Rule 424(b)(3)
File No. 333-74274
[NWE Logo]
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. On a best efforts, self-underwritten, minimum-maximum
offering basis, 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.
- - 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 $20-30 million in debt financing, to finance the anticipated $42
million in project costs, by April 30, 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.
BEFORE INVESTING IN OUR UNITS, PROSPECTIVE PURCHASERS SHOULD CONSIDER EACH OF
THE FACTORS UNDER "RISK FACTORS" BEGINNING ON PAGE 5.
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 MARCH 15, 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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TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY............................................................1
RISK FACTORS..................................................................5
WARNING REGARDING FORWARD-LOOKING STATEMENTS..................................9
USE OF PROCEEDS...............................................................9
CAPITALIZATION...............................................................10
DILUTION.....................................................................11
SELECTED FINANCIAL DATA......................................................12
MANAGEMENT'S PLAN OF OPERATIONS..............................................13
BUSINESS.....................................................................21
MANAGEMENT...................................................................43
EXECUTIVE COMPENSATION.......................................................45
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.........................45
UNIT OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................46
DESCRIPTION OF THE UNITS AND OUR AMENDED AND RESTATED OPERATING AGREEMENT....47
UNITS ELIGIBLE FOR FUTURE SALE...............................................55
FEDERAL INCOME TAX CONSEQUENCES..............................................56
PLAN OF DISTRIBUTION.........................................................63
LEGAL MATTERS................................................................65
EXPERTS......................................................................65
TRANSFER AGENT...............................................................65
WHERE YOU CAN GET MORE INFORMATION...........................................65
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. Our web site is
www.northwestethanol.com.
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.
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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 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 ethanol plant in northwest Ohio, near the
Indiana border. We will need binding written commitments for sufficient debt
financing 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; construction-related agreements with our design engineer and
anticipated lead contractor; and supply and marketing agreements with various
third parties. We have an agreement with a grain originator by which we will be
able to obtain all of the corn we need, and we have preliminary arrangements in
place by which, if finalized, we could obtain all of our 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, we have hired an experienced design engineer to
design our plant and we are negotiating with that engineer to oversee its
construction, and with several experienced lead contractors to build it.
Finally, we have a dedicated group of local farmers and other businessmen among
our founders, directors and officers.
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.
THE OPPORTUNITY
We believe 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
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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. 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.
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.
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We believe 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;
- 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; and
- a more profitable market for corn, since our proximity should reduce
farmers' transportation costs, our bunker should allow them to avoid
excessive handling costs, and we will be able to buy wet corn,
allowing farmers to reduce drying charges.
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 seventh largest
corn-producing state and one of the top 3 largest ethanol-consuming
states;
- 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.
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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 uncertain terms of our debt financing; possible
inability to service our debt; and our possible need for additional
capital;
- risks related to construction and operation of our ethanol plant,
including: our dependence upon our design engineer and its business
partners; our recent formation, start-up related risks, and expected
losses; our dependence on hiring competent personnel; price competition
in the event of supply exceeding demand nationally or regionally; lack
of diversification; price sensitivity and hedging transactions in corn,
energy and petroleum; and uncertain distributions;
- risks related to regulation, including the risk that previously
unknown, adverse environmental effects from ethanol may be discovered,
and the risk that the federal oxygen mandate could be eliminated or
made subject to waiver; and
- risks related to tax issues, including possible taxation without
distributions, possible double taxation of earnings and possible income
recognition due to our anticipated indebtedness.
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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. Our operating agreement is more fully summarized under
"Description of the Units and Our Amended and Restated Operating Agreement", and
a copy of our operating agreement is included as Appendix A to this prospectus.
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, Joe
Nester 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
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.
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.
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 would be permitted
under our operating agreement 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
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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 have received an opinion of our tax counsel, McDonald, Hopkins,
Burke & Haber Co., L.P.A. This opinion addresses both the treatment of the
company as a partnership for federal income tax purposes and the general income
tax consequences of owning our units. The opinion of our tax counsel provides
that reasonable basis exists to treat our limited liability company as a
partnership for federal income tax purposes. The opinion of our tax counsel also
provides that the discussion regarding the ownership of our units is an
accurate general description of the principal federal income tax consequences
that may arise from such ownership. If we are treated as a partnership, 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 of cash 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 as a partnership, 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" for
a more complete discussion of important federal income tax consequences.
SUMMARY FINANCIAL INFORMATION
The following table summarizes important financial information from our
December 31, 2001 unaudited financial statements. You should read this table in
conjunction with our financial statements and their notes, and our plan of
operations and other financial information included elsewhere in this
prospectus.
FROM FEBRUARY 8, 2001 (INCEPTION
DATE) TO DECEMBER 31, 2001
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA (CUMULATIVE FROM
INCEPTION):
Revenues $ --
Operating expenses:
Consulting fees 36,000
Professional fees 108,711
Licenses and permits 3,450
Miscellaneous 6,411
-----------
Total expenses 154,572
-----------
Operating loss (154,572)
Interest income 1,402
-----------
Net loss $ (153,170)
===========
Net loss per unit $ (393.75)
===========
DECEMBER 31, 2001
(UNAUDITED)
ACTUAL PRO FORMA(1)
BALANCE SHEET DATA:
Assets:
Cash and cash $ 494,255 $42,494,255
equivalents
Other assets 219,233 219,233
----------- -----------
Total assets $ 713,488 $42,713,488
=========== ===========
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Liabilities and
members' equity:
Current liabilities $ 166,658 $ 166,658
Long-Term debt 30,000 30,030,000
Total members' equity 516,830 12,516,830
----------- -----------
Total liabilities and $ 713,488 $42,713,488
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members' equity
(1) Pro forma to reflect the sale of a minimum of 2,400 units in the offering,
before deducting offering expenses, and the long-term financing necessary to
close this offering having sold the minimum number of units.
THE OFFERING AND RELATED DEBT FINANCING
The proposed ethanol plant is expected to cost approximately $42 million. We
intend to raise between $12 and $22 million in this offering, and we are also
seeking at least $20 - $30 million in debt financing, to pay for the acquisition
of the site, the design and construction of the plant and its initial operating
costs. Investors in this offering will not be able to review the terms of our
debt financing prior to subscribing for units, and our members will have no
redemption or withdrawal rights if they disagree with those terms. We have no
commitments with any lender for debt financing, but we will not close on this
offering until we receive binding written commitments for debt financing
totaling, together with the proceeds of this offering, at least $42 million. By
"binding written commitment," we mean a commitment letter from a commercial
bank or other lender, not a non-binding term sheet. In the context of an Ohio
Air Quality Development Authority bond offering, as discussed more fully under
"Management's Plan of Operations," to have a "binding written commitment", we
would need to have both an inducement agreement with the OAQDA and a commitment
letter from a letter of credit bank.
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
anticipate selling the units in Ohio, Indiana and Michigan; however, 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.
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In order to purchase units in this offering, you must complete the Execution
Package accompanying this prospectus, and forward the package, together with a
check for the full amount of your subscription payable to National City 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 promptly return your Execution
Package and the amount of your subscription, without interest. If we accept
your subscription, your check will be deposited in our escrow account at
National City 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.
If we satisfy the closing conditions and close on the offering prior to
April 30, 2002, subject to extension in our sole discretion, but not later than
September 30, 2002, we will deliver a certificate or certificates representing
your ownership of units within 60 days of the closing. After the closing, we may
continue to offer units up to the maximum of 4,400 units, accepting
subscriptions as they are received until April 30, 2002, subject to extension in
our sole discretion, but not later than September 30, 2002. 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 AND MAY REDUCE THEIR
VALUE.
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
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transfer qualifies as a permitted transfer as defined by that agreement. Even
if a transfer is treated as a permitted transfer, it will not be approved
unless various other conditions are satisfied, and in no event will any
transfer be approved without the prior written approval of our directors. To
maintain partnership tax status, the directors will generally approve a
transfer only if it falls within one or more "safe harbors" contained in the
publicly traded partnership rules provided under the Internal Revenue Code and
the Treasury Regulations. 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.
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THE TERMS OF OUR DEBT FINANCING ARE UNCERTAIN, AND MAY RESTRICT DISTRIBUTIONS
AND OUR FINANCIAL FLEXIBILITY.
The current credit market and competition for debt financing could make it
difficult for us to obtain binding written 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 restrict distributions or limit our financial flexibility, the value of
your units may be adversely affected. To the extent we obtain debt financing
with variable interest rates, we will be vulnerable to future interest rate
increases. Also, the less equity we raise in this offering, the more debt
financing we will need and the more 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. 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.
