposition, whether or not by operation of law.
"Unit" means an instrument used for purposes of determining certain
votes and making certain allocations of Profits and Losses. The number of Units
initially issued to each Member in exchange for their Capital Contribution is
set forth on EXHIBIT A which shall be amended in the event that the Company
issues additional Units or acquires any outstanding Units. Units shall not
represent a Member's interest in the capital of the Company, which shall be
determined solely by the Member's Capital Account.
"Working Capital Reserve" means such working capital, capital
expenditure and debt service reserves as the Directors reasonably determine are
necessary from time to time for the efficient and profitable operation of the
Company's business.
vi
EXHIBIT A
TO
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
NORTHWEST ETHANOL, LLC
- -------------------------------------- ------------------------------ ------------------------- -----------------------------
INITIAL CAPITAL
MEMBER CONTRIBUTION AND VALUE NUMBER OF UNITS INTEREST (%)
- -------------------------------------- ------------------------------ ------------------------- -----------------------------
Appendix B
NORTHWEST ETHANOL, LLC
EXECUTION PACKAGE
NORTHWEST ETHANOL, LCC
SUBSCRIPTION AGREEMENT
READ CAREFULLY BEFORE SIGNING
ALL SUBSCRIPTIONS ARE SUBJECT TO ACCEPTANCE BY THE COMPANY
SUBSCRIPTION AGREEMENT
This Subscription Agreement (the "Agreement") is a subscription for
investment units (the "Units") of Northwest Ethanol, LCC, an Ohio limited
liability company (the "Company"). The subscriber acknowledges that he or she
understands that the Company is relying upon the accuracy and completeness of
this Agreement in complying with its obligations under federal and state
securities laws.
1. SUBSCRIPTION. The undersigned hereby subscribes for the number of
Units indicated on page 3 of this Agreement, at a purchase price of Five
Thousand Dollars ($5,000) per Unit. The undersigned hereby tenders payment for
the full amount of the purchase price for such Units in the form of a check made
payable to Sky Bank as Escrow Agent for the Company.
2. ACCEPTANCE OF SUBSCRIPTION. It is understood and agreed that the
Company has the right to accept or reject this subscription in its discretion,
in whole or in part, and that the same shall be deemed to be accepted by the
Company only when the accompanying Acceptance of this Agreement is signed by the
Company. The undersigned understands that, once accepted by the Company, the
capital contribution accompanying this Agreement will be returned to the
undersigned with interest if the offering of Units of the Company of which this
subscription is a part fails for any reason to timely close (as described in the
Company's prospectus delivered to the undersigned in connection with the
offering of our Units (the "Prospectus")). Capitalized terms not defined herein
have the meaning given to them in the Prospectus.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS. The undersigned hereby
represents, warrants and covenants to the Company as follows:
(a) The address set forth herein is the undersigned's true and
correct principal residence or business address.
(b) The undersigned and his, her or its business, tax and/or
financial advisor(s) have obtained all information deemed
necessary or appropriate in order to evaluate the purchase of
the Units.
(c) The undersigned has adequate means of providing for his, her
or its current needs and possible personal contingencies and
he or she has no need now and anticipates no need in the
foreseeable future to sell the Units for which he, she or it
hereby subscribes. The undersigned is able to bear the
economic risks of this investment and consequently, without
limiting the generality of the foregoing, the undersigned is
able to hold the Units for an indefinite period of time and
has a sufficient net worth to sustain a loss the entire
investment in the Company in the event such loss should occur.
(d) The undersigned, either alone or with his, her or its
business, tax and/or financial advisor(s), has such knowledge
and experience in financial and business matters as to be
capable of evaluating the merits and risks of an investment in
the Company and of protecting his, her or its interests in
connection with this transaction. The undersigned recognizes
that an investment in the Company involves a high degree of
risk. The undersigned further understands that an investment
in the Units is highly speculative and is not suitable for
investors who cannot afford to lose all of their investment.
The undersigned is familiar with the nature of, and risks
attendant to, investments in securities of the type being
subscribed for hereby and has determined that the purchase of
such securities is consistent with his, her or its investment
objectives.
(e) The undersigned understands that the Units have not been
approved or disapproved by the Securities and Exchange
Commission or by any other federal or state agency, and no
such agency has passed on the accuracy or adequacy of the
Prospectus.
(f) The undersigned is not an affiliate of any other person or
entity known by the undersigned to be subscribing for Units
which, if added to the Units being subscribed for by the
undersigned, would total over 300 Units. By "affiliate", we
mean any person or entity who (i) directly or indirectly
controls, is controlled by or is under common control with the
undersigned; (ii) is an officer,
-1-
director, employee, trustee, partner or member of the
undersigned, or of which the undersigned is an officer,
director, employee, trustee, partner or member; (iii) directly
or indirectly is the beneficial owner of 10% or more of any
class of securities or partnership or limited liability
company interests, or has a substantial beneficial interest in
the undersigned, or of which the undersigned directly or
indirectly is the beneficial owner of 10% or more of any class
of securities or partnership or limited liability company
interests, or in which the undersigned has a substantial
beneficial interest; and (iv) is the spouse, a lineal
descendent, ancestor or sibling of the undersigned.