WE MAY NOT BE ABLE TO SERVICE, REPAY OR REFINANCE OUR DEBT.
Ultimately, 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
will depend 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 on favorable terms or at all, or to 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.
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An inability to service our debt or a breach of any 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.
WE MAY NEED ADDITIONAL CAPITAL TO COMPLETE OUR ETHANOL PLANT AND BEGIN
OPERATIONS.
Although we estimate that $42 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 THE CONSTRUCTION AND OPERATION OF OUR ETHANOL PLANT
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WE MAY BE DEPENDENT UPON MEMBERS OF THE GAYLOR ALLIANCE TO DESIGN AND BUILD OUR
ETHANOL PLANT, AND THAT DEPENDENCY MAY LEAVE US VULNERABLE TO UNFAVORABLE FINAL
CONSTRUCTION CONTRACT TERMS AND DELAYS OR CONFLICTS OF INTEREST DUE TO THEIR
OTHER PROJECTS.
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 the
construction of our ethanol plant. There can be no assurance that each 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 definitive agreements on acceptable terms, 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 engaged in a number of other projects which may compete with
our project for their time and attention, and each member may have interests in
one or more of those projects which may cause that company to prefer those other
projects over our project. If 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.
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 any or all
of 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 6 months ended December 31, 2001, we have
accumulated deficits of $51,713 and $153,170, respectively. We may continue
to incur 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.
BECAUSE OUR DIRECTORS AND OFFICERS HAVE VERY LITTLE EXPERIENCE IN THE ETHANOL
BUSINESS, OUR SUCCESS WILL DEPEND ON HIRING COMPETENT PERSONNEL, WHO MAY BE
DIFFICULT TO ATTRACT TO A RURAL COMMUNITY.
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Our directors and officers have no experience in the construction and
operation of an ethanol plant. Accordingly, with the help of Gaylor Engineering,
we must hire qualified managers. There are a limited number of qualified
individuals available to fill certain of the needed positions, and we will
compete for those individuals with other ethanol plant operators and consultants
and contractors operating in the ethanol industry. It may be difficult finding
and hiring qualified managers at salaries which 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 competent personnel, our ability
to produce and sell ethanol could be adversely affected.
DEMAND FOR ETHANOL MAY NOT KEEP PACE WITH INDUSTRY-WIDE OR REGIONAL PRODUCTION
CAPACITY, LEAVING US UNABLE TO COMPETE ON THE BASIS OF PRICE WITH LARGER,
BETTER-FINANCED ETHANOL PRODUCERS.
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Once the current large scale shift from MTBE to ethanol subsides, and in
light of the ongoing significant expansion in industry-wide production capacity,
the ethanol industry may have grown larger than necessary to meet resulting
demand. When supply exceeds demand in the fuel ethanol industry or in our
region, we may not be able to successfully compete on the basis of price,
expected to be our principal basis of competition, with larger, better-financed
ethanol producers which enjoy greater economics of scale, such as Archer Daniels
Midland, Minnesota Corn Processors and Cargill. In addition, while there are
currently no ethanol plants in Ohio and few to the northeast of us, we are aware
of at least 1 other, larger ethanol plant which is expected to be built in
northeastern Ohio by harvest 2003, by a larger, better financed competitor. If
and when the fuel ethanol supply in Ohio or to the northeast of us exceeds
demand, several of our competitive advantages, including proximity to low-cost
corn and easily-accessible, under-served markets for ethanol, may be
insufficient to allow us to successfully compete on the basis of price with
larger, better-financed producers.
BECAUSE OUR BUSINESS WILL NOT BE DIVERSIFIED, WE WILL BE VULNERABLE TO ANY
DEVELOPMENT WHICH NEGATIVELY IMPACTS THE FUEL ETHANOL INDUSTRY.
Our sole business will be the production and sale of fuel grade ethanol
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 material 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 plant. Our business would also be
significantly harmed if our ethanol plant could not operate at full capacity for
any extended period of time. 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 material sources of revenue upon which
to rely.
15
WE WILL BE VULNERABLE TO VARIOUS PRICE INCREASES AND DECREASES, HAVE LIMITED
ABILITY TO HEDGE THESE VULNERABILITIES, AND HEDGING TRANSACTIONS INVOLVE RISKS
THAT COULD HARM OUR BUSINESS.
We will be vulnerable to price increases primarily with respect to corn
and energy, and to price decreases primarily with respect to the ethanol and
distillers grains. The market prices of each of these and closely related
commodities are dependent upon a variety of factors
16
beyond our control, and may fluctuate significantly. Especially initially, we
may not be able to afford to fully implement adequate hedging strategies. Even
if fully implemented, our hedging activities may result in higher costs than
our competitors, if the market prices of the relevant commodities move in
unanticipated directions or degrees. If the market price of any of these
commodities moves significantly in the wrong direction, as corn prices did in
1996, and we are not adequately hedged against such movement, our financial
performance may be adversely affected, perhaps significantly.
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 this offering. Even after we are operating the ethanol plant, whether we
will be able to generate sufficient cash flow to make distributions to members
will depend upon numerous factors,
17
many of which are beyond our control. Our ability to make cash distributions
is restricted by our operating agreement and expected to be restricted by our
debt agreements. Accordingly, there can be no assurance that we will be able to
initiate or sustain cash distributions, or as to the amounts of any such
distributions.
RISKS RELATED TO REGULATION
18
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,
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.
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.
19
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 believe that we will be treated as a partnership for federal income tax
purposes. If we are treated as a partnership, 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.
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 taxation of our earnings and
profits. This result would materially adversely affect our financial results and
our ability to make distributions to you.
20
YOU MAY BE REQUIRED TO RECOGNIZE INCOME IF YOU TRANSFER YOUR UNITS, OR THERE IS
A DECREASE IN THE AMOUNT OF INDEBTEDNESS WHICH WE ALLOCATE TO YOU.
Assuming we are treated as a partnership for tax purposes, generally any
debt incurred by us will be treated as nonrecourse debt. 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 that amount. 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 occur as a result of the allocation of
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 your share of any nonrecourse debt.
21
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 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 $42 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 60,000 50,000
Capitalized interest 1,384,000 1,313,000
Land acquisition costs 621,000 621,000
Infrastructure costs 547,000 547,000
Insurance costs 50,000 50,000
Construction costs 36,250,000 36,250,000
Startup costs for labor 125,000 125,000
Inventories 1,710,000 1,710,000
General and administrative 262,000 262,000
Working capital 1,641,500 1,860,500
----------- -----------
TOTAL USES OF FUNDS $43,041,000 $43,179,000
=========== ===========
22
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.
23
CAPITALIZATION
The following table sets forth our capitalization at December 31, 2001, on
an actual and pro forma basis to reflect the units offered in this offering.
DECEMBER 31, 2001
--------------------------------------------
PRO FORMA (1)
---------------------------
ACTUAL
(UNAUDITED) MINIMUM MAXIMUM
------------ ------------ ------------
Long-term debt $ 30,000 $ 30,030,000 $ 20,030,000
------------ ------------ ------------
Members' equity:
Units; a minimum of
3,496 units and a
maximum of 5,496 units
issued and outstanding
on an as adjusted basis 670,000 12,670,000 22,670,000
Accumulated deficit (153,170) (153,170) (153,170)
------------ ------------ ------------
Total members' equity 516,830 12,516,830 22,516,830
------------ ------------ ------------
Total capitalization $ 546,830 $ 42,546,830 $ 42,546,830
============ ============ ============
(1) Pro forma to reflect the sale of 2,400 (minimum) or 4,400 (maximum) units in
the offering, before deducting offering expenses, and the long-term
financing to close the offering.
DILUTION
At December 31, 2001, we had a net tangible book value of $516,830 or $472
per unit. 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 $3,108 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 $3,625 if the maximum is sold. Purchasers of units in this offering
will realize an immediate dilution of $1,420 per unit in the net tangible book
value of their units if the minimum is sold, and a decrease of $903 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.
This table does not take into account any other changes in the net tangible book
value of our units occurring after December 31, 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 December 31, 2001 $ 472 $ 472
24
Increase in pro forma net tangible book value per unit
attributable to the sale of 2,400 (minimum) and 4,400
(maximum) units 3,108 3,625
------- -------
Net tangible book value per unit at December 31, 2001, as
adjusted for the sale of units 3,580 4,097
------ ------
Dilution per unit to new investors in this offering $1,420 $ 903
====== ======
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 December 31, 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.