(g) If a general partnership or an entity formed to invest in the
Company, the undersigned acknowledges that the
representations, warranties and covenants provided herein
apply and are satisfied with respect to each beneficial owner
of such general partnership or entity, and that additional
information may be needed by the Company in order to determine
the undersigned's eligibility to invest in the Company.
4. DEEMED EXECUTION OF OPERATING AGREEMENT; EXECUTION OF DOCUMENTS. By
executing this Agreement, the undersigned acknowledges that the undersigned will
thereby be deemed to have executed the Company's Amended and Restated Operating
Agreement, which accompanies the Prospectus as Appendix A, and shall be bound
thereby as fully and completely as if he or she had actually executed such
Operating Agreement. The undersigned shall, upon request of the Company, execute
any further agreements, instruments or documents as may be necessary or required
in connection with the purchase of the Units, including but not limited to the
Company's Operating Agreement, which agreements, instruments or documents may
contain transfer restrictions and/or other reservations concerning the Units.
5. ACKNOWLEDGEMENT. The undersigned hereby acknowledges that upon
acceptance of this Agreement by the Company, this Agreement shall entitle the
undersigned to become a member of the Company, and that the undersigned shall
possess all of the rights and powers of and be bound by all terms, conditions
and restrictions applicable to a member of the Company, as provided in the
Company's Articles of Organization and Operating Agreement.
6. INDEMNIFICATION. The undersigned understands the meaning and legal
consequences of the representations, warranties and covenants contained in this
Agreement, and agrees to indemnify and hold harmless the Company, each member,
manager, affiliate, officer, employee and agent of the Company, and the agents,
attorneys and employees of any of the foregoing, from and against any and all
expenses, costs, losses, damages, attorneys' fees or liabilities due to or
arising out of any breach or inaccuracy of any such representations, warranties
or covenants or any failure to fulfill any obligation, whether contained in this
Agreement or in any other document that the undersigned executes or is deemed to
have executed in connection with the undersigned's investment in Units of the
Company.
7. SURVIVAL. All representations, warranties, covenants and obligations
contained in this Agreement, including, without limitation, the indemnification
obligations contained in Section 6, shall survive the acceptance of this
subscription for Units and the acquisition of the Units by the undersigned
pursuant hereto.
8. BINDING EFFECT; ASSIGNMENT. This Agreement and the various rights
and obligations arising hereunder shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Neither this Agreement nor any of the rights, interests or obligations hereunder
shall be transferred or assigned (by operation of law or otherwise) by the
undersigned without the prior written consent of the Company. Any assignment or
attempted assignment in violation of the terms hereof shall be void and of no
force or effect.
9. AMENDMENT. This Agreement may only be amended, modified, terminated,
augmented, rescinded or discharged at any time by an instrument in writing which
refers to this Agreement and is executed by the parties hereto.
10. ENTIRE AGREEMENT. Except as expressly set forth in this Agreement,
this Agreement together with all exhibits, schedules, agreements, instruments
and other documents to be delivered hereunder embodies the entire
-2-
understanding and agreement between the parties hereto concerning the subject
matter of this Agreement, and no representations, warranties, covenants,
understandings or agreements exist between the parties hereto except those
incorporated herein and to be delivered hereunder.
11. WAIVERS. No waiver or any of the provisions of this Agreement shall
be valid or enforceable unless such waiver is in writing and signed by the
parties to be charged, and, unless otherwise stated therein, no such waiver
shall constitute a waiver of any other provision hereof (where or not similar)
or a continuing waiver.
12. GOVERNING LAW. This Agreement shall in all respects be construed in
accordance with and governed by the laws of the State of Ohio.
IN WITNESS WHEREOF, and subject to acceptance by the Company, the
undersigned has completed and executed this Agreement to evidence the
undersigned's subscription for Units of the Company.
- ------------------------------- ------------------------------------
Date Signature (and title, if applicable)
- ------------------------------- ------------------------------------
Business Telephone Number Printed Name of Subscriber
- ------------------------------- ------------------------------------
Residence Telephone Number Social Security of Tax Identification
Number
- ------------------------------- ------------------------------------
Facsimile Number Residence or Business Address
- ------------------------------- ------------------------------------
e-Mail Address City, State and Zip Code
I HEREBY SUBSCRIBE FOR _____ UNITS (MUST BE AT LEAST 2 UNITS), AT
$5,000 PER UNIT, FOR A TOTAL INVESTMENT OF $______________. A CHECK PAYABLE TO
SKY BANK AS ESCROW AGENT FOR NORTHWEST ETHANOL, LLC IS INCLUDED WITH THIS
EXECUTION PACKAGE.