TOTAL NUMBER OF UNITS PURCHASED TOTAL CONSIDERATION AND AVERAGE PER UNIT PRICE
------------------------------- -----------------------------------------------------------------
MINIMUM MAXIMUM MINIMUM MAXIMUM
------- ------- ------- -------
NUMBER PERCENT NUMBER PERCENT AMOUNT PERCENT AVERAGE(1) AMOUNT PERCENT AVERAGE(1)
------ ------- ------ ------- ------ ------- --------- ------ ------- ----------
Existing members 1,096 31% 1,096 20% $ 670,000 5% $ 611 $ 670,000 3% $ 611
as of
December 31, 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%
===== === ===== === =========== ==== =========== ===
(1) The average per unit price represents the total consideration received
divided by the total number of units purchased.
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, market
value or capitalized earnings. 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. If we sell additional units, the sale price of those units
could be higher or lower than the price per unit that investors are paying in
this offering. If we issue additional units at a lower price, that could lower
the value of an existing investor's units.
SELECTED FINANCIAL DATA
25
The following table summarizes important financial information from our
December 31, 2001 unaudited financial statements. You should read this table in
conjunction with our financial statements and their notes, and our plan of
operations and other financial information included elsewhere in this
prospectus.
FROM FEBRUARY 8, 2001 (INCEPTION
DATE) TO DECEMBER 31, 2001
(UNAUDITED)
--------------------------------
STATEMENT OF OPERATIONS DATA
(CUMULATIVE FROM INCEPTION):
Revenues $ ----
Operating expenses:
Consulting fees 36,000
Professional fees 108,711
Licenses and permits 3,450
Miscellaneous 6,411
------------
Total expenses 154,572
------------
Operating loss (154,572)
Interest income 1,402
------------
Net loss $ (153,170)
============
Net loss per unit $ (393.75)
============
DECEMBER 31, 2001
(UNAUDITED)
--------------------------------
ACTUAL PRO FORMA (1)
------ ------------
BALANCE SHEET DATA:
Assets:
Cash and cash equivalents $ 494,255 $ 42,494,255
Other assets 219,233 219,233
------------ ------------
Total assets $ 713,488 $ 42,713,488
============ ============
Liabilities and members'
equity:
Current liabilities $ 166,658 $ 166,658
Long-Term debt 30,000 30,030,000
Total members' equity 516,830 12,516,830
------------ ------------
Total liabilities and
members' equity $ 713,488 $ 42,713,488
============ ============
26
(1) Pro forma to reflect the sale of a minimum of 2,400 units in the offering,
before deducting offering expenses, and the long-term financing necessary
to close this offering having sold the minimum number of units.
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 $42 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 binding 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
$42 million. In the near future, appropriate informational materials are
expected to be distributed to a number of financial institutions. Based upon
the financing experience of our officers, directors and advisers, we expect to
receive initial reactions from these lenders within 1 week, and to negotiate
terms with all the institutions which express interest until we have obtained
sufficient binding written commitments, on the most favorable terms available
as determined by our directors, to satisfy our debt financing closing
condition. This process could take 4-8 weeks or more, and the longer it takes
the more we will incur costs in the form of consulting fees, attorneys' fees
and bank fees. Our ability and desire to finalize binding written commitments
may be complicated by delays in the passage of pending OAQDA legislation, and
in the processing of our United States Department of Agriculture Rural
Development Business and Industry Guaranteed Loan Program application, both of
which are discussed below. Any delay in the closing of this offering beyond
late April 2002 may cause us to be unable to commence operations by the 2003
harvest, which would have material adverse affects upon our start-up costs and
further delay the attainment of profitable operations.
27
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 2 agreements with our 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.
If the commencement of construction is delayed beyond late April 2002 as a
result of delays in acquiring our preferred site or finalizing our
construction-related agreements, our business will be adversely affected. In
addition, finalizing sales and marketing agreements as early as practicable is
expected to facilitate negotiations with lenders.
After the closing of this offering, we expect to:
- 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 approximately
1,000 feet of new track.
We have arranged for certain required infrastructure improvements for our
plant, including:
- Northwest Electric Cooperative'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 Pipeline Company'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.
28
These construction costs will be financed through the suppliers unless the
aggregate proceeds from this offering, together with the proceeds from debt
financing, exceed $42 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 $36.3 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 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, 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, disputes with our anticipated
design engineer which must be resolved through arbitration, inability to obtain
materials or labor or other factors. Transportation and utility infrastructures
we need to build and maintain may be more difficult or expensive to build and
maintain than we anticipate. 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.
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, a part-time administrative assistant and a part-time management
consultant who is an experienced plant manager. 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.
We 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. We also estimate that we will need
to spend approximately $25,000 annually during construction on directors and
officers' insurance, builder's risk insurance, general commercial liability,
worker's compensation and property insurance. However, 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.
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.
29
As of December 31, 2001, we had cash and cash equivalents of $494,255 and
total assets of $713,488. To date, we have raised $670,000 in seed capital from
our founding members, which includes $602,000 raised during the six months ended
December 31, 2001, 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 December 31, 2001, we had
current liabilities of $166,658. Since our inception on February 8, 2001 through
December 31, 2001, we have had a net loss of $153,170, and at December 31, 2001,
we had an accumulated deficit of $153,170. Members' equity as of December 31,
2001 was $516,830.
Since inception, we have had no revenues, and cash flows provided by
financing activities through December 31, 2001 were member contributions of
$653,000, of which $158,745 was used primarily for consulting and professional
fees, land development costs and costs of raising anticipated capital. During
this period, our accounts payable increased by $166,658.
We are seeking to raise a total of at least $42 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 binding written
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 and personal property 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. Pending
legislation 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.
Based on discussions with the OAQDA and its advisers, we expect to file a
loan application on a bifurcated basis, I.E., including both a loan under
existing state law, and a loan assuming that pending Ohio legislation passes,
making our entire ethanol plant an "air quality facility." Thereafter, on 2
weeks' written notice, the OAQDA is expected to hold an open meeting at which
its execution of a similarly-bifurcated inducement agreement would be
authorized. The inducement agreement, which would constitute the OAQDA's
commitment to provide financing subject to the successful sale of its bonds,
would typically be signed immediately after the open meeting. In order to remain
eligible for OAQDA financing, the inducement agreement must be signed before we
finalize other debt financing for the construction of an ethanol plant,
described above.
Assuming passage of the pending OAQDA legislation without substantial
revision, we believe that the OAQDA bonds will need to be backed by a letter of
credit from a commercial bank, and that a letter of credit bank's credit
analysis will generally be similar to that of a direct lender. Accordingly, we
expect to
30
combine the process of seeking a letter of credit bank to support the OAQDA
bonds with the process of seeking a direct lender.
Assuming we have entered into an inducement agreement with the OAQDA for the
issuance of enough bonds, when combined with our escrowed offering proceeds, to
total at least $42 million, and assuming that the pending OAQDA legislation
passes without substantial modification and we obtain a binding written
commitment from a letter of credit bank, we should be able to break escrow and
commence construction while the OAQDA bond offering process continues. Again
upon 2 weeks' notice, the OAQDA would hold another open meeting at which a bond
resolution would be adopted. Over the next approximately 4-6 weeks, after a
number of agreements between us, the OAQDA, a trustee, an underwriter and/or the
letter of credit bank were finalized, the underwriter would market the OAQDA
bonds using, first, a disclosure document similar to a prospectus called a
preliminary official statement, and then an official statement. Within about 1
week of the distribution of the official statement, the OAQDA bond offering
would close and we would receive our OAQDA loan. The offering costs for a
typical OAQDA bond offering of the size anticipated are unknown at the present
time. The offering costs associated with a typical OAQDA bond offering include
trustee and letter of credit bank fees, underwriting commissions, legal and
accounting fees and miscellaneous closing costs.
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."
UNITED STATES DEPARTMENT OF AGRICULTURE RURAL DEVELOPMENT BUSINESS AND INDUSTRY
GUARANTEED LOAN PROGRAM
Under this program to encourage economic development in rural areas,
we expect the USDA to provide us with a loan guarantee of up to 60% of debt
incurred from authorized lenders to build our ethanol plant, up to a maximum
guarantee of $15 million. The smaller the amount of the loan, the greater the
percentage guarantee. In connection with our anticipated USDA loan guarantee we
will have to pay a fee of up to 2% of the principal loan amount multiplied by
the guarantee percentage, and we will also be responsible for all closing
costs. We expect to apply for this program as soon as we are able to identify a
bank or banks on the application, as required. In order to do so, we need to
obtain contingent approval by the bank(s) to make the loan, whether or not the
USDA guarantees it. For 45 days after filing the application, we can change the
bank(s), and within 90 days of filing the application, the USDA will either
grant or deny our application. We have received an indication from the USDA
that it would guarantee OAQDA bonds.
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
31
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 $42 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 letters of credit to secure various payment
obligations we expect to have under our arrangements with our anticipated grain
originator and for ethanol hedging transactions. These letters of credit will
be subordinated to our principal credit facilities. We also expect that we will
need a revolving line of credit to finance receivables and inventories. We
expect that borrowing availability under the revolving line of credit may 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. In particular, 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 other liens on our assets;
- Use asset sale proceeds; or
- Merge, consolidate or dispose of all or substantially all of our
assets.
We may also 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. Our expectations with respect to the terms of our debt financing are
based upon preliminary discussions, which are ongoing, with a number of local,
regional and national financial institutions, as well as upon the financing
experience of other ethanol plants with which we are familiar, and the
financing experience of our officers, directors and advisers.
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'
32
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 $30
million in debt; or (2) we raise the maximum $22 million in the offering and
incur approximately $20 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 4 months of
wages, interest and other 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 30,000,000 20,000,000
Grants 300,000 300,000
Interest Income 71,000 209,000
------------ -----------
TOTAL SOURCES OF FUNDS $ 43,041,000 $43,179,000
============ ===========
USES OF FUNDS:
Construction Costs:
Engineering costs 2,000,000 2,000,000
General conditions 3,000,000 3,000,000
Construction contingency for cost
overruns 4,000,000 4,000,000
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
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 $36,250,000 $36,250,000
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
33
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 1,384,000 1,313,000
Working capital needs 1,641,500 1,860,500
Financing costs 60,000 50,000
Offering costs 390,500 390,500
----------- -----------
TOTAL USES OF FUNDS $43,041,000 $43,179,000
=========== ===========
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
$60,000 in financing related costs if the $12 million minimum is sold,
or $50,000 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.
As of December 31, 2001, we have incurred $190,210 of the offering costs. In
addition to the senior debt, a significant revolving credit facility will be
required to provide working capital.
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,
disease, farmers' planting decisions, global supply and demand and foreign and
domestic governmental agricultural policy. Also, increased production of ethanol
could result in increased demand for corn, which could in turn lead to higher
prices for corn. The price of corn has fluctuated significantly in the past and
may fluctuate significantly in the future. For example, in 1996 the market price
of corn increased significantly with a shortfall in supply, resulting in
decreased ethanol production and widespread unprofitable ethanol operations. If
corn prices moved against us as they did in 1996 and we were not adequately
hedged against that movement, our financial performance may be significantly
adversely affected. 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, which 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 pricing factors also include the overall supply and
demand of competing products, as well as the price of corn. Many existing
ethanol plants are constructing or will construct additions to increase their
production, and new fuel grade ethanol plants are being and will be constructed
to meet perceived demand. We cannot provide any assurance or guarantee that
there will continue to be material increases in the demand for ethanol, so the
increased production of ethanol may ultimately lead to lower prices for ethanol
and distillers grains.
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
hedge positions in the corn, energy, petroleum and other futures markets. 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, especially initially
we may be unable to implement hedging positions we would otherwise take. In
addition, if we are unable to initiate or maintain our desired 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.
We estimate that beginning once our plant nears operational status, we may
need to provide letters of credit securing: between $3-3.5 million in delayed
price corn delivered to our bunker; between $3-4 million in margin exposure on
outstanding corn forward pricing contracts; and between $2 - 6 million on
outstanding unleaded gasoline forward pricing contracts. However, these amounts
are only estimates, and the actual amounts may vary, at times substantially.
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
- 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. In
December 2001, Bill Cleland went to Minnesota with the Ohio Corn Growers
Association (OCGA) to observe existing ethanol plants. When he returned, he
discussed building an ethanol plant in Ohio with Jim Joost, one of his
suppliers. Jim Joost discussed it with his attorney, Ted Penner, who met Bill
Cleland at an OCGA informational meeting in late January 2001. In early February
2001, Bill Cleland, Jim Joost and Ted Penner formed Northwest Ethanol, and each
of them invited various personal and business contacts to a meeting. As the
individuals who took the initiative in forming us, Messrs. Cleland, Joost and
Penner were our promoters. Most of the people in attendance, or their affiliated
companies, became our founding members. Our founding members include the
following companies: 5 C's Farms, Inc.; Nester Ag-Management; Ney Oil Company;
Spatial Ag Systems, LLC; Timbrook Farms; and Rosebrock Farms. The rest of our
founding members are individuals, and include: Richard Yoder, Rick Hall, Donald
Rethmel, Robert Rethmel, David Bruggeman, Philip Yoder, Scott Mavis, Clint
Zeedyk, Chad Bok, William Bauer, Jr., J. J. Timbrook, Richard Wirth, Joseph
Schubert, John McGuire, Mike Cook, Bernard Czartoski, Gary Mavis, Virgil Hoene,
Eugene Schubert and Fred Schubert.
Since February, 2001, our directors, officers and founding members have:
invested a total of $670,000; hired 2 consultants; commissioned a feasibility
study; developed a business plan; hired an experienced design engineer; filed
for various permits for the plant; conducted a comprehensive site study; drilled
a 750' test well; obtained rezoning of our preferred site; negotiated with
various potential suppliers and customers; met with numerous state and federal
agencies and lawmakers; built a web site; and initiated this offering.
In this offering 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 plant materials, sometimes
called 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
34
sugars more easily than other kinds of plant materials. A typical bushel of 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
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 oxygenated motor fuels in
certain major urban areas, in order to reduce air pollution. Many other urban
areas have voluntarily adopted similar requirements.
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
35
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. On September 30, 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.
A number of other proposed federal and state laws presently under
consideration would address various aspects of this highly politicized industry,
including proposed federal 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.
In Ohio there are several pending bills, any one of which could provide us
with significant benefits if enacted as proposed. On January 16, 2002, one of
these bills was passed by the Senate. On February 14, it was recommended for
passage by the House Committee on Agriculture and National Resources, which
added an emergency provision so that, if passed by both houses and signed by
Governor Taft it would become law immediately. On February 27, 2002, it was
passed by the House and sent to conference committee. On March 5, 2002, it was
passed out of conference committee and approved by both the Senate and House.
Governor Taft has announced that he intends to sign this legislation into law on
March 21, 2002.
The bill has 3 separate components: one component would provide Ohio
taxpayers with a nonrefundable state income tax credit for certain investment in
an ethanol plant (the "Proposed Ohio Income Tax Investment Credit"); another
component would provide that an ethanol plant is an "air quality facility",
thereby making it possible for us to obtain most or all of our necessary debt
financing through a loan from the OAQDA, and providing personal and real
property tax exemptions for the entire facility for the life of the loan (the
"OAQDA Proposal"); and the third component would create the Ethanol Incentive
Board to administer the Proposed Ohio Tax Investment Credit.
Under the Proposed Ohio Income Tax Investment Credit, beginning in taxable
year 2001 and ending in taxable year 2011, an Ohio taxpayer would be able to
claim a nonrefundable Ohio income tax credit of 50% of the money the taxpayer
invests in an ethanol plant, up to a maximum credit of $5,000. The credit would
have to be claimed in the taxable year in which the investment was made. Any
unused portion of the credit could be carried forward for 3 tax years. Timely
passage of the Proposed Ohio Income Tax Investment Credit would provide
substantial benefits to Ohio taxpayers who purchase units in this offering, but
only if our ethanol plant is also certified by the proposed Ethanol Incentive
Board. In its present form, this bill would require that, for investors in an
ethanol plant to be eligible for the Proposed Ohio Income Tax Investment Credit,
the plant must be majority-owned by Ohio farmers. We are not sure who will be
classified as an "Ohio farmer" pursuant to the proposed legislation, and there
can be no assurance that we will be able to satisfy this requirement;
accordingly, even assuming this pending legislation becomes Ohio law without
substantial revision, there are no assurances that Ohio taxpayers who invest in
us will become eligible to receive the Proposed Ohio Income Tax Investment
Credit.
Under the OAQDA Proposal, the OAQDA could determine that our entire
ethanol plant, or any portion of it, is an eligible air quality facility. We
would apply for a loan for up to $30 million from the OAQDA. To the extent the
OAQDA approved our application, it would issue bonds through a public or private
offering, and loan the proceeds of the bond offering to us pursuant to a loan
agreement. The OAQDA's loan to us would have a term of up to 20 years, and
require equal periodic payments of principal and interest over the life of the
loan. These payments would be sufficient to service and eventually retire the
bonds issued by OAQDA. Our payments to the OAQDA under the loan agreement would
probably be secured by substantially all of our property, an irrevocable letter
of credit and/or other forms of security. There can be no assurance that we will
be successful in obtaining OAQDA financing.