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ACCEPTANCE
The foregoing subscription for Units of the Company is hereby accepted
as of _______________________, 2002.
NORTHWEST ETHANOL, LLC
BY: ________________________________
ITS: ______________________________
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COUNTERPART SIGNATURE PAGE FOR
THE AMENDED AND RESTATED OPERATING AGREEMENT OF
NORTHWEST ETHANOL, LLC
The undersigned, desiring to become a Member of Northwest Ethanol, LLC,
an Ohio limited liability company (the "Company"), hereby agrees to all of the
terms and conditions of the Amended and Restated Operating Agreement of the
Company, as referenced in the Prospectus, and hereby adopts and agrees to be
bound by all of the provisions thereof.
IN WITNESS WHEREOF, the undersigned has executed and delivered this
Counterpart Signature Page, as a Member of the Company, this ______ day of
___________, 20__.
By:
--------------------------
Purchaser's Signature
--------------------------
Purchaser's Name - Printed
"MEMBER"
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Ohio limited liability company law, a limited liability company
may indemnify any person who was or is a party, or who is threatened to be made
a party, to any threatened, pending or completed civil, criminal, administrative
or investigative action, suit or proceeding, other than an action by or in the
right of the company, because he is or was a manager, member, partner, officer,
employee or agent of the company or is or was serving at the request of the
company as a manager, director, trustee, officer, employee or agent of another
limited liability company, corporation, partnership, joint venture, trust or
other enterprise. Indemnifiable expenses include attorneys' fees, judgments,
fines and amounts paid in settlement that were actually and reasonably incurred
in connection with the proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the company
and, in connection with any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any action, suit
or proceeding by judgment, order, settlement, or conviction or upon a plea of
nolo contendere or its equivalent does not of itself create a presumption that
the person did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the company and, in connection
with any criminal action or proceeding, a presumption that he had reasonable
cause to believe that his conduct was unlawful.
Also under Ohio limited liability company law, a limited liability
company may indemnify any person who was or is a party or who is threatened to
be made a party to any threatened, pending or completed action by or in the
right of the company, because he is or was a manager, officer, employee or agent
of the company or is or was serving at the request of the company as a manager,
member, partner, director, trustee, officer, employee or agent of another
limited liability company, corporation, partnership, joint venture, trust or
other enterprise. Indemnifiable expenses include attorneys' fees that were
actually and reasonably incurred by him in connection with the defense or
settlement of the action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
company, except that no indemnification shall be made in respect of any claim,
issue or matter as to which the person is adjudged to be liable for negligence
or misconduct in the performance of his duty to the company unless and only to
the extent that the court determines that, despite the adjudication of liability
but in view of all the circumstances, the person is fairly and reasonably
entitled to indemnification for expenses that the court considers proper.
In either case, Ohio law provides that to the extent that a manager,
member, partner, officer, employee or agent of a limited liability company has
been successful on the merits or otherwise, he shall be indemnified against
expenses, including attorneys' fees, that were actually and reasonably incurred
by him.
Our Amended and Restated Operating Agreement requires us to indemnify
our officers and directors to the fullest extent permitted by law. In addition,
our employees and agents may be indemnified as determined by our directors in
their sole discretion. Indemnifiable expenses may be advanced to officers and
directors upon our receipt of an undertaking to repay amounts advanced to the
extent that it is ultimately determined that such officer or director was not
entitled to indemnification. The directors may require security for such
undertaking. These rights to indemnification and advancement of expenses are
nonexclusive of other such rights, and constitute contract rights of our
directors and officers.
With regards to indemnification for liabilities arising under the Securities
Act of 1933 for directors, officers or persons controlling the Company, the
Company has been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses payable by
us in connection with the sale of units being registered.
II-1
SEC registration fee $ 5,500
Blue Sky fees and expenses 15,000
Legal fees and expenses 250,000
Accounting fees and expenses 25,000
Printing and engraving expenses 35,000
Escrow agent fees 5,000
Advertising 50,000
Miscellaneous expenses 5,000
------------------
Total $ 390,500
==================
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since our inception, we have sold the following unregistered
securities, after adjustment to reflect a 4-to-1 unit split in November 2001:
In February, 2001, we sold an aggregate of 104 units to 26 investors in
reliance on Section 4(2) of the Securities Act of 1933.
In March, 2001, we sold an aggregate of 100 units to 25 of the original
26 investors in reliance on Section 4(2) of the Securities Act of 1933.
In September, 2001, we sold an aggregate of 428 units to the March,
2001 investors plus one additional investor in reliance on Section 4(2) of the
Securities Act of 1933.