These existing federal 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.
INDUSTRY GROWTH
In 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, 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
36
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 a 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:
PROJECTED USA ETHANOL PRODUCTION CAPACITY AT END OF YEAR
[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.
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
37
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". EPA has
classified MTBE as a possible carcinogen, and has issued a taste and odor
advisory of 20-40 micrograms/liter.
Due to "substantial evidence" that MTBE poses an "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.
38
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.
USA - Fuel Ethanol vs. MTBE
US demand in mln barrels per day
[chart]
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.
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
According to an article appearing in The Wall Street Journal on November 13,
2001, 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, at least until
recently about 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.
Historically, according to a 1993 General Accounting Office report, 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.
39
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.
Again according to the GAO, 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%.
40
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
[CHART]
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 above. 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. As the search continues to find alternative sources of energy, we believe
the demand for renewable energy sources such as ethanol may increase.
41
DESCRIPTION OF OUR ETHANOL PLANT'S PRODUCTION PROCESS
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 up to 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
the fall 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. Producers may benefit from reduced grain handling,
storage and drying.
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 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 31,500,000 denatured gallons. We expect to
have on-site storage capacity sufficient to keep an 8-day ethanol inventory on
site.
42
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.
[PHOTO - DIAGRAM]
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, 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 December 31, 2001, we have paid Gaylor
Engineering and Western Biomass approximately $30,000 for consulting and
preliminary design work. We have finalized a Contract for Detail Engineering
Services between us and Gaylor Engineering and are also negotiating with Gaylor
Engineering and several construction contractors including North Central
Construction, to finalize 2 additional agreements which together would provide
for the final design and construction of our ethanol plant. These agreements are
based upon the form contracts of the Construction Management Association of
America, Inc., and include an Owner and Construction Coordinator Agreement
between us and Gaylor Engineering and an Owner and Contractor Agreement between
us and our construction contractor.
CONTRACT FOR DETAIL ENGINEERING SERVICES
43
We have entered into a Contract for Detail Engineering Services 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, Gaylor Engineering will provide for 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.
Under the Contract for Engineering Services, Gaylor Engineering will
provide customary architectural and civil, structural, mechanical and
electrical engineering services to be set forth in a construction management
plan, and it warrants 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
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%
Gaylor Engineering will carry adequate errors and omission and liability
insurance related to this process guarantee.
Gaylor Engineering will be paid its out-of-pocket expenses and the maximum
sum of $800,000 as compensation for its services under the Contract for
Engineering Services, 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 Contract for Engineering Services, its compensation would also be
equitably adjusted. At our request, Gaylor Engineering may also perform
additional services under the Contract for Engineering Services, for which it
shall be compensated in an amount and on terms mutually agreeable by the
parties.
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
44
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.
45
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 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
46
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.
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. We expect
our ethanol plant to process approximately 11.3 million bushels of corn
annually. 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. In 2000, according to the same source:
- within a 25-mile radius of Defiance, Ohio, over 40 million bushels of
corn were produced;
- within a 35-mile radius of Defiance, almost 81 million bushels were
produced; and
- within a 45-mile radius of Defiance, over 115 million bushels were
produced.
There is an ample supply of nearby corn for our plant. For example, 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 have no agreements, commitments or understandings with any corn
producers in the area; however, we have an agreement with an affiliate of The
Andersons, a publicly-held grain marketing company with headquarters in Maumee,
Ohio, 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 include:
Grain Origination Services
- Assured corn volume and delivery timing
- Dedicated grain originator and GM of contract administration
- Cash market surveillance and analysis
- Producer customer account management
- Contract administration and settlement
- Precision originations and sales management
- Producer risk management and marketing education
- Cash grain forward contracts; Delayed price; Stop pricing
- Corn price-risk management tools for producer customers
Corn Price-Risk Management
- Cash grain forward contracts
- Basis and futures price analysis and information
- Management and position reports
- Corn price-risk management tools
Operation Support and Trucklot Management
- Interface to electronic scale system
- Electronic ticket processing
- Data management and interface
- Daily truck report and grain position report
47
- Truck scale interface consulting
- Daily receipt processing and disbursements
- User training
- Grain quality inspector training
- Accounting information and support for enterprise accounting
Grain Management Consulting
- Grain quality management consulting
- Accounting and systems policy consulting
- Inbound premium and discount administration
- Basis surveillance and risk management consultation
- Grain quality surveillance, risk management and gross revenue
consultation
- Grain production surveillance and consultation
- Inbound corn scheduling, logistics and arbitrage management
- Summary annual origination reporting
- Grain market management education
Transportation Administration and Rail Management
- Truck insurance compliance management
- Freight bill auditing
- Rail contract negotiation service
- Rail carrier management services
The agreement requires us to pay our grain originator $68,000 per month for
these services beginning the first month in which we produce ethanol, and
extends for an initial 4 year term, renewable for consecutive 3 year periods
unless either party provided advance written notice to the other party. The
agreement is subject to earlier termination upon either party's breach or
insolvency, whereupon, unless otherwise agreed, all open cash grain forward
contracts are to be marked to market and liquidated, and the parties will settle
all their respective financial obligations. The contract contains reciprocal
indemnification and insurance provisions, and it cannot be assigned by either
party without the other's consent. Disputes are subject to binding arbitration
under the rules of the National Grain and Feed Association.
Under the contract, we will pay the same basis price paid by our grain
originator, which is to be the lowest basis value price as delivered at our
plant. Basis price essentially represents the localization of supply and demand
factors, or the differences, above or below the Chicago Board of Trade futures
market price, for cash corn delivered to the plant. The Andersons' affiliate
will also enter into delayed pricing arrangements with us for some of the corn
delivered to our bunker, and we will be required to provide security for these
payment obligations through a letter or letters of credit. This letter or
letters of credit will also secure any payment obligations we may have under the
cash grain forward contracts to be purchased by The Andersons' affiliate in
supplying corn under the agreement. The letter(s) of credit must be maintained
at not less than $2 million plus the net aggregate contract equity exposure of
our open cash grain forward contracts and unpaid delayed price corn delivered to
our plant. Based upon discussions with our grain originator and consultants, we
estimate that beginning once our plant nears operations status, at any given
time there may be between $3-3.5 million in delayed price corn in our bunker,
and between $3-4 million in margin exposure on outstanding corn forward pricing
contracts. However, these amounts are only estimates, and the actual amounts may
vary, at times substantially.
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 will 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
additional opportunities relative to corn pricing.
WATER
We have worked closely with our consultant, our 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, 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.
48
If our assessment of our water needs or the quality and quantity of the
water supply believed to be 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.
ENERGY
Ethanol production is an energy intensive process using significant amounts
of electricity and natural gas. 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.
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 1 mile 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.
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, which includes the monthly
finance charge. NEC has also indicated that it would investigate the
availability of transmission facilities in the area that may reduce our
anticipated transmission costs.
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.
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
49
- 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, and FC Stone, a commodities broker specializing in agricultural and
energy products. The proposed ethanol marketing agreement with WES contemplates
that WES will purchase all of our 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. The proposed ethanol marketing agreement with
FC Stone is substantially similar to the proposed WES agreement.
We have also discussed the sale of our ethanol with a number of major
petroleum refiners and marketers. Generally, 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.
We expect to hedge against changes in the price of ethanol through FC
Stone. Such hedging activity may begin as early as 6 months before we commence
operations, if we are able to secure payment on our outstanding forward
contracts by providing the necessary letter or letters of credit. Based upon
discussions with FC Stone and our advisers, we estimate that at any given time
we may need to secure between $2 - 6 million in margin exposure on outstanding
unleaded gasoline forward pricing contracts; however, this is only an estimate,
and the actual exposure may vary, at times substantially.
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 potential purchasers Commodities Specialists
Company, Kalmbach Feeds, Inc. and FC Stone.
Commodity Specialists, an international agri-business products trading and
marketing 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.
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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.
CO2
A second co-product of the ethanol production process, carbon dioxide, or
CO2, has commercial value in the production of dry ice. We expect that our
ethanol plant will produce about 93,000 tons of CO2 annually. We have a
near-final agreement with Pain Enterprises, Inc., to sell most of the CO2 we
would produce. Pain Enterprises has proposed to construct, own and operate a CO2
liquefaction plant located adjacent to our ethanol facility, and purchase a
minimum of 41,250 tons annually of our CO2, for an initial term of 10 years,
continuing thereafter for two subsequent 5-year periods unless terminated sooner
at our option. Pain Enterprises 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 Pain Enterprises will pay
us a fixed price per year based on Pain Enterprises' selling price per ton of
liquid CO2, but in no event less than $7.50 per ton. CO2 is expected to account
for about 1% of our revenue.
COMPETITION
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, with greater
economies of scale. 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.
[PICTURE OF ETHANOL PLANTS BY STATE - 2000]
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 industrial site which had
been converted to a dry mill, and it permanently closed in June of 1995 after
13 years of operation.
We expect to compete with other ethanol producers based on price. Generally,
our competitors sell ethanol and distillers grains at market or market-driven
prices, and we expect to do so as well. Our ability to sell ethanol and
distillers grains profitably depends upon:
- our expected relatively low operating cost structure;
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- 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.
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
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
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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.
Presently, unlike most of the other states in the midwest, Ohio has no
special ethanol industry supports or incentives. The absence of state law
supports or incentives, if allowed to continue, may constitute an important
competitive disadvantage we face, and may have material adverse effects on our
business.
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.
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.
The current trend in ethanol production research is to develop an efficient
method of producing ethanol from cellulose-based plant materials such as
agricultural waste, forest residue, municipal solid waste, and energy crops.
This trend is driven by the fact that cellulose-based plant materials is
generally cheaper than corn, and producing ethanol from cellulose-based plant
materials 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 foreseeable future. If an efficient method of producing ethanol from
cellulose-based plant materials is developed, we may not be able to compete
effectively.
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.
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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. However, 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.
AIR EMISSIONS PERMIT
Ethanol production involves the emission of various airborn pollutants,
including particulate matters, carbon monoxide, oxides of nitrogen, volatile
organic compounds and sulfur dioxide. 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.
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WELL OPERATION
The water well logs for all 3 wells will 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 have obtained a Phase I archaeological survey of the project area
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. The survey indicated that the site is not considered to be
eligible for inclusion into the National Register of Historic Places.
Furthermore, the survey concluded that no further archeological work was deemed
necessary and the construction plans should be permitted to proceed.
NUISANCE
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
55
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.
OPERATIONAL SAFETY
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.
EMPLOYEES
As of December 31, 2001, we have no employees. 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
[MAP]
56
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.
One of these parcels, totaling about 57 acres, 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. The other
parcel, totaling approximately 150 acres, is owned by unaffiliated third
parties.
In connection with each option, we paid an initial option fee of $500 and
before March 31, 2002, an additional option fee of $500 to extend the exercise
period for each option until September 30, 2002. If we exercise either option,
the option fee and 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. Accordingly, no appraisal of either parcel was
deemed necessary. 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 through 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.
We have no current plans for expansion; however, to remain continually aware
of development in our industry, when and to the extent expansion becomes
economically feasible and attractive, we should be well-positioned to take
advantage of any expansion opportunities. 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., Vice President and owner of 34%
of 5 C's Farms, Inc., one of our members, and operates a 4,000 head capacity
cattle farm and a 1,400 acre corn, soybean and wheat farming operation. He is an
active member of the Central Mennonite Church in Fort Wayne, Indiana. He is 49
years old.
57
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 is a manufacturers' representative which 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 from 1997-2000, Bryan Custom Plastics from 1994-1997, and other
companies in the plastics industry, 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, and one of
our members, Joseph Schubert, is Gene's son.
Vice President. Joel Nester, age 45, lives southwest of Bryan in Defiance County
with his wife Rebecca and their three sons. He owns 100% of and operates Nester
Ag-Management, an agricultural consulting business that provides agronomy
support to farmers in northwest Ohio, northeast Indiana and southeast Michigan.
He attended Northwest State College, and is President of the Ohio Association of
Independent Crop Consultants. He is a director with the Ohio Certified Crop
Advisor board, a director with Brookside Laboratories International board, and
has been a trustee with the Conservation Action Project of northwest Ohio for 11
years. He is a member of Trinity Lutheran Church.
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, one of our members, for 8 years.
Lynn also owns 22.7% of Ney Oil. 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 director
of the Sherwood Mutual Telephone Association, Inc. for many years, serving as
its President for eight years. He currently serves as a director 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 co-owner
and Sales Manager of Al-Co Products in Latty, Ohio, for more than 10 years. He
is an active member of the Sherwood United Methodist Church. He is Gene
Schubert's brother and the uncle of one of our members, Joseph Schubert.
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, one of
our members, for over 1 year. He owns 60% of Spatial Ag. He was the sole owner
of one of its predecessors, Joost Farms, for 28 years. He 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 director of the Sherwood Mutual Telephone Company and
Antwerp Equity. 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. His son Scott is one of our members.
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
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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.
We believe that Messrs. Bergman, Hoene and Mavis are "independent directors"
as defined under applicable state law, and we will maintain at least 2 such
directors to the extent required by such law.
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.
CONSULTANT
In part based upon the recommendation of Gaylor Engineering, we have agreed with
an experienced ethanol plant manager, James E. Stewart, upon a consulting
agreement whereby he will provide about 20 hours per week of plant design and
operational consulting services for $50 per hour plus expenses. Mr. Stewart has
more than 20 years' experience in the fuel and beverage ethanol industries. For
over 10 years he has provided consulting and technical services to the ethanol
industry, and during that time has managed 3 different ethanol plants;
including, in reverse chronological order, the Sunrise Energy plant in
Blairstown, Iowa, the Heartland Grain Fuels plant in Huron, South Dakota and the
Gasohol de El Salvador plant in San Salvadore, El Salvadore. Mr. Stewart is 53
years old and is a Vietnam veteran.
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. At December 31, 2001, we
incurred legal fees to Ted Penner of $74,933 for services rendered to us, of
which $1,000 was paid by the issuance of units, $56,433 was paid in cash and
$17,500 was deferred at December 31, 2001, for a total of $74,933. 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 consulting
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. At December 31, 2001 these deferred
payments total $16,250.
We reimburse our directors and officers for out-of-pocket expenses incurred
in connection with their services to us. At December 31, 2001, there was $341 of
payables owing to directors and officers. There are no employment agreements in
place between us and any of our executive officers. 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,
- 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; at
December 31, 2001, we incurred and have paid a total of $7,091 under
this arrangement;
- 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
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- we expect to purchase approximately 57 acres 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, for $3,000 per net acre or a total of about $171,000. We
have paid these affiliated parties $500 for an option to purchase their
land, and expect to pay another $500 to extend that option through
September 30, 2002. These amounts will be applied to the purchase price.
There are no past or current contemplated loan transactions between us and
any of our officers or directors or their affiliates, and except as disclosed
in this section of the prospectus there are no other material transactions
contemplated between us and any of our officers or directors or their
affiliates. Many of our directors and officers are affiliated with other
businesses which may seek to do business with us. For example, subject to our
commitment to maintain at least 2 independent directors as required by
applicable state law, 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. Subject to the same commitment, 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 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, and we believe that the
transactions described above are consistent with this provision. In addition, to
the extent required by applicable state law, any such transactions shall be at
fair market value and approved in advance by a majority of disinterested
independent directors.
UNIT OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of our units as of December 31, 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. Each individual identified as an indirect
beneficial owner except Joel Nester disclaims beneficial ownership of the units
attributed to him, because he does not own 100% of the company which actually
directly owns the units attributable as indirectly owned by him. 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 *
Joel Nester(4) 56 5.11 1.60 1.02
Ted Penner 68 6.20 1.95 1.24
All directors and
executive officers as
a group 564 51.45 16.13 10.27
Clint Zeedyk 68 6.20 1.95 1.24
*Less than 1%
(1) Mr. Cleland may be attributed with indirect beneficial ownership of these
units, all of which are owned by 5C's Farms, Inc.
(2) Mr. Bergman may be attributed with indirect beneficial ownership of
these units, all of which are owned by Ney Oil Company.
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(3) Mr. Joost may be attributed with indirect beneficial ownership of these
units, all of which are owned by Spatial Ag Systems.
(4) Mr. Nester may be attributed with indirect beneficial ownership of
these units, all of which are owned by Nester-Ag Management.