In November, 2001, we sold an aggregate of 396 units to 22 of the
previous 27 investors in reliance on Section 4(2) of the Securities Act of 1933.
In addition, since February, 2001, we have issued a total of 12 units
to 2 individuals, including one of our officers who is also a member, and 8
units each to 4 of our 7 directors and to 3 affiliates of our other 3 directors,
as compensation for services rendered, in reliance upon Rule 701 under the
Securities Act of 1933.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER EXHIBIT TITLE
- -------------- ---------------------------------------------------------------
3.1 Articles of Organization*
3.2 Amended and Restated Operating Agreement (included as Appendix
A to the prospectus)
4.1 Form of Unit Certificate*
4.2 Form of Subscription Agreement (included in the Execution
Package which is Appendix B to the prospectus)
5.1 Opinion of McDonald, Hopkins, Burke & Haber Co., L.P.A. as to
the legality of the securities being registered*
10.1 Option Agreement dated September 22, 2001, among the Company
and 5C's Farm, Inc., William A. Cleland, Sr. and Doris I.
Cleland*
10.2 Option Agreement dated October 17, 2001, among the Company and
Elmer and Irene Frank*
23.1 Consent of McDonald, Hopkins, Burke & Haber Co., L.P.A.
(included in Exhibit 5.1)
23.2 Consent of Plante & Moran, LLP
24.1 Power of Attorney (included as part of signature page)
* To be filed by amendment
II-2
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person connected with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
[The remainder of this page is intentionally left blank]
II-3
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Defiance, State of Ohio, on the 30th of November, 2001.
NORTHWEST ETHANOL, LLC
By: *
--------------------------------------
William A. Cleland, Jr.
President and Chairman of the Board
(Principal Executive Officer)
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
NAME TITLE DATE
- ---------------------------------------- ----------------------------- ---------------------
*
Chairman of the Board and November 30, 2001
- ---------------------------------------- President (Principal
William A. Cleland, Jr. Executive Officer)
/s/ TED PENNER Secretary and Treasurer November 30, 2001
- ---------------------------------------- (Principal Accounting Officer)
Ted Penner
* Vice President and Director November 30, 2001
- ----------------------------------------
Eugene Schubert
* Director November 30, 2001
- ----------------------------------------
Lynn Bergman
* Director November 30, 2001
- ----------------------------------------
Gary Mavis
* Director November 30, 2001
- ----------------------------------------
James Joost
* Director November 30, 2001
- ----------------------------------------
Virgil Hoene
II-4
* Director November 30, 2001
- ----------------------------------------
Fred Schubert
*By: TED W. PENNER
-----------------------------------
Ted W. Penner, Attorney-in-Fact
II-5
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Lynn Bergman and Ted Penner and
each of them acting individually, as his or her attorney-in-fact, each with full
power of substitution, for him or her in any and all capacities, to sign any and
all amendments to this registration statement, including post-effective
amendments and amendments pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said Registration Statement.
NAME TITLE DATE
- ---------------------------------------- ----------------------------- ---------------------
/s/ William A. Cleland, Jr. Chairman of the Board and November 29, 2001
---------------------------- President (Principal
William A. Cleland, Jr. Executive Officer)
Secretary and Treasurer November 29, 2001
/s/ Ted Penner (Principal Accounting Officer)
---------------
Ted Penner
Vice President and Director November 29, 2001
/s/ Eugene Schubert
-------------------
Eugene Schubert
Director November 29, 2001
/s/ Lynn Bergman
----------------
Lynn Bergman
Director November 29, 2001
/s/ Gary Mavis
--------------
Gary Mavis
Director November 29, 2001
/s/ James Joost
---------------
James Joost
Director November 29, 2001
/s/ Virgil Hoene
----------------
Virgil Hoene
Director November 29, 2001
/s/ Fred Schubert
-----------------
Fred Schubert
II-6
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- -------------- ---------------------------------------------------------------
3.1 Articles of Organization*
3.2 Amended and Restated Operating Agreement (included as Appendix
A to the prospectus)
4.1 Form of Unit Certificate*
4.2 Form of Subscription Agreement (included in the Execution
Package which is Appendix B to the prospectus)
5.1 Opinion of McDonald, Hopkins, Burke & Haber Co., L.P.A. as to
certain securities matters*
10.1 Option Agreement dated September 22, 2001, among the Company
and 5C's Farm, Inc., William A. Cleland, Sr. and Doris I.
Cleland*
10.2 Option Agreement dated October17, 2001, among the Company and
Elmer and Irene Frank*
23.1 Consent of McDonald, Hopkins, Burke & Haber Co., L.P.A.
(included in Exhibit 5.1)
23.2 Consent of Plante & Moran, LLP
24.1 Power of Attorney (included as part of signature page)
* To be filed by amendment
II-7