As required under Ohio law, we have entered into an escrow and subordination
agreement dated as of February 22, 2002, with Messrs. Eugene Schubert, Fred
Schubert, Virgil Hoene, Gary Mavis and Ted Penner, Ney Oil Company, 5 C's Farms,
Inc., Spatial Ag Systems, LLC and Nester Ag-Management (collectively, the
"Unitholders") and National City Bank as escrow agent. Under the escrow and
subordination agreement, each Unitholder has placed in escrow unit certificates
representing that number of units shown opposite each Unitholder's name, as
follows: Eugene Schubert, 37.2 units; Fred Schubert, 22.8 units; Virgil Hoene,
94.2 units; Gary Mavis, 40.2 units; Ted Penner, 57.4 units; Ney Oil Company,
37.2 units; 5 C's Farms, Inc., 49.2 units; Spatial Ag Systems, LLC, 97.2 units;
and Nester Ag-Management, 47.6 units. A total of 483 units have been placed in
escrow, and generally cannot be transferred except upon the death of a
Unitholder or until released from escrow. Any distributions in respect of the
escrowed units must also be escrowed. The Unitholders will continue to vote the
escrowed units. The escrowed units and any escrowed proceeds in respect of those
units will be released from escrow upon the first to occur of any of the
following events: if a majority of non-escrowed units are purchased in a tender
offer for substantially all our outstanding units, or voted in favor of a
merger, consolidation or reorganization with an unaffiliated third party; when
our annual audited financial statements show either fully diluted net earnings
per unit of $600 for a period of 4 consecutive quarters or of $300 for each of 2
consecutive periods of 4 consecutive quarters, and the Ohio Commissioner of
Securities has not objected within 30 days of receipt of such financials; or 1/4
of each Unitholder's escrowed units and associated proceeds will be released
from escrow upon each of the fifth, sixth, seventh and eighth anniversaries of
the effective date of the registration statement of which this prospectus is a
part.
We have no outstanding options or warrants to purchase units or securities
convertible into units. At December 31, 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.
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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
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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.
CASH DISTRIBUTIONS
Under our operating agreement, our ability to make 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.
We also expect our ability to make cash distributions to be restricted by
our debt agreements, and to ultimately depend upon our ability to operate
profitability. This in turn will depend upon a variety of factors, many of which
are beyond our control, 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;
- Amounts of cash set aside for reserves;
- Prevailing economic conditions;
- Demand for and our success in selling ethanol, distillers grains
and CO2;
- Government regulations and government subsidies and support for
ethanol generally; and
- Technical advances in ethanol production.
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. A member 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 behalf of
a member.
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.
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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;
64
- 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.
CONTROL-RELATED CONSIDERATIONS
After the offering, assuming the minimum 2,400 units are sold and none of
our founders purchase units in the offering, our
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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 also purchase units in the offering, without limitation, in
order to meet the minimum offering amount or otherwise. See "Plan of
Distribution." 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.
Only one-third of the directors are subject to reelection each year, and 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.
RESTRICTIONS ON RESALE
There is no existing trading market for our units, and it is unlikely that
a market will develop. Your ability to transfer units will also be restricted by
our operating agreement, as summarized below. Generally under that agreement, a
member is not permitted to transfer any units unless the transfer qualifies as a
permitted transfer as defined by that agreement. Even if a transfer is treated
as a permitted transfer, it will not be approved unless various other conditions
are satisfied, and in no event will any transfer be approved without the prior
written approval of our directors. In addition, as summarized under "Federal
Income Tax Consequences" below, to maintain partnership tax status, the
directors will generally approve a transfer only if it falls within one or more
"safe harbors" contained in the publicly traded partnership rules provided under
the Internal Revenue Code and the Treasury Regulations. If any person transfers
units in violation of the publicly traded partnership rules or without our prior
consent, the transfer will be invalid.
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;
- 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;
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- 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.
In addition, 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.
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
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balances. Each member will receive a statement prepared by our directors setting
forth our assets and liabilities as of the date of termination.
INDEMNIFICATION
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 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 for directors, officers or persons controlling us, we have been informed
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy and unenforceable.
We may maintain insurance to protect ourselves and on behalf of any
director, officer, employee or agent against such expenses, liabilities or
losses.
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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.
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 -
Restrictions on Resale".
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary discussion of the federal income tax consequences
that may affect your investment. These provisions are highly technical and
complex, and this summary is qualified in its entirety by the applicable
Internal Revenue 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
69
consequences of the purchase, holding and sale of our units and any possible
changes in the tax laws after the date of this prospectus.
We have received an opinion of our tax counsel, McDonald, Hopkins, Burke &
Haber Co., L.P.A. This opinion addresses both the treatment of the company as a
partnership for federal income tax purposes and the general income tax
consequences of owning our units. This opinion has been rendered to us. Unless
expressly noted, the statements, conclusions and opinions contained in this
section and the opinion attached as an exhibit to the registration statement of
which this prospectus is a part constitute the opinion of our tax counsel,
provided we are operated as described in this prospectus. In regard to the
treatment of the company as a partnership for federal income tax purposes, our
tax counsel's opinion is based on various facts and assumptions and will be
conditioned upon certain representations made by us concerning our business as
set forth in this prospectus. In rendering this part of the opinion, our tax
counsel has applied the facts to the law. When discussing the tax consequences
to our members, our tax counsel emphasizes that its opinion extends only to
matters of law and specifically does not extend to matters of fact. Our tax
counsel's opinion is based on existing law as contained in the Code, Treasury
Regulations, administrative rulings and court decisions as of the date of this
prospectus. Because the tax consequences of owning our units, which are
described below, are highly dependent on matters of fact, including the
individual circumstances of investors, that have not been considered by and are
not known by our tax counsel, such individual tax consequences are not addressed
by the opinion, and you should consult with your own tax advisor prior to making
your investment decision because your own unique facts and circumstances are not
covered by the opinion. No rulings have been requested from the Internal Revenue
Service concerning any of the tax matters described. Accordingly, the Internal
Revenue Service or a court may disagree with the following discussion or with
any of the positions taken by us for federal income tax reporting purposes. The
opinion does not assure the intended tax consequences described below because it
will not bind the Internal Revenue Service or the courts. You may be subject to
various state or local taxes. The opinion specifically does not address any
state or local tax treatment.
PARTNERSHIP STATUS
The opinion of our tax counsel provides that reasonable basis exists to
treat our limited liability company as a partnership for federal income tax
purposes. It must be emphasized that this opinion is based on various facts and
assumptions and is conditioned upon certain representations made by us
concerning our business as set forth in this prospectus. Moreover, such
qualification and taxation as a partnership depends on our ability to comply
with various tests imposed under the Code which are discussed below, the results
of which may not be reviewed by McDonald, Hopkins, Burke & Haber Co., L.P.A.
Accordingly, no assurance can be given that we will be treated as a partnership
for federal income tax purposes from one taxable year to another.
If we are treated as a partnership, 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"
regulations, an unincorporated entity, such as a limited liability company, will
be taxed as a partnership unless the entity is considered a publicly traded
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 classified as a
publicly traded partnership as set forth under Section 7704 of the Code.
Generally, Section 7704 provides that a publicly traded partnership will be
taxed as a corporation. A partnership or limited liability company is considered
a publicly traded partnership 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 classified and taxed as a
corporation.
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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;
- 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;
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- 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 you receive any cash distributions.
As long as we are 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.
TAX CONSEQUENCES TO OUR MEMBERS
If we are taxed as a partnership, 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 you receive any cash distributions. 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 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.
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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 to you;
- 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.
For example, generally any debt incurred by us will be treated as nonrecourse
debt. 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.
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 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.
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- 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
activity 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 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 yet been made on this point.
TAX CONSEQUENCES UPON DISPOSITION OF UNITS
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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.
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.
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.
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
75
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. This could result in tax liabilities, penalties, interest and additional
costs to you.
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 disclosure of a position on the taxpayer's return will not
necessarily prevent the imposition of the negligence penalty.
SELF-EMPLOYMENT TAX
76
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 of
our investors 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, our unit holders should 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.
STATE AND LOCAL TAXES
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.
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.
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; however, we may consider accepting subscriptions from interested
investors in other states if it is not unreasonably burdensome to comply with
applicable securities law requirements in such states. We plan to promote the
offering by issuing press releases and advertising in newspapers and on the
radio, and we may distribute request cards and mail copies of our press
releases, advertisements and this prospectus to prospective investors in those
states. Any radio or television broadcasts and written materials used in
connection with the offering and not accompanied or preceded by a prospectus
will include only such limited information as is permitted under federal and
applicable state law. We also plan to hold informational meetings for potential
investors at 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 officers
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 and officers,
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. In Indiana our securities are expected to
be sold by Messrs. William Cleland, Eugene Schubert, Fred Schubert and Joel
Nester, while in Ohio and Michigan, all of our directors and officers are
expected to participate in selling activities. 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 these individuals 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;
- 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 these individuals 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;
77
- 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 National City Bank as Escrow Agent for Northwest
Ethanol, LLC, to Northwest Ethanol, LLC, P.O. Box 4505, Sherwood, Ohio
43556-0505. Our subscription agreement contains certain representations and
warranties upon which we will rely if we accept your subscription. 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 promptly return your Execution
Package and the amount of your subscription, without interest. If we accept your
subscription, your check will be deposited in our escrow account at National
City 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 promptly if by April 30, 2002, subject
to extension in our sole discretion but not later than September 30, 2002, we:
- determine in our sole discretion to terminate the offering; or
- have not received subscriptions for between the $12 million minimum and
the $22 million maximum, and binding written commitments for debt financing
sufficient, with the escrowed proceeds of this offering, to total $42
million.
By "binding written commitment" we mean a commitment letter from a commercial
bank or other lender, not a non-binding term sheet. In the context of an OAQDA
bond offering, to have a "binding written commitment", we would have to have
both an inducement agreement with the OAQDA and either a commitment letter from
a letter of credit bank or a "highly confident" letter from an investment
banker.
If we satisfy all these conditions and close on the offering, we will
deliver a certificate or certificates 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 April 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. There is no
limit to the amount of securities our founders and affiliates may purchase in
this offering, and any such purchases will be investment purposes only and not
with the intent of resale. Any such units will not be redeemed by us for at
least 1 year from the completion of the
78
offering. 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. 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.
79
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report...............................................................................F-2
Balance Sheets as of June 30, 2001 and December 31, 2001 (Unaudited).......................................F-3
Statements of Operations for the period from February 8, 2001 (inception date)
to June 30, 2001 and for the six months ended December 31, 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 six months ended December 31, 2001 (Unaudited)...............F-5
Statements of Cash Flows for the period from February 8, 2001 (inception date)
to June 30, 2001 and for the six months ended December 31, 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 SHEETS
DECEMBER 31, 2001
JUNE 30, 2001 (UNAUDITED)
------------- -----------
ASSETS
CURRENT ASSETS
Cash $ 34,710 $ 494,255
OTHER ASSETS
Deposits (Note 3) - 1,000
Costs of raising anticipated capital - 190,210
Land development cost - 28,023
---------------- ----------------
TOTAL ASSETS $ 34,710 $ 713,488
================ ================
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Note 3) $ 18,423 $ 166,658
LONG-TERM DEBT
Note Payable (Note 4) - 30,000
---------------- ----------------
TOTAL LIABILITIES 18,423 196,658
---------------- ----------------
MEMBERS' EQUITY (Note 2)
Member contributions 68,000 670,000
Deficit accumulated during the development stage (51,713) (153,170)
---------------- ----------------
TOTAL MEMBERS' EQUITY 16,287 516,830
---------------- ----------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 34,710 $ 713,488
================ ================
See notes to Financial Statements.
F-3
NORTHWEST ETHANOL, LLC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 8, 2001 (INCEPTION DATE) TO JUNE 30, 2001 AND THE
SIX MONTHS ENDED DECEMBER 31, 2001 (UNAUDITED)
CUMULATIVE LOSS
DECEMBER 31, 2001 FROM INCEPTION
JUNE 30, 2001 (UNAUDITED) (UNAUDITED)
------------- ----------- -----------
Revenue $ - $ - $ -
Operating Expenses
Consulting fees 14,000 22,000 36,000
Professional fees (Note 3) 35,289 73,422 108,711
Licenses and permits - 3,450 3,450
Miscellaneous 2,632 3,779 6,411
-------------- -------------- -------------
Total Expenses 51,921 102,651 154,572
-------------- -------------- -------------
OPERATING LOSS (51,921) (102,651) (154,572)
OTHER INCOME - INTEREST 208 1,194 1,402
-------------- -------------- -------------
NET LOSS $ (51,713) $ (101,457) $ (153,170)
============== ============== =============
NET LOSS PER UNIT $ (311.52) $ (179.57) $ (393.75)
============== ============== =============
WEIGHTED AVERAGE UNITS OUTSTANDING 166 565 389
============== ============== =============
See notes to Financial Statements.
F-4
NORTHWEST ETHANOL, LLC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 8, 2001 (INCEPTION DATE) TO
JUNE 30, 2001 AND THE SIX MONTHS ENDED DECEMBER 31, 2001 (UNAUDITED)
MEMBER ACCUMULATED
UNITS CONTRIBUTIONS DEFICIT TOTAL
----------- ------------- ----------- -------------
BALANCE - FEBRUARY 8, 2001 (INCEPTION DATE) $ $ $
Initial capital contributions, March 8, 2001 104 26,000 - 26,000
Capital contributions, April 23, 2001 68 17,000 - 17,000
Capital contributions, April 25, 2001 96 24,000 - 24,000
Capital contributions, April 30, 2001 4 1,000 - 1,000
Net loss - - (51,713) (51,713)
----------- ----------- ----------- -----------
BALANCE - JUNE 30, 2001 272 68,000 (51,713) 16,287
Capital contributions, September 28, 2001 428 107,000 - 107,000
Capital contributions, November 27, 2001 396 495,000 - 495,000
Net Loss - - (101,457) (101,457)
----------- ----------- ----------- -----------
BALANCE - DECEMBER 31, 2001 (UNAUDITED) 1,096 $ 670,000 $ (153,170) $ 516,830
=========== =========== ========== ===========
See notes to Financial Statements.
NORTHWEST ETHANOL, LLC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 8, 2001 (INCEPTION DATE) TO JUNE 30, 2001 AND THE
SIX MONTHS ENDED DECEMBER 31, 2001 (UNAUDITED)
CUMULATIVE CASH FLOWS
DECEMBER 31, 2001 FROM INCEPTION
JUNE 30, 2001 (UNAUDITED) (UNAUDITED)
------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (51,713) $ (101,457) $ (153,170)
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 62,715 81,138
------------- -------------- --------------
Net cash (used in) provided by operating (16,290) (39,742) (56,032)
activities
CASH FLOWS FROM INVESTING ACTIVITIES
Land development cost (28,023) (28,023)
CASH FLOWS FROM FINANCING ACTIVITIES
Member contributions 51,000 602,000 653,000
Proceeds from note payable - 30,000 30,000
Costs of raising anticipated capital - (104,690) (104,690)
------------- -------------- --------------
Net cash provided by financing activities 51,000 527,310 578,310
------------- -------------- --------------
NET INCREASE IN CASH 34,710 459,545 494,255
CASH - BEGINNING OF PERIOD - 34,710 -
------------- -------------- --------------
CASH - END OF PERIOD $ 34,710 $ 494,255 $ 494,255
============= ============== ==============
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 DECEMBER 31, 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 December 31, 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 December 31, 2001 and
for the six months ended December 31, 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 1,096 units to its founding members as of June 30, 2001 and December 31,
2001, respectively.
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 $79,985 for the
periods ending June 30, 2001 and December 31, 2001, respectively, from three
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 $3,402 for the periods ending June 30, 2001 and
December 31, 2001, respectively.
At June 30, 2001 and December 31, 2001, the Company had accounts payable of
$6,923 and $34,091, respectively, due to members and companies affiliated
through common ownership.
F-8
4. SUBSEQUENT EVENTS
In September 2001, the Company issued an additional 428 units at $250 per unit
for a total of $107,000.
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
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.
5
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.
6
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
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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;
12
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.
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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. Any Transfer, including
Transfers pursuant to Section 8.2 hereof, shall not be treated as a Permitted
Transfer hereunder unless and until the Directors have approved such Transfer
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 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.
(d) 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,
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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.
(e) 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. SURVIVAL. All representations, warranties, covenants and obligations
contained in this Agreement, shall survive the acceptance of this subscription
for Units and the acquisition of the Units by the undersigned pursuant hereto.
7. 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.
8. 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.
9. 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
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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.
10. 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.
11. GOVERNING LAW. This Agreement shall in all respects be construed in
accordance with and governed by the laws of the State of Ohio.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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
NATIONAL CITY BANK AS ESCROW AGENT FOR NORTHWEST ETHANOL, LLC IS INCLUDED WITH
THIS EXECUTION PACKAGE.
OPTIONAL The Company is seeking your consent to electronic delivery, to the
above e-mail address or such other e-mail address as you shall provide to the
Company in writing or electronically. If any of these communications is made
available to you in PDF format, the Company will provide you with the necessary
software, free of charge, by which to access such communications. You should
also understand that there may be costs associated with electronic delivery,
such as the costs of on-line time, and you should also understand the nature and
scope of the requested consent prior to providing your consent.
[ ] [ ]
I hereby consent to I hereby withhold consent
electronic delivery. to electronic delivery.
If no indication is given, consent will be treated as having been withheld.
-3-
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
___________, 2002.
By:
--------------------------
Purchaser's Signature
--------------------------
Purchaser's Name - Printed
"MEMBER"